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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 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, 1999
/ / 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)
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DELAWARE 13-3787366
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
685 THIRD AVENUE, NEW YORK, NEW YORK 10017
(Address of Principal Executive Offices) (Zip Code)
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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 April 10, 2000, was approximately $1,783,712,670.00. As of
April 10, 2000 50,034,866 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
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Part I........................................................................... 1
Item 1. Business.................................................... 1
Overview.................................................... 1
Strategy.................................................... 2
Our Network................................................. 2
Products and Services....................................... 5
Sales and Marketing; Customer Service....................... 7
Information Systems......................................... 8
Competition................................................. 9
Government Regulation....................................... 12
Employees................................................... 24
Item 2. Properties.................................................. 24
Item 3. Legal Proceedings........................................... 25
Item 4. Submission of Matters to a Vote of Securities Holders....... 25
Part II.......................................................................... 26
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 26
Item 6. Selected Consolidated Financial Data........................ 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risks....................................................... 47
Item 8. Financial Statements and Supplementary Data................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 76
Part III......................................................................... 76
Item 10. Directors and Executive Officers of the Registrant.......... 76
Item 11. Executive Compensation...................................... 81
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 87
Item 13. Certain Relationships and Related Transactions.............. 88
Part IV.......................................................................... 89
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 89
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "should," "will," and "would" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position or state other "forward-looking" information. We believe that
it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed below in "Part II--Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors," as well as any cautionary language in this report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
ITEM 1. BUSINESS
OVERVIEW
We are a rapidly growing provider of "ALL DISTANCE," integrated
telecommunications services in Europe and North America. We operate one of
Europe's largest pan-European networks, with international gateways in New York
City and London, direct sales forces in 12 Western European cities and New York
City and an indirect sales force in numerous locations in Western Europe and
North America. We have full public telecommunications operator licenses in each
of Austria, Belgium, Canada, France, Germany, Ireland, Italy, The Netherlands,
Spain, Switzerland, the United Kingdom and the continental United States, and
interconnection agreements with the incumbent telecommunications provider(s) in
each of these countries.
Our principal asset is our high-capacity fiber optic network. To date, our
network consists of 4,700 route kilometers of long-haul fiber linking cities in
the United Kingdom, The Netherlands, Belgium, France and Germany. Our network is
expected to reach over 10,400 route kilometers in Europe by the end of 2000, and
is connected to our trans-Atlantic cable capacity and U.S. fiber assets. Our
network has been designed to allow customers to seamlessly exchange voice, data
and video content between North America and Europe, and within Europe. Our
technologically advanced network employs fully protected, self-healing, ring
architecture and synchronous digital hierarchy systems to provide high
reliability and redundancy.
Our network currently connects New York with 40 cities in Europe. In the
second half of 2000, it is expected to connect Boston, Chicago, New York,
Philadelphia and Washington, DC with 59 cities in Belgium, France, Germany, The
Netherlands, Switzerland and the United Kingdom. Our European network operates
at a speed of 20 gigabits per second but can be upgraded, without service
interruptions, to at least 640 gigabits per second per fiber pair through the
further application of dense wave division multiplexing technology, to support
Europe's growing demand for bandwidth intensive data services.
We recently announced our entry into the competitive local exchange carrier,
or CLEC, business. Through a combination of self-constructed assets and fiber
exchanges, we will be deploying 22,000 fiber kilometers of metropolitan fiber,
in London, Amsterdam, Paris, Berlin, Frankfurt and Dusseldorf as well as in the
New York metropolitan area. We will soon be able to link our pan-European, North
American and trans-Atlantic broadband networks with high-speed local fiber
networks to offer customers a wide array of local and long-distance voice and
data services over a single seamless, multinational, integrated network.
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STRATEGY
Our goal is to provide integrated end-to-end, "ALL DISTANCE," solutions for
our customers' voice and data communications needs over our own network. We plan
to deliver these solutions primarily through networks that we have built, are in
the process of building or will build or acquire through fiber exchanges. Key
components of our strategy to achieve this goal are:
- CREATE AN INTEGRATED, CONTINUOUSLY UPGRADEABLE PAN-EUROPEAN NETWORK WITH
LONG-HAUL AND LOCAL ACCESS CAPABILITY
We will use our pan-European long-haul network to offer inter-city and
cross-border services primarily over our own facilities, rather than lines
leased from others. This network will use dense wave division multiplexing
technology and asynchronous transfer mode protocol to operate at very high
speeds in order to meet our customers' current and future broadband data
requirements. We will complement our long-haul network with extensive
metropolitan fiber networks in key cities in Europe and North America to provide
end-to-end connectivity solutions.
- INCREASE CUSTOMER "LAST MILE" CONNECTIONS USING MULTIPLE ACCESS
TECHNOLOGIES
Since early 1998, we have focused on building our high-capacity, inter-city
fiber optic networks, wherever possible building into the central business
district to permit future direct connectivity to a high percentage of the area's
commercial buildings. Beginning in the second quarter of 2000, we will add
broadband "last mile" connections through a combination of direct fiber
connectivity and wireless links. In addition to broadband fiber and wireless
links, we intend to deploy xDSL technology, beginning in Germany in the second
half of 2000, as an additional means of providing "last mile" connectivity to
our existing and prospective customers.
- CONFIGURE OUR NETWORK FOR THE PROVISION OF SERVICES OVER INTERNET PROTOCOL
We have installed Internet protocol routers and asynchronous transfer mode
switches in our network to meet our customers' growing data needs. We believe
that over time Internet protocol will replace asynchronous transfer mode as the
primary network protocol and emerge as the standard for data, video and voice
communications.
- INTRODUCE ADDITIONAL INTERNET SERVICES
In addition to expanding Internet access, which we currently offer on a
trial basis in three markets, we plan to offer complex Internet hosting,
e-commerce and hosted applications solutions ("netsourcing") through a strategic
alliance with Intira Corporation beginning in the third quarter of this year.
Under this strategic alliance, we will provide data center infrastructure and
connectivity for Intira's netsourcing activities, and will resell Intira
netsourcing solutions to our small- and medium-sized business customer base.
- BUILD ON OUR CUSTOMER BASE, EMPLOYEE BASE AND SYSTEMS TO SUCCEED IN THE
DATA SERVICES MARKET
We will apply the strategies and skills we have developed in the long
distance market to the growing European data services market. These include
special focus on small- and medium-sized business customers, decentralized local
management, close attention to customer care and effective, reliable back-office
systems. Additionally, we will exploit our market knowledge and sales channels
to bring data services to selected existing voice customers and to identify and
target new customers for data services.
OUR NETWORK
Our principal asset is our high-capacity fiber optic network, which will be
connected to our own trans-Atlantic cable system and U.S. fiber assets. We began
constructing our European fiber network in 1998. To date, we have completed
construction of the first two phases of our network build, consisting of over
3,000 route kilometers linking 40 cities in the United Kingdom, The Netherlands,
Belgium, France and
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Germany. The third phase of our network build, which will add eleven German
cities to our network, is nearing completion. We currently anticipate that the
fourth and fifth phases of our network build, which will extend into southern
and western France and Switzerland, will be completed during the second half of
2000. Due to our recent acquisition of AT&T Communications UK, Ltd.
("AT&T UK"), a provider of voice and data communications solutions primarily to
enterprise level corporate customers, we have added 1,700 route kilometers of
fiber linking 18 additional cities within England and Scotland to our existing
network.
Our technologically advanced network employs ring configurations and
self-healing synchronous digital hierarchy systems to provide high reliability
and redundancy. The network is equipped with technologically advanced fiber and
optical transmission systems, and consists of a uniform configuration of dense
wave division multiplexing optronics and Lucent fiber optic cable. We believe
that this uniform configuration allows us to ensure very high levels of service
quality while maintaining low operating costs and ease of upgradeability. Our
network was designed from the outset to support Internet protocol, asynchronous
transfer mode and traditional circuit switched services.
The long-haul network which we are constructing in Europe has at least
48 fibers installed throughout, with between 72 and 96 fibers in one conduit on
most terrestrial segments. In addition, we have laid at least one additional
spare conduit on most terrestrial segments. While we are constructing our
European long-haul network primarily for our own use, we have sold and expect to
continue to sell and exchange dark fibers and wavelengths on segments of our
network. Such capacity sales reduce our construction costs and such exchanges
help us expand our network footprint. We believe we have sufficient fibers to
meet our capacity needs for the foreseeable future and enough existing
additional fibers, as well as duct in which to lay additional fibers, to enable
us to engage in substantial additional fiber sales and exchanges.
LOCAL FIBER OPTIC NETWORKS
Through a combination of self-constructed assets and fiber exchanges, we
will be deploying 22,000 fiber kilometers of metropolitan fiber in London,
Amsterdam, Paris, Berlin, Frankfurt, Dusseldorf and the New York City
metropolitan area. We will soon be able to link customers to our pan-European,
North American and trans-Atlantic networks with broadband local fiber
connectivity enabling high speed integrated data, video and voice communication
with higher quality and lower cost, compared to leasing all of our "last mile"
lines from others.
TRANS-ATLANTIC CAPACITY
On April 10, 2000, we executed a definitive agreement with Level 3
Communications under the terms of which we acquired a 25% ownership interest in
the trans-Atlantic fiber optic cable project being developed by Level 3. This
four fiber pair, 1.28 terabit system, is currently under construction and is
scheduled to be in service by October 2000. The landing stations for this cable
are on Long Island in the United States and on the west coast of the United
Kingdom. As part of this acquisition, we also obtained 128 STM-1s of capacity on
the Atlantic Crossing 1 cable system operated by Global Crossing.
In addition to our proposed fiber pair on Level 3's trans-Atlantic fiber
optic cable, we also have significant capacity on the Atlantic Crossing 1 cable
system and additional capacity on the Gemini cable system, used primarily to
provide multi-path redundancy.
BROADBAND WIRELESS
We intend to reduce our reliance on "last mile" connections leased from the
incumbent carrier or other competitive local exchange carriers by increasing the
number of customers connected to our network. In some cases, we will construct a
fiber optic extension from the customer's premises to our network. In other
cases, we will deploy a high-bandwidth wireless connection between an antenna on
the customer's premises and an antenna at a central location that is directly
connected to our network. These
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point-to-point wireless connections offer high quality broadband capacity and
frequently cost less to install than direct fiber connections. We expect to
deploy wireless last mile extensions in most of our key European markets during
2000.
A wireless connection typically consists of paired antennas generally placed
at a distance of approximately four to six kilometers from one another with a
direct, unobstructed line of sight. The antennas are typically installed on
rooftops, towers or windows.
The wireless local loop technologies that we intend to use in our CITYCONNEX
SERVICE-TM- uses point-to-point radio transmissions having narrow beam width,
reducing the potential for channel interference and allowing dense deployment
and channel re-use. In some of our markets, such point-to-point services may be
deployed on unrestricted frequency bands requiring only limited permits. The
large amount of capacity in each channel permits the simultaneous use of
multiple voice and data applications. Properly deployed, wireless local loop
technology can substantially reduce the cost of connecting customers to a
network.
DIGITAL SUBSCRIBER LINE
DSL solutions are an important tool to provide broadband access to customers
who are not located near our city fiber rings or in areas not served by our
CITYCONNEX SERVICE-TM-. We are currently negotiating arrangements to co-locate
our DSL access multiplexers in approximately 600 of Deutsche Telekom's central
offices and we expect to initiate commercial DSL service in three German cities
by the end of 2000.
CIRCUIT SWITCHING VS. PACKET SWITCHING
There are two widely used switching technologies currently deployed in
communications networks: circuit-switching systems and packet-switching systems.
Circuit switch-based communications systems, which currently dominate the public
telephone network, establish a dedicated channel for each communication (such as
a telephone call for voice or fax), maintain the channel for the duration of the
call, and disconnect the channel at the conclusion of the call.
Packet-switch based communications systems, which format the information to
be transmitted into a series of shorter digital messages called "packets," are
the preferred means of data transmission. Each packet consists of a portion of
the complete message plus the addressing information to identify the destination
and return address. A key feature that distinguishes Internet architecture from
the public telephone network is that on the packet-switched network, a single
dedicated channel between communication points is not required.
Packet switch-based systems offer several advantages over circuit
switch-based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel.
Internet protocol technology, an open protocol that allows unrelated
computer networks to exchange data, is the technological basis of the Internet.
The Internet's explosive growth in recent years has focused intensive efforts
worldwide on developing Internet protocol-based networks and applications. In
contrast to protocols like asynchronous transfer mode, which was the product of
elaborate negotiations between the world's monopoly telephone companies,
Internet protocol is an open standard, subject to continuous improvement.
We believe that a form of Internet protocol-based switching will eventually
replace both asynchronous transfer mode and circuit switched technologies, and
will be the foundation of integrated networks that treat all
transmissions--including voice, fax and video--simply as forms of data
transmission. Current implementations of Internet protocol technology over the
Internet lack necessary quality of service to
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support real-time applications like voice and fax at commercially acceptable
quality levels. We expect that a combination of increased bandwidth and improved
technology will correct these deficiencies in the future.
We are in the process of configuring our network to add packet switch-based
technology to our current circuit switch-based systems. We believe that the
Internet protocol deployment currently under way on our network will enable us
to implement new services based on current Internet protocol technology, and
position us to adopt future Internet protocol technology implementations as they
evolve to support fully integrated communications networks. We anticipate
remaining flexible in our use of technology, however, so that as underlying
communications technology changes, we will have the ability to take advantage of
and implement these new technologies.
NETWORK OPERATIONS CENTERS
We currently monitor the activity of our network from international network
operations centers in Egham, England, Somerset, New Jersey and St. Louis,
Missouri (which facility will be closed effective June 30, 2000). These
international network operations centers have been fitted with sophisticated
surveillance and control capability, fraud detection and real time transmission
quality enhancements. Each of the Egham and Somerset network operations centers
is capable of acting as a full backup to the other and allow full capability to
remotely monitor, test and perform diagnostics on key elements of our network.
Our international network operations centers use a portfolio of network
management operations support systems from Lucent Technologies. The Lucent
systems are expected to be functionally integrated into one platform supporting
multi-vendor network elements. The Lucent operations support systems provide us
with technologically advanced service activation, service assurance and network
management capabilities.
PRODUCTS AND SERVICES
We provide products and services in three categories: basic services,
advanced services and capacity sales. Our basic products and services include
switched and dedicated long distance, 800 services, prepaid, postpaid and debit
calling cards, conference calling, and enhanced fax services. We provide many of
our basic services on a wholesale as well as a retail basis. Our advanced
services include domestic and international private line services, Internet
access, frame relay, asynchronous transfer mode and Internet protocol services
and managed bandwidth. These services are provided on a wholesale basis to
communication carriers, Internet service providers and other wholesale customers
as well as to end-users. Capacity sales include sales of dark fiber and leases
of capacity that qualify for sales-type accounting. Our services are discussed
below.
BASIC SERVICES
INTERNATIONAL AND DOMESTIC LONG DISTANCE SERVICE. International and domestic
long distance service is service that is accessed from a customer's billing
location, I.E., their home or office, using "1xxx" access in the United Kingdom
and Belgium or "1+" access in the United States and Canada. In France and
Switzerland, long distance service is accessed by using either "1+" access or by
dialing "1xxxx" access. In Germany, long distance service is accessed by using
either "1+" access or by dialing "01099" prior to dialing "0+".
CALLING CARD SERVICES. Our calling card services are sold in all of our
principal markets and can be used in over 65 countries. In continental Europe,
we believe that a substantial portion of our calling card customers use this
service from their home or office as an alternative to the incumbent carrier for
international calls. In contrast, in the United Kingdom and the United States,
our calling cards are sold to customers primarily for convenience when
traveling.
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PREPAID SERVICES. Our prepaid card services provide similar features and
manner of use as our calling cards. Our prepaid cards generally can be used from
the United Kingdom, the United States, Belgium, Canada, Germany, France, Israel,
Greece, The Netherlands and Switzerland. We also sell prepaid cards that can be
used only from the country in which they are sold.
We seek to introduce services that capitalize on the growing popularity of
the Internet for everyday commercial transactions. During the fourth quarter of
1998, we introduced Presto! Card-TM- in the United States. During March 1999, we
introduced presto phone-TM- in the United Kingdom. Presto! Card-TM- and presto
phone allow users to establish a virtual prepaid account that is purchased and
recharged exclusively over the Internet at WWW.PRESTOCARD.COM and
WWW.PRESTOPHONE.COM, respectively. These services enable users to make
international and domestic long distance calls from over 35 countries at
competitive rates and to view their call records on a real-time basis. We
believe that Presto! Card-TM- and presto phone are the first international
prepaid services that can be purchased and recharged instantly over the
Internet. We intend to offer these services in our continental European markets
and to develop additional Internet enabled services that take advantage of the
growing use of the Internet.
OTHER BASIC SERVICES. We also provide the additional retail services
described below.
- WIRELESS SERVICE. In the United Kingdom, we currently offer wireless
services to business customers through Wavetech Limited. In the New York
metropolitan area, we offer domestic and international long distance
services to cellular telephone users who access this service by dialing a
local access number or, in the case of Bell Atlantic Mobile customers in
certain area codes, by selecting us as their long distance provider.
- CONFERENCING SERVICE. We provide an audio conference service which allows
automatic, manual or operator assisted establishment of conference calls
24-hours-a-day, seven-days-a-week.
- TOLL-FREE SERVICE. We provide toll-free service, I.E., "800", "888" or
"877" service, to customers in the United States, the United Kingdom,
Belgium, Germany, Switzerland and The Netherlands. We also provide
international toll-free services for our customers in Europe.
ADVANCED SERVICES
We provide the advanced data services described below.
- SWITCHED DATA SERVICES. We offer frame relay, Internet protocol and
asynchronous transfer mode services that allow for the effective
transmission of large quantities of data between different sites. These
advanced services are used for wide area network connections and in text,
image and video communications that require greater transmission speed,
capacity and reliability than traditional telephony services. We are able
to offer asynchronous transfer mode, Internet protocol and frame relay in
the United Kingdom as part of a seamless service.
- MANAGED BANDWIDTH. Our managed bandwidth service provides capacity of
2 megabits per second, 34 megabits per second, 45 megabits per second and
155 megabits per second. Larger bandwidths up to 2.5 gigabits per second
may also be obtained upon request. Our managed bandwidth product is
designed for customers that require large transport capacity between
cities, including carrier customers who use the bandwidth to service their
end-user customers, as well as large corporate customers and
Internet-related customers.
- INTERNET ACCESS SERVICE. We began offering Internet access to retail
customers in Switzerland in February 1999 and in Belgium and Berlin,
Germany in September 1999. In Switzerland and Berlin, Germany, we
introduced a promotional program offering free Internet access and a
designated amount of toll-free Internet access each day to customers who
purchase our long distance services on a pre-select basis. In Belgium, we
offer 100 minutes of free Internet access to all customers who use our
"1xxx" service to access the Internet. We believe offering Internet access
will increase usage
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of our services, provide us with additional revenue and further enhance
our ability to attract and retain customers. Because retail customers in
these countries pay for the local call that originates the Internet
connection, we receive compensation on a per minute basis for our Internet
access services. We intend to offer Internet access during 2000 in
selected additional European countries in which we have interconnection,
such as Austria, France and the United Kingdom, as well as additional
cities in Germany. The regulatory regime concerning Internet access
services in Europe is currently under development.
- LOCAL ACCESS SERVICE. This year we began offering our CITYCONNEX
SERVICE-TM- which enables companies to bypass local loop connections of
incumbent operators through technologically advanced highly reliable "last
mile" wireless connectivity. This offering is available within and between
cities that are currently linked to our European network. Connectivity is
provided in a variety of ways: a single E1-voice and data; two E1s-all
voice, all data, or a combination of voice and data; and 10 megabits per
second local-area-network to local-area-network connectivity.
- DEDICATED ACCESS SERVICE. Customers using this service lease a
transmission line that connects the customer's business directly to one of
our switches or points of presence. This service is marketed to
high-volume customers in the United States and Europe and can be used for
voice, data, video and the Internet.
CAPACITY SALES
While we are constructing our network primarily for our own use, we have
sold capacity and expect to sell capacity in the future. Such sales include
sales of dark fiber, long term leases of capacity which qualify for sales-type
accounting treatment, and wavelength services. The dense wave division
multiplexing technology used in our network allows us to offer optical wave or
"wavelength" services to our customers, which provides 2.5 gigabits per second
or 10 gigabits per second of capacity. This service is designed for customers
who require large transport capacities between cities, but who do not wish to
purchase dark fiber and invest in the optronics required to enable the fiber to
carry traffic. We believe that the demand for this service will continue to
grow, as optical Internet protocol interfaces proliferate.
We sell capacity to third parties that offer their own branded products and
service. We believe that certain of these customers buy transmission from us not
only for our prices, but also for access to our software platform, which, among
other things, allows them to utilize our software technology to process calls
made with calling cards and prepaid cards and perform specialized billing
functions. In addition, we also sell capacity to resellers who in turn sell its
long distance services to their customers. For a discussion of the accounting
treatment associated with capacity sales see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--The Viatel Network."
SALES AND MARKETING; CUSTOMER SERVICE
We reach a broad range of customer groups through a variety of marketing
channels, including a direct sales force, independent sales agents, multilevel
marketing, customer incentive programs, advertising, affinity programs and the
Internet. As part of our multichannel marketing approach, we tailor our
marketing to specific geographic markets and services. We believe this is an
especially cost-effective means of marketing to our target customers.
We market our services at the local level through both independent sales
agents and an internal sales force, depending upon the particular geographic
market, customer group and service. Currently, we have a direct sales force in
12 Western European cities and New York and have established indirect sales
offices, through arrangements with independent sales representatives and
telemarketing agents, in more than 180 additional locations throughout Western
Europe and North America.
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In both the U.S. and Europe, our sales and marketing staff is currently
divided into two categories: direct sales representatives and indirect sales
representatives. Direct sales representatives are primarily responsible for
face-to-face sales efforts to larger accounts and sales to commercial accounts,
wholesale customers and other carriers. Our local internal sales forces also
typically advertise locally and provide support for our independent sales
representatives. Indirect sales representatives are primarily responsible for
telesales to smaller accounts and residential sales.
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 this three month period, the customer is turned over to proactive 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.
Many of 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 sales representatives is good.
CUSTOMER SUPPORT
We are committed to providing our customers with superior customer service
and believe that we have developed the infrastructure necessary to serve both
our existing customer base and accommodate substantial growth with minimal
additional investment. At each of our customer service facilities, our customer
service representatives handle both service and billing inquiries.
We have also developed our own proprietary software systems to serve better
our customers. For example, in each of our network countries, our monthly bills
are in the customer's native language and local currency (and we have the
ability to bill in Euros). We also provide detailed billing information for
commercial customers that includes itemized breakdowns of usage by account code
and department. In addition, we have implemented an interactive voice response
system that permits customers to obtain up-to-date information concerning their
account and their most recent invoice. We believe that our customer-oriented
philosophy, backed by the strength of our customer support infrastructure,
allows us to differentiate ourself from many of our competitors.
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:
- monitor and respond to customer needs by developing new and customized
services;
- manage least cost routing;
- provide customized billing information;
- provide high quality customer service;
- detect and control fraud;
- verify payables to suppliers; and
- rapidly integrate new customers.
We believe that our network intelligence, billing and financial reporting
systems enhance our ability to meet competitively the increasingly complex and
demanding requirements of the international and
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national long distance markets. While we believe that these systems are
currently sufficient for our operations, these 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. However, commencement of service can
take substantially longer. 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. 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 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 cost routing system is
designed to transmit the traffic over the next least cost route. The least cost
routing system chooses among the several variables to minimize the cost of a
long distance call over multiple 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.
We have developed a proprietary integrated customer service database and
billing system, called SERVICE ONE-TM-, which is currently in use for our retail
U.S. services. SERVICE ONE-TM- will afford greater flexibility as we increase
service offerings and will accommodate greater customer volume. In addition, we
have implemented an interactive voice response system that will permit customers
to obtain up-to-date information concerning their account and their most recent
invoice by telephone.
Our systems development group has internally developed sophisticated
proprietary software and intranet systems to manage better business and
appropriately price our services in many of our markets on a real-time basis.
For example, we have developed an interface with our network switches that
allows us to compile network information on a real-time basis, including the
number of minutes being routed through its switch (and corresponding revenue),
points of origination and termination, sources of traffic, by area code, city
and carrier, and other traffic information. We use this information every day in
connection with least cost routing, pricing, cost and margin analysis,
identifying market opportunities and developing our sales and marketing and
network expansion strategies, among other things. We believe that these
analytical tools allow our management team to quickly identify new market growth
and cost saving opportunities as well as control the retail business in an
environment of rapid growth. We believe that we are one of the few competitive
communications companies that have these types of analytical tools and to have
integrated them into its daily operations.
COMPETITION
EUROPE
The European telecommunications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions of
the larger industry participants and the introduction of new services and
transmission methods made possible by technological advances. We believe that as
the international telecommunications markets continue to deregulate, competition
in these markets will increase, similar to the competitive environment that has
developed in the United States following the AT&T divestiture in 1984. Our
success depends on our ability to compete with a variety of communications
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providers, including those providing competing voice services, competing
value-added services and competing networks.
In voice services, we have three main categories of competitors. The first
group consists of the incumbent telecommunications operators in each country in
which we operate. This group includes British Telecom, Cable & Wireless,
Deutsche Telekom, and France Telecom. The second category of competitors
consists of global alliances among some of the world's largest
telecommunications carriers. This group includes Concert, a joint venture
between British Telecom and AT&T. The third main category of competitors in
voice services is comprised of the new entrants, such as Storm
Telecommunications, KPN/ Qwest, Versatel, Energis plc, Carrier1, and Interoute
Telecommunications.
With regard to our bandwidth services, we are currently facing competition
from KPN/Qwest and GTS, each of which currently has broadband networks in
operation. We will also experience significant additional competition over the
next ten to twelve months as other broadband networks become operational. These
include networks being constructed by Global Crossing, Interoute and Concert. In
addition, Colt Telecom Group and Level 3 Communications are sharing the costs of
constructing two networks--one to link the German cities of Berlin, Koln,
Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart and the other linking
Paris, Frankfurt, Amsterdam, Brussels and London.
In value-added services, we compete with two main types of competitors--the
incumbent telecommunications operators and traditional value-added Internet
service providers. Major Internet service providers include EUNET, a subsidiary
of MCI WorldCom, Ebone, InfoNet and PSINet.
Many of our current and potential competitors have substantially greater
financial, marketing and other resources than we do and may be able to deploy
more extensive networks or may be better able to withstand pricing and other
market pressures. In addition, incumbent telecommunications operators generally
have additional competitive advantages, such as control access to local
networks, significant operational economies and close ties with national
regulatory authorties.
NORTH AMERICA
UNITED STATES. In the United States, which is among the most competitive
and deregulated long distance markets in the world, competition is based
primarily upon pricing, customer service, network quality, and the ability to
provide value-added services. As such, the long distance industry is
characterized by a high level of customer attrition or "churn," with customers
frequently changing long distance providers in response to the offering of lower
rates or promotional incentives by competitors. We compete with major carriers
such as AT&T, MCI WorldCom and Sprint, as well as other national and regional
long distance carriers and resellers, many of whom are able to provide services
at costs that are lower than our current costs. Many of these competitors have
greater financial, technological and marketing resources than we do. If any of
our competitors were to devote additional resources to the provision of
international or domestic long distance telecommunications services to our
target customer base, there could be a material adverse effect on our business.
Several companies have recently introduced flat rate long distance calling plans
with very low per-minute charges. We cannot predict the effect that these plans
will have on the industry generally and on us in particular.
As a result of the 1996 Telecommunications Act, the regional Bell operating
companies can compete with us in the long distance telecommunications industry,
both outside of their service territory and, upon satisfaction of certain
conditions, within their service territory. The 1996 Telecommunications Act
prospectively eliminated the restrictions on incumbent local exchange carriers,
such as the regional Bell operating companies, from providing long distance
service. These provisions permit a regional Bell operating company to enter an
"out-of-region" long distance market immediately upon the receipt of any state
and/or federal regulatory approvals otherwise applicable in the provision of
long distance service. Regional Bell operating companies must satisfy certain
procedural and substantive requirements, including obtaining Federal
Communications Commission approval upon a showing that, in certain instances,
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facilities-based competition is present in its market, that it has entered into
interconnection agreements that satisfy a 14-point "checklist" of competitive
requirements and that its entry into the "in-region" long distance market is in
the public interest before they are authorized to offer long distance service in
their regions. On December 22, 1999, Bell Atlantic was granted a license to
provide long distance service in New York. Because a substantial portion of our
customer base and traffic originates in the New York metropolitan area, Bell
Atlantic is a particularly formidable competitor. For long distance calls, Bell
Atlantic has a substantial cost advantage, because it does not have to pay
access fees to a local carrier to originate the call. Access fees constitute a
large portion of a long distance carrier's cost of services, including ours.
Moreover, should Bell Atlantic's proposed acquisition of GTE be consummated,
Bell Atlantic will have even greater resources to compete in its service
markets. In addition, SBC has a pending application at the Federal
Communications Commission for the provision of long distance service in Texas.
The continuing trend toward business combinations and alliances in the
telecommunications industry is also creating significant new or more powerful
competitors. The proposed acquisition of Teleglobe Inc. by Bell Canada, the
proposed acquisition of Sprint Corporation by MCI Worldcom, the proposed
acquisition of GTE by Bell Atlantic, the proposed acquisition of US West by
Qwest, the acquisition of Ameritech by SBC, the merger of WorldCom and MCI,
AT&T's acquisitions of Telecommunications, Inc. and Teleport Communications
Group, Global Crossing's acquisition of Frontier Communications, the primary
provider of our U.S. transmission capacity, Teleglobe's acquisition of Excel
Communications and SBC's acquisition of SNET are examples of some of the
business combinations that are being formed. Many of these combined entities
have, or will have, resources far greater than ours. These combined entities
may, now or in the future, be able to provide bundled packages of
telecommunications products, including local and long distance services, data
services and prepaid services, in direct competition with the products offered
or to be offered by us, and may be capable of offering these products sooner and
at more competitive rates than us.
During 1998, the World Trade Organization concluded an agreement on trade in
basic telecommunications services, known as the WTO Agreement, that has resulted
in additional competitors entering the U.S. telecommunications markets. Under
the WTO Agreement, the U.S. and other members of the World Trade Organization
committed themselves to, among other things, opening their telecommunications
markets to foreign carriers. The Federal Communications Commission has adopted
streamlined procedures for processing market entry applications from foreign
carriers, making it easier for such carriers to compete in the U.S. There can be
no assurance that the WTO Agreement will not have a material impact on our
business.
We also expect increasing competition from Internet telephony service
providers, including Internet service providers. The use of the Internet to
provide telephone service is a recent development. To date, the Federal
Communications Commission has determined not to subject such services to Federal
Communications Commission regulation as telecommunications services.
Accordingly, Internet service providers are, today, not subject to universal
service contributions, access charge requirements, or traditional common carrier
regulation. On April 5, 1999, US West filed a petition with the Federal
Communications Commission asking the Federal Communications Commission to find
that Internet telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charge and universal service obligations. On April 7, 1999, US West filed
similar petitions with the Colorado and Nebraska Commissions. Viatel cannot
predict how the Federal Communications Commission or any state public service
commissions will rule on US West's petition. If the Federal Communications
Commission or state public service commissions were to determine that certain
services are subject to Federal Communications Commission regulations as
telecommunications services, the service providers could be required to make
universal service contributions, pay access charges or be subject to traditional
common carrier regulation. We cannot predict the impact that this continuing
lack of regulation will have on our business.
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CANADA. The Canadian telecommunications market is highly competitive and is
dominated by a few established carriers whose marketing and pricing decisions
have a significant impact on the other industry participants, including us. We
compete with facilities-based carriers, other resellers and rebillers, primarily
on the basis of price. The principal facilities-based competitors include the
former Stentor partner companies, in particular, Bell Canada, the dominant
supplier of local and long distance services in the provinces of Ontario and
Quebec, BC Tel and Telus Communications, the next largest Stentor companies
merged their operations earlier this year as well as non-Stentor companies, such
as AT&T Canada, Teleglobe Canada, and Sprint Canada. Earlier this year, Bell
Canada announced its intent to acquire Teleglobe Inc. We also compete with ACC
TelEnterprises which, until its recent merger with AT&T Canada, was one of the
largest resellers in Canada. The former Stentor partner companies discontinued
their partnership on January 1, 1999 and are now competing against one another.
GOVERNMENT REGULATION
OVERVIEW
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. 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 these laws and regulations varies and could
limit our ability to provide certain telecommunications services in certain
markets. We cannot provide 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 WTO Agreement, 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
pro-competitive 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 provide any assurance that the WTO
Agreement will result in beneficial regulatory liberalization in all signatory
countries.
On November 26, 1997, the Federal Communications Commission adopted the
Foreign Participation Order to implement the U.S. obligations under the WTO
Agreement. In this order, the Federal Communications Commission adopted an open
entry standard for carriers from World Trade Organization member countries,
generally facilitating market entry for such applicants by eliminating certain
existing tests. These tests remain in effect, however, for carriers from
non-member countries.
International carriers serving the United States, including Viatel, are
subject to the Federal Communications Commission's international settlements
policy which, as discussed below, has been substantially relaxed. 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. Historically,
international settlement rates have vastly exceeded the cost of terminating
telecommunications traffic. The Federal Communications Commission's
international settlements policy requires: (1) the equal division of the
accounting rate between the U.S. and foreign carrier, (2) nondiscriminatory
treatment of U.S. carriers, and (3) proportionate return of inbound traffic. To
enforce the international settlements policy, the Federal Communications
Commission has required carriers to file publicly available copies of their
international settlement arrangements.
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The Federal Communications Commission adopted rules regarding specific rate
levels for international settlements rates, which became effective on
January 1, 1998 and which were substantially affirmed by the Federal
Communications Commission on reconsideration on June 11, 1999. Many parties
appealed the International Settlement Rates Order to the U.S. Court of Appeals
for the D.C. Circuit. 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 International Settlement Rates Order generally requires U.S.
facilities-based carriers to negotiate settlement rates with their foreign
correspondent at no greater than Federal Communications Commission-established
benchmark prices. In addition, the International Settlement Rates Order imposed
new conditions upon certain carriers, including us. First, as amended on
reconsideration, the Federal Communications Commission conditioned
facilities-based authorizations for service on a route on which a carrier has a
foreign affiliate with market power upon the foreign affiliate offering all
other U.S. carriers a settlement rate at or below the relevant benchmark. None
of our foreign affiliates have market power. Second, the Federal Communications
Commission conditioned any authorization to provide switched services over
either facilities-based or resold international private lines upon the condition
that at least half of the facilities-based international message telephone
service traffic on the subject route is settled at or below the relevant
benchmark rate. This condition applies whether or not the licensee has a foreign
affiliate on the route in question.
In the Foreign Participation Order described above, however, if the subject
route does not comply with the benchmark requirement, a carrier can demonstrate
that the foreign country provides "equivalent" resale opportunities.
Accordingly, since the February 9, 1998 effective date of the Foreign
Participation Order, we have been permitted to resell private lines for the
provision of switched services, also known as international simple resale, to
any country that either has been found by the Federal Communications Commission
to comply with the benchmarks or has been determined to be equivalent. We,
however, remain subject to prior Federal Communications Commission approval in
order to provide resold private lines to any country in which an affiliated
carrier that has not been found by the Federal Communications Commission to lack
market power.
In rules released on May 6, 1999, and which became effective on July 29,
1999, the Federal Communications Commission removed the international
settlements policy for: (1) all settlement arrangements between U.S. carriers
and foreign carriers that lack market power, and (2) all settlement arrangements
on routes where U.S. carriers are able to terminate at least 50 percent of their
traffic in the foreign market at rates that are at least 25 percent below the
applicable benchmark settlement rate. In this international settlement policy
order, the Federal Communications Commission also eliminated the requirement
that carriers file the settlement arrangements where the international
settlements policy has been eliminated. Finally, the international settlement
policy order expanded its rules to permit carriers to provide international
simple resale on any route where the resale carrier exchanges switched traffic
with a foreign carrier that lacks market power. Accordingly, we will have more
flexibility in negotiating settlement arrangements with many carriers on many
routes, which we expect will lower costs of terminating international traffic,
although our competitors will benefit from these new rules in the same way. On
routes where we are still subject to the international settlement policy, the
Federal Communications Commission could find that, absent a waiver, certain
terms of our foreign carrier agreements or our actions do not meet the
requirements of the international settlement policy. Although the Federal
Communications Commission generally has not issued penalties in this area, it
has issued a Notice of Apparent Liability against a U.S. company for violating
the international settlement policy, and it could take other action against a
carrier violating the international settlement policy, including issuing a cease
and desist order or imposing fines. If the Federal Communications Commission
were to impose such fines or other penalties on us, we do not believe that it
would have a material adverse effect on our business.
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way we can route calls. Although
certain Federal Communications Commission rules limit
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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 its 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 Federal
Communications Commission could find that our network configuration violates
these rules. If we were found to be in violation of these routing restrictions,
and if the violation were sufficiently severe, it is possible that the Federal
Communications Commission could impose sanctions and penalties upon us.
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, the European Council and the European Parliment 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
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 to enforce the directive, including proceedings before the European
Court of Justice. Private parties may also bring actions against European Union
member states for failing to implement such legislation.
In an effort to promote competition and efficiency in the European Union
telecommunications market, the European Commission, European Council and the
European Parliment 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 and its subsequent amendments,
including, in particular, the Full Competition Directive, adopted in
March 1996. These directives require 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, except in
member states receiving special derogations. These directives have been
supplemented by various harmonizing directives, which include the Open Network
Provision Directives, as well as the 1997 Licensing Directive.
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. It imposes certain rights and obligations on all operators deemed by
the National Regulatory Authorities to be covered by the directive. It also
imposes additional obligations on operators deemed by the National Regulatory
Authorities to have significant market power. These include obligations on fixed
operators to offer cost oriented interconnection charges on non-discriminatory
and transparent terms to other operators granted interconnection rights under
the directive. The objective of the directive is to ensure adequate and
efficient interconnection for public telecommunications networks and publicly
available telecommunications services. The Interconnection Directive was amended
to provide for carrier pre-selection and number portability on or before
January 1, 2000. Carrier pre-selection would enable a customer to access our
network over the fixed public telephone network of operators with significant
market power without dialing an access code, by "preselecting" Viatel as its
long distance carrier. In December 1999, the European Commission permitted the
United Kingdom to postpone until April 1, 2000 the introduction of carrier
pre-selection in British Telecommunications' network. Number portability would
enable customers to retain their existing telephone numbers when switching to
alternative carriers and is already available, although not universally, in the
United Kingdom. Some European Union member states have been granted temporary
waivers from
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implementing certain European Union liberalization requirements and have only
fully liberalized recently. Greece continues to have a derogation until
December 31, 2000.
In October 1997, the European Commission adopted a recommendation on how the
cost-orientation obligation on fixed operators with significant market power
should be interpreted. The European Commission recommends that cost oriented
interconnection charges should be based on long run incremental costs. The
European Commission published benchmark interconnection rates derived from some
of the long range incremental cost-based charges being offered at the time, for
example, in the United Kingdom. These rates were intended to provide guidance to
member states of what should be considered to be an acceptable level of
interconnection charging by fixed operators with significant market power. They
could be adopted in lieu of true long range incremental cost-based charges until
such time as an operator with significant market power, actual long range
incremental costs could be established using adequate accounting systems.
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. The European
Commission is actively seeking to minimize these disparities in national
interconnection policies. There can be no assurance, however, that these
disparities will 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.
The current European Union rules are likely to remain in force until
2002/2003, at which time a revised European Union framework is likely to be
introduced which reflects the growth of competition since 1998. The European
Commision is currently considering what the new framework should look like. It
is too early to say what the impact might be on our activities. However, the
European Commission sees the structure of the new regulatory framework for
communications infrastructure and associated services as consisting of three key
elements: binding sector-specific legistlation; complementary non-binding
sector-specific measures, such as recommendations; and competition law. In
parallel, the existing Article 86 (formerly Article 90) Directives will be
consolidated and simplified into one Liberalization Directive. In addition,
existing harmonization directives will be consolidated into five directives,
namely a Framework Directive, a Licensing & Authorization Directive, an Access
and Interconnection Directive, a Universal Service Directive and a Telecoms Data
Protection Directive.
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, although entry barriers continue to fall.
BELGIUM. In December 1997, the Belgian Federal Parliament provided for full
liberalization of the provision of telecommunications services. However, all of
the secondary legislation needed to implement the regulatory framework of
December 1997 has yet to be adopted.
Under the existing licensing scheme, public network license applicants must,
in principle, 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. Notwithstanding this, we obtained a license for the
provision of voice telephony over the entire country on December 8, 1998, and a
license for the establishment and
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operation of a public telecommunications network, which covers virtually the
entire country, on February 1, 1999. One of our operating subsidiaries also has
a permanent voice telephony license which expires in 2014, but which is capable
of being extended.
Belgacom (Belgium's incumbent telecommunications operator) is currently
offering carrier pre-selection for calls to all geographic numbers belonging to
a different zone than the one in which the calling party is located. As from
March 1, 2000, Belgacom will offer carrier pre-selection and carrier selection
for calls to value-added services numbers and, starting on the last quarter of
the year 2000, for calls to mobile numbers. Carrier selection and carrier
pre-selection for calls to value-added services numbers will be fully available
beginning June 30, 2000 and carrier pre-selection for calls to mobile numbers
will be fully available by December 31, 2000.
We have entered into an interconnection agreement with Belgacom, which
currently extends until May 1, 2000, and are able to originate and terminate
traffic throughout Belgium.
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 only
be triggered if: (i) Belgacom claims compensation for being the "universal
service provider", (ii) the Belgian Institute for Postal Services and
Telecommunications considers that the net cost of universal service provision
represents an unfair burden for Belgacom, and (iii) the Belgian Federal
Government takes a formal decision to create the Universal Service Fund. Since
1998, the Belgian Institute for Postal Services and Telecommunications has
"dry-run" the universal service costing model and kept operators informed of the
contributions that they may be required to make if and when the Universal
Service Fund is activated. Belgacom has thus far not asserted any claim to
compensation because of its status as the universal service provider.
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 to the public are subject to
individual licenses granted by the Minister in charge of telecommunications upon
recommendation of France's independent regulatory authority, the Autorite de
Regulation des T elecommunications ("ART").
On June 5, 1998, we were granted a regional license to be a public
telecommunications network operator (under Article L33.1 of the French Code des
Postes et T elecommunications) and a national license to be a provider of voice
telephony services to the public (under Article L34.1 of the French Code des
Postes et T elecommunications). An extension of the network operator license has
been requested by us in order to obtain a nationwide license. The application
was sent to ART on June 21, 1999. On October 26, 1999, ART recommended that our
nationwide license be granted and on November 22, 1999 the Minister granted
Viatel a nationwide license. In September 1998, an interconnection agreement was
signed with France Telecom. However, this agreement became operational in the
greater Paris region only in March 1999 and in the Strasbourg and Amiens regions
only in August 1999. One of our operating subsidiaries also has obtained a voice
telephony license.
We are subject to certain requirements in the operation of our 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. As a result of the construction of our network, we qualify for these
more favorable rates.
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Although carrier pre-selection currently has been available in France since
mid-February 2000, no carriers have yet offered this as an additional service.
Customers can currently access the public switched telephone network using
either 4-digit or 1-digit access codes. In addition, six carriers (including
France Telecom) that have agreed to geographic coverage conmitments and roll-out
schedules have been granted single digit access for their customers. Customers
of other carriers, including us, must dial a 4-digit code in order to access the
public switched telephone network in France.
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 overseen by the Regulatory Authority for
Telecommunications and Post ("RegTP") that operates under the supervision of the
Ministry of Economics.
Pursuant to the German Telecommunications Act, licenses are required for the
operation of transmission lines going beyond the limits of a property and used
to provide telecommunications services for the public as well as for the
offering of voice telephony to the public on the basis of self-operated
telecommunications networks. For the operation of transmission lines the
following types of licenses have been created: mobile radio licenses (class 1
licenses), satellite licenses (class 2 licenses), and licenses for the operation
of transmission lines other than mobile radio and satellite (class 3 licenses).
For the offering of voice telephony to the public a class 4 license is required.
We have been issued a nationwide class 3 infrastructure license and two
nationwide class 4 licenses, one in our name and one in the name of our
subsidiary, EconoPhone. Through our interconnection arrangement with Deutsche
Telekom and on the basis of our carrier identification code, our customers are
able to pre-select Viatel as their carrier for certain services.
On December 22, 1999, we signed a new interconnection agreement with
Deutsche Telekom which replaced our prior interconnection agreement. At present,
interconnection between our subsidiary, EconoPhone, and Deutsche Telekom is
realized based on an order of RegTP issued in May 1999. Although the order is
not restricted regarding its duration, RegTP requested that the order be
replaced by an interconnection agreement. Therefore, EconoPhone is currently
negotiating an interconnection agreement similar to ours. The EconoPhone
interconnection agreement is expected to be signed in the near future.
ITALY. From 1995 to 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 was amended earlier this year due to decisions by the Italian regulator.
The offer allows interconnection at one point of interconnect and has brought
interconnection rates down to a level much closer to the European Union
benchmarks. We initiated interconnection negotiations towards the end of 1998
and obtained an interconnection agreement with Telecom Italia on April 30, 1999.
As a result of an expansion of our license, our interconnection agreeement with
Telecom Italia was amended on October 13, 1999 and January 28, 2000.
In Italy, providers of network infrastructure and switched voice services as
well as national mobile operators, with a number of specific exceptions, may be
required to contribute to a universal service fund. This requirement took effect
in 1999. However, no contribution was required for 1999. Whether a contribution
will be required in 2000 will depend upon whether Telecom Italia can
demonstrate, 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.
Carrier pre-selection was introduced in Italy for calls between different
districts, international calls and mobile calls on January 1, 2000 and will be
introduced for calls within the same district starting May
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2000 for Milan, June 2000 for Rome and July 2000 for the other local areas. On
January 12, 2000, we filed an application with Telecom Italia requesting
authorization to activate carrier pre-selection.
Effective January 1, 2000, number portability was introduced in Italy for
calls within the same local area. The technical solution envisaged for immediate
implementation are those of "Onward Routing" (for geographical numbers) and of
"Always Query" (for non-geographical numbers).
THE NETHERLANDS. In The Netherlands, the incumbent telecommunications
operator's monopoly regarding voice telephony was abolished effective July 1,
1997. Other European Union liberalization obligations, which took effect on
January 1, 1998, were implemented through the new Netherlands Telecommunications
Act as of December 15, 1998. With the exception of the use of radio frequencies
(e.g. for mobile telecommunications networks or services), all licensing
requirements have been abolished and replaced by mandatory registration
requirements with the Independent Post and Telecommunications Authority. In
principle, there are no barriers to registration, but there must be a public
offer of infrastructure or services which must be shown to the Independent Post
and Telecommunications Authority in order to qualify for registration.
Furthermore, registered parties must comply with all relevant obligations under
the Telecommunications Act. In February 1999, we transferred our existing
authorization to a registration to provide a public telecommunications service
and to install and provide a public telecommunications network with the
Independent Post and Telecommunications Authority. In April 1999, we obtained
registration to install and provide leased lines.
SPAIN. Spain was required, under applicable European Union directives, to
implement full liberalization of public switched telephone services by
December 1, 1998. In accordance with this requirement, the liberalization
process began in April 1998 with the approval of the General Telecommunications
Act, and was completed by the December 1, 1998 deadline, with the approval of
subsequent regulations. Our subsidiary operating in Spain was granted a
nationwide infrastructure and voice telephony license in March 1999. In
September 1999, we were granted a type C authorization to be an Internet service
provider and we signed an interconnection agreement with Telefonica de Espana.
Carrier pre-selection is fully operational in Spain and number portability is
expected to be operational in the near future.
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: (i) applying a notification procedure for resellers, (ii) applying a
procedure for operators wishing to be granted a concession for the establishment
and operation of transmission facilities and (iii) providing rights-of-way,
subject to a procedure of authorization, over the public domain to
facilities-based carriers. Pro-competitive regulation is also applicable in the
area of numbering.
On July 13, 1999, OFCOM, the Swiss Office of Telecommunications, awarded us
a concession to own and operate our own telecommunications infrastructure in
Switzerland. The concession allows us to operate our own telecommunications
infrastructure in the country and to provide telecommunications services to
third parties.
Our Swiss subsidiary, Econophone AG, has signed an interconnection agreement
with Swisscom, the dominant Swiss carrier, on May 20, 1998, which was recently
replaced by a new interconnection agreement dated February 7, 2000. Our
interconnection with Swisscom enables its customers to pre-select our Swiss
subsidiary as their long distance carrier in Switzerland.
Switzerland is not a member of the European Union and, accordingly,
directives do not apply as such. Switzerland is, however, a party to the WTO
Agreement.
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AUSTRIA. In March, 1999, the Austrian regulator,
Telekom-Control-Kommission, granted one of our subsidiaries the license for
fixed network public voice telephony throughout Austria for an unlimited time
period. We signed an interconnection agreement with Austria Telekom in June 1999
and expect to implement interconnection in the second quarter of 2000.
UNITED KINGDOM. The United Kingdom has been progressively liberalizing the
United Kingdom communications market since 1984 when British Telecommunications
was privatized. There are now more than 400 licensed operators. Competition is
effective in some market sectors including many international routes. In other
sectors, such as local access, British Telecommunications continues to have
market power.
Our UK subsidiaries hold the following authorizations under Section 7 of the
Telecommunications Act 1984, as issued by the Department of Trade and Industry
on the advice of the Office of Telecommunications (OFTEL) in accordance with the
provisions of the Telecommunications (Licensing) Regulations 1997
(SI 1997/2930), and the Licensing Directive 97/13/EC:
- Viatel UK Limited has a fixed PTO license with code powers which
authorizes the running of a telecommunications system, provision of a
broad range of publicly available telecommunications services to customers
within the UK and international facilities based services and
international conveyance services to and from the UK. Viatel UK Limited
also has an International Simple Voice Resale license which authorizes the
provision of international simple voice resale services to customers in
the UK. Viatel UK Limited has been granted rights to interconnect with
British Telecommunications and to negotiate interconnection with other UK
operators;
- Destia Network Services Limited holds a fixed PTO license without code
powers and an Internal Simple Voice Resale registration. Destia Network
Services Limited has been granted rights to interconnect with British
Telecommunications and to negotiate interconnection with other UK
operators;
- Viatel Global Communications Limited (formerly AT&T Communications (UK)
Limited) holds a fixed PTO license with code powers. This subsidiary has
been granted rights to interconnect with British Telecommunications and to
negotiate interconnection with other UK operators.
In the absence of any determination by the National Regulatory Authority,
OFTEL, that the above named licensees have market power, there are few
regulatory constraints on our UK commercial activities although we must respect
UK and European Commission competition laws.
Because British Telecommunications, the former United Kingdom monopolist,
still controls over 80% of all access lines, we must compete primarily against
British Telecommunications' retail prices. There is significant downward
pressure on retail prices from other UK operators and service providers. Most of
British Telecommunications' retail prices are price controlled by OFTEL, except
its prices on multi-line businesses which are lightly regulated and open to
competition. The current retail price cap, which covers the lowest 80% of
customers by spend, most of whom are residential and small businesses, is due to
be reviewed in July 2001. It is not yet clear whether it will be replaced by a
further price cap, although it is likely that any future cap would only cover
the lower spending residential customers, thus opening up to more competition,
the higher spending market. British Telecommunications' prices may go up or
down. British Telecommunications' residential line rental is not fully
rebalanced, which means that retail call charges above cost subsidize retail
line rental charges which are set below cost. British Telecommunications'
business line rental is more or less fully rebalanced, i.e., call charges may
more closely reflect call costs because line rental is fully paid for in the
line rental retail charge.
We must purchase certain interconnection services from British
Telecommunications. Unlike the former incumbent in most other European Union
member states, British Telecommunications sets its own interconnection charges
according to a formula agreed with OFTEL. It has considerable freedom in the
more competitive interconnection markets such as inter-tandem, or long distance,
conveyance. Call origination and call termination are regulated more strictly.
Both are of particular importance to us, because we currently use indirect
access to access customers. OFTEL has announced a review of both in 2001. There
are indications that charges for call origination will rise, thus reducing the
revenues available to indirect access operators.
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Separately from its price control review, OFTEL is currently conducting a
full review of the regulatory framework relating to national leased lines. OFTEL
has announced an intention to complete the review and publish a statement by
October 2000. OFTEL's proposals for regulation are likely to primarily affect
British Telecommunications. However, operators such as us who may compete with
British Telecommunications in the provision of leased line services and who use
leased lines provided by other licensed operators may be affected if the prices
that British Telecommunications charges are reduced by regulation.
British Telecommunications is in the process of introducing an unmetered
tariff for access to the Internet. This may have an impact on the terms on which
we are able to provide our own Internet services.
Provision of wireless local loop services for direct access to customers in
the UK will depend, among other things, on the UK Radiocommunications Agency
granting to us a license under the Wireless Telegraphy Acts which authorizes use
of the radio spectrum. Radio spectrum is treated in the UK as a scarce resource
for regulatory purposes. As a result, licensing of use of the radio spectrum is
subject to the provisions of the Licensing Directive which require procedures to
be proportionate, transparent and non-discriminatory. There is no guarantee that
we or our subsidiaries would be granted such a license.
It is expected that carrier pre-selection will be introduced in the United
Kingdom in April 2000. This is expected to expand the market for indirect access
operators. It is also anticipated that local loop unbundling will be introduced
by British Telecommunications in the United Kingdom in 2001 at a date yet to be
determined, access to which must be provided to competitors on a basis which is
consistent with British Telecommunications' regulatory obligations. British
Telecommunications is currently upgrading much of its network with ADSL
technology. British Telecommunications' charges for use of its ADSL network have
not yet been determined. Its charges will affect the retail prices which we are
able to charge our customers if we use its ADSL network.
Through one of our UK subsidiaries, we are a fixed link Public Telecom
Operator, and we are licensed for the provision of international simple voice
resale and international facilities based services. This subsidiary has been
granted rights to interconnect with British Telecommunications and other
operators.
OTHER EUROPEAN MARKETS. Our ability to expand into other countries will be
affected by the degree to which liberalization has been implemented in those
countries. If, for strategic reasons, we decide to build out infrastructure in a
particular market prior to full liberalization and liberalization is delayed or
not fully implemented, we could sustain a loss on our infrastructure investment.
UNITED STATES
In the United States, our services are subject to the provisions of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, the
regulations of the Federal Communications Commission thereunder, as well as the
applicable laws and regulations of the various states administered by the
relevant public service commission. The recent trend in the United States for
both federal and state regulation of telecommunications service providers has
been in the direction of reduced regulation. Although this trend facilitates
market entry and competition by multiple providers, it has also given AT&T, the
largest international and domestic long distance carrier in the United States,
increased pricing and market entry flexibility that has permitted it to compete
more effectively with smaller carriers, such as us. In addition, the 1996
Telecommunications Act has opened the United States market to increased
competition from the regional Bell operating companies. We cannot be certain
whether future regulatory, judicial and legislative changes in the United States
will materially affect our business.
The Federal Communications Commission currently regulates us as a
non-dominant carrier with respect to both our international and domestic
interstate long distance services. Although the Federal Communications
Commission has generally chosen not to closely regulate the charges, practices
or classifications of non-dominant carriers, the Federal Communications
Commission has broad authority which includes the power to impose more stringent
regulatory requirements on us, to change its regulatory
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classification, to impose monetary forfeiture, and to revoke our authority. In
this increasingly deregulated environment, however, we believe that the Federal
Communications Commission is unlikely to do so.
In May 1994, the Federal Communications Commission authorized us pursuant to
Section 214 of the Communications Act to resell public switched
telecommunications services of other United States carriers. This authorization
requires that services be provided in a manner that is consistent with the laws
of countries in which we operate. Additionally, in September 1996 we received
final approval for another Section 214 authorization from the Federal
Communications Commission 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. Through our acquisitions of Flat Rate Communications and
Destia Communications, we also have additional Section 214 licenses to provide
global facilities-based and global resale services.
FCC DOMESTIC INTERSTATE. We are considered a non-dominant domestic
interstate carrier subject to minimal regulation by the Federal Communications
Commission. We are not required to obtain Federal Communications Commission
authority to provide domestic interstate telecommunications services, but are
required to maintain, and do maintain, a domestic interstate tariff on file with
the Federal Communications Commission. The Federal Communications Commission
presumes the tariffs of non-dominant carriers to be lawful. Therefore, the
Federal Communications Commission does not carefully review such tariffs. The
Federal Communications Commission could, however, investigate our tariffs upon
its own motion or upon complaint by a member of the public. As a result of any
such investigation, the Federal Communications Commission could order us to
revise our tariffs, or the Federal Communications Commission could prescribe
revised tariffs.
In late 1996, the Federal Communications Commission ruled that interexchange
carriers are no longer permitted to file their tariffs for domestic interstate
interexchange services. In August 1997, the Federal Communications Commission
affirmed its decision to end tariff filing requirements for domestic interstate
long distance services provided by non-dominant carriers. The Federal
Communications Commission also eliminated the requirement that non-dominant long
distance carriers disclose information on rates and terms of their products.
These detariffing orders have been stayed by the U.S. Court of Appeals for the
District of Columbia. Most recently, on March 18, 1999, the Federal
Communications Commission adopted an order that would permit the alternative of
posting rates on a carrier's web site. This order will not become effective
until the Court affirms the Federal Communications Commission's mandatory
detariffing scheme.
The 1996 Telecommunications Act is intended to increase competition in the
U.S. telecommunications markets. Among other things, the legislation contains
special provisions that eliminate the restrictions on incumbent local exchange
carriers such as the regional Bell operating companies from providing long
distance service. These provisions permit a regional Bell operating company to
enter an "out-of-region" long distance market immediately upon the receipt of
any state or federal regulatory approvals otherwise applicable in the provision
of long distance service. The provisions also permit a regional Bell operating
company to enter the "in-region" long distance market if it satisfies procedural
and substantive requirements, including showing that facilities-based
competition is present in its market, that it has entered into interconnection
agreements which satisfy a 14-point "checklist" of competitive requirements and
that its entry into the "in-region" long distance market is in the public
interest. On December 22, 1999, Bell Atlantic was granted a license to provide
long distance service in New York. Bell Atlantic competitors have appealed this
decision to the Court of Appeals for the D.C. Circuit. In addition, SBC has a
pending application at the FCC for the provision of long distance service in
Texas. A decision on this application is expected sometime during the second
half of 2000.
The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact our operations. On
August 1, 1996, the Federal Communications Commission adopted an Interconnection
Order implementing the requirements that incumbent local exchange carriers
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make available to new entrants interconnection and unbundled network elements,
and offer retail local services for resale at wholesale rates. However, on
January 25, 1999, the U.S. Supreme Court upheld most of the challenged rules,
finding that the Federal Communications Commission has significant jurisdiction
to establish rules to promote competition for competitive local exchange
services but required the Federal Communications Commission to re-evaluate the
standard it uses to determine which network elements the incumbent local
exchange carriers must unbundle. On September 15, 1999, the Federal
Communications Commission adopted an order setting forth a revised standard and
reaffirming that incumbent local exchange carriers must provide access to six of
the original seven network elements.
The Federal Communications Commission has also significantly revised the
universal service subsidy regime. Beginning January 1, 1998, interstate
carriers, such as us, as well as certain other entities, became obligated
pursuant to the 1996 Telecommunications Act to contribute to universal service
funds based upon interstate and international revenues. These funds subsidize
the provision of telecommunications services in high cost areas and to
low-income customers, as well as the provision of telecommunications and certain
other services to eligible schools, libraries and rural health care providers.
Contribution factors vary quarterly and we and other carriers are billed
monthly. Because the contribution factors do vary quarterly, the annual impact
cannot be estimated at this time, although we do not expect it to be material.
There can be no assurance as to how the orders will be ultimately implemented or
enforced or what effect the orders will have on competition within the
telecommunications industry or specifically on our competitive position. On
July 30, 1999, the United States Court of Appeals for the Fifth Circuit released
its decision reviewing the Federal Communications Commission's UNIVERSAL SERVICE
ORDER. Although the Fifth Circuit upheld the basic tenets of the Federal
Communications Commission's universal service program, its decision to reverse
or remand certain aspects of the program could have a significant impact on
carriers' universal service obligations. In particular, the Fifth Circuit found
that the Federal Communications Commission does not have the authority to
include intrastate revenues in the calculation of universal service
contributions and reversed and remanded the Federal Communications Commission's
decision to include the international revenues of interstate carriers in the
universal service contribution base. On October 8, 1999, the Federal
Communications Commission issued an order implementing the Fifth Circuit's
decision. The contribution factor for the first quarter of 2000 was 5.877% and
the contribution factor for the second quarter of 2000 is 5.71%.
Our costs of providing long distance services will also be affected by
changes in the access charge rates imposed by local exchange carriers for
origination and termination of calls over local facilities. The Federal
Communications Commission has significantly revised its access charge rules in
recent years to permit incumbent local exchange carriers greater pricing
flexibility and relaxed regulation of new switched and special access services
in those markets where there are other providers of access services. The most
recent pricing flexibility rules, which were adopted August 5, 1999, would,
among other things, grant certain local exchange carriers the ability to file
access tariffs on a streamlined basis. The Federal Communications Commission has
also restructured the charges certain local exchange carriers assess for
switched access, moving from usage-sensitive to non-usage sensitive charges to
recover certain costs. For example, the Federal Communications Commission
created a new presubscribed interexchange carrier charge rate element. The
presubscribed interexchange carrier charge is a flat-rate, per line charge that
is recovered by certain local exchange carriers from interexchange providers.
Effective July 1, 1999, the initial maximum permitted interstate presubscribed
interexchange carrier charge increased to $1.04 per month for primary
residential lines and single-line business lines and $2.53 per month for second
and additional residential lines. The initial maximum interstate presubscribed
interexchange carrier charge for multi-line businesses is $4.36 per month, per
line. The ceilings will continue to increase yearly. The Federal Communications
Commission continues to adjust its access charge rules and has indicated that it
will consider proposals to reform the access charge regime this year.
While we currently intend to pass through the costs of both the
presubscribed interexchange carrier charge and our universal service fund
contributions to our customers, there can be no assurance that we
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will be able to do so or that doing so will not result in a loss of customers.
Additionally, we currently have agreements to terminate, originate or exchange
traffic with a variety of carriers who, in turn, may be subject to similar
agreements with other carriers or local exchange carriers. Any change in any of
these agreements, whether by operation of law or otherwise, may affect our costs
or could disrupt our ability to terminate, originate or exchange traffic and,
therefore, have a material adverse effect on us.
The 1996 Telecommunications Act also requires interexchange carriers to
compensate payphone owners when a payphone is used to originate a telephone call
using a calling card. In orders issued in September and October of 1996, the
Federal Communications Commission established a compensation scheme that
required all carriers to begin compensating payphone owners on a per-call basis
beginning October 7, 1997 at a rate of $.35 per call. This rate has been
appealed to the D.C. Circuit and reversed and remanded to the Federal
Communications Commission twice for a revised rate calculation. In its most
recent remand decision, on February 4, 1999 the Federal Communications
Commission released an order which lowered the payphone compensation rate to
$.240, effective April 21, 1999. For amounts already due, the Federal
Communications Commission determined that the payphone owners should be
compensated at a rate of $.238. MCI WorldCom, Sprint, the regional Bell
operating companies and the American Public Communications Council have filed
Petitions for Review of this latest order with the United States Court of
Appeals for the District of Columbia Circuit. The court recently heard oral
agrument on this appeal. Additionally, a coalition comprised of the regional
Bell operating companies, SNET and GTE have filed a Petition for Clarification
with the Federal Communications Commission, seeking clarification as to which
long distance carriers are responsible for payment of per-call compensation and
urging that the obligation be placed on the entity identified by the Carrier
Identification Code used to route the call from the local exchange network. As a
result of many factors, including a complex and shifting regulatory scheme, many
long distance carriers have been the subject of compensation claims by payphone
service providers. In August 1999, Destia settled a lawsuit filed by payphone
service providers alleging that Destia Communications owed such payphone service
providers compensation for completed access code and toll free calls that have
been made since October 9, 1997 using the plaintiffs' payphones and carried over
Destia's network.
The Federal Communications Commission also imposes requirements for the
marketing of telephone services and for obtaining customer authorization for
changes in a customer's primary long distance carriers. The Federal
Communications Commission has recently imposed severe penalties on a number of
carriers for "slamming." Under an order recently issued by the Federal
Communications Commission, carriers such as us are required to take certain
additional steps to prevent slamming. The Federal Communications Commission is
continuing to reexamine its slamming rules.
STATES. Many states also impose various reporting and other requirements. A
number of state public service commissions have adopted rules governing the
marketing of telephone services and obtaining customer authorizations for
changes of a customers' primary long distance carrier. State public service
commissions also regulate access charges and other pricing for
telecommunications services within each state. We may also be required to
contribute to universal service funds in some states. State public service
commissions generally retain the right to sanction a carrier or to condition,
modify, cancel, terminate or revoke authorization to provide telecommunications
services within the state for failure to comply with state law and/or rules,
regulations and policies of the state regulatory authorities.
REGULATION OF THE INTERNET. The use of the Internet to provide telephone
service is a recent development. Currently, the Federal Communications
Commission is considering whether or not to impose surcharges or additional
regulations upon certain providers of Internet telephony. In an April 1998
report to Congress, the Federal Communications Commission indicated that it
would examine the question of whether certain forms of "phone-to-phone" Internet
protocol telephony are information services or telecommunications services. It
noted that certain forms of phone-to-phone Internet telephony appeared to have
the same functionality as non-Internet protocol telecommunications services and
lacked the characteristics that would render them information services. On
April 5, 1999, US West filed a petition
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with the Federal Communications Commission asking the Federal Communications
Commission to find that Internet telephony services are telecommunications
services, not enhanced services or information services, and therefore should be
subject to access charge and universal service obligations. On April 7, 1999, US
West filed similar petitions with the Colorado and Nebraska Commissions. No
significant action has been taken on these petitions, although it should be
noted that the Federal Communications Commission has recently initiated a public
inquiry on the separate subject of access to Internet telephony by the disabled.
We cannot predict how the Federal Communications Commission or state public
service commissions will rule on US West's petition. If the Federal
Communications Commission or state public service commissions were to determine
that certain services are subject to Federal Communications Commission
regulations as telecommunications services, these service providers could be
required to make universal service contributions, pay access charges or be
subject to traditional common carrier regulation. State public service
commissions may also retain jurisdiction to regulate the provision of intrastate
Internet telephony services and could initiate proceedings to do so.
PATENT RIGHTS RELATING TO PREPAID SERVICES. Various parties have claimed
that certain prepaid card providers are infringing upon patent rights held by
these parties relating to the provision of prepaid card services. We do not
expect that our prepaid card services will be found to infringe upon any
third-party patent rights, although there can be no assurance that we would
prevail if a claim were asserted by a third party. If we were unable to provide
our prepaid card services in the manner in which they currently are provided, it
could have a material adverse effect on our business and the price of our common
stock.
EMPLOYEES
As of December 31, 1999, we had 1,760 full-time employees, approximately 780
of whom were engaged in sales, marketing and customer service. None of our
employees are represented by a labor union or covered by a collective bargaining
agreement. We believe that our relationship with our employees is generally
good.
ITEM 2. PROPERTIES
Our tangible assets include a substantial investment in telecommunications
equipment. Our network and its component assets are the principal properties we
own. We own a significant portion of the telecommunications equipment required
for our business. Our network includes installed fiber optic cable consisting of
lighted (used) and dark (not used) fibers, which is either owned or leased and
is laid pursuant to various rights-of-way. Other fixed assets are located at
various locations in our service areas.
We currently occupy five sites in New York City, one of which serves as our
principal executive office, and one of which serves as one of our international
gateway switching centers. We also lease space in Somerset, New Jersey, which
serves as our U.S. Network Operations Center; Egham, England, which serves as
our European Network Operations Center; Brooklyn, New York, which serves as a
research center; Omaha, Nebraska, where our billing and operations center is
currently located; and St. Louis, Missouri, the former network operations center
for Destia. Our facilities in Omaha and St. Louis are being consolidated into a
new facility being constructed in College Station, Texas. In addition, we also
lease space at two locations in London, England, which serve as our European
headquarters. We lease locations pursuant to the terms of the respective leases
which expire at different times beginning in May 2004.
We have leased sales offices in several U.S. cities and leased European
sales offices in the following locations: London, England; Paris, Lyon,
Marseilles, Nantes, Nice and Toulouse, France; Brussels and Antwerp, Belgium;
Amsterdam, The Netherlands; Frankfurt, Berlin, Munich, Hamburg and Dusseldorf,
Germany; Milan and Rome, Italy; Athens, Greece; Vienna, Austria; Zurich,
Switzerland; and Barcelona and Madrid, Spain; all of which are leased.
We also maintain switching and transmission sites in several U.S. cities and
numerous countries throughout Europe. In general, these locations are leased for
a minimum term of 20 years, including
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renewal options. We attempt to structure our leases of space for our network
switching centers and rights-of-way for our fiber optic networks with initial
terms and renewal options so that the risk of relocation is minimized. We
anticipate that prior to termination of any of the leases, we will be able to
renew such leases or make other suitable arrangements.
ITEM 3. LEGAL PROCEEDINGS
We are involved from time to time in litigation that arises in the ordinary
course 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
On November 19, 1999, we held a special meeting of our stockholders at which
our stockholders were requested to approve the terms of the Agreement and Plan
of Merger, dated as of August 27, 1999, pursuant to which we agreed to acquire
Destia Communications, Inc. At the special meeting, a total of 22,453,191 shares
of our common stock, or 68.75% of the 32,656,644 shares outstanding and eligible
to vote at the meeting, were present, either in person or by proxy. The
Agreement and Plan of Merger was approved by the following vote:
<TABLE>
<CAPTION>
VOTES CAST FOR VOTES CAST AGAINST ABSTENTIONS
- --------------------- ------------------ -----------
<S> <C> <C>
22,294,695 133,591 24,905
</TABLE>
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market under the ticker
symbol "VYTL". As of April 10, 2000, there were 50,034,866 shares of our common
stock outstanding. We believe we have in excess of 500 beneficial owners of our
common stock. The following table shows, for the calendar quarters indicated,
based on published sources, the high and low closing sale prices per share of
our common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
VIATEL COMMON
STOCK
------------------------
HIGH LOW
---------- -----------
<S> <C> <C>
1997
Second Quarter............................................ $ 7 $ 6
Third Quarter............................................. 6 5/8 4 1/4
Fourth Quarter............................................ 7 5
1998
First Quarter............................................. 13 3/4 5
Second Quarter............................................ 17 7
Third Quarter............................................. 20 3/4 8 1/8
Fourth Quarter............................................ 23 1/2 7 1/4
1999
First Quarter............................................. 28 5/8 17
Second Quarter............................................ 52 7/8 28 1/8
Third Quarter............................................. 57 1/2 23 5/16
Fourth Quarter............................................ 54 5/8 27 1/16
2000
First Quarter............................................. 75 3/8 33 3/8
</TABLE>
On April 10, 2000, the reported last sale price of our common stock on the
Nasdaq National Market was $40.375 per share.
We have not paid any cash dividends on our common stock to date. The payment
of dividends, if any, in the future is within the discretion of our board and
will depend on our earnings, capital requirements and financial condition. It is
our present intention to retain future earnings, if any, to finance growth of
our business. Our ability to pay cash dividends is currently restricted under
the terms of the various indentures relating to our existing indebtedness.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements,
including the notes thereto, and the other consolidated financial data included
elsewhere in this report. The consolidated statement of operations data, other
consolidated financial data and consolidated balance sheet data as of and for
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 are 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 1999 and for each of the years
in the three-year period ended December 31, 1999 and the report of KPMG LLP
thereon, are included elsewhere in this report. We capitalize interest costs
that relate to debt to finance the network, until the related portion of the
network is placed into service. In 1995, 1996, 1997, 1998 and 1999, we
capitalized $.5 million, $.1 million, $.2 million, $3.3 million and
$10.1 million, respectively, of interest costs. EBITDA consists of earnings
before interest, income taxes, restructuring and impairment charges,
extraordinary loss, dividends on preferred stock and depreciation and
amortization. Capital additions for each period consist of capital expenditures,
the net change in payables for property and equipment purchases, assets acquired
under capital lease obligations and capitalized interest during the period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Communication services revenue........... $ 32,313 $ 50,419 $ 73,018 $ 131,938 $ 248,600
Capacity sales........................... -- -- -- 3,250 84,501
-------- -------- -------- ---------- ---------
Total revenue.......................... 32,313 50,419 73,018 135,188 333,101
Operating expenses:
Cost of services and sales............... 27,648 42,130 63,504 122,109 250,574
Selling, general and administrative...... 24,370 32,866 36,077 44,893 100,559
Depreciation and amortization............ 2,637 4,802 7,717 16,268 75,911
Restructuring and impairment............. 560 -- -- -- 13,206
-------- -------- -------- ---------- ---------
Total operating expenses............... 55,215 79,798 107,298 183,270 440,250
-------- -------- -------- ---------- ---------
Operating loss............................. (22,902) (29,379) (34,280) (48,082) (107,149)
Interest income............................ 3,282 1,852 3,686 28,259 26,722
Interest expense........................... (8,856) (10,848) (12,450) (79,177) (137,409)
-------- -------- -------- ---------- ---------
Loss before extraordinary loss............. (28,476) (38,375) (43,044) (99,000) (217,836)
Extraordinary loss on debt prepayment...... -- -- -- (28,304) --
-------- -------- -------- ---------- ---------
Net loss................................... (28,476) (38,375) (43,044) (127,304) (217,836)
Dividends on redeemable convertible
preferred stock.......................... -- -- -- (3,301) (1,341)
-------- -------- -------- ---------- ---------
Net loss attributable to common
stockholders............................. $(28,476) $(38,375) $(43,044) $ (130,605) $(219,177)
======== ======== ======== ========== =========
Net loss per common share attributable to
common stockholders...................... $ (2.09) $ (2.47) $ (1.90) $ (5.67) $ (7.43)
======== ======== ======== ========== =========
Weighted average common shares outstanding,
basic and diluted........................ 13,641 15,514 22,620 23,054 29,518
======== ======== ======== ========== =========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA:
EBITDA..................................... $(19,705) $(24,577) $(26,563) $ (31,814) $ (18,032)
Net cash used in operating activities...... (18,489) (26,331) (22,525) (60,318) (134,825)
Net cash used in investing activities...... (37,057) (1,592) (43,164) (349,992) (405,971)
Net cash (used in) provided by financing
activities............................... (2,306) 94,772 11,286 729,035 589,391
Capital additions.......................... 11,887 9,800 40,214 220,903 546,259
OTHER OPERATING DATA:
Billable minutes (000s).................... 25,932 62,249 140,918 383,875 1,595,658
Switches................................... 10 13 14 15 50
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $35,066 $ 92,982 $ 47,143 $ 329,511 $ 373,044
Restricted cash equivalents and restricted
marketable securities, current and
non-current.............................. -- -- -- 144,523 197,760
Cash securing letters of credit for network
construction............................. -- -- -- -- 50,165
Working capital............................ 26,214 79,434 7,667 428,657 278,858
Property and equipment, net................ 16,218 21,886 54,918 267,316 884,328
Intangible assets, net..................... 4,999 4,210 3,515 45,908 1,011,659
Total assets............................... 65,613 134,664 126,809 1,009,111 2,704,097
Total long-term liabilities................ 67,283 77,904 99,610 921,139 1,767,548
Series A redeemable convertible preferred
stock.................................... -- -- -- 47,121 --
Stockholders' equity (deficiency).......... (17,618) 38,483 (8,564) (137,292) 537,391
</TABLE>
28
<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 AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THE
FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS, INCLUDING, BUT NOT LIMITED TO, OUR SUBSTANTIAL
LEVERAGE, 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 "--RISK FACTORS."
OVERVIEW
We are a rapidly growing provider of "ALL DISTANCE," integrated
telecommunications services to individuals, corporations, internet service
providers, applications service providers and other communications carriers in
Europe and North America. We operate one of Europe's largest pan-European
networks, with international gateways in New York City and London, direct sales
forces in 12 Western European cities and New York City, and an indirect sales
force in numerous locations in Western Europe and North America. We have full
public telecommunications operator licenses in ten Western European countries,
Canada and the United States and interconnection agreements with the incumbent
telecommunications provider in each of these countries.
Since our inception in 1991, we have invested heavily in developing our
ability to provide international communications services within and between
Western Europe and North America and to expand our market presence. During the
past eight years, we have systematically expanded mainly through internal growth
by creating both direct and indirect sales organizations. Furthermore, we have
created an extensive commercial telecommunications network in Western Europe
which we believe is necessary to render economically the data and voice services
that we offer and intend to offer.
In 1999, we also continued to expand our network capabilities and services
and our ability to generate revenues through our strategic acquisition of Destia
Communications, a facilities-based provider of domestic and international long
distance telecommunications services in Europe and North America. On
February 29, 2000, we acquired all of the outstanding share capital of AT&T UK,
a provider of voice and data communications services to enterprise level
corporate customers. This acquisition should help accelerate our entry into the
provision of data services, such as frame relay, asynchronous transfer mode and
Internet protocol services.
REVENUE
Historically, our revenues have been derived primarily from the provision of
long distance telecommunications services in Europe and more recently in North
America. Increasingly, our revenue mix includes advanced services such as data
and Internet services.
Currently, our revenues also include revenues from capacity sales. Each
revenue source has a different impact on our results of operations. Revenue from
capacity sales will continue to vary substantially from period-to-period and
will result in fluctuations in our operating results. For a discussion of the
effects of our network on communications services revenue and capacity sales
revenue, as well as other line items, see "--The Viatel Network."
During 1999, our communications services revenue was based primarily on
billed minutes of use and, to a lesser extent, on the additional services and
products provided through our network. We derived our communications services
revenue principally from long distance telecommunications services.
29
<PAGE>
The table set forth below presents our communications 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,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Western Europe.............................................. 44.7% 46.6% 66.8%
North America............................................... 21.8% 41.6% 30.3%
Latin America............................................... 22.2% 10.8% 2.8%
Asia/Pacific Rim and Other.................................. 11.3% 1.0% 0.1%
</TABLE>
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 reduced
interconnection costs through the use of our network as it is expanded, (2) the
introduction of new products and services and (3) our ability to provide "last
mile" connections over our own facilities or through entering into additional
interconnection agreements to obtain more cost-effective access and termination
from incumbent telecommunications operators. We cannot assure you, however, that
the results referred to in the foregoing forward-looking statements, including a
decline in our cost of communications services, can be achieved.
In December 1999, we completed our acquisition of Destia. As a result, our
1999 consolidated financial statements include the results of operations of
Destia solely for the month of December 1999.
COST OF SERVICES AND SALES
Our cost of services and sales can be classified into four general
categories: access costs, network costs, termination costs and cost of capacity
sales. Access costs generally represent the costs associated with transporting
the traffic from a customer's premises to the closest access point on our
network. Access costs vary depending upon the distance from our network to the
customer's premises and from country-to-country. We currently expect that our
effective per minute access costs will be reduced as deregulation continues and
competition accelerates, as certain European Union directives requiring
cost-oriented pricing (i.e., costs that an effectively competitive market would
yield) by incumbent telecommunications operators are enforced and as we are able
to obtain cost-effective interconnection agreements. However, we can provide no
assurance regarding the extent or timing of such cost decreases or whether they
will occur. If such access costs do not fall as fast as we expect, or at all,
our gross margins could be adversely affected.
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 and facility/network management costs. These costs are
expected to decrease substantially as each additional portion of our constructed
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 not included in
network costs). See "--Depreciation and Amortization." In order to succeed, we
will need our per minute network costs to decline substantially compared to our
per minute revenue.
30
<PAGE>
We use least cost routing designed to terminate traffic in the most
cost-effective manner. We 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, (3) construct or purchase additional transmission facilities and
(4) provide "last mile" connections over our own 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 "--Risk Factors" and "Item 1. Business--Competition" and "Item 1.
Business--Government Regulation."
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 switched
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.
For a description of cost of capacity sales, see "--The Viatel Network."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses include advertising and
promotional costs, commissions paid to 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 have developed and expanded our business,
although these expenses have fallen as a percentage of revenue. We anticipate
that these expenses will continue to increase as our business is expanded in the
future. We anticipate that these expenses will continue to be incurred in
advance of anticipated related communications 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 intangible assets,
including goodwill and costs associated with acquired customer bases, employee
bases and sales forces. We depreciate our network over periods ranging from five
to 20 years and amortize our goodwill and acquired customer base and employee
base over periods ranging from three to seven years. We expect depreciation and
amortization expense to increase as we further expand our network, particularly
as each portion of our constructed network is placed into service, at least
until significant portions of the network are sold.
As a result of our acquisition of Destia, amortization expense will increase
significantly in 2000. The purchase price for Destia was $901.9 million and was
allocated based on estimated fair values at the date of acquisition, pending
final determination. This preliminary allocation has resulted in intangible
assets and goodwill of approximately $131.0 million and $822.3 million,
respectively, which are being amortized on a straight-line basis over their
estimated useful lives which are four to seven years and seven years,
respectively.
RESTRUCTURING AND ASSET IMPAIRMENTS
As a direct result of our acquisition of Destia Communications and the
overlap of some of our business activities, we decided during 1999 to streamline
our organizational structure and strategically
31
<PAGE>
reposition certain operations in both North America and Western Europe. As a
result of these actions, we recognized, during the fourth quarter of 1999,
certain restructuring and asset impairment charges. We also decided to
accelerate depreciation of certain assets which are currently in use but will be
taken out of service in 2000.
Restructuring charges were composed primarily of anticipated costs to
terminate leases and other contract cancellation costs, as well as severance
costs associated with workforce reductions. Asset impairments consisted of
non-cash charges for asset write-offs related to assets no longer in service at
December 31, 1999. In total, we estimate that the restructuring, impairment and
accelerated depreciation charges will be approximately $21.3 million. We
recognized approximately $4.1 million in restructuring charges and approximately
$9.1 million in asset impairments during 1999, and expect to recognize the
balance of these charges during the first half of 2000. We may also incur
restructuring charges related to the acquisition of AT&T UK. The magnitude of
these charges cannot be currently estimated.
THE VIATEL NETWORK
During the first quarter of 1999, we began selling capacity on our network.
Our network is expected to have significant effects on our results of
operations. Capacity sales will vary substantially from period-to-period and, as
a result, may result in fluctuations in our operating results. These sales
substantially increase our gross profit (I.E., total revenue less cost of
services and sales) because our cost of communication services as a percentage
of communications service revenue is currently higher than the cost of capacity
sales as a percentage of capacity sales. Due to the timing of capacity sales and
the higher margin associated with such sales, our gross profits and gross margin
may also fluctuate substantially in the future, in ways that will not
necessarily reflect the trends in our communication services business. We
capitalize all of the costs associated with designing, building, funding and
placing each portion of our constructed network into service.
Revenue from capacity sales consists mainly of revenues recognized when we
deliver indefeasible rights-of-use that qualify for sales-type lease accounting.
Transactions that do not meet the criteria for sales-type lease accounting are
accounted for as operating leases and revenue is recognized over the term of the
lease and is included in communication services revenue.
Cost of capacity sales represents non-cash charges of the PRO RATA cost of
the network asset and is determined based upon the ratio of total network
capacity sold to total estimated network capacity, multiplied by the total
capitalized costs of the related network. The portion of the total capitalized
cost of the network used to provide communication services is included in
property and equipment and is being charged to depreciation and amortization
over its useful life.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 43, "Real Estate Sales, an interpretation of
FASB Statement No. 66" ("FIN 43") which is applicable to all contracts entered
into after June 30, 1999. FIN 43 requires that a lease of property improvements
or integral equipment include a provision allowing title to transfer to the
lessee in order for that lease to be accounted for as a sales-type lease.
We recognize revenue in accordance with FIN 43 and the SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements". However,
accounting practices and guidance for sales of indefeasible rights-of-use are
evolving. Standard setting bodies are currently reviewing a number of issues
related to FIN 43 and other related issues will probably be referred to these
bodies. Changes in the accounting treatment as a result of the foregoing could
affect the way that we recognize revenues and costs associated with capacity
sales in the future.
We exchange capacity on our network for capacity on other cable systems.
Depending on the structure of these transactions, we generally do not recognize
any revenue or expense, so there is no effect on our statement of operations. We
will continue to incur sales and marketing and related expenses that will not
32
<PAGE>
be capitalized and will affect our results of operations, particularly while
portions of our network are being designed, built and placed into service. In
addition, we will continue to incur additional operating and maintenance
expenses as additional portions of our network become operational. As a result
of financing our network with debt, we are capitalizing a portion of the
interest incurred that relates to the construction of our network until it is
placed in service and will incur increases in interest expense thereafter.
Our network will continue to have a beneficial effect on our costs of
services and sales as well as net income (loss). This will occur as we continue
to bring traffic "on-net," to facilities we own, as opposed to facilities that
we lease from other carriers. A large portion of the expenses associated with
facilities we own is accounted for as depreciation and amortization, while
leased capacity is accounted for as a cost of services and sales. As a result,
we expect that our gross margins and profit will be improved as we continue to
bring traffic "on-net." However, net income (loss) will not improve to the same
extent. The effect of bringing traffic "on-net" will be somewhat delayed because
our leased line agreements require minimum notification to terminate our
obligations.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of our results of operations as
a percentage of revenue. Our revenue, and therefore these percentages, could
fluctuate substantially from period to period due to revenues from capacity
sales, which have a substantially different impact on margins than revenues from
communications services.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cost of services and sales.................................. 87.0% 90.3% 75.2%
Selling, general and administrative expenses................ 49.4% 33.2% 30.2%
Depreciation and amortization............................... 10.6% 12.0% 22.8%
Restructuring and impairment................................ -- -- 4.0%
EBITDA loss (1)............................................. (36.4%) (23.5%) (5.4%)
</TABLE>
- ------------------------
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
restructuring and impairment charges, extraordinary loss, dividends on
convertible preferred stock and depreciation and amortization. EBITDA is a
measure commonly used in the telecommunications industry to analyze
companies on the basis of operating performance. EBITDA is not a measure of
financial performance under generally accepted accounting principles, is not
necessarily comparable to similarly titled measures of other companies and
should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
1999 COMPARED TO 1998
TOTAL REVENUE. Total revenue increased by 146.4% from $135.2 million for
1998 to $333.1 million for 1999. This growth was attributable to an 88.4%
increase in communications services revenue from $131.9 million on
383.9 million billable minutes in 1998 to $248.6 million on 1.596 billion
billable minutes in 1999. Capacity sales increased from $3.3 million or, 2.4% of
revenue, in 1998 to $84.5 million, or 25.4% of revenue, in 1999. Revenue growth
in 1999 was generated primarily by growth from European operations, capacity
sales, and as a result of the Destia acquisition.
Although there was a substantial increase in billable minutes from 1998 to
1999, the effects of such growth were partially offset by a decline in revenue
per billable minute, as it declined by 54.5% from $.33 in 1998 to $.15 in 1999,
primarily because of (1) a higher percentage of lower-priced intra-European and
national long distance traffic on our network and (2) reductions in prices in
response to price reductions by incumbent telecommunications operators and other
carriers in many of our markets. Communications
33
<PAGE>
services revenue per billable minute excludes fixed monthly fees associated with
our other products and service offerings.
Communication services revenue per billable minute from the sale of services
to retail customers, which represented 41.7% of revenue in 1998, compared to
39.4% in 1999, decreased 65.8% from $.38 in 1998 to $.13 in 1999. Communication
services revenue per billable minute from the sale of services to carriers and
other resellers decreased 33.3% from $.30 in 1998 to $.20 in 1999.
During 1999, as compared to 1998, our wholesale sales to carriers grew on an
absolute basis, but decreased as a percentage of revenue because our other
services grew at a faster rate. The wholesale sales to carriers represented
approximately 55.9% of revenue and approximately 62.0% of billable minutes for
1998 as compared to approximately 35.2% of revenue and approximately 34.5% of
billable minutes for 1999.
COST OF SERVICES AND SALES. Cost of services and sales increased from
$122.1 million in 1998 to $250.6 million in 1999. As a percentage of revenue,
however, cost of services and sales decreased from approximately 90.3% in 1998
to approximately 75.2% in 1999, due to our migration from leased infrastructure
to our own network and because of capacity sales and as a result of the Destia
acquisition. The effect of bringing traffic on-net, however, will be somewhat
delayed because our leased line agreements require minimum notification to
terminate our obligations.
Cost of services and sales for 1999 includes costs associated with capacity
sales. The cost of capacity sales represents non-cash charges of the PRO RATA
cost of the network assets and is determined based upon the ratio of total
network capacity sold to total estimated network capacity, multiplied by the
total capitalized costs of the related network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $44.9 million in 1998 to $100.6 million
in 1999 and, as a percentage of revenue, decreased from approximately 33.2% in
1998 to approximately 30.2% in 1999. Much of these expenses are attributable to
overhead costs associated with our headquarters, back-office and operations as
well as maintaining a physical presence in multiple jurisdictions. We expect to
incur additional expenses as we continue to invest in operating infrastructure
and actively market our products and services. Salaries and commissions, as a
percentage of total selling, general and administrative expenses, were
approximately 49.3% and 41.4% in 1998 and 1999, respectively. Advertising and
promotion expenses have increased substantially and will continue to be a
significant component of selling, general and administrative expenses. As a
percentage of total selling, general and administrative expenses, advertising
and promotion expenses were approximately 3.6% and 7.6% in 1998 and 1999,
respectively.
EBITDA LOSS. EBITDA loss decreased from $31.8 million in 1998 to
$18.0 million in 1999. As a percentage of revenue, EBITDA loss decreased from
approximately 23.5% in 1998 to approximately 5.4% in 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of our network, increased from approximately
$16.3 million in 1998 to approximately $75.9 million in 1999. The increase was
due primarily to the $666.5 million increase in gross property and equipment
from $293.8 million at December 31, 1998 to $960.3 million at December 31, 1999,
and an increase in amortization of goodwill related to our acquisition of
Destia.
RESTRUCTURING AND IMPAIRMENT. Restructuring and impairment charges of
$13.2 million were recognized in 1999, consisting of anticipated costs to
terminate leases and other contract cancellation costs, severance costs and
charges for asset write-offs and write downs of underutilized assets.
Restructuring and impairment charges were approximately 4.0% as a percentage of
revenues. There were no restructuring and impairment charges in 1998.
34
<PAGE>
INTEREST. Interest expense increased from approximately $79.2 million in
1998 to approximately $137.4 million in 1999, primarily as a result of increases
in our outstanding indebtedness, which includes notes and capital lease
obligations, which increased from $930.1 million at December 31, 1998 to
$1.8 billion at December 31, 1999. During 1999, we capitalized approximately
$10.1 million of interest costs. Interest income decreased from approximately
$28.3 million in 1998 to approximately $26.7 million in 1999, primarily as a
result of the decrease in the balance of our outstanding investments.
1998 COMPARED TO 1997
TOTAL REVENUE. Total revenue increased by 85.1% from $73.0 million on
140.9 million billable minutes in 1997 to $135.2 million on 383.9 million
billable minutes in 1998. Total revenue growth in 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 in our Pacific Rim and Latin American operations. Total revenue in 1998
also included $3.3 million of trans-Atlantic capacity sales.
The overall increase of 172.4% in billable minutes from 1997 to 1998 was
partially offset by declining revenue per billable minute, primarily because of
(1) a higher percentage of lower-priced intra-European and national 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
price reductions enacted by incumbent telecommunications operators and other
carriers in many of our markets.
Communications services revenue per billable minute from the sale of
services to retail customers, which represented 72.1% of total revenue for 1997,
compared to 41.7% for 1998, decreased 44.1% from $.68 in 1997 to $.38 in 1998.
Communication services revenue per billable minute from the sale of services to
carriers and other resellers increased by 3.4% from $.29 in 1997 to $.30 in 1998
due primarily to changes in traffic mix. The number of contracted customers
billed declined 30.2% from 21,515 at December 31, 1997 to 15,010 at
December 31, 1998. This decline in contracted customers billed is primarily
attributable to our Pacific Rim operations where the number of customers billed
declined 93.2% from 5,424 at December 31, 1997 to 369 at December 31, 1998,
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 as compared to 1997, we significantly increased our wholesale
carrier business through which we sell switched minutes, private lines and ports
to carriers, Internet service providers and other resellers. The wholesale
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 wholesale carrier
business represented approximately 27.9% of total revenue and approximately
46.1% of billable minutes in 1997 as compared to approximately 55.9% of total
revenue and approximately 62.0% of billable minutes in 1998. The increase in
total revenue derived from carriers and other resellers is partially
attributable to the acquisition of Flat Rate Communications on February 27, 1998
which also significantly increased our North American revenues.
COST OF SERVICES. Cost of services increased from $63.5 million in 1997 to
$122.1 million in 1998 and, as a percentage of total revenue, increased from
approximately 87.0% to approximately 90.3%. Our gross margin decreased, as a
percentage of total revenue, from 13.0% in 1997 to 9.7% in 1998. This 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.
35
<PAGE>
Cost of 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 total revenue as we continue to migrate from leased to owned
infrastructure. From 1997 to 1998, we increased our private line circuit
capacity and, as a result, costs for private line circuits increased from
approximately $9.6 million in 1997 which is approximately 13.1% of total
revenue, to approximately $17.1 million in 1998 which is approximately 12.6% of
total revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $36.1 million in 1997 to $44.9 million in
1998 and, as a percentage of total revenue, decreased from approximately 49.4%
in 1997 to approximately 33.2% in 1998. 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 51.6% and 49.3% for 1997 and 1998, respectively. Advertising and
promotion expenses, as a percentage of total selling, general and administrative
expenses, were approximately 1.2% and 3.6% in 1997 and 1998, respectively. We
expect to incur additional expenses as we continue to invest in our sales and
marketing infrastructure and actively market our products and services.
EBITDA LOSS. EBITDA loss increased from $26.6 million in 1997 to
$31.8 million in 1998. As a percentage of total revenue, EBITDA loss decreased
from approximately 36.4% in 1997 to approximately 23.5% in 1998. These losses
resulted from lower gross margins as a percentage of total 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 from approximately $7.7 million
in 1997 to approximately $16.3 million in 1998. 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 in February
1998. Depreciation expense will increase substantially as each constructed
portion of our network becomes operational.
INTEREST. Interest expense increased from approximately $12.5 million in
1997 to approximately $79.2 million in 1998 primarily as a result of our 1998
high yield offering. Interest income increased from approximately $3.7 million
in 1997 to approximately $28.3 million in 1998 primarily as a result of the
interim investment of the net proceeds from our 1998 high yield offering. During
1998, we capitalized $3.3 million of interest costs.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses from operating activities in each year of operations
since our inception and expect to continue to incur operating and net losses for
the next several years. Since inception, we have used cash provided by financing
activities to fund operating losses, interest expense and capital expenditures.
The sources of this cash have primarily been through private and public equity
and debt financings and, to a lesser extent, equipment-based financing. As of
December 31, 1999, we had $423.2 million of cash, cash equivalents and cash
securing letters of credit for network construction and $197.8 million of
restricted cash equivalents and other restricted marketable securities, which
primarily secure interest payments on our notes through April 2001. The
following private and public equity and debt financing provided funds to satisfy
our liquidity needs.
On February 1, 2000, we executed a securities purchase agreement pursuant to
which we agreed to sell, and affiliates of Hicks, Muse Tate & Furst and Chase
Capital Partners committed to buy, $325 million in Series B cumulative
convertible preferred stock for net proceeds to us of $307.1 million. The
transaction closed on March 9, 2000, following receipt of Hart-Scott-Rodino
Antitrust Improvements Act clearance.
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The net proceeds of this private placement are being used for network expansion,
services development and general corporate purposes.
As part of the Destia acquisition, on December 8, 1999, the holders of all
of Destia's 11% senior discount notes due 2008 ($213.3 million in accreted
principal amount) exchanged their Destia notes, and all accreted but unpaid
interest on these notes through the date of the acquisition, for $205.8 million
in aggregate principal amount at maturity of our 11.5% senior notes due 2009 and
an aggregate cash payment of $21.4 million. In connection with this exchange
offer, we also completed a private placement of $63.7 million in gross principal
amount of our 11.5% senior dollar notes. A portion of the proceeds from this
private placement were used to purchase U.S. government securities which were
pledged as security for the first three interest payments on the notes.
Destia's credit facility with NTFC Capital Corporation, under which Destia
had borrowed approximately $32.3 million as of December 31, 1999, required
Destia to obtain NTFC's consent or prepay the borrowed amounts outstanding,
prior to any change in control transaction. Since our acquisition of Destia was
considered a change in control, Destia obtained a waiver from NTFC which
extended until March 8, 2000 and which has been subsequently extended until
May 8, 2000. Before May 8, 2000, we will be required either to (i) obtain a
further waiver from NTFC, (ii) prepay the outstanding amounts owed at a premium
of not more than 102% of the amount outstanding or (iii) negotiate a new
facility.
On June 29, 1999, we completed an offering of 4,315,000 shares of our common
stock at $47.00 per share. The net proceeds of the offering were approximately
$191.9 million.
On May 13, 1999, our series A preferred stock and subordinated convertible
debentures issued in 1998 were mandatorily converted into shares of our common
stock.
On February 29, 2000, we acquired the entire issued and outstanding share
capital of AT&T UK for $125 million in cash. In connection therewith, AT&T, Inc.
and we agreed to make certain post-closing payments if the working capital in
AT&T UK at closing was not $5 million.
During the second quarter of 2000, we intend to file a universal shelf
registration statement that will enable us to issue, from time to time,
additional shares of our common stock and preferred stock or debt securities. At
this time, we have not determined the dollar amount of securities that will be
registered for future offerings. We have no current intention to issue any
securities pursuant to this shelf registration in the immediate future.
We have very substantial interest expense. Although we have restricted cash
available to make our interest payments on high yield debt instruments through
April 15, 2001, thereafter we need to pay our interest expense from operating
income or borrowings. In 1999, we had an operating loss of $107.1 million and we
have no commitment from any lender to make funds available.
On April 12, 2000, Viatel Financing Trust I, a Delaware statutory trust and
subsidiary of ours, sold $180 million of 7 3/4% trust convertible preferred
securities. The proceeds from the offering of convertible preferred securities
have been loaned by the trust to us. We will use the net proceeds from this
offering, estimated to be $173.7 million, to further develop and enhance our
network, to make selective acquisitions and investments and for working capital
and general corporate purposes.
On April 14, 2000, we executed a placement agreement under the terms of
which we agreed to sell [EURO]300 million of 12 3/4% senior euro notes due 2008.
The transaction is expected to be completed on April 20, 2000.
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We believe that the net proceeds from the offerings discussed above together
with cash and marketable securities on hand and future capacity sales on our
network will provide sufficient funds for us to expand our business as planned
and to fund operating losses for the next 12 to 18 months. However, the amount
of our future capital requirements will depend on a number of factors, including
- the success of our business,
- any acquisitions or investments we make,
- the start-up dates of each additional segment of our network,
- the dates on which we further expand our network,
- whether our network build-out is on-time and on-budget,
- the types of services we offer,
- staffing levels, and
- customer growth
as well as other factors that are not within our control, including competitive
conditions, government regulatory developments and capital costs. Depending on
the factors listed above, we may need more capital or 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. If we are required to seek additional financing, there can be no
assurance that such financing will be available on acceptable terms or at all.
See "--Capital Additions; Commitments."
CAPITAL ADDITIONS; COMMITMENTS
The development of our business has required substantial capital. Capital
additions consist of capital expenditures, the net increase in property and
equipment purchases payable, assets acquired under capital lease obligations and
capitalized interest during the period. During 1998, capital additions totaled
$220.9 million and consisted of capital expenditures of approximately $94.7
million, a net increase of $92.5 million in property and equipment purchases
payable, $30.4 million of assets acquired under capital lease obligations and
capitalized interest of $3.3 million. For 1999, we had capital additions of
approximately $546.2 million, which consisted of capital expenditures of
approximately $527.3 million, a net decrease of $9.5 million in property and
equipment payable, $18.3 million of assets acquired under capital lease
obligations and capitalized interest of approximately $10.1 million. We have
also entered into certain agreements associated with our network, purchase
commitments for network expansion and other items aggregating approximately
$147.9 million at December 31, 1999. We expect to continue to have substantial
capital expenditures in the future. On April 10, 2000, we executed a definitive
agreement with Level 3 Communications under the terms of which we acquired a 25%
ownership interest in the trans-Atlantic fiber optic cable project being
developed by Level 3. Our required commitment in 2000 to fund this purchase is
approximately $140 million. See "Item 1. Business--Our Network--Trans-Atlantic
Capacity."
FOREIGN CURRENCY
We have exposure to fluctuations in foreign currencies relative to the U.S.
Dollar as a result of billing portions of our communications 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, we bill in U.S. dollars. Debt service on certain of the notes
issued by us is currently payable in Euros. A substantial portion of our capital
expenditures is 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 British
Pound Sterling. See "--Euro."
A significant portion of our assets are foreign-denominated and, as such,
are subject to fluctuations in value due to movements in foreign exchange rates.
With the continued expansion of our network, a
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substantial portion of the costs associated with the network, such as local
access and termination charges and a portion of the leased line costs, as well
as a majority of local selling expenses and debt service related to the Euro
denominated notes, are 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. Our financial position as of December 31, 1999 and
our results of operations for the fiscal year 1999 were not significantly
affected by fluctuations in the U.S. Dollar in relation to foreign currencies.
YEAR 2000
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit fields used by many systems. As was the case
with many companies, we did not experience any material business disruption as a
result of the Year 2000 issue due to the remediation work we accomplished prior
to such date. The amount spent in connection with our Year 2000 remediation
efforts was not significant. Due to a belief by certain computer experts that
there may still be residual consequences of the change in centuries, we intend
to continue to monitor our mission criticial systems and those of our suppliers
and vendors over the course of this year.
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. Throughout most of 1999, we
have been able to conduct business in both the Euro and sovereign currencies on
a parallel basis, as required by the European Union.
We believe that the Euro conversion has not and will not have a significant
impact on our business 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.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133 AND SFAS NO. 137. 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. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS 133,"
which amends SFAS 133 to delay the date by which all companies must comply with
SFAS 133. Companies must comply with SFAS 133 for all fiscal years beginning
after June 15, 2000. We have not completed our analysis of the impact of these
statements on our consolidated financial statements.
RISK FACTORS
WE MAY ENCOUNTER DIFFICULTIES IN COMBINING OPERATIONS AND REALIZING
SYNERGIES
In the past four months, we have completed two major acquisitions with the
expectation that these transactions will result in certain benefits, including
operating efficiencies, cost savings and synergies. Achieving the benefits of
these transactions will depend in part upon the integration of our businesses in
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an efficient manner, which requires considerable effort. In addition, the
consolidation of operations requires substantial attention from management. The
diversion of management attention and any difficulties encountered in the
transition and integration process could harm us. Furthermore, employees and
customers of our acquired companies may leave. We cannot assure you that we will
succeed in integrating the operations of the acquired companies into our
operations in a timely manner or that the expected efficiencies, cost savings
and synergies of these transactions will be realized.
WE HAVE INCURRED AND WILL CONTINUE TO INCUR SIGNIFICANT MERGER-RELATED
CHARGES
As a result of our two recent acquisitions, we have incurred related costs
such as financial advisory, legal and accounting fees, financial printing and
other related charges. In addition, we have incurred and will continue to incur,
integration costs associated with consolidating corporate headquarters and other
administrative functions, terminating certain leases and severance and facility
closing costs associated with consolidating certain product lines. In addition,
in connection with the Destia transaction we have also recorded a substantial
amount of goodwill and intangible assets that will decrease our earnings as they
are amortized over the next four to seven years. See "--Depreciation and
Amortization."
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.
As of December 31, 1999, we had approximately $1.8 billion of indebtedness. Our
substantial indebtedness could have important consequences. For example, it
could:
- limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, joint ventures and general corporate
purposes;
- 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;
- make us more vulnerable to economic downturns, limiting our ability to
withstand competitive pressures and reducing our flexibility in responding
to changing business and economic conditions;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
TO DATE, WE HAVE INCURRED SUBSTANTIAL NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS AND, IF THIS CONTINUES, WE WILL BE UNABLE TO MEET OUR WORKING
CAPITAL AND FUTURE DEBT SERVICE REQUIREMENTS
Our operating loss and net loss have 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. In 1999, we had an operating
loss of $107.1 million, negative EBITDA of $18.0 million and a net loss of
$217.8 million and, on a pro forma basis, after giving effect to our acquisition
of Destia as if it had occurred on January 1, 1999, would have had an operating
loss of $306.8 million, negative EBITDA of $71.3 million and a net loss of
$465.0 million. In 1998, we had interest expense of $79.2 million. In 1999, we
had interest expense of $137.4 million and, on a pro forma basis, after giving
effect to the combination with Destia as if it had occurred on January 1, 1999,
would have had interest expense of $191.3 million.
We are likely to have negative EBITDA and negative cash flow beyond 2001 if:
- we extend our expansion plans,
- prices charged to end-users for capacity sales or communications services
decline faster than we anticipate,
- interconnection rates and wholesale prices paid by us do not decline as
quickly as we anticipate or
- any of the other risks described in this report materialize.
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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 harm our business, financial condition and results of operations.
WE MUST OBTAIN CONSENTS AND WAIVERS UNDER THE TERMS OF DESTIA'S CREDIT
FACILITY
Destia's credit facility with NTFC Capital Corporation, under which Destia
had borrowed approximately $32.3 million as of December 31, 1999, required
Destia to obtain NTFC's consent or prepay the borrowed amounts outstanding,
prior to any change in control transaction. Since our acquisition of Destia was
considered a change in control, Destia obtained a waiver from NTFC which
extended until March 8, 2000 and which has been subsequently extended until
May 8, 2000. Before May 8, 2000, we will be required either to (i) obtain a
further waiver from NTFC, (ii) prepay the outstanding amounts owed at a premium
of not more than 102% of the amount outstanding or (iii) negotiate a new
facility. We cannot assure you that NTFC will grant an additional waiver, if one
is necessary, or that it will grant such a waiver on terms that are acceptable
to us. If NTFC does not grant the waiver and we do not prepay the amount owed or
negotiate a new facility, then we will be in default under the NTFC credit
facility which, in turn, would be an event of default with respect to all of our
senior indebtedness. An event of default on our senior indebtedness would enable
the holders of such indebtedness to accelerate payment. As of December 31, 1999,
we had total senior indebtedness of approximately $1.8 billion, and the
obligation to repay this amount would have a material and adverse effect on us,
as described above under "--To Date, We Have Incurred Substantial Net Losses and
Negative Cash Flow From Operations and, If This Continues, We Will Be Unable to
Meet Our Working Capital and Future Debt Service Requirements."
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:
- pricing changes in the industry;
- the start-up and ready-for-service dates of each phase of our network
expansion;
- timing of capacity sales;
- changes in the mix of services sold or channels through which those
services are sold;
- changes in user demand, customer terminations of service, capital
expenditures and other costs relating to the expansion of our network;
- the timing and costs of any acquisitions of customer bases and businesses,
services or technologies;
- the timing and costs of marketing and advertising efforts;
- the effects of government regulation and regulatory changes; and
- specific economic conditions in the communications 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.
DUE TO RESTRICTIONS IN OUR INDENTURES, WE MAY NOT BE ABLE TO OPERATE OUR
BUSINESS AS WE DESIRE
The indentures under which our long-term debt was issued contain a number of
conditions and limitations on the way in which we can operate our business.
These limitations may force us to pursue less
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than optimal business strategies or forego business arrangements which could
have been financially advantageous to us and our stockholders. The indentures
restrict, and in some cases significantly limit or prohibit, among other things,
our ability and the ability of our respective subsidiaries to:
- incur additional indebtedness,
- create liens,
- engage in sale-leaseback transactions,
- pay dividends or make distributions with respect to our capital stock,
- make certain investments,
- sell assets,
- redeem capital stock,
- issue or sell stock of restriced subsidiaries, or
- enter into transactions with stockholders or affiliates or effect a
consolidation or merger.
OUR FUTURE GROWTH WILL REQUIRE SUBSTANTIAL ADDITIONAL CAPITAL WHICH COULD
EXCEED BUDGETED AMOUNTS AND CAUSE US TO DELAY OR ABANDON EXPANSION PROJECTS
Our future growth will require substantial additional capital which may
exceed budgeted amounts. If we do not have sufficient cash to fund our growth as
planned, we may be required to delay or abandon some or all of our development
and expansion plans or we may have to seek additional money earlier than
anticipated. We cannot provide any assurance 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
engage in additional financings.
FAILURE TO CONTINUE TO IMPLEMENT OUR STRATEGY OF OWNING FACILITIES COULD
SIGNIFICANTLY IMPACT OUR FINANCIAL PERFORMANCE
If we are unable to continue to successfully implement our strategy of
owning, rather than leasing, communications facilities, we could experience a
significant decrease in margins which we make on communications services
transmitted on our network. Unless we are able to significantly increase the
number of billable minutes which we carry or the amount we can charge for
additional services, this decrease in margins would have a material adverse
effect on our business, financial condition and results of operations.
FAILURE TO SELL CAPACITY ON OUR NETWORK OR PRICE REDUCTIONS FOR CROSS-BORDER
CAPACITY IN EUROPE COULD HARM OUR BUSINESS
Our success and ability to achieve our business objectives depends, in part,
upon the sale of capacity on our network. The market for capacity has
experienced significant price reductions, which are expected to continue.
Although we have been successful in meeting capacity sales objectives to date,
we cannot assure you that such success will continue. Furthermore, even if
capacity sales projections are realized, price declines for cross-border
capacity may limit operating profitability or the ability to generate sufficient
cash flow to service our indebtedness. If we are unable to sell capacity
effectively on our network, it would harm our business, financial condition and
results of operations.
CHANGE IN ACCOUNTING POLICIES COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING
RESULTS
In June 1999, FASB issued FIN 43 which is applicable for all contracts
entered into after June 30, 1999. FIN 43 requires that a lease of property
improvements or integral equipment include a provision allowing title to
transfer to the lessee in order for that lease to be accounted for as a
sales-type lease.
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We recognize revenue in accordance with FIN 43 and the SEC's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
However, accounting practices and guidance for indefeasible rights-of-use is
evolving, and standard setting bodies are currently reviewing a number of issues
related to FIN 43 and other related issues will probably be referred to these
bodies. Changes in the accounting treatment as a result of the foregoing could
affect the way that we recognize revenue and expenses associated with these
capacity sales in the future. We cannot assure you that any such changes will
not have an adverse effect on our financial condition and results of operations.
WE MAY NOT BE ABLE TO PROVIDE DATA TRANSMISSION SERVICES EFFECTIVELY
Prior to our acquisition of AT&T UK, we had limited experience in providing
data transmission services and, consequently, we can provide no assurance that
we will be successful in expanding this aspect of our business. Our ability to
successfully expand our 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 additional qualified personnel;
- enhance our billing, back-office and information systems to accommodate
data transmission services; and
- obtain customer acceptance of our service offerings.
If we are not successful, our business may be materially adversely affected.
The data transmission business is also 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 vendors may not have adequate experience in providing
equipment and configuring data networks in our various markets. We may also
experience technical difficulties in integrating our equipment and handling
differing data transmission protocols in our various markets.
Unlike some of our competitors, we are not currently carrying voice
communications using Internet protocol technology on our network outside of the
U.K. While we currently carry portions of our traffic using Internet protocol
overlay, there is a risk that we will not be able to develop this Internet
protocol technology well enough to be able to use it for voice traffic and,
therefore, will not be able to realize the anticipated cost reductions
associated with using Internet protocol for voice transmissions.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED
As of December 31, 1999, we had federal income tax net operating loss
carryforwards of $577.2 million, which begin to expire in 2007. This amount
includes acquired net operating loss carryforwards of approximately $228.7
million from our acquisition of Destia. A tax asset related to this loss
carryforward does not appear on our balance sheet because it is unclear if we
will generate taxable income prior to the expiration of the net operating loss
carryforwards. Our ability to use our net operating loss carryforwards to reduce
future tax payments would be limited if a 50% ownership change, were to occur
over a three-year period. As a result of an ownership change in October 1996,
certain of our net operating loss carryforwards from before such time are
subject to this limitation. It is possible that our acquisition of Destia, when
combined with prior or subsequent direct or indirect changes in the ownership of
our common stock within the relevant three-year period, could trigger this
limitation.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE WITH PARTICIPANTS THAT
HAVE GREATER RESOURCES THAN WE DO, AND WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY
Our success depends upon our ability to compete with other communications
providers in each of our markets, many of whom have substantially greater
financial, marketing and other resources than we have. The markets in which we
offer and intend to offer our services are extremely competitive and competition
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is expected to intensify. Although our recent acquisitions of Destia and AT&T UK
are expected to create a company with increased revenues, purchasing power and
product offerings, if our competitors devote significant additional resources to
the provision of communications services to our target customer base, this
action could harm our business, financial condition and results of operations.
We cannot assure you that we will be able to compete successfully.
In Europe, we compete with different companies depending on the products and
services being offered. In voice services, our competitors consist of the
incumbent telecommunications operators in each country in which we operate,
global alliances among some of the world's largest telecommunications carriers
and new entrants. With regard to our bandwidth services, we are currently facing
competition from KPN/Qwest and GTS, each of which has broadband networks in
operation in Europe. We will also experience significant additional competition
over the next ten to twelve months as other broadband networks become
operational. These include networks being constructed by Global Crossing,
Interoute and Concert, the joint venture between British Telecom and AT&T. In
addition, Colt Telecom Group and Level 3 Communications are sharing the costs of
constructing two networks--one to link certain German cities and another linking
Paris, Frankfurt, Amsterdam, Brussels and London. In the area of value-added
services, we compete with two main types of competitors--the incumbent
telecommunications operators and traditional value-added Internet service
providers, such as EUNet, a subsidiary of MCI WorldCom, Ebone, InfoNet and
PSINet.
In the United States, which is among the most competitive and deregulated
long distance markets in the world, competition is based primarily upon pricing,
customer service, network quality, and the ability to provide value-added
services. As such, the long distance industry is characterized by a high level
of customer attrition or "churn," with customers frequently changing long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. We compete with major carriers such as AT&T, MCI
WorldCom and Sprint, as well as other national and regional long distance
carriers and resellers, many of whom are able to provide services at costs that
are lower than our current costs. Many of these competitors have greater
financial, technological and marketing resources than we do. If any of our
competitors were to devote additional resources to the provision of
communications services to our target customer base, there could be a material
adverse effect on our business. Several companies have recently introduced flat
rate long distance calling plans with very low per-minute charges. We cannot
predict the effect that these plans will have on the industry generally and on
us in particular.
As a result of the 1996 Telecommunications Act, the regional Bell operating
companies can compete with us in the long distance telecommunications industry,
both outside of their service territory and, upon satisfaction of certain
conditions, within their service territory. The 1996 Telecommunications Act
prospectively eliminated the restrictions on incumbent local exchange carriers,
such as the regional Bell operating companies, from providing long distance
service. These provisions permit a regional Bell operating company to enter an
"out-of-region" long distance market immediately upon the receipt of any state
or federal regulatory approvals otherwise applicable in the provision of long
distance service. Regional Bell operating companies must satisfy certain
procedural and substantive requirements, including obtaining Federal
Communications Commission approval upon a showing that, in certain instances,
facilities-based competition is present in its market, that it has entered into
interconnection agreements that satisfy a 14-point "checklist" of competitive
requirements and that its entry into the "in-region" long distance market is in
the public interest before they are authorized to offer long distance service in
their regions. On December 22, 1999, Bell Atlantic was granted a license to
provide long distance service in New York. Because a substantial portion of our
customer base and traffic originates in the New York metropolitan area, Bell
Atlantic is a particularly formidable competitor. For long distance calls, Bell
Atlantic has a substantial cost advantage, because it does not have to pay
access fees to a local carrier to originate the call. Access fees constitute a
large portion of a long distance carrier's cost of services, including ours.
Moreover, should Bell Atlantic's proposed acquisition of GTE be consummated,
Bell Atlantic will have even greater resources to compete in its service
markets. In addition, SBC has a pending application at the Federal Communication
Commission for the provision of long distance service in Texas.
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NETWORK CONSTRUCTION DELAYS AND SYSTEM DISRUPTIONS OR FAILURES COULD
ADVERSELY AFFECT OUR BUSINESS
Our success depends, in part, on our ability to continue to expand our
network and on our ability to provide seamless technical operation of this
network. Furthermore, as we continue to expand our network to increase our
capacity and reach, we will face increasing demands and challenges including:
- 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;
- increasing traffic volume on our network; and
- selling capacity on our network.
If the costs of construction projects significantly exceed the budget for
those projects, we may be required to obtain additional financing, proceed on a
joint build basis or to abandon or curtail portions of those projects. Our
build-out costs have exceeded budget in the past and may exceed budget in the
future. If we encounter construction delays, we will not be able to route our
traffic over our owned facilities as soon as we have planned, which could have a
detrimental effect on our ability to increase traffic volumes and gross margins.
In addition, construction delays could negatively affect our ability to sell
indefeasible rights-of-use or capacity to other carriers. We have experienced
delays in the past and may experience them in the future. Our network is also
subject to several risks which are outside of our control, such as the risk of
damage to software and hardware resulting from:
- fire,
- power loss,
- natural disasters, and
- general transmission failures caused by a number of additional factors.
Any failure of our network or other systems or hardware that causes
significant interruptions to our operations could harm 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. In the event of a system disruption, we could seek to minimize customer
inconvenience 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 could have a material adverse effect on our ability to manage our
network operations, generate accurate call detail reports and monitor our
systems.
The continued expansion and development of our network will require 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 capacity or minimum investment units on digital fiber optic cables or digital
microwave equipment, the purchase of dark fiber 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.
FOREIGN CURRENCY EXCHANGE RATES COULD HAVE ADVERSE EFFECTS ON OUR BUSINESS
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.
45
<PAGE>
In the future, we may elect to manage exchange rate exposure presented by
our Euro-denominated obligations through the use of hedging transactions. There
can be no 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 provide any assurance that the laws or administrative
practices relating to taxation, foreign exchange or other matters in countries
within which we operate will not change in a manner that could have a material
adverse effect on our business, financial condition and results of operations.
OUR DEPENDENCE UPON THIRD PARTIES FOR LEASED CAPACITY AND INTERCONNECTION
ARRANGEMENTS MAY RESULT IN SUBOPTIMAL UTILIZATION OF OUR NETWORK
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. A deterioration of our relationship 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.
Our ability to access customers and to utilize effectively our network is
dependent upon our ability to secure operative interconnection agreements,
providing access to and an exit from the public switched telephone network, with
the respective incumbent telecommunications operator in each market in which we
operate. Difficulties or delays in obtaining necessary operative
interconnections in a satisfactory or timely manner may significantly delay or
prevent the maximum utilization of our network, which could have a material
adverse effect on us.
WE ARE DEPENDENT UPON THIRD-PARTY SALES ORGANIZATIONS OVER WHICH WE CAN
EXERCISE ONLY LIMITED CONTROL
We sell a substantial portion of our services through indirect channels of
distribution, which consist of independent sales agents, distributors and, to a
lesser extent, resellers. We do not have control over such agents, distributors
and resellers and, therefore, are not able to ensure that they will perform in a
satisfactory manner or that their interests will be aligned with our interests.
In addition, such entities also may terminate their business relationships with
us at any time, with little or no prior notice. We have found this risk to be
especially pronounced in our multilevel marketing program in the United Kingdom,
where a master agent could decide to terminate its business relationship, and
that of its sub-agents, and conduct business with a competitor. Unsatisfactory
performance by such entities, or the termination by them of their business
relationship with us, would hinder our ability to grow and could harm our
business.
LOSS OF SIGNIFICANT CARRIER CUSTOMERS WOULD RESULT IN A SIGNIFICANT LOSS OF
REVENUES
We currently derive a significant portion of our revenues from a relatively
small number of carrier customers. During 1999, carrier customers accounted for
35.2% of our total revenue. Carrier customers generally are extremely price
sensitive and move their traffic from carrier to carrier based on small price
changes. In the markets in Western Europe, this risk is particularly acute.
Accordingly, the loss of revenue from significant carrier customers would harm
our business, financial condition and results of operations.
OUR BUSINESS WILL SUFFER IF WE LOSE CERTAIN KEY PERSONNEL OR FAIL TO ATTRACT
AND RETAIN OTHER QUALIFIED PERSONNEL
The continued 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.
46
<PAGE>
Mahoney, Chairman and Chief Executive Officer, Alfred West, Vice Chairman, and
William C. Murphy, President. We have employment agreements with only certain
members of key management including: Mr. Mahoney; Mr. West; Mr. Murphy; Allan L.
Shaw, Chief Financial Officer; Sheldon M. Goldman, Executive Vice President,
Corporate Development; Lawrence G. Malone, Executive Vice President, Wholesale
Sales and Marketing; and Francis J. Mount, Chief Technology Officer. Except for
a $3.0 million key-man life insurance policy on the life of Mr. Mahoney, we do
not maintain and do not currently contemplate obtaining such life insurance
policies on any of our employees.
The success of our business 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 who often have multiple employment
options. 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, retain and motivate qualified
personnel, could harm our business, financial condition and results of
operations.
WE ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH MAY AFFECT OUR
ABILITY TO OFFER CERTAIN SERVICES AND WHICH MAY BE CHANGED IN A MANNER
ADVERSE TO US
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. See "Item 1. Business--Government
Regulation."
The interpretation and enforcement of such laws and regulations varies and
could limit our ability to provide telecommunications services in certain
markets. We cannot assure you that:
- future regulatory, judicial and legislative changes will not harm us;
- domestic or international regulators or third parties will not raise
material issues with regard to our compliance with applicable laws and
regulations; or
- other regulatory activities will not harm our business, financial
condition and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to foreign currency exchange rate risk relating to receipts
from customers, payments to suppliers and interest and principal payments on the
outstanding Euro denominated senior notes and senior discount notes 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 Result 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.
47
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following statements are filed as part of this report:
<TABLE>
<CAPTION>
FORM 10-K
PAGE
--------------------
<S> <C>
Independent Auditors' Report................................ 49
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 50
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... 51
Consolidated Statements of Comprehensive Loss for the Years
Ended
December 31, 1997, 1998 and 1999.......................... 52
Consolidated Statements of Stockholders' Equity (Deficiency)
for the
Years Ended December 31, 1997, 1998 and 1999.............. 53
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... 54
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1997, 1998 and 1999.................... 55
II. Valuation and Qualifying Accounts....................... 75
</TABLE>
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.
48
<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 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 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
March 1, 2000
49
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 329,511 $ 373,044
Restricted cash equivalents............................... 10,310 9,632
Restricted marketable securities.......................... 50,870 125,581
Marketable securities..................................... 171,771 --
Trade accounts receivable, net of allowance for doubtful
accounts of $4,722 and $10,034, respectively............ 28,517 115,103
VAT receivables, net...................................... 12,561 37,867
Prepaid expenses and other current assets................. 3,260 16,789
---------- ----------
Total current assets.................................... 606,800 678,016
Restricted marketable securities, non-current............... 83,343 62,547
Property and equipment, net................................. 267,316 884,328
Cash securing letters of credit for network construction.... -- 50,165
Intangible assets, net...................................... 45,908 1,011,659
Other assets................................................ 5,744 17,382
---------- ----------
Total assets.............................................. $1,009,111 $2,704,097
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accrued telecommunications costs.......................... $ 26,518 $ 77,333
Accounts payable and other accrued expenses............... 23,656 156,218
Property and equipment purchases payable.................. 97,288 87,810
Accrued interest.......................................... 12,240 37,545
Liability under joint construction agreement.............. 9,523 4,918
Current installments of notes payable..................... 3,199 24,997
Current installments of obligations under capital
leases.................................................. 5,719 10,337
---------- ----------
Total current liabilities............................... 178,143 399,158
---------- ----------
Long-term liabilities:
Long-term debt, excluding current installments............ 896,503 1,680,885
Notes payable and obligations under capital leases,
excluding current installments.......................... 24,636 86,663
---------- ----------
Total long-term liabilities............................. 921,139 1,767,548
---------- ----------
Series A Redeemable Convertible Preferred Stock, $.01 par
value; Authorized 718,042 Shares; issued and outstanding
461,258 shares and none, respectively..................... 47,121 --
---------- ----------
Commitments and contingencies
Stockholders' equity (deficiency):
Preferred Stock, $.01 par value. Authorized 1,281,958
shares, no shares issued and outstanding................ -- --
Common Stock, $.01 par value. Authorized 150,000,000
shares; issued and outstanding 23,184,465 and 47,093,361
shares, respectively.................................... 232 471
Additional paid-in capital................................ 128,357 1,066,964
Unearned compensation..................................... -- (5,768)
Accumulated other comprehensive loss...................... (6,246) (45,464)
Accumulated deficit....................................... (259,635) (478,812)
---------- ----------
Total stockholders' equity (deficiency)................. (137,292) 537,391
---------- ----------
Total liabilities and stockholders' equity
(deficiency).......................................... $1,009,111 $2,704,097
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Revenue:
Communication services revenue............................ $ 73,018 $ 131,938 $ 248,600
Capacity sales............................................ -- 3,250 84,501
-------- --------- ---------
Total revenue........................................... 73,018 135,188 333,101
-------- --------- ---------
Operating expenses:
Cost of services and sales................................ 63,504 122,109 250,574
Selling, general and administrative....................... 36,077 44,893 100,559
Depreciation and amortization............................. 7,717 16,268 75,911
Restructuring and impairment.............................. -- -- 13,206
-------- --------- ---------
Total operating expenses................................ 107,298 183,270 440,250
-------- --------- ---------
Other income (expense):
Interest income........................................... 3,686 28,259 26,722
Interest expense.......................................... (12,450) (79,177) (137,409)
-------- --------- ---------
Loss before extraordinary loss.............................. (43,044) (99,000) (217,836)
Extraordinary loss on debt prepayment..................... -- (28,304) --
-------- --------- ---------
Net loss.................................................... (43,044) (127,304) (217,836)
Dividends on redeemable convertible preferred stock....... -- (3,301) (1,341)
-------- --------- ---------
Net loss attributable to common stockholders................ $(43,044) $(130,605) $(219,177)
======== ========= =========
Loss per common share, basic and diluted:
Before extraordinary item............................... $ (1.90) $ (4.44) $ (7.43)
From extraordinary item................................. $ -- $ (1.23) $ --
-------- --------- ---------
Net loss per common share attributable to common
stockholders.......................................... $ (1.90) $ (5.67) $ (7.43)
======== ========= =========
Weighted average common shares outstanding,
basic and diluted....................................... 22,620 23,054 29,518
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss.................................................... $(43,044) $(127,304) $(217,836)
Foreign currency translation adjustments.................. (4,494) (890) (39,218)
-------- --------- ---------
Comprehensive loss.......................................... $(47,538) $(128,194) $(257,054)
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATED
COMMON ADDITIONAL OTHER
STOCK COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL COMPENSATION LOSS DEFICIT TOTAL
---------- -------- ---------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997.......... 22,513,226 $225 $ 125,236 $ (130) $ (862) $ (85,986) $ 38,483
Stock options exercised............. 122,041 1 425 -- -- -- 426
Earned compensation................. -- -- -- 65 -- -- 65
Foreign currency translation
adjustment........................ -- -- -- -- (4,494) -- (4,494)
Net loss............................ -- -- -- -- -- (43,044) (43,044)
---------- ---- ---------- ------- -------- --------- ---------
BALANCE AT DECEMBER 31, 1997........ 22,635,267 226 125,661 (65) (5,356) (129,030) (8,564)
Stock options exercised............. 174,198 2 945 -- -- -- 947
Issuance costs of Series A
Redeemable Convertible Preferred
Stock............................. -- -- (1,620) -- -- -- (1,620)
Issuance of common stock related to
business purchase................. 375,000 4 3,371 -- -- -- 3,375
Earned compensation................. -- -- -- 65 -- -- 65
Foreign currency translation
adjustment........................ -- -- -- -- (890) -- (890)
Dividends on Series A Redeemable
Convertible Preferred Stock....... -- -- -- -- -- (3,301) (3,301)
Net loss............................ -- -- -- -- -- (127,304) (127,304)
---------- ---- ---------- ------- -------- --------- ---------
BALANCE AT DECEMBER 31, 1998........ 23,184,465 232 128,357 -- (6,246) (259,635) (137,292)
Conversion of Series A Redeemable
Convertible Preferred Stock....... 3,671,316 37 48,425 -- -- -- 48,462
Conversion of subordinated debt..... 943,916 9 12,320 -- -- -- 12,329
Stock options exercised............. 436,344 4 2,850 -- -- -- 2,854
Issuance of common stock for
acquisition....................... 14,299,969 143 560,559 -- -- -- 560,702
Options and warrants issued for
acquisition....................... -- -- 111,573 -- -- -- 111,573
Restricted shares issued............ 152,351 2 6,550 (6,552) -- -- --
Earned compensation................. -- -- -- 784 -- -- 784
Issuance of common stock for
services.......................... 90,000 1 4,499 -- -- -- 4,500
Common stock offering............... 4,315,000 43 191,831 -- -- -- 191,874
Foreign currency translation
adjustment........................ -- -- -- -- (39,218) -- (39,218)
Dividends on Series A Redeemable
Convertible Preferred Stock....... -- -- -- -- -- (1,341) (1,341)
Net loss............................ -- -- -- -- -- (217,836) (217,836)
---------- ---- ---------- ------- -------- --------- ---------
BALANCE AT DECEMBER 31, 1999........ 47,093,361 $471 $1,066,964 $(5,768) $(45,464) $(478,812) $ 537,391
========== ==== ========== ======= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (43,044) $(127,304) $(217,836)
Adjustments to reconcile net loss to net cash used in
operating
activities:
Depreciation and amortization........................... 7,717 16,268 75,911
Accreted interest expense on long term debt............. 12,479 35,417 38,047
Provision for losses on accounts receivable............. 2,733 4,225 11,511
Asset impairments....................................... -- -- 9,098
Restructuring accrual................................... -- -- 3,905
Extraordinary loss on debt prepayment................... -- 28,304 --
Earned stock compensation............................... 65 65 784
Changes in operating assets and liabilities, net of effect
of
acquisitions:
Increase in accounts receivable and accrued interest.... (6,221) (20,302) (27,292)
Increase in notes receivable............................ -- -- (7,862)
Increase in accrued interest expense on Senior Notes.... -- 11,969 15,715
Increase in prepaid expenses and other receivables...... (3,482) (8,291) (36,071)
Increase in other assets and intangible assets.......... (1,022) (12,625) (1,303)
Increase in accrued telecommunications costs, accounts
payable, and other accrued expenses................... 8,250 11,956 568
--------- --------- ---------
Net cash used in operating activities................. (22,525) (60,318) (134,825)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................... (34,190) (94,674) (527,327)
Cash paid for acquisitions, net of cash acquired........ -- (5,000) 39,998
Purchase of marketable securities....................... (49,098) (310,625) (217,519)
Proceeds from maturity of marketable securities......... 40,124 60,307 349,042
Cash securing letters of credit for network
construction.......................................... -- -- (50,165)
--------- --------- ---------
Net cash used in investing activities................. (43,164) (349,992) (405,971)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of senior notes,
senior discount notes and convertible debentures...... -- 845,752 425,635
Proceeds from issuance of subordinated
convertible preferred stock........................... -- 42,198 --
Repayment of senior discount notes...................... -- (119,282) --
Deferred financing costs................................ -- (31,547) (22,166)
Proceeds from exercise of stock options................. 426 947 2,854
Proceeds from common stock offering..................... -- -- 191,874
Borrowings on notes payable............................. 11,121 -- --
Payments under capital leases........................... (525) (5,480) (4,322)
Repayment of notes payable and bank credit line......... (336) (3,553) (4,484)
Borrowings under bank credit line....................... 600 -- --
--------- --------- ---------
Net cash provided by financing activities............. 11,286 729,035 589,391
--------- --------- ---------
Effects of exchange rate changes on cash.................... (297) -- (5,740)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (54,700) 318,725 42,855
Cash and cash equivalents at beginning of year.............. 75,796 21,096 339,821
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 21,096 $ 339,821 $ 382,676
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
54
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Viatel, Inc. and subsidiaries (collectively, the "Company") is a provider of
ALL DISTANCE communication services to individuals, corporations, internet
service providers and other communications carriers in Europe and North America.
The Company is a licensed provider of telecommunications services in ten
European countries and the United States. The Company owns and operates
international telecommunications networks and is also the owner, operator and
builder of a Western European fiber optic network.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries from their respective dates
of acquisition. All significant inter-company balances and transactions have
been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
The Company's policy is to maintain its uninvested cash at minimum levels.
Unrestricted cash equivalents include highly liquid debt instruments purchased
with an original maturity of three months or less.
(D) REVENUE AND COST OF SERVICES AND SALES
The Company records communication services revenue as earned at the time
services are provided. The related cost of communication services is reported in
the same period.
Revenue from capacity sales mainly represents indefeasible-rights-of-use
("IRUs") for portions of the network that qualify for sales-type lease
accounting. Transactions that do not meet the criteria for sales-type lease
accounting are accounted for as operating leases and revenue is recognized over
the term of the lease.
Cost of capacity in any period is determined based upon the ratio of total
capacity sold and total anticipated capacity to be utilized multiplied by the
related total costs of the relevant portion of the Company's network.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 43, "Real Estate Sales, an interpretation of FASB Statement
No. 66" ("FIN 43") which is applicable for all contracts entered into after
June 30, 1999. FIN 43 requires that a lease of property improvements or integral
equipment include a provision allowing title to transfer to the lessee in order
for that lease to be accounted for as a sales-type lease.
The Company recognizes revenue in accordance with FIN 43 and the Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements". However, accounting practices and guidance for sales
of IRUs is evolving. Standard setting bodies are currently reviewing a number of
issues related to FIN 43 and other related issues will probably be referred to
these bodies. Changes in the accounting treatment as a result of the foregoing
could affect the way that the Company recognizes revenue and costs associated
with these capacity sales in the future.
(E) PROPERTY AND EQUIPMENT
Property and equipment consists 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. The
Company also capitalizes certain software development costs for internal use.
Maintenance and repairs are expensed as incurred.
55
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the life of the lease or useful life of the improvement, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Communications systems...................................... 5 to 7 years
Fiber optic cable systems................................... 10 to 20 years
Leasehold improvements...................................... 2 to 5 years
Furniture, office and computer equipment and other.......... 2 to 5 years
</TABLE>
(F) INTANGIBLE ASSETS
Deferred financing and registration fees represent costs incurred to issue
and register debt and are being amortized over the term of the related debt.
Costs of licenses issued by governing bodies are being amortized on a
straight-line basis over the lesser of 25 years or the term of the license.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefitted, which is five to seven years.
Acquired customer base and acquired employee base represent intangible
assets associated with acquisitions and are being amortized on a straight-line
basis over 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
A significant portion of the Company's assets are foreign currency
denominated and as such are subject to fluctuations in value due to movements in
foreign exchange rates. 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, 1997, 1998 and 1999, 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, 1997, 1998 and 1999.
56
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company had potentially dilutive securities of 1.1 million (consists of
stock options), 7.2 million (consists of 2.6 million of stock options;
3.7 million of convertible preferred stock on an "as if" converted basis; and
.9 million subordinated convertible debt on an "as if" converted basis) and 6.0
million (consists of 5.7 million of stock options and .3 million of warrants)
for the years ended December 31, 1997, 1998 and 1999, respectively. These
potentially dilutive securities were not included in the computation of diluted
net loss per common share because they were antidilutive for the periods
presented.
(J) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
At December 31, 1998 and 1999, the company's financial instruments included
cash, cash equivalents, investments, receivables, accounts payable, accrued
interest and borrowings. The fair values, at December 31, 1998 and 1999, of cash
and cash equivalents, receivables, accounts payable and accrued interest
approximated their carrying values because of the short-term nature of these
instruments. The estimated fair values of other financial instruments subject to
fair value disclosures, determined based on broker quotes or quoted market
prices or rates for the same or similar instruments and the related carrying
costs are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Investments (see Note 2)......... $305,984 $305,984 $ 188,128 $ 188,128
Borrowings (see Note 8).......... $896,503 $868,017 $1,680,885 $1,665,462
</TABLE>
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. No one customer represented more than 10% of the Company's
total revenues for 1999 and 1997.
(K) 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.
(L) STOCK OPTION PLAN
The Company accounts for its stock option plans 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 13.
57
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) 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.
(N) ADDITIONAL ACCOUNTING POLICIES
Additional accounting policies are incorporated into the notes herein.
(O) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
(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
trading purposes and as such does not classify any securities as trading.
The cost of debt securities classified as held to maturity is 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 1999.
The following is a summary of the amortized cost, which approximates fair
value, of securities held to maturity at December 31 (in thousands):
<TABLE>
1998 1999
-------- --------
European corporate debt securities...................... $122,299 $ --
<S> <C> <C>
U.S. corporate debt securities.......................... 49,472 --
-------- --------
Total............................................... $171,771 $ --
======== ========
</TABLE>
The following is a summary of the amortized cost, which approximates fair
value, of restricted securities held to maturity at December 31 (in thousands):
<TABLE>
1998 1999
-------- --------
U.S. Treasury obligations............................... $105,508 $147,586
<S> <C> <C>
German government obligations........................... 28,705 40,542
-------- --------
Total............................................... $134,213 $188,128
======== ========
</TABLE>
58
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(2) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
The amortized cost, which approximates fair value, of restricted securities
held to maturity at December 31, are shown below (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Due within one year......................................... $ 50,870 $125,581
Due after one year through two years........................ 54,328 62,547
Due after two years......................................... 29,015 --
-------- --------
Total................................................... $134,213 $188,128
======== ========
</TABLE>
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale. Restricted marketable securities are restricted for use in
semi-annual interest payments of certain long term debt and are invested in U.S.
and German government securities maturing on a schedule which approximates the
required interest payments.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Communications systems...................................... $ 96,193 $698,483
Construction in progress.................................... 172,630 210,671
Furniture, office and computer equipment and other.......... 16,450 25,707
Software.................................................... 1,859 13,481
Leasehold improvements...................................... 6,651 11,926
-------- --------
293,783 960,268
Less accumulated depreciation and amortization.............. 26,467 75,940
-------- --------
$267,316 $884,328
======== ========
</TABLE>
At December 31, 1998 and 1999, construction in progress primarily represents
construction of the Western European fiber optic network. For the years ended
December 31, 1997, 1998 and 1999, $0.2 million, $3.3 million and $10.1 million,
respectively, of interest was capitalized.
(4) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Goodwill.................................................... $ 8,744 $ 842,555
Acquired customer base and employee base.................... -- 130,956
Deferred financing.......................................... 31,547 53,714
Licenses, trademarks and servicemarks....................... 10,237 9,495
------- ----------
50,528 1,036,720
Less accumulated amortization............................... 4,620 25,061
------- ----------
$45,908 $1,011,659
======= ==========
</TABLE>
59
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(4) INTANGIBLE ASSETS (CONTINUED)
During 1999, the Company recognized and paid its obligation for contingent
consideration for its 1998 acquisition of Flat Rate Communications, Inc. ("Flat
Rate") based upon key operating performance targets met during the period ended
March 31, 1999. Such contingent consideration has been recorded as goodwill and
is being amortized over the remaining useful life.
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accounts payable............................................ $ 5,566 $ 78,677
Accrued expenses............................................ 18,090 77,541
------- --------
$23,656 $156,218
======= ========
</TABLE>
(6) ACQUISITIONS
FLAT RATE COMMUNICATIONS, INC.
On February 27, 1998, the Company acquired Flat Rate Communications, Inc., a
long distance telecommunications reseller, for $5.0 million of cash, 375,000
shares of the Company's common stock and a $12.0 million cash contingent payment
paid in 1999 based upon key operating performance targets achieved. The Company
recorded the acquisition under the purchase method of accounting. The purchase
price was allocated to the assets acquired and liabilities assumed, based upon
the estimated fair values at the date of acquisition. The excess purchase price
was approximately $20.4 million and is being amortized on a straight-line basis
over its estimated useful life which is five years.
DESTIA COMMUNICATIONS, INC.
On August 27, 1999, the Company agreed to acquire Destia Communications,
Inc. ("Destia") through a merger of Destia with one of the Company's
subsidiaries. On December 8, 1999, the Company completed the merger and Destia
became a wholly-owned subsidiary of the Company. Destia is a facilities-based
provider of domestic and international long distance telecommunications services
in Europe and North America. Its customer base consists of residential
customers, commercial customers, ethnic groups and other telecommunications
carriers. Destia offers a variety of retail telecommunications services,
including international and domestic long distance, Internet access and wireless
services.
Holders of Destia common stock received 0.445 shares (the exchange ratio) of
the Company's common stock for each share of Destia common stock. In connection
with the acquisition, the Company issued 14,299,969 shares of its common stock
valued at $39.21 per share (total value of $560.7 million). Each outstanding
option and warrant to acquire shares of Destia common stock was converted into
an option or warrant to acquire shares of the Company on the basis of the
exchange ratio described above.
The purchase price for Destia was $901.9 million and was comprised of the
issuance of common stock, the fair value of existing Destia options and warrants
exchanged, issuance of 11.5% senior notes, the cash portion of the debt exchange
offer and transaction costs. The options and warrants have been valued at their
fair value using the Black-Scholes option pricing model. The acquisition has
been accounted for under the purchase method of accounting. The purchase price
has been preliminarily allocated based on estimated fair values at the date of
acquisition, pending final determination of certain acquired balances. This
preliminary allocation has resulted in intangible assets and goodwill of
approximately $131.0 million
60
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(6) ACQUISITIONS (CONTINUED)
and $822.3 million, respectively, which are being amortized on a straight-line
basis over their estimated useful lives which are four to seven years and seven
years, respectively. In connection with the Company's integration plan, the
Company recorded liabilities related to the closing and termination of Destia
facilities and lease and other contract costs of $9.6 million and severance
related to Destia employees, of $2.2 million. The results of operations of
Destia for December 1999 were included in the consolidated financial statements.
The preliminary allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Current assets.............................................. $ 147,083
Property, equipment and leasehold improvements.............. 163,389
Identifiable intangibles.................................... 130,956
Other non-current assets.................................... 15,982
Accounts payable and accrued expenses....................... (139,153)
Debt........................................................ (238,629)
---------
Fair value of net assets acquired........................... 79,628
Purchase price.............................................. 901,898
---------
Goodwill.................................................... $ 822,270
=========
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of Viatel, Destia, and Flat Rate, as if the
acquisitions had occurred as of the beginning of 1998 and 1999, after giving
effect to certain adjustments, including amortization of goodwill, depreciation
expense, and increased interest expense on debt related to the acquisition. The
unaudited pro forma financial information does not necessarily reflect the
results of operations that would have occurred had Viatel, Destia, and Flat Rate
constituted a single entity during such periods.
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1998 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenue........................................... $ 333,225 $ 618,915
Loss before extraordinary loss.................... (319,942) (465,032)
Net loss attributable to common stockholders...... (351,547) (466,373)
Net loss per common share attributable to common
stockholders.................................... $ (9.41) $ (10.87)
</TABLE>
61
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(7) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
The Company was obligated under the following debt arrangements primarily in
connection with equipment and capacity acquisitions:
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------
CURRENT LONG-TERM TOTAL
-------- --------- --------
<S> <C> <C> <C>
Obligations under capital leases (a)................... $10,337 $37,164 $ 47,501
Notes payable (b)...................................... 16,954 25,211 42,165
NTFC note (c).......................................... 8,043 24,288 32,331
------- ------- --------
$35,334 $86,663 $121,997
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
CURRENT LONG-TERM TOTAL
-------- --------- --------
<S> <C> <C> <C>
Obligations under capital leases (a).................... $5,719 $20,004 $25,723
Notes payable (b)....................................... 3,199 4,632 7,831
------ ------- -------
$8,918 $24,636 $33,554
====== ======= =======
</TABLE>
(a) The Company has various lease agreements for IRUs, buildings housing
switch sites, rights of way and other property.
(b) The Company has assumed the obligations of six notes payable related to
the purchase of cable lines and acquisitions entered into by Destia prior to its
acquisition by the Company. These notes with an aggregate value of
$37.9 million at December 31, 1999 bear interest at rates ranging from 5% to 12%
and have final maturity dates from May 2001 to November 2008.
62
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(7) NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES (CONTINUED)
The Company has entered into Loan and Security Agreements pursuant to which
the Company had outstanding borrowings of $7.8 million and $4.3 million at
December 31, 1998 and 1999, respectively. Under the terms of these agreements,
the Company is required to satisfy certain covenants and restrictions. As of
December 31, 1999, the Company had received waivers to these convants.
Obligations under these Loan and Security Agreements are secured by the grant of
a security interest in certain telecommunications equipment as well as a portion
of the payment obligations also being secured by letters of credit.
(c) The Company has assumed the obligations of a credit facility with NTFC
previously entered into by Destia prior to its acquisition by the Company. This
credit facility provides for borrowings to fund certain equipment acquisition
costs and related expenses. The facility provides for an aggregate commitment of
NTFC of $49.0 million. Loans under the NTFC facility accrue interest at a rate
equal to the 90-day commercial paper rate plus 395 basis points, subject to
certain quarterly adjustments depending on financial performance. The loans have
final maturity dates from July 2001 to November 2004. All of the equipment
purchased with the proceeds of the NTFC note has been pledged to NTFC. The terms
of the NTFC facility require the company to maintain certain Debt Service
Coverage Ratios, EBITDA (both as defined in the terms of the NTFC facility), and
minimum cash balances. A waiver of these covenants was obtained until May 8,
2000. Before May 8, 2000, the Company will be required to either (i) obtain a
further waiver or (ii) prepay the outstanding amounts owed at a premium of not
more than 102% of the amount outstanding or (iii) negotiate a new facility.
Maturities of notes payable and obligations under capital lease arrangements
over the next five years are as follows (in thousands):
<TABLE>
<S> <C>
2000...................................................... $ 35,334
2001...................................................... 38,472
2002...................................................... 9,095
2003...................................................... 6,811
2004...................................................... 7,092
Thereafter................................................ 25,193
--------
Total..................................................... $121,997
========
</TABLE>
63
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(8) LONG-TERM DEBT AND CONVERTIBLE SECURITIES
Long-term debt consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
11.25% Senior Notes(a)...................................... $400,000 $ 400,000
12.50% Senior Discount Notes, less discount of $202,716 and
$164,393, respectively(a)................................. 297,284 335,607
11.50% Senior Notes, less discount of $3,486(a)(c).......... -- 265,986
11.50% Senior Notes(a)...................................... -- 200,000
13.50% Senior Notes(b)...................................... -- 158,300
11.50% Senior Notes (E150,000).............................. -- 151,027
11.15% Senior Notes (DM178,000) and (E91,010),
respectively(a)........................................... 106,015 91,633
12.40% Senior Discount Notes (DM134,916) and (E115,552),
less discount of $54,249 (DM91,084) and $38,011,
(E37,752), respectively(a)................................ 80,355 78,332
10% Subordinated Convertible Debentures (DM21,573)(a)....... 12,849 --
-------- ----------
$896,503 $1,680,885
======== ==========
</TABLE>
(a) On March 19, 1999, the Company completed a high yield offering through
which we raised approximately $352.6 million of net proceeds in a combination of
senior dollar notes and senior Euro notes due 2009.
On April 8, 1998, the Company completed an offering of units (the "Units
Offering") consisting of senior notes and senior discount notes due 2008 and
shares of 10% Series A Redeemable Convertible Preferred Stock due 2010
("Series A Preferred") (see Note 9), $.01 par value per share, of the Company
and units consisting of senior notes and senior discount notes due 2008 and
subordinated convertible debentures due 2011 (the "Subordinated Debentures")
(see Note 9) 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. A portion of the
proceeds from the senior notes was used to purchase U.S. government and German
government securities which were pledged as security for the first six interest
payments on the Senior notes due 2008 and four interest payments on the Senior
notes due 2009. The amount of restricted securities remaining pledged as
security for these notes at December 31, 1999 is $176.7 million. The interest on
the senior notes is payable in semi-annual installments. The senior discount
notes accrete through April 15, 2003 and interest becomes payable in cash in
semi-annual installments thereafter.
The indentures pursuant to which the 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.
64
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(8) LONG-TERM DEBT AND CONVERTIBLE SECURITIES (CONTINUED)
(b) In conjunction with the Destia acquisition, the Company assumed
Destia's 13.5% 1997 notes which have an aggregate principal value of
$150.8 million. The Company determined the fair value of this debt to be
$158.3 million and is amortizing the premium over the remaining term. These
notes were unsecured obligations of Destia and mature in 2007. A portion of the
proceeds from the senior notes due 2007 was used by Destia to purchase U.S.
government securities and cash equivalents which were pledged as security for
the first six interest payments on such notes. The amount of restricted
securities and cash equivalents remaining pledged as security for these notes at
December 31, 1999 is $21.1 million.
The indentures pursuant to which the Destia 13.5% notes were issued contain
substantially similar covenants to the ones the Company has on its senior notes,
which 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, as a result of our acquisition of Destia, the Company was required to
offer to repurchase the notes at a purchase price equal to 101% of the
outstanding principal amount, together with accrued and unpaid interest. The
Company launched this required offer to purchase on December 22, 1999. In
connection therewith, the Company repurchased an aggregate amount of
$.6 million.
(c) In connection with the Destia acquisition, the holders of all of
Destia's 11% senior discount notes due 2008 ($213.3 million in accreted
principal amount) exchanged their Destia notes and all accreted but unpaid
interest on these notes through the date of the acquisition for $205.8 million
in aggregate principal amount at maturity of 11.5% senior notes due 2009 from
the Company. In connection with the exchange offer, the Company also completed a
private placement of $63.7 million in gross principal amount of its 11.5% senior
dollar notes. A portion of the proceeds from the private placement was used to
purchase U.S. government securities which were pledged as security for the first
three interest payments.
(9) STOCKHOLDERS' EQUITY (DEFICIENCY)
At the Company's 1999 Annual Meeting of Stockholders, the stockholders
approved an increase in the Company's capital stock from 52 million to 152
million. This increase reflected an increase in the available shares of common
stock from 50 million to 150 million.
On May 13, 1999, the conditions for mandatory conversion were met for both
the Series A Preferred and the Subordinated Debentures. The conversion rates for
the Series A Preferred and Subordinated Debentures were $13.20 and DM24.473,
respectively, at the then applicable exchange rates. Accordingly, the Company
issued 4,615,232 shares of its common stock and paid cash for any fractional
shares due upon conversion.
On June 1, 1999 the Company granted certain members of senior management a
total of 152,351 shares of its common stock subject to certain restrictions
("restricted shares"). Such shares have been valued at approximately
$6.6 million which was based on the closing market price of the Company's common
stock on the date of issue. The $6.6 million has been recorded as unearned
compensation in the consolidated statement of stockholder's equity (deficit) and
is being amortized as earned over the restricted period. Until the restrictions
lapse (which is 5 years from grant date), the restricted shares are not deemed
to vest other than that restricted shares do give an immediate right to normal
common stock voting rights. As of December 31, 1999 none of the restricted
shares issued in 1999 had satisfied the necessary conditions for the
restrictions to lapse.
65
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(9) STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
On June 29, 1999, the Company completed an offering of 4,315,000 shares of
its common stock at $47.00 per share. The net proceeds of the offering were
approximately $191.9 million and are being used primarily to fund the further
development of the Company's network as well as for working capital and general
corporate purposes.
As detailed in Note 13 below, the Company has in place a Stock Incentive
Plan which grants options to its employees. During 1999 and 1998 a total of
436,344 and 174,198, respectively, shares of common stock of the Company were
issued as a result of such options being exercised at an average exercise price
of $6.68 and $5.44 per share, respectively.
On December 16, 1999, the Company issued 90,000 shares of its common stock,
valued at $4.5 million to a contractor as part of its consideration for
construction work being performed on the Company's network. Such shares have
been valued based upon the closing market price on the date of issue.
(10) INCOME TAXES
The statutory Federal tax rate for the years ended December 31, 1997, 1998
and 1999 was 35%. The effective tax rate was zero for the years ended December
31, 1997, 1998 and 1999 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 $577.2 million expiring in 2007
through 2019. This amount includes acquired net operating loss carryforwards of
approximately $228.7 million from the Company's acquisition of Destia. 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. In addition, the availability of the net operating loss
carryforwards acquired from Destia will be limited due to Destia's change in
ownership.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Accounts receivable principally due to
allowance for doubtful accounts...................... $ 1,506 $ 3,198
Restructuring reserve.................................. -- 2,796
OID Interest not deductible in current period.......... 11,125 27,826
Federal net operating loss carryforwards............... 68,579 142,611
Foreign net operating loss carryforwards............... 7,989 59,399
Fixed assets........................................... -- 5,797
-------- ---------
Total gross deferred tax assets.................. 89,199 241,627
Customer base.......................................... -- (42,673)
Workforce.............................................. -- (3,162)
-------- ---------
Total gross deferred tax liabilities............. -- (45,835)
Total deferred tax assets.............................. 89,199 195,792
Less valuation allowance............................... (89,199) (195,792)
-------- ---------
Net deferred tax assets.......................... $ -- $ --
======== =========
</TABLE>
66
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(10) INCOME TAXES (CONTINUED)
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 1999, the
valuation allowance increased by $44.6 million and $106.6 million, respectively.
(11) SEGMENT AND GEOGRAPHIC DATA
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 wholesale, retail and
capacity. The information below summarizes revenue by customer type for the
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Retail...................................................... $52,621 $ 56,411 $131,769
Wholesale................................................... 20,397 75,527 116,831
Capacity.................................................... -- 3,250 84,501
------- -------- --------
Consolidated.............................................. $73,018 $135,188 $333,101
======= ======== ========
</TABLE>
The information below summarizes revenue by geographic area for the years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Western Europe.............................................. $ 32,647 $ 62,946 $222,589
North America............................................... 15,936 56,172 100,925
Latin America............................................... 16,240 14,653 9,460
Asia/Pacific Rim and other.................................. 8,195 1,417 127
-------- -------- --------
Consolidated.............................................. $ 73,018 $135,188 $333,101
======== ======== ========
</TABLE>
The information below summarizes long-lived assets by geographic area as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Western Europe.............................................. $237,443 $ 746,107
North America(1)............................................ 46,837 1,103,129
Latin America............................................... 289 201
-------- ----------
Consolidated.............................................. $284,569 $1,849,437
======== ==========
</TABLE>
67
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(11) SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
(1) Included in the long-lived assets as of December 31, 1999 is net goodwill
and other identifiable intangibles of approximately $942 million related to
the acquisition of Destia.
(12) RESTRUCTURING AND ASSET IMPAIRMENTS
Restructuring and asset impairments represent charges related to the
streamlining of the Company's organizational structure and the strategic
repositioning of certain operations, primarily as a result of the merger with
Destia. The Company recognized $4.1 million in restructuring charges and $9.1
million in asset impairments in the fourth quarter of 1999. There were no
restructuring charges in 1997 and 1998.
Restructuring charges were composed primarily of anticipated costs to
terminate lease and other contract cancellation costs in connection with the
company's streamlining activities, as well as severance costs associated with
workforce reductions. The Company identified approximately 175 employees who
would be separated as a result of actions taken during 1999 to streamline the
organizational structure. The charge included cash charges of $2.7 million for
lease and other contract cancellation costs, and $1.4 million for severance
costs. Asset impairments consist of non-cash charges for asset write-offs
related to assets no longer in service at December 31, 1999. At December 31,
1999, the Company had accruals for restructuring of approximately $3.9 million,
primarily related to severance and lease and other contract cancellation costs.
The Company has also accelerated depreciation on certain assets which are
currently in use but will be taken out of service in 2000. The Company
anticipates that action required to complete the plan will be completed by
December 2000.
(13) STOCK OPTION PLAN
At the 1999 Annual Meeting of Stockholders, the Company's stockholders
approved an amendment to the Stock Incentive Plan that increased the number of
shares of common stock available for future issuance thereunder from 3.6 million
to 5.3 million shares. The Company had approximately 1.7 million shares
available as of December 31, 1999 for future grant.
The Company has adopted an Amended Stock Incentive Plan (the "Stock
Incentive Plan"), the Amended and Restated 1999 Flexible Incentive Plan (the
"1999 Flexible Incentive Plan") (previously a Destia plan) and the Amended and
Restated 1996 Flexible Incentive Plan (previously a Destia plan) (the "1996
Flexible Incentive Plan," and collectively with the Stock Incentive Plan and the
1999 Flexible Incentive Plan, the "Plans"). Pursuant to the Plans,
"non-qualified" stock options to acquire shares of common stock may be granted
to employees, directors and consultants of the Company and
"incentive" stock options to acquire shares of common stock may be granted to
employees, including employee-directors. The Plans also provide for the grant of
stock appreciation rights and shares of restricted common stock to the Company's
employees, directors and consultants.
The Plans are currently administered by the Compensation Committee of the
Board of Directors of the Company. The Stock Incentive Plan allows for the
issuance of up to a maximum of 5,300,000 shares of common stock. The 1999
Flexible Incentive Plan allows for the issuance of up to a maximum of 2,670,000
shares of common stock, provided, however, that no individual may receive awards
of more than 445,000 shares of common stock in any calendar year. The 1996
Flexible Incentive Plan allows for the issuance of up to a maximum of 2,447,500
shares of common stock, of which 2,336,250 shares may be in the form of voting
stock and 111,250 shares may be in the form of non-voting stock. As a result of
the Company's
68
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(13) STOCK OPTION PLAN (CONTINUED)
acquisition of Destia, virtually all options granted by Destia prior to the
merger vested and became exercisable. Any options granted under the 1999
Flexible Incentive Plan and the 1996 Flexible Incentive Plan after the Destia
acquisition will be subject to accelerated vesting only as described below.
Under the Plans, 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 Company's board so determines. An incentive stock option may not be
granted to a "ten percent stockholder" (as that term is defined in Section 422A
of the Internal Revenue Code of 1986) 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 Plans is evidenced by a written agreement, 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
that agreement. The maximum term of each stock option granted to persons other
than ten percent stockholders is ten years from the date of grant.
On December 8, 1999, each outstanding option previously granted by Destia to
acquire shares of Destia common stock was converted into an option to acquire
the Company's common stock. The number of shares that the new option was
exercisable for and the exercise price of the new option was adjusted to reflect
the 0.445 exchange ratio in the merger (see Note 6 above). Excluding the options
related to the Destia acquisition, the per share weighted average fair value of
stock options granted during 1997, 1998 and 1999 was $5.99, $6.40 and $14.98,
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 1997
and 1998 and 6.0% in 1999; (2) an expected life of 10 years for 1997 and 1998
and 7 years for 1999; (3) volatility of approximately 52.2% for 1997, 92.7% for
1998 and 50.0% for 1999; and (4) an annual dividend yield of 0% for all years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Incentive Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements since the exercise
price was equal to or greater than the fair market value at the date of grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Net loss, as reported (in thousands)......... $(43,044) $(130,605) $(219,177)
Net loss, pro forma (in thousands)........... (44,171) (135,458) (227,003)
Net loss per common share, as reported....... (1.90) (5.67) (7.43)
Net loss per common share, pro forma......... (1.95) (5.88) (7.69)
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period of three years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
69
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(13) STOCK OPTION PLAN (CONTINUED)
Stock option activity, including activity related to the acquisition of
Destia under the Stock Incentive Plan, is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE SHARES
PRICES (IN THOUSANDS)
-------- --------------
<S> <C> <C>
Outstanding at January 1, 1997.............................. $ 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
Granted..................................................... 16.68 3,641
Forfeited................................................... 9.52 (57)
Expired..................................................... 5.85 (1)
Exercised................................................... 6.68 (436)
------ ------
Outstanding at December 31, 1999............................ $13.33 5,741
====== ======
</TABLE>
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 1999 REMAINING EXERCISE DECEMBER 31, 1999 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
-------------------------- -------------- --------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$ 0.15 - $ 5.00 433 7 Years $ 4.38 198 $ 3.66
5.01 - 10.00 2,080 4 Years 5.94 1,575 5.89
10.01 - 15.00 1,361 4 Years 11.68 897 12.37
15.01 - 25.00 1,473 3 Years 21.17 1,087 20.66
25.01 - 55.00 394 3 Years 38.55 282 37.40
----- ------ ----- ------
5,741 $13.33 4,039 $13.40
===== ====== ===== ======
</TABLE>
The exercise price of all options approximates the fair market value of the
Common Stock on the date of grant.
(14) STOCKHOLDER RIGHTS PLAN
Effective December 6, 1999, the Company adopted a Stockholder Rights Plan
(the "Rights Plan"). Under the Rights Plan, each stockholder of record on
December 24, 1999, received one preferred share
70
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(14) STOCKHOLDER RIGHTS PLAN (CONTINUED)
purchase right (a "Right") for each outstanding share of common stock. Each
share of common stock issued after the distribution is accompanied by a Right.
When a right becomes exercisable it entitles the holder to buy one
two-hundred thousandth of a share of a new series of preferred stock for $210.
The Rights are subject to adjustment upon the occurrence of certain dilutive
events. The Rights will become exercisable only when a person or group becomes
the beneficial owner of 15% or more of the outstanding shares of common stock or
10 days after a person or group announces a tender offer to acquire beneficial
ownership of 15% or more of the outstanding shares of common stock. No
certificates representing the Rights will be issued unless the Rights become
exercisable.
Under certain circumstances, holders of Rights, except a person or group
described above, and certain related parties, will be entitled to purchase
shares of common stock at 50% of the price at which the common stock traded
prior to the acquisition or announcement. In addition, if the Company is
acquired after the Rights become exercisable, the Rights will entitle those
holders to buy the acquiring company's shares at a similar discount.
The Company is entitled to redeem the Rights for one cent per Right under
certain circumstances. If not redeemed, the Rights will expire on December 5,
2009. The preferred stock issuable upon exercise of Rights consists of Series A
Junior Participating Preferred Stock of the Company.
(15) LETTER OF CREDIT
The Company has a revolving line of credit agreement which provides for
secured borrowings of up to $25.0 million, as amended. At December 31, 1998 and
1999, the Company had no borrowings under this line of credit. At December 31,
1998 and 1999, standby letters of credit of approximately $3.3 million and
$15.4 million, respectively, have been issued under this line of credit
agreement.
In connection with the Company's joint construction of the civil works
associated with a national communications network being constructed in Germany
during 1999, the Company was required to obtain a letter of credit of
approximately $112.8 million (DM219.1 million) in support of its obligation. At
December 31, 1999, the total amount outstanding relating to this letter of
credit was approximately $50.2 million (DM97.4 million) and was collateralized
by cash deposits.
71
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(16) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash used in operating activities included:
Interest paid.................................... $ 134 $31,560 $ 82,363
Noncash investing and financing activities
included:
Assets acquired under capital lease
obligations.................................. 1,122 30,359 18,335
Common stock issued for network construction... -- -- 4,500
Conversion of preferred stock and convertible
debentures................................... -- -- 60,791
Common stock issued for acquisitions........... -- 3,375 560,702
Value of options and warrants exchanged for
options and warrants of Destia............... -- -- 111,573
Exchange of senior debt........................ -- -- 205,790
</TABLE>
(17) COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1999, the Company was committed under non-cancelable
operating and capital leases for the rental of office space, network locations
and communication systems.
The Company's future minimum capital and operating lease payments are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
2000..................................................... $ 13,780 $10,940
2001..................................................... 12,439 10,285
2002..................................................... 3,645 9,609
2003..................................................... 2,936 8,050
2004..................................................... 2,932 7,308
Thereafter............................................... 56,201 31,781
-------- -------
Total minimum lease payments....................... 91,933 $77,973
=======
Less amounts representing interest....................... (44,432)
--------
$ 47,501
========
</TABLE>
Total rent expense amounted to $1.3 million, $1.8 million and $6.1 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
(B) PURCHASE COMMITMENTS
The Company continues to build its advanced broadband network that will link
40 major cities in Western Europe and is continually upgrading and expanding its
network and its switching facilities. In connection therewith, the Company has
entered into purchase commitments to spend approximately $147.9 million.
72
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(17) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(C) 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.
(D) 401(K) PLAN
The Company established a 401(k) Plan on January 1, 1996 that is available
to all employees for enrollment on the first day of the quarter following 90
days of service. Employees may contribute up to 15 percent of their salary. At
the discretion of management, the Company can make matching contributions to the
401(k) Plan up to 6% of the employees' salary. The Company contributed
$.2 million and $.4 million for 1998 and 1999, respectively.
(18) 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.
(19) RELATED PARTY TRANSACTIONS
On June 3, 1998, the Company entered into a Mutual Cooperation Agreement
with Martin Varsavsky, then a greater than ten percent stockholder of the
Company, and Jazz Telecom S.A. pursuant to which Mr. Varsavsky agreed to lock-up
his Viatel shares for a specified period, and 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. On November 13, 1998, Mr. Varsavsky entered into an additional lock-up
agreement with the Company 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 the Company's common stock, either directly or
indirectly, without the prior written consent of the Company until after
August 12, 1999.
During 1998 and 1999, the Company entered into agreements with Cignal Global
Communications, Inc. ("Cignal"), pursuant to which the Company sold network
transmission systems. Consideration received was in the form of 650,000 and
350,000 shares of Cignal's common stock, respectively. The Company recognized
$3.25 million and $1.75 million of revenue in 1998 and 1999, respectively, the
fair value of the network transmission systems. The Company's Chairman and Chief
Executive Officer is a director of Cignal.
During 1999, the Company entered into agreements with Sonic
Telecommunications International ("Sonic") pursuant to which the Company sold
network transmission systems. Consideration received was in the form of notes
receivable amounting to approximately $7.1 million at December 31, 1999. The
Company recognized $6.7 million of revenue in 1999, which represents the fair
value of the network transmission systems. The Company's Chairman and Chief
Executive Officer is a director of Sonic.
73
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997, 1998 AND 1999
(20) SUBSEQUENT EVENTS
ACQUISITION
On February 29, 2000, the Company acquired the entire issued and outstanding
share capital of AT&T Corporation's U.K. subsidiary, AT&T Communications (UK)
Limited ("AT&T UK"). The Company paid $125 million in cash for AT&T UK. As a
result of the transaction, AT&T UK became a wholly-owned subsidiary of the
Company. The transaction will be accounted for as a purchase.
ISSUANCE OF CONVERTIBLE PREFERRED STOCK -- UNAUDITED
On February 1, 2000, the Company executed a securities purchase agreement
pursuant to which the Company agreed to issue, and certain investors identified
therein committed to buy, $325 million in Series B Cumulative Convertible
Preferred Stock for net proceeds to the Company of $307.1 million. The Series B
preferred accrues interest at an annual rate of 7.50%, may be converted at the
option of the holder at a conversion price of $46.25 per share and is
mandatorily redeemable in 2015. As part of this financing, the Company also
issued warrants to purchase 753,116 shares of common stock, 50% of which are
exercisable for 5 years at a price of $75 per share, and 50% of which are
exercisable for 7 1/2 years at a price of $100 per share. In addition, the
Company issued warrants to purchase 7,532 shares of its Series C preferred stock
(each share of which is convertible into 100 shares of the Company's common
stock), 50% of which are exercisable for 5 years at a price of $7,500 per share
and 50% of which are exercisable for 7 1/2 years at a price of $10,000 per
share. The transaction closed on March 9, 2000, following receipt of Hart-
Scott-Rodino Antitrust Improvements Act clearance.
OFFERING OF TRUST CONVERTIBLE PREFERRED SECURITIES -- UNAUDITED
On April 12, 2000, Viatel Financing Trust I, a Delaware trust and subsidiary
of the Company (the "Trust"), sold $180 million of 7 3/4% trust convertible
preferred securities. The trust convertible preferred securities were sold
pursuant to a private placement transaction.
DEBT OFFERING -- UNAUDITED
On April 14, 2000, the Company executed a placement agreement under the
terms of which it agreed to sell [EURO]300 million of 12 3/4% senior euro notes
due 2008. The transaction is expected to be completed on April 20, 2000.
TRANS-ATLANTIC CAPACITY--UNAUDITED
On April 10, 2000, the Company executed a definitive agreement with Level 3
Communications ("Level 3"), under the terms of which the Company acquired a 25%
ownership interest in the trans-Atlantic fiber optic cable project being
developed by Level 3. The Company's required commitment in 2000 to fund this
purchase is approximately $140 million.
74
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO BALANCE
BEGINNING COST 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, 1997.............. 602 2,733 2,294 -- 1,041
Year ended December 31, 1998.............. 1,041 4,225 544 -- 4,722
Year ended December 31, 1999.............. 4,722 11,511 6,199 -- 10,034
Allowances for asset impairment
Year ended December 31, 1997.............. 560 -- -- -- 560
Year ended December 31, 1998.............. 560 -- -- -- 560
Year ended December 31, 1999.............. 560 -- -- -- 560
</TABLE>
75
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
directors and executive officers as of March 28, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ----------- ------------------------------------------
<S> <C> <C>
Michael J. Mahoney(1)(2).................. 40 Chairman of the Board and Chief Executive
Officer
Alfred West............................... 38 Vice Chairman of the Board
William C. Murphy......................... 45 President and Director
Allan L. Shaw(1).......................... 36 Chief Financial Officer and Director
Sheldon M. Goldman........................ 40 Executive Vice President, Corporate
Development and Director
Francis J. Mount.......................... 57 Chief Technology Officer and Director
Lawrence G. Malone........................ 48 Executive Vice President, Wholesale Sales
and Marketing
Abe Grohman............................... 40 Chief Information Officer
James P. Prenetta......................... 37 Senior Vice President and General Counsel
Glenn Davidson............................ 46 Senior Vice President, Corporate
Communications and External Affairs
Ellen Rudin............................... 37 Senior Vice President, Global Real Estate
Acquisition and Administration
Julie Partridge........................... 36 Senior Vice President, Human Resources
Wayne Myers............................... 46 President, European Operations
Jan Sarro................................. 45 Acting President, North American
Operations
John G. Graham(1)(2)(3)................... 61 Director
Paul G. Pizzani(1)(2)(3).................. 40 Director
Edward C. Schmults........................ 69 Director
John R. Muse.............................. 49 Director
</TABLE>
- ------------------------
(1) Member of the Directors Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
MICHAEL J. MAHONEY. Mr. Mahoney has served as Chairman of the Board of
Viatel since September 1998 and as its Chief Executive Officer since
September 1997. Mr. Mahoney has been a director of Viatel since 1995. Mr.
Mahoney was also Viatel's President from September 1996 to February 2000, Chief
Operating Officer 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.
ALFRED WEST. Mr. West has served as Vice Chairman of the Board of Viatel
since December 1999. Prior to Viatel's acquisition of Destia in December 1999,
Mr. West served as Destia's Chairman of the Board
76
<PAGE>
and Chief Executive Officer from its founding in 1992. Prior to founding Destia,
Mr. West managed a family-owned textile trading company.
WILLIAM C. MURPHY. Mr. Murphy has served as President of Viatel since
February 2000 and as a Director of Viatel since March 2000. From 1988 to January
2000, Mr. Murphy was employed by British Telecom, most recently as its Director
of Customer Service, Sales and Marketing, United Kingdom Corporate Clients
Business Division. Before joining British Telecom, Mr. Murphy worked for ITT
WorldCom for eight years.
ALLAN L. SHAW. Mr. Shaw has served as Chief Financial Officer of Viatel
since January 1996 and as a director of Viatel since June 1996. Mr. Shaw was
Senior Vice President of Viatel from December 1997 to January 2000, Vice
President, Finance of Viatel from January 1996 to December 1997 and Treasurer of
Viatel from September 1996 to April 1998. Prior to becoming Vice President,
Finance and Chief Financial Officer, Mr. Shaw served as Corporate Controller
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.
SHELDON M. GOLDMAN. Mr. Goldman has served as Executive Vice President,
Corporate Development of Viatel since January 2000 and as a director of Viatel
since December 1999. From August 1999 to January 2000, Mr. Goldman served as
Senior Vice President, Business and Legal Affairs of Viatel. Prior to becoming
Senior Vice President, Business and Legal Affairs, Mr. Goldman served as Senior
Vice President, Business Affairs and General Counsel from December 1997 to
August 1999. Prior to becoming Senior Vice President, Business Affairs and
General Counsel of Viatel, Mr. Goldman served as Vice President, Business and
Legal Affairs from December 1996 to December 1997 and 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 Chief Technology Officer of
Viatel since March 2000 and as a director of Viatel since June 1998. Prior to
becoming Chief Technology Officer of Viatel, Mr. Mount served as Senior Vice
President, Engineering and Network Operations from December 1997 to March 2000.
From December 1997 to December 1999, Mr. Mount served as Viatel's Senior Vice
President, Engineering and Network Operations. 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 1997 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, Procter and Gamble
and I.B.M. From March 1967 to December 1989, Mr. Mount was employed by AT&T in
various positions.
LAWRENCE G. MALONE. Mr. Malone has served as Executive Vice President,
Wholesale Sales and Marketing since March 2000. Prior to becoming Executive Vice
President, Wholesale Sales and Marketing, Mr. Malone served as Senior Vice
President, Global Sales and Marketing of Viatel from May 1997 to March 2000, as
Vice President and Managing Director, Intercontinental of Viatel from
September 1996 to May 1997 and 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.
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ABE GROHMAN. Mr. Grohman has served as Chief Information Officer of Viatel
since March 2000. Prior to Viatel's acquisition of Destia, Mr. Grohman served as
Destia's Chief Information Officer from October 1997 to December 1999. From
September 1994 to September 1997, Mr. Grohman was the Director of Management
Information Systems for LDM Systems Inc., a switchless reseller. From May 1986
to September 1994, Mr. Grohman was President of DBA Consulting, an independent
data processing consulting company.
JAMES P. PRENETTA. Mr. Prenetta has served as Senior Vice President and
General Counsel of Viatel since March 2000. Prior to becoming Senior Vice
President and General Counsel, Mr. Prenetta served as Vice President and General
Counsel of Viatel from August 1999 to March 2000. Mr. Prenetta has also served
as Secretary since December 1999. Prior to joining Viatel, Mr. Prenetta was a
partner at the law firm of Kelley Drye & Warren LLP from January 1998 to August
1999, where he specialized in a variety of areas of corporate representation,
including securities, venture capital, finance and mergers and acquisitions.
Prior to becoming a partner at Kelley Drye & Warren LLP, Mr. Prenetta was an
associate at that firm from November 1995 to January 1998. From September 1987
to November 1995, Mr. Prenetta was an associate at the law firm of Mudge Rose
Guthrie Alexander & Ferdon. Since August 1999, Mr. Prenetta has been Of Counsel
to the law firm of Kelley Drye & Warren LLP.
GLENN K. DAVIDSON. Mr. Davidson has served as Senior Vice President,
Corporate Communications & External Affairs since March 2000. Prior to becoming
Senior Vice President, Corporate Communications & External Affairs,
Mr. Davidson served as Vice President, Corporate Communications & External
Affairs from August 1998 to March 2000. 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.
ELLEN S. RUDIN. Ms. Rudin has served as Senior Vice President, Global Real
Estate Acquisition and Administration since March 2000. Prior to becoming Senior
Vice President, Ms. Rudin served as Vice President and Deputy General Counsel of
Viatel from September 1998 to March 2000 and as Assistant Secretary from
September 1997 to March 2000. Prior to becoming Vice President and Deputy
General Counsel, Ms. Rudin served as Assistant General Counsel from October 1997
to September 1998, as Counsel from March 1997 to October 1997 and as a staff
attorney from August 1996 to March 1997. From September 1987 to August 1996,
Ms. Rudin was associated with the law firm of Wien, Malkin & Bettex.
JULIE PARTRIDGE. Ms. Partridge has served as Senior Vice President, Human
Resources of Viatel since March 2000. Prior to Viatel's acquisition of AT&T
Communications (UK) Limited on February 29, 2000, Ms. Partridge served as Human
Resources Director of New Comms UK from November 1998 to March 2000. Prior to
becoming Human Resources Director of New Comms UK, Ms. Partridge served as Human
Resources Manager for Business Communications Services--Europe for AT&T Business
Communications Services--Europe from January 1994 to October 1998.
Ms. Partridge is a corporate member of Institute of Personnel and Development
(IPD).
WAYNE MYERS. Mr. Myers has served as President, European Operations of
Viatel since March 2000. Prior to becoming President, European Operations,
Mr. Myers served as Vice President, European Sales of Viatel from January 1999
to March 2000 and as General Manager, European Sales of Viatel 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.
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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 recently as a
National Account Director.
JAN S. SARRO. Ms. Sarro has served as Acting President, North American
Operations since March 2000. From January 1999 to March 2000, Ms. Sarro served
as Viatel's Vice President, Carrier Sales. Prior to becoming Vice President,
Carrier Sales, Ms. Sarro served as Viatel's General Manager, Carrier Sales from
January 1998 to January 1999. Prior to joining Viatel, Ms. Sarro was a Vice
President of Primus Telecommunications Group from October 1997 to December 1997.
From September 1995 to October 1997, Ms. Sarro was a Vice President, Sales and
Marketing of Telepassport, Inc. From 1987 to August 1995, Ms. Sarro 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. Sarro was
Director of Sales Administration and Customer Service for Argo Communications.
JOHN G. GRAHAM. Mr. Graham has served as a director of Viatel since
June 1998. Mr. Graham has been the President and Chief Operating Officer of
Utilities Mutual Insurance Company since May 1, 1999, a position he assumed
following his retirement from GPU Service, Inc. From December 1998 to May 1999,
Mr. Graham was an Executive Vice President of GPU Service, Inc. and from 1987 to
December 1998, was Senior Vice President and Chief Financial Officer of
GPU, Inc., a domestic and international electric utility and independent power
generation company. Mr Graham was employed by GPU in various other capacities
from 1976 to 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.
PAUL G. PIZZANI. Mr. Pizzani has served as a director of Viatel since
April 1996. Mr. Pizzani is currently a partner at eVentures LLC. From November
1997 to March 1999, Mr. Pizzani served as a Managing Director of Wasserstein
Perella Emerging Markets L.P. where he had 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.
EDWARD C. SCHMULTS. Mr. Schmults has served as a director of Viatel since
December 1999 and was a director of Destia prior to its acquisition by Viatel.
Mr. Schmults served as Senior Vice President and General Counsel of GTE
Corporation from February 1984 to June 1994. Mr. Schmults has held various
positions in government, including Deputy Attorney General of the United States
and Under Secretary of the U.S. Treasury Department. Mr. Schmults was a partner
with White & Case, a law firm in New York City. Mr. Schmults is a Director of
Greenpoint Financial Corp., The Germany Fund, The Central European Equity Fund
and BT Insurance Funds, Inc. Mr. Schmults is also Chairman of the Board of
Trustees of The Edna McConnell Clark Foundation, a charitable foundation.
JOHN R. MUSE. Mr. Muse has been a Director of Viatel since March 2000.
Mr. Muse is a Managing Director and Principal of Hicks, Muse, Tate & Furst, a
private investment firm. Before joining Hicks Muse in 1989, Mr. Muse was with
Prudential Securities, heading its investment/merchant banking activities for
the Southwest region of the United States. Prior to joining Prudential
Securities, from 1980 to 1984, Mr. Muse served as a Senior Vice President and
Director of Schneider, Bemet & Hickman, Inc. and was responsible for its
investment banking activities. Mr. Muse serves as a director of International
Home Foods and of several portfolio companies in which Hicks Muse has invested,
including Arena Brands Holding Corp., Arnold Palmer Golf Management Co., Glass's
Information Services, Olympus Real Estate 4 Corporation, Regal Cinemas, Inc.,
Sunrise Television Corp., and Suiza Foods Corporation. Mr. Muse also serves as a
director of the Southern Methodist University Edwin L. Cox School of Business.
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BOARD OF DIRECTORS
Our board of directors currently is comprised of ten directorships. 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. Class C directors were
elected at our 1999 annual meeting of stockholders, Class A directors will be
elected at our annual meeting of stockholders in 2000 and Class B directors will
be elected at our annual meeting to be held in the year 2001. In connection with
our March 2000 $325 million private placement of shares of preferred stock,
certain holders of such shares were granted the right to elect, as a class, one
director to our board. This director has been elected as a Class C director.
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.
Our board 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, Shaw, Graham and
Pizzani. The Compensation Committee reviews general policy matters relating to
compensation and benefits of our employees and officers and administers our
stock incentive plans. The Audit Committee recommends to our board the firm of
independent public accountants to audit our financial statements, reviews with
management and the independent accountants our interim and year-end operating
results, considers the adequacy of our internal controls and 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 our 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 Securities 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 SEC and the Nasdaq National Market. Directors, certain officers and greater
than 10% stockholders are also required by SEC regulations to furnish us with
copies of all 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, 1999.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by, or paid to our chief executive
officer during 1999, and our other four most highly compensated executive
officers during 1999 whose aggregate cash and cash equivalent compensation
exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------------- -------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL
COMPENSATION STOCK UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) AWARDS($)(3) OPTIONS(#) COMPENSATION(4)
- --------------------------- -------- --------- ----------- ------------ ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney,...... 1999 $367,833 $425,000 (2) $2,351,939 90,474 $ 10,000
President and Chief 1998 289,583 260,000 -- -- 360,771 10,000
Executive Officer 1997 212,500 125,000 -- -- -- 9,500
Allan L. Shaw,........... 1999 231,750 252,000 (2) 864,596 42,642 10,000
Senior Vice President, 1998 172,917 107,500 -- -- 195,019 10,000
Finance and Chief 1997 140,000 60,000 -- -- 60,666 8,400
Financial Officer
Lawrence G. Malone,...... 1999 232,850 245,000 (2) 864,596 42,642 10,000
Senior Vice President, 1998 155,833 110,000 -- -- 138,140 9,350
Global Sales and 1997 141,750 35,588 -- -- 73,533 8,505
Marketing
Sheldon M. Goldman,...... 1999 238,325 257,200 (2) 864,596 42,642 10,000
Senior Vice President, 1998 182,917 112,000 -- -- 162,500 10,000
Business and Legal 1997 143,750 60,000 -- -- 40,200 9,000
Affairs
Francis J. Mount(5),..... 1999 228,417 250,000 (2) 864,596 42,642 10,000
Senior Vice President, 1998 175,000 107,500 -- -- 122,500 10,000
Engineering and
Network Operations
</TABLE>
- ------------------------
(1) Includes the following amounts for Messrs. Mahoney, Shaw, Malone, Goldman
and Mount taken in the form of shares of restricted common stock, $39,000,
$55,200, $43,720, $51,440 and $50,000, respectively.
(2) The aggregate value of the perquisites and other personal benefits received
by each named executive has not been reported because such amount was below
the SEC's required reporting threshold.
(3) Calculated based on a value of $53.625, the fair market value of our common
stock on December 31, 1999. The stock performance criteria associated with
these shares of restricted stock vested on March 29, 2000 when our common
stock traded at or above $60 per share for a twenty (20) consecutive
business day period. These shares remain subject to a minimum two year
employment requirement but would vest upon a change of control or a
termination of the named executive without cause.
(4) Represents matching contributions under our 401(k) plan.
(5) Mr. Mount began his employment with us in December 1997.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase common stock made by us during the fiscal year ended December 31, 1999
to each of the executives named in the summary compensation table. No stock
appreciation rights were granted during 1999.
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<PAGE>
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED (#) 1999 (1) ($/SHARE)(2) DATE (5%) (10%)
- ---- ----------- ------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney......... 52,278(4)(5) 6.2% $ 22.875 01/01/09 $ 752,071 $1,905,899
38,196(4)(6) 4.6 43.00 06/01/09 1,032,820 2,617,572
Allan L. Shaw.............. 38,519(4)(5) 4.6 22.875 01/01/09 554,137 1,392,511
4,123(4)(6) 0.5 43.00 06/01/09 111,486 287,549
Lawrence G. Malone......... 38,519(4)(5) 4.6 22.875 01/01/09 554,139 1,392,511
4,123(4)(6) 0.5 43.00 06/01/09 111,436 284,549
Sheldon M. Goldman......... 38,519(4)(5) 4.6 22.875 01/01/09 554,174 1,392,511
4,123(4)(6) 0.5 43.00 06/01/09 111,486 289,549
Francis J. Mount........... 38,519(4)(5) 4.6 22.875 01/01/09 554,139 1,392,511
4,123(4)(6) 0.5 43.00 06/01/09 111,486 289,549
</TABLE>
- ------------------------
(1) We granted options to purchase a total of 837,709 shares of our common stock
during 1999.
(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 SEC 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) Options granted to the executives named in the summary compensation table
vest upon a change in control. See "--Employment Agreements."
(5) Options to purchase shares of our common stock vested and became exercisable
as to 33.34% of these options on January 1, 2000 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 to purchase shares of our common stock will vest and become
exercisable as to 33.34% of these options on June 1, 2000 and the remainder
will vest and become exercisable on each successive anniversary date
thereafter to the extent of 33.33% of these options.
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YEAR-END OPTION VALUES
The following table sets forth information regarding the number and year-end
value of unexercised options held at December 31, 1999 by each of the executives
named in the summary compensation table. No stock appreciation rights were
exercised by these executives during fiscal 1999.
FISCAL 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED "IN-THE-MONEY"
ACQUIRED OPTIONS AT FISCAL OPTIONS AT FISCAL
ON VALUE YEAR-END (#) YEAR-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
- ---- ------------ ------------ ------------------------- -----------------------------
<S> <C> <C> <C> <C>
Michael J. Mahoney..... -- -- 308,089/368,470 $15,436,113/$14,654,551
Allan L. Shaw.......... 20,000 $852,500(2) 131,127/197,866 6,030,293/8,410,111
6,000 276,750(5)
Lawrence G. Malone..... 20,000 835,500(2) 113,409/164,239 5,257,128/6,869,187
Sheldon M. Goldman..... 19,999 757,962(3) 75,976/169,367 3,505,237/7,165,441
Francis J. Mount....... 13,333 593,319(4) 15,590/126,558 714,530/5,208,790
3,667 161,348(4)
6,000 276,750(5)
</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 $53.625 per share, the fair market value of
our common stock issuable upon exercise of options at December 31, 1999 and
the exercise price of the option, multiplied by the applicable number of
options.
(2) The amount set forth represents the difference between $47.625 per share,
the fair market value of our common stock issuable upon exercise of these
options at June 23, 1999, and the exercise price of the option, multiplied
by the applicable number of options.
(3) The amounts set forth represent the difference between $43.750 per share,
the fair market value of our common stock issuable upon exercise of these
options at June 22, 1999, and the exercise price of the option, multiplied
by the applicable number of options.
(4) The amounts set forth represent the difference between $49.50 per share, the
fair market value of our common stock issuable upon exercise of these
options at June 7, 1999, and the exercise price of the option, multiplied by
the applicable number of options.
(5) The amount set forth represents the difference between $51.625 per share,
the fair market value of our common stock issuable upon exercise of these
options at June 24, 1999, and the exercise price of the option, multiplied
by the applicable number of options.
EMPLOYMENT AGREEMENTS
We have executed new employment agreements with Messrs. Mahoney, Shaw and
Goldman, pursuant to which Mr. Mahoney serves as our Chief Executive Officer,
Mr. Shaw serves as our Chief Financial Officer and Mr. Goldman serves as our
Executive Vice President, Corporate Development. In addition, we have executed
employment agreements with Alfred West, William Murphy, Lawrence Malone and
Francis Mount, pursuant to which Mr. West serves as Vice Chairman of our board,
Mr. Murphy serves as President, Mr. Malone serves as Executive Vice President,
Wholesale Sales and Marketing and Mr. Mount serves as our Chief Technology
Officer. The term of the Mahoney employment agreement extends for a period of
three years, and the term of the employment agreement of each of Messrs. Shaw,
Goldman, West, Murphy, Malone and Mount extends for a period of two years, in
each case unless earlier terminated in accordance with the terms of the
respective agreement. Pursuant to the respective employment agreements,
Mr. Mahoney is entitled to receive an annual base salary of $450,000 (subject to
adjustments), Mr. West is entitled to receive an annual base salary of $400,000,
Mr. Murphy is entitled to receive an annual base salary of $395,000, Mr. Shaw is
entitled to receive an annual base salary of $299,000, Mr. Goldman is entitled
to receive an annual base salary of $304,200 and Messrs. Malone and Mount are
each entitled to receive an annual base salary of $250,000, subject, in each
case, to increases approved from
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time to time by the compensation committee of our board in its sole discretion.
In addition, Mr. Mahoney's employment agreement provides for an annual cash
bonus payment equal to 100% of his base salary, Mr. West's employment agreement
provides for an annual cash bonus payment equal to 90% of his base salary,
Mr. Murphy's agreement provides for an annual cash bonus payment equal to 85% of
his base salary and each of Messrs. Shaw's, Goldman's, Mount's and Malone's
employment agreements provides for an annual cash bonus payment equal to 80% of
their respective base salaries, in each case multiplied by a bonus multiple
ranging from 0.6 to 2.0 determined based upon a comparison of actual versus
budgeted EBITDA and revenue figures. Each of these employment agreements also
(1) provides that the executive is entitled to receive annual grants of stock
options or restricted stock in amounts to be determined by the our board (or any
committee thereof) in its sole and absolute discretion, except that Mr. West is
entitled to receive a minimum of 20,000 shares of restricted stock with respect
to each of calendar years 2000 and 2001, (2) provides that following a change in
control (defined therein), we will be obligated to pay the executive an amount
equal to the severance amount (defined therein), together, in the case of
Messrs. Mahoney, Murphy, Shaw, Goldman, Mount and Malone, any applicable excise
tax gross up on such amount, if the executive's employment is terminated, and
(3) with respect to each executive, includes a non-competition covenant and
contains a prohibition on the solicitation of our employees.
For purposes of each of the foregoing employment agreements, "change in
control" is defined to mean such time as (1) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act, becomes
the ultimate "beneficial owner" (as defined in Rule 13d-3 of the Securities
Exchange Act) of more than 50% of the total voting power of our then outstanding
voting stock on a fully diluted basis or (2) individuals who at the beginning of
any period of two consecutive calendar years constituted our board (together
with any new directors whose election by our board or whose nomination for
election by our stockholders was approved by a vote of at least two-thirds of
the members of the Viatel board then still in office who either were members of
our board at the beginning of this period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of our board then in office.
STOCK INCENTIVE PLANS
We have adopted an Amended Stock Incentive Plan (the "Stock Incentive
Plan"), the Amended and Restated 1999 Flexible Incentive Plan (the "1999
Flexible Incentive Plan") (previously a Destia plan) and the Amended and
Restated 1996 Flexible Incentive Plan (previously a Destia plan) (the "1996
Flexible Incentive Plan," and collectively with the Stock Incentive Plan and the
1999 Flexible Incentive Plan, the "Plans"). Pursuant to the Plans,
"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 our employees, including
employee-directors. The Plans also provide for the grant of stock appreciation
rights and shares of restricted common stock to our employees, directors and
consultants.
The Plans are currently administered by the compensation committee of our
board. The Stock Incentive Plan allows for the issuance of up to a maximum of
5,300,000 shares of common stock. The 1999 Flexible Incentive Plan allows for
the issuance of up to a maximum of 2,670,000 shares of common stock, provided,
however, that no individual may receive awards of more than 445,000 shares of
common stock in any calendar year. The 1996 Flexible Incentive Plan allows for
the issuance of up to a maximum of 2,447,500 shares of common stock, of which
2,336,250 shares may be in the form of voting stock and 111,250 shares may be in
the form of non-voting stock. As a result of our acquisition of Destia,
virtually all options granted by Destia prior to the merger vested and became
exercisable. Any options granted under the 1999 Flexible Incentive Plan and the
1996 Flexible Incentive Plan after our acquistion of Destia will be subject to
accelerated vesting only as described below. Under the Plans, 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 our board so determines.
An incentive stock option may not be granted to a "ten percent stockholder" (as
that term is defined in Section 422A of the
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Internal Revenue Code of 1986) 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
Plans is evidenced by a written agreement, 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 that
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 options 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 our board, in
whole or in part,
- with shares of common stock,
- by irrevocable direction to an approved securities broker to sell shares
and deliver all or a portion of the proceeds to us,
- by delivery of a promissory note with any provisions that our board
determines appropriate, or
- in any combination of these three possibilities.
In addition, our board, 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 of an amount equal to the difference between
the aggregate fair market value of the shares of common stock subject to the
stock option and the aggregate option price per share of such common stock. In
the discretion of the board, this 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 of the two.
The Plans provide that outstanding options, restricted shares of common
stock or stock appreciation rights vest in their entirety and become
exercisable, or with respect to restricted common stock, are released from
restrictions on transfer and repurchase rights, in the event of a "corporate
transaction," unless assumed by the successor corporation. For purposes of the
Plans, a corporate transaction includes any of the following
stockholder-approved transactions to which Viatel is a party:
- a merger or consolidation in which Viatel is not the surviving entity,
other than a transaction the principal purpose of which is to change the
state of Viatel's incorporation, or a transaction in which Viatel's
stockholders immediately prior to the merger or consolidation hold (by
virtue of securities received in exchange for their shares in Viatel)
securities of the surviving entity representing more than 50.0% of the
total voting power of that entity immediately after the transaction,
- the sale, transfer or other disposition of all or substantially all of
the assets of Viatel unless Viatel's stockholders immediately prior to
the sale, transfer or other disposition hold (by virtue of securities
received in exchange for their shares in Viatel) securities of the
purchaser or other transferee representing more than 50.0% of the total
voting power of that entity immediately after the transaction, or
- any reverse merger in which Viatel is the surviving entity but in which
Viatel's stockholders immediately prior to the merger do not hold (by
virtue of their shares in Viatel held immediately prior to such
transaction) securities of Viatel representing more than 50.0% of the
total voting power of Viatel immediately after the transaction.
EMPLOYEE STOCK PURCHASE PLAN
We have adopted an Employee Stock Purchase Plan (the "ESPP") which we intend
to implement during the second quarter of 2000.
85
<PAGE>
Under the plan, eligible employees will be permitted to authorize payroll
deductions of 1% to 20% of his or her base salary for the purpose of purchasing
shares of our common stock. The amounts deducted during each six-month period
will be accumulated and, at the end of such period, will be used to purchase
shares of our common stock at the lower of 85% of the closing market price on
the first trading day of the relevant participation period or 85% of the closing
market price on the exercise date.
The ESPP, which will be administered by the Compensation Committee of our
board, allows for the issuance of up to a maximum of five hundred thousand
(500,000) shares of common stock. Under the ESPP, a participant will have no
rights as a stockholder until he or she acquires the stock at the end of the
relevant participation period.
The ESPP provides that in the event of any reorganization, recapitalization,
stock split, reverse stock split, stock dividend, combination of shares, merger,
consolidation, offering of rights or other similar change in the capital
structure of Viatel, the administrator of the plan may make such adjustment, if
any, as it deems appropriate in the number, kind and purchase price of the
shares available for purchase under the plan and in the maximum number of shares
that may be issued under the plan, subject to the approval of the board of
directors. If we are acquired in a transaction whereby we are not the surviving
entity or all or substantially all of its assets are acquired, the administrator
of the plan will be permitted to determine a plan termination date. This date
must precede the expected effective date of such acquisition by not more than
sixty (60) days. In the event the ESPP is terminated and the acquisition
transaction is not consummated, the plan may be reactivated on a date determined
by the Employee Stock Purchase Plan Committee.
The ESPP is designed to qualify as an "employee stock purchase plan" within
the meaning of Section 423 or any successor provisions of the Internal Revenue
Code and related regulations.
MANAGEMENT SEVERANCE PLAN
On December 8, 1999, we implemented a Management Severance Plan, which
provides that any of our employees who hold the title of director or above and
are selected to participate in the plan shall be entitled to receive at least
six months base salary and accelerated vesting of options and restricted stock
in the event the employee is terminated without "cause" within eighteen (18)
months following a change in control of Viatel. For purposes of this plan, a
termination without "cause" includes a voluntary termination due to a reduction
in the employee's base pay and a forced relocation of the employee to a site in
excess of sixty (60) miles from his or her worksite. For purposes of this plan,
change in control has the same meaning described above under "Employment
Agreements." Decisions of the plan administrator concerning eligibility and
entitlement to benefits are final and binding on all parties.
COMPENSATION OF DIRECTORS
We pay an annual fee to non-employee directors consisting of $15,000 in
cash, paid in quarterly installments, $15,000 worth of restricted stock, and
1,000 options to purchase shares of common stock. In addition, non-employee
directors also receive $1,200 for each board meeting attended and held
separately and $600 for each board meeting or committee meeting participated in
by telephone. Directors who are also our employees are not separately
compensated for serving on our board. All directors are reimbursed for
out-of-pocket expenses incurred in attending board meetings and committee
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, the members of our Compensation Committee were
Messrs. Mahoney, Pizzani and Graham. Mr. Mahoney is our Chairman of the Board
and Chief Executive Officer. None of our executive officers currently serves 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
our compensation committee and the board of directors or compensation committee
of any other company.
86
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of our common stock, as of March 28, 2000, by (1) each person known to
us to own beneficially more than 5% of our outstanding shares of common stock,
(2) each of our directors, (3) each person named in the summary compensation
table, and (4) all of our executive officers and directors, as a group. All
information with respect to beneficial ownership has been furnished to us by the
respective stockholders.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------- ----------------------- ----------
<S> <C> <C>
College Retirement Equities Fund(2) ........................ 2,630,179 5.5%
730 Third Avenue
New York, NY 10017
Alfred West(3).............................................. 5,092,144 10.6
Michael J. Mahoney(4)....................................... 571,302 1.2
Allan L. Shaw(4)............................................ 245,307 *
Lawrence G. Malone(4)....................................... 214,463 *
Sheldon M. Goldman(4)(5).................................... 180,198 *
Francis J. Mount(4)......................................... 135,943 *
Edward C. Schmults(4)....................................... 7,869 *
John G. Graham(4)........................................... 3,497 *
Paul G. Pizzani(4).......................................... 2,497 *
John R. Muse(6)............................................. -- *
William Murphy.............................................. 49,075 *
Thomas O. Hicks ............................................ 4,519,599(7) 9.4
200 Crescent Court
Dallas, Texas 75201
Chase Equity Associates, LLC ............................... 3,185,875(8) 6.6
380 Madison Avenue
12th Floor
New York, New York 10017
All directors and executive
officers as a group (18 persons).......................... 6,747,860 13.9%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of our outstanding shares of
common stock.
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
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 28, 2000 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. Except as otherwise indicated, the address of each
person listed in the table is c/o Viatel, Inc., 685 Third Avenue, New York,
New York 10017. Attn: General Counsel.
(2) Includes 900 shares held by TIAA Separate Account VA-1; 90,655 shares held
by TIAA-CREF Mutual Funds; 6,479 shares held by TIAA-CREF Institutional
Mutual Funds; and 100 shares held by TIAA-CREF Life Funds.
(3) Includes 397,593 shares held by AT Econ Ltd. Partnership and 39,297 shares
held by AT Econ Ltd. Partnership No. 2.
(4) Includes shares of common stock which these individuals have the right to
acquire through the exercise of options within 60 days of March 28, 2000, as
follows: Michael J. Mahoney, 286,033; Allan
87
<PAGE>
L. Shaw, 139,187; Lawrence G. Malone, 104,202; Sheldon M. Goldman, 93,215;
Francis J. Mount, 0; Edward C. Schmults, 5,340; John G. Graham, 1,463; and
Paul G. Pizzani, 1,463.
(5) 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 Securities Exchange Act.
(6) Mr. Muse, one of our directors, was appointed to our board of directors on
behalf of the holders of our Series B-1 7.50% cumulative convertible
preferred stock.
(7) The amount shown for Mr. Hicks is based upon a Schedule 13D filed on
March 20, 2000 by Mr. Hicks, chief executive officer of Hicks, Muse, Tate &
Furst Incorporated, Hicks, Muse, Tate & Furst Europe Fund, L.P.; HMEU Viatel
Qualified Fund LLC; Hicks, Muse, Tate & Furst Europe Private Fund, L.P.;
HMEU GP LLC; HMEU Viatel I-EQ Coinvestors, LLC; HMEU I-EQ Coinvestors, L.P.;
HMEU Viatel I-SBS Coinvestors, LLC; HMEU I-SBS Coinvestors, L.P.; HMEU
Intermediate Partners I-C, L.P.; Viatel PG Europe LLC; HM PG Europe I, C.V.;
HMEU Fund I-C, Inc.; HMTF Bridge Viatel, LLC; HMTF Bridge Partners, L.P.;
and HMTF Bridge Partners, LLC. The amount shown assumes conversion of all of
our Series B-1 7.50% cumulative convertible preferred stock beneficially
owned by such entities. The shares shown are subject to shared voting and
investment power.
(8) The amount shown assumes conversion of all Series B-2 7.50% cumulative
convertible preferred stock beneficially owned by Chase Equity Associates,
LLC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Through August 1999, James Prenetta, Senior Vice President and General
Counsel of Viatel, was a partner at the law firm of Kelley Drye & Warren LLP,
Viatel's primary U.S. outside counsel. Mr. Prenetta is currently Of Counsel to
Kelley Drye & Warren LLP and, in such capacity, continues to receive certain
payments from such firm.
Destia had outstanding loans of $308,000 due to Mrs. Rose West, the mother
of Messrs. Alfred West and Steven West. Destia has repaid these loans in full.
Alfred West has borrowed approximately $234,000 from Destia pursuant to
unsecured, interest bearing notes, repayable upon demand.
Sonja Gross, the sister of Alfred West, previously owned a 28% interest in
Destia's Swiss subsidiary, Econophone Services GmbH. On March 30, 1999, Destia
acquired Ms. Gross' interest in such company in exchange for 103,981 shares of
restricted voting common stock of Destia.
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<PAGE>
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.
Viatel filed a Report on Form 8-K dated November 3, 1999, pursuant to
Item 5 thereof.
Viatel filed a Report on Form 8-K dated December 9, 1999, pursuant to
Item 7 thereof.
Viatel filed a Report on Form 8-K dated December 17, 1999, pursuant to
Item 2 thereof.
Viatel filed a Report on Form 8-K dated December 24, 1999, pursuant to
Item 5 thereof.
Viatel filed a Report on Form 8-K dated December 29, 1999, pursuant to
Item 7 thereof.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 27, 1999,
by and among Viatel, Inc., Viatel Acquisition Corp. and
Destia Communications, Inc. (incorporated herein by
reference to Exhibit 2.1 to Viatel, Inc.'s Registration
Statement on Form S-4, filed on October 15, 1999,
Registration No. 333-89143) ("Viatel's October 1999 Form
S-4").
2.2 Agreement for the sale and purchase of the entire issued
share capital of AT&T Communications (UK) Limited, by and
among AT&T Communications Services International, Inc.,
Global Card Holdings Inc., Viatel, Inc. and Viatel Global
Communications Limited, dated February 29, 2000
(incorporated herein by reference to Exhibit 2.2 to Viatel,
Inc.'s Form 8-K, filed on March 13, 2000, File
No. 000-21261).
3.1(i)* Amended and Restated Certificate of Incorporation of Viatel,
Inc. (incorporated herein by reference to Exhibit 3.1(i)(b)
to Viatel, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09699, filed on August 7, 1996
("Viatel's Form S-1")); Certificate of Designations,
Preferences and Rights of 10% Series A Redeemable
Convertible Preferred Stock, $.01 par value per share
(incorporated herein by reference to Exhibit 3(i)(b) to
Viatel, Inc.'s Registration Statement on Form S-4, filed on
July 10, 1998, File No. 333-58921 ("Viatel's 1998
Form S-4")); Certificate of Amendment to Viatel, Inc.'s
Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 4.9 to Viatel,
Inc.'s quarterly report on Form 10-Q for the quarter ended
September 30, 1998, File No. 000-21261); Second Certificate
of Amendment to Viatel, Inc.'s Amended and Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1(i) to Viatel's October 1999 Form
S-4); Certificate of Designations of Series A Junior
Participating Preferred Stock of Viatel, Inc. (incorporated
herein by reference to Exhibit 3(i)(2) to Viatel, Inc.'s
Form 8-K, filed on December 29, 1999, File No. 000-21261);
Certificate of Designations, Preferences and Rights of 7.50%
Cumulative Convertible Preferred Stock Series B-1 Due 2015
(filed herewith); Certificate of Designations, Preferences
and Rights of 7.50% Cumulative Convertible Preferred Stock
Series B-2 Due 2015 (filed herewith); and Certificate
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
of Designations, Preferences and Rights of Convertible
Preferred Stock Series C (filed herewith).
3.1(ii) Third Amended and Restated Bylaws of Viatel, Inc.
(incorporated herein by reference to Exhibit 3.1(ii) to
Viatel's October 1999 Form S-4).
4.1 Specimen of Viatel common stock certificate (incorporated by
reference to Exhibit 4.4 of Viatel's Form S-1).
4.2 Indenture, dated as of April 8, 1998, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s 12.50% Senior Discount Notes Due 2008 (including form
of 12.50% Senior Discount Note) (incorporated herein by
reference to Exhibit 4.1 to Viatel's 1998 Form S-4).
4.3 Indenture, dated as of April 8, 1998, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s 11.25% Senior Notes Due 2008 (including form of
11.25% Senior Note) (incorporated herein by reference to
Exhibit 4.2 to Viatel's 1998 Form S-4).
4.4 Indenture, dated as of April 8, 1998, among Viatel, Inc.,
The Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 12.40% Senior Discount Notes Due
2008 (including form of 12.40% Senior Discount Note)
(incorporated herein by reference to Exhibit 4.3 to Viatel's
1998 Form S-4).
4.5 Indenture, dated as of April 8, 1998, among Viatel, Inc.,
The Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 11.15% Senior Notes Due 2008
(including form 11.15% Senior Note) (incorporated herein by
reference to Exhibit 4.4 to Viatel's 1998 Form S-4).
4.6 Indenture, dated as of March 19, 1999, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s U.S. dollar denominated 11.50% Senior Notes Due 2009
(including form of 11.50% Senior Dollar Note) (incorporated
herein by reference to Exhibit 4.9 to Viatel, Inc.'s
Registration Statement on Form S-3, filed on February 12,
1999, File No. 333-72309 ("Viatel's February 1999
Form S-3")).
4.7 Indenture, dated as of March 19, 1999, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s Euro denominated 11.50% Senior Notes due 2009
(including form of 11.50% Senior Euro Note) (incorporated
herein by reference to Exhibit 4.10 of Viatel's February
1999 Form S-3).
4.8 Indenture, dated as of July 1, 1997, between Destia
Communications, Inc. and The Bank of New York, as Trustee,
relating to Destia Communications Inc.'s 13.50% Senior Notes
due 2007 (including form of 13.50% Senior Note)
(incorporated herein by reference to Exhibit 4.5 of Destia
Communication's Registration Statement on Form S-4, File No.
333-47711 filed on August 7, 1997).
4.9 Indenture, dated as of December 8, 1999, between Viatel,
Inc. and The Bank of New York, as Trustee, relating to
Viatel, Inc.'s U.S. dollar denominated 11.50% Senior Notes
due 2009 (including form of 11.50% Senior Dollar Note)
(incorporated herein by reference to Exhibit 4.13 to
Viatel's Current Report on Form 8-K filed on December 9,
1999, File No. 000-21261).
4.10 Rights Agreement, dated as of December 6, 1999, between
Viatel, Inc. and The Bank of New York, as Rights Agent
(incorporated herein by reference to Viatel, Inc.'s
Registration Statement on Form 8-A, filed on December 24,
1999, File No. 000-21261).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.1 Stockholder Agreement, dated as of August 27, 1999, among
Alfred West, AT Econ Limited Partnership, AT Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.1 to Viatel's October 1999 Form
S-4).
10.2 Stockholder Agreement, dated as of August 27, 1999, among
Steven West, SS Econ Limited Partnership, SS Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.2 to Viatel's October 1999 Form
S-4).
10.3 Stockholder Agreement, dated as of August 27, 1999, among
Gary Bondi, GS Econ Limited Partnership, GS Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.3 to Viatel's October 1999 Form
S-4).
10.4 Mercury Carrier Services Agreement, dated as of March 1,
1994, between Viatel, Inc. and Mercury Communications
Limited (incorporated herein by reference to Exhibit 10.8 to
Viatel's 1995 Form S-4, filed on May 24, 1995 ("Viatel's
1995 S-4")).
10.5 Commercial Lease Agreement, dated as of November 1, 1993,
and Addendum, dated as of December 8, 1994, between Viatel,
Inc. and 123rd Street Partnership in connection with Viatel,
Inc.'s premises located in Omaha, Nebraska (incorporated
herein by reference to Exhibit 10.24 to Viatel's 1995
Form S-4).
10.6 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 Viatel's 1995 Form S-4).
10.7 Agreement of Lease, dated August 7, 1995, between Viatel,
Inc. and Joseph P. Day Realty Corp. (incorporated herein by
reference to Exhibit 10.33 to Viatel's 1995 Form S-4).
10.8+ Viatel, Inc. 1999 Amended Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.12 to Viatel's October
1999 Form S-4).
10.9+ Viatel, Inc. Amended and Restated 1999 Flexible Stock
Incentive Plan (incorporated herein by reference to Exhibit
4.11 to Viatel's Registration Statement on Form S-8,
Registration No. 333-92339, filed on December 8, 1999 (the
"1999 S-8").
10.10+ Viatel, Inc. 1996 Flexible Stock Incentive Plan
(incorporated herein by reference to Exhibit 4.12 to the
1999 S-8).
10.11*+ Employment Agreement between Viatel, Inc. and Michael J.
Mahoney.
10.12*+ Employment Agreement between Viatel, Inc. and Allan L. Shaw.
10.13*+ Employment Agreement between Viatel, Inc. and Sheldon M.
Goldman.
10.14*+ Employment Agreement between Viatel, Inc. and Francis J.
Mount.
10.15*+ Employment Agreement between Viatel, Inc. and Lawrence
Malone.
10.16+ Employment Agreement between Viatel, Inc. and Alfred West
(incorporated herein by reference to Exhibit 10.44 to
Viatel's October 1999 Form S-4).
10.17*+ Employment Agreement between Viatel, Inc. and William
Murphy.
10.18 Equipment Purchase Agreement, dated June 29, 1998, between
Viatel, Inc. and Nortel PLC (incorporated herein by
reference to Exhibit 10.16 to Viatel's 1998 Form S-4).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.19 Agreement of Lease, dated June 24, 1998, between 685
Acquisition Corp. and Viatel, Inc., as amended by a letter
agreement, dated July 27, 1998 (incorporated herein by
reference to Exhibit 10.17 to Viatel's 1998 Form S-4).
10.20 Lease, dated June 23, 1998, between VC Associates and Viatel
New Jersey, Inc. (incorporated herein by reference to
Exhibit 10.18 to Viatel's 1998 Form S-4).
10.21 Software License Agreement, dated October 22, 1998, between
Viatel, Inc. and Lucent Technologies Inc. (incorporated by
reference to Exhibit 10.19 to Viatel Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998 ("Viatel's
1998 Form 10-K")).
10.22* Equipment Purchase Agreement, dated December 31, 1998,
between Viatel, Inc. and Nortel plc. (incorporated by
reference to Exhibit 10.21 to Viatel's 1998 Form 10-K).
10.23* Project Services Agreement, dated as of January 11, 1999,
between Viatel, Inc. and Bechtel Limited (incorporated by
reference to Exhibit 10.22 to Viatel, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999
("Viatel's March 1999 Form 10-Q")).
10.24* Development Agreement by and among Vicaine Infrastructure
Development GMBH, Viatel German Asset GMBH, Carrier 1 Fiber
Network GMBH &Co. OH, Metromedia Fiber Network GMBH, Viatel,
Inc. and Metromedia Fiber Network, Inc., dated as of
February 19, 1999 (incorporated by reference to
Exhibit 10.23 to Viatel's March 1999 Form 10-Q).
10.25 Third Amended and Restated Equipment Loan and Security
Agreement, dated as of November 5, 1999, between Destia
Communications, Inc. and NTFC Capital Corporation
(incorporated herein by reference to Exhibit 10.36 to
Viatel, Inc.'s Form 8-K filed December 29, 1999).
10.26 Securities Purchase Agreement, dated as of February 1, 2000,
by and among Viatel, Inc. and HMTF Europe Acquisition Corp.
and Chase Equity Associates LLC (incorporated herein by
reference to Exhibit 4.13 to Viatel, Inc.'s Form 8-K filed
on February 16, 2000, File No. 000-21261).
10.27 Viatel Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.9 to Viatel, Inc.'s Registration
Statement on Form S-8, Registration No. 333-92339, filed on
December 8, 1999).
10.28*+ Viatel, Inc. Management Severance Plan (filed herewith).
10.29 Telecommunications Services Agreement between Frontier
Communications of the West, Inc. and Destia Communications,
Inc., dated November 17, 1998 (incorporated herein by
reference to Exhibit 10.16 of Destia's Registration
Statement on Form S-1, Registration No. 333-70463, filed on
January 29, 1999).
11.1* Statement of Computation of Earnings Per Share (filed
herewith).
21.1* Subsidiaries of Viatel, Inc. (filed herewith).
23.1* Consent of KPMG LLP (filed herewith).
24.1 Power of Attorney (included on the signature page).
27.1 Financial Data Schedule (incorporated herein by reference to
Exhibit 27 to Viatel, Inc.'s Form 8-K, filed on April 3,
2000, File No. 000-21261).
</TABLE>
- ------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
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<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 14(th) day of April, 2000.
<TABLE>
<S> <C> <C>
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Michael J. Mahoney
Chairman of the Board and Chief Executive
Officer
</TABLE>
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan L. Shaw and James P. Prenetta, 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 14(th) day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
/s/ MICHAEL J. MAHONEY Chief Executive Officer and Director
- -------------------------------------------- (Principal Executive Officer)
Michael J. Mahoney
/s/ WILLIAM C. MURPHY President and Director
- --------------------------------------------
William C. Murphy
/s/ ALLAN L. SHAW Chief Financial Officer and Director
- --------------------------------------------
Allan L. Shaw
/s/ ALFRED WEST Vice Chairman and Director
- --------------------------------------------
Alfred West
/s/ FRANCIS J. MOUNT Chief Technology Officer and Director
- --------------------------------------------
Francis J. Mount
/s/ SHELDON M. GOLDMAN Executive Vice President and Director
- --------------------------------------------
Sheldon M. Goldman
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
/s/ PAUL G. PIZZANI Director
- --------------------------------------------
Paul G. Pizzani
/s/ JOHN G. GRAHAM Director
- --------------------------------------------
John G. Graham
Director
- --------------------------------------------
Edward Schmults
Director
- --------------------------------------------
John Muse
</TABLE>
94
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 27, 1999,
by and among Viatel, Inc., Viatel Acquisition Corp. and
Destia Communications, Inc. (incorporated herein by
reference to Exhibit 2.1 to Viatel, Inc.'s Registration
Statement on Form S-4, filed on October 15, 1999,
Registration No. 333-89143) ("Viatel's October 1999 Form
S-4").
2.2 Agreement for the sale and purchase of the entire issued
share capital of AT&T Communications (UK) Limited, by and
among AT&T Communications Services International, Inc.,
Global Card Holdings Inc., Viatel, Inc. and Viatel Global
Communications Limited, dated February 29, 2000
(incorporated herein by reference to Exhibit 2.2 to Viatel,
Inc.'s Form 8-K, filed on March 13, 2000, File
No. 000-21261).
3.1(i)* Amended and Restated Certificate of Incorporation of Viatel,
Inc. (incorporated herein by reference to Exhibit 3.1(i)(b)
to Viatel, Inc.'s Registration Statement on Form S-1,
Registration No. 333-09699, filed on August 7, 1996
("Viatel's Form S-1")); Certificate of Designations,
Preferences and Rights of 10% Series A Redeemable
Convertible Preferred Stock, $.01 par value per share
(incorporated herein by reference to Exhibit 3(i)(b) to
Viatel, Inc.'s Registration Statement on Form S-4, filed on
July 10, 1998, File No. 333-58921 ("Viatel's 1998
Form S-4")); Certificate of Amendment to Viatel, Inc.'s
Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 4.9 to Viatel,
Inc.'s quarterly report on Form 10-Q for the quarter ended
September 30, 1998, File No. 000-21261); Second Certificate
of Amendment to Viatel, Inc.'s Amended and Restated
Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.1(i) to Viatel October 1999 Form
S-4); Certificate of Designations of Series A Junior
Participating Preferred Stock of Viatel, Inc. (incorporated
herein by reference to Exhibit 3(i)(2) to Viatel, Inc.'s
Form 8-K, filed on December 29, 1999, File No. 000-21261);
Certificate of Designations, Preferences and Rights of 7.50%
Cumulative Convertible Preferred Stock Series B-1 Due 2015
(filed herewith); Certificate of Designations, Preferences
and Rights of 7.50% Cumulative Convertible Preferred Stock
Series B-2 Due 2015 (filed herewith); and Certificate of
Designations, Preferences and Rights of Convertible
Preferred Stock Series C (filed herewith).
3.1(ii) Third Amended and Restated Bylaws of Viatel, Inc.
(incorporated herein by reference to Exhibit 3.1(ii) to
Viatel's October 1999 Form S-4).
4.1 Specimen of Viatel common stock certificate (incorporated by
reference to Exhibit 4.4 of Viatel's Form S-1).
4.2 Indenture, dated as of April 8, 1998, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s 12.50% Senior Discount Notes Due 2008 (including form
of 12.50% Senior Discount Note) (incorporated herein by
reference to Exhibit 4.1 to Viatel's 1998 Form S-4).
4.3 Indenture, dated as of April 8, 1998, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s 11.25% Senior Notes Due 2008 (including form of
11.25% Senior Note) (incorporated herein by reference to
Exhibit 4.2 to Viatel's 1998 Form S-4).
4.4 Indenture, dated as of April 8, 1998, among Viatel, Inc.,
The Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 12.40% Senior Discount Notes Due
2008 (including form of 12.40% Senior Discount Note)
(incorporated herein by reference to Exhibit 4.3 to Viatel's
1998 Form S-4).
</TABLE>
95
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<C> <S>
4.5 Indenture, dated as of April 8, 1998, among Viatel, Inc.,
The Bank of New York, as Trustee, and Deutsche Bank,
Aktiengesellschaft, as German Paying Agent and Co-Registrar,
relating to Viatel, Inc.'s 11.15% Senior Notes Due 2008
(including form 11.15% Senior Note) (incorporated herein by
reference to Exhibit 4.4 to Viatel's 1998 Form S-4).
4.6 Indenture, dated as of March 19, 1999, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s U.S. dollar denominated 11.50% Senior Notes Due 2009
(including form of 11.50% Senior Dollar Note) (incorporated
herein by reference to Exhibit 4.9 to Viatel, Inc.'s
Registration Statement on Form S-3, filed on February 12,
1999, File No. 333-72309 ("Viatel's February 1999
Form S-3")).
4.7 Indenture, dated as of March 19, 1999, between Viatel, Inc.
and The Bank of New York, as Trustee, relating to Viatel,
Inc.'s Euro denominated 11.50% Senior Notes due 2009
(including form of 11.50% Senior Euro Note) (incorporated
herein by reference to Exhibit 4.10 of Viatel's February
1999 Form S-3).
4.8 Indenture, dated as of July 1, 1997, between Destia
Communications, Inc. and The Bank of New York, as Trustee,
relating to Destia Communications Inc.'s 13.50% Senior Notes
due 2007 (including form of 13.50% Senior Note)
(incorporated herein by reference to Exhibit 4.5 of Destia
Communication's Registration Statement on Form S-4, File No.
333-47711 filed on August 7, 1997).
4.9 Indenture, dated as of December 8, 1999, between Viatel,
Inc. and The Bank of New York, as Trustee, relating to
Viatel, Inc.'s U.S. dollar denominated 11.50% Senior Notes
due 2009 (including form of 11.50% Senior Dollar Note)
(incorporated herein by reference to Exhibit 4.13 to
Viatel's Current Report on Form 8-K filed on December 9,
1999, File No. 000-21261).
4.10 Rights Agreement, dated as of December 6, 1999, between
Viatel, Inc. and The Bank of New York, as Rights Agent
(incorporated herein by reference to Viatel, Inc.'s
Registration Statement on Form 8-A, filed on December 24,
1999, File No. 000-21261).
10.1 Stockholder Agreement, dated as of August 27, 1999, among
Alfred West, AT Econ Limited Partnership, AT Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.1 to Viatel's October 1999 Form
S-4).
10.2 Stockholder Agreement, dated as of August 27, 1999, among
Steven West, SS Econ Limited Partnership, SS Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.2 to Viatel's October 1999 Form
S-4).
10.3 Stockholder Agreement, dated as of August 27, 1999, among
Gary Bondi, GS Econ Limited Partnership, GS Econ Ltd.
Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp.
and Destia Communications, Inc. (incorporated herein by
reference to Exhibit 10.3 to Viatel's October 1999 Form
S-4).
10.4 Mercury Carrier Services Agreement, dated as of March 1,
1994, between Viatel, Inc. and Mercury Communications
Limited (incorporated herein by reference to Exhibit 10.8 to
Viatel's 1995 Form S-4, filed on May 24, 1995 ("Viatel's
1995 S-4")).
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.5 Commercial Lease Agreement, dated as of November 1, 1993,
and Addendum, dated as of December 8, 1994, between Viatel,
Inc. and 123rd Street Partnership in connection with Viatel,
Inc.'s premises located in Omaha, Nebraska (incorporated
herein by reference to Exhibit 10.24 to Viatel's 1995
Form S-4).
10.6 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 Viatel's 1995 Form S-4).
10.7 Agreement of Lease, dated August 7, 1995, between Viatel,
Inc. and Joseph P. Day Realty Corp. (incorporated herein by
reference to Exhibit 10.33 to Viatel's 1995 Form S-4).
10.8+ Viatel, Inc. 1999 Amended Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.12 to Viatel's October
1999 Form S-4).
10.9+ Viatel, Inc. Amended and Restated 1999 Flexible Stock
Incentive Plan (incorporated herein by reference to Exhibit
4.11 to Viatel's Registration Statement on Form S-8,
Registration No. 333-92339, filed on December 8, 1999 (the
"1999 S-8").
10.10+ Viatel, Inc. 1996 Flexible Stock Incentive Plan
(incorporated herein by reference to Exhibit 4.12 to the
1999 S-8).
10.11*+ Employment Agreement between Viatel, Inc. and Michael J.
Mahoney.
10.12*+ Employment Agreement between Viatel, Inc. and Allan L. Shaw.
10.13*+ Employment Agreement between Viatel, Inc. and Sheldon M.
Goldman.
10.14*+ Employment Agreement between Viatel, Inc. and Francis J.
Mount.
10.15*+ Employment Agreement between Viatel, Inc. and Lawrence
Malone.
10.16+ Employment Agreement between Viatel, Inc. and Alfred West
(incorporated herein by reference to Exhibit 10.44 to
Viatel's October 1999 Form S-4).
10.17*+ Employment Agreement between Viatel, Inc. and William
Murphy.
10.18 Equipment Purchase Agreement, dated June 29, 1998, between
Viatel, Inc. and Nortel PLC (incorporated herein by
reference to Exhibit 10.16 to Viatel's 1998 Form S-4).
10.19 Agreement of Lease, dated June 24, 1998, between 685
Acquisition Corp. and Viatel, Inc., as amended by a letter
agreement, dated July 27, 1998 (incorporated herein by
reference to Exhibit 10.17 to Viatel's 1998 Form S-4).
10.20 Lease, dated June 23, 1998, between VC Associates and Viatel
New Jersey, Inc. (incorporated herein by reference to
Exhibit 10.18 to Viatel's 1998 Form S-4).
10.21 Software License Agreement, dated October 22, 1998, between
Viatel, Inc. and Lucent Technologies Inc. (incorporated by
reference to Exhibit 10.19 to Viatel Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998 ("Viatel's
1998 Form 10-K")).
10.22* Equipment Purchase Agreement, dated December 31, 1998,
between Viatel, Inc. and Nortel plc. (incorporated by
reference to Exhibit 10.21 to Viatel's 1998 Form 10-K).
10.23* Project Services Agreement, dated as of January 11, 1999,
between Viatel, Inc. and Bechtel Limited (incorporated by
reference to Exhibit 10.22 to Viatel, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999
("Viatel's March 1999 Form 10-Q")).
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
10.24* Development Agreement by and among Vicaine Infrastructure
Development GMBH, Viatel German Asset GMBH, Carrier 1 Fiber
Network GMBH &Co. OH, Metromedia Fiber Network GMBH, Viatel,
Inc. and Metromedia Fiber Network, Inc., dated as of
February 19, 1999 (incorporated by reference to
Exhibit 10.23 to Viatel's March 1999 Form 10-Q).
10.25 Third Amended and Restated Equipment Loan and Security
Agreement, dated as of November 5, 1999, between Destia
Communications, Inc. and NTFC Capital Corporation
(incorporated herein by reference to Exhibit 10.36 to
Viatel, Inc.'s Form 8-K filed December 29, 1999).
10.26 Securities Purchase Agreement, dated as of February 1, 2000,
by and among Viatel, Inc. and HMTF Europe Acquisition Corp.
and Chase Equity Associates LLC (incorporated herein by
reference to Exhibit 4.13 to Viatel, Inc.'s Form 8-K filed
on February 16, 2000, File No. 000-21261).
10.27 Viatel Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4.9 to Viatel, Inc.'s Registration
Statement on Form S-8, Registration No. 333-92339, filed on
December 8, 1999).
10.28*+ Viatel, Inc. Management Severance Plan (filed herewith).
10.29 Telecommunications Services Agreement between Frontier
Communications of the West, Inc. and Destia Communications,
Inc., dated November 17, 1998 (incorporated herein by
reference to Exhibit 10.16 of Destia's Registration
Statement on Form S-1, Registration No. 333-70463, filed on
January 29, 1999).
11.1* Statement of Computation of Earnings Per Share (filed
herewith).
21.1* Subsidiaries of Viatel, Inc. (filed herewith).
23.1* Consent of KPMG LLP (filed herewith).
24.1 Power of Attorney (included on the signature page).
27.1 Financial Data Schedule (incorporated herein by reference to
Exhibit 27 to Viatel, Inc.'s Form 8-K, filed on April 3,
2000, File No. 000-21261).
</TABLE>
- ------------------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
98
<PAGE>
Exhibit 3.1(i)
VIATEL, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF 7.50% CUMULATIVE
CONVERTIBLE PREFERRED STOCK SERIES B-1 DUE 2015
<PAGE>
CERTIFICATE OF DESIGNATIONS
Viatel, Inc., a company organized and existing under the General
Corporation Law of the State of Delaware (the "Company"), certifies that
pursuant to the authority contained in its Certificate of Incorporation (the
"Certificate of Incorporation") and its By-laws (the "By-laws"), and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the board of directors of the Company (the "Board of Directors") at a
meeting duly called and held on January 31st, 2000, duly approved and adopted
the following resolution, which resolution remains in full force and effect on
the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation and By-laws, the Board of
Directors does hereby create, authorize and provide for the issue of a series of
Preferred Stock having the following designation, voting powers, preferences and
relative, participating, optional and other special rights:
Certain capitalized terms used herein are defined in Section 16.
1. Number and Designation. The Company shall have a series of
Preferred Stock, which shall be designated as its 7.50% Series B-1 Cumulative
Convertible Preferred Stock due 2015 (the "Series B-1 Preferred Stock"), par
value $0.01 per share, with 325,000 shares initially authorized. Unless
otherwise specified, references herein to any "Section" refer to the Section
number specified in this Certificate of Designation.
2. Issuance. The Company may issue up to 325,000 shares of Series
B-1 Preferred Stock in accordance with the Purchase Agreement; provided that,
the aggregate of the then Outstanding shares of Series B-1 Preferred Stock and
Series B-2 Preferred Stock shall not exceed such 325,000 shares.
3. Registered Form; Liquidation Preference; Registrar. Certificates
for shares of Series B Preferred Stock shall be issuable only in registered form
and only with an initial Liquidation Preference of $1,072 per share. The Company
shall serve as initial Registrar and Transfer Agent (the "Registrar") for the
Series B Preferred Stock.
4. Registration; Transfer. Shares of the Series B Preferred Stock
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act") and may not be resold, pledged or otherwise transferred prior
to the date when they may be resold pursuant to Rule 144 under the Securities
Act other than (i) to the Company, (ii) pursuant to an exemption from
registration under the Securities Act or (iii) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States. Until such
time as it is no longer required pursuant to the Securities Act, certificates
evidencing the Series B Preferred Stock shall contain a legend (the "Restrictive
Legend") evidencing the foregoing restrictions in substantially the form
attached hereto as Exhibit A.
5. Paying Agent and Conversion Agent. (a) The Company shall maintain
(i) an office or agency where shares of Series B Preferred Stock may be
presented for payment (the "Paying Agent"), (ii) an office or agency where
shares of Series B Preferred Stock may be
<PAGE>
presented for conversion (the "Conversion Agent"), and (iii) a Registrar, which
shall be an office or an agency where shares of Series B Preferred Stock may be
presented for transfer. The Company may appoint the Registrar, the Paying Agent
and the Conversion Agent and may appoint one or more additional paying agents
and one or more additional conversion agents in such other locations as it shall
determine. The term "Paying Agent" includes any additional paying agent, and the
term "Conversion Agent" includes any additional conversion agent. The Company
may change any Paying Agent or Conversion Agent without prior notice to any
holder. The Company shall notify the Registrar of the name and address of any
Paying Agent or Conversion Agent appointed by the Company. If the Company fails
to appoint or maintain another entity as Paying Agent or Conversion Agent, the
Registrar shall act as such. Notwithstanding the foregoing, the Company or any
of its Affiliates may act as Paying Agent, Registrar, coregistrar or Conversion
Agent.
(b) Neither the Company nor the Registrar shall be required (i) to
issue, countersign or register the transfer of or exchange any share of Series B
Preferred Stock during a period beginning at the opening of business 15 days
before any Redemption Date (as defined under Section 10(d)) and ending at the
close of business on such Redemption Date or (ii) to register the transfer of or
exchange any share of Series B Preferred Stock so selected for redemption. This
Section 5(b) shall not apply to any conversion of Series B Preferred Stock in
accordance with Section 12.
(c) If shares of Series B Preferred Stock are issued upon the
transfer, exchange or replacement of shares of Series B Preferred Stock bearing
the Restrictive Legend, or if a request is made to remove such Restrictive
Legend on shares of Series B Preferred Stock, the shares of Series B Preferred
Stock so issued shall bear the Restrictive Legend, or the Restrictive Legend
shall not be removed, as the case may be, unless the holders of such shares
shall request such legend be removed, and outside counsel for such holders
reasonably determines that the transfer of such shares is no longer restricted
by the Securities Act and outside counsel for the Company reasonably concurs in
such determination.
(d) Each holder of a share of Series B Preferred Stock agrees to
indemnify the Company and the Registrar against any liability that may result
from the transfer, exchange or assignment by such holder of such holder's share
of Series B Preferred Stock in violation of any provision of this Certificate of
Designation and/or applicable Federal or state securities law; provided,
however, that such indemnity shall not apply to acts of willful misconduct or
gross negligence on the part of the Company or the Registrar, as the case may
be.
(e) Payments due on the shares of Series B Preferred Stock shall be
payable at the office or agency of the Company maintained for such purpose in
The City of New York and at any other office or agency maintained by the Company
for such purpose. If any such payment is in cash, it shall be payable by wire
transfer (provided that appropriate wire instructions have been received by the
Registrar at least 15 days prior to the applicable date of payment) to a United
States dollar account maintained by the holder with, a bank located in New York
City; provided that at the option of the Company payment of dividends in cash
may be made by check mailed to the address of the person entitled thereto as
such address shall appear in the Series B Preferred Share Register.
2
<PAGE>
6. Dividend Rights.
(a) The Company shall pay, and the holders of the shares of Series B
Preferred Stock shall be entitled to receive, cumulative dividends from the date
of initial issuance of such shares of Series B Preferred Stock at a rate of
7.50% per annum on the amount of the then-effective Liquidation Preference of
the shares of Series B Preferred Stock. Dividends will be computed on the basis
of a 360-day year of twelve 30-day months and will be payable in accordance with
Section 11 hereof. Dividends will be payable quarterly in arrears on May 31,
August 31, November 30 and February 28 of each year (each a "Dividend Payment
Date"), commencing (subject to the next sentence) on May 31, 2000, for so long
as any shares of Series B Preferred Stock are outstanding; provided, however,
that if such date is not a Business Day, then the Dividend Payment Date shall be
the next Business Day. The Company may elect not to declare dividend payments on
any Dividend Payment Date and shall not declare dividend payments prior to May
31, 2005; provided, however, that dividends on shares of the Series B Preferred
Stock will accrue (including, without limitation, for the period from the
issuance of the Series B Preferred Stock through May 31, 2005, notwithstanding
the prohibitions set forth above) whether or not the Company has earnings or
profits, whether or not there are funds legally available for the payment of
such dividends and whether or not dividends are declared. Dividends, whether
declared or undeclared, will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Company will take
all actions required or permitted under the General Corporation Law of the State
of Delaware to permit the payment or accrual of dividends on the shares of
Series B Preferred Stock. On each Dividend Payment Date, commencing May 31,
2000, to and including the May 31, 2005 Dividend Payment Date, accrued dividends
on a share of the Series B Preferred Stock for the preceding dividend period
shall be added cumulatively to and thereafter remain a part of the Liquidation
Preference of such share. Thereafter, accrued dividends shall be payable
quarterly on each Dividend Payment Date, commencing on August 31, 2005, to the
holders of record of the Series B Preferred Stock as of the close of business on
the applicable Dividend Record Date. Accrued dividends that are not paid in full
in cash on any such Dividend Payment Date (whether or not declared and whether
or not there are sufficient funds legally available for the payment thereof)
shall be added cumulatively to the Liquidation Preference on the applicable
Dividend Payment Date and thereafter remain a part thereof. Accrued dividends
added to the Liquidation Preference of a share of Series B Preferred Stock in
accordance with the foregoing provisions of this Section 6(a) are sometimes
referred to in this Certificate as "Accumulated Dividends". For purposes of
determining the amount of dividends "accrued" (i) as of the first Dividend
Payment Date and as of any date that is not a Dividend Payment Date, such amount
shall be calculated on the basis of the rate per annum specified above in this
paragraph for the actual number of days elapsed from and including the Closing
Date (in case of the first Dividend Payment Date and any date prior to the first
Dividend Payment Date ) or the last preceding Dividend Payment Date (in case of
any other date) to the date as of which such determination is to be made, based
on a 360-day year, and (ii) as of any Dividend Payment Date after the first
Dividend Payment Date, such amount shall be calculated on the basis of such rate
per annum based on a 360-day year of twelve 30-day months. Whenever the Company
shall declare or pay any dividend on any Series B Preferred Stock, the holders
of the Series B Preferred Stock shall be entitled to receive such dividends on a
per share basis.
3
<PAGE>
(b) In addition to all dividends payable pursuant to Section 6(a),
whenever the Company shall declare or pay any dividend on its Common Stock, the
holders of the Series B Preferred Stock shall be entitled to receive such
dividends on a ratable as-converted basis (calculated as if all shares of Series
B Preferred Stock had been converted directly or indirectly into Common Stock
and/or Series C Preferred Stock). Dividends payable pursuant to this Section
6(b) shall not reduce any dividends payable pursuant to Section 6(a).
7. Payment of Dividends; Mechanics of Payment; Dividend Rights
Preserved. (a) Subject to Sections 6 and 11, dividends on any share of Series B
Preferred Stock that are payable, and are punctually paid or duly provided for,
on any Dividend Payment Date shall be paid in arrears to the person in whose
name such share of Series B Preferred Stock (or one or more predecessor shares
of Series B Preferred Stock) is registered at the close of business on the next
preceding May 15, August 15, November 15 and February 15 (each a "Dividend
Record Date").
(b) Unless full cumulative dividends on all outstanding shares of
Series B Preferred Stock for all past dividend periods shall have been declared
and paid, or declared and a sufficient sum for the payment thereof set apart,
then:
(i) no dividend (other than (A) with respect to Junior Shares, a
dividend payable solely in any Junior Shares, or (B) with respect to
Parity Shares, a dividend payable solely in Junior Shares or Parity
Shares, or (C) with respect to Parity Shares, a partial dividend paid pro
rata on such Parity Shares and the shares of Series B Preferred Stock)
shall be declared or paid upon, or any sum set apart for the payment of
dividends upon, any Junior Shares or Parity Shares, respectively;
(ii) no other distribution shall be declared or made upon, or any
sum set apart for the payment of any distribution upon, any Junior Shares
or Parity Shares;
(iii) no Junior Shares or Parity Shares or any warrants, rights,
calls or options (other than any cashless exercises of options or buybacks
of options or restricted stock from present or former employees, directors
or consultants) exercisable for or convertible into any Parity Share or
Junior Share shall be purchased, redeemed or otherwise acquired (other
than in exchange for other Junior Shares or Parity Shares, respectively
and other than conversion of (A) Series B-1 Preferred Stock into Series
B-2 Preferred Stock, and vice versa, (B) Series B-2 Preferred Stock into
Series C Preferred Stock, and (C) Series C Preferred Stock into Common
Stock and vice versa) by the Company or any of its subsidiaries; and
(iv) no monies shall be paid into or set apart or made available for
a sinking or other like fund for the purchase, redemption or other
acquisition of any Junior Shares or Parity Shares or any warrants, rights,
calls or options exercisable for or convertible into any Parity Shares or
Junior Shares by the Company or any of its subsidiaries (other than any
cashless exercises of options or option buybacks).
4
<PAGE>
Except as provided in Sections 6, 12 or 13 hereof, holders of Series
B Preferred Stock will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of the full cumulative dividends as herein
described.
(c) The Company will notify the Registrar and make a public
announcement no later than the close of business on the tenth Business Day prior
to the Record Date for each dividend as to whether it will pay such dividend.
(d) Any dividends (other than Accumulated Dividends) on any share of
Series B Preferred Stock may be paid, subject to Section 11, by the Company in
any lawful manner (which shall include the establishment of a record date not
more than 45 days prior to the payment thereof) not inconsistent with the
requirements of any national stock exchange or Commission recognized trading
market on which the shares of Series B Preferred Stock may be listed or admitted
to trading, and upon such notice (which shall precede the record date by at
least ten Business Days) as may be required by such exchange or trading market,
if, after notice given by the Company to the Registrar of the proposed payment
pursuant to this clause (d), such manner of payment shall be deemed practicable
by the Registrar.
(e) Subject to the foregoing provisions of this Section 7, each
share of Series B Preferred Stock delivered under this Certificate of
Designation upon registration of transfer of or in exchange for or in lieu of
any other share of Series B Preferred Stock shall carry the rights to dividends
accumulated and unpaid, and to accrue, that were carried by such other shares of
Series B Preferred Stock.
(f) The holder of record of a share of Series B Preferred Stock at
the close of business on a Dividend Record Date with respect to the payment of
dividends on the shares of Series B Preferred Stock will be entitled to receive
such dividends with respect to such share of Series B Preferred Stock on the
corresponding Dividend Payment Date, notwithstanding the conversion of such
share after such Dividend Record Date and prior to such Dividend Payment Date.
8. Voting Rights. (a) The holders of record of shares of Series B
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section 8 or as otherwise provided by law.
(b) The holders of record of shares of Series B-1 Preferred Stock
shall be entitled to vote on all matters that the holders of the Company's
Common Stock are entitled to vote upon.
(c) In addition to the voting rights set forth above, the approval
of the holders of at least a majority of the then Outstanding shares of Series B
Preferred Stock voting or consenting, as the case may be, as one class, will be
required for the Company to:
(i) amend the Certificate of Incorporation, this Certificate of
Designation or the By-Laws so as to (A) affect adversely the rights,
preferences (including, without limitation, liquidation preferences,
conversion price, dividend rate and Optional Redemption provisions),
privileges or voting rights of holders of the shares of Series B Preferred
Stock, or (B) increase or decrease the number of authorized shares of
Series B Preferred Stock;
5
<PAGE>
(ii) in a single transaction or series of related transactions,
consolidate or merge with or into, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets to,
any Person or adopt a plan of liquidation, except as expressly provided in
Section 14 hereof;
(iii) enter into, or permit any of its subsidiaries to enter into,
any agreement that would impose material restrictions on the Company's
ability to honor the exercise of any rights of the holders of the Series B
Preferred Stock;
(iv) authorize or create, modify the terms of or increase or
decrease the authorized amount of any Senior Shares or Parity Shares;
(v) issue any shares of Series B Preferred Stock other than (a)
pursuant to the terms of the Purchase Agreement as in effect on the
Closing Date, or (b) shares of the Series B-1 Preferred Stock upon the
conversion of shares of the Series B-2 Preferred Stock and vice versa; or
(vi) after March 9, 2005 (the "Fifth Anniversary Date"), commence or
effect any tender or exchange offer made by the Company or any Subsidiary
for all or any portion of the Common Stock.
In addition to the voting rights set forth above, the approval of the holders of
at least a majority of the then Outstanding shares of Series B-1 Preferred
Stock, other than the Relinquishing Holders, voting or consenting, as the case
may be, as one class, will be required for the Company to, on or prior to the
Fifth Anniversary Date, commence or effect any tender or exchange offer made by
the Company or any Subsidiary for all or any portion of the Common Stock. No
amendment shall be made to this Certificate of Designations without making the
same amendment to the corresponding provision (if any) to the Series B-2
Certificate of Designations (and vice versa).
(d) For so long as members of the HMTF Group own any combination of
the shares of Series B Preferred Stock issued to members of the HMTF Group on
the Closing Date under the Purchase Agreement (the "HMTF Issued Series B
Preferred Shares") and shares of Common Stock issued upon conversion of HMTF
Issued Series B Preferred Shares that, taken together, would represent (if all
HMTF Issued Series B Preferred Shares were converted) an amount of Common Stock
issuable upon conversion of 50% or more of the HMTF Issued Series B Preferred
Shares, the HMTF Holders, voting as a single class, shall be entitled to elect
one director to serve on the Board of Directors at any annual meeting of
stockholders or special meeting held in place thereof, or at a special meeting
of the HMTF Holders called as hereinafter provided. If directors of the Company
are generally entitled to three year terms and a director has been elected by
the HMTF Holders pursuant to this paragraph, no subsequent election need be held
pursuant to this paragraph prior to the expiration of such three year term
unless a vacancy shall exist in the office of a director elected by the HMTF
Holders. At any time after voting power to elect such director shall have become
vested and be continuing in the HMTF Holders pursuant to this paragraph, or if a
vacancy shall exist in the office of a director elected by the HMTF Holders at a
time when the HMTF Holders are entitled to elect a director pursuant to this
paragraph, a proper officer of the Company may, and upon the written request of
the holders of
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record of at least twenty-five percent (25%) of the HMTF Issued Series B
Preferred Shares then Outstanding held by the HMTF Holders addressed to the
Secretary of the Company shall, call a special meeting of the HMTF Holders for
the purpose of electing the director that such holders are entitled to elect. If
such meeting shall not be called by a proper officer of the Company within
twenty (20) days after personal service of said written request upon the
Secretary of the Company, or within twenty (20) days after mailing the same
within the United States by certified mail, addressed to the Secretary of the
Company at its principal executive offices, then the holders of at least
twenty-five percent (25%) of the HMTF Issued Series B Preferred Shares then
Outstanding held by the HMTF Holders may designate in writing one of their
number to call such meeting at the expense of the Company, and such meeting may
be called by the person so designated upon the notice required for the annual
meeting of stockholders of the Company and shall be held at the place for
holding the annual meetings of stockholders. As used herein, (i) "HMTF Group"
means Hicks, Muse, Tate & Furst Incorporated, a Texas corporation, and its
Affiliates and their respective officers, directors, partners, members,
stockholders and employees (and members of their respective families and trusts
for the primary benefit of such family members) and HMTF Bridge Viatel, LLC,
HMEU Viatel I-EQ Coinvestors, LLC, HMEU Viatel I-SBS Coinvestors, LLC, HM Viatel
PG Europe, LLC, HMEU Viatel Qualified Fund, LLC, HMEU Viatel Private Fund, LLC,
and their respective Affiliates and (ii) "HMTF Holders" means members of the
HMTF Group that are the holders of all or a portion of the HMTF Issued Series B
Preferred Shares or the Common Stock into which such HMTF Issued Series B
Preferred Shares are converted. Any action permitted or required to be taken by
the HMTF Holders pursuant to this Section 8(d) may be taken (1) at any annual or
special meeting of stockholders or at a special meeting of the HMTF Holders, or
(2) without a meeting, without prior notice, and without a vote if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
HMTF Holders having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares held
by the HMTF Holders entitled to vote thereon were present and voted and shall be
delivered to the Company by delivery to its address listed in Section 8.2 of the
Purchase Agreement.
(e) In exercising the voting rights set forth in Section 8(b), each
share of Series B Preferred Stock shall be entitled to vote on an as-converted
basis with the holders of the Company's Common Stock. In exercising the voting
rights set forth in Section 8 (d), each HMTF Issued Series B Preferred Share
shall be entitled to vote on an as-converted basis with the other HMTF Issued
Series B Preferred Shares and shares of Common Stock held by the HMTF Holders
and into which HMTF Issued Series B Preferred Shares have been converted, voting
as a single class. In exercising the other voting rights set forth in this
Section 8 each share of Series B Preferred Stock entitled to vote shall have one
vote per share, except that when any other series of preferred stock shall have
the right to vote with the Series B Preferred Stock as a single class on any
matter not specified in this Section 8, then the Series B Preferred Stock and
such other series of preferred stock shall have with respect to such matters one
vote per $1,000 of the aggregate liquidation preference of all shares of Series
B Preferred Stock and all shares of such other series of preferred stock. Except
as otherwise required by applicable law or as set forth herein, the shares of
Series B Preferred Stock shall not have any relative, participating, optional or
other special voting rights and powers and the consent of the holders thereof
shall not be required for the taking of any corporate action.
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(f) Chase Capital Partners and its Affiliates that are holders of
all or a portion of the Series B-2 Preferred Stock issued to any such entities
on the Closing Date shall have the right to designate an observer who shall have
the right to attend meetings of the Company's Board of Directors and such
observer shall be entitled to receive notice of each such meeting at the same
time as such directors. In addition, to the extent that the Company's Board of
Directors is to take action by unanimous written consent, the observer shall be
entitled to receive a copy of any such written consent when it is forwarded to
the directors for their execution. For purposes of this Section 8(f), Series B-2
Preferred Stock issued on the Closing Date shall be deemed to include Series B-1
Preferred Stock or Series C Preferred Stock issued on any date after the Closing
Date upon conversion of such Series B-2 Preferred Stock, as well as Common Stock
issued on any date after the Closing Date upon conversion of such Series B-1
Preferred Stock or Series C Preferred Stock.
9. Ranking. (a) The shares of Series B Preferred Stock will, with
respect to dividend rights and rights on liquidation, winding-up and
dissolution, rank (i) senior to all shares of Common Stock (whether issued in
one or more classes), the Series A Junior Participating Preferred Stock of the
Company and to each other class of capital stock or series of Preferred Stock of
the Company, the terms of which do not expressly provide that it ranks senior to
or on a parity with the shares of Series B Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to, together with all shares of Common Stock (whether
issued in one or more classes) of the Company, as "Junior Shares"); (ii) on a
parity with additional shares of Series B Preferred Stock issued by the Company
and each other class of capital stock or series of Preferred Stock of the
Company issued by the Company in compliance with Section 8 hereof, the terms of
which expressly provide that such class or series will rank on a parity with the
shares of Series B Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Shares"); and (iii) junior to each class of capital stock or series
of Preferred Stock of the Company issued by the Company in compliance with
Section 8 hereof, the terms of which expressly provide that such class or series
will rank senior to the shares of Series B Preferred Stock as to dividend rights
and rights upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Shares").
(b) No dividend whatsoever shall be declared or paid upon, or any
sum set apart for the payment of dividends upon, any outstanding shares of
Series B Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividends, upon
all outstanding Senior Shares.
(c) In the event of any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock then Outstanding shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Company to the
holders of shares of Common Stock or Junior Shares by reason of their ownership
thereof, an amount equal to the greater of (i) the then effective Liquidation
Preference of their shares of Series B Preferred Stock, plus an amount equal to
all dividends accrued and unpaid thereon from the last Dividend Payment Date to
the date fixed for liquidation, dissolution or winding-up or (ii) the amount
such holders would receive if such holders converted, directly or indirectly in
accordance with their terms, their shares of Series B
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Preferred Stock into Common Stock and/or Series C Preferred Stock immediately
prior to such liquidation, dissolution or winding up.
(d) If upon the occurrence of such event the assets of the Company
shall be insufficient to permit the payment to such holders of the full
preferential amount and all liquidating payments on all Parity Shares, the
entire assets of the Company legally available for distribution shall be
distributed among the holders of the shares of Series B Preferred Stock and the
holders of all Parity Shares ratably in accordance with the respective amounts
that would be payable on such shares of Series B Preferred Stock and any such
Parity Shares if all amounts payable thereon were paid in full. After payment of
the full preferential amount (and, if applicable, an amount equal to a pro rata
dividend to the holders of Outstanding shares of Series B Preferred Stock), such
holders shall not be entitled to any further participation in any distribution
of assets of the Company.
10. Redemption. (a) The shares of Series B Preferred Stock may be
redeemed by the Company at any time commencing on or after the Fifth Anniversary
Date (or earlier, in accordance with the provisions of Section 13(d) if a Change
of Control Date shall have occurred, but only as to shares of Series B Preferred
Stock with respect to which the Remarketing Option has been elected), in whole
or from time to time in part, at the election of the Company (an "Optional
Redemption"), at a redemption price (the "Redemption Price") payable in cash
equal to 100% of the then effective Liquidation Preference (after giving effect
to the Special Payment, if applicable), plus accrued and unpaid dividends
thereon from the last Dividend Payment Date to the date of redemption (the
"Optional Redemption Date").
(b) Shares of Series B Preferred Stock (if not earlier redeemed or
converted) shall be mandatorily redeemed by the Company on February 28, 2015
(the "Mandatory Redemption Date"; provided, however, that if such date is not a
Business Day, then the Mandatory Redemption Date shall be the next Business
Day), at a Redemption Price per share in cash equal to the then effective
Liquidation Preference (after giving effect to the Special Payment, if
applicable), plus accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Mandatory Redemption Date.
(c) In the event of a redemption or repurchase of fewer than all the
shares of Series B Preferred Stock, the shares of Series B Preferred Stock will
be chosen for redemption by the Registrar from the Outstanding shares of Series
B Preferred Stock not previously called for redemption, pro rata based on the
number of shares of Series B Preferred Stock held by each holder; provided, that
the Company may redeem (an "Odd-lot Redemption") all shares held by holders of
fewer than 100 shares of Series B Preferred Stock (or by holders that would hold
fewer than 100 shares of Series B Preferred Stock following such redemption)
prior to its redemption of other shares of Series B Preferred Stock; provided,
further, that the Company may not redeem a portion of any share without
redeeming the entire share. If fewer than all the shares of Series B Preferred
Stock represented by any share certificate are so to be redeemed, (i) the
Company shall issue a new certificate for the shares not redeemed and (ii) if
any shares represented thereby are converted before termination of the
conversion right with respect to such shares, such converted shares shall be
deemed (so far as may be) to be the shares represented by such share certificate
that was selected for redemption. Shares of Series B Preferred Stock that have
been converted during a selection of shares of Series B Preferred Stock to be
redeemed
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<PAGE>
shall be treated by the Registrar as outstanding for the purpose of such
selection but not for the purpose of the payment of the Redemption Price.
(d) In the event the Company elects to effect an Optional
Redemption, the Company shall (i) make a public announcement of the redemption
and (ii) give a redemption notice (the "Redemption Notice") to the holders not
fewer than 30 days nor more than 60 days before the redemption date (the
"Redemption Date"). Whenever a Redemption Notice is required to be delivered to
the holders, such notice shall provide the information set forth below and be
given by first class mail, postage prepaid to each holder of shares of Series B
Preferred Stock to be redeemed, at such holder's address appearing in the Series
B Preferred Share Register. All Redemption Notices shall identify the shares of
Series B Preferred Stock to be redeemed (including CUSIP number) and shall
state:
(i) the Redemption Date;
(ii) the applicable Redemption Price;
(iii) if fewer than all the outstanding shares of Series B Preferred
Stock are to be redeemed, the identification (and, in the case of partial
redemption, the certificate number, the total number of shares represented
thereby and the number of such shares being redeemed on the Redemption
Date) of the particular shares of Series B Preferred Stock to be redeemed;
(iv) that on the Redemption Date, the Redemption Price, together
with all accrued and unpaid dividends from the last Dividend Payment Date
to the Redemption Date, will become due and payable upon each such share
of Series B Preferred Stock to be redeemed and that dividends thereon will
cease to accrue on and after said date;
(v) the conversion price, the date on which the right to convert
shares of Series B Preferred Stock to be redeemed will terminate and the
place or places where such shares of Series B Preferred Stock may be
surrendered for conversion; and
(vi) the place or places where such shares of Series B Preferred
Stock are to be surrendered for payment of the Redemption Price and the
other amounts which are then payable.
(vi) The Redemption Notice shall be given by the Company or, at the
Company's request, by the Registrar in the name and at the expense of
the Company; provided that if the Company so requests, it shall provide
the Registrar adequate time, as reasonably determined by the Registrar,
to deliver such notices in a timely fashion.
(e) Prior to any Redemption Date, the Company shall deposit with the
Registrar or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust) an amount of consideration sufficient to pay
the Redemption Price of all the shares of Series B Preferred Stock that are to
be redeemed on that date plus all accrued and unpaid dividends thereon from the
last Dividend Payment Date to the Redemption Date. If any share of Series B
Preferred Stock called for redemption is converted, any consideration deposited
with the Registrar or with any Paying Agent or so segregated and held in trust
for the redemption of such
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<PAGE>
share of Series B Preferred Stock shall be paid or delivered to the Company upon
Company Order or, if then held by the Company, shall be discharged from such
trust.
(f) Notice of redemption having been given as aforesaid, the shares
of Series B Preferred Stock so to be redeemed shall, on the Redemption Date,
become due and payable at the Redemption Price therein specified plus all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date, and from and after such date (unless the Company shall default
in the payment of the Redemption Price and accrued but unpaid dividends)
dividends on such shares of Series B Preferred Stock shall cease to accrue and
such shares shall cease to be convertible into shares of Common Stock. Upon
surrender of any such shares of Series B Preferred Stock for redemption in
accordance with said notice, such shares of Series B Preferred Stock shall be
redeemed by the Company at the applicable Redemption Price, together with all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date. If any share of Series B Preferred Stock called for redemption
shall not be so paid upon surrender thereof for redemption, the Redemption Price
thereof, and all accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Redemption Date, shall, until paid, bear interest from the
Redemption Date at the dividend rate payable on the shares of Series B Preferred
Stock and such shares shall remain convertible.
(g) Any certificate that represents more than one share of Series B
Preferred Stock and is to be redeemed only in part shall be surrendered at any
office or agency of the Company designated for that purpose (with, if the
Company or the Registrar so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Registrar
duly executed by, the holder thereof or his attorney duly authorized in
writing), and the Company shall execute, and the Registrar shall countersign and
deliver to the holder of such share of Series B Preferred Stock without service
charge, a new Series B Preferred Stock certificate or certificates, representing
any number of shares of Series B Preferred Stock as requested by such holder, in
aggregate amount equal to and in exchange for the number of shares not redeemed
and represented by the Series B Preferred Stock certificate so surrendered.
(h) If a share of Series B Preferred Stock is redeemed subsequent to
a Dividend Record Date with respect to any Dividend Payment Date and on or prior
to such Dividend Payment Date, then any accrued dividends payable on such
Dividend Payment Date will be paid to the person in whose name such share of
Series B Preferred Stock is registered at the close of business on such Dividend
Record Date.
11. Method of Payments. The Company may make any dividend payments
in cash with respect to any period after the Fifth Anniversary Date. Any
dividends not paid in cash on a current basis on the applicable Dividend Payment
Date with respect to all periods after the Fifth Anniversary Date, and all
dividends with respect to the periods prior to the Fifth Anniversary Date, shall
not be paid in cash but rather shall constitute Accumulated Dividends.
Notwithstanding the foregoing, the Company may make any dividend payments
required to be paid pursuant to Section 6(b) in cash. No payment may be made in
respect of Accumulated Dividends as dividends. Rather, Accumulated Dividends
shall be added to the Liquidation Preference. Dividends may not be paid by
delivery of shares of Series B Preferred Stock.
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12. Conversion. (a) Subject to and upon compliance with the
provisions of this Certificate of Designation, at the option of the holder
thereof, any share of Series B-1 Preferred Stock may be converted at any time
into a number of fully paid and nonassessable shares of Common Stock (calculated
as to each conversion to the nearest 1/100 of a share) equal to (i) the then
effective Liquidation Preference thereof plus accrued and unpaid dividends to
the date of conversion divided by (ii) the Conversion Price in effect at the
time of conversion. Such conversion right shall expire at the close of business
on the Business Day next preceding the Mandatory Redemption Date unless the
Company defaults on the payment due on redemption. In case a share of Series B-1
Preferred Stock is called for redemption, such conversion right in respect of
the share so called shall expire at the close of business on the Business Day
next preceding the Redemption Date, unless the Company defaults in making the
payment due upon redemption.
The "Conversion Price" shall be initially $46.25. The "Conversion
Price" shall be adjusted in certain instances as provided in Section 12(d) and
Section 12(e) hereof.
(b) In order to exercise the conversion privilege, the holder of any
share of Series B-1 Preferred Stock to be converted shall surrender the
certificate for such share, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained for that purpose,
accompanied by written notice to the Company at such office or agency that the
holder elects to convert such share or, if fewer than all the shares of Series
B-1 Preferred Stock represented by a single share certificate are to be
converted, the number of shares represented thereby to be converted.
Shares of Series B-1 Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of surrender of
such shares for conversion in accordance with the foregoing provisions, and at
such time the rights of the holders of such shares as holders shall cease, and
the person or persons entitled to receive the shares of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock at such time. As promptly as practicable
on or after the conversion date, the Company shall issue and shall deliver at
such office or agency a certificate or certificates for the number of full
shares of Common Stock issuable upon conversion, together with payment in lieu
of any fraction of a share, as provided in Section 12(c).
In the case of any conversion of fewer than all the shares of Series
B-1 Preferred Stock evidenced by a certificate, upon such conversion the Company
shall execute and the Registrar shall countersign and deliver to the holder
thereof, at the expense of the Company, a new certificate or certificates
representing the number of unconverted shares of Series B-1 Preferred Stock.
(c) No fractional shares of Common Stock shall be issued upon the
conversion of a share of Series B-1 Preferred Stock. If more than one share of
Series B-1 Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares of Common Stock which shall be
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series B-1 Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any share of Series B-1 Preferred Stock, the Company shall pay a
cash adjustment in respect of such
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<PAGE>
fraction in an amount equal to the same fraction of the closing price (as
defined in Section 12(d)(vi)) per share of Common Stock at the close of business
on the Business Day prior to the day of conversion.
(d) For purposes of this Section 12(d), all references to Common
Stock shall be deemed to include the shares of Common Stock into which the
Series C Preferred Stock is convertible. The Conversion Price shall be adjusted
from time to time by the Company as follows:
(i) If the Company shall hereafter pay a dividend or make a
distribution to all holders of the outstanding shares of Common Stock in
shares of Common Stock, the Conversion Price in effect at the opening of
business on the date following the date fixed for the determination of
shareholders entitled to receive such dividend or other distribution shall
be reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the Common Stock Record Date (as defined in Section
12(d)(vi)) fixed for such determination and the denominator shall be the
sum of such number of shares and the total number of shares constituting
such dividend or other distribution, such reduction to become effective
immediately after the opening of business on the day following the Common
Stock Record Date. If any dividend or distribution of the type described
in this Section 12(d)(i) is declared but not so paid or made, the
Conversion Price shall again be adjusted to the Conversion Price which
would then be in effect if such dividend or distribution had not been
declared.
(ii) (a) In case the Company shall issue or sell any Common Stock
(other than Common Stock issued (A) pursuant to the Company's existing or
future stock option plans or pursuant to any other existing or future
Common Stock-related director or employee compensation plan of the Company
approved by the Board of Directors, (B) pursuant to the Company's existing
or future stock purchase plans approved by the Board of Directors which
permit Company employees to purchase Common Stock at a purchase price that
is not more than a 15% discount to the Current Market Price, (C) as
consideration for the acquisition of a business or of assets, (D) in a
firm commitment underwritten public offering when either (i) the
underwriting discount is 5% or less, or (ii) the offering price per share
is greater than the Conversion Price, (E) to the Company's joint venture
partners in exchange for interests in the relevant joint venture, (F) upon
exercise or conversion of any security the issuance of which caused an
adjustment hereunder or the issuance of which did not require adjustment
hereunder or (G) upon exercise or conversion of any of the Series B-1
Preferred Stock, the Series B-2 Preferred Stock, the Series C Preferred
Stock or the Warrants (as defined in the Purchase Agreement) in accordance
with their respective terms) without consideration or for a consideration
per share less than the Current Market Price on the date of such issuance,
or shall issue securities convertible into Common Stock having a
conversion price per share less than the Current Market Price at the date
of issuance of such convertible security, the Conversion Price to be in
effect after such issuance or sale shall be determined by multiplying the
Conversion Price in effect immediately prior to such issuance or sale by a
fraction, (1) the numerator of which shall be the sum of (x) the number of
shares of Common Stock outstanding immediately prior to such issuance or
sale and (y) the
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number of shares of Common Stock which the aggregate consideration
receivable by the Company for the total number of additional shares of
Common Stock so issued or sold (or, in the case of convertible securities,
issuable on conversion) would purchase at the Current Market Price in
effect immediately prior to such issuance or sale and (2) the denominator
of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to such issuance or sale and the number of
additional shares of Common Stock to be issued or sold (or, in the case of
convertible securities, issued on conversion). In case any portion of the
consideration to be received by the Company shall be in a form other than
cash, the fair market value of such noncash consideration shall be
utilized in the foregoing computation. Such fair market value shall be
determined in good faith by the Board of Directors.
(b) If the Company shall offer or issue options, rights or warrants
to all holders of its outstanding shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock at a price per share less
than the Current Market Price (as defined in Section 12(d)(vi)) on the
Common Stock Record Date fixed for the determination of shareholders
entitled to receive such rights or warrants, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying
the Conversion Price in effect at the opening of business on the date
after such Common Stock Record Date by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the Common Stock Record Date plus the number of shares of
Common Stock which the aggregate offering price of the total number of
shares of Common Stock subject to such options, rights or warrants would
purchase at such Current Market Price and of which the denominator shall
be the number of shares of Common Stock outstanding at the close of
business on the Common Stock Record Date plus the total number of
additional shares of Common Stock subject to such options, rights or
warrants for subscription or purchase. Such adjustment shall become
effective immediately after the opening of business on the day following
the Common Stock Record Date fixed for determination of shareholders
entitled to purchase or receive such options, rights or warrants. To the
extent that shares of Common Stock are not delivered pursuant to such
options, rights or warrants, upon the expiration or termination of such
options, rights or warrants the Conversion Price shall again be adjusted
to be the Conversion Price which would then be in effect had the
adjustments made upon the issuance of such options, rights or warrants
been made on the basis of delivery of only the number of shares of Common
Stock actually delivered. If such options, rights or warrants are not so
issued, the Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such date fixed for the
determination of shareholders entitled to receive such options, rights or
warrants had not been fixed. In determining whether any options, rights or
warrants entitle the holders to subscribe for or purchase shares of Common
Stock at less than such Current Market Price, and in determining the
aggregate offering price of such shares of Common Stock, there shall be
taken into account (x) any consideration received for such options, rights
or warrants, with the value of such consideration and the amount of such
exercise or subscription price, if other than cash, to be determined by
the Board of Directors and (y) the amount of any exercise price or
subscription price required to be paid upon exercise of such options,
warrants or rights.
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(iii) If the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon which
such subdivision becomes effective shall be proportionately reduced, and,
conversely, if the outstanding shares of Common Stock shall be combined
into a smaller number of shares of Common Stock, the Conversion Price in
effect at the opening of business on the day following the day upon which
such combination becomes effective shall be proportionately increased,
such reduction or increase, as the case may be, to become effective
immediately after the opening of business on the day following the day
upon which such subdivision or combination becomes effective.
(iv) If the Company shall, by dividend or otherwise, distribute to
all holders of its shares of Common Stock any class of capital stock of
the Company (other than any dividends or distributions to which Section
12(d)(i) applies) or evidences of its indebtedness, cash or other assets
(including securities, but excluding any rights or warrants of a type
referred to in Section 12(d)(ii)(b) and dividends and distributions paid
exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation to
which Section 12(e) applies) (the foregoing hereinafter in this Section
12(d)(iv) called the "Distributed Securities"), then, in each such case,
the Conversion Price shall be reduced so that the same shall be equal to
the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the Common Stock Record Date
(as defined in Section 12(d)(vi)) with respect to such distribution by a
fraction of which the numerator shall be the Current Market Price
(determined as provided in Section 12(d)(vi)) on such date less the fair
market value (as determined by the Board of Directors, whose good faith
determination shall be conclusive and described in a resolution of the
Board of Directors) on such date of the portion of the Distributed
Securities so distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day
following the Common Stock Record Date; provided, however, that, in the
event the then fair market value (as so determined) of the portion of the
Distributed Securities so distributed applicable to one share of Common
Stock is equal to or greater than the Current Market Price on the Common
Stock Record Date, in lieu of the foregoing adjustment, adequate provision
shall be made so that each holder of shares of Series B Preferred Stock
shall have the right to receive upon conversion of a share of Series B
Preferred Stock (or any portion thereof) the amount of Distributed
Securities such holder would have received had such holder converted such
share of Series B Preferred Stock (or portion thereof) directly or
indirectly into Common Stock immediately prior to such Common Stock Record
Date. If such dividend or distribution is not so paid or made, the
Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of
any distribution for purposes of this Section 12(d)(iv) by reference to
the actual or when issued trading market for any securities constituting
all or part of such distribution, it must in doing so consider the prices
in such market over the same period used in computing the Current Market
Price pursuant to Section 12(d)(vi) to the extent possible.
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Options, rights or warrants distributed by the Company to all
holders of shares of Common Stock entitling the holders thereof to
subscribe for or purchase shares of the Company's capital stock (either
initially or under certain circumstances), which options, rights or
warrants, until the occurrence of a specified event or events ("Dilution
Trigger Event"): (A) are deemed to be transferred with such shares of
Common Stock; (B) are not exercisable; and (C) are also issued in respect
of future issuances of shares of Common Stock, shall be deemed not to have
been distributed for purposes of this Section 12(d)(iv) (and no adjustment
to the Conversion Price under this Section 12(d)(iv) shall be required)
until the occurrence of the earliest Dilution Trigger Event, whereupon
such options, rights and warrants shall be deemed to have been distributed
and an appropriate adjustment to the Conversion Price under this Section
12(d)(iv) shall be made. If any such options, rights or warrants,
including any such existing options, rights or warrants distributed prior
to the first issuance of shares of Series B-1 Preferred Stock, are subject
to subsequent events, upon the occurrence of each of which such options,
rights or warrants shall become exercisable to purchase different
securities, evidences of indebtedness or other assets, then the occurrence
of each such event shall be deemed to be such date of issuance and record
date with respect to new options, rights or warrants (and a termination or
expiration of the existing options, rights or warrants, without exercise
by the holder thereof). In addition, in the event of any distribution (or
deemed distribution) of options, rights or warrants, or any Dilution
Trigger Event with respect thereto, that was counted for purposes of
calculating a distribution amount for which an adjustment to the
Conversion Price under this Section 12(d) was made, (1) in the case of any
such options, rights or warrants which shall all have been redeemed or
repurchased without exercise by any holders thereof, the Conversion Price
shall be readjusted upon such final redemption or repurchase to give
effect to such distribution or Dilution Trigger Event, as the case may be,
as though it were a cash distribution, equal to the per share redemption
or repurchase price received by a holder or holders of shares of Common
Stock with respect to such options, rights or warrants (assuming such
holder had retained such options, rights or warrants), made to all holders
of shares of Common Stock as of the date of such redemption or repurchase,
and (2) in the case of such options, rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price (as adjusted pursuant to this paragraph) shall be
readjusted to be the Conversion Price which would have been in effect if
such options, rights or warrants had not been issued.
Notwithstanding any other provision of this Section 12(d)(iv) to the
contrary, options, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any
rights distributed pursuant to any shareholder rights plan) shall be
deemed not to have been distributed for purposes of this Section 12(d)(iv)
if the Company makes proper provision so that each holder of shares of
Series B-1 Preferred Stock who converts a share of Series B-1 Preferred
Stock (or any portion thereof) after the date fixed for determination of
shareholders entitled to receive any such distribution shall be entitled
to receive upon such conversion, in addition to the shares of Common Stock
issuable upon such conversion, the amount and kind of such distributions
that such holder would have been entitled to receive if such holder had,
immediately prior to such determination date, converted such share of
Series B-1 Preferred Stock into Common Stock.
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For purposes of this Section 12(d)(iv) and Sections 12(d)(i) and
(ii), any dividend or distribution to which this Section 12(d)(iv) is
applicable that also includes shares of Common Stock, or options, rights
or warrants to subscribe for or purchase shares of Common Stock to which
Section 12(d)(ii) applies (or both), shall be deemed instead to be (A) a
dividend or distribution of the evidences of indebtedness, assets, shares
of capital stock, rights or warrants other than such shares of Common
Stock or options, rights or warrants to which Section 12(d)(ii) applies
(and any Conversion Price reduction required by this Section 12(d)(iv)
with respect to such dividend or distribution shall then be made)
immediately followed by (B) a dividend or distribution of such shares of
Common Stock or such options, rights or warrants (and any further
Conversion Price reduction required by Sections 12(d)(i) or 12(d)(ii) with
respect to such dividend or distribution shall then be made), except that
(1) the Common Stock Record Date of such dividend or distribution shall be
substituted as "the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution", "the Common
Stock Record Date fixed for such determination" and "the Common Stock
Record Date" within the meaning of Section 12(d)(i) and as "the date fixed
for the determination of shareholders entitled to receive such rights or
warrants", "the Common Stock Record Date fixed for the determination of
the share holders entitled to receive such rights or warrants" and "such
Common Stock Record Date" for purposes of Section 12(d)(ii), and (2) any
shares of Common Stock included in such dividend or distribution shall not
be deemed "outstanding at the close of business on the date fixed for such
determination" for the purposes of Section 12(d)(i).
(v) If a tender offer made by the Company or any of its subsidiaries
for all or any portion of the Common Stock expires and such tender offer
(as amended upon the expiration thereof) requires the payment to
shareholders (based on the acceptance (up to any maximum specified in the
terms of the tender offer) of Purchased Shares) of an aggregate
consideration having a fair market value (as determined by the Board of
Directors, whose good faith determination shall be conclusive and
described in a resolution of the Board of Directors) that, combined
together with the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose good faith determination shall
be conclusive and described in a resolution of the Board of Directors), as
of the expiration of such tender offer, of consideration payable in
respect of any other tender offers, by the Company or any of its
subsidiaries for all or any portion of the shares of Common Stock expiring
within the 12 months preceding the expiration of such tender offer and in
respect of which no adjustment pursuant to this Section 12(d)(v) has been
made, exceeds 5% of the net income of the Company reported for the 12
month period ending with the fiscal quarter next preceding such payment
(determined as of the last time (the "Expiration Time") tenders could have
been made pursuant to such tender offer (as it may be amended)), then, and
in each such case, immediately prior to the opening of business on the day
after the date of the Expiration Time, the Conversion Price shall be
adjusted so that the same shall equal the price determined by multiplying
the Conversion Price in effect immediately prior to the close of business
on the date of the Expiration Time by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time multiplied by the Current Market
Price of the shares of Common Stock on the trading day next succeeding the
Expiration Time and the denominator shall be the sum of (x) the fair
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market value (determined as aforesaid) of the aggregate consideration
payable to shareholders based on the acceptance (up to any maximum
specified in the terms of the tender offer) of all shares validly tendered
and not withdrawn as of the Expiration Time (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) at the Expiration Time and the
Current Market Price of the shares of Common Stock on the trading day next
succeeding the Expiration Time, such reduction (if any) to become
effective immediately prior to the opening of business on the day
following the Expiration Time. If the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to
be the Conversion Price which would then be in effect if such tender offer
had not been made. If the application of this Section 12(d)(v) to any
tender offer would result in an increase in the Conversion Price, no
adjustment shall be made for such tender offer under this Section
12(d)(v).
(vi) For purposes of this Section 12(d), the following terms shall
have the meaning indicated:
"closing price" with respect to any securities on any day means the
closing sale price as of 4:00 p.m. Eastern Time on such day or any earlier final
closing on such day or, if no such sale takes place on such day, the average of
the reported high and low bid prices on such day, in each case on the Nasdaq
National Market, or the New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such national market or
exchange, on the national stock exchange or Commission recognized trading market
in the United States on which such security is quoted or listed or admitted to
trading, or, if not quoted or listed or admitted to trading on any national
stock exchange or Commission recognized trading market in the United States, the
average of the high and low bid prices of such security on the over-the-counter
market on the day in question as reported by the National Quotation Bureau
Incorporated or a similar generally accepted reporting service in the United
States, or, if not so available, in such manner as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a resolution of the
Board of Directors.
"Common Stock Record Date" means, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of shareholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
"Current Market Price" means the average of the daily closing prices
per share of Common Stock for the 10 consecutive trading days immediately prior
to the date in question; provided, however, that (A) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 12(d)(i), (ii), (iii), (iv), and (v) occurs during such 10
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consecutive trading days, the closing price for each trading day prior to the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the same fraction by which the Conversion Price is so required to be
adjusted as a result of such other event, (B) if the "ex" date for any event
(other than the issuance or distribution requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 12(d)(i),
(ii), (iii), (iv), or (v) occurs on or after the "ex" date for the issuance or
distribution requiring such computation and prior to the day in question, the
closing price for each trading day on and after the "ex" date for such other
event shall be adjusted by multiplying such closing price by the reciprocal of
the fraction by which the Conversion Price is so required to be adjusted as a
result of such other event and (C) if the "ex" date for the issuance or
distribution requiring such computation is prior to the day in question, after
taking into account any adjustment required pursuant to clause (A) or (B) of
this proviso, the closing price for each trading day on or after such "ex" date
shall be adjusted by adding thereto the amount of any cash and the fair market
value (as determined by the Board of Directors in a manner consistent with any
good faith determination of such value for purposes of Section 12(d)(iv) or (v),
whose good faith determination shall be conclusive and described in a resolution
of the Board of Directors) of the evidences of indebtedness, shares of capital
stock or assets being distributed applicable to one share of Common Stock as of
the close of business on the day before such "ex" date. For purposes of any
computation under Section 12(d)(v), the Current Market Price on any date shall
be deemed to be the average of the daily closing prices per share of Common
Stock for such day and the next two succeeding trading days; provided, however,
that, if the "ex" date for any event (other than the tender offer requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 12(d)(i), (ii), (iii), (iv), or (v) occurs on or after the Expiration
Time for the tender or exchange offer requiring such computation and prior to
the day in question, the closing price for each trading day on and after the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event. For purposes of this
paragraph, the term "ex" date (1) when used with respect to any issuance or
distribution, means the first date on which the shares of Common Stock trade
regular way on the relevant exchange or in the relevant market from which the
closing price was obtained without the right to receive such issuance or
distribution, (2) when used with respect to any subdivision or combination of
shares of Common Stock, means the first date on which the shares of Common Stock
trade regular way on such exchange or in such market after the time at which
such subdivision or combination becomes effective and (3) when used with respect
to any tender or exchange offer means the first date on which the shares of
Common Stock trade regular way on such exchange or in such market after the
Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to this
Section 12(d), such adjustments shall be made to the Current Market Price as may
be necessary or appropriate to effectuate the intent of this Section 12(d) and
to avoid unjust or inequitable results, as determined in good faith by the Board
of Directors.
"fair market value" means the amount which a willing buyer would pay
a willing seller in an arm's-length transaction.
(vii) No adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of
this Section 12(d)(vii) are not required
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to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 12 shall be
made by the Company and shall be made to the nearest cent. No adjustment
need be made for a change in the par value or no par value of the Common
Stock.
(viii) Whenever the Conversion Price is adjusted as herein provided,
the Company shall promptly file with the Registrar an Officers'
Certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of shares of Series B-1 Preferred Stock at such
holder's last address appearing on the register of holders maintained for
that purpose within 20 days of the effective date of such adjustment.
Failure to deliver such notice shall not affect the legality or validity
of any such adjustment.
(ix) In any case in which this Section 12(d) provides that an
adjustment shall become effective immediately after a Common Stock Record
Date for an event, the Company may defer until the occurrence of such
event issuing to the holder of any share of Series B-1 Preferred Stock
converted after such Common Stock Record Date and before the occurrence of
such event the additional shares of Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and
above the shares of Common Stock issuable upon such conversion before
giving effect to such adjustment.
(x) For purposes of this Section 12(d), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company shall not pay any dividend or make
any distribution on shares of Common Stock held in the treasury of the
Company.
(e) Subject to Section 13 hereof, in case of any consolidation of
the Company with, or merger of the Company into, any other Person, or in case of
any merger of another Person into the Company (other than a merger that does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Company), or in case of any sale,
conveyance or transfer of all or substantially all the assets of the Company,
the holder of each share of Series B-1 Preferred Stock shall have the right
thereafter, during the period such share of Series B-1 Preferred Stock shall be
convertible as specified in Section 12(a), to convert such share of Series B-1
Preferred Stock into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, conveyance or transfer by a holder
of the number of shares of shares of Common Stock of the Company into which such
share of Series B-1 Preferred Stock might have been converted immediately prior
to such consolidation, merger, conveyance or transfer, assuming such holder of
shares of Common Stock of the Company failed to exercise his rights of election,
if any, as to the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, conveyance or transfer (provided
that, if the kind or amount of securities, cash and other property receivable
upon such consolidation, merger, conveyance or transfer is not the same for each
share of
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Common Stock of the Company in respect of which such rights of election shall
not have been exercised ("nonelecting share"), then for the purpose of this
Section 12 the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, conveyance or transfer by each nonelecting
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the nonelecting shares). Such securities shall provide for
adjustments which, for events subsequent to the effective date of the triggering
event, shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 12. The above provisions of this Section 12 shall
similarly apply to successive consolidations, mergers, conveyances or transfers.
(f) In case:
(i) the Company shall declare a dividend (or any other distribution)
on its Common Stock and/or Series C Preferred Stock payable otherwise than
in cash out of its earned surplus; or
(ii) the Company shall authorize the granting to all holders of its
shares of Common Stock and/or Series C Preferred Stock of rights or
warrants to subscribe for or purchase any shares of capital stock of any
class or of any other rights; or
(iii) of any reclassification of the Common Stock and/or Series C
Preferred Stock (other than a subdivision or combination of the Company's
outstanding shares of Common Stock and/or Series C Preferred Stock), or of
any consolidation or merger to which the Company is a party and for which
approval of any shareholders of the Company is required, or the sale,
conveyance or transfer of all or substantially all the assets of the
Company; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then the Company shall cause to be filed with the Registrar and at each office
or agency maintained for the purpose of conversion of shares of Series B-1
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the shares of Series B-1 Preferred Stock
Register, at least 20 Business Days (or 10 Business Days in any case specified
in clause (i) or (ii) above) prior to the applicable date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, rights or warrants, or, if a record is not to be
taken, the date as of which the holders of shares of Common Stock and/or Series
C Preferred Stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date as of
which it is expected that holders of shares of Common Stock and/or Series C
Preferred Stock of record shall be entitled to exchange their shares of Common
Stock and/or Series C Preferred Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up. Failure to give the notice required by
this Section 12(f) or any defect therein shall not affect the legality or
validity of any dividend, distribution, right, warrant, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up,
or the vote upon any such action.
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(g) The Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of shares of Series B-1
Preferred Stock, the full number of shares of Common Stock then issuable upon
the conversion of all outstanding shares of Series B-1 Preferred Stock.
(h) The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
shares of Series B-1 Preferred Stock pursuant hereto. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the holder of the share of Series B-1 Preferred Stock or
shares of Series B-1 Preferred Stock to be converted, and no such issue or
delivery shall be made unless and until the Person requesting such issue has
paid to the Company the amount of any such tax, or has established to the
satisfaction of the Company that such tax has been paid or is not payable.
(i) Conversion to Other Series B Preferred Stock.
(i) Conversion of Series B-1 Preferred Stock. Subject to and upon
compliance with the provisions of this Section 12(i)(i), any Regulated
Stockholder (defined below) shall be entitled to convert, at any time and
from time to time, any or all of the shares of Series B-1 Preferred Stock
held by such Regulated Stockholder into the same number of shares of
Series B-2 Preferred Stock.
(ii) Conversion of Series B-2 Preferred Stock. Subject to and upon
compliance with the provisions of this Section 12(i)(ii), each record
holder of Series B-2 Preferred Stock shall be entitled at any time and
from time to time in such holder's sole discretion and at such holder's
option, to convert any or all of the shares of such holder's Series B-2
Preferred Stock into the same number of shares of Series B-1 Preferred
Stock (and, if such holder so elects, simultaneously upon issuance of such
shares of Series B-1 Preferred Stock to convert any or all of such shares
of Series B-1 Preferred Stock to shares of Common Stock, and in accordance
with this Certificate of Designations, as if such holder of Series B-2
Preferred Stock were a holder of Series B-1 Preferred Stock when making
such election); provided, however, that Series B-2 Preferred Stock held by
a particular Regulated Stockholder may not be converted into Series B-1
Preferred Stock to the extent that immediately prior thereto, or as a
result of such conversion, the number of shares of Series B-1 Preferred
Stock held by such Regulated Stockholder would exceed the number of shares
of Series B-1 Preferred Stock which such Regulated Stockholder reasonably
determines it and its Affiliates may own, control or have the power to
vote under any law, regulation, rule or other requirement of any
governmental authority at the time applicable to such Regulated
Stockholder or its Affiliates. Each Regulated Stockholder may provide for
further restrictions upon the conversion of any shares of Series B-2
Preferred Stock by providing the Company with signed, written instructions
specifying such additional restrictions and legending such shares as to
the existence of such restrictions.
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(iii) Conversion Procedure. Each conversion of shares of Series B
Preferred Stock into shares of another class of Series B Preferred Stock
shall be effected by the surrender of the certificate or certificates
representing the shares to be converted (the "Converting Shares") at the
principal office of the Company (or such other office or agency of the
Company as the Company may designate by written notice to the holders of
Series B Preferred Stock) at any time during its usual business hours,
together with written notice by the holder of such Converting Shares,
stating that such holder desires to convert the Converting Shares, or a
stated number of the shares represented by such certificate or
certificates, into an equal number of shares of the class into which such
shares may be converted (the "Converted Shares"). Such notice shall also
state the name or names (with addresses) and denominations in which the
certificate or certificates for Converted Shares are to be issued and
shall include instructions for the delivery thereof. The Company shall
promptly notify each Regulated Stockholder of its receipt of such notice.
Promptly after such surrender and the receipt of such written notice, the
Company will issue and deliver in accordance with the surrendering
holder's instructions the certificate or certificates evidencing the
Converted Shares issuable upon such conversion, and the Company will
deliver to the converting holder a certificate (which shall contain such
legends as were set forth on the surrendered certificate or certificates)
representing any shares which were represented by the certificate or
certificates that were delivered to the Company in connection with such
conversion, but which were not converted. Such conversion, to the extent
permitted by law, shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates shall have
been surrendered and such notice shall have been received by the Company,
and at such time the rights of the holder of the Converting Shares as such
holder shall cease and the person or persons in whose name or names the
certificate or certificates for the Converted Shares are to be issued upon
such conversion shall be deemed to have become the holder or holders of
record of the Converted Shares. Upon issuance of shares in accordance with
this Section 12(i)(iii), such Converted Shares shall be deemed to be duly
authorized, validly issued, fully paid and non-assessable. The Company
shall take all such actions as may be necessary to assure that all such
shares of Series B Preferred Stock may be so issued without violation of
any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Series B Preferred Stock
may be listed (except for official notice of issuance which will be
immediately transmitted by the Company upon issuance). The Company shall
not close its books against the transfer of shares of Series B Preferred
Stock in any manner which would interfere with the timely conversion of
any shares of Series B Preferred Stock.
A written request for conversion from any Regulated Stockholder to the
Company stating such Regulated Stockholder's reasonable belief that a
conversion is permissible under all applicable laws, rules and regulations
shall be conclusive and shall obligate the Company to effect such
conversion in a timely manner.
(iv) Notice of Conversion to Other Regulated Stockholders. The
Company shall not convert or directly or indirectly redeem, purchase or
otherwise acquire any shares of Series B Preferred Stock or any other
class of capital stock of the Company or take any other action affecting
the voting rights of such shares, if such action will
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increase the percentage of any class of outstanding voting securities
owned or controlled by any Regulated Stockholder (other than any such
stockholder which requested that the Company take such action, or which
otherwise waives in writing its rights under this Section 12(i)(iv)),
unless the Company simultaneously with taking such action gives written
notice that it is taking such action to each Regulated Stockholder.
(j) Miscellaneous.
(i) Stock Splits; Adjustments. If the Company shall in any manner
subdivide (by stock split, stock dividend or otherwise) or combine (by
reverse stock split or otherwise) the outstanding shares of the Series B-1
Preferred Stock or the Series B-2 Preferred Stock then the outstanding
shares of each other series of Series B Preferred Stock shall be
subdivided or combined, as the case may be, to the same extent, share and
share alike, and effective provision shall be made for the protection of
the conversion rights hereunder.
(ii) Preemptive Right with respect to Certain Issuances. In case the
Company shall issue or sell any Common Stock or convertible Junior Shares
(other than Common Stock issued (A) pursuant to the Company's existing or
future stock option plans or pursuant to any other existing or future
Common Stock-related director or employee compensation plan of the Company
approved by the Board of Directors, (B) other than pursuant to the
Company's existing or future stock purchase plans approved by the Board of
Directors which permit the Company's employees to purchase Common Stock at
not more than a 15% discount to the Current Market Price, (C) as
consideration for the acquisition of a business or of assets, (D) in a
firm commitment underwritten public offering when either (i) the
underwriting discount is 5% or less, or (ii) the offering price per share
is greater than the Conversion Price, (E) to the Company's unaffiliated
joint venture partners in exchange for interests in the relevant joint
venture, (F) upon exercise or conversion of any security, the issuance of
which caused an adjustment hereunder or the issuance of which did not
require adjustment hereunder or (G) upon exercise or conversion of any of
the Series B-1 Preferred Stock, the Series B-2 Preferred Stock, the Series
C Preferred Stock or the Warrants (as defined in the Purchase Agreement)
in accordance with their respective terms) for a consideration per share
less than the Conversion Price then in effect but equal to or greater than
the Current Market Price at the date of issuance of such Common Stock or
convertible Junior Shares, the holders of the Series B Preferred Stock
shall be entitled if they so elect to purchase such number of the shares
of the Common Stock or convertible Junior Shares (or, in the case of a
Regulated Holder, upon such Regulated Holder's request, nonvoting
securities (x) identical in all respects, other than voting, to any such
voting securities and (y) convertible into voting securities in a manner
consistent with the convertibility of Series B-2 Preferred Stock into
voting securities of the Company), being issued as will permit such
holders to maintain their proportional ownership interest in the Company
after giving effect to such issuance.
The Company shall give twenty days prior written notice to the
holders of the Series B Preferred Stock of its intention to issue or sell
any Common Stock or Junior Shares that would give rise to preemptive
rights pursuant to this Section 12(j)(ii). Within
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<PAGE>
ten days after receipt of such notice, the holders of the Series B
Preferred Stock shall notify the Company whether or not they intend
(without commitment) to purchase such shares.
(iii) No Charge. The issuance of certificates for shares of any
class of Series B Preferred Stock (upon conversion of shares of any other
series of Series B Preferred Stock or otherwise) shall be made without
charge to the holders of such shares for any issuance tax in respect
thereof or other cost incurred by the Company in connection with such
conversion and/or the issuance of shares of Series B Preferred Stock;
provided, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of
the Series B Preferred Stock converted.
13. Change of Control. (a) If a Change of Control shall have
occurred (the time and date of such occurrence being a "Change of Control
Date"), the Company shall cause to be filed with the Registrar and at each
office or agency maintained for the purpose of conversion of shares of Series B
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the Series B Preferred Stock Register, in any
case within 10 days after the Change of Control Date, a notice stating (1) the
Change of Control Date, (2) the fact that (if the Change of Control Date is
prior to the Fifth Anniversary Date) the holders shall receive the Special
Payment (as defined below) as a result of such Change of Control, (3) the fact
that holders shall have the right to either (a) continue to hold their shares of
Series B Preferred Stock (or the shares of preferred stock issued in respect
thereof pursuant to Section 14) (the "Hold Option") or (b) in the case of shares
of Series B-1 Preferred Stock, convert such shares (after taking into account
the Special Payment) in accordance with Section 12 or (c) elect the Remarketing
Option (as defined below), (4) the relevant circumstances and facts regarding
such Change of Control and (5) the instructions that such holder must follow in
order to exercise the rights identified above. As of the Change of Control Date
(if the Change of Control Date occurs prior to the Fifth Anniversary Date), the
holders of the Series B Preferred Stock shall receive the Special Payment,
pursuant to which the Liquidation Preference of each share of Series B Preferred
Stock shall be deemed to have been increased by an amount (the "Special
Payment") equal to the product of (x) the Share Factor with respect to such
share of Series B Preferred Stock and (y) the Aggregate Special Payment Amount.
Such Special Payment shall accrue as of the Change of Control Date (if the
Change of Control Date is prior to the Fifth Anniversary Date) whether or not
the Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividend and whether or not such dividend is
declared and shall be in all respects identical to any other dividend declared
or accrued on the Series B Preferred Stock (except as set forth above) and all
provisions of this Certificate of Designation applicable to dividends shall
apply to such Special Payment (except as set forth above). The Special Payment
shall be added to the Liquidation Preference as of the Change of Control Date
whether the holders of the Series B Preferred Stock elect the Hold Option or the
Remarketing Option or whether they elect to convert their shares in accordance
with Section 12.
(b) Within 30 days after delivery by the Company of the notice
described in Section 13(a), each holder of shares of Series B Preferred Stock
(or the shares of preferred stock issued in respect thereof pursuant to Section
14) who wishes to exercise the Hold Option or the Remarketing Option must submit
written notice (a "COC Response Notice") to the Company
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<PAGE>
setting forth the option such holder wishes to elect (and if no option is
selected within such 30 day period such holder shall be deemed to have selected
the Hold Option).
(c) If the Hold Option is selected with respect to a share of Series
B Preferred Stock, or if no notice from a holder is received by the date
referred to in the preceding paragraph, such share of Series B Preferred Stock
(or the shares of preferred stock issued in respect thereof pursuant to Section
14) shall remain outstanding in accordance with its current terms (including,
without limitation, the right to convert pursuant to Section 12) after giving
effect to the Special Payment (if applicable).
(d) If the Remarketing Option is selected with respect to a share of
Series B Preferred Stock, the holder of such share shall be deemed to have
elected to waive such holder's right during the Remarketing Period to convert
such share pursuant to Section 12 during the Remarketing Period and the Company
shall thereafter have the option (the "Remarketing Option") to either (a) have
such share redeemed in accordance with the optional redemption procedures set
forth in Section 10 (except that such procedures shall apply only to the holders
so electing the Remarketing Option) or (b) remarket such share for the account
of such holder and, if the net proceeds to such holder of such remarketing are
less than an amount in cash equal to 100% of the Liquidation Preference (after
giving effect to the Special Payment (if applicable)) of such share plus accrued
and unpaid dividends thereon from the last Dividend Payment Date to the date
payment in full is received by such holder in respect of such share (the
"Remarketing Price"), the Company shall issue to and sell for the account of
such holder a sufficient number of shares of Common Stock to make up such
shortfall; i.e., such that the holder receives a net amount in cash in respect
of such share of Series B Preferred Stock as to which the Remarketing Option has
been selected which, when taken together with the net proceeds received by such
holder in such remarketing is equal to the Remarketing Price. Written notice of
the election by the Company to either redeem or remarket such share shall be
provided to such holder within 75 days after receipt of a COC Response Notice
specifying the Remarketing Option.
(e) In order to accomplish the remarketing, the Company shall take
all actions that may be necessary, including without limitation, preparing and
filing a registration statement under the Securities Act, and shall pay all
expenses (including without limitation, underwriting discounts) associated with
the remarketing and issuance and shall provide customary indemnification for the
benefit of the holder against securities law liabilities in connection
therewith. If the Remarketing Option has been selected and the Company has not
elected to redeem such share, payment of the full Remarketing Price in respect
of the remarketed share shall be made at a single settlement against surrender
of the share. Such settlement shall take place as soon as reasonably
practicable. If such settlement does not take place within 180 days after the
date of the Company's written notice pursuant to paragraph (d) above (the
"Remarketing Period"), the Company shall give written notice to the holders that
have elected the Remarketing Option that such 180-day period has elapsed and
that each such holder shall have the option, for a period of 10 Business Days
following the giving of such notice, of electing to terminate the remarketing
process with respect to such holder's shares and to elect (i) to convert such
holder's shares in accordance with Section 12 or (ii) the Hold Option. The
foregoing shall not affect the holder's right to receive and retain the Special
Payment (if the Change of Control Date is prior to the Fifth Anniversary Date)
as of the Change of Control Date).
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<PAGE>
(f) The Company shall have the right to institute reasonable
procedures in order to implement this Section 13 and, to the extent reasonably
practicable, will make proper provision prior to the Change of Control Date to
ensure that the holders of shares of Series B Preferred Stock will be entitled
to receive the benefits intended to be afforded by this Section 13. Nothing in
this Section 13 shall affect the rights of the holders of Series B Preferred
Stock set forth in Section 14 hereof.
14. Consolidation, Merger, Conveyance or Transfer. Without the vote
or consent of the holders of a majority of the then Outstanding shares of Series
B Preferred Stock, the Company may not consolidate or merge with or into, or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets to, any Person unless (i) if the Company is the
surviving or continuing Person, the Series B Preferred Stock shall remain
outstanding without any amendment that would adversely affect the preferences,
rights or powers of the Series B Preferred Stock, (ii) if the Company is not the
surviving or continuing Person, (a) the entity formed by such consolidation or
merger or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (in any such case, the "resulting entity") is a
corporation organized and existing under the laws of Bermuda, the United States
or any State thereof or the District of Columbia; and (b) the shares of Series B
Preferred Stock are converted into or exchanged for and become shares of such
resulting entity, having in respect of such resulting entity the same (or more
favorable) powers, preferences and relative, participating, optional or other
special rights that the shares of Series B Preferred Stock had immediately prior
to such transaction; and (iii) the Company shall have delivered to the Registrar
an Officers' Certificate and an opinion of counsel, reasonably satisfactory in
form and content, each stating that such consolidation, merger, conveyance or
transfer complies with this Section 14 and that all conditions precedent herein
provided for relating to such transaction have been complied with.
15. SEC Reports; Reports by Company. So long as any shares of Series
B Preferred Stock are outstanding, the Company shall file with the SEC and,
within 15 days after it files them with the SEC, with the Registrar and, if
requested, furnish to each holder of shares of Series B Preferred Stock all
annual and quarterly reports and the information, documents, and other reports
that the Company is required to file with the SEC pursuant to Section 13(a) or
15(d) of the Exchange Act ("SEC Reports"). In the event the Company is not
required or shall cease to be required to file SEC Reports, pursuant to the
Exchange Act, the Company will nevertheless file such reports with the SEC
(unless the SEC will not accept such a filing). Whether or not required by the
Exchange Act to file SEC Reports with the SEC, so long as any shares of Series B
Preferred Stock are Outstanding, the Company will furnish or cause to be
furnished copies of the SEC Reports to the holders of shares of Series B
Preferred Stock at the time the Company is required to make such information
available to the Registrar and to prospective investors who request it in
writing.
16. Definitions. For purposes of this Certificate of Designation,
the following terms shall have the meaning set forth below (capitalized terms
used but not defined herein shall have the meanings ascribed to them in the
Series B-2 Certificate of Designations):
"Accumulated Dividends" has the meaning set forth in Section 6.
27
<PAGE>
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition and the
definition of "HMTF Group", "control" when used with respect to any Person means
the power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing. Without limiting the foregoing, each of Chase
Capital Partners, The Chase Manhattan Corporation, each of their respective
affiliates (the "Chase Entities") and any other person, fund or entity for whom
any of the Chase Entities acts as a fiduciary or provides discretionary
management with respect to any investments or any such direct or indirect
interests therein shall be deemed to be affiliates of each other.
"Aggregate Change of Control Date Accreted Value" means the product
obtained by multiplying (x) the Change of Control Date Accreted Value by (y) the
number of shares of Series B Preferred Stock Outstanding immediately prior to
the Change of Control Date.
"Aggregate Five Year Accreted Value" means the product obtained by
multiplying (x) the Five Year Accreted Value by (y) the number of shares of
Series B Preferred Stock Outstanding immediately prior to the Change of Control
Date.
"Aggregate Special Payment Amount" means the difference between (x)
the Aggregate Five Year Accreted Value and (y) the Aggregate Change of Control
Date Accreted Value.
"Board of Directors" has the meaning set forth in the Recitals.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to be closed.
"By-laws" has the meaning set forth in the Recitals.
"COC Response Notice" has the meaning set forth in Section 13(b).
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of such person's capital stock,
whether outstanding on the Closing Date or issued after the Closing Date, and
any and all rights (other than any evidence of indebtedness), warrants or
options exchangeable for or convertible into such capital stock.
"Certificate of Incorporation" has the meaning set forth in the
recitals.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
Voting
28
<PAGE>
Capital Stock of the Company; or (b) the Company consolidates with, or merges
with or into, another person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any person, or
any person consolidates with, or merges with or into the Company, in any such
event pursuant to a transaction in which either (A) the outstanding Voting
Capital Stock of the Company is converted into or exchanged for cash, securities
or other property, other than any such transaction where immediately after such
transaction no "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act) (other than any such group if each member of such
group, together with its Affiliates, owns less than 50% of the total Voting
Capital Stock of the Company) is the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total Voting Capital
Stock of the surviving or transferee company or its parent company or (B) the
holders of the outstanding Voting Capital Stock of the Company immediately prior
to such transaction hold less than 50% of the outstanding Voting Capital Stock
of the surviving or transferee company or its parent company immediately after
the transaction or (C) during any consecutive two-year period, individuals who
at the beginning of such period constituted the Board of Directors (together
with any new directors whose election by the Board of Directors or whose
nomination for election by the stockholders of the Company was approved by a
vote of a majority of the directors then still in office who were either
directors 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 Board of Directors then in office.
"Change of Control Date" has the meaning set forth in Section 13(a).
"Change of Control Date Accreted Value" means with respect to each
$1,072 of original Liquidation Preference, the value that $1,072 would accrete
to between the Closing Date and the Change of Control Date, compounded quarterly
at an annual rate of 7.50%.
"Closing Date" means any Closing Date under the Purchase Agreement.
"closing price" has the meaning set forth in Section 12(d)(vi).
"Common Stock Record Date" has the meaning set forth in Section
12(d)(vi).
"Common Stock" means the common stock of the Company, par value
$0.01 per share.
"Company" has the meaning set forth in the Recitals.
"Company Order" means a written request or order signed in the name
of the Company by its Chairman of the Board, its Chief Executive Officer, its
President or any Executive or Senior Vice President and by its Chief Financial
Officer, Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Conversion Agent" has the meaning set forth in Section 5(a).
"Conversion Price" has the meaning set forth in Section 12.
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<PAGE>
"Current Market Price" has the meaning set forth in Section
12(d)(vi).
"Dilution Trigger Event" has the meaning set forth in Section
12(d)(iv).
"Distributed Securities" has the meaning set forth in Section
12(d)(iv).
"Dividend Payment Date" has the meaning set forth in Section 6.
"Dividend Record Date" has the meaning set forth in Section 7(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Expiration Time" has the meaning set forth in Section 12(d)(v).
"fair market value" has the meaning set forth in Section 12(d)(vi).
"Fifth Anniversary Date" has the meaning set forth in Section
8(c)(vi).
"Five Year Accreted Value" means with respect to each $1,072 of
original Liquidation Preference, $1,554.34 (subject to appropriate adjustment
with respect to stock splits, stock dividends and similar events affecting the
Series B Preferred Stock).
"HMTF Group" has the meaning set forth in Section 8(d).
"HMTF Holders" has the meaning set forth in Section 8(d).
"Hold Option" has the meaning set forth in Section 13(a).
"Junior Shares" has the meaning set forth in Section 9(a).
"Liquidation Preference" means an amount equal to $1,000 per share
plus an amount equal to the Share Option Adjustment Amount per share of Series B
Preferred Stock, subject to change in accordance with Section 6, Section 7,
Section 11 and Section 13 hereof, including, without limitation, by the addition
of Accumulated Dividends and, if applicable and without duplication, the Special
Payment.
"Mandatory Redemption Date" has the meaning set forth in Section
10(b); provided, however, that if such date shall not be a Business Day, then
such date shall be the next Business Day.
"nonelecting share" has the meaning set forth in Section 12(e).
"Odd-lot Redemption" has the meaning set forth in Section 10(c).
"Officers' Certificate" means a certificate of the Company signed in
the name of the Company by its Chairman of the Board, its Chief Executive
Officer, its President or an Executive or Senior Vice President and by its Chief
Financial Officer, Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary.
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<PAGE>
"Optional Redemption" has the meaning set forth in Section 10(a).
"Optional Redemption Date" has the meaning set forth in Section
10(a).
"Outstanding" means (i) when used with respect to shares of Series B
Preferred Stock, as of the date of determination, all shares of Series B
Preferred Stock theretofore authenticated and delivered under this Certificate
of Designation, except (a) shares of Series B Preferred Stock theretofore
converted into shares of Common Stock and/or Series C Preferred Stock in
accordance with Section 12 and shares of Series B Preferred Stock theretofore
canceled by the Registrar or delivered to the Registrar for cancellation; (b)
shares of Series B Preferred Stock for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Registrar or any Paying
Agent (other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the holders
of such shares of Series B Preferred Stock; provided that, if such shares of
Series B Preferred Stock are to be redeemed, notice of such redemption has been
duly given pursuant to this Certificate of Designation or provision therefor
satisfactory to the Registrar has been made; and (c) shares of Series B
Preferred Stock in exchange for or in lieu of which other shares of Series B
Preferred Stock have been authenticated and delivered pursuant to this
Certificate of Designation; provided, however, that, in determining whether the
holders of the shares of Series B Preferred Stock have given any request,
demand, authorization, direction, notice, consent or waiver or taken any other
action hereunder, shares of Series B Preferred Stock owned by the Company or any
Subsidiary of the Company shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Registrar shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent, waiver
or other action, only shares of Series B Preferred Stock which the Registrar has
actual knowledge of being so owned shall be so disregarded. Shares of Series B
Preferred Stock so owned which have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the satisfaction of the Registrar
the pledgee's right so to act with respect to such shares of Series B Preferred
Stock and that the pledgee is not the Company or any other obligor upon the
shares of Series B Preferred Stock or any Affiliate of the Company or of such
other obligor and (ii) when used with respect to shares of Series B-2 Preferred
Stock, the same definition of "Outstanding" shall apply thereto with references
to Series B-2 being substituted for references to Series B-1 therein.
"Parity Shares" has the meaning set forth in Section 9(a).
"Paying Agent" has the meaning set forth in Section 5(a).
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such person's preferred or preference stock,
whether now outstanding or issued after the date hereof, including all series
and classes of such preferred or preference stock.
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<PAGE>
"Purchase Agreement" means the Securities Purchase Agreement, dated
as of February 1, 2000, among the Company and the Purchasers named therein, as
it may be amended from time to time.
"Purchased Shares" has the meaning set forth in Section 12(d)(v).
"Redemption Date" has the meaning set forth in Section 10(d).
"Redemption Notice" has the meaning set forth in Section 10(d).
"Redemption Price" has the meaning set forth in Section 10(a).
"Registrar" has the meaning set forth in Section 3.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 9, 2000, among the Company and the Purchasers.
"Regulated Stockholder" shall mean Chase Equity Associates, LLC or
any other stockholder that (i) is subject to the provisions of Regulation Y or
has an Affiliate subject to provisions of Regulation Y, (ii) holds shares of
Common Stock or Preferred Stock of the Company and (iii) has provided written
notice to the Company of its status as a "Regulated Stockholder" hereunder.
"Regulation Y" shall mean Regulation Y of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to such
Regulation).
"Relinquishing Holder" means Chase Capital Partners and its
Affiliates and their respective transferees and any other holder of a share of
Series B-1 Preferred Stock that delivers a written notice to the Company to the
effect that such holder elects not to be entitled to vote with respect to any
matter referred to in Section 8(d).
"Remarketing Option" has the meaning set forth in Section 13(d).
"Restrictive Legend" has the meaning set forth in Section 4.
"resulting entity" has the meaning set forth in Section 14.
"SEC" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or, if at
any time after the adoption of this Certificate of Designation such commission
is not existing and performing the duties now assigned to it, then the body
performing such duties at such time.
"SEC Reports" has the meaning set forth in Section 15.
"Securities Act" has the meaning set forth in Section 4.
"Senior Shares" has the meaning set forth in Section 9(a).
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<PAGE>
"Series B Preferred Stock" means the Series B-1 Preferred Stock and
the Series B-2 Preferred Stock.
"Series B-1 Preferred Stock" has the meaning set forth in Section 1.
"Series B-2 Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-2, due 2015.
"Series B-2 Preferred Stock" means the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-2, due 2015, par value $0.01 per share, to
be issued pursuant to the Series B-2 Certificate of Designations.
"Series C Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Series C Preferred Stock.
"Series C Preferred Stock" means the Company's Convertible Preferred
Stock, Series C, par value $0.01 per share, to be issued pursuant to the Series
C Certificate of Designations.
"Share Factor" means with respect to each share of Series B
Preferred Stock, a fraction, the numerator of which is the Liquidation
Preference of such share as of the Change of Control Date, without giving effect
to the Special Payment, and the denominator of which is the aggregate
Liquidation Preference of all outstanding shares of Series B Preferred Stock as
of the Change of Control Date, without giving effect to the Special Payment.
"Share Option Adjustment Amount" means an amount equal to $72.00.
"Special Payment" has the meaning set forth in Section 13.
"Voting Capital Stock" means with respect to any Person, securities
of any class or classes of Capital Stock in such Person ordinarily entitling the
holders thereof (whether at all times or at the times that such class of Capital
Stock has voting power by reason of the happening of any contingency) to vote in
the election of members of the board of directors or comparable governing body
of such Person.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be duly executed by the undersigned officer of the Company, this
9th day of March, 2000.
VIATEL, INC.,
By: /s/ JAMES P. PRENETTA
---------------------------------
Name: James P. Prenetta
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT A
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. SUCH
SHARES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OTHER
THAN PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS."
<PAGE>
VIATEL, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF 7.50% CUMULATIVE
CONVERTIBLE PREFERRED STOCK SERIES B-2 DUE 2015
<PAGE>
CERTIFICATE OF DESIGNATIONS
Viatel, Inc., a company organized and existing under the General
Corporation Law of the State of Delaware (the "Company"), certifies that
pursuant to the authority contained in its Certificate of Incorporation (the
"Certificate of Incorporation") and its By-laws (the "By-laws"), and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the board of directors of the Company (the "Board of Directors") at a
meeting duly called and held on January 31, 2000, duly approved and adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation and By-laws, the Board of
Directors does hereby create, authorize and provide for the issue of a series of
Preferred Stock having the following designation, voting powers, preferences and
relative, participating, optional and other special rights:
Certain capitalized terms used herein are defined in Section 16.
1. Number and Designation. The Company shall have a series of Preferred
Stock, which shall be designated as its 7.50% Series B-2 Cumulative Convertible
Preferred Stock due 2015 (the "Series B-2 Preferred Stock"), par value $0.01 per
share, with 325,000 shares initially authorized. Unless otherwise specified,
references herein to any "Section" refer to the Section number specified in this
Certificate of Designation.
2. Issuance. The Company may issue up to 162,500 shares of Series B-2
Preferred Stock in accordance with the Purchase Agreement; provided that, the
aggregate of the then Outstanding shares of Series B-1 Preferred Stock and
Series B-2 Preferred Stock shall not exceed 325,000 shares.
3. Registered Form; Liquidation Preference; Registrar. Certificates for
shares of Series B Preferred Stock shall be issuable only in registered form and
only with an initial Liquidation Preference of $1,072 per share. The Company
shall serve as initial Registrar and Transfer Agent (the "Registrar") for the
Series B Preferred Stock.
4. Registration; Transfer. Shares of the Series B Preferred Stock have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act") and may not be resold, pledged or otherwise transferred prior to the date
when they may be resold pursuant to Rule 144 under the Securities Act other than
(i) to the Company, (ii) pursuant to an exemption from registration under the
Securities Act or (iii) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States. Until such time as it is no longer
required pursuant to the Securities Act, certificates evidencing the Series B
Preferred Stock shall contain a legend (the "Restrictive Legend") evidencing the
foregoing restrictions in substantially the form attached hereto as Exhibit A.
5. Paying Agent and Conversion Agent.
<PAGE>
(a) The Company shall maintain (i) an office or agency where shares
of Series B Preferred Stock may be presented for payment (the "Paying Agent"),
(ii) an office or agency where shares of Series B Preferred Stock may be
presented for conversion (the "Conversion Agent"), and (iii) a Registrar, which
shall be an office or an agency where shares of Series B Preferred Stock may be
presented for transfer. The Company may appoint the Registrar, the Paying Agent
and the Conversion Agent and may appoint one or more additional paying agents
and one or more additional conversion agents in such other locations as it shall
determine. The term "Paying Agent" includes any additional paying agent, and the
term "Conversion Agent" includes any additional conversion agent. The Company
may change any Paying Agent or Conversion Agent without prior notice to any
holder. The Company shall notify the Registrar of the name and address of any
Paying Agent or Conversion Agent appointed by the Company. If the Company fails
to appoint or maintain another entity as Paying Agent or Conversion Agent, the
Registrar shall act as such. Notwithstanding the foregoing, the Company or any
of its Affiliates may act as Paying Agent, Registrar, coregistrar or Conversion
Agent.
(b) Neither the Company nor the Registrar shall be required (i) to
issue, countersign or register the transfer of or exchange any share of Series B
Preferred Stock during a period beginning at the opening of business 15 days
before any Redemption Date (as defined under Section 10(d)) and ending at the
close of business on such Redemption Date or (ii) to register the transfer of or
exchange any share of Series B Preferred Stock so selected for redemption. This
Section 5(b) shall not apply to any conversion of Series B Preferred Stock in
accordance with Section 12.
(c) If shares of Series B Preferred Stock are issued upon the
transfer, exchange or replacement of shares of Series B Preferred Stock bearing
the Restrictive Legend, or if a request is made to remove such Restrictive
Legend on shares of Series B Preferred Stock, the shares of Series B Preferred
Stock so issued shall bear the Restrictive Legend, or the Restrictive Legend
shall not be removed, as the case may be, unless the holders of such shares
shall request such legend be removed, and outside counsel for such holders
reasonably determines that the transfer of such shares is no longer restricted
by the Securities Act and outside counsel for the Company reasonably concurs in
such determination.
(d) Each holder of a share of Series B Preferred Stock agrees to
indemnify the Company and the Registrar against any liability that may result
from the transfer, exchange or assignment by such holder of such holder's share
of Series B Preferred Stock in violation of any provision of this Certificate of
Designation and/or applicable Federal or state securities law; provided,
however, that such indemnity shall not apply to acts of willful misconduct or
gross negligence on the part of the Company or the Registrar, as the case may
be.
(e) Payments due on the shares of Series B Preferred Stock shall be
payable at the office or agency of the Company maintained for such purpose in
The City of New York and at any other office or agency maintained by the Company
for such purpose. If any such payment is in cash, it shall be payable by wire
transfer (provided that appropriate wire instructions have been received by the
Registrar at least 15 days prior to the applicable date of payment) to a United
States dollar account maintained by the holder with, a bank located in New York
City; provided that at the option of the Company payment of dividends in cash
may be made by check
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mailed to the address of the person entitled thereto as such address shall
appear in the Series B Preferred Share Register.
6. Dividend Rights.
(a) The Company shall pay, and the holders of the shares of Series B
Preferred Stock shall be entitled to receive, cumulative dividends from the date
of initial issuance of such shares of Series B Preferred Stock at a rate of
7.50% per annum on the amount of the then-effective Liquidation Preference of
the shares of Series B Preferred Stock. Dividends will be computed on the basis
of a 360-day year of twelve 30-day months and will be payable in accordance with
Section 11 hereof. Dividends will be payable quarterly in arrears on May 31,
August 31, November 30 and February 28 of each year (each a "Dividend Payment
Date"), commencing (subject to the next sentence) on May 31, 2000, for so long
as any shares of Series B Preferred Stock are outstanding; provided, however,
that if such date is not a Business Day, then the Dividend Payment Date shall be
the next Business Day. The Company may elect not to declare dividend payments on
any Dividend Payment Date and shall not declare dividend payments prior to May
31, 2005; provided, however, that dividends on shares of the Series B Preferred
Stock will accrue (including, without limitation, for the period from the
issuance of the Series B Preferred Stock through May 31, 2005, notwithstanding
the prohibitions set forth above) whether or not the Company has earnings or
profits, whether or not there are funds legally available for the payment of
such dividends and whether or not dividends are declared. Dividends, whether
declared or undeclared, will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Company will take
all actions required or permitted under the General Corporation Law of the State
of Delaware to permit the payment or accrual of dividends on the shares of
Series B Preferred Stock. On each Dividend Payment Date, commencing May 31,
2000, to and including the May 31, 2005 Dividend Payment Date, accrued dividends
on a share of the Series B Preferred Stock for the preceding dividend period
shall be added cumulatively to and thereafter remain a part of the Liquidation
Preference of such share. Thereafter, accrued dividends shall be payable
quarterly on each Dividend Payment Date, commencing on August 31, 2005, to the
holders of record of the Series B Preferred Stock as of the close of business on
the applicable Dividend Record Date. Accrued dividends that are not paid in full
in cash on any such Dividend Payment Date (whether or not declared and whether
or not there are sufficient funds legally available for the payment thereof)
shall be added cumulatively to the Liquidation Preference on the applicable
Dividend Payment Date and thereafter remain a part thereof. Accrued dividends
added to the Liquidation Preference of a share of Series B Preferred Stock in
accordance with the foregoing provisions of this Section 6(a) are sometimes
referred to in this Certificate as "Accumulated Dividends". For purposes of
determining the amount of dividends "accrued" (i) as of the first Dividend
Payment Date and as of any date that is not a Dividend Payment Date, such amount
shall be calculated on the basis of the rate per annum specified above in this
paragraph for the actual number of days elapsed from and including the Closing
Date (in case of the first Dividend Payment Date and any date prior to the first
Dividend Payment Date ) or the last preceding Dividend Payment Date (in case of
any other date) to the date as of which such determination is to be made, based
on a 360-day year, and (ii) as of any Dividend Payment Date after the first
Dividend Payment Date, such amount shall be calculated on the basis of such rate
per annum based on a 360-day year of twelve 30-day months. Whenever the Company
shall declare or pay any dividend on any Series B
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Preferred Stock, the holders of the Series B Preferred Stock shall be entitled
to receive such dividends on a per share basis.
(b) In addition to all dividends payable pursuant to Section 6(a),
whenever the Company shall declare or pay any dividend on its Common Stock, the
holders of the Series B Preferred Stock shall be entitled to receive such
dividends on a ratable as-converted basis (calculated as if all shares of Series
B Preferred Stock had been converted directly or indirectly into Common Stock
and/or Series C Preferred Stock). Dividends payable pursuant to this Section
6(b) shall not reduce any dividends payable pursuant to Section 6(a).
7. Payment of Dividends; Mechanics of Payment; Dividend Rights Preserved.
(a) Subject to Sections 6 and 11, dividends on any share of Series B
Preferred Stock that are payable, and are punctually paid or duly provided for,
on any Dividend Payment Date shall be paid in arrears to the person in whose
name such share of Series B Preferred Stock (or one or more predecessor shares
of Series B Preferred Stock) is registered at the close of business on the next
preceding May 15, August 15, November 15 and February 15 (each a "Dividend
Record Date").
(b) Unless full cumulative dividends on all outstanding shares of
Series B Preferred Stock for all past dividend periods shall have been declared
and paid, or declared and a sufficient sum for the payment thereof set apart,
then:
(i) no dividend (other than (A) with respect to Junior Shares,
a dividend payable solely in any Junior Shares, or (B) with respect to
Parity Shares, a dividend payable solely in Junior Shares or Parity
Shares, or (C) with respect to Parity Shares, a partial dividend paid pro
rata on such Parity Shares and the shares of Series B Preferred Stock)
shall be declared or paid upon, or any sum set apart for the payment of
dividends upon, any Junior Shares or Parity Shares, respectively;
(ii) no other distribution shall be declared or made upon, or
any sum set apart for the payment of any distribution upon, any Junior
Shares or Parity Shares;
(iii) no Junior Shares or Parity Shares or any warrants,
rights, calls or options (other than any cashless exercises of options or
buybacks of options or restricted stock from present or former employees,
directors or consultants) exercisable for or convertible into any Parity
Share or Junior Share shall be purchased, redeemed or otherwise acquired
(other than in exchange for other Junior Shares or Parity Shares,
respectively and other than conversion of (A) Series B-1 Preferred Stock
into Series B-2 Preferred Stock, and vice versa, (B) Series B-2 Preferred
Stock into Series C Preferred Stock, and (C) Series C Preferred Stock into
Common Stock and vice versa) by the Company or any of its subsidiaries;
and
(iv) no monies shall be paid into or set apart or made
available for a sinking or other like fund for the purchase, redemption or
other acquisition of any Junior Shares or Parity Shares or any warrants,
rights, calls or options exercisable for or convertible into any Parity
Shares or Junior Shares by the Company or any of its subsidiaries (other
than any cashless exercises of options or option buybacks).
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Except as provided in Sections 6, 12 or 13 hereof, holders of Series B Preferred
Stock will not be entitled to any dividends, whether payable in cash, property
or stock, in excess of the full cumulative dividends as herein described.
(c) The Company will notify the Registrar and make a public
announcement no later than the close of business on the tenth Business Day prior
to the Record Date for each dividend as to whether it will pay such dividend.
(d) Any dividends (other than Accumulated Dividends) on any share of
Series B Preferred Stock may be paid, subject to Section 11, by the Company in
any lawful manner (which shall include the establishment of a record date not
more than 45 days prior to the payment thereof) not inconsistent with the
requirements of any national stock exchange or Commission recognized trading
market on which the shares of Series B Preferred Stock may be listed or admitted
to trading, and upon such notice (which shall precede the record date by at
least ten Business Days) as may be required by such exchange or trading market,
if, after notice given by the Company to the Registrar of the proposed payment
pursuant to this clause (d), such manner of payment shall be deemed practicable
by the Registrar.
(e) Subject to the foregoing provisions of this Section 7, each
share of Series B Preferred Stock delivered under this Certificate of
Designation upon registration of transfer of or in exchange for or in lieu of
any other share of Series B Preferred Stock shall carry the rights to dividends
accumulated and unpaid, and to accrue, that were carried by such other shares of
Series B Preferred Stock.
(f) The holder of record of a share of Series B Preferred Stock at
the close of business on a Dividend Record Date with respect to the payment of
dividends on the shares of Series B Preferred Stock will be entitled to receive
such dividends with respect to such share of Series B Preferred Stock on the
corresponding Dividend Payment Date, notwithstanding the conversion of such
share after such Dividend Record Date and prior to such Dividend Payment Date.
8. Voting Rights.
(a) The holders of record of shares of Series B Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this Section 8 or as otherwise provided by law.
(b) The approval of the holders of at least a majority of the then
Outstanding shares of Series B Preferred Stock voting or consenting, as the case
may be, as one class, will be required for the Company to:
(i) amend the Certificate of Incorporation, this Certificate
of Designation or the By-Laws so as to (A) affect adversely the rights,
preferences (including, without limitation, liquidation preferences,
conversion price, dividend rate and Optional Redemption provisions),
privileges or voting rights of holders of the shares of Series B Preferred
Stock, or (B) increase or decrease the number of authorized shares of
Series B Preferred Stock;
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(ii) in a single transaction or series of related
transactions, consolidate or merge with or into, or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all
of its assets to, any Person or adopt a plan of liquidation, except as
expressly provided in Section 14 hereof;
(iii) enter into, or permit any of its subsidiaries to enter
into, any agreement that would impose material restrictions on the
Company's ability to honor the exercise of any rights of the holders of
the Series B Preferred Stock;
(iv) authorize or create, modify the terms of or increase or
decrease the authorized amount of any Senior Shares or Parity Shares;
(v) issue any shares of Series B Preferred Stock other than
(a) pursuant to the terms of the Purchase Agreement as in effect on the
Closing Date, or (b) shares of the Series B-1 Preferred Stock upon the
conversion of shares of the Series B-2 Preferred Stock and vice versa; or
(vi) after March 9, 2005 (the "Fifth Anniversary Date"),
commence or effect any tender or exchange offer made by the Company or any
Subsidiary for all or any portion of the Common Stock.
No amendment shall be made to this Certificate of Designation without making the
same amendment to the corresponding provision (if any) to the Series B-1
Certificate of Designations (and vice versa).
(c) Chase Capital Partners and its Affiliates that are holders of
all or a portion of the Series B-2 Preferred Stock issued to any such entities
on the Closing Date shall have the right to designate an observer who shall have
the right to attend meetings of the Company's Board of Directors and such
observer shall be entitled to receive notice of each such meeting at the same
time as such directors. In addition, to the extent that the Company's Board of
Directors is to take action by unanimous written consent, the observer shall be
entitled to receive a copy of any such written consent when it is forwarded to
the directors for their execution. For purposes of this Section 8(c), Series B-2
Preferred Stock issued on the Closing Date shall be deemed to include Series B-1
Preferred Stock or Series C Preferred Stock issued on any date after the Closing
Date upon conversion of such Series B-2 Preferred Stock, as well as Common Stock
issued on any date after the Closing Date upon conversion of such Series B-1
Preferred Stock or Series C Preferred Stock.
9. Ranking.
(a) The shares of Series B Preferred Stock will, with respect to
dividend rights and rights on liquidation, winding-up and dissolution, rank (i)
senior to all shares of Common Stock (whether issued in one or more classes),
the Series A Junior Participating Preferred Stock of the Company and to each
other class of capital stock or series of Preferred Stock of the Company, the
terms of which do not expressly provide that it ranks senior to or on a parity
with the shares of Series B Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to, together with all shares of Common Stock
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(whether issued in one or more classes) of the Company, as "Junior Shares");
(ii) on a parity with additional shares of Series B Preferred Stock issued by
the Company and each other class of capital stock or series of Preferred Stock
of the Company issued by the Company in compliance with Section 8 hereof, the
terms of which expressly provide that such class or series will rank on a parity
with the shares of Series B Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Shares"); and (iii) junior to each class of capital stock or series
of Preferred Stock of the Company issued by the Company in compliance with
Section 8 hereof, the terms of which expressly provide that such class or series
will rank senior to the shares of Series B Preferred Stock as to dividend rights
and rights upon liquidation, winding-up and dissolution of the Company
(collectively referred to as "Senior Shares").
(b) No dividend whatsoever shall be declared or paid upon, or any
sum set apart for the payment of dividends upon, any outstanding shares of
Series B Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividends, upon
all outstanding Senior Shares.
(c) In the event of any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary, the holders of the shares of
Series B Preferred Stock then Outstanding shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Company to the
holders of shares of Common Stock or Junior Shares by reason of their ownership
thereof, an amount equal to the greater of (i) the then effective Liquidation
Preference of their shares of Series B Preferred Stock, plus an amount equal to
all dividends accrued and unpaid thereon from the last Dividend Payment Date to
the date fixed for liquidation, dissolution or winding-up or (ii) the amount
such holders would receive if such holders converted, directly or indirectly in
accordance with their terms, their shares of Series B Preferred Stock into
Common Stock and/or Series C Preferred Stock immediately prior to such
liquidation, dissolution or winding up.
(d) If upon the occurrence of such event the assets of the Company
shall be insufficient to permit the payment to such holders of the full
preferential amount and all liquidating payments on all Parity Shares, the
entire assets of the Company legally available for distribution shall be
distributed among the holders of the shares of Series B Preferred Stock and the
holders of all Parity Shares ratably in accordance with the respective amounts
that would be payable on such shares of Series B Preferred Stock and any such
Parity Shares if all amounts payable thereon were paid in full. After payment of
the full preferential amount (and, if applicable, an amount equal to a pro rata
dividend to the holders of Outstanding shares of Series B Preferred Stock), such
holders shall not be entitled to any further participation in any distribution
of assets of the Company.
10. Redemption.
(a) The shares of Series B Preferred Stock may be redeemed by the
Company at any time commencing on or after the Fifth Anniversary Date (or
earlier, in accordance with the provisions of Section 13(d) if a Change of
Control Date shall have occurred, but only as to shares of Series B Preferred
Stock with respect to which the Remarketing Option has been elected), in
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whole or from time to time in part, at the election of the Company (an "Optional
Redemption"), at a redemption price (the "Redemption Price") payable in cash
equal to 100% of the then effective Liquidation Preference (after giving effect
to the Special Payment, if applicable), plus accrued and unpaid dividends
thereon from the last Dividend Payment Date to the date of redemption (the
"Optional Redemption Date").
(b) Shares of Series B Preferred Stock (if not earlier redeemed or
converted) shall be mandatorily redeemed by the Company on February 28, 2015
(the "Mandatory Redemption Date"; provided, however, that if such date is not a
Business Day, then the Mandatory Redemption Date shall be the next Business
Day), at a Redemption Price per share in cash equal to the then effective
Liquidation Preference (after giving effect to the Special Payment, if
applicable), plus accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Mandatory Redemption Date.
(c) In the event of a redemption or repurchase of fewer than all the
shares of Series B Preferred Stock, the shares of Series B Preferred Stock will
be chosen for redemption by the Registrar from the Outstanding shares of Series
B Preferred Stock not previously called for redemption, pro rata based on the
number of shares of Series B Preferred Stock held by each holder; provided, that
the Company may redeem (an "Odd-lot Redemption") all shares held by holders of
fewer than 100 shares of Series B Preferred Stock (or by holders that would hold
fewer than 100 shares of Series B Preferred Stock following such redemption)
prior to its redemption of other shares of Series B Preferred Stock; provided,
further, that the Company may not redeem a portion of any share without
redeeming the entire share. If fewer than all the shares of Series B Preferred
Stock represented by any share certificate are so to be redeemed, (i) the
Company shall issue a new certificate for the shares not redeemed and (ii) if
any shares represented thereby are converted before termination of the
conversion right with respect to such shares, such converted shares shall be
deemed (so far as may be) to be the shares represented by such share certificate
that was selected for redemption. Shares of Series B Preferred Stock that have
been converted during a selection of shares of Series B Preferred Stock to be
redeemed shall be treated by the Registrar as outstanding for the purpose of
such selection but not for the purpose of the payment of the Redemption Price.
(d) In the event the Company elects to effect an Optional
Redemption, the Company shall (i) make a public announcement of the redemption
and (ii) give a redemption notice (the "Redemption Notice") to the holders not
fewer than 30 days nor more than 60 days before the redemption date (the
"Redemption Date"). Whenever a Redemption Notice is required to be delivered to
the holders, such notice shall provide the information set forth below and be
given by first class mail, postage prepaid to each holder of shares of Series B
Preferred Stock to be redeemed, at such holder's address appearing in the Series
B Preferred Share Register. All Redemption Notices shall identify the shares of
Series B Preferred Stock to be redeemed (including CUSIP number) and shall
state:
(i) the Redemption Date;
(ii) the applicable Redemption Price;
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(iii) if fewer than all the outstanding shares of Series B
Preferred Stock are to be redeemed, the identification (and, in the case
of partial redemption, the certificate number, the total number of shares
represented thereby and the number of such shares being redeemed on the
Redemption Date) of the particular shares of Series B Preferred Stock to
be redeemed;
(iv) that on the Redemption Date, the Redemption Price,
together with all accrued and unpaid dividends from the last Dividend
Payment Date to the Redemption Date, will become due and payable upon each
such share of Series B Preferred Stock to be redeemed and that dividends
thereon will cease to accrue on and after said date;
(v) the conversion price, the date on which the right to
convert shares of Series B Preferred Stock to be redeemed will terminate
and the place or places where such shares of Series B Preferred Stock may
be surrendered for conversion; and
(vi) the place or places where such shares of Series B
Preferred Stock are to be surrendered for payment of the Redemption Price
and the other amounts which are then payable.
(vii) The Redemption Notice shall be given by the Company or,
at the Company's request, by the Registrar in the name and at the expense
of the Company; provided that if the Company so requests, it shall provide
the Registrar adequate time, as reasonably determined by the Registrar, to
deliver such notices in a timely fashion.
(e) Prior to any Redemption Date, the Company shall deposit with the
Registrar or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust) an amount of consideration
sufficient to pay the Redemption Price of all the shares of Series B
Preferred Stock that are to be redeemed on that date plus all accrued and
unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date. If any share of Series B Preferred Stock called for
redemption is converted, any consideration deposited with the Registrar or
with any Paying Agent or so segregated and held in trust for the
redemption of such share of Series B Preferred Stock shall be paid or
delivered to the Company upon Company Order or, if then held by the
Company, shall be discharged from such trust.
(f) Notice of redemption having been given as aforesaid, the shares
of Series B Preferred Stock so to be redeemed shall, on the Redemption Date,
become due and payable at the Redemption Price therein specified plus all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date, and from and after such date (unless the Company shall default
in the payment of the Redemption Price and accrued but unpaid dividends)
dividends on such shares of Series B Preferred Stock shall cease to accrue and
such shares shall cease to be convertible into shares of Common Stock. Upon
surrender of any such shares of Series B Preferred Stock for redemption in
accordance with said notice, such shares of Series B Preferred Stock shall be
redeemed by the Company at the applicable Redemption Price, together with all
accrued and unpaid dividends thereon from the last Dividend Payment Date to the
Redemption Date. If any share of Series B Preferred Stock called for redemption
shall not be so paid upon surrender thereof for redemption, the Redemption Price
thereof, and all accrued and unpaid dividends thereon from the last Dividend
Payment Date to the Redemption Date, shall,
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until paid, bear interest from the Redemption Date at the dividend rate payable
on the shares of Series B Preferred Stock and such shares shall remain
convertible.
(g) Any certificate that represents more than one share of Series B
Preferred Stock and is to be redeemed only in part shall be surrendered at any
office or agency of the Company designated for that purpose (with, if the
Company or the Registrar so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to the Company and the Registrar
duly executed by, the holder thereof or his attorney duly authorized in
writing), and the Company shall execute, and the Registrar shall countersign and
deliver to the holder of such share of Series B Preferred Stock without service
charge, a new Series B Preferred Stock certificate or certificates, representing
any number of shares of Series B Preferred Stock as requested by such holder, in
aggregate amount equal to and in exchange for the number of shares not redeemed
and represented by the Series B Preferred Stock certificate so surrendered.
(h) If a share of Series B Preferred Stock is redeemed subsequent to
a Dividend Record Date with respect to any Dividend Payment Date and on or prior
to such Dividend Payment Date, then any accrued dividends payable on such
Dividend Payment Date will be paid to the person in whose name such share of
Series B Preferred Stock is registered at the close of business on such Dividend
Record Date.
11. Method of Payments. The Company may make any dividend payments in cash
with respect to any period after the Fifth Anniversary Date. Any dividends not
paid in cash on a current basis on the applicable Dividend Payment Date with
respect to all periods after the Fifth Anniversary Date, and all dividends with
respect to the periods prior to the Fifth Anniversary Date, shall not be paid in
cash but rather shall constitute Accumulated Dividends. Notwithstanding the
foregoing, the Company may make any dividend payments required to be paid by
Section 6(b) in cash. No payment may be made in respect of Accumulated Dividends
as dividends. Rather, Accumulated Dividends shall be added to the Liquidation
Preference. Dividends may not be paid by delivery of shares of Series B
Preferred Stock.
12. Conversion.
(a) Subject to and upon compliance with the provisions of this
Certificate of Designation, at the option of the holder thereof, any share of
Series B-2 Preferred Stock may be converted at any time into a number of fully
paid and nonassessable shares of Series C Preferred Stock (calculated as to each
conversion to the nearest 1/10,000 of a share) equal to (i)(x) the then
effective Liquidation Preference thereof plus accrued and unpaid dividends to
the date of conversion divided by (y) the Conversion Price in effect at the time
of conversion divided by (ii) one hundred (100). Such conversion right shall
expire at the close of business on the Business Day next preceding the Mandatory
Redemption Date unless the Company defaults on the payment due on redemption. In
case a share of Series B-2 Preferred Stock is called for redemption, such
conversion right in respect of the share so called shall expire at the close of
business on the Business Day next preceding the Redemption Date, unless the
Company defaults in making the payment due upon redemption.
The "Conversion Price" shall be initially $46.25. The "Conversion Price" shall
be adjusted in certain instances as provided in Section 12(d) and Section 12(e)
hereof.
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(b) In order to exercise the conversion privilege, the holder of any
share of Series B-2 Preferred Stock to be converted shall surrender the
certificate for such share, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained for that purpose,
accompanied by written notice to the Company at such office or agency that the
holder elects to convert such share or, if fewer than all the shares of Series
B-2 Preferred Stock represented by a single share certificate are to be
converted, the number of shares represented thereby to be converted.
Shares of Series B-2 Preferred Stock shall be deemed to have
been converted immediately prior to the close of business on the day
of surrender of such shares for conversion in accordance with the
foregoing provisions, and at such time the rights of the holders of
such shares as holders shall cease, and the person or persons
entitled to receive the shares of Series C Preferred Stock issuable
upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Series C Preferred Stock at such
time. As promptly as practicable on or after the conversion date,
the Company shall issue and shall deliver at such office or agency a
certificate or certificates for the number of full shares of Series
C Preferred Stock issuable upon conversion, together with payment in
lieu of any fraction of a share, as provided in Section 12(c).
In the case of any conversion of fewer than all the shares of
Series B-2 Preferred Stock evidenced by a certificate, upon such
conversion the Company shall execute and the Registrar shall
countersign and deliver to the holder thereof, at the expense of the
Company, a new certificate or certificates representing the number
of unconverted shares of Series B-2 Preferred Stock.
(c) If consented to by the holder of shares of Series B-2 Preferred
Stock being converted, no fractional shares of Series C Preferred Stock shall be
issued upon the conversion of a share of Series B-2 Preferred Stock. If more
than one share of Series B-2 Preferred Stock shall be surrendered for conversion
at one time by the same holder, the number of full shares of Series C Preferred
Stock, which shall be issuable upon conversion thereof shall be computed on the
basis of the aggregate number of shares of Series B-2 Preferred Stock so
surrendered. If consented to by the holder of shares of Series B-2 Preferred
Stock being converted, instead of any fractional shares of Series C Preferred
Stock which would otherwise be issuable upon conversion of any share of Series
B-2 Preferred Stock, the Company shall pay a cash adjustment in respect of such
fraction in an amount equal to (x) the same fraction of the closing price (as
defined in Section 12(d)(vi)) per share of Common Stock at the close of business
on the Business Day prior to the day of conversion multiplied by (y) 100.
(d) For purposes of this Section 12(d), all references to Common
Stock shall be deemed to include the shares of Common Stock into which the
Series C Preferred Stock is convertible. The Conversion Price shall be adjusted
from time to time by the Company as follows:
(i) If the Company shall hereafter pay a dividend or make a
distribution to all holders of the outstanding shares of Common Stock in
shares of Common Stock, the
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Conversion Price in effect at the opening of business on the date
following the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the Common Stock Record Date (as defined in Section 12(d)(vi))
fixed for such determination and the denominator shall be the sum of such
number of shares and the total number of shares constituting such dividend
or other distribution, such reduction to become effective immediately
after the opening of business on the day following the Common Stock Record
Date. If any dividend or distribution of the type described in this
Section 12(d)(i) is declared but not so paid or made, the Conversion Price
shall again be adjusted to the Conversion Price which would then be in
effect if such dividend or distribution had not been declared.
(ii)
(1) In case the Company shall issue or sell any Common
Stock (other than Common Stock issued (A) pursuant to the Company's
existing or future stock option plans or pursuant to any other
existing or future Common Stock-related director or employee
compensation plan of the Company approved by the Board of Directors,
(B) pursuant to the Company's existing or future stock purchase
plans approved by the Board of Directors which permit Company
employees to purchase Common Stock at a purchase price that is not
more than a 15% discount to the Current Market Price, (C) as
consideration for the acquisition of a business or of assets, (D) in
a firm commitment underwritten public offering when either (i) the
underwriting discount is 5% or less, or (ii) the offering price per
share is greater than the Conversion Price, (E) to the Company's
joint venture partners in exchange for interests in the relevant
joint venture, (F) upon exercise or conversion of any security the
issuance of which caused an adjustment hereunder or the issuance of
which did not require adjustment hereunder or (G) upon exercise or
conversion of any of the Series B-1 Preferred Stock, the Series B-2
Preferred Stock, the Series C Preferred Stock or the Warrants (as
defined in the Purchase Agreement) in accordance with their
respective terms) without consideration or for a consideration per
share less than the Current Market Price on the date of such
issuance, or shall issue securities convertible into Common Stock
having a conversion price per share less than the Current Market
Price at the date of issuance of such convertible security, the
Conversion Price to be in effect after such issuance or sale shall
be determined by multiplying the Conversion Price in effect
immediately prior to such issuance or sale by a fraction, (1) the
numerator of which shall be the sum of (x) the number of shares of
Common Stock outstanding immediately prior to such issuance or sale
and (y) the number of shares of Common Stock which the aggregate
consideration receivable by the Company for the total number of
additional shares of Common Stock so issued or sold (or, in the case
of convertible securities, issuable on conversion) would purchase at
the Current Market Price in effect immediately prior to such
issuance or sale
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and (2) the denominator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to such
issuance or sale and the number of additional shares of Common Stock
to be issued or sold (or, in the case of convertible securities,
issued on conversion). In case any portion of the consideration to
be received by the Company shall be in a form other than cash, the
fair market value of such noncash consideration shall be utilized in
the foregoing computation. Such fair market value shall be
determined in good faith by the Board of Directors.
(2) If the Company shall offer or issue options, rights
or warrants to all holders of its outstanding shares of Common Stock
entitling them to subscribe for or purchase shares of Common Stock
at a price per share less than the Current Market Price (as defined
in Section 12(d)(vi)) on the Common Stock Record Date fixed for the
determination of shareholders entitled to receive such rights or
warrants, the Conversion Price shall be adjusted so that the same
shall equal the price determined by multiplying the Conversion Price
in effect at the opening of business on the date after such Common
Stock Record Date by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of
business on the Common Stock Record Date plus the number of shares
of Common Stock which the aggregate offering price of the total
number of shares of Common Stock subject to such options, rights or
warrants would purchase at such Current Market Price and of which
the denominator shall be the number of shares of Common Stock
outstanding at the close of business on the Common Stock Record Date
plus the total number of additional shares of Common Stock subject
to such options, rights or warrants for subscription or purchase.
Such adjustment shall become effective immediately after the opening
of business on the day following the Common Stock Record Date fixed
for determination of shareholders entitled to purchase or receive
such options, rights or warrants. To the extent that shares of
Common Stock are not delivered pursuant to such options, rights or
warrants, upon the expiration or termination of such options, rights
or warrants the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect had the adjustments
made upon the issuance of such options, rights or warrants been made
on the basis of delivery of only the number of shares of Common
Stock actually delivered. If such options, rights or warrants are
not so issued, the Conversion Price shall again be adjusted to be
the Conversion Price which would then be in effect if such date
fixed for the determination of shareholders entitled to receive such
options, rights or warrants had not been fixed. In determining
whether any options, rights or warrants entitle the holders to
subscribe for or purchase shares of Common Stock at less than such
Current Market Price, and in determining the aggregate offering
price of such shares of Common Stock, there shall be taken into
account (x) any consideration received for such options, rights or
warrants, with the value of such consideration and the amount of
such exercise or subscription price, if other than cash, to be
determined by
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the Board of Directors and (y) the amount of any exercise price or
subscription price required to be paid upon exercise of such
options, warrants or rights.
(iii) If the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be proportionately reduced, and, conversely,
if the outstanding shares of Common Stock shall be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect at the opening
of business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which such subdivision or combination becomes
effective.
(iv) If the Company shall, by dividend or otherwise, distribute to
all holders of its shares of Common Stock any class of capital stock of the
Company (other than any dividends or distributions to which Section 12(d)(i)
applies) or evidences of its indebtedness, cash or other assets (including
securities, but excluding any rights or warrants of a type referred to in
Section 12(d)(ii)(b) and dividends and distributions paid exclusively in cash
and excluding any capital stock, evidences of indebtedness, cash or assets
distributed upon a merger or consolidation to which Section 12(e) applies) (the
foregoing hereinafter in this Section 12(d)(iv) called the "Distributed
Securities"), then, in each such case, the Conversion Price shall be reduced so
that the same shall be equal to the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on the
Common Stock Record Date (as defined in Section 12(d)(vi)) with respect to such
distribution by a fraction of which the numerator shall be the Current Market
Price (determined as provided in Section 12(d)(vi)) on such date less the fair
market value (as determined by the Board of Directors, whose good faith
determination shall be conclusive and described in a resolution of the Board of
Directors) on such date of the portion of the Distributed Securities so
distributed applicable to one share of Common Stock and the denominator shall be
such Current Market Price, such reduction to become effective immediately prior
to the opening of business on the day following the Common Stock Record Date;
provided, however, that, in the event the then fair market value (as so
determined) of the portion of the Distributed Securities so distributed
applicable to one share of Common Stock is equal to or greater than the Current
Market Price on the Common Stock Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each holder of shares of
Series B Preferred Stock shall have the right to receive upon conversion of a
share of Series B Preferred Stock (or any portion thereof) the amount of
Distributed Securities such holder would have received had such holder converted
such share of Series B Preferred Stock (or portion thereof) directly or
indirectly into Common Stock immediately prior to such Common Stock Record Date.
If such dividend or distribution is not so paid or made, the Conversion Price
shall again be adjusted to be the Conversion Price which would then be in effect
if such dividend or distribution had not been declared. If the Board of
Directors determines the fair market value of any distribution for purposes of
this Section 12(d)(iv) by reference to the actual or when issued trading market
for any securities constituting all or part of such
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distribution, it must in doing so consider the prices in such market over the
same period used in computing the Current Market Price pursuant to Section
12(d)(vi) to the extent possible.
Options, rights or warrants distributed by the Company to all holders of
shares of Common Stock entitling the holders thereof to subscribe for or
purchase shares of the Company's capital stock (either initially or under
certain circumstances), which options, rights or warrants, until the occurrence
of a specified event or events ("Dilution Trigger Event"): (A) are deemed to be
transferred with such shares of Common Stock; (B) are not exercisable; and (C)
are also issued in respect of future issuances of shares of Common Stock, shall
be deemed not to have been distributed for purposes of this Section 12(d)(iv)
(and no adjustment to the Conversion Price under this Section 12(d)(iv) shall be
required) until the occurrence of the earliest Dilution Trigger Event, whereupon
such options, rights and warrants shall be deemed to have been distributed and
an appropriate adjustment to the Conversion Price under this Section 12(d)(iv)
shall be made. If any such options, rights or warrants, including any such
existing options, rights or warrants distributed prior to the first issuance of
shares of Series B Preferred Stock, are subject to subsequent events, upon the
occurrence of each of which such options, rights or warrants shall become
exercisable to purchase different securities, evidences of indebtedness or other
assets, then the occurrence of each such event shall be deemed to be such date
of issuance and record date with respect to new options, rights or warrants (and
a termination or expiration of the existing options, rights or warrants, without
exercise by the holder thereof). In addition, in the event of any distribution
(or deemed distribution) of options, rights or warrants, or any Dilution Trigger
Event with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price under this
Section 12(d) was made, (1) in the case of any such options, rights or warrants
which shall all have been redeemed or repurchased without exercise by any
holders thereof, the Conversion Price shall be readjusted upon such final
redemption or repurchase to give effect to such distribution or Dilution Trigger
Event, as the case may be, as though it were a cash distribution, equal to the
per share redemption or repurchase price received by a holder or holders of
shares of Common Stock with respect to such options, rights or warrants
(assuming such holder had retained such options, rights or warrants), made to
all holders of shares of Common Stock as of the date of such redemption or
repurchase, and (2) in the case of such options, rights or warrants which shall
have expired or been terminated without exercise by any holders thereof, the
Conversion Price (as adjusted pursuant to this paragraph) shall be readjusted to
be the Conversion Price which would have been in effect if such options, rights
or warrants had not been issued.
Notwithstanding any other provision of this Section 12(d)(iv) to the
contrary, options, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any rights
distributed pursuant to any shareholder rights plan) shall be deemed not to have
been distributed for purposes of this Section 12(d)(iv) if the Company makes
proper provision so that each holder of shares of Series B-2 Preferred Stock who
converts a share of Series B-2 Preferred Stock (or any portion thereof) after
the date fixed for determination of shareholders entitled to receive any such
distribution shall be entitled to receive upon such conversion, in addition to
the shares of
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Series C Preferred Stock (or Common Stock, as the case may be) issuable upon
such conversion, the amount and kind of such distributions that such holder
would have been entitled to receive if such holder had, immediately prior to
such determination date, converted such share of Series B-2 Preferred Stock into
Series C Preferred Stock (or Common Stock, as the case may be).
For purposes of this Section 12(d)(iv) and Sections 12(d)(i) and (ii), any
dividend or distribution to which this Section 12(d)(iv) is applicable that also
includes shares of Common Stock, or options, rights or warrants to subscribe for
or purchase shares of Common Stock to which Section 12(d)(ii) applies (or both),
shall be deemed instead to be (A) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or options, rights or warrants to which Section
12(d)(ii) applies (and any Conversion Price reduction required by this Section
12(d)(iv) with respect to such dividend or distribution shall then be made)
immediately followed by (B) a dividend or distribution of such shares of Common
Stock or such options, rights or warrants (and any further Conversion Price
reduction required by Sections 12(d)(i) or 12(d)(ii) with respect to such
dividend or distribution shall then be made), except that (1) the Common Stock
Record Date of such dividend or distribution shall be substituted as "the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution", "the Common Stock Record Date fixed for such determination"
and "the Common Stock Record Date" within the meaning of Section 12(d)(i) and as
"the date fixed for the determination of shareholders entitled to receive such
rights or warrants", "the Common Stock Record Date fixed for the determination
of the share holders entitled to receive such rights or warrants" and "such
Common Stock Record Date" for purposes of Section 12(d)(ii), and (2) any shares
of Common Stock included in such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such determination"
for the purposes of Section 12(d)(i).
(v) If a tender offer made by the Company or any of its subsidiaries
for all or any portion of the Common Stock expires and such tender offer (as
amended upon the expiration thereof) requires the payment to shareholders (based
on the acceptance (up to any maximum specified in the terms of the tender offer)
of Purchased Shares) of an aggregate consideration having a fair market value
(as determined by the Board of Directors, whose good faith determination shall
be conclusive and described in a resolution of the Board of Directors) that,
combined together with the aggregate of the cash plus the fair market value (as
determined by the Board of Directors, whose good faith determination shall be
conclusive and described in a resolution of the Board of Directors), as of the
expiration of such tender offer, of consideration payable in respect of any
other tender offers, by the Company or any of its subsidiaries for all or any
portion of the shares of Common Stock expiring within the 12 months preceding
the expiration of such tender offer and in respect of which no adjustment
pursuant to this Section 12(d)(v) has been made, exceeds 5% of the net income of
the Company reported for the 12 month period ending with the fiscal quarter next
preceding such payment (determined as of the last time (the "Expiration Time")
tenders could have been made pursuant to such tender offer (as it may be
amended)), then, and in each such case, immediately prior to the
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opening of business on the day after the date of the Expiration Time, the
Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior
to the close of business on the date of the Expiration Time by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding (including any tendered shares) at the Expiration Time
multiplied by the Current Market Price of the shares of Common Stock on
the trading day next succeeding the Expiration Time and the denominator
shall be the sum of (x) the fair market value (determined as aforesaid) of
the aggregate consideration payable to shareholders based on the
acceptance (up to any maximum specified in the terms of the tender offer)
of all shares validly tendered and not withdrawn as of the Expiration Time
(the shares deemed so accepted, up to any such maximum, being referred to
as the "Purchased Shares") and (y) the product of the number of shares of
Common Stock outstanding (less any Purchased Shares) at the Expiration
Time and the Current Market Price of the shares of Common Stock on the
trading day next succeeding the Expiration Time, such reduction (if any)
to become effective immediately prior to the opening of business on the
day following the Expiration Time. If the Company is obligated to purchase
shares pursuant to any such tender offer, but the Company is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to
be the Conversion Price which would then be in effect if such tender offer
had not been made. If the application of this Section 12(d)(v) to any
tender offer would result in an increase in the Conversion Price, no
adjustment shall be made for such tender offer under this Section
12(d)(v).
(vi) For purposes of this Section 12(d), the following terms
shall have the meaning indicated:
"closing price" with respect to any securities on any day means the
closing sale price as of 4:00 p.m. Eastern Time on such day or any earlier final
closing on such day or, if no such sale takes place on such day, the average of
the reported high and low bid prices on such day, in each case on the Nasdaq
National Market, or the New York Stock Exchange, as applicable, or, if such
security is not listed or admitted to trading on such national market or
exchange, on the national stock exchange or Commission recognized trading market
in the United States on which such security is quoted or listed or admitted to
trading, or, if not quoted or listed or admitted to trading on any national
stock exchange or Commission recognized trading market in the United States, the
average of the high and low bid prices of such security on the over-the-counter
market on the day in question as reported by the National Quotation Bureau
Incorporated or a similar generally accepted reporting service in the United
States, or, if not so available, in such manner as furnished by any New York
Stock Exchange member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the Board of Directors,
whose determination shall be conclusive and described in a resolution of the
Board of Directors.
"Common Stock Record Date" means, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date
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<PAGE>
fixed for determination of shareholders entitled to receive such cash,
securities or other property (whether such date is fixed by the Board of
Directors or by statute, contract or otherwise).
"Current Market Price" means the average of the daily closing prices
per share of Common Stock for the 10 consecutive trading days immediately prior
to the date in question; provided, however, that (A) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the Conversion Price
pursuant to Section 12(d)(i), (ii), (iii), (iv), and (v) occurs during such 10
consecutive trading days, the closing price for each trading day prior to the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the same fraction by which the Conversion Price is so required to be
adjusted as a result of such other event, (B) if the "ex" date for any event
(other than the issuance or distribution requiring such computation) that
requires an adjustment to the Conversion Price pursuant to Section 12(d)(i),
(ii), (iii), (iv), or (v) occurs on or after the "ex" date for the issuance or
distribution requiring such computation and prior to the day in question, the
closing price for each trading day on and after the "ex" date for such other
event shall be adjusted by multiplying such closing price by the reciprocal of
the fraction by which the Conversion Price is so required to be adjusted as a
result of such other event and (C) if the "ex" date for the issuance or
distribution requiring such computation is prior to the day in question, after
taking into account any adjustment required pursuant to clause (A) or (B) of
this proviso, the closing price for each trading day on or after such "ex" date
shall be adjusted by adding thereto the amount of any cash and the fair market
value (as determined by the Board of Directors in a manner consistent with any
good faith determination of such value for purposes of Section 12(d)(iv) or (v),
whose good faith determination shall be conclusive and described in a resolution
of the Board of Directors) of the evidences of indebtedness, shares of capital
stock or assets being distributed applicable to one share of Common Stock as of
the close of business on the day before such "ex" date. For purposes of any
computation under Section 12(d)(v), the Current Market Price on any date shall
be deemed to be the average of the daily closing prices per share of Common
Stock for such day and the next two succeeding trading days; provided, however,
that, if the "ex" date for any event (other than the tender offer requiring such
computation) that requires an adjustment to the Conversion Price pursuant to
Section 12(d)(i), (ii), (iii), (iv), or (v) occurs on or after the Expiration
Time for the tender or exchange offer requiring such computation and prior to
the day in question, the closing price for each trading day on and after the
"ex" date for such other event shall be adjusted by multiplying such closing
price by the reciprocal of the fraction by which the Conversion Price is so
required to be adjusted as a result of such other event. For purposes of this
paragraph, the term "ex" date (1) when used with respect to any issuance or
distribution, means the first date on which the shares of Common Stock trade
regular way on the relevant exchange or in the relevant market from which the
closing price was obtained without the right to receive such issuance or
distribution, (2) when used with respect to any subdivision or combination of
shares of Common Stock, means the first date on which the shares of Common Stock
trade regular way on such exchange or in such market after the time at which
such subdivision or combination becomes effective and (3) when used with respect
to any tender or exchange offer means the first date on which the shares of
Common Stock trade regular way on such exchange or in such market after the
Expiration Time of such offer. Notwithstanding the foregoing, whenever
successive adjustments to the Conversion Price are called for pursuant to this
Section 12(d), such adjustments shall be made to the Current Market Price as may
be necessary or appropriate to effectuate the intent of this
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Section 12(d) and to avoid unjust or inequitable results, as determined in good
faith by the Board of Directors.
"fair market value" means the amount which a willing buyer would pay
a willing seller in an arm's-length transaction.
(vii) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least
1% in such price; provided, however, that any adjustments which by reason
of this Section 12(d)(vii) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this Section 12 shall be made by the Company and shall
be made to the nearest cent. No adjustment need be made for a change in
the par value or no par value of the Common Stock.
(viii) Whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly file with the Registrar an Officers'
Certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the Conversion
Price to each holder of shares of Series B-2 Preferred Stock at such
holder's last address appearing on the register of holders maintained for
that purpose within 20 days of the effective date of such adjustment.
Failure to deliver such notice shall not affect the legality or validity
of any such adjustment.
(ix) In any case in which this Section 12(d) provides that an
adjustment shall become effective immediately after a Common Stock Record
Date for an event, the Company may defer until the occurrence of such
event issuing to the holder of any share of Series B-2 Preferred Stock
converted after such Common Stock Record Date and before the occurrence of
such event the additional shares of Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and
above the shares of Common Stock issuable upon such conversion before
giving effect to such adjustment.
(x) For purposes of this Section 12(d), the number of shares
of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company. The Company shall not pay any dividend or
make any distribution on shares of Common Stock held in the treasury of
the Company.
(e) Subject to Section 13 hereof, in case of any consolidation of
the Company with, or merger of the Company into, any other Person, or in case of
any merger of another Person into the Company (other than a merger that does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or Series C Preferred Stock of the Company),
or in case of any sale, conveyance or transfer of all or substantially all the
assets of the Company, the holder of each share of Series B-2 Preferred Stock
shall have the right thereafter, during the period such share of Series B-2
Preferred Stock
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shall be convertible as specified in Section 12(a), to convert such share of
Series B-2 Preferred Stock into the kind and amount of securities, cash and
other property receivable upon such consolidation, merger, conveyance or
transfer by a holder of the number of shares of shares of Common Stock or Series
C Preferred Stock of the Company into which such share of Series B-2 Preferred
Stock might have been directly or indirectly converted immediately prior to such
consolidation, merger, conveyance or transfer, assuming such holder of shares of
Common Stock or Series C Preferred Stock of the Company failed to exercise his
rights of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, conveyance or
transfer (provided that, if the kind or amount of securities, cash and other
property receivable upon such consolidation, merger, conveyance or transfer is
not the same for each share of Common Stock and Series C Preferred Stock, on an
as-converted basis, of the Company in respect of which such rights of election
shall not have been exercised ("nonelecting share"), then for the purpose of
this Section 12 the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, conveyance or transfer by each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Such securities shall provide
for adjustments which, for events subsequent to the effective date of the
triggering event, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 12. The above provisions of this
Section 12 shall similarly apply to successive consolidations, mergers,
conveyances or transfers.
(f) In case:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock and/or Series C Preferred Stock payable
otherwise than in cash out of its earned surplus; or
(ii) the Company shall authorize the granting to all holders
of its shares of Common Stock and/or Series C Preferred Stock of rights or
warrants to subscribe for or purchase any shares of capital stock of any
class or of any other rights; or
(iii) of any reclassification of the Common Stock and/or
Series C Preferred Stock (other than a subdivision or combination of the
Company's outstanding shares of Common Stock and/or Series C Preferred
Stock), or of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or
the sale, conveyance or transfer of all or substantially all the assets of
the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then the Company shall cause to be filed with the Registrar and at each office
or agency maintained for the purpose of conversion of shares of Series B-2
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the shares of Series B-2 Preferred Stock
Register, at least 20 Business Days (or 10 Business Days in any case specified
in clause (i) or (ii) above) prior to the applicable date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, rights or warrants, or, if a record is not to be
taken, the date as of which the holders of shares of Common
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Stock and/or Series C Preferred Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined or (y) the date on which
such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date as of
which it is expected that holders of shares of Common Stock and/or Series C
Preferred Stock of record shall be entitled to exchange their shares of Common
Stock and/or Series C Preferred Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up. Failure to give the notice required by
this Section 12(f) or any defect therein shall not affect the legality or
validity of any dividend, distribution, right, warrant, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding-up,
or the vote upon any such action.
(g) The Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of shares of Series B-2
Preferred Stock, the full number of shares of Series B-1 Preferred Stock, Series
C Preferred Stock and Common Stock then issuable upon the direct or indirect
conversion of all outstanding shares of Series B-2 Preferred Stock (or any
security into which it is directly or indirectly convertible).
(h) The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Series C Preferred Stock on
conversion of shares of Series B-2 Preferred Stock. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Series C Preferred
Stock in a name other than that of the holder of the share of Series B-2
Preferred Stock or shares of Series B-2 Preferred Stock to be converted, and no
such issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Company the amount of any such tax, or has established to
the satisfaction of the Company that such tax has been paid or is not payable.
(i) Conversion to other Series B Preferred Stock.
(i) Conversion of Series B-1 Preferred Stock. Subject to and
upon compliance with the provisions of this Section 12(i)(i), any
Regulated Stockholder (defined below) shall be entitled to convert, at any
time and from time to time, any or all of the shares of Series B-1
Preferred Stock held by such Regulated Stockholder into the same number of
shares of Series B-2 Preferred Stock.
(ii) Conversion of Series B-2 Preferred Stock. Subject to and
upon compliance with the provisions of this Section 12(i)(ii), each record
holder of Series B-2 Preferred Stock shall be entitled at any time and
from time to time in such holder's sole discretion and at such holder's
option, to convert any or all of the shares of such holder's Series B-2
Preferred Stock into the same number of shares of Series B-1 Preferred
Stock (and, if such holder so elects, simultaneously upon issuance of such
shares of Series B-1 Preferred Stock to convert any or all of such shares
of Series B-1 Preferred Stock to shares of Common Stock, and, in
accordance with the Series B-1 Certificate of Designations, as if such
holder of Series B-2 Preferred Stock were a holder of Series B-1 Preferred
Stock when making such election); provided, however, that Series B-2
Preferred Stock held by a particular Regulated Stockholder may not be
converted into
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Series B-1 Preferred Stock to the extent that immediately prior thereto,
or as a result of such conversion, the number of shares of Series B-1
Preferred Stock held by such Regulated Stockholder would exceed the number
of shares of Series B-1 Preferred Stock or which such Regulated
Stockholder reasonably determines it and its Affiliates may own, control
or have the power to vote under any law, regulation, rule or other
requirement of any governmental authority at the time applicable to such
Regulated Stockholder or its Affiliates. Each Regulated Stockholder may
provide for further restrictions upon the conversion of any shares of
Series B-2 Preferred Stock by providing the Company with signed, written
instructions specifying such additional restrictions and legending such
shares as to the existence of such restrictions.
(iii) Conversion Procedure. Each conversion of shares of
Series B Preferred Stock into shares of another class of Series B
Preferred Stock shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (the "Converting
Shares") at the principal office of the Company (or such other office or
agency of the Company as the Company may designate by written notice to
the holders of Series B Preferred Stock) at any time during its usual
business hours, together with written notice by the holder of such
Converting Shares, stating that such holder desires to convert the
Converting Shares, or a stated number of the shares represented by such
certificate or certificates, into an equal number of shares of the class
into which such shares may be converted (the "Converted Shares"). Such
notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted
Shares are to be issued and shall include instructions for the delivery
thereof. The Company shall promptly notify each Regulated Stockholder of
its receipt of such notice. Promptly after such surrender and the receipt
of such written notice, the Company will issue and deliver in accordance
with the surrendering holder's instructions the certificate or
certificates evidencing the Converted Shares issuable upon such
conversion, and the Company will deliver to the converting holder a
certificate (which shall contain such legends as were set forth on the
surrendered certificate or certificates) representing any shares which
were represented by the certificate or certificates that were delivered to
the Company in connection with such conversion, but which were not
converted. Such conversion, to the extent permitted by law, shall be
deemed to have been effected as of the close of business on the date on
which such certificate or certificates shall have been surrendered and
such notice shall have been received by the Company, and at such time the
rights of the holder of the Converting Shares as such holder shall cease
and the person or persons in whose name or names the certificate or
certificates for the Converted Shares are to be issued upon such
conversion shall be deemed to have become the holder or holders of record
of the Converted Shares. Upon issuance of shares in accordance with this
Section 12(i)(iii), such Converted Shares shall be deemed to be duly
authorized, validly issued, fully paid and non-assessable. The Company
shall take all such actions as may be necessary to assure that all such
shares of Series B Preferred Stock may be so issued without violation of
any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Series B Preferred Stock
may be listed (except for official notice of issuance which will be
immediately transmitted by the Company upon issuance). The Company shall
not close its books against the transfer of shares of Series B Preferred
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Stock in any manner which would interfere with the timely conversion of
any shares of Series B Preferred Stock.
A written request for conversion from any Regulated Stockholder to the
Company stating such Regulated Stockholder's reasonable belief that a
conversion is permissible under all applicable laws, rules and regulations
shall be conclusive and shall obligate the Company to effect such
conversion in a timely manner.
(iv) Notice of Conversion to Other Regulated Stockholders. The
Company shall not convert or directly or indirectly redeem, purchase or
otherwise acquire any shares of Series B Preferred Stock or any other
class of capital stock of the Company or take any other action affecting
the voting rights of such shares, if such action will increase the
percentage of any class of outstanding voting securities owned or
controlled by any Regulated Stockholder (other than any such stockholder
which requested that the Company take such action, or which otherwise
waives in writing its rights under this Section 12(i)(iv)), unless the
Company simultaneously with taking such action gives written notice that
it is taking such action to each Regulated Stockholder.
(j) Miscellaneous.
(i) Stock Splits; Adjustments. If the Company shall in any
manner subdivide (by stock split, stock dividend or otherwise) or combine
(by reverse stock split or otherwise) the outstanding shares of the Series
B-1 Preferred Stock or the Series B-2 Preferred Stock then the outstanding
shares of each other series of Series B Preferred Stock shall be
subdivided or combined, as the case may be, to the same extent, share and
share alike, and effective provision shall be made for the protection of
the conversion rights hereunder.
(ii) Preemptive Right with respect to Certain Issuances. In
case the Company shall issue or sell any Common Stock or convertible
Junior Shares (other than Common Stock issued (A) pursuant to the
Company's existing or future stock option plans or pursuant to any other
existing or future Common Stock-related director or employee compensation
plan of the Company approved by the Board of Directors, (B) other than
pursuant to the Company's existing or future stock purchase plans approved
by the Board of Directors which permit the Company's employees to purchase
Common Stock at not more than a 15% discount to the Current Market Price,
(C) as consideration for the acquisition of a business or of assets, (D)
in a firm commitment underwritten public offering when either (i) the
underwriting discount is 5% or less, or (ii) the offering price per share
is greater than the Conversion Price, (E) to the Company's unaffiliated
joint venture partners in exchange for interests in the relevant joint
venture, (F) upon exercise or conversion of any security, the issuance of
which caused an adjustment hereunder or the issuance of which did not
require adjustment hereunder or (G) upon exercise or conversion of any of
the Series B-1 Preferred Stock the Series B-2 Preferred Stock, the Series
C Preferred Stock or the Warrants (as defined in the Purchase Agreement)
in accordance with their respective terms) for a consideration per share
less than the Conversion Price then in effect but equal to or greater than
the Current Market Price at the date of issuance of such Common Stock or
convertible Junior Shares, the
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holders of the Series B Preferred Stock shall be entitled if they so elect
to purchase such number of the shares of the Common Stock or convertible
Junior Shares (or, in the case of a Regulated Holder, upon such Regulated
Holder's request, nonvoting securities (x) identical in all respects,
other than voting, to any such voting securities and (y) convertible into
voting securities in a manner consistent with the convertibility of Series
B-2 Preferred Stock into voting securities of the Company), being issued
as will permit such holders to maintain their proportional ownership
interest in the Company after giving effect to such issuance.
The Company shall give twenty days prior written notice to the
holders of the Series B Preferred Stock of its intention to issue or sell
any Common Stock or Junior Shares that would give rise to preemptive
rights pursuant to this Section 12(j)(ii). Within ten days after receipt
of such notice, the holders of the Series B Preferred Stock shall notify
the Company whether or not they intend (without commitment) to purchase
such shares.
(iii) No Charge. The issuance of certificates for shares of
any class of Series B Preferred Stock (upon conversion of shares of any
other series of Series B Preferred Stock or otherwise) shall be made
without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Company in connection with
such conversion and/or the issuance of shares of Series B Preferred Stock;
provided, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of
the Series B Preferred Stock converted.
13. Change of Control.
(a) If a Change of Control shall have occurred (the time and date of
such occurrence being a "Change of Control Date"), the Company shall cause to be
filed with the Registrar and at each office or agency maintained for the purpose
of conversion of shares of Series B Preferred Stock, and shall cause to be
mailed to all holders at their last addresses as they shall appear in the Series
B Preferred Stock Register, in any case within 10 days after the Change of
Control Date, a notice stating (1) the Change of Control Date, (2) the fact that
(if the Change of Control Date is prior to the Fifth Anniversary Date) the
holders shall receive the Special Payment (as defined below) as a result of such
Change of Control, (3) the fact that holders shall have the right to either (a)
continue to hold their shares of Series B Preferred Stock (or the shares of
preferred stock issued in respect thereof pursuant to Section 14) (the "Hold
Option") or (b) in the case of shares of Series B-2 Preferred Stock, convert
such shares (after taking into account the Special Payment) in accordance with
Section 12 or (c) elect the Remarketing Option (as defined below), (4) the
relevant circumstances and facts regarding such Change of Control and (5) the
instructions that such holder must follow in order to exercise the rights
identified above. As of the Change of Control Date (if the Change of Control
Date occurs prior to the Fifth Anniversary Date), the holders of the Series B
Preferred Stock shall receive the Special Payment, pursuant to which the
Liquidation Preference of each share of Series B Preferred Stock shall be deemed
to have been increased by an amount (the "Special Payment") equal to the product
of (x) the Share Factor with respect to such share of Series B Preferred Stock
and (y) the Aggregate
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Special Payment Amount. Such Special Payment shall accrue as of the Change of
Control Date (if the Change of Control Date is prior to the Fifth Anniversary
Date) whether or not the Company has earnings or profits, whether or not there
are funds legally available for the payment of such dividend and whether or not
such dividend is declared and shall be in all respects identical to any other
dividend declared or accrued on the Series B Preferred Stock (except as set
forth above) and all provisions of this Certificate of Designation applicable to
dividends shall apply to such Special Payment (except as set forth above). The
Special Payment shall be added to the Liquidation Preference as of the Change of
Control Date whether the holders of the Series B Preferred Stock elect the Hold
Option or the Remarketing Option or whether they elect to convert their shares
in accordance with Section 12.
(b) Within 30 days after delivery by the Company of the notice
described in Section 13(a), each holder of shares of Series B Preferred Stock
(or the shares of preferred stock issued in respect thereof pursuant to Section
14) who wishes to exercise the Hold Option, or the Remarketing Option must
submit written notice (a "COC Response Notice") to the Company setting forth the
option such holder wishes to elect (and if no option is selected within such 30
day period such holder shall be deemed to have selected the Hold Option).
(c) If the Hold Option is selected with respect to a share of Series
B Preferred Stock, or if no notice from a holder is received by the date
referred to in the preceding paragraph, such share of Series B Preferred Stock
(or the shares of preferred stock issued in respect thereof pursuant to Section
14) shall remain outstanding in accordance with its current terms (including,
without limitation, the right to convert pursuant to Section 12) after giving
effect to the Special Payment (if applicable).
(d) If the Remarketing Option is selected with respect to a share of
Series B-2 Preferred Stock, the holder of such share shall be deemed to have
elected to waive such holder's right during the Remarketing Period to convert
such share pursuant to Section 12 during the Remarketing Period (other than
conversion of such share to a share of Series B-1 Preferred Stock) and the
Company shall thereafter have the option (the "Remarketing Option") to either
(a) have such share redeemed in accordance with the optional redemption
procedures set forth in Section 10 (except that such procedures shall apply only
to the holders so electing the Remarketing Option) or (b) remarket such share
(or the share of Series B-1 Preferred Stock into which such other share is
converted by the holder thereof) for the account of such holder and, if the net
proceeds to such holder of such remarketing are less than an amount in cash
equal to 100% of the Liquidation Preference (after giving effect to the Special
Payment (if applicable)) of such share plus accrued and unpaid dividends thereon
from the last Dividend Payment Date to the date payment in full is received by
such holder in respect of such share (the "Remarketing Price"), the Company
shall issue to and sell for the account of such holder a sufficient number of
shares of Common Stock (or, if requested by a Regulated Holder, shares of Series
C Preferred Stock) to make up such shortfall; i.e., such that the holder
receives a net amount in cash in respect of such share of Series B Preferred
Stock as to which the Remarketing Option has been selected which, when taken
together with the net proceeds received by such holder in such remarketing is
equal to the Remarketing Price. Written notice of the election by the Company to
either redeem or remarket such share shall be provided to such holder within 75
days after receipt of a COC Response Notice specifying the Remarketing Option.
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<PAGE>
(e) In order to accomplish the remarketing, the Company shall take
all actions that may be necessary, including without limitation, preparing and
filing a registration statement under the Securities Act, and shall pay all
expenses (including without limitation, underwriting discounts) associated with
the remarketing and issuance and shall provide customary indemnification for the
benefit of the holder against securities law liabilities in connection
therewith. If the Remarketing Option has been selected and the Company has not
elected to redeem such share, payment of the full Remarketing Price in respect
of the remarketed share shall be made at a single settlement against surrender
of the share. Such settlement shall take place as soon as reasonably
practicable. If such settlement does not take place within 180 days after the
date of the Company's written notice pursuant to paragraph (d) above (the
"Remarketing Period"), the Company shall give written notice to the holders that
have elected the Remarketing Option that such 180-day period has elapsed and
that each such holder shall have the option, for a period of 10 Business Days
following the giving of such notice, of electing to terminate the remarketing
process with respect to such holder's shares and to elect (i) to convert such
holder's shares in accordance with Section 12 or (ii) the Hold Option. The
foregoing shall not affect the holder's right to receive and retain the Special
Payment (if the Change of Control Date is prior to the Fifth Anniversary Date)
as of the Change of Control Date).
(f) The Company shall have the right to institute reasonable
procedures in order to implement this Section 13 and, to the extent reasonably
practicable, will make proper provision prior to the Change of Control Date to
ensure that the holders of shares of Series B Preferred Stock will be entitled
to receive the benefits intended to be afforded by this Section 13. Nothing in
this Section 13 shall affect the rights of the holders of Series B Preferred
Stock set forth in Section 14 hereof.
14. Consolidation, Merger, Conveyance or Transfer. Without the vote or
consent of the holders of a majority of the then Outstanding shares of Series B
Preferred Stock, the Company may not consolidate or merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its assets to, any Person unless (i) if the Company is the surviving or
continuing Person, the Series B Preferred Stock shall remain outstanding without
any amendment that would adversely affect the preferences, rights or powers of
the Series B Preferred Stock, (ii) if the Company is not the surviving or
continuing Person, (a) the entity formed by such consolidation or merger or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made (in any such case, the "resulting entity") is a corporation
organized and existing under the laws of Bermuda, the United States or any State
thereof or the District of Columbia; and (b) the shares of Series B Preferred
Stock are converted into or exchanged for and become shares of such resulting
entity, having in respect of such resulting entity the same (or more favorable)
powers, preferences and relative, participating, optional or other special
rights that the shares of Series B Preferred Stock had immediately prior to such
transaction; and (iii) the Company shall have delivered to the Registrar an
Officers' Certificate and an opinion of counsel, reasonably satisfactory in form
and content, each stating that such consolidation, merger, conveyance or
transfer complies with this Section 14 and that all conditions precedent herein
provided for relating to such transaction have been complied with.
15. SEC Reports; Reports by Company. So long as any shares of Series B
Preferred Stock are outstanding, the Company shall file with the SEC and, within
15 days after it files
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<PAGE>
them with the SEC, with the Registrar and, if requested, furnish to each holder
of shares of Series B Preferred Stock all annual and quarterly reports and the
information, documents, and other reports that the Company is required to file
with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company is not required or shall cease to be
required to file SEC Reports, pursuant to the Exchange Act, the Company will
nevertheless file such reports with the SEC (unless the SEC will not accept such
a filing). Whether or not required by the Exchange Act to file SEC Reports with
the SEC, so long as any shares of Series B Preferred Stock are Outstanding, the
Company will furnish or cause to be furnished copies of the SEC Reports to the
holders of shares of Series B Preferred Stock at the time the Company is
required to make such information available to the Registrar and to prospective
investors who request it in writing.
16. Definitions. For purposes of this Certificate of Designation, the
following terms shall have the meaning set forth below (capitalized terms used
but not defined herein shall have the meanings ascribed to them in the Series
B-1 Certificate of Designations):
"Accumulated Dividends" has the meaning set forth in Section 6.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Without limiting the foregoing, each of Chase Capital Partners, The Chase
Manhattan Corporation, each of their respective affiliates (the "Chase
Entities") and any other person, fund or entity for whom any of the Chase
Entities acts as a fiduciary or provides discretionary management with respect
to any investments or any such direct or indirect interests therein shall be
deemed to be affiliates of each other.
"Aggregate Change of Control Date Accreted Value" means the product
obtained by multiplying (x) the Change of Control Date Accreted Value by (y) the
number of shares of Series B Preferred Stock Outstanding immediately prior to of
the Change of Control Date.
"Aggregate Five Year Accreted Value" means the product obtained by
multiplying (x) the Five Year Accreted Value by (y) the number of shares of
Series B Preferred Stock Outstanding immediately prior to the Change of Control
Date.
"Aggregate Special Payment Amount" means the difference between (x)
the Aggregate Five Year Accreted Value and (y) the Aggregate Change of Control
Date Accreted Value.
"Board of Directors" has the meaning set forth in the Recitals.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to be closed.
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"By-laws" has the meaning set forth in the Recitals.
"COC Response Notice" has the meaning set forth in Section 13(b).
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of such person's capital stock,
whether outstanding on the Closing Date or issued after the Closing Date, and
any and all rights (other than any evidence of indebtedness), warrants or
options exchangeable for or convertible into such capital stock.
"Certificate of Incorporation" has the meaning set forth in the
recitals.
"Change of Control" means the occurrence of any of the following
events: (a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rule 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
Voting Capital Stock of the Company; or (b) the Company consolidates with, or
merges with or into, another person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all or substantially all of its assets to any
person, or any person consolidates with, or merges with or into the Company, in
any such event pursuant to a transaction in which either (A) the outstanding
Voting Capital Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where immediately
after such transaction no "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) (other than any such group if each
member of such group, together with its Affiliates, owns less than 50% of the
total Voting Capital Stock of the Company) is the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
Voting Capital Stock of the surviving or transferee company or its parent
company or (B) the holders of the outstanding Voting Capital Stock of the
Company immediately prior to such transaction hold less than 50% of the
outstanding Voting Capital Stock of the surviving or transferee company or its
parent company immediately after the transaction or (C) during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors (together with any new directors whose election by the Board
of Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of a majority of the directors then still in office who
were either directors 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 Board of Directors then in office.
"Change of Control Date" has the meaning set forth in Section 13(a).
"Change of Control Date Accreted Value" means with respect to each
$1,072 of original Liquidation Preference, the value that $1,072 would accrete
to between the Closing Date and the Change of Control Date, compounded quarterly
at an annual rate of 7.50%.
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"Closing Date" means any Closing Date under the Purchase Agreement.
"closing price" has the meaning set forth in Section 12(d)(vi).
"Common Stock Record Date" has the meaning set forth in Section
12(d)(vi).
"Common Stock" means the common stock of the Company, par value
$0.01 per share.
"Company" has the meaning set forth in the Recitals.
"Company Order" means a written request or order signed in the name
of the Company by its Chairman of the Board, its Chief Executive Officer, its
President or any Executive or Senior Vice President and by its Chief Financial
Officer, Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Conversion Agent" has the meaning set forth in Section 5(a).
"Conversion Price" has the meaning set forth in Section 12.
"Converted Shares" has the meaning set forth in Section 12(a).
"Current Market Price" has the meaning set forth in Section
12(d)(vi).
"Dilution Trigger Event" has the meaning set forth in Section
12(d)(iv).
"Distributed Securities" has the meaning set forth in Section
12(d)(iv).
"Dividend Payment Date" has the meaning set forth in Section 6.
"Dividend Record Date" has the meaning set forth in Section 7(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Expiration Time" has the meaning set forth in Section 12(d)(v).
"fair market value" has the meaning set forth in Section 12(d)(vi).
"Fifth Anniversary Date" has the meaning set forth in Section
8(b)(vi).
"Five Year Accreted Value" means with respect to each $1,072 of
original Liquidation Preference, $1,554.34 (subject to appropriate adjustment
with respect to stock splits, stock dividends and similar events affecting the
Series B Preferred Stock).
"Hold Option" has the meaning set forth in Section 13(a).
"Junior Shares" has the meaning set forth in Section 9(a).
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"Liquidation Preference" means an amount equal to $1,000 per share
plus an amount equal to the Share Option Adjustment Amount per share of Series B
Preferred Stock, subject to change in accordance with Section 6, Section 7 ,
Section 11 and Section 13 hereof, including, without limitation, Accumulated
Dividends and, if applicable and without duplication, the Special Payment.
"Mandatory Redemption Date" has the meaning set forth in Section
10(b); provided, however, that if such date shall not be a Business Day, then
such date shall be the next Business Day.
"nonelecting share" has the meaning set forth in Section 12(e).
"Odd-lot Redemption" has the meaning set forth in Section 10(c).
"Officers' Certificate" means a certificate of the Company signed in
the name of the Company by its Chairman of the Board, its Chief Executive
Officer, its President or an Executive or Senior Vice President and by its Chief
Financial Officer, Treasurer, an Assistant Treasurer, its Secretary or an
Assistant Secretary.
"Optional Redemption" has the meaning set forth in Section 10(a).
"Optional Redemption Date" has the meaning set forth in Section
10(a).
"Outstanding" means (i) when used with respect to shares of Series B
Preferred Stock, as of the date of determination, all shares of Series B
Preferred Stock theretofore authenticated and delivered under this Certificate
of Designation, except (a) shares of Series B Preferred Stock theretofore
converted into shares of Series C Preferred Stock and/or Common Stock in
accordance with Section 12 and shares of Series B Preferred Stock theretofore
canceled by the Registrar or delivered to the Registrar for cancellation; (b)
shares of Series B Preferred Stock for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Registrar or any Paying
Agent (other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the holders
of such shares of Series B Preferred Stock; provided that, if such shares of
Series B Preferred Stock are to be redeemed, notice of such redemption has been
duly given pursuant to this Certificate of Designation or provision therefor
satisfactory to the Registrar has been made; and (c) shares of Series B
Preferred Stock in exchange for or in lieu of which other shares of Series B
Preferred Stock have been authenticated and delivered pursuant to this
Certificate of Designation; provided, however, that, in determining whether the
holders of the shares of Series B Preferred Stock have given any request,
demand, authorization, direction, notice, consent or waiver or taken any other
action hereunder, shares of Series B Preferred Stock owned by the Company or any
Subsidiary of the Company shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Registrar shall be protected in relying
upon any such request, demand, authorization, direction, notice, consent, waiver
or other action, only shares of Series B Preferred Stock which the Registrar has
actual knowledge of being so owned shall be so disregarded. Shares of Series B
Preferred Stock so owned which have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the satisfaction of the Registrar
the pledgee's right so to act with respect to such shares of Series B Preferred
Stock and
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that the pledgee is not the Company or any other obligor upon the shares of
Series B Preferred Stock or any Affiliate of the Company or of such other
obligor and (ii) when used with respect to shares of Series B-1 Preferred Stock,
the same definition of "Outstanding" shall apply thereto with references to
Series B-1 being substituted for references to Series B-2 therein.
"Parity Shares" has the meaning set forth in Section 9(a).
"Paying Agent" has the meaning set forth in Section 5(a).
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such person's preferred or preference stock,
whether now outstanding or issued after the date hereof, including all series
and classes of such preferred or preference stock.
"Purchase Agreement" means the Securities Purchase Agreement, dated
as of February 1, 2000, among the Company and the Purchasers named therein, as
it may be amended from time to time.
"Purchased Shares" has the meaning set forth in Section 12(d)(v).
"Redemption Date" has the meaning set forth in Section 10(d).
"Redemption Notice" has the meaning set forth in Section 10(d).
"Redemption Price" has the meaning set forth in Section 10(a).
"Registrar" has the meaning set forth in Section 3.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 9, 2000, among the Company and the Purchasers.
"Regulated Stockholder" shall mean Chase Equity Associates, LLC or
any other stockholder that (i) is subject to the provisions of Regulation Y or
has an Affiliate subject to provisions of Regulation Y, (ii) holds shares of
Common Stock or Preferred Stock of the Company and (iii) has provided written
notice to the Company of its status as a "Regulated Stockholder" hereunder.
"Regulation Y" shall mean Regulation Y of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to such
Regulation).
"Remarketing Option" has the meaning set forth in Section 13(d).
"Restrictive Legend" has the meaning set forth in Section 4.
"resulting entity" has the meaning set forth in Section 14.
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"SEC" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or, if at
any time after the adoption of this Certificate of Designation such commission
is not existing and performing the duties now assigned to it, then the body
performing such duties at such time.
"SEC Reports" has the meaning set forth in Section 15.
"Securities Act" has the meaning set forth in Section 4.
"Senior Shares" has the meaning set forth in Section 9(a).
"Series B Preferred Stock" means the Series B-1 Preferred Stock and
the Series B-2 Preferred Stock.
"Series B-2 Preferred Stock" has the meaning set forth in Section 1.
"Series B-1 Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-2, due 2015.
"Series B-1 Preferred Stock" means the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-1, due 2015, par value $0.01 per share, to
be issued pursuant to the Series B-1 Certificate of Designations.
"Series C Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Series C Preferred Stock.
"Series C Preferred Stock" means the Company's Convertible Preferred
Stock, Series C, par value $0.01 per share, to be issued pursuant to the Series
C Certificate of Designations.
"Share Factor" means with respect to each share of Series B
Preferred Stock, a fraction, the numerator of which is the Liquidation
Preference of such share as of the Change of Control Date, without giving effect
to the Special Payment, and the denominator of which is the aggregate
Liquidation Preference of all outstanding shares of Series B Preferred Stock as
of the Change of Control Date, without giving effect to the Special Payment.
"Share Option Adjustment Amount" means an amount equal to $72.00.
"Special Payment" has the meaning set forth in Section 13.
"Voting Capital Stock" means with respect to any Person, securities
of any class or classes of Capital Stock in such Person ordinarily entitling the
holders thereof (whether at all times or at the times that such class of Capital
Stock has voting power by reason of the happening of any contingency) to vote in
the election of members of the board of directors or comparable governing body
of such Person.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be duly executed by the undersigned officer of the Company, this
9th day of March, 2000.
VIATEL, INC.,
By: /s/ JAMES P. PRENETTA
---------------------------------
Name: James P. Prenetta
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT A
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. SUCH SHARES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OTHER THAN PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS."
<PAGE>
VIATEL, INC.
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND
RIGHTS OF
CONVERTIBLE PREFERRED STOCK SERIES C
<PAGE>
CERTIFICATE OF DESIGNATIONS
Viatel, Inc., a company organized and existing under the General
Corporation Law of the State of Delaware (the "Company"), certifies that
pursuant to the authority contained in its Certificate of Incorporation (the
"Certificate of Incorporation") and its By-laws (the "By-laws"), and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the board of directors of the Company (the "Board of Directors") at a
meeting duly called and held on January 31, 2000, duly approved and adopted the
following resolution, which resolution remains in full force and effect on the
date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by the Certificate of Incorporation and By-laws, the Board of
Directors does hereby create, authorize and provide for the issue of a series of
Preferred Stock having the following designation, voting powers, preferences and
relative, participating, optional and other special rights:
Certain capitalized terms used herein are defined in Section 11.
1. Number and Designation. The Company shall have a series of Preferred
Stock, which shall be designated as its Series C Convertible Preferred Stock
(the "Series C Preferred Stock"), par value $0.01 per share, with 162,500 shares
initially authorized. Unless otherwise specified, references herein to any
"Section" refer to the Section number specified in this Certificate of
Designation.
2. Issuance. The Company may issue up to 162,500 shares of Series C
Preferred Stock.
3. Registered Form; Liquidation Preference; Registrar. Certificates for
shares of Series C Preferred Stock shall be issuable only in registered form and
only with an initial liquidation preference of $0.01 per share. The Company
shall serve as initial Registrar and Transfer Agent (the "Registrar") for the
Series C Preferred Stock.
4. Registration; Transfer. Shares of the Series C Preferred Stock have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act") and may not be resold, pledged or otherwise transferred prior to the date
when they may be resold pursuant to Rule 144 under the Securities Act other than
(i) to the Company, (ii) pursuant to an exemption from registration under the
Securities Act or (iii) pursuant to an effective registration statement under
the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States. Until such time as it is no longer
required pursuant to the Securities Act, certificates evidencing the Series C
Preferred Stock shall contain a legend (the "Restrictive Legend") evidencing the
foregoing restrictions in substantially the form attached hereto as Exhibit A.
5. Paying Agent and Conversion Agent.
(a) The Company shall maintain (i) an office or agency where shares
of Series C Preferred Stock may be presented for payment (the "Paying Agent"),
(ii) an office or agency where shares of Series C Preferred Stock may be
presented for conversion (the "Conversion
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Agent"), and (iii) a Registrar, which shall be an office or an agency where
shares of Series C Preferred Stock may be presented for transfer. The Company
may appoint the Registrar, the Paying Agent and the Conversion Agent and may
appoint one or more additional paying agents and one or more additional
conversion agents in such other locations as it shall determine. The term
"Paying Agent" includes any additional paying agent, and the term "Conversion
Agent" includes any additional conversion agent. The Company may change any
Paying Agent or Conversion Agent without prior notice to any holder. The Company
shall notify the Registrar of the name and address of any Paying Agent or
Conversion Agent appointed by the Company. If the Company fails to appoint or
maintain another entity as Paying Agent or Conversion Agent, the Registrar shall
act as such. Notwithstanding the foregoing, the Company or any of its Affiliates
may act as Paying Agent, Registrar, coregistrar or Conversion Agent.
(b) If shares of Series C Preferred Stock are issued upon the
transfer, exchange or replacement of shares of Series C Preferred Stock bearing
the Restrictive Legend, or if a request is made to remove such Restrictive
Legend on shares of Series C Preferred Stock, the shares of Series C Preferred
Stock so issued shall bear the Restrictive Legend, or the Restrictive Legend
shall not be removed, as the case may be, unless the holders of such shares
shall request such legend be removed, and outside counsel for such holders
reasonably determines that the transfer of such shares is no longer restricted
by the Securities Act and outside counsel for the Company reasonably concurs in
such determination.
(c) Each holder of a share of Series C Preferred Stock agrees to
indemnify the Company and the Registrar against any liability that may result
from the transfer, exchange or assignment by such holder of such holder's share
of Series C Preferred Stock in violation of any provision of this Certificate of
Designation and/or applicable Federal or state securities law; provided,
however, that such indemnity shall not apply to acts of willful misconduct or
gross negligence on the part of the Company or the Registrar, as the case may
be.
(d) Payments due on the shares of Series C Preferred Stock shall be
payable at the office or agency of the Company maintained for such purpose in
The City of New York and at any other office or agency maintained by the Company
for such purpose. If any such payment is in cash, it shall be payable by wire
transfer (provided that appropriate wire instructions have been received by the
Registrar at least 15 days prior to the applicable date of payment) to a United
States dollar account maintained by the holder with, a bank located in New York
City; provided that at the option of the Company payment of dividends in cash
may be made by check mailed to the address of the person entitled thereto as
such address shall appear in the Series C Preferred Share Register.
6. Dividend and Distribution Rights.
(a) Whenever the Company shall either declare or pay any dividend on
or make any distribution with respect to any Common Stock, the holders of the
Series C Preferred Stock shall be entitled to receive such dividends or
distributions on a ratable as-converted basis (calculated as if all shares of
Series C Preferred Stock had been converted into Common Stock); provided, that
(i) in the case of dividends or distributions payable in shares of Common Stock
of the Company, or options, warrants or rights to acquire shares of such Common
Stock, or securities convertible into or exchangeable for shares of such Common
Stock, the shares,
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<PAGE>
options, warrants, rights or securities so payable shall be payable in (as
applicable) shares of, or options, warrants or rights to acquire, or securities
convertible into or exchangeable for, shares of Series C Preferred Stock (which
on an as-converted basis would equate with the number of shares of Common Stock
which would otherwise be payable or issuable, on a fully-diluted basis, solely
with respect to such dividend or distribution to holders of the Series C
Preferred Stock); provided, however, if any of such shares, options, warrants,
rights or other securities constitute voting securities, then upon the request
of a holder of Series C Preferred Stock, the Company shall make available to
such holder of Series C Preferred Stock, non-voting securities of the
Corporation which are otherwise identical to such voting securities and which
are convertible into or exchangeable for such voting securities on substantially
the same terms as the Series B-2 Preferred Stock is convertible to the Series
B-1 Preferred Stock or the Series C Preferred Stock is convertible into Common
Stock, as applicable.
7. Voting Rights.
(a) The holders of record of shares of Series C Preferred Stock
shall not be entitled to any voting rights except as hereinafter provided in
this Section 7 or as otherwise provided by law.
(b) The approval of the holders of at least a majority of the then
Outstanding shares of Series C Preferred Stock and Series B-2 Preferred Stock
(on an as-converted basis into Series C Preferred Stock) voting or consenting,
as the case may be, as one class, will be required for the Company to:
(i) amend the Certificate of Incorporation, this Certificate
of Designation or the By-Laws so as to (A) affect adversely the rights,
preferences (including, without limitation, liquidation preferences,
conversion rights and dividend rights), privileges or voting rights of
holders of the shares of Series C Preferred Stock, or (B) increase or
decrease the number of authorized shares of Series C Preferred Stock;
(ii) enter into, or permit any of its subsidiaries to enter
into, any agreement that would impose material restrictions on the
Company's ability to honor the exercise of any rights of the holders of
the Series C Preferred Stock; or
(iii) issue any shares of Series C Preferred Stock other than
upon the conversion of shares of the Series B-2 Preferred Stock or
exercise of the A-2 Warrants and the B-2 Warrants (as defined in the
Purchase Agreement).
8. Ranking. In the event of any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary, the holders of the shares of
Series C Preferred Stock then Outstanding shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Company to the
holders of shares of Common Stock by reason of their ownership thereof, (i) an
amount equal to the amount such holders would receive if such holders converted,
in accordance with their terms, their shares of Series C Preferred Stock into
Common Stock immediately prior to such liquidation, dissolution or winding up,
plus (ii) $0.01 per share of Series C Preferred Stock.
9. Conversion to Common.
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<PAGE>
(a) Subject to and upon compliance with the provisions of this
Section 9(a), at the option of the Regulated Stockholder thereof, any share of
Series C Preferred Stock may be converted at any time into one hundred (100)
shares of Common Stock; provided, however, that Series C Preferred Stock held by
a particular Regulated Stockholder may not be converted into Common Stock to the
extent that immediately prior thereto, or as a result of such conversion, the
number of shares of Common Stock held by such Regulated Stockholder would exceed
the number of shares of Common Stock which such Regulated Stockholder reasonably
determines it and its Affiliates may own, control or have the power to vote
under any law, regulation, rule or other requirement of any governmental
authority at the time applicable to such Regulated Stockholder or its
Affiliates. Each Regulated Stockholder may provide for further restrictions upon
the conversion of any shares of Series C Preferred Stock by providing the
Company with signed, written instructions specifying such additional
restrictions and legending such shares as to the existence of such restrictions.
A written request for conversion from any Regulated Stockholder to
the Company stating such Regulated Stockholder's reasonable belief that a
conversion is permissible under all applicable laws, rules and regulations shall
be conclusive and shall obligate the Company to effect such conversion in a
timely manner.
(b) In order to exercise the conversion privilege, the holder of any
share of Series C Preferred Stock to be converted shall surrender the
certificate for such share, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained for that purpose,
accompanied by written notice to the Company at such office or agency that the
holder elects to convert such share or, if fewer than all the shares of Series C
Preferred Stock represented by a single share certificate are to be converted,
the number of shares represented thereby to be converted.
Shares of Series C Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of surrender of
such shares for conversion in accordance with the foregoing provisions, and at
such time the rights of the holders of such shares as holders shall cease, and
the person or persons entitled to receive the shares of Common Stock issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock at such time. As promptly as practicable
on or after the conversion date, the Company shall issue and shall deliver at
such office or agency a certificate or certificates for the number of full
shares of Common Shares issuable upon conversion, together with payment in lieu
of any fraction of a share, as provided in Section 9(c).
In the case of any conversion of fewer than all the shares of Series
C Preferred Stock evidenced by a certificate, upon such conversion the Company
shall execute and the Registrar shall countersign and deliver to the holder
thereof, at the expense of the Company, a new certificate or certificates
representing the number of unconverted shares of Series C Preferred Stock.
(c) No fractional shares of Common Stock shall be issued upon the
conversion of a share of Series C Preferred Stock. If more than one share of
Series C Preferred Stock shall be surrendered for conversion at one time by the
same holder, the number of full shares of Common Stock, which shall be issuable
upon conversion thereof shall be computed on
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<PAGE>
the basis of the aggregate number of shares of Series C Preferred Stock so
surrendered. Instead of any fractional shares of Common Stock, the Company shall
pay a cash adjustment in respect to such fraction in an amount equal to the same
fraction of the closing price (as defined in Section 12(d)(vi) of the Series B-2
Certificate of Designations) per Common Share at the close of business on the
Business Day prior to the day of conversion.
(d) The Company shall not convert or directly or indirectly redeem,
purchase or otherwise acquire any shares of Series C Preferred Stock or any
other class of Capital Stock of the Company or take any other action affecting
the voting rights of such shares, if such action will increase the percentage of
any class of outstanding voting securities owned or controlled by any Regulated
Stockholder (other than any such stockholder which requested that the Company
take such action, or which otherwise waives in writing its rights under this
Section 9(d)), unless the Company simultaneously with taking such action gives
written notice that it is taking such action to each Regulated Stockholder.
(e) In case of any consolidation of the Company with, or merger of
the Company into, any other corporation, or in case of any merger of another
corporation into the Company (other than a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares of
Common Stock or Series C Preferred Stock of the Company), or in case of any
recapitalization or reorganization, or in case of any sale, conveyance or
transfer of all or substantially all the assets of the Company, the holder of
each share of Series C Preferred Stock shall have the right thereafter, to
convert such share of Series C Preferred Stock into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
recapitalization, reorganization, conveyance or transfer by a holder of the
number of shares of Common Stock of the Company into which such share of Series
C Preferred Stock might have been converted immediately prior to such
consolidation, merger, recapitalization, reorganization, conveyance or transfer,
assuming such holder of shares of Common Stock of the Company failed to exercise
his rights of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, recapitalization,
reorganization, conveyance or transfer (provided that, if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
conveyance or transfer is not the same for each share of Common Stock and Series
C Preferred Stock on an as-converted basis of the Company in respect of which
such rights of election shall not have been exercised ("nonelecting share"),
then for the purpose of this Section 9 the kind and amount of securities, cash
and other property receivable upon such consolidation, merger, recapitalization,
reorganization, conveyance or transfer by each nonelecting share shall be deemed
to be the kind and amount so receivable per share by a plurality of the
nonelecting shares). Such securities shall provide for adjustments which, for
events subsequent to the effective date of the triggering event, shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 9. The above provisions of this Section 9 shall similarly apply to
successive consolidations, mergers, recapitalizations, reorganizations,
conveyances or transfers.
(f) In case:
(i) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable otherwise than in cash out of
its earned surplus; or
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<PAGE>
(ii) the Company shall authorize the granting to all holders
of its shares of Common Stock of rights or warrants to subscribe for or
purchase any shares of Capital Stock of any class or of any other rights;
or
(iii) of any reclassification of the Common Stock (other than
a subdivision or combination of the Company's outstanding shares of Common
Stock), or of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or
the sale, conveyance or transfer of all or substantially all the assets of
the Company; or
(iv) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company;
then the Company shall cause to be filed with the Registrar and at each office
or agency maintained for the purpose of conversion of shares of Series C
Preferred Stock, and shall cause to be mailed to all holders at their last
addresses as they shall appear in the shares of Series C Preferred Stock
Register, at least 20 Business Days (or 10 Business Days in any case specified
in clause (i) or (ii) above) prior to the applicable date hereinafter specified,
a notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, rights or warrants, or, if a record is not to be
taken, the date as of which the holders of shares of Common Stock of record to
be entitled to such dividend, distribution, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of shares
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding-up. Failure to give the notice required by this Section
9(f) or any defect therein shall not affect the legality or validity of any
dividend, distribution, right, warrant, reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding-up, or the vote upon any
such action.
(g) The Company shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of shares of Series C
Preferred Stock, the full number of shares of Common Stock then issuable upon
the conversion of all outstanding shares of Series B Preferred Stock and
(without duplication) Series C Preferred Stock.
(h) Miscellaneous.
(i) Stock Splits; Adjustments. If the Company shall in any
manner subdivide (by stock split, stock dividend or otherwise) or combine
(by reverse stock split or otherwise) or reclassify the outstanding shares
of the Common Stock, then the outstanding shares of Series C Preferred
Stock shall be subdivided or combined, as the case may be, to the same
extent, share and share alike, and effective provision shall be made for
the protection of the conversion rights hereunder.
(ii) No Charge. The issuance of certificates for shares of any
Common Stock (upon conversion of shares of Series C Preferred Stock or
otherwise) shall be made
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<PAGE>
without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Company in connection with
such conversion and/or the issuance of shares of Series C Preferred Stock;
provided, however, that the Company shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of
the Series C Preferred Stock converted.
(iii) Simultaneous Conversion of Series B-2 Preferred Stock,
A-2 Warrants and B-2 Warrants to Common Stock. In connection with any
conversion of Series B-2 Preferred Stock to Series C Preferred Stock in
accordance with the Series B-2 Certificate of Designations, or the
exercise of any A-2 Warrants or B-2 Warrants (as defined in the Purchase
Agreement) in accordance with the terms thereof for Series C Preferred
Stock, the holder of such Series B-2 Preferred Stock, A-2 Warrants or B-2
Warrants, as the case may be, may elect simultaneously upon issuance of
any such shares of Series C Preferred Stock to convert any or all of such
shares of Series C Preferred Stock to shares of Common Stock of the
Company or otherwise, in any case in accordance with, and to the extent
permitted by, this Certificate of Designations, as if such holder of
Series B-2 Preferred Stock, A-2 Warrants or B-2 Warrants, as the case may
be, were a holder of Series C Preferred Stock when making such election.
10. Consolidation, Merger, Conveyance or Transfer. Without the vote or
consent of the holders of a majority of the then Outstanding shares of Series C
Preferred Stock, the Company may not consolidate or merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of a The Special Payment
shall be added to the Liquidation Preference as of the Change of Control Date
whether the holders of the Series B Preferred Stock elect the Hold Option or the
Remarketing Option or whether they elect to convert their shares in accordance
with Section 12.ll or substantially all of its assets to, any Person unless (i)
if the Company is the surviving or continuing Person, the Series C Preferred
Stock shall remain outstanding without any amendment that would adversely affect
the preferences, rights or powers of the Series C Preferred Stock, (ii) if the
Company is not the surviving or continuing Person, (a) the entity formed by such
consolidation or merger or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (in any such case, the
"resulting entity") is a corporation organized and existing under the laws of
Bermuda, the United States or any State thereof or the District of Columbia; and
(b) the shares of Series C Preferred Stock are converted into or exchanged for
and become shares of such resulting entity, having in respect of such resulting
entity the same (or more favorable) powers, preferences and relative,
participating, optional or other special rights that the shares of Series C
Preferred Stock had immediately prior to such transaction; and (iii) the Company
shall have delivered to the Registrar an Officers' Certificate and an opinion of
counsel, reasonably satisfactory in form and content, each stating that such
consolidation, merger, conveyance or transfer complies with this Section 10 and
that all conditions precedent herein provided for relating to such transaction
have been complied with.
11. Definitions. For purposes of this Certificate of Designation, the
following terms shall have the meaning set forth below (capitalized terms used
not defined herein shall have the meanings ascribed to them in the Series B-1
Certificate of Designations):
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<PAGE>
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
Without limiting the foregoing, each of Chase Capital Partners, The Chase
Manhattan Corporation, each of their respective affiliates (the "Chase
Entities") and any other person, fund or entity for whom any of the Chase
Entities acts as a fiduciary or provides discretionary management with respect
to any investments or any such direct or indirect interests therein shall be
deemed to be affiliates of each other.
"Board of Directors" has the meaning set forth in the Recitals.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
are authorized or obligated by law or executive order to be closed.
"By-laws" has the meaning set forth in the Recitals.
"Capital Stock" means, with respect to any person, any and all
shares, interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of such person's Capital Stock,
whether outstanding on the Closing Date or issued after the Closing Date, and
any and all rights (other than any evidence of indebtedness), warrants or
options exchangeable for or convertible into such Capital Stock.
"Certificate of Incorporation" has the meaning set forth in the
Recitals.
"Closing Date" means any Closing Date under the Purchase Agreement.
"Common Stock" means the common stock of the Company, par value
$0.01 per share.
"Company" has the meaning set forth in the Recitals.
"Company Order" means a written request or order signed in the name
of the Company by its Chairman of the Board, its Chief Executive Officer, its
President or any Executive or Senior Vice President and by its Chief Financial
Officer, Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Conversion Agent" has the meaning set forth in Section 5(a).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"nonelecting share" has the meaning set forth in Section 9(b).
"Officers' Certificate" means a certificate of the Company signed in
the name of the Company by its Chairman of the Board, its Chief Executive
Officer, its President or an
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<PAGE>
Executive or Senior Vice President and by its Chief Financial Officer,
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary.
"Outstanding" means when used with respect to shares of Series C
Preferred Stock, as of the date of determination, all shares of Series C
Preferred Stock theretofore authenticated and delivered under this Certificate
of Designation, except (a) shares of Series C Preferred Stock theretofore
converted into shares of Common Stock in accordance with Section 9 and shares of
Series C Preferred Stock theretofore canceled by the Registrar or delivered to
the Registrar for cancellation; and (b) shares of Series C Preferred Stock in
exchange for or in lieu of which other shares of Series C Preferred Stock have
been authenticated and delivered pursuant to this Certificate of Designation;
provided, however, that, in determining whether the holders of the shares of
Series C Preferred Stock have given any request, demand, authorization,
direction, notice, consent or waiver or taken any other action hereunder, shares
of Series C Preferred Stock owned by the Company or any Subsidiary of the
Company shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Registrar shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent, waiver or other
action, only shares of Series C Preferred Stock which the Registrar has actual
knowledge of being so owned shall be so disregarded. Shares of Series C
Preferred Stock so owned which have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the satisfaction of the Registrar
the pledgee's right so to act with respect to such shares of Series C Preferred
Stock and that the pledgee is not the Company or any other obligor upon the
shares of Series C Preferred Stock or any Affiliate of the Company or of such
other obligor.
"Paying Agent" has the meaning set forth in Section 5(a).
"Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
"Preferred Stock" means, with respect to any person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such person's preferred or preference stock,
whether now outstanding or issued after the date hereof, including all series
and classes of such preferred or preference stock (other than the Series C
Preferred Stock).
"Purchase Agreement" means the Securities Purchase Agreement, dated
as of February 1, 2000, among the Company and the Purchasers named therein, as
it may be amended from time to time.
"Registrar" has the meaning set forth in Section 3.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 9, 2000, among the Company and the Purchasers.
"Regulated Stockholder" shall mean Chase Equity Associates, LLC or
any other stockholder that (i) is subject to the provisions of Regulation Y or
has an Affiliate subject to provisions of Regulation Y, (ii) holds shares of
Common Stock or Preferred Stock of the
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Company and (iii) has provided written notice to the Company of its status as a
"Regulated Stockholder" hereunder.
"Regulation Y" shall mean Regulation Y of the Board of Governors of
the Federal Reserve System, 12 C.F.R. Part 225 (or any successor to such
Regulation).
"Restrictive Legend" has the meaning set forth in Section 4.
"Securities Act" has the meaning set forth in Section 4.
"Series B-1 Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-1, due 2015.
"Series B-2 Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-2, due 2015.
"Series B-1 Preferred Stock" means the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-1, due 2015, par value $0.01 per shares,
to be issued pursuant to the Series B-1 Certificate of Designations.
"Series B-2 Preferred Stock" means the Company's 7.50% Cumulative
Convertible Preferred Stock, Series B-2, due 2015, par value $0.01 per share, to
be issued pursuant to the Series B-2 Certificate of Designations.
"Series C Preferred Stock" has the meaning set forth in Section 1.
"Series C Certificate of Designations" means the Certificate of
Designations, Preferences and Rights of the Company's Convertible Preferred
Stock, Series C.
10
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be duly executed by the undersigned officer of the Company, this
9th day of March, 2000.
VIATEL, INC.,
By: /s/ JAMES P. PRENETTA
---------------------------------
Name: James P. Prenetta
Title: Senior Vice President and
General Counsel
<PAGE>
EXHIBIT A
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. SUCH SHARES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OTHER THAN PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS."
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of January 3, 2000 by and between VIATEL, INC., a Delaware corporation
with an office at 685 Third Avenue, New York, New York 10017 (the "Company"),
and MICHAEL J. MAHONEY, an individual currently residing at 326 Hillside Road,
Fairfield, Connecticut 06430 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive have previously entered into
an Employment Agreement, dated as of April 1, 1998 and the parties desire to
amend and restate such agreement as set forth below.
NOW THEREFORE, each of the Company and the Executive,
intending to be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to one hundred
percent (100%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the Company or its reputation; or (v) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
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1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01
a share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over more than one calendar year) and
(ii) the amount payable to Executive under any disability plan as adopted by the
Company from time to time (the "Disability Plan").
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1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof) or (iv) material diminution in Executive's authority,
function or position with the Company which continues after 15 days of the date
that written notice thereof is given to the Board by Executive.
1.19 "Income Tax" shall mean all taxes other than the Excise
Tax (including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of the Company, the acceleration of the lapse of any
restrictions on performance stock or restricted stock of the Company held by
Executive or the acceleration of payment from any deferral plan.
1.24 "Performance Year" shall mean each calendar year.
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1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement
(excluding Termination for Good Reason) before mandatory retirement age, if any,
with an immediate, nonactuarially-reduced pension under any Retirement Program,
(2) termination in accordance with any retirement arrangement other than under
the Company's Retirement Program, which is established with Executive's consent
or (3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program
plan for the employees of the Company and participating subsidiaries plus any
excess or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i)
absent a Change of Control (A) the sum of (1) the Base Salary for the calendar
year in which the Termination occurs PLUS (2) the prior year's Bonus Award (not
to be less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and
(ii) in the event of a Change of Control, two hundred and ninety nine percent of
(299%) of the sum of (A) the greater of Executive's Base Salary payable to
Executive by the Company immediately before the Date of Termination and
Executive's Base Salary payable to Executive by the Company immediately before a
Change of Control, whether or not such Base Salary was includible in Executive's
gross income for Federal income tax purposes; plus (B) the average Bonus Award
for the three fiscal years prior to the Change of Control, whether or not such
Bonus Award was includible in Executive's gross income for Federal Income tax
purposes.
1.30 "Severance Period Multiple" shall mean, the quotient
obtained by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth herein, including
any period of consultancy under Section 5.3(e)(viii) hereof.
1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without
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limitation, any Common Stock, any preferred stock and any class or kind
ordinarily having the power to vote for the election of directors, managers or
other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the
Chairman of the Board of Directors and Chief Executive Officer of the Company,
and Executive hereby accepts such employment. In addition, Executive agrees that
he will serve in any similar capacity on behalf of any existing or future
subsidiary of the Company as reasonably requested by the Board.
2.2 TERM. (a) Subject to the provisions of Article V hereof,
the Term shall commence on the date hereof and shall end on the earlier of (i)
the third anniversary of the date hereof and (ii) the date of any Termination.
If at least six (6) months' advance written notice terminating this Agreement is
not received by either party from the other party before the end of the initial
three-year Term, then this Agreement shall be automatically renewed for
successive one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for
the Company's strategy and daily operations and shall have all powers, duties
and responsibilities commensurate with his positions as set forth in Section 2.1
hereof or as may be assigned by the Board from time to time; PROVIDED, HOWEVER,
that any such powers, duties and responsibilities assigned by the Board are
commensurate with such positions. The Executive shall use his best efforts and
devote all of his business time, attention and energy in performing his duties.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the
Company shall pay Executive an annual Base Salary of $450,000 in accordance with
the Company's regular payroll practices. On each anniversary date of this
Agreement, the Executive's Base Salary shall be increased as determined in the
sole discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall not be less than
the amount equal to the product of the Base Salary MULTIPLIED BY the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, All
Items, for the most recent twelve-month period for which such figures are then
available from the Department of Labor Bureau of Statistics or similar report.
3.2 BONUSES. (a) No later than January 15 of each calendar
year, the Company shall pay to Executive an annual Bonus in respect of the prior
fiscal year in an
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amount equal to the Bonus Award multiplied by the Bonus Multiple. For purposes
of this Agreement, the term "Bonus Multiple" shall mean the multiple, if any,
determined by reference to the matrix set forth below, based on the Company's
overall financial performance for the relevant year by providing the percentage
variance between "Revenue" and "EBITDA" actually reported for the fiscal year
and "Revenue" and "EBITDA" as set forth in the annual budget adopted by the
Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5% 0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5% 0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15% 1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25% 1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25% 1.4 1.7 1.8 2.0
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance
Year, he shall receive a pro rated Bonus Award, determined by computing the
Bonus Award as if Executive were employed for the entire Performance Year and
MULTIPLYING such Award by a fraction, of which (i) the numerator is the number
of days he was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid
if Executive's employment was terminated either (x) by the Board for Cause or
(y) by the Executive without Good Reason.
(d) Any compensation which may be otherwise authorized
from time to time by the Board (or an appropriate committee thereof) shall be in
addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive
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officers of the Company. Executive shall also be entitled to participate in all
other welfare and benefit plans maintained by the Company and/or its
subsidiaries, as the case may be, for their respective employees generally.
(b) VACATION. Executive shall be entitled to vacation and
paid holidays consistent with the Company's practices as adopted from time to
time; PROVIDED, HOWEVER, that such vacation shall not be less than 25 days each
year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment
and other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to a escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $3,000.
(d) The foregoing restrictions shall not apply if (i)
such Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of
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competent jurisdiction or any governmental or quasi-governmental agency,
authority or instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that
Executive shall, prior to any such disclosure, immediately notify the Company of
such requirement; PROVIDED, FURTHER, that the Company shall have the right, at
its expense, to object to such disclosures and to seek confidential treatment of
any Confidential Material to be so disclosed on such terms as it shall
determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
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document and to do all other lawfully permitted acts to further the prosecution,
issuance and other enforcement of patents, copyrights or other rights or
protections with the same effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant
or agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
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5.1 TERMINATION OF AGREEMENT. Except as otherwise provided,
this Agreement shall become invalid upon any Termination of employment.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be
terminated for Cause, upon prior written notice from the Board to Executive for
termination for Cause provided that Executive, with his counsel, shall have had
the opportunity during such period to be heard at a meeting of the Board
concerning such determination. The Executive's right to be heard in connection
with a Termination shall not otherwise effect the rights and obligations
hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason, upon prior written notice from
Executive to the Board of his intent to resign for Good Reason provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign. The Executive's
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the
occurence of any transaction resulting in a Change of Control, the Executive may
terminate his employment by providing written notice of such termination to the
Company within 60 days of the effective date of such Change of Control.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 10
days after the date of Termination; and
(ii) all benefits accrued by Executive as of the
date of Termination under all qualified and nonqualified retirement, pension,
profit sharing and
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similar plans of the Company to such extent, in such manner and at such time as
are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange to
provide Executive (and dependents, if applicable) with life, disability (to the
extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable life, disability, accident, dental and medical plans in effect
immediately before a Change of Control of the Company (except that after a
period of thirty six (36) months such benefits shall be provided on the same
financial terms and conditions as provided for under the respective plans).
Should it be determined that any of the medical
benefits to be provided to Executive (and dependents, if applicable) under this
subparagraph could be included in Executive's gross income for federal, state or
local tax purposes, then the following shall apply:
(A) If Executive is retirement eligible on
Executive's Date of Termination, then Executive shall participate in the
Company's medical
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benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three (3) years following
Executive's Date of Termination. Thereafter, Executive shall participate therein
on the same terms as other retired employees; and
(B) If Executive is not eligible for retirement
upon Executive's Date of Termination, Executive will no longer continue to
participate in the Company's medical benefit plans and (i) the Company shall
provide Executive with a cash payment in an amount equal to the amount required
by Executive to pay for coverage under COBRA for the first eighteen (18) months
following Executive's loss of medical coverage, and thereafter, (ii) the Company
shall, for the subsequent eighteen (18) months, purchase for Executive, at its
cost, a policy of medical insurance providing benefits substantially similar to
the benefits Executive would have received under the Company's medical benefit
plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement benefits
cannot be paid under the tax-qualified portion of the Retirement Program, the
Company shall provide such benefits to Executive through the purchase, and
delivery to Executive, of a non-qualified annuity from an insurance company, or
Executive may elect to receive a lump sum payment for the benefits.
(iii) FINANCIAL COUNSELING. The Company shall,
within 60 days of the Date of Termination, make available to Executive financial
counseling, tax counseling and tax preparation services. Executive may select
the organization that will provide such services. However, the Company's
obligation to provide Executive benefits under this subparagraph (iii) shall be
limited to $10,000. The Company shall provide to Executive any information
Executive request regarding Executive's personal and financial situation that
Executive wish to provide to the financial counseling firm in order for the firm
to provide the counseling services required by this subparagraph (iii).
(iv) SEVERANCE PAYMENT. Upon a Change of Control,
the Company shall pay the Severance Payment to Executive not later than the
fifth day following the Date of Termination.
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(v) NO REDUCTION IN SEVERANCE PAYMENT. The Severance
Payment shall not be reduced regardless of whether the Company can properly
deduct amounts paid pursuant to Code section 280G.
(vi) GROSS UP PAYMENT (A) If it shall be determined
that a Payment would be subject to an Excise Tax, then Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of Income Tax and Excise Tax imposed upon
the Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. Such payment shall be made as
soon as practicable.
(B) All determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for Executive's benefit.
(C) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment or the Underpayment. Such
notification shall be given as soon as practicable but no later than ten (10)
business days after Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which Executive give such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is
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due). If the Company notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably
requested by the Company relating to such claim,
(2) take such action in connection with contesting
such claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in
order effectively to contest such claim, and
(4) permit the Company to participate in any
proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (vi)(C), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; PROVIDED FURTHER, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and PROVIDED FURTHER, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.
(D) If, after the receipt by Executive of an amount
advanced by the Company, Executive become entitled to receive, and receive, any
refund with respect to such claim, Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount advanced by
the Company, a determination is made that Executive shall not be entitled to any
refund with respect to such claims and the Company does not notify Executive in
writing of its intent to contest such denial of refund prior to the expiration
of
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thirty (30) days after such determination, then such advance shall be forgiven
and shall not be required to be repaid.
(vii) VESTING. Upon a Change of Control, all
incentive compensation awards, whether stock options, restricted stock or
otherwise, which have not previously vested, shall automatically be deemed to
have vested and Executive may exercise such awards in accordance with the terms
and conditions of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the
occurrence of a Change of Control and provision of Notice of Termination by the
Executive, the Company may elect to require Executive to provide consulting
services for a six (6) month period commencing the date of such election. Such
election shall be made by the Company's provision to Executive of written notice
made no later than thirty (30) days after the receipt of any Notice of
Termination by the Executive.
(B) If such election is made, Executive agrees
to accept such engagement, in accordance with the following terms and
conditions: Executive shall be available to render such advisory and
consultative services up to thirty five (35) hours per week, but no more than
120 hours in any calendar month during the Term. Such services will be performed
during normal business hours, Monday through Friday, national and New York State
holidays excepted, and subject to reasonable absences for vacation and personal
reasons (with respect to any particular week). No more than ten (10) days away
from the New York metropolitan area, including travel, shall be required in any
calendar month.
(C) As consideration for Executive's services
hereunder, the Company shall pay Executive a Consulting Fee equal to 125% of the
Base Salary in effect immediately before the Change of Control and 125% of Bonus
Award for the prior fiscal year pro rated for the six month term and paid on a
semi-monthly basis in accordance with regular payroll practices prior to the
Change of Control. Such fee shall be paid without regard to the number of hours
of services actually provided pursuant to the terms hereof if the Company does
not request the Executive to provide the maximum number of hours.
(D) The Company shall supply Executive with all
materials which the Executive may reasonably require and shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in providing
services, including, but not limited to, first class travel if services are
required to be provided outside of New York State.
(E) Executive shall be indemnified by the
Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal activity, regardless of whether
criminal, civil, administrative or investigative in nature, to which he is made
a party by reason of his then providing or having provided services to the
Company hereunder.
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(F) The Non-Competition period set forth in
Section 4.3 hereof shall commence on the last date of employment of Executive
(as specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
(ix) NO DUTY TO MITIGATE. Executive shall not be
required to mitigate the amount of any payment provided for hereunder by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph 3.4, and
(b) such medical plan benefits are offered to Executive at no cost, Executive
shall no longer be eligible to receive medical plan benefits under this
Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
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(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: General Counsel
(b) if to Executive, to:
326 Hillside Road
Fairfield, Connecticut 06430
with a copy to:
Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related
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agreements, regarding the subject matter hereof. No change, alteration or
modification hereof may be made except in a writing, signed by both of the
parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Section Article IV, Section 5.3 and Article VI of this Agreement shall
survive termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered thisAgreement as of the day first written above.
VIATEL, INC.
By: /s/ SHELDON M. GOLDMAN
--------------------------------
EXECUTIVE
/s/ MICHAEL J. MAHONEY
------------------------------------
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Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of January 3, 2000 by and between VIATEL, INC., a Delaware corporation
with an office at 685 Third Avenue, New York, New York 10017 (the "Company"),
and ALLAN L. SHAW, an individual currently residing at 308 West 92nd Street,
Apartment 5B, New York New York 10025 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive have previously entered into
an Employment Agreement, dated as of April 1, 1998 and the parties desire to
amend and restate such agreement as set forth below.
NOW THEREFORE, each of the Company and the Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to one hundred
percent (100%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the Company or its reputation; or (v) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
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1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01
a share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over
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more than one calendar year) and (ii) the amount payable to Executive under any
disability plan as adopted by the Company from time to time (the "Disability
Plan").
1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof) or (iv) material diminution in Executive's authority,
function or position with the Company which continues after 15 days of the date
that written notice thereof is given to the Board by Executive.
1.19 "Income Tax" shall mean all taxes other than the Excise
Tax (including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of
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the Company, the acceleration of the lapse of any restrictions on performance
stock or restricted stock of the Company held by Executive or the acceleration
of payment from any deferral plan.
1.24 "Performance Year" shall mean each calendar year.
1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement
(excluding Termination for Good Reason) before mandatory retirement age, if any,
with an immediate, nonactuarially-reduced pension under any Retirement Program,
(2) termination in accordance with any retirement arrangement other than under
the Company's Retirement Program, which is established with Executive's consent
or (3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program
plan for the employees of the Company and participating subsidiaries plus any
excess or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i)
absent a Change of Control (A) the sum of (1) the Base Salary for the calendar
year in which the Termination occurs PLUS (2) the prior year's Bonus Award (not
to be less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and
(ii) in the event of a Change of Control, two hundred and fifty percent (250%)
of the sum of (A) the greater of Executive's Base Salary payable to Executive by
the Company immediately before the Date of Termination and Executive's Base
Salary which was payable to Executive by the Company immediately before a Change
of Control, whether or not such Base Salary was includible in Executive's gross
income for Federal income tax purposes; plus (B) the average Bonus Award for the
two (2) fiscal years prior to the Change of Control, whether or not such Bonus
Award was includible in Executive's gross income for Federal Income tax
purposes.
1.30 "Severance Period Multiple" shall mean, the quotient
obtained by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth herein, including
any period of consultancy under Section 5.3(e)(viii) hereof.
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1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the Chief
Financial Officer of the Company, and Executive hereby accepts such employment.
In addition, Executive agrees that he will serve in any similar capacity on
behalf of any existing or future subsidiary of the Company as reasonably
requested by the Board.
2.2 TERM. (a) Subject to the provisions of Article V hereof,
the Term shall commence on the date hereof and shall end on the earlier of (i)
the second anniversary of the date hereof and (ii) the date of any Termination.
If at least six (6) months' advance written notice terminating this Agreement is
not received by either party from the other party before the end of the initial
two-year Term, then this Agreement shall be automatically renewed for successive
one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for
the Company's financial affairs and shall have all powers, duties and
responsibilities commensurate with his positions as set forth in Section 2.1
hereof or as may be assigned by the Board from time to time; PROVIDED, HOWEVER,
that any such powers, duties and responsibilities assigned by the Board are
commensurate with such positions. The Executive shall use his best efforts and
devote all of his business time, attention and energy in performing his duties.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the
Company shall pay Executive an annual Base Salary of $299,000 in accordance with
the Company's regular payroll practices. On each anniversary date of this
Agreement, the Executive's Base Salary shall be increased as determined in the
sole discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall
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not be less than the amount equal to the product of the Base Salary MULTIPLIED
BY the percentage increase, if any, in the Consumer Price Index for all Urban
Consumers, All Items, for the most recent twelve-month period for which such
figures are then available from the Department of Labor Bureau of Statistics or
similar report.
3.2 BONUSES. (a) No later than January 15 of each calendar
year, the Company shall pay to Executive an annual Bonus in respect of the prior
fiscal year in an amount equal to the Bonus Award multiplied by the Bonus
Multiple. For purposes of this Agreement, the term "Bonus Multiple" shall mean
the multiple, if any, determined by reference to the matrix set forth below,
based on the Company's overall financial performance for the relevant year by
providing the percentage variance between "Revenue" and "EBITDA" actually
reported for the fiscal year and "Revenue" and "EBITDA" as set forth in the
annual budget adopted by the Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5% 0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5% 0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15% 1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25% 1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25% 1.4 1.7 1.8 2.0
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance
Year, he shall receive a pro rated Bonus Award, determined by computing the
Bonus Award as if Executive were employed for the entire Performance Year and
MULTIPLYING such Award by a fraction, of which (i) the numerator is the number
of days he was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid
if Executive's employment was terminated either (x) by the Board for Cause or
(y) by the Executive without Good Reason.
(d) Any compensation which may be otherwise authorized
from time to time by the Board (or an appropriate committee thereof) shall be in
addition to the Base Salary and any Bonus Award.
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3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation and
paid holidays consistent with the Company's practices as adopted from time to
time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days each
year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment
and other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive
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shall promptly deliver to the Company all of the Confidential Material (and
copies thereof) that may be in Executive's possession or control. The Company
hereby represents and warrants that it shall give custody of such Confidential
Material to a escrow agent, with terms acceptable to both the Company and the
Executive, for a three-year period at an annual cost not to exceed $3,000.
(d) The foregoing restrictions shall not apply if (i)
such Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist
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the Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
document and to do all other lawfully permitted acts to further the prosecution,
issuance and other enforcement of patents, copyrights or other rights or
protections with the same effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant
or agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he
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will not assert, and it should not be considered, that any provisions of this
Article IV prevented him from earning a living or otherwise are void, voidable
or unenforceable or should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except as otherwise provided,
this Agreement shall become invalid upon any Termination of employment.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be
terminated for Cause, upon prior written notice from the Board to Executive for
termination for Cause provided that Executive, with his counsel, shall have had
the opportunity during such period to be heard at a meeting of the Board
concerning such determination. The Executive's right to be heard in connection
with a Termination shall not otherwise effect the rights and obligations
hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason, upon prior written notice from
Executive to the Board of his intent to resign for Good Reason provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign. The Executive's
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the
occurence of any transaction resulting in a Change of Control, the Executive may
terminate his employment by providing written notice of such termination to the
Company within 60 days of the effective date of such Change of Control.
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5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 10
days after the date of Termination; and
(ii) all benefits accrued by Executive as of the
date of Termination under all qualified and nonqualified retirement, pension,
profit sharing and similar plans of the Company to such extent, in such manner
and at such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange to
provide Executive (and dependents, if applicable) with life, disability (to the
extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable
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life, disability, accident, dental and medical plans in effect immediately
before a Change of Control of the Company (except that after a period of thirty
six (36) months such benefits shall be provided on the same financial terms and
conditions as provided for under the respective plans).
Should it be determined that any of the medical
benefits to be provided to Executive (and dependents, if applicable) under this
subparagraph could be included in Executive's gross income for federal, state or
local tax purposes, then the following shall apply:
(A) If Executive is retirement eligible on
Executive's Date of Termination, then Executive shall participate in the
Company's medical benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three (3) years following
Executive's Date of Termination. Thereafter, Executive shall participate therein
on the same terms as other retired employees; and
(B) If Executive is not eligible for retirement
upon Executive's Date of Termination, Executive will no longer continue to
participate in the Company's medical benefit plans and (i) the Company shall
provide Executive with a cash payment in an amount equal to the amount required
by Executive to pay for coverage under COBRA for the first eighteen (18) months
following Executive's loss of medical coverage, and thereafter, (ii) the Company
shall, for the subsequent eighteen (18) months, purchase for Executive, at its
cost, a policy of medical insurance providing benefits substantially similar to
the benefits Executive would have received under the Company's medical benefit
plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement benefits
cannot be paid under the tax-qualified portion of the Retirement Program, the
Company shall provide such benefits to Executive through the purchase, and
delivery to Executive, of a non-qualified annuity from an insurance company, or
Executive may elect to receive a lump sum payment for the benefits.
(iii) FINANCIAL COUNSELING. The Company shall, within 60
days of the Date of Termination, make available to Executive financial
counseling, tax counseling and
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tax preparation services. Executive may select the organization that will
provide such services. However, the Company's obligation to provide Executive
benefits under this subparagraph (iii) shall be limited to $10,000. The Company
shall provide to Executive any information Executive request regarding
Executive's personal and financial situation that Executive wish to provide to
the financial counseling firm in order for the firm to provide the counseling
services required by this subparagraph (iii).
(iv) SEVERANCE PAYMENT. Upon a Change of Control, the
Company shall pay the Severance Payment to Executive not later than the fifth
day following the Date of Termination.
(v) NO REDUCTION IN SEVERANCE PAYMENT. The Severance
Payment shall not be reduced regardless of whether the Company can properly
deduct amounts paid pursuant to Code section 280G.
(vi) GROSS UP PAYMENT (A) If it shall be determined that
a Payment would be subject to an Excise Tax, then Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that,
after payment by Executive of Income Tax and Excise Tax imposed upon the
Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment equal
to the Excise Tax imposed upon the Payment. Such payment shall be made as soon
as practicable.
(B) All determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of
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the Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Company to or for Executive's benefit.
(C) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment or the Underpayment. Such
notification shall be given as soon as practicable but no later than ten (10)
business days after Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which Executive give such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
(1) give the Company any information reasonably
requested by the Company relating to such claim,
(2) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in
order effectively to contest such claim, and
(4) permit the Company to participate in any
proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (vi)(C), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; PROVIDED FURTHER, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and PROVIDED FURTHER, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up
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Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(D) If, after the receipt by Executive of an amount
advanced by the Company, Executive become entitled to receive, and receive, any
refund with respect to such claim, Executive shall (subject to the Company's
complying with the requirements hereof) promptly pay to the Company the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by Executive of an amount advanced by
the Company, a determination is made that Executive shall not be entitled to any
refund with respect to such claims and the Company does not notify Executive in
writing of its intent to contest such denial of refund prior to the expiration
of thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid.
(vii) VESTING. Upon a Change of Control, all incentive
compensation awards, whether stock options, restricted stock or otherwise, which
have not previously vested, shall automatically be deemed to have vested and
Executive may exercise such awards in accordance with the terms and conditions
of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the occurrence of
a Change of Control and provision of Notice of Termination by the Executive, the
Company may elect to require Executive to provide consulting services for a six
(6) month period commencing the date of such election. Such election shall be
made by the Company's provision to Executive of written notice made no later
than thirty (30) days after the receipt of any Notice of Termination by the
Executive.
(B) If such election is made, Executive agrees to
accept such engagement, in accordance with the following terms and conditions:
Executive shall be available to render such advisory and consultative services
up to thirty five (35) hours per week, but no more than 120 hours in any
calendar month during the Term. Such services will be performed during normal
business hours, Monday through Friday, national and New York State holidays
excepted, and subject to reasonable absences for vacation and personal reasons
(with respect to any particular week). No more than ten (10) days away from the
New York metropolitan area, including travel, shall be required in any calendar
month.
(C) As consideration for Executive's services
hereunder, the Company shall pay Executive a Consulting Fee equal to 125% of the
Base Salary in effect immediately before the Change of Control and 125% of Bonus
Award for the prior fiscal year pro rated for the six month term and paid on a
semi-monthly basis in accordance with regular payroll practices prior to the
Change of Control. Such fee shall be paid without regard to the number of hours
of services actually provided pursuant to the terms hereof if the Company does
not request the Executive to provide the maximum number of hours.
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(D) The Company shall supply Executive with all
materials which the Executive may reasonably require and shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in providing
services, including, but not limited to, first class travel if services are
required to be provided outside of New York State.
(E) Executive shall be indemnified by the Company
against reasonable expenses, including attorney's fees, actually and necessarily
incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal activity, regardless of whether
criminal, civil, administrative or investigative in nature, to which he is made
a party by reason of his then providing or having provided services to the
Company hereunder.
(F) The Non-Competition period set forth in Section
4.3 hereof shall commence on the last date of employment of Executive (as
specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
(ix) NO DUTY TO MITIGATE. Executive shall not be required
to mitigate the amount of any payment provided for hereunder by seeking other
employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph 3.4(a),
and (b) such medical plan benefits are offered to Executive at no cost,
Executive shall no longer be eligible to receive medical plan benefits under
this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
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<PAGE>
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: General Counsel
(b) if to Executive, to:
308 West 92nd Street, Apartment 5B
New York New York 10025
with a copy to:
Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this
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<PAGE>
Agreement shall be construed and interpreted in accordance with and governed by
the laws of the State of New York as applied to contracts capable of being
wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related agreements, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Section Article IV, Section 5.3 and Article VI of this Agreement shall
survive termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
----------------------------------
EXECUTIVE
/s/ ALLAN L. SHAW
--------------------------------------
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<PAGE>
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of January 3, 2000 by and between VIATEL, INC., a Delaware corporation
with an office at 685 Third Avenue, New York, New York 10017 (the "Company"),
and SHELDON M. GOLDMAN, an individual currently residing at 51 Crossway,
Scarsdale, New York 10583 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company and the Executive have previously entered into
an Employment Agreement, dated as of April 1, 1998 and the parties desire to
amend and restate such agreement as set forth below.
NOW THEREFORE, each of the Company and the Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to one hundred
percent (100%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the Company or its reputation; or (v) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the
<PAGE>
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 50% of the total voting power of the then outstanding Voting Stock of
the Company on a fully diluted basis or (ii) individuals who at the beginning of
any period of two consecutive calendar years constituted the Board (together
with any new directors whose election by the Board or whose nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the members of the Board then still in office who either were
members of the Board at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board then in office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01
a share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over more than one calendar year) and
(ii) the amount payable to Executive under any disability plan as adopted by the
Company from time to time (the "Disability Plan").
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<PAGE>
1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof) or (iv) material diminution in Executive's authority,
function or position with the Company which continues after 15 days of the date
that written notice thereof is given to the Board by Executive.
1.19 "Income Tax" shall mean all taxes other than the Excise
Tax (including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of the Company, the acceleration of the lapse of any
restrictions on performance stock or restricted stock of the Company held by
Executive or the acceleration of payment from any deferral plan.
1.24 "Performance Year" shall mean each calendar year.
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<PAGE>
1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement
(excluding Termination for Good Reason) before mandatory retirement age, if any,
with an immediate, nonactuarially-reduced pension under any Retirement Program,
(2) termination in accordance with any retirement arrangement other than under
the Company's Retirement Program, which is established with Executive's consent
or (3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program
plan for the employees of the Company and participating subsidiaries plus any
excess or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i)
absent a Change of Control (A) the sum of (1) the Base Salary for the calendar
year in which the Termination occurs PLUS (2) the prior year's Bonus Award (not
to be less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and
(ii) in the event of a Change of Control, two hundred and fifty percent (250%)
of the sum of (A) the greater of Executive's Base Salary payable to Executive by
the Company immediately before the Date of Termination and Executive's Base
Salary which was payable to Executive by the Company immediately before a Change
of Control, whether or not such Base Salary was includible in Executive's gross
income for Federal income tax purposes; plus (B) the average Bonus Award for the
two (2) fiscal years prior to the Change of Control, whether or not such Bonus
Award was includible in Executive's gross income for Federal Income tax
purposes.
1.30 "Severance Period Multiple" shall mean, the quotient
obtained by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth herein, including
any period of consultancy under Section 5.3(e)(viii) hereof.
1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without
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<PAGE>
limitation, any Common Stock, any preferred stock and any class or kind
ordinarily having the power to vote for the election of directors, managers or
other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the Executive Vice
President, Corporate Development of the Company, and Executive hereby accepts
such employment. In addition, Executive agrees that he will serve in any similar
capacity on behalf of any existing or future subsidiary of the Company as
reasonably requested by the Board.
2.2 TERM. Subject to the provisions of Article V hereof, the Term shall
commence on the date hereof and shall end on the earlier of (i) the second
anniversary of the date hereof and (ii) the date of any Termination. If at least
six (6) months' advance written notice terminating this Agreement is not
received by either party from the other party before the end of the initial
two-year Term, then this Agreement shall be automatically renewed for successive
one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for business
development initiatives and shall have such other powers, duties and
responsibilities as shall be assigned to him from time to time by the Chief
Executive Officer and/or the Board of Directors; PROVIDED, HOWEVER, that any
such powers, duties and responsibilities assigned by the Board are commensurate
with his position specified in Section 2.1 hereof. The Executive shall use his
best efforts and devote all of his business time, attention and energy in
performing his duties. Notwithstanding the foregoing, nothing in this Agreement
shall restrict Executive from managing his personal investments, personal
business affairs and other personal matters, or serving on civic or charitable
boards or committees, if such activities do not interfere with the performance
of his duties hereunder or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the
Company shall pay Executive an annual Base Salary of $304,200 in accordance with
the Company's regular payroll practices. On each anniversary date of this
Agreement, the Executive's Base Salary shall be increased as determined in the
sole discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall not be less than
the amount equal to the product of the Base Salary MULTIPLIED BY the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, All
Items, for the most recent twelve-month period for which such figures are then
available from the Department of Labor Bureau of Statistics or similar report.
3.2 BONUSES. (a) No later than January 15 of each calendar
year, the Company shall pay to Executive an annual Bonus in respect of the prior
fiscal year in an
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<PAGE>
amount equal to the Bonus Award multiplied by the Bonus Multiple. For purposes
of this Agreement, the term "Bonus Multiple" shall mean the multiple, if any,
determined by reference to the matrix set forth below, based on the Company's
overall financial performance for the relevant year by providing the percentage
variance between "Revenue" and "EBITDA" actually reported for the fiscal year
and "Revenue" and "EBITDA" as set forth in the annual budget adopted by the
Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5%
0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5%
0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15%
1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25%
1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25%
1.4 1.7 1.8 2.0
</TABLE>
(b) The final determination of EBITDA with respect to
any Performance Year shall be subject to the approval of the Compensation
Committee. If such approval is not obtained within 15 days after completion of
the Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a
Performance Year, he shall receive a pro rated Bonus Award, determined by
computing the Bonus Award as if Executive were employed for the entire
Performance Year and MULTIPLYING such Award by a fraction, of which (i) the
numerator is the number of days he was employed by the Company during such
Performance Year and (ii) the denominator is 365. Notwithstanding the foregoing,
no Bonus Award shall be paid if Executive's employment was terminated either (x)
by the Board for Cause or (y) by the Executive without Good Reason.
(d) Any compensation which may be otherwise
authorized from time to time by the Board (or an appropriate committee thereof)
shall be in addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive
annual grants of stock options or restricted stock in amounts determined by the
Board (or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall
be entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and
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<PAGE>
benefit plans maintained by the Company and/or its subsidiaries, as the case may
be, for their respective employees generally.
(b) VACATION. Executive shall be entitled to vacation
and paid holidays consistent with the Company's practices as adopted from time
to time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days
each year
(c) Expenses. The Company shall reimburse Executive
for reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment and
other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to a escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $3,000.
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to
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<PAGE>
any such disclosure, immediately notify the Company of such requirement;
PROVIDED, FURTHER, that the Company shall have the right, at its expense, to
object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
document and to do all other lawfully permitted acts to further the prosecution,
issuance and
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<PAGE>
other enforcement of patents, copyrights or other rights or protections with the
same effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant
or agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except as otherwise provided,
this Agreement shall become invalid upon any Termination of employment.
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5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be terminated
for Cause, upon prior written notice from the Board to Executive for termination
for Cause provided that Executive, with his counsel, shall have had the
opportunity during such period to be heard at a meeting of the Board concerning
such determination. The Executive's right to be heard in connection with a
Termination shall not otherwise effect the rights and obligations hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason, upon prior written notice from
Executive to the Board of his intent to resign for Good Reason provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign. The Executive's
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the
occurence of any transaction resulting in a Change of Control, the Executive may
terminate his employment by providing written notice of such termination to the
Company within 60 days of the effective date of such Change of Control.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 10
days after the date of Termination; and
(ii) all benefits accrued by Executive as of the date
of Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
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(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits coverage
of Executive and any dependents then provided under its benefit plans or
policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange to
provide Executive (and dependents, if applicable) with life, disability (to the
extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable life, disability, accident, dental and medical plans in effect
immediately before a Change of Control of the Company (except that after a
period of thirty six (36) months such benefits shall be provided on the same
financial terms and conditions as provided for under the respective plans).
Should it be determined that any of the medical
benefits to be provided to Executive (and dependents, if applicable) under this
subparagraph could be included in Executive's gross income for federal, state or
local tax purposes, then the following shall apply:
(A) If Executive is retirement eligible on
Executive's Date of Termination, then Executive shall participate in the
Company's medical benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three
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(3) years following Executive's Date of Termination. Thereafter, Executive shall
participate therein on the same terms as other retired employees; and
(B) If Executive is not eligible for
retirement upon Executive's Date of Termination, Executive will no longer
continue to participate in the Company's medical benefit plans and (i) the
Company shall provide Executive with a cash payment in an amount equal to the
amount required by Executive to pay for coverage under COBRA for the first
eighteen (18) months following Executive's loss of medical coverage, and
thereafter, (ii) the Company shall, for the subsequent eighteen (18) months,
purchase for Executive, at its cost, a policy of medical insurance providing
benefits substantially similar to the benefits Executive would have received
under the Company's medical benefit plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement
benefits cannot be paid under the tax-qualified portion of the Retirement
Program, the Company shall provide such benefits to Executive through the
purchase, and delivery to Executive, of a non-qualified annuity from an
insurance company, or Executive may elect to receive a lump sum payment for the
benefits.
(iii) FINANCIAL COUNSELING. The Company shall, within
60 days of the Date of Termination, make available to Executive financial
counseling, tax counseling and tax preparation services. Executive may select
the organization that will provide such services. However, the Company's
obligation to provide Executive benefits under this subparagraph (iii) shall be
limited to $10,000. The Company shall provide to Executive any information
Executive request regarding Executive's personal and financial situation that
Executive wish to provide to the financial counseling firm in order for the firm
to provide the counseling services required by this subparagraph (iii).
(iv) SEVERANCE PAYMENT. Upon a Change of Control, the
Company shall pay the Severance Payment to Executive not later than the fifth
day following the Date of Termination.
(v) NO REDUCTION IN SEVERANCE PAYMENT. The Severance
Payment shall not be reduced regardless of whether the Company can properly
deduct amounts paid pursuant to Code section 280G.
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(vi) GROSS UP PAYMENT (A) If it shall be determined
that a Payment would be subject to an Excise Tax, then Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of Income Tax and Excise Tax imposed upon
the Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. Such payment shall be made as
soon as practicable.
(B) All determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for Executive's benefit.
(C) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment or the Underpayment. Such
notification shall be given as soon as practicable but no later than ten (10)
business days after Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which Executive give such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
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(1) give the Company any information
reasonably requested by the Company relating to such claim,
(2) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good
faith in order effectively to contest such claim, and
(4) permit the Company to participate in
any proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (vi)(C) the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; PROVIDED FURTHER, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and PROVIDED FURTHER, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.
(D) If, after the receipt by Executive of
an amount advanced by the Company, Executive become entitled to receive, and
receive, any refund with respect to such claim, Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company, a determination is made that Executive shall not be
entitled to any refund with respect to such claims and the Company does not
notify Executive in writing of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid.
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(vii) VESTING. Upon a Change of Control, all incentive
compensation awards, whether stock options, restricted stock or otherwise, which
have not previously vested, shall automatically be deemed to have vested and
Executive may exercise such awards in accordance with the terms and conditions
of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the occurrence
of a Change of Control and provision of Notice of Termination by the Executive,
the Company may elect to require Executive to provide consulting services for a
six (6) month period commencing the date of such election. Such election shall
be made by the Company's provision to Executive of written notice made no later
than thirty (30) days after the receipt of any Notice of Termination by the
Executive.
(B) If such election is made, Executive agrees
to accept such engagement, in accordance with the following terms and
conditions: Executive shall be available to render such advisory and
consultative services up to thirty five (35) hours per week, but no more than
120 hours in any calendar month during the Term. Such services will be performed
during normal business hours, Monday through Friday, national and New York State
holidays excepted, and subject to reasonable absences for vacation and personal
reasons (with respect to any particular week). No more than ten (10) days away
from the New York metropolitan area, including travel, shall be required in any
calendar month.
(C) As consideration for Executive's services
hereunder, the Company shall pay Executive a Consulting Fee equal to 125% of the
Base Salary in effect immediately before the Change of Control and 125% of Bonus
Award for the prior fiscal year pro rated for the six month term and paid on a
semi-monthly basis in accordance with regular payroll practices prior to the
Change of Control. Such fee shall be paid without regard to the number of hours
of services actually provided pursuant to the terms hereof if the Company does
not request the Executive to provide the maximum number of hours.
(D) The Company shall supply Executive with all
materials which the Executive may reasonably require and shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in providing
services, including, but not limited to, first class travel if services are
required to be provided outside of New York State.
(E) Executive shall be indemnified by the
Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal activity, regardless of whether
criminal, civil, administrative or investigative in nature, to which he is made
a party by reason of his then providing or having provided services to the
Company hereunder.
(F) The Non-Competition period set forth in
Section 4.3 hereof shall commence on the last date of employment of Executive
(as specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
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(ix) NO DUTY TO MITIGATE. Executive shall not be
required to mitigate the amount of any payment provided for hereunder by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph3.4(a),
and (b) such medical plan benefits are offered to Executive at no cost,
Executive shall no longer be eligible to receive medical plan benefits under
this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: General Counsel
(b) if to Executive, to:
51 Crossway
Scarsdale, New York 10583
with a copy to:
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Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related agreements, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Section Article IV, Section 5.3 and Article VI of this Agreement shall
survive termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
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VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
--------------------------------
EXECUTIVE
/s/ SHELDON M. GOLDMAN
------------------------------------
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Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of January 3, 2000 by and between VIATEL, INC., a Delaware corporation with
an office at 685 Third Avenue, New York, New York 10017 (the "Company"), and
FRANCIS J. MOUNT, an individual currently residing at with an address at 35
Fieldstone Drive, Baskingridge, New Jersey 07920 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to enter into an agreement with
Executive to provide certain incentive to Executive to remain in the Company's
employ; and
WHEREAS, the Company and the Executive desire that Company employs
the Executive as the Senior Vice President, Engineering and Operations.
NOW THEREFORE, each of the Company and the Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the meanings
set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section 3.1
hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to one hundred
percent (100%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the Company or its reputation; or (v) conviction of any
felony or a misdemeanor involving fraud, misrepresentation or dishonesty.
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1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01 a
share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth in
Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth in
Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over
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more than one calendar year) and (ii) the amount payable to Executive under any
disability plan as adopted by the Company from time to time (the "Disability
Plan").
1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan or (iii) failure by the Company to
obtain an assumption of this Agreement by any successor of the Company (as
contemplated in Section 6.2 hereof).
1.19 "Income Tax" shall mean all taxes other than the Excise Tax
(including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of the Company, the acceleration of the lapse of any
restrictions on performance stock or restricted stock of the Company held by
Executive or the acceleration of payment from any deferral plan.
1.24 "Performance Year" shall mean each calendar year.
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1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement (excluding
Termination for Good Reason) before mandatory retirement age, if any, with an
immediate, nonactuarially-reduced pension under any Retirement Program, (2)
termination in accordance with any retirement arrangement other than under the
Company's Retirement Program, which is established with Executive's consent or
(3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program plan
for the employees of the Company and participating subsidiaries plus any excess
or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i) absent
a Change of Control (A) the sum of (1) the Base Salary for the calendar year in
which the Termination occurs PLUS (2) the prior year's Bonus Award (not to be
less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and (ii) in
the event of a Change of Control, two hundred and fifty percent (250%) of the
sum of (A) the greater of Executive's Base Salary payable to Executive by the
Company immediately before the Date of Termination and Executive's Base Salary
which was payable to Executive by the Company immediately before a Change of
Control, whether or not such Base Salary was includible in Executive's gross
income for Federal income tax purposes; plus (B) the average Bonus Award for the
two (2) fiscal years prior to the Change of Control, whether or not such Bonus
Award was includible in Executive's gross income for Federal Income tax
purposes.
1.30 "Severance Period Multiple" shall mean, the quotient obtained
by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER, that the
Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2 hereof
and shall include any renewal or extension as set forth herein, including any
period of consultancy under Section 5.3(d) hereof.
1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
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1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the Senior
Vice President, Engineeting and Operations of the Company, and Executive hereby
accepts such employment. In addition, Executive agrees that he will serve in any
similar capacity on behalf of any existing or future subsidiary of the Company
as reasonably requested by the Board.
2.2 TERM.(a) Subject to the provisions of Article V hereof, the
Term shall commence on the date hereof and shall end on the earlier of (i) the
second anniversary of the date hereof and (ii) the date of any Termination. If
at least six (6) months' advance written notice terminating this Agreement is
not received by either party from the other party before the end of the initial
two-year Term, then this Agreement shall be automatically renewed for successive
one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for the
Company's engineering, infrastructure development and network operations centers
and shall have all powers, duties and responsibilities commensurate with his
positions as set forth in Section 2.1 hereof or as may be assigned by the Board
from time to time; PROVIDED, HOWEVER, that any such powers, duties and
responsibilities assigned by the Board are commensurate with such positions. The
Executive shall use his best efforts and devote all of his business time,
attention and energy in performing his duties. Notwithstanding the foregoing,
nothing in this Agreement shall restrict Executive from managing his personal
investments, personal business affairs and other personal matters, or serving on
civic or charitable boards or committees, if such activities do not interfere
with the performance of his duties hereunder or conflict with the Company's
interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the Company
shall pay Executive an annual Base Salary of $250,000 in accordance with the
Company's regular payroll practices. On each anniversary date of this Agreement,
the Executive's Base Salary shall be increased as determined in the sole
discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall not be less than
the amount equal to the product of the Base Salary MULTIPLIED BY the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, All
Items, for the most recent twelve-month period for which such figures are then
available from the Department of Labor Bureau of Statistics or similar report.
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3.2 BONUSES. (a) No later than January 15 of each calendar year,
the Company shall pay to Executive an annual Bonus in respect of the prior
fiscal year in an amount equal to the Bonus Award multiplied by the Bonus
Multiple. For purposes of this Agreement, the term "Bonus Multiple" shall mean
the multiple, if any, determined by reference to the matrix set forth below,
based on the Company's overall financial performance for the relevant year by
providing the percentage variance between "Revenue" and "EBITDA" actually
reported for the fiscal year and "Revenue" and "EBITDA" as set forth in the
annual budget adopted by the Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5% 0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5% 0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15% 1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25% 1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25% 1.4 1.7 1.8 2.0
- -----------------------------------------------------------------------------------------------
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance
Year, he shall receive a pro rated Bonus Award, determined by computing the
Bonus Award as if Executive were employed for the entire Performance Year and
MULTIPLYING such Award by a fraction, of which (i) the numerator is the number
of days he was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid
if Executive's employment was terminated either (x) by the Board for Cause or
(y) by the Executive without Good Reason. The Bonus Award shall be paid no later
than February 28 of the succeeding year.
(d) Any compensation which may be otherwise authorized from
time to time by the Board (or an appropriate committee thereof) shall be in
addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive annual
grants of stock options or restricted stock in amounts determined by the Board
(or any committee thereof) in its sole and absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the Bonus
Award, Executive shall also be entitled to the following:
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(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation and
paid holidays consistent with the Company's practices as adopted from time to
time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days each
year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two years
thereafter, Executive agrees not to solicit or encourage any employee of the
Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment and
other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to a escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $3,000.
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations
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hereunder or by breach of any other person of a fiduciary or confidential
obligation to the Company) or (ii) Executive is required to disclose
Confidential Material by or to any court of competent jurisdiction or any
governmental or quasi-governmental agency, authority or instrumentality of
competent jurisdiction; PROVIDED, HOWEVER, that Executive shall, prior to any
such disclosure, immediately notify the Company of such requirement; PROVIDED,
FURTHER, that the Company shall have the right, at its expense, to object to
such disclosures and to seek confidential treatment of any Confidential Material
to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's
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Disability or other reason, Executive hereby irrevocably designates and appoints
the Company and each of its duly authorized officers and agents as Executive's
agent and attorney-in-fact to act for and on Executive's behalf and stead and to
execute and file any such document and to do all other lawfully permitted acts
to further the prosecution, issuance and other enforcement of patents,
copyrights or other rights or protections with the same effect as if executed
and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant or
agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
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ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except as otherwise provided, this
Agreement shall become invalid upon any Termination of employment.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be terminated
for Cause, upon prior written notice from the Board to Executive for termination
for Cause provided that Executive, with his counsel, shall have had the
opportunity during such period to be heard at a meeting of the Board concerning
such determination. The Executive's right to be heard in connection with a
Termination shall not otherwise effect the rights and obligations hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may terminate
his employment for Good Reason, upon prior written notice from Executive to the
Board of his intent to resign for Good Reason provided that Executive, with his
counsel, shall have met with the Board, if requested by the Board, during such
period with respect to his intent to resign. The Executive's obligation to be
heard in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the occurence
of any transaction resulting in a Change of Control, the Executive may terminate
his employment by providing written notice of such termination to the Company
within 60 days of the effective date of such Change of Control.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within
10 days after the date of Termination; and
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(ii) all benefits accrued by Executive as of the
date of Termination under all qualified and nonqualified retirement, pension,
profit sharing and similar plans of the Company to such extent, in such manner
and at such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange
to provide Executive (and dependents, if applicable) with life, disability (to
the extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable life, disability, accident, dental and medical plans in effect
immediately before a Change of Control of the Company (except that after a
period of thirty six (36) months such benefits shall be provided on the same
financial terms and conditions as provided for under the respective plans).
Should it be determined that any of the
medical benefits to be provided to Executive (and dependents, if applicable)
under this subparagraph could be
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included in Executive's gross income for federal, state or local tax purposes,
then the following shall apply:
(A) If Executive is retirement eligible
on Executive's Date of Termination, then Executive shall participate in the
Company's medical benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three (3) years following
Executive's Date of Termination. Thereafter, Executive shall participate therein
on the same terms as other retired employees; and
(B) If Executive is not eligible for
retirement upon Executive's Date of Termination, Executive will no longer
continue to participate in the Company's medical benefit plans and (i) the
Company shall provide Executive with a cash payment in an amount equal to the
amount required by Executive to pay for coverage under COBRA for the first
eighteen (18) months following Executive's loss of medical coverage, and
thereafter, (ii) the Company shall, for the subsequent eighteen (18) months,
purchase for Executive, at its cost, a policy of medical insurance providing
benefits substantially similar to the benefits Executive would have received
under the Company's medical benefit plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement
benefits cannot be paid under the tax-qualified portion of the Retirement
Program, the Company shall provide such benefits to Executive through the
purchase, and delivery to Executive, of a non-qualified annuity from an
insurance company, or Executive may elect to receive a lump sum payment for the
benefits.
(iii) FINANCIAL COUNSELING. The Company shall,
within 60 days of the Date of Termination, make available to Executive financial
counseling, tax counseling and tax preparation services. Executive may select
the organization that will provide such services. However, the Company's
obligation to provide Executive benefits under this subparagraph (vi) shall be
limited to $10,000. The Company shall provide to Executive any information
Executive request regarding Executive's personal and financial situation that
Executive wish to provide to the financial counseling firm in order for the firm
to provide the counseling services required by this subparagraph (vi).
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(iv) SEVERANCE PAYMENT. Upon a Change of Control,
the Company shall pay the Severance Payment to Executive not later than the
fifth day following the Date of Termination.
(v) NO REDUCTION IN SEVERANCE PAYMENT. The
Severance Payment shall not be reduced regardless of whether the can properly
deduct amounts paid pursuant to Code section 280G.
(vi) GROSS UP PAYMENT (A) If it shall be determined
that a Payment would be subject to an Excise Tax, then Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of Income Tax and Excise Tax imposed upon
the Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. Such payment shall be made as
soon as practicable.
(B) All determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for Executive's benefit.
(C) Executive shall notify the Company in
writing of any claim by the Internal Revenue Service that, if successful, would
require the payment by the Company of the Gross-Up Payment or the Underpayment.
Such notification shall be given as soon as practicable but no later than ten
(10) business days after Executive is informed in writing
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of such claim and shall apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid. Executive shall not pay such
claim prior to the expiration of the 30-day period following the date on which
Executive give such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such period
that it desires to contest such claim, Executive shall:
(1) give the Company any information
reasonably requested by the Company relating to such claim,
(2) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good
faith in order effectively to contest such claim, and
(4) permit the Company to participate in
any proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (ix)(D), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agree to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided further, that if the Company directs Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided further, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.
(D) If, after the receipt by Executive of an
amount advanced by the Company, Executive become entitled to receive, and
receive, any refund with respect to such claim, Executive shall (subject to the
Company's complying with the
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requirements hereof) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Executive of an amount advanced by the
Company, a determination is made that Executive shall not be entitled to any
refund with respect to such claims and the Company does not notify Executive in
writing of its intent to contest such denial of refund prior to the expiration
of thirty (30) days after such determination, then such advance shall be
forgiven and shall not be required to be repaid.
(vii) VESTING. Upon a Change of Control, all
incentive compensation awards, whether stock options, restricted stock or
otherwise, which have not previously vested, shall automatically be deemed to
have vested and Executive may exercise such awards in accordance with the terms
and conditions of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the
occurrence of a Change of Control and provision of Notice of Termination by the
Executive, the Company may elect to require Executive to provide consulting
services for a six (6) month period commencing the date of such election. Such
election shall be made by the Company's provision to Executive of written notice
made no later than thirty (30) days after the receipt of any Notice of
Termination by the Executive.
(B) If such election is made, Executive
agrees to accept such engagement, in accordance with the following terms and
conditions: Executive shall be available to render such advisory and
consultative services up to thirty five (35) hours per week, but no more than
120 hours in any calendar month during the Term. Such services will be performed
during normal business hours, Monday through Friday, national and New York State
holidays excepted, and subject to reasonable absences for vacation and personal
reasons (with respect to any particular week). No more than ten (10) days away
from the New York metropolitan area, including travel, shall be required in any
calendar month.
(C) As consideration for the Executive's
services hereunder, pursuant to this Agreement, the Company shall pay Executive
a Consulting Fee equal to 125% of the Base Salary in effect immediately before
the Change of Control and 125% of Bonus Award for the prior fiscal year pro
rated for the six month term and paid on a semi-monthly basis in accordance with
regular payroll practices prior to the Change of Control. Such fee shall be paid
without regard to the number of hours of services actually provided pursuant to
the terms hereof if the Company does not request the Executive to provide the
maximum number of hours.
(D) The Company shall supply Executive with
all materials which the Executive may reasonably require and shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in providing
services, including, but not limited to, first class travel if services are
required to be provided outside of New York State.
(E) Executive shall be indemnified by the
Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal
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<PAGE>
activity, regardless of whether criminal, civil, administrative or investigative
in nature, to which he is made a party by reason of his then providing or having
provided services to the Company hereunder.
(F) The Non-Competition period set forth in
Section 4.3 hereof shall commence on the last date of employment of Executive
(as specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
(ix) NO DUTY TO MITIGATE. Executive shall not be
required to mitigate the amount of any payment provided for hereunder by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph
2(a)(iii), and (b) such medical plan benefits are offered to Executive at no
cost, Executive shall no longer be eligible to receive medical plan benefits
under this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that he
has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
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<PAGE>
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: Senior Vice President, Business and Legal
Affairs
(b) if to Executive, to:
35 Fieldstone Drive
Baskingridge, New Jersey 07920
with a copy to:
Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed by
the parties hereto in one or more counterparts, each of which shall be deemed to
be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
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<PAGE>
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related agreements, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not be construed as part of this Agreement or to
limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary herein,
Section Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
------------------------------
EXECUTIVE
/s/ FRANCIS J. MOUNT
---------------------------------
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<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
as of January 3, 2000 by and between VIATEL, INC., a Delaware corporation with
an office at 685 Third Avenue, New York, New York 10017 (the "Company"), and
LAWRENCE G. MALONE, an individual currently residing at with an address at 651
Thompson Boulevard, Buffalo Grove, Illinois (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to enter into an agreement with
Executive to provide certain incentive to Executive to remain in the Company's
employ; and
WHEREAS, the Company and the Executive desire that Company employs
the Executive as the Senior Vice President, Sales and Marketing.
NOW THEREFORE, each of the Company and the Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the meanings
set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section 3.1
hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to one hundred
percent (100%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the
<PAGE>
Company or its reputation; or (v) conviction of any felony or a misdemeanor
involving fraud, misrepresentation or dishonesty.
1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01 a
share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth in
Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth in
Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
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<PAGE>
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over more than one calendar year) and
(ii) the amount payable to Executive under any disability plan as adopted by the
Company from time to time (the "Disability Plan").
1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan or (iii) failure by the Company to
obtain an assumption of this Agreement by any successor of the Company (as
contemplated in Section 6.2 hereof).
1.19 "Income Tax" shall mean all taxes other than the Excise Tax
(including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of
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<PAGE>
the Company, the acceleration of the lapse of any restrictions on performance
stock or restricted stock of the Company held by Executive or the acceleration
of payment from any deferral plan.
1.24 "Performance Year" shall mean each calendar year.
1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement (excluding
Termination for Good Reason) before mandatory retirement age, if any, with an
immediate, nonactuarially-reduced pension under any Retirement Program, (2)
termination in accordance with any retirement arrangement other than under the
Company's Retirement Program, which is established with Executive's consent or
(3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program plan
for the employees of the Company and participating subsidiaries plus any excess
or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i) absent
a Change of Control (A) the sum of (1) the Base Salary for the calendar year in
which the Termination occurs PLUS (2) the prior year's Bonus Award (not to be
less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and (ii) in
the event of a Change of Control, two hundred and fifty percent (250%) of the
sum of (A) the greater of Executive's Base Salary payable to Executive by the
Company immediately before the Date of Termination and Executive's Base Salary
which was payable to Executive by the Company immediately before a Change of
Control, whether or not such Base Salary was includible in Executive's gross
income for Federal income tax purposes; plus (B) the average Bonus Award for the
two (2) fiscal years prior to the Change of Control, whether or not such Bonus
Award was includible in Executive's gross income for Federal Income tax
purposes.
1.30 "Severance Period Multiple" shall mean, the quotient obtained
by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER, that the
Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2 hereof
and shall include any renewal or extension as set forth herein, including any
period of consultancy under Section 5.3(d) hereof.
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<PAGE>
1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the Senior
Vice President, Sales and Marketing of the Company, and Executive hereby accepts
such employment. In addition, Executive agrees that he will serve in any similar
capacity on behalf of any existing or future subsidiary of the Company as
reasonably requested by the Board.
2.2 TERM.(a) Subject to the provisions of Article V hereof, the
Term shall commence on the date hereof and shall end on the earlier of (i) the
second anniversary of the date hereof and (ii) the date of any Termination. If
at least six (6) months' advance written notice terminating this Agreement is
not received by either party from the other party before the end of the initial
two-year Term, then this Agreement shall be automatically renewed for successive
one year-periods.
2.3 DUTIES. The Executive shall be responsible for the Company's
sales and marketing strategies and shall have all powers, duties and
responsibilities commensurate with his positions as set forth in Section 2.1
hereof or as may be assigned by the Board from time to time; PROVIDED, HOWEVER,
that any such powers, duties and responsibilities assigned by the Board are
commensurate with such positions. The Executive shall use his best efforts and
devote all of his business time, attention and energy in performing his duties.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the Company
shall pay Executive an annual Base Salary of $250,000 in accordance with the
Company's regular payroll practices. On each anniversary date of this Agreement,
the Executive's Base Salary shall be increased as determined in the sole
discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall not be less than
the amount equal to the product of the Base Salary MULTIPLIED BY the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, All
Items,
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for the most recent twelve-month period for which such figures are then
available from the Department of Labor Bureau of Statistics or similar report.
3.2 BONUSES. (a) No later than January 15 of each calendar year,
the Company shall pay to Executive an annual Bonus in respect of the prior
fiscal year in an amount equal to the Bonus Award multiplied by the Bonus
Multiple. For purposes of this Agreement, the term "Bonus Multiple" shall mean
the multiple, if any, determined by reference to the matrix set forth below,
based on the Company's overall financial performance for the relevant year by
providing the percentage variance between "Revenue" and "EBITDA" actually
reported for the fiscal year and "Revenue" and "EBITDA" as set forth in the
annual budget adopted by the Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5% 0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5% 0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15% 1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25% 1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25% 1.4 1.7 1.8 2.0
- -----------------------------------------------------------------------------------------------
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance
Year, he shall receive a pro rated Bonus Award, determined by computing the
Bonus Award as if Executive were employed for the entire Performance Year and
MULTIPLYING such Award by a fraction, of which (i) the numerator is the number
of days he was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid
if Executive's employment was terminated either (x) by the Board for Cause or
(y) by the Executive without Good Reason. The Bonus Award shall be paid no later
than February 28 of the succeeding year.
(d) Any compensation which may be otherwise authorized from
time to time by the Board (or an appropriate committee thereof) shall be in
addition to the Base Salary and any Bonus Award.
3.3 STOCK OPTIONS. Executive shall be entitled to receive annual
grants of stock options or restricted stock in amounts determined by the Board
(or any committee thereof) in its sole and absolute discretion.
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<PAGE>
3.4 OTHER BENEFITS. In addition to the Base Salary and the Bonus
Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation and
paid holidays consistent with the Company's practices as adopted from time to
time; PROVIDED, HOWEVER, that such vacation shall not be less than 20 days
each year.
(c) EXPENSES. The Company shall reimburse Executive for
reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-LNTERFERENCE. During the Term and a period of two years
thereafter, Executive agrees not to solicit or encourage any employee of the
Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment and
other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to a escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $3,000.
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<PAGE>
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
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(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
document and to do all other lawfully permitted acts to further the prosecution,
issuance and other enforcement of patents, copyrights or other rights or
protections with the same effect as if executed and delivered by Executive.
4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant or
agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
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(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except as otherwise provided, this
Agreement shall become invalid upon any Termination of employment.
5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be terminated
for Cause, upon prior written notice from the Board to Executive for termination
for Cause provided that Executive, with his counsel, shall have had the
opportunity during such period to be heard at a meeting of the Board concerning
such determination. The Executive's right to be heard in connection with a
Termination shall not otherwise effect the rights and obligations hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may terminate
his employment for Good Reason, upon prior written notice from Executive to the
Board of his intent to resign for Good Reason provided that Executive, with his
counsel, shall have met with the Board, if requested by the Board, during such
period with respect to his intent to resign. The Executive's obligation to be
heard in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the occurence
of any transaction resulting in a Change of Control, the Executive may terminate
his employment by providing written notice of such termination to the Company
within 60 days of the effective date of such Change of Control.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
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(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within
10 days after the date of Termination; and
(ii) all benefits accrued by Executive as of the
date of Termination under all qualified and nonqualified retirement, pension,
profit sharing and similar plans of the Company to such extent, in such manner
and at such time as are provided under the terms of such plans and arrangements.
(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits
coverage of Executive and any dependents then provided under its benefit plans
or policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange
to provide Executive (and dependents, if applicable) with life, disability (to
the extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable life, disability, accident, dental and medical plans in effect
immediately before a Change of
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Control of the Company (except that after a period of thirty six (36) months
such benefits shall be provided on the same financial terms and conditions as
provided for under the respective plans).
Should it be determined that any of the
medical benefits to be provided to Executive (and dependents, if applicable)
under this subparagraph could be included in Executive's gross income for
federal, state or local tax purposes, then the following shall apply:
(A) If Executive is retirement eligible
on Executive's Date of Termination, then Executive shall participate in the
Company's medical benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three (3) years following
Executive's Date of Termination. Thereafter, Executive shall participate therein
on the same terms as other retired employees; and
(B) If Executive is not eligible for
retirement upon Executive's Date of Termination, Executive will no longer
continue to participate in the Company's medical benefit plans and (i) the
Company shall provide Executive with a cash payment in an amount equal to the
amount required by Executive to pay for coverage under COBRA for the first
eighteen (18) months following Executive's loss of medical coverage, and
thereafter, (ii) the Company shall, for the subsequent eighteen (18) months,
purchase for Executive, at its cost, a policy of medical insurance providing
benefits substantially similar to the benefits Executive would have received
under the Company's medical benefit plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement
benefits cannot be paid under the tax-qualified portion of the Retirement
Program, the Company shall provide such benefits to Executive through the
purchase, and delivery to Executive, of a non-qualified annuity from an
insurance company, or Executive may elect to receive a lump sum payment for the
benefits.
(iii) FINANCIAL COUNSELING. The Company shall,
within 60 days of the Date of Termination, make available to Executive financial
counseling, tax counseling and tax preparation services. Executive may select
the organization that will provide such services.
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However, the Company's obligation to provide Executive benefits under this
subparagraph (vi) shall be limited to $10,000. The Company shall provide to
Executive any information Executive request regarding Executive's personal and
financial situation that Executive wish to provide to the financial counseling
firm in order for the firm to provide the counseling services required by this
subparagraph (vi).
(iv) SEVERANCE PAYMENT. Upon a Change of Control,
the Company shall pay the Severance Payment to Executive not later than the
fifth day following the Date of Termination.
(v) NO REDUCTION IN SEVERANCE PAYMENT. The
Severance Payment shall not be reduced regardless of whether the can properly
deduct amounts paid pursuant to Code section 280G.
(vi) GROSS UP PAYMENT (A) If it shall be determined
that a Payment would be subject to an Excise Tax, then Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of Income Tax and Excise Tax imposed upon
the Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. Such payment shall be made as
soon as practicable.
(B) All determinations required to be
made hereunder, including whether a Gross-Up Payment is required and the amount
of such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of
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the Underpayment that has occurred and any such Underpayment shall be promptly
paid by the Company to or for Executive's benefit.
(C) Executive shall notify the Company
in writing of any claim by the Internal Revenue Service that, if successful,
would require the payment by the Company of the Gross-Up Payment or the
Underpayment. Such notification shall be given as soon as practicable but no
later than ten (10) business days after Executive is informed in writing of such
claim and shall apprise the Company of the nature of such claim and the date on
which such claim is requested to be paid. Executive shall not pay such claim
prior to the expiration of the 30-day period following the date on which
Executive give such notice to the Company (or such shorter period ending on the
date that any payment of taxes with respect to such claim is due). If the
Company notifies Executive in writing prior to the expiration of such period
that it desires to contest such claim, Executive shall:
(1) give the Company any
information reasonably requested by the Company relating to such claim,
(2) take such action in connection
with contesting such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting legal representation
with respect to such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in
good faith in order effectively to contest such claim, and
(4) permit the Company to
participate in any proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (ix)(D), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agree to prosecute
such contest to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided further, that if the Company directs Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided further, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up
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Payment would be payable hereunder and Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
(D) If, after the receipt by
Executive of an amount advanced by the Company, Executive become entitled to
receive, and receive, any refund with respect to such claim, Executive shall
(subject to the Company's complying with the requirements hereof) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company, a determination is made that
Executive shall not be entitled to any refund with respect to such claims and
the Company does not notify Executive in writing of its intent to contest such
denial of refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid.
(vii) VESTING. Upon a Change of Control, all
incentive compensation awards, whether stock options, restricted stock or
otherwise, which have not previously vested, shall automatically be deemed to
have vested and Executive may exercise such awards in accordance with the terms
and conditions of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the
occurrence of a Change of Control and provision of Notice of Termination by the
Executive, the Company may elect to require Executive to provide consulting
services for a six (6) month period commencing the date of such election. Such
election shall be made by the Company's provision to Executive of written notice
made no later than thirty (30) days after the receipt of any Notice of
Termination by the Executive.
(B) If such election is made, Executive
agrees to accept such engagement, in accordance with the following terms and
conditions: Executive shall be available to render such advisory and
consultative services up to thirty five (35) hours per week, but no more than
120 hours in any calendar month during the Term. Such services will be performed
during normal business hours, Monday through Friday, national and New York State
holidays excepted, and subject to reasonable absences for vacation and personal
reasons (with respect to any particular week). No more than ten (10) days away
from the New York metropolitan area, including travel, shall be required in any
calendar month.
(C) As consideration for the Executive's
services hereunder, pursuant to this Agreement, the Company shall pay Executive
a Consulting Fee equal to 125% of the Base Salary in effect immediately before
the Change of Control and 125% of Bonus Award for the prior fiscal year pro
rated for the six month term and paid on a semi-monthly basis in accordance with
regular payroll practices prior to the Change of Control. Such fee shall be paid
without regard to the number of hours of services actually provided pursuant to
the terms hereof if the Company does not request the Executive to provide the
maximum number of hours.
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(D) The Company shall supply Executive
with all materials which the Executive may reasonably require and shall
reimburse Executive for any reasonable out-of-pocket expenses incurred in
providing services, including, but not limited to, first class travel if
services are required to be provided outside of New York State.
(E) Executive shall be indemnified by
the Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal activity, regardless of whether
criminal, civil, administrative or investigative in nature, to which he is made
a party by reason of his then providing or having provided services to the
Company hereunder.
(F) The Non-Competition period set forth
in Section 4.3 hereof shall commence on the last date of employment of Executive
(as specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
(ix) NO DUTY TO MITIGATE. Executive shall not be
required to mitigate the amount of any payment provided for hereunder by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph
2(a)(iii), and (b) such medical plan benefits are offered to Executive at no
cost, Executive shall no longer be eligible to receive medical plan benefits
under this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that he
has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
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6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: Senior Vice President, Business and Legal
Affairs
(b) if to Executive, to:
651 Thompson Boulevard
Buffalo Grove, Illinois
with a copy to:
Lanny A. Oppenheim, Esq.
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed by
the parties hereto in one or more counterparts, each of which shall be deemed to
be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of
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the State of New York as applied to contracts capable of being wholly performed
in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related agreements, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not be construed as part of this Agreement or to
limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary herein,
Section Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day first written above.
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
-----------------------------
EXECUTIVE
/s/ LAWRENCE G. MALONE
--------------------------------
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Exhibit 10.17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of February 2, 2000 by and between VIATEL, INC., a Delaware corporation
with an office at 685 Third Avenue, New York, New York 10017 (the "Company"),
and WILLIAM C. MURPHY, an individual currently residing at 62 Clonmel Road,
London SW6 U.K. (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Executive and Executive
desires to provide services to the Company;
WHEREAS, the Company and the Executive desire that the Company
employs the Executive as the Company's President.
NOW THEREFORE, each of the Company and the Executive, intending to
be legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Agreement shall have the
meanings set forth below.
1.1 "Accrued Obligations" shall mean, as of the Date of
Termination, the sum of Executive's aggregate accrued but unpaid (A) Base
Salary, (B) Bonus Award, (C) other cash compensation and (D) vacation pay,
expense reimbursements and other cash entitlements, all determined through the
date of Termination.
1.2 "Base Salary" shall mean the amount set forth in Section
3.1 hereof.
1.3 "Bonus Award" shall mean a cash bonus equal to eighty five
percent (85%) of the Executive's Base Salary multiplied by the Bonus Multiple
for the applicable Performance Year.
1.4 "Bonus Multiple" shall mean the amount determined by
reference to Section 3.2 hereof.
1.5 "Cause" shall mean Executive's (i) material violation of
Section 2.3 hereof, which violation has not been cured within 15 days of the
date that written notice thereof is received by Executive from the Board of
Directors of the Company (the "Board"); (ii) material violation of Section 4.1
or 4.2 hereof; (iii) violation of Section 4.3 hereof; (iv) gross negligence or
dishonesty in the performance of his duties hereunder or habitual neglect in
managing the Company; PROVIDED, HOWEVER, that the Board undertakes a
comprehensive review and determines that such conduct is materially injurious or
materially damaging to the
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Company or its reputation; or (v) conviction of any felony or a misdemeanor
involving fraud, misrepresentation or dishonesty.
1.6 "Change of Control" is defined to mean such time as (i) a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.7 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.8 "Common Stock" shall mean the common stock, par value $.01
a share, of the Company.
1.9 "Competitive Activities" shall have the meaning set forth
in Section 4.3 hereof.
1.10 "Confidential Material" shall have the meaning set forth
in Section 4.2 hereof.
1.11 "Control" (including, with correlative meanings, the
terms "controlling," "controlled by," and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of
such Person, whether through ownership of voting securities, by contract or
otherwise.
1.12 "Date of Termination" shall mean (i) if employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that Executive shall not have returned to the full-time performance of
Executive's duties during such thirty (30) day period), and (ii) in all other
cases, the date specified in the Notice of Termination (which shall not be less
than thirty (30) nor more than sixty (60) days, respectively, from the date such
Notice of Termination is given).
1.13 "Disability" shall mean Executive's death or inability to
perform his material duties to the Company by reason of a physical or mental
disability, which inability has existed for at least six consecutive months. Any
question as to the existence of a Disability shall be determined by a qualified
physician not employed by the Company and selected by Executive (or a member of
Executive's immediate family) and approved by the Company. The written
determination of such physician shall be conclusive for all purposes relating to
this Agreement.
1.14 "Disability Payment" shall mean, for purposes of Section
5.3(d) hereof, an amount equal to the greater of (i) 60% of the Base Salary in
effect for the calendar year in which such Disability occurred (or the average
Base Salary if such Disability occurred over
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more than one calendar year) and (ii) the amount payable to Executive under any
disability plan as adopted by the Company from time to time (the "Disability
Plan").
1.15 "EBITDA" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated earnings
before interest, taxes, depreciation and amortization, as such is reported in
the Company's financial statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
1.17 "Excise Tax" shall mean the excise tax imposed by Code
Section 4999 plus any interest or penalties incurred by Executive with respect
to such excise tax.
1.18 "Good Reason" shall mean any (i) reduction in Executive's
Base Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof) or (iv) material diminution in Executive's authority,
function or position with the Company which continues after 15 days of the date
that written notice thereof is given to the Board by Executive.
1.19 "Income Tax" shall mean all taxes other than the Excise
Tax (including any interest or penalties imposed with respect to such taxes)
including, without limitation, any income and employment taxes imposed by any
federal (including (i) FICA and Medicare taxes, and (ii) the tax resulting from
the loss of any federal deductions or exemptions which would have been available
to Executive but for receipt of the Payment), state, local, commonwealth or
foreign government.
1.20 "Intellectual Property" shall mean any idea, process,
trademark, service mark, trade or business secret, invention, technology,
computer program or hardware, original work of authorship, design, formula,
discovery, patent or copyright, application, record, design, plan or
specification and any related improvement, right or claim.
1.21 "Notice of Termination" shall mean a written notice as
provided herein.
1.22 "Participation," including with correlative meanings, the
term "participate," shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.23 "Payment" shall mean any payment or distribution (or
acceleration of benefits) by the Company to or for Executive's benefit (whether
paid or payable or distributed or distributable (or accelerated) pursuant to the
terms of this Agreement or otherwise, but determined without regard to any
additional payments required under Section 5.3(e)(iv) hereof. In addition,
Payment shall include the amount of income deemed to be received by Executive as
a result of the acceleration of the exercisability of any of Executive's options
to purchase stock of the Company, the acceleration of the lapse of any
restrictions on performance stock or restricted stock of the Company held by
Executive or the acceleration of payment from any deferral plan.
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1.24 "Performance Year" shall mean each calendar year.
1.25 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.26 "Retirement" shall mean (1) voluntary retirement
(excluding Termination for Good Reason) before mandatory retirement age, if any,
with an immediate, nonactuarially-reduced pension under any Retirement Program,
(2) termination in accordance with any retirement arrangement other than under
the Company's Retirement Program, which is established with Executive's consent
or (3) mandatory retirement as set forth under any Retirement Program adopted by
the Company as it existed before the Change of Control or as agreed to by
Executive following a Change of Control.
1.27 "Retirement Program" shall mean any retirement program
plan for the employees of the Company and participating subsidiaries plus any
excess or supplemental pension plans maintained by the Company.
1.28 "Revenue" shall mean, with respect to the Company on a
consolidated basis for any Performance Year, the Company's consolidated net
revenue for such Performance Year as determined in accordance with generally
accepted accounting principles consistently applied, including revenue earned
during such Performance Year and less credits and discounts issued and accrued
during such Performance Year.
1.29 "Severance Payment" shall mean an amount equal to (i)
absent a Change of Control (A) the sum of (1) the Base Salary for the calendar
year in which the Termination occurs PLUS (2) the prior year's Bonus Award (not
to be less than $100,000) MULTIPLIED BY (B) the Severance Period Multiple; and
(ii) in the event of a Change of Control, two hundred and fifty percent of
(250%) of the sum of (A) the greater of Executive's Base Salary payable to
Executive by the Company immediately before the Date of Termination and
Executive's Base Salary which are payable to Executive by the Company
immediately before a Change of Control, whether or not such Base Salary was
includible in Executive's gross income for Federal income tax purposes; plus (B)
the average Bonus Award for the two fiscal years prior to the Change of Control,
whether or not such Bonus Award was includible in Executive's gross income for
Federal Income tax purposes.
1.30 "Severance Period Multiple" shall mean, the quotient
obtained by DIVIDING (i) the Severance Period by (ii) 12; PROVIDED, HOWEVER,
that the Severance Period Multiple shall not be less than one.
1.31 "Severance Period" shall mean the number of full calendar
months remaining in the Term on the date of any Termination.
1.32 "Term" shall have the meaning set forth in Section 2.2
hereof and shall include any renewal or extension as set forth herein, including
any period of consultancy under Section 5.3(e)(viii) hereof.
1.33 "Termination" shall mean termination of Executive's
employment with the Company for any reason.
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1.34 "Voting Stock" shall mean with respect to any share,
interest, participation or other equivalent (however designated, whether voting
or non-voting) in equity of the Company, whether now outstanding or issued after
the date hereof, including, without limitation, any Common Stock, any preferred
stock and any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the Board.
ARTICLE II
EMPLOYMENT AND TERM
2.1 EMPLOYMENT. The Executive shall be employed as the
President of the Company and Executive hereby accepts such employment. In
addition, Executive agrees that he will serve in any similar capacity on behalf
of any existing or future subsidiary of the Company as reasonably requested by
the Board.
2.2 TERM. (a) Subject to the provisions of Article V hereof,
the Term shall commence on the date hereof and shall end on the earlier of (i)
the second anniversary of the date hereof and (ii) the date of any Termination.
If at least six (6) months' advance written notice terminating this Agreement is
not received by either party from the other party before the end of the initial
two-year Term, then this Agreement shall be automatically renewed for successive
one year-periods.
2.3 DUTIES. The Executive shall be directly responsible for
the Company's daily operations and shall have all powers, duties and
responsibilities commensurate with his position as set forth in Section 2.1
hereof or as may be assigned by the Chief Executive Officer and/or the Board
from time to time; PROVIDED, HOWEVER, that any such powers, duties and
responsibilities assigned by the Board are commensurate with such position. The
Executive shall use his best efforts and devote all of his business time,
attention and energy in performing his duties. Notwithstanding the foregoing,
nothing in this Agreement shall restrict Executive from managing his personal
investments, personal business affairs and other personal matters, or serving on
civic or charitable boards or committees, if such activities do not interfere
with the performance of his duties hereunder or conflict with the Company's
interests.
ARTICLE III
COMPENSATION AND BENEFITS
3.1 BASE SALARY. For services performed by Executive, the
Company shall pay Executive an annual Base Salary of $395,000 in accordance with
the Company's regular payroll practices. On each anniversary date of this
Agreement, the Executive's Base Salary shall be increased as determined in the
sole discretion of the Compensation Committee of the Board (the "Compensation
Committee"); PROVIDED, HOWEVER, that such annual increase shall not be less than
the amount equal to the product of the Base Salary MULTIPLIED BY the percentage
increase, if any, in the Consumer Price Index for all Urban Consumers, All
Items, for the most recent twelve-month period for which such figures are then
available from the Department of Labor Bureau of Statistics or similar report.
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3.2 BONUSES. (a) ANNUAL BONUS. (i) No later than January 15 of
each calendar year, the Company shall pay to Executive an annual Bonus in
respect of the prior fiscal year in an amount equal to the Bonus Award
multiplied by the Bonus Multiple. For purposes of this Agreement, the term
"Bonus Multiple" shall mean the multiple, if any, determined by reference to the
matrix set forth below, based on the Company's overall financial performance for
the relevant year by providing the percentage variance between "Revenue" and
"EBITDA" actually reported for the fiscal year and "Revenue" and "EBITDA" as set
forth in the annual budget adopted by the Board.
EBITDA VARIANCE (ACTUAL VS. BUDGET)
<TABLE>
<CAPTION>
-15% TO -5% -5% TO 5% +5.1% TO 15% + 15%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE -15% TO -5%
0.6 0.7 0.8 1.0
------------------------------------------------------------
VARIANCE -4.99% TO 5%
0.8 1.0 1.1 1.2
------------------------------------------------------------
(ACTUAL +5% TO 15%
1.0 1.1 1.2 1.4
------------------------------------------------------------
VS. +15.1% TO 25%
1.2 1.5 1.7 1.8
------------------------------------------------------------
BUDGET) + 25% 1.4 1.7 1.8 2.0
</TABLE>
(ii) The final determination of EBITDA with respect
to any Performance Year shall be subject to the approval of the Compensation
Committee. If such approval is not obtained within 15 days after completion of
the Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(iii) If Executive is employed for a part of a
Performance Year, he shall receive a pro rated Bonus Award, determined by
computing the Bonus Award as if Executive were employed for the entire
Performance Year and MULTIPLYING such Award by a fraction, of which (i) the
numerator is the number of days he was employed by the Company during such
Performance Year and (ii) the denominator is 365. Notwithstanding the foregoing,
no Bonus Award shall be paid if Executive's employment was terminated either (x)
by the Board for Cause or (y) by the Executive without Good Reason.
(iv) Any compensation which may be otherwise
authorized from time to time by the Board (or an appropriate committee thereof)
shall be in addition to the Base Salary and any Bonus Award.
(b) SPECIAL BONUSES.(i) Promptly following the
execution of this Agreement, Executive shall receive a signing bonus of
$200,000. In addition, following Executive's repatriation to the United States,
Executive shall receive a relocation bonus of $150,000, which amount shall be
offset against any annual bonus paid to Executive for fiscal year 2000.
3.3 STOCK OPTIONS/RESTRICTED STOCK. In connection with the
execution of this Agreement, Executive shall receive options to purchase 189,000
shares of Common Stock
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and 48,000 shares of restricted Common Stock. In addition, Executive shall be
entitled to receive annual grants of stock options and/or restricted stock in
amounts determined by the Board (or any committee thereof) in its sole and
absolute discretion.
3.4 OTHER BENEFITS. In addition to the Base Salary and the
Bonus Award, Executive shall also be entitled to the following:
(a) PARTICIPATION IN BENEFIT PLANS. Executive shall be
entitled to participate in and receive benefits under all present and future
life, accident, disability, medical, pension, and savings plan and all similar
benefits made available to senior executive officers of the Company. Executive
shall also be entitled to participate in all other welfare and benefit plans
maintained by the Company and/or its subsidiaries, as the case may be, for their
respective employees generally.
(b) VACATION. Executive shall be entitled to vacation and
paid holidays consistent with the Company's practices as adopted from time to
time; PROVIDED, HOWEVER, that such vacation shall not be less than twenty (20)
days each year.
(c) CAR ALLOWANCE. Executive shall be entitled to receive
a car allowance of $1,000 per month while residing in the United Kingdom. Once
Executive has been repatriated to the United States, the foregoing car allowance
shall terminate and be replaced with a parking allowance in the range of $500
per month
(d) HOUSE HUNTING EXPENSE AND CLOSING EXPENSE ALLOWANCE.
Executive shall be entitled to reimbursement of costs (business-class airfare,
five nights accommodations and meals) associated with two trips by himself and
his wife from the United Kingdom to the United States for the purpose of
locating a primary residence in the greater New York metropolitan area. In
addition, Executive shall be entitled to reimbursement for up to $25,000 of
closing costs (inclusive of associated legal fees) in connection with the
purchase of his new primary residence in greater the New York metropolitan area.
(e) FAMILY REPATRIATION. Executive shall be entitled to
reimbursement for business-class airfare, ground transportation, meals and
incidentals associated with the repatriation of Executive's family to the United
States. In addition, the Company will reimburse Executive for any loss incurred
on the sale of up to two of Executive's personal automobiles located in the
United Kingdom, the reimbursable amount of which will be determined on the basis
of a percentage of the sales price based on the age of the automobile, using
five-year straight-line depreciation. Further, Executive shall also be entitled
to elect to have the Company either (i) purchase his residence in London at its
fair market value (which shall not be less than the sum of the original purchase
price paid by Executive, associated closing costs and documented costs of any
improvements made to the house by Executive) or (ii) provide rental management
of Executive's residence in London, which services will be provided by
Relocation Resources International, and pay the difference, if any, between
Executive's mortgage expense on his London residence and the monthly rental
which is obtained for the residence. In connection with Executive's
repatriation, the Company will arrange for, and bear the costs associated with,
the shipment of Executive's household goods via its international moving company
and will arrange and pay for one door-to-door air shipment of any personal
effects that Executive needs immediately upon his arrival in the
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United States. Finally, Executive shall receive a lump-sum payment for thirty
(30) days of interim living in the New York metropolitan area based on a per
diem rate for lodging, car rental, meals and incidentals.
(f) EXPENSES The Company shall reimburse Executive for
reasonable travel expenses and out of pocket business expenses incurred by
Executive in the performance of his duties hereunder, provided appropriate
documentation supporting such expenses is submitted in accordance with the
Company's governing policies.
ARTICLE IV
COVENANTS
4.1 NON-INTERFERENCE. During the Term and a period of two
years thereafter, Executive agrees not to solicit or encourage any employee of
the Company who is employed in an executive, managerial, administrative or
professional capacity or who possesses Confidential Material to leave the
employment of the Company.
4.2 NONDISCLOSURE OF CONFIDENTIAL MATERIAL. (a) In the
performance of his duties hereunder, Executive shall have access to confidential
records and information, including, but not limited to, information relating to
(i) any Intellectual Property or (ii) the Company's business practices,
finances, developments, customers, affairs, marketing or purchasing strategy or
other secret information (collectively, clauses (i) and (ii) of this Section
4.2(a) are referred to as the "Confidential Material").
(b) All Confidential Material shall be disclosed to
Executive in confidence. Except in performing his duties hereunder, Executive
shall not, during the Term and at all times thereafter, disclose or use any
Confidential Material other than for Company purposes.
(c) All records, files, drawings, documents, equipment and
other tangible items containing Confidential Material shall be the Company's
exclusive property, and, upon termination of this Agreement, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and copies thereof) that may be in Executive's
possession or control. The Company hereby represents and warrants that it shall
give custody of such Confidential Material to a escrow agent, with terms
acceptable to both the Company and the Executive, for a three-year period at an
annual cost not to exceed $3,000.
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; PROVIDED, HOWEVER, that Executive
shall, prior to any such disclosure, immediately notify the Company of such
requirement; PROVIDED, FURTHER, that the Company shall have the right, at its
expense, to object to such disclosures and to seek
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confidential treatment of any Confidential Material to be so disclosed on such
terms as it shall determine.
4.3 NON-COMPETITION. (a) The Executive shall not, during the
Term, Control any Person which is engaged, directly or indirectly, or
Participate in any business that is competitive with the Company's business of
developing, operating or expanding a facilities-based telecommunications voice
or data network within any country in any European Union member state,
Switzerland or any country (excluding the Americas) in which the Company
currently has a switch or point of presence for either origination or
termination of voice or data transmissions or in which the Company is so engaged
in business or proposes to be so engaged in business in accordance with its
strategic business plan current at the time of the Termination (including the
solicitation of any customer of the Company on behalf of any competitor or any
other business, directly, indirectly on behalf of himself or any other Person)
(collectively, "Competitive Activities"); PROVIDED, HOWEVER, that nothing in
this Agreement shall preclude Executive from owning less than 5% of any class of
publicly traded equity of any Person engaged in any Competitive Activity.
Notwithstanding the immediately preceding sentence, if the Company has ceased to
so provide such services within any such country at the time of Executive's
Termination (or any time thereafter), the covenant set forth in the immediately
preceding sentence shall no longer be applicable to such any such business in
such country.
(b) Upon any Termination, the Executive shall not, for
himself or any third party, directly or indirectly, for a period of one-year
following the date of such Termination engage in Competitive Activities.
4.4 EXECUTIVE INVENTIONS AND IDEAS.
(a) Executive hereby agrees to assign to the Company,
without further consideration, his entire right, title and interest (within the
United States and all foreign jurisdictions), to any Intellectual Property
created, conceived, developed or reduced to practice by Executive (alone or with
others), free and clear of any lien or encumbrance. If any Intellectual Property
shall be deemed patentable or otherwise registrable, Executive shall assist the
Company (at its expense) in obtaining letters patent or other applicable
registration therein and shall execute all documents and do all things
(including testifying at the Company's expense) necessary or appropriate to
obtain letters patent or other applicable registration therein and to vest in
the Company, or any affiliate specified by the Board.
(b) Should the Company be unable to secure Executive's
signature on any document necessary to apply for, prosecute, obtain or enforce
any patent, copyright or other right or protection relating to any Intellectual
Property, whether due to Executive's Disability or other reason, Executive
hereby irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as Executive's agent and attorney-in-fact to act
for and on Executive's behalf and stead and to execute and file any such
document and to do all other lawfully permitted acts to further the prosecution,
issuance and other enforcement of patents, copyrights or other rights or
protections with the same effect as if executed and delivered by Executive.
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4.5 ENFORCEMENT.
(a) Executive acknowledges that violation of any covenant
or agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights which the Company may have for damages, and all
of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application
thereof to any person, place or circumstance, shall be held by a court of
competent jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this
Article IV may limit his ability to earn a livelihood in a business similar to
the business of the Company but nevertheless agrees and hereby acknowledges that
(i) such provisions do not impose a greater restraint than is necessary to
protect the goodwill or other business interests of the Company; (ii) such
provisions contain reasonable limitations as to time and the scope of activity
to be restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by
Executive as part of the consideration for this Agreement and as an inducement
to the Company to enter into this Agreement and accept the obligations
hereunder.
ARTICLE V
TERMINATION
5.1 TERMINATION OF AGREEMENT. Except as otherwise provided,
this Agreement shall become invalid upon any Termination of employment.
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5.2 PROCEDURES APPLICABLE TO TERMINATION.
(a) TERMINATION FOR CAUSE. The Executive may be terminated
for Cause, upon prior written notice from the Board to Executive for termination
for Cause provided that Executive, with his counsel, shall have had the
opportunity during such period to be heard at a meeting of the Board concerning
such determination. The Executive's right to be heard in connection with a
Termination shall not otherwise effect the rights and obligations hereunder.
(b) RESIGNATION FOR GOOD REASON. The Executive may
terminate his employment for Good Reason, upon prior written notice from
Executive to the Board of his intent to resign for Good Reason provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign. The Executive's
obligation to be heard in connection with a Termination shall not otherwise
effect the rights and obligations hereunder.
(c) TERMINATION WITHOUT CAUSE. The Executive may be
terminated without Cause, upon prior written notice from the Board to Executive,
by a vote of the Board, provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
with respect to such determination. The Executive's right to be heard in
connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(d) TERMINATION FOR DISABILITY. The Executive may be
terminated for Disability, upon prior written notice from the Board to
Executive, by a vote of the Board, provided that Executive, with his counsel,
shall have had the opportunity during such period to be heard at a meeting of
the Board with respect to such determination. The Executive's right to be heard
in connection with a Termination shall not otherwise effect the rights and
obligations hereunder.
(e) TERMINATION UPON A CHANGE OF CONTROL. Upon the
occurence of any transaction resulting in a Change of Control, the Executive may
terminate his employment by providing written notice of such termination to the
Company within 60 days of the effective date of such Change of Control.
5.3 OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) ALL TERMINATIONS. Upon any Termination, the Company
shall pay to Executive, or, upon Executive's Disability, to his heirs, estate or
legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 10
days after the date of Termination; and
(ii) all benefits accrued by Executive as of the date
of Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
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(b) TERMINATION WITHOUT CAUSE OR RESIGNATION FOR GOOD
REASON. If the Board terminates Executive's employment without Cause (excluding
Termination because of Disability), or if Executive resigns for Good Reason, in
addition to the amounts payable under Section 5.3(a) hereof:
(i) The Company shall pay Executive the Severance
Payment in a lump sum within 10 days after the date of Termination; and
(ii) The Company shall continue all benefits coverage
of Executive and any dependents then provided under its benefit plans or
policies for the unexpired portion of the Term.
(c) TERMINATION FOR CAUSE OR RESIGNATION WITHOUT GOOD
REASON. If the Board terminates Executive's employment for Cause, or if
Executive resigns without Good Reason, Executive shall only be entitled to the
amounts payable under Section 5.3(a) hereof.
(d) TERMINATION FOR DISABILITY. Upon Termination of
Executive because of a Disability, in addition to the amounts payable under
Section 5.3(a) hereof, the Company shall pay the aggregate Disability Payment
for the greater of (i) three years (in accordance with the Company's regular
payroll practices then in existence) and (ii) the period covered by any
Disability Plan.
(e) TERMINATION UPON A CHANGE OF CONTROL. If Executive
provides Notice of Termination of employment within 60 days of the date that a
Change of Control occurs, in addition to the amounts payable under Section
5.3(a) hereof, Executive shall be entitled to the benefits provided below,
without regard to any contrary provision of any plan:
(i) INSURANCE COVERAGE. The Company shall arrange to
provide Executive (and dependents, if applicable) with life, disability (to the
extent available at standard commercial rates), accident, dental and medical
benefits substantially equivalent to those which Executive receives, or was
entitled to receive, from the Company immediately before a Change of Control of
the Company. Such benefits shall be provided for the longer of (x) thirty six
(36) months after such Date of Termination or (y) the period during which such
benefits would have been provided to Executive, as a terminated employee, under
the applicable life, disability, accident, dental and medical plans in effect
immediately before a Change of Control of the Company (except that after a
period of thirty six (36) months such benefits shall be provided on the same
financial terms and conditions as provided for under the respective plans).
Should it be determined that any of the medical
benefits to be provided to Executive (and dependents, if applicable) under this
subparagraph could be included in Executive's gross income for federal, state or
local tax purposes, then the following shall apply:
(A) If Executive is retirement eligible on
Executive's Date of Termination, then Executive shall participate in the
Company's medical benefit plans as if Executive retired from the Company on
Executive's Date of Termination, except that the Company shall provide such
medical coverage at no cost to Executive for three
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(3) years following Executive's Date of Termination. Thereafter, Executive shall
participate therein on the same terms as other retired employees; and
(B) If Executive is not eligible for retirement
upon Executive's Date of Termination, Executive will no longer continue to
participate in the Company's medical benefit plans and (i) the Company shall
provide Executive with a cash payment in an amount equal to the amount required
by Executive to pay for coverage under COBRA for the first eighteen (18) months
following Executive's loss of medical coverage, and thereafter, (ii) the Company
shall, for the subsequent eighteen (18) months, purchase for Executive, at its
cost, a policy of medical insurance providing benefits substantially similar to
the benefits Executive would have received under the Company's medical benefit
plans.
(ii) RETIREMENT BENEFITS. (A) The Company shall pay
Executive, at the time Executive is entitled to be paid a retirement pension
under the Retirement Program, a retirement pension equal to the greater of (x)
an amount computed in accordance with the terms of any Retirement Program in
effect immediately before the Change of Control, or (y) an amount computed in
accordance with the terms of the Retirement Program in effect immediately before
the Date of Termination, in either case less the amount of retirement pension
actually to be paid to Executive under the Retirement Program. In computing the
amounts of Executive's retirement pension hereunder and vesting thereunder,
three years shall be added to Executive's actual age and to actual service under
the Retirement Program so that Executive's retirement pension will be the amount
it would have been if Executive had been three years older than Executive
actually were, and had three years more years of service than Executive actually
had, on the Date of Termination.
(B) If for any reason, the retirement benefits
cannot be paid under the tax-qualified portion of the Retirement Program, the
Company shall provide such benefits to Executive through the purchase, and
delivery to Executive, of a non-qualified annuity from an insurance company, or
Executive may elect to receive a lump sum payment for the benefits.
(iii) FINANCIAL COUNSELING. The Company shall, within
60 days of the Date of Termination, make available to Executive financial
counseling, tax counseling and tax preparation services. Executive may select
the organization that will provide such services. However, the Company's
obligation to provide Executive benefits under this subparagraph (iii) shall be
limited to $10,000. The Company shall provide to Executive any information
Executive request regarding Executive's personal and financial situation that
Executive wish to provide to the financial counseling firm in order for the firm
to provide the counseling services required by this subparagraph (iii).
(iv) SEVERANCE PAYMENT. Upon a Change of Control, the
Company shall pay the Severance Payment to Executive not later than the fifth
day following the Date of Termination.
(v) NO REDUCTION IN SEVERANCE PAYMENT. The Severance
Payment shall not be reduced regardless of whether the Company can properly
deduct amounts paid pursuant to Code section 280G.
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(vi) GROSS UP PAYMENT (A) If it shall be determined
that a Payment would be subject to an Excise Tax, then Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that, after payment by Executive of Income Tax and Excise Tax imposed upon
the Gross-Up Payment, Executive shall retain an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payment. Such payment shall be made as
soon as practicable.
(B) All determinations required to be made
hereunder, including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the public accounting firm that is retained by
the Company as of the date immediately before a Change of Control of the Company
(the "Accounting Firm") which shall provide detailed supporting calculations
both to the Company and to Executive within fifteen (15) business days of the
receipt of notice from Executive that there has been a Payment, or such earlier
time as is requested by the Company (collectively, the "Determination"). If the
Accounting Firm is serving as accountant or auditor for the individual, entity
or group effecting a Change of Control of the Company, Executive may appoint
another nationally recognized public accounting firm to make the determinations
required hereunder (which accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall
be borne solely by the Company. Any Gross-Up Payment, as determined hereunder
shall be paid by the Company to Executive within ten (10) days of the
Determination. If the Accounting Firm determines that no Excise Tax is payable
by Executive, Executive may request the Accounting Firm to furnish Executive
with a written opinion that failure to report the Excise Tax on Executive's
applicable federal income tax return would not result in the imposition of a
negligence or similar penalty. The Determination by the Accounting Firm shall be
binding upon the Company and Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the Determination, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made ("Underpayment"), consistent with the calculations
required to be made hereunder. If the Company exhausts its remedies hereunder,
and Executive thereafter is required to make payment of any Excise Tax or Income
Tax, the Accounting Firm shall determine the amount of the Underpayment that has
occurred and any such Underpayment shall be promptly paid by the Company to or
for Executive's benefit.
(C) Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of the Gross-Up Payment or the Underpayment. Such
notification shall be given as soon as practicable but no later than ten (10)
business days after Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which Executive give such
notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies
Executive in writing prior to the expiration of such period that it desires to
contest such claim, Executive shall:
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(1) give the Company any information reasonably
requested by the Company relating to such claim,
(2) take such action in connection with contesting
such claim as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in
order effectively to contest such claim, and
(4) permit the Company to participate in any
proceeding relating to such claim;
PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold Executive harmless, on an
after-tax basis, for any Excise Tax or Income Tax imposed as a result of such
representation and payment of costs and expenses. Without limitation on the
foregoing provisions of this subparagraph (vi)(C), the Company shall control all
proceedings taken in connection with such contest and, at its sole option, may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option, either direct Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner, and Executive agrees to
prosecute such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more appellate courts, as the
Company shall determine; PROVIDED FURTHER, that if the Company directs Executive
to pay such claim and sue for a refund, the Company shall advance the amount of
such payment to Executive on an interest-free basis and shall indemnify and hold
Executive harmless, on an after-tax basis, from any Excise Tax or Income Tax
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and PROVIDED FURTHER, that any extension of the statute
of limitations relating to payment of taxes for Executive's taxable year with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest shall
be limited to issues with respect to which a Gross-Up Payment would be payable
hereunder and Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the Internal Revenue Service or any other taxing
authority.
(D) If, after the receipt by Executive of an
amount advanced by the Company, Executive become entitled to receive, and
receive, any refund with respect to such claim, Executive shall (subject to the
Company's complying with the requirements hereof) promptly pay to the Company
the amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by Executive of an amount
advanced by the Company, a determination is made that Executive shall not be
entitled to any refund with respect to such claims and the Company does not
notify Executive in writing of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such determination, then such
advance shall be forgiven and shall not be required to be repaid.
-15-
<PAGE>
(vii) VESTING. Upon a Change of Control, all
incentive compensation awards, whether stock options, restricted stock or
otherwise, which have not previously vested, shall automatically be deemed to
have vested and Executive may exercise such awards in accordance with the terms
and conditions of the award as if Executive were still employed by the Company.
(viii) CONSULTANCY ENGAGEMENT. (A) Upon the
occurrence of a Change of Control and provision of Notice of Termination by the
Executive, the Company may elect to require Executive to provide consulting
services for a six- (6) month period commencing the date of such election. Such
election shall be made by the Company's provision to Executive of written notice
made no later than thirty (30) days after the receipt of any Notice of
Termination by the Executive.
(B) If such election is made, Executive
agrees to accept such engagement, in accordance with the following terms and
conditions: Executive shall be available to render such advisory and
consultative services up to thirty five (35) hours per week, but no more than
120 hours in any calendar month during the Term. Such services will be performed
during normal business hours, Monday through Friday, national and New York State
holidays excepted, and subject to reasonable absences for vacation and personal
reasons (with respect to any particular week). No more than ten (10) days away
from the New York metropolitan area, including travel, shall be required in any
calendar month.
(C) As consideration for Executive's
services hereunder, the Company shall pay Executive a Consulting Fee equal to
125% of the Base Salary in effect immediately before the Change of Control and
125% of Bonus Award for the prior fiscal year pro rated for the six month term
and paid on a semi-monthly basis in accordance with regular payroll practices
prior to the Change of Control. Such fee shall be paid without regard to the
number of hours of services actually provided pursuant to the terms hereof if
the Company does not request the Executive to provide the maximum number of
hours.
(D) The Company shall supply Executive with
all materials which the Executive may reasonably require and shall reimburse
Executive for any reasonable out-of-pocket expenses incurred in providing
services, including, but not limited to, first class travel if services are
required to be provided outside of New York State.
(E) Executive shall be indemnified by the
Company against reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of any action, suit,
investigation or proceeding or similar legal activity, regardless of whether
criminal, civil, administrative or investigative in nature, to which he is made
a party by reason of his then providing or having provided services to the
Company hereunder.
(F) The Non-Competition period set forth in
Section 4.3 hereof shall commence on the last date of employment of Executive
(as specified in the Notice of Termination), regardless of whether the Company
exercises its option hereunder.
-16-
<PAGE>
(ix) NO DUTY TO MITIGATE. Executive shall not be
required to mitigate the amount of any payment provided for hereunder by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
hereunder be reduced by any compensation earned by Executive as the result of
employment by another employer or by retirement benefits after the Date of
Termination, or otherwise; provided, however, should Executive become reemployed
in a job which (a) offers medical plan benefits which are equal to or greater
than the medical plan benefits provided to Executive under subparagraph 3.4(a),
and (b) such medical plan benefits are offered to Executive at no cost,
Executive shall no longer be eligible to receive medical plan benefits under
this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 EXECUTIVE ACKNOWLEDGMENT. The Executive acknowledges that
he has consulted with or has had the opportunity to consult with independent
counsel of his own choice concerning this Agreement and has been advised to do
so by the Company, and that he has read and understands the Agreement, is fully
aware of its legal effect, and has entered into it freely based on his own
judgment.
6.2 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 NOTICES. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand or mailed within the continental United States
by first class certified mail, return receipt requested, postage prepaid,
addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
Attention: General Counsel
(b) if to Executive, to:
62 Clonmel Road
London SW6 UK
with a copy to:
-17-
<PAGE>
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 TAX WITHHOLDING. The Company shall provide for the
withholding of any taxes required to be withheld under federal, state and local
law (other than the employer's portion of such taxes) with respect to any
payment in cash and/or other property made by or on behalf of the Company to or
for the benefit of Executive under this Agreement or otherwise. The Company may,
at its option: (i) withhold such taxes from any cash payments owing from the
Company to Executive, (ii) require Executive to pay to the Company in cash such
amount as may be required to satisfy such withholding obligations and/or (iii)
make other satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.5 NO ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. Except as
otherwise expressly provided in Section 6.2 hereof, this Agreement is not
assignable by any party, and no payment to be made hereunder shall be subject to
alienation, sale, transfer, assignment, pledge, encumbrance or other charge.
Except for the Company and its existing and future subsidiaries, no Person shall
be, or deemed to be, a third party beneficiary of this Agreement.
6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed
by the parties hereto in one or more counterparts, each of which shall be deemed
to be an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.7 JURISDICTION AND GOVERNING LAW. Jurisdiction over disputes
with regard to this Agreement shall be exclusively in the courts of the State of
New York, and this Agreement shall be construed and interpreted in accordance
with and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.8 ENTIRE AGREEMENT; AMENDMENT. This Agreement embodies the
entire understanding of the parties hereto, and supersedes all prior employment
and related agreements, regarding the subject matter hereof. No change,
alteration or modification hereof may be made except in a writing, signed by
both of the parties hereto.
6.9 HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not be construed as part of this
Agreement or to limit or otherwise affect the meaning hereof.
6.10 SURVIVAL. Notwithstanding anything to the contrary
herein, Section Article IV, Section 5.3 and Article VI of this Agreement shall
survive termination of this Agreement or Termination for any reason whatsoever.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered thisAgreement as of the day first written above.
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
--------------------------------
EXECUTIVE
/s/ WILLIAM C. MURPHY
------------------------------------
William C. Murphy
-19-
<PAGE>
<PAGE>
Exhibit 10.28
[LOGO]
VIATEL, INC. MANAGEMENT SEVERANCE PLAN
PLAN DOCUMENT
EFFECTIVE DECEMBER 8, 1999
<PAGE>
VIATEL, INC. MANAGEMENT SEVERANCE PLAN
The attached Plan has been adopted by Viatel, Inc. (the "Plan Sponsor")
to provide severance pay benefits to the plan beneficiaries identified on the
attached Schedule A, whose employment is involuntarily terminated under the
circumstances set forth in this Plan. This Plan supersedes any other written or
unwritten plan, fund, program or arrangement to provide such benefits to the
individuals identified on the attached Schedule A that may be deemed to exist or
to have existed, under ERISA or otherwise, except to the extent that such a
person has superior benefits under an employment agreement with the Plan
Sponsor.
This Plan is hereby adopted and approved, effective as of December 8,
1999.
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
---------------------------------
<PAGE>
SCHEDULE A
<PAGE>
[LOGO]
VIATEL, INC. MANAGEMENT SEVERANCE PLAN
Summary Plan Description
Effective December 8, 1999
<PAGE>
VIATEL, INC. MANAGEMENT SEVERANCE PLAN
HIGHLIGHTS AND ELIGIBILITY REQUIREMENTS
o OVERVIEW
Viatel, Inc. (the "Plan Sponsor") has adopted an Management Severance
Plan (the "Plan") which provides severance pay benefits to certain members of
senior management of the Plan Sponsor and each of its current and future
subsidiaries (each of which is referred to herein as the "Employer") who have
been selected to participate in the Plan. The Plan eligibility requirements and
severance pay benefits are explained below.
o ELIGIBILITY
To be eligible under this Plan,
o you must be selected to participate by the Chief Executive
Officer;
o you must hold the title of director or above with the Plan
Sponsor;
o you must not have a superior individualized severance pay
benefits package through an employment agreement with an
Employer; and
o your employment with an Employer must be involuntarily terminated
without "cause" (as defined below) (which includes, for these
purposes, a (i) voluntary termination due to a reduction in your
Base Pay (as defined below)) or (ii) forced relocation to a site
in excess of 60 miles from your worksite, in either case within
eighteen (18) months after a "Change in Control" (as defined
below) of the Plan Sponsor.
The Plan Administrator (as defined below) shall have the absolute and
exclusive discretionary right and final authority to make any necessary
determinations concerning whether a member of senior management is eligible to
receive benefits under the Plan, and such determination by the Plan
Administrator shall be final and binding on all parties.
The last day of your active employment, in the context of an
involuntary termination without cause, or the date of your resignation, in the
case of a reduction in your Base Pay, will be referred to as your "Termination
Date."
<PAGE>
For purposes of the Plan, the following terms shall have the following
meaning:
"BASE PAY" means your regular weekly straight-time pay for your normal
work schedule for your last regular pay period with the Employer immediately
preceding your Termination Date or the date of the Change in Control, whichever
level of straight-time pay is the greatest. Base Pay excludes overtime pay,
bonuses, commissions, fees, incentive allowances and all Employer-provided
benefits.
"CAUSE" means a material violation by you of any policies of your
Employer, gross negligence or dishonesty in the performance of your duties as a
member of senior management, habitual neglect in performing your duties, or your
conviction of any felony or a misdemeanor involving fraud, misrepresentation or
dishonesty.
"CHANGE IN CONTROL" means such time as (i) a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the
total voting power of the then outstanding Voting Stock (as defined below) of
the Plan Sponsor on a fully diluted basis or (ii) individuals who at the
beginning of any period of two consecutive calendar years constituted the Board
of Directors of the Plan Sponsor (together with any new directors whose election
by the Board of Directors of the Plan Sponsor or whose nomination for election
by the Plan Sponsor's stockholders was approved by a vote of at least two-thirds
(2/3) of the members of the Board of Directors of the Plan Sponsor then still in
office who either were members of the Board of Directors of the Plan Sponsor 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 of Directors of the Plan Sponsor then in office.
"VOTING STOCK" of the Plan Sponsor means its common stock and any other
equity security entitled to vote with the common stock on an as converted basis.
O BENEFITS PROVIDED UNDER THE PLAN
If you meet the eligibility requirements of the Plan, you will be
entitled to receive a severance benefit determined based upon the following: (i)
your full years of service for an Employer (determined as of your Termination
Date) and (ii) your Base Pay with the Employer on the date immediately preceding
the Termination Date. In terms of cash severance, you will be entitled to two
weeks of Base Pay for each year of service with an Employer, with a minimum
severance benefit of six months' Base Pay. In addition, all of your unvested
stock options will become fully vested and any shares of restricted common stock
of the Plan Sponsor that you may have will no longer be subject to any
restrictions.
2
<PAGE>
In no event, however, will the aggregate amount of your severance
benefit exceed the dollar amount that would trigger the imposition of an excise
tax under Section 4999 of the Internal Revenue Code (that is, three (3) times
your average gross compensation from an Employer over the five (5) year-period
(or shorter period if not employed by an Employer for five full years) preceding
the year in which the Change in Control takes place).
The cash portion of the severance benefits will be paid in a lump sum
as soon as administratively possible following your Termination Date. Deductions
will be made for taxes and any other required or authorized deductions. The
Employer retains the right to reduce your severance benefits by the amount of
any unpaid debt you owe the Employer.
O CONDITIONS TO YOUR ELIGIBILITY FOR SEVERANCE BENEFITS AND ACTS
THAT MAY CAUSE YOUR BENEFITS UNDER THE PLAN TO END
To be eligible to receive severance benefits under this Plan, you must
return all Employer property that is in your possession, custody or control, and
certify to Employer that such has been done. This "property" includes, but is
not limited to, all materials, documents, plans, records or papers or any copies
of such documents or files which in any way relate to the Employer's affairs or
Employer supplied computers, software, Palm Pilots, cell phones, dictation
devices or similar equipment of any nature. This property further includes all
vehicles, credit cards, manuals, and any money due to the Employer.
ADDITIONAL IMPORTANT INFORMATION
o CLAIMS PROCEDURE WHEN YOUR BENEFITS ARE DISPUTED
If a dispute arises concerning whether you are entitled to severance
benefits under the Plan or as to the amount of your benefits, you must first
file a claim for benefits in accordance with the following procedure. A claim
for Plan benefits must be in writing and addressed to the Plan Administrator at
Viatel, Inc., 685 Third Avenue, 24th Floor, New York, New York 10017, or any
other address that may be designated from time to time. You will receive a
written notice from the Plan Administrator with respect to your claim within 10
days of the date the Plan Administrator received your initial claim. If special
circumstances require an extension of time, written notice will be given to you
before the end of this 10-day period and will explain the reasons for the delay.
If you are not furnished notice regarding your claim within these time periods,
your claim will be considered denied. If the Plan Administrator denies your
claim, in whole or in part, it will tell you why, refer you to the applicable
provisions of the Plan document or other relevant records or papers. You will
also be told how you can appeal for reconsideration of the Plan Administrator's
decision. Should you disagree with the determination, you have 60 days to
request a review. Your request for a review must be in writing. The Plan
Administrator will reconsider your claim and the resulting
3
<PAGE>
decision will be issued within 15 days after your request for a review. If more
time is needed because of unusual circumstances, you will be notified. The Plan
Administrator has the exclusive authority to construe and to interpret the Plan,
including any ambiguity, to decide all questions of eligibility for benefits and
to determine the amount of such benefits, and its decisions on such matters are
final and conclusive. The Plan Administrator must act in a reasonable and
nondiscriminatory manner in exercising its authority.
O ASSIGNMENT OF BENEFITS
Except to the extent mandated by law, benefits payable under this Plan
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any
kind, either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
right to benefits payable hereunder, shall be void and of no force and effect
whatsoever, PROVIDED, HOWEVER, that the benefits hereunder may be assigned or
transferred to pay any bona fide debt of the employee to the Employer or any
entity affiliated with the Employer. The Plan shall not in any manner be liable
for, or subject to, the debts, contracts, liabilities, engagements or torts of
any person entitled to benefits hereunder. If an eligible employee is entitled
to benefits hereunder but dies prior to receipt of such benefit, the benefit
will be paid to the estate of the deceased employee.
O FINANCING THE PLAN
Except as otherwise provided herein, no assets of the Employer are
specifically set aside for the payment of benefits under the Plan. Benefits
payable under the Plan shall be paid out of the general assets of the Employer.
The obligation of the Employer is simply an obligation to make payments
according to the terms and conditions of the Plan. An employee's right to any
payments hereunder shall be the same as that of any other unsecured general
creditor of the Employer.
O PLAN AMENDMENT AND TERMINATION; PLAN INTERPRETATION
The Plan Sponsor, in its sole discretion, reserves the right to amend
or terminate the Plan at any time, without notice, prior to a Change in Control.
This Plan may not be amended or terminated after the occurrence of a Change in
Control. This Plan rescinds and supersedes any and all prior severance benefit
plans applicable to persons covered by this Plan. The Plan Administrator has the
exclusive authority to construe and to interpret the Plan, to decide all
questions of eligibility for benefits and to determine the amount of such
benefits, and its decisions on such matters shall be final and conclusive.
O NONGUARANTEE OF EMPLOYMENT
Nothing contained in this Plan shall be construed as a contract of
employment between the Employer (or any entity affiliated with the Employer) and
any participant or as a right of any
4
<PAGE>
participant to be continued in the employment of the Employer (or any entity
affiliated with the Employer), or as a limitation of the right of the Employer
to discharge any of its employees with or without cause or notice.
BASIC PLAN DATA
O PLAN NAME AND TYPE
The name of the severance plan is Viatel, Inc. Management Severance
Plan. The Plan is considered a "welfare plan" under ERISA. This Plan is
effective as of December 8, 1999.
O NAME AND ADDRESS OF PLAN SPONSOR AND EMPLOYER
The Plan is sponsored by: Viatel, Inc.
685 Third Avenue, 24th Floor
New York, New York 10017
(212) 350-9200
Employer Identification Number: 13-3787366
O PLAN NUMBER
The plan number assigned to the Plan is: 502
O PLAN ADMINISTRATION
The Compensation Committee of the Board of Directors of Viatel, Inc.
serves as Plan Administrator for the Plan and can be contacted at the address
set forth above for the Plan Sponsor. The Plan Sponsor has the sole authority to
appoint and remove the Plan Administrator.
The Plan Administrator has the sole responsibility for the
administration of the Plan. The Plan Administrator may appoint or employ
individuals to assist in the administration of the Plan and may appoint or
employ any other agents it deems necessary or advisable, including legal counsel
and auditors, to serve at the Plan Administrator's direction.
In addition to the powers, duties and discretion described above, the
Plan Administrator has the following powers and responsibilities:
(a) to prescribe procedures to be followed by eligible employees
requesting benefits;
(b) to prepare and distribute, in such manner as the Plan
Administrator determines
5
<PAGE>
to be appropriate, information explaining the Plan; and
(c) to request and obtain from eligible employees and from the
Employer such information as is necessary for the proper
administration of the Plan.
Whenever, in the Plan Administrator's opinion, an eligible employee
entitled to receive any payment of a benefit hereunder is under a legal
disability or is incapacitated in any way so as to be unable to manage his or
her financial affairs, the Plan Administrator may direct payment to such person
or to the legal representative of such person for his or her benefit, or the
Plan Administrator may apply the payment for the benefit of such person in such
manner as the Plan Administrator reasonably considers advisable and in the best
interests of the employee. Any payment of a benefit in accordance with the
provisions of this paragraph shall be a complete discharge of any liability for
the making of such payment under the provisions of this Plan.
O FISCAL YEAR OF THE PLAN
The Plan and its records are kept on a calendar-year basis. The Plan
Year is the 12-month period beginning January 1 of each year and ending each
December 31.
O AGENT FOR SERVICE OF LEGAL PROCESS; APPLICABLE LAW
Legal process can be served on the General Counsel of the Plan Sponsor
at the above address for the Plan Sponsor. The provisions of the Plan shall be
construed and administered according to, and its validity and enforceability
shall be determined under ERISA. In the event ERISA does not pre-empt state law
in a particular circumstance, the laws of the State of New York shall govern. If
any provision of the Plan is or is hereafter declared to be void, voidable,
invalid or otherwise unlawful, the remainder of the Plan shall not be affected
thereby.
o STATEMENT OF ERISA RIGHTS
Federal law and regulations require the following statement. As a
participant in the Plan, you are entitled to certain rights and protection
under the Employee Retirement Income Security Act of 1974 ("ERISA"). ERISA
provides that all plan participants shall be entitled to:
o Examine, without charge, at the Plan Administrator's office and
at other specified locations, such as work sites, all Plan
documents and copies of all documents filed by the Plan with the
U.S. Department of Labor, such as detailed annual reports.
o Obtain copies of all Plan documents and other Plan information
upon written request to the Plan Administrator. The Plan
Administrator may make a reasonable charge for the copies.
6
<PAGE>
o Obtain a statement telling you whether you have a right under the
Plan to receive a benefit and, if so, what your benefit would be.
This statement must be requested in writing and is not required
to be given more than once a year. The Plan must provide the
statement free of charge.
In addition to creating rights for Plan participants, ERISA imposes
duties upon the individuals who are responsible for the operation of an employee
benefit plan. The individuals who operate your Plan, called "Fiduciaries" of the
Plan, have a duty to do so prudently and in the interest of you and other Plan
participants and beneficiaries. The Fiduciaries have only those powers, duties,
responsibilities and obligations as are specifically given or delegated to them
under this Plan.
Under ERISA, there are steps you can take to enforce the above rights.
For instance, if you request materials from the Plan Administrator and do not
receive them within 30 days, you may file a suit in a federal court. In such a
case, the court may require the Plan Administrator to provide the materials and
pay you up to $110.00 a day until you receive the materials, unless the
materials were not sent because of reasons beyond the control of the Plan
Administrator.
If you have a claim for benefits which is denied or ignored, in whole
or in part, you may file suit in a state or federal court. If it should happen
that Plan Fiduciaries misuse the Plan's money, or if you are discriminated
against for asserting your rights, you may seek assistance from the U.S.
Department of Labor, or you may file suit in a federal court. The court will
decide who should pay court costs and legal fees.
If you are successful, the court may order the person you have sued to
pay these costs and fees. If you lose, the court may order you to pay these
costs and fees, for example, if the court finds your claim to be frivolous. If
you have any questions about the Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest Area Office of the Pension
and Welfare Benefits Administration, U.S. Department of Labor, which is listed
in your local telephone directory, or you may contact the Division of Technical
Assistance and Inquiries, Pension and Welfare Benefit Administration, U.S.
Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
7
<PAGE>
EXHIBIT 11.1
VIATEL, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Loss before extraordinary loss............................ $(217,836) $ (99,000) $ (43,044)
Extraordinary loss on debt prepayment..................... -- (28,304) --
--------- --------- ---------
Net loss.................................................. (217,836) (127,304) (43,044)
Dividends on redeemable convertible preferred stock....... (1,341) (3,301) --
--------- --------- ---------
Net loss attributable to common stockholders.............. (219,177) (130,605) (43,044)
========= ========= =========
Weighted average common shares outstanding, basic and
diluted................................................... 29,518 23,054 22,620
========= ========= =========
Loss per common share, basic and diluted:
Before extraordinary item................................. (7.43) (4.44) (1.90)
From extraordinary item................................... -- (1.23) --
--------- --------- ---------
Net loss per common share attributable to common
stockholders............................................ (7.43) (5.67) (1.90)
========= ========= =========
</TABLE>
- ------------------------
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF VIATEL, INC.
JURISDICTION OF INCORPORATION
UNITED STATES SUBSIDIARY OR ORGANIZATION/ FOREIGN QUALIFICATIONS
- ------------------------ ---------------------------------------
Destia.com, Inc. Delaware
Destia Communications, Inc. Delaware, NY
Off the Mall Advertising Inc. Delaware
Viatel Argentina Holdings, Inc. Delaware
Viatel Argentina Management, Inc. Delaware
Viatel Brazil Holdings, Inc. Delaware
Viatel Brazil Management, Inc. Delaware
Viatel Cable Assets Inc. Delaware
Viatel Circe Cable System, Limited Delaware
Viatel Colombia Holdings, Inc. Delaware
Viatel Colombia Management, Inc. Delaware
Viatel Development Company Delaware, TX
Viatel Finance Company L.L.C. Delaware
Viatel Finland, Inc. Delaware
Viatel Global Communications, Ltd. Delaware
Viatel Nebraska, Inc. Delaware
Viatel New Jersey, Inc. DE, NJ
Viatel Sales U.S.A., Inc. DE, IN, CA, IL, CO
Viatel Services, Inc. All States
Viatel Sweden, Inc. Delaware
Viatel Virginia, Inc. Delaware
VYTL LLC Delaware (pending)
Voicenet Corporation New York
YYC Communications, Inc. DE, NY
<PAGE>
NAME OF FOREIGN SUBSIDIARY COUNTRY
- -------------------------- -------
Econophone GmbH Austria
Call BvBa Belgium
Econophone NV Belgium
Viaphone NV/SA Belgium
Viatel Belgium S.A./N.V. Belgium
Destia Communications Canada Inc. Canada
Viacol Ltda. Colombia
Destia Communications SA France
Viatel Operations S.A. France
Viatel S.A. France
VPN S.A.R.L. France
Econophone GmbH Germany
Teleriffic Global Communications GmbH Germany
Viatel Communications GmbH Germany
(Formerly Viaphone GmbH)
Viatel GmbH Germany
Viatel German Asset GmbH Germany
Viatel German Holding GmbH Germany
Viatel Global Communications GmbH Germany
ViCaMe Infrastructure Development GmbH Germany
Econophone (Hellas), SA Greece
Call the World Ireland
Destia Communications, Ltd. Ireland
Destia Communications Services, Ltd. Ireland
Viatel Global Communications S.p.A. Italy
Viatel S.R.L. Italy
Econophone Netherlands B.V. Netherlands
Strijk B.V. Netherlands
Viafoperations Communications B.V. Netherlands
Viatel Global Communications B.V. Netherlands
Viatel European Holding S.R.L. Spain
Viafon Dat Iberica, S.A. Spain
Viatel Global Communications Espana S.A. Spain
Econophone AG Switzerland
Econophone Services GmbH Switzerland
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NAME OF FOREIGN SUBSIDIARY COUNTRY
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Phonecentre GmbH Switzerland
Viaphone AG Switzerland
Viatel AG Switzerland
Amber Hold, Limited United Kingdom
America 1st Limited United Kingdom
Destia Communications, Limited United Kingdom
Destia Communications Holdings, Limited United Kingdom
Destia Network Services Limited United Kingdom
Econophone, Limited United Kingdom
Network Managed Services Limited United Kingdom
Viatel Communications U.K. Limited United Kingdom (in formation)
Viatel Austria, Limited United Kingdom
Viatel Belgium Limited United Kingdom
Viatel Cable Assets Limited United Kingdom
Viatel Circe Assets Limited United Kingdom
Viatel Communications Limited United Kingdom
Viatel (I) Limited United Kingdom
Viatel Spain Limited United Kingdom
Viatel U.K. Limited United Kingdom
Viatel U.K. Holding Limited United Kingdom
Viatel Global Communications (UK) Limited United Kingdom
Viatel Cables Limited United Kingdom
Viatel Holdings (UK) Limited United Kingdom
WaveTech, Limited United Kingdom
WaveTech Network Services Limited United Kingdom
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
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, in the registration statement No. 333-16671 on Form
S-8, in the registration statement No. 333-90257 on Form S-8, in the
registration statement No. 333-92235 on Form S-8, and in the registration
statement No. 333-92339 on Form S-8 of Viatel, Inc. of our report dated
March 1, 2000, relating to the consolidated balance sheets of Viatel, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the related consolidated
statements of operations, comprehensive loss, stockholders' equity (deficiency)
and cash flows for each of the years in the three-year period ended
December 31, 1999, and the related schedule, which appears in the December 31,
1999 annual report on Form 10-K of Viatel, Inc.
/s/ KPMG LLP
New York, New York
April 14, 2000
