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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER : 000-21261
VIATEL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3787366
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
685 THIRD AVENUE, NEW YORK, NEW YORK 10017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 350-9200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X].
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AS OF MARCH 12, 1999 WAS APPROXIMATELY $441,580,321. AS OF MARCH
12, 1999, 23,185,765 SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE,
WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE. NONE.
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TABLE OF CONTENTS
PAGE
PART I.................................................................... 1
ITEM 1. BUSINESS.................................................... 1
Overview.................................................... 1
Market Opportunities........................................ 2
Business Strategy........................................... 3
Services Currently Offered.................................. 5
The Viatel Network.......................................... 6
Circe Network............................................... 8
Sales and Marketing; Customers.............................. 9
Information Systems........................................ 10
Carrier Contracts.......................................... 11
Competition................................................ 11
Government Regulation...................................... 12
Employees.................................................. 19
ITEM 2. PROPERTIES................................................. 19
ITEM 3. LEGAL PROCEEDINGS.......................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 19
PART II.................................................................. 20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 20
ITEM 6. SELECTED FINANCIAL DATA.................................... 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS............................................... 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 65
PART III................................................................. 65
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 65
ITEM 11. EXECUTIVE COMPENSATION...................................... 69
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. ..................................... 73
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 75
PART IV.................................................................. 75
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K........................................ 75
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED HEREIN WHICH EXPRESS "BELIEF," "ANTICIPATION,"
"EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING STATEMENTS
CONCERNING THE DESIGN, CONFIGURATION, FEATURE AND PERFORMANCE OF OUR NETWORK AND
RELATED SERVICES, THE DEVELOPMENT AND EXPANSION OF OUR BUSINESS, THE MARKETS IN
WHICH OUR SERVICES ARE OR WILL BE OFFERED, CAPITAL EXPENDITURES AND REGULATORY
REFORM, INSOFAR AS THEY MAY APPLY PROSPECTIVELY AND ARE NOT HISTORICAL FACTS,
ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.
BECAUSE SUCH STATEMENTS INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CERTAIN FACTORS
WHICH MAY AFFECT OUR FUTURE RESULTS."
PART I
ITEM 1. BUSINESS.
OVERVIEW
We are a rapidly growing international communications company providing
high quality, competitively priced, long distance communication and data
services, to end users, carriers and resellers. Our revenue has grown from $32.3
million in 1995 to $135.2 million in 1998, and today we have direct sales forces
in twelve Western European cities and an indirect sales force in more than 180
locations in Western Europe.
To capitalize on the opportunities presented by full deregulation of
the telecommunications industry in Western Europe, we established an early
presence and sought aggressively to acquire (1) licenses, (2) interconnection
and (3) infrastructure. Today, we have licenses in each of Belgium, France,
Germany, The Netherlands and the United Kingdom and interconnection with each
incumbent telecommunications operator in these countries. We also have licenses
in each of Italy, Spain and Switzerland where we expect to obtain
interconnection during the fourth quarter of 1999.
We recently completed construction of the first ring of our fiber
optic network which connects, among other cities, London, Paris, Brussels,
Antwerp, Rotterdam and Amsterdam. Construction activity has also commenced on a
second ring which will connect Paris, Nancy, Strasbourg, Frankfurt, Koln,
Dusseldorf, Essen and Amsterdam, and a third ring which will connect Essen,
Hamburg, Berlin, Dresden, Leipzig, Nurnberg, Munich, Stuttgart and Frankfurt.
The proceeds from the sale of our recent debt offering will be used to construct
two additional fiber optic rings, our fourth and fifth rings. Ring four will
connect cities in southern France to portions of rings one and two. Ring five
will connect ring four with our network being constructed in Germany by way of
Switzerland. These five rings, which will encompass more than 7,500 route
kilometers, will comprise the "Circe Network."
We currently operate one of Europe's largest pan-European networks,
with points of presence in approximately 37 cities. We believe that control of
network infrastructure is critical to becoming a high quality, low-cost provider
of communications services because it will enable us to better manage service
offerings, quality of transmission and costs. Accordingly, we commenced
construction of the first ring of the Circe Network in 1998 and are currently in
the process of migrating from a network composed of international and domestic
leased circuits to a network composed primarily of owned fiber.
We believe, and our experience to date has indicated, that demand from
end users, carriers and other communications companies for high quality
transmission capacity in Europe will increase over the next several years due to
fundamental changes in the communications industry brought about by regulatory
and technical improvements. We also believe that cost effective transmission
capacity in Europe will allow new capacity intensive applications to be created
which will fuel the need for additional capacity. The Circe Network should allow
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us to meet this increased demand by providing abundant transmission capacity
for:
o continued growth in our existing long distance voice service
business,
o additional provision of wholesale services to the large base of
resellers that are developing as deregulation continues in
Western Europe,
o Internet, electronic-commerce, multi-media and video services and
other new technologies and applications, and
o asynchronous transfer mode, frame relay, Internet protocol and
other high speed data transmission services.
As part of our strategy to capture a share of the rapidly growing data
market, we recently entered into an arrangement with Lucent Technologies
pursuant to which Lucent Technologies is installing asynchronous transfer mode
backbone network equipment. This backbone equipment will enable us to provide
Internet protocol, frame relay and asynchronous transfer mode services to our
customers. Lucent Technologies has agreed to cooperate with us in developing
marketing strategies to promote our data services, to train our personnel and to
assist us in achieving network-to-network interfaces with certain specified
carriers. In exchange, we have agreed to allow Lucent Technologies to use the
Circe Network to beta test newly developed products intended for Europe.
We believe that our data network, which is scheduled to be commercially
operable in the third quarter of 1999, will allow us to provide packet switched
voice, video conferencing, private intranets and dedicated Internet protocol
transport over an integrated platform and offer end users high capacity, speed
and reliability. By engineering the Circe Network to integrate voice, data and
multimedia services over a variety of protocols, we expect to obtain a
relatively low cost basis for provisioning our services.
MARKET OPPORTUNITIES
International telecommunications is one of the fastest growing segments
of the long distance industry, having experienced a compounded growth in total
minutes of 15.5% per annum from 1988 to 1997. In 1997, according to industry
sources, the European international long distance market for voice services was
the largest in the world, with approximately 29.6 billion minutes or 43% of
international calling volume originating in Europe. A substantial portion of the
traffic originating in Europe terminates in Europe or the United States where we
have international gateway switches.
INTERNATIONAL TRAFFIC PATTERNS
1997 DESTINATION
OUTGOING MINUTES EUROPE* USA OTHER
---------------- ------ --- ------
(in millions)
United Kingdom............. 5,800 52% 13% 35%
Germany.................... 5,333 52 6 42
France..................... 3,545 64 6 30
Italy...................... 2,352 57 11 32
Switzerland................ 2,164 70 4 26
Netherlands................ 1,535 75 6 19
Belgium.................... 1,228 85 4 11
Spain...................... 1,025 70 5 25
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* Europe-EU member states and Switzerland.
Source: TeleGeography 1999.
In 1997, the market for total domestic and international long distance
in the Western European countries in which we operate represented approximately
$104.3 billion, with $87.4 billion representing national long distance and
approximately $16.9 billion representing international long distance (Source:
"The European Telecommunications Fact File 1998"). In many European Union member
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states, the ability to provide telecommunications services was liberalized on
January 1, 1998. We believe that regulatory liberalization in Western Europe and
technological advancements eventually will lead to market developments similar
to those that have occurred in the United States and the United Kingdom
following deregulation, including an increase in both international and national
traffic volume, reduced prices, increased service offerings and the emergence of
new entrants. By 1997, new entrants had amassed approximately 56.4% of the
United States international long distance market, from approximately 2.7% in
1985. (Source: FCC Common Carrier Bureau). In addition, from 1991 to July 1998
the number of licensed long distance competitors in the United Kingdom grew from
2 to 144 (Source: TeleGeography 1999).
We believe there continues to be a shortage of cross-border capacity in
Europe. Most infrastructure in Europe is owned and operated by the incumbent
telecommunications operator. Under the traditional system of carrying
cross-border telecommunications traffic in Europe, the incumbent
telecommunications operators did not develop end-to-end cross-border circuits,
but rather connected their national networks with other carriers at the border
pursuant to bilateral agreements. We believe the system of bilateralism resulted
in a serious shortage of cross-border capacity in Europe. We also believe that
cost effective transmission capacity in Europe will allow new capacity intensive
applications to be created which will fuel the need for additional capacity.
There are currently three private systems carrying cross-border traffic
in operation, the Ulysses cable system, which is owned by MCI WorldCom, the
Hermes Europe Railtel cable system and the KPN/Qwest cable system. The Ulysses
and KPN/Quest networks connect London, Amsterdam, Brussels, Paris and Frankfurt.
Hermes connects London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris,
Dusseldorf and Frankfurt. In addition, Level 3 Communications, British Telecom,
Global Crossing and Colt Telecom Group have announced their plans to construct
fiber optic networks in Europe. Cable & Wireless has also announced its
intention to invest significant resources in European telecommunications
facilities and other companies, such as Global One, have announced their
intention to continue to focus on the European telecommunications market. We
believe that the Circe Network will provide a valuable opportunity to market
capacity to other carriers and new entrants on an attractive cost-efficient
indefeasible right-of-use or long-term lease basis.
We believe that a substantial part of the capacity on existing routes
has a number of deficiencies including (1) high costs, (2) lack of end-to-end
quality control, (3) limited availability of capacity, (4) long lead times for
provisioning, (5) lack of redundancy and (6) long delays for restoration. While
there have been significant reductions in leased line costs as a result of
deregulation, these deficiencies are exacerbated by the increase in demand for
capacity from new entrants, thereby resulting in artificially and significantly
higher costs. We believe there is a significant opportunity to provide high
quality, cost-effective capacity to new entrants.
BUSINESS STRATEGY
Our strategy is to become a fully integrated communications company
that is well positioned to take advantage of growth opportunities in the
European communications industry. We believe that we can accomplish this goal by
becoming a low-cost provider of services through the ownership of key network
infrastructure. The key elements of our strategy include:
o CAPITALIZE ON LARGE DEREGULATING EUROPEAN MARKETS
Our principal focus is on exploiting both international and national
long distance opportunities presented by rapidly deregulating European markets.
In 1997, according to industry sources, the European international long distance
market for voice services was the largest in the world, with approximately 35
billion minutes of use. According to industry sources, Europe's volume of
international minutes grew approximately 12% from 1996 to 1997. Industry sources
estimate the European wholesale and retail market for all Internet services was
$1.9 billion in revenue for 1997.
o LEVERAGE ESTABLISHED MARKET PRESENCE AND LOCAL DISTRIBUTION
NETWORK
We established an early presence in Western Europe to capitalize on the
opportunities presented by deregulation of the telecommunications industry. As a
result, we gained substantial experience in the operational, technical,
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financial and logistical issues involved in building a network and sales force
in Western Europe. To date, we have established sales offices in twelve Western
European cities and have established indirect sales offices, through
arrangements with independent sales representatives and telemarketing agents, in
more than 180 locations in Western Europe. We believe that we are well
positioned to further capitalize on market opportunities in Western Europe,
enhance our sales force and operations and add products and services as
telecommunications markets continue to deregulate.
o LEVERAGE CIRCE NETWORK THROUGH RESELLERS AND CARRIERS
To efficiently use capacity on our network, we sell switched minutes to
wholesale customers and other resellers in the United States and the United
Kingdom. In addition, we intend to sell switched minutes as well as capacity on
each ring of the Circe Network to resellers and carriers. The sale of switched
minutes allows us to more fully utilize our network and generate revenue. While
we are constructing the Circe Network primarily for our own use, we also intend
to opportunistically sell excess capacity on the network thus reducing our
construction costs associated with the Circe Network.
o FOCUS ON END USERS
We have established a customer base of small and medium-sized
businesses to which we currently sell long distance voice services. Carrier
preselection, scheduled for the year 2000 for most countries in the European
Union, will further facilitate our ability to offer our services to end users at
economical prices. The Circe Network (1) allows us to reduce our transport and
interconnection costs and (2) enhances our ability to sell competitively priced
services to end users, particularly businesses requiring multiple points of
presence and significant capacity.
o OFFER A COMPREHENSIVE RANGE OF COMMUNICATION SERVICES
Historically, we only offered voice and value-added services such as
facsimile transmission. The Circe Network will significantly expand our ability
to meet the growing demand for data services and to offer a comprehensive range
of such services including Internet access and transmission, frame relay,
asynchronous transfer mode and Internet protocol services, as well as private
line, managed capacity and data center co-location services. All of these
services are extremely capacity intensive and until recently the high cost of
leased transmission capacity made it uneconomical to offer such services.
Network infrastructure ownership will facilitate our ability to provide these
services and new applications which may be developed in the future that are
expected to drive growth for additional high quality capacity. We expect to
begin offering data services by the end of 1999.
o BECOME A LOW COST PROVIDER OF COMMUNICATIONS SERVICES
We believe that it is critical to control key elements of our network
in order to be a low-cost provider of bundled communications services. The
ownership of these key elements will enable us to manage service offerings,
quality of transmission and costs. As part of our decision to own key portions
of our network, we (1) have invested in points of presence and switches, (2) are
in the process of constructing the Circe Network, and (3) have purchased
capacity or minimum investment units in digital fiber optic cable systems in and
between Western Europe and the U.S. The Circe Network's technologically advanced
fiber and transmission electronics are expected to provide lower installation,
operating and maintenance costs than older fiber optic systems generally in
commercial use today and are also significantly more scalable.
o PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
To date, our growth primarily has been internally generated and
managed. In addition to systematically expanding through internal growth, we
intend to expand our services and network capabilities through acquisitions,
investments and strategic alliances. We believe that acquisitions, investments
and strategic alliances are an important means of increasing network traffic
volume and achieving lower termination costs and desired economies of scale.
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SERVICES CURRENTLY OFFERED
We currently provide competitively priced long distance services with
value-added features that typically have not been provided by the respective
incumbent telecommunications operator in many of the countries in which we
operate. The products and services include switched and dedicated long distance,
800 services, calling cards, domestic and international private line, debit
cards, conference calling, advanced billing systems, enhanced fax and data
connections and facilities management. We are actively exploring the provision
of new services including Internet access, web hosting, asynchronous transfer
mode and frame relay services, the provision and management of intranets and
virtual private networks and video conferencing. We recently entered into an
arrangement with Lucent Technologies to facilitate the provision of these
services in the future. See "-- The Viatel Network."
Viatel's principal services include:
VIADIRECT - a service permitting domestic and international calling to
more than 230 countries and territories through interconnect switched access.
This service is currently marketed exclusively in Belgium, France, Germany, The
Netherlands and the United Kingdom where we have full interconnection and a
national operator's license. In addition, preselection, limiting the requirement
to dial carrier selection codes, is available in Germany.
VIADIRECT PLUS - provides dedicated access via a leased line from the
customer to our network, permitting calling without dialing access or location
codes.
VIACALL EXPRESS - provides a paid (local) access or toll free number
programmed to dial an existing phone number or system, generally in another
country, without the need for special circuits or modifications.
VIACALL - enables virtual private network calling to a pre-defined
group of locations within a closed user group that can be modified as required,
subject only to regulatory limitations.
VIAISDNFAX - permits domestic and international facsimile transmission
to more than 230 countries and territories through switched access via
integrated services digital network lines. In Spain, this service is restricted
to fax and voice band data pending the liberalization of the Spanish market.
VIAWORLDFAX - permits domestic and international facsimile transmission
to more than 230 countries and territories through switched access utilizing
assigned pin codes.
VIACONNECT - provides "anywhere to anywhere" international callback
access through manual, automatic, X.25 or Internet initiated callback. These
services are also offered with international toll-free access, subject to
pricing considerations.
VIAGLOBE - provides calling card access from more than 50 countries. In
addition to offering savings over the calling cards of AT&T, MCI and other
providers of credit-based international calling cards, VIAGLOBE provides 24-hour
operator assistance and speed dialing.
VIACARD - is a prepaid international debit card which provides many of
the same features as VIAGLOBE on a prepaid basis.
VIALINK - is the new audio conference service, allowing automatic,
manual or operator assisted establishment of conference calls 24 hours a day,
seven days a week.
VIA0800 - a personal 0800 number permitting users to call the sponsor
at no cost.
DATA SERVICES
The communications industry is expecting unparalleled growth in data in
the near term. To efficiently handle this growth, the industry has been evolving
away from circuit switching, where a route is maintained for the duration of an
entire call, to packet switching, where digital packets of information for
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various destinations are routed over a frame relay, asynchronous transfer mode
or Internet protocol network in an efficient and cost effective manner.
As part of our strategy to capture a share of the rapidly growing data
business market, we recently entered into an arrangement with Lucent
Technologies pursuant to which Lucent Technologies is installing asynchronous
transfer mode backbone network equipment. This backbone will enable us to
provide Internet protocol, frame relay and asynchronous transfer mode services
to our customers. Asynchronous transfer mode is a switching and transmission
technology based on encapsulation of information in short (53-byte) fixed-length
packets or "cells." Asynchronous transfer mode switching was specifically
developed to allow switching and transmission of mixed voice, data and video
(sometimes referred to as "multimedia" information). Lucent Technologies has
agreed to cooperate with us in developing marketing strategies to promote our
data services, to train our personnel and to assist us in achieving
network-to-network interfaces, with certain specified carriers. In exchange, we
are allowing Lucent Technologies to use the Circe Network to beta test newly
developed products intended for Europe.
We believe that our data network, which is scheduled to be commercially
operable in the third quarter of 1999, will allow us to provide packet switched
voice, video conferencing, private intranets and dedicated Internet protocol
transport over an integrated platform and offer end users high capacity, speed
and reliability. By engineering the Circe Network to integrate voice, data and
multimedia services, over a variety of protocols, we expect to obtain a
relatively low cost basis for provisioning our services.
THE VIATEL NETWORK
We currently operate one of the largest pan-European networks, with
international gateway switching centers in New York, New York, Somerset, New
Jersey and London, England which are connected by company-owned digital fiber
optic transmission facilities. Our network is an integrated digital, switch-
based telecommunications network with more than 37 points of presence in Western
Europe including switches in Amsterdam (The Netherlands), Barcelona and Madrid
(Spain), Brussels (Belgium), Frankfurt (Germany), Milan and Rome (Italy) and
Paris (France). Additional points of presence are placed to enhance network use
as required by the various interconnection agreements to which we are a party.
We intend to install additional points of presence in cities with both
significant calling activity directed to our switched-based cities and
significant potential for originating and terminating international and domestic
long distance traffic as required for interconnection with other carriers.
Access to our services is obtained either through "indirect access" or
"dedicated access." Indirect access requires the end user to use (1) carrier
selection codes (e.g., "1623" in The Netherlands, Belgium and France, "01079" in
Germany), which requires us to pay a regulated tariff for using the incumbent
telecommunications operator's network to originate the calls; (2) paid access,
which requires the end user to pay another carrier to access our services; (3)
national or international toll-free, which accesses one of our switches by
direct dial or (4) call reorigination, which enables the end user to receive a
return call providing a dial tone originated from one of our U.S. switching
centers. End users using dedicated access are connected to one of our switches
or points of presence by a private leased line connected to the end user's
premises. Carrier selection and dedicated access are our access methods of
choice in countries where we have achieved full interconnection with the
incumbent telecommunications operator. We currently have interconnection
agreements with Belgacom (Belgium), British Telecom (United Kingdom), Deutsche
Telekom (Germany), France Telecom (France) and KPN (The Netherlands). We also
have interconnection agreements with Cable & Wireless (United Kingdom) and
Infostrada (Italy). Currently, substantially all of our business customers use
one or more forms of indirect access. We are currently negotiating
interconnection agreements with Telefonica de Espana and Telecom Italia. There
can be no assurance that we will be successful in securing such interconnection
agreements in a satisfactory or timely manner.
Our ownership of transmission infrastructure and switches reduce our
reliance on other carriers, enables routing of telecommunications traffic over
multiple transmission paths, aids in controlling costs and permits the
compilation of call record data and other customer information. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
THE EUROPEAN PORTION OF OUR NETWORK. Our network in Europe currently
consists of an international gateway switching center in London and switches in
the Western European cities mentioned above. These cities were chosen as switch
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locations due to the substantial number of international calls originating from
such cities. Our network has been primarily used for call origination. We
anticipate increasing use of our network to transport calls in Western Europe.
See "-Carrier Contracts."
PRIVATE LINE CIRCUITS. While some of our nine switches in Western
Europe are currently connected to our international gateway switching center in
London by private line circuits, these switches will be connected by the Circe
Network as the various rings are constructed and placed into commercial
operation. Private line circuits are permanent point-to-point connections for
voice and data transmissions and, when certain levels of volume are reached, are
a less expensive alternative to the public switched telephone network. The
private line circuits connecting our switches to the international gateway
switching center in London are leased directly, or indirectly through third
parties, from the incumbent telecommunications operator in the countries in
which such calls originate.
As part of our concerted effort to convert leased capacity to owned
capacity for the purpose of improving operating margins, we have continued to
purchase capacity or minimum investment units in digital fiber optic cable
systems, including capacity in (1) CANUS-1/CANTAT-3 (8.192 megabits per second),
a transatlantic cable originating in the United States, Canada and the United
Kingdom, (2) TAT-12/13 (8.192 megabits per second), a transatlantic cable
originating in the United States, the United Kingdom and France, (3) Atlantic
Crossing-1 (466.5 megabits per second), a transatlantic cable originating in the
United States and the United Kingdom, and (4) Gemini (44.736 megabits per
second), a transatlantic cable originating in the United States and the United
Kingdom, and minimum investment units in (1) FLAG (18.440 megabits per second),
a cable connecting Europe with multiple locations in the Middle East and South
and Eastern Asia, (2) TAT-14 (311 megabits per second) and (3) JUS-1 (155.5
megabits per second). We also intend to acquire additional interests in digital
fiber optic cable originating from our owned infrastructure and connected to
other European Union member states in which we have a physical presence. These
cables will be used for transmission of traffic between the United States and
Europe and within Europe, resulting in improved service quality at lower cost.
By combining our international gateway switching centers in New York and London
with our transatlantic fiber optic cable capacity, we believe that we will be
able to provide customers with improved quality, while lowering transmission
costs.
SWITCHING PLATFORMS. Our network utilizes "intelligent switches" which
incorporate software designed to achieve least cost routing, the process by
which we enhance the routing of calls over our network for more than 230
countries and territories. Least cost routing is designed to allow calls that
are not routed over our network to be routed directly from our switches to those
public switch telecommunications network operators that offer call completion at
the lowest rates for each particular route at any given time.
Our network uses high capacity digital switching platforms designed to
provide services quickly and cost-effectively. The switches are modular and
scalable and incorporate among the most advanced technologies such as
self-diagnosis integrated services digital network hierarchical call control and
dynamic network management software. The backbone switches generally consist of
Nortel Telecom DMS switches. As our network continues to evolve, the installed
base of switches can be augmented or upgraded easily to create a cost effective,
scalable network.
INTERNATIONAL NETWORK OPERATIONS CENTERS. We currently monitor the
activity of our network from international network operations centers in Egham,
England and Somerset, New Jersey. These international network operations centers
have been fully fitted with sophisticated surveillance and control capability,
fraud detection and real time transmission quality enhancements. Our Omaha,
Nebraska site houses back office systems supporting the international network
operations centers and our network. Each international network operations center
is capable of acting as a full backup to the others and will allow full
monitoring capability and remote diagnostics and testing on key elements of our
network.
The international network operations centers will utilize a portfolio
of telecommunications network management operations support systems from Lucent
Technologies. The Lucent Technologies systems are functionally integrated into
one platform supporting multi-vendor network elements. Service activation
provides workflow management from order entry through network provisioning and
into billing. Service assurance includes trouble receipt, trouble management and
switch surveillance to include both traffic management and fault monitoring.
Network management includes inventory management, design and network
performance. The Lucent Technologies operations support systems provide us with
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state-of-the-art service activation, service assurance and network management
capabilities.
CIRCE NETWORK
We are developing the Circe Network which will link major cities in six
European countries. The Circe Network is a series of state-of-the-art, high
quality, high capacity, self-healing rings, utilizing advanced synchronous
digital hierarchy, the current international standard for digital transmission,
and dense wave division multiplexing technologies.
As currently planned, the Circe Network will be comprised of five
interlocking, bi-directional rings, encompassing approximately 7,500 route
kilometers of fiber optic cable. The first ring of this network, consisting of
approximately 1,850 route kilometers (including 320 route kilometers of undersea
fiber optic cable) was placed into commercial operation on March 15, 1999. The
second ring, which will extend through northern France, The Netherlands and into
western Germany, is scheduled to be placed into service during the third quarter
of 1999. The third ring, which will extend through eastern Germany, is scheduled
to be placed into service during the first quarter of 2000. We currently
anticipate that our proposed extension of the Circe Network into southern France
and Switzerland will be placed into service during the second quarter of 2000.
The Circe Network will offer incumbent telecommunications operators and
new entrants an attractive alternative for the transport of European
cross-border telecommunications traffic. Under the traditional system of
carrying cross-border telecommunications traffic in Europe, the incumbent
telecommunications operator did not develop end-to-end cross-border circuits,
but rather connected its national networks with other carriers at the border.
The Circe Network's cross-border transport will offer its consistently high
transmission quality at a reduced cost. The Circe Network will offer such
cost-effective, high quality, cross-border connectivity as a compelling
alternative to the incumbent telecommunications operators' leased lines.
Key characteristics of the Circe Network include:
STATE-OF-THE-ART-TECHNOLOGY. We are installing state-of-the-art,
technologically advanced equipment. The first ring of the Circe Network uses,
and each of the additional four rings will use, a laser-generated light to
transmit bi-directionally over fiber optic glass strands with an initial
capacity of 20 gigabits per second. The first ring of the Circe Network also
employs, and each of the additional four rings will employ, dense wave division
multiplexing technology, which is among the latest commercial advancements in
optical physics. This technology allows more discrete wavelengths of light to be
transmitted through fiber, thereby permitting the transfer of greater amounts of
information at lower cost than was achievable with prior fiber optic technology.
UNIFORM NETWORK ARCHITECTURE. We are developing a pan-European network
designed to utilize packet switching technology where appropriate, as well as
traditional circuit switching technology to cost effectively handle voice, data
and multimedia services. The entire Circe Network will consist of a single
uniform configuration of Nortel Telecom's optronics and Lucent Technologies'
fiber optic cable thereby enhancing service quality while improving efficiency
and lowering costs.
SECURE AND RELIABLE. The Circe Network is being designed to provide
high security and reliability, using:
o two international network operating centers monitoring the
network 24 hours a day, seven days a week,
o a self-healing system that will allow for instantaneous
restoration, virtually eliminating down time in the event of a
fiber cut,
o fiber cable generally installed in high-density polyethylene
conduits on terrestrial portions of the system, and
o advanced cable armoring techniques on the submarine portions of
the system.
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SCALABLE AND FLEXIBLE. The Circe Network's high density network
architecture may be upgraded, without service interruptions, to at least 320
gigabits per second per fiber pair (equivalent to 2,048 STM-l's) through the use
of dense wave division multiplexing technology and bi-directional multi-
wavelength optical amplifiers, to support demand for capacity intensive data
applications. We anticipate that each ring of the Circe Network will contain
multiple conduits containing at least 48 fibers along substantially all of the
routes. These conduits will have excess space through which additional fibers
may be run without the necessity for any further material civil works.
SALES AND MARKETING; CUSTOMERS
The Circe Network is designed to allow end users, carriers and
resellers to integrate high quality, cross-border capacity into their end user
offerings. Prior to bringing the Circe Network into service, we were limited in
our ability to provide high capacity services to other carriers so we focused
our business on selling to end users and selling switched minutes to carriers
and resellers in order to help use the fixed capacity of leased lines. With the
high quality, low cost transmission capacity to be provided by the Circe
Network, we will be well positioned to offer large capacity services to the
additional market segments listed below. We are targeting the following seven
major market segments:
o RESELLERS. Resellers are carriers that do not own transmission
facilities but obtain communications services from another
carrier for resale to the public. Resellers are a growing segment
of the market and are expected to increase in conjunction with
the liberalization of the European telecommunications market.
o INCUMBENT TELECOMMUNICATIONS OPERATORS. This customer segment
consists of the incumbent telecommunications operators that have
historically employed bilateral agreements with other incumbents
for cross-border connectivity but are now selling their own
transborder connectivity by leasing capacity on alternative
networks.
o INTERNATIONAL CARRIERS. This customer segment consists of
non-European carriers with traffic between European and other
international gateways. We can provide these customers a
pan-European distribution network to gather and deliver traffic
to and from their own networks and other hubs.
o END USERS. Small to large-sized enterprises need inexpensive
voice and data services. The Circe Network should allow us to
satisfy this need and provide bundled services. We expect that
additional demand for alternative service providers will come
from increased usage of dedicated circuits for Internet access,
private lines for the deployment of wide-area networks by large
enterprises, "single source" local and long distance services by
small and medium-sized enterprises and emerging high capacity
applications such as cable TV programming distribution (other
than broadcast) to the end user.
o ALTERNATIVE CARRIERS. This segment consists of new entrant
carriers, cable TV and mobile carriers and competitive access
providers. These new carriers have chosen to compete with the
incumbent telecommunications operators in their respective
countries.
o INTERNET BACKBONE NETWORKS. Internet backbone networks are a fast
emerging segment and are expected to generate significant
requirements for the services which we offer. As capacity becomes
available in Europe, Internet usage also is expected to grow.
These networks require large capacity international connectivity
services between Internet nodes (point of interconnection between
local Internet service providers) in all local European markets.
o VALUE ADDED NETWORKS AND OTHER SERVICE PROVIDERS. Value added
networks are data communications systems in which special service
features enhance the basic data transmission facilities offered
to customers. Many of these networks are targeted to the data
transfer requirements of specific international customer
segments, such as financial institutions. Many value added
networks' providers basic network transmission requirement is to
connect data switches or processors. Value added networks'
currently purchase their own international circuits and build
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additional resiliency into their network infrastructure. We will
allow them to meet these needs cost-effectively, and to extend
their services to new markets or customers without substantial
capital investment. This market segment is expected to experience
substantial growth over the next several years.
During 1998, one customer, LD Exchange.com, accounted for 10.6% of Viatel's
revenues.
From 1991 to 1994, our sales and marketing efforts were conducted by
independent sales representatives in each of our markets. In late 1994, we began
establishing our own direct sales forces in certain Western European markets to
take greater control over the sales and marketing functions and to provide a
higher level of customer service. Currently, we have direct sales forces in
twelve cities in Western Europe and have established indirect sales offices,
through arrangements with independent sales representatives and telemarketing
agents, in more than 180 locations in Western Europe. We have sales
professionals dedicated to marketing and maintaining relationships with our
wholesale customers in the United States and in the United Kingdom. In Europe,
our sales and marketing staff is currently divided into two categories: direct
sales representatives and indirect sales representatives. Direct sales
representatives are responsible for face-to-face sales efforts to larger
accounts and indirect sales representatives are responsible for telesales to
smaller accounts.
Our direct sales personnel are currently compensated on a salary and
commission basis, with potential commissions being paid on the basis of revenues
generated by new customers solely during their first three months as a customer.
After such three month period, the customer is turned over to pro-active account
managers who manage the account and are compensated based on the monthly growth
of such account above certain minimum requirements. We believe that this
compensation structure provides maximum incentive to our direct sales force to
continue to grow our customer base and revenue.
Our independent sales representatives are retained on a
non-exclusive/commission-only basis, with commissions being subject to charge
back for revenues not collectible by us. We believe that our relationship with
our independent sale representatives is good.
INFORMATION SYSTEMS
We believe that integrated and reliable billing and information systems
are key elements for growth and success in the telecommunications industry.
Accordingly, we have made significant investments to acquire and implement
sophisticated information systems which are designed to enable us to: (1)
monitor and respond to customer needs by developing new and customized services;
(2) manage least cost routing; (3) provide customized billing information; (4)
provide high quality customer service; (5) detect and control fraud; (6) verify
payables to suppliers; and (7) rapidly integrate new customers. We believe that
our network intelligence, billing and financial reporting systems enhance our
ability to competitively meet the increasingly complex and demanding
requirements of the international and national long distance markets. While we
believe that such systems are currently sufficient for our operations, such
network intelligence, selling and financial reporting systems will require
routine upgrades and ongoing investments.
We currently have a turnaround time of approximately 48 hours for new
account entry, subject to credit approval. Our billing system provides
multicurrency billing, itemized call detail, city level detail for destination
reporting and electronic output for select accounts. Customers are provided with
several payment options, including automated credit card processing and
automated direct debiting.
We have developed software to provide telecommunications services and
render customer support. In certain cases, the software used to support our
services may reside outside of the switches and, therefore, is not reliant on a
third party switch manufacturer for upgrades or support. Each switch has a call
detail recording function which is designed to enable us to: (1) achieve
accelerated collection of call records; (2) detect fraud and unauthorized usage;
and (3) permit rapid call detail record analysis.
We also use proprietary software to assist in analyzing traffic
patterns and determining network usage and busy hour percentage, originating
traffic by switching center, terminating traffic by supplier and originating
traffic by customer. This data is utilized to provide least cost routing, which
may result in call traffic being transmitted over our transmission facilities,
other carriers' transmission facilities or a combination of such facilities. If
traffic cannot be handled over the least cost route due to overflow, the least
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cost routing system is designed to transmit the traffic over the next least cost
route. The least cost routing system chooses among the following variables to
minimize the cost of a long distance call over 15 different suppliers and
multiple choices of terminating carrier per country. The performance of the
least cost routing system is verified based on a daily overflow report generated
by our network traffic management and a weekly/monthly average termination cost
report generated by our billing system.
CARRIER CONTRACTS
We have entered into contracts to purchase switched minute capacity
from various domestic and foreign carriers and currently depend on such
contracts for origination and termination of traffic on our network as well as
for resale of such capacity to others. Carrier costs constitute a significant
portion of our variable costs. Pursuant to these contracts, we obtain guaranteed
rates, which are generally more favorable than otherwise would be available, by
committing to purchase switched minute minimums from such carriers. If we fail
to meet our switched minute minimum requirements under a carrier contract, we
would still be required to pay the minimum monthly commitment as a penalty. We
do not believe that the loss of any one supplier or contract would have a
material adverse impact on our business, financial condition or results of
operations.
COMPETITION
Our success depends upon our ability to compete with other
telecommunications providers in each of our markets. These providers include the
incumbent telecommunications operator in each country in which we operate, and
global alliances among some of the world's largest telecommunications carriers,
such as Global One (Sprint, France Telecom and Deutsche Telekom), an alliance
between MCI WorldCom and Telefonica de Espana and an alliance between AT&T and
British Telecom. Other potential competitors include:
o cable communications companies,
o wireless telephone companies,
o electric and other utilities with rights-of-way,
o railways, microwave carriers, and
o large end users which have private networks.
The intensity of competition and price declines has increased over the
past several years and we believe that such competition and price declines will
continue to intensity, particularly in Western Europe. Many of our current and
potential competitors have substantially greater financial, marketing and other
resources than we do. If our competitors devote significant additional resources
to the provision of international or national long distance telecommunications
services to our target customer base, this action could have a material adverse
effect on our business, financial condition and results of operations and we
cannot provide any assurance that we will be able to compete successfully.
Because all of our current and intended European markets (other than
the United Kingdom) have only liberalized the provision of switched voice
telephony during the past year or still are in the process of liberalizing the
provision of voice telephony, customers in most of the markets are not
accustomed to obtaining services from competitors to incumbent
telecommunications operators and may be reluctant to use emerging
telecommunications providers, such as us. In particular, our targeted customer
base 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 can offer.
Competition for customers in the telecommunications industry is
primarily based on price and quality of services offered. We price our services
primarily by offering discounts to the prices charged by incumbent
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telecommunications operators and other major competitors. However, prices for
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 or expect to operate. Incumbent telecommunications operators
in several Western European countries are responding to deregulation far 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
customer service by the incumbent telecommunications operators could 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, numerous carriers currently offer, or 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.
Incumbent telecommunications operators generally have certain
competitive advantages that we and other competitors do not have due to their
control over local connectivity. We rely on the incumbent telecommunications
operator 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, grant regulatory approvals,
provide necessary provisions 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 would be able to compete effectively in
any of our current or proposed markets. The Circe Network will reduce our
dependence on incumbent telecommunications operators for leased long-haul lines,
but it will not reduce our dependence on such carriers to "last mile" access to
the vast majority of our end user customers.
GOVERNMENT REGULATION
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
markets. We cannot make any assurance 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 ("FCC")
adopted the Foreign Participation Order to implement the U.S. obligations under
the WTO Agreement. In this order, the FCC adopted an open entry standard for
carriers from WTO member countries, generally facilitating market entry for such
applicants by eliminating certain existing tests. These tests remain in effect,
however, for carriers from non-World Trade Organization member countries.
Requests for reconsideration of the Foreign Participation Order are pending at
the FCC.
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International carriers serving the United States, including us, remain
subject to the FCC's international settlement policies, including rules adopted
by the FCC 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 new International Settlement Rates Order generally
requires U.S. facilities based carriers to negotiate settlement rates with their
foreign correspondent at no greater than FCC established "benchmark" prices.
Historically, international settlement rates have vastly exceeded the cost of
terminating telecommunications traffic. In addition, the International
Settlement Rates Order imposed new conditions upon certain carriers, including
us. First, the FCC conditioned facilities-based authorizations for service on a
route on which a carrier has a foreign affiliate upon the foreign affiliate
offering all other U.S. carriers a settlement rate at or below the relevant
benchmark. Our foreign affiliates satisfy this condition. Second, the FCC
conditioned any authorization to provide switched services over either
facilities-based or resold international private lines upon the condition that
at least half of the facilities based international message telephone service
traffic on the subject route is settled at or below the relevant benchmark rate.
This condition applies whether or not the licensee has a foreign affiliate on
the route in question. In the Foreign Participation Order described above,
however, if the subject route does not comply with the benchmark requirement, a
carrier can demonstrate that the foreign country provides "equivalent" resale
opportunities. Accordingly, since the February 9, 1998 effective date of the
Foreign Participation Order, we have been permitted to resell private lines for
the provision of switched services to any country that either has been found by
the FCC to comply with the benchmarks or has been determined to be equivalent.
We, however, remain subject to prior FCC 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 FCC to lack market power. Many parties have appealed the
International Settlement Rates Order to the U.S. Court of Appeals for the D.C.
Circuit or have filed petitions for reconsideration with the FCC. 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 FCC. 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 FCC rules limit the way in 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
U.K., is specifically prohibited by, or undermines in any way the intent of,
these rules. It is possible, however, that the FCC 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 were sufficiently severe, it is
possible that the FCC could impose sanctions and penalties upon us.
REGULATORY STATUS. A summary discussion of the regulatory situations
in certain geographic regions in which we operate or have targeted for
penetration is set forth below.
EUROPEAN UNION. The European Union consists of the following member
states: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United
Kingdom. The European Union was established by the Treaty of Rome and subsequent
treaties. European Union member states are required to implement directives
issued by the European Commission and the European Council by passing national
legislation. If a European Union member state fails to effect such directives
with national (or, as the case may be, regional, community or local) legislation
and/or fails to render the provisions of such directives effective within its
territory, the European Commission may take action against the European Union
member state, including in proceedings before the European Court of Justice, to
enforce the directives. Private parties may also bring actions against European
Union member states for failures to implement such legislation.
In an effort to promote competition and efficiency in the European
Union telecommunications market, the European Commission and European Council
have issued a number of key directives establishing basic principles for the
liberalization of the European Union telecommunications market. The general
framework for this liberalized environment has been set out in the European
Commission's Services Directive (the "Services Directive") and its subsequent
amendments, including, in particular, the Full Competition Directive, adopted in
March 1996 (the "Full Competition Directive"). These directives require most
European Union member states to permit competition in all telecommunications
services and had set January 1, 1998 as the date by which all restrictions on
the provision of telecommunications services and telecommunications
infrastructure were to be removed. These directives have been supplemented by
various harmonizing directives, which include the Open Network Provision
Directives, as well as two additional directives adopted in 1997, the Licensing
Directive and the Interconnection Directive.
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The Licensing Directive established a framework for the granting of
national authorizations and licenses related to telecommunications services. It
permits European Union member states to establish different categories of
licenses for providers of infrastructure and services, but requires the overall
scheme to be transparent and non-discriminatory. The Interconnection Directive
requires member states to remove restrictions preventing negotiation of
interconnection agreements, ensure that interconnection requirements are
non-discriminatory and transparent and to ensure adequate and efficient
interconnection for public telecommunications networks and publicly available
telecommunications services.
In October 1997, the European Commission issued a consultative document
supporting the implementation of long run incremental cost principles as a basis
for interconnection pricing. This document also sets forth interconnection
pricing benchmarks reflecting current interconnection agreements in European
Union member states. The European Commission believes such benchmarks should be
relied upon pending the adoption of accounting systems and interconnection rates
based on long run incremental cost principles.
Several European Union member states have chosen to apply the
provisions of the Interconnection Directive within their jurisdictions in such
ways as to give more favorable treatment to infrastructure providers and network
operators than to carriers and resellers that have made no infrastructure
investment. Such distinctions must be objectively justified on the grounds of
the type of interconnection provided or because of relevant licensing
conditions. The Licensing Directive does not provide a clear definition of an
infrastructure investment, and many European Union member states have adopted
inconsistent approaches with respect to the level and type of infrastructure
investment required to justify differences in interconnection charges. While we
believe that the European Commission will seek to minimize these disparities in
national interconnection policies, there can be no assurance that these
disparities can be eliminated or significantly reduced or that any such
differences in regulatory treatment will not have a material adverse effect on
us. To the extent incumbent telecommunications operators deny or delay granting
us interconnection, even if only for a limited period of time, in any of the
countries in which we have or will have points of presence, we will be forced to
terminate traffic through refile or resale agreements with other carriers,
resulting in higher costs.
Each European Union member state in which we currently conduct our
business has a different regulatory regime and such differences are expected to
continue. The requirements for us to obtain necessary approvals vary
considerably from country to country.
BELGIUM. In December 1997, the Belgian Federal Parliament provided for
full liberalization of the provision of telecommunications services. However,
this law and secondary legislation are not yet complete.
Under the existing licensing scheme, applicants seeking a network
operator license must commit to invest 400 million Belgian Francs or to deploy
500 kilometers of transmission infrastructure within three years of the date the
license is granted as well as investing an amount equal to 1% of annual turnover
in order to fund research and development and other initiatives. Notwithstanding
these stringent requirements (which may be modified by European Commission
intervention that has been formally commenced), we obtained a license under the
provisional licensing system for the establishment and operation of a public
telecommunications network on June 30, 1998 and a provisional license for the
provision of voice telephony on July 3, 1998. Recently, these provisional
licenses were converted into definitive licenses.
Belgium is one of the European Union member states which differentiates
between interconnection for infrastructure providers and network operators and
switch-based carriers and resellers. The interconnection tariffs of Belgacom
(Belgium's incumbent telecommunications operator), which has been officially
approved by the Belgian Institute for Postal Services and Telecommunications,
provides more favorable interconnection rates for infrastructure providers and
network operators than for switch-based carriers and resellers. As a result of
the construction of the Circe Network, we qualify for these more favorable
rates.
The modified Belgian Telecommunications Law also provides for the
creation of a Universal Service Fund, to be managed by the Belgian Institute for
Postal Services and Telecommunications, to which operators may be required to
contribute funds in proportion to their revenues from the Belgian
telecommunications market. However, the Universal Service Fund system will not
be activated before the year 2000, and then only insofar as: (1) Belgacom claims
a compensation for being the universal service provider, (2) the Belgian
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Institute for Postal Services and Telecommunications considers that universal
service provision represents a net cost, and (3) the Belgian Federal Government
takes a formal decision to activate the Universal Service Fund. From 1998
onwards, the Belgian Institute for Postal Services and Telecommunications will
"dry-run" the universal service costing model and keep operators informed of the
contributions that they may be required to make if and when the Universal
Service Fund is activated.
FRANCE. In July 1996, legislation was enacted providing for the
liberalization of all telecommunications activities in France by January 1,
1998.
The establishment and operation of public telecommunications networks
and the provision of voice telephony services are subject to individual licenses
granted by the Minister in charge of telecommunications upon recommendation of
France's new independent regulatory authority, the Authorite de Regulation des
Telecommunications ("ART").
In December 1997, we filed a joint application for a license as a
public telecommunications network operator (under Article L33.1 of the French
Code de Postes et Telecommunications) and provider of voice telephony services
to the public (under Article L34.1 of the French Code de Postes et
Telecommunications). The license application was approved by both ART and the
relevant Minister during 1998. In March 1999, we obtained interconnection
arrangements which allow customers in the greater Paris region to originate and
terminate calls throughout France and all countries serviced by Viatel.
Additional interconnections to the Strasbourg and Amiens regions are expected to
be obtained in mid-1999.
We are subject to certain obligations in the operation of its public
telecommunications network, most notably in terms of non-discriminatory
treatment of customers and an obligation to accept reasonable requests for
interconnection from other carriers.
France is also one of the European Union member states which
differentiates between interconnection for public telecommunications network
operators, holding a L33.1 license, and voice telephony service providers,
holding a L34.1 license. The interconnection tariffs of France Telecom, which
have been officially approved by ART, provide substantially more favorable
interconnection rates for public telecommunications network operators than for
voice telephony service providers.
GERMANY. The German Telecommunications Act of July 25, 1996 provided
for the liberalization of all telecommunications activities by January 1, 1998.
The German Telecommunications Act has been supplemented by several ordinances
concerning, among other things, license fees, rate regulation, interconnection,
universal service, frequencies and customer protection. The German
telecommunications sector is currently overseen by a new Regulatory Authority
for Telecommunications and Post ("RegTP") that operates under the supervision of
the Ministry of Economics and has taken over the regulatory responsibilities of
the disbanded Ministry of Post and Telecommunications.
Under the German regulatory structure, licenses can be issued for
different types of infrastructure as well as for the provision of services based
on transmission lines provided by other service providers. Viatel has been
issued a nationwide class 3 infrastructure license and a nationwide class 4
license for the provision of voice telephony.
All existing interconnection agreements with Deutsche Telekom have been
terminated effective December 31, 1999, requiring all affected parties to seek
new interconnection with Deutche Telekom. In a letter dated February 19, 1999,
the FCC expressed its concerns about the new interconnection regime and argued
that the action taken by Deutsche Telekom, as well as other actions taken by
other such carriers, was designed to impede effective and competitive market
entry. Although we believe that we will be able to obtain a new interconnection
agreement with Deutsche Telekom prior to December 31, 1999, we cannot provide
any assurance that this will be the case or that the interconnection arrangement
obtained will contain terms which are as favorable to us as those contained in
our current interconnection arrangement.
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ITALY. In 1997, the Italian authorities enacted a legislative framework
for the full liberalization of telecommunications services by January 1, 1998.
On February 12, 1999, we received a license to provide voice telephony as well
as to own and operate infrastructure.
On July 24, 1998, Telecom Italia published its Reference Interconnect
Offer, which has been amended recently due to decisions by the Italian
regulator. The offer allows interconnection at one point of interconnect and
brought interconnection rates down to a level much closer to the European Union
benchmarks. We initiated interconnection negotiations towards the end of 1998
and expect to have an interconnection agreement with Telecom Italia by the end
of the third quarter of 1999.
In Italy, providers of network infrastructure and switched voice
services as well as national mobile operators must contribute to a universal
service fund. Such a requirement is to take effect in 1999 provided that Telecom
Italia demonstrates by March 31, 1999, on the basis of audited reports, that its
universal service obligations impose on it net losses. Even in these
circumstances, the Italian regulator can exempt new entrants from an obligation
to contribute to such a universal service fund. Both the Italian competition
agency and the European Commission are likely to recommend such an exemption
scheme to the Italian regulator. However, we cannot assess at this time any
possible impact of any such universal service obligations on our operating
margins.
THE NETHERLANDS. The Netherlands liberalized voice telephony in July
1997, and necessary legislation to implement the requirements of the Full
Competition Directive has been enacted. We have signed an interconnection
agreement with KPN Telecom. According to the terms of the new telecommunications
law, our original registration has been replaced by new general authorizations
for the provision of voice telephony and infrastructure.
SPAIN. The Spanish government implemented the full liberalization of
public switched telephone services on December 1, 1998. We were granted a
nationwide infrastructure and voice telephone license in March 1999. We expect
to sign an interconnection agreement with Telefonica de Espana in the fourth
quarter of 1999.
SWITZERLAND. A new Telecommunications Act was adopted by the Swiss
Parliament in April 1997 and came into effect on January 1, 1998, together with
certain ordinances containing more detailed regulations covering
telecommunications services, frequency management, numbering, terminal equipment
and license fees. The new Telecommunications Act provides for liberalization of
the Swiss telecommunications market as of January 1, 1998.
The Swiss telecommunications regulatory framework facilitates market
entry by: (1) applying a notification procedure for resellers, (2) applying a
procedure for operators wishing to be granted a concession for the establishment
and operation of transmission facilities and (3) providing rights-of-way,
subject to a procedure of authorization, over the public domain to
facilities-based carriers. Pro-competitive regulation is also applicable in the
area of numbering.
We have registered our activities as a provider of voice telephony
services in Switzerland but have not yet completed negotiation of an
interconnection agreement (in accordance with the notification procedure). We
are applying for a concession as a facilities-based carrier.
Switzerland is not a member of the European Union and, accordingly,
directives do not apply. Switzerland is, however, a party to the WTO Agreement.
UNITED KINGDOM. The Telecommunications Act 1984 (the "U.K. Act")
provides a licensing and regulatory framework for telecommunications activities
in the United Kingdom. The U.K. has liberalized its market substantially to meet
the requirements of the Full Competition Directive. There is pending secondary
legislation to fully implement the European Commission Directives which may
affect the licenses which have been granted to us and our competitors. We cannot
predict what effect, if any, this legislation will have on our business.
Viatel UK has been granted an international simple voice resale
standard license and was awarded an international facilities license with code
powers in June 1998. In addition, Viatel UK has interconnection agreements with
Cable & Wireless and British Telecom.
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<PAGE>
OTHER EUROPEAN MARKETS. Our ability to expand in other countries will
be affected by the degree to which liberalization has been implemented in that
country. If for strategic reasons we decide to build out infrastructure in each
particular market prior to full liberalization and liberalization is delayed or
not fully implemented, we could sustain a loss on our infrastructure investment.
LATIN AMERICA AND THE PACIFIC RIM. Outside of the European Union, we
provide our customers with access to our services through the use of call
reorigination. A substantial number of countries have prohibited certain forms
of call reorigination. There can be no assurance that certain of our services
and transmission methods will not be or will not become prohibited in certain
jurisdictions.
We are subject to a different regulatory regime in each country in
Latin America and the Pacific Rim in which we conduct business. Local
regulations determine issues significant to our business, including whether we
can obtain authorization to offer transmission of voice and voice band data
directly or through call reorigination. In general, competition is restricted in
the region, with the result that our ability to offer such service is limited.
Regulations governing enhanced services (such as facsimile and voice mail and
data transmission) tend to be more permissive than those covering voice
telephony.
ARGENTINA. The telecommunications industry in Argentina was privatized
in 1990, but opportunities for competitive entry in basic telephony services
remain restricted. The companies created at the time of privatization, Telecom
and Telefonica, respectively, were granted exclusive rights until 1997 to the
provision of domestic local and long distance fixed telephone service in the
northern and southern portions of Argentina, respectively. Telintar, a company
owned equally by Telecom and Telefonica, was given exclusive rights until 1997
for the provision of international telephony and data transmission services.
Value-added services may be competitively provided and are essentially
deregulated. Although a license must be obtained, such licenses are routinely
granted. Facilities for international value-added services must be obtained from
Telintar. Currently, call reorigination is legal in Argentina, although the
established carriers have advocated strenuously against it and the government's
view has changed from time to time. Telecom and Telefonica have instituted
significant rate rebalancing measures which are likely to lessen the
attractiveness of call reorigination. The Supreme Court recently ruled in favor
of rate rebalancing, rejecting several challenges to it.
We have had a sales representative in Argentina since 1991. We have
focused on call reorigination, Internet-initiated international
business-to-business service and international calling card services. We do not
currently hold any licenses in Argentina.
BRAZIL. In Brazil, value-added services are not considered to be
telecommunications services and currently can be provided on a completely
unregulated basis, without the necessity of obtaining a permit or a concession.
However, the service provider must operate through a Brazilian company. Call
reorigination is not prohibited in Brazil. A foreign ownership limit of 49% is
imposed under the 1996 "Minimal Law" for B-Band cellular, satellite and cable TV
services. There are presently no foreign ownership limits for limited services,
including specialized limited services, or value-added services. Under the 1997
"General Telecommunications Law," the President retains the authority to impose
foreign ownership limits on other services, but by decree dated May 15, 1998,
the President expressly decided not to impose any such limits.
Our services in Brazil currently include call reorigination and
international calling cards and fax store and forward which are classified as
value-added services and therefore do not require a license. We plan to offer
such services as well as to apply for licenses to offer specialized limited
services which include private line and data transmission services.
COLOMBIA. Under a new Constitution adopted in 1991, the possibility of
private provision of public services was ratified in Colombia. This paved the
way for both privatization of the state-owned long distance company, TELECOM, as
well as the competitive entry of other entities. Specific plans for the
privatization of TELECOM have faltered due to, among other things, labor union
resistance. However, the government mandated that competition be introduced in
1998. Two competitors to TELECOM have been licensed. A federal judicial body
with jurisdiction over public contracts has recently issued a writ declaring
that the issuance of licenses for any additional competition in long distance
services must be authorized by new legislation. The implications of this
decision for us are not clear.
17
<PAGE>
In Colombia, there are in excess of 35 local operating companies, many
municipally owned. Under Colombian law, local service has been completely
deregulated and may be provided without a telecommunications concession or
license. Other telecommunications services require a concession or other
authorization.
Value-added services are competitive, but must be licensed. There is
currently intense competition for value-added services, and the market for data
communications is one of the most dynamic segments of the telecommunications
sector. Although Colombian law requires that all telecommunications services be
rendered by Colombian entities, foreign investment is not limited.
Most of our customers in Colombia access our network via international
toll free numbers. We have formed a Colombian subsidiary and have been awarded a
value-added services license. We are working on the establishment and operation
of a network to utilize the value-added services license.
VENEZUELA. Pursuant to the Telecommunications Law of 1940, all
telecommunications activities in Venezuela are reserved to the government,
although concessions or permits for the provision of such services may be
granted to third parties. The administration, inspection and monitoring of all
communications systems in Venezuela are carried out by the Ministry of
Transportation and Communications through the Comision Nacional de
Telecommunicaciones.
The national telephone company of Venezuela, Compania Anonima Nacional
de Telefonos de Venezuela, was privatized in 1991 and its concession grants a
monopoly in the provision of basic telecommunications services until the year
2000. The only exceptions to this exclusivity are recently awarded concessions
for the provision of basic services to rural areas not reached by Compania
Anonima Nacional de Telefonos de Venezuela.
Other telecommunications services, such as cellular telephony and other
mobile radio services, private telecommunications networks, switched data
networks and value-added services (including e-mail, Internet, video text,
telenext, voicemail and faxmail) are open to competition upon receipt of a
concession or permit, as applicable. Call reorigination is officially illegal in
Venezuela. The prohibition is supposed to be enforced by Comision Nacional de
Telecommunicaciones with the unofficial aid of Compania Anonmia Nacional de
Telefonos de Venezuela through termination of subscriber service, but in
practice the prohibition is widely evaded.
We do not have a local affiliate in Venezuela and do not hold any
Venezuelan concessions or authorizations. At present, our agents in Argentina
offer only Internet-initiated international business-to-business services and
international calling cards in Venezuela. We do not believe that these services
are encompassed within the prohibition against call reorigination, but it is
possible that Venezuelan authorities may consider them to raise similar policy
issues to prohibited call reorigination services. If the call reorigination
prohibition is deemed to apply, we may have to discontinue Internet-initiated
services in Venezuela.
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<PAGE>
UNITED STATES. Our provision of international service to, from and
through the United States generally is subject to regulation by the FCC. Section
214 of the Communications Act of 1934 requires a company to make application to,
and receive authorization from, the FCC to provide such international
telecommunications services. In May 1994, the FCC authorized us pursuant to
Section 214 of the Communications Act to resell public switched
telecommunications services of other United States carriers (the "Section 214
Switched Authorization"). The Section 214 Switched Authorization requires that
services be provided in a manner that is consistent with the laws of countries
in which we operate. We also have a license to resell international private
lines for the provision of switched services between the United States and the
United Kingdom and between the United States and Canada. Additionally, in
September 1996 we received final approval for another Section 214 authorization
from the FCC to provide both facilities-based services and resale services
(including both the resale of switched services and the resale of private lines
for the provision of switched services) to all permissible international points.
Finally, in September 1996 we also received final approval for another Section
214 authorization from the FCC to provide facilities-based service between the
United States and the United Kingdom over the CANUS-1 and CANTAT-3 cable systems
(the "Section 214 UK Facilities Authorization").
EMPLOYEES
As of December 31, 1998, we had 488 full-time employees, 234 of whom
were engaged in sales, marketing and customer service. None of our employees
is covered by a collective bargaining agreement. We believe that our
relationship with our employees is good.
ITEM 2. PROPERTIES.
We currently occupy approximately 42,000 square feet of office space at
two sites in New York City, which serve as our principal executive office and an
international gateway switching center. The leases have an aggregate annual
rental obligation of approximately $1,596,000 and expire on March 31, 2009 and
May 31, 2007, respectively. We also lease approximately 26,000 square feet of
office space in Somerset, New Jersey, which serves as our U.S. Network
Operations Center. In addition, we lease approximately 22,000 square feet of
office space in Omaha, Nebraska, which serves as an operations center and a
switching center. This lease has an annual rental obligation of approximately
$120,000 and expires on May 31, 2004.
We also lease office space in various cities in Europe where we
maintain sales offices with annual rents ranging from $18,000 in Rome to
$511,800 in London (based on foreign currency exchange rates in effect as of
December 31, 1998). Our aggregate annual rental obligations for our European
offices is approximately $2,038,000 (based on foreign currency exchange rates in
effect as of December 31, 1998).
ITEM 3. LEGAL PROCEEDINGS.
We are involved from time to time in litigation incidental to the
conduct of our business. We believe that any potential adverse determination in
any pending action will not have a material adverse effect on our business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since completion of our initial public offering in October 1996 (the
"IPO"), our common stock, $0.01 par value per share (the "Common Stock") has
been traded on the Nasdaq Stock Market under the symbol "VYTL." As of March 10,
1999 there were 23,185,765 shares of Common Stock outstanding. We believe that
there are in excess of 500 beneficial owners of our common stock. The following
table sets forth, for each of the periods indicated, the high and low sales
prices per share of Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
1998
<S> <C> <C>
Fourth Quarter................................ 23-1/2 6-7/8
Third Quarter ................................ 22-3/4 8-1/8
Second Quarter................................ 17-5/8 6-3/4
First Quarter ................................ 14 5
1997
Fourth Quarter................................ 7-7/8 4-1/2
Third Quarter ................................ 6-3/4 4-1/8
Second Quarter................................ 7 6
First Quarter ................................ 9-1/2 6-1/2
1996
Fourth Quarter (from October 18, 1996)........ 12-1/4 8-1/2
</TABLE>
To date, we have never declared or paid any cash dividends on our
Common Stock and we do not expect to do so in the foreseeable future. We do not
expect to generate any net income in the foreseeable future, but anticipate
that future earnings generated from operations, if any, will be retained to
finance the expansion and continued development of our business. Any future
determination with respect to the payment of dividends on its Common Stock will
be within the sole discretion of our Board of Directors and will depend upon,
among other things, our earnings, capital requirements, the terms of the
existing indebtedness, applicable requirements of the Delaware General
Corporation Law, general economic conditions and such other factors considered
relevant by our Board of Directors. In addition, our ability to pay cash
dividends is currently restricted under the terms of the indentures, each dated
April 8, 1998 between us and The Bank of New York, pursuant to which our
outstanding senior notes and senior discount notes due 2008 were issued. On
March 19, 1999, we raised approximately $365.5 million of gross proceeds through
a high yield offering of senior notes. The principal purpose of this offering is
to fund the further expansion of the Circe Network.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected Consolidated Statement of Operations, Other
Financial Data and Balance Sheet Data as of and for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 have been derived from our Consolidated
Financial Statements and the notes related thereto, which were audited by KPMG
LLP, Independent Certified Public Accountants. The consolidated financial
statements as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 and the report of KPMG LLP thereon,
are included elsewhere in this Report. This information should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" our Consolidated Financial Statements,
including the notes thereto, and the other financial data included elsewhere in
this Report.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Communication services revenue $135,188 $ 73,018 $ 50,419 $ 32,313 $ 26,268
Operating expenses:
Cost of communication services 122,109 63,504 42,130 27,648 22,953
Selling, general and administrative 44,893 36,077 32,866 24,370 14,463
Depreciation and amortization 16,268 7,717 4,802 2,637 789
Equipment impairment loss - - - 560 -
----------- ---------- ---------- ---------- ----------
Total operating expenses 183,270 107,298 79,798 55,215 38,205
----------- ---------- ---------- ---------- -----------
Operating loss (48,082) (34,280) (29,379) (22,902) (11,937)
Interest income 28,259 3,686 1,852 3,282 214
Interest expense (79,177) (12,450) (10,848) (8,856) (772)
------------ ----------- ----------- ----------- ------------
Loss before extraordinary loss (99,000) (43,044) (38,375) (28,476) (12,495)
Extraordinary loss on debt prepayment (28,304) - - - -
------------ ----------- ----------- ----------- -----------
Net loss (127,304) (43,044) (38,375) (28,476) (12,495)
Dividend on redeemable convertible preferred stock (3,301) - - - -
------------ ----------- ----------- ----------- -----------
Net loss attributable to common stockholders $ (130,605) $ (43,044) $ (38,375) $ (28,476) $ (12,495)
============ =========== =========== =========== ===========
Loss per common share, basic and diluted:
Before extraordinary item (1) $ (4.44) $ (1.90) $ (2.47) $ (2.09) $ (1.22)
------------ ----------- ----------- ----------- -----------
From extraordinary item (1.23) - - - -
------------ ----------- ----------- ----------- -----------
Net loss attributable to
common stockholders $ (5.67) $(1.90) $ (2.47) $ (2.09) $ (1.22)
============ =========== =========== =========== ===========
OTHER FINANCIAL DATA:
EBITDA(2) $(31,814) $ (26,563) $ (24,577) $ (20,265) $ (11,148)
Net cash used in operating activities (60,318) (22,525) (26,331) (18,489) (11,571)
Net cash used in investing activities (349,992) (43,164) (1,592) (37,057) (4,996)
Net cash provided by (used in) financing activities 729,035 11,286 94,772 (2,306) 80,984
Capital expenditures 94,674(3) 34,190 9,423 11,378 3,672
Deficiency of earnings to fixed charges(5) (130,605) (43,044) (38,375) (28,476) (12,495)
OTHER OPERATING DATA:
Billable minutes (000s) 383,875 140,918 62,249 25,932 14,981
Average revenue per billable minute $ .34 $ .51 $ .80 $ 1.23 $ 1.70
Average cost per billable minute $ .31 $ .44 $ .67 $ 1.04 $ 1.53
Switches(4) 15 14 13 10 2
Points of presence(4) 34 33 13 11 3
Customers(4) 15,010 21,515 18,172 9,218 6,469
BALANCE SHEET DATA(4):
Cash, cash equivalents and marketable securities $501,282 $ 47,143 $ 92,982 $ 35,066 $ 66,762
Restricted cash equivalents and restricted
marketable securities 144,523(5) - - - -
Property and equipment, net 266,256 54,094 21,074 15,715 6,933
Total assets 1,009,111 126,809 134,664 65,613 83,923
Long-term debt, excluding current installments 921,139 99,610 77,904 67,283 59,955
Redeemable convertible preferred stock 47,121 - - - -
Stockholders' (deficiency) equity (137,292) (8,564) 38,483 (17,618) 10,985
</TABLE>
- - -----------
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<PAGE>
(1) Net loss per share is computed on the basis described in Note 1 of our
Consolidated Financial Statements.
(2) As used herein, "EBITDA" consists of earnings before interest, income
taxes, extraordinary loss, dividends on preferred stock and
depreciation and amortization. EBITDA is a measure commonly used in
the telecommunications industry to analyze companies on the basis of
operating performance. EBITDA is not a measure of financial
performance under generally accepted accounting principles, is not
necessarily comparable to similarly titled measures of other companies
and should not be considered as an alternative to net income as a
measure of performance nor as an alternative to cash flow as a measure
of liquidity.
(3) As of December 31, 1998, we also had a $97.3 million payable for
purchase of property and equipment. During 1998, we also acquired
$30.4 million of assets under capital lease obligations.
(4) Information presented as of the end of the periods indicated.
(5) Restricted cash equivalents include $9.3 million of funds deposited by
Metromedia Fiber Networks, Inc. and Carrier 1, Inc. in connection with
the joint construction of civil works associated with a national
communications network being constructed by each party in Germany. See
Note 3 to our Consolidated Financial Statements. Restricted marketable
securities represents government obligations purchased by us which
secure the payment of the next five interest payments on our
outstanding senior notes.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS, THE NOTES THERETO, AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS REPORT. THE FOLLOWING DISCUSSION INCLUDES CERTAIN
FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT FACTORS, INCLUDING,
BUT NOT LIMITED TO, THE CONTINUED DEVELOPMENT OF OUR BUSINESS, ACTIONS OF
REGULATORY AUTHORITIES AND COMPETITORS, PRICE DECLINES AND OTHER FACTORS WHICH
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS REFERRED TO IN
THE FORWARD-LOOKING STATEMENTS, SEE " - CERTAIN FACTORS WHICH MAY AFFECT OUR
FUTURE RESULTS."
OVERVIEW
Since our inception in 1991, we have invested heavily in developing our
ability to provide international communications services within Western Europe
and expanding our market presence. During the past seven years, we have made
substantial investments in software and back office operations, an
administrative infrastructure and a direct sales organization in Western Europe.
Furthermore, we have created an extensive commercial telecommunications network
in Western Europe which we believe is necessary to economically render the voice
and data services we offer and intend to offer. We have also expanded our
ability to generate revenues in North America, in part due to the acquisition of
Flat Rate Communications, Inc., during 1998. Currently, our revenues are derived
from wholesale and retail sales. Beginning in 1999, our revenues are expected to
be derived from three primary sources: wholesale sales, retail sales (which is
composed of sales to end users) and revenue from the sale of capacity on our
network. Each revenue source has a different impact on our results of
operations. The sale of capacity on the Circe Network will vary substantially
from period to period and will result in fluctuations in our operating results.
For a discussion of the effects of the Circe Network on communication services
revenue and other line items, see "--The Circe Network."
COMMUNICATION SERVICES REVENUE
Our communication services revenue is currently based primarily on the
number of minutes of use billed ("billable minutes") and, to a lesser extent, on
the additional services and products provided through our network. While we
provide both international and national long distance telecommunications
services, we currently derive our communication services revenue principally
from international long distance telecommunications services. We believe,
however, that revenue from national long distance telecommunications services
will continue to increase as a percentage of total communication services
revenue as the Circe Network is completed.
During recent years, the following key trends have affected the
composition of our communication services revenue:
o A growing proportion of our customers, particularly in Western Europe,
now access our network using either "indirect access" or "dedicated
access" rather than call re-origination or international toll-free
access (See "Business--The Viatel Network").
o We have continued to expand our wholesale business, which represented
approximately 58.3%, 27.9% and 16.5% of total communication services
revenue for 1998, 1997 and 1996, respectively. Our acquisition of Flat
Rate Communications, Inc. during 1998 has, in part, resulted in a
significant increase in our wholesale business, and has increased our
revenues generated in North America. While we believe that the
revenues generated in North America will continue to increase, we
anticipate that the percentage of such revenue will decrease as a
percentage of total communications revenue as revenues from Western
Europe are expected to grow at an increasing rate and as we begin to
recognize revenue from the sale of capacity.
o Western Europe has continued to become an important market for us.
During 1998, approximately 46.6% of our communication services revenue
was generated in Western Europe, as compared to approximately 44.7% of
such communication services revenue for 1997 and 41.9% for 1996. In
contrast, communication services revenue from Latin America
represented approximately 10.8% of our communication services revenue
for 1998, as compared to approximately 22.2% for 1997, and
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<PAGE>
communications services revenue from the Asia/Pacific Rim and other
areas represented approximately 1.0% of our communication services
revenue for 1998, as compared to approximately 11.2% for 1997. We
anticipate that the revenue which we derive from Latin America will
continue to decrease as a percentage of total communications revenue
as we continue to grow our business in Western Europe.
We have experienced, and expect to continue to experience, declining
revenue per minute in all of our markets, in part as a result of increasing
worldwide competition within the telecommunications industry. We believe,
however, that the impact on our results of operations from price decreases will
be at least partially offset by (1) continuing decreases in our cost of
providing telecommunications services, particularly those decreases resulting
from our continued efforts to convert from leased to owned infrastructure and
reduce interconnection costs through the use of the Circe Network as it is
expanded, (2) the introduction of new products and services and (3) our
ability to enter into additional interconnection agreements. There can be no
assurance, however, that the results referred to in the foregoing forward-
looking statement, including a decline in our cost of communication services,
can be achieved.
The table set forth below presents our communication services revenue,
as a percentage of total revenue, from different regions (based on where calls
originated on our Network):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Western Europe 46.6% 44.7% 41.9%
North America 41.6 21.9 16.9
Latin America 10.8 22.2 28.4
Asia/Pacific Rim and Other 1.0 11.2 12.8
</TABLE>
COST OF COMMUNICATION SERVICES
Our cost of communication services can be classified into three general
categories: access costs, network costs and termination costs. Access costs
generally represent the costs associated with transporting the traffic from a
customer's premises to the closest access point on the Viatel network. Access
costs vary depending upon the distance to the customer's premises and from
country to country. We currently expect that the effective per minute cost of
these access costs will be reduced as deregulation continues and competition
accelerates, certain European Union directives requiring cost-oriented pricing
(i.e., costs that an effectively competitive market would yield or that deregu-
lation would seek to ensure) by incumbent telecommunications operators are
enforced and as we are able to obtain cost effective interconnection agreements,
although there can be no assurance regarding the extent or timing of such cost
decreases. In the event that such access costs were to fall at a slower rate
than our price per minute, our gross margins could be adversely impacted.
Network costs represent the costs of transporting calls over our
network from its point of entry to its point of exit. Network costs generally
consist of leased line rental costs, facility/network management costs and costs
associated with interconnection with facilities of incumbent telecommunications
operators. Network costs will decrease substantially as each ring of the Circe
Network is placed into service and we secure infrastructure ownership on other
routes, which will enhance gross margins. However, there will be an associated
increase in depreciation and amortization expense (which is included in a
different line item). In order to succeed, we will need our per minute cost of
services to decline substantially compared to our per minute revenue. We
generated only $.03 of gross profit per minute in 1998. See "--Depreciation
and Amortization."
Termination costs currently represent the costs which we are required
to pay to other carriers from the point of exit from our network to the point of
destination. Termination costs are generally variable with traffic volume and
traffic mix. If a call is terminated in a city in which we have a switch or
point of presence, the call is usually transferred to the public switch
telephone network for local termination. If the call is to a location in which
we do not have a switch or point of presence, then the call must be transferred
to another carrier with which we are interconnected. We utilize least cost
routing designed to terminate traffic in the most cost effective manner. We
24
<PAGE>
believe that local termination costs should decrease as we (1) add additional
switches and points of presence, (2) interconnect with additional incumbent
telecommunications operators and other infrastructure providers and (3)
construct or purchase additional transmission facilities. Local termination
costs should also decrease as new telecommunications service providers emerge
and, in Western Europe, as European Union member states implement and enforce
regulations requiring incumbent telecommunications operators to establish rates
which are set at the forward-looking, long run economic costs that would be
incurred by an efficient provider using state-of-the-art technology. We cannot
provide any assurance regarding the results referred to in the foregoing
forward-looking statements, including the extent or timing of cost decreases.
See "--Certain Factors Which May Affect Our Future Results."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses include commissions
paid to independent sales representatives and overhead costs associated with our
headquarters, back office and network operations centers and sales offices. Our
selling, general and administrative expenses have continued to increase since
our inception as we developed and expanded our business, although these expenses
have fallen as a percentage of communications revenue. We anticipate that these
expenses will continue to increase as our business is expanded in the future,
however, we cannot provide any assurance that this will be the case. We
anticipate that these expenses will continue to be incurred in advance of
anticipated related communication services revenue.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which consist principally of
telecommunications-related equipment such as switches and points of presence,
indefeasible rights of use and minimum investment units, furniture and
equipment, leasehold improvements, and amortization of intangibles assets,
including goodwill and costs associated with acquired employee base and sales
forces. We depreciate our network over periods ranging from five to 15 years and
amortize our intangible assets over periods ranging from three to 25 years. We
expect depreciation and amortization expense to increase as we further expand
our network, particularly as each ring of the Circe Network is placed into
service, at least until significant portions of the Circe Network are sold.
THE CIRCE NETWORK
The Circe Network, which is being constructed with funds raised by us
through our April 1998 and March 1999 high yield offerings, is expected to have
significant effects on our results of operations. The sale of capacity on the
Circe Network will vary substantially from period to period and may result in
fluctuations in our operating results. We will capitalize all of the costs
associated with designing, building, funding and placing each ring of the
Circe Network into service.
We intend to sell capacity on the Circe Network. Revenue from capacity
sales that qualify under generally accepted accounting principles to be treated
as sales will be recognized in the period when the capacity is sold under a line
item to be titled "Capacity sales revenue." The related cost of sales will be
reported in the same period. With respect to any given sale of capacity, the
related cost of capacity sales will be equal to a proportionate amount of the
total capitalized cost of the Circe Network. Revenue from leases of private line
circuits, which will be included in communications services revenue, will be
recognized on a straight line basis over the life of the lease. The portion of
the total capitalized cost of the Circe Network used to provide leased private
line circuits will be included in property and equipment and charged to
depreciation and amortization over its useful life.
In addition, we expect to trade capacity on the Circe Network for
capacity on other cable systems. These trades of capacity are expected to be
non-monetary exchanges and are not expected to have a material affect on our
statement of operations. We will also incur selling, general and administrative
expenses with respect to the Circe Network that will not be capitalized and will
affect our results of operations, particularly while the Circe Network is being
designed and built and placed into service, and will incur additional operating
and maintenance expenses until capacity on the Circe Network is sold. As a
result of financing the Circe Network with debt, we will capitalize a portion of
the interest incurred that relates to the construction of the Circe Network
until it is placed in service and will incur substantial increases in interest
expense thereafter.
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The Circe Network is expected to decrease our per minute costs of
communication services.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of our results of
operations as a percentage of communication services revenue:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Communication revenue 100.0% 100.0% 100.0%
Cost of communication services 90.3% 87.0% 83.6%
Selling, general and administrative expenses 33.2% 49.4% 65.2%
Depreciation and amortization 12.0% 10.6% 9.5%
EBITDA loss (1) (23.5%) (36.4%) (48.7%)
</TABLE>
- - -------------------
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
extraordinary loss, dividends on preferred stock and depreciation and
amortization. EBITDA is a measure commonly used in the telecommunications
industry to analyze companies on the basis of operating performance. EBITDA is
not a measure of financial performance under generally accepted accounting
principles, is not necessarily comparable to similarly titled measures of other
companies and should not be considered as an alternative to net income as a
measure of performance nor as an alternative to cash flow as a measure of
liquidity.
1998 COMPARED TO 1997
COMMUNICATION SERVICES REVENUE. Communication services revenue
increased by 85.1% to $135.2 million on 383.9 million billable minutes for 1998
from $73.0 million on 140.9 million billable minutes for 1997. Communication
services revenue growth for 1998 was generated primarily from increased European
retail traffic and growth in our carrier business in Western Europe and in North
America which was partially offset by decreased revenue from our Pacific Rim and
Latin American operations.
The overall increase of 172.4% in billable minutes from 1997 to 1998
was partially offset by declining revenue per billable minute, as revenue per
billable minute declined by 33.3% to $.34 in 1998 from $.51 in 1997, primarily
because of (1) a higher percentage of lower-priced intra-European and
intranational long distance traffic on our network as compared to
intercontinental traffic, (2) a higher percentage of lower-priced carrier
traffic as compared to retail traffic and (3) reductions in certain rates
charged to retail customers in response to pricing reductions enacted by
incumbent telecommunications operators and other carriers in many of our
markets. See "- Cost of Communication Services."
Communication services revenue per billable minute from the sale of
services to retail customers, which represented 41.7% of total communication
services revenue for 1998, compared to 72.1% for 1997, decreased 43.5% to $.39
in 1998 from $.69 in 1997. Communication services revenue per billable minute
from the sale of services to carriers and other resellers increased by 3.3% to
$.31 in 1998 from $.30 in 1997 due primarily to changes in traffic mix. The
number of contracted customers billed declined 30.2% to 15,010 at December 31,
1998 from 21,515 at December 31, 1997. This decline in contracted customers
billed is primarily attributable to our Pacific Rim operations where the number
of customers billed declined 93.2% to 369 at December 31, 1998 from 5,424 at
December 31, 1997, representing a net loss of 5,055 customers, as a result of
currency fluctuations caused by the Asian economic crisis, which made our rates
noncompetitive.
During 1998, approximately 46.6% of our communication services revenue
was generated in Western Europe as compared to approximately 44.7% of our
communication services revenue during 1997. Communication services revenue from
Latin America represented approximately 10.8% of our communication services
revenue during 1998 compared to approximately 22.2% of our communication
services revenue during 1997. Communication services revenue from the Pacific
Rim represented approximately 1.0% of our communication services revenue during
1998 as compared to approximately 11.2% during 1997.
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During 1998 as compared to 1997, we significantly increased our carrier
business through which we sell switched minutes, private lines and ports to
carriers, Internet service providers and other resellers. The carrier business
has enabled us to recover partially the costs associated with increased capacity
in advance of demand from retail customers. The resulting economies of scale
have allowed us to use our network more profitably for network originations and
terminations within Europe. The carrier business represented approximately 58.3%
of total communication services revenue and approximately 62.0% of billable
minutes for 1998 as compared to approximately 27.9% of total communication
services revenue and approximately 46.1% of billable minutes for 1997. The
increase in communication services revenue derived from carriers and other
resellers is partially attributable to the acquisition of Flat Rate
Communications, Inc., a long distance telecommunications reseller, on February
27, 1998, which also significantly increased our North American revenues.
COST OF COMMUNICATION SERVICES. Cost of communication services
increased to $122.1 million in 1998 from $63.5 million in 1997 and, as a
percentage of communication services revenue, increased to approximately 90.3%
from approximately 87.0%. Our gross margin decreased, as a percentage of
communication services revenue, to 9.7% for 1998 from 13.0% for 1997. This
expected decrease was primarily due to (1) decreased revenue per minute
resulting from price competition and foreign currency fluctuations which was not
offset by corresponding decreases in infrastructure costs, (2) increased sales
to carrier customers which generate substantially lower margins, and (3) an
increase in intra-European and national long distance traffic compared to higher
margin international traffic. This decrease in gross margin, as a percentage of
revenue, is one of the principal reasons we initiated a strategy to own key
elements of our network infrastructure. Although it did not decrease as fast as
revenues per minute, our average cost per billable minute decreased to $.31
during 1998 from $.44 during 1997, a 29.5% decrease. This decrease, which
partially offset the effect of the decline in average revenue per billable
minute, was attributable primarily to increased traffic being routed through our
network and increased switched minutes generated by our carrier business, both
of which increased the utilization of fixed cost leased lines. Increased
utilization of our network also reduced costs on a per minute basis with respect
to European long distance telecommunications services.
Cost of communication services increased in 1998 in part because of the
relatively high cost of leased infrastructure. These costs are expected to
decrease as a percentage of communication services revenue as we continue to
migrate from leased to owned infrastructure. From 1997 to 1998, we increased our
private line circuits capacity and, as a result, costs for private line circuits
increased to approximately $17.1 million for 1998 (approximately 12.6% of
communication services revenue) from approximately $9.6 million for 1997
(approximately 13.1% of communication services revenue).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $44.9 million in 1998 from $36.1 million in
1997 and, as a percentage of communication services revenue, decreased to
approximately 33.2% in 1998 from approximately 49.4% in 1997. Much of these
expenses are attributable to overhead costs associated with our headquarters,
back office and network operations as well as maintaining sales offices.
Salaries and commissions, as a percentage of total selling, general and
administrative expenses, were approximately 49.3% and 51.6% for 1998 and 1997,
respectively. Advertising and promotion expenses, as a percentage of total
selling, general and administrative expenses, were approximately 3.6% and 1.2%
for 1998 and 1997, respectively. We expect to incur additional expenses as we
continue to invest our sales and marketing infrastructure and actively market
our products and services.
EBITDA LOSS. EBITDA loss increased to $31.8 million for 1998 from $26.6
million for 1997. As a percentage of communication services revenue, EBITDA loss
decreased to approximately 23.5% in 1998 from approximately 36.4% in 1997. These
losses resulted from lower gross margins as a percentage of communication
services revenue due to the relatively high cost of intra-European leased lines
which was compounded by the impact on revenue of aggressive price reductions
implemented by incumbent telecommunications operators.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of our network, increased to approximately $16.3
million in 1998 from approximately $7.7 million in 1997. The increase was due
primarily to (1) the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997 and (2) the
amortization of goodwill associated with the acquisition of Flat Rate
Communications, Inc. in February 1998. Depreciation expense will increase
substantially as each ring of the Circe Network becomes operational.
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<PAGE>
INTEREST. Interest expense increased to approximately $79.2 million in
1998 from approximately $12.5 million in 1997 primarily as a result of our high
yield offering completed in April 1998. Interest income increased to
approximately $28.3 million for 1998 from approximately $3.7 million in 1997
primarily as a result of the interim investment of the net proceeds from the
1998 high yield offering. During 1998, we capitalized $3.3 million of interest
costs.
1997 COMPARED TO 1996
COMMUNICATION SERVICES REVENUE. Communication services revenue
increased by 44.8% to $73.0 million on 140.9 million billable minutes for 1997
from $50.4 million on 62.2 million billable minutes for 1996. Communication
services revenue growth for 1997 was generated primarily from increased traffic
volume on our network from growth in our carrier business and, to a lesser
extent, increased traffic volume in Latin America and the Pacific Rim.
The overall increase of 126.4% in billable minutes from 1996 to 1997
was partially offset by declining revenue per billable minute, as average
revenue per billable minute declined by 36.3% to $.51 in 1997, from $.80 in 1996
primarily because of (1) a higher percentage of lower-priced intra-European and
national long distance traffic from our network as compared to intercontinental
traffic, (2) a higher percentage of lower-priced carrier traffic as compared to
retail traffic, (3) reductions in certain rates charged to retail customers in
response to pricing reductions enacted by certain incumbent telecommunications
operators and other carriers in many of our markets, (4) changes in customer
access methods and (5) foreign currency fluctuations. See "- Cost of
Communication Services."
Communication services revenue per billable minute from the sale of
services to retail customers, which represented 72.1% of total communication
services revenue in 1997, compared to 83.5% in 1996, decreased to $.69 in 1997
from $1.04 in 1996 . Communication services revenue per billable minute from
the sale of services to carriers and other resellers decreased from $.38 in 1996
to $.30 in 1997, primarily as a result of price competition. The number of
customers billed rose 18.4% from 18,172 at December 31, 1996 to 21,515 at
December 31, 1997.
During 1997, approximately 44.7% of our communication services revenue
was generated in Western Europe as compared to approximately 41.9% of our
communication services revenue in 1996. Despite an increase of approximately
14.1% over 1996, communication services revenue from Latin America represented
approximately 22.2% of our communication services revenue during 1997 as
compared to approximately 28.4% of our communication services revenue during
1996. Communication services revenue from the Pacific Rim represented
approximately 11.2% of our communication services revenue in 1997 as compared to
approximately 12.4% of our communication services revenue during 1996.
The carrier business represented approximately 27.9% of total
communication services revenue and approximately 46.1% of billable minutes for
1997 as compared to approximately 16.5% of total communication services revenue
and approximately 35.2% of billable minutes for 1996. This increase in
communication services revenue represents an increase of approximately 147.0%
over 1996.
COST OF COMMUNICATION SERVICES. Cost of communication services
increased to $63.5 million in 1997 from $42.1 million in 1996 and, as a
percentage of communication services revenue, increased to approximately 87.0%
from approximately 83.6% for 1997 and 1996, respectively. Our gross margin
decreased to 13% for 1997 from 16.4% for 1996. This decrease was primarily due
to (1) decreased revenue per minute resulting from price competition and foreign
currency fluctuations which were not offset by corresponding decreases in
infrastructure costs, (2) increased sales to carrier customers which generate
substantially lower margins, and (3) an increase in intra-European and national
long distance traffic compared to higher margin international traffic. Although
it did not decrease as fast as revenues per minute, our average cost per
billable minute decreased to $.44 during 1997 from $.67 during 1996, a 34.3%
decrease. This decrease, which partially offset the effect of the decline in
average revenue per billable minute, was attributable primarily to (1) increased
traffic being routed through our network, which increased the utilization of
fixed cost leased lines, (2) increased switched minutes generated by our carrier
business, which also increased the utilization of fixed cost leased lines, and
(3) changes in customer access methods. Increased European network utilization
helped reduce costs on a per minute basis with respect to European long distance
telecommunications services.
28
<PAGE>
Cost of communication services increased in 1997 because of the
relatively high cost of leased infrastructure and the accelerated rollout of
European points of presence. These costs are expected to decrease as a
percentage of communication services revenue as we continue our efforts to
convert from leased to owned capacity. We increased our private line circuits
capacity by 311%, and as a result the fixed costs associated with our network,
costs for private line circuits increased to approximately $6.0 million for 1997
(approximately 8.2% of communication services revenue) from approximately $4.1
million for 1996 (approximately 8.2% of communication services revenue).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $36.1 million in 1997 from $32.9 million in
1996 and, as a percentage of communication services revenue, decreased to
approximately 49.4% in 1997 from approximately 65.2% in 1996. Much of these
expenses are attributable to overhead costs associated with our headquarters,
back office and network operations as well as maintaining a physical presence in
seventeen different jurisdictions. Salaries and commissions, as a percentage of
total selling, general and administrative expenses, were approximately 51.6% and
49.0% for 1997 and 1996, respectively.
EBITDA LOSS. EBITDA loss increased to $26.6 million for 1997 from $24.6
million for 1996. As a percentage of communication services revenue, EBITDA loss
decreased to approximately 36.4% in 1997 from approximately 48.7% in 1996. These
losses resulted from lower gross margins as a percentage of communication
services revenue due to the relatively high cost of intra-European leased lines
which was compounded by the impact on revenue of aggressive price reductions
implemented by certain incumbent telecommunications operators.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense,
which includes depreciation of our network, increased to approximately $7.7
million in 1997 from approximately $4.8 million in 1996. The increase was due
primarily to the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997.
INTEREST. Interest expense increased to approximately $12.5 million in
1997 from approximately $10.8 million in 1996 due to the accretion of non-cash
interest on the notes we issued in 1994. Interest income increased to
approximately $3.7 million in 1997 from approximately $1.9 million for 1996,
primarily as a result of the investment of the net proceeds from our initial
public offering.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses from operating activities in each year since
our inception and expect to continue to incur operating and net losses for the
next several years. Since inception, we have utilized cash provided by financing
activities to fund operating losses and capital expenditures. The sources of
this cash have primarily been through private and public equity and debt
financings and, to a lesser extent, equipment-based financing. In particular, in
1996 we raised approximately $104.0 million of gross proceeds (approximately
$94.5 million net proceeds) from the sale of our common stock, in 1998 we
completed a high yield offering through which we raised approximately $889.6
million of gross proceeds (approximately $856.6 million of net proceeds) and in
March 199 we completed a high yield offering through which we raised
approximately $365.5 million of gross proceeds (approximately $352.6 million of
net proceeds). A portion of the proceeds from the 1998 high yield offering was
utilized by us to retire our 15% Senior Discount Notes due 2005 pursuant to a
tender offer. Additionally, a portion of the proceeds from the 1998 and 1999
high yield offerings was used to purchase securities which were pledged as
security for each of the interest payment on the notes. As of December 31, 1998,
we had $501.3 million of cash, cash equivalents and other liquid investments and
$144.5 million of restricted cash equivalents and other restricted investments
which secure the next five interest payments on our outstanding high yield
notes. Approximately $78.2 million of the proceeds from the March 1999 offering
were used to purchase government obligations which will be recorded as
restricted investments in our first quarter financials.
We believe that the net proceeds from the March 1999 high yield
offering, together with cash and marketable securities on hand and the sale of
capacity on the Circe Network will provide sufficient funds for us to expand our
business as planned and to fund operating losses for at least the next 12 to 18
months. However, the amount of our future capital requirement will depend on a
number of factors, including the success of our business, the start-up dates of
each ring of the Circe Network, the dates at which we further expand our
network, the types of services we offer, staffing levels, acquisitions and
customer growth, as well as other factors that are not within our control,
including competitive conditions, government regulatory developments and capital
costs. In the event our plan or assumptions change or prove to be inaccurate, we
are unable to convert from leased to owned infrastructure in accordance with our
current plans or the net proceeds of this offering, cash and investments on
hand, equity offerings and the proceeds from the sale of capacity on the Circe
Network prove to be insufficient to fund our growth in the manner and at the
rate 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. In the event we are
required to seek additional financing, there can be assurance that such
financing will be available on acceptable terms or at all.
29
<PAGE>
CAPITAL EXPENDITURES; COMMITMENTS. The development of our business has
required substantial capital expenditures. During 1998, we had capital
expenditures of approximately $94.7 million, acquired $30.4 million of assets
under capital lease obligations and at December 31, 1998, had $97.3 million
payable for purchase of property and equipment. We have entered into certain
agreements associated with the Circe Network, purchase commitments for network
expansion and other items aggregating $168.8 million at December 31, 1998.
During 1999, we also intend to enter into certain agreements associated with the
Circe Network, purchase commitments for network expansion and other items
aggregating over $500 million. At December 31, 1998, we 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 network
being constructed by each party in Germany. 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. In addition, we have minimum volume commitments to
purchase transmission capacity from various domestic and foreign carriers
aggregating approximately $13.2 million for 1999.
FOREIGN CURRENCY. We have exposure to fluctuations in foreign
currencies relative to the U.S. Dollar as a result of billing portions of our
communication services revenue in the local European currency in countries where
the local currency is relatively stable while many of our obligations, including
a substantial portion of our transmission costs, are denominated in U.S.
Dollars. In countries with less stable currencies, such as Brazil, we billed in
U.S. Dollars. For 1998, approximately 45.4% of our communication services
revenue was billed in various European currencies. Debt service on certain of
the notes issued in our 1998 high yield offering are currently payable in Euros.
Substantially all of the costs of acquisition and upgrade of our switches have
been, and are expected to continue to be, U.S. Dollar denominated transactions.
A substantial portion of the costs to construct each ring of the Circe Network
has been and will continue to be denominated in various European currencies,
including the Euro. Most of the European currencies in which we do business
converged effective January 1, 1999, with the exception of the Pound Sterling.
With the continued expansion of our network, a substantial portion of
the costs of communications service, such as local access and termination
charges and a portion of the leased line costs, as well as a majority of local
selling expenses and debt service related to the Euro denominated notes, will be
charged to us in the same currencies as revenue is billed. These developments
create a natural hedge against a portion of our foreign exchange exposure. To
date, much of the funding necessary to establish the local direct sales
organizations has been derived from communication services revenue that was
billed in local currencies. Consequently, we believe that our financial position
as of December 31, 1998 and our results of operations for the year ended
December 31, 1998 were not significantly impacted by fluctuations in the U.S.
Dollar in relation to European currencies.
YEAR 2000
The Year 2000 problem 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 internal systems,
which we have divided into two categories, business essential and support
systems. Business essential systems include communications switching systems and
billing systems. The inventory of our business essential systems is complete.
The backbone of our communications network is primarily composed of Nortel
switches which are Year 2000 complaint with the exception of one Nortel switch
which is scheduled for upgrade in April 1999. Additional testing has been done
on our Nortel switches to ensure Year 2000 compliance. Certain ancillary
switches used in our communications network are currently not Year 2000
30
<PAGE>
compliant. We have identified the upgrades required to make these switches
compliant and have developed a plan to complete the upgrades by July 1999. Our
message processing and billing systems, which are used to record and process
millions of call detail records, are Year 2000 compliant. Additional testing
using a wide range of data has been planned and is scheduled for completion in
May 1999.
Our inventory and assessment of our support systems is approximately
30% complete. The global nature of our business makes the inventory of these
systems more difficult. Most of these systems have been purchased within the
last year and have already been assessed for Year 2000 problems prior to
purchase. The assessment of all remaining systems are scheduled to be completed
by July 1999. We will replace or modify any non-compliant Year 2000 systems as
required.
We have 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 problems. There can be no
assurance 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
such disruptions and the specific services affected, such disruptions could have
a material adverse affect on our business, financial condition and results of
operations. As a contingency against any possible disruptions in services
provided by vendors, we have sought to diversify our vendor base. We believe
that the diversity of our vendor base is sufficient to mitigate Year 2000
related disruptions in service to our customers. In addition, we believe that
the fact that we conduct business in, and derive revenue from, multiple Western
European countries helps to mitigate the potential impact of Year 2000 related
disruptions.
In addition, disruptions in the economy generally resulting from Year
2000 problems could also have a material adverse effect 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.
EURO
On January 1, 1999, eleven of the fifteen member countries of the
European Union established irrevocable fixed conversion rates between their
existing sovereign currencies and a single currency called the Euro. The
sovereign currencies are scheduled to remain legal tender as denominations of
the Euro during a transition period from January 1, 1999 to January 1, 2002.
We have completed an internal analysis regarding business and systems
issues related to the Euro conversion and, as a result, made necessary
modifications to our business processes and software applications. We are now
able to conduct business in both Euro and sovereign currencies on a parallel
basis, as required by the European Union.
We believe that the Euro conversion has not and will continue to not
have a significant impact on our business strategy in Europe. The costs to
convert all systems to be Euro compliant did not have a significant impact on
our results of operations.
INFLATION
We do not believe that inflation has had a significant effect on our
operations to date.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring recognition of those instruments as assets and liabilities and to
measure them at fair value. SFAS 133 will be effective for us in the year 2000.
We have not completed our analysis of the impact of this statement on our
financial statements but do not currently believe it will be material.
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<PAGE>
The American Institute of Certified Public Accountants issued Statement
of Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. We are required to adopt both new statements in the
first quarter of 1999. The adoption of these statements is not expected to have
a material effect on our consolidated financial statements.
CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS
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 (approximately $1.3 billion). Our substantial indebtedness could
have important consequences to you. For example, it could:
o increase the chance that we will not be able to make payments on
our outstanding indebtedness;
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.
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:
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 we
incur new indebtedness, the related risks that we and our subsidiaries now face
could intensify.
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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.
Our operating loss, negative EBITDA and net loss has increased for each
of the last four years. In 1998, we had an operating loss of $48.1 million,
negative EBITDA of $31.8 million and a net loss of $127.3 million. We also had
interest expense of $79.2 million and capitalized interest of $3.3 million.
Interest expense will increase substantially as a result of this offering. These
losses and interest expense present a significant risk for investors. We need to
begin placing traffic on the Circe Network to reverse these trends.
Our negative EBITDA and negative cash flows are likely to continue
beyond the year 2000 if:
o we extend our expansion plans,
o prices charged to end users 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 Annual Report
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 $720 million for capital
expenditures in 1999 and 2000, including the proposed expansion of our network
into southern France and Switzerland. That network expansion could cost us as
much as $350 million including civil construction costs and the cost of network
equipment and related facilities. We will seek to reduce this amount by sharing
civil construction costs with a partner. However, we do not currently have a
partner for the expansion project. If we do not find a partner, we may be
required to reduce our planned network expansion. In that event, we might not
build a "ring." As a result, a fiber cut would interrupt our service on that
segment. We cannot assure you that actual costs of our network expansion
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 capacity on our network.
We cannot assure you that additional financing arrangements will be
available to us on acceptable terms or at all. Moreover, the amount of our
outstanding indebtedness may adversely affect our ability to raise additional
funds.
We believe that the net proceeds from our 1998 and 1999 high yield
offerings, cash and investments on hand and the sale of capacity on our network
will provide sufficient funds for us to expand our business as planned and to
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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 and ready-for-service 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 and proceeds from the sale of equity securities 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 sufficiently 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 (the
"FCC") has adopted the international settlement rate order, which is designed to
bring downward pressure on international telephone rates by requiring U.S.
carriers to pay lower settlement rates to their correspondent foreign carriers.
Industry observers predict that telephone charges will be less affected
by the distance a call is carried, particularly with the possible increased use
of voice services over the Internet. As a consequence, if we are unable to
effectively implement our strategy of owning, rather than leasing, facilities,
we will not be able to increase our 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, Many Participants Have Greater Resources Than We Do."
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
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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
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 substantially in
the future as a result of a variety of factors, including:
o pricing changes in the industry;
o the start-up and ready-for-service dates of each phase of the
Circe Network;
o timing of capacity sales;
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 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 INDUSTRY IS HIGHLY COMPETITIVE, MANY PARTICIPANTS HAVE GREATER RESOURCES
THAN WE DO
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), an alliance between MCI Worldcom and Telefonica de Espana, an
alliance between AT&T and British Telecom 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
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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, 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 us. In particular, our target customer
base 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. Incumbent
telecommunications operators in Western Europe are responding to deregulation
far 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 customer service by the incumbent telecommunications operators
could 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.
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.
A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM CARRIER CUSTOMERS
We derive a significant portion of our revenues from a relatively small
number of carrier customers. In 1998, carrier customers accounted for 58.3% of
our total communications revenues with the top five carrier customers accounting
for 25.8% of such amount. Over the next several years, we expect to continue to
derive a substantial portion of our revenues from carrier customers.
Accordingly, the loss of revenue from several carrier customers could have a
material adverse effect upon our business, financial condition and results of
operations.
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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.
THERE ARE SIGNIFICANT RISKS OF ENTRY INTO DATA TRANSMISSION BUSINESS
We have no direct experience providing data transmission services
although we have extensive experience in the telecommunication business
including an executive team with significant telecommunications expertise. We
intend to begin offering data transmission services by the end of 1999. These
services, which will include frame relay and asynchronous transfer mode, will be
targeted at our existing and potential customers with substantial data
communications requirements.
The data transmission business is extremely competitive and prices have
declined substantially in recent years and are expected to continue to decline.
In providing these services, we will be dependent upon vendors for assistance in
the planning and deployment of our data product offerings, as well as ongoing
training and support. Our provider for asynchronous transfer mode equipment is
Lucent Technologies. We believe that Lucent Technologies does not have extensive
experience providing this equipment, or configuring data networks, in Europe. In
addition, this Lucent Technologies equipment will need to be integrated with our
existing Nortel Telecom-based platforms. In Europe, there are a number of
different protocols for data transmission. Our network will need to be able to
handle all these protocols, which will pose technical difficulties. The success
of our entry into the data transmission business will depend upon, among other
things, our ability to select new equipment and software and integrate these
into our network, hire and train qualified personnel, enhance our billing,
back-office and information systems to accommodate data transmission services
and customer acceptance of our service offerings. We cannot provide any
assurance that we will be successful in the data transmission business. If we
are not successful, there may be a material adverse effect on our business,
financial condition and results of operations.
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 others:
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
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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.
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 which
may expose us to the following risks:
o the difficulty of assimilating the operations and personnel of
the acquired entities;
o the potential disruption of our ongoing business;
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 "- Risks Associated with the Expansion of Our Network,
Construction Delays and System Failures Could Adversely Affect Our Business" and
"-Operating In Foreign Countries Presents Risks That May Affect Our
Performances."
RISKS ASSOCIATED WITH THE EXPANSION OF 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 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 capacity to
other carriers. Our network is subject to several risks which are outside of our
control, such as:
o the risk of damage to software and hardware resulting from fire,
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o power loss,
o natural disasters, and
o 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 our 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 rights capacity or minimum investment units on digital fiber optic cables or
digital microwave equipment, or the further 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
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 KPN/Qwest cable system both connect London, Amsterdam,
Brussels, Paris and Frankfurt, and the Hermes Europe Railtel B.V cable system
connects London, Rotterdam, Amsterdam, Antwerp, Brussels, Paris, Dusseldorf, and
Frankfurt. In addition, Level 3 Communications, British Telecom, Global
Crossing, and Colt Telecom Group have announced their plans to construct fiber
optic networks in Europe. As a result, there has been pricing pressure with
respect to sales of 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, such as dense wave division
multiplexing, 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 the full transmission capacity of our network
will be adversely affected. In addition, we intend to sell 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 total available capacity that exceeds overall demand in
general or along any of our routes, severe additional pricing pressure could
develop.
FOREIGN CURRENCY EXCHANGE RATES COULD HAVE ADVERSE EFFECTS ON OUR BUSINESS
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
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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
Pound Sterling. Any appreciation in the value of the U.S. Dollar or the Euro
relative to the Pound 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 PERFORMANCES
There are certain risks inherent in conducting an international
business. These risks include, among others:
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 PROBLEM
The year 2000 problem 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
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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 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 problems. 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 problems could
also have a material adverse affect on us. The amount and potential liability or
lost revenue cannot be reasonably estimated at this time.
WE ARE DEPENDENT UPON THIRD PARTIES FOR LEASED CAPACITY AND INTERCONNECTION
ARRANGEMENTS
Other than our fiber ring which connects London, Paris, Brussels,
Antwerp and Rotterdam and capacity 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 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 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.
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, Finance and Chief Financial Officer, and Sheldon M. Goldman, our
Senior Vice President, Business Affairs and General Counsel. Except for a $3.0
million "key-man" life insurance policy which we obtained on the life of Mr.
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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, 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.
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
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 FCC adopted the Foreign Participation Order
to implement the U.S. obligations under the WTO Agreement. In this order, the
FCC 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 FCC.
International carriers serving the United States, including us, remain
subject to the FCC's international settlement policies, including rules adopted
by the FCC 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 FCC-established "benchmark" prices.
Historically, international settlement rates have vastly exceeded the cost of
terminating telecommunications traffic. In addition, the International
Settlement Rates Order imposed new conditions upon certain carriers, including
us. First, the FCC conditioned facilities-based authorizations for service on a
route on which a carrier has a foreign affiliate upon the foreign affiliate
offering all other U.S. carriers a settlement rate at or below the relevant
benchmark. Our foreign affiliates satisfy this condition. Second, the FCC
conditioned any authorization to provide switched services over either
facilities-based or resold international private lines upon the condition that
at least half of the facilities based international message telephone service
traffic on the subject route is settled at or below the relevant benchmark rate.
This condition applies whether or not the licensee has a foreign affiliate on
the route in question. In the Foreign Participation Order described above,
however, if the subject route does not comply with the benchmark requirement, a
carrier can demonstrate that the foreign country provides "equivalent" resale
opportunities. Accordingly, since the February 9, 1998 effective date of the
Foreign Participation Order, we have been permitted to resell private lines for
the provision of switched services to any country that either has been found by
the FCC to comply with the benchmarks or has been determined to be equivalent.
We, however, remain subject to prior FCC approval in order to provide resold
private lines to any country in which we have an affiliated carrier that has not
42
<PAGE>
been found by the FCC to lack market power. Many parties have appealed the
International Settlement Rates Order to the U.S. Court of Appeals for the D.C.
Circuit or have filed 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 FCC. 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 FCC rules limit the way in 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
U.K., is specifically prohibited by, or undermines in any way the intent of,
these rules. It is possible, however, that the FCC 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 FCC 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 FCC 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.
43
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are subject to foreign currency exchange rate risk relating to
receipts from customers, payments to suppliers and interest payments on the
outstanding Euro denominated senior notes, senior discount notes and subordinate
convertible debentures in foreign currencies. We do not consider the market risk
exposure relating to foreign currency exchange to be material. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Foreign Currency."
We have financial instruments that are subject to interest rate risk,
principally short-term investments and debt obligations issued at a fixed rate.
Historically, we have not experienced material gains or losses due to interest
rate changes when selling short-term investments and typically hold these
securities until maturity. Based on our current holdings of short-term
investments, our exposure to interest rate risk is not material. Fixed-rate debt
obligations issued by us are generally not callable until maturity.
44
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Report:
Form 10-K
Financial Statements: PAGE NO.
Independent Auditors' Report............................................. 46
Consolidated Balance Sheets as of December 31, 1998 and 1997............. 47
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.................................... 48
Consolidated Statements of Comprehensive Loss for the Years Ended
December 31, 1998, 1997 and 1996.................................... 49
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years ended December 31, 1998, 1997 and 1996........................ 50
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996.................................... 51
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1998, 1997 and 1996.............................. 52
II. Valuation and Qualifying Accounts.................................... 64
All other schedules have been omitted because the required information either
is not applicable or is shown in the consolidated financial statements or notes
thereto.
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc.:
We have audited the consolidated financial statements of Viatel, Inc.
and subsidiaries as listed in the accompanying index. In connection with our
audits of the consolidated financial statements, we also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/S/ KPMG LLP
New York, New York
February 26, 1999
46
<PAGE>
<TABLE>
<CAPTION>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
--------------- --------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 329,511 $ 21,096
Restricted cash equivalents 10,310 -
Restricted marketable securities, current 50,870 -
Marketable securities, current 171,771 3,500
Trade accounts receivable, net of allowance for
doubtful accounts of $3,093 and $1,041, respectively 28,517 10,981
Other receivables 13,404 6,505
Prepaid expenses 2,417 1,348
-------------- --------------
Total current assets 606,800 43,430
Restricted marketable securities, non-current 83,343 -
Marketable securities, non-current - 22,547
Property and equipment, net 266,256 54,094
Intangible assets, net 46,968 4,338
Other assets 5,744 2,400
============== ==============
$ 1,009,111 $ 126,809
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accrued telecommunications costs $ 26,518 $ 16,898
Accounts payable and other accrued expenses 23,656 10,753
Property and equipment purchases payable 97,288 4,739
Accrued interest 12,240 -
Liability under joint construction agreement 9,523 -
Current installments of notes payable and obligations under capital leases 8,918 3,373
-------------- -------------
Total current liabilities 178,143 35,763
-------------- -------------
Long term liabilities:
Long term debt 896,503 89,855
Notes payable and obligations under capital leases, excluding current
installments 24,636 8,255
Equipment purchase obligation - 1,500
-------------- -------------
Total long term liabilities 921,139 99,610
-------------- -------------
Series A Redeemable Convertible Preferred Stock, $.01 par value; Authorized
718,042 Share issued and outstanding 461,258 and no shares, 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 23,184,465 and 22,635,267 shares, respectively 232 226
Additional paid-in capital 128,357 125,661
Unearned compensation - (65)
Accumulated other comprehensive loss (6,246) (5,356)
Accumulated deficit (259,635) (129,030)
-------------- --------------
Total stockholders' deficiency (137,292) (8,564)
-------------- --------------
$ 1,009,111 $ 126,809
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
47
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- --------------------
<S> <C> <C> <C>
Communication services revenue $135,188 $73,018 $50,419
-------------------- --------------------- --------------------
Operating expenses:
Cost of communication services 122,109 63,504 42,130
Selling, general and administrative expenses 44,893 36,077 32,866
Depreciation and amortization 16,268 7,717 4,802
-------------------- --------------------- --------------------
Total operating expenses 183,270 107,298 79,798
-------------------- --------------------- --------------------
Other income (expense):
Interest income 28,259 3,686 1,852
Interest expense (79,177) (12,450) (10,848)
-------------------- --------------------- --------------------
Loss before extraordinary loss (99,000) (43,044) (38,375)
Extraordinary loss on debt prepayment (28,304) - -
-------------------- --------------------- --------------------
Net loss (127,304) (43,044) (38,375)
Dividend on redeemable convertible preferred stock (3,301) - -
==================== ===================== ====================
Net loss applicable to common stockholders $(130,605) $(43,044) $(38,375)
==================== ===================== ====================
Loss per common share, basic and diluted:
Before extraordinary item $ (4.44) $ (1.90) $ (2.47)
From extraordinary item
(1.23) - -
-------------------- --------------------- --------------------
Net loss per common share attributable to common
stockholders $ (5.67) $ (1.90) $ (2.47)
==================== ===================== ====================
Weighted average common shares outstanding 23,054 22,620 15,514
==================== ===================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ----------------------
<S> <C> <C> <C>
Net loss $(127,304) $ (43,044) $(38,375)
Foreign currency translation adjustments (890) (4,494) (698)
----------------------- --------------------- ----------------------
Comprehensive loss $(128,194) $ (47,538) $(39,073)
======================= ===================== ======================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Number of
Number of Class A
Common Common Class A
Stock Stock Common Common
Shares Shares Stock Stock
-------------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 10,736,135 2,904,846 $107 $29
Issuance of restricted common stock 66,666 - 1 -
Issuance of common stock, net of
$9,541,954 issue costs 8,667,000 - 87 -
Conversion of Class A common stock to
common stock 2,904,846 (2,904,846) 29 (29)
Stock options exercised 138,579 - 1 -
Foreign currency translation adjustment - - - -
Net loss - - - -
-------------- -------------- ----------- -----------
Balance at December 31, 1996 22,513,226 - 225 -
Stock options exercised 122,041 - 1 -
Earned compensation - - - -
Foreign currency translation adjustment - - - -
Net loss - - - -
-------------- -------------- ----------- -----------
Balance at December 31, 1997 22,635,267 - 226 -
Stock options exercised 174,198 - 2 -
Issuance costs of Series A Redeemable
Convertible Preferred Stock - - - -
Issuance of common stock related to
business purchase 375,000 - 4 -
Earned compensation - - - -
Foreign currency translation adjustment - - - -
Dividends on redeemable convertible
preferred stock - - - -
Net loss - - - -
-------------- -------------- ----------- -----------
Balance at December 31, 1998 23,184,465 - $232 $ -
============== ============== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other
Unearned Comprehensive Accumulated
Compensation Loss Deficit Total
---------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $(78) $(164) $(47,611) $(17,618)
Issuance of restricted common stock (52) - - 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) - (698)
Net loss - - (38,375) (38,375)
---------------- ---------------- ----------------- ------------
Balance at December 31, 1996 (130) (862) (85,986) 38,483
Stock options exercised - - - 426
Earned compensation 65 - - 65
Foreign currency translation adjustment - (4,494) - (4,494)
Net loss - - (43,044) (43,044)
---------------- ---------------- ----------------- ------------
Balance at December 31, 1997 (65) (5,356) (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 - - 65
Foreign currency translation adjustment - (890) - (890)
Dividends on redeemable convertible
preferred stock - - (3,301) (3,301)
Net loss - - (127,304) (127,304)
---------------- ---------------- ----------------- ------------
Balance at December 31, 1998 $ - $(6,246) $(259,635) $(137,292)
================ ================ ================= =============
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (127,304) $ (43,044) $ (38,375)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 16,268 7,717 4,802
Accreted interest expense on long term debt 35,417 12,479 10,783
Provision for losses on accounts receivable 4,225 2,733 2,225
Extraordinary loss on debt prepayment 28,304 - -
Earned compensation 65 65 338
Changes in assets and liabilities:
Increase in accounts receivable (20,302) (6,221) (6,058)
Increase in accrued interest expense on Senior Notes 11,969 - -
Increase in prepaid expenses and other receivables (8,291) (3,482) (1,384)
Increase in other assets and intangible assets (12,625) (1,022) (315)
Increase in accrued telecommunications costs,
accounts payable and other accrued expenses 11,956 8,250 1,653
------------------- ------------------- ------------------
Net cash used in operating activities (60,318) (22,525) (26,331)
------------------- ------------------- ------------------
Cash flows from investing activities:
Purchase of property, equipment and software (94,674) (34,190) (9,423)
Payment for business acquired excluding cash
acquired of $364 (5,000) - -
Purchase of marketable securities (310,625) (49,098) (30,571)
Proceeds from maturity of marketable securities 60,307 40,124 38,807
Investment in affiliate - - (102)
Issuance of notes receivable - - (303)
------------------- ------------------- ------------------
Net cash used in investing activities (349,992) (43,164) (1,592)
------------------- ------------------- ------------------
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 947 426 94,836
Borrowings on notes payable - 11,121 -
Payments under capital leases (5,480) (525) (64)
Repayment of notes payable and bank credit line (3,553) (336) -
Borrowings under bank credit line - 600 -
------------------- ------------------- ------------------
Net cash provided by financing activities 729,035 11,286 94,772
------------------- ------------------- ------------------
Effects of exchange rate changes on cash - (297) 12
------------------- ------------------- ------------------
Net (decrease) increase in cash and cash equivalents 318,725 (54,700) 66,861
Cash and cash equivalents at beginning of year 21,096 75,796 8,935
------------------- ------------------- ------------------
Cash and cash equivalents at end of year $ 339,821 $ 21,096 $ 75,796
=================== =================== ==================
Supplemental disclosures of cash flow information:
Interest paid $ 31,560 $ 134 $ 65
=================== =================== ==================
Assets acquired under capital lease obligations $ 30,359 $ 1,122 $ 310
=================== =================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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 $278.9
million and $8.2 million at December 31, 1998 and 1997, 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:
Communications systems........................................ 5 to 7 years
Fiber optic cable systems..................................... 15 years
Leasehold improvements........................................ 2 to 5 years
Furniture, equipment and other................................ 5 years
(F) INTANGIBLE ASSETS
Deferred financing and registration fees represent costs incurred to
issue and register debt and are being amortized over the term of the related
debt.
52
<PAGE>
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 benefited, 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,
1998, 1997 and 1996, 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, 1998, 1997 and
1996.
The Company had potentially dilutive common stock equivalents of 7.2
million, 1.1 million and 1.0 million for the years ended December 31, 1998, 1997
and 1996, 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 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.
53
<PAGE>
(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 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 available for sale as of
December 31, 1998 and no securities classified as held to maturity as of
December 31, 1997.
54
<PAGE>
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):
U.S. Treasury obligations $105,508
German government obligations 28,705
===============
Total $134,213
===============
The following is a summary of the amortized cost, which approximates
fair value of securities held to maturity at December 31, 1998 (in thousands):
European corporate debt securities $ 122,299
U.S. corporate debt securities 49,472
---------------
Total $ 171,771
===============
The following is a summary of the fair value of securities available
for sale at December 31, 1997 (in thousands):
U.S. Treasury obligations $ 2,028
Corporate debt securities 13,482
Federal agencies obligations 10,537
---------------
Total $ 26,047
===============
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):
Due within one year $ 50,870
Due after one year through two years 54,328
Due after two years 29,015
---------------
Total $ 134,213
===============
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1998 1997
--------------- --------------
Communications system $ 70,971 $ 43,322
Construction in progress 172,630 10,094
Fiber optic cable systems 25,222 1,432
Furniture, equipment and other 16,450 8,924
Leasehold improvements 6,651 3,254
--------------- --------------
291,924 67,026
Less accumulated depreciation
and amortization 25,668 12,932
--------------- --------------
$266,256 $ 54,094
=============== ==============
At December 31, 1998, construction in progress represents construction
of the Circe Network. At December 31, 1997, construction in progress represents
a portion of the expansion of the Company's European network. For the years
ended December 31, 1998, 1997 and 1996, $3.3 million, $0.2 million and $0.1
million of interest was capitalized.
55
<PAGE>
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 do 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 network 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>
1998 1997
---------------- --------------
<S> <C> <C>
Deferred financing and registration costs $ 31,547 $ 3,789
Licenses, trademarks and servicemarks 10,031 464
Goodwill 8,744 474
Purchased software 1,859 1,494
Acquired employee base and sales force in place - 1,607
Other 206 385
---------------- --------------
52,387 8,213
Less accumulated amortization 5,419 3,875
================ ==============
$ 46,968 $ 4,338
================ ==============
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Accounts payable $ 5,566 $ 6,231
Accrued expenses 16,224 3,253
Accrued compensation and benefits 1,866 1,269
---------------- ---------------
$23,656 $ 10,753
================ ===============
</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 no borrowings under the line of credit agreement
at December 31, 1998 and $0.6 million in borrowings under the line of credit
agreement at December 31, 1997. 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%.
56
<PAGE>
(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 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 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 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 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.
Long term debt consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<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 (DM 21,573) 12,849 -
15% Senior discount notes, less discount of $30,845 - 89,855
================= =================
$896,503 $89,855
================= =================
</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
57
<PAGE>
$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.
(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 the 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 1998, 1997 and 1996 would have been $138.5 million, $101.8 million
and $53.4 million, respectively, (ii) loss before extraordinary loss for 1998
would have been $(98.9) million, (iii) net loss applicable to common
shareholders for the years 1998, 1997 and 1996 would have been $(130.5) million,
$(42.8) million and (38.5) million, respectively and (iv) net loss per common
share for the years 1998, 1997 and 1996 would have been $(5.65), $(1.86) and
$(2.43), respectively.
(10) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1998,
1997 and 1996 were 35%. The effective tax rates were zero for the years ended
December 31, 1998, 1997 and 1996 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.
58
<PAGE>
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,
--------------------------------------
1998 1997
----------------- -------------------
<S> <C> <C>
Accounts receivable principally due to
allowance for doubtful accounts $ 1,506 $ 587
OID Interest not deductible in current period 11,125 11,149
Federal net operating loss carryforwards 68,579 29,093
Foreign net operating loss carryforwards 7,989 3,777
----------------- -------------------
----------------- -------------------
Total gross deferred tax assets 89,199 44,606
Less valuation allowance (89,199) (44,606)
----------------- -------------------
Net deferred tax assets $ - $ -
================= ===================
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning in making these assessments. During 1998 and
1997, the valuation allowance increased by $44.6 million and $14.7 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 customer types, wholesale
and retail. The information below summarizes communication services revenue by
customer type (in thousands):
1998 1997 1996
----------- --------- -----------
Wholesale $ 78,777 $20,397 $ 9,516
Retail 56,411 52,621 40,903
=========== ========= ===========
Consolidated $135,188 $73,018 $50,419
=========== ========= ===========
59
<PAGE>
The information below summarizes communication services revenue by geographic
area (in thousands):
1998 1997 1996
----------- --------- -----------
Western Europe $ 62,946 $32,647 $19,917
North America 56,172 15,936 9,516
Latin America 14,653 16,240 14,402
Asia/PacificRim and other 1,417 8,195 6,584
=========== ========= =========
Consolidated $135,188 $73,018 $50,419
=========== ========= =========
The information below summarizes long lived assets by geographic area (in
thousands):
1998 1997
------------------ ------------------
Western Europe $237,443 $32,640
North America 75,492 25,626
Latin America 289 166
================== ==================
Consolidated $313,224 $58,432
================== ==================
(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-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 1998, 1997 and 1996 was $6.40, $5.99 and $2.29, respectively, on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: (1) a risk free interest rate of 5.0% in 1998 and 5.5% in 1997 and
1996, (2) an expected life of 10 years for all years, (3) volatility of
approximately 92.7% for 1998, 52.2% for 1997 and 35.9% for 1996 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:
1998 1997 1996
----------- ----------- -----------
Net loss, as reported (in thousands) $(130,605) $(43,044) $(38,375)
Net loss, pro forma (in thousands) (135,458) (44,171) (38,986)
Net loss per common share, as reported (5.67) (1.90) (2.47)
Net loss per common share, pro forma (5.88) (1.95) (2.51)
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.
60
<PAGE>
Stock option activity under the Stock Incentive Plan is shown below:
WEIGHTED
AVERAGE NUMBER OF
EXERCISE SHARES (IN
PRICES THOUSANDS)
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
============= ===============
The following table summarizes weighted-average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------------
NUMBER
OUTSTANDING AT WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF DECEMBER 31, AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE 1998 (IN REMAINING EXERCISE DECEMBER 31, 1998 EXERCISE
PRICES THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- - ----------------- --------------------------------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
$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.
(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.
61
<PAGE>
The Company's future minimum capital and operating lease payments are
as follows (in thousands):
CAPITAL OPERATING
---------------- ----------------
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
================
Total rent expense amounted to $1.8 million, $1.3 million and $1.5
million for the years ended December 31, 1998, 1997 and 1996, 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.
(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.
62
<PAGE>
(15) RELATED PARTY TRANSACTION
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 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.
(16) SUBSEQUENT EVENT--UNAUDITED
On March 19, 1999, the Company completed 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.
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.
63
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATIONS AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
beginning Costs and Other at end
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS CHANGES OF PERIOD
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from
asset accounts:
Allowances for uncollectible accounts
Receivable
Year ended December 31, 1996 473 2,225 2,096 - 602
Year ended December 31, 1997 602 2,733 2,294 - 1,041
Year ended December 31, 1998 1,041 4,225 2,173 - 3,093
Allowances for asset impairment
Year ended December 31, 1996 560 - - - 560
Year ended December 31, 1997 560 - - - 560
Year ended December 31, 1998 560 - - - 560
</TABLE>
64
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the
executive officers of the Company as of March 15, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------------------------------------
<S> <C> <C>
Michael J. Mahoney.................... 39 Chairman of the Board, Chief Executive Officer and President
Allan L. Shaw......................... 35 Senior Vice President, Finance; Chief Financial Officer and
Director
Lawrence G. Malone.................... 47 Senior Vice President, Global Sales and Marketing
Sheldon M. Goldman.................... 39 Senior Vice President, Business Affairs; General Counsel and
Secretary
Francis J. Mount...................... 56 Senior Vice President, Engineering and Network Operations and
Director
John G. Graham........................ 60 Director
Paul G. Pizzani....................... 39 Director
</TABLE>
MICHAEL J. MAHONEY. Mr. Mahoney has served as Chairman of the Board of
Viatel since September 1998, as its Chief Executive Officer since September
1997, as its President since September 1996 and as a director since 1995. Mr.
Mahoney was also Chief Operating Officer of Viatel from September 1996 to
September 1997, Executive Vice President, Operations and Technology of Viatel
from July 1994 to September 1996 and Managing Director, Intercontinental of
Viatel from January 1996 to September 1996. From August 1990 to June 1994, Mr.
Mahoney was employed by SITEL Corporation, a teleservices company, most recently
as President, Information Services Group. From August 1987 to August 1990, Mr.
Mahoney was employed by URIX Corporation, a manufacturer of telecommunications
hardware and software, in a variety of sales and marketing positions.
ALLAN L. SHAW. Mr. Shaw has served as Senior Vice President, Finance
of Viatel since December 1997 and has served as Chief Financial Officer of
Viatel since January 1996. Mr. Shaw has served as a director of Viatel since
June 1996. Mr. Shaw was Vice President, Finance of Viatel from January 1996 to
December 1997 and Treasurer of Viatel from September 1996 to April 1998. Prior
to becoming Viatel's Vice President, Finance and Chief Financial Officer, Mr.
Shaw served as Corporate Controller of Viatel from November 1994 to December
1995. From August 1987 to November 1994, Mr. Shaw was employed by Deloitte &
Touche LLP, most recently as a Manager. Mr. Shaw is a Certified Public
Accountant and a member of the American Institute, United Kingdom Society and
New York State Society of Certified Public Accountants.
LAWRENCE G. MALONE. Mr. Malone has served as Senior Vice President,
Global Sales and Marketing of Viatel since May 1997. Mr. Malone served as Vice
President and Managing Director, Intercontinental of Viatel from September 1996
to May 1997 and served as its Vice President of Sales for Carriers/Wholesale
from January 1995 to September 1996. From December 1993 to December 1994, Mr.
Malone was employed by Frame Relay Technologies, a communications equipment
manufacturer, as Director of Sales. From December 1987 to November 1993, Mr.
Malone was employed by Republic Telcom Systems, a voice/data networking company,
where he most recently served as Vice President of Sales and Marketing.
SHELDON M. GOLDMAN. Mr. Goldman has served as Senior Vice President,
Business Affairs and General Counsel of Viatel since December 1997. Prior to
becoming Senior Vice President, Business Affairs and General Counsel, Mr.
Goldman served as Vice President, Business and Legal Affairs of Viatel from
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December 1996 to December 1997 and served as United States General Counsel of
Viatel from April 1996 to December 1996. From January 1987 to March 1996, Mr.
Goldman was associated with the law firm of Wien, Malkin & Bettex. Since March
1996, Mr. Goldman has been Of Counsel to the law firm of Brief Kesselman Knapp &
Schulman, LLP.
FRANCIS J. MOUNT. Mr. Mount has served as Senior Vice President,
Engineering and Network Operations of Viatel since December 1997 and as a
Director of Viatel since June 1998. Prior to joining Viatel, Mr. Mount was
Senior Vice President, Business Initiatives of Primus Telecommunications Group
from October 1997 to December 1997, responsible for Internet telephony, European
operations and network quality. From June 1996 to October 1997, Mr. Mount was
Executive Vice President and Chief Operating Officer of Telepassport, Inc. and
was Vice President and Chief Operating Officer of Telepassport, Inc. from
January 1996 to June 1997. From 1990 to January 1996, Mr. Mount was employed by
MCI, most recently as Director, Global Technical Services, responsible for
international development, alliance management and all technical operations and
services outside the United States, including the construction and maintenance
of large networks such as Hyperstream, "Concert" and private networks for large
accounts such as J.P. Morgan, Proctor and Gamble and I.B.M. From March 1967 to
December 1989, Mr. Mount was employed by AT&T in various positions.
JOHN G. GRAHAM. Mr. Graham has served as a director of Viatel since
June 1998. Mr. Graham has been elected as the President and Chief Operating
Officer of Utilities Mutual Insurance Company, positions which he will assume
effective May, 1, 1999 following his retirement from GPU Service, Inc. Mr.
Graham is currently an Executive Vice President of GPU Service, Inc. and was
Senior Vice President and Chief Financial Officer of GPU, Inc., a domestic and
international electric utility and independent power generation company from
1987 to December 1998. Mr. Graham was employed by GPU in various capacities
since 1976 and has held his current position since 1987. From 1970 to 1976, Mr.
Graham was a Partner in the law firm of Ruprecht and Graham, Newark, New Jersey.
From 1993 to 1997, Mr. Graham served as a Director and Chairman of the Audit
Committee of Edisto Resources, Inc., which was engaged in the exploration,
production and marketing of natural gas and oil. Mr. Graham has been elected as
the President and Chief Operating Officer of Utilities Mutual Insurance Company,
positions which he will assume effective May 1, 1999 following his retirement
from GPU Service, Inc.
PAUL G. PIZZANI. Mr. Pizzani has served as a director of Viatel since
April 1996. Mr. Pizzani is currently a Managing Director of Wasserstein Perella
Emerging Markets L.P. where he has been employed since November 1997. Prior to
November 1997, Mr. Pizzani was associated with COMSAT Corporation and its
subsidiaries in various capacities from November 1985 to October 1997, most
recently as Treasurer.
SENIOR MANAGEMENT
FRED HUGHES. Mr. Hughes has served as Vice President, Engineering of
Viatel since December 1997. From July 1994 to December 1997, Mr. Hughes was Vice
President, Operations-Europe of Viatel. From August 1993 to July 1994, Mr.
Hughes served as Director of Telephony of Viatel. From January 1991 to August
1993, Mr. Hughes was President of Communications Services Group, a
Connecticut-based voice and data communications consulting company. From August
1988 to January 1991, Mr. Hughes was Director of Engineering at Millicom
Telecommunications Services, Inc.
PAUL K. HEUN. Mr. Heun has been Vice President, Operations of Viatel
since January 1998. Prior to joining Viatel, Mr. Heun was Vice President,
Network Services of Primus Telecommunications Group from October 1997 to January
1998. From April 1996 to October 1997, Mr. Heun was Vice President, Network
Services of Telepassport, Inc. From January 1995 to April 1996, Mr. Heun was
employed by AT&T as Manager, Customer Connectivity. From April 1989 to January
1995, Mr. Heun was employed by MCI, most recently as Senior Manager, Network
Operations.
WAYNE MYERS. Mr. Myers has been Vice President, European Sales of
Viatel since January 1999. Prior to becoming Vice President, European Sales, Mr.
Myers was General Manager, European Sales of the company from July 1997 to
January 1999. From February 1996 to June 1997, Mr. Myers was Channel Sales
Director of PSI Net. From November 1994 to February 1996, Mr. Myers was a Sales
Director for LDDS/WorldCom. From June 1993 to November 1994, Mr. Myers was
President of the Gold Club, a direct mail Company. From February 1988 to June
1993, Mr. Myers was employed by Cable & Wireless Communications, Inc. in various
capacities most recent as a National Account Director.
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JAN C. PIAZZA. Ms. Piazza has been Vice President, Carrier Sales of
Viatel since January 1999. Prior to becoming Vice President, Carrier Sales, Mr.
Piazza served as Viatel's General Manager, Carrier Sales from January 1998 to
January 1999. Prior to joining Viatel, Ms. Piazza was a Vice President of Primus
Telecommunications Group from October 1997 to December 1997. From September 1995
to October 1997, Ms. Piazza was a Vice President, Sales and Marketing of
Telepassport, Inc. From 1987 to August 1995, Ms. Piazza served in various
positions at a predecessor of WorldCom, most recently as Vice President of
Product Development and Carrier Sales. From 1983 until 1987, Ms. Piazza was
Director of Sales Administration and Customer Service for Argo Communications.
ELLEN S. RUDIN. Ms. Rudin has served as Vice President and Deputy
General Counsel of Viatel since September 1998 and as Assistant Secretary since
September 1997. Prior to becoming Vice President and Deputy General Counsel, Ms.
Rudin served as Vice President and Assistant General Counsel from October 1997
to September 1998, as Counsel from March 1997 to October 1997 and as a staff
attorney for Viatel from August 1996 to March 1997. From September 1987 to
August 1996, Ms. Rudin was associated with the law firm of Wien, Malkin &
Bettex.
CHARLES T. FIELD. Mr. Field has served as Vice President and Treasurer
of Viatel since September 1998. Prior to becoming Vice President and Treasurer,
Mr. Field served as Treasurer from April 1998 to September 1998. Prior to
joining Viatel, Mr. Field was employed by Horsehead Industries, Inc., a
diversified manufacturing company, from August 1995 to April 1998. From October
1987 to August 1995, Mr. Field was employed by Deloitte & Touche LLP,
Independent Certified Public Accountants, most recently as Manager. Mr. Field is
a Certified Public Accountant and a member of the American Institute, United
Kingdom Society and Illinois Society of Certified Public Accountants.
DEREK FOXWELL. Mr. Foxwell has served as Viatel's Vice President of
Infrastructure Programs since January 1999. Prior to becoming Vice President of
Infrastructure Programs, Mr. Foxwell served as Director of Infrastructure
Programs from May 1998 to January 1999. From December 1997 to May 1998, Mr.
Foxwell served as a consultant to Viatel providing advice to Viatel in
connection with the development of the Circe Network. Prior to joining Viatel as
a consultant, Mr. Foxwell was a consultant to Nynex Network Service (Flag,-
Ltd.) where he chaired the Flag Assignment, Routing & Restoration Subcommittee
and Sprint International (PTAT) and acted as the operations and maintenance
manager for PTAT systems. From 1972 to 1991, Mr. Foxwell was employed by British
Telecom, most recently as Transmission Engineering Planning Manager,
International Cable Network; International and National Elements. Mr. Foxwell is
a chartered engineer with more than 25 years of experience in international
telecommunications networks.
GLENN K. DAVIDSON. Mr. Davidson has served as Viatel's Vice President,
Corporate Communications since August 1998. Prior to joining Viatel, Mr.
Davidson was employed by the Computer & Communications Industry Association as
Executive Vice President, Chief Operating Officer and Corporate Secretary from
September 1995 to July 1998. From November 1994 to September 1995, Mr. Davidson
was an independent consultant. From May 1994 to November 1994, Mr. Davidson was
the Campaign Manager for Douglas Wilder's bid for election to the United States
Senate. From August 1991 to January 1994, Mr. Davidson was employed by the
Office of Governor, Commonwealth of Virginia, most recently as Chief of Staff.
From January 1990 to August 1991, Mr. Davidson was the Director of the Virginia
Liaison Office, Commonwealth of Virginia. From 1985 to 1990, Mr. Davidson was
employed by Computer & Communications Industry Association in various
capacities, most recently as Vice President and Chief of Staff.
EVAN MILLER. Mr. Miller has served as Vice President of Business
Development of Viatel since February 1999. Prior to joining Viatel, Mr. Miller
was Director, Equity Research at Credit Suisse First Boston from March 1995 to
December 1998 and was Director, Equity Research at Lehman Brothers from December
1990 to February 1995. From April 1988 to November 1990, Mr. Miller was a member
of the Senior Management Group, Corporate Strategy at British Telecom.
PETER STEPHENS. Mr. Stephens has been Vice President, Operations -
Europe of Viatel since January 1999. Prior to becoming Vice President,
Operations - Europe, Mr. Stephens served as Technical Director for MCI's
operations in Europe, the Middle East and Africa from January 1993 to December
1998. Prior to January 1993, Mr. Stephens was employed by Reuters in various
capacities for approximately 19 years, most recently as Communications Quality
Director.
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STEPHEN GRIST. Mr. Grist has served as European Finance Director of
Viatel since February 1998. Prior to joining Viatel, Mr. Grist was employed by
Mincom Pty Ltd., a privately held Australian software and consulting company,
from October 1994 to February 1998, most recently as U.K./Europe Financial
Controller. From January 1989 to July 1994, Mr. Grist was employed by Coopers &
Lybrand, Independent Certified Public Accountants, most recently as a Senior
Audit Manager. Mr. Grist has been a member of the Institute of Chartered
Accountants in England and Wales.
Our Board of Directors is comprised of seven directorship, two of which
are currently vacant. The Board consists of three classes: Class A, Class B and
Class C. One of the three classes, comprising approximately one-third of the
directors, is elected each year to succeed the directors whose terms are
expiring. Directors hold office until the annual meeting for the year in which
their terms expire and until their successors are elected and qualified unless,
prior to that date, they have resigned, retired or otherwise left office. In
accordance with our Amended and Restated Certificate of Incorporation, Class C
directors are to be elected at the 1999 Annual Meeting of Stockholders, Class A
directors are to be elected at the 2000 Annual Meeting of Stockholders and Class
B directors are to be elected at the 2001 Annual Meeting of Stockholders.
The Board of Directors has established three committees, a Compensation
Committee, an Audit Committee and a Directors Committee. The current members of
the Compensation Committee are Messrs. Mahoney, Graham and Pizzani, the current
members of the Audit Committee are Messrs. Graham and Pizzani and the current
members of the Directors Committee are Messrs. Mahoney, Graham and Pizzani. The
Compensation Committee reviews general policy matters relating to compensation
and benefits of our employees and officers and administers the Stock Incentive
Plan. The Audit Committee recommends to the Board the firm of independent public
accountants to audit our financial statement, reviews with management and the
independent accountants our interim and year-end operating results, considers
the adequacy of our internal controls and our audit procedures and reviews the
nonaudit services to be performed by the independent accountants. The Directors
Committee searches for and interviews prospective directors, makes
recommendations to the Board regarding the size of the Board and candidates to
fill vacancies on the Board, including vacancies created by reason of an
increase in the size of the Board and nominates candidates for election to the
Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, certain
officers and persons holding more than 10% of a registered class of our equity
securities to file reports of ownership and reports of changes in ownership with
the Securities and Exchange Commission (the "Commission") and the Nasdaq
National Market. Directors, certain officers and greater than 10% stockholders
are also required by Commission regulations to furnish us with copies of all
such reports that they file. Based on our review of copies of such forms
provided to us, we believe that all filing requirements were complied with
during the fiscal year ended December 31, 1998.
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ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to, any person acting
as our Chief Executive Officer during 1998, regardless of the amount of
compensation paid, and the other of our most highly compensated executive
officers, whose aggregate cash and cash equivalent compensation exceeded
$100,000 (the "Named Executives").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
OTHER
ANNUAL RESTRICTED SECURITIES
COMPENSATION STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS ($) OPTIONS(#) COMPENSATION(2)
- - --------------------------- ---- --------- -------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney(3)........ 1998 $289,583 $260,000 $ -- $ -- 360,771 $10,000
President and Chief
Executive Officer 1997 212,500 125,000 -- -- -- 9,500
1996 166,458 183,129 102,825 299,977(4) 253,333 --
Allan L. Shaw................ 1998 172,917 107,500 -- -- 195,019 10,000
Senior Vice President,
Finance 1997 140,000 60,000 -- -- 60,666 8,400
and Chief Financial Officer
1996 108,333 115,000 -- -- 43,333 --
Lawrence G. Malone........... 1998 155,833 110,000 -- -- 138,140 9,350
Senior Vice President
Global Sales and Marketing 1997 141,750 35,588 -- -- 73,533 8,505
1996 98,333 88,147 -- -- -- --
Sheldon M. Goldman(5)........ 1998 182,917 112,000 -- -- 162,500 10,000
Senior Vice President,
Business Affairs 1997 143,750 60,000 -- -- 40,200 9,000
and General Counsel 1996 86,354 100,000 -- -- 20,000 --
Francis J. Mount(6).......... 1998 175,000 107,500 -- -- 122,500 10,000
Senior Vice President,
Engineering and
Network Operations
</TABLE>
- - -----------
(1) The amount reflected for Mr. Mahoney includes $32,416 of tax equalization
payments, $28,227 of relocation expense reimbursement associated with Mr.
Mahoney's repatriation from London to New York and $9,263 of tax gross ups.
(2) Represents matching contributions under our 401(k) plan.
(3) Mr. Mahoney was appointed as Chief Executive Officer in September 1997.
(4) Calculated based on a value of $9.00 per share, the fair market value of
the Common Stock on December 31, 1996.
(5) Mr. Goldman began his employment with us in March 1996.
(6) Mr. Mount began his employment with us in December 1997.
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STOCK OPTION GRANTS
The following table sets forth information regarding grants of options
to purchase Common Stock made by us during the fiscal year ended December 31,
1998 to each of the Named Executives. No stock appreciation rights ("SARs") were
granted during 1998.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
INDIVIDUAL GRANTS
-----------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED ANNUAL
SECURITIES TOTAL OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE EXPIRATION OPTION TERM (3)
NAME GRANTED (#) 1998 (1) ($/SHARE)(2) DATE (5%) (10%)
---- ----------- -------------- ------------ ------------ ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney.............. 90,000(4) (5) 5.0% $5.00 01/01/2008 $282,600 $717,300
90,000(4) (6) 5.0 5.50 01/01/2008 311,400 789,300
180,771(4) (7) 10.1 10.25 09/18/2008 1,165,973 2,953,798
Allan L. Shaw................... 60,000(4) (5) 3.3 5.00 01/01/2008 188,400 478,200
60,000(4) (6) 3.3 5.50 01/01/2008 207,600 526,200
75,019(4) (7) 4.2 10.25 09/18/2008 483,873 1,225,815
Lawrence G. Malone.............. 27,000(4) (5) 1.5 5.00 01/01/2008 84,780 215,190
60,000(4) (6) 3.3 5.50 01/01/2008 207,600 526,200
51,140(4) (7) 2.9 10.25 09/18/2008 329,853 835,628
Sheldon M. Goldman.............. 60,000(4) (5) 3.3 5.00 01/01/2008 188,400 478,200
60,000(4) (6) 3.3 5.50 01/01/2008 207,600 526,200
42,500(4) (7) 2.4 10.25 09/18/2008 274,125 694,450
Francis J. Mount................ 40,000(4) (5) 2.2 5.00 01/01/2008 125,600 318,800
60,000(4) (6) 3.3 5.50 01/01/2008 207,600 526,200
22,500(4) (7) 1.3 10.25 09/18/2008 145,125 367,650
</TABLE>
- - -----------
(1) We granted options to purchase a total of 1,793,736 shares of common stock
during 1998.
(2) The exercise price was equal to the fair market value of the shares of
common stock underlying the options on the grant date.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
common stock over the term of the options. These assumptions are based on
rules promulgated by the Commission and do not reflect our estimate of
future stock price appreciation. Actual gains, if any, on the stock option
exercises and common stock holdings are dependent on the timing of such
exercise and the future performance of the common stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the option
holder.
(4) In the event of certain Corporate Transactions (as defined) involving us,
all unvested stock options become fully vested. See "-- Stock Incentive
Plan." The options granted to the Named Executives also vest upon a change
of control.
(5) Options to purchase shares of common stock vested and became exercisable as
to 33.34% of these options on January 1, 1999 and the remainder will vest
and become exercisable on each successive anniversary date thereafter to
the extent of 33.33% of these options.
(6) Options vested and became exercisable as to 25% on January 1, 1999 and the
remainder will vest and become exercisable on each successive anniversary
date thereafter to the extent of 25% of these options.
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<PAGE>
(7) Options to purchase shares of common stock will vest and become exercisable
as to 33.34% of these options on September 18, 1999 and the remainder will
vest and become exercisable on each successive anniversary date thereafter
to the extent of 33.33% of these options.
On January 1, 1999, Viatel granted the following stock options with an
exercise price of $22.875 per share, to the Named Executives: Michael J.
Mahoney, 52,278 options; Allan L. Shaw, 38,519 options; Lawrence G. Malone,
38,519 options; Sheldon M. Goldman, 38,519 options; and Francis J. Mount, 38,519
options.
YEAR-END OPTION VALUES
The following table sets forth information regarding the number and
year end value of unexercised options held at December 31, 1998 by each of the
Named Executives. No stock appreciation rights were exercised by the Named
Executives during fiscal 1998.
FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED "IN-THE-MONEY"
OPTIONS AT OPTIONS AT
SHARES FISCAL FISCAL
ACQUIRED YEAR-END (#) YEAR-END ($)
ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
- - ---- ------------ ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Michael J. Mahoney........ 46,666 $662,891(2) 217,820/368,265 $3,372,766/$5,179,939
Allan L. Shaw............. - - 132,116/180,235 2,144,123/2,724,471
Lawrence G. Malone........ - - 105,249/149,757 1,713,119/2,298,995
Sheldon M. Goldman........ - - 81,805/179,414 1,330,560/2,219,277
Francis J. Mount.......... - - 28,360/94,140 499,435/1,542,128
</TABLE>
- - ------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $22.875 per share, the fair
market value of the common stock issuable upon exercise of options at
December 31, 1998 and the exercise price of the option, multiplied by
the applicable number of options.
(2) The amounts set forth represent the difference between $19.00 per
share, the fair market value of the common stock issuable upon exercise
of options at July 27, 1998, and the exercise price of the option,
multiplied by the applicable number of options.
EMPLOYMENT AGREEMENTS
We have executed employment agreements with Messrs. Mahoney, Shaw and
Goldman, each dated April 1, 1998, pursuant to which Mr. Mahoney serves as our
President and Chief Executive Officer, Mr. Shaw serves as Senior Vice President,
Finance and Chief Financial Officer and Mr. Goldman serves as our Senior Vice
President, Business Affairs and General Counsel (collectively, the "Employment
Agreements"). The term of the Mahoney Employment Agreement extends for a period
of three years and the term of the Shaw and Goldman Employment Agreements extend
for a period of two years, in each case unless earlier terminated in accordance
with the terms thereof. Pursuant to the respective Employment Agreement, Mr.
Mahoney is entitled to receive an annual base salary
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<PAGE>
of $300,000 (subject to inflationary adjustments), Mr. Shaw is entitled to
receive an annual base salary of $175,000 and Mr. Goldman is entitled to receive
an annual base salary of $185,000, subject, in each case, to increases approved
from time to time by the Board. In addition, Mr. Mahoney's Employment Agreement
provides for an annual cash bonus payment equal to 70% of his base salary
multiplied by a bonus multiple ranging from 0.6 to 2.0 determined based upon a
comparison of actual versus projected EBITDA and revenue figures and each of
Messrs. Shaw's and Goldman's Employment Agreement provides for an annual cash
bonus payment equal to 50% of their base salary multiplied by a bonus multiple
ranging from 0.6 to 2.0 determined based upon a comparison of actual versus
projected EBITDA and revenue figures. Each of the Employment Agreements also
provides that the executive will be entitled to receive annual grants of stock
options or restricted stock in amounts to be determined by the Board of
Directors in its sole and absolute discretion and provides that following a
change of control (as defined therein), we will be obligated to pay the
executive an amount equal to the Severance Amount (as defined therein) if the
executive chooses to terminate his employment and include a non-competition
covenant. Each of the Employment Agreements also contains a prohibition on the
solicitation of our employees.
For purposes of the Employment Agreement, "change of control" is
defined to mean such time as (i) a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act), becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) of more than
50% of the total voting power of the then outstanding voting stock of Viatel on
a fully diluted basis or (ii) individuals who at the beginning of any period of
two consecutive calendar years constituted the Board (together with any new
directors whose election by the Board or whose nomination for election by our
stockholders was approved by a vote of at least two-thirds of the members of the
Board then still in office who either were members of the Board at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of the
Board then in office.
STOCK INCENTIVE PLAN
We have adopted the Amended Stock Incentive Plan (the "Stock Incentive
Plan") under which "non-qualified" stock options to acquire shares of common
stock may be granted to our employees, directors and consultants and "incentive"
stock options to acquire shares of common stock may be granted to employees,
including employee-directors. The Stock Incentive Plan also provides for the
grant of stock appreciation rights and shares of restricted common stock to our
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. Under the Stock Incentive Plan, the option
price of any incentive stock option 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 a non-qualified stock option may be less than the fair market
value on the date the non-qualified stock option is granted if the Board of
Directors so determines. An incentive stock option may not be granted to a "ten
percent stockholder" (as such term is defined in Section 422A of the Code)
unless the exercise price is at least 110.0% of the fair market value of the
common stock and the term of the option may not exceed five years from the date
of grant. Each option granted pursuant to the Stock Incentive Plan is evidenced
by a written agreement executed by us and the grantee, which contains the terms,
provisions and conditions of the grant. Stock options may not be assigned or
transferred during the lifetime of the holder except as may be required by law
or pursuant to a qualified domestic relations order. Common stock subject to a
restricted stock purchase or bonus agreement is transferable only as provided in
such agreement. The maximum term of each stock option granted to persons other
than ten percent stockholders is ten years from the date of grant.
For options to qualify as incentive stock options, the aggregate fair
market value, determined on the date of grant, of the shares with respect to
which the incentive stock option are exercisable for the first time by the
grantee during any calendar year may not exceed $100,000. Payment by option
holders upon exercise of an option may be made in cash or, with the consent of
the Board of Directors, in whole or in part, (1) with shares of common stock,
(2) by irrevocable direction to an approved securities broker to sell shares and
deliver all or a portion of the proceeds to us, (3) by delivery of a promissory
note with such provisions as the Board of Directors determines appropriate or
(4) in any combination of the foregoing. In addition, the Board of Directors, in
its sole discretion, may authorize the surrender by an optionee of all or part
of an unexercised stock option and authorize a payment in consideration thereof
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of an amount equal to the difference between the aggregate fair market value of
the shares of common stock subject to such stock option and the aggregate option
price per share of such common stock. In the Board of Directors' discretion,
such payment may be made in cash, shares of common stock with a fair market
value on the date of surrender equal to the payment amount or some combination
thereof.
The Stock Incentive Plan provides that outstanding options, restricted
shares of common stock or stock appreciation rights vest in their entirety and
become exercisable, or with respect to restricted stock, are released from
restrictions on transfer and repurchase rights, in the event of a "Corporate
Transaction." For purposes of the Stock Incentive Plan, a Corporate Transaction
includes any of the following stockholder-approved transactions to which we are
a party: (1) a merger or consolidation in which we are not the surviving entity,
other than a transaction the principal purpose of which is to change the state
of our incorporation, or a transaction in which our stockholders immediately
prior to such merger or consolidation hold (by virtue of securities received in
exchange for their shares in us) securities of the surviving entity representing
more than 50.0% of the total voting power of such entity immediately after such
transaction; (2) the sale, transfer or other disposition of all or substantially
all of the assets of Viatel unless our stockholders immediately prior to such
sale, transfer or other disposition hold (by virtue of securities received in
exchange for their shares in us) securities of the purchaser or other transferee
representing more than 50.0% of the total voting power of such entity
immediately after such transaction; or (3) any reverse merger in which we are
the surviving entity but in which our stockholders immediately prior to such
merger do not hold (by virtue of their shares in Viatel held immediately prior
to such transaction) securities in our company representing more than 50.0% of
the total voting power of us immediately after such transaction.
We have filed with the Commission a Registration Statement on Form S-8
covering the shares of common stock underlying options granted under the Stock
Incentive Plan.
COMPENSATION OF DIRECTORS
Effective June 1998, we increased the annual fee paid to non-employee
directors from $12,000 to $30,000 (paid $15,000 in cash, in quarterly
installments, and $15,000 paid in options to purchase common stock), increased
from $1,000 to $1,200 the meeting fee paid to directors for every board meeting
attended and held separately and increased from $500 to $600 the fee paid to
directors for each Board meeting or committee meeting participated in by
telephone. Directors who are also employees of Viatel are not separately
compensated for serving on the Board. All directors are reimbursed for
out-of-pocket expenses incurred in attending Board and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the members of the Compensation Committee were Messrs.
Graham, Pizzani and Mahoney. Mr. Mahoney is Viatel's President and Chief
Executive Officer. None of our executive officers currently serve on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing functions similar to the Compensation
Committee. No interlocking relationships exist between our Board of Directors or
its Compensation Committee and the board of directors or compensation committee
of any other company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the common stock, as of March 15, 1999, by (1) each
person known to us to own beneficially more than 5% of our outstanding shares of
common stock, (2) each director of the company (3) each of the Named Executives,
and (4) all executive officers and directors of us, as a group. All information
with respect to beneficial ownership has been furnished to us by our respective
stockholders.
73
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE
OF BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP (1) CLASS
<S> <C> <C>
Martin Varsavsky
Parque Empresarial Edificio 2,
c/o Beatriz De Bobadilla
14,5(degree)Ofic. B
Madrid, Spain..................................................... 3,596,666 15.5%
The Capital Guardian Trust Co.
11100 Santa Monica Boulevard
Los Angeles, CA 90025-3384(2)..................................... 2,695,700 11.6
Michael J. Mahoney(3)............................................... 318,819 1.4
Allan L. Shaw(3).................................................... 153,116 *
Lawrence G. Malone(3)............................................... 121,249 *
Sheldon M. Goldman(3)(4)............................................ 105,805 *
Francis J. Mount(3)................................................. 44,336 *
John G. Graham(3)................................................... 1,732 *
Paul G. Pizzani(3).................................................. 732 *
All directors and executive
officers as a group (7 persons)(5)............................. 745,789 3.4%
</TABLE>
- - -----------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common
stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of March 15, 1999
are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of
any other person. Except as indicated in the footnotes to this table,
the stockholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
(2) The amount reported reflects shares held by a subsidiary of The Capital
Guardian Trust Co. solely as the investment manager of various
institutional accounts. The Capital Guardian Trust Co. does not have
investment power or voting power over any of these shares.
(3) Includes shares of common stock which these individuals have the right
to acquire through the exercise of options within 60 days of March 15,
1999, as follows: Michael J. Mahoney 217,820; Allan L. Shaw 132,116;
Lawrence G. Malone 105,249; Sheldon M. Goldman 81,805; and Francis J.
Mount 28,336; John G. Graham, 732; and Paul G. Pizzani, 732.
(4) Includes 1,000 shares owned by Mr. Goldman's wife. Mr. Goldman
disclaims "beneficial ownership" of such shares within the meaning of
Rule 13d-3 under the Exchange Act.
(5) Includes vested and exercisable options to purchase 566,814 shares
of common stock which were granted pursuant to the Stock Incentive Plan.
74
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On June 3, 1998, we 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"), we 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 we agreed to
purchase $6.0 million of Jazz Telecom S.A. common stock, (3) Viatel 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) we 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) we agreed to release any past claims
which we had against either Jazz Telecom S.A. and Mr. Varsavsky in exchange for
their respective release of any claims against us and (7) Mr. Varsavsky agreed
to pay to us liquidated damages in the event that he violates certain provisions
of the agreement. Viatel and Jazz Telecom S.A. are currently in discussions
concerning 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 intentional to sell, pledge or otherwise dispose
of his shares of our common stock, either directly or indirectly, without the
prior written consent from us until after August 12, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1 FINANCIAL STATEMENTS.
The financial statements are included in Part II, Item 8 of this
Report.
2 FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION REQUIRED
TO BE SUBMITTED.
Any required financial statement schedules are included in Part II,
Item 8 of this Report.
(B) REPORT ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
(C) INDEX TO EXHIBITS.
The following is a list of all Exhibits filed as part of this Report:
75
<PAGE>
EXHIBIT NO. DESCRIPTION OF DOCUMENTS
- - ----------- ------------------------
3(i)* - Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1(i)(a) to the
Company's Registration Statement on Form S-1, filed on August 7,
1996, Registration No. 333-09699 (the "Company's S-1")).*
3(i)(a) - Certificate of Amendment to the Company's Amended and Restated
Certificate of Incorporation (incorporated herein by reference to
Exhibit 4.9 of the Company's Quarterly Report on From 10-Q for the
quarter ended September 30, 1998, File No. 000-21261).*
3(i)(b) - 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 the
Company's Registration Statement on From S-4, filed July 10, 1998,
Registration Statement No. 58921 (the "Company's 1998 Form S-4")).
3(ii)* - Second Amended and Restated By-laws of the Company (incorporated
herein by reference to Exhibit 3.1(ii) of the Company's Form 10-Q
for the fiscal quarter ended September 30, 1997, File No.
000-21261).
4.1* - Indenture, dated as of December 15, 1994, between the Company and
United States Trust Company of New York, as Trustee (incorporated
herein by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-4, filed on May 24, 1995, Registration No.
33-92696 (the "Company's 1995 Form S-4").
4.2* - Company Common Stock Certificate (incorporated herein by reference
to Exhibit 4.4 to the Company's S-1).
4.3* - Amendment No. 1 to the Indenture, dated as of December 15, 1994,
between the Company and United States Trust Company of New York, as
Trustee (incorporated herein by reference to Exhibit 4.5 to the
Company's S-1).
4.4* - Indenture, dated as of April 8, 1998, between the Company and The
Bank of New York, as Trustee, relating to Viatel, Inc.'s 12.50%
Senior Discount Notes Due 2008 (including from of 12.50% Senior
Discount Note) (incorporated herein by reference to Exhibit 4.1 to
the Company's 1998 From S-4).
4.5* - Indenture, dated as of April 8, 1998 between the Company 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 the Company's
1998 Form S-4).
4.6* - Indenture, dated as of April 8, 1998, among the Company, The Bank
of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft, as
German Paying Agent and Co-Registrar, relating to the Company'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 the Company's 1998 Form S-4).
4.7* - Indenture, dated as of April 8, 1998, among the Company, The Bank
of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft, as
German Paying Agent and Co-Registrar, relating to the Company's
11.15% Senior Notes Due 2008 (including form of 11.15% Senior Note)
(incorporated herein by reference to Exhibit 4.4 to the Company's
1998 Form S-4).
4.8* - Indenture, dated as of April 8, 1998, among the Company, The Bank
of New York, as Trustee, and Deutsche Bank, Aktiengesellschaft, as
German Paying Agent and Co-Registrar, relating to the Company's 10%
Subordinated Convertible Debentures Due 2011 (including form of 10%
Subordinated Convertible Debenture) (incorporated herein by
reference to Exhibit 4.5 to the Company's 1998 Form S-4).
76
<PAGE>
4.9* - Conversion Shares Registration Rights Agreement, dated April 3,
1998, among the Company, 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 the Company's 1998
Form S-4).
10.1* - Common Stock Registration Rights Agreement, dated as of December
15, 1994, among the Company, Martin Varsavsky, Juan Manuel
Aisemberg and Morgan Stanley & Co. Incorporated in connection with
the Company's shares of non-voting Class A Common Stock
(incorporated herein by reference to Exhibit 10.4 to the Company's
1995 Form S-4).
10.2* - Mercury Carrier Services Agreement, dated as of March 1, 1994,
between the Company and Mercury Communications Limited
(incorporated herein by reference to Exhibit 10.8 to the Company's
1995 Form S-4).
10.3* - Provision and Management Facilities Agreement, dated as of October
17, 1994, between the Company and Mercury Communications Limited
(incorporated herein by reference to Exhibit 10.9 to the Company's
1995 Form S-4).
10.4* - Stock Purchase Agreement, dated as of September 30, 1993, as
amended as of April 5, 1994, and as further amended as of December
21, 1994, between the Company and S-C V-Tel Investments, L.P.
(incorporated herein by reference to Exhibit 10.13 to the Company's
1995 Form S-4).
10.5* - Stock Purchase Agreement, dated as of April 5, 1994, between the
Company and COMSAT Investments, Inc. (incorporated herein by
reference to Exhibit 10.14 to the Company's 1995 Form S-4).
10.6* - Shareholders' Agreement, dated as of April 5, 1994, and as amended
as of November 22, 1994, by and among the Company, Martin
Varsavsky, Juan Manuel Aisemberg and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.19 to the Company's
1995 Form S-4).
10.7* - Shareholders' Agreement, dated as of September 30, 1993, as amended
as of December 9, 1993 and as further amended as of April 5, 1994,
November 22, 1994 and December 21, 1994, by and among the Company,
Martin Varsavsky and S-C V-Tel Investments, L.P. (incorporated
herein by reference to Exhibit 10.21 to the Company's 1995 Form
S-4).
10.8* - Commercial Lease Agreement, dated as of November 1, 1993, and
Addendum, dated as of December 8, 1994, between the Company and
123rd Street Partnership in connection with the Company's premises
located in Omaha, Nebraska (incorporated herein by reference to
Exhibit 10.24 to the Company's 1995 Form S-4).
10.9* - Facilities Management and Services Agreement, dated as of August 4,
1995, between Viatel U.K. Limited and Telemedia International Ltd.
(incorporated herein by reference to Exhibit 10.32 to the Company's
1995 Form S-4).
10.10* - Agreement of Lease, dated August 7, 1995, between the Company and
Joseph P. Day Realty Corp. (incorporated herein by reference to
Exhibit 10.33 to the Company's 1995 Form S-4).
10.11*+ - Employment Agreement between the Company and Michael J. Mahoney
(incorporated herein by reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(the "Company's 1997 Form 10K)).
77
<PAGE>
10.12*+ - Amended Stock Incentive Plan (incorporated herein by reference to
Exhibit 4.10 to the Company's Form 10-Q for the fiscal quarter
ended September 30, 1998, File No. 000-21261).
10.13*+ - Employment Agreement between the Company and Allan L. Shaw
(incorporated herein by reference to Exhibit 10.14 to the Company's
1997 Form 10-K).
10.14*+ - Employment Agreement between the Company and Sheldon M. Goldman
(incorporated herein by reference to Exhibit 10.15 to the Company's
1997 Form 10-K).
10.15* - Mutual Cooperation Agreement, dated as of June 3, 1998, among the
Company, Martin Varsavsky and Jazz Telecom S.A. (incorporated
herein by reference to Exhibit 10.16 to the Company's Current
Report on Form 8-K, dated June 8, 1998, File No. 000-21261).
10.16* - Equipment Purchase Agreement, dated June 29, 1998, between the
Company and Nortel PLC (incorporated herein by reference to Exhibit
10.16 to the Company's 1998 Form S-4).
10.17* - Agreement of Lease, dated June 24, 1998, between 685 Acquisition
and the Company, as amended by a letter agreement, dated July 27,
1998 (incorporated herein by reference to Exhibit 10.17 to the
Company's 1998 Form S-4).
10.18* - Lease, dated June 23, 1998, between VC Associates and Viatel New
Jersey, Inc. (incorporated herein by reference to Exhibit 10.18 to
the Company's 1998 Form S-4).
10.19** - Software License Agreement, dated October 22, 1998, between the
Company and Lucent Technologies Inc.
10.20** - Engineering, Procurement and Construction Contract, dated as of
November 10, 1998, between Viatel Global Communications, Inc. and
Alcatel Submarine Network S.A.
10.21** - Equipment Purchase Agreement, dated December 31, 1998, between the
Company and Nortel plc.
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
- - ----------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
** Filed herewith. Confidential treatment requested as to certain portions.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City and State
of New York, on the 31st day of March, 1999.
VIATEL, INC.
By: /S/ MICHAEL J. MAHONEY
--------------------------
Michael J. Mahoney
President and Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allan L. Shaw and Sheldon M. Goldman his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of March, 1999.
SIGNATURE TITLE(S)
/S/ MICHAEL J. MAHONEY President, Chief Executive Officer
- - ---------------------- and Director (Principal Executive Officer)
Michael J. Mahoney
/S/ ALLAN L. SHAW Senior Vice President, Finance, Chief
- - ---------------------- Financial Officer and Director
Allan L. Shaw
/S/ FRANCIS J. MOUNT Director
- - ----------------------
Francis J. Mount
/S/ PAUL G. PIZZANI Director
- - ----------------------
Paul G. Pizzani
/S/ JOHN G. GRAHAM Director
- - ----------------------
John G. Graham
79
<PAGE>
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF DOCUMENTS PAGE
- - ----------- ------------------------ ------------
3(i)* - Amended and Restated Certificate of
Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1(i)(a) to the
Company's Registration Statement on Form S-1,
filed on August 7, 1996, Registration No.
333-09699 (the "Company's S-1")).*
3(i)(a) - Certificate of Amendment to the Company's
Amended and Restated Certificate of
Incorporation (incorporated herein by reference
to Exhibit 4.9 of the Company's Quarterly Report
on From 10-Q for the quarter ended September 30,
1998, File No. 000-21261).*
3(i)(b) - 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 the
Company's Registration Statement on From S-4,
filed July 10, 1998, Registration Statement No.
58921 (the "Company's 1998 Form S-4")).
3(ii)* - Second Amended and Restated By-laws of the
Company (incorporated herein by reference to
Exhibit 3.1(ii) of the Company's Form 10-Q for
the fiscal quarter ended September 30, 1997,
File No. 000-21261).
4.1* - Indenture, dated as of December 15, 1994,
between the Company and United States Trust
Company of New York, as Trustee (incorporated
herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4,
filed on May 24, 1995, Registration No. 33-92696
(the "Company's S-4").
4.2* - Company Common Stock Certificate (incorporated
herein by reference to Exhibit 4.4 to the
Company's S-1).
4.3* - Amendment No. 1 to the Indenture, dated as of
December 15, 1994, between the Company and
United States Trust Company of New York, as
Trustee (incorporated herein by reference to
Exhibit 4.5 to the Company's S-1).
4.4* - Indenture, dated as of April 8, 1998, between
the Company and The Bank of New York, as
Trustee, relating to Viatel, Inc.'s 12.50%
Senior Discount Notes Due 2008 (including from
of 12.50% Senior Discount Note) (incorporated
herein by reference to Exhibit 4.1 to the
Company's 1998 From S-4).
4.5* - Indenture, dated as of April 8, 1998 between the
Company 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 the Company's 1998 Form S-4).
80
<PAGE>
4.6* - Indenture, dated as of April 8, 1998, among the
Company, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German
Paying Agent and Co-Registrar, relating to the
Company'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 the Company's 1998 Form S-4).
4.7* - Indenture, dated as of April 8, 1998, among the
Company, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German
Paying Agent and Co-Registrar, relating to the
Company's 11.15% Senior Notes Due 2008
(including form of 11.15% Senior Note)
(incorporated herein by reference to Exhibit 4.4
to the Company's 1998 Form S-4)
4.8* - Indenture, dated as of April 8, 1998, among the
Company, The Bank of New York, as Trustee, and
Deutsche Bank, Aktiengesellschaft, as German
Paying Agent and Co-Registrar, relating to the
Company's 10% Subordinated Convertible
Debentures Due 2011 (including form of 10%
Subordinated Convertible Debenture)
(incorporated herein by reference to Exhibit 4.5
to the Company's 1998 Form S-4).
4.9* - Conversion Shares Registration Rights Agreement,
dated April 3, 1998, among the Company, 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 the Company's 1998 Form S-4).
10.1* - Common Stock Registration Rights Agreement,
dated as of December 15, 1994, among the
Company, Martin Varsavsky, Juan Manuel Aisemberg
and Morgan Stanley & Co. Incorporated in
connection with the Company's shares of
non-voting Class A Common Stock (incorporated
herein by reference to Exhibit 10.4 to the
Company's 1995 Form S-4).
10.2* - Mercury Carrier Services Agreement, dated as of
March 1, 1994, between the Company and Mercury
Communications Limited (incorporated herein by
reference to Exhibit 10.8 to the Company's 1995
Form S-4).
10.3* - Provision and Management Facilities Agreement,
dated as of October 17, 1994, between the
Company and Mercury Communications Limited
(incorporated herein by reference to Exhibit
10.9 to the Company's 1995 Form S-4).
10.4* - Stock Purchase Agreement, dated as of September
30, 1993, as amended as of April 5, 1994, and as
further amended as of December 21, 1994, between
the Company and S-C V-Tel Investments, L.P.
(incorporated herein by reference to Exhibit
10.13 to the Company's 1995 Form S-4).
10.5* - Stock Purchase Agreement, dated as of April 5,
1994, between the Company and COMSAT
Investments, Inc. (incorporated herein by
reference to Exhibit 10.14 to the Company's 1995
Form S-4).
80
<PAGE>
10.6* - Shareholders' Agreement, dated as of April 5,
1994, and as amended as of November 22, 1994, by
and among the Company, Martin Varsavsky, Juan
Manuel Aisemberg and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit
10.19 to the Company's 1995 Form S-4).
10.7* - Shareholders' Agreement, dated as of September
30, 1993, as amended as of December 9, 1993 and
as further amended as of April 5, 1994, November
22, 1994 and December 21, 1994, by and among the
Company, Martin Varsavsky and S-C V-Tel
Investments, L.P. (incorporated herein by
reference to Exhibit 10.21 to the Company's 1995
Form S-4).
10.8* - Asset Purchase Agreement, dated as of August 27,
1993, between the Company and Sitel Corporation
(incorporated herein by reference to Exhibit
10.26 to the Company's 1995 Form S-4).
10.9* - Facilities Management and Services Agreement,
dated as of August 4, 1995, between Viatel U.K.
Limited and Telemedia International Ltd.
(incorporated herein by reference to Exhibit
10.32 to the Company's 1995 Form S-4).
10.10* - Agreement of Lease, dated August 7, 1995,
between the Company and Joseph P. Day Realty
Corp. (incorporated herein by reference to
Exhibit 10.33 to the Company's 1995 Form S-4).
10.11*+ - Employment Agreement between the Company and
Michael J. Mahoney (incorporated herein by
reference to Exhibit 10.12 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997 (the "Company's 1997 Form
10-K")).
10.12*+ - Amended Stock Incentive Plan (incorporated
herein by reference to Exhibit 4.10 to the
Company's Form 10-Q for the fiscal quarter ended
September 30, 1998, File No. 000-21261).
10.13*+ - Employment Agreement between the Company and
Allan L. Shaw (incorporated herein by reference
to Exhibit 10.14 to the Company's 1997 Form
10-K).
10.14*+ - Employment Agreement between the Company and
Sheldon M. Goldman (incorporated herein by
reference to Exhibit 10.15 to the Company's 1997
Form 10-K).
10.15* - Mutual Cooperation Agreement, dated as of June
3, 1998, among the Company, Martin Varsavsky and
Jazz Telecom S.A. (incorporated herein by
reference to Exhibit 10.16 to the Company's
Current Report on Form 8-K, dated June 8, 1998,
File No. 000-21261).
10.16* - Equipment Purchase Agreement, dated June 29,
1998, between the Company and Nortel PLC
(incorporated herein by reference to Exhibit
10.16 to the Company's 1998 Form S-4).
82
<PAGE>
10.17* - Agreement of Lease, dated June 24, 1998, between
685 Acquisition and the Company, as amended by a
letter agreement, dated July 27, 1998
(incorporated herein by reference to Exhibit
10.17 to the Company's 1998 Form S-4).
10.18* - Lease, dated June 23, 1998, between VC
Associates and Viatel New Jersey, Inc.
(incorporated herein by reference to Exhibit
10.18 to the Company's 1998 Form S-4).
10.19** - Software License Agreement, dated October 22,
1998, between the Company and Lucent
Technologies Inc.
10.20** - Engineering, Procurement and Construction
Contract, dated as of November 10, 1998, between
Viatel Global Communications, Inc. and Alcatel
Submarine Network S.A.
10.21** - Equipment Purchase Agreement, dated December
31,1998, between the Company and Nortel plc.
21.1 - Subsidiaries of the Company.
23.1 - Consent of KPMG LLP.
24.1 - Power of Attorney (Appears on signature page).
27.1 - Financial Data Schedule.
- - ----------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement.
** Filed herewith. Confidential treatment requested as to certain portions.
83
EXHIBIT 10.19
SOFTWARE LICENSE AGREEMENT
BETWEEN
VIATEL, INC.
AND
LUCENT TECHNOLOGIES INC.
CONTRACT # GCMVIA98-10-22
<PAGE>
SOFTWARE LICENSE AGREEMENT
This Agreement is made the 22nd day of October, 1998 (the "Effective
Date") between Lucent Technologies Inc., a corporation organized and existing
under the laws of the State of Delaware, and having its corporate headquarters
at 600 Mountain Avenue, Murray Hill, New Jersey 07974 (hereinafter referred to
as "Lucent") and Viatel, Inc., a corporation organized and existing under the
laws of Delaware and having its principal office at 800 Third Avenue, New York,
New York 10022 (hereinafter referred to as "Licensee"). Each of Lucent and
Licensee may be referred to in this Agreement individually as a "Party" and
collectively as the "Parties."
1. HEADINGS & DEFINITIONS
All headings used in this Agreement are inserted for convenience only and are
not intended to affect the meaning or interpretation of this Agreement. For the
purpose of this Agreement, the following definitions will apply:
"Acceptance Test" means those tests performed by Licensee after
Lucent's installation of Licensed Materials as described in the
Statement of Work.
"Advertising" means all advertising, sales promotion, press releases,
and other publicity matters relating to performance under this
Agreement.
"Affiliate" of a corporation means it Subsidiaries, any company of
which it is a Subsidiary, and other Subsidiaries of such company. For
purposes of this Agreement, the meaning of "Affiliate" shall not
include any company or subsidiary which is a manufacturer of
telecommunications products in direct competition with Lucent.
"Agreement" means this Agreement concluded between Lucent and Licensee
named herein incorporating these conditions, including any amendment
changes authorized by the parties.
"Attachment" means any document appended to this Agreement and referred
to as an Attachment which further describes the agreement concluded
between Lucent and Licensee named herein.
"Change of Control" means, with respect to a Party either (1) the
consolidation or merger of the Party with or into any other entity
where such Party is not the surviving entity; (2) the sale, transfer or
other disposition of all or substantially all of the Party's assets; or
(3) the acquisition by any entity, or group of entities acting in
concert, of beneficial ownership of more than fifty percent (50%) of
the Party's outstanding voting securities.
"Change Order" means the written order between Lucent and Licensee to
execute a change in the tasks, activities or responsibilities from that
which was previously agreed to by the Parties.
"Completion Notice" means the written document delivered by Lucent to
Licensee confirming the completion of tasks or activities referenced in
the Notice according to the terms of the Agreement.
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"Days" or "days" means, unless otherwise stated, calendar days.
"Defect" means an error condition that causes the Licensed Materials to
fail to operate in compliance with the Specifications.
"Designated Processor" means the central processing unit or units for
which a license to use Licensed Materials are initially granted as
described in the Statement of Work.
"Dollars" means U.S. dollars.
[TERM AND DEFINITION REDACTED]
"Enhancement" means any modification to the Licensed Materials that are
directly related to maintaining interoperability with the Nortel
Switches. Enhancements does not include new generic releases or other
new features or functionality.
"Firmware" means a combination of (1) Hardware and (2) Software
represented by a pattern of bits contained in such Hardware.
"Hazardous Materials" means material designated as a "hazardous
chemical substance or mixture" pursuant to Section 6 of the Toxic
Substance Control Act; a "hazardous material" defined in the Hazardous
Materials Transportation Act (49 U.S.C. 1801, et seq.); "hazardous
substance" as defined in the Occupational Safety and Health Act Hazard
Communication Standard (29 CFR 1910.1200).
"Information" means all documentation and technical and business
information in whatever form recorded, which a Party may furnish under,
or has furnished in contemplation of, this Agreement.
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[TERM AND DEFINITION REDACTED]
"Licensed Materials" means the Software (including Enhancements and
Updates) and Related Documentation for which licenses are granted by
Lucent under this Agreement and identified in the Statement of Work.
No Source Code versions of Software are included in Licensed Materials.
"Nortel Switches" means the Software contained in the specific DMS
I00E, DMS 250, DMS 300 and DMS GSP switches manufactured by Northern
Telecom Ltd. and identified in the Statement of Work with such features
and functionalities and configurations in existence as of the Effective
Date and included in the Statement of Work.
"Related Documentation" means materials useful or necessary in
connection with use of Software Products such as, but not limited to,
flowcharts, logic diagrams and listings, program descriptions and
Specifications; no Source Code is included in Related Documentation.
"Services" means the services performed for Licensee as more fully
described in this Agreement, including, but not limited to, (1)
engineering services, (2) installation services, and (3) other services
such as maintenance, support and training provided hereunder and in the
Statement of Work. However, Services does not include post-warranty
maintenance and support.
"Software" means a computer program consisting of a set of logical
instructions and tables of information which guide the functioning of a
processor; such program may be contained in any medium whatsoever,
including Hardware containing a pattern of bits representing such
program, but the term "Software" does not mean or include such medium.
"Software Products" means, collectively, Licensed Materials, Third
Party Products and Services.
"Specifications" means Lucent's or its vendor's technical
specifications for particular Software Products furnished hereunder, as
more fully described in the Statement of Work included as Appendix B.
"Statement of Work" means the Statement of Work attached hereto as
Appendix B, as the same may be amended from time to time by written
agreement between Lucent and Licensee.
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"Source Code" means any version of Software incorporating high-level or
assembly language or human readable material that generally is not
directly executable by a processor.
"Subsidiary" of a company means a corporation the majority of whose
shares or other securities entitled to vote for election of directors
is now or hereafter owned or controlled by such company either directly
or indirectly; but such corporation shall be deemed to be a Subsidiary
of such company only as long as such ownership or control exists.
"T+52 Delivery" means the delivery and installation of all Licensed
Materials by Lucent as described in the Statement of Work such that
Licensee may begin carrying out the relevant Acceptance Tests on or
before the date representing "T+52." [REDACTED]
"Third Party Product" means Software not developed by Lucent and/or
hardware not manufactured by Lucent.
"Update" means a modification to the Licensed Materials that rectifies
or provides "fixes" to a Defect.
"Use" with respect to Licensed Materials means loading the Licensed
Materials, or any portion thereof, into a processor for execution of
the instructions and tables contained in such Licensed Materials or any
other use of the Licensed Materials in accordance with this Agreement.
"Warranty Period" means a period of time equal to the following:
[REDACTED]
2 TERM OF AGREEMENT
This Agreement shall be effective on the date first written above and, except as
otherwise provided herein, shall continue in effect unless terminated in
accordance with the provisions herein. The modification, termination or
expiration of this Agreement shall not affect the rights or obligations of
either Party under any order accepted by Lucent before the effective date of the
modification, termination or expiration.
3. SCOPE OF AGREEMENT
3.1 SCOPE
This Agreement shall apply to Lucent's provision to Licensee of the
Software Products set forth on Appendix A - "List of Deliverable Items
and Prices." The Software Products will be provided pursuant to the
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Statement of Work attached hereto as Appendix B. In the event of any
amibiguity or conflict between this Agreement and the Statement of
Work, the terms of this Agreement will control.
3.2 CHANGE IN SCOPE OR SCHEDULE
Either Party may request changes in the work within the general scope
of the Agreement consisting of additions, deletions, or other revisions
with the Agreement Prices and Schedule being adjusted accordingly. The
receiving Party will respond promptly to the requested change
identifying these impacts on schedules and pricing. If the Parties
agree to the change, it will be authorized by a Change Order, signed by
the Parties and performed in accordance with the applicable conditions
of this Agreement.
4. LICENSEE'S COMMITMENT
Licensee through the execution of this Agreement agrees to license and/or
purchase [REDACTED] of the Software Products as described in Appendix A and
the Statement of Work (the "1998 Commitment"). The Software Products described
in the Statement of Work will be delivered/performed on basis of purchase orders
as may be agreed to by the parties. Such purchase orders are for project
management purposes only and do not affect Licensee's commitment to license
and/or purchase the Software Products as described in the Statement of Work.
For a period [REDACTED] following the Effective Date, until Licensee has
purchased or licensed Software Products manufactured by Lucent's Communications
Software Group or its successor business unit or stand-alone software
manufactured by Lucent ("CS Software Products") with a purchase or license price
not less than [REDACTED], Lucent will be considered by Licensee as a preferred
supplier of Software Products similar to products manufactured by the
Communications Software Product Group of Lucent or successor thereof. The status
of preferred supplier means that Lucent will have and will be given the
opportunity to bid on any project of Licensee containing products and services
substantially similar in quality and functionality to CS Software Products and
Licensee shall award the project or portion thereof -if applicable- to Lucent if
the Lucent offered price for that project or the relevant portion thereof is not
more than [REDACTED] than the lowest price offered by an alternative supplier
for a substantially similar solution or substantially comparable portion.
In the event Lucent, pursuant to the foregoing, will not be awarded the project
or corresponding portion of it, then Licensee will arrange a meeting between one
or more Executive Officers of Licensee and one or more Executive Officers of the
Communications Software Product Group in order to consult how Lucent may
increase its success-rate in being awarded orders.
5. PRICING SCHEDULE
Prices, fees, and charges for the Software Products (hereinafter "Prices") are
set forth in Appendix A.
Unless expressly stated in writing, Lucent's prices are exclusive of charges for
transportation and other related services and any sales or other tax or duty
which Lucent may be required to collect or pay upon the ordered transaction.
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6. PURCHASE ORDERS
All purchase orders submitted by Licensee shall be deemed to incorporate and be
subject to the terms and conditions of this Agreement, unless otherwise agreed
in writing by the Parties. No provision or data on any purchase order or
contained in any documents attached to or referenced in any purchase order shall
be binding to the extent that it is in addition to or contradicts the terms and
conditions contained herein or the provisions of the Statement of Work
(including amendments thereto). All other such data and provisions shall be
deemed deleted and are hereby rejected except to the extent such data and
provisions are incorporated in an executed Change Order. Additional provisions
applicable to the ordering of specific items may be found in the other clauses
or Attachments of this Agreement.
All purchase orders shall contain the information reasonably necessary for
Lucent to fulfill the order. Lucent promptly will notify Licensee if Lucent is
unable to FULFILL a purchase order as submitted.
The Parties recognize that from time to time Licensee may desire that Lucent
provide Services promptly and without adhering to the ordering process set out
by the above paragraphs, for example, in the case of a telephonic request for
emergency support. Licensee shall promptly establish a "running order" against
which invoices for Services performed in response to such requests can be billed
at a reasonable cost to be approved by Licensee (such approval not to be
unreasonably withheld or delayed) and will be paid for by Licensee.
While it is Lucent's objective to provide Licensee with an acknowledgment of
each order received, it is Licensee's responsibility to advise Lucent of any
missing or late notifications to insure that the order has not been lost. No
order is to be considered "accepted" by Lucent unless its receipt has been
acknowledged (such acknowledgement not to be unreasonably withheld or delayed),
however, orders for Services to be billed against a running order shall be
deemed accepted by Lucent if Lucent commences performance thereof.
7. DELIVERY
Lucent will make arrangements for the delivery of Licensed Materials ordered by
Licensee according to the Specifications and intervals included in Appendix B -
Statement of Work. Licensee will specify the location for the order to be
delivered. Delivery will be made according to the standard procedures of Lucent,
unless otherwise requested by Licensee and agreed to by Lucent in writing.
7.1 SPECIAL PACKING AND/OR MARKING
Lucent's prices include packing and marking containers in accordance
with Lucent's standard practices for shipment. When, in order to meet
Licensee's written request, Lucent packs a product and/or is required
to mark shipping cartons in accordance with Licensee's written
specifications, such shall be done by Lucent for an additional charge
which shall be invoiced to and paid by Licensee in accordance with the
terms and conditions of this Agreement; provided that such charges have
been agreed upon by the Parties in writing.
Lucent shall:
(a) Render the commercial invoice;
(b) Send full set of bill of lading, marked as to who to notify;
(c) Render certificate of Origin or Quality;
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(d) Enclose Packing List;
(e) Mark containers in accordance with characteristics and
requirements of each container, in English, with appropriate
illustrative marks universal in international trade;
(f) Mark each container with carton number, contract number,
destination, weights and cubes. International shipments will
also be marked with the freight-forward location and the port
of destination.
7.2 PASSING OF RISK AND TITLE
Title to Licensed Materials shall not pass to Licensee, but shall
remain with Lucent or its suppliers, as the case may be. Title to
hardware will pass upon delivery to Licensee's facility. Risk of loss
or damage to Licensed Materials, including any media containing the
Licensed Materials, or other items furnished to Licensee under this
Agreement shall pass to Licensee upon delivery of said Licensed
Materials or items to an authorized shipping agent or upon completion
of transmission if electronically delivered.
Nothing herein shall, during the period a Party has the risk of loss or
damage to an item, relieve the other Party of responsibility for loss
or damage to the item resulting from the acts or omissions of such
other Party, its employees or agents.
8. ACCEPTANCE
After Lucent's installation of the Licensed Materials, or any part thereof as
set forth in Appendix B, Lucent will deliver a Completion Notice to Licensee and
Licensee will carry out Acceptance Tests in accordance with the Statement of
Work, testing the compliance of the Licensed Materials with the Statement of
Work (Appendix B). Licensee will start the Acceptance Tests no later than
[REDACTED] days after Lucent's installation of the Licensed Materials and
receipt of the Completion Notice and complete the Acceptance Tests no later than
[REDACTED] days after Lucent's installation of the Licensed Materials and
receipt of the Completion Notice by Licensee.
Licensed Materials will be considered fully accepted unless Lucent receives
written notification to the contrary documenting the specific material
non-compliance with the Specifications within [REDACTED] after Lucent's
installation of such Licensed Materials and Licensee's receipt of the Completion
Notice. Lucent will promptly correct any material non-compliance for which it is
responsible and deliver the modified Licensed Material. Licensee shall have
[REDACTED] days from the date of installation of the modified Licensed Materials
and Licensee's receipt of the Completion Notice to inspect, test, evaluate said
modified Licensed Materials to determine whether the modified Licensed Materials
are materially compliant with the Specifications. Modified Licensed Materials
will be considered fully accepted unless Lucent receives written notification to
the contrary documenting the specific material non-compliance with the
Specifications within [REDACTED] days after Lucent's installation of such
modified Licensed Materials and Licensee's receipt of the Completion Notice.
This process shall be repeated until the Licensed Materials are considered
accepted per this section.
Notwithstanding anything in this Agreement to the contrary, Licensee's Use of
any part of the Licensed Materials for any purpose other than testing, or any
other Use conducted at Lucent's direction or under Lucent's supervision, as
provided for above or training, whether or not revenue is generated, shall
constitute Acceptance for all relevant purposes of this Agreement, including but
not limited to, commencement of the applicable warranty period.
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The costs and expenses of the Acceptance Tests will be borne by Licensee. Upon
request of Licensee, Lucent will provide reasonable support to Licensee during
the Acceptance Tests.
8A. [REDACTED]
9
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[REDACTED]
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9. INVOICES AND TERMS OF PAYMENT
Lucent will forward invoices in Lucent's standard format or as otherwise agreed
in writing by the Parties to Licensee upon shipment of the Licensed Materials or
portion thereof. Lucent will forward invoices for Services upon completion of
the Services or portion thereof described in the invoice or as soon thereafter
as practicable. Licensee will pay said invoices as set out below. If Licensee
requires special information on the invoice or that it be in a special format,
then Licensee shall pay Lucent for additional charges associated with complying
with Licensee's special needs provided that the charges have been agreed upon by
the Parties in writing.
Licensee shall pay each invoice for Licensed Materials or Third Party Products
within [REDACTED] days from the date of the invoice. Licensee shall pay each
invoice for Services within the later of (i) [REDACTED] days from the date of
the invoice or (ii) [REDACTED] business days from acceptance or deemed
acceptance by Licensee of that portion of the work or the Licensed Materials to
which the Services relate. Such invoice shall not be subject to withholding or
reduction for any reason, except as provided for in this clause. All bank
charges, taxes, levies and other costs which may be due or become due on
transfers of payments shall be for the account of Licensee.
If Licensee disputes any item contained on the invoice, then Licensee shall pay
all undisputed amounts to Lucent and notify Lucent of the disputed items within
the [REDACTED] days of receipt of the invoice. Upon resolution of the disputed
amount, which shall occur within [REDACTED] days, Licensee shall pay in full all
amounts due to Lucent. If Licensee is unable to document a claim against the
invoiced item, the original invoice date plus [REDACTED] days will be the basis
for calculating late payment penalties set forth below. Delinquent payments and
disputed payments where the dispute is resolved in favor of Lucent, are subject
to a late payment charge equal to the lesser of (i) [REDACTED] or (ii) the
maximum amount allowed by law.
If an undisputed invoice remains unpaid for [REDACTED] days after payment is
due, Licensee shall be in default of its obligations under the Agreement, and
Lucent may terminate this Agreement; PROVIDED, HOWEVER, that Lucent will have
provided [REDACTED] Days prior written notice to Licensee, and Licensee will
have failed to pay all monies due, including late payment charges by the end of
such [REDACTED] Day period. If Lucent elects to terminate this Agreement
pursuant to this paragraph, Lucent may, without prejudice to any other rights or
remedies of Lucent in this Agreement or at law or in equity suspend all work,
and Licensee shall return to Lucent (or destroy in accordance with Lucent's
written instructions) such portion of Lucent's products and all copies of
Licensed Materials at all Licensee locations for which payment (including,
without limitation, license fees) has not been received. Licensee shall bear the
expense of removal of Lucent's products and Licensed Materials. All costs
associated with restoring Licensee's premises to pre-installation condition
shall be the sole responsibility of Licensee. Licensee shall pay all documented
damages, costs and expenses (including, without limitation, reasonable legal
fees) incurred by Lucent in termination of this Agreement.
10. TAXES & LEVIES
Licensee shall be liable for and shall reimburse Lucent for all taxes, duties,
levies and related charges (including any interest and penalties), however
designated (excluding taxes on Lucent's net income) imposed upon or arising from
the provision of Services, or the transfer, sale, license, or use of Licensed
Materials or other items provided by Lucent. Taxes reimbursable under this
clause shall be separately listed on the invoice.
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Lucent shall not collect the otherwise applicable tax if Licensee's purchase is
exempt from Lucent's collection of such tax and a valid tax exemption
certificate is furnished by Licensee to Lucent.
Lucent reserves the right to claim United States or foreign customs duty
drawback on all sales pursuant to this Agreement. The Parties agrees to
cooperate with each other in this regard in all reasonable ways, including,
without limitation, providing proof of exportation, advance notice of
exportation, certificates, endorsements, or any other documentation or proof as
may be necessary for Lucent or its Affiliates to receive payment of the drawback
claims and, if required by the United States Customs Service or similar entity,
by making the Licensed Materials available for examination by such Customs
Service or entity.
11. EXPORT CONTROL
The Parties acknowledge that any License Materials and Information (including,
but not limited to, Services and training) provided under this Agreement may be
subject to U.S. export laws and regulations, and any use or transfer of such
Licensed Materials and Information must be authorized under those regulations.
Licensee agrees not to use, distribute, transfer, or transmit the Licensed
Materials or Information (even if incorporated into other products) in violation
of U.S. export regulations. If reasonably requested by Lucent, Licensee also
agrees to sign written assurances and other export-related documents as may be
required for Lucent to comply with U.S.
export regulations.
12. APPLICABLE LICENSES
Upon delivery of Licensed Materials pursuant to this Agreement, and subject to
Licensee's payment of the applicable fees and compliance with the applicable
terms and conditions hereunder, Lucent grants to Licensee a perpetual, personal,
nontransferable, and nonexclusive license with use limitations to Use Licensed
Materials on the Designated Processors for its own business operations. Licensee
is authorized to Use Licensed Materials within a capacity limitation to
interface with such network elements at such capacity levels within Licensee's
network as set forth in the Statement of Work. Licensee must pay additional
license fees prior to exceeding the authorized capacity limitation. Except as
provided in the following paragraph, no license is granted to Licensee to
sublicense such Licensed Materials furnished by Lucent. Licensee shall not
reverse engineer, decompile or disassemble Software furnished as object code to
generate corresponding Source Code. Unless otherwise agreed in writing by
Lucent, Licensee shall not modify Software furnished by Lucent under this
Agreement except as provided in the Related Documentation. If the Designated
Processor becomes temporarily inoperative, Licensee shall have the right to Use
the Licensed Materials temporarily on a backup processor until operable status
is restored and processing on the backup processor is completed.
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Lucent grants to Licensee a non-exclusive and non-transferable right to
sublicense the Licensed Materials to a wholly-owned Subsidiary on a single
Designated Processor; provided, however, as follows:
(i) Such Subsidiary is bound in writing by the same terms,
conditions and restrictions as contained in this Agreement,
but shall have no right to grant future sublicenses.
(ii) Licensee shall remain fully liable for the performance by the
Subsidiary of all terms of the sublicense.
(iii) Licensee shall use best efforts to enforce Lucent's rights
under such sublicense agreement and shall do such things and
provide Lucent with such assistance as may be necessary for
Lucent to enforce such rights.
12.1 TITLE, RESTRICTIONS AND CONFIDENTIALITY OF LICENSED MATERIALS
All Licensed Materials (whether or not part of Firmware) furnished by
Lucent, and all copies thereof made by Licensee, including
translations, compilations, and partial copies are, and shall remain,
the property of Lucent. Except for any part of such Licensed Materials
which is or becomes generally known to the public through acts not
attributable to Licensee, Licensee shall hold such Licensed Materials
in confidence, and shall not, without Lucent's prior written consent,
disclose, provide, or otherwise make available, in whole or in part,
any Licensed Materials to anyone, except to its employees having a
need-to-know in connection with licensed Use. Licensee shall not make
any copies of any Licensed Materials except as necessary to exercise
the rights granted hereunder. Licensee shall reproduce and include any
Lucent copyright and proprietary notice on all such necessary copies of
Licensed Materials. Licensee shall also mark all media containing such
copies with a warning that Licensed Materials are subject to
restrictions contained in an agreement between Lucent and Licensee and
that they are the property of Lucent. Licensee shall maintain records
of the number and location of all copies of Licensed Materials. If
Licensee's license is canceled or terminated, or when the Licensed
Materials are no longer needed by Licensee in Licensee's discretion,
Licensee shall return all copies of such Licensed Materials to Lucent
or follow written disposition instructions provided by Lucent.
12.2 MODIFICATIONS TO USER CONTROLLED MODULES
Licensee may add to, delete from, or modify user controlled Software
modules or menus as contemplated in the Related Documentation. Such
changes or modifications, however extensive, shall not affect Lucent's
title to the Licensed Materials. Licensee shall retain ownership to
intellectual property independently developed by Licensee. Lucent shall
have no liability for Licensee's errors in making such changes or
modifications.
12.3 CHANGES IN LICENSED MATERIALS
Prior to shipment, Lucent at its option may, upon prior written notice
to Licensee and with Licensee's prior written consent, not to be
unreasonably withheld or delayed, modify the Specifications relating to
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its Licensed Materials, provided the modifications, under normal and
proper Use, do not materially adversely affect the Use, function, or
performance of the ordered Licensed Materials. Unless otherwise agreed
in writing, such substitution shall not result in any additional
charges to Licensee with respect to licenses for which Lucent has
quoted fees to Licensee.
12.4 OPTIONAL SOFTWARE FEATURES
Software provided to Licensee under this Agreement may contain optional
features which are separately licensed and priced. Licensee agrees that
such optional features will not knowingly be activated by Licensee
without written authorization from Lucent and Licensee's payment of
appropriate license fees. If such features are activated knowingly by
Licensee, Licensee agrees to so notify Lucent promptly and to pay
Lucent the license fees for the activated features, as well as the
reasonable cost of money for the period in which such features were
activated. In the event that such features are activated without
Licensee's knowledge in spite of Licensee's reasonable efforts to
comply with this restriction, Licensee agrees to cooperate with Lucent
to deactivate such features and prevent future activation of such
features.
12.5 RELOCATION OF LICENSED MATERIALS
Upon [REDACTED] days advance written notice, Licensee may move Software
contained in the Licensed Materials or optional feature packages for
which Licensee has the right to Use, from a Designated Processor and
relocate them to another Designated Processor within the same company
as Licensee. Unless otherwise agreed by the parties in writing,
Licensee shall not be required to pay additional right-to-use fees as a
result of such relocation, except where size sensitive units are a
factor or where use of the Software is for a different purpose than
originally specified. Lucent may charge Licensee for Services requested
by Licensee in support of such relocation. Licensee shall remove all
copies of the Software from any processor from which the Software has
been relocated. To the extent that Lucent otherwise consents to the
relocation of a Designated Processor outside of the United States or
the United Kingdom, Lucent and Licensee agree to negotiate in good
faith an amendment to the geographic territories covered by Section 15.
The Parties acknowledge that such an amendment, if agreed, may increase
costs to Licensee.
12.6 CANCELLATION OF LICENSE
Notwithstanding any other clause in this Agreement to the contrary, if
Licensee materially breaches any of the terms and conditions of this
Agreement with respect to the unauthorized Use, transfer or sublicense
of Licensed Materials, and such failure continues beyond [REDACTED]
days after receipt of written notice thereof by Licensee, Lucent, upon
written notice to Licensee, may, in addition to any other remedies
hereunder, cancel the license granted hereunder for the applicable
portion of the Licensed Materials affected by the unauthorized Use,
transfer or sublicense. Cancellation of license shall not relieve
Licensee of its obligation to pay all the fees that have accrued for
Use of the Licensed Materials.
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13. WARRANTY
13.1 [REDACTED]
13.2 YEAR 2000 WARRANTY
(a) Lucent represents and warrants that during the period
beginning on the warranty start date and for the Warranty
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Periods set forth in this Agreement, but in no event ending
prior to December 31, 2001, the Licensed Materials delivered
by Lucent to Licensee under this Contract will:
(i) record, store, present and process calendar dates
falling on or after January 1, 2000 in the same
manner and with the same functionality as such
products record, store, present and process calendar
dates failing on or before December 31, 1999
(including, without limitation, the recognition of
the Year 2000 as a leap year); and
(ii) provide the same functionality with respect to the
introduction of records containing dates falling on
or after January 1, 2000, as it provides with respect
to the introduction of records containing dates
falling on or before December 31, 1999. All of the
foregoing functionality shall be known as "Year 2000
Capable."
(b) Year 2000 CapableLicensed Materials that are intended to
interoperate as described in the Statement of Work will be
compatible and interoperate in such manner as to process
between them, as applicable, date related data correctly as
described in Section (a) above.
(c) The foregoing sets forth an additional warranty for Lucent's
products and Software. The failure of the Licensed Materials
to meet the foregoing requirements during the warranty period
set forth in this subsection 13.2 entitles Licensee to the
remedies set forth elsewhere in this Section 13.
(d) Other than as set forth in Section 13.2(b), nothing in the
foregoing shall be deemed to make Lucent responsible for the
Year 2000 capability of any third party Software
interoperating or intending to operate with the Licensed
Materials.
13.3 NO ADDITIONAL WARRANTIES
THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. LICENSEE'S
SOLE AND EXCLUSIVE REMEDY SHALL BE LUCENT'S OBLIGATION TO REPAIR,
REPLACE, CREDIT, OR REFUND AS SET FORTH ABOVE. LICENSEE'S SOLE REMEDY
FOR INFRINGEMENT SHALL BE THE REMEDIES SET FORTH IN "PATENTS,
TRADEMARKS & COPYRIGHTS" HEREIN.
13.4 POST-WARRANTY SUPPORT
Post-warranty support will be provided on terms and conditions and
subject to such fees as contained in a separate maintenance agreement
attached hereto
14. USE OF INFORMATION
All technical and business information in whatever form which bears a legend or
notice restricting its use, copying or dissemination or, if not in tangible
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form, is described as being proprietary or confidential at the time of
disclosure and is subsequently summarized in writing so marked and delivered to
the receiving Party within thirty (30) days of disclosure to the receiving Party
(all hereinafter designated "Information") shall remain the property of the
furnishing Party. All Software shall be deemed to be Information regardless of
how labeled. The furnishing Party grants the receiving Party the right to use
such Information only as follows: Such Information (a) shall not be reproduced
or copied, in whole or part, except for use as authorized in this Agreement; and
(b) shall, together with any full or partial copies thereof, be returned or
destroyed when no longer needed. Licensee shall use such Information only (a) to
order, (b) to evaluate the Licensed Materials, or other items, or Services, or
(c) to install, operate, and maintain the particular Licensed Materials, or
other items for which it was originally furnished. Unless the furnishing Party
consents in writing, such Information, except for that part, if any, which is
known to the receiving Party to be free of any confidential obligation, or which
becomes generally known to the public through acts not attributable to the
receiving Party, shall be held in confidence by the receiving Party. The
receiving Party may disclose such Information to other persons, upon the
furnishing Party's prior written authorization, but solely to enable such third
party to perform acts which this clause expressly authorizes the receiving Party
to perform itself and further provided such other person agrees in writing (a
copy of which writing will be provided to the furnishing Party at its request)
to the same conditions respecting use of Information contained in this clause
and to any other reasonable conditions requested by the furnishing Party.
15. PATENTS, TRADEMARKS & COPYRIGHTS
In the event of any claim, action, proceeding or suit by a third party against
Licensee alleging an infringement of any United States or United Kingdom patent,
copyright, or trademark, or a violation in the United States or United Kingdom
of any trade secret or proprietary rights by reason of the use, in accordance
with Lucent's or other applicable specifications, any of the Licensed Materials
or other item furnished by Lucent to Licensee under this Agreement, Lucent, at
its expense, will defend Licensee, subject to the conditions and exceptions
stated below. Lucent will reimburse Licensee for any losses, liabilities,
claims, actions, cost, expense or attorney's fee, incurred at Lucent's written
request or authorization, and will indemnify Licensee against any liability
assessed against Licensee by final judgment on account of such infringement or
violation arising out of such use.
If Licensee's use shall be enjoined or in Lucent's reasonable opinion is likely
to be enjoined, Lucent will, at its expense and at its option, either (a)
replace the affected portion of the Licensed Materials or other item furnished
pursuant to this Agreement with a suitable substitute free of any infringement
or violation, (b) modify it so that it will be free of the infringement or
violation, or (c) procure for Licensee a license or other right to use it. If
none of the foregoing options is practical, Lucent will give Licensee as much
notice as possible and then remove the enjoined portion of the Licensed
Materials or other item, or in the event that removal of a portion is not
commercially reasonable, such greater portion of the Licensed Materials or items
that is commercially reasonable, and refund to Licensee a PRO RATA portion of
the license right to use fees paid to Lucent under this Agreement equal to the
remaining useful life of the Licensed Materials, which useful life will be
deemed to be ten (10) years from the date of delivery of the Licensed Materials.
Licensee shall give Lucent prompt written notice of all such claims, actions,
proceedings or suits alleging infringement or violation and Lucent shall have
full and complete authority to assume the sole defense thereof, including
appeals, and to settle same. Licensee shall, upon Lucent's request and at
Lucent's expense, furnish all necessary information and assistance available to
Licensee and cooperate in every reasonable way to facilitate the defense and/or
17
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settlement of any such claim, action, proceeding or suit at Lucent's expense. If
Lucent fails or refuses to provide the defense of Licensee as required by this
Section 15, Licensee shall be entitled to proceed with its own defense at the
expense of Lucent. Lucent shall be entitled to proceed with a defense of
Licensee with a reservation of rights.
No undertaking of Lucent under this section shall extend to any such alleged
infringement or violation to the extent that it: (a) arises from adherence to
design modifications, specifications, drawings, or express written instructions
which Lucent is expressly directed by Licensee to follow, but only if such
alleged infringement or violation does not reside in corresponding commercial
Licensed Material of Lucent's design or selection; or (b) arises from adherence
to instructions to apply Licensee's trademark, trade name, or other company
identification; or (c) resides in a Licensed Material which is not of Lucent's
origin and which is furnished by Licensee to Lucent for use under this
Agreement; or (d) relates to use of Licensed Materials or other items provided
by Lucent in combinations with other products, Licensed Materials or other
items, furnished either by Lucent or others, which combination was not
installed, recommended or otherwise approved by Lucent.
THE LIABILITY OF LUCENT AND LICENSEE WITH RESPECT TO ANY AND ALL CLAIMS,
ACTIONS, PROCEEDINGS, OR SUITS BY THIRD PARTIES ALLEGING INFRINGEMENT OF
PATENTS, TRADEMARKS, OR COPYRIGHTS OR VIOLATION OF TRADE SECRETS OR PROPRIETARY
RIGHTS BECAUSE OF, OR IN CONNECTION WITH, ANY ITEMS FURNISHED PURSUANT TO THIS
AGREEMENT SHALL BE LIMITED TO THE SPECIFIC UNDERTAKINGS CONTAINED IN THIS
SECTION.
16. LIMITATIONS OF LIABILITY
[REDACTED]
18
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17. FORCE MAJEURE
Neither Party shall be liable to the other Party for any loss, damage, delay or
failure of performance resulting directly or indirectly from any cause which is
beyond its reasonable control, including, but not limited to the elements;
extraordinary traffic conditions; riots; civil disturbances; wars; states of
belligerency or acts of the public enemy; labor disputes; strikes; work
stoppages; inability to secure raw materials, product or transportation
facilities; or the laws, regulations, acts or failure to act of any governmental
authority, including but not limited to denial of a U.S. Export License,
hereinafter referred to as "Force Majeure". A Party shall promptly notify the
other Party of the occurrence of a Force Majeure event and the notifying Party
shall be excused from any further performance of these obligations affected by
the Force Majeure Event for as long as such Force Majeure Event continues and
such Party uses and continues to use its best efforts to recommence performance.
Failure of a Party to perform under this Agreement because of the endurance of a
Force Majeure event for more than thirty (30) days will represent grounds by the
other Party to terminate the portion of this Agreement affected by the Force
Majeure event.
18. INDEPENDENT CONTRACTOR
All work performed by one Party under this Agreement shall be performed as an
independent contractor and not as an agent of the other and neither Party shall
be, nor represent itself to be, the employee, agent, representative, partner or
joint venture of the other. Neither Party shall have the right or authority to
assume or create an obligation on behalf of or in the name of the other or to
otherwise act on behalf of the other. The performing Party shall be responsible
for its employees' and agents' compliance with all applicable laws, rules, and
regulations while performing work under this Agreement.
19. ASSIGNMENT
Except as provided in this Agreement, neither Party shall assign this Agreement
or any right or interest under this Agreement, nor delegate any work or
19
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obligation to be performed under this Agreement, (an "assignment") without the
other Party's prior written consent. Notwithstanding the foregoing, Lucent may
assign or delegate any portion of this Agreement that relates to work performed
in the European Union to an affiliate entity domiciled in the European Union;
provided, however, that Lucent shall remain responsible for the performance by
the assignee of such obligations. Nothing shall preclude a Party from employing
a subcontractor in carrying out its obligations under this Agreement, but a
Party's use of such subcontractor shall not release the Party from its
obligations under this Agreement.
20. NON-WAIVER
No waiver of the terms and conditions of this Agreement, or the failure of
either Party to strictly enforce any term or condition of this Agreement on one
or more occasions shall be construed as a waiver of the same or of any other
term or condition of this Agreement on any other occasion.
21. SEVERABILITY
If any provision in this Agreement, or any portion thereof, is subsequently held
to be invalid or unenforceable under any applicable statute or rule of law, then
that provision or portion notwithstanding, this Agreement shall remain in full
force and effect and such provision or portion shall be deemed omitted and this
Agreement shall be construed as if such invalid or unenforceable provision or
portion had not been contained herein.
22. SETTLEMENT OF DISPUTES
Senior Management of either Party may, upon notice of a dispute and within five
(5) business days of receipt of such a notice from the other Party elect to
utilize a non-binding resolution procedure whereby each presents its case before
a panel consisting of two senior executives of each of the Parties and, if such
executives can agree upon such an individual, a mutually acceptable neutral
advisor. If a Party elects to use the procedure set forth in this clause, the
other Party shall participate. The hearing shall occur no more than 10 business
days after a Party serves notice to use the procedure set forth in this clause.
If the matter cannot be resolved by such senior executives, the neutral advisor,
if one has been agreed upon, may be asked to assist such senior executives in
evaluating the strengths and weaknesses of each Party's position on the merits
of their dispute. The Parties shall each bear their respective costs incurred in
connection with the procedure set forth in this clause, except that they shall
share equally the fees and expenses of the neutral advisor, if any, and the cost
of the facility for the hearing.
If a dispute is not resolved as set forth above, then either Party may, upon
notice to the other Party, submit the dispute to binding arbitration in
accordance with the following:
(a) The arbitration shall be held in New York City before a panel
of three arbitrators. Either Party may, upon notice to the
other Party, demand arbitration by serving on the other Party
a statement of the dispute, the facts relating or giving rise
to such dispute and the name of the arbitrator selected by it.
Issues of arbitration shall be decided by the arbitrators.
(b) Within five (5) days after receipt of such notice, the other
Party shall name its arbitrator, and the two arbitrators named
by the Parties shall, within five (5) days after the date of
such notice, select the third arbitrator.
(c) The arbitration shall be administered by the American
Arbitration Association and be governed by the Commercial
20
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Arbitration Rules of the American Arbitration Association, as
may be amended from time to time, except as expressly provided
in this clause. The arbitrators may not amend or disregard any
provision of this clause.
(d) Discovery shall only be allowed as ordered by the arbitrators.
The arbitrators shall allow such discovery as is appropriate
to the purposes of arbitration in accomplishing a fair, speedy
and cost-effective resolution of disputes. The arbitrators
shall reference the rules of evidence of the Federal Rules of
Civil Procedure then in effect in setting the scope and
direction of such discovery, but shall afford substantial
weight to the burden of discovery in making such
determinations.
(e) The decision and award rendered by the arbitrators shall be
binding on the Parties. The arbitrators shall have no
authority to award punitive or exemplary damages or to award
damages in excess or in contravention of the Agreement.
(f) The arbitration shall be governed by the United States
Arbitration Act. The award shall be made within four (4)
months of the appointment of the arbitrator and judgment on
the award may be entered by any court having jurisdiction.
(g) The costs of the arbitration proceedings conducted pursuant to
this clause shall be paid by the Party designated by the
arbitrators.
23. TERMINATION; SURVIVAL OF OBLIGATIONS
In the event that either Party is in material breach or default of the terms of
this Agreement and such breach or default continues for a period of thirty (30)
days after receipt of written notice from the other Party, then the Party not in
breach or default shall have the right to terminate this Agreement without any
charge , obligation or liability except for (i) charges to Licensee for Software
Products already delivered and accepted or deemed accepted and (ii) charges to
Licensee for Services already performed. Notwithstanding the foregoing, if the
non-breaching party is Licensee, Licensee may, at its option and in addition to
the remedies provided in Section 8A , return all Software Products to Lucent and
receive a refund from Lucent for the amounts paid to Lucent in clauses (i) and
(ii) above. The Party not in breach or default shall provide full cooperation to
the other party in every reasonable way to facilitate the remedy of the breach
or default hereunder within the applicable cure period. Notwithstanding the
foregoing, if the nature of the material breach or default is such that it is
not a payment obligation (other than failure to comply with the license
restrictions contained herein) and it is incapable of cure within the foregoing
thirty (30) day period, then the thirty (30) day cure period may be extended for
a reasonable period of time (in no event to exceed an additional thirty (30)
days), provided that the Party in breach or default is proceeding diligently and
in good faith to effectuate a cure.
The Parties agree, in good faith to negotiate and finalize the maintenance
agreement (the "Maintenance Agreement"), as referred to in the letter from
Lucent dated October 21, 1998, within a period of fifteen (15) business days
following the Effective Date. The Maintenance Agreement will be based on the
pricing and other principles as stated in the above referred to letter. In the
event no agreement is reached within said time frame with respect to a
maintenance agreement, either party will have the right to immediately terminate
this Agreement with no additional obligations.
The Parties' rights and obligations which, by their nature, would continue
beyond the termination, cancellation, or expiration of this Agreement, including
21
<PAGE>
but not limited to, the obligations in the clauses entitled Limitations of
Liability, Patents, Trademarks and Copyrights, Use of Information, Publication
of Agreement, and Export Control, shall survive such termination, cancellation,
or expiration.
24. GOVERNING LAW
Except as required by local law in any jurisdiction outside of the United States
and as expressly agreed to in writing by the Parties, this Agreement and the
rights and obligations of the Parties under this Agreement shall be construed in
accordance with and be governed by the laws of the State of New York without
giving effect to the principles therein relating to the conflicts of law.
25. NOTICES
All notices, requests, approvals and other communications ("Notices") required
or allowed under this Agreement shall be in writing and addressed as set forth
below or to such other person and/or address as either Party may designate by
written Notice pursuant hereto. Such Notices shall be deemed to have been given
when received. Notices may be delivered by hand or sent by prepaid certified or
registered airmail, confirmed facsimile or electronic mail, provided a copy is
also forwarded by prepaid registered airmail.
Lucent: Lucent Technologies Inc.
Global Commercial Markets
5440 Millstream Road, E3N32
McCleansville, North Carolina 27301
Attention: Contract Manager
Licensee: Viatel, Inc.
800 Third Avenue, 18th Floor
New York, New York 10022
Attention: General Counsel
26. ENTIRE AGREEMENT
This Agreement, which includes any exhibits or attachments hereto, represents
the entire Agreement and understanding between the Parties and all prior
discussions and arrangements between the Parties, whether oral or written, are
merged into this Agreement and there are no other representations,
understandings, arrangements or agreements between the Parties, except as
expressly set forth herein. Neither Party shall be bound by any conditions,
definitions, warranties, understandings, or representations with respect to the
subject matter hereof other than as expressly provided in this Agreement.
This Agreement may be modified only by written amendment and signed by
authorized representatives of the Parties. No course of dealing or usage of
trade shall be invoked to modify the terms or conditions of the Agreement.
22
<PAGE>
27. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
LUCENT TECHNOLOGIES INC. VIATEL, INC.
By: /s/(SIGNATURE ILLEGIBLE) By: /s/(SIGNATURE ILLEGIBLE)
------------------------------- -----------------------------------
Name:______________________________ Name:__________________________________
Title:_____________________________ Title:_________________________________
Date:______________________________ Date:__________________________________
23
<PAGE>
LUCENT TECHNOLOGIES
Bell Labs Innovations
Angela R. Pinette Lucent Technologies
Sales Engineering Director 1600 Osgood Street
Communication Software Business Unit Room 20-3S3
North Andover, MA 01845
October 21, 1998
Dear Frank,
This letter refers to our discussions of last Friday (98/10/16) with respect to
changes to the scope of work of our project, and is intended to synchronize our
presently negotiated SOW (Version 3.0 DRAFT 3) to the total price of the project
and the license agreement we are currently negotiating. Secondly, we also refer
to the discussions of last Friday regarding VIATEL's request for maintenance
services. Thirdly, we would like to bring up a subject not previously discussed,
which is a recent change to the number of switches in your described network,
that is now included in the above referenced SOW and for which you have not
approved pricing.
[REDACTED]
1
<PAGE>
Definition of 'no-breakage' support:
No-breakage support means:
a) During the term of this maintenance agreement Lucent agrees to maintain
the compatibility between the Software on the one hand, and the NORTEL
DMS systems 100E, 250/300, and GSP on the other hand, provided that
VIATEL has made available to Lucent well in advance all such
information (which may include Proprietary Information), subject to the
use and disclosure restrictions of this Agreement, as reasonably
required to establish such compatibility.
b) If VIATEL determines, upon analysis undertaken, that there have been
any changes to its NORTEL DMS systems 100E, 250, 300, and GSP installed
in its network that would affect the compatibility or the operating
ability with Lucent's product or successor product, then VIATEL shall
promptly provide to Lucent the information necessary for Lucent to
update the compatibility of its products or successor products.
c) Compatibility as referred to in sub a) and sub b) means that the
functionality of Lucent products will not be affected. However,
compatibility does not mean, and Lucent does not warrant, that the new
functionality of the new generic release of the NORTEL DMS software
will work in conjunction with and is supported by the Lucent product.
[REDACTED]
Please provide us with written confirmation on acceptance of this letter.
Sincerely
Angela R. Pinette
2
<PAGE>
APPENDIX A
Contract Price List 98/10/22
VIATEL SERVICE & NETWORK OPERATIONS CENTER PROJECT
COMMUNICATION SOFTWARE PRICES
[REDACTED]
APPENDIX B
[REDACTED]
EXHIBIT 10.20
ENGINEERING, PROCUREMENT
AND CONSTRUCTION CONTRACT
dated as of November 10, 1998
between
VIATEL GLOBAL COMMUNICATIONS, LTD.
and
ALCATEL SUBMARINE NETWORKS S.A.
---------------------------------------
CIRCE CABLE SYSTEM
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS; INTERPRETATION..................................1
1.1. Defined Terms..................................................1
1.2. Rules of Construction..........................................1
SECTION 2. INTENT.......................................................3
2.1. Generally......................................................3
SECTION 3. CONTRACT DOCUMENTS............................................3
3.1. Form Part of this Contract.....................................3
3.2. Conflicts......................................................3
SECTION 4. RESPONSIBILITIES OF THE CONTRACTOR...........................4
4.1. Scope of Work..................................................4
4.2. Technical Information..........................................5
SECTION 5. TECHNICAL REQUIREMENTS, PLAN OF WORK AND PROGRESS MEETINGS...5
5.1. Technical Requirements.........................................5
5.2. Plan of Work...................................................5
5.3. Progress Meetings..............................................5
SECTION 6. CONTRACTOR TO INFORM ITSELF FULLY............................5
6.1. Generally......................................................5
6.2. No Liability of Purchaser Persons..............................6
6.3. Familiarity....................................................6
SECTION 7. COMPLIANCE WITH LAWS; PERMITS................................6
7.1. Compliance With Laws...........................................6
7.2. Variations Required By Law.....................................6
7.3. Permits........................................................7
7.4. No Liability...................................................8
SECTION 8. MARINE ROUTE SELECTION.......................................8
8.1. Desk Study and Marine Route Survey.............................8
8.2. Marine Route Survey............................................8
8.3. Route Selection, Etc...........................................8
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SECTION 9. DESIGN AND PERFORMANCE RESPONSIBILITY........................8
9.1. The Contractor Solely Responsible..............................8
9.2. No Diminishment................................................8
SECTION 10. MAINTENANCE OF BOOKS AND RECORDS.............................9
10.1. Maintenance of Records.........................................9
10.2. Access to Records..............................................9
SECTION 11. TAXES........................................................9
11.1. Responsibility for Taxes.......................................9
11.2. Exemption from Taxes..........................................10
11.3. Withholding...................................................10
SECTION 12. INTELLECTUAL PROPERTY RIGHTS................................10
12.1. Generally.....................................................10
12.2. Injunction....................................................11
12.3. Infringement..................................................11
SECTION 13. PAYMENTS FOR THE WORK.......................................11
13.1. Initial Contract Price........................................11
13.2. General Conditions of Payment.................................11
13.3. [REDACTED]....................................................13
13.4. Contractor Invoices...........................................14
13.5. The Purchaser's Right to Withhold Payment.....................15
13.6. Overdue Payments..............................................16
SECTION 14. DEDUCTIONS FROM PAYMENTS TO THE CONTRACTOR..................16
14.1. Amounts Payable...............................................16
14.2. Deduction.....................................................16
14.3. Certificate...................................................17
SECTION 15. CONTRACTOR BOND.............................................17
15.1. Generally.....................................................17
15.2. Form of Contractor Bond.......................................17
15.3. Issuer Requirements...........................................17
15.4. Return of Contractor Bond.....................................17
SECTION 16. CONTRACT VARIATIONS.........................................18
16.1. Generally.....................................................18
ii
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16.2. Amendment.....................................................19
16.3. Other Adjustments.............................................19
16.4. Effect of Contract Variations.................................19
16.5. Pricing.......................................................19
16.6. Valuation.....................................................19
16.7. No Delay......................................................20
16.8. Obsolete or Surplus Supplies..................................20
SECTION 17. TECHNICAL SUPPORT, SPARE PARTS, ETC.........................20
17.1. Technical Support.............................................20
17.2. Spare Parts...................................................20
17.3. [REDACTED]....................................................21
SECTION 18. [REDACTED]
SECTION 19. FORCE MAJEURE...............................................22
19.1. Definition....................................................22
19.2. Mitigation....................................................23
19.3. Notice........................................................23
19.4. Application...................................................23
19.5. Extension of Time.............................................24
19.6. Limitation....................................................24
SECTION 20. PROJECT MANAGER AND THE PURCHASER'S REPRESENTATIVE..........24
20.1. Project Manager...............................................24
20.2. The Purchaser's Representative................................25
SECTION 21. INSPECTION RIGHTS...........................................25
21.1. Generally.....................................................25
21.2. Covered Work..................................................25
21.3. No Relief.....................................................26
SECTION 22. DEFECTIVE WORK..............................................26
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<PAGE>
SECTION 23. SUSPENSION OF WORK BY THE PURCHASER.........................26
23.1. Generally.....................................................26
23.2. The Contractor's Duties Upon Suspension.......................27
23.3. The Contractor's Duties After Suspension......................27
SECTION 24. TERMINATION FOR CONVENIENCE.................................27
24.1. Termination...................................................27
24.2. Termination Date..............................................27
24.3. Termination Payment (Convenience).............................28
SECTION 25. EVENTS OF DEFAULT AND REMEDIES..............................29
25.1. Events of Default and Remedies................................29
25.2. No Prejudice..................................................31
25.3. Notice of Exercise of Remedies................................32
SECTION 26. TAKE OVER AND PAYMENTS TO THE PURCHASER.....................32
26.1. Replacement Contractors.......................................32
26.2. No Right of Compensation......................................32
26.3. Payments to the Purchaser.....................................32
SECTION 27. TERMINATION FOR DEFAULT.....................................32
27.1. Effect of Termination.........................................32
27.2. Termination Date..............................................33
27.3. Right to Terminate............................................33
27.4. Right to Complete the Work....................................33
SECTION 28. DUTIES UPON TERMINATION.....................................33
28.1. Generally.....................................................33
28.2. Subcontractor Claims..........................................35
28.3. Funds Held by the Purchaser...................................35
SECTION 29. LIMITATION OF LIABILITY.....................................35
29.1. No Consequential Damages......................................35
29.2. Other Limitations.............................................35
30.1. Reasonable Precautions........................................36
30.2. Waste Disposal................................................36
SECTION 31. PERFORMANCE TESTS.............................................36
31.1. Generally.....................................................36
iv
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31.2. Right of Waiver...............................................36
31.3. Long-Term Obligations.........................................37
31.4. Operating Revenues............................................37
SECTION 32. SYSTEM ACCEPTANCE.............................................37
32.1. Initial System Commissioning Report...........................37
32.2. Provisional Acceptance........................................37
32.3. Commercial Acceptance.........................................38
32.4. Failure to Achieve Provisional or Commercial Acceptance.......39
32.5. Final Acceptance..............................................40
SECTION 33. WARRANTIES....................................................40
33.1. General Warranties............................................40
SECTION 34. ASSIGNMENT AND SUBCONTRACTING.................................43
34.1. Generally.....................................................43
34.2. Subcontracts..................................................43
34.3. Existing Subcontracts.........................................44
34.4. Breach........................................................44
34.5. Conditional Assignment........................................44
SECTION 35. THE CONTRACTOR'S PERSONNEL....................................44
SECTION 36. THE PURCHASER'S STAFF.........................................44
36.1. Generally.....................................................44
36.2. Limitations...................................................45
SECTION 37. TITLE.........................................................45
37.1. Title to Supplies.............................................45
37.2. Removal of Liens..............................................45
37.3. No Release of the Contractor..................................45
37.4. Title to the System...........................................46
SECTION 38. REPRESENTATIONS AND WARRANTIES................................46
38.1. The Contractor's Representations and Warranties...............46
38.2. The Purchaser's Representations and Warranties................47
SECTION 39. CONSENT TO JURISDICTION.......................................48
SECTION 40. INDEMNIFICATION...............................................49
40.1. Generally.....................................................49
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40.2. Waiver........................................................49
SECTION 41. RISK OF LOSS..................................................49
41.1. Generally.....................................................49
41.2. Payments to the Purchaser.....................................50
SECTION 42. INSURANCE.....................................................50
42.1. Types of Insurance............................................50
42.2. Notice of Cancellation........................................52
42.3. Copies........................................................52
42.4. Failure to Maintain Insurance.................................52
42.5. Compliance With Policies......................................52
42.6. Claim Information.............................................53
42.7. Remedy of Loss or Damage......................................53
42.8. Insolvency of Insurers........................................53
SECTION 43. DOCUMENTS, INFORMATION AND CONFIDENTIALITY....................53
43.1. Generally.....................................................53
43.2. The Contractor to Retain Drawings.............................53
43.3. Confidentiality...............................................53
SECTION 44. PUBLICITY.....................................................55
SECTION 45. CORRUPT GIFTS AND THE PAYMENT OF COMMISSIONS..................55
45.1. Gifts, Etc....................................................55
45.2. Payments......................................................55
45.3. Foreign Corrupt Practices Act.................................56
45.4. Permitted Activities..........................................56
45.5. Materiality...................................................56
SECTION 46. RELATIONSHIP OF THE PARTIES...................................56
46.1. Generally.....................................................56
46.2. No Obligations of the Purchaser to Subcontractors.............57
SECTION 47. NOTICES.......................................................57
47.1. Methods and Effectiveness.....................................57
47.2. Addresses.....................................................57
47.3. English Language..............................................58
SECTION 48. DISPUTE RESOLUTION............................................58
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48.1. Mutual Discussions............................................58
SECTION 49. NO CONFLICTS..................................................58
SECTION 50. MISCELLANEOUS.................................................58
50.1. Headings......................................................58
50.2. Governing Law.................................................58
50.3. Severability..................................................58
50.4. Integration...................................................58
50.5. Amendments and Waivers........................................58
50.6. Further Assurances............................................59
50.7. Counterparts..................................................59
50.8. Successors and Assigns........................................59
50.9. No Third Party Beneficiaries..................................59
50.10. United Nations Convention On Contracts For The
International Sale Of Goods...................................59
50.11. Remedies Cumulative...........................................59
EXHIBITS
EXHIBIT 1 Defined Terms
EXHIBIT 2 Form of Contractor Bond
EXHIBIT 3 Form of Certificate of Payment and Final Release
EXHIBIT 4 Form of Lien Release
Appendix 1 Provisions Schedule
Appendix 2 Payment Schedule
Appendix 3 Scope of Work
Appendix 4 Plan of Work
Appendix 5 Technical Specifications
Appendix 6 Technical Descriptions
Appendix 7 Equipment Descriptions
Appendix 8 Principal Subcontractors
vii
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CIRCE CABLE SYSTEM
ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT
ENGINEERING, PROCUREMENT AND CONSTRUCTION CONTRACT, dated as of
November 10, 1998, between VIATEL GLOBAL COMMUNICATIONS, LTD., a Delaware
corporation (the "PURCHASER"), and ALCATEL SUBMARINE NETWORKS S.A., a French
corporation (the "CONTRACTOR").
W I T N E S S E T H :
WHEREAS, the Purchaser is developing the System (as hereinafter
defined); and
WHEREAS, the Contractor desires to provide certain services for:
(a) the design, engineering, start-up and testing of the System; and
(b) the procurement and construction of the System on a fixed-price,
turnkey, date certain basis,
in each case as set forth in this Contract; and
NOW THEREFORE, the Parties, in consideration of the mutual covenants
herein expressed, covenant and agree with each other as follows:
SECTION 1. DEFINITIONS; INTERPRETATION
1.1. DEFINED TERMS. As used in this Contract and in all Contract Documents,
capitalized terms shall have the meanings ascribed thereto in Exhibit
1 hereto.
1.2. RULES OF CONSTRUCTION. In the interpretation of this Contract, unless
the context otherwise requires:
(a) The singular includes the plural and vice versa and, in
particular (but without limiting the generality of the
foregoing), any word or expression defined in the singular has
the corresponding meaning used in the plural and vice versa;
(b) The term "or" is not exclusive;
(c) The term "including" shall mean "including, without limitation";
<PAGE>
(d) Any reference to any gender includes the other gender;
(e) Any reference to any agreement, instrument, contract or other
document shall:
(i) Include all appendices, exhibits, annexes and schedules
thereto; and
(ii) Be a reference to such agreement, instrument, contract or
other document as amended, supplemented, modified,
suspended, restated or novated from time to time;
(f) Any reference to any Law or Codes and Standards shall include all
statutory and administrative provisions consolidating, amending
or replacing such Law or Codes and Standards, and shall include
all rules and regulations promulgated thereunder;
(g) Any reference to "hereof", "hereto", "herein", "hereunder" or any
other similar term is a reference to this Contract as a whole,
and not to any particular provision or part of this Contract;
(h) Any reference to any Person includes its permitted successors and
assigns;
(i) Unless otherwise specified, a reference to a Section, Exhibit, or
Appendix is to the Section, Exhibit, or Appendix of this
Contract;
(j) Unless otherwise specified, any right may be exercised at any
time and from time to time;
(k) All obligations under this Contract of any Party are continuing
obligations throughout the term hereof;
(l) The fact that counsel to any Party shall have drafted this
Contract shall not affect the interpretation of any provision of
this Contract in a manner adverse to such Party or otherwise
prejudice or impair the rights of such Party; and
(m) If an index or similar reference referred to in this Contract is
changed or no longer published or reported by the Person (or such
Person's successor) who, on the date hereof, publishes or reports
such index or reference, then the Parties shall use their best
efforts to replace such index with the best substitute for the
changed or no-longer published index or reference.
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SECTION 2. INTENT
2.1. GENERALLY.
(a) In consideration of the Contract Price, the Contractor shall:
(i) undertake all necessary Work and perform in full its
obligations hereunder in order to plan, manufacture,
supply, install, assemble and test the System;
(ii) achieve Provisional Acceptance for the System on or before
the Guaranteed RFPA Date; and
(iii) furnish to the Purchaser the System capable of operation in
accordance with the Technical Specification and the other
requirements of this Contract, in each case, through the
end of the Warranty Periods.
(b) The Contractor shall perform all of its Work specified or
reasonably inferred from this Contract. The Contractor's
performance under this Contract shall include everything
requisite and necessary to complete the entire Work
notwithstanding the fact that every item necessarily involved may
not be specifically mentioned. Details not indicated by the
Technical Requirements shall be performed by the Contractor at no
extra cost if such details are necessary to complete the intent
of this Contract.
SECTION 3. CONTRACT DOCUMENTS
3.1. FORM PART OF THIS CONTRACT. Each Contract Document shall be deemed to
form and be read and construed as part of this Contract, and all
matters and things herein expressed as a duty or obligation of either
Party (either actual or potential) therein shall be the duty or
obligation of such Party hereunder.
3.2. CONFLICTS. In the event of any conflict between a provision of this
Contract and a provision of any Contract Document, the former shall
prevail. In the event of any conflict between or among the provisions
of one or more Contract Documents that cannot be resolved by any
provision of this Contract, then the provision in the Contract
Document having the highest order of precedence below shall prevail:
(a) Technical Specification;
(b) Provisioning Schedule;
(c) Payment Schedule;
(d) Scope of Work;
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(e) Plan of Work;
(f) Marine Route Survey Report; and
(g) Desk Study Report.
SECTION 4. RESPONSIBILITIES OF THE CONTRACTOR
4.1. SCOPE OF WORK. The Contractor shall plan, manufacture, supply,
install, assemble and test the System in accordance with all the terms
and conditions contained in this Contract on a fixed-price, turnkey,
date certain basis. The System shall be in full accordance with the
Technical Requirements and the other requirements of this Contract and
the Contract Documents, including the Purchaser's overall performance
requirements set forth therein. As more specifically described in the
Technical Specification and including the Scope of Work, Contractor
shall perform or continue to perform the following obligations, with
each item listed herein constituting, individually and as referenced
collectively, the Work (the "WORK"):
(a) ENGINEERING AND DESIGN SPECIFICATION. Provision of
specifications, engineering, design and testing of the System
(which shall be consistent with the design, equipment and testing
parameters set forth in the Contract Documents) and finalization
of the engineering design documentation for the integration of
System components.
(b) MARINE ROUTE SPECIFICATIONS. Finalization of all marine crossing
and landing specifications in accordance with the Technical
Requirements, including performance of all obligations of the
Contractor specified in Section 8 hereof;
(c) FIBER OPTIC CABLE. Manufacture or procurement of the Fiber Optic
Cable and the installation thereof (including all ancillary
equipment necessary for the placement, safeguarding and
beach-jointing of such Fiber Optic Cable) along the System Route,
including the provision of materials, testing equipment, labor
and services, cable laying vessels, support craft, submersible
vehicles and cable plows as necessary for the secure placement of
the Fiber Optic Cable in accordance with the Technical
Requirements and the Warranties;
(d) FIBER OPTIC CABLE SPLICING AND TESTING. Splicing and testing of
the entire length of the Fiber Optic Cable at the Contractor's
facilities, on board cable laying vessels and at the Landing
Sites;
(e) COORDINATION. Technical coordination in the manufacture and
installation of the Fiber Optic Cable (including the manufacture
and installation of the joint casings) such that the System shall
be compatible with the performance parameters identified in the
Technical Specification;
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(f) PERFORMANCE GUARANTEES AND THE WARRANTIES. Meeting the
requirements of the Technical Specification by the Guaranteed
RFPA Date and complying with all Warranties during applicable
Warranty Periods;
(g) MEET INTENT OF CONTRACT. All other matters specified as the
responsibility of the Contractor in this Contract or any Contract
Document; satisfying in all respects the intent of this Contract
as expressed in Section 2 hereof and elsewhere in the Contract
Documents; and
(h) RELATED WORK; ANCILLARY SERVICES AND SUPPLIES. In connection with
any and all of the foregoing, the Contractor shall:
(i) furnish all construction tools and equipment, small tools
and temporary electricity, water, heat, telephone and other
construction utilities required to complete the System;
(ii) arrange for transportation and receipt, unloading and
storage at appropriate locations of all Supplies and other
components of the System and the Work; and
(iii) obtain, furnish and maintain in effect all Contractor
Permits.
4.2. TECHNICAL INFORMATION. In addition to the requirements for the
provision of technical information described in this Contract, the
Contractor shall, upon request, provide the Purchaser with such
additional technical information in connection with this Contract as
the Purchaser may reasonably require.
SECTION 5. TECHNICAL REQUIREMENTS, PLAN OF WORK AND PROGRESS MEETINGS
5.1. TECHNICAL REQUIREMENTS. In accordance with Section 4.1 hereof, the
Work shall comply with the Technical Requirements.
5.2. PLAN OF WORK. The Contractor shall perform all Work in conformity with
the Plan of Work.
5.3. PROGRESS MEETINGS. The Contractor shall attend meetings with the
Purchaser's representatives and customers, at such times and places as
may be required by the Purchaser, to discuss the general progress of
the Work.
SECTION 6. CONTRACTOR TO INFORM ITSELF FULLY
6.1. GENERALLY. The Contractor shall be deemed to have notice of, and to
have fully examined and independently verified, the Technical
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Requirements and all other Contract Documents, and all drawings,
specifications, schedules, terms and conditions of this Contract,
Laws, Codes and Standards and other information in relation to the
Work and this Contract and to have fully examined, understood and
satisfied itself as to all information that is relevant as to the
risks (whether political or otherwise), contingencies and other
circumstances that could affect this Contract and, in particular, the
laying of the Fiber Optic Cable for the System, including the matters
listed below:
(a) Permit requirements and approvals for transiting, surveying and
laying the System in the territorial waters, exclusive economic
zones and other claimed waters through which it shall pass;
(b) fees, pilotage and any dues payable to port authorities;
(c) conditions affecting labor, including work permits and visas; and
(d) rules and regulations of Governmental Authorities or port
authorities.
6.2. NO LIABILITY OF PURCHASER PERSONS. No Purchaser Person shall have any
liability in law or equity or in contract or in tort with respect to
any such information, risk, contingency or other circumstance.
6.3. FAMILIARITY. The Contractor has reviewed all requirements relating to
the Work as a whole and in detail and has fully satisfied itself of
the feasibility and practicability thereof.
SECTION 7. COMPLIANCE WITH LAWS; PERMITS
7.1. COMPLIANCE WITH LAWS. The Contractor shall comply with all Laws and
Codes and Standards of the countries, states, provinces and
territories in which any part of the Work is to be done and with all
international treaties in any way affecting this Contract or
applicable to any of the Work.
7.2. VARIATIONS REQUIRED BY LAW. The Contractor shall, before making any
variation from any design, drawing, plan or procedure that may be
necessitated by so complying, give to the Purchaser written notice,
specifying the variations proposed to be made, and the reasons for
making them, and apply for instructions thereon. The Contractor shall
be responsible for the payment of any and all costs incurred as a
result of the need to vary design, drawings, plans or procedures to
comply with any of the circumstances set forth in this Section 7.2;
PROVIDED, HOWEVER, that the Purchaser shall be responsible for all
reasonable additional costs incurred as a result of a Change in Law.
The Contractor shall:
(a) give all notices required by Law to be given to any Governmental
Authority;
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(b) perform or permit the performance by authorized Persons of any
inspection required by Law; and
(c) pay all fees, charges, impositions or any other moneys payable to
any Governmental Authority or any public officer in respect of
the Work.
7.3. PERMITS.
(a) CONTRACTOR PERMITS. The Contractor shall be responsible, at its
expense, for obtaining, maintaining and complying with all
Permits in connection with the installation of the System
(collectively, the "CONTRACTOR PERMITS") including:
(i) Permits from naval and port authorities;
(ii) Permits for the Contractor's and its Subcontractors'
personnel and equipment used to perform the Work;
(iii) Permits necessary for the Contractor's and its
Subcontractors' vessels and equipment to enter and work in
the waters of the applicable country;
(iv) Permits to conduct installation activities within exclusive
economic zones and territorial waters; and
(v) approval for, and the removal of, fishing nets, fishing
gear and other commercial obstructions along the route for
marine operations.
(b) PURCHASER PERMITS. The Purchaser shall be responsible, at its
expense, for obtaining, maintaining and complying with all
Permits in connection with the permanent ownership, laying
operation and landing of the System (collectively, the "PURCHASER
PERMITS") including:
(i) Permits to land the System and for the System to be
operated and maintained along the System Route;
(ii) Permits for dredging, boring, sampling and other such
activities conducted by the Contractor during the Marine
Route Survey, but excluding such Permits required solely in
respect of the entry and operation in the relevant waters
of the Contractor's and its Subcontractors' vessels and
equipment in connection with the Marine Route Survey, which
Permits shall be the sole responsibility of the Contractor
pursuant to Section 7.3(a)(iii) hereof;
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(iii) Permits for the occupation of the land, waters and seabed
along the System Route; and
(iv) Permits from the respective owners to cross existing cable
systems, pipelines or lease blocks and for long-term
maintenance agreements at the crossing points.
(c) COOPERATION. Each Party shall:
(i) use all reasonable efforts in assisting the other Party to
obtain the Permits contemplated by this Section 7.3; and
(ii) exchange material information and attend meetings, as
reasonably necessary, with the other Party regarding the
progress in obtaining such Permits.
7.4. NO LIABILITY. No Purchaser Person shall be responsible for any act or
omission of the Contractor that violates any Law.
SECTION 8. MARINE ROUTE SELECTION
8.1. DESK STUDY AND MARINE ROUTE SURVEY. The Contractor has performed the
Desk Study and has supplied to the Purchaser the Desk Study Report.
8.2. MARINE ROUTE SURVEY. The Contractor has performed the Marine Route
Survey in a prudent manner, using the highest professional standards.
8.3. ROUTE SELECTION, ETC. The Contractor shall be fully responsible for
selection of the System Route, the types and quantities of cable, the
percentage cable slack allowance, the protection of shallow water
sections, any other special protection requirements for the System,
the System link loss budget and all other design parameters of the
System. The Contractor shall base its design of the above items on the
Marine Route Survey Report (with appropriate analysis of the routes
and associated survey results), and may propose changes relating to
the System Route in accordance with the procedures set forth in
Section 16.1(a)(ii) hereof.
SECTION 9. DESIGN AND PERFORMANCE RESPONSIBILITY
9.1. THE CONTRACTOR SOLELY RESPONSIBLE. The Contractor shall be solely
responsible for the Work (including design of and for all details of
the System) and for the adequacy thereof, and shall not claim any
additional payment nor be relieved from any obligation imposed on it
by this Contract on grounds of misunderstanding or incorrect or
insufficient information, including any information received from or
supplied by any Purchaser Person on any matter whatsoever related to
this Contract.
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9.2. NO DIMINISHMENT. The Contractor's responsibility for the design of the
System shall not in any way be diminished, nor shall the Contractor's
design approach be restricted or limited, by any Purchaser Person's:
(a) acceptance of the Contractor's guidance or recommendations as to
engineering standards and design specifications;
(b) suggestions or recommendations on any aspect of the design of any
part of the System;
(c) acceptance or approval of any portion of the Work delivered in
connection therewith; or
(d) acceptance or approval of any Subcontractor.
SECTION 10. MAINTENANCE OF BOOKS AND RECORDS
10.1. MAINTENANCE OF RECORDS. The Contractor shall keep, and maintain for a
period ending upon the later of:
(a) five (5) years after the RFPA Date; and
(b) the date on which no claim based upon, arising out of or related
to this Contract is outstanding,
all books, records, vouchers and accounts pertaining to this Contract,
including such books, records, accounts and vouchers related to the
Contractor's billing of items specified in the Provisioning Schedule
and with respect to the engineering, provision and installation of
facilities of the System (which shall include all details of any
Contract Variations or additional Work, information on any Defects and
remedial actions taken, as well as all other data that the Purchaser
may reasonably require for the Contractor to substantiate the
Contractor Invoices or other claims for payment). The Contractor shall
obtain from its Subcontractors such supporting records as may be
required by this Section 10.1 and shall maintain such records for such
period.
10.2. ACCESS TO RECORDS.
(a) GENERALLY. The Contractor shall, until the Final Acceptance Date,
give each Purchaser Person access to all documentation and
records required to be kept, obtained and maintained pursuant to
Section 10.1 hereof and shall not destroy any such documentation
or records without affording the Purchaser an opportunity to
review or copy such documentation and records. With respect to
financial records required to be maintained under this Contract
(including Section 10.1 hereof), the Contractor may, at its
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discretion, require that the Purchaser appoint independent
accountants to review such financial records.
(b) LIMITATION. Notwithstanding the foregoing clause (a) of this
Section 10.2, the Parties hereby agree that access to financial
information of the Contractor shall be limited to that strictly
necessary for the purpose of Sections 11, 16, 17, 24 and 28
hereof.
SECTION 11. TAXES
11.1. RESPONSIBILITY FOR TAXES. The Purchaser acknowledges that the Contract
Price is exclusive of applicable Taxes. The Purchaser shall be
responsible for and shall pay all such Taxes. The Purchaser shall bear
responsibility for importation, including customs clearances, of
Supply to the relevant Site. Notwithstanding the foregoing, nothing in
this Contract shall be construed as imposing any liability on the
Purchaser with respect to any Tax levied on or attributable to
property owned or income earned by the Contractor.
11.2. EXEMPTION FROM TAXES. The Contractor shall use all reasonable efforts
to have all items of Work made exempt from all Taxes, whether in the
manufacture thereof or related to the importation or location or
installation thereof, and shall cooperate fully with the Purchaser in
this respect. The Contractor hereby undertakes to make applications
for such revisions and for drawbacks, remissions, reclassifications or
the like to the appropriate Governmental Authorities, in accordance
with the relevant Laws then in force. Notwithstanding the foregoing,
should the Purchaser be made aware of any area of exemption from taxes
or duties, then the Purchaser shall identify such area to the
Contractor, which shall investigate the same.
11.3. WITHHOLDING. To the extent that any Law or Regulatory Authority shall
require the Purchaser to withhold any amount on account of any Tax,
the procedures specified in Section 13.2(c) shall apply.
SECTION 12. INTELLECTUAL PROPERTY RIGHTS
12.1. GENERALLY. The Contractor shall obtain for itself and the Purchaser,
without cost to the Purchaser, any and all patent, copyright and other
industrial or intellectual property licenses:
(a) in the case of the Contractor, necessary for the performance of
this Contract; and
(b) in the case of the Purchaser, necessary for the ownership,
operation, maintenance and marketing of the System.
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The Contract Price shall include all amounts payable for patent,
copyright and other industrial or intellectual property rights,
royalties or similar expenses, on or with respect to the Supplies or
Work or any part thereof, and, without limiting the generality of
Section 40 hereof, the Contractor shall indemnify, protect, defend and
hold harmless each Purchaser Person from and against all Losses based
upon, arising out of, or otherwise related to an infringement or
claimed infringement of patent, copyright or other industrial or
intellectual property rights by reason of the manufacture, purchase,
possession or use of the Supplies, the Work or the System or any part
thereof. Notwithstanding the foregoing, the Contractor shall be under
no obligation to indemnify the Purchaser with respect to any Losses
relating to any infringement or claimed infringement where the
manufacture, purchase, possession or use for which infringement is
claimed was undertaken by the Contractor at the Purchaser's express
instruction and the Supplies or other items of Work manufactured,
purchased, possessed or used were selected or furnished by the
Purchaser. The Purchaser shall, in such cases, indemnify and hold
harmless the Contractor from and against any Losses so incurred by the
Contractor at the Purchaser's direction.
12.2. INJUNCTION. If, as a consequence of any action or claim described in
Section 12.1 hereof, the use of the System is enjoined, the Contractor
shall use its best efforts to negotiate with the claimant so as to
remove such injunction or to obtain for the Purchaser or the
Contractor, as the case may be, a license or other agreement in
respect thereof as soon as possible. Subject to Section 29.1, if the
Contractor is unable to have the injunction removed, the Contractor
shall be liable to the Purchaser for Losses arising as a result of
such injunction, none of which shall result in any increase in the
Contract Price.
12.3. INFRINGEMENT. If the System or any part thereof is held to constitute
infringement and is subject to an order restraining its use or
providing for its surrender or destruction, the Contractor shall at
its own expense promptly (but in no event later than sixty (60) Days
after such injunction, or such shorter period imposed by any claimant)
either:
(a) procure for the Purchaser the right to retain and continue to use
the affected System; or
(b) modify the System so that it becomes non-infringing.
SECTION 13. PAYMENTS FOR THE WORK
13.1. INITIAL CONTRACT PRICE. The Contractor shall provide the System to the
Purchaser for a price of [REDACTED] (the "INITIAL CONTRACT PRICE").
The Initial Contract Price is the price to be paid by the Purchaser
for the full and proper performance by the Contractor of the Work and
all of its other obligations under this Contract, and shall not be
varied except as provided in Section 16 hereof.
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13.2. GENERAL CONDITIONS OF PAYMENT.
(a) PAYMENTS IN DOLLARS. All payments to the Contractor shall be made
in Dollars, free of all bank charges arising from the United
States. Any such charges shall be the responsibility of the
Purchaser.
(b) INVOICES. All Contractor Invoices shall be submitted to the
Purchaser in accordance with Section 13.4 hereof.
(c) TAXES. With respect to any Tax that is payable on any payment due
to the Contractor, the following procedure shall apply:
(i) If the Purchaser:
(A) receives a notice, order or instruction from a
competent Governmental Authority that a Tax is required
to be withheld by Law; or
(B) otherwise has a reasonable belief that any Tax is
required to be withheld from any payment due to the
Contractor,
then the Purchaser shall promptly so inform the Contractor
as far in advance of any proposed withholdings as
practicable.
(ii) The Contractor shall obtain documentary evidence from the
relevant taxing authorities reasonably satisfactory to the
Purchaser that the Purchaser is not required to withhold
such Tax. If the Contractor is unable to obtain such
documentary evidence on a timely basis, then the Purchaser
shall proceed to withhold any such Tax via an escrow agent
or other mutually agreeable procedure. Thereafter, the
Purchaser shall, at the Contractor's expense, provide any
documentation or other cooperation as may be reasonably
requested by the Contractor to permit the Contractor to
recover any withheld amounts to which the Contractor is
entitled.
(iii) The Contractor shall protect, defend, indemnify in full and
hold harmless each Purchaser Person from and against any
Losses based upon, arising out of or otherwise related to
Taxes that are owed by the Contractor to any taxing
authority.
(d) FINAL PAYMENT. On receipt by the Contractor of the final payment
of the Contract Price (the "FINAL PAYMENT"):
(i) the Purchaser shall thereby be released from all claims
whatsoever by the Contractor, whether at law or in equity,
contract or tort or otherwise, by reason of anything based
upon, arising out of or relating to this Contract, other
than:
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(A) claims asserted in writing on or before the Final
Payment is made;
(B) claims arising from circumstances, acts or events
occurring after the Final Payment is made; and
(C) claims that the Contractor was not aware of, and could
not have been aware of, and that are based solely on
the willful misconduct or gross negligence of a
Purchaser Person; and
(ii) the covenants and agreements of the Purchaser shall
terminate and be of no further force and effect except the
requirement of the Purchaser to return to the Contractor the
Contractor Bond at the expiration of the Warranty Period.
(e) EFFECT OF PAYMENT. No payment (final or otherwise) made under or
in connection with this Contract shall be conclusive evidence of
the performance of the Work, or of this Contract, in whole or in
part, and no such payment shall:
(i) be construed to constitute the acceptance of any Defective
Work or Supplies containing Defects; or
(ii) release the Contractor from any of its obligations under
this Contract.
13.3. [REDACTED]
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13.4. CONTRACTOR INVOICES.
(a) GENERALLY. Each Contractor Invoice shall detail the items to be
paid and the amount due, with specific reference to the item
number or numbers stated in the Provisioning Schedule, and shall
be in form and substance satisfactory to the Purchaser.
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(b) DOCUMENTS. The Contractor shall provide one (1) original and
three (3) copies of each Contractor Invoice, plus one (1)
additional copy to be sent by facsimile on the date of issuance
of such Contractor Invoice. At a minimum and where applicable,
the following documents in the following quantities shall
accompany each Contractor Invoice:
(i) Packing List - One (1) original and four (4) copies;
(ii) Certificate of Origin - One (1) original and three (3)
copies;
(iii) Certificate of Loading signed by Contractor and the
Purchaser or its designee -- One (1) original and three (3)
copies;
(iv) Insurance Certificate - One (1) original and three (3)
copies;
(v) Lien Release - One (1) original and three (3) copies;
(vi) Factory Release Certificate, signed by the Contractor, and
counter-signed by the Purchaser's Representative or his
designee (in each case, within a reasonable time after the
Contractor's submission thereof for signature) - One (1)
original and three (3) copies; and
(vii) such other documentation necessary to demonstrate
compliance with the terms of this Contract in such
quantities as the Purchaser shall request.
(c) MONTHLY INVOICES. Only one Contractor Invoice shall be issued
during any month.
13.5. THE PURCHASER'S RIGHT TO WITHHOLD PAYMENT.
(a) GENERALLY. Notwithstanding the foregoing, the Purchaser may
withhold any payment or other amount due to the Contractor
hereunder in an amount and to such extent as the Purchaser may
determine to be reasonably necessary to protect the Purchaser
from Loss or damage because of:
(i) Defective Work not remedied in accordance with this
Contract;
(ii) Work that is not complete;
(iii) the Contractor's failure to comply with any Warranty;
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(iv) the Contractor's failure to perform the Work in accordance
with this Contract;
(v) third-party claims, suits, stop notices, attachments,
levies or Liens (other than Purchaser Liens) against the
System, the Work, the Supplies or any Party;
(vi) Losses or other damage to the Purchaser or any
Subcontractor that results from the Contractor's failure
to obtain or maintain insurance required hereunder;
(vii) the Contractor's failure to provide on a timely basis the
documentation required under Section 13 hereof; or
(viii) reasonable evidence that any payment previously made
hereunder (together with all other previously requested
amounts) exceeds the amount payable with respect to the
Work actually performed.
(b) THE PURCHASER'S APPLICATION OF FUNDS WITHHELD. The Purchaser may,
upon notice to the Contractor of its intention to do so, apply
any funds withheld or moneys to become due to the Contractor to
satisfy, discharge or secure the release of such claims that the
Contractor has failed to settle within thirty (30) Days after
notice by the Purchaser to the Contractor. Any such application
shall be deemed payment to the Contractor. Any additional expense
incurred by the Purchaser as a result of the Contractor's default
hereunder shall be deducted from the Contract Price. No action by
either Party during the above activities shall affect the Plan of
Work unless a Contract Variation is agreed to by the Purchaser.
If the Purchaser's withholding is determined to be wrongful, the
Purchaser shall promptly pay the withheld amount with interest at
the rate set forth in paragraph (c) from the due date thereof
until the date of payment.
(c) RELEASE OF PUNCH LIST RESERVE. Within ten (10) Days after the
Contractor has, to the Purchaser's satisfaction, remedied the
deficiencies and completed the Work indicated on any Punch List,
the Contractor shall release to the Contractor the Punch List
Reserve held by the Purchaser in respect of such incomplete or
Defective Work.
13.6. OVERDUE PAYMENTS. If a party shall fail to pay any undisputed amount
within thirty (30) days of the date such payment is due, the party to
whom such amount is owed shall have the right to charge interest upon
such amount at a rate which is equal to the London Interbank Offered
Rate as published for such period in the Wall Street Journal, Eastern
Edition.
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SECTION 14. DEDUCTIONS FROM PAYMENTS TO THE CONTRACTOR
14.1. AMOUNTS PAYABLE. To the extent that an amount is not withheld in
respect thereof pursuant to Section 13.5 hereof, all Losses that the
Purchaser shall have incurred or sustained by reason of any act that
entitles the Purchaser to indemnification under this Contract or any
default or omission of the Contractor in the performance of this
Contract, together with any sum or sums payable to the Purchaser, as
Delay Damages or otherwise, under this Contract, shall be paid by the
Contractor on or prior to the earlier of:
(a) the date that is thirty (30) Days after receipt of the
certificate referenced in Section 14.3 hereof; and
(b) the date the Final Payment is made.
14.2. DEDUCTION. Should the Contractor fail to make any payment required
under Section 14.1 hereof by the due date thereof, the Purchaser may
then deduct the amount of the requested payment from any moneys that
are, or may become, due to the Contractor or have been made available
by it under the Contractor Bond. If the moneys so due or deposited
shall be less than the amount so deductible, the difference shall be
treated as a debt by the Contractor to the Purchaser and shall be paid
by the Contractor to the Purchaser within seven (7) Days after the
Contractor's receipt of the Purchaser's demand therefor. If the
Contractor fails to make such payment within such period, then the
amount of such deficiency may be recovered in any court of competent
jurisdiction.
14.3. CERTIFICATE. A certificate signed by the Purchaser stating the amount
of the Losses, costs, charges, expenses, damages or other amounts
referred to in this Section 14 shall be prima facie evidence of the
matter stated.
SECTION 15. CONTRACTOR BOND
15.1. GENERALLY. The performance of all of the Contractor's obligations
under this Contract shall be secured by a performance and payment bond
in substantially the form of Exhibit 3 hereto (the "CONTRACTOR BOND").
The Contractor shall deliver the Contractor Bond to the Purchaser no
later than five (5) Days after the date hereof.
15.2. FORM OF CONTRACTOR BOND. The Contractor Bond shall:
(a) be issued and outstanding until the later to occur of (i) date of
expiration of all Warranty Periods and (ii) the Final Acceptance
Date;
(b) be in an amount equal to not less than ten percent (10%) of the
Contract Price on any date up to and including the RFPA Date,
whereupon the Contractor shall have the right to reduce such
amount to an amount not less than five percent (5%) of the
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Contract Price until Final Acceptance provided, however, if after
the fifth anniversary of the RFPA Date any Replacement Items have
been provided by the Contractor, the Contractor shall have the
right to reduce the amount of the Contractor Bond to an amount
not less than the value of such Replacement Items until Final
Acceptance; and
(c) name the Purchaser or their permitted assigns as beneficiaries
thereof.
15.3. ISSUER REQUIREMENTS. The Contractor Bond and all renewals, extensions
and replacements thereof shall be issued by a bonding or insurance
company acceptable to the Purchaser at the time of issuance. If the
financial condition of any such bonding or insurance company declines
to less than an A.M. Best rating of A-, the Contractor shall, at its
sole cost and expense, within thirty (30) Days after any such decline
in rating, replace the issuer of the Contractor Bond with an entity
acceptable to the Purchaser; PROVIDED that if the Contractor Bond is
provided by more than one bonding or insurance company and each such
company is jointly and severally liable thereunder, the highest rating
of any one of such companies shall be controlling.
15.4. RETURN OF CONTRACTOR BOND. The Purchaser shall return the Contractor
Bond to the Contractor after Final Acceptance.
SECTION 16. CONTRACT VARIATIONS
16.1. GENERALLY. The Purchaser may from time to time, with the consent of
the Contractor (which consent shall not be unreasonably withheld or
delayed), direct by written order to the Contractor (each, a "CONTRACT
VARIATION") that changes be made, within the general scope of this
Contract, to drawings, designs, specifications, the method or manner
of performance of the Work, the method of shipment and packing or the
time or place of delivery. The Purchaser may, with the consent of the
Contractor (which consent shall not be unreasonably withheld or
delayed), by Contract Variation, require additional Work, reduce or
direct the omission of Work or suspend the Work pursuant to Section 23
hereof or, as appropriate, extend the period of any General Warranty.
Subject to the provisions of this Section 16, the Contractor shall
comply with each such Contract Variation. The total value of Contract
Variations made under this Section 16 shall not exceed ten percent
(10%) of the Initial Contract Price.
(a) CONTRACTOR-PROPOSED VARIATIONS.
(i) GENERALLY. The Contractor may propose modifications to the
Work if it determines that such modifications will result
in improved manufacturing processes or timeframes,
reductions in costs or maintenance requirements, or
improvements in the System's technical capabilities. The
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Purchaser shall in good faith consider such Contractor
proposals, and shall seek to implement the same where doing
so would not, in the Purchaser's judgment, impair or
adversely affect the System as delivered by the Contractor
or the Warranties.
(ii) MARINE ROUTE SURVEY. The Contractor may, based on the
Marine Route Survey results, propose Contract Variations
with respect to the System Route or the types of Fiber
Optic Cable to be used for the System, and the Purchaser
shall not unreasonably withhold its consent to any such
Contract Variation.
(iii) FISHERMEN COMPENSATION. The Contractor shall be entitled to
a Contract Variation to increase the Initial Contract Price
in the reasonable amount of compensation paid by the
Contractor to fishermen to remove gear or fishing nets
subject to the prior approval by the Purchaser.
(iv) CHANGE IN LAW. The Contractor shall be entitled to a
Contract Variation to increase the Initial Contract Price
in the reasonable amount of reasonable additional costs
incurred by the Contractor because of a Change in Law,
subject to the prior approval of the Purchaser which shall
not unreasonable be withheld.
(b) PURCHASER-CAUSED DELAY OR LOSS. If (i) the negligent or willful
acts or omissions of the Purchaser shall cause any Loss or damage
to the Site, the Work or the System, and (ii) such Loss or
damage, despite the Contractor's reasonable efforts in mitigation
thereof, results in any material increase in the cost or time
required for the Contractor's performance of the Work, the
Contractor shall be entitled to a Contract Variation in respect
of the most appropriate, as determined by the Purchaser in
consultation with the Contractor, of the following terms of this
Contract:
(A) the Plan of Work (including the Guaranteed RFPA Date); or
(B) the Contract Price (but only to the extent that such Losses
or increased costs are not recoverable from the proceeds of
insurance required to be maintained by the Contractor
hereunder); or
(C) both the Plan of Work and the Contract Price.
16.2. AMENDMENT. Each Contract Variation shall be recorded by means of a
formal written amendment executed by the Parties. Subject to Section
16.6 hereof, no Contract Variation shall be effective until the
Parties execute such amendment.
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16.3. OTHER ADJUSTMENTS. No claim for adjustment in time or cost with
respect to any change in the Work shall be made, recognized or acceded
to unless such change has been made in accordance with a Contract
Variation issued in accordance with Sections 16.1 and 16.2 hereof. The
Purchaser shall not be liable for the cost of any additional Supplies
or Work unless made pursuant to a Contract Variation. No claim for any
adjustment pursuant to any Contract Variation shall be made after the
Final Payment is made. The Purchaser shall not unreasonably refuse to
authorize any Contract Variation issued in accordance with action
taken by the Purchaser pursuant to Section 23 hereof.
16.4. EFFECT OF CONTRACT VARIATIONS. No Contract Variation shall vitiate or
invalidate this Contract. A Contract Variation may result in an
increase, decrease or no change in the Contract Price, with any change
in the Contract Price effected thereby determined in accordance with
the valuation procedures set forth in Section 16.6 hereof.
16.5. PRICING. Unless otherwise approved by the Purchaser, the price for
each Contract Variation shall be determined as provided in the
relevant provision of this Contract before the Contract Variation is
authorized.
16.6. VALUATION. A Contract Variation shall be valued at the Scheduled Rates
to the extent that, in the reasonable opinion of the Purchaser, the
Scheduled Rates are applicable to such Contract Variation. In the case
of a Contract Variation to which no Scheduled Rate applies, the rate
or price payable for the Contract Variation shall be determined by
agreement between the Parties, and the Contractor shall provide to the
Purchaser all price detail and other information the Purchaser may
require to determine for this purpose. If the Parties are unable to
agree, at the request of the Purchaser, the Contractor shall continue
to perform in accordance with the terms of this Contract, as modified
by such Contract Variation, pending resolution of the matter.
16.7. NO DELAY. The Contractor shall, unless otherwise agreed to in writing
by the Purchaser (such agreement not to be unreasonably withheld),
implement all Contract Variations within the time allowed in this
Contract for completion of the Work. In this respect, the Contractor
shall develop all reasonable work-around plans, alternate sources or
any other means available in order to prevent delays.
16.8. OBSOLETE OR SURPLUS SUPPLIES. If the cost of Supplies made obsolete or
surplus as a result of a Contract Variation is included in the
Contractor's claim for adjustment, the Purchaser shall have the right
to prescribe the manner of disposition of such Supplies and the
Purchaser shall receive an equitable credit arising from disposition
of such Supplies.
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SECTION 17. TECHNICAL SUPPORT, SPARE PARTS, ETC.
17.1. TECHNICAL SUPPORT. Without limiting Section 33 hereof, the Contractor
shall provide technical support to the Purchaser and to undertake
repairs and to investigate trend faults for the Purchaser when
required, at reasonable cost, to ensure the successful operation of
the System throughout the System Design Life. Furthermore, during the
System Design Life, the Contractor shall provide technical advice to
the Purchaser, when requested and at a reasonable cost, concerning all
aspects of the design, maintenance and operation of the System.
17.2. SPARE PARTS.
(a) GENERALLY. The Contractor warrants the availability of, and
undertakes to enter into long-term contracts to supply, spare
parts and replacement equipment and facilities to maintain all
parts of the System, including all training courses that may be
necessary for the maintenance of the System, all under reasonable
technical and commercial conditions, during the System Design
Life. If the Contractor cannot supply identical units or
components due to obsolescence, then the spares and replacements
to be supplied shall be the equivalent of the original parts. In
addition, the Contractor shall carry out as practicable any
adaptive engineering work necessary and provide all necessary
implementation documentation.
(b) CESSATION OF MANUFACTURE. If for any reason the Contractor
intends to cease manufacturing identical parts and replacement
equipment, the Contractor shall inform the Purchaser by written
notice at least one (1) year before ceasing such manufacture and
allow the Purchaser to order from the Contractor any required
spare parts or replacement equipment.
(c) PRICING. The Contractor undertakes to provide such spare parts,
replacements and facilities:
(i) if of its own manufacture, at the Scheduled Rates, but
varied in accordance with the price variation formula in
Section 17.3 hereof;
(ii) if not of its own manufacture, at mutually agreed equitable
prices.
17.3. [REDACTED]
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SECTION 18. [REDACTED]
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SECTION 19. FORCE MAJEURE
19.1. DEFINITION.
(a) INCLUDED EVENTS. An event shall be a "FORCE MAJEURE EVENT" if
such event:
(i) is beyond the Contractor's reasonable control;
(ii) is not the result of any breach by the Contractor of any
provision of this Contract;
(iii) was not caused by the negligent or careless act or omission
of any Contractor Person;
(iv) will result in a delay in the completion of any material
part of the Work despite the Contractor's exercise of all
reasonable diligence and pursuit of alternative measures of
performance; and
(v) is within one or more of the following categories:
(A) civil disturbance, war, invasion or act of foreign
enemies;
(B) civil uprising or rebellion, or broad-based strike or
disruption in freight or distribution networks;
(C) fire, flood, epidemic, act of God and natural disaster
(PROVIDED that the Contractor shall remain responsible
for all weather conditions that do not constitute
Unusually Severe Weather Conditions);
(D) Unusually Severe Weather Conditions;
(E) acts or failures to act of Governmental Authorities
(including Changes in Law);
(F) acts of third parties; and
(G) trawler or anchor damage (other than damage resulting
from or aggravated by Defective Work, including faulty
or defective installation).
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(b) EXCLUDED EVENTS. The following events are explicitly excluded
from the term Force Majeure Event and are solely the
responsibility of the Contractor:
(i) strikes, labor disputes and lockouts of any kind involving
employees of the Contractor, or of any Subcontractor or
agent;
(ii) late delivery of equipment or materials (except to the
extent caused by a Force Majeure Event);
(iii economic hardship;
(iv) default of Subcontractors (except to the extent caused by a
Force Majeure Event);
(v) events and conditions of which the Contractor is deemed
hereunder to have fully informed itself; and
(vi) all other events and acts not specifically identified in
Section 19(a) hereof as a Force Majeure Event.
19.2. MITIGATION. The Contractor shall use its best efforts to mitigate and
minimize the effects of any Force Majeure Event and to resume in full
its performance under this Contract.
19.3. NOTICE. The Contractor shall advise the Purchaser's Representative in
reasonable detail of any Force Majeure Event within fourteen (14) Days
from the date of the occurrence thereof; PROVIDED that if the
Contractor can satisfactorily demonstrate to the Purchaser that the
Contractor has been unavoidably delayed in becoming aware of the
occurrence of such Force Majeure Event, such period and the time
period set forth in Section 19.4 hereof shall commence from the date
reasonably determined by the Purchaser that the Contractor became
aware, or should have become aware, of such occurrence.
19.4. APPLICATION. If the Contractor is directly delayed in the execution of
the Work by any Force Majeure Event, the Contractor shall have the
right to apply in writing to the Purchaser's Representative within
thirty (30) Days after the occurrence of such Force Majeure Event for
an extension of the Guaranteed RFPA Date or any date set forth in the
Plan of Work, if and to the extent any such date is affected by such
Force Majeure Event. Such application shall set forth a statement of
all the facts on which the Contractor bases such an application,
including a detailed description of work-around plans, alternate
sources or any other means the Contractor will utilize to make up for
any such period of delay and to prevent any further delay to the Work.
The Contractor shall not be entitled to any increase in the Contract
Price on account of a Force Majeure Event.
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19.5. EXTENSION OF TIME. The extension of time, if any, to be allowed to the
Contractor pursuant to this Section 19 shall be set forth in a
Contract Variation duly executed and delivered in accordance with
Section 16 hereof, and shall be for such periods as the Purchaser
approves (which approval shall not be unreasonably withheld) as
necessary to remedy the effect of the Force Majeure Event, but shall
in no event limit the Purchaser's rights under this Contract,
including its rights with respect to matters arising prior to the
occurrence of the Force Majeure Event.
(a) DELAYS IN MARINE INSTALLATION DUE TO UNUSUALLY SEVERE WEATHER
CONDITIONS. In the event that, due to the occurrence of Unusually
Severe Weather Conditions, (i) marine installation is delayed
beyond the date specified therefor in the Plan of Work, or (ii)
such date is extended by the Parties in accordance with this
Section 19, then the Purchaser shall reimburse the Contractor, on
a cost-incurred basis at the Scheduled Rate that would be
applicable if such costs were incurred as part of the Work, for
any additional cableship costs incurred by the Contractor
(despite its best efforts in mitigation thereof) in completing
the marine installation under such circumstances.
19.6. LIMITATION. Unless:
(a) an event is a Force Majeure Event as provided in Section 19.1
hereof;
(b) the Contractor notifies the Purchaser thereof within the time
period provided in Section 19.3 hereof;
(c) the Contractor applies for an extension of time in respect
thereof within the time period provided in Section 19.4 hereof;
and
(d) the Purchaser approves an extension of time in respect thereof in
accordance with Section 19.5 hereof,
the Contractor shall not be entitled to, and shall not claim an
extension of time, for such event, and shall not by reason of any
delay arising from any such event be relieved in any way, or to any
extent, from its obligations to proceed with, execute and complete
the Work within the time fixed by this Contract.
SECTION 20. PROJECT MANAGER AND THE PURCHASER'S REPRESENTATIVE
20.1. PROJECT MANAGER. The Contractor shall designate in writing a project
manager (the "PROJECT MANAGER") to be responsible for the coordination
and monitoring of the Work on the Contractor's behalf, and shall
provide the Purchaser with a summary of such Project Manager's
background and relevant experience. The Project Manager shall act as
the principal point of contact between the Contractor and the
Purchaser, and shall have authority to act and make decisions on
behalf of, and be authorized to bind by contract or otherwise, the
Contractor. If the Project Manager shall resign or at any time be
unable to act, the Contractor shall immediately designate a successor
by notice to the Purchaser.
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20.2. THE PURCHASER'S REPRESENTATIVE. The Purchaser shall designate in
writing a system manager (the "PURCHASER'S REPRESENTATIVE") to be
responsible for coordination and monitoring of the Work on the
Purchaser's behalf. The Purchaser's Representative shall provide the
interface with the Contractor on all technical and contractual matters
pertaining hereto, and shall have authority to act and make decisions
on behalf of, and be authorized to bind by contract or otherwise, the
Purchaser. The Purchaser's Representative shall from time to time
authorize in writing Persons to carry out specific tasks on the
Purchaser's behalf. The Purchase has authorized Bechtel International
Inc. or an affiliate ("Bechtel") to act as a Purchaser's Inspector
hereunder.
SECTION 21. INSPECTION RIGHTS
21.1. GENERALLY. The Purchaser and its designees shall at all times have
access to the Work and Supplies. The Contractor shall provide
appropriate facilities, as described in the Technical Specification,
for such access and for the purpose of inspection and testing in
accordance with the provisions of the Technical Requirements. The
Purchaser and its designees shall be allowed reasonable access to all
plants, offices and Sites of the Contractor and its Subcontractors to
enable it to inspect the Work and Supplies and to monitor progress.
The Purchaser and its designees shall have the right to establish
resident representative(s) at the Contractor's and its Subcontractors'
plants and at all Sites, and the Contractor and its Subcontractors
shall, at the Purchaser's or its designee's request, make suitable
office space, facilities and shipboard accommodation available for
such representative(s) at the Contractor's expense. The Contractor
shall include in all of its Subcontracts such provisions as may be
necessary to secure such rights on behalf of the Purchaser or its
designees. The Purchaser's and its designee's inspection activities
may include:
(a) an audit of the Contractor's and its Subcontractors' quality
control system and practices and their application to the Work
and Supplies, including to the design, manufacture,
transportation, installation and testing of all Supplies,
materials and components; and
(b) inspection of all parts of the Supplies and Work to ensure
compliance with the Technical Requirements.
21.2. COVERED WORK. If any portion of the Work should be covered contrary to
the request of or to requirements specifically expressed in this
Contract, such Work must, if required in writing by the Purchaser or
its designee, be uncovered for its observation and replaced, at the
Contractor's expense. If any other portion of the Work is covered and
the Purchaser or its designee had not specifically requested the
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opportunity to inspect such Work prior to it being covered and it was
not covered contrary to requirements specifically expressed in this
Contract, the Purchaser or its designee may request the opportunity to
inspect such Work and it shall be uncovered by the Contractor. If such
Work is found to be in accordance with this Contract, the cost of
uncovering and recovering shall, by a Contract Variation made in
accordance with Section 16, be charged to the Purchaser. If such Work
is found not to be in accordance with this Contract, the Contractor
shall pay all costs of uncovering and recovering.
21.3. NO RELIEF. No inspection, audit or approval by or on behalf of the
Purchaser or its designee in respect of any aspect of the Work or any
Supply shall relieve the Contractor of any of its responsibilities
under this Contract.
SECTION 22. DEFECTIVE WORK
If at any time before the Provisional Acceptance Date, the Purchaser
states that, in accordance with the Technical Requirements, any of the
Contractor's Work contains Defects, or is otherwise not in accordance
with this Contract, the Purchaser or its designee may reject such Work
or Supplies, and the Purchaser shall have no liability with respect to
payment therefor, notwithstanding that:
(a) satisfaction may previously have been expressed;
(b) title to such Work or Supplies may have passed to the Purchaser
in accordance with Section 37 hereof;
(c) such Work or Supplies may previously have been accepted; or
(d) payment may have been made in respect of such Work or Supplies,
and the Contractor shall promptly replace, at its own cost and
expense, the Defective Work or inferior Supplies to the satisfaction
of the Purchaser. If, however, the Work was not Defective Work, the
Contractor shall be reimbursed for its reasonable costs of
replacement.
SECTION 23. SUSPENSION OF WORK BY THE PURCHASER
23.1. GENERALLY. Should the Purchaser desire, in its sole discretion, to
suspend the whole or any part of the Work or suspend for a further
period Work already suspended pursuant to this Section 23, the
Purchaser shall notify the Contractor, indicating the period of the
proposed suspension or further suspension. If the Contractor believes
that such suspension will result in additional costs or delay for the
Contractor, the Contractor shall, within fourteen (14) Days after such
notice, furnish an itemized statement of such estimated costs and
estimated delays to the Purchaser's Representative. Upon receipt of
such itemized statement (or if no such statement is received within
the stipulated fourteen 14-Day period), the Purchaser's Representative
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shall either confirm or cancel the proposal to suspend or further
suspend the Work or further question the Contractor on the basis of
such itemized statement. Promptly after the Parties agree on the
amount of such costs or any extension of time, they shall execute a
Contract Variation in respect thereof in accordance with Section 16
hereof.
(a) LIMITATION ON THE PURCHASER'S RIGHT TO SUSPEND WORK. In the event
that the Purchaser shall, pursuant to this Section 23.1, suspend
the Work in its entirety for (i) a period of six (6) consecutive
months, or (ii) periods totaling twelve (12) months, such
suspension shall, upon the expiry of such 6- or 12-month period,
as applicable, constitute a Termination for Convenience for all
purposes hereof.
23.2. THE CONTRACTOR'S DUTIES UPON SUSPENSION. During any such suspension,
the Contractor shall:
(a) cease performance of the Work and place no further orders or
Subcontracts relating to the suspended Work;
(b) protect and care for all Work, Supplies and materials, in transit
to or from the System or at storage areas for which it is
responsible; and
(c) give the Purchaser copies of all outstanding orders and contracts
for Supplies, materials and services and take any action with
respect to such orders and contracts as the Purchaser may direct.
23.3. THE CONTRACTOR'S DUTIES AFTER SUSPENSION. Upon the cessation of such
suspension, the Contractor shall resume performance of the Work within
a reasonable period after being directed to do so by the Purchaser.
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SECTION 24. TERMINATION FOR CONVENIENCE
24.1. TERMINATION. The Purchaser may, upon written notice (a "NOTICE OF
TERMINATION FOR CONVENIENCE") to the Contractor at any time, terminate
this Contract or otherwise terminate the Contractor's employment
hereunder as to either the whole or part of the Work (a "TERMINATION
FOR CONVENIENCE"). A Termination for Convenience shall not nullify
this Contract but shall operate to terminate the Contractor's right to
proceed with the Work and to discharge the Purchaser from its
obligations under this Contract, except for the Purchaser's obligation
to pay the Termination Payment (Convenience). A Termination for
Convenience shall not relieve the Contractor from liability under
applicable Law for damages for any failure or omission to perform any
portion of this Contract prior to such termination or prejudice any
legal rights of the Purchaser or the Contractor, whether those rights
arise under this Contract or otherwise.
24.2. TERMINATION DATE. A Termination for Convenience shall be effective,
and this Contract shall be terminated, when the Notice of Termination
for Convenience is delivered to the Contractor.
24.3. TERMINATION PAYMENT (CONVENIENCE).
(a) AMOUNT.
(i) FORMULA. In the case of a Termination for Convenience, the
Purchaser shall make a payment to the Contractor (the
"TERMINATION PAYMENT (CONVENIENCE)") to reimburse it as
follows:
(A) the Scheduled Rate for completed items of Work,
including Supplies manufactured by or purchased from
any Subcontractor in respect of this Contract; and
(B) in the case of incomplete Work, an amount (the "COST
FOR INCOMPLETE WORK") equal to the total costs and
expenses incurred for each category of Work identified
on the Provisioning Schedule, with the addition of the
individual category's gross margin to the cost
category.
Costs for which the Contractor has, despite its best
efforts in mitigation thereof, become legally liable
shall be considered incurred for purposes of this
Section 24.3.
(ii) LIMITATION. Notwithstanding the preceding clause (i), the
Termination Payment (Convenience), taken together with all
other payments made to the Contractor under this Contract,
shall not exceed the sum of:
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(A) the portion of the Contract Price applicable to the
portion of the Work that has been completed in
accordance with this Contract; plus (without
duplication)
(B) the Cost for Incomplete Work.
(b) TERMINATION CLAIM. The Contractor shall submit to the
Purchaser a written termination claim (the "TERMINATION
CLAIM"). The Termination Claim shall set forth a calculation
of the Termination Payment (Convenience) and all other
relevant facts, and shall contain supporting documentation
in respect thereof. The Termination Claim shall be submitted
promptly, but in no event later than six (6) months from the
effective date of termination of this Contract.
(c) REVIEW PERIOD. Within ninety (90) Days after its receipt of
the Termination Claim (the "TERMINATION CLAIM REVIEW
PERIOD"), the Purchaser shall convey any objections or
requests for additional information it may have with respect
to the determination of the Termination Payment
(Convenience). The Contractor shall provide such information
to the Purchaser as soon as practicable. If the Purchaser
objects to any portion of the Termination Claim, it shall
notify the Contractor in writing, not later than the end of
the Termination Claim Review Period, of each item it
believes requires adjustment and, for not more than thirty
(30) Days thereafter, the Parties shall attempt in good
faith to resolve any differences.
(d) ACCOUNTING FIRM. If the Parties are unable to so resolve
such differences within such time period, they shall, within
ten (10) Days, jointly submit the items in dispute to a "Big
Four" accounting firm mutually agreed upon by the Contractor
and the Purchaser for resolution on an expedited basis with
a request for a written report thereon to be submitted
within thirty (30) Days from such submittal. If the Parties
cannot agree on the determination of the accountant for the
purposes hereof, the accountant shall be a "Big Four"
accounting firm designated by the mutual agreement of a "Big
Four" accounting firm designated by the Purchaser and a "Big
Four" accounting firm designated by the Contractor.
Adjustments to the Termination Claim by the accountant, if
any, shall be:
(i) made in accordance with the criteria set forth in this
Section 24.3;
(ii) set forth in its written report; and
(iii) final and binding on the Parties in the absence of
manifest error.
Judgment may be entered thereon in a court of competent
jurisdiction. The accountant shall have no authority to
change or alter the terms and conditions of this Contract.
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Such determination by the accountant shall not relieve
either Party from liability under applicable Law for damages
for breach of contract or prejudice any legal right of the
Parties, whether those rights arise under this Contract or
otherwise. The Contractor shall provide the accountant with
access, under confidentiality conditions, to all books of
account and records of the Contractor that relate to the
System and are relevant to the determination of the
Termination Claim, based on the criteria set forth in this
Section 24.3. The accountant shall not be permitted to
disclose to the Purchaser the underlying cost information.
The fees and expenses incurred in connection with any review
by the accountant pursuant to this Section 24.3(d) shall be
borne one-half by the Purchaser and one-half by the
Contractor.
SECTION 25. EVENTS OF DEFAULT AND REMEDIES
25.1. EVENTS OF DEFAULT AND REMEDIES. If at any time (any of the following,
an "Event of Default"):
(a) the Contractor fails to carry out engineering, fabrication,
supply, delivery, installation and testing the Supplies and the
Work at the rate of progress required by the Plan of Work and in
accordance with this Contract that is likely to result in a
material breach of this Contract; or
(b) the Contractor fails to make any payment hereunder when due; or
(c) the Contractor commits any material breach of, or fails in any
material respect to comply with and observe, any provision of
this Contract; or
(d) the Contractor abandons the Work for a period in excess of ten
(10) Days, or intimates without lawful cause or justification
that the Work will not or cannot be completed; or
(e) the Contractor shall make a general assignment for the benefit of
creditors, or any proceeding shall be instituted by the
Contractor seeking to adjudicate it a bankrupt or insolvent, or
seeking liquidation, winding up, reorganization, arrangement,
adjustment, protection, relief or composition of the Contractor
or its debts under Law relating to bankruptcy, insolvency or
reorganization or relief or the appointment of a receiver,
trustee or other similar official for the Contractor or for any
substantial part of its property or the Contractor shall take any
corporate action to authorize any of the actions set forth above
in this Section 25.1(e); or
(f) an involuntary petition shall be filed or an action or proceeding
otherwise commenced against the Contractor seeking
reorganization, arrangement or readjustment of the Contractor's
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debts or for any other relief under any bankruptcy or insolvency
act or Law, now or hereafter existing and remain undismissed or
unvacated for a period of thirty (30) Days; or
(g) a receiver, assignee, liquidator, trustee or similar officer for
the Contractor or for all or any part of its property shall be
appointed involuntarily; or
(h) the Contractor shall file a certificate of dissolution under
applicable Law or shall be liquidated, dissolved or wound up or
shall commence or have commenced against it any action or
proceeding for dissolution, winding up or liquidation, or shall
take any corporate action in furtherance thereof; or
(i) the Contractor either:
(i) fails to make prompt payment of any undisputed invoice due
to any Subcontractor or otherwise for materials or labor; or
(ii) repudiates or is in default with respect to any of its
obligations to a Subcontractor; or
(j) the Contractor fails, after being notified thereof by the
Purchaser, to promptly correct any Defective Work during
performance of the Work or within the relevant Warranty Period;
or
(k) any representation or warranty made by the Contractor herein or
in any certificate, financial statement or other document
furnished to the Purchaser by or on behalf of the Contractor
shall prove to be false or misleading in any material respect as
of the time made, confirmed or furnished;
then, upon the occurrence of any Event of Default referred to in
paragraph (a), (c), (j) or (k) of this Section 25.1, the Purchaser
may, by notice in writing, advise the Contractor of such Event of
Default and the Contractor shall have fifteen (15) Days to correct
such Event of Default to the satisfaction of the Purchaser PROVIDED,
HOWEVER, that, if such Event of Default can not be cured in such
15-Day period through the diligent efforts of Contractor, but can be
cured in a longer period without there occurring any failure to meet
the Plan of Work, the Contractor shall have an additional period, not
to exceed 45 Days so long as it shall commence the cure during such
15-Day period and diligently pursue such cure. If the Contractor fails
to correct any such Event of Default to the satisfaction of the
Purchaser within such 15-Day period (or subject to the conditions set
forth in the previous sentence, such longer period), or, upon the
occurrence of any other Event of Default, then the Purchaser may, upon
written notice (a "NOTICE OF EXERCISE OF REMEDIES") to the Contractor,
exercise any or all of the following rights and remedies:
(A) suspend payment under this Contract in whole or in
part;
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(B) take the Work wholly or partly out of the control of
the Contractor or any other Person in whose control or
possession the Work or any part of it may be, and cause
to be completed the same in accordance with Section 26
hereof (a "TAKE OVER");
(C) terminate this Contract in accordance with Section 27
hereof (such event, a "TERMINATION FOR DEFAULT"; such
Notice of Exercise of Remedies, a "NOTICE OF
TERMINATION FOR DEFAULT");
(D) exercise its rights under the Contractor Bond; or
(E) apply any amount owning to the Contractor hereunder to
the payment and performance of the obligations of the
Contractor hereunder; or
(F) exercise any and all rights and remedies it may have
under law or equity, including seeking specific
performance and the recovery of damages.
The foregoing remedies are cumulative, and the Purchaser may elect one
or more thereof without prejudice to any other right or remedy the
Purchaser may have.
25.2. NO PREJUDICE. No action taken by the Purchaser under this Section 25
shall prejudice any right of the Purchaser under Section 14 hereof.
SECTION 26. TAKE OVER AND PAYMENTS TO THE PURCHASER
26.1. REPLACEMENT CONTRACTORS. If the Purchaser elects a Take Over, the
Purchaser may contract with and employ any Person or Persons (each, a
"REPLACEMENT CONTRACTOR") to further execute and complete the Work or
any portion thereof, and each Replacement Contractor may provide such
Supplies and labor as may be necessary to enable that completion.
26.2. NO RIGHT OF COMPENSATION. If the Purchaser elects a Take Over (whether
or not through a Replacement Contractor), the Contractor shall have no
right to any compensation arising from such action and the Purchaser
may pay each Replacement Contractor such amounts of money as may be
agreed upon between such Replacement Contractor and the Purchaser.
26.3. PAYMENTS TO THE PURCHASER. If the Purchaser elects a Take Over, the
Contractor shall, without prejudice to any other rights or remedies of
the Purchaser hereunder or under applicable Law with respect to the
Event of Default (including Delay Damages and recourse to the
Contractor Bond), be liable to the Purchaser as direct damages for an
amount equal to:
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(a) all costs (including the costs of redoing any portion of the Work
not reasonably usable in the completion of the System) so
incurred by the Purchaser; PLUS
(b) the amounts already paid or payable to the Contractor in respect
of completed Work accepted by the Purchaser as of the date on
which the Notice of Exercise of Remedies is given by the
Purchaser, which amounts the Contractor shall be entitled to
retain or receive, as applicable; PLUS
(c) the amounts paid to the Contractor and not refunded to the
Purchaser as required pursuant to this Section 26.3; MINUS
(d) the total amount paid to the Purchaser under the Contractor Bond;
MINUS
(e) the Initial Contract Price.
The Contractor shall refund to the Purchaser all amounts paid to the
Contractor for Work not reasonably usable in the completion of the
System within fifteen (15) Days after written notice that such Work
has been rejected by the Purchaser.
SECTION 27. TERMINATION FOR DEFAULT
27.1. EFFECT OF TERMINATION. A Termination for Default shall not nullify
this Contract but shall operate to terminate the Contractor's right to
proceed with the Work and to discharge the Purchaser from its
obligations under this Contract. A Termination for Default shall not
relieve the Contractor from liability under applicable Law for damages
for any failure or omission to perform any portion of this Contract
prior to such termination or prejudice any legal rights of the
Purchaser or Contractor, whether those rights arise under this
Contract or otherwise.
27.2. TERMINATION DATE. A Termination for Default shall be effective, and
this Contract shall be terminated, when the Notice of Termination for
Default is served upon the Contractor.
27.3. RIGHT TO TERMINATE. The Purchaser may exercise its right to terminate
this Contract whether or not any of the Work remains to be executed or
whether or not the time limit for completion of the Work has expired.
27.4. RIGHT TO COMPLETE THE WORK. On termination of this Contract upon an
Event of Default, the Purchaser shall be empowered to complete the
Work in the same manner as provided for under Section 26 hereof, as if
the Work had been taken wholly out of the control of the Contractor by
the Purchaser and this Contract had not been terminated.
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SECTION 28. DUTIES UPON TERMINATION
28.1. GENERALLY. Upon receipt of a Notice of Termination for Convenience or
a Notice of Termination for Default (each, a "NOTICE OF TERMINATION"),
unless otherwise directed by the Purchaser in such notice, the
Contractor shall:
(a) stop work under this Contract on the date and to the extent
specified in the Notice of Termination;
(b) place no further orders or contracts for materials, services or
facilities except as may be necessary for completion of the
portion of the Work, if any, under this Contract that is not
terminated;
(c) unless otherwise directed by the Purchaser, use reasonable
efforts to terminate all orders and contracts and Subcontracts
(other than Subcontracts assigned to the Purchaser in accordance
with clause (d) below) to the extent that they relate to the
performance of Work terminated by the Notice of Termination;
(d) assign to the Purchaser (or at the Purchaser's direction, any
Replacement Contractor), in the manner, at the time and to the
extent directed by the Purchaser, all of the Contractor's right,
title and interest under such orders, contracts and Subcontracts,
whether or not terminated;
(e) use reasonable efforts to settle all outstanding liabilities and
all claims arising out of such termination of orders and
contracts, with the Purchaser's approval or ratification to the
extent the Purchaser so requires;
(f) relinquish title as provided for in Section 37 hereof and deliver
the following to the Purchaser in the manner, at the time, at the
place and to the extent (if any) directed by the Purchaser:
(i) the fabricated or unfabricated parts, Work in process,
completed Work, Supplies and all other items commenced,
partly executed, produced or completed as part of, or
acquired in connection with, the performance of the Work
terminated by the Notice of Termination; and
(ii) the completed or partially completed plans, drawings,
information, Permits and other property that, if this
Contract had not been terminated, would have been required
to be furnished to the Purchaser;
(g) in the case of any property referred to in Section 28.1(f)
hereof:
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(i) use its best efforts in the case of an Event of Default or
reasonable efforts in the case of a Termination for
Convenience to use such property in the manufacture of other
projects that the Contractor has, or will have, under
contract for other customers; the Scheduled Rate thereof
shall be deducted from the Termination Payment (Convenience)
or paid in such other manner as the Purchaser may direct;
and
(ii) use reasonable efforts to sell, in the manner, at the times,
to the extent and at the price or prices directed or
authorized by the Purchaser; the proceeds of any such sale
shall be deducted from the Termination Payment (Convenience)
or paid in such other manner as the Purchaser may direct;
(h) complete performance of such part of the Work as may not have
been terminated by the Notice of Termination;
(i) take such action as may be necessary, or which the Purchaser may
direct, for the protection and preservation of the property
related to this Contract that is in the Contractor's possession
and in which the Purchaser has or may acquire an interest;
(j) grant to the Purchaser, any Replacement Contractor and each
Subcontractor at the Contractor's expense, the right to continue
to use any and all patented or proprietary information that the
Purchaser deems necessary to complete the System, subject to
reasonable proprietary restrictions; and
(k) at the Purchaser's request and at the Contractor's expense:
(i) For Default supply any proprietary components needed for the
completion and operation of the System;
(ii) assist the Purchaser in preparing an inventory of all
equipment in use or in storage;
(iii)assign to the Purchaser or to any Replacement Contractor
and make available all issued Permits then held by the
Contractor pertaining to the System; and
(iv) remove all such equipment, waste and rubbish as the
Purchaser may designate.
28.2. SUBCONTRACTOR CLAIMS. For a Notice of Termination for Default,
notwithstanding Section 21(e), the Purchaser shall not be liable to
the Contractor with respect to any claim that any Subcontractor may
make arising out of any termination of this Contract.
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28.3. FUNDS HELD BY THE PURCHASER. Without prejudice to Section 14 hereof,
for a Notice of Termination for Default:
(a) all sums of money that may remain in the hands of the Purchaser
with respect to this Contract;
(b) all funds made available under the Contractor Bond or any other
security retained for the due fulfillment of this Contract; and
(c) all sums named in this Contract as Delay Damages that may be due
to the Purchaser,
at the election of the Purchaser may be withheld pending the final
determination of the rights and obligations of the Parties under this
Contract.
SECTION 29. LIMITATION OF LIABILITY
29.1. NO CONSEQUENTIAL DAMAGES. The Contractor shall not be liable, whether
at contract, at law, in tort or otherwise, for any indirect or
consequential losses or any loss of income or profit, loss of
opportunity to do business or the costs of, or associated with, the
use of restoration facilities; PROVIDED that the foregoing shall not
in any way limit the Contractor's liability for Delay Damages.
29.2. OTHER LIMITATIONS. The Contractor's maximum liability hereunder shall
be:
(a) For indemnity claims, there shall be no limit;
(b) For delay, the damages shall be limited to the Delay Damages as
set forth in Section 18.3 hereof; and
[REDACTED]
SECTION 30. THE CONTRACTOR'S ON-SITE DUTIES
30.1. REASONABLE PRECAUTIONS. The Contractor acknowledges that, until such
time as title to the System has passed in its entirety to the
Purchaser, it shall remain solely responsible for the institution and
maintenance of all such usual and reasonable precautions for the
protection of the Sites, the System and any Work, and for the
prevention of danger or damage to all persons or property on or near
the Sites. Without limiting the generality of the foregoing, the
Contractor shall, at its own expense, ensure that each Site is
constructed, secured, illuminated and maintained in such manner as
would a reasonably prudent owner of a facility analogous to such Site.
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30.2. WASTE DISPOSAL. The Contractor shall, at its own expense, manage and
dispose of all waste materials in strict accordance with applicable
Laws and Codes and Standards, and shall keep each Site free from
debris and waste resulting from the performance of the Work and the
presence of the Contractor Persons at such Site. In the event that any
Contractor Person shall discover the presence of, or cause the
discharge of, any material of a hazardous nature on or from any Site,
the Contractor shall immediately notify the Purchaser, and shall
instruct all Contractor Persons to desist immediately from the Work
until further instruction from the Purchaser.
SECTION 31. PERFORMANCE TESTS
31.1. GENERALLY.
(a) THE CONTRACTOR'S OBLIGATION TO CONDUCT PERFORMANCE TESTS. The
Contractor shall, at its own cost and expense, conduct and repeat as
necessary the Performance Tests as required hereunder in connection
with Provisional Acceptance (and, as applicable, Commercial
Acceptance) and Final Acceptance, in accordance with the Technical
Specification.
(b) SAFETY. If during any Performance Test, it is discovered that testing
cannot be conducted in a safe manner in accordance with industry
practice, such Performance Test shall be terminated and the Contractor
shall remedy the unsafe condition, whereupon such Performance Test
shall start over.
31.2. RIGHT OF WAIVER. The Purchaser may, but shall have no obligation to,
waive, defer or reduce any of the requirements relating to the
achievement of Provisional Acceptance or Final Acceptance at any time
by written notice to the Contractor; PROVIDED that the Purchaser's
exercise of any rights hereunder shall apply only to such requirements
as the Purchaser may specify and shall in no event relieve the
Contractor of any requirements, liability or other obligations not so
specified.
31.3. LONG-TERM OBLIGATIONS. Nothing in this Section 31, including the
Purchaser's approvals, nor the issuance of a Certificate of Commercial
Acceptance or a Certificate of Provisional Acceptance, shall in any
way modify or alter the Contractor's obligations with respect to
Warranties hereunder. Neither the inspection, approval or payment,
including the Final Payment, under this Contract shall:
(a) be construed to be an acceptance of any Defective Work;
(b) be an admission of the Contractor's satisfactory performance of
the Work; or
(c) relieve the Contractor of any of its obligations under this
Contract.
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31.4. OPERATING REVENUES. Any and all revenues generated by the operation of
the System shall be solely for the account of the Purchaser.
SECTION 32. SYSTEM ACCEPTANCE
32.1. INITIAL SYSTEM COMMISSIONING REPORT. The Contractor shall submit to
the Purchaser the Initial System Commissioning Report with respect to
the System in accordance with the Technical Specification. Within
thirty (30) Days after its receipt of the relevant Initial System
Commissioning Report, the Purchaser shall:
(a) issue a Certificate of Provisional Acceptance in accordance with
Section 32.2 hereof; or
(b) issue a Certificate of Commercial Acceptance in accordance with
Section 32.3 hereof; or
(c) not accept the System in its existing condition and the terms and
provisions of Section 32.4 hereof shall apply.
32.2. PROVISIONAL ACCEPTANCE.
(a) GENERALLY. When, in respect of the System, the Purchaser is
reasonably satisfied:
(i) with the Initial System Commissioning Report;
(ii) that the System has been completed in accordance with the
Technical Requirements and any other requirements of this
Contract;
(iii) that the System has achieved all requirements contained in
the Technical Specifications, as of the RFPA Date, during
the Performance Tests;
(iv) that the System is available for full commercial operation;
and
(v) that all requirements of this Contract relating to the
System (including all Technical Requirements) have been
fulfilled and all required documentation has been
completed, in each case other than those that do not, by
the express terms hereof, have to be fulfilled or completed
on or prior to the RFPA Date,
the Purchaser shall issue a "CERTIFICATE OF PROVISIONAL
ACCEPTANCE" in accordance with the Technical Specification
dated the same day as the Initial System Commissioning
Report or bearing the date (the "RFPA Date") on which the
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above conditions for the System to be provisionally accepted
were actually met. The following shall occur on the RFPA
Date:
(A) the System shall be deemed to be provisionally accepted
by the Purchaser; and
(B) title to any part of the System that has not previously
passed and the risks thereof and responsibility for
routine maintenance shall, subject to Section 32.2(b)
hereof, vest in the Purchaser.
(b) PUNCH LIST. The Certificate of Provisional Acceptance may, in the
Purchaser's sole discretion, be unqualified or may have annexed
to it a Punch List, which shall be compiled by the Purchaser, of
any outstanding minor deficiencies or items to be completed by
the Contractor. The Contractor shall, as soon as practicable,
remedy the deficiencies and complete the Work indicated on all
such listed items so as to ensure full compliance with the
requirements of this Contract. Such corrective action shall be
taken by the Contractor at no cost to the Purchaser. The
Contractor shall continue to bear the risk with respect to these
items, as long as any such items are outstanding, notwithstanding
that title shall have passed to the Purchaser.
32.3. COMMERCIAL ACCEPTANCE.
(a) GENERALLY. If the Purchaser does not issue a Certificate of
Provisional Acceptance because the System contains Defects that
would prevent the full commercial operation of the System, but
nevertheless the Purchaser has determined that the System or any
part thereof is suitable to be put into commercial service (the
System or such part, the "RFCS PORTION") and desires to put the
RFCS Portion into commercial service, then the Purchaser shall
issue, with the consent of the Contractor (which consent shall
not be unreasonably withheld or delayed), to the Contractor a
"CERTIFICATE OF COMMERCIAL ACCEPTANCE." On the date that such
Certificate is issued:
(i) the Purchaser shall be entitled to commence commercial
service over the RFCS Portion;
(ii) title to the RFCS Portion that has not previously passed,
and the responsibility for routine maintenance thereof,
shall be vested in the Purchaser; and
(iii) the risk for the RFCS Portion shall be vested in the
Purchaser, except that any risk attributable to the System
or part of the System that requires corrective action by
the Contractor shall remain the sole responsibility of the
Contractor.
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(b) PUNCH LIST. The Certificate of Commercial Acceptance shall have
as an attachment a list of items requiring corrective action and
items still to be provided. Such corrective action shall be taken
promptly and such items completed by the Contractor at no cost to
the Purchaser. When:
(i) the outstanding corrective action has been taken;
(ii) all outstanding items have been delivered and approved; and
(iii) the conditions described in Section 32.2 hereof have been
satisfied,
the Purchaser shall issue a Certificate of Provisional
Acceptance. Upon such issuance, title and risk to the remainder
of the System shall pass to the Purchaser and the provisions of
Section 32.2(b) shall apply.
(c) NO RELIEF. The issuance of a Certificate of Commercial Acceptance
shall in no way relieve the Contractor from its obligation to
provide a System complying with the technical and other
requirements of this Contract and, in particular, any
deterioration or Defects in the System occurring or becoming
known between the date of issuance of such Certificate and the
date of issuance of a Certificate of Provisional Acceptance shall
be corrected at the sole expense of the Contractor.
32.4. FAILURE TO ACHIEVE PROVISIONAL OR COMMERCIAL ACCEPTANCE. If neither a
Certificate of Provisional Acceptance nor a Certificate of Commercial
Acceptance is issued due to the existence of Defects with respect to
the System or the Work, the Purchaser shall, without prejudice to any
of its other rights and remedies under this Contract, issue a list
detailing such Defects and advise the Contractor of a period of time
in which such Defects shall be remedied to the satisfaction of the
Purchaser. The Contractor shall issue an additional commissioning
report similar in form and substance to the Initial System
Commissioning Report to the Purchaser after all actions required to
remedy such Defects have been taken by the Contractor and such report
shall be considered in accordance with the provisions of Section 32.1
hereof.
32.5. FINAL ACCEPTANCE. The Purchaser shall issue to the Contractor a
"CERTIFICATE OF FINAL ACCEPTANCE" in respect of the System within ten
(10) Days after the date on which all of the following conditions
have, in the Purchaser's judgment, been satisfied in full:
(a) the Purchaser has issued a Certificate of Provisional Acceptance;
(b) during the period since the RFPA Date:
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(i) the System has continuously performed in accordance with
the Technical Requirements, including the Technical
Specification;
(ii) there has been no component failure; and
(iii) the Contractor fully discharged all of its obligations
comprising the Work on the System;
(c) the Warranty Period applicable to each component of the System
has expired and there are no Warranty claims outstanding with
respect thereto;
(d) any and all items on all Punch Lists relating to the System have
been completed;
(e) the Purchaser has received the Certificate of Payment and Final
Release;
(f) the System has achieved during the Final Acceptance Test and
conforms with the specifications set forth in the Technical
Specifications, including the Design Life Performance Standards,
as of the Final Acceptance Date; and
(g) the Purchaser has received such other documentation as the
Purchaser or any Financing Party may have reasonably requested to
establish the Contractor's satisfaction in full of its
obligations relating to the System.
SECTION 33. WARRANTIES
33.1. GENERAL WARRANTIES.
(a) WARRANTIES. Notwithstanding the System having been provisionally
accepted by the Purchaser and without prejudice to any other
warranty made by the Contractor hereunder, the Contractor
warrants until the expiration of the Warrant Period to the
Purchaser that the System shall (each of the following, a
"GENERAL WARRANTY"):
(i) be free from Defects in design, materials, construction and
workmanship;
(ii) not develop any pattern of failure or degradation that
would be likely to cause the System to fail to meet the
Design Life Performance Standards;
(iii) be fit for the particular use described in the Technical
Specification; and
(iv) meet the Technical Specifications and all other
requirements of this Contract.
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(b) REPAIR GENERALLY. If at any time within any applicable Warranty
Period any Defect occurs in the System as a result of a failure
of a Warranty,
(i) and such Defect causes the System to fail to meet the
Technical Specifications, the Contractor shall promptly
repair or replace such part or parts thereof to the
satisfaction of the Purchaser without any charge to the
Purchaser; or
(ii) while the System is meeting the Technical Specifications,
the Contractor shall, at the direction of the Purchaser,
either:
(A) replace any Defective Work immediately; or
[REDACTED]
PROVIDED that the Contractor shall not be responsible for
any cost or expense relating to any repair cableship
necessary for installation, de-installation or otherwise
required to effect repairs of any Defect occurring after the
first two (2) years of the applicable Warranty Period. The
Contractor shall make every reasonable effort to minimize
the period of time to repair or replace any faulty unit or
equipment and to deliver such unit or equipment, as repaired
or replaced, to the Purchaser.
(c) REPLACEMENT ONLY. If during any applicable Warranty Period:
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(i) based on analysis pursuant to Section 33.1(g) hereof,
related or substantially similar defects are found on
repeated occasions in any part of the System; or
(ii) any other pattern of failure or pattern of degradation is
likely to cause any part of the System to fail to meet the
Design Life Performance Guarantees over the System Design
Life,
then, in either case, at the request of the Purchaser, each such
part shall not be repaired but shall be replaced by a new part.
(d) OUT OF SERVICE. The Contractor shall make every reasonable effort
to minimize the period of time that the System is out of service
for repair and testing. For failures or any situations that cause
or risk an outage of the System, the Contractor shall initiate a
corrective intervention immediately after receipt of notice from
the Purchaser.
(e) REPAIR BY THE PURCHASER. Upon any breach of any General Warranty
of the Contractor occurring during the applicable Warranty
Period, the Purchaser may, to the extent that the Contractor has
failed to (i) make prompt repair or replacement, or (ii) minimize
System out-of-service time for testing and repair, arrange for
the repair or replacement of any Defective Work and the
Contractor shall reimburse the Purchaser for the cost of repairs
or replacements, including the cost of chartering cableships,
remotely operated vehicles and other repair equipment; provided
that the Contractor shall not be responsible for any cost or
expense relating to any repair cableship or equipment necessary
for installation, de-installation or otherwise required to effect
repairs of Defects occurring after the first two (2) years of the
applicable Warranty Period. The Purchaser agrees to (i) give the
Contractor prompt notice of any such repair undertaking, (ii)
coordinate its repair activities with those of the Contractor,
and (iii) comply with the Contractor's repair policies delivered
to the Purchaser, and the Contractor shall be permitted to have a
representative on board to observe at-sea repairs to the extent
accommodation is available and the repair ship's sailing or the
repair will not be delayed. The Contractor shall, at the
Purchaser's option, also repair or replace any such recovered
defective part or parts and return the same to the cable depot
nominated by the Purchaser at the Contractor's expense in lieu of
reimbursement for the use of the Purchaser's spares for
replacement. Any repair by the Purchaser shall not in any way
diminish the Contractor's obligations under this Section 33.
(f) REPAIRED OR REPLACEMENT PARTS. Each defective part repaired or
replaced pursuant to this Section 33 (a "REPLACEMENT ITEM") shall
itself be subject to the provisions of this Section 33 (including
this Section 33.1), and shall be warranted from the date of
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repair or replacement, as applicable, until a date five (5) years
thereafter; provided that the Warranty Period applicable to any
Replacement Item shall in no case exceed seven (7) years from the
RFPA Date.
(g) INVESTIGATION. The Contractor shall investigate, at its sole cost
and expense, any defective part or parts repaired or replaced
pursuant to this Section 33 to determine, to the reasonable
satisfaction of the Purchaser, the type of defect and the cause
of failure of the part or parts. The Contractor shall provide a
descriptive written report to the Purchaser on the results of the
investigation, the type of defect found and, when appropriate,
the repair carried out on such defective part or parts. The
Contractor shall also state whether the type of defect and the
cause of the failure are expected to occur elsewhere in the
System; PROVIDED that the Contractor's determination shall not be
conclusive for the purposes of Section 33.1(c) hereof.
(h) THE PURCHASER'S EXPENSES. The Contractor shall pay to the
Purchaser all the expenses (if any) incurred by the Purchaser in
testing or examining any part of the System for the purpose of or
in connection with this Section 33 or in or about or in
connection with the correction, replacement or repair of any part
of the System.
SECTION 34. ASSIGNMENT AND SUBCONTRACTING
34.1. GENERALLY. The Contractor shall not, without the prior written consent
of the Purchaser, assign this Contract or Subcontract any part of the
Work, or assign, mortgage, charge or encumber any of the moneys due or
becoming due under this Contract, or any other benefit or obligation
whatsoever arising, or that may arise under this Contract. The
Contractor shall not be relieved of responsibility under this Contract
for such parts of the Work as are assigned or Subcontracted. The
Subcontractors as of the date hereof are set forth on Appendix 8.
34.2. SUBCONTRACTS. The Contractor shall ensure that each Subcontract shall
contain:
(a) provisions allowing the Purchasers and its designees reasonable
access to all plants, offices and Sites in accordance with
Section 21 hereof;
(b) provisions stating that the Subcontractor shall have no rights
against the Purchaser and shall not file any Lien (equitable or
otherwise) against the Purchaser, the System or any of the Work
or Supplies; and
(c) such other provisions of this Contract as prudently should be
made applicable to such Subcontract or Subcontractor in order to
permit the Contractor to fulfill its obligations hereunder or
otherwise give full effect to the provisions of this Contract.
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34.3. EXISTING SUBCONTRACTS. The Contractor represents, warrants and
covenants that all Subcontracts entered into by the Contractor on or
prior to the date hereof contain, or shall be amended to contain,
provisions addressing the matters set forth in Section 34.2 hereof.
34.4. BREACH. If the Contractor commits any breach of this Section 34, any
assignment, mortgage, charge, encumbrance or Subcontract in
contravention of this Section 34 shall, as against the Purchaser, be
null and void and of no force and effect, and may be ignored by the
Purchaser. The Contractor shall protect, defend, indemnify and keep
indemnified the Purchaser against all Losses suffered or incurred by
the Purchaser arising out of or related to such assignment, mortgage,
charge, encumbrance or Subcontract.
34.5. SUBCONTRACTOR ASSIGNMENT. The Contractor shall make reasonable efforts
so that its Subcontracts include provisions permitting the assignment
of that Subcontract to the Purchaser upon a Termination For Default or
Take Over.
SECTION 35. THE CONTRACTOR'S PERSONNEL
The Contractor shall employ, and shall ensure that its Subcontractors
employ, for Work to be performed in connection with this Contract only
such persons who are careful, suitably skilled and experienced. The
Purchaser, or its designee, may object to and direct the Contractor to
remove any person employed by the Contractor or any Subcontractor and
such person shall be removed within a reasonable period of time and
shall not be employed again for any portion of the Work without the
prior approval of the Purchaser's Representative.
SECTION 36. THE PURCHASER'S STAFF
36.1. GENERALLY. Where the Technical Requirements provide for stipulated
Work to be carried out by the Purchaser, such Work shall be carried
out in the manner and with the responsibilities as defined therein.
Such participation by any of the Purchaser's staff (or any other
Person designated by the Purchaser by contract or otherwise) in the
Work shall not be construed as relieving the Contractor of its
responsibility for the design, quality and performance of the System.
36.2. LIMITATIONS. Where any of the Purchaser's staff (or any other Persons
designated by the Purchaser by contract or otherwise) participate in
the Work, they shall remain officers, partners, employees or agents
and under the administrative control of the Purchaser. The Contractor
shall not be liable for any negligent act or omission of such staff,
agents or designees, but if in giving instructions to be carried out
by any such Persons, or by omitting to give such instructions, the
Contractor fails to use proper skill and care, the Contractor shall be
deemed to have been negligent and shall be liable for the consequence
of such negligence.
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SECTION 37. TITLE
37.1. TITLE TO SUPPLIES. The absolute and exclusive right, title and
interest to each item of Supply intended for use in the System shall
vest in and be the absolute property of the Purchaser from the moment
that the Contractor Invoice (together with all documentation required
under Section 13.4 hereof) for the Progress Payment in respect of such
Supply is submitted to the Purchaser and such Contractor Invoice is
paid by the Purchaser subject to the Purchaser's rights under Section
13.5. The Contractor represents and warrants that the Purchaser shall
at that time acquire good and clear title to such Supply, free and
clear of all Liens. When held at any Site, such Supply shall be
identified as clearly as possible by the prominent display of notices
and by marking as being the property of the Purchaser. The Contractor
shall ensure that the relevant books of account are suitably
annotated, and shall allow the Purchaser access to the premises and
records in order to check that such identification has been carried
out.
37.2. REMOVAL OF LIENS. The Contractor shall secure the removal of any Lien
(other than Purchaser Liens) on the Work and Supplies within thirty
(30) Days after obtaining notice thereof. If any Lien (other than
Purchaser Liens) is not discharged, satisfied or released within such
30 Days or such earlier time as may be necessary in order for the
Purchaser to avoid being damaged thereby, the Purchaser may, upon
notice to the Contractor of its intention to do so, apply any funds
withheld or moneys to become due to the Contractor hereunder to
satisfy, discharge or secure the release (including by posting a bond)
of such items. Any such application by the Purchaser shall be deemed
payment to the Contractor. Any additional expense incurred by the
Purchaser as a result of the Contractor's breach of any provision of
this Section 37.2 shall be borne by the Contractor.
37.3. NO RELEASE OF THE CONTRACTOR. The transfer of title shall not absolve
or release the Contractor from its obligations and liabilities under
this Contract. The Contractor shall be deemed the bailee of such
Supplies and shall remain liable to the Purchaser therefor and shall
bear the risk of loss or damage thereto, until the risk of loss
thereof has passed to the Purchaser in accordance with Section 41
hereof.
37.4. TITLE TO THE SYSTEM. Upon:
(a) the issuance of a Certificate of Provisional Acceptance or a
Certificate of Commercial Acceptance in accordance with Section
32 hereof; or
(b) termination, in whole or in part, of this Contract or the
Contractor pursuant to Sections 24 or 27 hereof,
absolute and exclusive right, title and interest to any part of the
System that has not previously passed to the Purchaser under Section
37.1 hereof (other than Work being completed pursuant to Section
28.1(h) hereof) shall thereupon pass to the Purchaser; PROVIDED,
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HOWEVER that, with respect to a Termination For Convenience, such
title shall not pass to the Purchaser until the Termination Payment
(Convenience) has been paid. The Contractor represents and warrants
that the Purchaser shall acquire good and clear title thereto, free
and clear of all Liens.
SECTION 38. REPRESENTATIONS AND WARRANTIES
38.1. THE CONTRACTOR'S REPRESENTATIONS AND WARRANTIES. The Contractor hereby
represents and warrants that:
(a) ORGANIZATION; POWER AND AUTHORITY. It is a corporation duly
organized, validly existing and in good standing under the Laws
of France and is qualified to do business in all jurisdictions,
including the United Kingdom, the Netherlands and France, in
which the nature of the business conducted by it makes such
qualification necessary, and has all requisite legal power and
authority to execute this Contract and to perform the terms,
conditions and provisions thereof.
(b) AUTHORIZATION. The execution and delivery by the Contractor of
this Contract has been duly authorized by all requisite corporate
action.
(c) ENFORCEABILITY. This Contract constitutes the legal, valid and
binding obligation of the Contractor, enforceable in accordance
with the terms thereof except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws affecting creditors' rights generally and to
the extent that the remedies of specific performance, injunctive
relief and other forms of equitable relief are subject to
equitable defenses, the discretion of the court before which any
proceeding therefor may be brought, and the principles of equity
in general.
(d) NO CONFLICT. Neither the execution, delivery or performance by
the Contractor of this Contract, nor the consummation of the
transactions contemplated thereby, will result in:
(i) a violation of, or a conflict with, any provision of the
organizational documents of the Contractor;
(ii) a contravention or breach of, or a default under, any term
or provision of any material contract, agreement or
instrument to which the Contractor is a party or by which it
or its property may be bound, which contravention, breach or
default could be reasonably expected to have a material
adverse effect on the ability of the Contractor to perform
its obligations under this Contract to consummate the
transactions contemplated by this Contract; or
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(iii) a violation by the Contractor of any Law.
(e) NO VIOLATION OF LAW. It is not in violation of any Law
promulgated, or judgment entered, by any governmental authority,
which violations, individually or in the aggregate, would
adversely affect it or its performance of any obligations
hereunder.
(f) LITIGATION. There are no actions, suits or proceedings, now
pending or (to its best knowledge) threatened against it before
any court or administrative body or arbitral tribunal that might
materially adversely affect the ability of the Contractor or any
Subcontractor to perform its obligations hereunder.
(g) LICENSES. It will hold all national, provincial, local and other
Permits required to allow it to operate or conduct its business
now and as contemplated by this Contract.
(h) QUALIFICATIONS. It has:
(i) examined the Contract Documents thoroughly and has become
familiar with their terms;
(ii) full experience and proper qualifications to perform the
Work and to construct the System; and
(iii) ascertained the nature and location of the Work, the
character and accessibility of the System build-out, the
existence of obstacles to construction, the availability of
facilities and utilities, the location and character of
existing or adjacent work or structures and other general
and local conditions (including labor, safety and
environmental) that might affect its performance of the
Work or the Contract Price.
38.2. THE PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Purchaser hereby
represents and warrants that:
(a) ORGANIZATION; POWER AND AUTHORITY. It is a corporation duly
organized, validly existing and in good standing under the Laws
of Delaware and is qualified to do business in all jurisdictions
in which the nature of the business conducted by it makes such
qualification necessary, and has all requisite legal power and
authority to execute this Contract and to perform the terms,
conditions and provisions thereof.
(b) AUTHORIZATION. The execution and delivery by the Purchaser of
this Contract has been duly authorized by all requisite corporate
action.
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(c) ENFORCEABILITY. This Contract constitutes the legal, valid and
binding obligation of the Purchaser, enforceable in accordance
with the terms thereof except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws affecting creditors' rights generally and to
the extent that the remedies of specific performance, injunctive
relief and other forms of equitable relief are subject to
equitable defenses, the discretion of the court before which any
proceeding therefor may be brought, and the principles of equity
in general.
SECTION 39. CONSENT TO JURISDICTION
The Parties hereto agree that, without limiting the ability of either Party
to appeal an order of any such court, the United States District Court for
the Southern District of New York and state courts located in the State of
New York shall have exclusive jurisdiction to enforce the terms of this
Contract and to decide any claims or disputes that may arise or result from,
or be connected with, this Contract and any superseding agreement, any
breach or default hereunder or thereunder, or the transactions contemplated
herein or therein. Any and all claims, actions, causes of action, suits or
proceedings relating to the foregoing shall be filed and maintained only in
such courts, and the Parties hereto hereby irrevocably consent and submit to
the jurisdiction of such courts. If an action, suit or proceeding is
instituted in the United States District Court for the Southern District of
New York or a state court located in the State of New York, each Party
agrees not to assert, by way of motion, as a defense or otherwise, in any
such action, suit or proceeding, any claim that:
(a) it is not subject personally to the jurisdiction of such court;
(b) such action, suit or proceeding is brought in an inconvenient
forum;
(c) the venue of such action, suit or proceeding is improper; or
(d) this Contract and any superseding agreement or the subject matter
hereof or thereof may not be enforced in or by such court.
Any and all service of process, and any other notice in any such action,
shall be given personally or by registered or certified mail, return
receipt requested, or by any other means of mail that requires a signed
receipt, postage prepaid, mailed to such a Party as herein provided. The
Parties agree to and submit to enforcement of interim judgments issued in
any such court.
SECTION 40. INDEMNIFICATION
40.1. GENERALLY. The Contractor shall be liable for, and shall indemnify,
protect, defend and hold harmless each Purchaser Person from and
against, all Losses:
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(a) in respect of any injury to, or death or disease of, any person,
or any damage to, or loss of use of, any property or asset based
upon, arising under or otherwise related to the act, omission or
negligence of any Contractor Person in connection with the
performance of this Contract; or
(b) arising in connection with any infringement or claimed
infringement of intellectual property rights as described in
Section 12.1 hereof; or
(c) arising from any act or omission of any Contractor Person that
violates any Law; or
(d) to the extent not covered by items (a) through (c) above, in
respect of any injury to, or death or disease of, any person, or
any damage to, or loss of use of, any property as a result of the
discharge or presence of any environmentally hazardous substance,
which discharge or presence was caused in any manner by the act,
omission or negligence of any Contractor Person in connection
with the performance of this Contract; or
(e) suffered or incurred as a result of the breach of any of the
Contractor's General Warranties.
except for such Losses (i) solely due to the willful misconduct
or gross negligence of such Purchaser Person, or (ii)
representing consequential, special or indirect damages arising
from the interruption of telecommunications services provided by
the Purchaser, its contractors, representatives, agents, lessees,
customers and correspondents.
40.2. WAIVER. The Contractor shall not make any claim or demand or commence
or prosecute any proceeding against any Purchaser Person with respect
to any of the matters referred to in Section 40.1 hereof, and hereby
waives all causes of action, rights and remedies in connection
therewith.
SECTION 41. RISK OF LOSS
41.1. GENERALLY. Notwithstanding that title in whole or in part to the
Supplies or Work may have passed to the Purchaser pursuant to Section
37 hereof, the Contractor shall retain the risk of loss and remain and
be responsible to the Purchaser to make good for loss or damage to the
System or such Supplies or Work arising from any cause (other than the
negligent or willful acts or omissions of the Purchaser) whatsoever as
follows:
(a) For Supplies or Work generally (other than spare parts), from the
date hereof until (i) the RFPA Date, or (ii) the issuance of a
Certificate of Commercial Acceptance (but only to the extent that
such Supplies or Work constitute part of the RFCS Portion),
whichever is earlier, in accordance with Section 32 hereof; and
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(b) For Supplies or Work that are spare parts, from the date hereof
until such spare parts are delivered to cable depots or made
available at a port for transfer to a cable maintenance vessel,
in either case, in accordance with the Purchaser's instruction.
41.2. PAYMENTS TO THE PURCHASER. Where the Contractor has not, either in
accordance with the terms of this Contract or otherwise, without cost
or expense to the Purchaser, corrected any damage to the System or any
portion thereof with respect to which it retains the risk of loss, the
Contractor shall pay to the Purchaser compensation equal to the
expenses reasonably incurred by the Purchaser of correcting such
damage or other loss. This Section 41 is without prejudice to the
obligations of the Contractor under any other provision of this
Contract.
SECTION 42. INSURANCE
42.1. TYPES OF INSURANCE. The Contractor shall, at its own expense, provide
insurance to the reasonable satisfaction of the Purchaser until the
RFPA Date (except, in the case of property insurance on the Work, to
the extent that the Contractor no longer has the risk of loss thereof
as provided in Section 41 hereof), for all risks normally insurable
and insured in accordance with industry standards relating to the Work
or Supplies or covered in this Contract. Such insurance shall be in
the name of the Contractor and, to the extent available, shall include
the Purchaser as a joint insured or as an additional insured, as
applicable, and shall include the following:
(a) ALL RISKS PHYSICAL DAMAGE INSURANCE COVERING THE WORK AT THE
CONTRACTOR'S PREMISES. This insurance shall be written on a
replacement cost basis for the full value at risk. This coverage
may terminate when the last shipment of the completed Work is
loaded on board any vehicle or carrier for the purpose of
transportation from the Contractor's premises.
(b) CARGO AND INSTALLATION ALL RISKS ON GOODS OF THE CONTRACT. The
Contractor shall procure and maintain in force an insurance
contract written on the latest edition of the Institute Cargo
Clauses "A" (All Risks Form), modified if required to pick up the
installation exposures. This insurance is to cover the cable and
equipment from the point where the insurance required under
Section 42.1(a) hereof ceases, and to continue until the RFPA
Date. Such insurance shall include the perils of jettison, loss
overboard, due and labor. The limit of such insurance shall be
not less than the replacement value of any one shipment at any
time.
(c) WORKER'S COMPENSATION INSURANCE. From the date hereof until the
RFPA Date, the Contractor shall, at its own expense, maintain a
policy of insurance with an insurer nominated by it that shall
indemnify the Parties from and against all liability, loss, cost,
expense, claim or proceedings under any legislation relating to
workers' compensation or employers' liability or under any
applicable Law with respect to any accident or injury to, or
death of, or any liability to, workers (as designated in such
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legislation) and other persons employed by the Contractor in or
about or in connection with the Work and the performance of the
Contractor's obligations under this Contract. This insurance
shall cover all employees and servants of the Contractor for all
compensation and other benefits required by any applicable Law or
by Governmental Authority in respect of injury, death, sickness
or disease. The territorial restriction shall be amended so that
employees working at sea or in the area of operation are not
excluded.
(d) EMPLOYER'S LIABILITY INSURANCE. This insurance shall cover claims
presented by or on behalf of employees or servants of the
Contractor and related to employer's liability, whether the claim
arises under statute or maritime Law or otherwise. [REDACTED]
(e) CHARTERER'S LIABILITY. To the extent applicable hereunder, this
coverage shall cover the legal and contractual liability of the
Contractor as charterer of a vessel. The limit of liability of
this coverage shall be appropriate to the vessel chartered and
the coverage shall include any loss, damage or expense, including
demurrage, removal of wreck, collision liability or any other
consequential loss or damage resulting from an accident involving
any chartered vessel used by the Contractor in the performance of
this Contract. This insurance shall include claims for Protection
and Indemnity as well as War Protection and Indemnity, loss or
damage to any chartered vessel including claims related to
detention or delay and the consequences thereof. It should also
provide recovery for liability in respect of general average and
salvage charges as well as legal expenses and costs incurred with
underwriter's approval in defending or investigating claims.
(f) INSURANCE COVERAGE TO BE MAINTAINED BY SHIPOWNER. The Contractor
shall require the shipowner to provide and maintain in force
during the charter period the following coverage:
(i) Protection and Indemnity coverage from one of the recognized
Protection and Indemnity Associations as per Standard Rules
with an unlimited liability for general Protection and
Indemnity Risks [REDACTED] for each vessel owned or
chartered by the Contractor and used in the performance of
this Contract; and
(ii) Hull and Machinery Insurance coverage (including War Risk
coverage, as applicable) on full conditions for a limit of
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no less than the actual value of each vessel owned or
chartered by the Contractor and used in the performance of
this Contract. The territorial warranties of the policy
shall include the planned cable route.
Coverage described under clauses (i) and (ii) above shall be
extended to pick up losses and exposures of any sub-sea equipment
(sea plow, remotely-operated vehicle or the like) that the
Contractor may be using in the performance of the Work.
42.2. NOTICE OF CANCELLATION. All of the insurance coverages shall provide
that, prior to any cancellation or material change thereto initiated
by the insurers, a thirty (30) Day written notice shall be forwarded
to the Purchaser.
42.3. COPIES. At the Purchaser's request, the Contractor shall furnish the
Purchaser with certified copies of insurance policies or certificates
of insurance that provide sufficient information to verify that the
Contractor has complied with the insurance requirements under this
Contract.
42.4. FAILURE TO MAINTAIN INSURANCE. If the Contractor fails to effect or
keep in force any of the insurance required by this Section 42, the
Purchaser may, without prejudice to any other rights it may have under
this Contract, effect and keep in force any such insurance and pay the
premium due or take out new insurance satisfactory to the Purchaser,
in which event any amounts so paid by the Purchaser shall become
immediately due and payable by the Contractor to the Purchaser. Should
the Contractor fail to make any payment to the Purchaser upon its
request therefor, the Purchaser may deduct the amount of such payment
from any payment that is, or may become, due to the Contractor.
42.5. COMPLIANCE WITH POLICIES. The Contractor shall comply with all terms,
conditions and guaranties contained in all policies relating to the
insurance required by this Section 42 and shall provide to the
Purchaser copies of certificates of insurance, and all other evidence,
including information from insurance brokers and insurers, that the
Purchaser may reasonably request to demonstrate compliance with the
terms of this Article 42.
42.6. CLAIM INFORMATION. The Contractor shall notify the insurers promptly
and shall supply all necessary information concerning any occurrence
that may give rise to a claim under the above insurance policies in
order to expedite the processing of the claim.
42.7. REMEDY OF LOSS OR DAMAGE. Following a loss or damage, the Contractor
shall remedy any such loss or damage with due diligence and dispatch
and shall not wait for any insurance proceeds to effect the repairs.
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42.8. INSOLVENCY OF INSURERS. The insolvency, liquidation, bankruptcy or
failure of any insurer providing insurance for the Contractor or any
Subcontractor, or failure of any such insurer to pay claims accruing,
shall not be considered a waiver of, nor shall it excuse the
Contractor from complying with, any of the provisions of this
Contract.
SECTION 43. DOCUMENTS, INFORMATION AND CONFIDENTIALITY
43.1. GENERALLY. All drawings, diagrams, specifications and any other
information to be provided by the Contractor to the Purchaser under
this Contract shall be supplied by the Contractor in accordance with
the specified procedures and schedules set forth in the Technical
Requirements (including the Technical Specification). The Contractor
shall be solely responsible for any delay resulting from failure on
its part to provide such drawings, diagrams, specifications or other
information to the Purchaser within the times required.
43.2. THE CONTRACTOR TO RETAIN DRAWINGS. All drawings and documents held by
the Contractor at the RFPA Date shall be retained by the Contractor
during the Warranty Period to enable the Contractor to supply any
replacement parts or extensions to the System if these shall
subsequently be required. At the Purchaser's request, the Contractor
shall provide the Purchaser with access to all such documents.
43.3. CONFIDENTIALITY.
(a) GENERALLY. All drawings, diagrams, specifications or other
information supplied in connection with this Contract by or on
behalf of either Party (such disclosing Party or person acting on
its behalf, the "DISCLOSING PARTY") to the other Party (such
recipient Party, together with its directors, officers,
employees, agents or subcontractors or any of their respective
directors, officers, employees, agents or subcontractors, the
"RECIPIENTS") shall be used solely in assisting the Recipients in
performance of this Contract and shall not be disclosed by such
Recipients to any third party without the prior written consent
of the Disclosing Party, except as expressly permitted under
clause (b) of this Section 43.3. Each Party hereto shall ensure
that each potential Recipient under its control or acting on its
behalf in connection with this Contract is subject to appropriate
confidentiality undertakings with respect to all information
disclosed hereunder.
(b) Notwithstanding the absence of the Disclosing Party's prior
written consent, any Recipient may disclose information furnished
hereunder:
(i) as necessary for the performance of this Contract (and then
only under conditions of confidentiality as set forth
herein);
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(ii) as required by Law or pursuant to court order;
(iii) if it is or becomes generally available to the public by
publication or otherwise, other than by disclosure in
violation of this Section 43;
(iv) if it was within any Recipient's possession prior to being
furnished to a Recipient by or on behalf of the Disclosing
Party;
(v) if it becomes available to the Recipient on a
nonconfidential basis; or
(vi) if it was independently developed by the Recipient without
reference to the information provided by or on behalf of
the Disclosing Party.
To the extent practicable, any Recipient shall give reasonable
advance notice to the Disclosing Party prior to any disclosure
pursuant to Section 43.3(a)(ii) hereof.
(c) TITLE TO INTELLECTUAL PROPERTY. The copyright and all other forms
of intellectual property in all drawings, specifications and data
issued by either Party in connection with this Contract shall
remain the property of that Party; PROVIDED that any drawings,
specifications and data relating specifically to the System (as
distinguished from the Contractor's standard products and
services) provided by or on behalf of any Contractor Person to
the Purchaser shall become the property of the Purchaser and the
Contractor hereby assigns to the Purchaser all of its right,
title and interest, that now exists or may arise in the future,
in and to such drawings, specifications and data. The Purchaser
shall have the right to use and reproduce all drawings, diagrams
and specifications and other information provided by or on behalf
of the Contractor for its own use in connection with the
operation, marketing and maintenance of the System and
interconnection with other systems, but not for other commercial
purposes.
SECTION 44. PUBLICITY
No publicity relating to this Contract or the Work shall be published in any
newspaper, magazine, journal or any other written, oral or visual medium
without the prior written approval of the Purchaser's Representative.
SECTION 45. CORRUPT GIFTS AND THE PAYMENT OF COMMISSIONS
45.1. GIFTS, ETC. The Contractor:
(a) represents and warrants that no Contractor Person has; and
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(b) covenants that no Contractor Person shall,
offer or give or agree to give to any Purchaser Person any gift,
commission, rebate or consideration of any kind as an inducement or
reward for doing, influencing or carrying out any act in relation to
the obtaining or execution of this Contract or for showing any favor
or disfavor to any Person in relation to this Contract.
45.2. PAYMENTS. The Contractor covenants that neither it, nor any other
Contractor Person, shall, directly or indirectly:
(a) offer, pay, promise to pay or authorize the payment of any money,
or offer, give, promise to give or authorize the giving of
anything of value to any foreign (non-U.S.) government official
or any foreign political party, official thereof or candidate for
political office for purposes of influencing any act or decision
of such government official or political party, official or
candidate, or inducing such government official or political
party, official or candidate to use its or its influence with the
government or instrumentality thereof to influence any act or
decision of such government or instrumentality;
(b) offer, pay, promise to pay or authorize the payment of any money,
or offer, give, promise to give or authorize the giving of
anything of value to any Person while knowing or having a reason
to know that all or a portion of such money or thing of value
will be offered or given to any such government official or any
such political party, official thereof or candidate for political
office for purposes of influencing any act or decision of such
government official or political party, official or candidate, or
inducing such government official or political party, official or
candidate to use its or its influence with respect to any act or
decision of such government or instrumentality;
(c) use fictitious, inflated, duplicate, anonymous, inadequate,
unrecorded or otherwise false accounts, transfers, records,
reports, documents or bookkeeping entries for the purpose of (i)
concealing, mislabeling, misstating, omitting or otherwise
falsifying the existence, source or application of funds for the
uses proscribed by Section 45.2(a) or 45.2(b) hereof, (ii)
excluding them from the Purchaser's usual system of financial
accountability or (iii) obtaining approval by the Purchaser of
any activities proscribed by Section 45.2(a) or 45.2(b) hereof.
45.3. FOREIGN CORRUPT PRACTICES ACT. The Contractor acknowledges that the
prohibitions set forth in Section 45.2 hereof conform to the
requirements of the U.S. Foreign Corrupt Practices Act of 1977, as
amended, and shall apply to all activities of each Contractor Person,
notwithstanding the fact that such activities may be permitted by the
standards or customs of countries other than the United States.
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45.4. PERMITTED ACTIVITIES. Section 45.2 hereof does not prohibit:
(a) the normal extension of those common courtesies and social
amenities (including meals, holiday gifts and tips of nominal
amounts) consistent with ethical business practices that are
offered and received on a basis of friendship or hospitality, and
without the expectation of anything in return, and are of too
little value, duration or frequency to give even the appearance
of impropriety; PROVIDED that the cost thereof is properly
identified and disclosed on the books of the Purchaser;
(b) the payment of commissions or fees to responsible and qualified
consultants, agents, marketing representatives, attorneys and
others for necessary and legitimate services actually performed;
PROVIDED that the amount paid is reasonably related to the value
of such services or the benefits resulting therefrom;
(c) payments to Persons whose duties are essentially ministerial or
clerical, which are not intended to influence the misuse of
official position, but rather are intended to encourage the
lawful use of official position to expedite a matter or to act
with respect to matters not involving any discretion; or
(d) any payment to a government official, employee or agency that is
specifically required by Law, regulation or decree equally
applicable to all similarly situated companies.
45.5. MATERIALITY. Breach of this Section 45 may render the Contractor, its
Subcontractors and agents liable to punishment by Law, and any such
breach shall constitute an Event of Default.
SECTION 46. RELATIONSHIP OF THE PARTIES
46.1. GENERALLY. The relationship between the Parties shall not be that of
partners or joint venturers and nothing herein contained shall be
deemed to constitute a partnership or joint venture among them.
Neither Party shall have authority or power to act unilaterally as
agent for the other.
46.2. NO OBLIGATIONS OF THE PURCHASER TO SUBCONTRACTORS. No Subcontractor or
any of its employees, representatives or agents shall be deemed or
construed to be employees, representatives or agents of the Purchaser.
No Subcontractor shall be deemed a third-party beneficiary of, or have
any interest in, this Contract.
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SECTION 47. NOTICES
47.1. METHODS AND EFFECTIVENESS. All notices, requests, consents and other
communications hereunder (each, a "Notice") shall be in writing and
shall be delivered by one or more of the following methods:
METHOD DATE OF EFFECTIVENESS
====== =====================
Personal delivery Date delivered
Facsimile with return Date sent
confirmation of transmission
Nationally recognized Business day after the date sent if
overnight courier service within the same country, otherwise
the date delivered
First-class certified mail, Fifth day after the date sent
postage prepaid and return
receipt requested
47.2. ADDRESSES. Unless otherwise notified in writing, for the purposes of
this Section 47, the addresses and facsimile numbers of the Parties
are:
(a) THE CONTRACTOR. If to the Contractor, at the following addresses:
Alcatel Submarine Networks
30 Rue Pierre Beregovoy
BP 309, 92111 Clichy Cedex
FRANCE
Attention: Charles Matthews
Telephone: +33-1-4756-6852
Facsimile: +33-1-4756-6569
(b) THE PURCHASER. If to the Purchaser, at the following address:
Viatel Global Communications, Ltd.
800 Third Avenue
New York, New York 10022
Attention: General Counsel
Telephone: 212-350-9225
Facsimile: 212-350-9250
or to such other place and with such other copies as either Party may
designate as to itself by written notice to the other Party.
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47.3. ENGLISH LANGUAGE. Except where otherwise provided, all documents
relating to this Contract and all communications between the Parties
shall be in the English language.
SECTION 48. DISPUTE RESOLUTION
48.1. MUTUAL DISCUSSIONS. If a dispute or difference of any kind whatsoever
shall arise between the Parties in connection with, relating to or
arising out of this Contract, including the interpretation,
performance, non-performance or termination of this Contract, the
Parties shall attempt to settle such dispute in the first instance by
mutual discussions between the Project Manager and the Purchaser's
Representative.
SECTION 49. NO CONFLICTS
The Contractor represents and warrants that it has not, nor will it
hereafter enter into, any contract with any customer, and has not, and will
not, take or omit any action, in either case that could jeopardize its
ability to perform its obligations under this Contract.
SECTION 50. MISCELLANEOUS
50.1. HEADINGS. For the purposes of interpretation, the headings of the
Sections hereof shall not be deemed to form part of this Contract.
50.2. GOVERNING LAW. This Contract shall be construed and governed in
accordance with the Laws in force in the State of New York, United
States, applicable to agreements made and to be performed wholly
within such State.
50.3. SEVERABILITY. If any provision of this Contract shall be invalid or
unenforceable, such invalidity or unenforceability shall not
invalidate or render unenforceable the entire Contract, but rather the
entire Contract shall be construed as if not containing the particular
invalid or unenforceable provision or provisions, and rights and
obligations of the Purchaser and the Contractor shall be construed and
enforced accordingly.
50.4. INTEGRATION. This Contract supersedes all prior oral or written
understandings between the Parties and, constitutes the entire
agreement with respect to the subject matter of this Contract.
50.5. AMENDMENTS AND WAIVERS.
(a) AMENDMENTS. This Contract and any of its provisions may be
amended, supplemented or otherwise modified by another agreement
in writing signed by a duly authorized person on behalf of each
Party.
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<PAGE>
(b) WAIVERS. Any provision of this Contract may be waived if, and
only if, such waiver is in writing and signed by the Party
against whom the waiver is to be enforced. No failure or delay by
any Party in exercising any right, power or privilege hereunder
shall operate as waiver thereof, nor shall any single or partial
exercise thereof preclude any other or further exercise thereof
or the exercise of any right, power or privilege.
50.6. FURTHER ASSURANCES. The Contractor shall provide any and all such
cooperation and assistance as the Purchaser may reasonably request in
connection with the implementation of this Contract and the
engineering, procurement and construction of the System. Specifically,
the Contractor shall promptly provide any technical, engineering,
financial or other information that the Purchaser is entitled to under
this Contract, whenever requested by the Purchaser, including in
connection with any requests by, filings to, or regulatory
requirements of, Governmental Authorities.
50.7. COUNTERPARTS. This Contract may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an
original. Such counterparts together shall constitute but one
Contract.
50.8. SUCCESSORS AND ASSIGNS. This Contract shall be binding upon, and is
solely for the benefit of, each Party, its successors and permitted
assignees. The Purchaser may assign its interest in this Contract
without the consent of the Contractor to any affiliate or group of
affiliates (after providing to Contractor reasonable assurance of the
ability of such affiliate to fulfill the obligations including payment
obligations, of the Purchaser hereunder) or, with the consent to the
Contractor (not to be unreasonably withheld or delayed), to Bechtel.
The Contractor may not assign its interests in this Contract without
the written consent of the Purchaser.
50.9. NO THIRD PARTY BENEFICIARIES. Nothing in this Contract is intended to
confer upon any Person other than each Party, its successors and
permitted assignees any rights or remedies of any nature whatsoever
under or by reason of this Contract.
50.10. UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF
GOODS. The Parties agree that the United Nations Convention on
Contracts for the International Sale of Goods shall not apply to this
Contract.
50.11. REMEDIES CUMULATIVE. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by
Law.
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IN WITNESS WHEREOF, the Parties have duly executed this Contract as of
the date first set forth above.
ALCATEL SUBMARINE NETWORKS S.A.
By /S/ TERENCE L. HOUGHTON
------------------------------------
Name: TERENCE L. HOUGHTON
Title: MANAGER, BUSINESS STRATEGY
VIATEL GLOBAL COMMUNICATIONS, LTD.
By /S/ SHELDON M. GOLDMAN
------------------------------------
Name: SHELDON M. GOLDMAN
Title: SENIOR VICE PRESIDENT
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<PAGE>
DEFINED TERMS
"AFFILIATE" of any Person means any other Person that, directly or
indirectly through one or more intermediaries, controls the first Person, or any
other Person that is controlled by or under common control with the first
Person. For the purposes of this definition, the term "control" shall be defined
as direct or beneficial ownership of greater than fifty percent (50%) of the
equity interests or greater than fifty percent (50%) of the voting control of an
entity.
"BECHTEL" has the meaning ascribed thereto in Section 20.2.
"CERTIFICATE OF COMMERCIAL ACCEPTANCE" has the meaning ascribed thereto in
Section 32.3 of the Contract.
"CERTIFICATE OF FINAL ACCEPTANCE" has the meaning ascribed thereto in
Section 32.5 of the Contract.
"CERTIFICATE OF PAYMENT AND FINAL RELEASE" means the certificate delivered
by the Contractor to the Purchaser in the form of Exhibit 4 to the Contract.
"CERTIFICATE OF PROVISIONAL ACCEPTANCE" has the meaning ascribed thereto in
Section 32.2 of the Contract.
"CHANGE IN LAW" means:
(a) the adoption, enactment or application to either Party or the
System of any Law of the United Kingdom, the Netherlands, France
or the United States not existing or applicable to such Party or
System on the date of the Contract; or
(b) any change in any Law of the United Kingdom, the Netherlands,
France or the United States or in the application thereof by a
Governmental Authority after the date of the Contract,
but not including any Law or application thereof in existence on the date of the
Contract that, by its terms, becomes or will become effective and applicable to
either Party or the System after the date of the Contract.
"CIF" means Carriage, Insurance and Freight, as defined in Incoterms.
"CODES AND STANDARDS" means the Laws, rules, regulations, statutes,
ordinances, codes, standards, interpretations, Permits and other governmental
requirements pertaining to or relating to the System and the Work.
<PAGE>
"CONTRACT" means Sections 1 through 50 of the Engineering, Procurement and
Construction Contract, dated November 10, 1998, between the Contractor and the
Purchaser, including all Exhibits thereto.
"CONTRACT DOCUMENTS" means the items listed in Section 3.2 of the Contract.
"CONTRACT PRICE" means, as of any date, the Initial Contract Price, as
adjusted in accordance with Section 16 of the Contract.
"CONTRACTOR" has the meaning ascribed thereto in the preamble to the
Contract.
"CONTRACTOR BOND" has the meaning ascribed thereto in Section 15.1 of the
Contract.
"CONTRACTOR INVOICE" means an invoice in form and substance satisfactory to
the Purchaser which is duly submitted by the Contractor to the Purchaser in
accordance with Section 13.4 of the Contract.
"CONTRACTOR PERMITS" has the meaning ascribed thereto in Section 7.3(a) of
the Contract.
"CONTRACTOR PERSON" means (a) the Contractor, (b) any Subcontractor or (c)
any subsidiary, Affiliate, agent, representative, director, manager, officer,
employee (including the Project Manager), transferee, successor or assign of the
Contractor or any Subcontractor.
"CONTRACT VARIATION" has the meaning ascribed thereto in Section 16.1 of
the Contract.
"COST FOR INCOMPLETE WORK" has the meaning ascribed thereto in Section 24.3
of the Contract.
"DAY" means the 24-hour period beginning and ending at 00.00 hours
Greenwich Mean Time.
"DDP" means Delivered Duty Paid (as defined in Incoterms).
"DEFECTIVE WORK" means any portion of the Work that contains Defects.
"DEFECTS" means:
(a) when used with respect to structures, materials and Supplies,
such items that are not:
(i) of good quality or free from improper workmanship and
deficiencies; and
(ii) free from errors or omissions in design or manufacture in
light of the Technical Requirements; and
(b) when used with respect to the Work or any portion thereof:
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<PAGE>
(i) it is not in accordance with the Contract Documents;
(ii) it is not provided in a workmanlike manner;
(iii) any design, engineering, start-up activities, materials,
equipment, tools, Supplies, installation or quality-control
activities that, in the Purchaser's reasonable judgment:
(A) does not conform to the Technical Requirements or is of
improper or inferior workmanship; or
(B) would adversely affect the ability of the System to
meet any Warranty requirement hereunder;
A Defect shall be deemed to exist when actually discovered or
when it should have been apparent to a party in the Contractor's
position after reasonable inspection or testing.
[TERM AND DEFINITION REDACTED]
"DESIGN LIFE PERFORMANCE STANDARDS" means the performance standards for the
System over the System Design Life, as set forth in the Technical Specification.
"DESK STUDY" means the desktop study referenced in the Marine Route Survey
Agreement.
"DESK STUDY REPORT" means the desktop study report for the proposed System
Route furnished by the Contractor to the Purchaser.
"DISCLOSING PARTY" has the meaning ascribed thereto in Section 43.3 of the
Contract.
"DOLLARS" or "$" means the lawful currency of the United States.
"EVENT OF DEFAULT" has the meaning ascribed thereto in Section 25.1 of the
Contract.
"FACTORY RELEASE CERTIFICATE" means, in respect of each delivery of Supply,
the certificate issued by the Contractor's Quality Assurance Department in the
form specified in Annex 1.1 to Appendix 5.
"FIBER OPTIC CABLE" means the fiber optic cable to be used for the System,
as specifically described in the Technical Specification.
"FINAL ACCEPTANCE" means the issuance of the Certificate of Final
Acceptance.
"FINAL ACCEPTANCE DATE" means the date on which Final Acceptance of the
System occurs.
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<PAGE>
"FINAL PAYMENT" means the remaining portion of the Contract Price paid to
the Contractor after the Contractor has completed the Work and remedied any
deficiencies.
"FINAL ACCEPTANCE TEST" means the performance test conducted in accordance
with the Technical Specification in connection with Final Acceptance.
"FOB" means Free On Board (as defined in Incoterms).
"FORCE MAJEURE EVENT" has the meaning ascribed thereto in Section 19.1 of
the Contract.
"GENERAL WARRANTY" has the meaning ascribed thereto in Section 33.1 of the
Contract.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state or other
political subdivision thereof, and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
[TERM AND DEFINITION REDACTED]
"INCOTERMS" means the "International Rules for the Interpretation of Trade
Terms," as adopted by the International Chamber of Commerce (the "ICC") to be
effective as of July 1, 1990 and published in ICC Publication No. 460/90 (ISBN
92-842-0087-3). All matters relating to the construction and interpretation of
Incoterms shall be resolved by reference to the Guide to Incoterms 1990, ICC
Publication No. 461/90 (ISBN 92-842-1088-7).
"INITIAL CONTRACT PRICE" has the meaning ascribed thereto in Section 13.1
of the Contract.
"INITIAL SYSTEM COMMISSIONING REPORT" means the Initial System
Commissioning Report for the System to be delivered to the Purchaser upon the
Contractor's completion of the commissioning tests, as described in the
Technical Specification.
"LANDING SITE" means each of the four Fiber Optic Cable landing sites (up
to and including the System beach joints located thereon) at each of the three
landing countries:
(a) United Kingdom (two sites);
(b) Netherlands; and
(c) France.
"LAW" means any federal, state, provincial, local or other constitution,
charter, act, statute, law, ordinance, code, rule, regulation, order,
proclamation, specified standard or objective criteria, Permit, other approval
or other legislative or administrative action of any Governmental Authority,
including:
(a) a final decree, judgment or order of a court; and
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<PAGE>
(b) any building code applicable to the System.
"LIEN" means any mortgage, pledge, lien, deed of trust, claim, charge,
security interest, attachment or encumbrance of any kind, or any other similar
type of preferential arrangement, including materialmen's, laborers',
mechanics', Subcontractors' and vendors' liens, and including any agreement to
give any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof.
"LIEN RELEASE" means the lien release executed and delivered by the
Contractor in the form of Exhibit 4 hereto, which shall contain:
(a) a waiver and release of any and all Liens arising from or
relating to such portions of the Work to which any Contractor
Invoice relates; and
(b) a certification to the Purchaser that the System and Work are
free from Liens.
"LOSSES" means all damages, obligations, debts, deficiencies, demands,
judgments, causes of action, costs, charges, fines, penalties, claims, actions,
proceedings, liabilities, losses, demands, suits, prosecutions or expenses
(including reasonable attorney's fees, disbursements, costs, expenses and other
charges).
"MARINE ROUTE SURVEY" means the Marine Route Survey dated June 8, 1998, as
supplemented by the Marine Route Survey dated September, 1998, for the System
forming a part of the Work hereunder.
"NOTICE" has the meaning ascribed thereto in Section 47.1 of the Contract.
"NOTICE OF EXERCISE OF REMEDIES" has the meaning ascribed thereto in
Section 25.1 of the Contract.
"NOTICE OF TERMINATION" has the meaning ascribed thereto in Section 28.1 of
the Contract.
"NOTICE OF TERMINATION FOR CONVENIENCE" has the meaning ascribed thereto in
Section 24.1 of the Contract.
"NOTICE OF TERMINATION FOR DEFAULT" has the meaning ascribed thereto in
Section 25.1 of the Contract.
"PARTIES" means the Purchaser and the Contractor.
[TERM AND DEFINITION REDACTED]
"PERFORMANCE TESTS" means the System tests (including the Final Acceptance
Test) conducted in accordance with the Technical Specification.
"PERMITS" means all:
5
<PAGE>
(a) permits, "no objections", permissions-in-principle,
authorizations, consents, registrations, certificates,
rights-of-way, way-leaves, certificates of occupancy, licenses,
orders, vessel and crew authorizations/visas, permission for the
operation of navigational aids and radio systems and similar
authorizations; and
(b) consents, licenses, waivers, privileges, acknowledgements,
agreements, concessions, approvals from and all other filings
with and applications submitted to, any Governmental Authority or
any other Person.
"PERSON" means an individual, corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization or Governmental
Authority.
"PLAN OF WORK" means Appendix 3 to the Contract.
"PROGRESS PAYMENT" means the payment made by the Purchaser to the
Contractor pursuant to Section 13.3(b) of the Contract in respect of any
Contractor Invoice.
"PROJECT MANAGER" has the meaning ascribed thereto in Section 20.1 of the
Contract.
"PROVISIONAL ACCEPTANCE" means the issuance by the Purchaser of the
Certificate of Provisional Acceptance.
"PROVISIONING SCHEDULE" means Appendix 1 to the Contract.
"PUNCH LIST" means the list prepared by the Purchaser identifying items of
the Work that are incomplete or that contain Defects.
"PUNCH LIST RESERVE" means an amount in cash equal to two hundred percent
(200%) of the cost of completing or correcting all items identified on the Punch
Lists prepared in connection with Commercial Acceptance or Provisional
Acceptance.
"PURCHASER" has the meaning ascribed thereto in the preamble to the
Contract.
"PURCHASER LIEN" means any Lien created directly by the Purchaser.
"PURCHASER PERMITS" has the meaning ascribed thereto in Section 7.3(b) of
the Contract.
"PURCHASER PERSON" means:
(a) the Purchaser, the Purchaser's Representative, QA/QC Contractor,
Bechtel;
(b) anyone else acting on behalf of the Purchaser in connection with
the Contract; and
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<PAGE>
(c) the successors, assigns, employees, agents, officers, directors
and Affiliates of any of the foregoing.
"PURCHASER'S INSPECTOR" means a qualified Person designated as the
authorized representative of the Purchaser to:
(a) make all necessary inspections of the Work, including the labor,
Supplies, materials and equipment furnished or being furnished by
the Contractor under the Contract;
(b) to report on progress in the performance of the Work; and
(c) to review the Performance Tests, the Contractor Invoices,
acceptance of Commercial Acceptance, Provisional Acceptance or
Final Acceptance, and other matters relating to the Contract.
"PURCHASER'S REPRESENTATIVE" has the meaning ascribed thereto in Section
20.2 of the Contract.
"QA/QC CONTRACTOR" means the representative nominated by the Purchaser to
facilitate the quality assurance/quality control program for the System.
"RECIPIENT" has the meaning ascribed thereto in Section 43.3 of the
Contract.
"RELEVANT LABOR INDEX" means, for any Supply manufactured in:
(a) France, the Price Index of Mechanical and Electrical Industries
labor costs (S) as published in the "Bulletin Official du Service
de Prix" (B.O.S.P.), an official French publication that is
published monthly by the French Treasury Department; or
(b) the United Kingdom, the Index of Average Monthly Earnings of all
employees employed in the United Kingdom Electrical Engineering
Industry as published in Table 18.10 of the Monthly Digest of
Statistics.
"RELEVANT PRICE INDEX" means, for any Supply manufactured in:
(a) France, the Price Index for Miscellaneous Telephone Products and
Services (PsdT) as published in the "Bulletin Official du Service
de Prix" (B.O.S.P.), an official French publication that is
published monthly by the French Treasury Department; or
(b) the United Kingdom, the Price Index of Materials and Fuels
Purchased - Electronic Engineering Industries, as published in
Table 18.6 of the Monthly Digest of Statistics.
7
<PAGE>
"REPLACEMENT CONTRACTOR" has the meaning ascribed thereto in Section 26.1
of the Contract.
"REPLACEMENT ITEM" has the meaning ascribed thereto in Section 33.1 of the
Contract.
"REPLACEMENT STOCK" means all Supplies and other materials furnished to the
Purchaser by the Contractor to replace any of the Purchaser's spare Supplies,
materials or other items which are used by either of the Contractor or the
Purchaser in connection with the Work or the Warranties.
"RFCS PORTION" has the meaning ascribed thereto in Section 32.3 of the
Contract.
"RFPA DATE" means the date on which Provisional Acceptance of the System
occurs, as determined in accordance with Section 32.2 of the Contract.
"SCHEDULED RATE" for any part of the Work means the rate or price set forth
therefor under the heading "TOTAL PRICE" in the Provisioning Schedule.
"SCOPE OF WORK" means the Scope of Work set forth on Appendix 3.
"SITE" means any location or locations at which any Contractor Person is at
any time performing the Work hereunder.
"SUBCONTRACT" means any contract, or the conclusion of any contract,
between the Contractor and any Subcontractor, or between any Subcontractor and
any other Person, relating to the Work or any Supply to be provided by such
Subcontractor in respect of the System.
"SUBCONTRACTOR" means any contractor (other than the Contractor), vendor or
supplier that contracts to perform services or provide Supplies to the
Contractor constituting part of the Work.
"SUPPLIES" means and includes any and all materials, plant, machinery,
equipment, hardware and items (whether or not identified separately in the
Provisioning Schedule) supplied by the Contractor under the Contract.
"SYSTEM" means the whole of the submarine Fiber Optic Cable link beach
joint to beach joint (in each case including beach joint but excluding the
manhole) along the System Route, including all Work relating thereto, as more
particularly described in the Technical Specification.
"SYSTEM DESIGN LIFE" means a period of twenty-five (25) years from the RFPA
Date.
"SYSTEM ROUTE" means the submarine Fiber Optic Cable route, as shall be
more precisely identified in the Marine Route Survey Report.
"TAKE OVER" has the meaning ascribed thereto in Section 25.1 of the
Contract.
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<PAGE>
"TAXES" means all taxes and duties of any type, including sales-of-goods
taxes, value-added taxes, customs duties or other levies and duties applicable
to the performance of the Work hereunder.
"TECHNICAL REQUIREMENTS" means the following documents:
(a) the Technical Specification; and
(b) the Marine Route Survey Report.
"TECHNICAL SPECIFICATION" means Appendices 5, 6 and 7, collectively, to the
Contract.
"TERMINATION CLAIM" has the meaning ascribed thereto in Section 24.3 of the
Contract.
"TERMINATION CLAIM REVIEW PERIOD" has the meaning ascribed thereto in
Section 24.3 of the Contract.
"TERMINATION FOR CONVENIENCE" has the meaning ascribed thereto in Section
24.1 of the Contract.
"TERMINATION FOR DEFAULT" has the meaning ascribed thereto in Section 25.1
of the Contract.
"TERMINATION PAYMENT (CONVENIENCE)" has the meaning ascribed thereto in
Section 24.3 of the Contract.
"UNITED STATES" means the United States of America.
"UNUSUALLY SEVERE WEATHER CONDITIONS" means weather conditions occurring at
any Site that are materially more severe than would reasonably be anticipated,
based upon the weather pattern records for the most recent 10-year period
maintained by the London meteorological office for the time of year and
geographical location at issue, by a prudent contractor conducting work similar
to the Work.
"WARRANTY" means any General Warranty.
"WARRANTY PERIOD" means, with respect to any item of Work to be provided
hereunder, a period [REDACTED]
9
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"WORK" has the meaning ascribed thereto in Section 4.1 of the Contract.
Whether or not used in conjunction with the term "Supplies," the term Work shall
always be deemed to include Supplies, unless the context requires otherwise.
10
<PAGE>
EXHIBIT 3
CERTIFICATE OF PAYMENT AND FINAL RELEASE
Dated _____________
CIRCE CABLE SYSTEM
Reference is made to the Engineering, Procurement and Construction
Contract, dated as of November 10, 1998 (as amended, supplemented or otherwise
modified from time to time, the "EPC CONTRACT"), between Viatel Global
Communications, Ltd. (the "PURCHASER") and Alcatel Submarine Networks (the
"CONTRACTOR"). Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed thereto in the EPC Contract.
1. RELEASE AND WAIVER. In consideration of, and subject to, the Final Payment,
the Contractor hereby and forever releases, waives, and discharges:
1.1. any rights, Liens or other claims that the Contractor has or may have
against the Purchaser (including any shareholder, Affiliate, successor
or assign of any of them) arising out of or relating to the System or
any Work, including any materials, equipment or Supplies forming a
part of, or furnished in connection with, the Work; and
1.2. any other legal or equitable claim or right that the Contractor may
have against any Purchaser Person in any manner arising out of or
relating to the System or the Work.
2. CERTIFICATIONS. The Contractor certifies that:
2.1. acceptance of the Final Payment by the Contractor shall represent the
Contractor's complete satisfaction with the final compensation for all
claims and the Work;
2.2. there are no expected or known Liens arising out of or in connection
with the performance by the Contractor or any Subcontractor of the
Work;
2.3. all Taxes and insurance premiums for which the Contractor is
responsible under the EPC Contract that have accrued to date in
connection with the Work have been fully paid and discharged.
IN WITNESS WHEREOF, the Contractor has executed this Certificate of Payment
and Final Release as of _______________, _____.
<PAGE>
ALCATEL SUBMARINE NETWORKS
By
-------------------------
Name:
Title:
[Certificate of Payment and Final Release]
<PAGE>
EXHIBIT 4
LIEN RELEASE
Dated _____________
CIRCE CABLE SYSTEM
Reference is made to the Engineering, Procurement and Construction
Contract, dated as of November 10, 1998 (as amended, supplemented or otherwise
modified from time to time, the "EPC CONTRACT"), between Viatel Global
Communications, Ltd. (the "PURCHASER") and Alcatel Submarine Networks (the
"CONTRACTOR"). Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed thereto in the EPC Contract.
1. RELEASE AND WAIVER. In consideration of, and subject to, the Purchaser's
payment for the Work described in the Contractor Invoice, dated as of the
date hereof (the "Current Contractor Invoice"), the Contractor hereby and
forever releases, waives, and discharges any rights, Liens or other claims
(other than claims arising in connection with Dispute Resolution that are
subject to mutual discussions in accordance with Section 48 of the EPC
Contract) that the Contractor has or may have against the Purchaser or any
Financing Party or Sponsor (including any shareholder, Affiliate, successor
or assign of any of them) arising out of or relating to the System or such
Work or any other Work heretofore performed or delivered (collectively, the
"WORK-TO-DATE"), including any materials, equipment or Supplies forming a
part of, or furnished in connection with, any Work-to-Date.
2. CERTIFICATIONS. The Contractor certifies that:
2.1. there are no expected or known Liens on the System or the Work arising
out of or in connection with the performance by the Contractor or any
Subcontractor of the Work-to-Date; and
2.2. all Taxes (excluding any income taxes) and insurance premiums for
which the Contractor is responsible under the EPC Contract that have
accrued to date in connection with the Work-to-Date have been fully
paid and discharged.
IN WITNESS WHEREOF, the Contractor has executed this Lien Release as of
this ___ day of _________________________, _____.
ALCATEL SUBMARINE NETWORKS
By
-------------------------
Name:
Title:
<PAGE>
LIST OF APPENDICES
Appendix 1 [REDACTED]
Appendix 2 [REDACTED]
Appendix 3 [REDACTED]
Appendix 4 [REDACTED]
Appendix 5 [REDACTED]
Appendix 6 [REDACTED]
Appendix 7 [REDACTED]
EXHIBIT 10.21
EQUIPMENT PURCHASE AGREEMENT
BETWEEN
VIATEL INC.
AND
NORTEL PLC.
<PAGE>
THIS AGREEMENT, DATED DECEMBER 31, 1998 (HEREINAFTER THE "EFFECTIVE DATE"), BY
AND BETWEEN:
NORTEL PLC., WHOSE REGISTERED OFFICES ARE AT MAIDENHEAD OFFICE PARK, WESTACOTT
WAY, MAIDENHEAD, BERKSHIRE SL6 3QH, ENGLAND (HEREINAFTER CALLED "NORTEL");
AND
VIATEL INC., WHOSE REGISTERED OFFICES ARE AT 685 THIRD AVENUE, NEW YORK, NY
10017, USA (HEREINAFTER CALLED "VIATEL");
and jointly referred to as the "Parties".
WHEREAS Viatel desires to purchase and/or license various Equipment, Software,
and related Services from Nortel's portfolio of ETSI telecommunications
equipment ("Products") from Nortel for deployment within its telecommunications
network in various countries;
AND WHEREAS Nortel is willing to supply such Products to Viatel upon the terms
and conditions hereinafter contained.
NOW THEREFORE, the Parties agree as follows:
1. DEFINITIONS
The meaning of terms and expressions used herein are set out in Clause 1 of
Annex A hereto.
2. SCOPE
2.1 This Agreement shall govern the ordering and purchase of Products by
Viatel and its Affiliates from Nortel and its Affiliates but nothing in
this Agreement obliges Nortel to provide, or Viatel to order, any
Products.
2.2 Viatel may from time to time identify to Nortel countries in which they
wish to deploy Products or equipment other than the Products that they
wish to deploy in their network whereupon the Parties shall determine the
configuration(s) of such Equipment suitable to Viatel's needs, the
specification with respect thereto and prices therefore applicable to
each country for which Viatel expects to place Orders. The results of
this determination shall be incorporated into Annex C of this Agreement
thus defining the contractual rights and obligations of the Parties in
relation to the type and specification of the Equipment, Software and
Services which Nortel are to provide and the prices which Viatel shall
pay for them.
3. EFFECTIVE DATE, TERM, AND RENEWAL
3.1 This Agreement shall come into force and effect on the Effective Date and
shall continue for a term of [REDACTED] thereafter and shall govern the
provision of any specific Equipment, Software, or Services set forth in
the relevant Annex C hereof. A separate Specification will be prepared
for each product type specific to each country or related group of
countries of deployment and shall be numbered sequentially (C1, C2 etc.).
4. PRICES
4.1 The Prices to be paid by Viatel for Products purchased under this
Agreement shall be those set forth in Annex C as it may be amended
pursuant to the terms hereof.
4.2 Unless the Parties agree otherwise and in respect of deployments within
the European Union, the Prices include Delivery on DDP European Union
Site (INCOTERMS 1990) terms and unloading at the applicable sites. Based
upon the principle that at the date of this Agreement, sales between
<PAGE>
member states of the European Union do not attract import duties or sales
taxes other than Value Added Tax, DDP terms will be subject to review
should this change.
4.3 Where sales take place outside of the European Union the Prices shall
include Delivery on a CIP port/airport of entry basis. Where Nortel
undertakes delivery beyond this point then Viatel shall, at Nortel's
direction, promptly reimburse Nortel or pay directly to the applicable
government or taxing authority all taxes and charges arising hereunder,
except for taxes computed upon the net income of Nortel. This shall
include Value Added Tax and taxes on Services which are not included in
the Total Price by virtue of the relevant INCOTERM. Viatel's obligations
pursuant to this Clause 4 shall survive any termination of this
Agreement.
4.4 [REDACTED]
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5. ORDERING PROCESS
The following procedure shall apply to Equipment, Software and related Services
to be supplied and installed by Nortel hereunder:
5.1 The specific terms for the purchase of Products by Viatel are set forth
in this Agreement. Orders shall reference this Agreement and shall be
governed solely by the terms and conditions set forth herein. Orders
shall specify the Viatel nominated address to which the foregoing are to
be consigned, the relevant implementation schedule, and any other
information which may be required to be included in accordance with the
provisions of this Agreement.
5.2 This Agreement sets the master terms and conditions for supply of
Products by Nortel and their Affiliates, and where appropriate, their
distributors, to Viatel and Viatel Affiliates for their own use in
specified countries. The Nortel Affiliates appropriate to the sale of the
Products in each specified country of deployment is set out in Annex B,
Nortel reserves the right to change this detail from time to time by
written notice to Viatel. This list may also be subject to alteration in
relation to purchases of different products. Subject to the terms and
conditions of this Agreement, Viatel or a Viatel Affiliate may place a
Order for Products on Nortel or the appropriate Nortel Affiliate or
distributor covering the territory into which the Products are to be
delivered.
5.3 The Parties recognise that it may not be possible for Nortel to provide
Products for certain countries outside of the European Union by reason of
the non-standardisation of the Products in the country of delivery;
relationships with distributors, agents, manufacturers or other entities
limiting Nortel's ability to sell in such region; the inability of Nortel
to support the delivery, installation or performance of the Products; or
the violation of any applicable law, regulation or contractual
relationship created by any such sale, delivery, installation and/or
performance.
5.4 The Parties recognise that Viatel expects to place Orders that will
comprise one or more Networks or Systems. It is a condition precedent to
the effectiveness of any Order from Viatel with respect to any Product
which comprises part of a Network or System that the Specification with
respect to such Network or System be prepared and added to this Agreement
and numbered sequentially as Annex D1, D2, etc. and that a Guaranteed
Acceptance Date with respect to such Network or System be agreed in
writing between the parties.
6. SUCCESSORS
This Agreement shall be binding upon the Parties to it and their successors and
permitted assigns.
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7. CONTRACTOR NOT AGENT
Nortel agrees that the relationship established by this Agreement constitutes it
as an independent contractor and that this Agreement shall not in any way
constitute Nortel or its employees or agents, an employee, partner or agent of
Viatel nor appoint nor authorise Nortel to act as agent of Viatel and that
furthermore no tax, assessment or legal liability of Nortel or of its employees
or agents becomes, by reason of this Agreement, an obligation of Viatel.
8. NOTICES
Any and all notices or other information required to be given by one of the
Parties to the other shall be deemed sufficiently given when forwarded by
prepaid registered mail, by facsimile or hand-delivered to the other Party at
the following address:
Viatel Inc., Nortel plc.,
685 Third Street, Maidenhead Office Park,
New York, Westacott Way,
NY 10017, Maidenhead,
USA. Berkshire SL6 3QH
England
Attention: General Counsel Attention: Legal Department
Facsimile: 212-350-9245 Facsimile:
and such notices shall be deemed to have been received ten (10) business days
after mailing if forwarded by mail, and the following business day if forwarded
by facsimile or hand-delivered and three (3) business days if forwarded
internationally by an internationally recognised courier service for quickest
delivery. The aforementioned address of either Party may be changed at any time
by giving fifteen (15) business days prior notice to the other Party in
accordance with the foregoing.
Furthermore, for the purpose of service of all notices, writs, or summons or
other documents in any suit at law, action or proceeding which Viatel may take
under the Agreement, and for all legal intent or purposes, Nortel elects
domicile at the aforementioned address.
9. APPLICABLE LAW
This Agreement shall be construed and governed by the laws of the State of New
York. Should any provisions of this Agreement be illegal or not enforceable
under such laws, it or they shall be considered severable and this Agreement and
its conditions shall remain in force and be binding upon the Parties as though
the said provisions had never been included.
The courts of the State of New York in the County of New York or the Federal
courts of the United States of America for the Southern District of New York
shall have exclusive jurisdiction with respect to any litigation between the
parties. Each party submits to the jurisdiction of such courts and submits to
the enforcement of any interim judgements issued by any such courts and agrees
not to object to the jurisdiction of such courts..
10. ASSIGNMENT
Either Party shall have the right to assign all or any part of its rights or
interests under this Agreement to any of its Affiliates without the consent of
the other Party. Such assignment to an Affiliate shall however be notified to
the other Party prior to execution. Otherwise, neither Party shall assign all or
any part of its rights or interest under this Agreement without the prior
written consent of the other Party.
11. PUBLIC RELEASE OF INFORMATION
The Parties shall obtain the written approval one of the other concerning the
content and timing of news releases, articles, brochures, advertisements,
prepared speeches and other information releases concerning this Agreement and
any subsequent Order.
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12. NOT USED
13. ATTACHED DOCUMENTS
The following documents attached hereto form part hereof:
Annex A - Conditions of Order
Annex B - Schedule of Nortel Affiliates.
Annex C - Product Descriptions and Pricing.
Annex D - Specification
14. ENTIRE AGREEMENT
This Agreement including its Annexes sets forth the entire agreement and
understanding between the Parties with respect to the supply and acquisition of
Products subsequent to the date hereof. There are no understandings,
representations, conditions, or warranties, express or implied, statutory or
otherwise, made or assumed by the Parties, other than those expressly contained
in this Agreement. Neither Party shall be bound by any term, clause, provision
or condition save as expressly provided herein or as duly set forth on or
subsequent to the date of this Agreement in writing signed by duly authorised
officers of the Parties except as provided in Section 4.4.
IN WITNESS WHEREOF the Parties have executed these presents on the date first
herein above written.
VIATEL INC. NORTEL PLC.
By: /S/ (SIGNATURE ILLEGIBLE) By: /S/ (SIGNATURE ILLEGIBLE)
------------------------- -------------------------
Name Name:
Title: Title:
Date: 12/31/98 Date: 12/31/98
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ANNEX A
GENERAL CONDITIONS
<PAGE>
1 DEFINITIONS AND INTERPRETATION
1.1
The following expressions shall have the meanings hereby respectively assigned
to them:-
1.1.1 "Acceptance"
Means in respect of any System and any Equipment and Software installed and
commissioned by Nortel when Acceptance Certificates shall have been issued in
respect of that System or any part thereof in accordance with the process
described in Clauses 15 and 16 hereof. "Accept" and "Accepted" shall be
interpreted accordingly.
1.1.2 "Acceptance Certificate"
Means the certificate to be issued when a System or any specified part thereof
has satisfactorily completed the appropriate Acceptance Tests, in accordance
with the requirements of Clauses 15 and 16 hereof.
1.1.3 "Acceptance Tests"
Means such tests described in Clauses 15 and 16 hereof carried out pursuant to
test specifications acceptable to Viatel, as may be undertaken by Nortel to
demonstrate to the reasonable satisfaction of the Parties that a System as
installed and commissioned on Site by Nortel or any integral part thereof
complies with the Specification and other provisions of the Agreement.
1.1.4 "Affiliate"
Means a Party's parent company, or any corporation or company effectively
controlled directly or indirectly by such parent company through the ownership
or control of shares or other securities in such corporation or company and, in
the case of Nortel, listed on Annex B. Nortel Dasa GmbH. of Germany shall for
the purposes of this Agreement also be treated as an Affiliate of Nortel.
1.1.5 "Amendment"
Means the written document executed by both Parties by which changes to the
Agreement are effected pursuant to Clause 3.
1.1.6 "Delivery Acceptance"
Means the Acceptance that takes place at the successful conclusion of Delivery
Acceptance Testing as set forth in Clause 15.1.a) hereof.
1.1.7 "Equipment"
Means all items of hardware which Nortel is required to supply to meet the
requirements of this Agreement and any Order placed by Viatel pursuant to the
terms hereof, including those items set forth in Annex C.
1.1.8 "Guaranteed Acceptance Date"
Means, with respect to any System that Viatel may order hereunder, the date
which is specified as the "Guaranteed Acceptance Date" for that System which is
set forth in a written notice from Viatel and accepted by Nortel.
1.1.9 "Network"
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Means any combination of Equipment, Software and/or Services which comprise a
telecommunications network or sub-set thereof and which are ordered under one or
more Orders.
1.1.10 "Network Acceptance"
Means the Acceptance that takes place at the successful conclusion of Network
Acceptance Testing as set forth in Clause 15.1 c) hereof.
1.1.11 "Network Price"
Means the aggregate of all the Order Prices to be paid by Viatel and its
Affiliates to Nortel and its Affiliates hereunder for a Network.
1.1.12 "Nortel"
Means Nortel Plc. or its nominated Affiliate and includes its successors and
permitted assigns.
1.1.13 "Order"
Means the purchase order placed by Viatel's appropriate Affiliate on Nortel's
appropriate Affiliate for the provision of Works incorporating these terms and
Specifications and other documents contained herein.
1.1.14 "Order Price"
Means the price payable to Nortel by Viatel pursuant to the terms hereof for
items of Equipment, Software, the performance of the Work, or for Services as
detailed in Annex C.
1.1.15 "Provisional Acceptance"
Means the Acceptance that takes place at the successful conclusion of
Provisional Acceptance Testing as set forth in Clause 15.1 b) hereof.
1.1.16 "Services"
Means, as appropriate to any particular Order, the factory testing, engineering,
testing, installation and commissioning of the Equipment and the testing of a
Network and other services specified or reasonably inferred herein, including
everything necessary to complete the installation of the Equipment in accordance
with the terms of this Agreement.
1.1.17 "Site"
Means the land, buildings and environment where a System is to be installed or
the storage premises nominated by Viatel.
1.1.18 "Software"
Means the set of machine readable instructions provided by Nortel for the
control and operation of the System.
1.1.19 "Specification"
Means any Specification incorporated in Annex D.
1.1.20 "System"
Means the Equipment and Software integrated as necessary to meet the
requirements of the Specification and the other provisions of this Agreement.
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1.1.21 "Viatel"
Means Viatel Inc. or its nominated Affiliate and includes its successors and
permitted assigns.
1.1.22 "Work"
Means, as appropriate to any particular Order, the (i) manufacture, factory
testing, engineering, testing, installation and commissioning of the Equipment
and testing of the specified System in accordance with all the terms and
conditions contained in this Agreement, (ii) all services necessary so that any
System to be provided by Nortel hereunder shall be in accordance with the
Specification relevant thereto and the other requirements of this Agreement,
(iii) the provision of materials, test equipment, labour and services as
necessary for the terms of this Agreement, (iv) complying with the Guaranteed
Acceptance Date, (v) complying with the Warranties during the applicable period,
(vi) technical and other co-ordination with Viatel and its Project Manager such
that the System shall be compatible with the Specifications, and (vii) all other
matters specified as the responsibility of Nortel in this Agreement.
1.2
Words indicating the singular only also include the plural and vice versa where
the context requires.
1.3
The heading of the terms shall not affect their interpretation.
1.4
The term "including" shall mean "including, without limitation".
1.5
Any reference to any gender includes the other gender.
1.6
Any reference to "hereof", "hereto", "herein", "hereunder" or any similar term
is a reference to this Agreement as a whole, and not to any particular provision
or part of this Agreement.
1.7
Any reference to "this Agreement" shall include all appendices, exhibits,
annexes and schedules thereto, and be a reference to such agreement, instrument,
contract or other document as amended, supplemented, modified, suspended,
restated or novated from time to time.
2. DOCUMENTS
All drawings, diagrams, Specifications and any other information to be provided
by one Party to the other Party hereunder shall be supplied in the English
language.
3. ALTERATION TO ORDER
3.1
All alterations, waivers, consents or amendments shall be mutually agreed
between Viatel and Nortel and recorded by means of formal Amendments executed by
Viatel and by Nortel before it is effective.
3.2
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From time to time, Nortel may submit to Viatel a request for, or Viatel may
submit to Nortel a proposed amendment that may result in:
(a) an increase or decrease in a unit Price contained in Annex C or the
total Network Price set forth in Annex C ; or
(b) an adjustment in a Guaranteed Acceptance Date, the project schedule,
the progress schedule and any other dates related to Nortel's
performance set forth in the scope of work.
As a result of the following:
(i) any Force Majeure; or
(ii) any change in any applicable law occurring after the Effective Date; or
(iii) an Optional Suspension.
Viatel's grant of an adjustment shall not constitute a waiver of any of its
rights in respect thereof.
4. PRICES
The prices stated herein shall be firm and fixed in United States of America
Dollars ($US) and shall not be varied except by formal Amendment as permitted
herein or as contemplated pursuant to Clause 4.4 of the Agreement.
5. TAXES, DUTIES AND LEVIES
Responsibility for customs formalities, including administration charges,
duties, taxes and/or levies payable upon exportation or importation of Equipment
shall be apportioned in accordance with the INCOTERM shipping term set forth in
Clause 4 of the Agreement or in Annex C. In any event, Viatel shall be
responsible for the payment of Value Added Tax as an addition to the Price at
the rate prevailing at the date of invoice.
6. TERMS OF PAYMENT
6.1
Invoices shall be submitted to Viatel by Nortel in accordance with the following
payment schedule:
6.1.1 Networks:
i) [REDACTED] of the Price upon placement of an Order hereunder.
ii) [REDACTED] of the value of each item on the date of shipment of
each item of the Equipment and Software.
iii) [REDACTED] of the value each item of Equipment and Software upon
Provisional Acceptance.
iv) [REDACTED] of the Price upon Network Acceptance.
v) [REDACTED] of the value of each item of Services upon its
completion.
6.1.2 Additional Items
Payment of the Price for Additional Items shall become payable as
follows:
6.1.2.1 In the case of supply and install items, the pattern of payment shown
in 6.1.1 above shall apply except that where Network Acceptance is not
a requirement of an Order then the payment set forth in Clause 6.1.1
iv) shall be made upon Provisional Acceptance..
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6.1.2.2 In the case of supply only items, the pattern of payments shown below
shall apply:
i) [REDACTED] of the Price upon Nortel's acceptance of purchase
order.
ii) [REDACTED] of the Price upon shipment of the Equipment and/or
Software.
6.2
Payment shall be made to Nortel by Viatel within 30 days of receipt of Nortel's
invoices. Subject to Section 6.3, in the event that Nortel does not receive
payment within 45 (forty five) calendar days of Viatel's receipt of an
undisputed invoice, then Nortel reserves the right to charge daily interest upon
the outstanding sum(s) at a rate which is 2% (two percent) above the Midland
Bank Base Lending Rate as then current until Nortel receives payment in full.
6.3
Viatel may withhold payment where it can be shown to protect Viatel from
financial loss when:
a) defective work attributable to Nortel has not been remedied by Nortel;
b) there are third party claims against the Equipment, or Nortel pursuant to
the terms hereof by virtue of the acts or omissions of Nortel;
c) Nortel has failed to obtain or maintain insurance as required by Clause 20
hereof;
e) Nortel has failed to provide all documentation required hereunder;
f) Nortel's failure to pay an amount of liquidated damages;
g) Nortel has failed to properly make payments for materials or labour;
h) Viatel can demonstrate that any prior progress payment exceeds the amount
that should have been payable based upon the Work actually performed.
In all cases, the amount withheld shall not exceed the amount which would
otherwise have become due to Nortel but for Nortel's shortcoming in meeting the
contractual obligation in question. When Nortel has rectified its shortcoming,
then the sum withheld shall be paid by Viatel forthwith.
7. DELIVERY TERMS, PROPERTY AND RISK
7.1
Nortel shall undertake delivery of Equipment in accordance with the Order
implementation plan upon shipping terms in accordance with INCOTERMS 1990
published by the International Chamber of Commerce set forth in the Order and
determined in accordance with Clause 4 of the Agreement.
7.2
A schedule of the Equipment shall be submitted to Viatel prior to delivery to
facilitate the checking of consignment contents by Viatel when deliveries are
made.
7.3
Risk of loss or damage to the Equipment shall pass upon Delivery Acceptance.
7.4
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Equipment supplied pursuant to this Agreement shall become the property of
Viatel at the time that payment of the Price is made in full by Viatel to the
extent required pursuant to the terms of this Agreement.
7.5
Viatel shall not acquire any rights in respect of the Software other than the
licence with respect to Software granted in accordance with Clause 19.
8. PERSONNEL
8.1
Both Parties shall appoint project managers who shall each:
a) be fully conversant with the requirements of this Agreement; and
b) speak English on a technical level; and
c) have full control of their employer's personnel, including any of its
subcontractors, engaged in the performance of this Agreement.
8.2
The Parties shall ensure that their staff assigned under the Agreement are
suited in skill, health and temperament to undertake their duties. Viatel may
object to and direct Nortel to remove within 24 hours any person employed by
Nortel and such person shall not be employed again for any portion of the
Services hereunder without the prior approval of Viatel.
9. SITE INFORMATION
9.1
When requested by Nortel to do so, Viatel shall supply Nortel with accurate and
complete information in all material respects concerning a Site and any
equipment and facilities installed thereon, and shall within a reasonable time
advise Nortel of any alterations thereto during this Agreement, and shall
prepare a Site for installation in accordance with Nortel's reasonable
requirements.
9.2
Nortel shall ensure that each System complies with all applicable legal
requirements. Nortel shall comply with all laws, codes, permits, standards
applicable in the countries, provinces and territories in which any part of the
Services are to be performed. Viatel shall not be responsible for any act or
omission of Nortel that violates any such law, code, permit or standard, and
Nortel shall indemnify and hold harmless Viatel from and against any and all
costs or liabilities arising in connection with any such violation by Nortel.
9.3
At Nortel's request Viatel shall afford Nortel access to any Site at all
reasonable times.
10. LOCAL FACILITIES AND SERVICES
10.1
Viatel shall be responsible for the reasonable provision and costs of:
(i) any crane, slings or other specialist lifting or positioning equipment
required to facilitate installation activities on Site which Viatel
shall ensure are in safe working condition.
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(ii) suitable office and temporary storage facilities for use by Nortel or
its sub-contractors until the date of Acceptance.
(iii) interpreters as may be necessary to assist Nortel's personnel in their
duties under the Order.
(iv) the fencing, lighting and guarding of the Site.
(v) the supply of telephone, fax, electricity, water and gas facilities as
may be required by Nortel
(vi) approaches to the Site suitable for Nortel's delivery vehicles.
10.2
Viatel shall obtain at its own expense, prior to the date scheduled for
commencement of any work on Site, all necessary consents, licences and permits
for the installation and use of the Equipment and Software which it shall be
required under applicable law to obtain as the owner of any applicable System.
11. PROGRESS
11.1
If Nortel at any time has reason to believe that the schedule for the
performance of the Work may be delayed Nortel shall promptly notify Viatel.
11.2
If and to the extent that the schedule for the performance of the Work is
delayed by reasons of Force Majeure the provisions of Clause 12 shall apply.
11.3
If Viatel at any time has reason to believe that the date by which Viatel is to
provide Sites, equipment or services ready for use by Nortel may be delayed
Viatel shall promptly advise Nortel. In such event Nortel shall be granted an
extension of time to the Guaranteed Acceptance Date in a number of days to be
agreed by the Parties, but no more than the amount of the delay directly
attributable to Viatel. The costs and expenses incurred which are directly
attributable to the delay (less any savings) shall be recoverable from Viatel
and reflected in an appropriate Amendment to be agreed between the Parties.
Nortel shall use reasonable efforts to mitigate such costs and expenses.
11.4
Viatel may suspend the Work, in whole or in part, at any time from time to time,
upon written notice to Nortel of such suspension, stating the effective date and
anticipated duration of the suspension ("Optional Suspension"). Promptly after
receipt of such notice (and in any event, within 10 days), Viatel shall suspend
the Work to the extent specified. During any Optional Suspension, Nortel shall:
a) place no further orders relating to the suspended Work;
b) shall negotiate reasonably with Viatel to reschedule the manufacture of
Equipment;
c) protect and care for all Work and Equipment already manufactured;
d) give Viatel copies of all outstanding orders with respect to the Work,
materials and services and take any action with respect to such orders as
Viatel may reasonably direct.
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Thereafter, Nortel:
(i) shall resume performance of the Work within a reasonable period after being
directed to do so by Viatel; and
(ii) shall be entitled to an amendment to the Price and Guaranteed Acceptance
Date as agreed by the Parties. All additional costs incurred by Nortel
during an Optional Suspension shall be reimbursed to Nortel by Viatel.
Nortel shall use reasonable efforts to mitigate such costs and expenses.
Should the period of Optional Suspension continue for longer than three
months then Nortel shall be entitled to terminate the Orders with respect
to which the Optional Suspension applies.
12. FORCE MAJEURE
12.1
The following events shall constitute Force Majeure events:
a) Any destruction of or damage to, or any interruption, suspension or
interference with, the Work caused by Acts of God, landslides, lightning,
earthquakes, volcanic eruptions, fires, explosions, floods, epidemic,
plague, acts of a public enemy, wars, revolutions, blockades, riots,
rebellions, sabotage, insurrections, civil disturbances or similar
occurrences;
b) Any national, regional or local labour strike, work stoppage, boycott or
walk-out occurring other than any such which pertains solely to Nortel's
employees, (collectively "Labour Disputes") so long as Nortel has advised
Viatel as far in advance as possible of such Labour Dispute; and
c) Any suspension, termination, interruption, denial or failure to obtain or
renew any permit that Viatel has the responsibility to obtain;
d) Any act or omission of Viatel, its agents or subcontractors;
provided that Force Majeure shall not include any of the forgoing to the
extent that:
(i) it is or was within Nortel's control, provided that the forgoing does
not imply that Nortel must meet any labour demand;
(ii) Nortel should have been able to prevent or provide against it by
exercise of reasonable diligence;
(iii) It does not result in a material delay to, and/or increase in cost
of, the Work to Nortel;
(iv) It results from the fault or negligence of Nortel, its affiliates,
subcontractors or vendors.
12.2
In the event that either Party shall be prevented from material performance of
its obligations hereunder by reason of an event of Force Majeure for a
continuous period of more than six months the other Party shall have the right
to terminate the Agreement by notice in writing whereupon the provisions of
Clauses 21.5 or 22.6 as appropriate shall apply.
12.3
Notwithstanding Clause 12.1, such cause shall not apply to Viatel's obligation
to make payments hereunder.
13. [REDACTED]
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14. FACTORY TESTS AND INSPECTIONS
14.1
Nortel shall be responsible for standard factory testing procedures which will
ensure that the Equipment meets the needs of the System and the other terms and
conditions of the Agreement.
14.2
Viatel shall have the right to inspect Nortel's manufacturing facility and
witness factory testing and shall give Nortel, in writing, 30 calendar days'
notice of its intention to visit Nortel's facility. In any event the factory
tests shall proceed according to Nortel's plan which has been disclosed to
Viatel in writing whether or not Viatel's representative is in attendance.
14.3
Viatel shall be responsible for all costs and expenses in respect of its
representative(s) visiting Nortel's facility. Whilst on Nortel's premises
Viatel's representative(s) shall comply with all Nortel's regulations in force.
15. ACCEPTANCE TESTING
15.1
Nortel shall submit for the approval of Viatel a comprehensive schedule of tests
in respect of Equipment and Software, which Nortel is to install and commission
on Site, designed to demonstrate that a System and each portion thereof will
perform in accordance with the criteria defined in the relevant Specification
and the other terms and conditions hereof. The schedule of Acceptance Tests will
vary according to the extent of the Work required under each Order. These shall
comprise the combination of the following which most effectively meets the
requirements of each Order:
a) Delivery Acceptance Testing - this will take place following installation
of the Equipment at each installation Site and its connection to its
specified electricity supply. It shall demonstrate that the Equipment and
Software so installed works correctly in isolate mode. Where supply only
items are a requirement of an Order, Delivery Acceptance shall be effected
by Viatel and acceptance or rejection communicated to Nortel within 10
working days of receipt.
b) Provisional Acceptance Testing - this will be carried out on each completed
route or node following the connection of all of the Equipment and Software
within the said route or node already the subject of Delivery Acceptance.
It shall demonstrate that the System comprised in the route or node can
provide the facilities and services required for each route or node and
that the route or node will carry traffic all as set forth in the
Specification.
c) Network Acceptance Testing - this will be carried out on the completed
Network following connection of all of the routes and nodes which have
passed Provisional Acceptance. It shall demonstrate that the total System
meets the technical requirements set forth in the Specification and the
other terms and conditions of this Agreement. For non-Network Orders,
Network Acceptance Testing will not be a requirement.
Viatel shall approve the schedule of tests, or reject on the grounds of
non-compliance with this Agreement, within 14 (fourteen) days of submission by
Nortel.
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15.2
Nortel shall give Viatel 14 (fourteen) days notice in writing of the
commencement of the each of the tests of the System or any Equipment or Software
thereof so that Viatel can either make the necessary arrangements for its
representative to be present to witness such tests and approve results or advise
Nortel that its representative will not attend.
15.3
On satisfactory completion of each schedule of tests a comprehensive record of
results shall be provided by Nortel to Viatel. If Viatel has advised Nortel in
accordance with Clause 15.2 that its representative will not attend the testing
of any part or parts of the System, the schedule of results shall be annotated
to this effect by Nortel.
16. ACCEPTANCE
16.1
Acceptance of each portion of the System as set out in Clause 15 above, shall be
signified by the appropriate Acceptance Certificate signed by Viatel upon
satisfactory completion of each of the Acceptance Tests, where applicable.
Viatel will not unreasonably refuse to sign an Acceptance Certificate on account
of minor omissions or defects which do not materially affect the use of the
System.
16.2
In the event that the Equipment and/or Software or any portion thereof is put
into use for commercial purposes by Viatel after completion of the applicable
tests but prior to its signature of an appropriate Acceptance Certificate, then
the appropriate Acceptance shall be deemed to have taken place upon the date of
such putting into use for commercial purposes, unless within a reasonable time
Viatel shall have given written notice to Nortel of material shortcomings in the
Network as demonstrated by the Acceptance Tests or other terms and conditions of
this Agreement which it requires Nortel to rectify. Such Acceptance shall be
without prejudice to Nortel's obligations to complete the System in accordance
with the requirements of the Agreement.
16.3
The Network Acceptance Date, where applicable, shall occur when the Network
Acceptance Certificate has been issued as set forth above. It shall be a
condition precedent to the issuance of the Network Acceptance Certificate that
the following conditions have been satisfied:
a) an initial commissioning report has been delivered;
b) that the System has been completed in accordance with the Specification and
any other requirements of this Agreement as demonstrated by the Acceptance
Tests;
c) that the System has achieved all performance requirements during the
Network Acceptance Tests;
d) that the System is available for commercial operation as described in the
Specification;
e) that all liens relating to the system have been discharged and releases
given therefor, except for those which may apply by virtue of any financing
arrangement which Viatel are using to make the purchase.
f) that no unresolved event of default by Nortel exists;
g) that all requirements of the Agreement relating to the System, or such
smaller portion of the System as has, by the mutual agreement of the
Parties, undergone Acceptance (including all technical requirements) have
been fulfilled and all required documentation has been completed, in each
case other than those that do not, by the express terms hereof, have to be
fulfilled on or completed prior to Network Acceptance.
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16.6
Final Acceptance with respect to a System shall occur when Viatel issues a
Certificate of Final Acceptance acknowledging that the following conditions have
been satisfied:
a) A Delivery, Provisional or Network Acceptance Certificate as appropriate
has been issued;
b) the Warranty Period shall have expired and there shall be no outstanding
warranty claims thereunder;
c) all documentation required under the Agreement has been delivered;
d) there shall be no outstanding liens except for those which may apply by
virtue of any financing arrangement which Viatel are using to make the
purchase.
17. WARRANTY
17.1
The following shall be Nortel's general warranties ("General Warranties"):
a) The Work, including the Equipment and Software shall meet the performance
criteria set out in the Specification;
b) The Work shall be done in a workmanlike manner and in accordance with:
(i) best practices of the telecommunications industry;
(ii) all applicable mandatory requirements of the law of the country of
deployment;
(iii) all other workmanship requirements specified in the Agreement.
(iv) be free from defects in design, materials, installations or
workmanship.
c) The Equipment shall be new and Equipment and Software (except where
expressly specified in the Agreement), fit for the purpose specified in the
Agreement, and shall meet the requirements of the Agreement; and
d) The Equipment shall be:
(i) fit for the purpose of transmitting and receiving telecommunications
signals of the type specified in the Agreement;
(ii) capable of achieving the performance specification set out in the
Specification; and
(iii) built strictly in accordance with the Specification.
The warranty period ("Warranty Period") shall end: [REDACTED]
Notwithstanding the appropriate Acceptance having occurred, Nortel undertakes
that during the Warranty Period, it shall promptly repair or replace, at its
option, without charge to Viatel, the whole or any part of the System found to
be faulty by reason of the above causes. This Warranty shall not apply to
consumable items or routine maintenance materials.
11
<PAGE>
17.2
Any parts found not to be compliant with the Warranty in Clause 17.1 shall be
returned by Viatel to Nortel's works, carriage and insurance to Nortel's
account, and the replacement or repaired parts supplied by Nortel shall be
delivered free of charge to the Site.
17.3
In the event of a major service-affecting failure during the Warranty Period
Nortel shall promptly:
(a) advise any corrective action that Viatel may be able to take on Site; or
(b) despatch by express delivery such parts and/or Software as may be necessary
to restore the System; or
(c) send an appropriate specialist to Site and maintain him there at no cost to
Viatel for as long as is necessary to rectify the defect.
Nortel shall make every reasonable effort to minimise the period of time that
the System is out of service for repair and testing. For failures or any
situations that cause or risk an outage of the Network, Nortel shall initiate a
corrective action immediately after receipt of notice from Viatel. Upon any
breach of the Warranties contained herein during the applicable Warranty Period,
Viatel may, to the extent that Nortel has failed to (i) make prompt repair or
replacement, or (ii) minimise System out-of-service time for testing and repair,
arrange for the repair or replacement of any defective Work and Nortel shall
reimburse Viatel for the cost of repairs or replacements.
17.4
Nortel shall have no obligation to repair or replace Equipment and/or Software
which has been abused, used in unauthorised applications in accordance as per
Clause 19 hereof, altered, or used in conjunction with third party material
which is defective or of poor quality, or which has been operated and maintained
by Viatel with a material lack of compliance with Nortel's operating and
maintenance instructions. Nortel shall be entitled to charge Viatel for any work
performed in investigating and/or rectifying problems not covered by the
provisions of Clause 17.1.
17.5
EXCEPT AS PROVIDED BY APPLICABLE LAW, THE WARRANTY PROVIDED IN THIS CLAUSE 17
CONSTITUTES THE SOLE LIABILITY OF NORTEL IN RESPECT OF THOSE MATTERS TO WHICH IT
REFERS. ALL OTHER TERMS, CONDITIONS AND WARRANTIES EXPRESSED OR IMPLIED WHETHER
STATUTORIALLY OR OTHERWISE ARE HEREBY EXPRESSLY EXCLUDED TO THE EXTENT THAT THE
PARTIES CANNOT SO EXCLUDE AT APPLICABLE LAW.
18. SUPPORT
For a period of 10 (ten) years from the date of Acceptance with respect to any
System Nortel shall, if required by Viatel, supply any spare or replacement
parts, or suitable alternatives, for the Equipment at the prices then
prevailing.
19. RIGHTS TO USE THE SOFTWARE
12
<PAGE>
19.1
In consideration of Viatel paying to Nortel fees as specified in the Order,
Nortel grants to Viatel a permanent (subject to compliance with terms hereof)
non-exclusive non-transferable Right to Use licence in respect of the Software
and associated documentation delivered in accordance with this Agreement. Viatel
shall not duplicate nor modify nor disassemble nor decompile the Software except
as provided for under the Council of the European Communities Directive on the
legal protection of Computer Programs dated the 14th May 1991 (91/250/EEC) and
furthermore Viatel shall not divulge or otherwise make available any Software or
associated documentation to persons other than its employees without the prior
written consent of Nortel.
19.2
The Right to Use licence is granted on condition that the Software is utilised
for the operation and maintenance of the appropriate elements of the System as
detailed herein and for no other purpose and on no equipment other than the
Equipment without the prior written authorisation of Nortel.
19.3
This Software licence is granted only on those features identified in the
Software Specification and for which licence fees have been paid in accordance
with the Price Schedule. Viatel understands that Nortel may furnish within the
Software load features which Viatel is not granted a right to use by virtue of
not being included within the specified licence fees, but may nevertheless be
accessible to them. Where Viatel wishes to use such non-licensed features then
it shall be entitled to do so subject to payment of the applicable additional
Software right to use fee prior to commercial deployment of such non-licensed
Software feature or functionality.
19.4
The conditions of this Clause 19 shall survive the expiry or termination of the
Agreement except where termination is by virtue of breach of the software
licence.
20. LIABILITY AND INSURANCE
20.1
Each Party shall be indemnified by the other Party against any liability, loss,
claim and/or proceedings whatsoever in respect of personal injury to and/or
death of any person and damages to and/or loss of tangible property howsoever
arising pursuant to this Agreement or any breach thereof due to the acts or
omissions of such other Party, its servants or agents.
20.2 [REDACTED]
20.3
IN NO EVENT SHALL EITHER VIATEL OR NORTEL BE LIABLE, WHETHER AS THE RESULT OF
CONTRACT, TORT, INCLUDING, WITHOUT LIMITATION, NEGLIGENCE, OR OTHERWISE
HOWSOEVER ARISING, FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR FOR ANY
DAMAGES ARISING FROM OR ATTRIBUTABLE TO FAILURE TO REALISE EXPECTED SAVINGS,
LOSS OF DATA, CAPITAL DOWNTIME COSTS, LOSS OF USE, LOSS OF GOODWILL OR LOSS OF
ANTICIPATED OR ACTUAL REVENUE OR PROFIT EVEN IF EITHER PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF ANY SUCH DAMAGES.
13
<PAGE>
20.4
Subject to sub-clause 20.1 of these conditions in the event that Nortel is found
liable for breach of its obligations under an Order then its total liability
shall not under any circumstances exceed the Order Price for any breach or
breaches.
20.5
20.5.1 Nortel shall insure the Works and keep each part thereof insured for
their full replacement value against all loss or damage from whatever cause
arising until a Delivery Acceptance Certificate has been issued. All monies
received under any such policy shall be applied in or towards the replacement
and repair of the Works lost, damaged or destroyed.
20.5.2 Nortel shall, prior to commencing work on the Site pursuant to the
Agreement, insure in an amount which shall not exceed [REDACTED] per event,
against his liability for damage or death or personal injury occurring before
the Works have achieved Acceptance, to any person (including any employee of
Nortel or Viatel) or to any property (other than property forming part of the
Works) due to or arising out of the execution of the Works.
20.5.3 Nortel shall insure and shall maintain insurance against his liability
for accidents or injuries to their employees.
20.5.4 If Nortel shall fail to effect and keep in force the insurances specified
herein then Viatel may effect and keep in force any such insurance and pay such
premium or premiums as may be necessary and from time to time deduct the amount
so paid by Viatel from any monies due or which may become due to, or recover the
same as a debt due from Nortel. Nortel shall furnish Viatel with documentary
evidence as to the existence of the above policies.
21. TERMINATION BY VIATEL
21.1
If Nortel shall be in material breach of the its obligations under an Order and
Viatel shall so inform Nortel by notice in writing and should the breach
continue for more than 30 (thirty) days, or such longer period as may be
specified by Viatel, after such notice then Viatel may terminate the Agreement
or the Order by notice in writing to Nortel and may suspend further payment to
Nortel pending resolution of financial settlement pursuant to the conditions set
out below.
21.2
Upon termination of the Agreement or an Order as provided in Clauses 21.1 or 23
Nortel shall forthwith cease work and remove its labour from the relevant Site.
However Nortel shall not remove from the relevant Site any Equipment, the title
of which has not passed to Viatel, nor any of its installation tools or
materials unless given permission to do so in writing by Viatel. Viatel may
elect to complete the purchase of any such Equipment and use any such
installation tools or materials by paying Nortel the unpaid price of such
Equipment and a fair price for use of such tools and/or materials less any
amount payable hereunder by Nortel to Viatel.
21.3
Upon termination of the Agreement or an Order as provided for in Clauses 21.1 or
23, Viatel may at its option;
21.3.1 reject the relevant System and elect to retain such portion(s) of the
relevant System as it may determine. Nortel shall refund any amount(s) of money
to Viatel which Viatel has paid in respect of the rejected items subject to the
payment by Viatel to the extent required to the for those items which Viatel
elects to retain (less any amount payable hereunder by Nortel to Viatel), and/or
14
<PAGE>
21.3.2 continue work either by itself or by sub-contracting to a third party to
complete the System. Nortel shall if so required by Viatel to the extent
allowable by such agreements, within 14 (fourteen) calendar days of the date of
termination assign to Viatel without payment the benefit of any agreement for
supply of materials or goods and/or execution of any work for the purposes of
the Agreement. In the event that Viatel had already paid the price thereof to
Nortel, then Nortel shall promptly repay such sum(s) to Viatel. In the event of
the System being completed by Viatel or a third party and the total cost
incurred by Viatel in so completing the System being greater than that which
would have been incurred had the Order not been terminated then Nortel shall pay
to Viatel such excess up to a maximum of the Order Price.
21.4
In addition to any other powers to terminate the Agreement Viatel shall have the
power to terminate an Order in whole or in part for its own convenience at any
time up to 30 days prior to the scheduled date for delivery of the Equipment or
carrying out of the Services contained in that Order by giving notice in writing
to Nortel. In the event of Viatel exercising such power of termination Nortel
shall carry out Viatel's reasonable instructions in regard to termination.
21.5
Upon termination by the Viatel in accordance with the provisions of Clauses 12
or 21.4 Nortel shall immediately cease work and Viatel shall pay to Nortel
forthwith upon termination the proportion of the Order Price applicable to the
portion or portions fully or substantially performed prior to the termination in
accordance with pricing set forth in Annex C.
21.6
Termination of an Order shall be without prejudice to the rights and remedies of
the parties accrued under the Agreement immediately prior to the termination.
22. TERMINATION BY NORTEL
22.1
Nortel shall not have the right to terminate an Order except for reasons of
Force Majeure (Clause 12) or in the event of actual insolvency of Viatel (Clause
23) or in respect of a material breach of the terms and provisions of the
Agreement by Viatel (Clause 22.2).
22.2
Without prejudice to the provisions of Clause 22.3, if Viatel shall be in
material breach of it obligations under the Agreement and Nortel shall so inform
Viatel by notice in writing and should the breach continue for 30 (thirty) days
after such notice, or, in the case of failure by Viatel to pay any sum due to
Nortel hereunder, 10 (ten) working days after such notice, Nortel shall without
prejudice to any of its other rights and remedies have the right to immediately
terminate the Agreement and claim from Viatel for any resulting loss or damage.
22.3
Notwithstanding the provisions of Clause 22.2, in the event of a material breach
or violation of the Software Right to Use conditions (Clause 19) by Viatel,
Nortel shall inform Viatel by notice in writing and should the breach or
violation continue for more than 14 (fourteen) days after such notice Nortel may
terminate the Software Right to Use licence forthwith.
22.4
15
<PAGE>
Upon termination of the Software Right to Use licence in accordance with Clause
22.3 Nortel may, at its absolute discretion, either require Viatel to return all
copies of the Software and associated documentation within 14 (fourteen) days of
the notice to do so, or permit Viatel the continued use of the Software and
associated documentation upon such terms as Nortel may direct.
22.5
Application of the provisions of Clause 22.4 shall be without prejudice to
Nortel's right to recover costs and/or damages for breach of contract by Viatel.
The sums to be paid by Viatel to Nortel in respect of such costs or damages
shall be as agreed by the Parties or as awarded by a court of competent
jurisdiction subject to the limitation set forth herein.
22.6
Upon termination by Nortel in accordance with the provisions of Clause 12.2,
Viatel shall pay to Nortel forthwith upon termination the proportion of the
Order Price applicable to the portion or portions of the Order which have been
delivered or are in progress of manufacture (unless such Equipment is sold to a
third party) plus the price of services performed prior to such termination,
together with any additional sums properly expended by Nortel in regard to
termination plus a reasonable rate of profit on the same (less any savings).
Nortel shall have a duty to mitigate damages hereunder.
23. INSOLVENCY AND LIQUIDATION
If either party shall commence any case, proceeding or other action under any
law relating to bankruptcy, insolvency, reorganisation or relief of debtors,
seeking to have an order for relief entered with respect to or seeking to
adjudicate it a bankrupt or insolvent or seeking reorganisation, arrangement,
adjustment, winding up, liquidation, dissolution, composition or other relief
with respect to it or its debts or seeking appointment of a receiver, trustee,
custodian, conservator or other similar official for it or for all or any
substantial part of its assets, or shall make a general assignment for the
benefit of its creditors or there is commenced against it any such action, case,
or proceeding, then the other Party shall be entitled to terminate the Agreement
and exercise any remedies provided for herein or in law.
24. PATENTS AND COPYRIGHTS
24.1
Nortel shall defend and indemnify Viatel against all actions or claims for
infringement of patents, copyright, registered design or other intellectual
property rights arising by reason of Viatel's purchase, possession or use of
Systems, the Software, or the Equipment provided that Viatel:
(i) gives notice to Nortel of any actual or threatened action or claim within
a reasonable time of becoming aware of the same; and
(ii) gives Nortel the sole conduct of the defence to any actual or threatened
action or claim in respect of an alleged intellectual property
infringement and does not at any time, following receiving a threat of or
notice of commencement of proceedings, admit liability or otherwise
attempt to settle or compromise the said action or claim except with the
prior written consent of Nortel; and
(iii) acts in accordance with the reasonable instructions of Nortel and gives to
Nortel such assistance as it shall reasonably require in respect of the
conduct of the said defence including, without prejudice to the generality
of the foregoing, the filing of all pleadings and other court process and
the provision of all relevant documents. In this respect Nortel shall
reimburse Viatel's reasonable out of pocket expenses incurred in such an
exercise.
16
<PAGE>
24.2
In the event that it is held that there is an infringement as described in
Clause 24.1, Viatel agrees that Nortel's total liability in addition to the
payment of any losses or damage awarded against Viatel shall, at Nortel's
option, be either :
(i) to modify the System or part thereof so that it does not infringe; or
(ii) to replace the System or part thereof with non-infringing products; or
(iii) to procure for Viatel the right for Viatel to continue its use of the
System
In the event that Nortel cannot perform under (i), (ii) or (iii) above, Viatel
shall have the right to return the infringing Equipment and / or Software to
Nortel following written notice to Nortel, and in the event of such return,
neither Party shall have any further liabilities or obligations in respect of
such Equipment and Software, except that Nortel shall refund the Order Price and
take possession of the affected Equipment and Software.
24.3
This indemnity shall not extend to infringement resulting from use or adoption
by Nortel of Viatel's parts, designs or specific instructions or from use of the
System, the Equipment or the Software in a manner or for a purpose not stated in
the Specification or in the event that Viatel makes an admission, following
receiving a threat of or notice of commencement of proceedings, which is or may
be prejudicial to Nortel's case.
24.4
The copyright in all drawings, specifications and data issued by either Party in
connection with the Agreement shall remain the property of the issuing Party but
the other Party shall be entitled for all reasonable purposes in connection with
the Agreement to a personal, non-exclusive, non-transferable licence, free of
charge, to use such drawings, specifications and data. Use by the other Party of
such drawings, specifications and data for any other purpose will entitle the
issuing Party to terminate such license forthwith.
25. CONFIDENTIAL INFORMATION
Each Party shall keep confidential and shall disclose only to its own employees
and agents to the extent necessary for the performance of this Agreement and
shall not, without the other Party's prior written consent, disclose to any
third party any document or information acquired from the other Party pursuant
to the Agreement and such documents and information shall only be used for the
purpose of the Agreement provided however that nothing shall prevent either
Party from disclosing information which:
(a) is in its possession with the full right to disclose prior to receiving it
from the other Party or,
(b) is or later becomes public knowledge other than by a breach of this Clause
25 or,
(c) it may independently receive from a third party with the full right to
disclose or,
(d) is developed independently of the information disclosed under this Clause
25 or,
(e) is required by law to be disclosed,
subject, in the case of disclosure to agents, to the signature by such agents of
a confidentiality undertaking in favour of the party to whom any relevant
information belongs in terms equivalent to the provisions of this clause 25.
26. GIFTS OR CONSIDERATIONS
17
<PAGE>
Nortel shall not offer to give or agree to give to any person any gift or
consideration of any kind as an inducement or reward for doing or forbearing to
do or for having done or forborne to do any act in relation to the obtaining or
execution of this or any other agreement with Viatel or for showing or
forbearing to show favour or disfavour to any person in relation to this or any
other Agreement with Viatel.
27. EXPORT AND RE-EXPORT
27.1
All Orders are subject to the granting of all appropriate Governmental export
and where applicable, import licences prior to any deliveries. In the event that
such licences are not granted within 6 (six) months of issuance of the Order
then the Agreement shall be declared null and void. In such event neither Party
shall have any claims against the other Party with respect to that Order.
27.2
Regardless of any disclosure made by Viatel to Nortel of the ultimate
destination of any System or any part thereof, Viatel undertakes not to export,
either directly or indirectly, any System in whole or in part, nor any system
incorporating any System in whole or in part without having first obtained
clearance or a licence to re-export from the USA and/or Canadian Governments as
required under their respective re-export regulations.
28. CONSTRUCTION OF AGREEMENT
If any term or condition of the Agreement is held to be invalid under any
applicable statute or rule of law, it shall be deemed to be omitted from these
terms and conditions to the extent of such invalidity but the remainder of the
Agreement provisions shall continue in full force.
29. SUBCONTRACTING
Should any sub-contractor required by Nortel to perform the Works or parts
thereof which were not identified to Viatel prior to signature of the Agreement,
Nortel will submit details of the proposed sub-contractors for Viatel's approval
prior to the sub-contractors commencing any work. Any notification by Nortel of
such sub-contract not relieve Nortel from any liability or obligation under the
Agreement.
30. NON-WAIVER
The failure of either Party to give notice to the other of any breach or
non-fulfilment of any provision, term or Clause of this Order shall not
constitute a waiver thereof, nor shall the waiver of any breach or
non-fulfilment of any provision, term or Clause hereof constitute a waiver of
any other provision, term or Clause hereof.
31. SURVIVAL OF CONDITIONS
The provisions of the following Clauses shall survive and shall continue in full
force and effect notwithstanding the expiration or earlier termination of the
Order:
Clause 17 relating to Warranty
Clause 19 relating to Right to Use Software
Clause 20 relating to Liability and Insurance
Clause 24 relating to Patents & Copyrights
Clause 25 relating to Confidential Information
Clause 27.2 relating to Re-export Controls
Clause 28.1 relating to Applicable Law
18
<PAGE>
ANNEX B
NORTEL AFFILIATES
<PAGE>
GERMANY
Nortel Dasa Network Systems GmbH &Co.KG
Public Carrier Networks
Hahnstr. 37 - 39
60528 Frankfurt/Main, Germany
UNITED KINGDOM
Nortel plc.,
Maidenhead Office Park
Westacott Way
Maidenhead
Berkshire
SL6 3QH
NETHERLANDS
Northern Telecom BV
Siriusdreef 17-27
2132 WT Hoofddorp
FRANCE
Matra Nortel Communications SAS
33 quai Paul Doumer
Paris la Defense
92415 Courbevoie Cedex
BELGIUM
Northern Telecom NV
Belgicastraat 4
1930 Zaventum
Brussels
<PAGE>
ANNEX C
PRODUCT DESCRIPTION AND PRICING
[REDACTED]
<PAGE>
ANNEX D
SPECIFICATIONS
[REDACTED]
EXHIBIT B
SUBSIDIARIES OF VIATEL, INC.
NAME OF SUBSIDIARY JURISDICTION
- - ------------------ ------------
Viatel U.K. Limited England and Wales
Viatel Belgium Limited England and Wales
Viatel Spain Limited England and Wales
Viatel (I) Limited England and Wales
Viatel Staines Limited England and Wales
Viatel Global Communications S.p.A.
(formerly Viaphone S.R.L.) Italy
Viatel S.R.L. Italy
Viatel Operations, S.A. France
Viatel S.A. France
VPN S.A.R.L. France
Viafon Dat Iberica, S.A. Spain
Viatel Global Communications Espana S.A. Spain
Viatel Belgium NV/SA Belgium
Viaphone NV/SA Belgium
Viatel GmbH Germany
Viaphone GmbH Germany
Viatel AG Switzerland
Viaphone AG Switzerland
Viatel Global Communications B.V. Netherlands
Viafoperations Communications B.V. Netherlands
Viacol Ltda. Columbia
Viatel Colombia Management, Inc. Delaware
Viatel Colombia Holdings, Inc. Delaware
Viatel Sales U.S.A., Inc. Delaware
YYC Communications, Inc. Delaware
Viatel Nebraska, Inc. Delaware
Viatel Sweden, Inc. Delaware
Viatel Finland, Inc. Delaware
Viatel Argentina Holdings, Inc. Delaware
Viatel Argentina Management, Inc. Delaware
Viatel Brazil Management, Inc. Delaware
Viatel Brazil Holdings, Inc. Delaware
Viatel Development Company Delaware
Viatel Circe Cable System, Limited Delaware
Viatel Financial Company L.L.C. Delaware
Viatel Global Communications, Ltd. Delaware
Viatel New Jersey, Inc. Delaware
Exhibit 23.1
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to incorporation by reference in the registration
statement No. 333-15155 on Form S-8 and in the registration statement No.
333-16671 on Form S-8 of Viatel, Inc. of our report dated February 26, 1999,
relating to the consolidated balance sheets of Viatel, Inc. and subsidiaries as
of December 31, 1998 and 1997 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, and the
related schedule, which appears in the December 31, 1998 annual report on Form
10-K of Viatel, Inc.
/s/ KPMG LLP
New York, New York
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the consolidated balance sheets of
Viatel, Inc. at December 31, 1998 and the consolidated
statements of operations for the year ended December
31, 1998 and is qualified in its entirety by reference
to such financial statements.
There was no change in primary and diluted EPS for
1996 as a result of the adoption of SFAS 128.
</LEGEND>
<MULTIPLIER> 1
<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> 305,984,000
<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> (102,301,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (102,301,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (28,304,000)
<CHANGES> 0
<NET-INCOME> (130,605,000)
<EPS-PRIMARY> (5.67)
<EPS-DILUTED> (5.67)
</TABLE>
