<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 1999
REGISTRATION NO. 333-71463
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
---------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DESTIA COMMUNICATIONS, INC.
(formerly Econophone, Inc.)
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 11-3132722
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
95 RTE. 17 SOUTH
PARAMUS, NJ 07652
(201) 226-4500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
RICHARD L. SHORTEN, JR., ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
DESTIA COMMUNICATIONS, INC.
95 RTE. 17 SOUTH
PARAMUS, NJ 07652
(201) 226-4500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
PLEASE SEND COPIES TO:
MICHAEL R. LITTENBERG, ESQ. JAMES S. SCOTT, SR., ESQ.
SCHULTE ROTH & ZABEL LLP SHEARMAN & STERLING
900 THIRD AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 756-2000 (212) 848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, AS AMENDED, CHECK THE FOLLOWING BOX. / /
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. / /
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY 4, 1999
6,500,000 SHARES
[LOGO]
DESTIA COMMUNICATIONS, INC.
(FORMERLY ECONOPHONE, INC.)
COMMON STOCK
-----------------
DESTIA COMMUNICATIONS, INC. IS OFFERING 6,500,000 SHARES OF ITS COMMON STOCK.
THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS
FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC
OFFERING PRICE WILL BE BETWEEN $9 AND $11 PER
SHARE.
-------------------
OUR COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "DEST."
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
-----------------
PRICE $ A SHARE
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
DESTIA COMMUNICATIONS, INC. HAS GRANTED THE U.S. UNDERWRITERS THE RIGHT TO
PURCHASE UP TO AN ADDITIONAL 975,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN
STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON
, 1999.
-------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
, 1999
<PAGE>
[Map of the Destia Network illustrating by geographic location (i) where Destia
maintains switches and points of presence, (ii) where Destia owns and/or leases
fiber routes, and (iii) other elements of the Destia Network].
[Montage of photographs illustrating certain of Destia's domestic and
international product offerings and advertisements.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Prospectus Summary............................... 5
Risk Factors..................................... 12
Use of Proceeds.................................. 25
Dividend Policy.................................. 25
Certain Information.............................. 25
Capitalization................................... 26
Dilution......................................... 27
Selected Consolidated Financial Data............. 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 30
Industry Overview................................ 40
Business......................................... 42
<CAPTION>
PAGE
-----------
<S> <C>
Management....................................... 75
Certain Transactions............................. 83
Certain Indebtedness............................. 84
Principal Stockholders........................... 87
Description of Capital Stock..................... 88
Shares Eligible for Future Sale.................. 91
Certain United States Tax Consequences to
Non-United States Holders...................... 93
Underwriters..................................... 95
Legal Matters.................................... 100
Experts.......................................... 100
Additional Information........................... 100
Index to Consolidated Financial Statements....... F-1
</TABLE>
We have not taken any action to permit a public offering of the shares of
common stock outside the United States or to permit the possession or
distribution of this prospectus outside the United States. Persons outside the
United States who come into possession of this prospectus must inform themselves
about and observe any restrictions relating to the offering of the shares of
common stock and the distribution of this prospectus outside the United States.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, the "Company," "Destia," "we," "us" and "our" refer to Destia
Communications, Inc. and its subsidiaries, unless the context indicates
otherwise.
Until , 1999 (25 days after the commencement of the offering),
all dealers that buy, sell or trade in the common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus that are not historical
facts, including some statements made in the sections of this prospectus
entitled "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" are statements of future
expectations and other forward-looking statements pursuant to Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"). These statements are
based on management's current views and assumptions and involve known and
unknown risks and uncertainties that could cause actual results, performance or
events to differ materially from those expressed or implied in those statements,
including:
- the rate of expansion of Destia's network and/or customer base;
- inaccuracies in Destia's forecasts of telecommunications traffic or
customers;
- loss of a customer or distributor that provides Destia with significant
revenues;
- concentration of credit risk;
- highly competitive market conditions;
- changes in or developments under laws, regulations, licensing requirements
or telecommunications standards;
- changes in the availability of transmission facilities;
- currency fluctuations;
- changes in retail or wholesale telecommunications rates;
- changes in international settlement rates;
- loss of the services of key officers, such as Alfred West, the Chairman
and Chief Executive Officer, or Alan L. Levy, the President and Chief
Operating Officer; and
- general economic conditions.
The foregoing important factors should not be construed as exhaustive. We
undertake no obligations to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. See also
"Risk Factors" for additional cautionary statements identifying important
factors with respect to forward-looking statements contained in this prospectus
that could cause actual results to differ materially from results or
expectations referred to in the forward-looking statements.
4
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE DECIDING TO PURCHASE OUR COMMON
STOCK. WE URGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE
STATEMENTS.
THE COMPANY
We are a rapidly growing, facilities-based provider of domestic and
international long distance telecommunications services in North America and
Europe. Our extensive international telecommunications network allows us to
provide services primarily to retail customers in many of the largest
metropolitan markets in the United States, Canada, the United Kingdom, Belgium,
France, Germany and Switzerland, and we believe that we are well positioned to
capitalize on continued growth in these markets. In 1997, worldwide
international long distance traffic totaled 81.8 billion minutes, with the
majority originating in the United States and Europe. This volume is expected to
grow at a compound annual growth rate of 12% to 18% from 1997 to 2001.
We provide our customers with a variety of retail telecommunications
services, including international and domestic long distance, calling card and
prepaid services, and wholesale transmission services. Our approximately 350,000
customer accounts are diverse and include residential customers, commercial
customers, ethnic groups and telecommunications carriers. In each of our
geographic markets, we utilize a multichannel distribution strategy to market
our services to our target customer groups. We believe this strategy greatly
enhances our growth prospects and reduces our dependence on any one service,
customer group or channel of distribution.
We entered the U.S. market during 1993 and the U.K. market during 1995. In
continental Europe, we commenced offering our services before the January 1,
1998 full liberalization of telecommunications services in those markets. Given
our early entry into many of our continental European markets, as well as our
established network, sales and marketing and customer support infrastructure, we
believe we are well positioned to further grow our business in continental
Europe.
COMPETITIVE STRENGTHS
We believe we have successfully distinguished ourselves from many of our
competitors and enjoy several competitive strengths.
PROVEN TRACK RECORD OF STRONG INTERNAL GROWTH
For 1996, 1997 and 1998, our revenues were $45.1 million, $83.0 million and
$193.7 million, respectively. Substantially all of our growth has been generated
internally, although we have made several minor acquisitions. In addition, our
retail focused strategy has allowed us to generate strong gross margins. For
1996, 1997 and 1998, our gross margins were 21.6%, 23.2% and 27.5%,
respectively. During the fourth quarter of 1998, our gross margins were 29.0%.
ESTABLISHED INTERNATIONAL TELECOMMUNICATIONS NETWORK
Our network (the "Destia Network") is comprised of:
- 14 operational carrier-grade switches, with seven in North America and
seven in Europe;
- an IRU from Frontier on portions of its U.S. fiber optic network ("IRUs"
are long-term capacity leases);
- transatlantic IRUs;
5
<PAGE>
- leased capacity and IRUs in Europe; and
- leased capacity in Canada.
In addition, we have completed direct interconnections with the dominant
carriers (the "PTTs") in five of our major European markets (the United Kingdom,
Belgium, Germany, France and Switzerland) and have signed an interconnection
agreement with the PTT in The Netherlands.
COST-EFFECTIVE MULTICHANNEL MARKETING
We reach a broad range of customer groups by using a variety of marketing
channels, including a direct sales force, independent sales agents, multilevel
marketing, customer incentive programs, advertising and the Internet. We believe
our multichannel approach is a cost-effective means of marketing to our target
customers and reduces the risks associated with dependence on a limited number
of distribution channels.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT OWNERSHIP
Our management team includes a broad base of seasoned professionals from the
domestic and international telecommunications sector with expertise in
management, multinational sales and marketing, network operations and
engineering, finance and regulatory issues. On a fully-diluted basis, our senior
management and other employees currently own approximately 59% of Destia and
following the offering will own approximately 48%.
COMMITMENT TO SUPERIOR CUSTOMER SERVICE
We have developed the infrastructure to deliver high levels of customer
satisfaction, including local customer service in native languages and detailed
billing information in local currencies. This infrastructure, together with our
customer-oriented philosophy, allows us to differentiate ourselves from many of
our competitors.
SOPHISTICATED OPERATIONAL CONTROL SYSTEMS
We have internally developed sophisticated software and intranet systems
that enable us to better manage our business and appropriately price our
services in each of our markets on a real-time basis. We believe that these
systems allow us to quickly identify new market growth and cost saving
opportunities, as well as control our business in an environment of rapid
growth.
COMPANY STRATEGY
Our objective is to become a leading facilities-based provider of
telecommunications services in the largest metropolitan markets in Europe and
North America. The key elements of our growth strategy are as follows:
- focus on high margin retail business;
- leverage our existing network and customer support infrastructure;
- enhance the Destia Network and opportunistically enter new markets;
- expand our IP telephony capabilities; and
- pursue strategic acquisitions and alliances.
6
<PAGE>
SELECTED FIRST QUARTER 1999 RESULTS
On May 3, 1999, we reported our results for the quarter ended March 31,
1999. This information is contained below. The information contained below
should be read together with the other financial information contained in this
prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our total revenues for the first quarter of 1999 were $62.6 million. This
represented an increase of 50% over revenues of $41.7 million for the first
quarter of 1998 and an increase of 19% over revenues of $52.8 million for the
fourth quarter of 1998. Wholesale revenues declined as a percentage of total
revenues during the first quarter although such revenues may increase in future
periods. The number of customer accounts increased to approximately 475,000 at
March 31, 1999, compared to approximately 209,000 at March 31, 1998 and
approximately 357,000 at December 31, 1998. Retail direct dial revenues for the
first quarter of 1999 increased more than 130%, as compared to the first quarter
of 1998. This increase was primarily attributable to growth, in percentage
terms, of revenues from new customers in continental Europe and the United
States. Revenues from calling card and prepaid card services increased 78% over
the same period as a result of increased marketing efforts, particularly in the
United States and continental Europe. Our revenues per minute declined due to
continuing competition, but our gross margins improved slightly due to a greater
decline in per-minute cost of services.
Our gross profit margin in the first quarter of 1999 improved to 29.1% from
24.5% in the comparable quarter of the prior year and was up slightly from the
29.0% reported for the fourth quarter of 1998. These increases were primarily
attributable to improved line cost management, the continued expansion of the
Destia Network, increased utilization of owned and leased transmission capacity
and our continued focus on higher margin retail services. Our gross margins
improve as we bring traffic onto our owned facilities because that is a less
expensive transmission media and because depreciation expense is not included in
the calculation of gross margins. Our gross margins increased even though our
revenues per minute declined.
Selling, general and administrative, or SG&A, expenses as a percentage of
revenues were 42.5% in the first quarter of 1999, compared to 37.2% in the first
quarter of 1998 and 43.5% in the fourth quarter of 1998. The increase in SG&A
expenses as a percentage of revenues in the year-to-year periods was primarily
attributable to a lower portion of wholesale revenues and an increase in
staffing-related costs and marketing and promotional expenses. The increase in
retail revenues as a percentage of total revenues contributed to an increase in
SG&A expenses because retail revenues have higher selling expenses than
wholesale revenues. The increase in marketing and promotional expenses was
primarily the result of our spending in developing marketing and sales channels
in Europe, as well as increased marketing expenditures to grow the retail
customer base in North America.
We reported a net loss of $24.5 million in the first quarter of 1999,
compared to a net loss of $12.6 million in the comparable period of 1998. The
increase in net loss is primarily due to the higher level of SG&A expenses and
higher interest expense incurred on our bonds.
7
<PAGE>
The following table further illustrates our selected first quarter 1999
results, together with a comparison to the first quarter of 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................ $ 41,660 $ 62,619
Cost of services................................................ 31,456 44,370
---------- ----------
Gross profit.................................................... 10,204 18,249
Selling, general and administrative expense..................... 15,484 26,615
Depreciation and amortization................................... 1,678 5,849
---------- ----------
Income (loss) from operations................................... (6,958) (14,215)
Interest income, interest expense, other, net................... (5,636) (10,284)
Provision for income taxes...................................... -- --
---------- ----------
Net income (loss)............................................... $ (12,594) $ (24,499)
---------- ----------
---------- ----------
Net earnings (loss) per share (basic and diluted)............... $ (0.61) $ (1.17)
---------- ----------
---------- ----------
Weighted average number of shares of common stock outstanding
(basic and diluted)........................................... 20,778 20,963
---------- ----------
---------- ----------
</TABLE>
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered in:
The U.S. offering................. 5,200,000 shares
The international offering........ 1,300,000 shares
Total........................... 6,500,000 shares(1)
Common stock to be outstanding
after the offering................ 31,087,507 shares(1)(2)
Over-allotment option............... 975,000 shares
Use of proceeds..................... We will receive net proceeds from the offering of
approximately $59.7 million. We intend to use the
net proceeds to expand our sales and marketing
activities, to make capital expenditures and to fund
working capital and general corporate purposes,
including to fund losses. Since we continuously
engage in discussions with potential acquisition
candidates, we may use net proceeds to fund suitable
strategic acquisitions.
Dividend policy..................... We do not intend to pay dividends on our common
stock. We plan to retain earnings, if any, for use
in the operation of our business and to fund future
growth. In addition, our indentures and our
equipment financing agreement currently restrict the
payment of dividends.
Risk factors........................ For a discussion of certain risks relating to our
company, its business and an investment in our
common stock, see "Risk Factors."
Nasdaq National Market symbol....... DEST
</TABLE>
- ------------------------------
(1) Excludes the possible issuance of up to 975,000 additional shares of common
stock pursuant to the exercise of the U.S. underwriters' over-allotment
option.
(2) As of April 1, 1999, we had 24,587,507 shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of Series A
preferred stock ("Series A Preferred Stock") into common stock upon the
closing of the offering. The foregoing numbers of shares of common stock do
not include outstanding options to purchase 5,111,060 shares of common stock
at a weighted average exercise price of $4.20 per share, and warrants (the
"Warrants") to purchase 1,315,148 shares of common stock at an exercise
price of $.01 per share. See "Capitalization," "Management--1996 Flexible
Incentive Plan" and "Underwriters." All share numbers relating to common
stock contained herein give effect to the 1.04 for 1 stock split to be
effected prior to the offering. See "Certain Information."
9
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The following summary consolidated financial data (with the exception of
other data and regional data) for 1994, 1995, 1996, 1997 and 1998 and as of
December 31, 1998 are derived from our audited consolidated financial
statements. The summary set forth below should be read in conjunction with, and
is qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and the
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT REVENUE PER MINUTE AND PER
SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................................ $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737
Cost of services........................................................ 5,540 19,735 35,369 63,707 140,548
--------- --------- --------- --------- ---------
Gross profit............................................................ 2,983 7,755 9,734 19,296 53,189
Selling, general and administrative expense............................. 2,013 7,087 16,834 37,898 80,092
Depreciation and amortization........................................... 168 389 1,049 3,615 11,866
--------- --------- --------- --------- ---------
Income (loss) from operations........................................... 802 279 (8,149) (22,217) (38,769)
Interest income......................................................... 6 19 84 3,689 11,516
Interest expense........................................................ (109) (167) (380) (11,437) (41,030)
Other income (expense).................................................. 100 (10) 133 (163) (661)
Provision for income taxes.............................................. 73 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)....................................................... $ 726 $ 121 $ (8,312) $ (30,128) $ (68,944)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net earnings (loss) per share
(basic and diluted)................................................... $ 0.03 $ 0.01 $ (0.41) $ (1.50) $ (3.31)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of shares of common stock outstanding (basic and
diluted)(1)........................................................... 20,778 20,778 20,778 20,778 20,846
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures and acquisitions................................... $ 906 $ 1,677 $ 4,670 $ 19,021 $ 111,999
EBITDA(2)............................................................... 1,070 658 (6,967) (18,765) (27,564)
Distributions to S Corporation shareholders(3).......................... -- 499 226 -- --
Series A Preferred Stock dividends(4)................................... -- -- 281 879 --
Net cash provided by (used in) operating activities..................... 474 2,037 (6,006) (12,219) (26,414)
Net cash used in investing activities................................... (801) (1,206) (4,247) (13,267) (119,092)
Net cash provided by (used in) financing activities..................... 292 (810) 16,419 145,844 177,561
Revenue per minute...................................................... .70 .57 .43 .25 .22
REGIONAL DATA:
Revenues
Continental Europe.................................................... $ 2,652 $ 5,025 $ 11,441 $ 15,741 $ 21,101
United Kingdom........................................................ 3,143 14,173 15,477 18,363 55,991
North America......................................................... 2,728 8,292 18,185 48,899 116,645
--------- --------- --------- --------- ---------
Total............................................................... $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Minutes
Continental Europe.................................................... 1,957 3,856 8,351 17,239 45,085
United Kingdom........................................................ 4,532 20,592 27,968 68,810 288,892
North America......................................................... 5,707 23,411 68,247 244,095 549,654
--------- --------- --------- --------- ---------
Total............................................................... 12,196 47,859 104,566 330,144 883,631
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(5)
----------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..................................... $ 139,561 $ 199,261
Restricted cash and securities(6).................................................... 40,467 40,467
Total assets......................................................................... 388,208 447,908
Current portion of borrowings........................................................ 16,694 16,694
Long-term borrowings, less current portion........................................... 380,748 380,748
Series A Preferred Stock............................................................. 14,421 --
Total stockholders' equity (deficit)................................................. (102,467) (28,346)
</TABLE>
- ------------------------------
(1) Weighted average numbers of shares have been retroactively restated to give
effect to the 1.04 for 1 stock split to be effected prior to the offering.
See "Certain Information."
(2) "EBITDA" is defined as net income (loss) plus net interest expense, income
tax expense, and depreciation and amortization expense. We have included
information concerning EBITDA in this prospectus because this type of
information is commonly used in the telecommunications industry as one
measure of a company's operating performance and liquidity. EBITDA is not
determined using generally accepted accounting principles ("GAAP") and,
therefore, our EBITDA is not necessarily comparable to EBITDA of other
companies. EBITDA also does not indicate cash provided by operating
activities. You should not use our EBITDA as a measure of our operating
income and cash flows from operations under GAAP. Both of those measures are
presented above. You also should not look at our EBITDA in isolation, as an
alternative to or as more meaningful than measures of performance determined
in accordance with GAAP.
(3) The distributions reflected in this line item were declared when we were a
subchapter S corporation under U.S. tax law.
(4) The Series A Preferred Stock accrued monthly dividends at a compounded
monthly rate of 12% per year. The dividends began to accrue and compound
interest from November 1, 1996, the issuance date of the Series A Preferred
Stock, and ceased to accrue on July 1, 1997.
(5) The as adjusted data give effect to (i) the offering, (ii) the conversion of
the Series A Preferred Stock into our common stock upon consummation of the
offering, as if these events had occurred on December 31, 1998 and (iii) a
1.04 for 1 stock split to be effected prior to the offering.
(6) We used $57.4 million of the net proceeds from our 1997 offering of units
(the "1997 Unit Offering") to purchase a portfolio of U.S. government
securities that we reserved for the payment of the first six scheduled
interest payments due on the $155.0 million principal amount of 13 1/2%
Senior Notes due 2007 (the "1997 Notes") that we issued in the 1997 Unit
Offering. Warrants also were issued in the 1997 Unit Offering. See
"Capitalization."
11
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
LIMITED OPERATING HISTORY
We have a limited operating history. We were founded in 1992 and before 1994
only conducted minimal business. In addition, we have only begun providing most
of our current services in most of our current markets since 1996 or later. See
"Business--Products and Services."
We have had limited experience in most of the markets we currently serve and
intend to significantly expand the scale and scope of our operations in our
markets. As part of this expansion, we intend to introduce new services and
features including enhanced services such as voicemail, "follow me," data and
Internet access services that we have not historically offered to any
significant extent. We also intend to enter into new geographic markets where we
currently do not have operations. In 1999, the new geographic markets that we
intend to enter include Austria, Ireland, Italy and The Netherlands.
Our prospects must therefore be considered in light of the foreseeable and
unforeseeable risks, expenses, problems and delays inherent in an early stage
company substantially expanding its business in a rapidly evolving industry and
in new markets. Any of these factors could have a material adverse effect on our
business or the price of our common stock.
IMPLEMENTATION OF OUR EXPANSION PLANS
Our company is highly leveraged, which we hope will enhance the return to
our stockholders. However, our leverage makes our success, and the return to our
stockholders, extremely dependent on our ability to grow. To successfully
implement our goal of expanding and enhancing our business operations, we will
need to:
- successfully implement our marketing strategies;
- continue the development, expansion and integration of our network;
- obtain satisfactory and cost-effective ownership interests and lease
rights from, and establish interconnection arrangements with, competitors
that own transmission lines (in certain cases, intra-national transmission
lines may be available only from a PTT);
- hire, retain and motivate highly productive sales personnel and
independent sales agents, particularly in Europe, where such individuals
are particularly difficult to identify and retain;
- continue to expand and develop our billing systems, order provisioning
processes, technical support, customer service and other back-office
capacity;
- enhance and expand our service features and offerings; and
- continue to attract and hire experienced corporate professionals.
If we fail to successfully implement these plans, it is likely that our
business and the price of our common stock would be materially adversely
affected.
EXPANSION COSTS AND RISKS WILL BE SIGNIFICANT
We will incur significant costs as we attempt to expand. These costs
generally will be incurred in advance of anticipated related revenues, and may
cause substantial and unanticipated fluctuations in our operating results.
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To increase our customer base and enhance our support of our customers, we
intend to substantially increase our sales and marketing and customer care
expenses, especially in our newer geographic markets and over the Internet. We
plan to conduct new sales and marketing campaigns. We also plan to hire
additional internal sales personnel. In addition, we intend to make significant
investments to continue to expand and enhance our customer support, billing,
order provisioning and other information processing capabilities. These
initiatives will be costly and will affect our operating results.
We also will make substantial capital expenditures. For 1999, we plan to
spend approximately $100 million for capital expenditures on network equipment,
back-office systems, the continued build-out of our network operations center in
St. Louis, Missouri, a transatlantic IRU and other fiber optic transmission
capacity. Actual capital expenditures may be significantly different than our
current plans, in part because we intend to be opportunistic in acquiring
transmission capacity in a dynamic market. We also expect to have substantial
capital expenditures after 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
We may seek to finance our capital expenditures by issuing additional debt
or equity securities. The issuance of debt would increase risk to our
stockholders. See "--Substantial Indebtedness, Future Losses and Negative
EBITDA." The issuance of equity would dilute our stockholders' ownership
interests in our company.
RISKS OF POTENTIAL ACQUISITIONS
We intend to pursue selected acquisitions and strategic alliances, some of
which may be material. We continuously engage in discussions with potential
acquisition candidates. Our ability to engage in acquisitions will be dependent
upon our ability to identify attractive acquisition candidates and, if
necessary, obtain financing on satisfactory terms. The challenges of
acquisitions include:
- potential distraction to management;
- integrating the network and operations of acquired businesses into our
own;
- integrating the acquired business's financial, computer, payroll and other
systems into our own;
- implementing additional controls and information systems appropriate to a
growing company;
- unanticipated liabilities or contingencies from the acquired company; and
- reduced earnings due to increased goodwill amortization, increased
interest costs and costs related to integration.
It is possible that we will pay for acquisitions using our common stock,
which would dilute our stockholders' ownership interests in our company. If we
are unsuccessful in meeting the challenges arising out of our growth, our
business and the price of our common stock could be adversely affected.
SUBSTANTIAL INDEBTEDNESS, FUTURE LOSSES AND NEGATIVE EBITDA
As of December 31, 1998, we had total consolidated indebtedness of $397.4
million and a stockholders' deficit of $102.5 million. Furthermore, the 11%
Senior Discount Notes due 2008 that we issued during 1998 (the "1998 Notes")
currently do not pay interest in cash, and from January 1, 1999 to February 15,
2003 will accrete in value (i.e., effectively increase in principal amount), by
approximately $107.1 million. Thereafter, interest on the 1998 Notes must be
paid in cash. For 1998, we had a net loss of $68.9 million, we had negative
EBITDA of $27.6 million and net cash used in operating activities was $26.4
million. We expect to have operating losses and negative EBITDA and negative
cash flow from operations through at least 2000. We cannot be certain that we
will ever operate at profitable levels or have positive EBITDA or be able to
repay principal and interest on money that we have borrowed. Our failure to
achieve any of these results would materially adversely affect our business and
the price of our common stock.
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We expect that the net proceeds of this offering, together with equipment
loans that we expect to obtain and our other cash resources, will be sufficient
to fund our budgeted capital expenditures and operations until we generate
positive cash flow from operations. However, if we make any significant
acquisitions of businesses or assets, or our business plans or assumptions prove
to be inaccurate, we may need to borrow more money, which would increase our
overall indebtedness.
If we are unable to generate sufficient cash flows from operations to pay
principal and interest on our indebtedness, we may be required to refinance some
or all of it. If we are not able to refinance our indebtedness on acceptable
terms or to borrow additional money, we could be forced to default on our
indebtedness obligations. This would have a material adverse effect on our
business and the price of our common stock.
The indentures pertaining to the 1997 Notes and the 1998 Notes that we have
issued contain various restrictive covenants. See "Certain Indebtedness" for
details on these restrictions. All of these restrictions, in combination with
our highly leveraged financial situation, could:
- limit our ability to react to changing market conditions, changes in our
industry or economic downturns;
- place us at a competitive disadvantage if we are not able to borrow money
on acceptable terms for future acquisitions, capital expenditures or other
purposes;
- increase the losses we will need to fund and require us to dedicate a
substantial portion of the cash flow from our operations, if any, to pay
our interest expense, which would make it more difficult to fund our
company's needs or plans; and
- make it more difficult for us to satisfy our debt obligations.
See "Capitalization," "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
The markets for all of our services are extremely competitive and we expect
competition to continue to intensify, particularly in continental Europe, where
many regulatory barriers have recently been reduced as part of an ongoing
liberalization. Competition results in customer "churn" or "turnover" as well as
downward price pressure. We believe that competition in many of our markets in
Europe will eventually become as strong as competition in the United States. For
a discussion of price competition, see the Risk Factor entitled "--Increasing
Pricing Pressures."
Many of our competitors are well-known, have substantially greater
financial, technical and marketing resources and larger networks than we do,
control a greater portion of their transmission lines and have long-standing
relationships with our target customers and the regulators in local markets.
Many of our larger competitors, such as AT&T, MCI WorldCom, Sprint, British
Telecom, Deutsche Telekom, France Telecom, Belgacom and SwissCom already have
universal name recognition. We also compete with alliances such as British
Telecom's alliance with AT&T (which recently announced that their alliance will
include Japan Telecom). We believe that many of these competitors will continue
to increase the resources that they devote to marketing and selling
international and/or domestic long distance services in each of the markets
where we operate. As a result, we will face increasing pressure upon our ability
to acquire customers. These competitive pressures could materially adversely
affect our business and the price of our common stock.
Many of our larger competitors, particularly in the United States, also
offer customers an integrated full service telecommunications package consisting
of local and long distance voice, data and Internet transmission. We do not
currently offer all of these types of services and only intend to add some or
all of such offerings over time. In particular, we currently have no plan to
offer local service in the United States.
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In the United States, we expect that, in the near future, the Regional Bell
Operating Companies ("RBOCs"), which are the principal U.S. local telephone
companies, also may compete with us for long distance customers in their "in
region" service areas. RBOCs have to satisfy a list of competitive requirements
before they are authorized to offer long distance service to their local
customers. No RBOC is authorized to do so yet, but they are expected to be
authorized soon. When they are authorized, they will be very formidable
competitors. In particular, Bell Atlantic, which serves the New York
metropolitan and mid-Atlantic regions, is considered by industry observers to be
the RBOC most likely to be the first permitted to offer long distance services.
On April 13, 1999, Bell Atlantic filed its application with the New York Public
Service Commission. Because a substantial portion of our customer base and
traffic originates in the New York metropolitan area, Bell Atlantic will be a
particularly formidable competitor. For long distance calls, Bell Atlantic will
have a substantial cost advantage because it will 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 many foreign markets where we do business, our principal competitor is
the government-owned or quasi-governmental PTT, which has a long history of
influence and control over the telecommunications market in its country. This
history provides the PTTs with certain inherent competitive advantages over
other providers, including:
- control of "interconnection," which is the direct connection at one or
more switches between a competing carrier (such as our company) and the
PTT, which owns the lines to virtually every telephone in the country;
- extensive, and in many cases exclusive, ownership of facilities;
- the ability to delay or prevent equal access to lines; and
- the reluctance of some regulators to adopt policies and grant regulatory
approval that will result in increased competition for the local PTT.
For example, in England a caller must dial a four-digit prefix before every
call in order to select our long distance service. If a customer does not dial a
prefix, the call is automatically carried by British Telecom. In France, only
seven carriers have been granted regulatory approval to provide long distance
service using a single digit prefix. We are not one of these carriers. Thus, a
caller in France must dial a four-digit prefix in order to select our long
distance service (otherwise, the call will be carried by a competitor). In
Germany, Deutsche Telekom was granted the approval to charge one-time fees to
any customer that changes its preselected long distance service provider. During
1998, this fee was 20 Deutsche Marks ("DM") and is currently DM10. In Greece,
regulatory restrictions prohibit us from offering long distance services other
than value-added services, such as prepaid cards, or services to closed user
groups (i.e., we cannot offer services to the general public). Furthermore,
because competition has only recently been allowed in most of our European
markets, the customers of PTTs may be reluctant to entrust their
telecommunications needs to new providers, such as Destia.
We also may experience competition from competitors that use new or
different technologies and/or transmission methods, including Internet service
providers, cable television companies, wireless telephone companies, satellite
owners and resellers, electric and other utilities, railways, microwave carriers
and large end users that have private networks. While few of these types of
competitors have been able to gain any material market share for our principal
services to date, technological advances may enable one or more of them to
provide attractive alternative services. For example, we expect flat-rate
nationwide cellular or PCS phone plans to offer increasingly formidable
competition to our calling card services. In the United Kingdom, cable companies
have been very successful in entering the telecommunications market. See
"Business--Products and Services."
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INCREASING PRICING PRESSURES
We compete for customers based primarily on price. Price competition for all
of our services is intensive, but it is particularly acute for our U.S. prepaid
card and calling card services.
Our larger competitors generally have lower per call transmission costs than
we have. They own more transmission capacity, have more favorable
interconnection rates and obtain larger volume discounts from suppliers. We have
no control over the prices set by our competitors, and when our competitors
reduce their prices, we must reduce our prices.
Industry observers predict that prices will continue to drop. This trend
will in part be due to the increase in the number of carriers with international
transmission networks. By having their own international networks, carriers are
able to substantially reduce their variable transmission costs, which enables
them to offer lower retail and wholesale prices. If this trend continues, we
expect to experience a substantial reduction in our gross margins for
international calls, which, absent a substantial increase in traffic carried or
charges for additional services, would have a material adverse effect on our
business and the price of our common stock.
We expect that retail telecommunications rates in all of our principal
markets, particularly in continental Europe and Canada, will continue to
decrease rapidly. Some of the factors that will affect price competition for our
services are discussed below.
PRICE COMPETITION IN EUROPE
We anticipate that continuing deregulation will cause significant retail
price declines, similar to the price declines experienced in the United States
and being experienced in the United Kingdom as a result of deregulation in those
countries. We believe that European PTTs are reacting to competition more
aggressively than AT&T did in the U.S. following the break-up of its monopoly in
the 1980s.
For example, each of our PTT competitors in Europe has taken steps to
substantially reduce retail prices in an effort to protect its market share and
deter competitors. In this regard, France Telecom has recently announced that it
will reduce its prices on average by 10% on international services and by 12% on
domestic long distance services. In the United Kingdom, the national regulatory
authority has put downward pressure on British Telecom's retail prices by
imposing a price cap on its retail prices for residential services. In Germany,
Deutsche Telekom has announced that it will reduce its retail long distance
rates by as much as 60%.
In certain European countries, carriers that make significant investments in
infrastructure have cost advantages over other carriers. For example, in France
and Belgium, "facilities-based" carriers that make investments in infrastructure
receive lower interconnection rates than non-facilities-based providers. We are
not a "facilities-based" provider within the meaning of French and Belgian
regulations.
The rapid reduction of retail prices by PTTs in continental Europe places
increasing pressure on us to reduce our costs in order to preserve and improve
our gross margins. Because of the expansion of the Destia Network and reductions
in wholesale transmission costs, we have been able to avoid substantial declines
in gross margins. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Cost of Services." As retail
prices continue to fall, we will be subject to increasing pressure, which could
have a material adverse effect on our business and the price of our common
stock.
COLLAPSE OF THE INTERNATIONAL SETTLEMENT REGIME
Prices for international long distance calls are determined in part by
international settlement rates, which are the rates that a carrier (often a PTT)
charges to terminate an international call in its home country. Because these
rates were set by national monopolies, they were traditionally set at arbitrary,
artificially high levels that enabled many carriers to enjoy high gross margins
on international calls. With the introduction of competition in many countries,
international settlement rates have been declining for
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the last several years. Additionally, an increasing number of calls are being
placed outside the international settlement rate system, resulting in
drastically lower prices. Moreover, practices such as "refile" (where traffic
originating from a particular country is rerouted through another country with a
lower settlement rate), off settlement rate terminations (where a local carrier
agrees to terminate an international call at rates below the settlement rates)
and transit (where a carrier agrees to terminate another carrier's traffic to a
particular country at a negotiated price other than the settlement rate) are
becoming increasingly common. Industry observers believe that the combined
effects of deregulation, excess transmission capacity, advances in technology
and the negligible marginal cost to a carrier that owns its own switches and
transmission facilities of carrying an international call, are gradually causing
the collapse of the international settlement rate system.
Settlement rates also are being reduced as a result of regulatory
initiatives. Lower settlement rates are scheduled to be in effect for
substantially all countries over the next several years. Lower settlement rates
will reduce our per call revenue, which could have a material adverse effect on
our business and the price of our common stock. Prices for international calls
may be further driven down as a result of the FCC's recent decision to lift its
International Settlements Policy ("ISP") on competitive routes. We note that the
FCC has yet to release its order containing these rules and that the rules are
not yet in effect. See "Business-Regulation-United States."
PRICE COMPETITION FROM INTERNET TELEPHONY
The increased use of voice services over the Internet also is expected to
result in a further reduction in prices. Competition from Internet telephony is
expected to come from both Internet service providers and telephone companies.
For example, AT&T, MCI WorldCom and ICG Communications have begun to offer voice
telecommunications services over the Internet at substantially reduced prices.
While the provision of voice telephony over the Internet historically has been
characterized by lower standards of quality, technological improvements may
result in Internet-based voice telephony becoming a strong competitor to voice
services that are typically offered by carriers today.
In the United States, providers of Internet telephony also benefit from an
inherent cost advantage because their traffic is considered data, rather than
voice telephony. This allows them to avoid paying access fees to RBOCs and other
local telephone companies, while providers of traditional long distance services
are required to pay such fees. Access fees constitute a large portion of a long
distance carrier's cost of services, including ours. We note, however, that on
April 5, 1999, US West filed a petition with the FCC asking the FCC to find that
Internet telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charges and universal service obligations. On April 7, 1999, US West filed
similar petitions with the Colorado and Nebraska Commissions. Should the FCC and
State PSCs rule adversely to US West, the cost advantage in favor of Internet
telephony providers could have a material adverse effect on our business and the
price of our common stock.
DEPENDENCE ON THIRD PARTY SALES ORGANIZATIONS
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 ("Third Party Agents").
We believe that our relationships with our Third Party Agents are good.
However, we do not have control over Third Party Agents or their agents and
employees. We therefore cannot be certain that they will perform in a
satisfactory manner or that their interests will be aligned with ours. In
addition, Third Party Agents also may terminate their business relationships
with us at any time, with little or no prior notice. They could do this if our
competitors offer them increased sales incentives. This risk is especially
pronounced in our multilevel marketing program in the United Kingdom, where a
master agent could determine to terminate its business relationship (and that of
its sub-agents) with us and conduct business with a competitor. Unsatisfactory
performance by Third Party Agents, or the termination by them of their business
relationship with us, would hinder our ability to continue to grow and could
have a material adverse effect on our business and the price of our common
stock.
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Recent European Union ("EU") regulations pertaining to commercial agents
provide sales agents with far greater protection than that provided by prior
legislation, and could result in increased termination payments in the event of
a dispute with a Third Party Agent.
We previously experienced disputes with some of our independent sales
agents. In connection with a change in our distribution strategy in the United
Kingdom, in late 1996, we entered into a settlement agreement with Europhone
International ("EI"), our former partner in a U.K. sales and marketing joint
venture. Under the terms of the settlement, among other things, EI retained all
of the rights in the customer list of the joint venture. For 1996, our joint
venture with EI and sales of carrier services to EI contributed 32% of our
consolidated revenues and 92% of our U.K.-originated revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--1997
Compared to 1996--SG&A."
IMPORTANCE OF CARRIER AND OTHER WHOLESALE CUSTOMERS
Carrier customers generally are extremely price sensitive, generate very low
margin business and move their traffic from carrier to carrier based solely on
small price changes. These changes occur as frequently as daily. Furthermore,
there are numerous examples of small carriers obtaining service and credit terms
from other carriers, reselling this service to customers at a loss in order to
quickly build revenue and then refusing to pay the carrier bills when they come
due. In the deregulating markets in Europe, these risks are particularly acute.
Therefore, we could be exposed to a material credit risk over a very short
period of time. We maintain a reserve for doubtful accounts receivable and
periodically write off specific accounts receivable. We believe that our credit
criteria enable us to reduce our exposure to these risks. However, we cannot be
certain that our criteria will afford adequate protection against these risks.
During 1997 and 1998, our sales of transmission capacity to carrier
customers ranged from 9% to 30% of our consolidated revenues on a quarterly
basis. During 1999, we intend to increase our carrier revenues, although our
business will continue to be predominantly focused on retail sales. This may
make us more susceptible to the risks associated with carrier customers, which
could have a material adverse effect on our business and the price of our common
stock.
REGULATORY RESTRICTIONS
Regulation of the telecommunications industry is changing rapidly, both
domestically and internationally. Although we believe that deregulation efforts
will create opportunities for us, they also present risks, which could have a
material adverse effect on our business and the price of our common stock.
As an international telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we provide our
services. Laws and regulations differ significantly among these jurisdictions.
There can be no assurance that future regulatory, judicial and legislative
changes will not have a material adverse effect on our company or that domestic
or international regulators or third parties will not raise material issues with
regard to our compliance with applicable regulations.
In the United States, regulatory considerations that affect or limit our
business include:
- restrictions on our use of leased lines;
- universal service fund contribution requirements;
- access charges that we are required to pay to local exchange carriers
("LECs");
- payphone access charges that we are required to pay;
- regulations and penalties relating to "slamming" (i.e., switching a
customer's service without its permission); and
- regulations concerning use of customer proprietary network information in
cross marketing efforts.
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In Europe, regulatory considerations that affect or limit our business
include:
- EU directives pertaining to equal access and number portability;
- implementation of national legislation giving effect to EU directives;
- EU directives relating to data protection and customer privacy; and
- temporary license and/or interconnection regimes.
In addition to the regulatory considerations indicated in this Risk Factor,
see also "--Need for Interconnection" and "Business--Regulation" for a
discussion of these and certain other regulatory risks and considerations
relevant to our business.
NEED FOR INTERCONNECTION
In each jurisdiction in which we operate, a monopoly or former monopoly owns
the only line to an overwhelming majority of the telephones. Therefore, we need
to interconnect with these monopolies or former monopolies.
In the United States, LECs are required to provide interconnection at
regulated rates. Outside the United States, interconnection can be obtained
through interconnection agreements negotiated directly with the PTTs (such as
our PTT interconnection agreements in the United Kingdom, Belgium, Germany,
France, The Netherlands and Switzerland), or indirectly through other parties
that have direct interconnection with the PTT. Interconnection agreements with
PTTs typically provide for substantially more favorable access and termination
rates and other benefits, such as the ability to offer customers abbreviated
dialing. As a practical matter, interconnection with the PTT is a prerequisite
to offering cost-effective services to customers in local markets. The
availability and rates of interconnection are determined on a country-by-country
basis. The failure to obtain interconnection on commercially acceptable terms,
particularly in key markets, could have a material adverse effect on our
business and the price of our common stock.
CONSIDERATIONS AFFECTING INTERCONNECTION IN EUROPE
Regulations governing interconnection are not as developed and favorable to
us in most of continental Europe as in the United States and the United Kingdom.
We have been successful to date in obtaining interconnection in most of our
major network cities in continental Europe. However, we have experienced delays
in obtaining interconnection from some PTTs. We cannot be certain that we will
be able to maintain all of our interconnections, obtain additional
interconnection in current network cities (which would increase our ability to
handle larger traffic volumes) or obtain interconnection in additional cities,
in each case on acceptable terms, on a timely basis or at all. In addition, in
continental European cities where we have interconnection through private
parties, we cannot be certain that we will be able to satisfactorily migrate to
interconnection agreements with PTTs.
In continental Europe, we generally must obtain our local connectivity
directly from the PTTs, which are our primary competitors in that region. The
PTTs have only recently begun the process of providing interconnection to other
carriers and in many cases have delayed doing so.
Our interconnection to the PTT in Belgium has been granted on a temporary
basis pending the adoption of certain new telecommunications legislation in
Belgium. Our interconnection agreement in Germany granting us access to Deutsche
Telekom's network expired at the end of February 1999, although we have
initiated legal action to maintain continued interconnection with Deutsche
Telekom's network. In the interim, we are currently still interconnected to
Deutsche Telekom's network. If Deutsche Telekom were permitted to restrict our
interconnection, our transmission costs in Germany would increase and the
services we could offer might be limited. We expect our temporary
interconnections in Belgium and Germany to be extended until relevant national
rules or interconnection decisions are adopted, although there can be no
assurance that either of them will be extended. See
"Business--Regulation--Belgium" and "Business--Regulation--Germany."
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CONSIDERATIONS AFFECTING INTERCONNECTION IN THE UNITED STATES
In the United States, we obtain interconnection from LECs. Because per
minute retail rates on U.S. domestic long distance calls are low, the access and
termination costs charged by LECs to long distance providers make up a
significant portion of the total cost of these calls. If a LEC increases its
access and termination charges, our margins on domestic long distance calls to
that LEC's home region would be materially adversely affected. We are also
dependent upon LECs to implement the transfer of customers from other long
distance carriers to us in a timely and accurate manner. In addition, when LECs
are able to offer long distance services to their local customers, they will not
have to pay these access charges. This will put us at a price disadvantage
compared to the LECs.
DEPENDENCE ON TRANSMISSION LINE PROVIDERS
Transmission lines are the connections that carry substantially all of our
voice and data communications. We have not constructed our own fixed
transmission lines and we do not have any plans to do so. Instead, we either
acquire ownership or a long-term right to use (I.E., an IRU) the facilities of
another carrier or consortium of carriers or we lease our transmission capacity
on a short-term basis.
RISKS RELATING TO U.S. TRANSMISSION ARRANGEMENTS
In the United States, we currently have a lease arrangement with Qwest that
provides us with most of our U.S. transmission capacity. By primarily using one
transmission provider in the United States, we are able to obtain more favorable
leased line charges, although it increases our dependence on a single
transmission provider.
Because of the substantial increase in our domestic traffic and U.S.-bound
foreign traffic and our desire to provide services in more U.S. markets, we
recently acquired a 20-year IRU from Frontier to use portions of its U.S. fiber
optic network. This will replace our use of the Qwest network. Frontier is in
the process of building the fiber optic network that we will use, and we expect
this network to be completed and substantially operational by the end of 1999.
We expect to begin using a portion of Frontier's network by July 1999, although
there can be no assurance in this regard. If the Frontier U.S. fiber optic
network is not completed within this time frame, we will need to obtain more
expensive transmission capacity from other network providers, which will reduce
our gross margins on substantially all of our U.S. calls. See "Business--The
Destia Network--North American Network."
Because we will obtain most of our U.S. transmission capacity from Frontier,
network failures or quality problems experienced by Frontier will affect us.
Furthermore, because the network will be managed by Frontier and not by our own
personnel, we will not have the ability to directly remedy network problems. If
Frontier is not able to adequately manage and maintain the network or our
interconnection, we could experience quality and reliability problems, which
would require us to secure more expensive transmission capacity. In the past,
Frontier has experienced problems with its existing network, which utilizes
technology different from that of its new network. We cannot be certain that
similar problems will not arise with Frontier's new network or with the
technology utilized in the network. This could have a material adverse effect on
our business and the price of our common stock. In addition, as a result of the
pending acquisition of Frontier by Global Crossing, there may be potential
operational and management integration issues that affect us.
RISKS RELATING TO ACQUIRING LINES FROM PTTS
In several European countries, including France and Germany, the only
large-scale providers of transmission facilities are the PTTs. In these
countries, we may be required to acquire or lease transmission capacity at
artificially high rates from a provider that occupies a monopoly or near
monopoly position. In some areas, PTTs may not be required by law to provide us
with the transmission capacity that may be required to implement our anticipated
growth plans.
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Even when PTTs are required by law to provide transmission capacity to other
carriers, we and other private carriers have experienced recurring and
substantial delays in the negotiation of leases and interconnection agreements
and in the commencement of operations.
RISKS RELATING TO CAPACITY PURCHASE AND LEASE TERMS
Under our short-term lease arrangements, we typically acquire transmission
capacity on a fixed cost basis for a term of one month, one year or, in the case
of our current arrangement with Qwest, three years. Our long-term capacity
arrangements are for periods of up to 20 or 25 years. Our IRU from Frontier for
our domestic network and our IRU agreements providing us with capacity on
various transatlantic crossings are long-term capacity arrangements. See
"Business--The Destia Network--Network Economics."
When we negotiate our purchase and lease agreements and make a determination
to acquire a long-term lease or ownership of transmission capacity rather than a
short-term lease, we must estimate the future supply and demand for transmission
capacity, as well as our customer calling patterns and traffic levels. Our
profitability depends, in part, on our ability to obtain capacity on a
cost-effective basis and determine when it is appropriate to buy transmission
capacity or lease it on a long-term basis, rather than to lease it on a
short-term basis. We could suffer competitive disadvantages if we base our
acquisitions of transmission capacity on inaccurate projections.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
In order to bill our customers, we must record and process large amounts of
data quickly and accurately. While we believe our management information systems
currently are adequate, if our customer base continues to increase, we will need
to continue to make substantial investments in new and enhanced information
systems. If we encounter delays or cost-overruns or suffer adverse consequences
in implementing these systems, there could be a material adverse effect on our
business and the price of our common stock. See "Business--The Destia
Network--Network Operations."
As our information systems suppliers revise and upgrade their hardware,
software and equipment technology, we may encounter difficulties in integrating
these new technologies into our business; in addition, these new revisions and
upgrades may not be appropriate for our business.
DEVALUATION AND CURRENCY RISKS
A substantial portion of our revenues and expenses are denominated in
non-U.S. currencies, consisting principally of the British pound and the
currencies represented by the euro. Although our business strategy contemplates
that an increasing portion of our revenues and expenses will be denominated in
non-U.S. currencies, a disproportionate portion of our expenses, including
interest and principal on our indebtedness, will nevertheless continue to be
denominated in U.S. dollars. This exposes us to fluctuations in the rate of
exchange between foreign currencies and the U.S. dollar. Significant exchange
rate fluctuations could have a material adverse effect on our business and the
price of our common stock.
At times, we use foreign exchange contracts to hedge foreign currency
exposure resulting from our non-U.S. trade accounts receivables. Because of the
number of currencies involved, our constantly changing currency exposure and the
fact that all foreign currencies do not fluctuate in the same manner against the
U.S. dollar, we cannot quantify the effect of exchange rate fluctuations on our
future financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL; INTEGRATION OF MANAGEMENT AND OTHER PERSONNEL
Our success depends largely on the skills, experience and performance of key
members of our senior management team. If we lose one or more of these key
employees, particularly Alfred West or Alan L.
21
<PAGE>
Levy, our ability to successfully implement our ambitious business plan and the
price of our common stock could be materially adversely affected. We have
employment agreements with certain senior employees, but we cannot prohibit our
employees from leaving. See "Management--Executive Compensation" and
"Management--Employment Agreements and Arrangements."
Under our equipment financing agreement (the "NTFC Agreement"), we may not
cease to employ Mr. West (other than by reason of his death or disability) or
let Mr. West compete with us. If we were to breach our equipment financing
agreement, we would be in default, which would require us to prepay all
borrowings outstanding thereunder, which would cause a default under the
indenture for the 1997 Notes (the "1997 Indenture") and the indenture for the
1998 Notes (the "1998 Indenture") and could require prepayment of all amounts
outstanding on the 1997 Notes and the 1998 Notes. That would have a material
adverse effect on our business and the price of our common stock.
YEAR 2000 TECHNOLOGY RISKS
We face certain risks arising from Year 2000 issues which could have a
material adverse effect on our business and the price of our common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" for a discussion of certain risks relating to
Year 2000 issues.
DEPENDENCE ON OUR PRINCIPAL EQUIPMENT SUPPLIER
We purchase a significant portion of our switching equipment from Northern
Telecom. We also rely on Northern Telecom for a substantial portion of our
technical support for this equipment. From time to time, Northern Telecom also
introduces software and hardware upgrades, which increase the efficiency and/or
features of our switching equipment. These upgrades frequently can be purchased
only directly from Northern Telecom. Northern Telecom is aware of our reliance
on them for our network hardware and we believe that this may put us at a
disadvantage in our negotiations with them to acquire network hardware at
reasonable prices. See "Business--The Destia Network--Network Hardware and
Software."
As we continue to expand the Destia Network, we cannot be certain that we
will be able to acquire all of the compatible equipment that we require. Our
inability to acquire network hardware on a timely basis or at a reasonable price
could result in delays, operational problems or increased expenses, any of which
could have a material adverse effect on our business and the price of our common
stock.
CONTROL BY PRINCIPAL STOCKHOLDERS
When this offering is completed, Alfred West, (our Chief Executive Officer
and Chairman of our Board of Directors), Steven West, (the brother of Alfred
West and a member of our Board of Directors), and Gary Bondi (a member of our
Board of Directors) will in total beneficially own or control approximately 58%
of our outstanding common stock. As a result of their percentage ownership of
our common stock, these stockholders will exert significant influence over all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, which could delay or prevent
someone from acquiring us. See "Principal Stockholders."
ANTI-TAKEOVER PROVISIONS
Some of the provisions that may be included in our Certificate of
Incorporation and Bylaws may discourage, delay or prevent an acquisition of our
company at a premium price. These provisions:
- authorize the issuance of "blank check" preferred stock;
- prohibit cumulative voting in the election of directors;
- limit the removal of directors by the shareholders to removal for cause;
- require a super-majority stockholder vote to effect certain amendments to
our Certificate of Incorporation and Bylaws;
22
<PAGE>
- limit the persons who may call special meetings of stockholders;
- prohibit stockholder action by written consent except where unanimous; and
- establish advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
In addition, we intend to adopt a shareholder rights plan after the
completion of this offering. A shareholder rights plan would cause substantial
dilution to any person or group that attempts to acquire our company on terms
not approved in advance by our Board of Directors.
Section 203 of the Delaware General Corporation Law (the "DGCL") also
imposes certain restrictions on mergers and other business combinations between
us and any holder of 15% or more of our common stock. By its terms, the
prohibitions of Section 203 of the DGCL are not applicable to Messrs. Alfred
West, Steven West and Gary Bondi. See "Principal Stockholders." In addition,
certain of our employment agreements provide for payments to be made to the
employees thereunder if their employment is terminated in connection with a
change of control.
Certain provisions of the DGCL, our shareholder rights plan and some of our
employment agreements may delay, deter or prevent someone from acquiring us in a
transaction that results in stockholders receiving a premium over the market
price for the shares of common stock. See "Management--Employment Agreements and
Arrangements" and "Description of Capital Stock-- Provisions of the Certificate
of Incorporation, Bylaws and Delaware Law That May Have an Anti-takeover
Effect." In addition, the Federal Communications Commission (the "FCC") and
certain state public service commissions ("PSCs") require prior approval of
transfers of control, including PRO FORMA transfers of control resulting from
corporate reorganizations and assignments of regulatory authorization. Such
requirements may delay, prevent or deter a change in control of our company.
In addition to the foregoing, under the 1997 Indenture and the 1998
Indenture, we must offer to purchase all the 1997 Notes and 1998 Notes at a
purchase price equal to 101% of the principal amount or accreted value (as
applicable) of such notes. Our equipment financing debt has similar provisions.
See "Certain Indebtedness." The foregoing covenants may also deter third parties
from entering into a change of control transaction with us.
NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
There is no market for our common stock. An active public market for our
common stock may not develop or be sustained after the offering. The price of
our common stock is likely to change after the offering. See "Underwriters." The
market price of our common stock may fluctuate significantly in response to a
number of factors, (some of which are beyond our control), including:
- variations in operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of telecommunications companies;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- our success or failure to implement our expansion plans;
- an adverse decision by a regulatory agency in one of our primary markets;
- increases or decreases in reported holdings by insiders or mutual funds;
- additions or departures of key personnel;
- future sales of common stock; and
- stock market price and volume fluctuations generally.
23
<PAGE>
POTENTIAL EFFECT OF SHARES BECOMING AVAILABLE FOR SALE
Sales of a substantial number of shares of common stock after the offering
(or the perception that such sales might occur) could adversely affect the
market price of our common stock and could impair our ability to raise capital
through the sale of additional stock. Immediately after this offering, we will
have 33,698,061 shares of common stock outstanding or that are the subject of
currently exercisable options. The 6,500,000 shares sold in this offering will
generally be freely tradable without restriction. The 20,778,321 shares of our
common stock outstanding on completion of this offering will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act ("Rule
144").
The 3,553,821 shares of common stock that will be held by Princes Gate
Investors II, L.P. and certain affiliates when its shares of Series A Preferred
Stock are converted upon completion of this offering will be entitled to certain
registration rights. See "Underwriters."
Immediately after this offering, we also will have an additional
approximately 3,520,000 shares of common stock that are the subject of options
that are not currently exercisable. To the extent that these options are
properly exercised, the underlying shares of common stock will be freely
tradable immediately upon exercise of the options.
Stockholders holding more than approximately 80% of our outstanding common
stock and currently exercisable options to purchase our common stock prior to
the offering have executed lock-up agreements that limit their ability to sell
such common stock. These stockholders have agreed not to sell or otherwise
dispose of any shares of our common stock for a period of at least 180 days
after the date of this prospectus without the prior written approval of Morgan
Stanley & Co. Incorporated. When the lock-up agreements expire, these shares and
the shares underlying the options will become eligible for sale, in some cases
subject to the volume, manner of sale and notice requirements of Rule 144. See
"Management-- Employment Agreements and Arrangements" and "Shares Eligible for
Future Sale."
ABSENCE OF DIVIDENDS
We have not paid dividends on our common stock since we became a subchapter
C corporation. We do not anticipate paying any dividends on our common stock for
the foreseeable future. In addition, the instruments governing our indebtedness
contain restrictions on our ability to declare and pay dividends. See "Dividend
Policy" and "Certain Indebtedness."
IMMEDIATE SUBSTANTIAL DILUTION
The initial public offering price will be substantially higher than the book
value per share of our outstanding common stock (which is negative). As a
result, investors purchasing our common stock in this offering will incur
immediate substantial dilution. In addition, we have issued options and warrants
to acquire our common stock at prices significantly below the initial public
offering price. To the extent these outstanding options or warrants are
ultimately exercised, there will be further dilution to investors in this
offering. See "Dilution."
24
<PAGE>
USE OF PROCEEDS
Our company will receive net proceeds from the offering of approximately
$59.7 million (approximately $68.8 million if the underwriters exercise their
over-allotment option in full), assuming that our common stock is offered at
$10.00 per share, the midpoint of the range set forth on the cover page of this
prospectus, and after deducting underwriting discounts and commissions and the
estimated expenses of the offering. Our company intends to use the net proceeds
to expand its sales and marketing activities and to make capital expenditures,
particularly in Europe, as well as to fund working capital and general corporate
purposes, including to fund losses. Since we continuously engage in discussions
with potential acquisition candidates, we may use net proceeds to fund suitable
strategic acquisitions. Pending the use of the net proceeds, we intend to
contribute them to an "Unrestricted Subsidiary," as defined in our indentures.
DIVIDEND POLICY
Our company has not declared or paid any cash dividends on its common stock
or other securities since it became a subchapter C corporation and it does not
intend to pay cash dividends in the foreseeable future. Our company plans to
retain earnings, if any, for use in the operation of its business and to fund
future growth. In addition, our company's indentures and our equipment financing
agreement currently restrict the payment of dividends. See "Certain
Indebtedness."
CERTAIN INFORMATION
Our company's principal executive offices are located at 95 Rte. 17 South,
Paramus, New Jersey 07652, and its telephone number is (201) 226-4500. Its World
Wide Web site address is www.destia.com. The information in its web site is not
incorporated by reference into this prospectus.
Our company's logo and certain titles and logos of our company's services
mentioned in this prospectus are our company's trademarks. Each trademark, trade
name or service mark of any other company appearing in this prospectus belongs
to its holder.
This prospectus includes statistical data (including FCC and International
Telecommunications Union ("ITU") data) concerning the telecommunications
industry that we obtained from industry publications. These publications
generally indicate that they have obtained information from sources that they
believe are reliable, but that they do not guarantee the accuracy and
completeness of the information. Although we believe that these industry
publications are reliable, we have not independently verified their data. We
also have not sought the consent of any of these publications to refer to their
data in this prospectus.
The information in this prospectus has been adjusted to reflect the
conversion of all 140,000 outstanding shares of the Series A Preferred Stock
into 3,553,821 shares of common stock, which will occur immediately prior to the
closing of the offering. The information in this prospectus also has been
adjusted to reflect this 1.04 for 1 split of our common stock and Non-Voting
Common Stock (as defined below). Except where specifically indicated, the
information in this prospectus does not take into account the exercise of any of
our outstanding options or warrants.
As used herein, common stock refers to the voting common stock of our
company. As of April 1, 1999, there were 151,474 shares of non-voting common
stock ("Non-Voting Common Stock") outstanding and 103,891 shares of restricted
voting common stock ("Restricted Voting Common Stock").
25
<PAGE>
CAPITALIZATION
The following table sets forth our cash and capitalization as of December
31, 1998 (i) on an actual basis and (ii) on an as adjusted basis after giving
effect to the offering and the conversion of all outstanding shares of Series A
Preferred Stock into shares of common stock. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the related notes
thereto appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents, marketable securities and restricted cash........................ $ 180,028 $ 239,728
---------- -----------
---------- -----------
Current portion of long-term debt and capital lease obligations.......................... $ 16,694 $ 16,694
---------- -----------
---------- -----------
Long-term debt and capital lease obligations:
Capital leases......................................................................... $ 193 $ 193
1997 Notes............................................................................. 150,240 150,240
1998 Notes............................................................................. 192,936 192,936
Other long-term debt................................................................... 37,379 37,379
---------- -----------
Total long-term debt and capital lease obligations................................. 380,748 380,748
Redeemable convertible preferred stock................................................... 14,421 --
Stockholders' equity (deficit):
Common stock--voting, $.01 par value, 29,250,000 shares authorized, actual, and
74,250,000 shares authorized, as adjusted; 20,778,321 shares issued and outstanding,
actual and 30,832,142 shares issued and outstanding,
as adjusted (1)...................................................................... 208 308
Non-voting common stock, $.01 par value, 500,000 shares authorized, actual and
adjusted; 135,890 shares issued and outstanding, actual and 135,890 shares issued and
outstanding, as adjusted............................................................. 1 1
Additional paid-in capital (2)......................................................... 6,923 80,944
Accumulated other comprehensive loss................................................... (856) (856)
Accumulated deficit.................................................................... (108,743) (108,743)
---------- -----------
Total stockholders' equity (deficit)............................................... (102,467) (28,346)
---------- -----------
Total capitalization............................................................. $ 292,702 $ 352,402
---------- -----------
---------- -----------
</TABLE>
- ------------------------------
(1) Actual amount outstanding does not include (i) 4,437,115 shares of common
stock issuable upon the exercise of options to employees at a weighted
average exercise price of $3.85, (ii) 3,553,821 shares of common stock
issuable upon conversion of the Series A Preferred Stock, (iii) 135,890
shares of common stock to be issued after the offering upon conversion of
outstanding shares of Non-Voting Common Stock, which will be convertible at
the option of the holder at a nominal exercise price, or (iv) 1,315,148
shares of common stock issuable upon exercise of the Warrants issued in
connection with the 1997 Unit Offering at an exercise price of $.01 per
share. As adjusted amount outstanding does not include items (i) and (iii)
of the preceding sentence. All share numbers contained herein give effect to
the 1.04 for 1 stock split to be effected prior to the offering. See
"Certain Information."
(2) Includes $5.6 million attributable to the Warrants, which represents the
portion of the issue price paid in the 1997 Unit Offering attributable to
the fair value of the Warrants. This amount has been recognized as a
discount on the 1997 Notes and is being amortized over the term of the 1997
Notes. The Warrants expire on June 30, 2007.
26
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's common stock as of
December 31, 1998, giving effect to the conversion of all shares of the Series A
Preferred Stock into common stock on the closing of this offering, was
$(149,778,000), or approximately $(6.12) per share. "Pro forma net tangible book
value" per share represents the amount of total tangible assets of the Company
less total liabilities, divided by 24,468,032 shares of common stock outstanding
after giving effect to the conversion of the Series A Preferred Stock into
common stock. After giving effect to the issuance and sale of 6,500,000 shares
of common stock offered by the Company (based on an assumed initial public
offering price of $10.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of December
31, 1998 would have been $(90,078,000), or $(2.91) per share. This represents an
immediate increase in pro forma net tangible book value of $3.21 per share to
existing stockholders and an immediate dilution in net tangible book value of
$12.91 per share to new investors. Investors participating in this offering will
incur immediate, substantial dilution. The following table illustrates the per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......................... $ 10.00
Pro forma net tangible book value per share as of December 31, 1998.... $ (6.12)
Increase in pro forma net tangible book value per share attributable to
new investors........................................................ 3.21
---------
Pro forma net tangible book value per share after the offering........... (2.91)
---------
Dilution per share to new investors...................................... $ 12.91
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1998, after giving effect to the conversion of all outstanding shares of Series
A Preferred Stock into common stock on the closing of this offering, the
difference between the existing stockholders and the purchasers of shares of
common stock in this offering (at an assumed initial public offering price of
$10.00 per share) with respect to the number of shares of common stock purchased
from the Company, the total consideration paid and the average price paid per
share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................. 24,468,032 79% $ 14,000,000 18% $ 0.57
New investors......................................... 6,500,000 21 65,000,000 82 10.00
------------ --- ------------- ---
Total............................................. 30,968,032 100% $ 79,000,000 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
As of December 31, 1998, there were approximately 4,437,115 shares of common
stock subject to outstanding options at a weighted average exercise price of
approximately $3.85 per share, 135,890 shares of common stock issuable upon
conversion of shares of Non-Voting Common Stock and 1,315,148 shares of common
stock issuable upon the exercise of the Warrants at an exercise price of $.01
per share. To the extent outstanding options and Warrants are exercised, there
will be further dilution to new investors. See "Capitalization,"
"Management--Executive Compensation" and "Management--1996 Flexible Incentive
Plan."
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (with the exception of
other data and regional data) for 1994, 1995, 1996, 1997 and 1998 and as of
December 31, 1998 are derived from our audited consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The selected consolidated financial data set forth below should be
read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- -------------
<CAPTION>
(IN THOUSANDS, EXCEPT REVENUE PER MINUTE AND PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................. $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737
Cost of services..................................................... 5,540 19,735 35,369 63,707 140,548
--------- --------- --------- --------- -------------
Gross profit......................................................... 2,983 7,755 9,734 19,296 53,189
Selling, general and administrative expense.......................... 2,013 7,087 16,834 37,898 80,092
Depreciation and amortization........................................ 168 389 1,049 3,615 11,866
--------- --------- --------- --------- -------------
Income (loss) from operations........................................ 802 279 (8,149) (22,217) (38,769)
Interest income...................................................... 6 19 84 3,689 11,516
Interest expense..................................................... (109) (167) (380) (11,437) (41,030)
Other income (expense)............................................... 100 (10) 133 (163) (661)
Provision for income taxes........................................... 73 -- -- -- --
--------- --------- --------- --------- -------------
Net income (loss).................................................... $ 726 $ 121 $ (8,312) $ (30,128) $ (68,944)
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
Net earnings (loss) per share
(basic and diluted)................................................ $ 0.03 $ 0.01 $ (0.41) $ (1.50) $ (3.31)
Weighted average number of shares of common stock outstanding (basic
and diluted)(1).................................................... 20,778 20,778 20,778 20,778 20,846
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
OTHER DATA:
Capital expenditures and acquisitions................................ $ 906 $ 1,677 $ 4,670 $ 19,021 $ 111,999
EBITDA(2)............................................................ 1,070 658 (6,967) (18,765) (27,564)
Distributions to S Corporation shareholders(3)....................... -- 499 226 -- --
Series A Preferred Stock dividends(4)................................ -- -- 281 879 --
Net cash provided by (used in) operating activities.................. 474 2,037 (6,006) (12,219) (26,414)
Net cash used in investing activities................................ (801) (1,206) (4,247) (13,267) (119,092)
Net cash provided by (used in) financing activities.................. 292 (810) 16,419 145,844 177,561
Revenue per minute................................................... .70 .57 .43 .25 .22
REGIONAL DATA:
Revenues
Continental Europe................................................. $ 2,652 $ 5,025 $ 11,441 $ 15,741 $ 21,101
United Kingdom..................................................... 3,143 14,173 15,477 18,363 55,991
North America...................................................... 2,728 8,292 18,185 48,899 116,645
--------- --------- --------- --------- -------------
Total............................................................ $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
Minutes
Continental Europe................................................. 1,957 3,856 8,351 17,239 45,085
United Kingdom..................................................... 4,532 20,592 27,968 68,810 288,892
North America...................................................... 5,707 23,411 68,247 244,095 549,654
--------- --------- --------- --------- -------------
Total............................................................ 12,196 47,859 104,566 330,144 883,631
--------- --------- --------- --------- -------------
--------- --------- --------- --------- -------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(5)
----------- --------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities..................................... $ 139,561 $ 199,261
Restricted cash and securities(6).................................................... 40,467 40,467
Total assets......................................................................... 388,208 447,908
Current portion of borrowings........................................................ 16,694 16,694
Long-term borrowings, less current portion........................................... 380,748 380,748
Series A Preferred Stock............................................................. 14,421 --
Total stockholders' equity (deficit)................................................. (102,467) (28,346)
</TABLE>
- ------------------------------
(1) Weighted average numbers of shares have been retroactively restated to give
effect to the 1.04 for 1 stock split to be effected prior to the offering.
See "Certain Information."
(2) "EBITDA" is defined as net income (loss) plus net interest expense, income
tax expense, and depreciation and amortization expense. We have included
information concerning EBITDA in this prospectus because this type of
information is commonly used in the telecommunications industry as one
measure of a company's operating performance and liquidity. EBITDA is not
determined using GAAP and, therefore, our EBITDA is not necessarily
comparable to EBITDA of other companies. EBITDA also does not indicate cash
provided by operating activities. You should not use our EBITDA as a measure
of our operating income and cash flows from operations under GAAP. Both of
those measures are presented above. You also should not look at our EBITDA
in isolation, as an alternative to or as more meaningful than measures of
performance determined in accordance with GAAP.
(3) The distributions reflected in this line item were declared when we were a
subchapter S corporation under U.S. tax law.
(4) The Series A Preferred Stock accrued monthly dividends at a compounded
monthly rate of 12% per year. The dividends began to accrue and compound
interest from November 1, 1996, the issuance date of the Series A Preferred
Stock, and ceased to accrue on July 1, 1997.
(5) The as adjusted data give effect to (i) the offering, (ii) the conversion of
the Series A Preferred Stock into our common stock upon consummation of the
offering, as if these events had occurred on December 31, 1998 and (iii) a
1.04 for 1 stock split to be effected prior to the offering.
(6) We used $57.4 million of the net proceeds from our 1997 Unit Offering to
purchase a portfolio of U.S. government securities that we reserved for the
payment of the first six scheduled interest payments due on the $155.0
million principal amount of the 1997 Notes that we issued in the 1997 Unit
Offering. Warrants also were issued in the 1997 Unit Offering. See
"Capitalization."
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS" (ON PAGE 4). SEE
ALSO "RISK FACTORS" AND THE COMPANY'S FINANCIAL STATEMENTS AND THE RELATED NOTES
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company is a rapidly growing, facilities-based provider of domestic and
international long distance telecommunications services in North America and
Europe. Its extensive international telecommunications network allows it to
provide services primarily to retail customers in many of the largest
metropolitan markets in the United States, Canada, the United Kingdom, Belgium,
France, Germany and Switzerland.
The Company provides its customers with a variety of retail
telecommunications services, including international and domestic long distance,
calling card and prepaid services, and wholesale transmission services. The
Company's approximately 350,000 customer accounts are diverse and include
residential customers, commercial customers, ethnic groups and
telecommunications carriers. In each of the Company's geographic markets, it
utilizes a multichannel distribution strategy to market its services to its
target customer groups.
REVENUES
The Company's revenues are primarily based on usage and are derived from (1)
the number of minutes of telecommunications traffic carried and (2) generally, a
fixed per minute rate. The following table shows the total revenue and billable
minutes of use attributable to the Company's operations by region for 1996, 1997
and 1998. Over time, the Company expects its European markets to contribute a
larger percentage of its revenues.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
North America................................................................ $ 18,185 $ 48,899 $ 116,645
United Kingdom............................................................... 15,477 18,363 55,991
Continental Europe........................................................... 11,441 15,741 21,101
---------- ---------- ----------
Total.................................................................... $ 45,103 $ 83,003 $ 193,737
---------- ---------- ----------
---------- ---------- ----------
BILLABLE MINUTES OF USE
North America................................................................ 68,247 244,095 549,654
United Kingdom............................................................... 27,968 68,810 288,892
Continental Europe........................................................... 8,351 17,239 45,085
---------- ---------- ----------
Total.................................................................... 104,566 330,144 883,631
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company generally prices its services at a discount to the dominant
carrier (or carriers) in each of its markets. The Company has experienced and
expects to continue to experience declining revenue per minute in all of its
markets, particularly European markets, as a result of increased competition.
However, the Company believes such declines in revenue per minute will be offset
in part by an increased demand for long distance services and declining costs of
transmission. Historically, transmission costs in the telecommunications
industry have declined at a more rapid rate than prices due to technological
30
<PAGE>
innovation and the availability of substantial transmission capacity. There can
be no assurance that this cost trend will continue. See "Risk
Factors--Increasing Pricing Pressures" and "Industry Overview."
The Company's revenues are recorded upon completion of calls. For prepaid
services, the Company's revenues are reported net of selling discounts and
commissions and are recorded based upon usage rather than at the time of initial
sale.
Revenues also include amounts billed to customers which are, in turn,
remitted to third parties, including universal service fund fees, fixed rate
access charges paid to LECs and payphone owner compensation fees. These charges
are expensed in cost of services in amounts similar to corresponding amounts
billed to customers and included in revenue.
COST OF SERVICES
The major components of the Company's cost of services are the cost of
origination, transmission and termination of traffic. Virtually all calls
carried by Destia must be originated or terminated on another carrier's local
facilities, for which the Company pays a per minute charge. These charges are
known as "access" or "termination" charges. In countries where the Company has
interconnection, it is able to originate and terminate calls more
cost-effectively, either pursuant to fixed price contractual arrangements with
PTTs or LECs or pursuant to a tariff.
The Company's transmission cost of services consists of expenses related to
leased lines and switched minutes. The Company typically acquires leased lines
for specific point-to-point routes on a fixed cost basis, which involve monthly
payments regardless of usage levels. Leased lines have a shorter duration than
IRUs. Because the cost of leased lines is typically a fixed monthly payment,
transmitting an increased portion of the Company's calls over leased lines
reduces its incremental transmission costs. Accordingly, once certain traffic
volume levels are reached, leased line capacity is more cost effective than
capacity acquired on a variable cost basis, such as switched minutes.
To transmit calls to locations not covered by its network, the Company
acquires switched minutes from other carriers. Switched minutes are acquired on
a per minute basis (with volume discounts) and, accordingly, are a variable
cost. The cost of switched minutes also includes termination charges. As the
Company's minutes of traffic carried have grown, the Company has obtained better
pricing on switched minute transmission capacity. In general, the Company
expects its marginal cost of services will decline over time due to greater
usage of owned transmission capacity, technological innovation, increased
leverage with suppliers and the increasing availability of substantial
third-party transmission capacity.
A substantial and increasing portion of the Company's calls are also
transmitted over its IRUs. The cost of IRUs is expensed in depreciation and
amortization and is, therefore, not accounted for as part of cost of services.
To the extent the Company's increased use of IRUs reduces its utilization of
leased lines and switched minutes, the increase in depreciation expense of the
IRUs will be offset by a decrease in the cost of services of leased lines and
switched minutes. As a result, although the Company's gross margins and EBITDA
are expected to improve, the Company's net income (loss) will not necessarily
improve to the same extent.
Cost of services also includes certain fees imposed by regulators and third
parties that are typically billed to customers together with an administrative
fee. See "--Revenues."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
To date, the Company has sold its services primarily through independent
sales channels. Selling expenses have, therefore, primarily consisted of
commissions paid to agents. To a lesser extent, selling expenses have also
included advertising and promotion costs, sales by the Company's internal sales
force and expenses related to its customer service department. Since completing
the acquisition of VoiceNet
31
<PAGE>
during the first quarter of 1998, the Company's commissions paid to and retained
by VoiceNet (i.e., commissions not subsequently paid by VoiceNet to its
independent sales agents) have been eliminated.
The Company is continuing to increase its internal sales force and this
expansion will significantly increase the selling expenses associated with
operating and staffing sales offices. In addition, as the Company expands its
customer base in new and existing markets, it intends to increase its
advertising expenses. The Company expects all of these costs to eventually
decline as a percentage of its revenues. General and administrative expenses
have increased primarily as a result of the Company's expansion of its customer
service, billing, financial reporting and other management information systems.
These expenses have also increased as a result of implementing more extensive
network management systems and organizational expenses related to entering
additional markets.
DEPRECIATION AND AMORTIZATION EXPENSE
The Company's depreciation and amortization expense is primarily related to
depreciation on the Company's IRUs and switching equipment, amortization of
costs associated with the issuance of the 1997 Notes and 1998 Notes and
amortization of goodwill from the purchases of VoiceNet and the minority
interest in its subsidiary, Telco Global Communications ("Telco").
As the Company expands the Destia Network, it will continue to add new
switching equipment and acquire additional IRUs, both of which will increase the
Company's depreciation expense. Transmission over IRUs involves only fixed
costs, with no per minute charges, and is a more cost-effective means of
transmitting traffic once certain volume levels are reached. The Company
recently acquired a 20-year IRU from Frontier which provides Destia with fiber
optic transmission capacity in the United States. The Company also intends to
acquire additional IRUs, particularly in Europe. To the extent the Company's
increased use of IRUs reduces its utilization of leased lines and switched
minutes, the increase in depreciation expense of the IRUs will be offset by a
decrease in the cost of services of leased lines and switched minutes. As a
result, although the Company's gross margins and EBITDA are expected to improve,
the Company's net income (loss) will not necessarily improve to the same extent.
INTEREST EXPENSE
Prior to July 1, 1997, interest expense principally consisted of interest
payable in connection with equipment financing loans and short-term
indebtedness. The 1997 Notes and 1998 Notes currently constitute most of the
Company's interest expense. Annual interest expense for the 1997 Notes and 1998
Notes will aggregate $43.3 million in 1999. The 1998 Notes were issued at a
discount and accrete to their aggregate principal amount at maturity on February
15, 2003. Until that date, interest expense on the 1998 Notes will increase in
each period. Thereafter, interest on the 1998 Notes will accrue and be required
to be paid in cash semi-annually. See "Certain Indebtedness."
RESULTS OF OPERATIONS
The following table presents certain data concerning Destia's results of
operations for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues....................................................................... $ 45,103 $ 83,003 $ 193,737
Cost of services............................................................... 35,369 63,707 140,548
Selling, general and administrative expenses................................... 16,834 37,898 80,092
Depreciation and amortization.................................................. 1,049 3,615 11,866
Net income (loss).............................................................. (8,312) (30,128) (68,944)
</TABLE>
32
<PAGE>
1998 COMPARED TO 1997
REVENUES. Total revenues for 1998 increased by 133% to $193.7 million from
$83.0 million for 1997. Billable minutes of use increased 168% to 883.6 million
in 1998 from 330.1 million in 1997. The increases in revenues and billable
minutes were primarily attributable to strong customer growth in both the U.S.
and U.K. markets. Revenues for all services increased substantially from 1997 to
1998. The increase in revenues resulting from the growth in billable minutes was
partially offset by per-minute price reductions caused by increased competition,
most significantly in the U.K. and continental European markets. This
competition was a primary factor in the decrease in average revenue per minute
from $.25 per minute during 1997 to $.22 per minute in 1998.
In North America, revenues grew by 139% to $116.6 million from $48.9
million. This increase was due principally to prepaid and calling card revenues.
The remainder of the increase resulted from increases in long distance revenues.
Average North American revenue per minute increased to $.21 per minute during
1998 from $.20 per minute during 1997. This increase was due principally to the
substantial growth of prepaid card sales, which typically carry a higher per
minute rate than long distance service, offset in part by rate decreases for
long distance services.
In the United Kingdom, revenues increased 205% to $56.0 million in 1998 from
$18.4 million in 1997, while the average revenue per minute decreased from $.27
per minute during 1997 to $.19 per minute during 1998. This reduction was due
principally to increased price competition.
In continental Europe, revenues increased by 34% to $21.1 million from $15.7
million. A portion of this revenue growth was attributable to a full year of
revenue reported for certain country operations that commenced during 1997.
Average continental European revenue per minute decreased from $.91 per minute
during 1997 to $.47 per minute during 1998, as a result of increased competition
brought about by deregulation of the Company's continental European markets.
GROSS MARGIN. The Company's gross margin for 1998 increased to 27.5% from
23.2% for 1997. This increase was attributable to (1) expansion of the Destia
Network (which shifted some expenses from cost of services to depreciation
expense), (2) migration of additional switched traffic onto the Destia Network,
(3) "least-cost" routing, (4) leveraging the Company's traffic volumes to
negotiate lower usage-based costs from domestic and foreign providers of
transmission capacity and (5) the Company's ability to obtain more cost
effective interconnect agreements. An improvement in gross margin does not
necessarily result in an equal improvement in net income (loss). See
"--Overview--Cost of Services."
SG&A. SG&A increased to $80.1 million for 1998 from $37.9 million for 1997,
and, as a percentage of revenues was 41% for 1998 and 46% for 1997. The decrease
in SG&A as a percentage of revenue during 1998 was primarily attributable to the
significant increase in revenues. The increase of $42.2 million in SG&A from
1997 was attributable to the expansion of the sales, operations and back office
infrastructure to support the significant retail sales growth the Company
experienced in 1998. During 1998 the Company expanded its management team and
significantly increased staffing levels in its customer service, network
management, management information systems and finance organizations. In
addition, substantial expenses were incurred in connection with entering new
markets and further developing existing marketing and sales channels. The
Company recorded bad debt expense of $7.4 million, or 3.8% of revenue, for 1998,
compared to bad debt expense of $3.9 million, or 4.7% of revenue, for 1997. This
decline in bad debt expense as a percent of revenue was primarily the result of
improved credit and collection procedures and controls.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $11.9 million for 1998 from $3.6 million for 1997. This increase
was substantially due to the continuing build-out of the Company's network in
the United States, the United Kingdom and continental Europe, amortization of
costs associated with the Company's issuance of the 1997 Notes and the 1998
Notes and amortization of goodwill from the purchases of VoiceNet and the
minority interest in Telco.
33
<PAGE>
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $41.0
million in 1998 from $11.4 million in 1997. This increase was attributable to
the issuance of the 1997 Notes and the 1998 Notes. Interest income increased to
$11.5 million in 1998 from $3.7 million in 1997. This increase was primarily due
to interest income earned on the investment of the net proceeds received from
the 1998 Notes.
NET LOSS. The Company reported a net loss of $68.9 million for 1998,
compared to a net loss of $30.1 million for 1997. The increase in net loss is
primarily due to the higher level of SG&A expenses and higher interest expense.
Net loss is expected to increase substantially over the near term, primarily due
to interest expense incurred on the 1998 Notes and the 1997 Notes.
1997 COMPARED TO 1996
REVENUES. Total revenues for 1997 increased by 84% to $83.0 million on
330.1 million billable minutes of use from $45.1 million on 104.6 million
billable minutes of use for 1996. Billable minutes of use increased by 216% for
1997 from 1996. Growth in revenues during 1997 primarily was attributable to
additional minutes of use, particularly in the United States, offset in part by
a substantial decline in prices, as a result of increased competition. This
competition was a primary factor for the average revenue per minute decrease
from $.43 during 1996 to $.25 during 1997. An additional factor in the decrease
in revenues per minute was a larger portion of national, as opposed to
international, minutes of use. The increase in revenues was primarily
attributable to sales by VoiceNet of $23.6 million for 1997, compared to $1.9
million for 1996.
In the United Kingdom, revenues increased by 19% to $18.4 million from $15.5
million, primarily due to sales by Telco, which increased, to $10.6 million in
1997 from $1.3 million in 1996. Increases in U.K. revenue were partially offset
by the termination of the Company's business relationship with EI, which
accounted for $14.2 million in revenues in 1996. During the fourth quarter of
1996, the Company began marketing efforts in the U.K. through Telco. During
1997, U.K. revenues consisted principally of $10.6 million from international
and domestic long distance and prepaid card services attributable to Telco, as
well as $7.2 million from carrier services sold through Destia Network Services,
Ltd. ("DNS"), a wholly-owned subsidiary of the Company. Average U.K. revenue per
minute decreased from $.55 per minute during 1996 to $.27 per minute during
1997. This reduction was due principally to sales of a larger percentage of
domestic long distance minutes, which are sold at lower rates than international
minutes, and to increased price competition.
In continental Europe, revenues increased by 38% to $15.7 million from $11.4
million. This increase was attributable to an increase in prepaid card services,
primarily in France and Germany. Average continental European revenue per minute
decreased from $1.37 per minute during 1996 to $.91 per minute during 1997. This
decrease was due to lower rates in France and Germany.
In North America, revenues grew by 169% to $48.9 million from $18.2 million.
This increase was due principally to calling card revenues attributable to sales
by VoiceNet, which were $23.6 million during 1997, compared to $1.9 million
during 1996. VoiceNet began reselling the Company's calling card services to
end-users during the second quarter of 1996. The remainder of the increase
resulted from increases in sales of carrier services, and, to a lesser extent,
international and domestic long distance and prepaid card services. Average U.S.
revenue per minute decreased to $.20 per minute during 1997 from $.27 per minute
during 1996. This reduction was due principally to sales of a larger percentage
of domestic long distance minutes, which are sold at lower rates than
international minutes, and to increased price competition.
During 1997, the Company experienced an average customer turnover or "churn"
rate of approximately 5% relating to U.S., U.K. and continental European "1+",
"1xxx" and calling card services. To date, the Company's revenues and margins
have not been materially impacted by its "churn" rate. The Company's "churn"
rate with respect to any given period consists of the average number of
customers that ceased using the Company's services during any month of the
period divided by the average monthly number of customers for the period.
Customers that have ceased using the Company's services during any
34
<PAGE>
given month are those customers who used the Company's services during the prior
month but not during any subsequent month of the applicable period.
GROSS MARGIN. The Company's gross margin for 1997 increased to 23.2% from
21.6% for 1996. This increase was attributable to the Company's increased use of
owned and leased line transmission capacity and its ability to obtain lower
prices on switched transmission capacity because of increased traffic volumes
and a greater availability of capacity generally. An improvement in gross margin
does not necessarily result in an equal improvement in net income (loss). See
"--Overview--Cost of Services."
SG&A. SG&A increased to $37.9 million for 1997 from $16.8 million for 1996,
and, as a percentage of revenues, was 46% for 1997 and 37% for 1996. The
increase primarily consisted of commissions paid to resellers (principally
VoiceNet) and independent agents, an increase in payroll costs related to
additional management and staff in the areas of finance, sales, customer
service, network management and information systems at the Company's Manhattan,
New York, Brooklyn, New York and College Station, Texas facilities, as well as
the London, Brussels, Hamburg and Paris offices. For 1996, a majority of the
expenses consisted of expenses related to EI and commissions paid to independent
sales agents.
In connection with the termination of the Company's joint venture with EI
during June 1996, EI granted the Company the right to compete with EI in the
United Kingdom in exchange for forgiveness of a net receivable due to the
Company of $2.0 million. The forgiveness of the receivable has been reclassified
as an expense of the joint venture and was charged to bad debt expense. The
Company previously had capitalized the U.K. territorial rights granted to it by
EI on its consolidated balance sheet and was amortizing the rights over a
15-year life. The Company subsequently decided to write off this asset,
resulting in an additional $1.9 million charge in 1996.
The Company recorded bad debt expense of $3.9 million, or 4.7% of revenue,
for 1997, compared to bad debt expense of $2.0 million, or 4.4% of revenue, for
1996. The charge in 1996 was related to EI.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $3.6 million for 1997 from $1.0 million for 1996. This increase was
substantially due to the depreciation associated with upgrades in the Company's
switch in New York and installation of multiplexing equipment in New York and
London, as well as amortization of costs associated with the 1997 Unit Offering.
INTEREST EXPENSE. The Company had $11.4 million of interest expense during
1997, as compared to interest expense of $0.4 million during 1996. Interest
expense has increased substantially as a result of the 1997 Unit Offering, with
$10.5 million of 1997 expense attributable to the 1997 Unit Offering.
NET LOSS. The Company had a net loss of $30.1 million during 1997, compared
to a net loss of $8.3 million during 1996. The increase is primarily due to
costs associated with increasing the internal infrastructure, building the
network, marketing, commissions paid to resellers and interest expense related
to the 1997 Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses and made
substantial capital expenditures, due in large part to the start-up and
development of the Company's operations and the Destia Network. The Company will
continue to incur additional losses and have substantial additional capital
expenditures. The Company has utilized cash provided from financing activities
to fund losses and capital expenditures. The sources of this cash have primarily
been the proceeds from the sale of the 1997 Notes and the 1998 Notes and, to a
lesser extent, equipment-based financing and a $14.0 million equity investment
(less fees and expenses) by Princes Gate Investors.
As of December 31, 1998, the Company had $139.6 million of cash, cash
equivalents and marketable securities, as well as $40.5 million of restricted
cash and securities (which will be used to pay interest expense on the 1997
Notes through July 15, 2000). The Company believes that the net proceeds of this
35
<PAGE>
offering, as well as equipment loans it expects to obtain and cash on hand, will
provide sufficient funds for the foreseeable future. However, the amount of the
Company's future capital requirements will depend on a number of factors,
including the success of its business, its gross margins, and its SG&A expenses,
as well as other factors, many of which are not within its control, including
competitive conditions and regulatory developments. In the event that the
Company's plans or assumptions change or prove to be inaccurate, it may be
required to delay or abandon some or all of its development and expansion plans
or the Company may be required to seek additional sources of capital. Future
sources may include public debt or equity offerings or equipment financings.
There can be no assurance that additional financing arrangements will be
available on acceptable terms.
The Company's capital expenditures during 1998 were approximately $76.7
million. These were made principally to support the continued expansion of the
Destia Network, including the purchase of telecommunications equipment and the
purchase of additional transatlantic IRUs. In addition, the Company made capital
expenditures related to the continued development of its back office
capabilities, including management information and network management systems.
In 1999, the Company plans to spend approximately $100 million for capital
expenditures on network equipment, back-office systems, the continued build-out
of its network operations center in St. Louis, Missouri, transatlantic IRUs and
other fiber optic transmission capacity. Actual capital expenditures may be
significantly different from the Company's current plans, in part because the
Company intends to be opportunistic in acquiring transmission capacity in a
dynamic market. The Company also expects to have substantial capital
expenditures after 1999.
The Company's net cash used in operating activities was $26.4 million for
1998 and was primarily attributable to a net loss of $68.9 million and an
increase in accounts receivable of $22.1 million partially offset by an increase
in accounts payable, accrued expenses and other current liabilities of $34.7
million and non-cash interest expense of $17.7 million. Net cash used in
investing activities of $119.1 million for 1998 was attributable to the purchase
of marketable securities, investments made primarily in switching and other
telecommunications equipment and IRUs and the VoiceNet acquisition. Net cash
provided by financing activities in 1998 of $177.6 million was primarily related
to the issuance of the 1998 Notes.
On February 12, 1998, the Company acquired VoiceNet, a major distribution
channel for the Company's calling card products. The initial purchase price was
$21.0 million, which was paid in cash. The sellers of VoiceNet also are entitled
to receive an earn-out based upon the revenue growth of the VoiceNet business.
The earn-out bonus will not have a material impact on the Company's liquidity.
The acquisition was accounted for under the purchase method of accounting.
Goodwill was recorded to the extent the purchase price exceeded the fair value
of the net assets purchased. Approximately $1.0 million of the initial purchase
price will reflect the underlying value of the assets acquired and $20.0 million
will reflect goodwill. The goodwill is being amortized over 20 years.
At the end of 1998, the Company completed two small acquisitions. In
November 1998, the Company acquired a controlling interest in America First Ltd.
("America First"), a prepaid card distributor in the United Kingdom for
approximately $5.5 million. The majority of the purchase price was recorded as
goodwill and will be amortized over 20 years. In December 1998, the Company also
acquired the customer list of a long distance reseller, also located in the
United Kingdom. The purchase price was allocated to the customer base and will
be amortized over 5 years.
In the United Kingdom, the majority of the Company's sales are made through
Telco, its majority owned subsidiary. On July 17, 1998, the Company acquired the
minority interest in Telco that it did not already own in exchange for a note in
the principal amount of approximately $14.0 million, payable by the Company in
quarterly installments, together with interest at a rate of 8.0% per annum, over
approximately three years. The note was paid in full on April 28, 1999. The
entire purchase price is classified as goodwill, which will be amortized over 20
years. In connection with such acquisition, (1) Telco obtained ownership rights
with respect to certain proprietary software used in Telco's business and (2)
the Company converted
36
<PAGE>
options to acquire Telco shares held by Telco employees into grants of
non-voting restricted shares of the Company's common stock.
During 1998, the Company incurred certain other non-operating cash
commitments which, as of December 31, 1998, included approximately $42.3 million
in the aggregate for a 20-year IRU from Frontier to use portions of its U.S.
fiber optic network and for the purchase of a transatlantic IRU. As of December
31, 1998, the Company is required to pay approximately $1.2 million per quarter
as installments of principal on its equipment facility. In addition, the Company
pays $20.9 million per annum as interest expense on the 1997 Notes. The Company
has put funds in escrow to cover this expense through July 15, 2000. For a
discussion of the Company's IRU from Frontier, see "Business--The Destia
Network--North American Network."
The Company continually evaluates business opportunities, including
potential acquisitions, and engages in discussions with potential acquisition
candidates. The Company may use funds to consummate suitable strategic
acquisitions. The Company will seek to acquire or align itself with
complementary companies that (1) offer attractive opportunities in new
geographic markets (with an emphasis on continental Europe), (2) have an
established customer base or (3) have innovative telecommunications services or
technologies (such as data transmission and wireless or Internet services).
MARKET RISK
The carrying value of cash and cash equivalents approximates fair value due
to the short-term, highly liquid nature of the cash equivalents, which have
maturities of three months or less. Interest rate fluctuations would not have a
significant effect on the fair value of cash equivalents held by the Company.
At December 31, 1998 the Company had debt in the amount of $396.8 million of
which $375.7 million is fixed interest debt. The remaining $21.1 million carries
adjustable interest rates equal to the 90-day commercial paper rate plus 395
basis points. A one percent change in the interest rate would change interest
payments by approximately $18,000 per month.
FOREIGN CURRENCY EXPOSURE
The Company is exposed to fluctuations in foreign currencies relative to the
U.S. dollar because the Company bills in local currency, while transmission
costs are largely incurred in U.S. dollars and interest expense on the 1997
Notes and 1998 Notes is in U.S. dollars. For each of 1998 and 1997,
approximately 40% of the Company's revenues were billed in currencies other than
the U.S. dollar, consisting primarily of British pounds and Belgian francs. The
effect of these fluctuations on the Company's revenues for 1998 and 1997 was
immaterial. As the Company expands its operations, a higher percentage of
revenues is expected to be billed in currencies other than the U.S. dollar. The
Company from time to time uses foreign exchange contracts relating to its trade
accounts receivables to hedge foreign currency exposure and to control risks
relating to currency fluctuations. The Company does not use derivative financial
instruments for speculative purposes. At December 31, 1998 and 1997, the Company
had $0 and $.3 million open foreign currency hedging positions, respectively.
EURO CONVERSION
On January 1, 1999, several member countries of the EU established fixed
conversion rates and adopted the euro as their new common legal currency. Since
that date, the euro has traded on currency exchanges, although the legacy
currencies will remain legal tender in the participating countries for a
transition period between January 1, 1999 and January 1, 2002. During the
transition period, parties can elect to pay for goods and services and transact
business using either the euro or a legacy currency. Between January 1, 2002 and
July 1, 2002, the participating countries will introduce euro currency coins and
withdraw all legacy currencies.
37
<PAGE>
The euro conversion may affect cross-border competition by creating
cross-border price transparency. The Company is assessing its pricing and
marketing strategy in order to insure that it remains competitive in a broader
European market. In addition, the Company is reviewing whether certain existing
contracts will need to be modified. The Company's currency risks and risk
management for operations in participating countries may be reduced as the
legacy currencies now trade at a fixed exchange rate against the euro. The
Company will continue to evaluate issues involving introduction of the euro.
However, based on current information and assessments, the Company does not
expect that the euro conversion will have a material adverse effect on its
results of operations or financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use software, dividing the development into three stages: (1) the
preliminary project stage, during which conceptual formulation and evaluation of
alternatives takes place, (2) the application development stage, during which
design, coding, installation and testing takes place and (3) the operations
stage during which training and maintenance takes place. Cost incurred during
the application development stage are capitalized, all other costs are expensed
as incurred. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company is currently evaluating the
impact of adopting SOP 98-1.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires that all non-governmental entities
expense the costs of start-up activities, including organization costs, as those
costs are incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company has reviewed the provisions
of SOP 98-5 and does not believe adoption of this standard will have a material
effect on its results of operations.
YEAR 2000 COMPLIANCE
The Company is engaged in an ongoing process of assessing its exposure to
the Year 2000 issue--the potential problems arising from computer systems that
were designed to use two digits, rather than four, to specify the year. The
Company has formed a project team (consisting of representatives from its
information technology, finance, business development, product development,
sales, marketing and legal departments) to address internal and external Year
2000 issues. By December 31, 1998, the Company had completed its internal review
of its financial and other computer systems (which include switching, billing
and other platforms) to assess Year 2000 issues. Based on this review, the
Company believes that the amount of work and expense required to address Year
2000 issues relating to its internal systems will not be material. The Company
is upgrading certain of its Northern Telecom switches to make them and their
related software Year 2000 compliant. The Company expects this upgrade to be
completed by June 30, 1999 at a cost of approximately $0.9 million. In addition,
the Company may be required to modify some of its other existing software. The
Company estimates that it will have updated all of its significant internal
systems to make them Year 2000 compliant and will be able to begin testing by
June 30, 1999.
In addition to assessing its own systems, the Company plans to retain a
consulting firm during the second quarter of 1999 to assist it in conducting an
external review of its significant customers, suppliers and other third parties
with which it does business, including significant equipment and system
providers and telecommunications service providers, to determine their
vulnerability to Year 2000 problems and any potential impact on the Company. In
particular, the Company may experience problems to the extent that other
telecommunications carriers are not Year 2000 compliant. The Company anticipates
that this external review and related third party review will be substantially
completed by September 30, 1999. The Company's ability to determine the status
of these third parties ability to address issues relating to the Year
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2000 issues is limited and there is no assurance that these third parties will
achieve full Year 2000 compliance before the end of 1999.
The Company believes that its reasonably possible worst case Year 2000
scenario is disruption of its ability to route traffic over portions of its own
network or an inability to terminate calls to certain destinations, which would
require the Company to utilize other transmission capacity at greater cost. To
the extent that a limited number of carriers experience disruption in service
due to the Year 2000 issue, the Company's contingency plan is to obtain service
from alternate carriers. However, there is no assurance that alternate carriers
will be available or, if available, that the Company can purchase transmission
capacity at a reasonable cost. In addition, in many continental European
countries there are no alternative carriers to use. Significant Year 2000
failures in the systems of the Company, alternate carriers and other third
parties (or third parties on whom they depend) would have a material adverse
effect on the Company's business and the price of its common stock.
The Company estimates the total cost for resolving its Year 2000 issues to
be approximately $2.0 million, of which approximately $1.0 million has been
spent through the end of the first quarter of 1999, with the majority of
expenditures expected to be incurred in the first two quarters of 1999 in
connection with upgrades of its Northern Telecom switches and the retention of
an outside consulting firm. This estimate includes the accelerated cost of
replacing systems that are not Year 2000 compliant. Actual costs may, however,
differ materially.
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INDUSTRY OVERVIEW
International telecommunications is one of the fastest growing segments of
the long distance industry, having experienced compounded annual growth in total
minutes of 14.3% from 1989 to 1997. Forecasts by the ITU project this growth to
continue at a compound annual growth rate of between approximately 12% and 18%
from 1997 to 2001. Based on this estimate, worldwide international long distance
traffic is projected to increase from approximately 81.8 billion minutes in 1997
to between approximately 128.7 and 158.6 billion minutes by the year 2001. The
market for these services is highly concentrated in more developed countries,
with approximately 43% of 1997 worldwide international long distance traffic
originating in Europe and 33% originating in the United States. In Europe,
domestic long distance services in each country also present a large, growing
market opportunity.
While the U.S. long distance market was liberalized in 1984 and the U.K.
long distance market was liberalized in 1992, the continental European voice
telephony market was liberalized only recently on January 1, 1998 and
liberalization is still in the process of being implemented. Generally,
substantial advances in the implementation of liberalization have taken place,
including (i) the establishment of national regulatory authorities, (ii)
licensing, (iii) network interconnection, (iv) universal service, (v) tariffs,
(vi) numbering and number portability and (vii) rights-of-way. EU deregulation
is intended to create a fully liberalized single market for continental European
telecommunications. As of August 1, 1998, there were over 180 operators within
the EU authorized to provide national public voice telephony and over 250
operators authorized to provide international public voice telephony.
Historically, continental European telecommunications rates have been
designed to subsidize the provision of local service with high priced long
distance services. As a result, long distance services generated a substantial
portion of the profitability of continental European PTTs. To become more
competitive in providing long distance, the PTTs are seeking to "rebalance"
their rates among local and long distance services. Generally, this presents
some political difficulty since rates for local service typically must rise to
support lower long distance rates. While in some countries (such as France)
substantial rate rebalancing has already occurred, other countries (such as The
Netherlands) have yet to rebalance rates. We believe that in the near term,
where rates have not been substantially rebalanced, long distance rates will
continue to subsidize the high overhead costs of the PTTs. However, significant
competitive rate reductions have occurred without rebalancing in some countries
(such as Germany) where the incumbent PTT has lost market share. Additional rate
reductions also remain a possibility in these and other countries. See "Risk
Factors--Increasing Pricing Pressures."
Implementation of interconnection is an important variable in the ability of
companies such as Destia to provide services on a competitive basis.
Interconnection allows a new competitor to use the facilities of existing
service providers, particularly PTTs, often at very attractive rates. Many
national regulators have established access charge regimes generally thought to
be favorable to new competitors. For example, in the New York City market (which
has been liberalized since 1984) companies generally pay $.013 per minute for
local termination of a long distance call. In Berlin and Paris (which have been
liberalized only since January 1, 1998) these rates are $.025 and $.020,
respectively. In addition to favorable rates established by regulation, we
believe that the entry of new European CLECs (I.E., competitive LECs) will
further drive down the costs of local access in Europe. Concerns regarding
interconnection include delays by reluctant PTTs in executing agreements and in
implementing interconnections.
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The cost of operating a retail long distance business in continental Europe
is declining rapidly as alternative wholesale networks are constructed. These
alternative networks include Ulysses (MCI WorldCom), Hermes Europe Railtel (GTS
and others) and Circe (Viatel), as well as announced network construction by
Level 3 and Global Crossing. At present, most of these networks are under
development, although portions of some of them are complete. Since these
projects have been announced or completed, pricing for European long-haul
facilities has begun to decline rapidly. For example, over a period of less than
one year, the price of an E-1 circuit from Brussels to London has fallen from
approximately $19,000 to approximately $10,400 per month. The Company believes
that these costs will continue to decline more rapidly than the prices for long
distance services due to the fact that (i) the market for retail national and
international long distance services in all EU countries is still dominated by
the PTTs who are reluctant to reduce prices and (ii) enhanced services and
generally lower prices will increase the demand for long distance services.
However, there can be no assurance in this regard. See "Risk
Factors--Competition" and "--Increasing Pricing Pressures."
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BUSINESS
We are a rapidly growing, facilities-based provider of domestic and
international long distance telecommunications services in North America and
Europe. Our extensive international telecommunications network allows us to
provide services primarily to retail customers in many of the largest
metropolitan markets in the United States, Canada, the United Kingdom, Belgium,
France, Germany and Switzerland, and we believe that we are well positioned to
capitalize on the continued growth in these markets. In 1997, worldwide
international long distance traffic totaled 81.8 billion minutes with the
majority originating in the United States and Europe. This volume is expected to
grow at a compound annual growth rate of 12% to 18% from 1997 to 2001.
We provide our customers with a variety of retail telecommunications
services, including international and domestic long distance, calling card and
prepaid services, and wholesale transmission services. Our approximately 350,000
customer accounts are diverse and include residential customers, commercial
customers, ethnic groups and telecommunications carriers. In each of our
geographic markets, we utilize a multichannel distribution strategy to market
our services to our target customer groups. We believe this strategy greatly
enhances our growth prospects and reduces our dependence on any one service,
customer group or channel of distribution.
We entered the U.S. market during 1993 and the U.K. market during 1995. In
continental Europe, we commenced offering our services before the January 1,
1998 full liberalization of telecommunications services in those markets. We
established operations in Belgium, France and Germany in the first quarter of
1997 and Switzerland in the fourth quarter of 1997. Given our early entry into
many of our continental European markets, as well as our established network,
sales and marketing and customer support infrastructure, we believe we are well
positioned to further grow our business in continental Europe.
COMPETITIVE STRENGTHS
The European and North American telecommunications industry is rapidly
evolving following the reduction of regulatory barriers, investment in new
transmission capacity and the development of new services and technologies. In
this dynamic environment, we believe we have successfully distinguished
ourselves from many of our competitors and enjoy several competitive strengths:
PROVEN TRACK RECORD OF STRONG INTERNAL GROWTH
For 1996, 1997 and 1998, our revenues were $45.1 million, $83.0 million and
$193.7 million, respectively. In addition, for 1996, 1997 and 1998, we carried
104.6 million, 330.1 million and 883.6 million minutes of traffic, respectively.
Substantially all of our growth has been generated internally, although we have
made several minor acquisitions. Our only significant acquisition to date, the
purchase of VoiceNet, solidified a key distribution channel, but had no direct
effect on our revenues or customer base. As we have grown our business, we have
focused on managing our growth in a manner that has enabled us to increase our
customer base and maintain our high standards of service quality and customer
support. We believe that our demonstrated ability to grow organically and manage
rapid growth provides us with a solid foundation to continue to grow our
business.
ESTABLISHED INTERNATIONAL TELECOMMUNICATIONS NETWORK
Since 1996, we have made substantial investments in expanding the Destia
Network. The Destia Network is comprised of:
- 14 operational carrier-grade switches with seven in North America and
seven in Europe;
- an IRU from Frontier on portions of its U.S. fiber optic network;
- transatlantic IRUs;
- leased capacity and IRUs in Europe; and
- leased capacity in Canada.
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In addition, we have completed direct interconnections with the PTTs in five
of our major European markets (the United Kingdom, Belgium, Germany, France and
Switzerland) and have signed an interconnection agreement with the PTT in The
Netherlands. Interconnection allows us to offer services to customers as a
domestic carrier through a direct connection to the PSTN and with lower access
costs. In expanding our network, we have used "carrier-grade" equipment, which
allows us to offer high quality services and expand our service offerings on a
cost-efficient basis. As a result of our network build-out program, we believe
that we are well-positioned to aggressively grow our revenues.
COST-EFFECTIVE MULTICHANNEL MARKETING
We reach a broad range of customer groups by using a variety of marketing
channels, including a direct sales force, independent sales agents, multilevel
marketing, customer incentive programs, advertising and the Internet. Our
multichannel approach allows us to tailor our marketing to specific geographic
markets and services. We believe this is an especially cost-effective means of
marketing to our target customers. For example, to sell our residential long
distance, calling card and prepaid services in the United Kingdom, we use a
multilevel marketing program. To market our VoiceNet-TM- calling card to U.S.
business travelers, we use advertisements in in-flight magazines and selected
well-known U.S. newspapers and magazines. For marketing our international and
domestic long distance and prepaid card services to metropolitan-area ethnic
communities, we use independent sales representatives who are part of the
targeted community, and we advertise in local, ethnic-oriented publications and
co-sponsor ethnic events. We also intend to cross-market many of our services.
For example, we recently started marketing our "1+" services to our VoiceNet
customer base. We expect that our multichannel marketing approach will
facilitate our continued rapid growth while reducing the risks associated with
dependence on a limited number of distribution channels.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT OWNERSHIP
We believe we have an experienced and motivated management team that is
well-suited to continue leading the growth of our company. Our management team
includes a broad base of seasoned professionals from the domestic and
international telecommunications sector with expertise in management,
multinational sales and marketing, network operations and engineering, finance
and regulatory issues. Furthermore, in each of our geographic markets, we employ
local staffs in management, operations, sales and marketing and customer
service. These staffs are familiar with local technical issues, market dynamics,
customer preferences and cultural norms. On a fully diluted basis, our senior
management and other employees currently own approximately 59% of Destia and
following the offering will own approximately 48%.
COMMITMENT TO SUPERIOR CUSTOMER SERVICE
We are committed to providing our customers with superior customer service
and believe we have developed the infrastructure to deliver high levels of
customer satisfaction. For example, in all of our markets, we provide customers
with local customer service and billing support and, in the United States and
the United Kingdom, we provide this support 24 hours a day. In addition, for our
ethnic customers, we provide customer service in their native language. As of
December 31, 1998, we had 242 full-time equivalent customer service
representatives company-wide. We have also developed our own proprietary
software systems to better serve 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 telephone number or by account code and department. We
believe that our customer support infrastructure, together with our
customer-oriented philosophy, differentiates us from many of our competitors.
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SOPHISTICATED OPERATIONAL CONTROL SYSTEMS
We have internally developed sophisticated software and intranet systems
that enable us to better manage our business and appropriately price our
services in each 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 our 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. We believe these analytical tools allow us to quickly identify new
market growth and cost saving opportunities as well as control our business in
an environment of rapid growth.
COMPANY STRATEGY
Our objective is to become a leading facilities-based provider of
telecommunications services in the largest metropolitan markets in Europe and
North America that generate significant domestic and international traffic. The
key elements of our growth strategy are as follows:
FOCUS ON HIGH MARGIN RETAIL BUSINESS
Since our inception, the primary focus of our business has been to provide
services to retail customers. We believe that the advantages of focusing on
retail, instead of wholesale, customers include:
- higher margins;
- higher barriers to entry because of the significant investments required
to develop sales, marketing and customer support;
- more opportunities to bundle value-added services;
- more opportunities to build brand loyalty; and
- reduced credit and cancellation risk (compared to wholesale customers who
buy transmission services almost entirely based on price).
We believe that our retail focused strategy has been highly successful to
date and has allowed us to build strong gross margins. For 1996, 1997, 1998 and
the fourth quarter of 1998, our gross margins were 21.6%, 23.2%, 27.5% and
29.0%, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview--Cost of Services" and
"--Depreciation and Amortization" for a description of how gross margins are
calculated. In addition, we have also achieved strong growth, particularly in
the largely deregulated U.S. and U.K. telecommunications markets. For example,
our U.K. revenues have increased from $15.5 million for 1996 to $56.0 million
for 1998, and our U.K. customer accounts have increased from approximately 1,000
at the end of 1996 to approximately 107,000 at the end of 1998. We believe we
can continue to replicate this strategic focus and further improve our revenue
growth and gross margin performance as we expand our retail presence in our
European and North American markets.
LEVERAGE OUR EXISTING NETWORK AND CUSTOMER SUPPORT INFRASTRUCTURE
We believe that our switching infrastructure and our sales and marketing and
customer support infrastructure in our European and North American markets will
enable us to expand our retail customer base in these markets. We will seek to
add to our customer base by increasing the size of our direct sales force,
targeting additional ethnic markets, expanding our global carrier services
group, introducing multilevel marketing in additional markets, increasing
advertising, co-branding our services, participating in affinity programs and
cross-marketing our services. Because our existing infrastructure was designed
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with the retail customer in mind, we believe that we can add customers rapidly
without sacrificing transmission quality or our established level of customer
service.
In addition to expanding our customer base, we will also seek to increase
our utilization of the Destia Network and thereby reduce our per minute costs
and increase our gross margins. In general, the incremental cost to us of
carrying calls on the Destia Network is much less than the incremental cost of
carrying calls over other carriers' networks. This is because the cost of our
IRUs and certain leased lines is fixed, regardless of how many calls we carry.
On the other hand, when we transmit calls over another carrier's network, we pay
a per minute charge. As a result, by increasing our amount of "on-net" traffic,
we can reduce our per minute costs. In addition, we also can better control call
quality. We intend to increase the utilization of our network by (1) migrating a
greater percentage of our overall traffic on to the Destia Network, (2)
increasing those sales and marketing initiatives that promote customer usage of
services that are provided in a Destia Network city, such as "1+" and "1xxx"
services, and (3) targeting carrier and other wholesale customers so we can
generate revenues from otherwise unused portions of the Destia Network.
ENHANCE THE DESTIA NETWORK AND OPPORTUNISTICALLY ENTER NEW MARKETS
As we continue to complete the build-out of our network, we intend to do so
in a cost-effective manner that provides us with the flexibility to introduce
new services, employ new technologies and reach new customers. For example, in
the United States our recent agreement with Frontier provides us with fiber
optic transmission capacity connecting 43 U.S. markets. In addition, the
Frontier arrangement gives us favorable origination and termination rates
throughout the continental United States. We also intend to continue to explore
opportunities to extend our network into additional markets which complement our
existing regional presences, or otherwise offer significant growth opportunities
for our company. For example, during 1999, we intend to install POPs and begin
marketing our services in selected cities in Ireland and Italy, to begin
marketing our services in Austria and The Netherlands and to expand our service
offerings in Greece.
EXPAND OUR IP TELEPHONY CAPABILITIES
We are currently deploying an Internet protocol ("IP") network overlay on
selected transatlantic and European routes. This network overlay enables us to
carry voice and data traffic using IP technology over portions of the Destia
Network. During 1999, we plan to expand our IP network overlay and explore new
IP-based service offerings for Destia customers. We will be able to offer
customers direct access to our network for both voice and data services using
cost-effective, off-the-shelf equipment located at the customer's premises. In
addition, this overlay will allow us to more efficiently use transmission
capacity. However, we have very limited experience with IP technology and many
of our competitors are making substantial IP investments. There can be no
assurance that we will be successful with IP technology.
PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES
To date, a substantial majority of our growth has been internally generated.
While we will continue to focus on internal growth, we also intend to pursue
selected acquisitions and strategic alliances and we continuously engage in
discussions with potential acquisition candidates. In particular, we will seek
to acquire or align ourselves with complementary companies that (1) offer
attractive opportunities in new geographic markets (with an emphasis on
continental Europe), (2) have an established customer base or (3) have
innovative telecommunications services or technologies (such as data
transmission and wireless or Internet services). We believe that our geographic
reach and management expertise create access to acquisition opportunities.
PRODUCTS AND SERVICES
We provide our customers with a variety of retail telecommunications
services, including international and domestic long distance, calling card and
prepaid services. Our retail customer base is diverse and
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includes residential customers, commercial customers and ethnic groups. In
addition, we also provide wholesale transmission services to carriers and other
wholesale customers. Our services are discussed below.
RETAIL SERVICES
The following table summarizes our principal retail services in our
principal geographic markets.
<TABLE>
<CAPTION>
RETAIL SERVICES
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL LONG DOMESTIC LONG CALLING CARD PREPAID
DISTANCE DISTANCE SERVICES SERVICES
----------------------- ------------------- ----------------- -------------------
Continental Europe
Belgium.......................... X X X X
France........................... X X X X
Germany.......................... X X X X
Switzerland...................... X X X X
United Kingdom..................... X X X X
North America
United States.................... X X X X
Canada........................... X X X X
<CAPTION>
<S> <C>
E-COMMERCE
AND INTERNET
SERVICES
-----------------
Continental Europe
Belgium.......................... --
France........................... --
Germany.......................... --
Switzerland...................... X
United Kingdom..................... X
North America
United States.................... X
Canada........................... --
</TABLE>
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, France and Belgium or "1+" access in the United States and Canada. In
Germany, France and Switzerland, long distance service is accessed by using
either "1+" or "1xxxx" access. Our international and domestic long distance
service generally enables customers to call to any destination.
CALLING CARD SERVICES. Our calling card services are sold in all of our
principal markets and can be used in over 50 countries. In the United States, we
principally market our calling cards under the VoiceNet-TM- brand name.
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 PTT 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. As we complete interconnection in continental Europe and are
able to provide both international and domestic long distance service to our
customers on a cost-efficient basis, we intend to migrate our home- and
office-based calling card customers to our international and domestic long
distance service. Our calling card service will then be offered in continental
Europe as a premium travel service.
In Europe and North America, our calling card service is accessed by dialing
a national toll free number or a local access number. Calling card customers can
access our services from outside their home country by dialing an international
toll free number, a national toll free number or a local access number,
depending on the country from which the customer is calling. We can offer
customers competitive domestic and international long distance rates for calls
from places where customers can use national toll-free and local access numbers.
For calls from places where customers can only use international toll-free
numbers, we can offer customers competitive rates only on international long
distance calls.
We also intend to introduce an enhanced service, using our calling card
platform, which will allow a user's calls to "follow" him or her from the home,
to the office, to the mobile phone, while also enabling the user to screen
calls. This service is currently being developed for us by an outside firm
specializing in enhanced services. We expect to have this service ready for our
customers by the third quarter of 1999.
PREPAID SERVICES. Our prepaid card service is a prepaid version of our
calling card, with similar features and the same manner of use as our calling
card. Our prepaid cards generally can be used from the
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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.
In 1998, we introduced our Telco Prepaid-TM- service to residential
customers in the United Kingdom. Telco Prepaid allows customers to access our
services from their homes on a prepaid basis utilizing "1xxx" and toll-free
access. When the customer makes a domestic or international long distance call,
our switch automatically recognizes the customer's telephone number and deducts
the cost of the call from the customer's prepaid account balance. Telco Prepaid
customers are able to replenish their balances by purchasing vouchers or by
phone with a credit card. Customers also can access their account balance by
phone using voice prompts.
E-COMMERCE SERVICES. As part of our strategy, 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 and presto phone are our first
e-commerce services and the first services offered through what we intend to
develop as an Internet-based portal for telecommunications services. Presto!
Card 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 at competitive rates and to view
their call records on a real-time basis. We believe that Presto! Card and presto
phone are currently the only prepaid services that can be purchased and
recharged instantly over the Internet. We intend to offer these services in
Canada and our continental European markets and to develop additional e-commerce
services that take advantage of the growing use of the Internet.
We believe that e-commerce services offer us significant opportunities for
growth. In particular, we believe these services will appeal to a highly
desirable segment of the population that is technologically proficient, makes a
significant number of long distance calls and represents a broad geographic
base. In addition, e-commerce services offer a number of other advantages.
Presto! Card and presto phone, like our other prepaid cards, do not require any
billing support and do not expose us to any credit risk. Also, e-commerce
services have lower associated sales and marketing and customer service costs.
We believe that e-commerce may, over time, become an important distribution
channel for certain other services.
INTERNET SERVICES. In February 1999 we began offering Internet access to
retail customers in Switzerland, and we expect to offer Internet access to
retail customers in Belgium by the end of the third quarter of 1999. We believe
offering Internet access will increase usage of our services, provide us with
additional revenue and further enhance our ability to attract and retain
customers. We intend to offer Internet access during 1999 in selected additional
European countries in which we have interconnection, such as the United Kingdom
and Germany. The legal regime concerning Internet access services in Europe is
under development. This also is a new service that we have not provided before
which may present implementation risks.
OTHER RETAIL SERVICES. We also provide the other retail services described
below. These services currently represent a relatively small portion of our
revenues. We expect most of these services to continue as ancillary service
offerings.
- DEDICATED ACCESS SERVICE. Customers using this service lease a
transmission line that connects the customer's business directly to one of
our switches or POPs. This service is marketed to high-volume customers in
the United States and can be used for voice, data, video and the Internet.
We intend to increase our sales and marketing efforts for this service.
- TOLL-FREE SERVICE. We provide domestic toll-free service (I.E., "800",
"888" or "877" service) to customers in the United States, the United
Kingdom, Belgium, Germany and Switzerland. We also provide international
toll-free services ("ITFS") for our customers in Europe.
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- DIRECTORY ASSISTANCE. In the United States, we provide nationwide
directory assistance service for our long distance customers 24 hours a
day.
- LONG DISTANCE WIRELESS SERVICE. We offer domestic and international long
distance services to cellular telephone users in the New York metropolitan
area. Users access this service by dialing a local access number or, in
the case of Bell Atlantic Mobile customers in certain area codes, by
selecting Destia as their long distance provider. We intend to market
domestic and international long distance services to cellular telephone
users in selected metropolitan U.S. markets.
WHOLESALE SERVICES
CARRIER SERVICES. In the United Kingdom, Belgium, France, Germany and the
United States, we sell wholesale transmission capacity to carrier customers who
use the transmission capacity to service their end-user customers. Carrier
customers generally are extremely price sensitive, generate very low margins and
frequently move their traffic from carrier to carrier based solely on small
price changes in termination costs to particular destinations. Larger carrier
customers sometimes change providers on a daily basis. Furthermore, smaller
carrier customers are generally perceived in the telecommunications industry as
presenting a higher risk of payment delinquency or nonpayment than other
customers. In the deregulating markets in Europe, these risks are particularly
acute.
When we sell transmission capacity to carrier customers where all or a
portion of the traffic is transmitted on our IRUs or fixed-cost leased lines
that have unused capacity, we can generate additional revenues without incurring
significant marginal costs. When we sell carrier customers transmission capacity
which we purchase from third-party vendors, providing these services allows us
to increase the amount of transmission capacity that we purchase overall. As a
result, we are able to obtain even greater volume discounts on our purchases of
transmission capacity from these third-party vendors and therefore generate
higher margins and/or offer better pricing on our retail services.
During 1997 and 1998, sales of transmission capacity to carrier customers
ranged from 9% to 30% of our consolidated revenues on a quarterly basis,
comprising 9% of our consolidated revenues for the fourth quarter of 1998.
During 1999, we intend to increase our carrier revenues, although our business
will continue to be predominantly focused on retail sales. In order to increase
our carrier revenues, we have increased our carrier services group to 12 people,
located in the United States, the United Kingdom and Germany, who are
responsible for sales to carriers in each of the cities the Destia Network
serves. In addition to increasing carrier revenues, we also seek to diversify
our carrier customer base to include more higher margin continental European
traffic. See "Risk Factors--Importance of Carrier and Other Wholesale
Customers."
OTHER WHOLESALE SERVICES. We sell transmission capacity to third parties
that offer their own branded products and services such as private label calling
cards. We believe that many 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 transmission capacity to resellers who in turn sell
our long distance services to their customers. In 1999, we intend to grow the
reselling portion of our business, since this channel typically has higher
margins than wholesale carrier sales. See "Risk Factors--Importance of Carrier
and Other Wholesale Customers."
THE DESTIA NETWORK
As of December 31, 1998, the Destia Network was comprised of:
- 14 operational carrier-grade Northern Telecom switches with seven in North
America and seven in Europe;
- ten POPs in North America and seven POPs in Europe, in addition to our
switch locations;
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- over 100 interconnections to LEC tandems and LEC end-offices in the United
States, which provide us with direct interconnections to LECs;
- 20 points of interconnection to PTTs in the United Kingdom and continental
Europe;
- a U.S. fiber optic transmission network backbone that we currently lease
from Qwest;
- a U.S. fiber optic transmission network that will consist of IRUs covering
more than 27 million DS-0 miles of fiber optic cable connecting 43 U.S.
markets. This transmission network will be leased from Frontier on a
long-term basis and will replace our existing Qwest network. In addition,
the Frontier arrangement gives us attractive origination and termination
rates in the continental United States;
- a transcontinental transmission network consisting of IRUs and other
ownership interests, including rights on the AC-1, PTAT, TAT 12/13 and
CANTAT-3 transatlantic cables;
- leased capacity and IRUs in Europe and leased capacity in Canada;
- 32 network-based servers located in nine cities in continental Europe, the
United Kingdom and North America controlled by a centralized enhanced
services platform; and
- an Internet protocol network overlay that permits point-to-point
transmission using packet-switched voice and data transmission technology.
This network overlay is currently deployed between certain of our European
switches and between those switches and our switch in New York.
See the inside cover of this prospectus for a graphic depiction of the
Destia Network. We intend to continue to make significant investments in network
infrastructure, particularly investments that will provide us with long-term
access to high-bandwidth capacity in European markets where we are seeking to
expand our customer base. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
NETWORK ECONOMICS
The major components of our costs include the cost of origination,
transmission and termination. To the extent we can manage these costs
appropriately we believe that we can significantly improve our gross margins.
ORIGINATION AND TERMINATION. In general, we pay a per minute fee to
originate and terminate calls. In the United States, we can reduce these costs
by having direct interconnection to LECs through LEC tandems and end-offices,
which allows us to carry a larger portion of each call on our network. In
Europe, we can reduce these costs through implementing direct interconnection
with the local PTTs. In addition, by having these interconnections, we are able
to provide network access through abbreviated dialing and to originate calls on
our network in a greater number of cities. Direct interconnection also provides
better transmission quality and greater reliability. However, there are often
delays in executing and implementing interconnection. See "Risk
Factors--Competition" and "--Regulation."
TRANSMISSION CAPACITY. At present, our transmission capacity consists
primarily of:
- IRUs, which are long-term capital leases of fiber optic cable for periods
typically of up to 20 or 25 years (which is usually the entire useful life
of the transmission facility);
- leased lines, which as the term is generally used in the
telecommunications industry, represent transmission capacity leased for a
shorter duration under an operating lease. Our leased lines generally are
leased for 12 to 36 months; and
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- switched minutes, which are purchased from carriers on a per minute basis.
Switched minutes are used principally to carry traffic to destinations not
covered by the Destia Network. These purchases are made on an as-needed
basis and do not involve significant minimum purchase requirements.
In order to effectively manage our transmission costs, we utilize a mix of
IRUs, leased lines and switched minutes. We typically seek to acquire IRUs that
connect network cities which have significant calling traffic between them.
However, in regions where transmission capacity costs have been rapidly
declining, such as in continental Europe, we have instead utilized leased lines
and intend to obtain IRUs when we believe prices for IRUs have sufficiently
declined. Leased lines also permit us to operate on a fixed-cost basis for
certain routes where we have experienced increased traffic, but do not require a
significant investment of infrastructure, human resources or technology and have
a shorter duration than IRUs. Because the cost of IRUs and leased lines involve
an initial capital outlay or a fixed monthly payment, transmitting an increased
portion of calls over these IRUs and leased lines reduces our incremental
transmission costs and thereby enables us to offer services on a competitive
basis and/or increase our gross margins. Once we have generated enough traffic
to cover the costs of IRUs and leased lines, there is no significant marginal
cost to us for carrying additional calls over these IRUs and leased lines. In
order to further increase the capacity of our IRUs, we in some cases utilize
carrier grade compression or multiplexing equipment.
As part of our expansion strategy, and as a result of increasingly
attractive pricing, we intend to acquire additional IRUs, including in
continental Europe. Although our IRUs are currently operated and maintained by
third parties, we have the right to transmit our telecommunications traffic
through the fiber. To the extent cost efficient, we may acquire additional IRUs
including IRUs in "dark fiber." Under certain circumstances, acquiring these
types of IRUs may be more cost advantageous than acquiring IRUs in transmission
capacity that is operated and maintained by third parties, although it also
involves certain additional operational costs and risks and, in some countries,
additional regulatory compliance requirements. See "Risk Factors--Dependence on
Transmission Line Providers."
In addition, we can further reduce our transmission costs for traffic on our
network by increasing the amount of traffic routed by our switches. Because our
switches are programmed to route traffic over the lowest cost network service,
depending upon cost and bandwidth availability, traffic routed by our switches
can be delivered on a "least cost" basis.
OTHER. In addition to the cost of origination, transmission and
termination, the other costs of our network relate primarily to switching
equipment, compression equipment, our Internet protocol overlay and
facility/network management and related software.
NETWORK OPERATIONS
NETWORK OPERATIONS CENTER. During the fourth quarter of 1998, we
established a network operations center in St. Louis, Missouri, which operates
on a 24-hour-a-day, 7-day-per-week basis. From this facility, we monitor our
operations in the United Kingdom, continental Europe and North America.
Performing these tasks from a centralized location enables us to monitor the
network more effectively and on a more cost-efficient basis. In addition, we
also have the capability to monitor our European network from our network
operations center in London.
During 1998, we began rolling out our St. Louis network operations center
and developing and enhancing our network control systems. We expect to invest a
total of approximately $3.0 million for the build-out of the network operations
center. Among the most significant of the improvements we are undertaking is the
installation of digital cross-connect systems ("DACs") equipment at each of our
switch locations, which will enable us to monitor, test and re-configure network
facilities from a central location to maintain transmission quality on our
network.
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INTEGRATED INFORMATION SYSTEMS. The development and integration of the
information systems that interface with the Destia Network are performed at our
College Station, Texas, and Brooklyn, New York, facilities. One of the principal
development projects during 1998 was the development of a proprietary integrated
customer service database and billing system, called Service One-TM-, which is
currently in use for all of our U.S. services. Service One will afford greater
flexibility as we increase service offerings and will accommodate greater
customer volume. In addition, we recently 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.
During 1998, we spent approximately $2.3 million to enhance current, and
develop new, network information systems. We expect to invest approximately $2.4
million for these purposes during 1999. While we believe that our current
information systems are adequate for our near term growth, additional investment
will be required as we expand our operations. See "Risk Factors--Dependence on
Effective Information Systems."
SOPHISTICATED OPERATIONAL CONTROL SYSTEMS. Our systems development group
has internally developed sophisticated proprietary software and intranet systems
to better manage our business and appropriately price our services in each 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 our 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 of 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 our
business in an environment of rapid growth. We believe that we are one of the
few competitive telecommunications companies that have these types of analytical
tools and to have integrated them into our daily operations.
EUROPEAN NETWORK
We have seven switches and seven POPs in continental Europe and the United
Kingdom. The location of our European switches and the date of completed
interconnection of each are as follows:
<TABLE>
<CAPTION>
DATE OF DATE OF
CITY OPERATION INTERCONNECTION
- ----------------------------------------- --------------- ---------------
<S> <C> <C>
Brussels, Belgium........................ 1Q97 4Q98
Paris, France............................ 1Q97 2Q99
London, United Kingdom................... 2Q97 2Q97
Frankfurt, Germany....................... 3Q98 4Q98
Zurich, Switzerland...................... 3Q98 4Q98
Amsterdam, The Netherlands............... 4Q98 3Q99E
Berlin, Germany.......................... 4Q98 4Q98
</TABLE>
We also own IRUs on the PTAT-1, CANTAT-3, TAT 12/13 and AC-1 transatlantic
cables. As part of our expansion strategy, we intend to acquire additional IRUs,
including in continental Europe. See "--Network Economics--Transmission
Capacity."
The Destia Network's European hub is located in London. A large portion of
our transatlantic calls between continental Europe and the United States are
routed through London because it is the most cost-effective routing due to the
low per minute marginal costs associated with our transatlantic IRUs. We also
route a substantial portion of our international intra-European calls (E.G.,
Berlin to Paris) through our London hub to take advantage of favorable
transmission rates to and from London. These rates are often
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lower than the costs of transmitting the call by a more direct "off-net" route
where the Destia Network does not have a transmission line between the
originating and terminating switch.
As a result of deregulation and geography, Frankfurt is emerging as a
popular European hub for telecommunications carriers, especially for calls to
and from Eastern Europe. We believe that we are well positioned to take
advantage of these market developments due to our Frankfurt switch and intend to
market our carrier services to carriers that route calls through Frankfurt.
In addition to adding new switches in continental Europe during 1998, we
further enhanced the Destia Network in continental Europe by entering into and
implementing direct interconnection agreements with the PTTs in Belgium, Germany
and Switzerland. We are currently in the final stage of testing our
interconnection with the PTT in France, and we expect to implement
interconnection with the PTT in The Netherlands during the third quarter of
1999. These agreements add to the interconnection that we have had in place with
British Telecom in the United Kingdom since the second quarter of 1997. Our
interconnection arrangements provide us with a direct connection to the PSTN. By
having a direct connection to the PSTN, we are able to offer domestic long
distance service, provide network access through abbreviated dialing and
originate and terminate calls in a greater number of cities and at a
substantially reduced cost.
In addition, in 1999, we intend to upgrade our POPs in Hamburg, Germany and
Vienna, Austria to switches and install POPs in Dublin, Ireland and Milan,
Italy.
NORTH AMERICAN NETWORK
We have seven switches and ten POPs in the United States and Canada. Our
North American switches, which are all interconnected and operational, are
located in the following cities:
<TABLE>
<CAPTION>
DATE OF
CITY OPERATION
- --------------------------------------------------------------- -----------
<S> <C>
New York....................................................... 3Q93
Los Angeles.................................................... 1Q98
Miami.......................................................... 3Q98
Washington, D.C................................................ 3Q98
Toronto........................................................ 3Q98
Chicago........................................................ 4Q98
Dallas......................................................... 4Q98
</TABLE>
U.S. NETWORK EXPANSION. In 1998, we substantially expanded our U.S. network
infrastructure by adding switches in Chicago, Dallas, Los Angeles, Miami and
Washington, D.C. We also added a number of POPs connecting various cities to our
network. All of the foregoing reduce our transmission costs.
During 1999, we intend to upgrade our POP in Atlanta, Georgia to a switch.
In addition, during 1999, we intend to add additional connections to LEC tandem
switches and LEC end-offices.
We currently obtain most of our U.S. fiber optic transmission capacity from
Qwest. Because of the substantial increase in our domestic traffic and our
desire to provide services in more U.S. markets, we recently acquired a 20-year
IRU from Frontier to use portions of its U.S. fiber optic network. This network
will consist of more than 27 million DS-0 miles of fiber optic cable connecting
43 markets and will replace our Qwest network. In addition, the Frontier
arrangement also gives us favorable origination and termination rates in the
continental United States. This will provide us with the cost benefits of having
additional network access and drop-off points in areas where we have not
invested in our own switches or POPs. We believe that the extensive reach of the
Destia Network in the United States following the addition of transmission
capacity from Frontier will provide us with a significant cost advantage over
many
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of our competitors, although relying primarily on one network provider for U.S.
transmission capacity also results in additional risks. See "Risk
Factors--Dependence on Transmission Line Providers."
Frontier is in the process of building the fiber optic network that we will
use, and we expect this network to be completed and substantially operational by
the end of 1999. We expect to begin using a portion of Frontier's network by
July 1999.
GATEWAY SWITCH UPGRADES. Gateway switches permit us to convert
international protocols to U.S-based protocols. This ability to convert
protocols enables us to terminate inbound international traffic in the United
States for overseas carriers and to carry outbound international traffic closer
to its destination and at a lower cost before handing it off to another carrier
(such as the PTT) in the terminating country. We currently have gateway switches
in New York and London. During 1999 and early 2000, we intend to upgrade our
switches in Miami and Los Angeles to have international gateway capabilities,
which will allow them to interface directly with protocols used by non-U.S.
carriers. The Miami gateway switch will interface primarily with carriers from
Latin America and the Caribbean and the Los Angeles gateway switch will
interface primarily with carriers from Asia.
CANADIAN EXPANSION. During the third quarter of 1998, we expanded the
Destia Network to Canada by installing a switch in Toronto. We plan to install a
POP in Montreal by the fourth quarter of 1999. This switch and POP will enable
us to originate calls in two of the largest long distance markets in Canada.
NETWORK ACCESS AND CALL ROUTING
NETWORK ACCESS. The Destia Network can be accessed through a variety of
methods, depending upon the service and the location from which the customer is
calling. These methods are as follows:
- "1+" ACCESS. "1+" access, also known as preselection or equal access,
enables a long distance customer to access the Destia Network from the
customer's premises by dialing "1" and then the number that the customer
is calling. "1+" access is currently available to our customers in the
United States, Canada, Germany and Switzerland where the Destia Network
has a switch or POP. Using this access method, a customer does not need to
dial a special prefix access code because the customer has preselected our
company as its long distance carrier and the LEC's or PTT's switching
system already is programmed to direct long distance calls from the
customer's telephone to the nearest Destia Network switch.
- "1XXX" ACCESS. "1xxx" access, or prefix dialing, enables a long distance
customer in our European countries (as well as the United States) to
access the Destia Network from the customer's premises by dialing "1" and
a code number and then the number the customer is calling.
- LOCAL DIAL-UP ACCESS. In continental European cities where we have
installed a switch or POP, customers can access our international and
domestic long distance service and, in some cases, prepaid card service,
by dialing a local telephone number. Local dial-up access reduces our
transmission costs for these calls because it shifts the cost of accessing
our switch to the customer. The reduction in transmission costs enables us
to increase our margins and/or reduce our retail prices on these calls, as
well as to provide competitively priced intra-European long distance
service.
- INTERNATIONAL TOLL-FREE ACCESS. This access method allows customers to
access our card-based services in selected continental European markets by
dialing an international toll-free number. This access method is
predominantly used by business travelers.
- NATIONAL TOLL-FREE ACCESS. Customers who access our services in this
manner do so by dialing a national toll-free number. This access method is
available to customers who use our calling card and prepaid card services
in the United States, the United Kingdom and Germany.
- DEDICATED ACCESS. Carrier customers and high volume end-users can be
connected to our switch by a dedicated leased line. The advantages to the
customer of dedicated access are simplified dialing,
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faster call setup times and lower access costs if a sufficient volume of
calls is transmitted over the leased line. This service can be used for
voice, data, video and the Internet over a single leased line.
CALL ROUTING. Calls are routed to their destination through one or more of
our switches. If the call originates in a network city with a switch, the caller
generally will dial into the network over local lines. These calls will then be
routed by the local service provider (a LEC in the U.S. and typically a PTT in
Europe) to our switch. A call originating in a city with a POP, which acts
solely as a collection point for calls, generally will be originated using one
of the foregoing access methods and will be sent to the POP. The call will then
be transmitted from the POP to one of our switches on an owned or leased line
comprising part of the Destia Network. If the call originates in a city where we
do not have a switch or POP, the caller generally dials into the network using
national or international toll-free access, which is substantially less
cost-efficient for us than "1xxx," "1+" or local dial-up access. From our
switch, "least cost" routing techniques are used to determine whether the call
should be transferred directly to the PSTN or routed to another one of our
switches over an owned or leased line and then transferred to the PSTN for
termination. See "--Network Hardware and Software--Least Cost Routing."
NETWORK HARDWARE AND SOFTWARE
CARRIER GRADE SWITCHES AND TECHNOLOGY. We use Northern Telecom carrier
grade switches throughout the Destia Network. The principal benefits of carrier
grade switches are their ability to (1) handle large, simultaneous call volumes,
(2) provide better quality service to customers, and (3) seamlessly interconnect
with local operators. Each of these benefits is discussed below:
- CALL CAPACITY. Carrier grade switches generally have more port capacity
than smaller switches, which enables them to route a greater number of
simultaneous calls.
- BETTER QUALITY SERVICE. Carrier grade switches provide higher transmission
quality, faster call setup times and better call completion rates than
smaller, less powerful switches. Our carrier grade switches also have call
completion capabilities that reduce the time needed to connect calls and
allow for more efficient use of transmission capacity.
- DIRECT INTERCONNECTION WITH PTT AND LEC NETWORKS. Carrier grade switches
enable our network to interconnect directly with the networks of PTTs and
LECs, subject to applicable regulatory requirements and an interconnection
arrangement being in place. The benefits of direct interconnection
generally include better quality service, lower costs, improved
reliability and the ability to rapidly increase call-handling capacity.
We believe that by utilizing the equipment of a single principal supplier we
are able to minimize the difficulties associated with integrating equipment from
various sources and with differing specifications. In addition, it also enables
us to develop a single proprietary software to compile our network information
since we do not need to accommodate switches of different manufacturers.
However, using equipment principally from one supplier does entail certain
risks. See "Risk Factors--Dependence on Our Principal Equipment Supplier."
SS7 TECHNOLOGY. Signaling System 7 technology (also known as "SS7"), which
is used primarily in the United States, performs two significant functions
within the Destia Network. SS7 facilitates faster call setup by sending messages
that precede the call and obtain information about its destination, such as
whether the destination number is available or engaged in a call. Second, SS7 is
able to look up destination numbers, such as toll-free "800" numbers, in a
central database. This allows the Destia Network to use intelligent call
routing.
We are currently migrating from SS7 services provided by third parties on a
per switch basis to using our own SS7 equipment throughout our U.S. network. We
will then use one centralized provider to enable us to make SS7 connections with
LEC offices nationwide. This will provide us with greater flexibility and will
enable us to control equipment usage, maintain network integrity and reduce
costs.
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Our SS7 technology will be supported from the St. Louis network operations
center. This will provide real time information on network usage and integrity
while allowing for instantaneous call tracing, monitoring, and fraud detection.
LEAST COST ROUTING. Through a combination of hardware and software, our
network enables us to perform "least cost" routing analysis, which enables us to
transmit a call over the most cost-efficient route during that time of day.
Prices for various destinations fluctuate on a daily basis. Our least cost
routing software enables us to continually revise our routing tables, including
accounting for fluctuations in currency exchange rates, as the cost of certain
routes change. We have a dedicated group that is responsible for monitoring the
routing of calls and seeking to minimize our transmission costs.
DIGITAL CROSS-CONNECT CAPABILITY. We are in the process of installing DACs
hardware and software at each of our switches and major POPs. DACs will enable
us to monitor, test and re-configure network facilities from a central location
to maintain transmission quality on our network.
INTERNET PROTOCOL OVERLAY. Currently, voice calls are carried by keeping a
circuit open between two (or more) parties. This is inefficient because it uses
transmission capacity even when the parties are silent. Our carrier grade
switches are capable of interfacing with TCP/IP, an Internet protocol software,
and the related hardware. TCP/IP technology would enable us to provide
simultaneous voice and data transmission over a single line, since the
technology compartmentalizes voice, data and/or video into digital pieces of
information (I.E., into "packets") before they are transmitted. The packets can
be sent separately over one or more lines and are then reassembled at the
destination switch prior to being converted into their original format. This is
a much more efficient use of transmission capacity than keeping a circuit open.
Packet-based transmission would enable us to transmit data and video using less
transmission capacity, thus increasing the amount of information we can transmit
over a given line and our network overall.
We have installed TCP/IP hardware and software manufactured by third parties
on selected transatlantic and European routes, which enable us to carry traffic
using Internet protocol technology over a portion of the Destia Network. We are
currently exploring various potential service applications. For example,
packet-based transmission would allow us to offer integrated voice, fax and
video services as well as Internet access over an ordinary telephone line.
However, we have very limited experience with IP technology and many of our
competitors are making substantial IP investments. There can be no assurance
that we will be successful with IP technology.
OPERATING AGREEMENTS; TRANSIT AGREEMENTS
Through our affiliates, we have entered into operating, termination and/or
transit agreements with a number of overseas PTTs and competitive carriers,
including carriers in Denmark, Greece, Ireland, Israel, Italy, Poland, Romania,
Russia, Slovenia, Sweden and the Ukraine. As part of our strategy, and as market
and regulatory conditions warrant, we intend to enter into more of these
agreements with additional overseas carriers.
Operating and termination agreements provide us with more favorable
termination rates in the home country of the other carrier who is a party to the
agreement. We can directly interconnect with the local carrier who then locally
terminates all calls. These agreements also afford us more control over the
quality of the terminating segment of our international calls. In addition,
operating agreements also increase our overall gross margins because our
correspondent carriers are required to send us a specified portion of their
traffic that is bound for markets covered by the Destia Network. We note,
however, that the FCC recently approved rules that, when effective, will remove
these requirements for arrangements with foreign carriers lacking market power
(I.E., possessing less than 50% market share in the relevant destination market)
and for arrangements with all carriers on liberalized routes (I.E., those routes
where the settlement rate to terminate U.S. calls is at least 25% below the
FCC's benchmark rate for that country). See Risk Factors--Increasing Pricing
Pressures--Collapse of the International Settlement Regime" and
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"Business--Regulation--United States." We can charge "settlement rates" for this
traffic that substantially exceed our termination costs. We note, however, that
the international settlement regime is collapsing. See "Risk Factors--Increasing
Price Pressure--Collapse of the International Settlement Regime." Alternatively,
the additional gross margins on this return traffic enable us to price our calls
to a given country more competitively while still maintaining an acceptable
average gross margin on all calls both to and from that country. Similarly,
transit agreements are advantageous to us because they provide us with more
favorable transit rates to third countries. Such agreements and switched hubbing
arrangements may allow us to pay less than the full settlement rate we would
otherwise have to pay if we had a direct operating agreement with the
terminating PTT. See "--Regulation" for additional information concerning these
types of agreements.
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SALES AND MARKETING
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 and the Internet. As part of
our multichannel marketing approach, we tailor our marketing to our specific
geographic markets and services. We believe this is an especially cost-effective
means of marketing to our target customers. In addition, we expect that our
multichannel marketing approach will facilitate our continued rapid growth while
reducing the risks associated with dependence on a limited number of
distribution channels.
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. Our independent sales representatives, who
generally are retained on a commission-only basis, concentrate primarily on
residential sales and sales to commercial accounts. Our internal sales force
concentrates primarily on sales to commercial accounts, wholesale customers and
other carriers. This internal sales force includes a recently expanded carrier
services group of 12 people located in the United States, the United Kingdom and
Germany who are responsible for sales to carriers in each of the Destia Network
cities. Our local internal sales forces also typically advertise locally and
provide support for our independent sales representatives.
We recently changed our name to "Destia Communications, Inc." and also
developed a new company logo. We believe that our new name and logo better
emphasize our focus on providing innovative services. We also believe that by
establishing a widely recognized brand, we can increase brand awareness among
our target customers and facilitate cross-marketing of additional services to
our existing customers. After completing the transition to the Destia name,
which will occur after the offering, nearly all of our primary services in all
our geographic markets will be either branded or co-branded with the Destia name
and logo.
CONTINENTAL EUROPE
Our sales and marketing strategy in most of our continental European markets
has been initially to concentrate on sales of prepaid services through
independent distribution channels since prepaid services operations present a
limited credit risk and independent distribution does not require substantial
initial investments. After gaining market acceptance and establishing our local
sales and marketing infrastructure, we typically have then introduced calling
card services and, once a POP or switch is installed, international long
distance services. Concurrently, we also have aggressively pursued
interconnection arrangements with the local PTTs, which allow us to provide
national origination on a cost-effective basis. Following interconnection, we
further increase our sales and marketing activities in a market in order to
promote our services. As part of our initial entry into a new market, we also
typically have concentrated on sales in ethnic communities since these market
segments can be effectively targeted with limited resources, enabling us to
rapidly generate revenues, create brand awareness and promote customer loyalty.
While our general sales and marketing strategy in continental Europe remains
consistent, we also tailor it to meet the needs of each particular market. For
example, in Belgium, we have generated significant revenues by placing our
prepaid cards (together with point of purchase displays) in many highly visible
locations such as bookstores, newsstands, kiosks and convenience stores. In
France, we concentrate on commercial accounts and employ an internal sales force
for this purpose. In Germany, we have an internal sales force in Hamburg that
primarily markets prepaid cards and commercial long distance services. We also
began marketing our "1+" long distance services in Germany during the first
quarter of 1999 through a multilevel marketing program that is similar to our
U.K. program. In Switzerland, we market our services through indirect channels,
supported by direct advertising in national media. We also cross-market our
services in Switzerland. For example, we began providing Internet services in
Switzerland in February 1999 and introduced a promotional program that offers
one year of free Internet access to customers who purchase our long distance
services.
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We also adapt successful marketing approaches from certain countries to
other continental European markets. For example, we intend to advertise in
national magazines and newspapers in Germany, which has been effective in
Switzerland. In addition, we intend to replicate the success of our multilevel
marketing program in the United Kingdom in other European markets.
We have an internal sales force based in each city in which we have a switch
except Amsterdam. In each of these cities, we are expanding our internal sales
forces and recruiting additional independent sales representatives.
UNITED KINGDOM
In the United Kingdom, we market our services nationally. We offer all of
our U.K. services through Telco, our wholly-owned U.K. subsidiary.
Our residential domestic and international long distance service and calling
and prepaid cards are marketed primarily by independent sales representatives
through multilevel marketing. We believe that multilevel marketing is the most
cost-effective way to continue to increase our U.K. residential and card-based
customer revenues since it encourages independent sales representatives to both
sell services and recruit additional independent sales representatives. Sales
representatives are motivated to both sell and recruit because they receive a
commission based on their own sales and sales of representatives recruited by
them. A substantial number of these sales representatives operate on a part-time
basis, using the commissions from sales of services as a secondary source of
income. During December 1998, we had approximately 4,000 independent sales
representatives that received commissions. In addition, we are one of only 150
companies, and the first telecommunications company, to be accepted for full
membership in the Direct Sellers Association, a nationally recognized U.K.
industry trade group for multilevel marketing.
We market domestic and international long distance services to U.K.
commercial accounts and carrier services to carrier customers through a direct
sales force. We have adopted this approach for these services since they are
more complex and usually require a longer sales cycle. We market and distribute
our presto phone virtual prepaid service, which is currently available only to
our long distance customers, directly to customers over the Internet.
We also increased our U.K. prepaid card distribution capabilities through
our acquisition of a controlling interest in America First, a well-recognized
prepaid card distributor, during the fourth quarter of 1998. We intend to
migrate our U.K. prepaid card distribution to America First because we believe
that America First is well positioned as an experienced and recognized
distributor of prepaid phone cards in the London area.
NORTH AMERICA
UNITED STATES. Prior to 1998, we marketed our services primarily in the New
York metropolitan area. During 1998, we significantly expanded our marketing
efforts beyond the New York metropolitan area to include other U.S. network
cities. We now have independent sales representatives in all of our network
cities and have internal sales representatives in New York, Los Angeles, Miami
and Washington, D.C.
Our international and domestic residential long distance services, which are
marketed primarily to ethnic communities, are sold primarily through independent
sales representatives. We target ethnic communities for these services because
we believe that members of these communities generate above average
international calling volumes, are not as heavily targeted by other long
distance providers as the general population and enable us to build brand
recognition in a well-defined community. We intend to expand the use of
independent sales representatives to market our residential services in the
United States beyond the ethnic market.
Our international and domestic long distance services for commercial
accounts are sold primarily through our internal sales force, which targets
accounts with significant calling volumes to European destinations. Many
business customers also require unified or other specialized billing formats.
Members
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of our sales force work with customers to address their billing needs such as
providing monthly bills with breakdowns of usage by account code, area code or
department.
Our calling card services are marketed and co-branded under both the
VoiceNet and EconoCard-TM- brand names. VoiceNet calling cards are marketed
primarily through in-flight magazines, national magazines and newspapers and
through advertising materials placed in high traffic locations, such as
restaurants. We also market VoiceNet calling cards through independent sales
representatives. EconoCard calling cards are marketed to ethnic groups in
conjunction with our residential services.
Prepaid cards are sold under a variety of brand names in major metropolitan
areas and are primarily sold through wholesale distributors and other
independent sales representatives. These distinctively branded prepaid cards can
be accessed by dialing a local access number in the area in which the card was
purchased, which reduces our costs and permits us to offer lower rates than most
of our competitors. This is important because prepaid card customers are
particularly price sensitive and frequently purchase prepaid cards based on
small differences in price for calls to specific destinations.
We currently are in the process of implementing a cross-marketing program to
VoiceNet customers to offer them our "1+" long distance service in the United
States. We also have expanded our marketing of new services to existing
residential long distance customers by describing these services regularly in
the "DESTIADVISOR" monthly insert included with each customer bill. In addition,
we have entered into affinity programs with major credit card companies, such as
First USA and GE Capital, to promote our VoiceNet calling cards. These affinity
programs include mass mailings in customers' monthly billing statements that
contain a preapproved VoiceNet calling card which, when used by the customer, is
automatically billed to the customer's credit card account.
We market and distribute our Presto! Card virtual prepaid service to
customers over the Internet and through an affinity program with the New Jersey
Devils professional hockey team.
We use an internal sales force to market to carrier customers and other
wholesale customers that purchase privately branded calling cards and prepaid
cards. We have adopted this sales approach for these services since they are
more complex and usually require a longer sales cycle.
CANADA. In Canada, we currently market our services in Toronto and Montreal
primarily to ethnic communities that generate substantial international calling
volume. Marketing is being done primarily through independent sales
representatives and our internal sales representatives in Canada. As we expand
our customer base in Toronto and Montreal, we intend to broaden our target
customer groups, introduce additional services and increase our internal sales
and marketing capabilities.
CUSTOMER SERVICE
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. We have a 24-hour-a-day customer service department
located in College Station, Texas, which, at December 31, 1998, had 157
full-time equivalent customer service representatives. In the United Kingdom, we
also maintain a 24-hour-a-day customer service department that, at December 31,
1998, had 65 full-time equivalent customer service representatives located at
the Telco facility in London, England. In continental Europe, each country in
the Destia Network has a customer call center, which in the aggregate totalled
20 full-time equivalent customer service representatives at December 31, 1998.
At all of our customer service facilities, our customer service representatives
handle both service and billing inquiries. In addition, our call centers all
have representatives that are multilingual.
We also have developed our own proprietary software systems to better serve
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 will permit customers to obtain
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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 ourselves from our
competitors.
COMPANY OPERATIONS
Currently, our extensive international telecommunications network allows us
to provide services in many of the largest metropolitan markets in the United
States, Canada, the United Kingdom, Belgium, France, Germany and Switzerland.
Our operations in each of our principal markets are briefly described below.
CONTINENTAL EUROPE
A significant component of our growth strategy is focused on the continued
development of our business in the deregulating telecommunications markets of
continental Europe. Prior to January 1, 1998, there were significant regulatory
limitations on our ability to provide services in most continental European
countries. Now, as a result of EU and national regulatory initiatives, we may
provide a range of services in many of these countries that is comparable to the
services we provide in the United States and the United Kingdom. In some cases,
however, national regulatory restrictions and technology issues (such as credit
card verification for e-commerce purchases) may limit our ability to do so.
Subject only to these limitations, in continental Europe we intend to offer the
same range of services that we offer in the United States and the United
Kingdom.
BELGIUM. Belgium was our third largest market based on revenues for 1998.
Sales of prepaid cards comprised the largest portion of our Belgian revenues,
followed by revenues derived from international long distance from commercial
and residential customers.
Prior to January 1, 1998, due to regulatory limitations, we only were able
to provide a limited number of services in Belgium that included international
service utilizing international toll-free access and local access for card-based
services, but did not include domestic long distance service. Since regulatory
liberalization occurred on January 1, 1998, we have expanded our services to
include both domestic and international long distance service. In addition,
during the fourth quarter of 1998, we completed our interconnection with
Belgacom, the Belgian PTT. This interconnection provides us with a total of 10
connection points with Belgacom, including our switch in Brussels, and permits
us to provide our services to customers anywhere in Belgium. This
interconnection also permits us to provide network access to our customers
through abbreviated dialing and enables us to originate and terminate calls in
Belgium on a more cost effective basis.
FRANCE. We have offered international long distance service to customers in
Paris since the first quarter of 1997, in Marseilles and Nice since the fourth
quarter of 1997 and in Lyon and Toulouse since the fourth quarter of 1998. We
began offering domestic long distance services in selected markets in France in
April 1999. Our revenues in France are currently predominantly generated by
international long distance services. Sales of prepaid cards comprise virtually
all of the other revenues. Most of our customers have CLI (calling line
identity), which allows our switches to recognize the number that the customer
is calling from, so that the customer can access our network without the need
for a personal identification number. In addition, we provide automatic dialers
free of charge to our commercial accounts. Automatic dialers eliminate the need
for a customer to dial a prefix to use our services.
Our network includes a switch in Paris and POPs in Marseilles, Toulouse,
Nice and Lyon. During the fourth quarter of 1998, we entered into an
interconnection agreement with France Telecom that will enable our customers to
access our long distance service from their home or office through abbreviated
dialing, although certain carriers (including France Telecom) are able to
provide direct, "1xxx" access. We are currently in the final stage of testing
our interconnection with France Telecom. However, there may still be delays in
completing our interconnection. See "Risk Factors--Need for Interconnection" and
"-- Regulation."
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GERMANY. Germany is the largest market for telecommunications services in
continental Europe. Our current principal service in Germany is our prepaid card
service, which we offer predominantly to commercial accounts. We currently
provide international long distance service, which we market primarily to
commercial customers. We have offered this service in Hamburg since the first
quarter of 1997, in Berlin since the fourth quarter of 1997 and in Frankfurt
since the third quarter of 1998. We began marketing domestic long distance
services in the third quarter of 1998 because we completed interconnection in
the fourth quarter 1998. We also began marketing long distance services to
residential accounts. We intend to introduce our Presto! Card in Germany during
the second quarter of 1999. In addition, in 1999, we intend to roll out our
successful U.K. multilevel marketing program in Germany and to establish an
internal sales force in Frankfurt. See "--Sales and Marketing--United Kingdom."
As of December 31, 1998, we had switches in Berlin and Frankfurt and a POP
in Hamburg. We expect to upgrade our Hamburg POP to a switch during the third
quarter of 1999. We believe that our Frankfurt switch will allow us to take
advantage of the growing popularity of Frankfurt as a European hub for
telecommunication carriers, especially for calls to and from Eastern Europe, and
we intend to market our carrier services to carriers that route calls through
Frankfurt.
During the fourth quarter of 1998, we implemented our interconnection with
Deutsche Telekom, which enables us to offer customers in our German network
cities and the surrounding metropolitan areas, both domestic and international
long distance service through "1+" access. Our interconnection agreement in
Germany granting us access to Deutsche Telekom's network expired at the end of
February 1999, although we have initiated legal action to maintain continued
interconnection with Deutsche Telekom's network. In the interim, we are
currently still interconnected to Deutsche Telekom's network. If Deutsche
Telekom were permitted to restrict our interconnection, our transmission costs
in Germany would increase and the services we could offer might be limited. We
expect to be able to maintain our interconnection to Deutsche Telekom's network
although there can be no assurance that this will be the case. See "Risk
Factors--Need for Interconnection--Considerations Affecting Interconnection in
Europe." We plan to add additional interconnection points in Germany in 1999 to
meet additional traffic or regulatory requirements, which will enable us to
originate and terminate traffic in most of the major cities in Germany. See
"Risk Factors--Competition."
SWITZERLAND. Switzerland has been substantially deregulated. Our principal
service in Switzerland is international long distance. Customers may preselect
our company as their long distance carrier and make long distance calls on our
network using "1+" dialing. During 1998, the majority of our customers were
commercial accounts. In February 1999, we began providing Internet services in
Switzerland and introduced a promotional program that offers one year of free
Internet access to customers who purchase our long distance services.
We established a POP in Zurich during the third quarter of 1997 and upgraded
it to a switch in the third quarter of 1998. In addition, during October 1998,
we were one of the first telecommunications carriers to be interconnected to
SwissCom, the PTT in Switzerland. This interconnection enables us to originate
and terminate traffic in Switzerland more cost effectively, which provides us
with a competitive advantage over those of our competitors who do not currently
have interconnection. Since we completed our interconnection in October 1998,
our number of customers has more than quadrupled and as of April 1, 1999 we had
approximately 20,000 customer accounts in Switzerland. During the same period,
our Swiss revenues also more than doubled. We intend to expand our customer base
significantly in Switzerland during 1999. We anticipate, however, that
additional competitive carriers will obtain interconnection rights from
SwissCom, which will lead to increased competition.
UNITED KINGDOM
Since 1991, the U.K. government has sought to encourage increased
competition in telecommunications services. As a result of regulatory
initiatives, the telecommunications market in the United Kingdom now resembles
the United States in terms of services and pricing.
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International and domestic long distance services generated the largest
percentage of our U.K. revenues during 1998. We have provided these services in
the London area since the fourth quarter of 1996 and nationwide in the United
Kingdom since the second quarter of 1997. Our other principal services in the
United Kingdom are prepaid cards and sales to resellers and carrier customers.
In March 1999, we launched the presto phone virtual prepaid service.
We offer all our residential, calling card and prepaid services in the
United Kingdom primarily through Telco. We believe that Telco has been
particularly successful marketing our services in the United Kingdom through its
multilevel marketing program. Our prepaid card services, which are currently
offered by Telco, are being migrated to America First, a prepaid card
distributor that we acquired a majority interest in during the fourth quarter of
1998. See "--Sales and Marketing--United Kingdom."
We currently have five interconnection points in London that enable us to
provide our services throughout the United Kingdom. However, our U.K. customers
currently are unable to preselect any carrier except British Telecom as their
long distance carrier and thus cannot access our services without first dialing
a four-digit access code. Under EU regulations, preselection is scheduled to
become available by January 1, 2000, although the U.K. regulator is seeking a
waiver of this requirement until a later date. In order to migrate more traffic
on to our network, we are marketing automatic dialers to our residential and
commercial customers in order to compete more effectively against British
Telecom, which provides long distance service without requiring the user to dial
an access code. Customers purchase or lease the dialer, which automatically
dials our network access code for the customer.
Our European network (including the United Kingdom) is monitored by DNS, one
of our wholly-owned subsidiaries, in London and by Destia through our network
operations center in St. Louis, Missouri.
NORTH AMERICA
UNITED STATES. The United States is one of our original markets. We have
been providing international and domestic long distance service in the New York
metropolitan area since 1993. We now also provide our calling card, prepaid
card, wireless access to long distance and directory assistance services
nationally and provide our other services (primarily residential and commercial
long distance) in the 16 U.S. cities in which the Destia Network has a switch or
POP. Because of the U.S. market's size and receptiveness to new services, we
typically introduce new services in the United States before our other markets.
For example, during the last quarter of 1998, we first introduced our Presto!
Card virtual prepaid service in the United States over the Internet. We also
intend to test (and cross market) additional e-commerce services to Presto! Card
customers due to their predisposition to making purchases on-line.
As of March 31, 1999, we had six switches and ten POPs in the United States,
which enable us to originate domestic and international long distance calls in
many of the largest U.S. metropolitan areas. Because of the substantial increase
in our domestic traffic and our desire to provide services in more U.S. markets,
we recently acquired a 20-year IRU from Frontier to use portions of its U.S.
fiber optic network. This will replace our use of the Qwest network. Frontier is
in the process of building its fiber optic network that we will use, and we
expect this network to be completed and substantially operational by the end of
1999. We expect to begin using a portion of Frontier's network by July 1999,
although there can be no assurance in this regard. In addition, the Frontier
arrangement will give us favorable origination and termination rates throughout
the continental United States. See "--The Destia Network--North American
Network--U.S. Network Expansion."
CANADA. We expanded our network into Canada during the third quarter of
1998 by installing a switch in Toronto. We also plan to install a POP in
Montreal by the fourth quarter of 1999. This switch and POP will enable us to
originate and terminate calls in Toronto and Montreal, two of the largest long
distance markets in Canada. Like most of western Europe, Canada also has
recently liberalized its telecommunication laws. Since October 1, 1998, private
carriers have been able to provide international long distance service
originating in Canada. We began providing services in Canada late in the fourth
quarter of 1998 and intend to further expand our internal sales force in Canada
in 1999.
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COMPETITION
The international 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
long distance service providers compete principally on the basis of price,
customer service, product quality and breadth of services offered. In each
country of operation, we have numerous competitors. 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. Prices
for long distance calls in the markets in which we compete have declined
historically and are likely to continue to decrease. Many of our competitors are
significantly larger, have substantially greater financial, technical and
marketing resources and larger networks than us.
Privatization and deregulation have had, and are expected to continue to
have, significant effects on competition in the industry. For example, as a
result of legislation enacted in the United States, RBOCs will be allowed to
enter the long distance market, AT&T, MCI WorldCom and other long distance
carriers can now enter the local telephone service markets, and cable television
companies and utilities can now enter both the local and long distance
telecommunications markets. In addition, competition has begun to increase in
the EU telecommunications markets in connection with the deregulation of the
telecommunications industry in most EU countries, which began in January 1998.
This increase in competition is likely to affect revenue per minute and gross
margin as a percentage of revenue.
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 and/or domestic long distance telecommunications services to our
target customer base, there could be a material adverse effect on our business
and the price of our common stock.
As a result of the 1996 Telecommunications Act, the RBOCs 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 Telecommunications Act prospectively eliminated the
restrictions on incumbent LECs, such as the RBOCs, from providing long distance
service. These provisions permit an RBOC 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. RBOCs must satisfy certain procedural and substantive requirements,
including obtaining FCC 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. No RBOC is authorized to do so yet, but they are expected to be
authorized soon. When they are authorized, they will be very formidable
competitors. In particular, Bell Atlantic, which serves the New York
metropolitan and mid-Atlantic regions, is considered by industry observers to be
the most likely RBOC to be the first to be permitted to offer long distance
services. On April 13, 1999, Bell Atlantic filed its application with the New
York PSC. Because a substantial portion of our customer base and traffic
originates in the New York metropolitan area, Bell Atlantic will be a
particularly formidable competitor. For long distance calls, Bell Atlantic will
have a substantial cost advantage, because it will not have to pay access fees
to a local carrier to originate the call.
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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.
The continuing trend toward business combinations and alliances in the
telecommunications is also creating significant new or more powerful competitors
to our company. The proposed acquisition of Frontier (the primary provider of
our U.S. transmission capacity beginning later in 1999) by Global Crossing and
of GTE by Bell Atlantic, the proposed acquisition of Ameritech by SBC, the
merger of WorldCom and MCI, AT&T's acquisitions of Telecommunications, Inc. and
Teleport Communications Group, 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 those of our company. These combined entities may,
now or in the future, be able to provide bundled packages of telecommunications
products, including local and long distance services and 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.
For example, AT&T recently acquired SmarTalk, which sells prepaid cards.
This acquisition provides AT&T with access to a major distribution network for
inexpensive prepaid cards, a market where AT&T has not historically competed on
the basis of price. AT&T's significant marketing resources and extensive network
will make it a formidable competitor in the prepaid card market.
The World Trade Organization (the "WTO") recently concluded an agreement,
known as the WTO Basic Telecommunications Service Agreement (the "WTO
Agreement"), that has already resulted in additional competitors entering the
U.S. telecommunications markets. Under the WTO Agreement, the U.S. and other
members of the WTO committed themselves to, among other things, opening their
telecommunications markets to foreign carriers. The FCC 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 FCC has
determined not to subject such services to FCC 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
FCC asking the FCC 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. We cannot predict how the FCC or any State PSCs will rule on US
West's petition. Should the FCC and state PSCs rule adversely to U.S. West,
however, we cannot predict the impact that this continuing lack of regulation
will have on our business.
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 our
company. 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 which have announced a proposed merger, as well as
non-Stentor companies, such as AT&T Canada, Teleglobe Canada, and Sprint Canada.
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.
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EUROPE
In continental Europe, our competitors include:
- PTTs;
- alliances such as Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and AT&T's alliance with both British
Telecom and Japan Telecom (the members of which have recently announced a
plan to contribute their international facilities and personnel to a newly
formed company that is likely to be a substantially more formidable
competitor);
- companies offering resold international telecommunications services; and
- other companies with business plans similar in varying degrees to us,
including emerging public telephone operators who are constructing their
own networks and wireless network operators.
We believe that our continental European markets will continue to experience
increased competition and will begin to resemble the competitive landscape in
the United States and the United Kingdom. In addition, we anticipate that
numerous new competitors will enter the continental European telecommunications
market.
Competition is strong in the liberalized U.K. telecommunications market. In
the United Kingdom our principal competitors are British Telecom, the U.K.'s
PTT, First Telecom and Cable & Wireless. We also face competition from emerging
licensed public telephone operators (who are constructing their own
facilities-based networks) and from resellers. We also compete with wireless
service providers and cable companies.
Furthermore, in certain European countries (including in France and Belgium)
"facilities-based" carriers that make investments in infrastructure receive
lower interconnection rates than non-facilities based providers. We do not
expect to qualify for such a discount until we purchase more fiber optic
transmission capacity in Europe (particularly in France and Belgium). In
addition, certain of our competitors offer customers an integrated full service
telecommunications package consisting of local and long distance voice, data and
Internet transmission. We do not currently offer all of these types of service,
which could have a material adverse effect on our competitiveness and the price
of our common stock.
See "Risk Factors--Competition" and "Risk Factors--Increasing Pricing
Pressures."
REGULATION
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. As an international telecommunications company, we
are subject to varying degrees of regulation in each of the jurisdictions in
which we provide our services. Laws and regulations, and the interpretation of
such laws and regulations, differ significantly among the jurisdictions in which
we operate. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on our company or
that domestic or international regulators or third parties will not raise
material issues with regard to our compliance or noncompliance with applicable
regulations.
The regulatory framework in certain jurisdictions in which we provide our
services is described below:
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
FCC regulations thereunder, as well as the applicable laws and regulations of
the various states administered by the relevant PSCs. 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
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United States, increased pricing and market entry flexibility that has permitted
it to compete more effectively with smaller carriers, such as the Company. In
addition, the 1996 Telecommunications Act has opened the United States market to
increased competition from RBOCs. We cannot be certain whether future
regulatory, judicial and legislative changes in the United States will
materially affect our business and the price of our common stock.
The FCC currently regulates our company as a non-dominant carrier with
respect to both its international and domestic interstate long distance
services. Although the FCC has generally chosen not to closely regulate the
charges, practices or classifications of non-dominant carriers, the FCC has
broad authority which includes the power to impose more stringent regulatory
requirements on our company, to change our regulatory classification, to impose
monetary forfeiture, and to revoke our authority. In this increasingly
deregulated environment, however, we believe that the FCC is unlikely to do so.
The FCC and certain PSCs require prior approval of transfers of control,
including PRO FORMA transfers of control resulting from corporate
reorganizations, and assignments of regulatory authorizations. Such requirements
may delay, prevent or deter a change in control of our company. In a recently
released order, the FCC announced it will forebear from reviewing PRO FORMA
assignments and transfers of control of international Section 214
authorizations. Instead, only post-consummation notifications will be required
and then only in the case of PRO FORMA assignments, not PRO FORMA transfers of
control. The rules implementing these determinations are not yet in effect, but
are currently scheduled to go into effect on May 19, 1999. Although we believe
that no material penalties would result from our failure to notify the FCC and
certain PSCs of a change of control or from our failure to seek prior approval
or take certain actions where required, we cannot be certain whether this will
be the case.
FCC INTERNATIONAL. In addition to the general requirement that we obtain
authority under Section 214 of the Communications Act and file a tariff
containing the rates, terms and conditions applicable to our international
services, we also are subject to the FCC's international service policies,
certain of which may affect our ability to provide our services in the most
economical fashion. For example, the FCC's private line resale policy prohibits
a carrier from reselling interconnected international private leased circuits to
provide switched services (known as "ISR") to or from a country absent FCC
authorization. The FCC will allow ISR between the U.S. and a WTO member country
for which it has not previously authorized such service upon a demonstration
that (1) settlement rates for at least 50 percent of the settled U.S.-billed
traffic between the U.S. and the country at the foreign end of the private line
are at or below the benchmark settlement rate adopted by the FCC, or (2) where
the country at the foreign end affords resale opportunities "equivalent" to
those available under U.S. law. Both conditions must be present before the FCC
will authorize private line resale between the U.S. and a non-WTO member country
for which the FCC has not previously authorized the provision of private line
resale. The FCC has authorized ISR to the following countries: Australia,
Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy,
Japan, Luxembourg, New Zealand, The Netherlands, Norway, Sweden, Switzerland,
and the United Kingdom. The practical implication for us of this policy is that
we are restricted from (i) transmitting calls routed over leased lines between
New York and London onward over a leased line to continental Europe (other than
to a country approved for ISR); and (ii) transmitting calls from continental
European countries (other than those approved for ISR) over leased lines from
London and then onward over a leased line between London and New York. The
policy may materially limit the best use of our leased lines between New York
and London and may result in increased transmission costs on certain calls,
which we are not able to pass through to our customers. We note, however, that
on March 23, 1999, the FCC released an order simplifying the procedures for
obtaining authorization to provide ISR to previously unauthorized countries.
Specifically, the rules, which are not yet effective, but which are expected to
become effective on May 19, 1999, will reduce both the amount of information
required of a carrier seeking authority to provide ISR to a particular country
and the FCC's decision making time.
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We are also subject to the FCC's ISP which governs the exchange of traffic
and settlement between U.S. carriers and their foreign correspondents of the
cost of terminating traffic over each other's network. The FCC could find that,
absent a waiver, certain terms of our foreign carrier agreements or our actions
do not meet the requirements of the ISP. Although the FCC generally has not
issued penalties in this area, it has recently issued a Notice of Apparent
Liability against a U.S. company for violating the ISP, and it could take other
action against a carrier violating the ISP, including issuing a cease and desist
order or imposing fines. If the FCC were to impose such fines or other penalties
on our company, we do not believe that it would have a material adverse effect
on our business or the price of our common stock. We note, moreover, that the
FCC recently approved sweeping reform of its ISP. Specifically, the FCC has
determined to eliminate the ISP for arrangements with foreign carriers lacking
market power (I.E., less than 50% market share in the relevant destination
market) and for arrangements with all carriers on liberalized routes (I.E.,
those routes where the settlement rate to terminate U.S. calls is at least 25
percent below the FCC's relevant benchmark rate set for that country). The FCC
has yet to release its order containing these rules and the rules are not yet in
effect. While the new rules, when effective, should afford us additional
flexibility, they may also increase competition on certain routes.
FCC DOMESTIC INTERSTATE. We are considered a non-dominant domestic
interstate carrier subject to minimal regulation by the FCC. We are not required
to obtain FCC authority to expand our domestic interstate operations, but we are
required to maintain, and do maintain, a domestic interstate tariff on file with
the FCC. The FCC presumes the tariffs of non-dominant carriers to be lawful.
Therefore, the FCC does not carefully review such tariffs. The FCC 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 FCC could order
us to revise our tariffs, or the FCC could prescribe revised tariffs.
In late 1996, the FCC ruled that interexchange carriers are no longer
required to file their tariffs for domestic interstate interexchange services.
In August 1997, the FCC affirmed its decision to end tariff filing requirements
for domestic interstate long distance services provided by non-dominant
carriers. The FCC 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 FCC 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 FCC'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 LECs such as the
RBOCs from providing long distance service. These provisions permit an RBOC 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. The provisions also permit an RBOC 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.
A number of RBOCs have made initial applications for the approvals necessary
to enter their "in-region" long distance markets, although, to date, all such
applications have been denied on the basis that the RBOC has not satisfied the
list of competitive requirements. However, there have recently been extensive
discussions among the state PSCs, the FCC and RBOCs in order to develop a
definitive understanding of these requirements and the specific criteria to
measure their satisfaction. These discussions may lead to one or more successful
RBOC "in-region" applications in the future. In particular, Bell Atlantic, which
serves the New York metropolitan and mid-Atlantic regions is considered by
industry observers to be the most likely RBOC to be the first to be permitted to
offer long distance services. On April 13, 1999, Bell Atlantic filed its
application with the New York PSC. Because a substantial portion of our customer
base and traffic originates in the New York metropolitan area, Bell Atlantic
would be a
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particularly formidable competitor. We expect that Bell Atlantic will have a
cost advantage over our company because it will not need to pay access charges,
which constitute a substantial portion of our cost of services. Moreover, should
Bell Atlantic's proposed acquisition of GTE be consummated, Bell Atlantic will
have greater resources to compete in its service markets. See "Risk
Factors--Competition."
The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact our operations. It is
unknown at this time precisely the nature and extent of the impact that the
legislation will have on us. On August 1, 1996, the FCC adopted an
Interconnection Order implementing the requirements that incumbent LECs make
available to new entrants interconnection and unbundled network elements, and
offer retail local services for resale at wholesale rates. Important portions of
the FCC's order were subsequently overturned by a court order. However, on
January 25, 1999, the U.S. Supreme Court upheld most of the challenged rules,
finding that the FCC has significant jurisdiction to establish rules to promote
competition for competitive local exchange services. Although some of the FCC's
rules may be challenged in future proceedings and the Supreme Court decision
requires the FCC to conduct additional proceedings to determine new unbundling
standards, the Supreme Court decision seems likely to promote competition for
telecommunications services generally.
Section 706 of the Telecommunications Act gives the FCC the right to forbear
from regulating a market if the FCC concludes that such forbearance is necessary
to encourage the rapid deployment of advanced telecommunications capability.
Section 706 has not been used to date, but in January 1998, Bell Atlantic filed
a petition under Section 706 seeking to have the FCC deregulate entirely its
provision of packet-switched telecommunications services. Similar petitions were
filed later by the Alliance for Public Technology and US West Inc. (currently
Media One Group Inc.).
On August 7, 1998, the FCC released an order denying requests by the RBOCs
that it use Section 706 of the Telecommunications Act to forbear from regulating
advanced telecommunications services. Instead, the FCC determined that advanced
services are telecommunications services and that ILECs providing advanced
services are still subject to unbundling and resale obligations of Section
251(c) and the in-region interLATA restrictions of Section 271.
On the same day, the FCC released a Notice of Proposed Rulemaking ("NPRM")
proposing that ILECs be permitted to offer advanced services through separate
affiliates. Such affiliates would continue to be prohibited from completing
interLATA calls but would not be required to unbundle network elements under
Section 251(c).
On March 31, 1999, the FCC released its Collocation Order. The Collocation
Order strengthened collocation requirements applicable to incumbent local
exchange carriers ("ILECs") requiring ILECs to permit CLECs to collocate any
equipment used for interconnection or access to unbundled network elements even
if that equipment includes switching or enhanced service functions.
The FCC has also significantly revised the universal service subsidy regime.
Beginning January 1, 1998, interstate carriers, such as our company, as well as
certain other entities, became obligated to make FCC-mandated contributions to
universal service funds. These funds subsidize the provision of
telecommunications services in high cost areas and to low-income customers, as
well as the provisions of telecommunications and certain other services to
eligible schools, libraries and rural health care providers. Our share of these
federal subsidy funds will be based on our revenues. Our revenues that are
subject to the high cost and low income fund are our interstate and
international gross end-user telecommunications revenues. Our revenues for the
schools and libraries and rural health care fund are our intrastate, interstate
and international gross end-user telecommunications revenues. Contribution
factors vary quarterly and we and other carriers are billed monthly. In
addition, the FCC orders implementing the universal service contribution
obligation are subject to petitions seeking reconsideration by the FCC and to
certain appeals. Until such petitions and appeals are decided, 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. Contribution factors
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for second quarter 1999 are: (i) 3.05% for the high cost, insular and low income
funds (interstate and international revenues); and (ii) 0.58% for the schools,
libraries, and rural health care funds (intrastate, interstate and international
revenues). Because the contribution factors do vary quarterly, the annual impact
on our company cannot be estimated at this time, although we do not expect it to
be material.
Our costs of providing long distance services will also be affected by
changes in the access charge rates imposed by LECs for origination and
termination of calls over local facilities. The FCC has significantly revised
its access charge rules in recent years to permit ILECs greater pricing
flexibility and relaxed regulation of new switched access services in those
markets where there are other providers of access services. The FCC has, for
example, created a new presubscribed interexchange carrier charge ("PICC") rate
element. The PICC is a flat-rate, per line charge that is recovered by LECs from
interexchange providers. Effective January 1, 1998, the initial maximum
permitted interstate PICC charge is $0.53 per month for primary residential
lines and single-line business lines and $1.50 per month for second and
additional residential lines. The initial maximum interstate PICC for multi-line
businesses are $2.75 per month, per line. The ceilings are scheduled to increase
in July 1999 and then yearly thereafter until they reach certain caps.
While we currently intend to pass through the costs of both the PICC and our
universal service fund contributions to our customers, there can be no assurance
that we will be able to 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 LECs. Any change in any of these agreements,
whether by operation of law or otherwise, may affect our company's costs or
could disrupt our company's ability to terminate, originate or exchange traffic
and, therefore, have a material adverse effect on our company.
The FCC continues to adjust its access charge rules and has indicated that
it will promulgate additional rules sometime in 1999 that may grant certain LECs
further flexibility. Most recently, the FCC issued an order that clearly
established the definition of a "primary line." The FCC defines a primary
residential line to be "one residential line provided by a price cap LEC per
service location." The FCC retained its price cap rule definition of a single
line business subscriber line as a line for which the subscriber pays a rate
that is not described as a residential rate in the local exchange service tariff
and does not obtain more than one such line from a particular telephone company.
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 FCC
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 $.35 per call. On July 1, 1997, the United States Court of Appeals for the
District of Columbia ("D.C. Circuit") issued an opinion reversing in part the
FCC's payphone orders. The court ruled that the rate of $.35 per call was
arbitrary and capricious and remanded the case to the FCC for further
proceedings. The FCC, thereafter, issued a further rulemaking on compensation
for payphone owners. On October 9, 1997, the FCC ruled that interexchange
carriers are required to compensate payphone owners at a rate of $.284 for all
payphone calls. The FCC ruled that this compensation method will be effective
from October 7, 1997 through October 7, 1999. On May 15, 1998, the D.C. Circuit
remanded the order to the FCC, ruling that the $.284 rate established was
arbitrary and capricious, but did not vacate it. On February 4, 1999 the FCC
released an order which lowered the payphone compensation rate to $.240,
effective April 21, 1999. For amounts already due, the FCC determined that the
payphone owners should be compensated at a rate of $.238. MCI WorldCom, Sprint,
the RBOCs 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. Additionally, a coalition comprised of the RBOCs,
SNET and GTE have filed a Petition for Clarification with the FCC, 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 (CIC) used to route the call from
the local exchange network. As a result of
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many factors, including a complex and shifting regulatory scheme, many long
distance carriers have been the subject of compensation claims by payphone
service providers. A lawsuit has been filed against the Company by payphone
service providers alleging that the Company owes 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 the
Company's network. The Company has paid all payphone compensation that it
believes is due under the most recent payphone compensation scheme and believes
that the aggregate liability to the Company of all such claims, if concluded in
a manner adverse to the Company, would not have a material adverse effect on the
Company. The Company notes, moreover, that the parties to the lawsuit have
agreed to an extension of time for the Company to answer the Complaint. The
purpose for the extension of time is to allow the parties to engage in
settlement discussions. There can be no assurance, however, that the settlement
discussions will be successful and, if they are not, that the Company will
prevail in this lawsuit.
The FCC 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 FCC has recently imposed severe penalties on a
number of carriers for "slamming." Under an order recently issued by the FCC,
carriers such as our company are required to take certain additional steps to
prevent slamming. The FCC is continuing to reexamine its slamming rules.
STATES. Our predecessor corporation, Econophone, Inc., which was
incorporated in New York, received authorization, where necessary, either
pursuant to certification, the fulfillment of tariff requirements or
notification requirements, to provide long distance services in 49 states.
Following the reorganization of Econophone, Inc. as a Delaware corporation, the
authorizations were transferred to us. We in turn transferred the authorizations
to our wholly-owned subsidiary, Econophone Services, Inc., which recently
changed its name to Destia Communications Services, Inc. We are in the process
of notifying the various state PSCs and, where necessary, seeking approval in
connection with the name change. We cannot be certain that we will obtain all
necessary regulatory approvals in connection with the name change.
Many states also impose various reporting and other requirements. A number
of state PSCs have adopted rules governing the markets of telephone services and
obtaining customer authorizations for changes of a customers' primary long
distance carrier. State 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. States
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 FCC 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 FCC 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 with the
FCC asking the FCC to find that IP 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. We
cannot predict how the FCC or state PSCs will rule on US West's petition. If the
FCC or state PSCs were to determine that certain services are subject to FCC
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 PSCs may also retain
jurisdiction to regulate the provision of intrastate Internet telephony services
and could initiate proceedings to do so.
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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.
EUROPEAN UNION
In Europe, the regulation of the telecommunications industry is governed at
a supra-national level by legislation passed by the European Commission, the
Council and the Parliament of the European Union ("EU"), (formerly the European
Communities), consisting of the EU member states: Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands,
Portugal, Spain, Sweden and the United Kingdom. The EU has adopted pan-European
policies through legislation and developed a regulatory framework to ensure an
open and competitive telecommunications market.
As of January 1, 1998 the EU required all special or exclusive rights that
restrict the provision of telecommunications services to be abolished. Specific
directives have been adopted, which include the Open Network Provision ("ONP")
Framework Directive, the Leased Lines Directive, the Revised Voice Telephony
Directive, the ONP Adaptation of Full Competition Amending Directive and the
Interconnection Directive, the latter of which has been amended to provide for
carrier preselection and number portability on or before January 1, 2000.
Carrier preselection 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" our company as its long
distance carrier. However, Oftel, the U.K. regulatory authority, already has
indicated that it will seek to defer the implementation of carrier preselection
in the United Kingdom. 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 EU member
states have been granted temporary waivers from implementing certain EU
liberalization requirements and have only fully liberalized recently. Ireland
and Portugal have derogations until January 1, 2000 and Greece until January 1,
2001.
National governments must pass legislation within their countries to give
effect to EU directives. Each EU member state in which we currently conduct
business has implemented the EU directives differently and we will therefore
continue to operate under different national regulatory regimes. The
requirements for us to obtain necessary approvals vary between member states and
are expected to continue to so vary. See "Risk Factors--Regulatory
Restrictions."
WORLD TRADE ORGANIZATION INITIATIVES. The WTO recently concluded the WTO
Agreement, which opens the telecommunications markets of the signatory countries
to entry by foreign carriers on varying dates and to varying degrees. The WTO
Agreement became effective on February 5, 1998. Pursuant to the WTO Agreement,
U.S. companies would have foreign market access for local, long distance and
international services, either on a facilities basis or through resale of
existing network capacity on a reasonable and non-discriminatory basis. Although
the WTO Agreement may open additional markets to us or broaden the permissible
services that we can provide in certain markets, the WTO Agreement also may
subject us to greater competitive pressures in our markets, with the risk of
losing customers to other carriers and reductions in our rates.
UNITED KINGDOM. Licenses are needed to provide all the international
services that we provide in the United Kingdom. Licenses are granted by the
Secretary of State for Trade and Industry but enforced by the U.K. regulatory
authority under powers granted by the Telecommunications Act, 1984. We have all
of the necessary licenses to provide our services in the United Kingdom.
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International simple resellers, such as our company, operate under
registrable class licenses. Through our U.K. subsidiary DNS, we have an
International Simple Voice Resale Class License (the "ISVR"), which entitles us
to resell international message, telephone and private line services. The ISVR
license also enables DNS to interconnect with, and lease capacity at wholesale
rates from, British Telecom and other public telecommunications operators. We
also have an International Facilities License, which authorizes us to provide
international telecommunication services over our own international
infrastructure.
Our U.K. customers currently are unable to preselect us as their long
distance carrier. Equal access is scheduled to become available in the United
Kingdom on January 1, 2000 pursuant to relevant EU directives. However, the
national regulatory authority is seeking to defer the implementation of carrier
preselection in the United Kingdom until a later date.
BELGIUM. Since January 1, 1998, licensed operators have been able to
provide telephony services in Belgium. On July 15, 1998, the Royal Decree of
Voice Telephony removing the last remaining monopolies of Belgacom, the Belgium
PTT, was published. These permitted services include all of the services that we
currently provide in Belgium.
Providers of voice telephony services must apply for a voice telephony
license. We were recently granted a permanent license, which expires in 2014, by
the Belgium Minister for Telecommunications.
In Belgium, "facilities-based" carriers that make investments in
infrastructure receive lower interconnection rates than non facilities-based
providers. These incentives provide carriers that own infrastructure with a cost
advantage over carriers that do not own infrastructure. Because we are not a
facilities-based carrier within the meaning of Belgian regulations, we are not
eligible for these incentives.
Preselection currently is unavailable to our customers in Belgium. The
Belgian regulatory authorities have not yet introduced the regulations setting
forth the criteria that private carriers must satisfy in order to be able to
offer preselection to their customers.
Our interconnection in Belgium has been granted on a temporary basis until
July 15, 1999 pending the adoption of certain new telecommunications legislation
in Belgium. Once this legislation has been adopted, we will need to enter into a
new interconnection agreement with Belgacom. If this new legislation has not
been adopted before July 15, 1999, we expect the term of our Belgian
interconnection to be extended. Furthermore, once the new legislation is
adopted, we expect to be able to enter into a new interconnection agreement with
Belgacom. However, there can be no assurance that this will be the case with
respect to either of the foregoing. If we were to lose our interconnection with
Belgacom in Belgium, we would need to obtain interconnection from another
carrier, which could increase our transmission costs in Belgium.
FRANCE. Since January 1, 1998, licensed private service providers have been
able to offer domestic and international long distance voice telephony services
to the general public in France after obtaining a voice telephony license. Our
French subsidiary, Econophone SA, obtained its voice telephony license during
the third quarter of 1998. This license enables us to provide all of our current
services in France.
In order to own and control transmission infrastructure in France, a carrier
must obtain an infrastructure license from the Autorite de Regulation de
T elecommunications. Because we lease, rather than own, our transmission lines
in France, we are not required to have an infrastructure license. France
Telecom's standard interconnection offer provides the carriers that own
infrastructure with a cost advantage over carriers that do not own
infrastructure and are not available to us.
Preselection currently is unavailable to our customers in France. In
addition, seven carriers that have agreed to interconnect on a national basis to
the French PSTN in a substantial number of markets have been granted single
digit access for their customers. We are not one of these carriers.
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GERMANY. On January 1, 1998, the German telecommunications market was
substantially liberalized. Through our interconnection with Deutsche Telekom and
on the basis of our carrier identification code, our customers are able to
preselect us as their carrier for certain services. In Germany, our activities
are governed by the Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act"). Under the German Telecommunications Act, the provision
of "voice telephone service," which includes services involving switching in
Germany, over a privately owned telecommunications network, requires a Class 4
license under the German Telecommunications Act. We received a Class 4 license
during the second quarter of 1998, which enables us to provide voice telephony
services throughout Germany.
The German Telecommunications Act and the Network Access Ordinance require
public telecommunications network operators to offer interconnection at the
request of other network interconnection operators. This requires Deutsche
Telekom to allow other providers interconnection to its telecommunications
networks. During the fourth quarter of 1998, we entered into an interconnection
agreement with Deutsche Telekom, which expired at the end of February 1999. We
initiated a legal action with the German regulatory authorities on February 25,
1999 that challenged the terms of interconnection being offered by Deutsche
Telekom and requested the German regulatory authorities to issue a preliminary
order and a final order requiring Deutsche Telekom to offer reasonable
interconnection terms to maintain continued interconnection of our German
network with Deutsche Telekom's network.
A large number of other competitive carriers, government authorities and
industry associations are now participating in this legal action, since the
determination on these issues is likely to have industry-wide consequences for
all competitive carriers that interconnect with Deutsche Telekom in Germany.
Deutsche Telekom, as a market-dominating operator, is obligated to grant us
access to its network. In addition, certain conditions of such network access
may be determined by the regulatory authorities. Nevertheless, it is uncertain
if the regulatory authorities will grant us access on desirable terms and
conditions. If Deutsche Telekom were permitted to restrict our interconnection,
our transmission costs in Germany would increase and the services we could offer
might be limited.
SWITZERLAND. With the implementation of the Telecommunication Act of 1997
on January 1, 1998, Switzerland became a fully liberalized telecommunications
market. The provision of our services in Switzerland does not require a license,
although we are required to make certain notice filings.
Our Swiss subsidiary, Econophone GmbH, signed an interconnection agreement
with Swisscom, the Swiss PTT, during the second quarter of 1998. Our
interconnection with Swisscom enables our customers to preselect our company as
their long distance carrier in Switzerland.
AUSTRIA. We recently obtained a license from the Austrian regulator,
Telekom-Control-Commission, to provide public telephone service in Austria for
an unlimited time period. We are one of 13 telecommunications services providers
in Austria. We plan to file an application for interconnection in Austria.
CANADA
The domestic long distance market in Canada was first opened to resale
competition in 1990 and then to facilities-based competition in 1992. Although
Canada's international market was also opened to competition in 1992, most
facilities-based competitors were not permitted to enter this market due to a
long-standing monopoly held by Teleglobe Canada. As a signatory to the WTO
Agreement, Canada agreed to end Teleglobe Canada's monopoly on Canada-overseas
transmission facilities effective on October 1, 1998. We received a license
early in the first quarter of 1999 which authorizes us to provide international
long distance services to our customers in Canada. The provision of domestic
long distance services in Canada does not require a license, although we are
required to make certain notice filings. As a reseller of long distance
services, we are currently not subject to any foreign ownership restrictions in
Canada.
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EMPLOYEES
As of December 31, 1998, we had 877 employees, an increase from the 408
employees that we had at December 31, 1997. The breakdown of our employees by
region as of December 31, 1998 was as follows:
<TABLE>
<CAPTION>
NUMBER
REGION OF EMPLOYEES
- ------------------------------------------------------------ ---------------
<S> <C>
Continental Europe.......................................... 108
United Kingdom.............................................. 247
North America............................................... 522
---
Total....................................................... 877
</TABLE>
Our North American employees are based principally in our offices in
Paramus, New Jersey (executive offices); New York, New York; Brooklyn, New York;
College Station, Texas; and St. Louis, Missouri. In Europe, our employees are
based principally in offices located in cities where we have a switch. We have
never experienced a work stoppage and our employees are not represented by a
labor union or a collective bargaining agreement. We consider our employee
relations to be good.
LITIGATION
We are from time to time a party to litigation that arises in the ordinary
course of our business operations or otherwise. We believe that we are not
presently a party to any litigation that, if decided in a manner adverse to us,
would have a material adverse effect on our business or operations.
PROPERTIES
All of our facilities are leased from third parties. Our principal
facilities are located in Paramus, New Jersey; College Station, Texas; Brooklyn,
New York; and London, England. Our network operations center is located in St.
Louis, Missouri. We also maintain sales offices in several cities in the United
States including in most switch locations and in the following European cities,
among others:
- Amsterdam, The Netherlands
- Antwerp, Belgium
- Athens, Greece
- Berlin, Germany
- Brussels, Belgium
- Frankfurt, Germany
- Hamburg, Germany
- London, England
- Lyon, France
- Marseilles, France
- Paris, France
- Vienna, Austria
- Zurich, Switzerland
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SENIOR MANAGEMENT
The following table sets forth certain information with respect to the
directors, executive officers and other senior management of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --------- ----------------------------------------------------------------------
<S> <C> <C>
Alfred West........................ 37 Chief Executive Officer and Chairman of the Board of Directors
Alan L. Levy....................... 39 President, Chief Operating Officer and Director
Kevin A. Alward.................... 32 President--North America
Phillip J. Storin.................. 48 Senior Vice President, Treasurer and Chief Financial Officer
Richard L. Shorten, Jr............. 31 Senior Vice President and General Counsel
Abe Grohman........................ 39 Chief Information Officer
Daran M. Churovich................. 44 Vice President of Global Network Engineering
Ines C. LeBow...................... 53 Vice President of Global Network Operations
Barry Toser........................ 40 Vice President of Global Carrier Services
Paolo Di Fraia..................... 38 Managing Director--Continental Europe
Michael Whittingham................ 47 Director of International Project Development
Mark St. J. Courtney............... 39 Director of European Commercial and Regulatory Affairs
Gary S. Bondi...................... 48 Director
Steven West........................ 49 Director
Stephen R. Munger.................. 41 Director
</TABLE>
ALFRED WEST, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF
DIRECTORS. Mr. West founded the Company in 1992. Prior to founding the Company,
Mr. West managed a family-owned textile trading company. Mr. West is the brother
of Steven West, a Director of the Company.
ALAN L. LEVY, PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR. Mr. Levy has
served as the Company's Chief Operating Officer since August 1996, as a Director
since January 1997 and as President since August 1997. Mr. Levy also served as
Chief Financial Officer from August 1996 to January 1998. From October 1993 to
July 1996, Mr. Levy served as Executive Vice President and Managing Director,
Europe, as well as Chief Financial Officer, of Viatel, where, among other
things, Mr. Levy was responsible for the implementation of Viatel's European
strategy. Mr. Levy is a Certified Public Accountant.
KEVIN A. ALWARD, PRESIDENT-NORTH AMERICA. Mr. Alward has served as the
Company's President-North America since February 1998. From October 1996 to
January 1998, Mr. Alward served as Director, President and Chief Operating
Officer of TotalTel USA Communications. From September 1994 to October 1996, Mr.
Alward served as President of TotalTel, Inc., the principal operating subsidiary
of TotalTel USA Communications. From 1992 to 1994, Mr. Alward served as Senior
Vice President at TotalTel USA Communications and assumed the additional
responsibilities of Chief Operating Officer in 1993, a position he held until
1998. Mr. Alward also served from 1991 to 1992 as Vice President of Marketing at
TotalTel USA Communications, and from 1990 to 1991 as Manager of Sales. Mr.
Alward served as a sales account executive at TotalTel USA Communications from
1988 to 1990.
PHILLIP J. STORIN, SENIOR VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL
OFFICER. Mr. Storin has served as a Senior Vice President and the Chief
Financial Officer of the Company since February 1998. Mr. Storin was elected
Treasurer of the Company on May 3, 1999. From May 1996 to January 1998, Mr.
Storin served as Senior Vice President and Chief Financial Officer of USLD
Communications Corp., and from October 1994 to May 1996 served as Vice President
and Corporate Controller. From July 1992 to October 1994, Mr. Storin served as
Vice President, Accounting at USLD Communications Corp. Before joining USLD
Communications Corp., Mr. Storin served for five years as Director of Accounting
for Dell
75
<PAGE>
Computer Corporation. Prior to such time, Mr. Storin served in various financial
management positions at Datapoint Computer Corporation and Westvaco Corporation.
Mr. Storin is a Certified Public Accountant and a Certified Management
Accountant.
RICHARD L. SHORTEN, JR., SENIOR VICE PRESIDENT AND GENERAL COUNSEL. Mr.
Shorten has served as a Senior Vice President and the General Counsel of the
Company since December 1997. From September 1992 to December 1997, Mr. Shorten
was an associate at the New York law firm Cravath, Swaine & Moore, where he
specialized in a variety of areas of corporate representation, including
securities, finance and mergers and acquisitions.
ABE GROHMAN, CHIEF INFORMATION OFFICER. Mr. Grohman has served as the
Company's Chief Information Officer since October 1997. 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.
DARAN M. CHUROVICH, VICE PRESIDENT OF GLOBAL NETWORK ENGINEERING. Mr.
Churovich has served as the Company's Vice President of Global Network
Engineering since 1998. From 1996 to 1998, Mr. Churovich served as Director of
Switch Engineering at Brooks Fiber Properties, Inc. and was later promoted to
Senior Director - Network Engineering. Following a merger with Worldcom in 1997,
Mr. Churovich assumed the position of Director - Network Technology and
Integration. Prior to 1996, Mr. Churovich maintained a variety of positions
within different divisions at Western Electric, Inc., a subsidiary of AT&T.
INES C. LEBOW, VICE PRESIDENT OF GLOBAL NETWORK OPERATIONS. Ms. LeBow has
served as Vice President, Global Network Operations since June 1998. From May
1997 to May 1998, Ms. LeBow served as Vice President, Network Implementation of
Brooks Fiber Properties. From May 1995 to May 1997, Ms. LeBow served as National
Director, Planning and Engineering of MFS. From May 1982 to May 1995, Ms. LeBow
served in various engineering and operations positions at Contel ASC and GTE.
BARRY TOSER, VICE PRESIDENT OF GLOBAL CARRIER SERVICES. Mr. Toser has
served as the Company's Vice President of Global Carrier Services since January
1999. Previously, Mr. Toser was the Vice President of Sales for the North
American business unit of Alphanet Telecom from October 1997 to December 1998.
Prior to this, he was Vice President of U.S. Sales for Teleglobe International,
an international telecommunications organization. While at Teleglobe, Mr. Toser
directed the sales and service responsibilities for all carrier, commercial, and
Regional Bell Operating Company accounts. Before joining Teleglobe, he was
involved in sales, marketing and customer retention activities for Cable and
Wireless, Inc. from 1987 through 1995. Previous to Cable and Wireless, Inc. Mr.
Toser spent six years with US Sprint in sales, sales management, and marketing
management.
PAOLO DI FRAIA, MANAGING DIRECTOR--CONTINENTAL EUROPE. Mr. Di Fraia has
served as the Company's Managing Director of Continental Europe since December
1998 and as European Finance Director since February 1998. Mr. Di Fraia served
as Viatel Inc.'s European Finance Director from January 1996 to February 1998.
From November 1994 to December 1995, Mr. Di Fraia served as European Controller
of the Company. From April 1989 to August 1994, Mr. Di Fraia was employed by
Philip Crosby Associates, S.A. as European Controller.
MICHAEL WHITTINGHAM, DIRECTOR OF INTERNATIONAL PROJECT DEVELOPMENT. Mr.
Whittingham has been with the Company since 1995. Since joining the Company, Mr.
Whittingham has been responsible for the build-out of the European Network.
Prior to joining the Company. Mr. Whittingham was employed by Worldexchange
Limited as a Technologies Director for Europe from 1994 to 1995. From 1992 to
1994, Mr. Whittingham served as a Vice President in charge of the European
Telecommunications Department at Marsh & McLennan.
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<PAGE>
MARK ST. J. COURTNEY, DIRECTOR OF EUROPEAN COMMERCIAL AND REGULATORY
AFFAIRS. Mr. Courtney has served as the Company's Director of European
Commercial and Regulatory Affairs since September 1997. Mr. Courtney served as
Viatel Inc.'s European General Counsel from August 1995 and as Secretary of
Viatel from March 1996 to September 1997. From December 1992 to July 1995, Mr.
Courtney served as European and International Counsel for Legent, Inc., a
software company.
GARY S. BONDI, DIRECTOR. Mr. Bondi has served as a Director of the Company
since 1993. Mr. Bondi served as Treasurer of the Company from 1993 to May 1999.
Mr. Bondi is the President of Bondi, Inc., a multinational trading firm
specializing in non-ferrous metals that he founded in 1987. Mr. Bondi is also
the Chairman and Chief Executive Officer of ECONergy Energy Company, Inc., a
competitive energy provider that he founded in 1996.
STEVEN WEST, DIRECTOR. Mr. West has served as a Director of the Company
since 1993. Mr. West is a founding partner of SO Accurate Group., a refiner and
reprocessor of precious metals in the New York/ New Jersey metropolitan area
that was founded in 1982. Steven West is the brother of Alfred West, the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company.
STEPHEN R. MUNGER, DIRECTOR. Mr. Munger has served as a Director of the
Company since November 1997. Mr. Munger is a Managing Director in the Mergers,
Acquisitions and Restructuring Department of Morgan Stanley & Co. Incorporated
("Morgan Stanley") and is Head of the Private Investment Department. He joined
Morgan Stanley in 1988 as a Vice President in the Corporate Finance Department.
He became a Principal in 1990 and a Managing Director in 1993. In 1994, Mr.
Munger was Administrative Director of the Corporate Finance Department.
EDWARD C. SCHMULTS, age 68, is expected to join the Board of Directors of
the Company upon the election of a director to fill a vacancy on the Board of
Directors. Mr. Schmults' appointment is contingent upon the consummation of the
offering. 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,
Deutsche Portfolio and Deutsche Funds, Inc.
BOARD COMPOSITION
The Company's Board of Directors is currently set at six directors and has
one vacancy, which the Company's Bylaws authorize the Board of Directors to
fill. The vacancy is expected to be filled by Edward C. Schmults, who will be an
outside director, following the consummation of this offering. The Company is
required to appoint an outside director to maintain its listing on the Nasdaq
National Market. A discussion on Mr. Schmults' biographical information is in
the preceding paragraph.
The Company's Bylaws provide that the authorized number of directors shall
be determined by the Board of Directors. Vacancies on the Board may be filled
only by a majority of the directors then in office, even if less than a quorum,
or by a sole remaining director.
Until the consummation of the offering, the holders of the Series A
Preferred Stock will have the right to vote as a separate class to elect one
director. Upon the consummation of the offering, all of the Series A Preferred
Stock will be converted into common stock and the former holders of the Series A
Preferred Stock will cease to have the right to separately elect a director.
Stephen Munger serves as the director designated by the Series A Preferred
Stockholders. Mr. Munger will continue as a member of the Board of Directors
following the consummation of the offering.
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<PAGE>
BOARD COMMITTEES
Following the completion of this offering, the Board of Directors will
designate a Compensation Committee and an Audit Committee. The Compensation
Committee will be comprised solely of independent directors and at least a
majority of the members of the Audit Committee will be independent directors.
The Compensation Committee will establish remuneration levels for certain
officers of the Company and perform such functions as may be delegated to it
under certain of the Company's benefit and executive compensation programs.
The Audit Committee will select and engage the independent public
accountants to audit the Company's annual financial statements. The Audit
Committee also will review and approve the planned scope of the annual audit.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company. Regular meetings of the
Board of Directors will be held quarterly.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the consummation of this offering, the Company did not have a
formal compensation committee. Decisions with respect to compensation matters
that otherwise would have been decided by a compensation committee were made by
the Board of Directors as a whole.
Alfred West, Alan L. Levy, Gary S. Bondi, Steven West and Stephen R. Munger
participated in deliberations concerning executive officer compensation during
1998. Alfred West and Alan L. Levy receive compensation as officers of the
Company. Stephen R. Munger is a Managing Director of Morgan Stanley and the
President of the General Partner of Princes Gate Investors II, L.P. ("Princes
Gate"), which is an affiliate of Morgan Stanley and which owns 140,000 shares of
Series A Preferred Stock, all of which will be converted into common stock upon
the consummation of this offering. Morgan Stanley was the placement agent in
connection with the 1997 Unit Offering, 1998 Debt Offering and is a managing
underwriter in connection with this offering. See "--Executive Compensation" and
"Underwriters."
COMPENSATION OF DIRECTORS
It is anticipated that Directors who are not associated with the Company
will be paid an annual Board membership fee of $10,000 and an attendance fee of
$750 for each meeting of the Board of Directors and for each meeting of a
committee of the Board of Directors. In addition, Directors who are not
associated with the Company will receive an initial option grant of 12,000
shares of common stock upon appointment to the Board of Directors and an annual
option grant to purchase 6,000 shares of common stock during their term as a
Director. All such grants will have an exercise price equal to the market price
at the time of grant and will vest over a six month period from the date of the
grant.
EXECUTIVE COMPENSATION
At December 31, 1998, the chief executive officer and four other most highly
compensated executive officers of the Company were Mr. Alfred West and Messrs.
Levy, Alward, Storin and Shorten. The following table summarizes all
compensation awarded to, earned by or paid to Mr. West and Messrs. Levy, Alward,
Storin and Shorten (Messrs. West, Levy, Alward, Storin and Shorten are referred
to herein as the "Named Executive Officers" for 1997 and 1998).
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) OPTIONS GRANTED COMPENSATION(1)
- ---------------------------------------------- --------- ---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Alfred West (3)............................... 1998 $ 323,784 $ 404,730 -- $ 4,725(4)
Chief Executive Officer 1997 323,784 295,306 -- $ 4,725(4)
Alan L. Levy (5).............................. 1998 250,000 250,000 -- --
President and Chief Operating Officer 1997 210,000 157,500 -- --
Kevin A. Alward (6)........................... 1998 198,000 110,000 519,458 --
President--North America
Phillip J. Storin (7)......................... 1998 165,000 82,110 103,892 --
Senior Vice President and Chief Financial
Officer
Richard L. Shorten, Jr. (8)................... 1998 165,000 41,250 25,973 --
Senior Vice President and General Counsel 1997 6,875 -- 51,946 --
</TABLE>
- ------------------------
(1) Does not include the value of certain personal benefits. The estimated
value of such personal benefits for each Named Executive Officer did not
exceed the lesser of $50,000 or 10% of the total annual salary and bonus
paid to the Named Executive Officer in 1998.
(2) Bonus amounts apply to the year during which such bonuses were earned and
are recorded on an accrual basis instead of a cash basis.
(3) See "--Employment Agreements and Arrangements" for a description of Mr.
West's Employment Agreement.
(4) Consists of compensation in respect of life insurance, of which Mr. West's
designee is the beneficiary, paid by the Company.
(5) See "--Employment Agreements and Arrangements" for a description of Mr.
Levy's Employment Agreement.
(6) Mr. Alward commenced employment with the Company during February 1998.
(7) Mr. Storin commenced employment with the Company during February 1998.
(8) Mr. Shorten commenced employment with the Company on December 15, 1997.
1996 FLEXIBLE INCENTIVE PLAN
The Company has adopted the 1996 Flexible Incentive Plan (the "Incentive
Plan"), which provides for the grant of incentive stock options ("ISOs") to
acquire shares of common stock to employees of the Company or any of its
subsidiaries, the grant of non-qualified stock options ("NQSOs") to acquire
shares of common stock, the sale or grant of Restricted Shares and Unrestricted
Shares (each, as defined in the Incentive Plan) and the grant of stock
appreciation rights ("SARs") to employees, directors and consultants. The
Incentive Plan also provides for Tax Offset Payments (as defined in the
Incentive Plan) to employees.
The Incentive Plan provides that, in the event of a merger, consolidation,
combination, exchange of shares, separation, spin-off, reorganization,
liquidation or other similar transaction, the Board of Directors of the Company
may, in its sole discretion, accelerate the lapse of Restricted Periods (as
defined in the Incentive Plan) and other vesting periods and waiting periods and
extend exercise periods applicable to any awards made under the Incentive Plan,
except that, upon a Change of Control (as defined in the Incentive Plan), if an
employee has been employed by the Company for the twelve month period preceding
the Change of Control, vesting of any options held by such employee
automatically will accelerate.
Amendments to the 1996 Incentive Plan have been adopted to increase the
number of authorized shares in respect of which options can be granted to
5,250,000 shares of voting common stock and 250,000 shares of non-voting stock.
Holders of restricted voting stock have the right to receive cash dividends with
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<PAGE>
respect to such shares. Upon the consummation of the offering, holders of
Restricted Shares may elect, for a nominal exercise price, to convert Restricted
Shares held by them into an equivalent number of shares of voting stock to be
issued that shall have the same terms and conditions as the Restricted Shares.
The Company has adopted the 1999 Flexible Incentive Plan (the "1999
Incentive Plan"). The terms of the 1999 Incentive Plan are substantially similar
to the terms of the Incentive Plan (except that under the 1999 Incentive Plan
options will automatically accelerate upon a change of control, including
unvested options held by employees that have been employed by the Company for
less than twelve months prior to the change of control) and provide for the
award of up to a maximum of 6.0 million shares of common stock. The 1999
Incentive Plan is administered either by the Board of Directors of the Company
or a committee thereof.
As of April 1, 1999, the Company had issued stock options to purchase
5,111,060 shares of common stock under the Incentive Plan, 2,610,554 of which
were exercisable as of such date, and 151,474 Restricted Shares, of which 87,020
were vested.
The following table sets forth grants of options to purchase shares of
common stock of the Company made during 1998 to each Named Executive Officer.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS APPRECIATION FOR
NUMBER OF GRANTED TO OPTION
SECURITIES EMPLOYEES EXERCISE TERM
UNDERLYING IN FISCAL YEAR PRICE PER EXPIRATION ----------------------
NAME OPTIONS 1998 SHARE($) DATE 5%($) 10%($)
- ------------------------------------------- ----------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Alfred West................................ -- -- -- -- -- --
Alan L. Levy............................... -- -- -- -- -- --
Kevin A. Alward............................ 519,458 33.3% 7.22 2/2/2008 1,036,056 2,289,413
Phillip J. Storin.......................... 103,892 6.66% 4.81 2/2/2008 78,813 165,500
Richard L. Shorten, Jr..................... 25,973 1.67% 7.22 7/1/2008 29,555 62,063
</TABLE>
The following table sets forth options exercised during 1998 and the fiscal
year-end value of unexercised options for each Named Executive Officer.
OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (1) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- --------------- ----------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alfred West............................. -- -- -- -- -- --
Alan L. Levy............................ -- -- 1,617,384 460,448 6,616,400 1,883,600
Kevin A. Alward......................... -- -- -- 519,458 -- --
Phillip J. Storin....................... -- -- -- 103,892 -- 175,000
Richard L. Shorten, Jr.................. -- -- 17,316 60,603 29,167 58,333
</TABLE>
- ------------------------
(1) No options were exercised during 1998.
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<PAGE>
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
The Company has entered into an employment agreement with Alfred West (the
"West Employment Agreement"), pursuant to which Mr. West serves as Chief
Executive Officer and Chairman of the Board of Directors of the Company. The
term of the West Employment Agreement extends until the fifth anniversary of the
consummation of this offering, subject to any earlier termination in accordance
with the terms thereof. Pursuant to the West Employment Agreement, Mr. West is
entitled to receive an annual base salary of $500,000 during each year of the
term thereof (the "West Base Salary"). Mr. West is entitled to receive an annual
bonus of between 50% and 100% of his annual base salary ("West Target Bonus"),
subject to attainment of certain performance goals as determined by the Board of
Directors of the Company or the compensation committee thereof. If there is no
Change of Control and his termination is (x) without cause, (y) voluntary and
for good reason on Mr. West's behalf or (z) due to the Company's failure to
renegotiate the West Employment Agreement at the end of its term, Mr. West is
entitled to receive the greater of (i) West Base Salary payable for the
remainder of the term and (ii) two years' Base Salary and two years' West Target
Bonus based on amounts previously earned, either of which shall be paid together
with and related benefits ("West Severance Package") for the greater of the
remaining term of the West Employment Agreement or two years. If there is a
Change of Control, and within two years of such event Mr. West's termination is
(i) without cause or (ii) voluntary and for good reason on Mr. West's behalf,
then Mr. West will be entitled to receive the West Severance Package calculated
based on a three-year term, as well as reimbursement for any tax liability
pursuant to the Code.
The Company has entered into an employment agreement with Alan L. Levy (the
"Levy Employment Agreement"), pursuant to which Mr. Levy serves as President and
Chief Operating Officer of the Company. The term of the Levy Employment
Agreement extends until the third anniversary of completion of the offering,
subject to any earlier termination in accordance with the terms thereof.
Pursuant to the Levy Employment Agreement, Mr. Levy is entitled to receive an
annual base salary of $325,000 during each year of the term thereof ("Levy Base
Salary"). In addition, Mr. Levy is entitled to receive incentive compensation an
annual bonus of between 50% and 100% of his annual base salary, subject to
attainment of certain performance goals as determined by the Board of Directors
of the Company or the compensation committee thereof ("Levy Target Bonus"). Mr.
Levy also is entitled to receive options to purchase 1,038,916 shares of common
stock (as adjusted for the stock split) vesting in equal amounts of 259,729
shares of common stock (as adjusted for the stock split) on the second through
fifth anniversaries of the offering. The exercise price of options that vest on
the second and third anniversaries of the offering will be the offering price
per share. The exercise price of options that vest on the fourth and fifth
anniversaries of the offering will be 1.5 and 2.0 times the offering price per
share, respectively. In the event of a Change in Control (as defined in the
Incentive Plan), unvested options will vest immediately, while options whose
exercise price is greater than the Company's common stock price at the time of
the Change in Control will automatically convert into options to acquire common
stock of the acquiring entity at an equivalent exercise price. Mr. Levy also is
entitled to receive severance benefits under certain circumstances. If there is
no Change of Control and his termination is (x) without cause, (y) voluntary and
for good reason on Mr. Levy's behalf or (z) due to the Company's failure to
renegotiate the Levy Employment Agreement at the end of its term, Mr. Levy is
entitled to receive the greater of (i) Levy Base Salary payable for the
remainder of the term and (ii) two years' Base Salary and two years' Levy Target
Bonus based on amounts previously earned, either of which shall be paid together
with related benefits ("Levy Severance Package"). If there is a Change of
Control, and within two years of such event Mr. Levy's termination is (i)
without cause or (ii) voluntary and for good reason on Mr. Levy's behalf, then
Mr. Levy is entitled to receive a Levy Severance Package calculated based on a
three-year period and an additional amount determined according to the Levy
Target Bonus, as well as reimbursement for any tax liability pursuant to the
Code.
Destia has entered into employment agreements with Phillip J. Storin (the
"Storin Employment Agreement"), Kevin A. Alward (the "Alward Employment
Agreement") and Richard L. Shorten, Jr. (the "Shorten Employment Agreement").
The term of the Storin Employment Agreement and the Alward Agreement each
extends until February 2, 2001, and the term of the Shorten Employment Agreement
extends until January 1, 2001, in each instance subject to earlier termination
in accordance with the terms thereof. Pursuant to their employment agreements,
Messrs. Storin, Shorten and Alward are entitled to
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<PAGE>
receive an annual base salary of $180,000, $180,000 and $216,000, respectively,
during each year of the term thereof. In each case, increases in compensation
shall be at the discretion of the Board of Directors. In addition, Messrs.
Storin, Shorten and Alward are each eligible to participate in Destia's
incentive compensation programs and to receive such annual bonus or other
compensation, including restricted stock or incentive stock options, as may be
determined by Destia's Board of Directors. If either of Messrs. Storin's,
Shorten's or Alward's employment is terminated prior to January 1, 2001 by
Destia without cause, they will be entitled to a severance payment equal to one
year's base salary.
As part of the acquisition of VoiceNet on February 12, 1998, the Company
entered into employment contracts with the sellers of VoiceNet providing for
annual base salary of $180,000 each. In total, the sellers of VoiceNet also were
granted 311,675 options at an exercise price of $4.81 per share under the
Incentive Plan during 1998.
LIMITATIONS ON OFFICERS' AND DIRECTORS' LIABILITY
The Company's Certificate of Incorporation indemnifies its officers and
directors to the fullest extent permitted by the DGCL. Under Section 145 of the
DGCL, a corporation may indemnify its directors, officers, employees and agents
and its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended. The Certificate of Incorporation
and the DGCL also prohibit limitations on officer or director liability for acts
or omissions which resulted in a violation of a statute prohibiting certain
dividend declarations, certain payments to stockholders after dissolution and
particular types of loans. The effect of these provisions is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against an officer
or director for breach of fiduciary duty as an officer or director (including
breaches resulting from grossly negligent behavior), except in the situations
described above.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors or officers of the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
RELATED PARTY LOANS
The Company had outstanding loans of $308,000 due to Mrs. Rose West, the
mother of Messrs. Alfred West and Steven West. The Company has repaid these
loans in full.
Alfred West has borrowed $232,441 from the Company pursuant to unsecured,
interest bearing notes, repayable upon demand.
MINORITY INTEREST IN THE ECONOPHONE SERVICES GMBH
Sonja Gross, the sister of Mr. Alfred West, previously owned a 28% interest
in the Company's Swiss subsidiary, Econophone Services GmbH. On March 30, 1999,
the Company acquired Ms. Gross' interest in Econophone Services GmbH in exchange
for 103,891 shares of Restricted Voting Common Stock.
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CERTAIN INDEBTEDNESS
THE 1998 DEBT OFFERING
In connection with the 1998 Debt Offering, the Company issued $300.0 million
of 11% Senior Discount Notes due 2008 pursuant to the 1998 Indenture among the
Company and The Bank of New York, as trustee.
PRINCIPAL, MATURITY AND INTEREST
The 1998 Notes are unsecured unsubordinated obligations of the Company, and
mature on February 15, 2008. Interest on the 1998 Notes accrues at the rate of
11% per annum, payable semi-annually on February 15 and August 15 of each year.
OPTIONAL REDEMPTION
The 1998 Notes will be redeemable, at the Company's option, on or after
February 15, 2003 at the following redemption prices (expressed in percentages
of principal amount), plus accrued and unpaid interest, if any, to the
redemption date, if redeemed during the 12-month period commencing February 15
of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------- ----------------
<S> <C>
2003.......................................... 105.500%
2004.......................................... 103.667%
2005.......................................... 101.833%
2006 and thereafter........................... 100.000%
</TABLE>
In addition, at any time prior to February 15, 2001, the Company may redeem
up to 35% of the aggregate principal amount of the 1998 Notes with the net
proceeds of one or more sales of common equity at a redemption price of 111.0%,
plus accrued and unpaid interest, if any, to the redemption date; PROVIDED that
at least $195.0 million aggregate principal amount of 1998 Notes remains
outstanding after each such redemption.
RANKING
The indebtedness evidenced by the 1998 Notes ranks PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of the Company
(including the 1997 Notes) and senior in right of payment to all existing and
future subordinated indebtedness of the Company.
COVENANTS
The 1998 Indenture restricts, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, engage in any sale and lease-back transaction, sell
assets, enter into certain transactions with affiliates or engage in merger
transactions. There are significant "carve-outs" and exceptions to these
covenants. In addition, the 1998 Indenture permits the Company's subsidiaries to
be deemed unrestricted subsidiaries under certain circumstances and thus not
subject to the restrictions of the 1998 Indenture.
REPURCHASE OF 1998 NOTES UPON A CHANGE IN CONTROL
If there is a Change in Control (as defined in the 1998 Indenture) the
Company must offer to purchase for cash all 1998 Notes for 101% of the
outstanding principal amount, plus accrued interest.
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<PAGE>
EVENTS OF DEFAULT
The 1998 Indenture contains standard events of default, including, but not
limited to, (i) defaults in the payment of principal, premium or interest, (ii)
defaults in the compliance with covenants contained in the 1998 Indenture, (iii)
cross defaults on more than $5.0 million of other indebtedness, (iv) failure to
pay more than $5.0 million of judgments that have not been stayed by appeal or
otherwise and (v) the bankruptcy of the Company or certain of its subsidiaries.
THE 1997 UNIT OFFERING
In connection with the 1997 Unit Offering, the Company issued $155.0 million
of 13 1/2% Senior Notes due 2007 pursuant to an Indenture among the Company and
The Bank of New York, as trustee. The terms of the 1997 Notes are substantially
similar to those of the 1998 Notes. See "--The 1998 Debt Offering."
PRINCIPAL, MATURITY AND INTEREST
The 1997 Notes are unsecured unsubordinated obligations of the Company, and
mature on July 15, 2007. Interest on the 1997 Notes accrues at the rate of
13 1/2% per annum payable on January 15 and July 15 of each year. The Company
purchased certain securities which were pledged as security for the payment of
interest on the principal of the 1997 Notes. Proceeds from these securities are
being used by the Company to make interest payments on the 1997 Notes through
July 15, 2000.
OPTIONAL REDEMPTION
The 1997 Notes will be redeemable, at the Company's option, on or after July
15, 2002, at the following redemption prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, if redeemed during
the 12-month period commencing July 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------- ----------------
<S> <C>
2002.......................................... 106.750%
2003.......................................... 103.375%
2004 and thereafter........................... 100.000%
</TABLE>
In addition, at any time prior to July 15, 2000, the Company may redeem up
to 35% of the aggregate principal amount of the 1997 Notes with the net proceeds
of one or more sales of common equity at a redemption price of 113.50%, plus
accrued and unpaid interest, if any, to the redemption date; PROVIDED that at
least $100.0 million aggregate principal amount of 1997 Notes remains
outstanding after each such redemption.
RANKING
The indebtedness evidenced by the 1997 Notes ranks PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of the Company
(including the 1998 Notes) and senior in right of payment to all existing and
future subordinated indebtedness of the Company.
COVENANTS
The 1997 Indenture restricts, on substantially the same terms as the 1998
Indenture, among other things, the Company's ability to incur additional
indebtedness, pay dividends or make certain other restricted payments, incur
liens, engage in any sale and lease-back transaction, sell assets, enter into
certain transactions with affiliates or engage in merger transactions. There are
significant "carve-outs" and exceptions to these covenants. In addition, the
1997 Indenture permits, under the same circumstances as the 1998 Indenture, the
Company's subsidiaries to be deemed unrestricted subsidiaries and thus not
subject to the restrictions of the 1997 Indenture.
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REPURCHASE OF 1997 NOTES UPON A CHANGE IN CONTROL
If there is a Change in Control (as defined in the 1997 Indenture), the
Company must offer to purchase for cash all 1997 Notes for 101% of the
outstanding principal amount, plus accrued interest.
EVENTS OF DEFAULT
The 1997 Indenture contains standard events of default, including, but not
limited to, (i) defaults in the payment of principal, premium or interest, (ii)
defaults in the compliance with covenants contained in the 1997 Indenture, (iii)
cross defaults on more than $5.0 million of other indebtedness, (iv) failure to
pay more than $5.0 million of judgments that have not been stayed by appeal or
otherwise and (v) the bankruptcy of the Company or certain of its subsidiaries.
The events of default contained in the 1997 Indenture are the same as those
contained in the 1998 Indenture.
NTFC VENDOR FINANCING
On May 28, 1996, the Company entered into a credit facility with NTFC, which
has been amended and increased as to amount on several occasions. On January 28,
1998, the NTFC credit facility was amended and restated in its entirety in order
to effect various amendments and increase the amount of NTFC's commitment
thereunder (such credit facility, as amended and restated, is referred to herein
as the "NTFC Facility"). The NTFC Facility provides for borrowings by the
Company and its subsidiaries to fund certain equipment acquisition costs and
related expenses. The NTFC Facility provides for an aggregate commitment of NTFC
of $24.0 million pursuant to tranches of $2.0 million, $3.0 million and $19.0
million. Loans borrowed under each tranche of the NTFC Facility amortize in
equal monthly installments over a five year period ending on July 1, 2001, April
1, 2002 and January 1, 2003, respectively. As of March 31, 1999, the aggregate
amount outstanding under all tranches of the NTFC Facility was $19.8 million.
Loans under the NTFC Facility accrue interest at an interest rate equal to the
90-day commercial paper rate plus 395 basis points, (an interest rate of 8.90%
as of April 1, 1999), subject to certain quarterly adjustments depending upon
financial performance. All of the equipment purchased with the proceeds of the
NTFC Facility has been pledged to NTFC.
The NTFC Facility permits the incurrence of indebtedness (including
contingent obligations), the creation of liens and transactions with affiliates
on substantially the same terms as the 1998 Indenture.
The NTFC Agreement prohibits the Company from making any distribution or any
redemption of capital stock, directly or indirectly, other than nominal payments
in lieu of the issuance of fractional shares upon an exercise of options,
warrants or similar agreements or conversion rights and other than any
repurchase of Warrants in connection with a repurchase offer by the Company.
Except in connection with certain transactions with affiliates not involving a
change of control, the Company may not enter into or become the subject of, any
merger, acquisition of consolidation, or liquidate, wind-up or dissolve itself
(or suffer any liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of all or any substantial part of its business or assets.
In addition, the Company may not enter into any new business or make any
material change in any of its business objectives, purpose and operations from
those related to the telecommunications industry.
Pursuant to the NTFC Agreement, the Company may not cease to employ Alfred
West (other than by reason of his death or disability) or suffer to exist any
material competition by any of Alfred West, Steven West or Gary Bondi, with the
business now or hereafter conducted by the Company.
The NTFC Facility requires the Company to do the following: (i) it must
maintain a Debt Service Coverage Ratio (as defined therein) for each quarter
through December 31, 1999 of not less than 1.10 to 1.00 and for each fiscal
quarter thereafter of not less than 1.25 to 1.00; (ii) it must maintain
specified minimum cash balances (certain related business investments and
acquisitions qualify as cash for the foregoing purposes); (iii) it must have
EBITDA (as defined in the NTFC Facility) of not less than negative
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<PAGE>
$25.0 million for the fiscal year ending December 31, 1999, negative $5.0
million for the fiscal year ending December 31, 2000, $10.0 million for the
fiscal year ending December 31, 2001, and $10.0 million for the fiscal year
ending December 31, 2002 and (iv) its Minimum Projected Revenue (as defined in
the NTFC Facility), measured quarterly on a graduated basis, must be more than:
$256.1 million for the fiscal year ending December 31, 1999; $367.2 million for
the fiscal year ending December 31, 2000; $498.0 million for the fiscal year
ending December 31, 2001; $640.0 million for the fiscal year ending December 31,
2002; $729.6 million for the fiscal year ending December 31, 2003; and $802.6
million for the fiscal year ending December 31, 2004.
The Debt Service Coverage Ratio is defined to include cash on hand. The
Company may cure a default of its Minimum Projected Revenue requirements if its
Debt Service Coverage Ratio is more than 1.10 : 1.0. However, with respect to
such Minimum Revenue Projection requirements, the Debt Service Coverage Ratio
does not include cash on hand. If neither the quarterly Minimum Revenue
Projections nor Debt Service Coverage Ratio (which does not include cash on
hand) is met during any fiscal quarter, then the quarterly Minimum Revenue
Projections will be deferred by one fiscal quarter for all future fiscal
quarters during the remaining term of the NTFC Facility. If, in the fiscal
quarter after any deferral, the Company does not meet such deferred quarterly
Minimum Revenue Projections or the Debt Service Coverage Ratio of at least
1.10:1.0, it shall be in default of such Minimum Projected Revenue requirements.
Borrowings from NTFC are secured by the equipment purchased therewith and
general intangibles and intangible property that is associated with such
equipment.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the common stock as of April 1, 1999, and as adjusted to
reflect the sale by the Company of the shares of common stock offered hereby, by
(i) each person known by the Company to beneficially own more than 5% of the
Company's voting securities, (ii) each of the Company's directors, (iii) each of
the Current Named Executive Officers and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1)(2) AFTER THE OFFERING(1)
----------------------- -------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT(3)
- ------------------------------------------------------- ------------ --------- ------------ -----------
<S> <C> <C> <C> <C>
Alfred West............................................ 11,428,076(4) 46.7% 11,428,076(4) 36.9%
Steven West............................................ 4,519,285(5) 18.5% 4,519,285(5) 14.6%
Gary Bondi............................................. 4,473,832(6) 18.3% 4,473,832(6) 14.4%
PG Investors II, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway New York, New York 10036............... 3,553,821 14.5% 3,553,821 11.5%
Kevin A. Alward........................................ 415,566 (8) 1.7% 415,566 (8) 1.3%
Alan L. Levy........................................... 1,906,156(9) 7.2% 1,906,156(9) 5.8%
Stephen R. Munger(12).................................. -- -- -- --
Richard L. Shorten, Jr................................. 17,316 10) * 17,316 10) *
Phillip J. Storin...................................... 34,630 11) * 34,630 11) *
------------ --------- ------------ -----------
All Directors and Executive Officers as a Group (8
persons)............................................. 22,794,862 85.9% 22,794,862 69.0%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except where otherwise indicated, the Company believes that all persons
listed in the table, based on information provided by such persons, have
sole voting and dispositive power over the securities beneficially owned by
them, subject to community property laws, where applicable. For purposes of
this table, a person is deemed to be the "beneficial owner" of any shares
that such person has the right to acquire within 60 days from April 1, 1999.
Shares which a person does not have the right to acquire within 60 days from
April 1, 1999 are not reflected in this table. For purposes of computing the
percentage of outstanding shares held by each person named above on a given
date, any security that such person has the right to acquire within 60 days
is deemed to be outstanding, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
where otherwise indicated, the address of each person listed in the table is
c/o Destia Communications, Inc., 95 Rte. 17, Paramus, NJ 07652. Attn:
General Counsel.
(2) Determined on an as-converted basis, assuming the conversion of all issued
and outstanding shares of Series A Preferred Stock into common stock. Each
share of Series A Preferred Stock is convertible into 25.38 shares of common
stock, or a total of 3,553,821 shares of common stock. All of the shares of
Series A Preferred Stock will be converted into common stock upon
consummation of this offering.
(3) Assumes that the underwriters' overallotment option is not exercised.
(4) Includes 893,468 shares held by AT Econ Ltd. Partnership and 88,308 held by
AT Econ Ltd. Partnership No. 2.
(5) Includes 893,468 shares held by SS Econ Ltd. Partnership and 108,226 shares
held by SS Econ Ltd. Partnership No. 2. Also includes shares held jointly by
spouse.
(6) Includes 893,468 shares held by GS Econ Ltd. Partnership.
(7) Includes 212,978 shares held by Kevin Alward, 20,778 shares held by Alward
Investment Associates LLC and 77,919 shares held by Kevin and Belinda Alward
Grantor Retained Annuity Trust. The remainder includes shares issuable upon
the exercise of options.
(8) Does not include options to purchase 415,566 shares of Common Stock under
the Incentive Plan which are not exercisable within 60 days after April 1,
1999.
(9) Does not include options to purchase 171,676 shares of Common Stock under
the Incentive Plan which are not exercisable within 60 days after April 1,
1999.
(10) Does not include options to purchase 86,576 shares of Common Stock under
the Incentive Plan which are not exercisable within 60 days after April 1,
1999.
(11) Does not include options to purchase 69,261 shares of Common Stock under
the Incentive Plan which are not exercisable within 60 days after April 1,
1999.
(12) Mr. Munger is the President of PG Investors II, Inc. and disclaims
beneficial ownership of the shares controlled by PG Investors II, Inc.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF THE COMPANY'S CAPITAL STOCK
DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY
BY, THE CERTIFICATE OF INCORPORATION AND BYLAWS AND BY THE PROVISIONS OF
APPLICABLE LAW. COPIES OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART.
GENERAL
On the closing of this offering, the authorized capital stock of the Company
will consist of 72,000,000 shares of voting common stock, 500,000 shares of
Non-Voting Common Stock and 2,500,000 shares of preferred stock without
designation. Simultaneously with the closing of this offering, all of the
outstanding shares of Series A Preferred Stock will be converted into common
stock. The Company presently does not intend to issue additional shares of
preferred stock.
COMMON STOCK
Upon the consummation of this offering, there will be 30,832,142 shares of
voting common stock (referred to herein as "common stock" or "voting common
stock") outstanding (assuming no exercise of outstanding options or warrants).
In addition, there will be 151,474 shares of Non-Voting Common Stock outstanding
and 103,891 shares of Restricted Voting Common Stock outstanding. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock that will be issued on completion of this offering will
be fully paid and nonassessable.
The holders of voting common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. The holders of Non-Voting Common
Stock do not have voting rights, except to the extent required by law. Except as
indicated below, the other terms of the voting common stock and Non-Voting
Common Stock are the same.
Subject to preferences that may be applicable to any outstanding series of
preferred stock, the holders of voting common stock and Non-Voting Common Stock
are entitled to receive ratably any dividends that may be declared from time to
time by the Board of Directors. The Company does not intend to, and is currently
not permitted to, pay any dividends. See "Dividend Policy." In the event of the
liquidation, dissolution or winding-up of the Company, the holders of voting
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The voting common stock and Non-Voting Common Stock have no
preemptive or conversion rights or other subscription rights, except that the
Non-Voting Common Stock is convertible into voting common stock upon the
consummation of the offering. There are no redemption or sinking fund provisions
applicable to the common stock or Non-Voting Common Stock.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 250,000 shares of
preferred stock in one or more series and to fix rights, preferences, privileges
and restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of shares of preferred stock (and the Board's ability to do so) may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW THAT MAY
HAVE AN ANTI-TAKEOVER EFFECT
CERTIFICATE OF INCORPORATION AND BYLAWS. Certain provisions in the
Company's Amended and Restated Certificate of Incorporation and Bylaws
summarized below may be deemed to have an anti-takeover effect and may delay,
deter or prevent a tender offer or takeover attempt that a stockholder might
consider to be in its best interests, including attempts that might result in a
premium being paid over the market price for the shares held by stockholders.
The Company's Amended and Restated Certificate of Incorporation provides
that, subject to any rights of holders of preferred stock to elect additional
directors under specified circumstances, the number of directors of the Company
will be fixed as specified in the Bylaws. The Bylaws will provide that, subject
to any rights of holders of preferred stock to elect additional directors under
specified circumstances, the number of directors will be fixed at six unless the
Board of Directors, by vote of a majority of the directors, votes that such
number shall be increased or decreased. In addition, the Amended and Restated
Certificate of Incorporation and Bylaws provide that, subject to any rights of
holders of preferred stock, and unless the Company's Board of Directors
otherwise determines, any vacancies may be filled by the affirmative vote of a
majority of the remaining members of the Board, though less than a quorum, or by
a sole remaining director, and except as otherwise provided by law, any such
vacancy may not be filled by the stockholders.
The Company's Bylaws provide for an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors, of
candidates for election as directors as well as for other stockholder proposals
to be considered at annual meetings of stockholders. In general, notice of
intent to nominate a director or raise matters at such meetings will have to be
received in writing by the Company at its principal executive offices not less
than 120 days prior to the first anniversary of the previous year's annual
meeting of stockholders, and must contain certain information concerning the
person to be nominated or the matters to be brought before the meeting and
concerning the stockholder submitting the proposal. The Company's Amended and
Restated Certificate of Incorporation and Bylaws also provide that special
meetings of stockholders may be called only by certain specified officers of the
Company or by any such officer at the request in writing of the Board of
Directors; special meetings of stockholders cannot be called by stockholders. In
addition, the Company's Amended and Restated Certificate of Incorporation will
provide that any action required or permitted to be taken by stockholders may
not be effected by written consent unless unanimous.
The foregoing provisions of the Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors--Anti-Takeover Provisions."
DELAWARE TAKEOVER STATUTE. The Company is subject to Section 203 of the
DGCL, which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any "business combination" (as
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defined below) with any "interested stockholder" (as defined below) for a period
of three years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (ii) on
consummation of the transaction that resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 31,087,507 shares of
common stock outstanding. Of this amount, the shares offered hereby will be
available for immediate sale in the public market as of the date of this
prospectus. An additional 6,130,518 shares of common stock are issuable upon the
exercise of outstanding options under the Company's 1996 Flexible Incentive Plan
and 1999 Flexible Incentive Plan at a weighted average exercise price of $5.16.
Of this amount, options for 2,610,554 shares are presently exercisable and
3,519,964 are subject to the satisfaction of vesting criteria. In addition,
1,315,148 shares of common stock are issuable upon the exercise of the Warrants
at $0.01 per share. The Warrants expire on June 30, 2007.
In addition, after the offering, the Company believes that it will have
greater flexibility in consummating acquisitions and/or strategic alliances and
may use shares of its common stock as an alternative form of consideration in
such transactions.
The Company, its directors and executive officers, have agreed pursuant to
the Underwriting Agreement and other agreements that they will not sell any
common stock without the prior consent of Morgan Stanley for a period of 180
days from the date of this prospectus (the "180-day Lockup Period").
Approximately 20,732,868 additional shares will be available for sale following
the expiration of the 180-day Lockup Period.
The outstanding shares of common stock not issued in connection with this
offering are available for sale in the public market, subject to the 180-day
Lockup Period and compliance with the requirements of Rule 144. In general,
under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of common stock or (ii) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the foregoing volume limitations.
Persons deemed to be affiliates must always sell pursuant to the volume
limitations under Rule 144, even after the applicable holding periods have been
satisfied. The Company is unable to estimate the number of shares that will be
sold under Rule 144, since this will depend on the market price for the common
stock of the Company, the personal circumstances of the sellers and other
factors.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of common stock reserved for issuance under
the Company's 1996 Flexible Incentive Plan 1999 Flexible Incentive Plan and
Employee Stock Purchase Plan, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act.
The Company intends to register these shares on Form S-8, along with options
that have not yet been issued under the Company's Incentive Plan as of the date
of this prospectus but may in the future be issued under the Incentive Plan.
The holders of the Series A Preferred Stock are entitled to certain
registration rights with respect to the shares of common stock issuable upon the
conversion of the Series A Preferred Stock (the "Registrable Shares"). If the
Company proposes to register any of its securities under the Securities Act, the
holders of the Registrable Shares will be entitled to notice thereof, and
subject to certain restrictions, to include their Registrable Shares in such
registration. In addition, immediately following the consummation of this
offering, holders of at least 25% of the outstanding Registrable Shares may make
up to two demands of the Company to file a registration statement under the
Securities Act, subject to certain conditions and limitations and provided that
(i) in the discretion of the lead underwriter of the immediately prior offering,
no demand may be made within 180 days after the effective date of a prior demand
registration and (ii) no two such demands may be made within any twelve month
period.
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If the Company proposes to file a Registration Statement with the Commission
with respect to an offering of any shares of common stock for cash (other than
an offering registered solely on Form S-4 or S-8 or any successor form thereto)
and other than the initial public offering of shares of common stock if no
shareholder of the Company participates therein, then all the holders of the
Warrants shall have the right within 20 days after delivery of notice by the
Company, subject to certain conditions and limitations, to request in writing
that the Company include all or a portion of the shares of common stock issued
or issuable upon exercise of such holder's Warrants in such registration
statement, to the extent that such shares of common stock are subject to
restrictions on transfer.
Sales of a substantial number of shares of common stock after the offering
(or the perception that such sales might occur) could adversely affect the
market price of the common stock and could impair our ability to raise capital
through the sale of additional equity securities. See "Risk Factors--Potential
Effect of Shares Becoming Available for Sale."
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CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any person or entity
that is, for U.S. federal income tax purposes, a foreign corporation, a
non-resident alien individual, a foreign partnership or a foreign estate or
trust. This discussion does not address all aspects of U.S. federal income and
estate taxes that may be relevant to such Non-U.S. Holders in light of their
particular circumstances (such as certain tax consequences applicable to
pass-through entities) and does not deal with foreign, state and local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder ("Treasury Regulations") and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a non-resident alien) with respect to any current calendar
year if (i) the individual was present in the United States on at least 31 days
during such year and (ii) the sum of the number of days on which such individual
was present in the U.S. during the current year, one-third of the number of such
days during the first preceding year, and one-sixth of the number of days during
the second preceding year, equals or exceeds 183 days. Resident aliens are
subject to U.S. federal income tax as if they were U.S. citizens.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE U.S. TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY TAX CONSEQUENCES
THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION.
DIVIDENDS
The Company does not intend to, and currently is not permitted to, pay any
dividends. See "Dividend Policy." In the event that dividends are paid on shares
of common stock, however, dividends paid to a Non-U.S. Holder of common stock
generally will be subject to withholding of U.S. federal income tax at a 30%
rate or at such lower rate as may be specified by an applicable income tax
treaty. However, dividends that are effectively connected with the conduct of a
trade or business by the Non-U.S. Holder within the United States and, where a
tax treaty applies, are attributable to a U.S. permanent establishment of the
Non-U.S. Holder, are not subject to the withholding tax, but instead are subject
to U.S. federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends received
by a foreign corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a rate of 30% (or lower applicable treaty
rate).
In the event that the Company is permitted to and decides to pay dividends
at some future date, Non-U.S. Holders generally will be required to (i) in the
case of dividends effectively connected with the conduct of a U.S. trade or
business by the Non-U.S. Holder, supply an Internal Revenue Service ("IRS") form
to the withholding agent on which such holder provides its U.S. tax
identification number and (ii) otherwise, comply with IRS certification
procedures to obtain the benefits of a reduced rate of U.S. withholding tax
under an applicable income treaty.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of common stock
unless (i) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the United States and, where a tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. Holder, (ii) in
the case of a Non-U.S. Holder who is an individual and holds the common stock as
a capital asset, such holder is present in the United States for 183 or more
days in the taxable year of the sale or other disposition and certain other
conditions are met, (iii) the Non-U.S. Holder is an individual who is subject to
tax pursuant to certain
94
<PAGE>
provisions of the Code applicable to U.S. expatriates or (iv) the Company is or
has been a "U.S. real property holding corporation" (a "USRPHC") for U.S.
federal income tax purposes and, in the event that the common stock is
considered "regularly traded," the Non-U.S. Holder held directly or indirectly
at any time during the five-year period ending on the date of disposition more
than five percent of the common stock. The Company believes it is not and does
not anticipate becoming a USRPHC for U.S. federal income tax purposes. However,
because the determination of USRPHC status is based upon the composition of the
assets of the Company from time to time, there can be no assurance that the
Company will not become a USRPHC.
An individual Non-U.S. Holder who has gain that is described in clause (i)
above will, unless an applicable treaty provides otherwise, be taxed on the net
gain derived from the sale under regular graduated U.S. federal income tax rates
and will not be subject to the withholding tax. An individual Non-U.S. Holder
described in clause (ii) above will be subject to a flat 30% tax on the gain
derived from the sale, which may be offset by certain U.S.-source capital
losses.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it will be taxed on its gain under regular graduated U.S. federal income
tax rates and may be subject to an additional branch profits tax at a 30% rate,
unless it qualifies for a lower rate under an applicable income tax treaty.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual Non-U.S. Holder at
the time of death will be included in such holder's gross estate for U.S.
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise, and therefore may be subject to U.S. federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends, if any, paid to such holder and the tax, if any, withheld
with respect to such dividends. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty or certain other agreements.
Backup withholding at a 31% rate generally will not apply to dividends paid
prior to January 1, 2000 to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). A
Non-U.S. Holder will generally be subject to backup withholding with respect to
dividends paid after December 31, 1999 unless applicable IRS certification
requirements (or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures) are
satisfied.
Payment of the proceeds of a sale of common stock effected by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner provides the payer with its name and
address and certifies under penalties of perjury that it is a Non-U.S. Holder,
or otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
common stock by or through a foreign office of a broker. If, however, such
broker is, for U.S. federal income tax purposes, a U.S. person, a controlled
foreign corporation, a foreign person that derives 50% or more of its gross
income for a certain period from the conduct of a trade or business in the
United States or, effective after December 31, 1999, another U.S.-related person
described in Section 1.6049-5(c)(5) of the Treasury Regulations, such payments
will be subject to information reporting (but not backup withholding), unless
(i) such broker has documentary evidence in its records that the beneficial
owner is a Non-U.S. Holder and certain other conditions are met or (ii) the
beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against the Non-U.S. Holder's U.S. federal
income tax liability provided the required information is furnished in a timely
manner to the IRS.
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<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
underwriters named below, for whom Morgan Stanley & Co. Incorporated, Credit
Suisse First Boston Corporation and Lehman Brothers Inc. are acting as U.S.
representatives, and the international underwriters named below, for whom Morgan
Stanley & Co. International Limited, Credit Suisse First Boston (Europe) Limited
and Lehman Brothers International (Europe) are acting as international
representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, the respective number of shares of our common stock set forth
opposite the names of such underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
U.S. underwriters:
Morgan Stanley & Co. Incorporated..............................................
Credit Suisse First Boston Corporation.........................................
Lehman Brothers Inc............................................................
----------
Subtotal................................................................... 5,200,000
----------
International underwriters:
Morgan Stanley & Co. International Limited.....................................
Credit Suisse First Boston (Europe) Limited....................................
Lehman Brothers International (Europe).........................................
----------
Subtotal................................................................... 1,300,000
----------
Total.................................................................... 6,500,000
----------
----------
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively referred
to as the "underwriters" and the "representatives," respectively. The
Underwriting Agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of our common stock offered hereby
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take and pay for all
of the shares of common stock offered hereby (other than those covered by the
U.S. underwriters' over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented and agreed that, with certain exceptions:
- it is not purchasing any shares (as defined herein) for the account of
anyone other than a United States or Canadian person (as defined herein);
and
- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
outside of the United States or Canada or to anyone other than a United
States or Canadian person.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that, with certain
exceptions:
- it is not purchasing any shares for the account of any United States or
Canadian person; and
- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
in the United States or Canada or to any United States or Canadian person.
96
<PAGE>
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements made by
it in its capacity as a U.S. underwriter apply only to it in its capacity as a
U.S. underwriter and made by it in its capacity as an international underwriter
apply only to it in its capacity as an international underwriter. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement between U.S. and International
Underwriters. As used herein, "United States" or "Canadian person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the laws
of the United States or Canada or of any political subdivision thereof (other
than a branch located outside the United States and Canada of any United States
or Canadian person), and includes any United States or Canadian branch of a
person who is otherwise not a United States or Canadian person. All shares of
common stock to be purchased by the underwriters under the Underwriting
Agreement are referred to herein as the "shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. underwriters and international underwriters of any
number of shares as may be mutually agreed. The per share price of any shares so
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has represented and agreed that:
- it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international underwriters,
will not offer or sell, any shares to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations
1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United Kingdom;
and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the offering
of the shares to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 (as amended) or is a person to whom such document may otherwise
lawfully be issued or passed on.
97
<PAGE>
Pursuant to the Agreement between U.S. and International Underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registrations requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares a notice stating in substance that, by purchasing such
shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such shares a
notice containing substantially the same statement as is contained in this
sentence.
The Underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other underwriters or to certain other dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
The Company has granted to the U.S. underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to an aggregate of
975,000 additional shares of common stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The U.S.
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such U.S. underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the names
of all U.S. underwriters in the preceding table. If the U.S. underwriters'
option is exercised in full, the total price to the public for this offering
would be $ , the total underwriters' discounts and commissions would be
$ and total proceeds to the Company would be $ .
The underwriters have informed the Company that each principal underwriter
in this offering may, subject to the approval of Morgan Stanley & Co.
Incorporated, sell to discretionary accounts over which such principal
underwriter exercises discretionary authority. The underwriters have further
informed the Company that they estimate that such sales will not exceed in the
aggregate five percent of the total number of shares of common stock offered by
them.
The Company has been approved for listing on the Nasdaq National Market
under the symbol "DEST."
At the request of the Company, the underwriters will reserve up to 325,000
shares of common stock to be issued by the Company and offered hereby for sale,
at the initial offering price, to directors, officers, employees of the Company
and others, who will agree to hold their shares for at least 180 days after the
date of this prospectus. This directed share program will be administered by
Morgan Stanley & Co. Incorporated. The number of shares of common stock
available for sale to the general public will be reduced to the extent such
individuals purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby.
98
<PAGE>
Each of the Company and certain directors and executive officers of the
Company and Princes Gate has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by the Company of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than the Company relating to shares of
common stock or other securities acquired in open market or other
transactions after the completion of the offering;
- grants from time to time of employee stock options and other employee
incentive compensation, provided that such options or awards do not vest
during the period of 180 days ending after the date of this prospectus.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may agree to sell (or allot) more
shares than the 6,500,000 shares of common stock the Company has agreed to sell
to them. This over-allotment would create a short position in the common stock
for the underwriters' account. To cover any over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. The underwriters have reserved the
right to reclaim selling concessions in order to encourage underwriters and
dealers to distribute the common stock for investment, rather than for
short-term profit taking. Increasing the proportion of the offering held for
investment may reduce the supply of common stock available for short-term
trading. Any of these activities may stabilize or maintain the market price of
the common stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
From time to time, certain of the underwriters have provided, and may
continue to provide, investment banking services to the Company.
The Company and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
TRANSACTIONS WITH MORGAN STANLEY
INVESTMENT BY PRINCES GATE
On November 1, 1996, Princes Gate purchased 140,000 shares of Series A
Preferred Stock for a purchase price of $14.0 million, less $0.9 million of fees
and expenses. The Series A Preferred Stock is
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<PAGE>
convertible into 3,553,821 shares of common stock. The Series A Preferred Stock
will be converted into common stock upon the closing of this offering (the
shares of Series A Preferred Stock so converted are referred to herein as the
"Conversion Shares").
SECURITYHOLDERS AGREEMENT
Mr. Alfred West, the Company and Princes Gate entered into a Securityholders
Agreement in connection with Princes Gate's investment in the Company (the
"Securityholders Agreement"). This agreement will survive the closing of this
offering and will apply to the Conversion Shares. Certain terms of the
Securityholders Agreement are discussed below.
REGISTRATION RIGHTS. Holders of the Conversion Shares have certain
"piggy-back" registration rights. Following this offering, holders of at least
25% of the outstanding Registrable Shares (as defined in the Securityholders
Agreement) may make up to two demands of the Company to file a registration
statement under the Securities Act, subject to certain conditions and
limitations.
PARTICIPATION IN SALES BY MR. ALFRED WEST. Holders of the Conversion Shares
have the right to participate on a pro rata basis in sales of common stock by
Mr. West on the same terms and conditions as Mr. West. Under certain
circumstances, Mr. West has a right to require such persons to transfer their
shares on a pro rata basis on the same terms and conditions as Mr. West.
BRIDGE FUNDING BY MORGAN STANLEY GROUP
In April 1997, Morgan Stanley Group Inc. ("Morgan Stanley Group"), an
affiliate of the lead underwriter in this offering and Princes Gate, agreed to
purchase from the Company up to $15.0 million of Bridge Notes. Bridge Notes
totaling $7.0 million were issued. The net proceeds from the Bridge Notes sold
by the Company were $6.6 million and were used to fund equipment and other
capital expenditures and operations. All of the outstanding Bridge Notes ($7.0
million) have been paid. Morgan Stanley Group received customary fees in
connection with the Bridge Notes.
In connection with the Note Purchase Agreement, the Company granted Morgan
Stanley Group and its affiliates the right to act as sole underwriter or
placement agent in connection with the 1997 Unit Offering and to act as lead
underwriter in the Company's initial public offering.
LOAN TO MR. ALFRED WEST
In October 1997, Morgan Stanley, through its Private Wealth Management
division, provided Mr. Alfred West with a $3.0 million line of credit which is
collateralized with 2.7 million shares of common stock. In April 1999, Morgan
Stanley increased the line of credit to $4.0 million. There is a balance of $2.4
million outstanding on the line of credit on April 13, 1999, which is payable to
Morgan Stanley upon demand.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between the Company and the U.S. representatives. The factors considered in
determining the initial public offering price include the future prospects of
the Company and its industry in general, revenues, earnings and certain other
financial operating information of the Company in recent periods, and the
price-revenue ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company. The estimated initial public offering price range set forth on the
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
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<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for the
Company by Schulte Roth & Zabel LLP New York, New York. Certain legal matters in
connection with the offering will be passed on for the underwriters by Shearman
& Sterling New York, New York.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for the three
years ended December 31, 1998, included in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Act, and, in accordance therewith, files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at: Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
http://www.sec.gov. The Company's common stock has been approved for quotation
on the Nasdaq National Market, and such reports, proxy and information
statements and other information also can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the common stock offered hereby.
This prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and the common
stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement. Statements
contained in this prospectus concerning the contents of any contract or any
other document to which this prospectus refers are not necessarily complete.
Each such statement is qualified in all respects to any underlying contract or
document filed as an exhibit to the Registration Statement. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., and copies of
all or any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.
The Company intends to provide its stockholders with annual reports
containing consolidated financial statements audited by an independent public
accounting firm.
101
<PAGE>
DESTIA COMMUNICATIONS, INC.
(FORMERLY ECONOPHONE, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................... F-2
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1998............................................... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997
AND 1998................................................................................................. F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998...... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Destia Communications, Inc. (formerly Econophone, Inc.):
We have audited the accompanying consolidated balance sheets of Destia
Communications, Inc. (formerly Econophone, Inc.) (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for each of the three years ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Destia
Communications, Inc. (formerly Econophone, Inc.) and subsidiaries as of December
31, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
New York, New York
February 2, 1999
F-2
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------- -------------
1997 1998 1998
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...........................................
$ 67,202 $ 118,218
Marketable securities...............................................
-- 21,343
Accounts receivable, net of allowance for doubtful accounts of
$1,594 and $4,086, respectively...................................
16,796 33,351
Prepaid expenses and other current assets...........................
1,868 3,409
Restricted cash and securities......................................
10,463 9,590
--------- ---------
Total current assets..........................................
96,329 185,911
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS net of accumulated
depreciation and amortization of $3,690 and $12,418, respectively
(Note 5)..........................................................
24,113 107,249
Debt issuance costs.................................................
6,356 12,244
Intangible assets, net of accumulated amortization of $0 and $1,324,
respectively......................................................
-- 49,488
Other assets........................................................
2,242 2,439
Restricted cash and securities......................................
48,965 30,877
--------- ---------
Total assets..................................................
$ 178,005 $ 388,208
---------
--------- ---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable....................................................
$ 21,101 $ 33,352
Accrued expenses and other current liabilities (Note 7).............
5,356 31,131
Interest accrued on Senior Notes....................................
10,462 9,590
Current maturities of other long-term debt (Note 9).................
1,829 16,232
Current maturities of obligations under capital lease (Note 15).....
156 154
Current maturities of notes payable-related party (Note 13).........
315 308
Deferred revenue....................................................
2,568 4,739
--------- ---------
Total current liabilities.....................................
41,787 95,506
OTHER LONG-TERM DEBT (Note 9).......................................
5,657 37,379
OBLIGATIONS UNDER CAPITAL LEASE (Note 15)...........................
279 193
SENIOR NOTES (Note 9)...............................................
149,680 343,176
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 12)...........
14,328 14,421 --
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' DEFICIT (Note 11):
Common stock--voting, par value $.01; authorized 29,250,000 shares;
20,778,321, 20,778,321 and 24,332,142 shares issued and
outstanding at December 31, 1997 and 1998 and pro forma,
respectively......................................................
2 208 243
Common stock--non-voting, par value $.01; authorized
500,000 shares; 0, 135,890 and 135,890 issued and outstanding at
December 31, 1997 and 1998 and pro forma, respectively............
-- 1 1
Additional paid-in capital..........................................
6,082 6,923 21,309
Accumulated other comprehensive loss................................
(104) (856) (856)
Accumulated deficit.................................................
(39,706) (108,743) (108,743)
--------- --------- -------------
Total stockholders' deficit...................................
(33,726) (102,467) (88,046)
--------- --------- -------------
Total liabilities and stockholders' deficit...................
$ 178,005 $ 388,208 $ 388,208
---------
--------- --------- -------------
--------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- ----------
REVENUES....................................................................... $ 45,103 $ 83,003 $ 193,737
COST OF SERVICES............................................................... 35,369 63,707 140,548
--------- ---------- ----------
Gross profit............................................................. 9,734 19,296 53,189
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 16,834 37,898 80,092
DEPRECIATION AND AMORTIZATION.................................................. 1,049 3,615 11,866
--------- ---------- ----------
Loss from operations..................................................... (8,149) (22,217) (38,769)
OTHER INCOME (LOSS)............................................................ 106 102 (747)
FOREIGN CURRENCY EXCHANGE GAIN (LOSS), net..................................... 27 (265) 86
INTEREST EXPENSE, net.......................................................... (296) (7,748) (29,514)
--------- ---------- ----------
Net loss................................................................. $ (8,312) $ (30,128) $ (68,944)
--------- ---------- ----------
--------- ---------- ----------
HISTORICAL
LOSS PER SHARE (basic and diluted) (Note 2).................................... $ (0.41) $ (1.50) $ (3.31)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (basic and diluted) (Note
2)........................................................................... 20,778 20,778 20,846
--------- ---------- ----------
PRO FORMA LOSS PER SHARE (basic and diluted)(unaudited) (Note 2):.............. $ (2.83)
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (basic and
diluted) (Note 2)............................................................ 21,373 24,332 24,400
--------- ---------- ----------
</TABLE>
DESTIA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- ----------
NET LOSS........................................................................ $ (8,312) $ (30,128) $ (68,944)
OTHER COMPREHENSIVE LOSS, net of tax:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS.................................. -- (104) (752)
--------- ---------- ----------
COMPREHENSIVE LOSS.............................................................. $ (8,312) $ (30,232) $ (69,696)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
RETAINED
VOTING NON VOTING ADDITIONAL EARNINGS ACCUMULATED
------------------------ ------------------------ PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) LOSS
----------- ----------- ----------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........ 20,778 $ 2 -- -- $ 392 $ 316 $ --
Distribution of S corporation
earnings........................ -- -- -- -- (316) --
Contribution of capital to C
corporation..................... -- -- -- -- 90 -- --
Net loss.......................... -- -- -- -- (8,312) --
Accretion of preferred stock...... -- -- -- -- (15) --
Dividends on preferred stock...... -- -- -- -- (281) --
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1996........ 20,778 2 -- -- 482 (8,608) --
Net loss.......................... -- -- -- -- -- (30,128) --
Warrants.......................... -- -- -- -- 5,600 -- --
Accretion of preferred stock...... -- -- -- -- -- (91) --
Dividends on preferred stock...... -- -- -- -- -- (879) --
Cumulative translation
adjustment...................... -- -- -- -- -- -- (104)
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1997........ 20,778 2 -- -- 6,082 (39,706) (104)
Net loss.......................... -- -- -- -- -- (68,944) --
Issuance of non voting restricted
shares.......................... -- -- 136 1 994 -- --
Accretion of preferred stock...... -- -- -- -- -- (93) --
Change in par value............... -- 206 -- -- (206) -- --
Cumulative translation
adjustment...................... -- -- -- -- -- -- (752)
Other............................. -- -- -- -- 53 -- --
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1998........ 20,778 $ 208 136 $ 1 $ 6,923 $ (108,743) $ (856)
----------- ----- --- ----- ----------- ------------ -------
----------- ----- --- ----- ----------- ------------ -------
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, December 31, 1995........ $ 710
Distribution of S corporation
earnings........................ (316)
Contribution of capital to C
corporation..................... 90
Net loss.......................... (8,312)
Accretion of preferred stock...... (15)
Dividends on preferred stock...... (281)
---------
BALANCE, December 31, 1996........ (8,124)
Net loss.......................... (30,128)
Warrants.......................... 5,600
Accretion of preferred stock...... (91)
Dividends on preferred stock...... (879)
Cumulative translation
adjustment...................... (104)
---------
BALANCE, December 31, 1997........ (33,726)
Net loss.......................... (68,944)
Issuance of non voting restricted
shares.......................... 995
Accretion of preferred stock...... (93)
Change in par value............... --
Cumulative translation
adjustment...................... (752)
Other............................. 53
---------
BALANCE, December 31, 1998........ $(102,467)
---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (8,312) $ (30,128) $ (68,944)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 1,049 3,615 11,866
Provision for doubtful accounts............................ 291 832 2,603
Accreted interest expense.................................. -- 280 17,711
Changes in assets and liabilities:
Increase in accounts receivable............................ (887) (9,682) (22,100)
Increase in prepaid expenses and other current assets...... (350) (1,004) (2,175)
Increase in other assets................................... (1,514) (3,277) (791)
Increase in accounts payable, accrued expenses and other
current liabilities...................................... 3,352 14,975 34,745
Increase (decrease) in interest accrued on senior notes.... -- 10,462 (872)
Increase in deferred revenue............................... 365 1,708 1,543
--------- --------- ---------
Net cash used in operating activities.................. (6,006) (12,219) (26,414)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisitions................................ -- -- (21,063)
Purchase of marketable securities, net....................... -- -- (21,343)
Purchases of property and equipment.......................... (4,247) (13,267) (76,686)
--------- --------- ---------
Net cash used in investing activities.................. (4,247) (13,267) (119,092)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock.................... 13,061 -- --
Proceeds from line of credit................................. 800 -- --
Repayment of line of credit.................................. (1,000) -- --
Proceeds from short-term borrowings.......................... 5,437 -- --
Repayments of short-term borrowings.......................... (3,309) (2,128) --
Proceeds from long-term debt and capital leases.............. 2,232 -- 16,390
Repayments of long-term debt and capital leases.............. (566) (661) (7,497)
Repayments of notes payable-related party.................... (10) (12) (7)
Dividends paid............................................... (226) -- --
Proceeds from senior discount notes.......................... -- 149,400 175,785
Proceeds from issuance of warrants........................... -- 5,600 --
Payment of debt issuance costs............................... -- (6,355) (7,110)
Proceeds from bridge loan.................................... -- 7,000 --
Repayments of bridge loan.................................... -- (7,000) --
--------- --------- ---------
Net cash provided by financing activities.............. 16,419 145,844 177,561
--------- --------- ---------
Increase in cash and cash equivalents, (including restricted
cash)...................................................... 6,166 120,358 32,055
Cash and cash equivalents, beginning of period, (including
restricted cash)........................................... 106 6,272 126,630
--------- --------- ---------
Cash and cash equivalents, end of period, (including
restricted cash)........................................... $ 6,272 $ 126,630 $ 158,685
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................... $ 210 $ 505 $ 24,329
Income Taxes............................................... -- -- --
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Note issued for purchase of minority interest--Telco......... $ -- $ -- $ 14,035
Accretion of preferred stock................................. 15 91 93
Accrued dividends on preferred stock......................... 281 879 --
Capital leases executed and notes issued for asset
purchases.................................................. 423 5,754 14,250
DETAILS OF ACQUISITIONS:
Fair Value of assets acquired................................ -- -- $ 1,896
Goodwill..................................................... -- -- (50,759)
Liabilities assumed and notes issued......................... -- -- 27,800
--------- --------- ---------
Net cash paid for acquisitions............................... -- -- $ (21,063)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. NATURE OF BUSINESS
Destia Communications, Inc. (formerly Econophone Inc.) ("Destia") is a
rapidly growing, facilities-based provider of domestic and international long
distance telecommunications services in North America and Europe. Its extensive
international telecommunications network allows it to provide services primarily
to retail customers in many of the largest metropolitan markets in the United
States, Canada, the United Kingdom, Belgium, France, Germany and Switzerland.
The Company provides its customers with a variety of retail
telecommunications services, including international and domestic long distance,
calling card and prepaid services, and wholesale transmission services. The
Company's 350,000 customer accounts are diverse and include residential
customers, commercial customers, ethnic groups and telecommunications carriers.
In each of the Company's geographic markets, it utilizes a multichannel
distribution strategy to market its services to its target customer groups.
Destia entered the US market in 1993 and the UK market in 1995. In continental
Europe, Destia commenced offering its service before the January 1, 1998
liberalization of telecommunications services in those markets.
In February 1998, the New York corporation "Econophone, Inc." (now known as
Destia Communications, Inc.) was merged into its wholly owned subsidiary named
"Econophone, Inc." (now known as Destia Communications, Inc.) which had been
incorporated in the State of Delaware, for the sole purpose of changing the
state of incorporation of the Company. The Delaware corporation was the
surviving entity in the merger. In connection with the foregoing, the par value
of the Company's common stock was changed to $.01 per share of voting and
non-voting common stock from $.0001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Destia and its
wholly owned subsidiaries, its 72% owned subsidiary, Econophone Services GmbH
(Switzerland) and its 81.25% owned subsidiary America First, Ltd. (England)
(collectively, the "Company"). The full amount of the net loss for the year
ended December 31, 1997 and 1998 for Econophone Services GmbH and America First,
Ltd. have been recorded in the consolidated financial statements of the Company.
All significant intercompany balances and transactions have been eliminated in
consolidation. See Note 17.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's revenues are primarily based on usage and are derived from (1)
the number of minutes of telecommunications traffic carried and, (2) generally,
a fixed per minute rate. For prepaid services, the Company's revenues are
reported net of selling discounts and commissions and are recorded based upon
usage rather than time of initial sale.
F-8
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets, which range
from one to fifteen years. Depreciation of IRUs is computed using the
straight-line method over the lease term. Amortization of leasehold improvements
is computed using the straight-line method over the lesser of the lease term or
estimated useful lives of the improvements.
INTERNAL-USE SOFTWARE
The Company capitalizes certain software development costs for internal use.
For the years ended December 31, 1997 and 1998, the Company incurred
approximately $897,000 and $1,925,000 respectively, of such costs and has
included them in Property, Equipment and Leasehold Improvements. The capitalized
software are amortized on a straight-line basis over the estimated useful life,
generally two years. Prior to 1997, such costs were immaterial.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost of acquired businesses over
the underlying fair value of the tangible net assets acquired. Intangible assets
are amortized on a straight-line basis over their estimated period of benefit,
generally 5 - 20 years). The carrying value of goodwill is periodically reviewed
for impairment whenever events or changes in circumstances indicate that it may
not be recoverable.
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost. In accordance
with Statement of Financial Accounting Standards ("SFAS ") No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," these assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. Furthermore, the assets are evaluated for continuing value and
proper useful lives by comparison to expected future cash projections. The
Company amortizes these costs over the expected useful life of the related
asset. As of December 31, 1998 the Company does not believe any impairment
exists with its long-lived assets.
INCOME TAXES
Prior to 1996, the Company was an S-Corporation for federal and state income
tax purposes and, as a result, the earnings of the Company were treated as
taxable income of the shareholders. During 1996, the Company changed its tax
status to a C-Corporation.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their
F-9
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be applied to taxable income in the year in which
those temporary differences are expected to be recovered or settled. Deferred
income taxes are not provided on undistributed earnings of foreign subsidiaries
since such earnings are currently expected to be permanently reinvested outside
the United States.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation awards to employees and directors using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the amount an employee or director must pay to
acquire the stock.
The Company accounts for stock-based compensation awards to outside
consultants and affiliates based on the fair value of such awards. Accordingly,
compensation costs for stock option awards to outside consultants and affiliates
is measured at the date of grant based on the fair value of the award using the
Black-Scholes option pricing model (See Note 14).
NEW ACCOUNTING PRONOUNCEMENTS
These standards increase disclosure only and have no impact on the Company's
financial position or results of operations. These standards have been adopted
in 1998 and have been reflected in the financial statements and notes for the
year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use software, dividing the development into three stages: (1) the
preliminary project stage, during which conceptual formulation and evaluation of
alternatives takes place, (2) the application development stage, during which
design, coding, installation and testing takes place and (3) the operations
stage during which training and maintenance takes place. Costs incurred during
the application development stage are capitalized, all other costs are expensed
as incurred. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has reviewed the provisions of
SOP 98-1 and does not believe adoption of this standard will have a material
effect on its results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires that all non-governmental entities
expense the costs of start-up activities, including organization costs, as those
costs are incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company has reviewed the provisions
of SOP 98-5 and does not believe adoption of this standard will have a material
effect on its results of operations.
F-10
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY EXCHANGE
The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheets and an
average rate for the period on the statements of operations. Translation
adjustments generally are reflected as foreign currency translation adjustments
in the statement of stockholders' equity and, accordingly, have no effect on net
income. Foreign currency transaction adjustments are reflected in the statements
of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
UNAUDITED PRO FORMA INFORMATION
The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of Series A
Redeemable Convertible Preferred Stock into common stock concurrent with the
closing of the Company's anticipated initial public offering ("IPO") (see Note
12 for conversion terms).
The unaudited pro forma consolidated balance sheet as of December 31, 1998,
reflects the conversion of 140,000 shares of the Series A Redeemable Convertible
Preferred Stock into approximately 3,554,000 shares of common stock.
Pro forma loss per share is computed using the weighted average number of
common shares outstanding during the period assuming the conversion of
convertible preferred stock issued into common stock as of the date of issuance.
PER SHARE DATA
During 1997, SFAS No. 128 "Earnings per Share" was issued and became
effective for the Company's December 31, 1997 financial statements. SFAS No. 128
establishes new standards for computing and presenting earnings per share
("EPS"). The new standard requires the presentation of basic EPS and diluted
EPS. Basic EPS is calculated by dividing income available to common shareholders
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding
adjusted to reflect potentially dilutive securities. All outstanding options,
warrants and convertible preferred shares would be antidilutive. Therefore,
their effect has been excluded from the calculation of diluted EPS.
F-11
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is the reconciliation of net loss per share as of December 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
NUMERATOR
Net loss................................................ $ (8,312,000) $ (30,128,000) $ (68,944,000)
Less dividends on preferred stock....................... (281,000) (879,000) --
Less accretion of preferred stock....................... (15,000) (91,000) (93,000)
------------- -------------- --------------
Loss available to common shareholders................... $ (8,608,000) $ (31,098,000) $ (69,037,000)
------------- -------------- --------------
------------- -------------- --------------
DENOMINATOR
Weighted Average shares outstanding..................... 20,778,000 20,778,000 20,846,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued SFAS No. 107 entitled
"Disclosures about Fair Value of Financial Instruments," which requires entities
to disclose information about the fair values of their financial instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
LONG-TERM DEBT
The carrying amount of the Company's current portion of long-term borrowings
approximates fair value. The fair value of the Company's long-term debt,
including current portions, is determined based on market prices for similar
debt instruments or on the current rates offered to the Company for debt with
similar maturities. As of December 31, 1998, the Company's senior notes were
made up of the 13 1/2% Senior Notes due 2007 (the "1997 Notes") issued July 1,
1997, and the 11% Senior Discount Notes due 2008 (the "1998 Notes") issued
February 12, 1998 (together the "Senior Notes"). The fair value of the 1997
Notes and the 1998 Notes, based upon quotes from securities dealers, were
$157,325,000 and $151,500,000, respectively.
4. DEBT AND EQUITY SECURITIES
The Company accounts for short-term investments in accordance with SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
Short-term investments have an original maturity of more than three months and a
remaining maturity of less than one year. These investments are stated at cost
as it is the intent of the Company to hold these securities until maturity. The
funds are invested in compliance with the Company's bond indentures which
restrict the type, quality and maturity of
F-12
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
4. DEBT AND EQUITY SECURITIES (CONTINUED)
investments. The table below discloses the fair value of held-to-maturity
securities as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE FAIR VALUE GROSS GROSS
AMORTIZED DECEMBER 31, UNREALIZED UNREALIZED
COST BASIS 1998 HOLDING GAINS HOLDING LOSSES
-------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. treasury notes........................... $ 38,949,000 $ 39,246,000 $ 365,000 $ (68,000)
Government agency notes....................... 54,438,000 54,611,000 173,000 --
Commercial paper.............................. 14,914,000 14,960,000 47,000 (1,000)
Other debt securities......................... 19,976,000 19,975,000 -- (1,000)
-------------- ----------------- ------------- --------------
$ 128,277,000 $ 128,792,000 $ 585,000 $ (70,000)
-------------- ----------------- ------------- --------------
-------------- ----------------- ------------- --------------
Included in cash and cash equivalents......... $ 66,467,000
Included in marketable securities............. 21,343,000
Included in current portion of restricted
cash........................................ 9,590,000
Included in non-current restricted cash....... 30,877,000
--------------
$ 128,277,000
--------------
--------------
</TABLE>
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Equipment......................................................... $23,403,000 $102,696,000
Computer software................................................. 2,263,000 9,257,000
Furniture and fixture............................................. 634,000 4,841,000
Leasehold improvements............................................ 1,503,000 2,873,000
---------- -----------
27,803,000 119,667,000
Less accumulated depreciation and amortization.................... (3,690,000) (12,418,000)
---------- -----------
Property, equipment and leasehold improvements, net............... $24,113,000 $107,249,000
---------- -----------
---------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998,
was $1,008,000, $2,297,000 and $8,728,000, respectively.
6. TERRITORIAL RIGHTS
In September 1994, the Company entered into a joint venture with Europhone
International Ltd. ("EI") to jointly market Destia's services in the United
Kingdom. EI engaged in sales and marketing, while Destia provided network
support, billing and transmission services.
In connection with the modification of this joint marketing arrangement,
which occurred in June 1996, EI granted the Company the right to compete with EI
in exchange for forgiveness of the net receivable due
F-13
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
6. TERRITORIAL RIGHTS (CONTINUED)
to the Company of $2,000,000. The Company charged this to operations in 1996 as
an expense of the joint venture.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist primarily of accrued
carrier cost of $1,658,000 and $17,408,000 for 1997 and 1998, respectively.
F-14
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. FOREIGN OPERATIONS AND CONCENTRATIONS
FOREIGN OPERATIONS
The Company's trade accounts receivable are subject to credit risk, although
the customer base is diversified due its size and geographic dispersion. The
Company does not require collateral or other security to support its
receivables. The Company closely monitors extensions of credit and performs
ongoing evaluations of customer accounts to control the exposure to bad debt
risks. Bad debt expense is recorded quarterly and is based on the Company's
historical bad debt write-off experience. Actual write-offs are charged against
the bad debt allowance as certain accounts are determined to be uncollectable.
The Company's total sales, operating income (before interest, foreign currency
exchange and other income) and identifiable assets by geographical area for the
years ended and as of December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
NORTH OTHER
UNITED KINGDOM AMERICA BELGIUM EUROPE CONSOLIDATED
--------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1996
Revenues........................ $ 15,477,000 $ 18,185,000 $ 9,038,000 $ 2,403,000 $ 45,103,000
--------------- -------------- ------------- -------------- --------------
Operating loss.................. $ (2,473,000) $ (3,855,000) $ (1,472,000) $ (349,000) $ (8,149,000)
Corporate expenses.............. (163,000)
--------------
$ (8,312,000)
--------------
Accounts receivable............. $ 2,283,000 $ 3,718,000 $ 1,488,000 $ 457,000 $ 7,946,000
Property, equipment and
leasehold improvements........ 1,423,000 4,001,000 847,000 201,000 6,472,000
Corporate assets................ 8,337,000
--------------
$ 22,755,000
--------------
1997
Revenues........................ $ 18,363,000 $ 48,899,000 $ 7,981,000 $ 7,760,000 $ 83,003,000
--------------- -------------- ------------- -------------- --------------
Operating loss.................. $ (2,966,000) $ (18,213,000) $ (374,000) $ (664,000) $ (22,217,000)
Corporate expenses.............. (7,911,000)
--------------
$ (30,128,000)
--------------
Accounts receivable............. $ 5,252,000 $ 9,034,000 $ 1,250,000 $ 1,260,000 $ 16,796,000
Property, equipment and
leasehold improvements........ 6,731,000 16,515,000 463,000 405,000 24,114,000
Corporate assets................ 137,095,000
--------------
$ 178,005,000
--------------
1998
Revenues........................ $ 55,991,000 $ 116,645,000 $ 11,515,000 $ 9,586,000 $ 193,737,000
--------------- -------------- ------------- -------------- --------------
Operating income(loss).......... $ (16,474,000) $ (17,138,000) $ 905,000 $ (6,062,000) $ (38,769,000)
Corporate expenses.............. (30,175,000)
--------------
$ (68,944,000)
--------------
Accounts receivable............. $ 11,367,000 $ 19,096,000 $ 1,430,000 $ 1,458,000 $ 33,351,000
Property, equipment and
leasehold improvements........ 15,899,000 74,700,000 3,673,000 12,977,000 107,249,000
Corporate assets................ 247,608,000
--------------
$ 388,208,000
--------------
</TABLE>
F-15
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. FOREIGN OPERATIONS AND CONCENTRATIONS (CONTINUED)
The revenues of EI accounted for $14.2 million or 32% in 1996. The
relationship was terminated in December 1996.
9. BORROWINGS
At December 31, 1997, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------ -------------- --------------
<S> <C> <C> <C>
Long-term debt:
NTFC note (a).................................. $ 1,633,000 $ 5,522,000 $ 7,155,000
Notes Payable (b).............................. 196,000 135,000 331,000
1997 Notes (c)................................. -- 149,680,000 149,680,000
------------ -------------- --------------
$ 1,829,000 $ 155,337,000 $ 157,166,000
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
At December 31, 1998, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
Long-term debt:
NTFC note (a)................................ $ 4,708,000 $ 16,434,000 $ 21,142,000
Notes payable (b)............................ 11,524,000 20,945,000 32,469,000
1997 Notes (c)............................... -- 150,240,000 150,240,000
1998 Notes (d)............................... -- 192,936,000 192,936,000
------------- -------------- --------------
$ 16,232,000 $ 380,555,000 $ 396,787,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
(a) On May 28, 1996, Destia entered into a credit facility with NTFC, which the
terms and amount of have been amended and increased, respectively, on
several occasions. On January 28, 1998, the NTFC credit facility was amended
and restated in its entirety in order to effect various amendments and
increase the amount of NTFC's commitment thereunder (such credit facility,
as amended and restated, is referred to herein as the "NTFC Facility"). The
NTFC Facility provides for borrowings by Destia and its subsidiaries to fund
certain equipment acquisition costs and related expenses. The NTFC Facility
provides for an aggregate commitment of NTFC of $24.0 million pursuant to
three tranches of $2.0 million, $3.0 million and $19.0 million. Loans
borrowed under each tranche of the NTFC Facility amortize in equal monthly
installments over a five year period ending on July 1, 2001, April 1, 2002
and January 1, 2003, respectively. Loans under the NTFC Facility accrue
interest at an interest rate equal to the 90-day commercial paper rate plus
395 basis points, subject to certain quarterly adjustments depending upon
financial performance. All of the equipment purchased with the proceeds of
the NTFC Facility has been pledged to NTFC. The NTFC Facility requires
Destia to maintain certain Debt Service Coverage Ratios, EBITDA (each
defined in the NTFC Facility) and minimum cash balances. Destia was in
compliance with these covenants at December 31, 1997. Destia obtained a
waiver of these covenants so that it was in compliance at December 31, 1998.
(b) At December 31, 1998 the Company has seven notes payable related to the
purchase of cable lines and acquisitions. These notes bear interest at rates
ranging from 5% to 12%, and have maturity dates from April 2001 to November
2008.
F-16
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
9. BORROWINGS (CONTINUED)
At December 31, 1997 the Company has six notes payable related to the
purchase of cable lines. Three of these notes bear interest at 12%, and
matures through September 1998. The remaining three notes bear interest at
LIBOR plus 5%, and mature on June 30, 2001. These notes have quarterly
principal and interest payments ranging from $5,849 to $30,291.
(c) Destia completed on July 1, 1997 the offering (the "1997 Unit Offering") of
155,000 units (each a "Unit"), each Unit consisting of one 1997 Note and one
warrant (each a "Warrant") to purchase 8.485 shares of common stock of
Destia. The Units were sold for an aggregate gross purchase price of $155.0
million. On December 5, 1997, the Company consummated an offer to exchange
the notes issued in the 1997 Unit Offering for $155.0 million of notes that
had been registered under the Securities Exchange Act of 1933.
The 1997 Notes are unsecured unsubordinated obligations of Destia, limited
to $155.0 million aggregate principal amount at maturity, and mature on July
15, 2007. Interest on the 1997 Notes accrues at the rate of 13 1/2% per
annum from the most recent interest payment date on which interest has been
paid or provided for, payable semiannually (to holders of record at the
close of business on the January 1 or July 1 immediately preceding the
interest payment date) on January 15 and July 15 of each year, commencing
January 15, 1998. At the closing of the 1997 Unit Offering, Destia used
$57.4 million of the net proceeds of the 1997 Unit Offering to purchase
restricted cash and securities, which were pledged as security for the
payment of interest on the principal of the 1997 Notes. Proceeds from the
restricted cash and securities are being used by Destia to make interest
payments on the 1997 Notes through July 15, 2000. The restricted cash and
securities are being held by a trustee pending disbursement.
(d) During February 1998, the Company issued the 1998 Notes. The 1998 Notes are
unsecured unsubordinated obligations of the Company, initially limited to
$300.0 million aggregate principal amount at maturity, and mature on
February 15, 2008. Although for Federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, was
recognized by the holders as such discount accrues from the closing date, no
interest is payable on the 1998 Notes prior to February 15, 2003. Interest
on the 1998 Notes will accrue at 11.0% from February 15, 2003 or from the
most recent Interest Payment Date to which interest has been paid or
provided for, payable semiannually (to holders of record at the close of
business on the February 1 or August 1 immediately preceding the Interest
Payment Date) on February 15 and August 15 of each year, commencing August
15, 2003.
Maturities of long-term debt (excluding the accretion of the 1998 Notes) over
the next five years are as follows:
<TABLE>
<S> <C>
1999.................................................................. $16,232,000
2000.................................................................. 14,567,000
2001.................................................................. 10,808,000
2002.................................................................. 4,837,000
2003 and thereafter................................................... 350,343,000
-----------
Total................................................................. $396,787,000
-----------
-----------
</TABLE>
F-17
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
10. TAXES
As a telephone carrier and reseller doing business in the U.S., the Company
is required to file annual telephone and transmission tax returns in accordance
with state tax laws. These returns include taxes on net worth, gross sales and
gross profit. In addition, each type of tax requires an additional tax
surcharge. The Company also remits federal and state excise taxes and other
state and local sales taxes.
As of December 31, 1997 and 1998, the Company had a net operating loss
carryforward of approximately $36,000,000 and $80,000,000, respectively, which
is available to reduce its future taxable income and expires at various dates
through 2012. A full valuation allowance of approximately $14,000,000 and
$31,000,000, respectively, has been established against the deferred tax assets
due to the uncertainties surrounding the utilization of the carryforward. There
are no other significant timing differences.
A value added tax "VAT" is a tax charged on goods and services that is
designed to be borne by the ultimate end user of the goods and services.
Pursuant to the Sixth European Commission VAT Directive adopted in 1977 ("VAT
Directive"), providers of telecommunications services in the European Union (the
EU) are liable for VAT in the EU member state where the provider of the services
is established. The provider, in turn, charges VAT to its customers at the rate
prevailing in the provider's country of establishment. To date, the collection
of VAT by Destia does not appear to have a material adverse effect on its
ability to attract or retain customers and the collection of VAT has not
required Destia to reduce its prices to remain competitive.
Destia's non-U.S. subsidiaries file separate tax returns and provide for
taxes accordingly.
11. STOCKHOLDERS' EQUITY (DEFICIT)
In February 1998, the New York corporation "Econophone, Inc." was merged
into its wholly-owned subsidiary named "Econophone, Inc." (now known as Destia
Communications, Inc.) which had been incorporated in the State of Delaware for
the sole purpose of changing the state of incorporation of the Company. The
Delaware corporation was the surviving entity in the merger. In connection with
the foregoing, the par value of the Company's common stock was changed to $.01
per share of voting and non-voting common stock.
On July 17, 1998, the Company acquired the minority interest in Telco that
it did not already own. In connection with such acquisition the Company
converted options to acquire Telco shares held by Telco employees into grants of
non-voting restricted shares of the Company's common stock. The shares carry the
same rights as the voting common stock, other than voting rights.
On November 1, 1996, the Company's Articles of Incorporation were amended to
change all of the authorized shares of common stock and non-voting common stock
from no par value per share to $.0001 par value per share, to increase the
number of shares of authorized common stock from 400 shares to 29,250,000
shares, to increase the number of authorized shares of non-voting common stock
from 19,600 shares to 500,000 shares and to authorize the issuance of 250,000
shares of preferred stock. Additionally, the Company effected a recapitalization
whereby the outstanding shares of common stock were converted on a 73,125:1
basis.
All information contained in the accompanying financial statements and
footnotes have been retroactively restated to give effect to these transactions.
F-18
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
11. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Included within additional paid in capital, is $5.6 million attributable to
the Warrants, which represents the portion of the issue price for the Units
attributable to the fair value of the Warrants. Such amount has been recognized
as a discount on the 1997 Notes and will be amortized over the term of the 1997
Notes. Each Warrant may be exercised for 8.167 shares of common stock at an
exercise price of $.01 per share. The Warrants are exercisable for 1,315,148
shares of common stock, in the aggregate. The fair value of the shares issuable
upon exercise of the Warrants was determined to be $4.26 per share. Among the
factors considered in making such determinations were the history of the
prospects for the industry in which Destia competes, an assessment of Destia's
management, the present operations of Destia, the historical results of
operations of Destia and the trend of its revenues and earnings, the prospects
for future earnings of Destia, the general condition of the securities markets
at the time of the 1997 Unit Offering and the prices of similar securities of
generally comparable companies. The Warrants expire on June 30, 2007.
12. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 1, 1996, the Company entered into a Securities Purchase
Agreement (the "Agreement") with Princes Gate Investors II, L.P., an affiliate
of Morgan Stanley & Co., Incorporated, whereby it authorized and issued 140,000
shares of $.01 par value Redeemable Convertible Preferred Stock (the "Series A
Preferred") for a purchase price of approximately $13,061,000, net of issuance
costs. The stated redemption value on the preferred stock is $14,000,000 (or
$100 per share). The Series A Preferred is senior to all other capital stock of
the Company.
The Series A Preferred accrue monthly cumulative dividends on each
outstanding share at a rate of $1.00 per month. The accrued and unpaid dividends
compound monthly at a rate of 12% per year. The dividends began to accrue and
compound interest from the issuance date of the preferred stock and ceased to
accrue on July 1, 1997, when the Senior Notes were issued.
The mandatory redemption of the Series A Preferred is October 31, 2006. The
redemption shall be in cash.
F-19
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
12. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each holder of the Series A Preferred shall have the right, at the option of
the holder, to convert any of its shares of Series A Preferred into a number of
fully paid and nonassessable shares of common stock. At any time, any holder of
Series A Preferred Stock may convert all or any portion thereof into common
stock of Destia. As of December 31, 1997 and 1998, the shares of Series A
Preferred Stock outstanding were convertible into 3,553,821 shares of common
stock and would convert automatically upon the Company closing an initial public
offering of common stock. The number of shares of common stock that each share
of Series A Preferred Stock is convertible into is equal to the number of shares
of common stock outstanding on November 1, 1996 (on a diluted basis), which was
22,564,000, multiplied by a fraction (i) the numerator of which is equal to the
stated value with respect to the shares of Series A Preferred Stock being so
converted, plus any dividends accrued thereon, and (ii) the denominator of which
is equal to $100.0 million plus the number of dollars received by Destia since
November 1, 1996 from the exercise of specified options or warrants.
13. RELATED PARTY TRANSACTIONS
The Company has notes payable due to various related parties. These notes
are unsecured, and accrue interest at annual rates ranging from 9% to 18%. These
notes are demand obligations. (See Note 17 for a discussion of the repayment of
certain indebtedness).
The Company has an interest bearing note receivable at December 31, 1997 and
1998 for approximately $215,000 and $230,000, respectively, from a related
party.
The sister of Alfred West owns a 28% interest in Destia's Swiss subsidiary,
Econophone Services GmbH. (See Note 17 for a discussion of the Company's
acquisition of such interest)
14. STOCK-BASED COMPENSATION PLANS
On October 31, 1996, the Board of Directors adopted the Destia
Communications, Inc. 1996 Flexible Incentive Plan (the "1996 Plan") and an
Incentive Stock Option Agreement with the then Chief Operating Officer and Chief
Financial Officer of the Company. The Company accounts for awards granted to
employees and directors under APB No. 25, under which no compensation cost has
been recognized for stock options granted. Had compensation cost for these stock
options been determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net Loss:
Available to Common Shareholders............ $ (8,608,000) $ (31,098,000) $ (69,037,000)
Pro Forma................................... (9,103,000) (31,889,000) (70,737,000)
Basic EPS:
As Reported................................. $ (0.41) $ (1.50) $ (3.31)
Pro Forma................................... $ (0.44) $ (1.53) $ (3.39)
</TABLE>
F-20
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
14. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts since the Company anticipates additional awards in
the future.
Under the 1996 Plan, the Company granted 20,778 options to outside
consultants. All transactions with individuals other than those considered
employees, as set forth within the scope of APB No. 25, must be accounted for
under the provisions of SFAS No. 123. Under SFAS No. 123, the fair value of the
options granted to the consultants as of the date of grant using the
Black-Scholes pricing model is $33,019. The NQSOs (as hereinafter defined) were
granted to the consultants for terms of up to ten years and are exercisable in
whole or in part at stated times from the date of grant up to three years from
the date of grant. The 10,389 options granted to consultants during 1996 and the
10,389 options granted to consultants during 1998 have an exercise price of
$2.41 and $4.81, respectively. As of December 31, 1997 and 1998, 3,463 and
12,121 of the options granted to the consultants were exercisable, respectively,
and the expense recognized in 1996, 1997 and 1998 relating to these options was
$496, $2,976 and $9,666, respectively.
The 1996 Plan as amended authorizes the granting of awards, the exercise of
which would allow up to an aggregate of 4,600,000 shares of the Company's common
stock to be acquired by the holders of said awards. The awards can take the form
of Incentive Stock Options ("ISOs"), Non-qualified Stock Options ("NQSOs"),
Stock Appreciation Rights ("SARs"), Restricted Stock and Unrestricted Stock. The
SARs may be awarded either in tandem with options or on a stand-alone basis.
Awards may be granted to key employees, directors and consultants. ISOs and
NQSOs are granted in terms not to exceed ten years and become exercisable as set
forth when the award is granted. Options may be exercised in whole or in part.
The exercise price of the ISOs is the market price of the Company's common stock
on the date of grant. The exercise price of NQSOs shall never be less than the
par value of the Company's common stock. Any plan participant who is granted
ISOs and possesses more than 10% of the voting rights of the Company's
outstanding common stock must be granted an option price with at least 110% of
the fair market value on the date of grant and the option must be exercised
within five years from the date of grant. Under the Company's 1996 Plan, ISOs
and NQSOs have been granted to key employees and directors for terms of up to
ten years, at various exercise prices and are exercisable in whole or in part at
stated times from the date of grant up to three years from the date of grant. At
December 31, 1997 and 1998, 1,152,418 and 2,239,583 options respectively, were
exercisable under the Company's 1996 Plan.
Option activity during 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
Outstanding at beginning of year.................... 2,707,935 $ 2.41 3,014,358 $ 2.64
Granted............................................. 316,812 4.81 1,598,429 6.13
Cancelled........................................... (10,389) 2.41 (175,672) 2.93
Outstanding at end of year.......................... 3,014,358 2.64 4,437,115 3.85
Exercisable at end of year.......................... 1,152,418 2.41 2,239,583 2.74
Weighted average fair value of options granted...... 1.84 2.36
</TABLE>
F-21
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
14. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998: risk-free interest rate of 6.23%
and 5.43% for 1997 and 1998; expected life of three years for 1997 and 1998;
expected volatility of 47% for 1997 and 66% for 1998 and expected dividend yield
of zero percent for 1997 and 1998.
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT REMAINING WEIGHTED AVERAGE AT WEIGHTED AVERAGE
PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ------------- ------------------- ------------------- ------------------- ------------------ -------------------
2$.41--$4.81.. 3,568,062 8.03 $ 3.05 2,239,583 $ 2.64
6$.50--$7.22.. 869,053 9.28 $ 7.14 -- --
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company has various lease agreements for offices, automobiles and other
property. Future minimum annual lease payments under the Company's operating and
capital leases with initial or remaining terms of one year or more at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- ----------
<S> <C> <C>
1999............................................................... $ 5,389,000 $ 154,000
2000............................................................... 4,140,000 91,000
2001............................................................... 3,529,000 67,000
2002............................................................... 2,988,000 35,000
2003 and thereafter................................................ 6,919,000 --
------------- ----------
Total minimum lease payments....................................... $ 22,965,000 $ 347,000
------------- ----------
------------- ----------
</TABLE>
The rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $394,000, $1,378,000 and $2,824,000, respectively.
As of December 31, 1998, The Company has entered into employment agreements
with certain officers which expire by December 31, 1999. The aggregate
commitment for future compensation under these agreements is approximately
$1,350,000. These officers are also eligible for annual bonuses based on
performance. See Note 17 for a discussion regarding employment agreements
entered into after such date.
LONG-TERM LEASE AGREEMENT
On November 17, 1998, Destia reached an agreement with Frontier
Communications ("Frontier") to acquire a 20-year IRU to use portions of its U.S.
fiber optic network. The Company expects to begin using some of Frontier's
network by July 1999. Additionally, management expects that Frontier's fiber
optic network will be fully operational by the end of 1999. A portion of the
acquisition price was paid on
F-22
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
November 17, 1998. The balance of the obligation will be discharged over the
next 36 months based upon the terms and conditions of the agreement. Beginning
in June 1999, Frontier shall have the right to purchase on a monthly basis up to
a cumulative average of one million dollars in Destia services that will be
offset against the remaining obligation in lieu of additional cash payments. At
the end of the 36-month period the balance remaining will be settled with a cash
payment. The acquisition price will be amortized over 20 years and will commence
at the date that the network becomes substantially operational. The Company's
total commitments are approximately $42.3 million in the aggregate for the
20-year IRU from Frontier and for the purchase of a transatlantic IRU.
16. ACQUISITIONS
VOICENET ACQUISITION
A definitive agreement to acquire VoiceNet was entered into on January 28,
1998. The closing of the VoiceNet Acquisition occurred on February 12, 1998. The
initial purchase price for VoiceNet was $21.0 million and was paid out of cash
on hand. The sellers of VoiceNet also are entitled to receive an earn-out based
upon the revenue growth of the VoiceNet business for a period of up to one year
following the closing of the acquisition.
VoiceNet provides travellers and other callers with calling card services,
which are advertised primarily in in-flight magazines. Destia has provided
substantially all of VoiceNet's transmission, billing and customer service
functions since April 1996.
TELCO MINORITY INTEREST ACQUISITION
In the United Kingdom, the majority of Destia's sales are made through Telco
Global Communications ("Telco"), its majority owned subsidiary that was
established during the fourth quarter of 1996. Telco's revenues are derived
primarily from international and domestic long distance services and the sale of
prepaid cards. On July 17, 1998, the Company acquired the 30% minority interest
in Telco it did not already own in exchange for approximately $14.0 million in
cash, payable by the Company in quarterly installments, together with interest
at a rate of 8.0% per annum, over approximately three years. The entire purchase
price is classified as goodwill, which will be amortized over 20 years. In
connection with such acquisition, (i) Telco obtained ownership rights with
respect to certain proprietary software used in Telco's business and (ii) the
Company converted options to acquire Telco shares held by Telco employees into
grants of non-voting restricted shares of the Company's common stock.
OTHER ACQUISITIONS
During November 1998, the Company completed two small acquisitions. It
acquired a controlling interest in America First Ltd. ("America First"), a
prepaid card distributor in the United Kingdom for approximately $5.5 million.
The majority of the purchase price was recorded as goodwill and will be
amortized over 20 years. The Company also acquired the customer list of a long
distance reseller, also located in the United Kingdom. The purchase price was
allocated to the customer base and will be amortized over 5 years.
F-23
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
17. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
On February 1, 1999, the Company announced that it had filed a registration
statement with the Securities and Exchange Commission for an initial public
offering of its common stock, with the number of shares and price to be
determined.
STOCK SPLIT
The financial statements retroactively reflect the 1.04 for 1 stock split
which will occur immediately prior to the completion of the above offering.
ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On March 30, 1999, the Company acquired the 28% minority interest in
Econophone Services GmbH (Switzerland). The entire purchase price is classified
as goodwill, which is amortized over 20 years.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
For a discussion on recent employment agreements and arrangements with
certain officers of the Company, see "Management--Employment Agreements and
Arrangements" in the Registration Statement.
REPAYMENT OF CERTAIN INDEBTEDNESS
The related party notes described in Note 13 have been repaid in full.
F-24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the NASDAQ National Market
listing fee in connection with the offering.
<TABLE>
<S> <C>
SEC Registration fee............................................................ $ 51,430
NASD Filing fee................................................................. 8,000
NASDAQ National Market listing fee.............................................. 95,000
Printing and engraving expenses................................................. 300,000
Legal fees and expenses......................................................... 500,000
Accounting fees and expenses.................................................... 100,000
Blue sky fees and expenses...................................................... 13,000
Transfer agent fees............................................................. 3,500
Miscellaneous fees and expenses................................................. 229,070
---------
Total........................................................................... $1,300,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Destia's Certificate of Incorporation indemnifies its officers and directors
to the fullest extent permitted by the DGCL. Under Section 145 of the DGCL, a
corporation may indemnify its directors, officers, employees and agents and
those who serve, at the corporation's request, in such capacities with another
enterprise, against expenses (including attorneys' fees), as well as judgments,
fines and settlements in nonderivative lawsuits, actually and reasonably
incurred in connection with the defense of any action, suit or proceeding in
which they or any of them were or are made parties are threatened to be made
parties by reason of their serving or having served in such capacity. The DGCL
provides, however, that such person must have acted in good faith and in a
manner such person reasonably believed to be in (or not opposed to) the best
interests of the corporation and, in the case of a criminal action, such person
must have had no reasonable cause to be believe his or her conduct was unlawful.
In addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended. The Certificate
of Incorporation and the DGCL also prohibit limitations on officer or director
liability for acts or omissions which resulted in a violation of a statute
prohibiting certain dividend declarations, certain payments to stockholders
after dissolution and particular types of loans. The effect of these provisions
is to eliminate the rights of Destia and its stockholders (through stockholders'
derivative suits on behalf of Destia) to recover monetary damages against an
officer or director for breach of fiduciary duty as an officer or director
(including breaches resulting from grossly negligent behavior), except in the
situations described above. These provisions will not limit the liability of
directors or officer under the federal securities laws of the United States. The
foregoing summary of Destia's Certificate of Incorporation, as amended, is
qualified in its entirety by reference to the relevant provisions thereof (filed
as Exhibit 3.1).
In addition, Destia has entered into indemnification agreements with its
directors and officers providing for, among other things, indemnification to the
extent permitted under Delaware law.
See Item 17 for a statement of the Company's undertaking as to the
Commission's position respecting indemnification arising under the Securities
Act.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1996, the Company has issued and sold the following
securities:
1. On November 1, 1996, the Company sold Princes Gate Investors II, L.P.
140,000 shares of Series A Preferred Stock with an aggregate liquidation
preference of $14.0 million for an aggregate purchase price of $13.44 million.
This sale was privately negotiated and did not involve a public offering and was
exempt from registration under the Securities Act in reliance on Section 4(2) of
such Act.
2. On April 24, 1997, the Company entered into a Note Purchase Agreement
pursuant to which Morgan Stanley Group purchased an aggregate amount of $7.0
million of Bridge Notes. Morgan Stanley Group acted as placement agent in this
transaction and received approximately $400,000 in fees and expenses in
connection with the transaction. This sale was privately negotiated and did not
involve a public offering and was exempt from registration under the Securities
Act in reliance on Section 4(2) of such Act.
3. On July 1, 1997, the Company sold $155.0 million of 13 1/2% Senior Notes
due 2007 and warrants to purchase 1,315,148 shares of voting common stock. This
issuance was underwritten by Morgan Stanley & Co. Incorporated who acted as
placement agent for this transaction and received fees of $5.425 million. All of
the Units were initially purchased by Morgan Stanley & Co. Incorporated pursuant
to Section 4(2) of the Securities Act and resold to "qualified institutional
buyers" pursuant to Rule 144A thereunder.
4. On February 18, 1998, the Company sold $300.0 million aggregate principal
amount at maturity of 11% Senior Discount Notes due 2008. This issuance was
underwritten by Morgan Stanley & Co. Incorporated who also received fees of
$6.152 million. All of such Notes were initially purchased by Morgan Stanley &
Co. Incorporated pursuant to Section 4(2) of the Securities Act and resold to
"qualified institutional buyers" pursuant to Rule 144A thereunder.
5. On July 14, 1998, the Company acquired the 30% minority interest in Telco
Global Communications Limited from Gold Valley Limited for a cash payment of
$13.75 million. The acquisition also included the rollover of employee options
in Telco into the Company's restricted Share awards. Approximately 145,448
restricted shares will be awarded as a result of the rollover. This transaction
was privately negotiated, did not involve a public offering and was exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act.
6. On March 30, 1999, the Company acquired Ms. Sonja Gross' 28% interest in
Econophone Services GmbH, the Company's Swiss subsidiary. In exchange, Ms. Gross
received 103,891 restricted shares of the Company's common stock. This
transaction was privately negotiated, did not involve a public offering and was
exempt from registration under the Securities Act in reliance on Section 4(2) of
such Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
3.3 Certificate of Name Change from Econophone, Inc. to Destia Communications, Inc. (incorporated by
reference to Form 10-K filed by the Company for the year ended December 31, 1998).
3.4 Certificate of Designation
4.1* Specimen of Destia Communications, Inc.'s 11% Senior Discount Note due 2008.
4.2* Indenture, dated as of February 18, 1998, between Destia Communications, Inc. and The Bank of New
York, as Trustee.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.3* Specimen of Destia Communications, Inc.'s 13 1/2% Senior Note due 2007.
4.4* Indenture, dated as of July 1, 1997, between Destia Communications, Inc. and The Bank of New York, as
Trustee.
4.5 Specimen of Common Stock certificate.
5.1 Opinion of Schulte Roth & Zabel LLP regarding legality.
8.1 Opinion of Schulte Roth & Zabel LLP regarding tax matters (contained in Exhibit 5.1).
10.1** Securityholders Agreement, dated as of November 1, 1996, between Alfred West, Destia Communications,
Inc. and Princes Gate Investors II, L.P.
10.2** Securities Purchase Agreement, dated as of November 1, 1996, between Destia Communications, Inc. and
Princes Gate Investors II, L.P.
10.3** Note Purchase Agreement, dated as of April 24, 1997, between Destia Communications, Inc. and Morgan
Stanley Group Inc.
10.4** Form of Note under Note Purchase Agreement.
10.5* Second Amended and Restated Equipment Loan and Security Agreement, dated as of January 28, 1998,
between Destia Communications, Inc. and NTFC Capital Corporation.
10.6* Stock Purchase Agreement, dated January 28, 1998, between Destia Communications, Inc. and the
shareholders of Voicenet Corporation.
10.7 Amendment, dated April 16, 1998, to Stock Purchase Agreement between Destia Communications, Inc. and
the shareholders of Voice Net Corporation (incorporated by reference to Form 10-K filed by the
Company for the year ended December 31, 1998).
10.8 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alan Levy.
10.9 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alfred West.
10.10 Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Phillip J.
Storin (incorporated by reference to Form 10-K filed by the Company for the year ended December 31,
1998).
10.11*** Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Kevin Alward.
10.12 Employment Agreement, dated January 1, 1999, between Destia Communications, Inc. and Richard L.
Shorten, Jr.
10.13** Amended and Restated Destia Communications, Inc. 1996 Flexible Incentive Plan.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.14 Amendment to 1996 Flexible Incentive Plan (incorporated by reference to Form 10-K filed by the
Company for the year ended December 31, 1998).
10.15 Stock Purchase Agreement, dated July 17, 1998, between Destia Communications, Inc. and certain
shareholders of Telco Global Communications (incorporated by reference to
Form 10-K filed by the Company for the year ended December 31, 1998).
10.16**** Telecommunications Services Agreement between Frontier Communications of the West, Inc. and Destia
Communications, Inc., dated November 17, 1998.
10.17 1999 Flexible Incentive Plan.
10.18 Second Amendment to 1996 Flexible Incentive Plan.
10.19 Modification Agreement No. 1 dated as of March 31, 1999 to the Second Amended and Restated Equipment
Loan and Security Agreement between Destia Communications, Inc. and NTFC Capital Corporation.
10.20 Form of Indemnification Agreement with directors and officers
21.1 Subsidiaries of Destia Communications, Inc. (incorporated by reference to Form 10-K filed by the
Company for the year ended December 31, 1998).
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Schulte Roth & Zabel LLP (contained in Exhibit 5.1).
27.1*** Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed as exhibits to Registration Statement on Form S-4,
Commission file number 333-47711, and hereby incorporated herein by
reference.
** Previously filed as exhibits to Registration Statement on Form S-4,
Commission file number 333-33117, and hereby incorporated herein by
reference.
*** Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement on Form S-1, Commission File Number 333-71463 and hereby
incorporated herein by reference.
****Previously filed as an exhibit to the Inital Registration Statement on Form
S-1, Commission File number 333-71463 and hereby incorporated herein by
reference. Portions of the exhibit have been omitted pursuant to a request
for confidential treatment.
(b) Financial Statement Schedule
Schedule II--Schedule of Valuation and Qualifying Accounts (included
at page S-1)
ITEM 17. UNDERTAKINGS
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.
II-4
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense or any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Borough of Paramus, New Jersey on
the 4th day of May, 1999.
<TABLE>
<S> <C> <C>
DESTIA COMMUNICATIONS, INC.
By: /s/ PHILLIP J. STORIN
-----------------------------------------
Name: Phillip J. Storin
Title: Chief Financial Officer, Senior
Vice President and Treasurer (Principal
Financial and Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
and
* Chairman of the Board of
- ------------------------------ Directors
Alfred West (Principal Executive
Officer)
*
- ------------------------------ President, Chief Operating
Alan L. Levy Officer and Director
*
- ------------------------------ Director
Gary S. Bondi
*
- ------------------------------ Director
Steven West
*
- ------------------------------ Director
Stephen Munger
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RICHARD L. SHORTEN, JR.
-----------------------------------
Richard L. Shorten, Jr., May 4, 1999
Attorney-in-fact
</TABLE>
Original powers of attorney authorizing Alan L. Levy, Richard L. Shorten and
Alfred West and each of them to sign this amendment on behalf of the directors
and officers of the Registrant indicated above are held by the Registrant and
available for examination pursuant to Rule 302(b) of Regulation S-T.
II-6
<PAGE>
SCHEDULE II
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGES
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
OF PERIOD EXPENSES DEDUCTIONS(A) PERIOD
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
December 31,
1998............................................ $ 1,593,531 $ 7,392,234 $(4,899,663) $ 4,086,102
1997............................................ 761,372 3,890,525 (3,058,366) 1,593,531
1996............................................ 470,610 290,762 -- 761,372
</TABLE>
- ------------------------
(a) Represents writeoffs, recoveries and other deductions.
S-1
<PAGE>
[ ] SHARES
DESTIA COMMUNICATIONS, INC.
COMMON STOCK
(PAR VALUE .01 PER SHARE)
UNDERWRITING AGREEMENT
[ ], 1999
<PAGE>
[ ], 1999
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Lehman Brothers Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Credit Suisse First Boston (Europe) Limited
Lehman Brothers International (Europe)
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
DESTIA COMMUNICATIONS, INC. a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several Underwriters, (as defined below) 6,500,000
shares of its Common stock, $.01 par value per share (the "FIRM SHARES").
It is understood that, subject to the conditions hereinafter stated,
[ ] Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S.
UNDERWRITERS") in connection with the offering and sale of such U.S. Firm
Shares in the United States and Canada to United States and Canadian Persons
(as such terms are defined in the Agreement Between U.S. and International
Underwriters of even date herewith), and [ ] Firm Shares (the
"INTERNATIONAL SHARES") will be sold to the several International
Underwriters named in Schedule II hereto (the "INTERNATIONAL UNDERWRITERS")
in connection with the offering and sale of such International Shares outside
the United States and Canada to persons other than United States and Canadian
Persons. Morgan Stanley & Co. Incorporated and Credit Suisse First Boston
Corporation and Lehman Brothers Inc. shall act as representatives (the "U.S.
REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited and Credit Suisse First Boston (Europe) Limited and
Lehman Brothers International (Europe) shall act as representatives (the
"INTERNATIONAL REPRESENTATIVES") of the several International Underwriters.
The U.S. Underwriters and the International Underwriters are hereinafter
collectively referred to as the Underwriters.
<PAGE>
The Company also proposes to issue and sell to the several U.S. Underwriters
not more than an additional 975,000 shares of its Common stock, $.01 par value
per share (the "ADDITIONAL SHARES"), if and to the extent that the U.S.
Representatives shall have determined to exercise, on behalf of the U.S.
Underwriters, the right to purchase such shares of common stock granted to the
U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares
are hereinafter collectively referred to as the "SHARES". The shares of Common
Stock, $.01 par value per share, of the Company to be outstanding after giving
effect to the sales contemplated hereby are hereinafter referred to as the
"COMMON STOCK".
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "PROSPECTUS". If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"RULE 462(B) REGISTRATION STATEMENT"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462(b)
Registration Statement.
Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve
up to 325,000 Shares to be purchased by it under this Agreement for sale to the
Company's directors, officers, employees and business associates and other
parties related to the Company (collectively, "PARTICIPANTS"), as set forth in
the Prospectus under the heading "Underwriters" (the "DIRECTED SHARE PROGRAM").
The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program
are referred to hereinafter as the "DIRECTED SHARES". Any Directed Shares not
orally confirmed for purchase by any Participant by the end of the business day
on which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the Underwriters that:
2
<PAGE>
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and
no proceedings for such purpose are pending before or threatened by the
Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations of
the Commission thereunder, and (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly subsisting under
the laws of the State of Delaware, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. All of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned directly by
the Company, free and clear of all liens, encumbrances, equities and
claims except that the Company owns 81.25% of the common stock of America
First Ltd. ("America First") and America First has issued no preferred
stock.
3
<PAGE>
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of the
Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or
by-laws of the Company or any agreement or other instrument binding upon the
Company or any of its subsidiaries or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any of its subsidiaries, and no consent, approval, authorization or order
of, or qualification with, any governmental body or agency is required for
the performance by the Company of its obligations under this Agreement,
except such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement). Furthermore, (1) the
Company and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material transaction
not in the ordinary course of business; (2) the Company has not purchased
any of its outstanding capital stock, nor declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock other than
ordinary and customary dividends; and (3) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company and its subsidiaries, except in each case as described in or
contemplated by the Prospectus in respect of the business of the Company
described therein.
4
<PAGE>
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration Statement or
the Prospectus and are not so described or any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL
LAWS"), (ii) have received all permits, licenses or other approvals required
of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any
such permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company
to require the Company to include securities with the Shares registered
pursuant to the Registration Statement except for such rights as have been
waived in a valid and binding written document.
(p) The Company and its subsidiaries have good title to all properties
and assets owned by them and have good leasehold interest in each property
and asset leased by them, in each case free and clear of all pledges, liens,
encumbrances, security interests, charges, mortgages and defects, except (i)
such as are described or referred to in the Prospectus and the financial
statements and notes thereto contained therein, (ii) such as do not
materially affect the value of such property or asset, (iii) such as do
5
<PAGE>
not interfere with the use made and proposed to be made of such
properties or assets by the Company or its subsidiaries, as the case may
be or (iv) such as do not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(q) The Company and its subsidiaries have filed all foreign and U.S.
federal and state income and franchise tax returns required to be filed and
have paid all taxes shown thereon as due, and there is no material tax
deficiency which has been asserted against the Company or any of its
subsidiaries; all material tax liabilities of the Company and its
subsidiaries are adequately provided for on the books of the Company or its
subsidiaries, as the case may be.
(r) Except as disclosed in the prospectus, the Company and its
subsidiaries own or possess all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in connection with the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would reasonably be expected to
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole.
(s) No material labor dispute with the employees of the Company or any
of its subsidiaries exists, except as described in or contemplated by the
Prospectus, or, to the knowledge of the Company, is imminent; and the
Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that would reasonably be expected to result in
any material adverse change in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its subsidiaries,
taken as a whole.
(t) Except as set forth in the Prospectus, the Company and its
subsidiaries have all necessary permits, licenses, authorizations, consents
and approvals and have made all necessary filings required under any
federal, state, local or foreign supranational, national or regional law,
regulation or rule, and have obtained all necessary authorizations, consents
and approvals from other persons, material to the present conduct of their
respective businesses, in each case except to the extent that the failure to
obtain such permits, licenses, authorizations, consents or approvals or to
make such filings would not, singly or in the aggregate, have a material
adverse effect on the properties, assets, prospects, condition, financial or
otherwise, business or operations of the Company and its subsidiaries, taken
as a whole; except as set forth in
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the Prospectus, the Company and its subsidiaries have not received any
notice of proceedings which remain unresolved relating to revocation or
modification of any such permits, licenses, authorizations, consents or
approvals, nor is the Company or any of its subsidiaries in violation of,
or in default under, any such license, authorization, consent or approval
or any federal, state, local or foreign supranational, national or
regional law, regulation or rule or any decree, order or judgment
applicable to the Company or its subsidiaries the effect of which could
have a material adverse effect on the properties, assets, prospects,
condition, financial or otherwise, business or operations of the Company
and its subsidiaries, taken as a whole.
(u) The Company and its subsidiaries are insured against such losses
and risks and in such amounts as management of the Company reasonably
believes are prudent for the operation of their business; and neither the
Company nor any of its subsidiaries has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially
and adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the company and its subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus.
(v) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or
specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(w) The financial statements included in the Prospectus present fairly
the consolidated financial position of the Company as of the dates indicated
and the results of operations and cash flows of the Company for the periods
specified. Such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved. The selected financial data included in the
Prospectus present fairly the information shown therein and have been
compiled from data contained in the audited financial statements of the
Company, except as indicated in the Prospectus.
(x) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operation of
the Company or any of its
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subsidiaries will be affected by the Year 2000 Problem (that is, any
significant risk that computer hardware or software applications used by
the Company and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to
January 1, 2000); as a result of such review, the Company has no reason
to believe, and does not believe, the (A) there are any issues related to
the Company's preparedness to address the Year 2000 Problem that are of a
character required to be described or referred to in the Registration
Statement or Prospectus and (B) the Year 2000 Problem will have a
material adverse effect on the condition, financial or otherwise, or on
the earnings, business or operations of the Company and its subsidiaries,
taken as a whole, or result in any material loss or interference with the
business or operations of the Company and its subsidiaries taken as a
whole. Based on its inquiries to date, the Company believes that the
suppliers, vendors, customers or other material third parties used or
served by the Company and its subsidiaries are addressing or will address
the Year 2000 Problem in a timely manner.
Furthermore, the Company represents and warrants to Morgan Stanley that (i)
the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with any
applicable laws or regulations of foreign jurisdiction in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are offered
outside the United States.
The Company has not offered, or caused the Underwriters to offer, Shares to
any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the
customer's or supplier's level or type of business with the Company, or (ii) a
trade journalist or publication to write or publish favorable information about
the Company or its products.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
here to opposite its names at U.S.$ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall
have a one-time right to purchase, severally
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and not jointly, up to 975,000 Additional Shares at the Purchase Price. If
the U.S. Representatives, on behalf of the U.S. Underwriters, elect to
exercise such option, the U.S. Representatives shall so notify the Company in
writing not later than 30 days after the date of this Agreement, which notice
shall specify the number of Additional Shares to be purchased by the U.S.
Underwriters and the date on which such shares are to be purchased. Such date
may be the same as the Closing Date (as defined below) but not earlier than
the Closing Date nor later than ten business days after the date of such
notice. Additional Shares may be purchased as provided in Section 4 hereof
solely for the purpose of covering overallotments made in connection with the
offering of the Firm Shares. If any Additional Shares are to be purchased,
each U.S. Underwriter agrees, severally and not jointly, to purchase the
number of Additional Shares (subject to such adjustments to eliminate
fractional shares as the U.S. Representatives may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as
the number of U.S. Firm Shares set forth in Schedule I hereto opposite the
name of such U.S. Underwriter bears to the total number of U.S. Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i)
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Shares to be sold hereunder (B)
the issuance by the Company of shares of Common Stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
hereof of which the Underwriters have been advised in writing or (C)
transactions by any person other than the Company relating to shares of
Common Stock or other securities acquired in open market transactions after
the completion of the offering of the Shares.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$[ ] a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$[ ] a share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
U.S.$[ ] a share, to any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to the
Company in Federal or other funds immediately available in New York City against
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delivery of such Firm Shares for the respective accounts of the several
Underwriters at a closing to be held at the office of Shearman & Sterling, 599
Lexington Avenue, New York, New York, at 10:00 A.M., New York City time, on
[ ], 1999, or at such other time on the same or such other date, not later
than [ ], 1999, as shall be designated in writing by you. The time
and date of such payment are herein referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company in Federal or
other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at a
closing to be held at the offices of Shearman & Sterling, 599 Lexington Avenue,
New York, New York, at 10:00 a.m., New York City time, on the date specified in
the notice described in Section 2 or at such other time on the same or on such
other date, in any event not later than [ ], 1999, as shall be designated
in writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [ ] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the date of this Agreement and prior to the Closing
Date, there shall not have occurred any change, or any development involving
a prospective change, in the condition, financial or otherwise, or in the
earnings, business or operations, of the Company and its subsidiaries, taken
as a whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement)
that, in your judgment, is material and adverse and that makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
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(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the Closing
Date and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied on
or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an opinion
of Schulte Roth & Zabel LLP, independent counsel for the Company, dated the
Closing Date, substantially to the effect set forth in Exhibit B.
(d) The Underwriters shall have received on the Closing Date an opinion
of Shearman & Sterling, counsel for the Underwriters, dated the Closing
Date, in form and substance satisfactory to you.
(e) The Underwriters shall have received on the Closing Date opinions
of (i) Swidler, Berlin, Shereff, Friedman, special U.S. federal and state
regulatory counsel to the Company, (ii) Simmons & Simmons, special U.K. and
European Union regulatory counsel to the Company, (iii) Baker & McKenzie,
special Belgian regulatory counsel to the Company, (iv) Doser Amereller
Noack, special German regulatory counsel to the Company, and (v) Simmons &
Simmons, special French regulatory counsel to the Company, respectively,
dated the Closing Date, substantially in the form of Exhibits C-1, C-2,
C-3, C-4, and C-5, respectively.
(f) The Underwriters shall have received on each of the date hereof and
the Closing Date a letter, dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Arthur Andersen
LLP, the Company's independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus; PROVIDED that the letter delivered on the Closing Date shall
use a "cut-off date" not earlier than the date hereof.
(g) The "lockup" agreements, each substantially in the form of Exhibit
A hereto, between you and certain shareholders, officers and directors of
the Company listed on Exhibit A-1 hereto relating to sales and certain other
dispositions of shares of Common
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Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
(h) The Shares shall have been approved for listing on the Nasdaq
National Market, subject only to official notice of issuance.
(i) You shall have received such other documents as you and your
counsel shall reasonably request.
The several obligations of the U.S. Underwriters to purchase Additional
Shares hereunder are subject to the delivery to the U.S. Representatives on the
Option Closing Date of such documents as they may reasonably request with
respect to the good standing of the Company, the due authorization and issuance
of the Additional Shares and other matters related to the issuance of the
Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the agreements of
the Underwriters contained in this Agreement, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, seven signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you, without charge, in New York City,
prior to 10:00 a.m. New York City time on the business day next succeeding
the date of this Agreement and during the period mentioned in Section 7(c)
below, as many copies of the Prospectus and any supplements and amendments
thereto or to the Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object without unreasonable delay, and to file with the
Commission within the applicable period specified in Rule 424(b) under the
Securities Act any prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result
of which it is necessary in your judgement to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, forthwith to prepare, file with the Commission
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and furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to any
other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request; provided that in no event shall the Company be obligated to qualify
to do business in any jurisdiction where it is not now so qualified or to
take any action which would subject it to taxation in any jurisdiction where
it is not now so subject or to service or process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction where
it is not now so subject.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve-month
period ending June 30, 2000 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of
the Registration Statement, any preliminary prospectus, the Prospectus
and amendments and supplements to any of the foregoing, including all
printing costs associated therewith, and the mailing and delivering of
copies thereof to the Underwriters and dealers, in the quantities
hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky or Legal Investment memorandum in connection with
the offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer and
sale under state securities laws as provided in Section 6(d) hereof,
including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky or Legal Investment memorandum, (iv) all
filing fees and the reasonable fees and disbursements of counsel to the
Underwriters incurred in connection with the review and qualification of
the offering of the Shares by the
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National Association of Securities Dealers, Inc., (v) all fees and
expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to listing the Shares on the Nasdaq National
Market, (vi) the cost of printing certificates representing the Shares,
(vii) the costs and charges of any transfer agent, registrar or
depositary, (viii) the costs and expenses of the Company relating to
investor presentations on any "road show" undertaken in connection with
the marketing of the offering of the Shares, including, without
limitation, expenses associated with the production of road show slides
and graphics, fees and expenses of any consultants engaged in connection
with the road show presentations with the prior approval of the Company,
travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered
in connection with the road show, (ix) all other costs and expenses
incident to the performance of the obligations of the Company hereunder
for which provision is not otherwise made in this Section and (x) all
expenses in connection with any offer and sale of the Shares outside of
the United States, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with offers
and sales outside of the United States. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution", and the last paragraph of Section 9 below, the
Underwriters will pay all of their costs and expenses, including fees and
disbursements of their counsel, stock transfer taxes payable on resale of
any of the Shares by them and any advertising expenses connected with any
offers they may make.
(g) In the event that counsel for the Underwriters determines that any
of the Underwriters, or any successors thereto, has become an Affiliate (as
such term is defined in Rule 405 under the Securities Act) of the Issuer, or
any successor thereto, the Issuer (or its successor) shall use its best
efforts to cause to be filed as soon as practicable after receiving notice
thereof from such counsel a shelf registration statement (the "RESALES
REGISTRATION STATEMENT") under the Securities Act providing for the resale
by the Underwriters (or any of their Affiliates) of all securities of the
Issuer that were originally offered to the public and that they acquire from
time to time in connection with market-making activities and to have such
shelf registration statement declared effective by the Commission. The
Issuer (or its successor) will use its best efforts to keep the Resales
Registration Statement effective and current until such time as each
Underwriter and its Affiliates shall, in its opinion, cease to be an
Affiliate of the Issuer, as evidenced by written notice sent promptly upon
such event to the Issuer.
(h) That, in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the National Association of Securities Dealers, Inc. (the
"NASD") or the NASD rules from sale,
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transfer, assignment, pledge or hypothecation for a period of three
months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which
Participants will need to be so restricted. The Company will direct the
transfer agent to place stop transfer restrictions upon such securities
for such period of time.
(i) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters
in connection with the Directed Share Program.
Furthermore, the Company covenants with Morgan Stanley that the Company will
comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (in each case, as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company to such Underwriter;
but only with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendments or supplements thereto.
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(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b) such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought
(the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably
satisfactory to the indemnified party to represent the indemnified party and
any others the indemnifying party may designate in such proceeding and shall
pay the fees and disbursements of such counsel related to such proceeding. In
any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. It is understood
that the indemnifying party shall not, in respect of the legal expenses of
any indemnified party in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the fees and expenses of
more than one separate firm (in addition to any local counsel) for all such
indemnified parties and that all such fees and expenses shall be reimbursed
as they are incurred. Such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated, in the case of parties indemnified pursuant to
Section 7(a), and by the Company, in the case of parties indemnified pursuant
to Section 7(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or 7(b)
is unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then each indemnifying party
under such paragraph, in lieu of
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indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause 7(d)(i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause 7(d)(i) above but also the relative fault of
the Company on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand in connection with the offering of the
Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses) received
by the Company and the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover of
the Prospectus, bear to the aggregate Public Offering Price of the Shares.
The relative fault of the Company on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the respective number
of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Section 7 were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
17
<PAGE>
(f) The indemnity and contribution provisions contained in this Section
7 and the representations, warranties and other statements of the Company
contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, or by or on behalf of the Company, its officers
or directors or any person controlling the Company and (iii) acceptance of
and payment for any of the Shares.
8. DIRECTED SHARE PROGRAM INDEMNIFICATION. (a) The Company agrees to
indemnify and hold harmless Morgan Stanley and each person, if any, who controls
Morgan Stanley within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation) shall
be instituted involving any Morgan Stanley Entity in respect of which indemnity
may be sought pursuant to Section 10(a), the Morgan Stanley Entity seeing
indemnity, shall promptly notify the Company in writing and the Company, upon
request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any others the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in respect of the legal expenses of the Morgan Stanley
Entities in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Morgan Stanley Entities. Any such
separate firm for the Morgan Stanley Entities shall be designated in writing by
Morgan Stanley. The Company shall not be liable for any settlement of any
proceeding effected without its written consent, but if
18
<PAGE>
settled with such consent or if there be a final judgment for the plaintiff,
the Company agrees to indemnify the Morgan Stanley Entities from and against
any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time a Morgan Stanley
Entity shall have requested the Company to reimburse it for fees and expenses
of counsel as contemplated by the second and third sentences of this
paragraph, the Company agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by the Company of the aforesaid
request and (ii) the Company shall not have reimbursed the Morgan Stanley
Entity in accordance with such request prior to the date of such settlement.
The Company shall not, without the prior written consent of Morgan Stanley,
effect any settlement of any pending or threatened proceeding in respect of
which any Morgan Stanley Entity is or could have been a party and indemnity
could have been sought hereunder by such Morgan Stanley Entity, unless such
settlement includes an unconditional release of the Morgan Stanley Entitites
from all liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 10(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the Company
in lieu of indemnifying the Morgan Stanley Entity thereunder, shall
contribute to the amount paid or payable by the Morgan Stanley Entity as a
result of such losses, claims, damages or liabilities (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Morgan Stanley Entities on the other hand from the
offering of the Directed Shares or (ii) if the allocation provided by clause
10(c)(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
10(c)(i) above but also the relative fault of the Company on the one hand and
of the Morgan Stanley Entities on the other hand in connection with any
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Morgan
Stanley Entities on the other hand in connection with the offering of the
Directed Shares shall be deemed to be in the same respective proportions as
the net proceeds from the offering of the Directed Shares (before deducting
expenses) and the total underwriting discounts and commissions received by
the Morgan Stanley Entities for the Directed Shares, bear to the aggregate
Public Offering Price of the Directed Shares. If the loss, claim, damage or
liability is caused by an untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities
on the other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement or the omission or alleged
omission relates to information supplied by the Company or by the Morgan
Stanley Entities and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would not be
just or equitable if contribution pursuant to this Section 10 were determined by
PRO RATA allocation
19
<PAGE>
(even if the Morgan Stanley Entities were treated as one entity for such
purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 10(c). The amount paid or
payable by the Morgan Stanley Entities as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by the Morgan Stanley Entities in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 10, no Morgan Stanley Entity
shall be required to contribute any amount in excess of the amount by which
the total price at which the Directed Shares distributed to the public were
offered to the public exceeds the amount of any damages that such Morgan
Stanley Entity has otherwise been required to pay. The remedies provided for
in this Section 10 are not exclusive and shall not limit any rights or
remedies which may otherwise be available to any indemnified party at law or
in equity.
(e) The indemnity and contribution provisions contained in this Section 10
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. TERMINATION. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall
have been suspended or materially limited on or by, as the case may be, any
of the New York Stock Exchange, the American Stock Exchange, the National
Association of Securities Dealers, Inc., the Chicago Board of Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or
any calamity or crisis that, in your judgment, is material and adverse and
(b) in the case of any of the events specified in clauses 8(a)(i) through
8(a)(iv), such event, singly or together with any other such event, makes it,
in your judgment, impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
10. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of the Shares to be purchased on such date, the other
20
<PAGE>
Underwriters shall be obligated severally in the proportions that the number
of Firm Shares set forth opposite their respective names in Schedule I or
Schedule II bears to the aggregate number of Firm Shares set forth opposite
the names of all such non-defaulting Underwriters, or in such other
proportions as you may specify, to purchase the Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; PROVIDED that in no event shall the number of Shares that any
Underwriter has agreed to purchase pursuant to this Agreement be increased
pursuant to this Section 11 by an amount in excess of one-ninth of such
number of Shares without the written consent of such Underwriter. If, on the
Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Firm Shares to be purchased, and arrangements satisfactory to you and the
Company for the purchase of such Firm Shares are not made within 36 hours
after such default, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in
any other documents or arrangements may be effected. If, on the Option
Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase in the absence of such default. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
21
<PAGE>
13. HEADINGS. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
DESTIA COMMUNICATIONS, INC.
By
--------------------------------------
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
LEHMAN BROTHERS INC.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------------------
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
----------------------------------------
Name:
Title:
22
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated................................................................
Credit Suisse First Boston Corporation...........................................................
Lehman Brothers Inc..............................................................................
---------------
Total U.S. Firm Shares...........................................................................
---------------
---------------
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
- ----------- ---------------
<S> <C>
Morgan Stanley & Co. International Limited.......................................................
Credit Suisse First Boston (Europe) Limited......................................................
Lehman Brothers International (Europe)...........................................................
---------------
Total International Firm Shares..................................................................
---------------
---------------
</TABLE>
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
, 1999
Morgan Stanley & Co. Incorporated
Credit Suisse First Boston Corporation
Lehman Brothers Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Credit Suisse First Boston (Europe) Limited
Lehman Brothers International (Europe)
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and Morgan Stanley & Co. International Limited ("MSIL") propose to
enter into an Underwriting Agreement (the "Underwriting Agreement") with Destia
Communications, Inc., a Delaware corporation (the "Company"), providing for the
public offering (the "Public Offering") by the several Underwriters, including
Morgan Stanley and MSIL (the "Underwriters") of [ ] shares (the
"Shares") of the Common stock, $.01 par value per share of the Company (the
"Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of,
A-1
<PAGE>
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2)
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (1) or (2) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired
in open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into
or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
--------------------------------------
(Name)
--------------------------------------
(Address)
A-2
<PAGE>
EXHIBIT A-1
Kevin A. Alward
Alward Investment Associates LLC
Kevin and Belinda Alward Grantor Retained Annuity Trust
Gary S. Bondi
GS Econ Ltd. Partnership
Alan L. Levy
Alfred West
AT Econ Ltd. Partnership
AT Econ Ltd. Partnership No. 2
Steven West
SS Econ Ltd. Partnership
SS Econ Ltd. Partnership No. 2
Princes Gate Investors II, L.P.
A-3
<PAGE>
EXHIBIT B
FORM OF OPINION OF COUNSEL
FOR THE COMPANY
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has the corporate power and authority to own its property and
to conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares to be sold by the
Selling Shareholders) outstanding prior to the issuance of the Shares to be sold
by the Company have been duly authorized and are validly issued, fully paid and
non-assessable;
(v) all of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims;
(vi) the Shares to be sold by the Company have been duly authorized and,
when issued and delivered in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights;
B-1
<PAGE>
(vii) this Agreement [and each of the Power of Attorney and Custody
Agreements] have been duly authorized, executed and delivered by the Company;
(viii) the execution and delivery by the Company of, and the performance by
the Company of its obligations under, this Agreement [and the Power of Attorney
and Custody Agreements] will not contravene any provision of applicable law or
the certificate of incorporation or by-laws of the Company or, to the best of
such counsel's knowledge, any agreement or other instrument binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole, or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations under
this Agreement [or the Power of Attorney or Custody Agreements,] except such as
may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the captions "[ ],"
"[ ]," "Description of Capital Stock" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(x) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended;
(xii) the Company and its subsidiaries (A) are in compliance with any and
all applicable Environmental Laws, (B) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (C) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with
B-2
<PAGE>
Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken as a
whole;
(xiii) the statements in the Prospectus under the caption "Certain United
States Federal Income Tax Considerations," insofar as such statements constitute
a summary of the United States federal tax laws referred to therein, are
accurate and fairly summarize the United States federal tax laws referred to
therein; and
* (xiv) such counsel (A) is of the opinion that the Registration Statement
and Prospectus (except for financial statements and schedules and other
financial and statistical data included therein as to which such counsel need
not express any opinion) comply as to form in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus when issued contained,
or as of the date such opinion is delivered contains, any untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
* The opinion and belief of Schulte Roth & Zabel LLP are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification, except as
specified.
B-3
<PAGE>
EXHIBIT C
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT C-1: Form of Opinion of U.S. Regulatory Counsel to the Company
EXHIBIT C-2: Form of Opinion of U.K. and European Union Regulatory Counsel to the Company
EXHIBIT C-3: Form of Opinion of Belgian Regulatory Counsel to the Company
EXHIBIT C-4: Form of Opinion of German Regulatory Counsel to the Company
EXHIBIT C-5: Form of Opinion of French Regulatory Counsel to the Company
</TABLE>
C-1
<PAGE>
EXHIBIT C-1
[U.S. REGULATORY COUNSEL OPINION FORM]
We are of the opinion that:
1. The descriptions in the Prospectus, dated [ ] 1999, (hereinafter
referred to as the "Prospectus") of federal statutes relating to
telecommunications, and the respective rules and regulations promulgated
thereunder, including, without limitation, the Telecommunications Act of 1996
and the Communications Act of 1934 (collectively, the "Federal Communications
Law"), and current telecommunications statutes, rules and regulations of the
states where Destia Communications, Inc. ("Destia") and its subsidiaries listed
on schedule A hereto (the "Subsidiaries") are authorized to provide
interexchange telecommunications services (collectively, the "State
Communications Law"), and the statements in the Prospectus discussing matters
related to the Federal Communications Law and the State Communications Law,
including, without limitation, those under the captions "Risk Factors--
Competition--North America--United States," "Risk Factors--Regulatory
Restrictions," "Risk Factors--Need for Interconnection," "Industry Overview,"
"Business--Competition," "Business-- Regulation--United States," are accurate in
all material respects and fairly summarize all matters described therein.
2. (A) The consummation of the transactions contemplated by the Prospectus
do not violate (1) the Federal Communications Law; (2) any rules and regulations
of the Federal Communications Commission ("FCC") applicable to Destia or any of
its Subsidiaries, (3) State Communications Law applicable to Destia and its
Subsidiaries, and (4) to the best of our knowledge after due inquiry, any
telecommunication related decree from any court, and (B) no authorization or
filing with the FCC or any state regulatory authority (hereinafter, "State
Authority") is necessary for the consummation of the transactions contemplated
by the Prospectus.
3. to our knowledge and after due inquiry of Destia, (A)(i) Destia is a
nondominant carrier authorized by the FCC to provide international and
interstate interexchange telecommunications services, (ii) Destia has been
granted Section 214 authority by the FCC to provide international message
telecommunications services through the resale of international switched voice
to [list countries], through the resale of private line services to [list
countries], and as a facilities-based carrier to [list countries]; (iii) Destia
has been authorized by the FCC to provide interstate interexchange message
telecommunications services, (iv) Destia and the Subsidiaries named on schedule
[ ] hereto are certified and/or registered to resell intrastate interexchange
telecommunications services in, and are not required to be certified to resell
intrastate interexchange telecommunications services in, the respective states
named on Schedule [ ] hereto and (v) in accordance with (i), (ii) and (iii)
above,
C-2
<PAGE>
Destia has on file with the FCC tariffs applicable to its international
and interstate exchange message telecommunications services; (B) to our
knowledge and after due inquiry of Destia, Destia has all the certificates,
orders, permits, licenses, authorizations, consents and approvals, including
those specified in subparagraph (A) above, of the FCC and the State Authorities
necessary to own, lease, or use its transmission lines and to conduct its
business in the manner described in the Prospectus; and (C) to our knowledge and
after due inquiry of Destia, Destia has not received any notice from the FCC of
any proceedings relating to the revocation or modification of any of such
certificates, orders, permits, licenses, authorizations, consents or approvals,
or the qualification or rejection of any such filing, the effect of which,
singly or in the aggregate, would have a material adverse effect on the
prospects, condition (financial or otherwise), earnings, business or operations
of Destia.
4. To our knowledge and after due inquiry of Destia, (A) Destia is
conducting its business in accordance with the FCC and state authorizations
mentioned in Paragraph 3 above; and (B) Destia is not in violation of or in
default under the Federal Communications Law, the rules or regulations of the
FCC or State Communications Law, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects, conditions,
(financial or otherwise), earnings, business or operations of Destia.
5. To our knowledge and after due inquiry of Destia, except as disclosed in
the Prospectus, (A) no decree or order of the FCC or any State Authority has
been issued against Destia; (B) no litigation, proceeding, inquiry or
investigation has been commenced or threatened, and no notice of violation or
order to show cause has been issued, against Destia, before or by the FCC or any
State Authority and (C) there are no rulemaking or other administrative
proceedings pending before the FCC or any State Authority, (i) which are
generally applicable to telecommunications services or the resale thereof, and
(ii) which, if decided adversely to the interest of Destia, would have a
material adverse effect on Destia.
C-3
<PAGE>
EXHIBIT C-2
[UK & EU REGULATORY COUNSEL OPINION FORM]
We are of the opinion that
1. The wholly owned subsidiary of Destia Communications, Inc., American
Telemedia Limited (the "Subsidiary") is the holder of the International
Facilities Licence ("the IFL") and registered under the International Simple
Voice Resale Licence ("the ISVR License") (together known as "the Licenses") in
the UK. The ISVR License relates to the provision of international simple voice
resale services by means of the Applicable Systems as specified in Annex A
thereto. The IFL relates to the provision of international services (other than
international simple voice resale services) by means of the Applicable Systems
as defined therein.
2. The descriptions in the Prospectus dated [ ] 1999 (the
"Prospectus") of current UK statutes relating to telecommunications, and the
respective rules and regulations promulgated thereunder (collectively, the "UK
Communications Law"), including, without limitation, the 1984 Act, and the
statements in the Prospectus discussing matters relating to the UK
Communications Law, including, without limitation, those under the captions
"Risk Factors--Increasing Pricing Pressures-- Price Competition in Europe,",
"Risk Factors--Need for Interconnection--Considerations Affecting
Interconnection in Europe,", "Industry Overview,", "Business--Company
Strategy--Focus on High Margin Retail Business,", "Business--Company
Operations--United Kingdom," and "Business-- Regulation--European Union--United
Kingdom" ("the Sections"), are accurate in all material respects and fairly
summarize all matters described therein. We expressly exclude from our opinion
any statements made in the Sections concerning the permissibility of the
Issuer's or the Subsidiary's services under the local laws of any country other
than the UK.
3. Except as stated below in this paragraph 3, the descriptions in the
Prospectus of current law of the EU relating to telecommunications, in the form
of Directives promulgated by European Commission (the "Commission") or otherwise
(collectively the "EC Directives"), including, without limitations, European
Commission Directive 90/388/EEC of 28 June 1990 (the "Services Directive") and
the European Commission Directive 96/19/EC of 13 March 1996 (the "Full
Competition Directive"), and the statements in the Prospectus discussing matters
related to the EC Directives, including, without limitation, those under the
captions"Risk Factors--Dependence on Third Party Sales Organizations,", "Risk
Factors--Regulatory Restrictions,", "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Euro Conversion,", "Industry
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<PAGE>
Overview", "Business--Company Operations--Continental Europe,",
"Business--Company Operations--United Kingdom,", "Business--Competition" and
"Business--Regulation--European Union" ("the EU Sections") are accurate in
all material respects and fairly summarise all matters described therein. We
expressly exclude from our opinion any statements made in the EU Sections
concerning the permissibility of Destia's or the Subsidiary's services under
the local laws of any country other than the UK.
4. The execution and delivery of the Underwriting Agreement dated [
] 1999 (hereinafter referred to as the "Underwriting Agreement") and the
consummation of the transactions contemplated hereby do not violate (1) the UK
Communications Law, (2) any telecommunications related rules or regulations of
the Department of Trade and Industry ("DTI") and OFTEL applicable to Destia and
the Subsidiary and (3) to the best of our knowledge any telecommunications
related judgment from any English court. However, the Subsidiary may be required
under the Licenses to notify the change in shareholding in Destia occasioned by
the consummation of the transactions referred to above.
5. (A) to the best of our knowledge, each of Destia and the Subsidiary has
all certificates, orders, permits, licenses, authorisations, consents and
approvals of and from the DTI necessary to own, lease, license and use its
properties and assets and to conduct its business in the manner described in the
Prospectus, it being recognized that the Subsidiary and not Destia holds the
necessary licenses to run any telecommunications systems owned or leased by
Destia in the UK; and (B) to the best of our knowledge and having made a
telephone enquiry of OFTEL (but no further enquiry), neither Destia nor the
Subsidiary has received any notice or proceedings relating to the revocation or
modification of any such DTI granted certificates, orders, permits, licenses,
authorisations, consents or approvals, or the qualification or rejection of any
such filing or registration, the effect of which, singly or in the aggregate,
would have a material adverse effect on the prospects, condition, financial or
otherwise, or in the earnings, business or operations of the Issuer and its
subsidiaries, taken as a whole.
6. To the best of our knowledge and having made a telephone enquiry of
OFTEL (but not further enquiry), (A) no determination or order of OFTEL has been
issued against Destia or the Subsidiary and (B) no litigation, proceeding,
inquiry or investigation has been commenced or threatened, and no interim
determination or provisional order has been issued, against Destia or the
Subsidiary before or by OFTEL.
7. To the best of our knowledge, there are no consultation documents,
complaints or other administrative proceedings pending before OFTEL which are in
the public domain (1) which are generally applicable to telecommunications
services or
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<PAGE>
the resale thereof and (2) which, if decided adversely to the interest of
Destia or the Subsidiary, would have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
AMERICAN TELEMEDIA LIMITED ("ATL") AND TELCO GLOBAL COMMUNICATIONS LIMITED
("TELCO") (TOGETHER "THE COMPANIES")
We are of the opinion that:
(A) the Companies have been duly incorporated and are validly existing as
limited liability companies under the laws of England and Wales. You
have informed us that the business of the Companies is the provision
of telephony and related and ancillary services. We confirm that both
ATL and Telco have full power and corporate authority to conduct such
business and to own their properties; and
(B) so far as we are aware, based on the Searches, no receiver,
liquidator or administrator of any of the Companies has been
appointed nor has any winding-up or administration order in respect
of any of the Companies been made; in this connection, it should be
noted that a search at the Register of Companies at Companies House
would not necessarily reveal whether or not a receiver, liquidator or
administrator of the Companies had been appointed or a winding-up or
administration order had been made against, or a winding-up
resolution had been passed by, any of the Companies on or prior to
the date of such search.
C-6
<PAGE>
EXHIBIT C-3
[BELGIAN REGULATORY COUNSEL OPINION FORM]
We are of the opinion that:
1. the descriptions in the Prospectus of [matters in connection with]
current statutes relating to telecommunications, and the respective
rules and regulations promulgated thereunder (collectively, the "
Communications Law"), including, without limitation, [relevant
telecommunications law], [and the statements in the Prospectus discussing
matters related to Communications Law, including, without limitation,
those under the captions [" -- " and
" -- -- ,",...] are accurate in all material respects and
fairly summarize all matters described therein;
2. Econophone limited (hereinafter referred to as "Econophone") is the
holder of licence[s] issued by the [relevant government agency], dated
, 199 , issued under Section of [relevant law], relating to
the provision of international telecommunications services in ;
3. (A) the execution and delivery of the Underwriting Agreement by
Destia Communications, Inc. (Hereinafter referred to as "the Company"), and
the consummation of the transactions contemplated thereby do not violate (1)
the Communications Law, (2) any rules or regulations of [government
agency] applicable to the Company, Econophone, and other subsidiaries of the
Company (hereinafter referred to as "the Subsidiaries") and (3) to the best
of our knowledge after due inquiry, any telecommunications related decree
from any court, and (B) no authorization of or filing with [government
agency] is necessary for the execution and delivery of the Underwriting
Agreement by the Company and the consummation of the transactions
contemplated thereby in accordance with the terms thereof;
4. (A) each of the Company, Econophone and the Subsidiaries has all
certificates, orders, permits, licenses, authorizations, consents and
approvals of and from [government agency] necessary to own, lease, license
and use its properties and assets and to conduct its business in the manner
described in the Prospectus; and (B) to the best of our knowledge after due
inquiry, neither the Company, Econophone nor any of the Subsidiaries has
received any notice of proceedings relating to the revocation or
modification of any such certificates, orders, permits, licenses,
authorizations, consents or approvals, or the qualification or rejection of
any such filing or registration, the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects, condition,
financial or otherwise, or in the earnings, business or operations of the
Company, Econophone and the Subsidiaries, taken as a whole;
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<PAGE>
5. to the best of our knowledge after due inquiry, (A) each of the
Company, Econophone and the Subsidiaries is conducting its business in
accordance with [government agency] authorizations listed in Paragraph 4
above and (B) neither the Company, Econophone nor any of the Subsidiaries is
in violation of or in default under the Communications Law or the
rules or regulations of [government agency], the effect of which, singly or
in the aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or in the earnings, business or
operations of the Company, Econophone and the Subsidiaries, taken as a
whole; and
6. to the best of our knowledge after due inquiry, (A) no decree or
order of [government agency] has been issued against the Company,
Econophone or any of the Subsidiaries; (B) no litigation, proceeding,
inquiry or investigation has been commenced or threatened, and no notice
of violation or order to show cause has been issued, against the Company,
Econophone or any of the Subsidiaries before or by [government agency]
and (C) there are no rulemakings or other administrative proceedings
pending before [government agency], (i) which are generally applicable to
telecommunications services or the resale thereof and (ii) which, if
decided adversely to the interest of the Company, Econophone or the
Subsidiaries, would have a material adverse effect on the Company,
Econophone and the Subsidiaries, taken as a whole.
* Unless otherwise defined herein, capitalized terms used herein have the
meanings assigned to such terms in the Underwriting Agreement.
C-8
<PAGE>
EXHIBIT C-4
[GERMAN REGULATORY COUNSEL OPINION FORM]
We are of the opinion that:
1. The description in Destia communications, Inc.'s Prospectus dated [ ]
1999 (hereinafter the "Prospectus") of matters in connection with the German
Telecommunications Act of 25 July 1996 (the "German Telecommunications Act")
and the statements in the Prospectus discussing matters related to the
German Telecommunications Act, including, without limitation, those under
the caption"Risk Factors--Competition,", "Industry Overview,",
"Business--The Destia Network-- European Network," and
"Business--Regulation--European Union--Germany,", are accurate in all
material respects regarding the German Telecommunications Act and fairly
summarize all matters described therein;
2. Destia Communications, Inc. ("The Company") has duly filed a notification as
a telecommunications service provider of the Bundesamt fur Post und
Telekommunikation on June 12, 1997;
3. The consummation of the transactions contemplated by the Prospectus do not
violate (1) the German Telecommunications Act, (2) any rules or regulations
promulgated under the German Telecommunications Act applicable to the
Company and its subsidiaries and (3) to the best of our knowledge after due
inquiry, any telecommunications-related decree from any German court, and
(B) no authorization of or filing with the Regulatory Authority for
Telecommunciations and Posts (this defined term refers to both the Federal
office of that name which was established on January 1 1998 and to the
Federal Ministry of Posts and Telecommunications which assumed the functions
of the Regulatory Authority for Telecommunications and Posts until 1 January
1998) is necessary for the consummation of the transactions contemplated by
the Prospectus in accordance with the terms thereof;
4. (A) To the best of our knowledge, each of the Company and its subsidiaries
has all certificates, orders, permits, licenses, authorizations, consents
and approvals of and from the Regulatory Authority of Telecommunications and
Posts necessary under the German Telecommunications Act to offer the
services described in Annex A; and (B) to the best of our knowledge after
due inquiry, neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any
such certificates, orders, permits, licenses, authorizations,
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<PAGE>
consents or approvals or the qualifications or rejection of any such
filing or registration, the effect of which, singly or in the aggregate,
would have a material adverse effect on the prospects, condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole;
5. To the best of our knowledge after due inquiry, (A) each of the Company and
its subsidiaries is conducting its business in accordance with the
notification filed with the Federal Office for Telecommunications and Post
on June 12, 1997 and (B) neither the Company nor any of its subsidiaries is
in violation of or in default under the German Telecommunications Act or the
rules or regulations of the Regulatory Authority for Telecommunciations and
Posts, the effect of which, singly or in the aggregate, would have a
material adverse effect on the prospects, condition, financial or otherwise,
or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole; and
6. To the best of our knowledge after due inquiry, (A) no decree or order of
the Regulatory Authority for Telecommunications and Posts has been issued
against the Company or any of its subsidiaries; (B) no litigation,
proceeding, inquiry or investigation has been commenced or threatened,
and no notice of violation or order to show cause has been issued,
against the Company or any of its subsidiaries before or by the
Regulatory Authority for Telecommunciations and Posts and (C) there are
no rulemakings or other administrative proceedings pending before the
Regulatory Authority for Telecommunications and Posts (i) which are
generally applicable to telecommunications services or the resale thereof
and (ii) which, if decided adversely to the interest of the Company or
its subsidiaries, would have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
C-10
<PAGE>
ANNEX A TO LEGAL
OPINION
GERMANY
[ ] 1999
SERVICES PROVIDED BY THE COMPANY AND ITS SUBSIDIARIES IN GERMANY
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<PAGE>
EXHIBIT C-5
[FRENCH REGULATORY COUNSEL OPINION FORM]
DESTIA COMMUNICATIONS, INC. (THE "ISSUER"): PROPOSED OFFERING OF SHARES OF
COMMON STOCK
We are of the opinion that;
The statements in the Prospectus dated [ ]1999 (hereinafter the
"Prospectus") concerning French law and regulation relating to
telecommunications (including the CODE DES POSTES ET TELECOMMUNICATIONS, and the
rules and regulations promulgated thereunder), including those under the
captions "Risk Factors--Competition,", "Risk Factors--Increasing Pricing
Pressures--Price Competition in Europe,", "Industry Overview," and
"Business--Regulation--European Union--France", are accurate in all material
respects.
ECONOPHONE FRANCE SARL (THE "COMPANY")
We are of the opinion that:
(A) The Company has been duly incorporated and is validly existing as a
limited liability company (SOCIETE A RESPONSABILITE LIMITEE) under the laws
of France.
(B) The Company's corporate objects, as stated in article 2 of the
STATUTS (a copy of which is annexed hereto) include the following object:
<TABLE>
<S> <C>
-- the development, marketing, in France and abroad, of telecommunications
services and telecommunications networks, by any technical means, whether
actual or developed in the future.
</TABLE>
We are of the opinion that the statements in the Prospectus concerning
French law and regulation relating to telecommunications (including CODE DES
POSTES ET TELECOMMUNICATIONS, and the rules and regulations promulgated
thereunder), including those under the captions "Risk Factors--Competition,",
"Risk Factors--Increasing Pricing Pressures--
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<PAGE>
Price Competition in Europe,", "Industry Overview," and
"Business--Regulation--European Union--France", are accurate in all material
respects.
C-13
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DESTIA COMMUNICATIONS, INC.
The following Amended and Restated Certificate of
Incorporation of Destia Communications, Inc. amends and restates the provisions
of and supersedes the Certificate of Incorporation filed with the Secretary of
State of the State of Delaware on Oct. 29, 1996, under the name of Econophone
Inc., in its entirety.
ARTICLE I
The name of the corporation is Destia Communications, Inc.
(the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the
State of Delaware is 11th Floor, Rodney Square North, 11th and Market
Streets, City of Wilmington, County of New Castle, Delaware 19801.
Corporation Guarantee and Trust Company is the Corporation's registered agent
at that address.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "General Corporation Law").
<PAGE>
ARTICLE IV
The Corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is seventy five
million (75,000,000) shares. Seventy two million (72,000,000) shares shall be
Voting Common Stock, $.01 par value per share, five hundred thousand (500,000)
shares shall be Non-voting Common Stock, $.01 par value per share, and two
million, five hundred thousand (2,500,000) shares shall be Preferred Stock, $.01
par value per share, without designation.
At the effective time of this amendment and without further
action on the part of the Corporation or the holders of its stock, each one (1)
share of Common Stock of the Corporation outstanding or held in treasury
immediately prior thereto shall be changed and converted into 1.038916026 fully
paid and non assessable shares of Common Stock of the Corporation, and at such
time each holder of record of Common Stock shall, without further action, be and
become the holder of 1.038916026 shares of Common Stock for each one (1) share
of Common Stock held of record immediately prior thereto. No fractional shares
shall be issued as a result of such stock split and, in lieu of any fractional
shares, the Corporation shall pay cash equal to such fraction multiplied by the
fair market value of the Common Stock as determined by the Board of Directors of
the Corporation. In addition, the rights, powers, designations, preferences and
relative, participating, optional or other rights of the Corporation's presently
authorized, issued and outstanding class of Redeemable Convertible preferred
stock, $.01 per share ("the Series A Preferred") shall, from and after the
filing of this Amended and Restated Certificate of Incorporation, be as set
forth in the Certificate of Designation pertaining
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<PAGE>
thereto that has been filed with the Secretary of State of the State of Delaware
at the same time as this Amended and Restated Certificate of Incorporation.
Additional Preferred Stock may be issued from time to time in
one or more series. The Board of Directors of the Corporation is hereby
authorized, within the limitations and restrictions prescribed by law or stated
in this Certificate of Incorporation, and by filing a certificate pursuant to
applicable law of the State of Delaware, to provide for the issuance of
Preferred Stock in additional series (in addition to the series set forth below
herein), to establish from time to time the number of shares to be included in
each such series and to fix the voting powers, designations, powers, preferences
and relative, participating, optional or other rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, including,
but not limited to, the fixing or alteration of the dividend rights, dividend
rate, conversion rights, conversion rates, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences of any wholly unissued series of Preferred
Stock, and to increase or decrease the number of shares of any series subsequent
to the issue of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased (including the Series A Preferred), the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by the General Corporation Law
(including, without limitation, paragraph (7) of subsection (b) of Section 102
thereof), as the same may be amended and supplemented from time to time.
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<PAGE>
ARTICLE VI
In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation.
Notwithstanding anything contained in this Certificate of
Incorporation or the Corporation's Bylaws to the contrary, the affirmative vote
of the holders of at least eighty percent (80%) of the outstanding shares
entitled to vote shall be required to make, alter, amend or repeal any Bylaw of
the Corporation.
ARTICLE VII
Advance notice of new business and stockholder nominations for
the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation. No action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation may be taken by stockholders without a meeting, and the power of
stockholders to consent in writing, without a meeting, to the taking of any
action is specifically denied.
Notwithstanding anything contained in this Certificate of
Incorporation or the Corporation's Bylaws to the contrary, the affirmative vote
of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares entitled to vote shall be required to amend or repeal, or
adopt any provision inconsistent with, this Article VII.
ARTICLE VIII
The Corporation shall, to the fullest extent permitted by the
General Corporation Law (including, without limitation, Section 145 thereof), as
the same may be amended and supplemented from time to time, indemnify any and
all persons whom it shall have the power to
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<PAGE>
indemnify under the General Corporation Law. The indemnification provided for
herein shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled whether as a matter of law, under any Bylaw of
the Corporation, by agreement, by vote of stockholders or disinterested
directors of the Corporation or otherwise.
ARTICLE IX
The election of directors of the Corporation need not be by
written ballot, unless the Bylaws of the Corporation otherwise provide.
ARTICLE X
Except as otherwise required by law or provided in the Bylaws
of the Corporation, and subject to the rights of the holders of any class or
series of shares issued by the Corporation having a preference over the Common
Stock as to dividends or upon liquidation to elect directors in certain
circumstances, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution approved by the
affirmative vote of no less than a majority of the directors then in office, by
the Chairman of the Board of Directors or by the President of the Corporation.
ARTICLE XI
All shares of Voting Common Stock currently owned and held by
Princes Gate Investors II, L.P. and its affiliates ("Princes Gate"), including
shares of Voting Common Stock owned and held by Morgan Stanley & Co.
Incorporated and Morgan Stanley & Co. International Limited, will not be
entitled to be voted by any such entity at any time unless, and except to the
extent that, at such time, such entity would be able to acquire and vote such
shares owned and held by it without violation of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), including following the
making of any filing and the obtaining of any
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<PAGE>
approvals required under the HSR Act; provided, however, that the foregoing
shall not limit the right of any other party to acquire or vote any shares of
Common Stock.
ARTICLE XII
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
The foregoing Amended and Restated Certificate of
Incorporation has been duly adopted by the stockholders of the Corporation in
accordance with the provisions of Section 242 and 245 of the General Corporate
Law of the State of Delaware, as amended.
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<PAGE>
In WITNESS WHEREOF, the undersigned has executed this
certificate on May __, 1999.
/s/ Richard L. Shorten, Jr., Esq.
--------------------------------------------
Richard L. Shorten, Jr., Esq.
Senior Vice President and General Counsel
The undersigned certifies under penalty of perjury that he has
read the foregoing Amended and Restated Certificate of Incorporation and knows
the contents thereof, and that the statements therein are true.
Executed at Paramus, New Jersey on May __, 1999
/s/ Richard L. Shorten, Jr., Esq.
--------------------------------------------
Richard L. Shorten, Jr., Esq.
Senior Vice President and General Counsel
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<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
DESTIA COMMUNICATIONS, INC.
ARTICLE I
OFFICES
Section 1. The registered office of the Corporation shall be
in the City of Wilmington, State of Delaware. The Corporation also may have
offices at such other places, within or without the State of Delaware, as the
Board of Directors determines from time to time or the business of the
Corporation requires.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Except as otherwise provided in
these Bylaws, all meetings of the stockholders shall be held on such dates and
at such times and places, within or without the State of Delaware, as shall be
determined by the Board of Directors or the Chairman of the Board of Directors
or the President and as shall be stated in the notice of the meeting or in
waivers of notice thereof. If the place of any meeting is not so fixed, it shall
be held at the registered office of the Corporation in the State of Delaware.
Section 2. ANNUAL MEETING. The annual meeting of stockholders
for the election of directors and the transaction of such other proper business
as may be brought before the meeting shall be held on such date after the close
of the Corporation's fiscal year, and at such time, as the Board of Directors
may from time to time determine.
<PAGE>
Section 3. SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes prescribed in the notice of the
meeting, may be called only (i) by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors then in
office, (ii) by the Chairman of the Board or (iii) the President of the
Corporation. Business transacted at special meetings shall be confined to the
purpose or purposes stated in the notice.
Section 4. NOTICE OF MEETINGS. Except as otherwise required or
permitted by law, whenever the stockholders are required or permitted to take
any action at a meeting, written notice thereof shall be given, stating the
place, date and hour of the meeting and, unless it is the annual meeting, by or
at whose direction it is being issued. The notice also shall designate the place
where the stockholders list is available for examination, unless the list is
kept at the place where the meeting is to be held. Notice of a special meeting
also shall state the purpose or purposes for which the meeting is called. A copy
of the notice of any meeting shall be delivered personally or shall be mailed,
not less than 10 and not more than 60 days before the date of the meeting, to
each stockholder entitled to vote at the meeting. If mailed, the notice shall be
deemed given when deposited in the United States mail, postage prepaid, directed
to each stockholder at such stockholder's address as it appears on the records
of the Corporation, unless such stockholder shall have filed with the Secretary
of the Corporation a written request that such notices be mailed to some other
address, in which case it shall be directed to such other address. Notice of any
meeting of stockholders need not be given to any stockholder who shall attend
the meeting, other than for the express purpose of objecting at the beginning
thereof to the transaction of any business because the meeting is not lawfully
called or convened, or who shall submit, either before or after the time stated
therein, a signed waiver of notice. Unless the Board of Directors, after an
adjournment is taken, shall fix a new record date for an adjourned meeting
-2-
<PAGE>
or unless the adjournment is for more than 30 days, notice of an adjourned
meeting need not be given if the place, date and time to which the meeting shall
be adjourned are announced at the meeting at which the adjournment is taken.
Section 5. QUORUM. Except as otherwise provided by law or by
the Certificate of Incorporation of the Corporation, at all meetings of
stockholders the holders of a majority of the shares of the Corporation entitled
to vote, present in person or represented by proxy, shall constitute a quorum
for the transaction of business.
Section 6. CONDUCT OF THE STOCKHOLDERS' MEETING. At every
meeting of the stockholders, the Chairman, if there is such an officer, or if
not, the President of the Corporation, or in his absence a Vice President
designated by the President, or in the absence of such designation any Vice
President, or in the absence of the President or any Vice President, a chairman
chosen by the majority of the voting shares represented in person or by proxy,
shall act as Chairman. The Secretary of the Corporation or a person designated
by the Chairman shall act as Secretary of the meeting. Unless otherwise approved
by the Chairman, attendance at the stockholders' meeting is restricted to
stockholders of record, persons authorized in accordance with Article II,
Section 8 of these Bylaws to act by proxy, and officers of the Corporation.
Section 7. CONDUCT OF BUSINESS. The Chairman shall call the
meeting to order, establish the agenda, and conduct the business of the meeting
in accordance therewith or, at the Chairman's discretion, it may be conducted
otherwise in accordance with the wishes of the stockholders in attendance. The
date and time of the opening and closing of the polls for each matter upon which
the stockholders will vote at the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly
manner, rule on the precedence of and procedure on, motions and other procedural
matters, and exercise discretion
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<PAGE>
with respect to such procedural matters with fairness and good faith toward all
those entitled to take part. The Chairman may impose reasonable limits on the
amount of time taken up at the meeting on discussion in general or on remarks by
any one stockholder. Should any person in attendance become unruly or obstruct
the meeting proceedings, the Chairman shall have the power to have such person
removed from participation. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at a meeting except in accordance with
the procedures set forth in this Article II, Section 7 and Article II, Section 8
below. The Chairman of a meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Article II, Section 7 and Article
II, Section 8, and, if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
Section 8. NOTICE OF STOCKHOLDER BUSINESS. At an annual or
special meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
the Chairman of the Board or the President of the Corporation, (b) properly
brought before the meeting by or at the direction of the Board of Directors, the
Chairman of the Board or the President of the Corporation, or (c) properly
brought before an annual meeting by a stockholder. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder proposal to be presented at an annual meeting shall be
received at the Corporation's principal executive offices not less than 120
calendar days in advance of the one year anniversary of the date that the
Corporation's (or the Corporation's predecessor's) proxy
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statement was released to stockholders in connection with the previous year's
annual meeting of stockholders. A stockholder's notice to the Secretary shall
set forth as to each matter the stockholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business.
Section 9. VOTING. Except as otherwise provided by law or by
the Certificate of Incorporation of the Corporation, at any meeting of the
stockholders every stockholder of record having the right to vote thereat shall
be entitled to one vote for every share of stock standing in his name as of the
record date and entitling him to so vote. A stockholder may vote in person or by
proxy. Except as otherwise provided by law or by the Certificate of
Incorporation, any corporate action to be taken by a vote of the stockholders,
other than the election of directors, shall be authorized by the affirmative
vote of a majority of the shares present or represented by proxy at the meeting
and entitled to vote on the subject matter. Directors shall be elected as
provided in Article III, Section 1 of these Bylaws. Written ballots shall not be
required for voting on any matter unless ordered by the chairman of the meeting,
except that, unless otherwise provided in the Certificate of Incorporation of
the Corporation, all elections of directors shall be by written ballot.
Notwithstanding anything in this Section 9, stockholders holding Non-voting
Common Stock shall not have the right to vote, except as required by law.
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Section 10. PROXIES. Every proxy shall be executed in writing
by the stockholder or by his authorized representative, or otherwise as provided
in the General Corporation Law of the State of Delaware (the "General
Corporation Law").
Section 11. LIST OF STOCKHOLDERS. At least 10 days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing their addresses
and the number of shares registered in their names as of the record date shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least 10 days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
BOARD OF DIRECTORS
Section 1. NUMBER AND TERM OF OFFICE. The number of directors
shall initially be six (6) and, thereafter, shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption). Except as provided in
Article II, Section 2, and, subject to the terms of any one or more classes, or
series of Preferred Stock, directors shall be elected by a plurality of the
votes cast at annual meetings of stockholders and each director shall serve
until his or her successor is duly elected and qualified, or until his or her
earlier death, incapacity, resignation, retirement, disqualification or removal
from office.
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Section 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Subject
to the terms of any one or more classes or series of Preferred Stock, newly
created directorships resulting from any increase in the number of directors and
any vacancies in the Board of Directors resulting from death, incapacity,
resignation, retirement, disqualification or removal from office may be filled
only by the affirmative vote of a majority of the directors then in office,
though less than a quorum, or by a sole remaining director, and any director so
elected shall hold office until his or her successor is duly elected and
qualified, or until his or her earlier death, incapacity, resignation,
retirement, disqualification or removal from office.
Section 3. REMOVAL. Subject to the rights of holders of any
series of Preferred Stock then outstanding, any directors, or the entire Board
of Directors, may be removed from office for cause only, by the affirmative vote
of the holders of at least a majority of the voting power of all of the then
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class.
Vacancies in the Board of Directors resulting from such removal may be filled,
as provided in Article III, Section 2.
Section 4. PLACE OF MEETINGS. Except as otherwise provided in
these Bylaws, all meetings of the Board of Directors shall be held at such
places, within or without the State of Delaware, as the Board determines from
time to time.
Section 5. ANNUAL MEETING. The annual meeting of the Board of
Directors shall be held either without notice immediately after the annual
meeting of stockholders and in the same place, or as soon as practicable after
the annual meeting of stockholders on such date and at such time and place as
the Board determines from time to time.
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Section 6. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held on such dates and at such times and places as the Board
determines from time to time. Notice of regular meetings need not be given,
except as otherwise required by law.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of
Directors, for any purpose or purposes, may be called by the Chairman of the
Board of Directors or the President and shall be called by the President or the
Secretary upon the written request of a majority of the directors. The request
shall state the date, time, place and purpose or purposes of the proposed
meeting.
Section 8. NOTICE OF MEETINGS. Notice of each special meeting
of the Board (and of each annual meeting which is not held immediately after,
and in the same place as, the annual meeting of stockholders) shall be given,
not later than 24 hours before the meeting is scheduled to commence, by the
Chairman of the Board of Directors, the President or the Secretary and shall
state the place, date and time and the purpose or purposes, of the meeting.
Notice of each meeting may be delivered to a director by hand or given to a
director orally (either by telephone or in person) or mailed or sent by
facsimile transmission to a director at his residence or usual place of
business, provided, however, that if notice of less than 72 hours is given it
may not be mailed. If mailed, the notice shall be deemed given when deposited in
the United States mail, postage prepaid; and if sent by facsimile transmission,
the notice shall be deemed given when transmitted with transmission confirmed.
Notice of any meeting need not be given to any director who shall submit, either
before or after the time stated therein, a signed waiver of notice or who shall
attend the meeting, other than for the express purpose of objecting at the
beginning thereof to the transaction of any business because the meeting is not
lawfully called or convened. Notice of an adjourned meeting, including the
place, date and time of the new meeting, shall be
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given to all directors not present at the time of the adjournment, and also to
the other directors unless the place, date and time of the new meeting are
announced at the meeting at the time at which the adjournment is taken.
Section 9. QUORUM. Except as otherwise provided by law or in
these Bylaws, at all meetings of the Board of Directors a majority of the whole
Board shall constitute a quorum for the transaction of business, and the vote of
a majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board. A majority of the directors present, whether or
not a quorum is present, may adjourn any meeting to another place, date and
time.
Section 10. CONDUCT OF MEETINGS. At each meeting of the Board
of Directors, the Chairman of the Board of Directors or, in his absence, the
President or, in his absence, a director chosen by a majority of the directors
present, shall act as chairman of the meeting. The Secretary or, in his absence,
any person appointed by the chairman of the meeting shall act as secretary of
the meeting and keep the minutes thereof. The order of business at all meetings
of the Board shall be as determined by the chairman of the meeting.
Section 11. COMMITTEES OF THE BOARD. The Board of Directors,
by resolution adopted by a majority of the whole Board, may designate an
executive committee and other committees, each consisting of one or more
directors. Each committee (including the members thereof) shall serve at the
pleasure of the Board of Directors and shall keep minutes of its meetings and
report the same to the Board. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member or members at any meeting of the committee. In addition, in
the absence or disqualification of a member of a committee, if no alternate
member has been designated by the Board of Directors, the member or members
present at any meeting and not disqualified from
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voting, whether or not they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member. Except as limited by law, each committee, to the
extent provided in the resolution of the Board of Directors establishing it,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation.
Section 12. OPERATION OF COMMITTEES. A majority of all the
members of a committee shall constitute a quorum for the transaction of
business, and the vote of a majority of all the members of a committee present
at a meeting at which a quorum is present shall be the act of the committee.
Each committee shall adopt whatever other rules of procedure it determines for
the conduct of its activities.
Section 13. CONSENT TO ACTION. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 14. ATTENDANCE OTHER THAN IN PERSON. Members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board or committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation shall constitute
presence in person at the meeting.
Section 15. POWERS. The Board of Directors may, except as
otherwise required by law, exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation, including, without
limiting the generality of the foregoing, the unqualified power:
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(1) to declare dividends from time to time in
accordance with law;
(2) to purchase or otherwise acquire any
property, rights or privileges on such terms
as it shall determine;
(3) to authorize the creation, making and
issuance, in such form as it may determine,
of written obligations of every kind,
negotiable or non-negotiable, secured or
unsecured, and to do all things necessary in
connection therewith;
(4) to remove any officer of the Corporation
with or without cause, and from time to time
to devolve the powers and duties of any
officer upon any other person for the time
being;
(5) to confer upon any officer of the
Corporation the power to appoint, remove and
suspend subordinate officers, employees and
agents;
(6) to adopt from time to time such stock,
option, stock purchase, bonus or other
compensation plans for directors, officers,
employees and agents of the Corporation and
its subsidiaries as it may determine;
(7) to adopt from time to time such insurance,
retirement and other benefit plans for
directors, officers, employees and agents of
the Corporation and its subsidiaries as it
may determine; and
(8) to adopt from time to time regulations, not
inconsistent with these bylaws, for the
management of the Corporation's business and
affairs.
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Section 16. COMPENSATION OF DIRECTORS. Directors, as such, may
receive, pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 17. NOMINATION OF DIRECTOR CANDIDATES. Subject to the
rights of holders of any class or series of Preferred Stock then outstanding,
nominations for the election of directors may be made by the Board of Directors
or by a committee appointed by the Board of Directors or by any stockholder
entitled to vote in the election of directors generally. However, any
stockholder entitled to vote in the election of directors generally may nominate
one or more persons for election as directors at a meeting only if timely notice
of such stockholder's intent to make such nomination or nominations has been
given in writing to the Secretary of the Corporation. To be timely, a
stockholder nomination for a director to be elected at an annual meeting shall
be received at the Corporation's principal executive offices not less than 120
calendar days in advance of the one year anniversary of the date that the
Corporation's (or the Corporation's Predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, or in the event of a nomination for a director to be elected at a
special meeting at which directors are to be elected pursuant to the
Corporation's notice of special meeting, notice by the stockholders to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the special meeting was mailed. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote for the election of directors on the date of such
notice and intends to appear in person or
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by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (d) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (e) the consent of each nominee to serve as a director of the Corporation if
so elected.
In the event that a person is validly designated as a nominee
in accordance with this Article III, Section 17 and shall thereafter become
unable or unwilling to stand for election to the Board of Directors, the Board
of Directors or the stockholder who proposed such nominee, as the case may be,
may designate a substitute nominee upon delivery, not fewer than five days prior
to the date of the meeting for the election of such nominee, of a written notice
to the Secretary setting forth such information regarding such substitute
nominee as would have been required to be delivered to the Secretary pursuant to
this Article III, Section 17 had such substitute nominee been initially proposed
as a nominee. Such notice shall include a signed consent to serve as a director
of the Corporation, if elected, of each such substitute nominee.
If the chairman of the meeting for the election of Directors
determines that a nomination of any candidate for election as a Director at such
meeting was not made in accordance with the applicable provisions of this
Article III, Section 17, such nomination shall be void; provided, however, that
nothing in this Article III, Section 17 shall be deemed to limit any voting
rights upon the occurrence of dividend arrearages provided to holders of
Preferred Stock pursuant to the Preferred Stock designation for any series of
Preferred Stock.
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ARTICLE IV
OFFICERS
Section 1. EXECUTIVE AND OTHER OFFICERS. The executive
officers of the Corporation shall be a President, a Secretary and a Treasurer.
The Board of Directors also may elect or appoint a Chairman of the Board of
Directors, one or more Vice Presidents (any of whom may be designated as Senior
Vice Presidents or otherwise), and any other officers it deems necessary or
desirable for the conduct of the business of the Corporation (including one or
more Assistant Secretaries and/or Assistant Treasurers), each of whom shall have
such powers and duties as the Board determines.
Section 2. DUTIES
(a) THE CHAIRMAN OF THE BOARD OF DIRECTORS. The
Chairman of the Board of Directors, who shall be a member of the Board of
Directors, shall be the chief executive officer of the Corporation. The Chairman
of the Board of Directors shall preside at all meetings of the stockholders and
the Board.
(b) THE PRESIDENT. The President shall be the chief
operating officer of the Corporation. The President shall be responsible for the
general management of the business and affairs of the Corporation, subject to
the control of the Chairman of the Board of Directors and the Board of
Directors, and he shall have such other powers and duties as the Chairman of the
Board of Directors and the Board assigns to him.
(c) THE VICE PRESIDENT. The Vice President or, if
there shall be more than one, the Vice Presidents, if any, in the order of their
seniority or in any other order determined by the Board of Directors, shall
perform, in the absence or disability of the President,
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the duties and exercise the powers of the President, and shall have such other
powers and duties as the Board, the Chairman of the Board of Directors or the
President assigns to him or them.
(d) THE SECRETARY AND ASSISTANT SECRETARIES. Except
as otherwise provided in these Bylaws or as directed by the Board of Directors,
the Secretary shall attend all meetings of the stockholders and the Board; he
shall record the minutes of all proceedings in books to be kept for that
purpose; he shall give notice of all meetings of the stockholders and special
meetings of the Board; and he shall keep in safe custody the seal of the
Corporation and, when authorized by the Board, he shall affix the same to any
corporate instrument. The Secretary shall have such other powers and duties as
the Board, the Chairman of the Board of Directors or the President assigns to
him. Assistant Secretaries, if any, shall have the same duties and powers,
subject to supervision by the Secretary.
(e) THE TREASURER AND ASSISTANT TREASURERS. Subject
to the control of the Board, the Treasurer shall have the care and custody of
the corporate funds and the books relating thereto; and he shall perform all
other duties incident to the office of Treasurer. The Treasurer shall have such
other powers and duties as the Board, the Chairman of the Board of Directors or
the President assigns to him. Assistant Treasurers, if any, shall have the same
duties and powers, subject to supervision by the Treasurer.
Section 3. TERM; REMOVAL. Subject to his earlier death,
resignation or removal, each officer shall hold his office until his successor
shall have been elected or appointed and shall have qualified, or until his
earlier death, resignation or removal. Any officer may be removed at any time,
with or without cause, by the Board of Directors.
Section 4. RESIGNATIONS. Any officer may resign at any time by
giving written notice of his resignation to the Corporation. A resignation shall
take effect at the time specified
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therein or, if the time when it shall become effective shall not be specified
therein, immediately upon its receipt, and, unless otherwise specified therein,
the acceptance of a resignation shall not be necessary to make it effective.
Section 5. VACANCIES. If an office becomes vacant for any
reason, the Board of Directors may fill the vacancy, and each officer so elected
or appointed shall serve for the remainder of his predecessor's term and until
his successor shall have been elected or appointed and shall have qualified.
ARTICLE V
PROVISIONS RELATING TO STOCK
CERTIFICATES AND STOCKHOLDERS
Section 1. CERTIFICATES. Certificates for the Corporation's
capital stock shall be in such form as required by law and as approved by the
Board of Directors. Each certificate shall be signed in the name of the
Corporation by the Chairman of the Board of Directors, the President or any Vice
President and by the Secretary, the Treasurer, any Assistant Secretary or any
Assistant Treasurer, and shall bear the seal of the Corporation or a facsimile
thereof.
Section 2. REPLACEMENT CERTIFICATES. The Corporation may issue
a new certificate of stock in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors may
require the owner of the lost, stolen or destroyed certificate, or such person's
legal representative, to make an affidavit of that fact and to give the
Corporation a bond sufficient to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss, theft or destruction
of the certificate or the issuance of such new certificate.
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Section 3. TRANSFERS OF SHARES. Transfers of shares shall be
registered on the books of the Corporation maintained for that purpose after due
presentation of the stock certificates therefor, appropriately endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer.
Section 4. RECORD DATE. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or for the purpose of determining stockholders entitled to
receive payment of any dividend or other distribution or the allotment of any
rights, or for the purpose of any other action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than 60 or less than 10 days before the date of any such
meeting, and shall not be more than 60 days prior to any other action.
ARTICLE VI
INDEMNIFICATION
Section 1. INDEMNIFICATION. Unless otherwise determined by the
Board of Directors, the Corporation shall, to the fullest extent permitted by
the General Corporation Law (including, without limitation, Section 145 thereof)
or other provisions of the laws of Delaware relating to indemnification of
directors, officers and employees, as the same may be amended and supplemented
from time to time, indemnify any and all such persons whom it shall have power
to indemnify under the General Corporation Law or such other provisions of law.
Section 2. STATUTORY INDEMNIFICATION. Without limiting the
generality of Section 1 of this Article VI, to the fullest extent permitted, and
subject to the conditions imposed, by law,
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and pursuant to Section 145 of the General Corporation Law, unless otherwise
determined by the Board of Directors:
(i) the Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding whether
civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that such
person is or was a director, officer or employee of the Corporation, or
is or was serving at the request of the Corporation as a director,
officer or employee of another corporation, partnership, joint venture,
trust or other enterprise against reasonable expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action,
suit or proceeding if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful; and
(ii) the Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director, officer or employee of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer or employee of another corporation, partnership,
joint venture, trust or other enterprise against reasonable expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if
such person acted in
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good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except as otherwise
provided by law.
Section 3. INDEMNIFICATION BY RESOLUTION OF STOCKHOLDERS OR
DIRECTORS OR AGREEMENT. Without limiting the generality of Section 1 or Section
2 of this Article VI, to the fullest extent permitted by law, indemnification
may be granted, and expenses may be advanced, to the persons described in
Section 145 of the General Corporation Law or other provisions of the laws of
Delaware relating to indemnification and advancement of expenses, as from time
to time may be in effect, by (i) a resolution of stockholders, (ii) a resolution
of the Board of Directors, or (iii) an agreement providing for such
indemnification and advancement of expenses, provided that no indemnification
may be made to or on behalf of any person if a judgment or other final
adjudication adverse to the person establishes that such person's acts were
committed in bad faith or were the result of active and deliberate dishonesty
and were material to the cause of action so adjudicated, or that such person
personally gained in fact a financial profit or other advantage to which such
person was not legally entitled.
Section 4. GENERAL. It is the intent of this Article VI to
require the Corporation to indemnify the persons referred to herein for
judgments, fines, penalties, amounts paid in settlement and reasonable expenses
(including attorneys' fees), and to advance expenses to such persons, in each
and every circumstance in which such indemnification and such advancement of
expenses could lawfully be permitted by express provision of by-laws, and the
indemnification and expense advancement provided by this Article VI shall not be
limited by the absence of an express recital of such circumstances. The
indemnification and advancement of expenses provided by, or granted pursuant to,
these Bylaws shall not be deemed exclusive of any other rights to which a person
seeking indemnification or advancement of expenses may be entitled,
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whether as a matter of law, under any provision of the Certification of
Incorporation of the Corporation or these Bylaws, by agreement, by vote of
stockholders or disinterested directors of the Corporation or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
Section 5. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under
this Article VI is not paid in full by the Corporation within ninety (90) days
after a written claim for payment has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if such suit is not frivolous or
brought in bad faith, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. The burden of proving such claim shall be on the
claimant. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the General Corporation Law for the
Corporation to indemnify the claimant for the amount claimed. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that claimant has not
met the applicable standard of conduct.
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Section 6. LIMITATION ON INDEMNIFICATION. Notwithstanding
anything contained in this Article VI to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Article VI,
Section 5 hereof), the Corporation shall not be obligated to indemnify any
director or officer in connection with a proceeding (or part thereof) initiated
by such person unless such proceeding (or part thereof) was authorized or
consented to by the Board of Directors of the Corporation.
Section 7. INDEMNIFICATION BENEFITS. Indemnification pursuant
to these Bylaws shall inure to the benefit of the heirs, executors,
administrators and personal representatives of those entitled to
indemnification.
ARTICLE VII
GENERAL PROVISIONS
Section 1. DIVIDENDS. To the extent permitted by law, the
Board of Directors shall have full power and discretion, subject to the
provisions of the Certificate of Incorporation of the Corporation and the terms
of any other corporate document or instrument binding upon the Corporation, to
determine what, if any, dividends or distributions shall be declared and paid or
made.
Section 2. SEAL. The Corporation's seal shall be in such form
as is required by law and as shall be approved by the Board of Directors.
Section 3. FISCAL YEAR. The fiscal year of the Corporation
shall be determined by the Board of Directors.
Section 4. VOTING SHARES IN OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, shares in other corporations which
are held by the Corporation shall be
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represented and voted only by the Chairman of the Board of Directors, the
President or a proxy or proxies appointed by him.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT OF BYLAWS. The Board of Directors is
expressly empowered to make, alter, amend or repeal Bylaws of the Corporation.
Any adoption, alteration, amendment or repeal of the Bylaws of the Corporation
by the Board of Directors shall require the approval of a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any resolution providing for
adoption, amendment or repeal is presented to the Board). Any adoption,
alteration, amendment or repeal of the Bylaws of the Corporation by the
stockholders of the Corporation shall require the approval of the holders of not
less than 80% of all shares of the Corporation entitled to vote, voting together
as a single class.
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Exhibit 3.4
DESTIA COMMUNICATIONS, INC.
---------------------------
CERTIFICATE OF DESIGNATION OF
SERIES A PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS OF SUCH PREFERRED STOCK
The powers, preferences, rights, qualifications, limitations
and restrictions of the Redeemable Convertible Preferred Stock, Series A, par
value $.01 per share (the "Series A Preferred"), of Destia Communications, Inc.
a Delaware corporation (the "Corporation"), previously were set forth in the
Amended and Restated Certificate of Incorporation of the Corporation.
Simultaneously with the filing with the Secretary of State of the State of
Delaware of this Certificate of Designation, the Corporation is filing an
Amended and Restated Certificate of Incorporation. The Corporation now wishes to
set forth the powers, preferences, rights, qualifications, limitations and
restrictions of the Series A Preferred in this separate Certificate of
Designation. This Certificate of Designation does not alter any of the terms of
the Series A Preferred.
The Amended and Restated Certificate of Incorporation has been
duly adopted by the stockholders of the Corporation in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law.
Pursuant to Section 151 of the Delaware General Corporation
Law, the undersigned DOES HEREBY CERTIFY that the Board of Directors of Destia
Communications, Inc., a Delaware corporation (the "Corporation"), duly adopted
the following resolution on May 3, 1999, with the preferences and rights set
forth therein having been fixed by the Board of Directors pursuant to Article IV
of the Corporation's Certificate of Incorporation, as amended, and that such
resolution has not been modified and is in full force and effect:
RESOLVED that, pursuant to the authority vested in the Board
of Directors of the Corporation in accordance with the provisions of the
Certificate of Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), a series of preferred stock of the Corporation is hereby
created and that the designation and number of shares thereof and the voting
powers, preferences and relative, participating, optional and other special
rights of the shares of such series, and the qualifications, limitations and
restrictions thereof, are as follows:
Section 1. DESIGNATION; RANK. This series of Preferred Stock
shall be designated Redeemable Convertible Preferred Stock, Series A, par value
$.01 per share (the "Series A Preferred"). The Series A Preferred shall be
senior to all other capital stock of the Corporation, whether now outstanding or
hereafter issued, including the Common Stock of the Corporation, as to dividend
payments and as to distributions upon liquidation, dissolution or winding up of
the Corporation.
Section 2. AUTHORIZED NUMBER. The number of shares
constituting the Series
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A Preferred shall be 140,000 shares.
Section 3. DIVIDENDS. The Series A Preferred shall accrue
monthly cumulative dividends on each outstanding share of Series A Preferred at
the rate of $1 per share per month. Such cumulative dividends shall accrue,
whether or not declared by the Board, in equal amounts (other than with respect
to the initial dividend period) monthly on the first day of each month (each a
"Dividend Accrual Date"), to holders of record as they appear on the register
for the Series A Preferred at the close of business on the day immediately
preceding such Dividend Accrual Date. Such accrued and unpaid dividends shall
compound monthly at a rate of 12% per annum. As used herein, "accrued dividends"
and "accrued and unpaid dividends" shall mean accrued dividends, including,
without limitation, the amount compounded thereon. A monthly dividend period
shall begin on the day following each Dividend Accrual Date and end on the next
succeeding Dividend Accrual Date. Notwithstanding the foregoing, (A) the first
dividend period shall commence on the Series A Preferred Issue Date, and the
dividend payable in respect thereof shall accrue for the actual number of days
in such period and (B) dividends shall cease to accrue and compound on the
Series A Preferred on the closing date with respect to the High Yield Offering.
For purposes hereof, "High Yield Offering" shall mean the offering completed in
July 1997 of $155 million in aggregate principal amounts of 13 1/2% Senior Notes
due 2007.
Dividends on any share of Series A Preferred shall not be paid
in cash prior to the redemption, if any, of such share.
Except as provided in Section 6(a)(i), no dividends or other
distributions, and no redemption, purchase or other acquisition for value, shall
be made with respect to any share of or right to acquire the Common Stock (other
than the Series A Preferred) or any other class or series of the Corporation's
Capital Stock at any time when any share of the Series A Preferred is
outstanding. The foregoing provision shall not be violated by reason of (i) the
repurchase of Capital Stock followed immediately by the reissuance thereof for
consideration in an amount at least equal to the consideration paid to acquire
such stock, (ii) the redemption, repurchase or other acquisition for value of
Capital Stock in exchange for, or with the proceeds of a substantially
concurrent offering (occurring not more than 90 days prior to such redemption,
repurchase or other acquisition for value) of, other Capital Stock of the
Corporation (other than Disqualified Stock), (iii) the repurchase of Capital
Stock of the Corporation from employees (other than Mr. Alfred West, Steven West
and Gary Bondi) of the Corporation or any of its Subsidiaries for consideration
not to exceed, in the aggregate, $1,000,000, (iv) [intentionally left blank],
(v) repurchases or redemptions pursuant to the last paragraph of Section
10.1(c). For purposes hereof, payments with respect to any stock appreciation
right shall be deemed to be a repurchase of Capital Stock.
Section 4. LIQUIDATION PREFERENCE. (a) In the event of any
liquidation, dissolution, or winding up of the Corporation, either voluntary or
involuntary, distributions to the shareholders of the Corporation shall be made
in the following manner:
The holders of the Series A Preferred shall be
entitled to receive prior and
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in preference to any distribution of any of the assets or
funds of the Corporation to the holders of the Common Stock or
any other class or series of the Corporation's capital stock
the stated value (in cash) of $100 (the "stated value") per
share for each share of Series A Preferred then held by them
plus an amount equal to all accrued dividends (whether or not
declared) on the Series A Preferred to the date of
liquidation, dissolution or winding up (the "Redemption
Amount"). If the assets and funds thus distributed among the
holders of Series A Preferred are insufficient to permit the
payment to such holders of the full preferential amount
described above, then the entire assets and funds of the
Corporation legally available for distribution shall be
distributed among the holders of Series A Preferred in the
proportion that the number of shares of Series A Preferred
held by each such holder bears to the number of all shares of
the Series A Preferred then outstanding. After payment has
been made to the holders of the Series A Preferred of the full
amounts to which they are entitled, no further amounts are
required to be paid with respect to the Series A Preferred,
and the remaining assets of the Corporation shall be
distributed among the holders of all capital stock of the
Corporation junior to the Series A Preferred in accordance
with the Amended and Restated Certificate of Incorporation of
the Corporation and applicable law.
(b) Unless waived in advance in writing by the lender (or its
assignee) under the Equipment Loan and Security Agreement, dated May 28, 1996,
between NTFC Capital Corporation and the Corporation, as the same may be amended
from time to time (the "NTFC Lender" and, as amended, the "NTFC Loan"), during
such time as any amounts shall be due under the NTFC Loan, the Corporation shall
not effect any redemption of the Series A Preferred for cash; provided that,
this sentence shall not prohibit any redemption by the Corporation pursuant to
Section 7(a). Any cash payment by the Corporation in violation of the preceding
sentence shall forthwith be paid by the recipient thereof to the Lender. The
Corporation shall pay all amounts due under the NTFC Loan whenever it shall have
any then current redemption obligation with respect to the Series A Preferred so
that the first sentence of this paragraph shall not prohibit any such payment to
holders of Series A Preferred.
Section 5. PROVISIONS GENERALLY APPLICABLE TO DIVIDENDS AND
LIQUIDATION. Except as provided in Section 6, the Corporation will not, by
amendment of its Amended and Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of Sections 3 and 4 and in the
taking of all such action as may be necessary or appropriate in order to protect
the dividend and liquidation rights of the holders of the Series A Preferred
against impairment.
Section 6. VOTING RIGHTS. (a) In addition to such other vote,
if any, as may be required by Delaware law or provided by the resolution
creating any other series of Preferred Stock, the affirmative vote of the
holders of at least a majority of the outstanding shares of Series
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A Preferred, voting together as a single class, shall be necessary to: (i)
declare or pay any dividends on, or redeem or otherwise acquire any other class
or series of Capital Stock of the Corporation, except to the extent provided for
pursuant to the terms of any class or series of Capital Stock approved by the
affirmative vote of the holders of at least a majority of the then outstanding
shares of Series A Preferred; (ii) authorize an amendment to the Corporation's
Amended and Restated Certificate of Incorporation decreasing the liquidation
preference of the Series A Preferred or otherwise adversely affecting the
preferences, rights or powers of the Series A Preferred or the Warrants; (iii)
effect a voluntary liquidation, dissolution or winding up of the Corporation, or
the sale of all or substantially all the assets of the Corporation, or the
merger, consolidation or recapitalization of the Corporation; or (iv) amend the
Amended and Restated Certificate of Incorporation or Bylaws of the Corporation
in a manner or take any other action that would in any way impair, limit or
delay the ability of the holders of the Series A Preferred to exercise the
voting rights set forth in this Section 6, by written consent or at any meeting
of shareholders of the Corporation.
(b) In addition to the voting rights provided for in Section
6(a), the holders of the Series A Preferred shall, until the earlier of (x) the
IPO Closing Date (as defined in Section 10.1(b)) and (y) such time as Permitted
Holders shall cease to own at least a majority of the shares of Series A
Preferred issued on the Series A Preferred Issue Date, be entitled to elect, by
the affirmative vote of at least a majority of the outstanding shares of Series
A Preferred, voting together as a single class, one director of the Corporation
(the "PG Director"), who shall at all times be a member of the Executive
Committee and Compensation Committees of the Board and any committee performing
similar functions, if such committees exist. The PG Director shall serve at the
pleasure of the holders of the Series A Preferred until such time as the holders
of the Series A Preferred, by affirmative vote of at least a majority of the
outstanding shares of Series A Preferred, shall elect a different individual to
be the PG Director. The election of the PG Director shall occur upon the
delivery to the Secretary of the Corporation of a certificate, executed by
holders of a majority of the shares of Series A Preferred, indicating the
nomination of the individual so named in such certificate, and the directors of
the Corporation shall thereafter promptly take all action necessary to elect the
PG Director as a director of the Corporation. Notwithstanding any provision of
the Amended and Restated Certificate of Incorporation or By-laws of the
Corporation to the contrary, (i) the PG Director shall be entitled to five
Business Days' notice of all meetings of the Board and, if applicable, the
Executive and Compensation Committees thereof and any committee performing
similar functions, (ii) meetings of the Board and such committees shall be held
in reasonable places at reasonable times and (iii) the Board shall meet at least
quarterly. The PG Director shall resign on the earlier of the two dates referred
to in the first sentence of this Section 6(b) and the right of holders of the
Series A Preferred to elect a director shall be terminated.
(c) Except as specifically provided in this Section 6 and as
provided under Delaware corporate law, the holders of the Series A Preferred
shall not be entitled to any voting rights.
Section 7. REDEMPTION. (a) Special Optional Redemption.
[Intentionally left blank.]
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<PAGE>
(b) Mandatory Redemption. On October 31, 2006, the Corporation
shall redeem all of the then outstanding shares of Series A Preferred, out of
funds legally available therefor. The Corporation shall use its best efforts to
cause funds to be legally available therefor. The redemption payment for each
share of Series A Preferred shall be the Redemption Amount, in cash, as of
October 31, 2006.
(c) Mechanics of Redemption. (i) At least 20 days, but not
more than 60 days, prior to the date fixed for any redemption pursuant to
Section 7(a) or (b) (the "Redemption Date"), the Corporation shall send a
written notice (the "Redemption Notice") to each holder of shares of Series A
Preferred to be redeemed on such date (the "Redemption Shares") stating: (A) the
total number of anticipated Redemption Shares at such date; (B) the number of
anticipated Redemption Shares held by such holder at such date; (C) the
anticipated Redemption Date; (D) the anticipated Redemption Amount per share
(calculated based on the anticipated Redemption Date); and (E) the manner in
which and the place at which such holder is to surrender to the Corporation the
certificate or certificates representing its Redemption Shares.
(ii) Upon surrender to the Corporation, in the manner
and at the place designated, of a certificate or certificates representing
Redemption Shares, the Redemption Amount for such shares shall be payable to the
order of the person whose name appears on such certificate or certificates as
the owner thereof. All such surrendered certificates shall be canceled.
(iii) On or prior to the Redemption Date, the
Corporation shall have the option to deposit the aggregate of all Redemption
Amounts for all Redemption Shares in a bank or trust company (designated in the
Redemption Notice) doing business in the Borough of Manhattan, the City and
State of New York, having aggregate capital and surplus in excess of
$500,000,000, as a trust fund for the benefit of the respective holders of
Redemption Shares, with irrevocable instructions and authority to the bank or
trust company to pay the appropriate Redemption Amount to a given holder of
Redemption Shares upon receipt of notification from the Corporation that such
holder has surrendered the certificate representing such shares to the
Corporation, which notification shall be given by the Corporation upon its
receipt of such shares. Such instructions shall also provide that any such
moneys remaining unclaimed at the expiration of one year following the
Redemption Date shall thereafter be returned to the Corporation upon its request
as expressed in a resolution of the Board. The holder of any Redemption Shares
in respect of which such deposit has been returned to the Corporation pursuant
to the preceding sentence shall have a claim as an unsecured creditor against
the Corporation for the Redemption Amount in respect thereof, without interest.
(iv) Provided that the Corporation has given the
Redemption Notice described in Section 7(c)(i) and has on or prior to the
Redemption Date either paid or made available (as described in Section
7(c)(iii)) Redemption Amounts to the holders of Redemption Shares, all
Redemption Shares shall be deemed to have been redeemed as of the close of
business of the Corporation on the applicable Redemption Date. Thereafter, the
holder of such shares shall no longer be treated for any purposes as the record
holder of such shares of Series A
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<PAGE>
Preferred, regardless of whether the certificates representing such shares are
surrendered to the Corporation or its transfer agent, excepting only the right
of the holder to receive the appropriate Redemption Amount, without interest,
upon such surrender. Such shares so redeemed shall not be transferred on the
books of the Corporation or be deemed to be outstanding for any purpose
whatsoever.
(v) The Corporation shall not be obligated to pay the
Redemption Amount to any holder of Redemption Shares unless the certificates
evidencing such shares are either delivered to the Corporation or its transfer
agent, or the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
reasonably satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates.
(vi) A Redemption Notice may provide that it is
subject to the occurrence of any event before the Redemption Date specified in
such notice and such Redemption Notice shall be of no effect unless all such
conditions to the redemption have occurred before the Redemption Date or have
been waived by the Corporation.
(d) Change of Control; Breach of Covenant. (i) If (A) there
shall occur a Change of Control (as defined in Section 12(b)), (B) the
Corporation shall take any of the actions described in Section 6(a) without
obtaining the affirmative vote of the holders of at least a majority of the
outstanding shares of Series A Preferred, (C) the Corporation shall breach and
fail to cure within 10 days of such breach any of its obligations pursuant to
Section 12(a)(iii), 12(a)(vi) or 12(a)(vii) or (D) Mr. Alfred West shall die or
become substantially disabled on a long term basis at any time prior to the
effectiveness of the Key Man Insurance (as defined in Section 12(a)(vi)), any
holder of shares of the Series A Preferred shall have the right, at such
holder's option, to require the Corporation to redeem, and upon the exercise of
such right the Corporation shall purchase, for cash, all of the shares of the
Series A Preferred held by such holder at a price per share equal to the
Redemption Amount determined as of the date the Corporation redeems such shares
as specified by the Corporation pursuant to Section 7(d)(ii). In the case of
clause (B) above, such right to require such purchase shall be in addition to
any legal or equitable remedy available to holders of Series A Preferred. In
addition, if there shall occur a Change of Control, the Corporation shall cause
the holders of Series A Preferred to be entitled to sell any or all of their
shares of Series A Preferred to the acquiror or acquirors on terms and
conditions at least as favorable as the terms and conditions with respect to the
sale to the acquiror or acquirors by the Corporation or any beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 5% or more of any
class of Capital Stock of the Corporation.
(ii) Procedure. On or before the fifth day after the
occurrence of an event giving rise to a right of redemption pursuant to Section
7(d)(i), the Corporation shall send each holder of Series A Preferred a notice
advising such holder of its rights hereunder and specifying the date, not less
than 20 nor more than 60 days after the date such notice is delivered to such
holder, on which the Corporation proposes to redeem the shares of those holders
requesting redemption pursuant hereto (and, in the case of a sale referred to in
the last sentence of Section 7(d)(i), the date on which the Change of Control is
expected to occur); provided that
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<PAGE>
no failure of the Corporation to give such notice shall limit the rights of
holders hereunder. Any holder of shares of the Series A Preferred wishing to
exercise its rights hereunder shall deliver to the Corporation on or before the
fifteenth day after receipt of the notice referred to in the first sentence of
this clause (ii), written notice of such holder's exercise of such right, which
notice shall set forth the name of the holder, the number of shares of Series A
Preferred which such holder wishes to have redeemed or sold and a statement that
an election to exercise its rights hereunder is being made thereby. Upon
delivery of such shares, the redemption procedures of Sections 7(c)(ii) through
(v) shall be applicable (with the notice referred to in the first sentence of
this clause (ii) constituting the Redemption Notice).
(e) Redemption Subject to Applicable Law. Any redemption
pursuant to this Section 7 shall be subject to Section 160 of the General
Corporation Law.
Section 8. (a) Transfer and Legending of Shares. No transfer
of shares of the Series A Preferred shall be effective until such transfer is
registered on the books of the Corporation. Any shares so transferred must
(unless otherwise permitted by Section 8(b)) bear a legend substantially in the
following form:
THE SECURITY REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN
COMPLIANCE WITH THE ACT, THE RULES AND REGULATIONS PROMULGATED
THEREUNDER AND ANY APPLICABLE STATE SECURITIES LAWS. THE
SECURITY REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO A
SECURITYHOLDERS AGREEMENT DATED AS OF NOVEMBER 1, 1996 THAT
FIXES CERTAIN RIGHTS AND OBLIGATIONS OF THE ISSUER HEREOF AND
THE HOLDER OF THIS SECURITY. A COPY OF THE AGREEMENT IS ON
FILE AT THE ISSUER'S PRINCIPAL OFFICE.
(b) Any holder of shares of Series A Preferred may, upon
providing evidence reasonably satisfactory to the Corporation (including, if so
requested by the Corporation, an opinion of counsel of such holder) that such
shares of Series A Preferred may be sold pursuant to Rule 144(k) under the
Securities Act, exchange the certificate representing such shares of Series A
Preferred for a new certificate that does not bear the legend set forth in
Section 8(a).
The Corporation shall refuse to register any attempted
transfer of shares of Series A Preferred not in compliance with this Section 8.
Section 9. STATUS OF REDEEMED SHARES. If shares of the Series
A Preferred are redeemed pursuant to Section 7 hereof, the shares so redeemed
shall be retired and shall assume the status of authorized but unissued shares
of preferred stock of the Corporation.
Section 10.1. RIGHT TO CONVERT; MANDATORY CONVERSION. (a) Each
holder of the Series A Preferred shall have the right, at the option of such
holder, at any time or from time to time, to convert any of its shares of Series
A Preferred, into a number of fully paid and
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nonassessable whole shares of Common Stock of the Corporation equal to the
Conversion Number (as defined below).
(b) The Corporation may, at its option, convert any of the
shares of Series A Preferred into a number of fully paid and nonassessable whole
shares of Common Stock of the Corporation equal to the Conversion Number;
provided that such conversion may only occur on the IPO Closing Date. For
purposes hereof, the "IPO Closing Date" means the closing date with respect to
the initial public offering of Common Stock of the Corporation generating gross
proceeds of at least $25 million and registered with the U.S. Securities and
Exchange Commission on Form S-1 (or such other form as is then available); the
shares of Common Stock sold in such initial public offering and generating such
$25 million of gross proceeds may be sold by the Corporation, any securityholder
of the Corporation or any combination of the Corporation and its
securityholders.
(c) For purposes hereof, the Conversion Number shall be equal
to:
(i) the total number of shares of Common Stock
outstanding as of the Series A Preferred Issue Date (calculated on a fully
diluted basis, including all warrants, options or rights held by employees or
any other Person, assuming that the employee options referenced on the Schedules
to the Security Purchase Agreement were issued prior to the Series A Preferred
Issue Date, but excluding the Series A Preferred and Warrants), multiplied by
(ii) a fraction, (A) the numerator of which is equal
to the stated value with respect to the shares of Series A Preferred being so
converted, plus any dividends accrued thereon, and (B) the denominator of which
is equal to 100 million plus the number of U.S. dollars received by the
Corporation, since the Series A Preferred Issue Date, from the exercise of
options or warrants to purchase Common Stock that are specified on Schedule
3.04(a) to the Securities Purchase Agreement.
The number referred to in subparagraph (i) above shall be
deemed to be 22,561,000, absent evidence to the contrary.
If the Conversion Number is not a whole number, it shall be
increased to the next largest whole number, or at the option of the Corporation,
any fractional share of Common Stock otherwise receivable upon a conversion of
Series A Preferred may instead be paid in cash at the Redemption Amount.
(d) In the event that there shall be more than one class of
Common Stock of the Corporation outstanding as of the date of any conversion of
Series A Preferred, each holder of Series A Preferred being converted shall be
entitled to designate which class of Common Stock it shall receive upon
conversion of its Series A Preferred. The shares of Common Stock of the
Corporation into which the shares of Series A Preferred are converted shall be
referred to herein as "Conversion Shares."
Section 10.2. MECHANICS OF CONVERSION. In order to effect the
conversion of any shares of Series A
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Preferred into Conversion Shares, the holder of such shares of Series A
Preferred shall surrender to the Corporation the shares of Series A Preferred to
be converted accompanied by a duly executed notice of conversion form set forth
in the certificate representing such shares of Series A Preferred stating that
such holder elects to convert all or a specified portion of shares of Series A
Preferred represented by such certificate in accordance with the provisions
hereof, specifying the name or names in which such holder wishes the Conversion
Shares to be issued and the amount of each class of Common Stock of the
Corporation into which the shares of Series A Preferred should be converted.
The Corporation will pay any and all issue and other taxes
(but not any taxes based on income) that may be payable in respect of any issue
or delivery of Conversion Shares upon conversion of shares of Series A
Preferred.
As promptly as practicable and in any event within seven
Business Days after the receipt of such notice of conversion, the Corporation
shall deliver to, or upon the written order of, the holder of the Series A
Preferred to be converted (i) certificates representing the number of validly
issued, fully paid and nonassessable whole Conversion Shares to which the holder
of the securities being converted shall be entitled and (ii) if fewer than all
the Series A Preferred surrendered are being converted, a new share certificate
or certificates, evidencing the number of shares of Series A Preferred equal to
the number of shares of Series A Preferred surrendered for conversion less the
number of shares of Series A Preferred being converted. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Series A Preferred to be converted. Upon such
conversion, the rights of the holder thereof as to the Series A Preferred being
converted shall cease except for the right to receive Conversion Shares (or such
other consideration as provided herein) in accordance herewith, and the person
entitled to receive the Conversion Shares shall be treated for all purposes as
having become the record holder of such Conversion Shares at such time.
Section 11.1. ADJUSTMENTS. The number of Conversion Shares
issuable upon the conversion of each share of Series A Preferred shall be
subject to adjustment from time to time as set forth in this Section 11.1.
(a) Issuance of Common Stock of the Corporation at less than
Current Market Value. In the event the Corporation shall issue or sell shares of
Common Stock, or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for, purchase or otherwise acquire
shares of Common Stock (each an "Issuance", but such term shall not include the
issuance or sale of any of the foregoing types of securities (w) in connection
with a transaction in which holders of Series A Preferred exercise their rights
to transfer securities under Article 4 of the Securityholders Agreement, (x)
upon the exercise, conversion or exchange of any securities received in an
Issuance, (y) as part of the High Yield Offering or (z) of up to 3,561,000
shares of Common Stock or rights, options or warrants therefor granted or sold
to key employees of the Corporation or its Subsidiaries in order to retain or to
create an incentive for such key employees; provided that such 3,561,000 shares,
options, rights or warrants shall include any shares, options, rights or
warrants referenced in any of the Schedules to the Securities Purchase Agreement
or outstanding on the Series A Preferred Issue Date) at a consideration (the
"Consideration") per share of Common Stock (determined, in the case of such
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rights, options, warrants or convertible or exchangeable securities, by dividing
(i) the aggregate amount received or receivable by the Corporation in
consideration of the issuance or sale of such rights, options, warrants or
convertible or exchangeable securities, plus the total consideration payable to
the Corporation upon exercise, conversion or exchange thereof, by (ii) the total
number of shares of Common Stock covered by such rights, options, warrants or
convertible or exchangeable securities) that is lower than the Current Market
Value per share of Common Stock immediately prior to such Issuance, then the
number of shares of Common Stock of the Corporation into which each share of
Series A Preferred is convertible shall be adjusted so that it shall equal an
amount determined by: (I) multiplying the percentage of the fully-diluted shares
of Common Stock of the Corporation into which such share of Series A Preferred
is convertible immediately prior to such Issuance by the number of fully-diluted
shares of Common Stock of the Corporation immediately prior to such Issuance and
then by a fraction, the numerator of which shall be the product of (A) the
number of fully-diluted shares of Common Stock of the Corporation immediately
after such Issuance multiplied by (B) the Current Market Value per share of such
Common Stock on the date of such Issuance, and the denominator of which shall be
the sum of (1) the number of fully-diluted shares of Common Stock of the
Corporation immediately prior to such Issuance multiplied by such Current Market
Value plus (2) the aggregate Consideration received by the Corporation for such
Issuance, (II) dividing the amount determined in clause (I) above by the number
of fully-diluted shares of Common Stock of the Corporation immediately after
such Issuance.
Such adjustments shall be made successively whenever such an
Issuance is made. For the purposes of such adjustments, the shares of Common
Stock which the holder of any rights, options, warrants or convertible or
exchangeable securities received in an Issuance shall be entitled to subscribe
for, purchase or otherwise acquire shall be deemed to be issued and outstanding
as of the date of such Issuance and the consideration received by the
Corporation therefor shall be deemed to be the Consideration received by the
Corporation for such rights, options, warrants or convertible or exchangeable
securities, plus the consideration or premiums stated in such rights, options,
warrants or convertible or exchangeable securities to be paid for the shares of
Common Stock covered thereby. In the event the Corporation shall issue or sell
shares of Common Stock or options, warrants or convertible or exchangeable
securities containing the right to subscribe for, purchase or otherwise acquire
shares of Common Stock in an Issuance, for a consideration consisting, in whole
or in part, of property other than cash or its equivalent, then, in determining
the "price per share of Common Stock" and the "Consideration received by the
Corporation" for purposes of the first sentence of this Section 11.1(a), the
Board shall determine, in good faith, the fair value of the property, which
determination shall be applied in connection with any determination of Current
Market Value pursuant to this Section 11.1(a). If any Issuance results in an
adjustment pursuant to this Section 11.1(a) and the rights, options, warrants or
convertible or exchangeable securities to which such Issuance related expire or
mature without being exercised, converted or exchanged, then the adjustment made
as a result of such Issuance shall be reversed and be of no effect.
(b) Current Market Value. For the purposes of any computation
under this Section 11.1, the Current Market Value per share of Common Stock of
the Corporation or of any other security (herein collectively referred to as a
"security") at any date herein specified shall be:
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(i) if the security is not registered under the
Exchange Act, the fair value of the security (1) most recently determined as of
a date within the six months preceding such date by an Independent Financial
Expert selected by the Corporation in accordance with the criteria for such
valuation set out in Section 11.1(e), or (2) if no such determination shall have
been made within such six-month period or if the Corporation so chooses,
determined as of such date by an Independent Financial Expert selected by the
Corporation in accordance with the criteria for such valuation set out in
Section 11.1(e), or
(ii) if the security is registered under the Exchange
Act, the average of the daily market prices of the security for the 20
consecutive trading days immediately preceding such date or, if the security has
been registered under the Exchange Act for less than 20 consecutive trading days
before such date, then the average of the daily market prices for all of the
trading days before such date for which daily market prices are available. The
market price for each such trading day shall be: (A) in the case of a security
listed or admitted to trading on any national securities exchange, the closing
sales price, regular way, on such day, or if no sale takes place on such day,
the average of the closing bid and asked prices on such day on the principal
national securities exchange on which such security is listed or admitted, such
exchange to be determined by the Board, in good faith; provided that, for
purposes of such determination, the PG Director shall have a number of votes
equal to one-half of the votes of all members of the Board voting thereon, (B)
in the case of a security not then listed or admitted to trading on any national
securities exchange, the last reported sale price on such day, or if no sale
takes place on such day, the average of the closing bid and asked prices on such
day, as reported by a reputable quotation source designated by the Corporation,
(C) in the case of a security not then listed or admitted to trading on any
national securities exchange and as to which no such reported sale price or bid
and asked prices are available, the average of the reported high bid and low
asked prices on such day, as reported by a reputable quotation service, or a
newspaper of general circulation in the Borough of Manhattan, City and State of
New York customarily published on each Business Day, designated by the
Corporation, or, if there shall be no bid and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on the most recent
day (not more than 30 days prior to the date in question) for which prices have
been so reported and (D) if there are no bid and asked prices reported during
the 30 days prior to the date in question, the Current Market Value of the
security shall be determined in accordance with Section 11.1(e).
(c) De Minimis Adjustments. No adjustment in the number of
shares of Common Stock of the Corporation issuable upon conversion of the Series
A Preferred shall be required unless such adjustment would require an increase
or decrease of at least one percent (1%) in the number of shares of Common Stock
of the Corporation issuable upon the conversion of each share of Series A
Preferred; provided, however, that any adjustments which by reason of this
Section 11.1(c) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations shall be made to the
nearest one-thousandth of a share.
(d) Additional Adjustments. In addition to the foregoing
adjustments, the Board may make any other adjustment to increase the number of
shares of Common Stock of the
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Corporation issuable upon conversion of shares of Series A Preferred as it may,
in good faith, deem desirable to protect the rights and benefits of holders of
Series A Preferred.
(e) Current Market Value. The Current Market Value shall be
deemed to be equal to the fair value set forth in the Value Report (as defined
below) as determined by an Independent Financial Expert, which shall be selected
by the Board, and retained on customary terms and conditions, using one or more
valuation methods that the Independent Financial Expert, in its best
professional judgment, determines to be most appropriate; provided that, for
purposes of such selection, the PG Director shall have a number of votes equal
to one-half of the votes of all members of the Board voting thereon. The
Corporation shall engage the Independent Financial Expert to deliver to the
Corporation, within 45 days of the appointment of the Independent Financial
Expert, a value report (the "Value Report") stating the value of Common Stock of
the Corporation and other securities or property of the Corporation, if any,
being valued as of the Valuation Date and containing a brief statement as to the
nature and scope of the examination or investigation upon which the
determination of value was made. The determination as to Current Market Value in
accordance with the provisions of this Section 11.1(e) shall be conclusive on
all Persons. The Independent Financial Expert shall consult with management of
the Corporation and the PG Director in order to allow management and the PG
Director to comment on the proposed value prior to delivery to the Corporation
of any Value Report of the Independent Financial Expert.
For purposes hereof, "Financial Expert" means one of BT Alex.
Brown, Inc.; Bear, Stearns & Co., Inc.; SBC Warburg Dillon & Read; DLJ
(Donaldson, Lufkin & Jenrette); Goldman, Sachs & Co.; Lazard Freres & Co. LLC;
Merrill Lynch & Co. Inc.; PaineWebber; Prudential Securities Inc.; Salomon
Brothers; Oppenheimer; Furman Selz LLC; or Lehman Brothers Incorporated; and
"Independent Financial Expert" means a Financial Expert that does not (or whose
directors, executive officers or 5% stockholders do not) have a direct or
indirect financial interest in the Corporation or any of its Subsidiaries, which
has not been for at least five years, and, at the time it is called upon to give
independent financial advice to the Corporation is not (and none of its
directors, executive officers or 5% stockholders is) a promoter, director, or
officer of the Corporation or any of its Subsidiaries. The Independent Financial
Expert may be compensated and indemnified by the Corporation for opinions or
services it provides as an Independent Financial Expert.
As used herein "fair value" means the price a willing buyer,
under no compulsion to buy, would pay a willing seller, under no compulsion to
sell, in an arms' length transaction.
Section 11.2. NOTICE OF ADJUSTMENT. Whenever the number of
shares of Common Stock of the Corporation or other stock or property issuable
upon the conversion of any share of Series A Preferred is adjusted, as herein
provided, by more than 1%, the Corporation shall mail to each holder notice of
such adjustment or adjustments and shall deliver to each Holder an officers'
certificate (and if requested by holders of a majority of the shares of Series A
Preferred, a certificate of a firm of independent public accountants selected by
the Board (who may be the regular accountants employed by the Corporation))
setting forth the number of shares of Common Stock of the Corporation or other
stock or property issuable upon the conversion of
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any share of Series A Preferred after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.
Section 12. (a) Certain Additional Provisions. (i) Limitation
on Indebtedness. (A) The Corporation shall not, and shall not permit any
Restricted Subsidiary to, Incur any Indebtedness except: (1) Indebtedness in an
aggregate principal amount not to exceed $20 million outstanding at any time;
(2) Indebtedness to the Corporation or any Restricted Subsidiary; (3)
Indebtedness or Disqualified Stock issued in exchange for, or the net proceeds
of which are used to exchange, refinance, refund or defease outstanding
Indebtedness or Disqualified Stock, other than Indebtedness Incurred under
clauses (1) and (6) of this subparagraph (a)(i)(A) and any refinancings thereof,
in an amount (or, if such new Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, with an original issue price) not to exceed the amount
exchanged, refinanced, refunded or defeased (plus premiums, accrued interest,
fees and expenses); provided that Indebtedness or Disqualified Stock the
proceeds of which are used to exchange, refinance, refund or defease
Disqualified Stock, determined as of the date of Incurrence of such new
Indebtedness or issuance of such Disqualified Stock, does not mature prior to
the Stated Maturity of the Indebtedness to be exchanged, refinanced, refunded,
redeemed or defeased or have a mandatory redemption date prior to the
Disqualified Stock to be exchanged, refinanced, refunded or defeased, and the
Average Life of such Indebtedness or Disqualified Stock is at least equal to the
remaining Average Life of the Indebtedness or Disqualified Stock to be
exchanged, refinanced, refunded or defeased; (4) Indebtedness issued in the High
Yield Offering or in an offering of debt securities to bonafide third parties
having a maturity of no less than seven years occurring prior to March 1, 1998
which is underwritten or placed by an investment bank of national standing; (5)
Indebtedness Incurred solely to fund the acquisition of assets used or useful in
the telecommunications business; and (6) Indebtedness (I) in respect of
performance bonds, bankers' acceptances and surety or appeal bonds provided in
the ordinary course of business, (II) under (or in respect of) Currency
Agreements and Interest Rate Agreements; provided that, (i) such Currency
Agreements do not increase the Indebtedness of the Corporation and its
Restricted Subsidiaries outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder and that such Currency
Agreements are entered into for the purpose of hedging, not speculating on,
foreign currency fluctuations and (ii) such Interest Rate Agreements are entered
into for the purpose of protecting the Corporation and its Subsidiaries from
fluctuations in interest rates, not speculating on fluctuations in interest
rates, and (III) arising from agreements providing for indemnification,
adjustment of purchase price or similar options, or from Guarantees or letters
of credit, surety bonds or performance bonds securing any obligations of the
Corporation or any of its Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets or
Subsidiary of the Corporation, other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or Subsidiary
of the Corporation for the purpose of financing such acquisition.
(B) Notwithstanding any other provision of this paragraph
(a)(i), the
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maximum amount of Indebtedness that the Corporation or any of its Subsidiaries
may Incur pursuant to this paragraph (a)(i) shall not be deemed to be exceeded
due solely to the result of fluctuations in the exchange rates of currencies.
(C) For purposes of determining any particular amount of
Indebtedness under this paragraph (a)(i), Guarantees of, or obligations with
respect to letters of credit supporting, Indebtedness otherwise included in the
determination of such particular amount shall not be included. For purposes of
determining compliance with this paragraph (a)(i), in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Corporation, in its sole discretion, shall
designate the clause or clauses under which such item of Indebtedness shall be
Incurred.
(ii) Limitation on Restricted Payments. The
Corporation shall not and shall not permit any Restricted Subsidiary to make any
Investment in any Person, other than a Permitted Investment (a "Restricted
Payment"), if at the time of and after giving effect to the proposed Restricted
Payment: (I) a Default shall have occurred and be continuing or (II) the
aggregate amount expended for all Restricted Payments (the amount so expended,
if other than in cash, to be determined in good faith by the Board, whose
determination shall be conclusive and evidenced by a Board Resolution) after the
Series A Preferred Issue Date shall exceed the sum of (w) 50% of the aggregate
amount of consolidated net income (or, if a loss, minus 100% of such amount) of
the Corporation accrued on a cumulative basis during the period (taken as one
accounting period) beginning on October 1, 1996 and ending on the last day of
the last fiscal quarter preceding the Transaction Date plus (x) the aggregate
net cash proceeds (other than cash proceeds applied as provided in clause (ix)
of the definition of Permitted Investment) received by the Corporation from the
issuance and sale of Junior Securities of the Corporation (other than
Disqualified Stock) to any Person other than a Restricted Subsidiary of the
Corporation or Indebtedness that is convertible into Junior Securities of the
Corporation (other than Disqualified Stock) to the extent such Indebtedness is
converted into Junior Securities of the Corporation (other than Disqualified
Stock), subsequent to the Series A Preferred Issue Date, plus (y) an amount
equal to the net reduction in Investments (other than Permitted Investments).
(iii) Limitation on Transactions with Shareholders
and Affiliates. (A) The Corporation shall not, and shall not permit any
Subsidiary of the Corporation to, directly or indirectly, enter into, renew or
extend any transaction (including, without limitation, the purchase, sale, lease
or exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of the Corporation or with any Affiliate of the Corporation, except for
transactions on terms at least as favorable to the Corporation or such
Subsidiary as could be obtained on an arms-length basis from a Person that is
not such an Affiliate or 5% holder. In addition, the Corporation shall notify
the initial holder of Series A Preferred of any such transaction, whether or not
such transaction is on an arms-length basis, if such transaction occurs at any
time when Permitted Holders own at least 35% of the shares of Series A Preferred
issued on the Series A Preferred Issue Date. The limitation contained in the
first sentence of this subparagraph (iii) does not apply to transactions (A)
pursuant to documents existing on the Series A Preferred Issue Date and listed
on Schedule 3.06 to the Securities Purchase Agreement, (B) between the
Corporation and its Restricted
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Subsidiaries and, in the case of tax sharing agreements, its Unrestricted
Subsidiaries or (C) between Restricted Subsidiaries.
(iv) [Intentionally left blank.]
(v) Limitation on Liens. The Corporation will not,
and will not permit any Restricted Subsidiary to, create, incur, assume or
suffer to exist any Lien on any of its assets or properties of any character, or
any shares of Capital Stock or Indebtedness of any Restricted Subsidiary.
The foregoing limitation does not apply to (i) Liens existing
on the Series A Preferred Issue Date; (ii) Liens granted after the Series A
Preferred Issue Date on any assets or Capital Stock of the Corporation or its
Restricted Subsidiaries created in favor of the holders of the Series A
Preferred; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Corporation or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Corporation or such
other Restricted Subsidiary; (iv) Liens securing Indebtedness permitted to be
Incurred hereunder; or (v) Permitted Liens.
(vi) Key Man Insurance. The Corporation shall
maintain "Key Man" insurance with respect to the death and long term incapacity
of Mr. West, naming the Corporation as sole beneficiary, from an insurance
company satisfactory to the PG Director and containing terms and conditions
reasonably satisfactory to the PG Director with a benefit of at least $10
million (the "Key Man Insurance"), shall maintain such Key Man Insurance in full
force and effect, shall not permit the naming of any other beneficiary thereof
and shall not transfer any of its rights thereunder, in each case until the
third anniversary of the Series A Preferred Issue Date. Notwithstanding the
foregoing, in the event that the Corporation or Mr. West shall receive any
termination notice with respect to the Key Man Insurance from the insurer with
respect thereto, it shall use its best efforts to cause a new insurer to provide
Key Man Insurance prior to the effective date of such termination.
(vii) Maintenance of Business. The business of the Corporation
and its Restricted Subsidiaries shall be limited to the telecommunications
business and businesses reasonably related or ancillary thereto.
(b) Definitions. As used in this Amended and Restated
Certificate of Incorporation, the following terms shall have the following
meanings (with terms defined in the singular having comparable meanings when
used in the plural and vice versa), unless the context otherwise requires:
"Affiliate" is defined to mean, as applied 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" (including, without limitation, with correlative meanings,
the terms "controlling," "controlled by" and "under common control with"), as
applied to any Person, is defined to mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
contract or otherwise.
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"Average Life" means, at any date of determination with
respect to any debt security, the quotient obtained by dividing (i) the sum of
the product of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(b) the amount of such principal payment by (ii) the sum of all such principal
payments; and with respect to any Disqualified Stock shall have an analogous
meaning.
"Board Resolution" means, with respect to the Board or the
Executive Committee thereof, a copy of a resolution, certified by the Secretary
or Assistant Secretary thereof to have been duly adopted by the Board to be in
full force and effect on the date of such certification.
"Business Day" means any day except a Saturday or Sunday or
other day on which commercial banks in The City of New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or nonvoting) of capital stock of such Person, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such Person;
and "Capitalized Lease Obligation" means the rental obligations, as aforesaid,
under such lease.
"Change of Control" means such time as (i) Mr. Alfred West
ceases to be the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act) of Voting Securities representing at least 25% of the total voting power of
the outstanding Voting Securities of the Corporation, (ii) a "person" or "group"
within the meaning of Section 13d-3 or 14(d)(2) of the Exchange Act becomes the
beneficial owner of Voting Securities representing more voting power than the
Voting Securities then beneficially owned by Mr. Alfred West, or (iii) the
Corporation shall sell or agree in writing to sell all or substantially all of
its assets.
"Common Stock" means, with respect to any Person, any and all
shares, interests, participations and other equivalents (however designated,
whether voting or nonvoting) of common stock of such Person, including, without
limitation, with respect to the Corporation, its common stock, no par value.
"Compensation Committee" means a committee of the Board of the
Corporation which shall have exclusive authority (i) to make decisions regarding
the compensation of each officer of the Corporation and its Subsidiaries and
(ii) to adopt and administer any arrangement under which options, warrants or
other rights to purchase securities of the Corporation or its Subsidiaries are
granted to any employee of the Corporation or any Subsidiary thereof.
"Currency Agreement" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement that relates
to fluctuations in currency
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values to or under which the Corporation or any of its Restricted Subsidiaries
is a party or a beneficiary on the Series A Preferred Issue Date or becomes a
party or a beneficiary thereafter.
"Default" means a breach of any of the obligations of the
Corporation under this Amended or Restated Certificate of Incorporation.
"Disqualified Stock" means any class or series of Capital
Stock of the Corporation that by its terms or otherwise is (i) required to be
redeemed prior to the mandatory redemption date of the Series A Preferred, (ii)
redeemable at the option of the holder of such class or series of Capital Stock
at any time prior to the mandatory redemption date of the Series A Preferred, or
(iii) convertible into or exchangeable for Capital Stock referred to in clause
(i) or (ii) above prior to the redemption of the Series A Preferred or
Indebtedness having a scheduled maturity prior to the mandatory redemption date
of the Series A Preferred; provided that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require the Corporation to repurchase or redeem such Capital Stock
upon the occurrence of a "change of control" occurring prior to the mandatory
redemption date of the Series A Preferred, shall not constitute Disqualified
Stock if the "change of control" provision applicable to such Capital Stock is
no more favorable to the holders of such Capital Stock than the provisions
contained in Section 7 and such Capital Stock specifically provides that the
Corporation will not repurchase or redeem any such Capital Stock pursuant to
such provisions prior to the Corporation's repurchase of Series A Preferred
required to be repurchased by the Corporation under Section 7.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Series A Preferred Issue Date
applied on a basis consistent with the principles, methods, procedures and
practices employed in the preparation of the Corporation's audited financial
statements, including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All computations
based on GAAP contained in this Amended and Restated Certificate of
Incorporation shall be computed in conformity with GAAP, except that
calculations made for purposes of determining compliance with the provisions
hereof shall be made without giving effect to (i) the amortization of any
expenses incurred in connection with the issuance of the Series A Preferred, and
(ii) except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay or advance or supply funds for the purchase or
payment of such Indebtedness or other obligation of such other Person (whether
arising by virtue
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of partnership arrangements, or by agreement to keep well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to, or become responsible for, the payment of, contingently or otherwise, such
Indebtedness; provided that neither the accrual of interest (whether such
interest is payable in cash or kind) nor the accretion of original issue
discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date
of determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including,
without limitation, reimbursement obligations with respect thereto), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person, provided that the amount of such
Indebtedness shall be the lesser of (a) the fair market value of such asset at
such date of determination and (b) the amount of such Indebtedness of such other
Person, (vii) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person, and (viii) to the extent
not otherwise included in this definition, all obligations of such Person under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar agreement or
arrangement that relates to fluctuations in interest rates.
"Investment" means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of the Corporation or its
Subsidiaries and other than advances to sales
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representatives in the ordinary course of business in an amount not to exceed
$250,000 at any one time outstanding) or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others) or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, any other Person. For purposes of the definition
of "Unrestricted Subsidiary" and paragraph (a)(ii) hereof, (i) "Investment"
shall include the fair market value of the net assets of any Subsidiary of the
Corporation at the time that such Subsidiary of the Corporation is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Subsidiary of the Corporation and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer, in each case as determined by the
Board in good faith.
"Junior Securities" means any securities of the Corporation
other than securities evidencing Indebtedness.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Permitted Holders" means Princes Gate Investors II, L.P.,
Investor Investments AB, PGI Investments Limited, Gregor von Opel and Acorn
Partnership II, L.P. and any affiliate of any of the foregoing.
"Permitted Investment" means (i) an Investment in the
Corporation or a Restricted Subsidiary or a Person which will, upon or in
connection with the making of such Investment, become a Restricted Subsidiary or
be merged or consolidated with or into or transfer or convey all or
substantially all its assets to, the Corporation or a Restricted Subsidiary;
provided that such person's primary business is related, ancillary or
complementary to the businesses of the Corporation and its Subsidiaries on the
date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel
and similar advances to cover matters that are expected at the time of such
advances ultimately to be treated as expenses in accordance with GAAP; (iv)
notes and other evidences of Indebtedness, not to exceed $2 million at any one
time outstanding; (v) stock, obligations or securities received in satisfaction
of judgments; (vi) relocation and similar loans to employees of the Corporation
or its Subsidiaries not to exceed $150,000 at any one time outstanding; (vii)
loans to employees of the Corporation or its Subsidiaries, evidenced by an
unsubordinated promissory note, for the purpose of enabling such employees to
purchase Capital Stock of the Corporation, in an amount not to exceed $1.5
million at any one time outstanding; and (viii) Investments, not to exceed $5
million at any one time outstanding, if the Board has determined that such
Investments constitute strategic investments, provided that such incurrences and
issuances are permitted by the terms of this Amended and Restated Certificate of
Incorporation.
"Permitted Liens" means (i) Liens for taxes, assessments,
governmental charges
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or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Corporation or any of its Restricted Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or personal
property or any other asset acquired after the Series A Preferred Issue Date;
provided that (a) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with Section 12(a)(i), (1) to finance the
cost (including the cost of improvement or construction) of the item of property
or assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness so secured, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any
such Lien does not extend to or cover any property or assets other than such
item of property or assets and any improvements on such item; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Corporation and its Restricted Subsidiaries, taken as
a whole; (viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Corporation or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of Capital
Stock or Indebtedness of, any Person existing at the time such Person becomes,
or becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Corporation or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Corporation or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Corporation or any Restricted
Subsidiary of the Corporation that does not give rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters of credit
that encumber documents and other property relating to such letters of credit
and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under
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<PAGE>
Interest Rate Agreements and Currency Agreements and forward contracts, options,
future contracts, futures options or similar agreements or arrangements designed
solely to protect the Corporation or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Corporation or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Corporation and its Restricted Subsidiaries prior to
the Series A Preferred Issue Date; and (xviii) Liens on or sales of receivables.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including, without
limitation, a government or political subdivision or an agency or
instrumentality thereof.
"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 preferred or preference stock of such Person,
including, without limitation, with respect to the Corporation, the Series A
Preferred.
"Restricted Subsidiary" means any Subsidiary of the
Corporation other than an Unrestricted Subsidiary.
"Securityholders Agreement" means the Securityholders
Agreement, dated November 1, 1996, among the Corporation, Princes Gate Investors
II, L.P. and Mr. Alfred West.
"Securities Purchase Agreement" means the Securities Purchase
Agreement, dated November 1, 1996 between the Corporation and Princes Gate
Investors II, L.P.
"Stated Maturity" means, with respect to any debt security,
the date specified in such debt security as the fixed date on which any
principal of such debt security is due and payable.
"Subsidiary" means, with respect to any Person, any
corporation or other entity of which Voting Securities representing more than
50% of the voting power of all of such corporation's or entity's Voting
Securities are at the time directly or indirectly owned by such Person.
"Temporary Cash Investment" means any of the following: (i)
direct obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of America
or any agency thereof, (ii) time deposit accounts, certificates of deposit and
money market deposits maturing within 270 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws of
the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-
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<PAGE>
market fund sponsored by a registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for underlying
securities of the types described in clause (i) above entered into with a bank
meeting the qualifications described in clause (ii) above, (iv) commercial
paper, maturing not more than 180 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Corporation) organized and in
existence under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America with a rating at
the time as of which any investment therein is made of "P-l" (or higher)
according to Moody's Investors Service, Inc. ("Moody's") or "A-1" (or higher)
according to Standard & Poor's Ratings Group ("S&P"), (v) securities with
maturities of six months or less from the date of acquisition issued or fully
and unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or Moody's and (vi) time deposits,
certificates of deposit, money market deposits, bank promissory notes and
bankers' acceptances maturing not more than 270 days after the acquisition
thereof and guaranteed or issued by any of the ten largest banks (based on
assets as of the immediately preceding December 31) organized under the laws of
any jurisdiction in which one of the Restricted Subsidiaries does business and
which are not under intervention, bankruptcy or similar proceeding, not to
exceed $2 million outstanding (or, subsequent to the High Yield Offering, $10
million) at any one time.
"Trade Payables" means, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors created, assumed or Guaranteed by such Person or any of its Restricted
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Transaction Date" means, with respect to the Incurrence of
any Indebtedness or the issuance of Disqualified Stock by the Corporation or any
of its Subsidiaries, the date such Indebtedness is to be Incurred or such
Disqualified Stock is to be issued and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Corporation that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board may designate any Subsidiary
of the Corporation (including any newly acquired or newly formed Subsidiary of
the Corporation) to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Corporation or any other Subsidiary of the Corporation (other than an
Unrestricted Subsidiary or one of its Subsidiaries) that is not a Subsidiary of
the Subsidiary to be so designated; provided that either (a) the Subsidiary to
be so designated has total assets of $1,000 or less or (b) if such Subsidiary
has assets greater than $1,000, such designation would be permitted under
paragraph (a)(ii) hereof. The Board may designate any Unrestricted Subsidiary to
be a Subsidiary of the Corporation; provided that immediately after giving
effect to such designation (1) the Corporation could Incur $1.00 of additional
Indebtedness under subparagraph (a)(i)(A) hereof and (2) such designation would
not result in any Default.
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<PAGE>
"Voting Securities" of any Person means stock or other
ownership interests of such Person entitled to vote for the board of directors
of such Person or other entity performing similar functions.
"Warrants" means the Warrants which may be granted to holders
of the Series A Preferred pursuant to the Securityholders Agreement.
"Wholly Owned Restricted Subsidiary" means with respect to any
Person, any Subsidiary of such Person if all of the Common Stock or other
similar equity ownership interests in such Subsidiary (other than any director's
qualifying shares or Investments by foreign nationals mandated by applicable
law) is owned directly or indirectly by such Person.
(c) High Yield Conforming Amendment. Notwithstanding anything
herein contained to the contrary, the Corporation may, on or at any time
subsequent to the date of the filing of the Amended and Restated Certificate of
Incorporation, without any action or approval by any holder of Series A
Preferred, amend this Amended and Restated Certificate of Incorporation so that
the obligations of the Corporation pursuant to the last paragraph of Section 3,
Section 12(a)(i), 12(a)(ii), 12(a)(iii) and 12(a)(v) shall be no more
restrictive than the more favorable to the Corporation of the analogous
covenants contained in any indenture with respect to Indebtedness contemplated
by Section 12(a)(4).
Section 13. 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 when sent by telecopier (with receipt
confirmed), provided a copy is also sent by express (overnight, if possible)
courier, addressed (i) in the case of a holder of the Series A Preferred, to
such holder's address of record, and (ii) in the case of the Corporation, to the
Corporation's principal executive offices to the attention of the Corporation's
President.
Section 14. AMENDMENTS AND WAIVERS. Any right, preference,
privilege or power of, or restriction provided for the benefit of, the Series A
Preferred set forth herein may be amended and the observance thereof may be
waived (either generally or in a particular instance and either retroactively or
prospectively) with the affirmative vote or written consent of the holders of at
least a majority of the shares of Series A Preferred then outstanding, and any
amendment or waiver so effected shall be binding upon all holders of the Series
A Preferred.
-23-
<PAGE>
IN WITNESS WHEREOF, DESTIA COMMUNICATIONS, INC. has caused
this Certificate of Designation to be duly executed by its Senior Vice President
and General Counsel on May 3, 1999.
DESTIA COMMUNICATIONS, INC.
------------------------------------
Name: Richard L. Shorten, Jr.
Title: Senior Vice President and General
Counsel
<PAGE>
EXHIBIT 4.5
(FRONT SIDE OF STOCK CERTIFICATE)
COMMON STOCK SHARES
NUMBER CUSIP 25063E 10 0
C________________________________
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE DESTIA COMMUNICATIONS, INC.
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK. $.01 PAR VALUE, of Destia
Communications, Inc., transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST
BY , TRANSFER AGENT
AND REGISTRAR
AUTHORIZED OFFICER
SECRETARY CHAIRMAN OF THE BOARD
(CORPORATE SEAL)
(REVERSE SIDE OF STOCK CERTIFICATE)
DESTIA COMMUNICATIONS, INC.
The Corporation will furnish without charge to each stockholder who so
requests, the designations, powers, preferences and relative participating,
optional or other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations or restrictions of such
preferences and/or rights. Any such request should be made to the Secretary of
the Corporation or to the Transfer Agent and Registrar named on the face of this
certificate.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - _________ Custodian
(Cust)
TEN ENT- as tenants by the entireties
---------
(Minor)
JT TEN- as joint tenants with under Uniform gifts
right of survivorship to Minors Act
and not as tenants in common
<PAGE>
-----------------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________________ hereby sell, assign and
transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
- ------------------------------------
- -----------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OR ASSIGNEE)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shares of the stock represented by the within certificate, and do hereby
irrevocably constitute and appoint _______________________, Attorney, to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated __________________________
------------------------------------
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED GUARANTEE MEDALLION PROGRAM).
<PAGE>
EXHIBIT 5
[Schulte Roth & Zabel LLP Letterhead]
May 4, 1999
Destia Communications, Inc.
95 Rte. 17 South
Paramus, New Jersey 07652
Dear Sirs:
We have acted as special counsel to Destia Communications,
Inc., a Delaware corporation (the "Company"), in connection with the preparation
and filing by the Company with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form S-1, Commission file number
333-71463 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the offer and sale of a maximum of
7,475,000 shares of Common Stock, par value $.01 per share, of the Company (the
"Common Stock," and the shares of Common Stock covered by the Registration
Statement are referred to herein as the "Shares"). The Shares are to be
purchased by certain underwriters and offered for sale to the public pursuant to
the terms of an Underwriting Agreement (the "Underwriting Agreement"), the form
of which will be filed as an exhibit to the Registration Statement.
In our capacity as special counsel to the Company in
connection with the preparation and filing by the Company of the Registration
Statement and the offer and sale of Shares contemplated thereby, we have
examined originals, telecopies or copies, certified or otherwise identified to
our satisfaction, of such records of the Company and all such agreements,
certificates of public officials, certificates of officers or representatives of
the Company and others, and such other documents, certificates and corporate or
other records as we have deemed necessary or appropriate as a basis for this
opinion.
<PAGE>
In our examination, we have assumed the genuineness of all
signatures, the legal capacity of natural persons signing or delivering any
instrument, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents. As to any facts material to this opinion that were not independently
established or verified, we have relied upon statements and representations of
officers and other representatives of the Company and others.
We are attorneys admitted to practice in the State of New York
and the opinion set forth below is limited to the Delaware General Corporation
Law.
Based upon the foregoing, and having regard for such legal
considerations as we deem relevant, we are of the opinion the Shares have been
duly authorized by the Company and, upon payment and delivery in accordance with
the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We have reviewed the discussion contained under the heading
"Certain United States Tax Consequences to Non-United States Holders" in the
Prospectus forming a part of the Registration Statement. In our opinion, such
discussion sets forth the material U.S. federal income tax considerations
applicable generally to non-U.S. holders of the Shares and to such holders'
ownership and disposition of the Shares.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to this firm under the
heading "Legal Matters" in the Prospectus which forms a part thereof. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Schulte Roth & Zabel LLP
---------------------------------
Schulte Roth & Zabel LLP
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 3, 1999, is made
by and between DESTIA COMMUNICATIONS, INC., a Delaware corporation, having its
principal office at 95 Route 17 South, Paramus, New Jersey 07652 ("Destia") and
Mr. Alan Levy ("Executive").
WHEREAS, Destia desires to employ Executive and Executive desires to
provide services to Destia;
NOW, THEREFORE, in consideration of the premises and of the other mutual
covenants and conditions contained herein and for other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged,
Destia and Executive agree as follows:
SECTION 1. Employment and Term. (a) Destia hereby employs Executive
commencing as of the date of consummation of the initial public offering of the
common stock of Destia (the "Commencement Date"). The initial term of
Executive's employment shall be three years, subject to earlier termination as
specified herein (the "Employment Term"). Any renewal or extension of the
Employment Term and this Agreement shall be subject to the mutual agreement of
Executive and Destia, subject to Section 8 hereof.
(b) Executive shall be employed as President and Chief Operating Officer
of Destia, with powers and duties consistent with such position, for the
duration of the Employment Term. In addition, Destia shall cause Executive to be
nominated for election to the Board of Directors of Destia at each election of
directors that occurs during the Employment Term. Executive shall report to the
Chairman and CEO of Destia or as the Board of Directors of Destia may otherwise
direct.
(c) Executive shall be employed at the headquarters of Destia in the New
York metropolitan area.
SECTION 2. Full-Time Employment. (a) During Executive's employment by
Destia, Executive shall devote Executive's entire business time, energy and
skill to the performance of Executive's duties hereunder and to the business of
Destia. Executive shall faithfully and diligently perform such duties, shall
adhere to the instructions of the Chief Executive Officer and Board of Directors
of Destia and shall use his best efforts to promote the interests of Destia
consistent with the foregoing. Executive shall adhere to all corporate policies
of Destia and, to the extent applicable to Executive's duties hereunder,
Destia's subsidiaries and affiliates. Executive shall not, directly or
indirectly, alone or as a member of any partnership, or as an officer, director
or executive of any other corporation, partnership or other organization, be
actively engaged in or concerned with any other duties or pursuits which
interfere with the performance of his duties hereunder, or which may be inimical
to or contrary to the best interests of Destia. Notwithstanding the foregoing,
Executive shall be entitled to devote a reasonable portion of his time to civic
responsibilities, charitable organizations and personal financial matters so
long as such activities do not interfere with the Executive's responsibilities
hereunder.
<PAGE>
(b) Executive represents and warrants that he is free to be employed by
Destia upon the terms contained in this Agreement and that he is not a party to
any employment contract or restrictive covenant or other arrangement which could
reasonably be expected to prevent, interfere with or hinder, or be deemed to be
breached by, full performance of his duties hereunder.
SECTION 3. Compensation. (a) Base Salary. For all services rendered by
Executive in any capacity during Executive's employment under this Agreement,
including, without limitation, service as an executive, officer, or member of
any committee of Destia or any of its subsidiaries or affiliates, Destia agrees
to pay or cause to be paid to Executive a base salary at the rate of not less
than $325,000 per annum (effective as of January 1, 1999), payable in equal
installments in accordance with the prevailing salary payment practices of
Destia in effect from to time (the "Base Salary"). In addition, in the event
Executive is promoted during Executive's employment under this Agreement,
Executive's Base Salary shall be reviewed and increased effective upon the
effective date of such promotion to take into account Executive's increased
responsibilities. In the event that sickness or accident disability payments
under Destia's insurance programs shall become payable to Executive in respect
of any period of Executive's employment hereunder the salary installment payable
to Executive hereunder in respect of his Base Salary on the next succeeding
salary installment payment date shall be an amount computed by subtracting (i)
the amount of such disability payments which shall have become payable during
the period between such date, from (ii) the salary installment otherwise payable
to Executive hereunder in respect of his Base Salary on such date.
(b) Bonus. Executive shall be entitled to receive an annual bonus payment
from Destia to be awarded and payable in accordance with Destia's bonus program
for senior executives. Executive's annual target bonus shall be 50% of
Executive's Base Salary. Destia's bonus program for senior executives shall
provide that Executive shall be entitled to a bonus payment of up to 100% of
Base Salary for superior performance. Any bonus in excess of the aforementioned
amounts shall be paid at the sole discretion of the Board of Directors of Destia
and shall be made to the extent, at such time and in such amount as determined
by the Board of Directors of Destia in its sole discretion.
(c) Incentive Compensation. In addition to the other compensation
hereunder, the Company will grant to Executive in accordance with Destia's 1999
Flexible Incentive Plan (the "Plan"), certain options to acquire common stock of
Destia. The terms of the vesting and exercise of such options shall be governed
by the Incentive Stock Option Agreement attached as Exhibit A. The terms of
Executive's stock option grant pursuant to Destia's Amended and Restated 1996
Flexible Incentive Plan (the "1996 Plan"; collectively with the Plan, the
"Incentive Plans") shall be modified in accordance with the amended Incentive
Stock Option Agreement attached as Exhibit B.
(d) Benefits. Executive shall be entitled to participate in medical,
dental, life insurance, 401(k) savings and other benefits (collectively, the
"Benefits") in accordance with the prevailing policies of Destia for executive
employees.
(e) Loan for Exercise of Options. In accordance with the terms of the 1996
Plan, Destia shall make available to Executive loans of up to $700,000 to be
used by Executive solely for the purpose of the payment of the exercise price
for options issued to Employee under the Plans.
<PAGE>
Employee shall pay interest on all amounts borrowed from Destia at a rate
mutually agreed by Executive and the Board of Directors. The terms of such loan
shall provide that Executive shall have the right to elect either to pay
interest on such loan on a monthly basis or elect to cause the interest payable
to be added to the principal amount, whereupon interest shall accrue on the
entire principal amount of the loan as so increased. All amounts borrowed by
employee pursuant to the terms hereof shall be payable by Executive (together
with all accrued interest) within 30 days of the termination of Executive's
employment hereunder for any reason. Executive shall enter into such agreements
as may be reasonably requested by Destia in connection with the provision of
such loans.
SECTION 4. Vacation. Executive shall be entitled to an annual vacation of
four (4) weeks (without deduction in salary or other compensation or Benefits).
Such vacation shall be taken at such time or times as may be convenient to the
operations of Destia and shall be consistent with the prevailing vacation
policies of Destia. Within ten (10) days of the termination or expiration of the
Employment Term, any accrued but unused vacation earned by Executive shall be
paid to Executive at the rate of Executive's base salary at the time of
termination or expiration of the Employment Term.
SECTION 5. Reimbursement for Expenses. Executive is authorized to incur
reasonable and necessary traveling expenses and other reasonable and necessary
disbursements for or on behalf of Destia in the performance of Executive's
duties during Executive's employment under this Agreement in accordance with
Destia's prevailing expense incurrence policies. Destia will reimburse Executive
for all such expenses in accordance with its prevailing expense reimbursement
policies upon presentation of a properly itemized account of such expenditures
and the business reasons for such expenditures. In addition, Executive shall be
entitled to an additional payment of up to $1000 per month for automotive
expenses.
SECTION 6. Termination of Employment By Destia. (a) Termination. Executive
shall be subject to dismissal from his position as an executive of Destia at any
time and with or without Cause. The effect of any termination of the employment
of Executive with Cause is set forth in Section 8(a) hereof. The effect of any
termination of the employment of Executive without Cause is set forth in Section
8(d) hereof.
(b) Definition of Cause. The term "Cause" shall be defined to include: (i)
any wilful breach by Executive of the performance of any of his duties pursuant
to this Agreement; (ii) any wilful breach by Executive of any other obligation
under this Agreement; (iii) any attempt by Executive to secure any personal
profit in connection with the business of Destia, other than as expressly
provided for in this Agreement; (iv) failure by Executive to devote sufficient
business time to the affairs of Destia; (v) material breach by Executive of any
of the representations or warranties contained in this Agreement; (vi)
activities of Executive inimical to the best interests of Destia; provided,
however, that such activities shall not include mistakes in business judgment
made in good faith; (vii) conviction of, or a plea of nolo contendere to, a
felony or any act of fraud, whether or not related to the affairs of Destia;
(viii) subject to Sections 6(c) and 6(d) below, death or disability of
Executive; and (ix) dishonesty, moral turpitude or other misconduct that, in the
absence of any agreement in writing between the parties hereto, would entitle
Destia to terminate Executive's employment in accordance with its prevailing
employment policies; provided further,
<PAGE>
however, that in the event of actions allegedly constituting Cause pursuant to
clauses (i), (ii), (iv), (v) or (vi) that are susceptible to cure, Destia shall
provide Executive with no less than thirty (30) days' notice of such
deficiencies prior to any termination as a result there of and during such prior
notice period shall afford Executive the opportunity to remedy such deficiencies
to Destia's reasonable satisfaction.
(c) Termination by Reason of Incapacity. In the event that Executive
suffers a disability which prevents him from substantially performing his duties
under this Agreement for a period of at least sixty (60) calendar days within a
365-calendar day period (whether consecutive or non-consecutive) (a
"Disability"), Destia shall have the right to dismiss Executive upon ten (10)
calendar days written notice. In the event of any dispute between Destia and
Executive as to whether Executive has suffered a Disability, the determination
of whether Executive has suffered a Disability shall be made by an independent
physician selected by Destia (subject to Executive's reasonable consent), and
the decision of such physician shall be binding upon Destia and Executive.
(d) Termination by Death. In the event Executive dies during the
Employment Term, this Agreement shall terminate automatically, such termination
to be effective on the date of Executive's death.
SECTION 7. Termination of Employment By Executive. The employment of
Executive under this Agreement shall be deemed to have been terminated by
Executive for "Good Reason" if Executive voluntarily terminates employment
following the occurrence of a material breach by Destia of any of its
obligations under this Agreement; provided, however, that Executive shall
provide written notice of such material breach within thirty (30) days after
Executive's discovery of such material breach and Destia shall have the
opportunity to cure such default within thirty (30) days after receipt of such
written notice. If Destia does not cure the default within such time, then
Executive's employment shall be deemed to have been terminated for Good Reason
by Executive, thirty (30) days after receipt of such written notice by Destia,
or such shorter period as Destia may elect. No resignation or other voluntary
termination by Executive other than pursuant to this Section 7 shall be deemed
under any circumstances to be a termination with Good Reason, a "constructive
termination" or otherwise not in breach of Executive's obligations under this
Agreement.
SECTION 8. Effect of Termination. (a) For Cause; Without Good Reason. In
the event of termination of this Agreement (x) by Destia for Cause (except by
reason of death or Disability) or (y) by Executive without Good Reason, Destia
shall pay to Executive within thirty (30) days of termination any Base Salary
accrued but not paid to Executive prior to the date of such termination and
Executive shall be entitled to any Benefits which may then be due under any of
the benefit or other plans in which Executive is a participant. Executive shall
forfeit any right to any bonus not previously paid to Executive by Destia and
shall not be entitled to any further compensation or benefits hereunder
(including, without limitation, the Benefits). In addition, in the event of a
termination for Cause, Executive shall forfeit all unvested options held by
Executive in accordance with the terms of Executive's Incentive Stock Option
Agreement.
(b) By Reason of Executive's Death. In the event of the termination of
this Agreement by reason of the death of the Executive, Destia (i) shall pay
Executive's legal representatives within
<PAGE>
sixty (60) days of death (A) any unpaid salary installment in respect to
Executive's Base Salary to the last day of the month in which Executive's death
occurs, and (B) any bonus previously awarded but not yet paid to the Executive
and (ii) shall continue to provide (subject to any applicable eligibility
criteria) any medical and dental benefits comprising part of the Benefits (or
comparable benefits) to the spouse and any dependents of Executive at the time
of Executive's death for a period equal to the longer of twelve (12) months from
the last day of the month in which Executive's death occurs and the remainder of
the Employment Term. In addition, all unvested options held by Executive at the
time of his death that are scheduled to vest within one (1) year of Executive's
death shall become immediately vested.
(c) By Reason of the Incapacity of the Executive. In the event of the
termination of this Agreement by reason of the Disability of the Executive,
Destia (i) shall pay the Executive within thirty (30) days of termination (A)
Executive's Base Salary to the last day of the month in which such termination
occurs and (B) any bonus previously awarded but not yet paid to the Executive
and (ii) shall continue to provide (subject to any applicable eligibility
criteria) any medical benefits comprising part of the Benefits (or comparable
benefits) to Executive, Executive's spouse and any dependants of Executive who
enjoyed such medical benefits at the time of Executive's Disability, for a
period equal to the longer of twelve (12) months from the last day of the month
in which such termination occurs and the remainder of the Employment Term. In
addition, all unvested options held by Executive at the time of his death that
are scheduled to vest within one (1) year of Executive's incapacity shall become
immediately vested.
(d) Without Cause; For Good Reason; Non-Renewal. In the event of (x)
termination of this Agreement (1) by Destia without Cause or (2) by Executive
for Good Reason or (y) the failure of Destia to make a binding offer to
Executive for a renewal of the Employment Term for at least [two (2)] years on
terms no less favorable to Executive than the terms applicable to Executive's
employment immediately prior to the expiration of the Employment Term, Destia
(i) shall pay the Executive (A) Executive's Base Salary through the date of
termination, in accordance with its prevailing salary payment practices (as
determined by Destia in its sole discretion), (B) within thirty (30) days of
such termination, a severance payment in the amount equal to the greater of (1)
the Base Salary payable to Executive for the remainder of the Employment Term
and (2) two years' Base Salary at the rate in effect at the time of termination
plus two (2) year's bonuses based on such Base Salary using the average of the
actual bonus percentages used by Destia in the payment of bonuses to Executive
during the two (2) years prior to such termination and (C) within thirty (30)
days of termination any bonus previously awarded to but not yet paid to
Executive and (ii) shall continue to provide Executive with Benefits (or
comparable benefits), including (subject to applicable eligibility criteria)
medical benefits comprising a portion of the Benefits (or comparable benefits)
in respect of Executive's spouse and any dependents of the Executive as of the
date of such termination, until the latter of (A) two years following the date
of termination and (B) the remainder of the Employment Term. Notwithstanding the
foregoing, in the event that any termination in accordance with this Section
8(d) shall occur within two years following a Change of Control (as defined in
the Destia 1999 Flexible Incentive Plan), the amounts payable to Executive
pursuant to subsection 8(d)(i)(B) and the period for which Benefits will be
provided pursuant to subsection 8(d)(ii) above shall be increased to the greater
of three (3) years from the date of termination or the remainder of the
Employment Term, and Executive shall be entitled to an additional payment equal
to the amount of any excise taxes payable by Executive pursuant to Section 4999
of the Code as a result of such
<PAGE>
termination plus all federal, state and local taxes applicable taxes applicable
to Destia's payment of such excise taxes, including any additional excise taxes
due under Section 4999 of the Code with respect to payments made pursuant to
this provision, including any such taxes resulting from the acceleration of
options or other benefits hereunder. The determination of the amounts required
to be paid under this Employment Agreement shall be made by a nationally
recognized United States public accounting firm which may be the independent
public accounting firm used by Destia to audit its financial statements. In
addition, upon any such termination in accordance with this Section 8(d), all
options granted to Executive in accordance with the terms of the Plan (or any
comparable incentive plan) shall become immediately vested and exercisable.
(e) Sole Remedy. Executive shall not be entitled to any form of severance
benefits, including, without limitation, benefits otherwise payable under any of
Destia's regular severance policies, other than those set forth herein. In
consideration of the compensation and benefits available hereunder, Executive,
except as otherwise expressly provided in this Agreement, unconditionally
releases Destia and its present and future Affiliates, directors, officers,
employees and agents, or any of them, from any and all claims, liabilities and
obligations of any nature pertaining to termination of Executive's employment
hereunder. Executive and Destia further agree that upon any termination of
Executive's employment in accordance with the terms hereof, each of Executive
and Destia shall act in good faith in connection with any such termination and
neither Executive nor Destia shall disparage or otherwise defame the business
reputation of the other party hereto.
SECTION 9. Non-Competition and Permitted Business Activities. Non-Compete
During Employment Term. (a) Executive agrees that during the Employment Term of
this Agreement, except with the written consent of Destia, such Executive shall
not (i) accept any form of employment with remuneration from any business
related to the provision of telecommunications services (a "Competing Business")
or (ii) hold any beneficial ownership interest, directly or indirectly, in any
Competing Business; provided however, that none of the foregoing shall prohibit
Executive from owning, for the purpose of passive investment, less than five
percent 5% of any class of securities of another publicly-held corporation.
(b) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of employment for any
reason, Executive shall not, except in the course of his duties hereunder,
directly or indirectly induce or attempt to induce or otherwise counsel, advise,
solicit or encourage any person to leave the employ of Destia (or any subsidiary
or affiliate thereof) to accept employment with any person or entity other than
Destia.
(c) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of such employment
for any reason, Executive shall not directly or indirectly solicit, induce or
attempt to solicit, induce or otherwise counsel, advise, or encourage any
customer, agent, dealer, distributor or consultant of Destia (or any subsidiary
or affiliate thereof) to become a customer, agent, dealer, distributor or
consultant, directly or indirectly, of another person or entity other than
Destia.
SECTION 10. Ownership of Work Product. (a) Executive acknowledges that
during the
<PAGE>
Employment Term, he may conceive of, discover, invent or create inventions,
improvements, new contributions, literary property, material, ideas and
discoveries, whether patentable or copyrightable or not (collectively, "Work
Product"), and that various business opportunities may be presented to him by
reason of his employment by Destia. Executive acknowledges that, unless Destia
otherwise agrees in writing, all such Work Product and business opportunities
shall be owned by and belong exclusively to Destia and that he shall have no
personal interest therein.
(b) Executive shall further, unless Destia otherwise agrees in writing,
(i) promptly disclose any such Work Product and business opportunities to
Destia, (ii) assign to Destia, upon request and without additional compensation,
the entire rights to such Work Product and business opportunities, (iii) execute
all documents necessary to carry out the foregoing and (iv) give testimony in
support of his inventorship or creation in any appropriate case upon request of
the senior management of Destia. Executive agrees that he will not assert any
rights to any Work Product or business opportunity as having been made or
acquired by him prior to the date of this Agreement except for Work Product or
business opportunities, if any, disclosed to and acknowledged by Destia in
writing prior to the date hereof.
(c) The provisions of this Section 10 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 11. Non-Disclosure of Confidential Information. (a) Executive
shall hold in a fiduciary capacity for the benefit of Destia all Confidential
Information (as defined below) and shall not, during the term of Executive's
employment hereunder or after the termination of such employment, communicate or
divulge any Confidential Information to, or use any Confidential Information for
the benefit of, any person (including Executive) other than Destia, affiliates
of Destia or persons designated in writing by Destia. "Confidential Information"
shall mean customer lists, costs and specifications of Destia's products and
services, know-how, trade secrets, financial data, operational methods,
marketing and sales information, marketing plans and strategies, business plans,
personnel information, research projects, development plans or projects and all
other information of a proprietary nature. Upon termination of Executive's
employment with Destia for any reason whatsoever, Executive shall promptly
return to Destia any documents or other written, recorded or graphic matter
containing, relating or referring to any Confidential Information (and all
copies and extracts thereof and any notes relating thereto) in Executive's
possession or control and deliver to Destia a written confirmation that all such
Confidential Material has been so returned.
(b) The provisions of this Section 11 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 12. Liability for Actions or Inactions; Indemnification. (a)
Executive shall not be liable, in damages or otherwise, to Destia for any act or
failure to act on behalf of Destia, performed within the scope of his authority
conferred by the terms of his employment under this Agreement, unless such act
or omission constituted Cause or fraudulent or willful misconduct, was performed
or omitted in bad faith or constituted gross negligence.
<PAGE>
(b) Destia shall indemnify and hold harmless Executive from and against
any and all claims, losses, damages and expenses incurred by reason of any acts,
omission or alleged acts or omissions undertaken or omitted (a) in the good
faith belief that such act or omission was in furtherance of the business of
Destia; (b) not in contravention of this Agreement; and (c) not in contravention
of the standard set forth in Section 12(a) hereof, incurred as a result of any
actual or threatened civil, criminal, administrative or investigative action,
proceeding or claim; provided, however, that if Executive ultimately is found by
any court of competent jurisdiction or by any arbitrator to have acted or
omitted to act in a manner which is in contravention of the standard set forth
in any of the foregoing clauses (a), (b) or (c), Executive shall repay all
amounts paid or reimbursed by Destia. Destia shall not be required to indemnify
Executive for any amount paid or payable by Executive in the settlement of any
action, proceeding or investigation agreed to without the written consent of
Destia (which consent shall not unreasonably be withheld or delayed). Promptly
after receipt by Executive of notice of his involvement in any action,
proceeding or investigation, Executive shall, if a claim in respect thereof for
indemnification is to be made by Executive against Destia under this Section,
notify Destia in writing of such involvement. No failure by Executive to so
notify Destia shall relieve Destia from the obligation to indemnify Executive
unless and to the extent that Destia shall have been actually prejudiced by such
failure. To the extent it wishes, Destia shall be entitled to assume the defense
of any action that is the subject of this Section; provided, however, that
Executive may retain his own counsel (i) at his own expense in order to
participate in such defense, and (ii) at the expense of Destia if representation
of both Executive and Destia would, in the reasonable judgment of Executive, be
inappropriate due to actual or potential differing interests between them.
(c) The provisions of this Section 12 shall survive following expiration,
cancellation or other termination of this Agreement until all liability under
all applicable statutes of limitations is barred.
(d) The provisions of this Section 12 are in addition to any
indemnification rights that Executive may have pursuant to Destia's Certificate
of Incorporation, Bylaws, or policies application to executive-employees of
Destia.
SECTION 13. Entire Agreement. (a) This entire Agreement, together with the
Incentive Stock Option Agreement that is an Exhibit hereto, contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior agreements and understandings, both written and
oral, of the parties with respect to the subject matter hereof including the
Employment Agreement dated as of August 1, 1996 between the parties and the
amendment thereto dated as of October 31, 1996.
SECTION 14. Governing Law; Jurisdiction; Service of Process. (a) This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York (other than its rules of conflicts of laws to the extent that
the application of the laws of another jurisdiction would be required thereby).
(b) With respect to any suit, action, or proceedings relating to this
Agreement ("Proceedings"), the parties irrevocably:
<PAGE>
(i) submit to the non-exclusive jurisdiction of the courts of the
State of New York and the United States District Court located in the
Borough of Manhattan in New York City; and
(ii) waive any objection that they may have at any time to the
laying of venue of any Proceedings brought in any such court; waive any
claim that such Proceedings have been brought in an inconvenient forum;
and further waive the right to object, with respect to such Proceedings,
that such court does not have jurisdiction over such party.
(c) The parties irrevocably consent to service of process given in the
manner provided for notices in Section. Nothing in this Agreement shall affect
the right of either party to serve process in any other manner permitted by law.
SECTION 15. Specific Enforcement. If Executive breaches, or threatens to
commit a breach of, any of the provisions of Sections 9, 10 or 11 hereof, Destia
shall have the right and remedy to have such provision specifically enforced by
any court having jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to Destia and that
money damages will not provide an adequate remedy to Destia. Nothing in this
Section 15 shall be construed to limit the right of Destia to collect money
damages in the event of a breach of any of the provisions of this Agreement,
including, without limitation, Sections 9, 10 and 11 hereof.
SECTION 16. Third Party Beneficiaries. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any third party (other
than Executive's heirs and representatives), including, without limitation, any
creditor of Destia or of Executive. No such third party shall obtain any right
under any provision of this Agreement or shall by reason of any such provision
make any claim in respect of any debt, liability, or obligation (or otherwise)
against Destia.
SECTION 17. Waiver of Jury Trial. Each party waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in respect
of any litigation arising out of or relating to this Agreement and Executive's
employment by Destia. Each party (a) certifies that no representative, agent or
attorney of the other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it has been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications set
forth in this Section.
<PAGE>
SECTION 18. Expenses. Each party hereto shall assume and pay its own
expenses incident to the negotiation and execution of this Agreement, the
preparation for carrying it into effect and the consummation of the transactions
contemplated hereby. Without limiting the generality of the foregoing, each
party shall pay all legal fees and other fees to consultants and advisors
incurred by it relating to this Agreement and such transactions and shall
indemnify and hold the other party harmless from and against any claims for such
expenses and fees.
SECTION 19. Waivers and Amendments. This Agreement may be amended,
superseded, canceled, renewed or extended and the terms hereof may be waived,
only by a written instrument signed by each party, or, in the case of a waiver,
by the party waiving compliance. Except where a specific period for action or
inaction is provided herein, no delay on the part of a party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Neither
any waiver on the part of a party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege shall preclude
any further exercise thereof or the exercise of any other such right, power or
privilege.
SECTION 20. Notices. All notices or other communications required or
permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent, postage prepaid, by registered, certified or express mail or
reputable overnight courier service and shall be deemed given when so delivered
by hand, or if mailed, three days after mailing (one business day in the case of
express mail or overnight courier service), as follows:
if to Destia:
Destia Comunications, Inc.
95 Route 17 South
Paramus, NJ 07652
Attention: General Counsel
if to Executive:
at the then current address for Executive maintained in the Destia
employee files.
SECTION 21. Calculations. All calculations of Dollar amounts hereunder
shall be rounded to the nearest whole cent. Equidistant amounts shall be rounded
upwards.
SECTION 22. Severability. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby; provided, however,
that the parties shall negotiate in good faith with respect to an equitable
modification of the provision or application thereof held to be invalid. To the
extent that it may effectively do so under applicable law, each party hereto
hereby waives any provision of law, which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
SECTION 23. Successors and Assigns. Except as otherwise specifically
provided in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the parties, and their legal representatives, and permitted
successors and assigns.
<PAGE>
SECTION 24. Captions. All headings, paragraph titles and captions
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provisions hereof.
SECTION 25. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be on original and all of which, when taken
together, shall together constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DESTIA COMMUNICATIONS, INC.,
By: ___________________________
Name:
Title:
MR. ALAN LEVY
_______________________________
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 3, 1999, is made
by and between DESTIA COMMUNICATIONS, INC., a Delaware corporation, having its
principal office at 95 Route 17 South, Paramus, New Jersey 07652 ("Destia") and
Mr. Alfred West ("Executive").
WHEREAS, Destia desires to employ Executive and Executive desires to
provide services to Destia;
NOW, THEREFORE, in consideration of the premises and of the other mutual
covenants and conditions contained herein and for other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged,
Destia and Executive agree as follows:
SECTION 1. Employment and Term. (a) Destia hereby employs Executive
commencing as of the date of consummation of the initial public offering of the
common stock of Destia (the "Commencement Date"). The initial term of
Executive's employment shall be five years, subject to earlier termination as
specified herein (the "Employment Term"). Any renewal or extension of the
Employment Term and this Agreement shall be subject to the mutual agreement of
Executive and Destia, subject to Section 8 hereof.
(b) Executive shall be employed as the Chief Executive Officer of Destia,
with powers and duties consistent with such position, for the duration of the
Employment Term. In addition, Destia shall cause Executive to be nominated for
election to the Board of Directors of Destia at each election of directors that
occurs during the Employment Term. Executive shall report to the Board of
Directors of Destia.
(c) Executive shall be employed at offices of Destia maintained for
Executive in the New York metropolitan area.
SECTION 2. Full-Time Employment. (a) During Executive's employment by
Destia, Executive shall devote Executive's entire business time, energy and
skill to the performance of Executive's duties hereunder and to the business of
Destia. Executive shall faithfully and diligently perform such duties, shall
adhere to the instructions of the Board of Directors of Destia and shall use his
best efforts to promote the interests of Destia consistent with the foregoing.
Executive shall adhere to all corporate policies of Destia and, to the extent
applicable to Executive's duties hereunder, Destia's subsidiaries and
affiliates. Executive shall not, directly or indirectly, alone or as a member of
any partnership, or as an officer, director or executive of any other
corporation, partnership or other organization, be actively engaged in or
concerned with any other duties or pursuits which interfere with the performance
of his duties hereunder, or which may be inimical to or contrary to the best
interests of Destia. Notwithstanding the foregoing, Executive shall be
<PAGE>
entitled to devote a reasonable portion of his time to civic responsibilities,
charitable organizations and personal financial matters so long as such
activities do not interfere with the Executive's responsibilities hereunder.
(b) Executive represents and warrants that he is free to be employed by
Destia upon the terms contained in this Agreement and that he is not a party to
any employment contract or restrictive covenant or other arrangement which could
reasonably be expected to prevent, interfere with or hinder, or be deemed to be
breached by, full performance of his duties hereunder.
SECTION 3. Compensation. (a) Base Salary. For all services rendered by
Executive in any capacity during Executive's employment under this Agreement,
including, without limitation, service as an executive, officer, or member of
any committee of Destia or any of its subsidiaries or affiliates, Destia agrees
to pay or cause to be paid to Executive a base salary at the rate of not less
than $500,000 per annum (effective as of January 1, 1999), payable in equal
installments in accordance with the prevailing salary payment practices of
Destia in effect from to time (the "Base Salary"). In addition, in the event
Executive is promoted during Executive's employment under this Agreement,
Executive's Base Salary shall be reviewed and increased effective upon the
effective date of such promotion to take into account Executive's increased
responsibilities. In the event that sickness or accident disability payments
under Destia's insurance programs shall become payable to Executive in respect
of any period of Executive's employment hereunder the salary installment payable
to Executive hereunder in respect of his Base Salary on the next succeeding
salary installment payment date shall be an amount computed by subtracting (i)
the amount of such disability payments which shall have become payable during
the period between such date, from (ii) the salary installment otherwise payable
to Executive hereunder in respect of his Base Salary on such date
(b) Bonus. Executive shall be entitled to receive an annual bonus payment
from Destia to be awarded and payable in accordance with Destia's bonus program
for senior executives. Executive's annual target bonus shall be 50% of
Executive's base salary. Destia's bonus program for senior executives shall
provide that Executive shall be entitled to a bonus payment of up to 100% of
base salary for superior performance. Any bonus in excess of the aforementioned
amounts shall be paid at the sole discretion of the Board of Directors of Destia
and shall be made to the extent, at such time and in such amount as determined
by the Board of Directors of Destia in its sole discretion.
(c) Intentionally omitted.
(d) Benefits. Executive shall be entitled to participate in medical,
dental, life insurance and other benefits (collectively, the "Benefits") in
accordance with the prevailing policies of Destia for executive employees.
<PAGE>
SECTION 4. Vacation. Executive shall be entitled to an annual vacation of
four (4) weeks (without deduction in salary or other compensation or Benefits).
Such vacation shall be taken at such time or times as may be convenient to the
operations of Destia and shall be consistent with the prevailing vacation
policies of Destia. Within 10 days of the termination or expiration of the
Employment Term, any accrued but unused vacation earned by Executive shall be
paid to Executive at the rate of Executive's base salary at the time of
termination or expiration of the Employment Term.
SECTION 5. Reimbursement for Expenses. Executive is authorized to incur
reasonable and necessary traveling expenses and other reasonable and necessary
traveling expenses and other reasonable and necessary disbursements for or on
behalf of Destia in the performance of Executive's duties during Executive's
employment under this Agreement in accordance with Destia's prevailing expense
incurrence policies. Destia will reimburse Executive for all such expenses in
accordance with its prevailing expense reimbursement policies upon presentation
of a properly itemized account of such expenditures and the business reasons for
such expenditures. In addition, Executive shall be entitled to an additional
payment of up to $1000 per month for automotive expenses.
SECTION 6. Termination of Employment By Destia. (a) Termination. Executive
shall be subject to dismissal from his position as an executive of Destia at any
time and with or without Cause. The effect of any termination of the employment
of Executive with Cause is set forth in Section 8(a) hereof. The effect of any
termination of the employment of Executive without Cause is set forth in Section
8(d) hereof.
(b) Definition of Cause. The term "Cause" shall be defined to include: (i)
any wilful breach by Executive of the performance of any of his duties pursuant
to this Agreement; (ii) any wilful breach by Executive of any other obligation
under this Agreement; (iii) any attempt by Executive to secure any personal
profit in connection with the business of Destia, other than as expressly
provided for in this Agreement; (iv) failure by Executive to devote sufficient
business time to the affairs of Destia; (v) material breach by Executive of any
of the representations or warranties contained in this Agreement; (vi)
activities of Executive inimical to the best interests of Destia; provided,
however, that such activities shall not include mistakes in business judgment
made in good faith; (vii) conviction of, or a plea of nolo contendere to, a
felony or any act of fraud, whether or not related to the affairs of Destia;
(viii) subject to Sections 6(c) and 6(d) below, death or disability of
Executive; and (ix) any other dishonesty, moral turpitude or other misconduct
that, in the absence of any agreement in writing between the parties hereto,
would entitle Destia to terminate Executive's employment in accordance with its
prevailing employment policies; provided further, however, that in the event of
actions allegedly constituting Cause pursuant to clauses (i), (ii), (iv), (v) or
(vi) that are susceptible to cure, Destia shall provide Executive with no less
than thirty (30) days' notice of such deficiencies prior to any termination as a
result there of and during such prior notice period shall afford Executive the
opportunity to remedy such deficiencies to Destia's reasonable satisfaction.
<PAGE>
(c) Termination by Reason of Incapacity. In the event that Executive
suffers a disability which prevents him from substantially performing his duties
under this Agreement for a period of at least sixty (60) calendar days within a
365-calender day period (whether consecutive or non-consecutive) (a
"Disability"), Destia shall have the right to dismiss Executive for Cause upon
ten (10) calendar days written notice. In the event of any dispute between
Destia and Executive as to whether Executive has suffered a Disability, the
determination of whether Executive has suffered a Disability shall be made by an
independent physician selected by Destia (subject to Executive's reasonable
consent), and the decision of such physician shall be binding upon Destia and
Executive.
(d) Termination by Death. In the event Executive dies during the
Employment Term, this Agreement shall terminate automatically, such termination
to be effective on the date of Executive's death.
SECTION 7. Termination of Employment By Executive. The employment of
Executive under this Agreement shall be deemed to have been terminated by
Executive for "Good Reason" if Executive voluntarily terminates employment
following the occurrence of a material breach by Destia of any of its
obligations under this Agreement; provided, however, that Executive shall
provide written notice of such material breach within thirty (30) days after
Executive's discovery of such material breach and Destia shall have the
opportunity to cure such default within thirty (30) days after receipt of such
written notice. If Destia does not cure the default within such time, then
Executive's employment shall be deemed to have been terminated for Good Reason
by Executive, thirty (30) days after receipt of such written notice by Destia,
or such shorter period as Destia may elect. No resignation or other voluntary
termination by Executive other than pursuant to this Section 7 shall be deemed
under any circumstances to be a termination with Good Reason, a "constructive
termination" or otherwise not in breach of Executive's obligations under this
Agreement.
SECTION 8. Effect of Termination. (a) For Cause; Without Good Reason. In
the event of termination of this Agreement (x) by Destia for Cause (except by
reason of death or Disability) or (y) by Executive without Good Reason, Destia
shall pay to Executive any Base Salary accrued but not paid to Executive prior
to the date of such termination and Executive shall be entitled to any Benefits
which may then be due under any of the benefit or other plans in which Executive
is a participant. Executive shall forfeit any right to any bonus not previously
paid to Executive by Destia and shall not be entitled to any further
compensation or benefits hereunder (including, without limitation, the
Benefits).
(b) By Reason of Executive's Death. In the event of the termination of
this Agreement by reason of the death of the Executive, Destia (i) shall pay
Executive's legal representatives (A) any unpaid salary installment in respect
to Executive's Base Salary to the last day of the month in which Executive's
death occurs, and (B) any bonus previously awarded but not yet paid to the
Executive and (ii) shall continue to provide (subject to any applicable
eligibility criteria) any medical and dental benefits comprising part of the
Benefits (or comparable benefits) to the spouse and any dependents of Executive
at the time of Executive's death, for a period equal to the longer of
<PAGE>
twelve (12) months from the last day of the month in which Executive's death
occurs and the remainder of the Employment Term.
(c) By Reason of the Incapacity of the Executive. In the event of the
termination of this Agreement by reason of the Disability of the Executive,
Destia (i) shall pay the Executive (A) Executive's Base Salary to the last day
of the month in which such termination occurs and (B) any bonus previously
awarded but not yet paid to the Executive and (ii) shall continue to provide
(subject to any applicable eligibility criteria) any medical benefits comprising
part of the Benefits (or comparable benefits) to Executive, Executive's spouse
and any dependants of Executive who enjoyed such medical benefits at the time of
Executive's Disability, for a period equal to the longer of twelve (12) months
from the last day of the month in which such termination occurs and the
remainder of the Employment Term.
(d) Without Cause; For Good Reason; Non-Renewal. In the event of (x)
termination of this Agreement (1) by Destia without Cause or (2) by Executive
for Good Reason or (y) the failure of Destia to make a binding offer to
Executive for a renewal of the Employment Term for at least two years on terms
no less favorable to Executive than the terms applicable to Executive's
employment immediately prior to the expiration of the Employment Term, Destia
(i) shall pay the Executive (A) Executive's Base Salary through the date of
termination, in accordance with its prevailing salary payment practices (as
determined by Destia in its sole discretion), (B) within thirty (30) days of
such termination, a severance payment in the amount equal to the greater of (1)
the Base Salary payable to Executive for the remainder of the Employment Term
and (2) two years' Base Salary at the rate in effect at the time of termination
plus two (2) year's bonuses based on such Base Salary using the average of the
actual bonus percentages used by Destia in the payment of bonuses to Executive
during the two (2) years prior to such termination and (C) within thirty (30)
days of termination any bonus previously awarded to but not yet paid to
Executive and (ii) shall continue to provide Executive with Benefits (or
comparable benefits), including (subject to applicable eligibility criteria)
medical benefits comprising a portion of the Benefits (or comparable benefits)
in respect of Executive's spouse and any dependents of the Executive as of the
date of such termination, until the latter of (A) two years following the date
of termination and (B) the remainder of the Employment Term. Notwithstanding the
foregoing, in the event that any termination in accordance with this Section
8(d) shall occur within two years following a Change of Control (as defined in
the Destia 1999 Flexible Incentive Plan), the amounts payable to Executive
pursuant to subsection 8(d)(i)(B) and the period for which Benefits will be
provided pursuant to subsection 8(d)(ii) above shall be increased to the greater
of three (3) years from the date of termination or the remainder of the
Employment Term, and Executive shall be entitled to an additional payment equal
to the amount of any excise taxes payable by Executive pursuant to Section 4999
of the Code as a result of such termination plus all federal, state and local
taxes applicable taxes applicable to Destia's payment of such excise taxes,
including any additional excise taxes due under Section 4999 of the Code with
respect to payments made pursuant to this provision, including any such taxes
resulting from the acceleration of options or other benefits. The determination
of the amounts required to be paid under this Employment Agreement shall be made
by a nationally recognized United States public accounting firm which may be the
independent public accounting firm used by
<PAGE>
Destia to audit its financial statements. In addition, upon any such termination
in accordance with this Section 8(d), all options granted to Executive in
accordance with the terms of the Plan (or any comparable incentive plan) shall
become immediately vested and exercisable.
(e) Sole Remedy. Executive shall not be entitled to any form of severance
benefits, including, without limitation, benefits otherwise payable under any of
Destia's regular severance policies, other than those set forth herein. In
consideration of the compensation and benefits available hereunder, Executive,
except as otherwise expressly provided in this Agreement, unconditionally
releases Destia and its present and future Affiliates, directors, officers,
employees and agents, or any of them, from any and all claims, liabilities and
obligations of any nature pertaining to termination of Executive's employment
hereunder. Executive and Destia further agree that upon any termination of
Executive's employment in accordance with the terms hereof, each of Executive
and Destia shall act in good faith in connection with any such termination and
neither Executive nor Destia shall disparage or otherwise defame the business
reputation of the other party hereto.
SECTION 9. Non-Competition and Permitted Business Activities. Non-Compete
During Employment Term. (a) Executive agrees that during the Employment Term of
this Agreement, except with the written consent of Destia, such Executive shall
not (i) accept any form of employment with remuneration from any business
related to the provision of telecommunications services (a "Competing Business")
or (ii) hold any beneficial ownership interest, directly or indirectly, in any
Competing Business; provided however, that none of the foregoing shall prohibit
Executive from owning, for the purpose of passive investment, less than 5% of
any class of securities of another publicly-held corporation.
(b) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of employment for any
reason, Executive shall not, except in the course of his duties hereunder,
directly or indirectly induce or attempt to induce or otherwise counsel, advise,
solicit or encourage any person to leave the employ of Destia (or any subsidiary
or affiliate thereof) to accept employment with any person or entity other than
Destia.
(c) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of such employment
for any reason, Executive shall not directly or indirectly solicit, induce or
attempt to solicit, induce or otherwise counsel, advise, or encourage any
customer, agent, dealer, distributor or consultant of Destia (or any subsidiary
or affiliate thereof) to become a customer, agent, dealer, distributor or
consultant, directly or indirectly, of another person or entity other than
Destia.
SECTION 10. Ownership of Work Product. (a) Executive acknowledges that
during the Employment Term, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (collectively, "Work
Product"), and that various business opportunities may be presented to
<PAGE>
him by reason of his employment by Destia. Executive acknowledges that, unless
Destia otherwise agrees in writing, all such Work Product and business
opportunities shall be owned by and belong exclusively to Destia and that he
shall have no personal interest therein.
(b) Executive shall further, unless Destia otherwise agrees in writing,
(i) promptly disclose any such Work Product and business opportunities to
Destia, (ii) assign to Destia, upon request and without additional compensation,
the entire rights to such Work Product and business opportunities, (iii) execute
all documents necessary to carry out the foregoing and (iv) give testimony in
support of his inventorship or creation in any appropriate case upon request of
the senior management of Destia. Executive agrees that he will not assert any
rights to any Work Product or business opportunity as having been made or
acquired by him prior to the date of this Agreement except for Work Product or
business opportunities, if any, disclosed to and acknowledged by Destia in
writing prior to the date hereof.
(c) The provisions of this Section 10 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 11. Non-Disclosure of Confidential Information. (a) Executive
shall hold in a fiduciary capacity for the benefit of Destia all Confidential
Information (as defined below) and shall not, during the term of Executive's
employment hereunder or after the termination of such employment, communicate or
divulge any Confidential Information to, or use any Confidential Information for
the benefit of, any person (including Executive) other than Destia, affiliates
of Destia or persons designated in writing by Destia. "Confidential Information"
shall mean customer lists, costs and specifications of Destia's products and
services, know-how, trade secrets, financial data, operational methods,
marketing and sales information, marketing plans and strategies, business plans,
personnel information, research projects, development plans or projects and all
other information of a proprietary nature. Upon termination of Executive's
employment with Destia for any reason whatsoever, Executive shall promptly
return to Destia any documents or other written, recorded or graphic matter
containing, relating or referring to any Confidential Information (and all
copies and extracts thereof and any notes relating thereto) in Executive's
possession or control and deliver to Destia a written confirmation that all such
Confidential Material has been so returned.
(b) The provisions of this Section 11 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 12. Liability for Actions or Inactions; Indemnification. (a)
Executive shall not be liable, in damages or otherwise, to Destia for any act or
failure to act on behalf of Destia, performed within the scope of his authority
conferred by the terms of his employment under this Agreement, unless such act
or omission constituted Cause or fraudulent or willful misconduct, was performed
or omitted in bad faith or constituted gross negligence.
<PAGE>
(b) Destia shall indemnify and hold harmless Executive from and against
any and all claims, losses, damages and expenses incurred by reason
of any acts, omission or alleged acts or omissions undertaken or
omitted (a) in the good faith belief that such act or omission was
in furtherance of the business of Destia; (b) not in contravention
of this Agreement; and (c) not in contravention of the standard set
forth in Section 12(a) hereof, incurred as a result of any actual or
threatened civil, criminal, administrative or investigative action,
proceeding or claim; provided, however, that if Executive ultimately
is found by any court of competent jurisdiction or by any arbitrator
to have acted or omitted to act in a manner which is in
contravention of the standard set forth in any of the foregoing
clauses (a), (b) or (c), Executive shall repay all amounts paid or
reimbursed by Destia. Destia shall not be required to indemnify
Executive for any amount paid or payable by Executive in the
settlement of any action, proceeding or investigation agreed to
without the written consent of Destia (which consent shall not
unreasonably be withheld or delayed). Promptly after receipt by
Executive of notice of his involvement in any action, proceeding or
investigation, Executive shall, if a claim in respect thereof for
indemnification is to be made by Executive against Destia under this
Section, notify Destia in writing of such involvement. No failure by
Executive to so notify Destia shall relieve Destia from the
obligation to indemnify Executive unless and to the extent that
Destia shall have been actually prejudiced by such failure. To the
extent it wishes, Destia shall be entitled to assume the defense of
any action that is the subject of this Section; provided, however,
that Executive may retain his own counsel (i) at his own expense in
order to participate in such defense, and (ii) at the expense of
Destia if representation of both Executive and Destia would, in the
reasonable judgment of Executive, be inappropriate due to actual or
potential differing interests between them.
(c) The provisions of this Section 12 shall survive following
expiration, cancellation or other termination of this Agreement
until all liability under all applicable statutes of limitations is
barred.
(c) The provisions of this Section 12 are in addition to any
indemnification rights that Executive may have pursuant to Destia's
Certificate of Incorporation, Bylaws, or policies application to
executive-employees of Destia.
SECTION 13. Entire Agreement. (a) This entire Agreement, together with the
Incentive Stock Option Agreement that is an Exhibit hereto, contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior agreements and understandings, both written and
oral, of the parties with respect to the subject matter hereof including the
Employment Agreement dated as of January 1, 1997.
<PAGE>
SECTION 14. Governing Law; Jurisdiction; Service of Process. (a) This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York (other than its rules of conflicts of laws to the extent that
the application of the laws of another jurisdiction would be required thereby).
(b) With respect to any suit, action, or proceedings relating to this
Agreement ("Proceedings"), the parties irrevocably:
(i) submit to the non-exclusive jurisdiction of the courts of the
State of New York and the United States District Court located in the
Borough of Manhattan in New York City; and
(ii) waive any objection that they may have at any time to the
laying of venue of any Proceedings brought in any such court; waive any
claim that such Proceedings have been brought in an inconvenient forum;
and further waive the right to object, with respect to such Proceedings,
that such court does not have jurisdiction over such party.
(c) The parties irrevocably consent to service of process given in the
manner provided for notices in Section. Nothing in this Agreement shall affect
the right of either party to serve process in any other manner permitted by law.
SECTION 15. Specific Enforcement. If Executive breaches, or threatens to
commit a breach of, any of the provisions of Sections 9, 10 or 11 hereof, Destia
shall have the right and remedy to have such provision specifically enforced by
any court having jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to Destia and that
money damages will not provide an adequate remedy to Destia. Nothing in this
Section 15 shall be construed to limit the right of Destia to collect money
damages in the event of a breach of any of the provisions of this Agreement,
including, without limitation, Sections 9, 10 and 11 hereof.
SECTION 16. Third Party Beneficiaries. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any third party (other
than Executive's heirs and representatives), including, without limitation, any
creditor of Destia or of Executive. No such third party shall obtain any right
under any provision of this Agreement or shall by reason of any such provision
make any claim in respect of any debt, liability, or obligation (or otherwise)
against Destia.
SECTION 17. Waiver of Jury Trial. Each party waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in respect
of any litigation arising out of or relating to this Agreement and Executive's
employment by Destia. Each party (a) certifies that no representative, agent or
attorney of the other party has represented, expressly or otherwise, that such
<PAGE>
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it has been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications set
forth in this Section.
SECTION 18. Expenses. Each party hereto shall assume and pay its own
expenses incident to the negotiation and execution of this Agreement, the
preparation for carrying it into effect and the consummation of the transactions
contemplated hereby. Without limiting the generality of the foregoing, each
party shall pay all legal fees and other fees to consultants and advisors
incurred by it relating to this Agreement and such transactions and shall
indemnify and hold the other party harmless from and against any claims for such
expenses and fees.
SECTION 19. Waivers and Amendments. This Agreement may be amended,
superseded, canceled, renewed or extended and the terms hereof may be waived,
only by a written instrument signed by each party, or, in the case of a waiver,
by the party waiving compliance. Except where a specific period for action or
inaction is provided herein, no delay on the part of a party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Neither
any waiver on the part of a party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege shall preclude
any further exercise thereof or the exercise of any other such right, power or
privilege.
SECTION 20. Notices. All notices or other communications required or
permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent, postage prepaid, by registered, certified or express mail or
reputable overnight courier service and shall be deemed given when so delivered
by hand, or if mailed, three days after mailing (one business day in the case of
express mail or overnight courier service), as follows:
if to Destia:
Destia Comunications, Inc.
95 Route 17 South
Paramus, NJ 07652
Attention: General Counsel
if to Executive:
at the then current address for Executive maintained in the Destia
employee files.
SECTION 21. Calculations. All calculations of Dollar amounts hereunder
shall be rounded to the nearest whole cent. Equidistant amounts shall be rounded
upwards.
SECTION 22. Severability. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby;
<PAGE>
provided, however, that the parties shall negotiate in good faith with respect
to an equitable modification of the provision or application thereof held to be
invalid. To the extent that it may effectively do so under applicable law, each
party hereto hereby waives any provision of law, which renders any provision of
this Agreement invalid, illegal or unenforceable in any respect.
SECTION 23. Successors and Assigns. Except as otherwise specifically
provided in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the parties, and their legal representatives, and permitted
successors and assigns.
SECTION 24. Captions. All headings, paragraph titles and captions
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provisions hereof.
SECTION 25. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be on original and all of which, when taken
together, shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DESTIA COMMUNICATIONS, INC.,
By: ___________________________
Name:
Title:
MR. ALFRED WEST
_______________________________
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), dated as of January 1, 1999, is
made by and between DESTIA COMMUNICATIONS, INC., a Delaware corporation, having
its principal office at 95 Route 17 South, Paramus, New Jersey 07652 ("Destia")
and Mr. Richard Shorten ("Executive").
WHEREAS, Destia desires to employ Executive and Executive desires to
provide services to Destia;
NOW, THEREFORE, in consideration of the premises and of the other mutual
covenants and conditions contained herein and for other good and valuable
consideration, the sufficiency and receipt of which are hereby acknowledged,
Destia and Executive agree as follows:
SECTION 1. Employment and Term. (a) Destia hereby employs Executive
commencing as of the date hereof (the "Commencement Date"). The initial term of
Executive's employment shall be two years, subject to earlier termination as
specified herein (the "Employment Term"). Any renewal or extension of the
Employment Term and this Agreement shall be subject to the mutual agreement of
Executive and Destia, subject to Section 8 hereof.
(b) Executive shall be employed as a Senior Vice President and General
Counsel of Destia, with powers and duties consistent with such position, for the
duration of the Employment Term. During the term of Executive's employment by
Destia, Executive shall report to the President of Destia.
(c) Executive shall be employed at the headquarters of Destia in the New
York metropolitan area.
SECTION 2. Full-Time Employment. (a) During Executive's employment by
Destia, Executive shall devote Executive's entire business time, energy and
skill to the performance of Executive's duties hereunder and to the business of
Destia. Executive shall faithfully and diligently perform such duties, shall
adhere to the instructions of the Chief Executive Officer, President and Board
of Directors of Destia and shall use his best efforts to promote the interests
of Destia consistent with the foregoing. Executive shall adhere to all corporate
policies of Destia and, to the extent applicable to Executive's duties
hereunder, Destia's subsidiaries and affiliates. Executive shall not, directly
or indirectly, alone or as a member of any partnership, or as an officer,
director or executive of any other corporation, partnership or other
organization, be actively engaged in or concerned with any other duties or
pursuits which interfere with the performance of his duties hereunder, or which
may be inimical to or contrary to the best interests of Destia.
<PAGE>
2
(b) Executive represents and warrants that he is free to be employed by
Destia upon the terms contained in this Agreement and that he is not a party to
any employment contract or restrictive covenant or other arrangement which could
reasonably be expected to prevent, interfere with or hinder, or be deemed to be
breached by, full performance of his duties hereunder.
SECTION 3. Compensation. (a) Base Salary. For all services rendered by
Executive in any capacity during Executive's employment under this Agreement,
including, without limitation, service as an executive, officer, or member of
any committee of Destia or any of its subsidiaries or affiliates, Destia agrees
to pay or cause to be paid to Executive a base salary at the rate of not less
than $180,000 per annum, payable in equal installments in accordance with the
prevailing salary payment practices of Destia in effect from to time (the "Base
Salary"). Executive's Base Salary shall be subject to review and increase on an
annual basis based upon changes in Executive's performance, title, job
description or responsibilities. In the event that sickness or accident
disability payments under Destia's insurance programs shall become payable to
Executive in respect of any period of Executive's employment hereunder the
salary installment payable to Executive hereunder in respect of his Base Salary
on the next succeeding salary installment payment date shall be an amount
computed by subtracting (i) the amount of such disability payments which shall
have become payable during the period between such date, from (ii) the salary
installment otherwise payable to Executive hereunder in respect of his Base
Salary on such date.
(b) Bonus. Executive shall be entitled to receive an annual bonus payment
from Destia to be awarded and payable in accordance with Destia's bonus program
for senior executives. Executive's annual target bonus shall be 50% of
Executive's base salary. Destia's bonus program for senior executives shall
provide that Executive shall be entitled to a bonus payment in excess of such
amount for superior performance. Any bonus in excess of the aforementioned
amounts shall be paid at the sole discretion of the Board of Directors of Destia
and shall be made to the extent, at such time and in such amount as determined
by the Board of Directors of Destia in its sole discretion.
(c) Incentive Compensation. In addition to the other compensation
hereunder, the Company has granted to Executive in accordance with Destia's 1996
Flexible Incentive Plan (the "Plan"), certain options to acquire common stock of
Destia. The terms of the vesting and exercise of such options shall be governed
by the Incentive Stock Option Agreements entered into by Executive and Destia
and the terms of the Plan.
(d) Benefits. Executive shall be entitled to participate in medical,
dental, life insurance and other benefits (collectively, the "Benefits") in
accordance with the prevailing policies of Destia for executive employees.
SECTION 4. Vacation. Executive shall be entitled to an annual vacation of
three weeks (without deduction in salary or other compensation or Benefits).
Such vacation shall be taken at such time or times as may be convenient to the
operations of Destia and shall be consistent with the
<PAGE>
3
prevailing vacation policies of Destia. Within 10 days of the termination or
expiration of the Employment Term, any accrued but unused vacation earned by
Executive shall be paid to Executive at the rate of Executive's base salary at
the time of termination or expiration of the Employment Term.
SECTION 5. Reimbursement for Expenses. Executive is authorized to incur
reasonable and necessary traveling expenses and other reasonable and necessary
traveling expenses and other reasonable and necessary disbursements for or on
behalf of Destia in the performance of Executive's duties during Executive's
employment under this Agreement in accordance with Destia's prevailing expense
incurrence policies. Destia will reimburse Executive for all such expenses in
accordance with its prevailing expense reimbursement policies upon presentation
of a properly itemized account of such expenditures and the business reasons for
such expenditures. In addition, Executive shall be entitled to an additional
payment of $1000 per month for automotive, garage, insurance and related
expenses, together with a tax "gross-up" payment to cover any additional income,
medicare or other tax expense to Executive arising from the expense
reimbursements set forth in this Section 5.
SECTION 6. Termination of Employment By Destia. (a) Termination. Executive
shall be subject to dismissal from his position as an executive of Destia at any
time and with or without Cause. The effect of any termination of the employment
of Executive with Cause is set forth in Section 8(a) hereof. The effect of any
termination of the employment of Executive without Cause is set forth in Section
8(d) hereof.
(b) Definition of Cause. The term "Cause" shall be defined to include: (i)
any wilful breach by Executive of the performance of any of his duties pursuant
to this Agreement; (ii) any wilful breach by Executive of any other obligation
under this Agreement; (iii) any attempt by Executive to secure any personal
profit in connection with the business of Destia, other than as expressly
provided for in this Agreement; (iv) failure by Executive to devote sufficient
business time to the affairs of Destia; (v) material breach by Executive of any
of the representations or warranties contained in this Agreement; (vi)
activities of Executive inimical to the best interests of Destia; provided,
however, that such activities shall not include mistakes in business judgment
made in good faith; (vii) conviction of, or a plea of nolo contendere to, a
felony or any act of fraud, whether or not related to the affairs of Destia;
(viii) subject to Sections 6(c) and 6(d) below, death or disability of
Executive; and (ix) any other insubordination, dishonesty, moral turpitude or
other misconduct that, in the absence of any agreement in writing between the
parties hereto, would entitle Destia to terminate Executive's employment in
accordance with its prevailing employment policies; provided further, however,
that in the event of actions allegedly constituting Cause pursuant to clauses
(i), (ii), (iv), (v) or (vi) that are susceptible to cure, Destia shall provide
Executive with no less than thirty (30) days' notice of such deficiencies prior
to any termination as a result there of and during such prior notice period
shall afford Executive the opportunity to remedy such deficiencies to Destia's
reasonable satisfaction.
(c) Termination by Reason of Incapacity. In the event that Executive
suffers a disability which prevents him from substantially performing his duties
under this Agreement for a period of at
<PAGE>
4
least sixty (60) calendar days within a 365-calendar day period (whether
consecutive or non-consecutive) (a "Disability"), Destia shall have the right to
dismiss Executive upon ten (10) calendar days written notice. In the event of
any dispute between Destia and Executive as to whether Executive has suffered a
Disability, the determination of whether Executive has suffered a Disability
shall be made by an independent physician selected by Destia, and the decision
of such physician shall be binding upon Destia and Executive.
(d) Termination by Death. In the event Executive dies during the
Employment Term, this Agreement shall terminate automatically, such termination
to be effective on the date of Executive's death.
SECTION 7. Termination of Employment By Executive. The employment of
Executive under this Agreement shall be deemed to have been terminated by
Executive for "Good Reason" if Executive voluntarily terminates employment
following the occurrence of a material breach by Destia of any of its
obligations under this Agreement; provided, however, that Executive shall
provide written notice of such material breach within thirty (30) days after
Executive's discovery of such material breach and Destia shall have the
opportunity to cure such default within thirty (30) days after receipt of such
written notice. If Destia does not cure the default within such time, then
Executive's employment shall be deemed to have been terminated for Good Reason
by Executive, thirty (30) days after receipt of such written notice by Destia,
or such shorter period as Destia may elect. No resignation or other voluntary
termination by Executive other than pursuant to this Section 7 shall be deemed
under any circumstances to be a termination with Good Reason, a "constructive
termination" or otherwise not in breach of Executive's obligations under this
Agreement.
SECTION 8. Effect of Termination. (a) For Cause; Without Good Reason. In
the event of termination of this Agreement (x) by Destia for Cause (except by
reason of death or Disability) or (y) by Executive without Good Reason, Destia
shall pay to Executive within thirty (30) days of such termination any Base
Salary accrued but not paid to Executive prior to the date of such termination
and Executive shall be entitled to any Benefits which may then be due under any
of the benefit or other plans in which Executive is a participant. Executive
shall forfeit any right to any bonus not previously paid to Executive by Destia
and shall not be entitled to any further compensation or benefits hereunder
(including, without limitation, the Benefits). In addition, Executive shall
forfeit all unvested options held by Executive in accordance with the terms of
Executive's Incentive Stock Option Agreement.
(b) By Reason of Executive's Death. In the event of the termination of
this Agreement by reason of the death of the Executive, Destia (i) shall pay,
within sixty (60) days of death, Executive's legal representatives (A) any
unpaid salary installment in respect to Executive's Base Salary to the last day
of the month in which Executive's death occurs, and (B) any bonus previously
awarded but not yet paid to the Executive and (ii) shall continue to provide
(subject to any applicable eligibility criteria) any medical and dental benefits
comprising part of the Benefits (or comparable benefits) to the spouse and any
dependents of Executive at the time of Executive's
<PAGE>
5
death, for a period of twelve (12) months from the last day of the month in
which Executive's death occurs. In addition, all unvested options held by
Executive at the time of his death that are scheduled to vest within one (1)
year of Executive's death shall become immediately vested.
(c) By Reason of the Incapacity of the Executive. In the event of the
termination of this Agreement by reason of the Disability of the Executive,
Destia (i) shall pay the Executive (A) Executive's Base Salary to the last day
of the month in which such termination occurs and (B) any bonus previously
awarded but not yet paid to the Executive and (ii) shall continue to provide
(subject to any applicable eligibility criteria) any medical benefits comprising
part of the Benefits (or comparable benefits) to Executive, Executive's spouse
and any dependants of Executive who enjoyed such medical benefits at the time of
Executive's Disability, for a period of twelve (12) months from the last day of
the month in which such termination occurs. In addition, all unvested options
held by Executive at the time of his death that are scheduled to vest within one
(1) year of Executive's death shall become immediately vested.
(d) Without Cause; For Good Reason; Non-Renewal. In the event of (x)
termination of this Agreement (1) by Destia without Cause or (2) by Executive
for Good Reason or (y) the failure of Destia to make a binding offer to
Executive for a renewal of the Employment Term for at least one year on terms no
less favorable to Executive than the terms applicable to Executive's employment
immediately prior to the expiration of the Employment Term, Destia (i) shall pay
the Executive (A) Executive's Base Salary through the date of termination, in
accordance with its prevailing salary payment practices (as determined by Destia
in its sole discretion), (B) within 30 days of such termination, a severance
payment in the amount equal to one year's base salary at the time of termination
and (C) any bonus previously awarded to but not yet paid to Executive and (ii)
shall continue to provide Executive with Benefits (or comparable benefits),
including (subject to applicable eligibility criteria) medical benefits
comprising a portion of the Benefits (or comparable benefits) in respect of
Executive's spouse and any dependents of the Executive as of the date of such
termination, until one year following the date of termination. In addition, upon
any such termination in accordance with this Section 8(d), all options granted
to Executive in accordance with the terms of the Plan (or any comparable
incentive plan) shall become immediately vested and exercisable.
(e) Sole Remedy. Executive shall not be entitled to any form of severance
benefits, including, without limitation, benefits otherwise payable under any of
Destia's regular severance policies, other than those set forth herein. In
consideration of the compensation and benefits available hereunder, Executive,
except as otherwise expressly provided in this Agreement, unconditionally
releases Destia and its present and future Affiliates, directors, officers,
employees and agents, or any of them, from any and all claims, liabilities and
obligations of any nature pertaining to termination of Executive's employment
hereunder. Executive and Destia further agree that upon any termination of
Executive's employment in accordance with the terms hereof, each of Executive
and Destia shall act in good faith in connection with any such termination and
neither Executive nor Destia shall disparage or otherwise defame the business
reputation of the other party hereto.
<PAGE>
6
SECTION 9. Non-Competition and Permitted Business Activities. Non-Compete
During Employment Term. (a) Executive agrees that during the Employment Term of
this Agreement, except with the written consent of Destia, such Executive shall
not (i) accept any form of employment with remuneration from any business
related to the provision of telecommunications services (a "Competing Business")
or (ii) hold any beneficial ownership interest, directly or indirectly, in any
Competing Business; provided however, that none of the foregoing shall prohibit
Executive from owning, for the purpose of passive investment, less than 5% of
any class of securities of another publicly-held corporation.
(b) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of employment for any
reason, Executive shall not, except in the course of his duties hereunder,
directly or indirectly induce or attempt to induce or otherwise counsel, advise,
solicit or encourage any person to leave the employ of Destia (or any subsidiary
or affiliate thereof) to accept employment with any person or entity other than
Destia.
(c) Executive agrees that during the term of this Agreement, and for a
period of twelve (12) consecutive months after termination of such employment
for any reason, Executive shall not directly or indirectly solicit, induce or
attempt to solicit, induce or otherwise counsel, advise, or encourage any
customer, agent, dealer, distributor or consultant of Destia (or any subsidiary
or affiliate thereof) to become a customer, agent, dealer, distributor or
consultant, directly or indirectly, of another person or entity other than
Destia.
SECTION 10. Ownership of Work Product. (a) Executive acknowledges that
during the Employment Term, he may conceive of, discover, invent or create
inventions, improvements, new contributions, literary property, material, ideas
and discoveries, whether patentable or copyrightable or not (collectively, "Work
Product"), and that various business opportunities may be presented to him by
reason of his employment by Destia. Executive acknowledges that, unless Destia
otherwise agrees in writing, all such Work Product and business opportunities
shall be owned by and belong exclusively to Destia and that he shall have no
personal interest therein.
(b) Executive shall further, unless Destia otherwise agrees in writing,
(i) promptly disclose any such Work Product and business opportunities to
Destia, (ii) assign to Destia, upon request and without additional compensation,
the entire rights to such Work Product and business opportunities, (iii) execute
all documents necessary to carry out the foregoing and (iv) give testimony in
support of his inventorship or creation in any appropriate case upon request of
the senior management of Destia. Executive agrees that he will not assert any
rights to any Work Product or business opportunity as having been made or
acquired by him prior to the date of this Agreement except for Work Product or
business opportunities, if any, disclosed to and acknowledged by Destia in
writing prior to the date hereof.
(c) The provisions of this Section 10 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
<PAGE>
7
SECTION 11. Non-Disclosure of Confidential Information. (a) Executive
shall hold in a fiduciary capacity for the benefit of Destia all Confidential
Information (as defined below) and shall not, during the term of Executive's
employment hereunder or after the termination of such employment, communicate or
divulge any Confidential Information to, or use any Confidential Information for
the benefit of, any person (including Executive) other than Destia, affiliates
of Destia or persons designated in writing by Destia. "Confidential Information"
shall mean customer lists, costs and specifications of Destia's products and
services, know-how, trade secrets, financial data, operational methods,
marketing and sales information, marketing plans and strategies, business plans,
personnel information, research projects, development plans or projects and all
other information of a proprietary nature. Upon termination of Executive's
employment with Destia for any reason whatsoever, Executive shall promptly
return to Destia any documents or other written, recorded or graphic matter
containing, relating or referring to any Confidential Information (and all
copies and extracts thereof and any notes relating thereto) in Executive's
possession or control and deliver to Destia a written confirmation that all such
Confidential Material has been so returned.
(b) The provisions of this Section 11 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 12. Liability for Actions or Inactions; Indemnification. (a)
Executive shall not be liable, in damages or otherwise, to Destia for any act or
failure to act on behalf of Destia, performed within the scope of his authority
conferred by the terms of his employment under this Agreement, unless such act
or omission constituted Cause or fraudulent or willful misconduct, was performed
or omitted in bad faith or constituted gross negligence.
(b) Destia shall indemnify and hold harmless Executive from and against
any and all claims, losses, damages and expenses incurred by reason of any acts,
omission or alleged acts or omissions undertaken or omitted (a) in the good
faith belief that such act or omission was in furtherance of the business of
Destia; (b) not in contravention of this Agreement; and (c) not in contravention
of the standard set forth in Section 12(a) hereof, incurred as a result of any
actual or threatened civil, criminal, administrative or investigative action,
proceeding or claim; provided, however, that if Executive ultimately is found by
any court of competent jurisdiction or by any arbitrator to have acted or
omitted to act in a manner which is in contravention of the standard set forth
in any of the foregoing clauses (a), (b) or (c), Executive shall repay all
amounts paid or reimbursed by Destia. Destia shall not be required to indemnify
Executive for any amount paid or payable by Executive in the settlement of any
action, proceeding or investigation agreed to without the written consent of
Destia (which consent shall not unreasonably be withheld or delayed). Promptly
after receipt by Executive of notice of his involvement in any action,
proceeding or investigation, Executive shall, if a claim in respect thereof for
indemnification is to be made by Executive against Destia under this Section,
notify Destia in writing of such involvement. No failure by Executive to so
notify Destia shall relieve Destia from the obligation to indemnify Executive
unless and to the extent that Destia shall have been actually prejudiced by such
failure. To the extent it wishes, Destia shall be entitled to assume the defense
of any action that is the subject of this Section; provided, however, that
Executive may retain his own counsel (i) at his own expense in
<PAGE>
8
order to participate in such defense, and (ii) at the expense of Destia if
representation of both Executive and Destia would, in the reasonable judgment of
Executive, be inappropriate due to actual or potential differing interests
between them.
(c) The provisions of this Section 12 shall survive for a period of three
(3) years following expiration, cancellation or other termination of this
Agreement.
SECTION 13. Entire Agreement. (a) This entire Agreement, together with the
Incentive Stock Option Agreement that is an Exhibit hereto, contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes any and all prior agreements and understandings, both written and
oral, of the parties with respect to the subject matter hereof.
SECTION 14. Governing Law; Jurisdiction; Service of Process. (a) This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York (other than its rules of conflicts of laws to the extent that
the application of the laws of another jurisdiction would be required thereby).
(b) With respect to any suit, action, or proceedings relating to this
Agreement ("Proceedings"), the parties irrevocably:
(i) submit to the non-exclusive jurisdiction of the courts of the
State of New York and the United States District Court located in the
Borough of Manhattan in New York City; and
(ii) waive any objection that they may have at any time to the
laying of venue of any Proceedings brought in any such court; waive any
claim that such Proceedings have been brought in an inconvenient forum;
and further waive the right to object, with respect to such Proceedings,
that such court does not have jurisdiction over such party.
(c) The parties irrevocably consent to service of process given in the
manner provided for notices in Section. Nothing in this Agreement shall affect
the right of either party to serve process in any other manner permitted by law.
SECTION 15. Specific Enforcement. If Executive breaches, or threatens to
commit a breach of, any of the provisions of Sections 9, 10 or 11 hereof, Destia
shall have the right and remedy to have such provision specifically enforced by
any court having jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to Destia and that
money damages will not provide an adequate remedy to Destia. Nothing in this
Section 15 shall be construed to limit the right of Destia to collect money
damages in the event of a breach of any of the provisions of this Agreement,
including, without limitation, Sections 9, 10 and 11 hereof.
<PAGE>
9
SECTION 16. Third Party Beneficiaries. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any third party (other
than Executive's heirs or representatives), including, without limitation, any
creditor of Destia or of Executive. No such third party shall obtain any right
under any provision of this Agreement or shall by reason of any such provision
make any claim in respect of any debt, liability, or obligation (or otherwise)
against Destia.
SECTION 17. Waiver of Jury Trial. Each party waives, to the fullest extent
permitted by applicable law, any right it may have to a trial by jury in respect
of any litigation arising out of or relating to this Agreement and Executive's
employment by Destia. Each party (a) certifies that no representative, agent or
attorney of the other party has represented, expressly or otherwise, that such
other party would not, in the event of litigation, seek to enforce the foregoing
waiver; and (b) acknowledges that it has been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications set
forth in this Section.
SECTION 18. Expenses. Each party hereto shall assume and pay its own
expenses incident to the negotiation and execution of this Agreement, the
preparation for carrying it into effect and the consummation of the transactions
contemplated hereby. Without limiting the generality of the foregoing, each
party shall pay all legal fees and other fees to consultants and advisors
incurred by it relating to this Agreement and such transactions and shall
indemnify and hold the other party harmless from and against any claims for such
expenses and fees.
SECTION 19. Waivers and Amendments. This Agreement may be amended,
superseded, canceled, renewed or extended and the terms hereof may be waived,
only by a written instrument signed by each party, or, in the case of a waiver,
by the party waiving compliance. Except where a specific period for action or
inaction is provided herein, no delay on the part of a party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Neither
any waiver on the part of a party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege shall preclude
any further exercise thereof or the exercise of any other such right, power or
privilege.
SECTION 20. Notices. All notices or other communications required or
permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent, postage prepaid, by registered, certified or express mail or
reputable overnight courier service and shall be deemed given when so delivered
by hand, or if mailed, three days after mailing (one business day in the case of
express mail or overnight courier service), as follows:
if to Destia:
Destia Communications, Inc.
95 Route 17 South
Paramus, NJ 07652
Attention: President
<PAGE>
10
if to Executive:
at the then current address for Executive maintained in the Destia
employee files.
SECTION 21. Calculations. All calculations of Dollar amounts hereunder
shall be rounded to the nearest whole cent. Equidistant amounts shall be rounded
upwards.
SECTION 22. Severability. If any provision of this Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement or the application of such provision to
other persons or circumstances shall not be affected thereby; provided, however,
that the parties shall negotiate in good faith with respect to an equitable
modification of the provision or application thereof held to be invalid. To the
extent that it may effectively do so under applicable law, each party hereto
hereby waives any provision of law, which renders any provision of this
Agreement invalid, illegal or unenforceable in any respect.
SECTION 23. Successors and Assigns. Except as otherwise specifically
provided in this Agreement, this Agreement shall be binding upon and inure to
the benefit of the parties, and their legal representatives, and permitted
successors and assigns.
SECTION 24. Captions. All headings, paragraph titles and captions
contained in this Agreement are inserted only as a matter of convenience and for
reference and in no way define, limit, extend or describe the scope of this
Agreement or the intent of any provisions hereof.
SECTION 25. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be on original and all of which, when taken
together, shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DESTIA COMMUNICATIONS, INC.,
By:
-----------------------------------
Name:
Title:
MR. RICHARD SHORTEN
------------------------------
<PAGE>
Exhibit 10.17
================================================================================
DESTIA COMMUNICATIONS, INC.
1999 FLEXIBLE INCENTIVE PLAN
================================================================================
AS OF MAY 3, 1999
<PAGE>
DESTIA COMMUNICATIONS, INC.
1999 FLEXIBLE INCENTIVE PLAN
TABLE OF CONTENTS
Page
----
ARTICLE 1 ESTABLISHMENT AND PURPOSE ........................................ 1
1.1 Establishment and Effective Date .................................. 1
1.2 Purpose ........................................................... 1
ARTICLE 2 AWARDS ........................................................... 1
2.1 Form of Awards .................................................... 1
2.2 Maximum Shares Available; Maximum Award ........................... 1
2.3 Return of Prior Awards ............................................ 2
ARTICLE 3 ADMINISTRATION ................................................... 2
3.1 Committee ......................................................... 2
3.2 Powers of the Committee ........................................... 2
3.3 Delegation ........................................................ 3
3.4 Interpretations ................................................... 3
3.5 Liability; Indemnification ........................................ 3
ARTICLE 4 ELIGIBILITY ...................................................... 3
ARTICLE 5 STOCK OPTIONS .................................................... 4
5.1 Grant of Options .................................................. 4
5.2 Designation as Non-qualified Stock Option or Incentive
Stock Option .................................................... 4
5.3 Option Price ...................................................... 4
5.4 Limitation on Amount of Incentive Stock Options ................... 5
5.5 Limitation on Time of Grant ....................................... 5
5.6 Exercise and Payment .............................................. 5
5.7 Term .............................................................. 5
5.8 Rights as a Stockholder ........................................... 5
5.9 General Restrictions .............................................. 5
5.10 Cancellation of Stock Appreciation Rights ......................... 6
ARTICLE 6 STOCK APPRECIATION RIGHTS ........................................ 6
6.1 Grants of Stock Appreciation Rights ............................... 6
6.2 Limitations on Exercise ........................................... 6
6.3 Surrender or Exchange of Tandem Stock Appreciation
Rights .......................................................... 6
6.4 Exercise of Nontandem Stock Appreciation Rights ................... 7
6.5 Settlement of Stock Appreciation Rights ........................... 7
6.6 Cash Settlement ................................................... 7
<PAGE>
ARTICLE 7 NONTRANSFERABILITY OF OPTIONS AND STOCK APPRECIATION
RIGHTS ........................................................... 7
ARTICLE 8 EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY,
RETIREMENT, DEATH OR CHANGE IN CONTROL ........................... 8
8.1 General Rule ...................................................... 8
8.2 Disability or Retirement .......................................... 8
8.3 Death ............................................................. 9
8.4 Change in Control ................................................. 9
8.5 Termination of Unvested Options ................................... 10
ARTICLE 9 RESTRICTED SHARES ................................................ 10
9.1 Grant or Sale of Restricted Shares ................................ 10
9.2 Restrictions ...................................................... 10
9.3 Restricted Stock Certificates ..................................... 10
9.4 Rights of Holders of Restricted Shares ............................ 11
9.5 Forfeiture; Repurchase ............................................ 11
9.6 Delivery of Restricted Shares ..................................... 11
ARTICLE 10 ADJUSTMENT UPON CHANGES IN CAPITALIZATION ....................... 11
ARTICLE 11 AMENDMENT AND TERMINATION ....................................... 11
ARTICLE 12 WRITTEN AGREEMENT ............................................... 12
ARTICLE 13 MISCELLANEOUS PROVISIONS ........................................ 12
13.1 Tax Withholding .................................................. 12
13.2 Compliance With Section 16(b) .................................... 12
13.3 Successors ....................................................... 13
13.4 General Creditor Status .......................................... 13
13.5 No Right to Employment ........................................... 13
13.6 Notices .......................................................... 13
13.7 Severability ..................................................... 13
13.8 Governing Law .................................................... 13
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<PAGE>
DESTIA COMMUNICATIONS, INC.
1999 FLEXIBLE INCENTIVE PLAN
ARTICLE 1
ESTABLISHMENT AND PURPOSE
1.1 Establishment and Effective Date. Destia Communications, Inc., a
Delaware corporation (the "Corporation"), hereby establishes a stock option plan
to be known as the "Destia Communications, Inc. 1999 Flexible Incentive Plan"
(the "Plan"). The Plan shall become effective as of May 3, 1999, subject to the
approval of the stockholders of the Corporation. In the event that such
stockholder approval is not obtained, any awards made hereunder shall be
canceled and all rights of employees and consultants with respect to such awards
shall thereupon cease. Upon approval of the Plan by the Board of Directors of
the Corporation (the "Board"), any awards may be made by the Board or a
committee of the Board duly authorized to administer the Plan (the "Committee"),
as provided herein.
1.2 Purpose. The purpose of the Plan is to encourage and enable key
employees and consultants (subject to such requirements as may be prescribed by
the Committee) of the Corporation and its subsidiaries to acquire a proprietary
interest in the Corporation through the ownership of the Corporation's voting
common stock ("Common Stock"), and other rights with respect to the Common
Stock. Such ownership will provide such employees and consultants with a more
direct stake in the future welfare of the Corporation and encourage them to
remain with the Corporation and its subsidiaries. It is also expected that the
Plan will encourage qualified persons to seek and accept employment with the
Corporation and its subsidiaries.
ARTICLE 2
AWARDS
2.1 Form of Awards. Awards under the Plan may be granted in any one
or all of the following forms: (i) incentive stock options ("Incentive Stock
Options") meeting the requirements of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"); (ii) non-qualified stock options
("Non-qualified Stock Options") (unless otherwise indicated, references in the
Plan to "Options" shall include both Incentive Stock Options and Non-qualified
Stock Options); (iii) stock appreciation rights ("Stock Appreciation Rights"),
as described in Article 6 hereof, which may be awarded either in tandem with
Options ("Tandem Stock Appreciation Rights") or on a stand-alone basis
("Nontandem Stock Appreciation Rights") and (iv) shares of Common Stock which
are subject to vesting requirements as provided in Article 9 hereof ("Restricted
Shares").
2.2 Maximum Shares Available; Maximum Award. The maximum aggregate
number of shares of Common Stock available for award under the Plan is
6,000,000, subject to adjustment pursuant to Article 10 hereof; provided,
however, that no individual may receive
<PAGE>
awards of or relating to more than 1,000,000 shares of Common Stock in any
calendar year. In the event that prior to the end of the period during which
Options may be granted under the Plan, any Option or any Nontandem Stock
Appreciation Rights under the Plan expires unexercised or is terminated,
surrendered or canceled (other than in connection with the exercise of Stock
Appreciation Rights) without being exercised in whole or in part for any reason,
or any Restricted Shares are forfeited, or if such awards are settled in cash in
lieu of shares of Common Stock, then such shares shall be available for
subsequent awards under the Plan upon such terms as the Committee may determine.
2.3 Return of Prior Awards. As a condition to any subsequent award,
the Committee shall have the right, in its sole discretion, to require employees
and consultants to return to the Corporation awards previously granted under the
Plan. Subject to the provisions of the Plan, such new award shall be upon such
terms and conditions as are specified by the Committee at the time the new award
is granted.
ARTICLE 3
ADMINISTRATION
3.1 Committee. Awards shall be determined, and the Plan shall be
administered, by the Board or the Committee; provided, however, that from and
after the consummation of the initial public offering of the Common Stock and so
long as the Plan shall be required to comply with Rule 16b-3 ("Rule 16b-3")
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), in order to permit
transactions pursuant to the Plan by officers and directors of the Corporation
to be exempt from the provisions of Section 16(b) of the 1934 Act, each member
of the Committee, at the effective date of his appointment to the Committee,
shall be a "non-employee director," as that term is defined in Rule 16b-3, as in
effect from time to time.
3.2 Powers of the Committee. Subject to the express provisions of
the Plan, the Committee at any time or prior to the designation of the
Committee, the Board, shall have the power and authority (i) to grant Options
and to determine the purchase price of the Common Stock covered by each Option,
the term of each Option, the number of shares of Common Stock to be covered by
each Option, the time or times at which each Option shall become exercisable and
the duration of the exercise period applicable to each Option; (ii) to designate
Options as Incentive Stock Options or Non-qualified Stock Options and to
determine which Options, if any, shall be accompanied by Tandem Stock
Appreciation Rights; (iii) to grant Tandem Stock Appreciation Rights and
Nontandem Stock Appreciation Rights and to determine the terms and conditions of
such rights; (iv) to grant or cause to be sold Restricted Shares and to
determine the purchase price, if any, of such shares and the vesting period and
other conditions and restrictions applicable to such shares; (v) to determine
the directors, the employees and the consultants to whom, and the time or times
at which, Options, Stock Appreciation Rights and Restricted Shares shall be
granted or made; and (vi) to take all other actions contemplated to be taken by
the Board or the Committee under the Plan, including, but not limited to,
authorizing the amendment of any written agreement relating to any award made
thereunder. Without limiting the foregoing, in the
-2-
<PAGE>
event of a merger, consolidation, combination, exchange of shares, separation,
spin-off, reorganization, liquidation or other similar transaction, the Board
may, in its sole discretion, accelerate the lapse of Restricted Periods, as
defined below, and other vesting periods and waiting periods and extend exercise
periods applicable to any award made under the Plan.
3.3 Delegation. The Board or the Committee, as the case may be, may
delegate to one or more of its members or to any other person or persons such
ministerial duties as it may deem advisable; provided, however, that the
Committee may not delegate any of its responsibilities hereunder if such
delegation would cause the Plan or the grant of any award hereunder to fail to
qualify for exemption under Rule 16b-3. The Board and the Committee may also
employ attorneys, consultants, accountants or other professional advisors and
shall be entitled to rely upon the advice, opinions or valuations of any such
advisors.
3.4 Interpretations. The Board shall have sole discretionary
authority to interpret the terms of the Plan, to adopt and revise rules,
regulations and policies to administer the Plan and to make any other factual
determinations which it believes to be necessary or advisable for the
administration of the Plan. All actions taken and interpretations and
determinations made by the Board in good faith shall be final and binding upon
the Corporation, all directors, employees and consultants who have received
awards under the Plan and all other interested persons.
3.5 Liability; Indemnification. No member of the Board, nor any
person to whom ministerial duties have been delegated, shall be personally
liable for any action, interpretation or determination made with respect to the
Plan or awards made thereunder, and each member of the Board shall be fully
indemnified and protected by the Corporation with respect to any liability he or
she may incur with respect to any such action, interpretation or determination,
to the extent permitted by applicable law and to the extent provided in the
Corporation's Certificate of Incorporation and Bylaws, as amended from time to
time, or under any agreement between any such member and the Corporation.
ARTICLE 4
ELIGIBILITY
Awards may be made to all directors, employees and consultants of
the Corporation or any of its subsidiaries (subject to such requirements as may
be prescribed by the Committee). In determining the directors, employees and
consultants to whom awards shall be granted and the number of shares to be
covered by each award, the Board shall take into account the nature of the
services rendered by such directors, employees and consultants, their present
and potential contributions to the success of the Corporation and its
subsidiaries and such other factors as the Board in its sole discretion shall
deem relevant.
Notwithstanding the foregoing, only employees of the Corporation and
any present or future corporation which is or may be a "subsidiary corporation"
of the Corporation (as such term is defined in Section 424(f) of the Code) shall
be eligible to receive Incentive Stock Options.
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<PAGE>
ARTICLE 5
STOCK OPTIONS
5.1 Grant of Options. Options may be granted under the Plan for the
purchase of shares of Common Stock. Options shall be granted in such form and
upon such terms and conditions, including the satisfaction of corporate or
individual performance objectives and other vesting standards, as the Committee
shall from time to time determine.
5.2 Designation as Non-qualified Stock Option or Incentive Stock
Option. In connection with any grant of Options, the Board shall designate in
the written agreement required pursuant to Article 12 hereof whether the Options
granted shall be Incentive Stock Options or Non-qualified Stock Options, or in
the case both are granted, the number of shares of each.
5.3 Option Price. The purchase price per share under each Incentive
Stock Option shall be the Market Price (as hereinafter defined) of the Common
Stock on the date the Incentive Stock Option is granted. The purchase price per
share under each Non-qualified Stock Option shall be determined by the
Committee. In no case, however, shall the purchase price per share of either an
Incentive Stock Option or Non-qualified Stock Option be less than the par value
of the Common Stock ($0.01). In the case of an Incentive Stock Option granted to
an employee owning (actually or constructively under Section 424(d) of the
Code), more than 10% of the total combined voting power of all classes of stock
of the Corporation or of a subsidiary, including treasury stock and stock of
original issue (a "10% Stockholder"), the option price shall not be less than
110% of the Market Price of the Common Stock on the date of grant.
The "Market Price" of the Common Stock shall be determined as
follows: (i) if the Common Stock is listed on a national securities exchange or
quoted through the NASDAQ National Market System, the Market Price shall be the
average of either (x) the average of the closing bid and asked prices reported
on the Consolidated Trading listing for such day or (y) the closing price
reported on the Consolidated Trading listing for such day; (ii) if the Common
Stock is quoted on the NASDAQ interdealer quotation system ("NASDAQ"), the
Market Price shall be the average of the representative bid and asked prices at
the close of business for such day; (iii) if the Common Stock is not listed on a
national stock exchange or quoted on NASDAQ, the Market Price shall be the
average of the high bid and low asked prices reported by the National Quotation
Bureau, Inc. for such day; or (iv) if the Common Stock is not registered under
Section 12 of the Securities Act of 1933, as amended, the Market Price shall be
the fair market value of the Common Stock as determined by the Board. In no
event shall the Market Price of a share of Common Stock subject to an Incentive
Stock Option be less than the fair market value as determined for purposes of
Section 422(b)(4) of the Code.
The Option price so determined shall also be applicable in
connection with the exercise of any Tandem Stock Appreciation Rights granted
with respect to such Option.
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<PAGE>
5.4 Limitation on Amount of Incentive Stock Options. In the case of
Incentive Stock Options, the aggregate Market Price (determined at the time the
Incentive Stock Option is granted) of the Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by any optionee
during any calendar year (under all plans of the Corporation and any subsidiary)
shall not exceed $100,000.
5.5 Limitation on Time of Grant. No grant of an Incentive Stock
Option shall be made under the Plan more than ten (10) years after the date the
Plan is approved by the stockholders of the Corporation.
5.6 Exercise and Payment. Options may be exercised in whole or in
part. Common Stock purchased upon the exercise of Options shall be paid for at
the time of purchase. Such payment shall be made in cash or, in the sole
discretion of the Board, through delivery of shares of Common Stock, or a
combination of cash and Common Stock, in accordance with procedures to be
established by the Board. Any shares so delivered shall be valued at their
Market Price on the date of exercise. Upon receipt of a notice of exercise and
payment in accordance with procedures to be established by the Board, the
Corporation or its agent shall deliver to the person exercising the Option (or
his or her designee) a certificate for such shares.
In the event that payment for exercised Options is made through the
delivery of shares of Common Stock, the Board, in accordance with procedures
established by the Board, may grant Non-qualified Stock Options ("Restoration
Options") to the person exercising the Option for the purchase of a number of
shares equal to the number of shares of Common Stock delivered to the
Corporation in connection with the payment of the exercise price of the Option
and the payment of or surrender of shares for any withholding taxes due upon
such exercise. The purchase price per share under each Restoration Option shall
be the Market Price of the Common Stock on the date the Restoration Option is
granted.
5.7 Term. The term of each Option granted hereunder shall be
determined by the Board; provided, however, that, notwithstanding any other
provision of the Plan, in no event shall an Incentive Stock Option be
exercisable after ten (10) years from the date it is granted, or in the case of
an Incentive Stock Option granted to a 10% Stockholder, five (5) years from the
date it is granted.
5.8 Rights as a Stockholder. A recipient of Options shall have no
rights as a stockholder with respect to any shares issuable or transferable upon
exercise thereof until the date a stock certificate representing such shares is
issued to such recipient. Except as otherwise expressly provided in the Plan or
by the Board, no adjustment shall be made for cash dividends or other rights for
which the record date is prior to the date such stock certificate is issued.
5.9 General Restrictions. Each Option granted under the Plan shall
be subject to the requirement that, if at any time the Board shall determine, in
its sole discretion, that the listing, registration or qualification of the
shares issuable or transferable upon exercise thereof upon any securities
exchange or under any state or Federal law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such Option or the issue, transfer, or purchase
of shares thereunder, such Option
-5-
<PAGE>
may not be exercised in whole or in part unless such listing, registration,
qualification, consent, or approval shall have been effected or obtained free of
any conditions not acceptable to the Board.
The Board or the Committee may, in connection with the granting of
any Option, require the individual to whom the Option is to be granted to enter
into an agreement with the Corporation stating that as a condition precedent to
each exercise of the Option, in whole or in part, such individual shall if then
required by the Corporation represent to the Corporation in writing that such
exercise is for investment only and not with a view to distribution, and also
setting forth such other terms and conditions as the Board or the Committee may
prescribe.
5.10 Cancellation of Stock Appreciation Rights. Upon exercise of all
or a portion of an Option, the related Tandem Stock Appreciation Rights shall be
canceled with respect to an equal number of shares of Common Stock.
ARTICLE 6
STOCK APPRECIATION RIGHTS
6.1 Grants of Stock Appreciation Rights. Tandem Stock Appreciation
Rights may be awarded by the Board in connection with any Option granted under
the Plan, either at the time the Option is granted or thereafter at any time
prior to the exercise, termination or expiration of the Option. Nontandem Stock
Appreciation Rights may also be granted by the Board at any time. At the time of
grant of Nontandem Stock Appreciation Rights, the Committee shall specify the
number of shares of Common Stock covered by such right and the base price of
shares of Common Stock to be used in connection with the calculation described
in Section 6.4 below. The base price of any Nontandem Stock Appreciation Rights
shall be not less than 100% of the Market Price of a share of Common Stock on
the date of grant. Stock Appreciation Rights shall be subject to such terms and
conditions not inconsistent with the other provisions of the Plan as the Board
shall determine.
6.2 Limitations on Exercise. Tandem Stock Appreciation Rights shall
be exercisable only to the extent that the related Option is exercisable and
shall be exercisable only for such period as the Board may determine (which
period may expire prior to the expiration date of the related Option). Upon the
exercise of all or a portion of Tandem Stock Appreciation Rights, the related
Option shall be canceled with respect to an equal number of shares of Common
Stock. Shares of Common Stock subject to Options, or portions thereof,
surrendered upon exercise of Tandem Stock Appreciation Rights shall not be
available for subsequent awards under the Plan. Nontandem Stock Appreciation
Rights shall be exercisable during such period as the Committee shall determine.
6.3 Surrender or Exchange of Tandem Stock Appreciation Rights.
Tandem Stock Appreciation Rights shall entitle the recipient to surrender to the
Corporation unexercised the related Option, or any portion thereof, and to
receive from the Corporation in exchange therefor that number of shares of
Common Stock having an aggregate Market Price equal to (A) the excess of (i) the
Market Price of one (1) share of Common Stock as of the date the Tandem
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Stock Appreciation Rights are exercised over (ii) the option price per share
specified in such Option, multiplied by (B) the number of shares of Common Stock
subject to the Option, or portion thereof, which is surrendered. Cash shall be
delivered in lieu of any fractional shares.
6.4 Exercise of Nontandem Stock Appreciation Rights. The exercise of
Nontandem Stock Appreciation Rights shall entitle the recipient to receive from
the Corporation that number of shares of Common Stock having an aggregate Market
Price equal to (A) the excess of (i) the Market Price of one (1) share of Common
Stock as of the date on which the Nontandem Stock Appreciation Rights are
exercised over (ii) the base price of the shares covered by the Nontandem Stock
Appreciation Rights, multiplied by (B) the number of shares of Common Stock
covered by the Nontandem Stock Appreciation Rights, or the portion thereof being
exercised. Cash shall be delivered in lieu of any fractional shares.
6.5 Settlement of Stock Appreciation Rights. As soon as is
reasonably practicable after the exercise of any Stock Appreciation Rights, the
Corporation shall (i) issue, in the name of the recipient, stock certificates
representing the total number of full shares of Common Stock to which the
recipient is entitled pursuant to Section 6.3 or 6.4 hereof and cash in an
amount equal to the Market Price, as of the date of exercise, of any resulting
fractional shares, and (ii) if the Committee causes the Corporation to elect to
settle all or part of its obligations arising out of the exercise of the Stock
Appreciation Rights in cash pursuant to Section 6.6 hereof, deliver to the
recipient an amount in cash equal to the Market Price, as of the date of
exercise, of the shares of Common Stock it would otherwise be obligated to
deliver.
6.6 Cash Settlement. The Board, in its sole discretion, may cause
the Corporation to settle all or any part of its obligation arising out of the
exercise of Stock Appreciation Rights by the payment of cash in lieu of all or
part of the shares of Common Stock it would otherwise be obligated to deliver in
an amount equal to the Market Price of such shares on the date of exercise.
ARTICLE 7
NONTRANSFERABILITY OF OPTIONS AND STOCK APPRECIATION RIGHTS
No Option or Stock Appreciation Rights may be transferred, assigned,
pledged or hypothecated (whether by operation of law or otherwise), except as
provided by will or the applicable laws of descent and distribution, and no
Option or Stock Appreciation Rights shall be subject to execution, attachment or
similar process. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of an Option or Stock Appreciation Rights not specifically
permitted herein shall be null and void and without effect. An Option or Stock
Appreciation Rights may be exercised by the recipient only during his or her
lifetime, or following his or her death pursuant to Section 8.3 hereof.
Notwithstanding anything to the contrary in the preceding paragraph,
the Committee may, in its sole discretion, cause the written agreement relating
to any Non-qualified Stock Options or Stock Appreciation Rights granted
hereunder to provide that the recipient of such Non-qualified Stock Options or
Stock Appreciation Rights may transfer any of such Non-
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qualified Stock Options or Stock Appreciation Rights other than by will or the
laws of descent and distribution in any manner authorized under applicable law.
ARTICLE 8
EFFECT OF TERMINATION OF EMPLOYMENT,
DISABILITY, RETIREMENT, DEATH OR CHANGE IN CONTROL
8.1 General Rule. Except as expressly provided in the written
agreement relating to any Option or Stock Appreciation Rights or as otherwise
expressly determined by the Committee in its sole discretion, in the event that
a recipient of Options or Stock Appreciation Rights ceases to be an employee or
consultant of the Corporation and its subsidiaries (a "Terminated Person") for
any reason other than Cause, Disability, Retirement (as hereinafter defined) or
death, any Options or Stock Appreciation Rights which were held by such Person
on the date on which he or she ceased to be director, employee or consultant
(the "Termination Date") and which were otherwise exercisable on such Date shall
expire unless exercised within the period of 90 days following the Termination
Date, but in no event after the expiration of the exercise period of such
Options or Stock Appreciation Rights.
Except as expressly provided in the written agreement relating to
the Options or Stock Appreciation Rights or as otherwise expressly determined by
the Committee in its sole discretion, the Board may, in its sole discretion,
cause any Option or Stock Appreciation Rights to be forfeited upon an employee's
termination of employment or the termination of a consultant's consulting
arrangement if the employee or consultant was terminated for Cause. "Cause"
shall mean one (or more) of the following reasons: (i) the employee's or
consultant's conviction, or plea of guilty or nolo contendere to the commission,
of a felony, (ii) the employee's or consultant's commission of any fraud,
misappropriation or misconduct which causes demonstrable injury to the
Corporation or a subsidiary, (iii) an act of dishonesty by the employee or
consultant resulting or intended to result, directly or indirectly, in gain or
personal enrichment at the expense of the Corporation or a subsidiary, (iv) any
breach of the employee's or consultant's fiduciary duties to the Corporation, or
(v) the employee's or consultant's willful failure to perform those duties which
the employee or consultant is required to perform as an employee or consultant
of the Corporation or a subsidiary; provided, however, that "cause," in the case
of an employee or consultant who has an employment or consulting agreement with
the Corporation or a subsidiary thereof, shall have the meaning, if any, set
forth in such employment or consulting agreement. It shall be within the sole
discretion of the Board to determine whether an employee's or consultant's
termination was for one of the foregoing reasons, and the decision of the Board
shall be final and conclusive.
8.2 Disability or Retirement. Except as expressly provided otherwise
in the written agreement relating to any Option or Stock Appreciation Rights
granted under the Plan or as otherwise determined by the Board in its sole
discretion, in the event of a termination of employment or consulting
arrangement of a Terminated Person due to the Disability or Retirement of such
Person, any Options or Stock Appreciation Rights which were held by such Person
on the Termination Date and which were otherwise exercisable on such Date shall
expire
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at the expiration date of the exercise period of such Options or Stock
Appreciation Rights; provided, however, that any Incentive Stock Option of such
Terminated Person shall no longer be treated as an Incentive Stock Option unless
exercised within three (3) months of the Termination Date (or within one (1)
year in the case of an employee who is "disabled" within the meaning of Section
22(e)(3) of the Code).
"Disability" shall mean any termination of employment or consulting
arrangement with the Corporation or a subsidiary because of a long-term or total
disability, as determined by the Committee in its sole discretion. "Retirement"
shall mean a termination of employment or consulting arrangement with the
Corporation or a subsidiary with the written consent of the Board in its sole
discretion. The decision of the Board shall be final and conclusive.
8.3 Death. Except as expressly provided in the written agreement
relating to the Options or Stock Appreciation Rights or as otherwise expressly
determined by the Board in its sole discretion, in the event of the death of a
recipient of Options or Stock Appreciation Rights while an employee or
consultant of the Corporation or any subsidiary, any Options or Stock
Appreciation Rights which were held by such Person at the date of death and
which were otherwise exercisable on such date shall be exercisable by the
beneficiary designated by the employee or consultant for such purpose (the
"Designated Beneficiary") or if no Designated Beneficiary shall be appointed or
if the Designated Beneficiary shall predecease the employee, by the employee's
personal representatives, heirs or legatees for a period up to the expiration
date of the exercise period of such Options or Stock Appreciation Rights, at
which time such Options or Stock Appreciation Rights shall expire.
In the event of the death of a Terminated Person following a
termination of employment due to Disability or Retirement, any Options or Stock
Appreciation Rights which were held by such Person on the Termination Date and
which were exercisable on such Date shall be exercisable by such recipient's
Designated Beneficiary, or if no Designated Beneficiary shall be appointed or if
the Designated Beneficiary shall predecease such recipient, by such recipient's
personal representatives, heirs or legatees for a period up to the expiration
date of the exercise period of such Options or Stock Appreciation Rights, at
which time such Options or Stock Appreciation Rights shall expire; provided,
however, that any Incentive Stock Option of such Terminated Person shall no
longer be treated as an Incentive Stock Option unless exercised within three (3)
months of the date of such Termination Date (or within one (1) year in the case
of an employee who is "disabled" within the meaning of Section 22(e)(3) of the
Code).
8.4 Change in Control. Except as expressly provided otherwise in the
written agreement relating to any Option or Stock Appreciation Rights granted
under the Plan, if there should be a Change in Control of the Corporation, the
Corporation shall give each holder of an Option or Stock Appreciation Right
written notice of such Change in Control as promptly as practicable prior to or
after the effective date thereof and any outstanding Options or Stock
Appreciation Rights held by such holders shall become immediately exercisable.
For purposes hereof, "Change in Control" means (i) any "person" (as such term is
used in Sections 13(d) and 14(d)(2) of the 1934 Act), other than Alfred West,
his designee(s) or "affiliate(s)" (as defined in Rule 12b-2 under the 1934 Act)
or any combination thereof, is or becomes the "beneficial
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owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
securities of the Corporation representing forty percent (40%) or more of the
combined voting power of the Corporation's then outstanding securities; (ii) the
Corporation merges, combines or consolidates with another entity and persons
beneficially owning more than fifty percent (50%) of the combined voting power
of the Corporation's then outstanding securities prior to the merger,
combination or consolidation, cease to beneficially own more than fifty percent
(50%) of the combined voting power of the securities of the surviving entity;
(iii) a sale (in one transaction or a series of related transactions) of all or
substantially all of the assets of the Corporation; or (iv) during any period of
two (2) consecutive years, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a majority
thereof, unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors representing
at least a majority of the directors then in office who were directors at the
beginning of the period.
8.5 Termination of Unvested Options. All Options and Stock
Appreciation Rights which were not exercisable by a Terminated Person as of the
Termination Date of such Terminated Person shall terminate as of such Date,
except as expressly provided in the written agreement relating to the Options or
Stock Appreciation Rights or as otherwise expressly determined by the Board in
its sole discretion. Options and Stock Appreciation Rights shall not be affected
by any change of employment so long as the recipient continues to be employed by
either the Corporation or a subsidiary.
ARTICLE 9
RESTRICTED SHARES
9.1 Grant or Sale of Restricted Shares. The Committee may from time
to time cause the Corporation to grant or to sell Restricted Shares under the
Plan to employees and consultants, subject to such restrictions, conditions and
other terms as the Committee may determine. The purchase price, if any, for
Restricted Shares shall be determined by the Board in its sole discretion.
9.2 Restrictions. At the time a grant of Restricted Shares is made,
the Board shall establish a period over which such Restricted Shares will vest
(the "Restricted Period"). Each grant of Restricted Shares may be subject to a
different Restricted Period. The Board may, in its sole discretion, at the time
a grant is made prescribe restrictions in addition to or other than the
expiration of the Restricted Period, including the satisfaction of corporate or
individual performance objectives, which shall be applicable to all or any
portion of the Restricted Shares. The Board may also, in its sole discretion, at
any time shorten or terminate the Restricted Period or waive any other
restrictions applicable to all or a portion of such Restricted Shares. None of
the Restricted Shares may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of during the Restricted Period or prior to the
satisfaction of any other restrictions prescribed by the Board with respect to
such Restricted Shares.
9.3 Restricted Stock Certificates. The Corporation shall issue, in
the name of each director, employee or consultant to whom Restricted Shares have
been granted or sold,
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stock certificates representing the total number of Restricted Shares granted or
sold to the employee or consultant, as soon as reasonably practicable after the
grant or sale. The Corporation, at the direction of the Board, shall hold such
certificates, properly endorsed for transfer, for the employee's or consultant's
benefit until such time as the Restricted Shares are forfeited to or repurchased
by the Corporation or the restrictions lapse.
9.4 Rights of Holders of Restricted Shares. Holders of Restricted
Shares shall have the right to receive any cash dividends with respect to such
shares and the right to vote such shares. All distributions, if any, received by
an employee or consultant with respect to Restricted Shares as a result of any
stock split, stock distribution, a combination of shares, or other similar
transaction shall be subject to the restrictions of this Article 9.
9.5 Forfeiture; Repurchase. Except as expressly provided in the
written agreement relating to Restricted Shares or as otherwise expressly
determined by the Board in its sole discretion, any Restricted Shares held by a
director, employee or consultant pursuant to the Plan shall be forfeited or
subject to repurchase by the Corporation at a price equal to the original price
paid therefor, if any, by the director, employee or consultant upon the
termination of his or her employment or consulting agreement with the
Corporation or its subsidiaries, as the case may be, prior to the expiration or
termination of the Restricted Period and the satisfaction of any other
conditions applicable to such Restricted Shares. Upon any such forfeiture or
repurchase, the Restricted Shares shall be retained in the treasury of the
Corporation and available for subsequent awards under the Plan, unless the Board
directs that such Restricted Shares be canceled.
9.6 Delivery of Restricted Shares. Upon the expiration or
termination of the Restricted Period applicable to any Restricted Shares and the
satisfaction of any other conditions prescribed by the Board that are applicable
to such Shares, the restrictions applicable to the Restricted Shares shall lapse
and a stock certificate for the number of Restricted Shares with respect to
which the restrictions have lapsed shall be delivered, free of all such
restrictions, to the director, employee, consultant, beneficiary or estate, as
the case may be.
ARTICLE 10
ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event of any change in the Common Stock by reason of any
stock dividend, stock split, recapitalization, merger, consolidation,
combination or exchange of shares, separation, spin-off, reorganization,
liquidation or the like, the number and kind of shares represented by any awards
and the purchase price per share thereof, if any, shall be appropriately
adjusted consistent with such change in such manner as the Board may deem
equitable to prevent dilution or enlargement of the rights granted under any
awards.
ARTICLE 11
AMENDMENT AND TERMINATION
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The Board or Committee may suspend, terminate, modify or amend the
Plan, provided that any amendment that would (i) materially increase the
aggregate number of shares which may be issued under the Plan, (ii) materially
increase the benefits accruing to employees under the Plan, or (iii) materially
modify the requirements as to eligibility for participation in the Plan, shall
be subject to the approval of the Corporation's stockholders, except that any
such increase or modification that may result from adjustments authorized by
Article 10 hereof shall not require such stockholder approval. If the Plan is
terminated, the terms of the Plan shall, notwithstanding such termination,
continue to apply to awards granted prior to such termination. No suspension,
termination, modification or amendment of the Plan may, without the consent of
the employee or consultant to whom an award shall theretofore have been granted,
adversely affect the rights of such employee or consultant under such award.
ARTICLE 12
WRITTEN AGREEMENT
Each award of Options, Stock Appreciation Rights and Restricted
Shares shall be evidenced by a written agreement containing such restrictions,
terms and conditions, if any, as the Board may require. In the event of any
conflict between a written agreement and the Plan, the terms of the Plan shall
govern.
ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 Tax Withholding. The Corporation shall have the right to
require employees or their beneficiaries or legal representatives to remit to
the Corporation an amount sufficient to satisfy Federal, state and local
withholding tax requirements, or to deduct from all payments under the Plan,
amounts sufficient to satisfy all withholding tax requirements. Whenever
payments under the Plan are to be made to an employee in cash, such payments
shall be net of any amounts sufficient to satisfy all Federal, state and local
withholding tax requirements. The Board may, in its sole discretion, permit an
employee to satisfy his or her tax withholding obligation either by (i)
surrendering shares owned by the employee or (ii) having the Corporation
withhold from shares otherwise deliverable to the employee. Shares surrendered
or withheld shall be valued at their Market Price as of the date on which income
is required to be recognized for income tax purposes.
13.2 Compliance With Section 16(b). In the case of employees who are
or may be subject to Section 16 of the 1934 Act, it is the intent of the
Corporation that the Plan, any award granted hereunder and any other transaction
contemplated by the Plan satisfy and be interpreted in a manner that satisfies
the applicable requirements of Rule 16b-3 so that such persons will be entitled
to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the
1934 Act and will not be subjected to liability thereunder. If any provision of
the Plan, any award or any other transaction contemplated by the Plan would
otherwise conflict with the intent expressed herein, that provision, to the
extent possible, shall be interpreted and deemed amended so as to avoid such
conflict. To the extent of any remaining irreconcilable conflict with
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such intent, such provision shall be deemed void as applicable to directors or
employees who are or may be subject to Section 16 of the 1934 Act.
13.3 Successors. The obligations of the Corporation under the Plan
shall be binding upon any successor corporation or organization resulting from
the merger, consolidation or other reorganization of the Corporation, or upon
any successor corporation or organization succeeding to all or substantially all
of the assets and business of the Corporation. In the event of any of the
foregoing, the Board may, in its discretion prior to the consummation of the
transaction and subject to Article 11 hereof, cancel, offer to purchase,
exchange, adjust or modify any outstanding awards, at such time and in such
manner as the Board deems appropriate and in accordance with applicable law.
13.4 General Creditor Status. Directors, employees and consultants
shall have no right, title, or interest whatsoever in or to any investments
which the Corporation may make to aid it in meeting its obligations under the
Plan. Nothing contained in the Plan, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship between the Corporation and any director, employee,
consultant, beneficiary or legal representative of such person. To the extent
that any person acquires a right to receive payments from the Corporation under
the Plan, such right shall be no greater than the right of an unsecured general
creditor of the Corporation. All payments to be made hereunder shall be paid
from the general funds of the Corporation and no special or separate fund shall
be established and no segregation of assets shall be made to assure payment of
such amounts except as expressly set forth in the Plan.
13.5 No Right to Employment. Nothing in the Plan or in any written
agreement entered into pursuant to Article 12 hereof, nor the grant of any
award, shall confer upon any employee any right to continue in the employ of the
Corporation or a subsidiary or to be entitled to any remuneration or benefits
not set forth in the Plan or such written agreement or interfere with or limit
the right of the Corporation or a subsidiary to modify the terms of or terminate
such employee's employment at any time. The preceding sentence shall be equally
applicable with respect to directors or consultants of the Corporation or a
subsidiary.
13.6 Notices. Notices required or permitted to be made under the
Plan shall be sufficiently made if personally delivered or sent by regular mail
addressed (a) to the director, employee or consultant at the person's address as
set forth in the books and records of the Corporation or its subsidiaries, or
(b) to the Corporation at the principal office of the Corporation clearly marked
"Attention: Stock Plan Administrator."
13.7 Severability. In the event that any provision of the Plan shall
be held illegal or invalid for any reason, such illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
13.8 Governing Law. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of New York.
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Exhibit 10.18
SECOND AMENDMENT
TO THE AMENDED AND RESTATED ECONOPHONE, INC.
1996 FLEXIBLE INCENTIVE PLAN
1. The first sentence of Section 2.2 of the 1996 Flexible Incentive Plan
is amended to read as follows:
The maximum aggregate number of shares of Common Stock available for award
under the Plan is 5,500,000, subject to adjustment pursuant to Article 12
hereof, of which 5,250,000 may be in the form of Voting Stock and 250,000
may be in the form of Non-voting Stock.
<PAGE>
Exhibit 10.19
[EXECUTION COPY]
MODIFICATION AGREEMENT NO. 1
TO
SECOND AMENDED AND RESTATED
LOAN AND
SECURITY AGREEMENT
THIS MODIFICATION AGREEMENT NO. 1 dated as of March 31, 1999 (the
"Modification Agreement No. 1"), to the Second Amended and Restated Loan and
Security Agreement dated as of January 28, 1998 (as may be further amended,
supplemented, amended and restated or otherwise modified from time to time, the
"Loan Agreement"), among Destia Communications, Inc, a Delaware corporation
formerly known as Econophone, Inc. ("Destia"), American Telemedia Limited, an
English corporation ("ATL") and a wholly owned subsidiary of Destia, ECONOPHONE
GmbH, a limited liability company organized under the laws of the Federal
Republic of Germany ("ECONOphone GmbH") and an indirect wholly owned subsidiary
of Destia (Destia, ATL, ECONOphone GmbH and additional Subsidiaries of Destia as
may become a Borrower under the Loan Agreement pursuant to Section 2.11 thereof
are individually referred to as a "Borrower" and collectively as the
"Borrowers"), and NTFC Capital Corporation, a Delaware corporation (the
"Lender");
W I T N E S S E T H:
WHEREAS, the Borrowers have requested that certain provisions of the Loan
Agreement be amended in certain respects as set forth herein; and
WHEREAS, the Lender is willing to amend such provisions of the Loan
Agreement and to take or permit the taking of certain actions as set forth
herein, but only on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Certain Definitions. Unless otherwise defined herein or
the context otherwise requires, capitalized terms used in this
<PAGE>
Modification Agreement No. 1, including its preamble and recitals, have
the meanings provided in the Loan Agreement.
ARTICLE II
AMENDMENT OF LOAN AGREEMENT
AS OF THE MODIFICATION EFFECTIVE DATE
Effective on (and subject to the occurrence of) the Modification Effective
Date, the provisions of the Loan Agreement referred to below are hereby amended
in accordance with this Article II. Except as expressly so amended, the Loan
Agreement shall continue in full force and effect in accordance with its terms.
SECTION 2.1. Modification of Article I (Definitions). Article I of the
Loan Agreement is hereby modified as follows:
SECTION 2.1.1. The following definitions are inserted in Article I of the
Loan Agreement:
"Adjusting Fiscal Quarter": the fiscal quarter (x) immediately
following a fiscal quarter in which Destia's Debt Service Coverage Ratio
was not greater than 1.10 to 1.00 and in which Destia failed to have
revenues (calculated at the end of such fiscal quarter as the revenue of
the four fiscal quarters then ending) equal to or greater than 85% of the
level projected for such fiscal quarters in the Original Minimum Projected
Revenue Table and (y) in which Destia's Debt Service Coverage Ratio was
not greater than 1.10 to 1.00 and in which Destia does not have revenues
(calculated at the end of such following fiscal quarter as the revenue of
the four fiscal quarters then ending) equal to or greater than 85% of the
level projected for such fiscal quarters in the Original Minimum Projected
Revenue Table.
"Adjusted Minimum Revenue Projection Table": the table of
projections for Destia's minimum revenues set forth in the attached Table
2.
"Applicable Minimum Revenue Projection Table": (i) Prior to the
Adjusting Fiscal Quarter, the Original Minimum Projected Revenue Table,
and (ii) from and after the Adjusting Fiscal Quarter, the Adjusted Minimum
Projected Revenue Table.
"Original Minimum Revenue Projection Table": the table of
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<PAGE>
projections for Destia's minimum revenues set forth in the attached Table
1.
SECTION 2.2. Modification of Article VII (Covenants). Article VII of the
Loan Agreement is hereby modified as follows:
SECTION 2.2.1. Schedule 7.15 of the Loan Agreement is hereby amended by
deleting Schedule 7.15(c) in its entirety and substituting the following in its
place:
(c) EBITDA. Borrower's EBITDA shall not be less than: for the fiscal
year ending December 31, 1999, ($25,000,000); for the fiscal year ending
December 31, 2000, ($5,000,000); for the fiscal year ending December 31,
2001, $10,000,000; and for the fiscal year ending December 31, 2002,
$10,000,000.
SECTION 2.2.2. Schedule 7.15 of the Loan Agreement is hereby amended by
adding to Schedule 7.15 a paragraph (e) Compliance with Projections as follows:
(e) Compliance with Projections. For any quarter in which Destia's
Debt Service Coverage Ratio (calculated at the end of such fiscal quarter
and without any of the adjustments provided in Schedule 7.15(a)) is not
greater than 1.10 to 1.00, Destia shall have revenues (calculated at the
end of such fiscal quarter as the revenue of the four fiscal quarters then
ending) equal to or greater than 85% of the level projected for such
fiscal quarters in the Applicable Minimum Revenue Projection Table.
SECTION 2.3. Modification of Article IX (Defaults). Article IX of the Loan
Agreement is hereby modified as follows:
SECTION 2.3.1. Section 9.01 of the Loan Agreement is hereby amended by
deleting Schedule 9.01(c) in its entirety and substituting the following in its
place:
(c) Covenant Defaults. (i) If Borrower defaults in the performance
or observance of any covenant or agreement in this Agreement, and such
default continues for a period of twenty (20) calendar days after the
earlier of Borrower's knowledge thereof or receipt of written notice from
Lender thereof, except for violations of Section 7.08(d), which shall
become an Event of Default at the end of the sixty (60) day period stated
therein and except for specific Defaults listed elsewhere in this Section
9.01, as to which no notice or cure period shall
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apply unless specified; or
(ii) If Destia defaults in the observance of the covenant set forth
in Schedule 7.15(e) at the end of any fiscal quarter occurring on or after the
Adjusting Fiscal Quarter.
ARTICLE III
CONDITIONS TO EFFECTIVENESS
SECTION 3.1. Modification Effective Date. This Modification Agreement No.
1 shall become effective as of the date first above written (the "Modification
Effective Date"), when all of the conditions set forth in Sections 3.1.1 through
3.1.3 shall have been satisfied:
SECTION 3.1.1. Resolutions, etc. The Lender shall have received from the
Borrower, a certificate of the Secretary of Destia, dated the Modification
Effective Date, of their respective Secretaries or any Assistant Secretaries as
to:
(a) resolutions of the Board of Directors of each Borrower then
being in full force and effect authorizing the execution, delivery,
and performance of this Modification Agreement No. 1 and each other
Loan Document to be executed by it; and
(b) the incumbency and signatures of the officers of such Borrower
authorized to act with respect to this Modification Agreement No. 1
and each other Loan Document to be executed by it (upon which
certificate the Lender may conclusively rely until the Lender shall
have received a further certificate of the Secretary of such
Borrower canceling or amending such prior certificate, which further
certificate shall be reasonably satisfactory to the Lender).
SECTION 3.1.2. Execution of Counterparts. The Lender shall have received
counterparts of this Modification Agreement No. 1 duly executed by each Borrower
and the Lender.
SECTION 3.1.3. Compliance with Warranties; No Default etc. The Lender
shall have received from a Responsible Officer of Destia a certificate, dated
the date first above written, stating that
(a) the representations and warranties of the Borrowers set forth in
the Loan Agreement and the representations and warranties of the
Borrowers set forth in each of the other Loan Documents, in each
case as modified in accordance herewith, are true and correct
4
<PAGE>
in all material respects with the same effect as if then made
(unless stated to relate solely to an earlier date, in which case
such representations and warranties were true and correct as of such
earlier date); and
(b) no Default has occurred and is continuing.
ARTICLE IV
MISCELLANEOUS
SECTION 4.1. Cross References. References in this Modification Agreement
No. 1 to any article or section are, unless otherwise specified, to such article
or section of this Modification Agreement No. 1.
SECTION 4.2. Instrument Pursuant to Loan Agreement. This Modification
Agreement No. 1 is a Loan Document executed pursuant to the Loan Agreement and
shall (unless otherwise expressly indicated therein) be construed, administered,
and applied in accordance with all of the terms and provisions of the Loan
Agreement (including that it shall be governed by the laws of the State of New
York). Any term or provision of and any modification effected by this
Modification Agreement No. 1 may be modified in any manner by an instrument in
writing executed by the Borrowers and the Lender. Except as expressly amended
hereby, all of the representations, warranties, terms, covenants and conditions
of the Loan Agreement shall remain unmodified and unwaived. The modifications
set forth herein shall be limited precisely as provided for herein to the
provisions expressly modified herein and shall not be deemed to be a waiver of,
amendment of, consent to or modification of any other term or provision of any
other Loan Document or of any transaction or further or future action on the
part of any Borrower which could require the consent of the Lender under the
Loan Agreement.
SECTION 4.3. Successors and Assigns. This Modification Agreement No. 1
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
SECTION 4.4. Counterparts. This Modification Agreement No. 1 may be
executed by the parties hereto in several counterparts which shall be executed
by the Borrowers and the Lender, as the case may be, all of which shall be
deemed to be an original and which shall constitute together but one and the
same agreement.
5
<PAGE>
SECTION 4.5. Event of Default. It is understood and agreed that any breach
of any representation or warranty or covenant contained herein shall constitute
an Event of Default.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement No. 1 to be executed by the respective officers hereunder duly
authorized as of the day and year first above written.
DESTIA:
DESTIA COMMUNICATIONS, INC.
BY:
----------------------------------
TITLE:
-------------------------------
ATL:
AMERICAN TELEMEDIA LIMITED
BY:
----------------------------------
TITLE:
-------------------------------
ECONOPHONE GmbH:
ECONOPHONE GmbH
BY:
----------------------------------
TITLE:
-------------------------------
LENDER:
NTFC CAPITAL CORPORATION
BY:
----------------------------------
TITLE:
-------------------------------
7
<PAGE>
TABLE 1
Destia Communications
Original Minimum Projected Revenue Table
(000s)
YEAR
- --------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
31-Mar $ 62,400 $ 96,907 $127,073 $172,682 $207,614 $226,155
- --------------------------------------------------------------------------------
30-Jun $ 68,891 $103,992 $139,289 $182,709 $212,284 $232,487
- --------------------------------------------------------------------------------
30-Sep $ 79,555 $112,213 $153,769 $194,182 $217,591 $239,462
- --------------------------------------------------------------------------------
31-Dec $ 90,444 $118,879 $165,779 $203,344 $220,855 $246,074
- --------------------------------------------------------------------------------
Totals $301,290 $431,991 $585,910 $752,917 $858,344 $944,178
TABLE 2
Destia Communications
Adjusted Minimum Projected Revenue Table
(000s)
YEAR
- --------------------------------------------------------------------------------
1999 2000 2001 2002 2003 2004
- --------------------------------------------------------------------------------
31-Mar $ 58,000 $ 90,444 $118,879 $165,779 $203,344 $220,855
- --------------------------------------------------------------------------------
30-Jun $ 62,400 $ 96,907 $127,073 $172,682 $207,614 $226,155
- --------------------------------------------------------------------------------
30-Sep $ 68,891 $103,992 $139,289 $182,709 $212,284 $232,487
- --------------------------------------------------------------------------------
31-Dec $ 79,555 $112,213 $153,769 $194,182 $217,591 $239,462
- --------------------------------------------------------------------------------
Totals $268,846 $403,556 $539,010 $715,352 $840,833 $918,959
<PAGE>
Exhibit 10.20
INDEMNIFICATION AGREEMENT dated as of _____________, 19_, between DESTIA
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and
_____________________ ("Indemnitee").
It is essential to the Company to retain and attract as directors and
officers the most capable persons available. It is becoming increasingly more
difficult for companies to attract the most qualified and experienced people to
serve as officers and directors because of the tendency in the United States of
increasing litigation and other challenges by stockholders and others against
officers and directors of companies. In recognition of Indemnitee's need for
substantial protection against personal liability in order to enhance
Indemnitee's continued and effective service to the Company, and in order to
induce Indemnitee to provide such services to the Company as a director or
officer, the Company wishes to provide in this Agreement for the indemnification
of and the advancing of expenses to Indemnitee to the fullest extent (whether
partial or complete) permitted by law and as set forth in this Agreement,
whether or not insurance is maintained to provide coverage for Indemnitee.
NOW THEREFORE, in consideration of the foregoing and of Indemnitee's
continued service to the Company and intending to be legally bound hereby, the
parties agree as follows:
1. Certain Definitions. Whenever used in this Agreement, the following
words and phrases shall have the following meanings:
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall be deemed to have occurred if (i) any "person"
(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act
of 1934, as amended), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the company is or becomes the "Beneficial
Owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing 20% or more of the total voting power
represented by the Company's then outstanding Voting Securities (a "20%
Interest"), (ii) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board and any new director whose
election by the Board or nomination for election by the Company's stockholders
was approved by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation that would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all of the Company's assets.
<PAGE>
2
"Expenses" shall mean any expense, liability or loss, including attorneys'
fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be
paid in settlement, any interest, assessments, or other charges imposed thereon,
and any federal, state, local or foreign taxes imposed as a result of the actual
or deemed receipt of any payments under this Agreement, paid or incurred in
connection with investigating, defending, being a witness in, or participating
in (including on appeal), or preparing for any of the foregoing, any Proceeding
relating to any Indemnifiable Event.
"Indemnifiable Event" shall mean any event or occurrence that takes place
either prior to or after the execution of this Agreement, related to the fact
that Indemnitee is or was a director or an officer of the Company, or while a
director or officer is or was serving at the request of the Company as a
director, officer, employee, trustee, agent, or fiduciary of another foreign or
domestic corporation, partnership, joint venture, employee benefit plan, trust,
or other enterprise, or was a director, officer, employee, or agent of a foreign
or domestic corporation that was a predecessor corporation of the Company or of
another enterprise at the request of such predecessor corporation, or related to
anything done or not done by Indemnitee in any such capacity, whether or not the
basis of the Proceeding is alleged action in an official capacity as a director,
officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent of the Company, as described above.
"Independent Counsel" shall mean the person or body appointed in
connection with Section 3.
"Proceeding" shall mean any threatened, pending, or completed action,
suit, or proceeding (including an action by or in the right of the Company) or
any inquiry, hearing, or investigation, whether conducted by the Company, a
stockholder or bond holder of the Company, a governmental body, or any other
party, that Indemnitee in good faith believes might lead to the institution of
any such action, suit, or proceeding, whether civil, criminal, administrative,
investigative, or other.
"Reviewing Party" shall mean the person or body appointed in accordance
with Section 3.
"Voting Securities" shall mean any securities of the Company that vote
generally in the election of directors.
2. Agreement to Indemnify.
(a) General Agreement. In the event Indemnitee was, is, or becomes a party
to or witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Proceeding by reason of (or arising out of)
an Indemnifiable Event, the Company shall indemnify Indemnitee from and against
any and all Expenses to the fullest extent permitted by law applicable to the
Indemnifiable Event, or as the same may exist currently or may hereafter be
amended or interpreted (but in the case of any such subsequent amendments or
interpretations, only to the extent that such amendments or interpretations
permit the Company to provide broader indemnification rights than were permitted
prior thereto). The parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly permitted by statute, including,
without limitation, any indemnification provided by the company's Certificate of
Incorporation, its By-laws, vote of its stockholders or disinterested directors,
or applicable law.
(b) Initiation of Proceeding. Notwithstanding anything in this Agreement
to the contrary, Indemnitee shall not be entitled to indemnification pursuant to
this Agreement in connection with any Proceeding initiated by Indemnitee against
the Company or any director or officer of the Company unless
<PAGE>
3
(i) the Company has joined in or the Board has consented to the initiation of
such Proceeding; (ii) the Proceeding is one to enforce indemnification rights
under Section 5 hereof; or (iii) the Proceeding is instituted after a Change in
Control (other than a Change in Control approved by a majority of the directors
on the Board who were directors immediately prior to such Change in Control) and
Independent Counsel has approved its initiation.
(c) Expense Advances. If so requested by Indemnitee, the Company shall
advance (within ten business days of such request) any and all Expenses to
Indemnitee (an "Expense Advance"); provided that, if and to the extent the
Reviewing Party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid in connection with the Proceeding then in question. If
Indemnitee has commenced or commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be indemnified
under applicable law, as provided in Section 4,any determination made by the
Reviewing Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding and Indemnitee shall not be required to
reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or have lapsed). Indemnitee's obligation to
reimburse the Company for Expense Advances shall be unsecured and no interest
shall be charged thereon.
(d) Mandatory Indemnification. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits in
defense of any Proceeding relating in whole or in part to an Indemnifiable Event
or in defense of any issue or matter therein, Indemnitee shall be indemnified
against all Expenses incurred in connection therewith.
(e) Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses, but not, however, for the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled.
(f) Prohibited Indemnification. No indemnification pursuant to this
Agreement shall be paid by the Company on account of any Proceeding in which
judgment is rendered against Indemnitee for an account of profits made from the
purchase or sale by Indemnitee of securities of the Company pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
or similar provisions of any federal, state, or local laws, or in the event
Indemnitee is found in the applicable Proceeding to have committed gross
negligence or reckless disregard of his or her fiduciary obligations under
Delaware law.
3. Reviewing Party
Prior to any Change in Control, the Reviewing Party shall be any
appropriate person or body consisting of a member or members of the Board; after
a Change in Control, the Reviewing Party shall be the Independent Counsel
referred to below. With respect to all matters arising after a Change in Control
(other than a Change in Control approved by a majority of the directors
comprising the Board immediately prior to such Change of Control) concerning the
rights of Indemnitee to indemnity payments and Expense Advances under this
Agreement or any other agreement or under applicable law or the Company's
Articles of Incorporation or By-laws now or hereafter in effect relating to
indemnification for Indemnifiable Events, the Company shall seek advice only
from Independent Counsel selected by
<PAGE>
4
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld), and who has not otherwise performed services for the Company or the
Indemnitee (other than in connection with indemnification matters) within the
last five years. The Independent Counsel shall not include any person who, under
the applicable standards of professional conduct then prevailing, would have a
conflict of interest in representing either the Company or Indemnitee in an
action to determine Indemnitee's rights under this Agreement. Such counsel,
among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent the Indemnitee should be permitted
to be indemnified under applicable law. The Company agrees to pay the reasonable
fees of the Independent Counsel and to indemnify fully such counsel against any
and all expenses (including attorneys' fees), claims, liabilities, loss and
damages arising out of or relating to this Agreement or the engagement of
Independent Counsel pursuant hereto.
4. Indemnification Process and Appeal.
(a) Indemnification Payment. Indemnitee shall be entitled to
indemnification of Expenses, and shall receive payment thereof, from the Company
in accordance with this Agreement as soon as practicable after Indemnitee has
made written demand on the Company for indemnification, unless the Reviewing
Party has given a written opinion to the Company that Indemnitee is not entitled
to indemnification under this agreement and applicable law.
(b) Suit to Enforce Rights. Regardless of any action by the Reviewing
Party, if Indemnitee has not received full indemnification within thirty days
after making a demand in accordance with Section 4(a), Indemnitee shall have the
right to enforce its indemnification rights under this Agreement commencing
litigation in any court in the State of New York having subject matter
jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. The Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
not challenged by the Indemnitee shall be binding on the Company and Indemnitee.
The remedy provided for in this Section 4 shall be in addition to any other
remedies available to Indemnitee in law or equity.
(c) Defense to Indemnification, Burden of Proof, and Presumptions. It
shall be a defense to any action brought by Indemnitee against the Company to
enforce this Agreement (other than an action brought to enforce a claim for
Expenses incurred in defending a Proceeding in advance of its final disposition
where the required undertaking has been tendered to the Company) that it is not
permissible under applicable law or under this Agreement for the Company to
indemnify Indemnitee for the amount claimed. In connection with any such action
or any determination by the Reviewing Party or otherwise as to whether
Indemnitee is entitled to be indemnified hereunder, the burden of proving such a
defense or determination shall be on the Company. Neither the failure of the
Reviewing Party or the Company (including its Board, independent legal counsel,
or its stockholders) to have made a determination prior to the commencement of
such action by Indemnitee that indemnification of the claimant is proper under
the circumstances because he has met the standard of conduct set forth in
applicable law, nor an actual determination by the Reviewing Party or Company
(including its Board, independent legal counsel, or its stockholders) that the
Indemnitee had not met such applicable standard of conduct, shall be a defense
to the action or create a presumption that the Indemnitee has not met the
applicable standard of conduct. For purposes of this Agreement, the termination
of any claim, action, suit, or proceeding, by judgment, order, settlement
(whether with or without court approval), conviction, or upon a plea of nolo
contendere, or the equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct
<PAGE>
5
or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
5. Indemnification for Expenses Incurred in Enforcing Rights.
The Company shall indemnify Indemnitee against any and all Expenses that
are incurred by Indemnitee in connection with any action brought by Indemnitee
for (i) indemnification of Expenses by the Company under this Agreement or any
other agreement or under the Company's Articles of Incorporation or By-laws now
or hereafter in effect relating to indemnification for Indemnifiable Events,
and/or (ii) recovery under directors' and officers' liability insurance policies
maintained by the Company, but only in the event that Indemnitee ultimately is
determined to be entitled to such indemnification or insurance recovery, as the
case may be. In addition, the Company shall, if so requested by Indemnitee,
advance the foregoing Expenses to Indemnitee, subject to and in accordance with
Section 2(c).
6. Notification and Defense of Proceeding.
(a) Notice. Promptly after receipt by Indemnitee of notice of the
commencement of any Proceeding, Indemnitee, will, if a claim in respect thereof
is to be made against the Company under this Agreement, notify the Company of
the commencement thereof; but the omission so to notify the Company will not
relieve it from any liability that it may have to Indemnitee, except as provided
in Section 6(c).
(b) Defense. With respect to any Proceeding as to which Indemnitee
notifies the Company of the commencement thereof, the Company will be entitled
to participate in the Proceeding at its own expense and except as otherwise
provided below, to the extent the Company so wishes, it may assume the defense
thereof with counsel reasonably satisfactory to Indemnitee. After notice from
the Company to Indemnitee of its election to assume the defense of any
Proceeding, the Company will not be liable to Indemnitee under this Agreement or
otherwise for any Expenses subsequently incurred by Indemnitee under this
Agreement except as otherwise provided below. Indemnitee shall have the right to
employ his own counsel in such Proceeding, but all Expenses related thereto
incurred after notice from the Company of its assumption of the defense shall be
at Indemnitee's expense unless: (i) the employment of counsel by Indemnitee has
been authorized by the Company, (ii) Indemnitee has reasonably determined that
there may be a conflict of interest between Indemnitee and the Company in the
defense of the Proceeding and such determination has been affirmed by any then
existing Independent Counsel, (iii) after a Change in Control (other than a
Change in Control approved by a majority of the directors on the Board who were
directors immediately prior to such Change in Control), the employment of
counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the
Company shall not in fact have employed counsel to assume the defense of such
Proceeding, in each of which case all Expenses of the Proceeding shall be borne
by the Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to which Indemnitee
shall have made the determination provided for in (ii) above.
(c) Settlement of Claims. The Company shall not be liable to indemnify
Indemnitee under this Agreement or otherwise for any amounts paid in settlement
of any Proceeding effected without the Company's written consent, provided,
however, that if a Change in Control has occurred (other than a Change in
Control approved by a majority of the directors on the Board who were directors
immediately prior to such Change in Control), the Company shall be liable for
indemnification of Indemnitee for amounts paid in settlement if the Independent
Counsel has approved the settlement. The Company shall
<PAGE>
6
not settle any Proceeding in any manner that would impose any penalty or
limitation on Indemnitee without Indemnitee's written consent. Neither the
Company nor Indemnitee will unreasonably withhold their consent to any proposed
settlement. The Company shall not be liable to indemnify Indemnitee under this
Agreement with regard to any judicial award if the Company was not given a
reasonable and timely opportunity, at its expense, to participate in the defense
of such action; the Company's liability hereunder shall not be excused if
participation in the Proceeding by the Company was barred by this Agreement.
7. Establishment of Trust.
In the event of a Change in Control (other than a Change in Control
approved by a majority of the directors on the Board who were directors
immediately prior to such Change in Control) the Company shall, upon written
request by Indemnitee, create a Trust for the benefit of Indemnitee and from
time to time upon written request of Indemnitee shall fund the Trust in an
amount sufficient to satisfy any and all Expenses reasonably anticipated at the
time of each such request to be incurred in connection with investigating,
preparing for, participating in, and/or defending any Proceeding relating to an
Indemnifiable Event. The amount or amounts to be deposited in the Trust pursuant
to the foregoing funding obligation shall be determined by the Reviewing Party.
The terms of the Trust shall provide that (i) the Trust shall not be revoked or
the principal thereof invaded, without the written consent of Indemnitee, (ii)
the Trustee shall advance, within ten business days of a request by Indemnitee,
any and all Expenses to Indemnitee (and Indemnitee hereby agrees to reimburse
the Trust under the same circumstances for which Indemnitee would be required to
reimburse the Company under Section 2(c) of this Agreement), (iii) the Trust
shall continue to be funded by the Company in accordance with the funding
obligation set forth above, (iv) the Trustee shall promptly pay to Indemnitee
all amounts for which Indemnitee shall be entitled to indemnification pursuant
to this Agreement or otherwise, and (v) all unexpended funds in the Trust shall
revert to the Company upon a final determination by the Reviewing Party or a
court of competent jurisdiction, as the case may be, that Indemnitee has been
fully indemnified under the terms of this Agreement. The Trustee shall be chosen
by Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by the Company for federal, state, local, and
foreign tax purposes. The Company shall pay all costs of establishing and
maintaining the Trust, and shall indemnify the Trustee against any and all
expenses (including attorneys' fees), claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
8. Non-Exclusivity.
The rights of Indemnitee hereunder shall be in addition to any other
rights Indemnitee may have under the Company's Certificate of Incorporation,
By-laws, applicable law, or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Certificate of
Incorporation, By-laws, applicable law, or this Agreement it is the intent of
the parties that Indemnitee enjoy by this Agreement the greater benefits so
afforded by such change.
9. Liability Insurance.
To the extent the Company maintains an insurance policy or policies
providing directors' and officers' liability insurance, Indemnitee shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any Company director or
officer.
<PAGE>
7
10. Period of Limitations.
No legal action shall be brought and no cause of action shall be asserted
by or on behalf of the Company or any affiliate of the Company against
Indemnitee, Indemnitee's spouse, heirs, executors, or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, or such longer period as may be required by state law
under the circumstances. Any claim or cause of action of the Company or its
affiliate shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause of
action, the shorter period shall govern.
11. Retroactivity.
This Agreement shall be deemed to have been in effect during all periods
that Indemnitee was an officer or director of the Company, regardless of the
date of this Agreement.
12. Amendment of this Agreement.
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall be binding unless in the form of a
writing signed by the party against whom enforcement of the waiver is sought,
and no such waiver shall operate as a waiver of any other provisions hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver.
Except as specifically provided herein, no failure to exercise or any delay in
exercising any right or remedy hereunder shall constitute a waiver thereof.
13. Subrogation.
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of such payment to all of the rights of recovery of
Indemnitee, who shall execute all papers reasonably required and shall do
everything that may be reasonably necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
14. No Duplication of Payments.
The Company shall not be liable under this Agreement to make any payment
in connection with any claim made against Indemnitee to the extent Indemnitee
has otherwise received payment (under any insurance policy, By-law, or
otherwise) of the amounts otherwise indemnifiable hereunder.
15. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of the business and/or assets of the Company), assigns,
spouses, heirs, and personal and legal representatives. The Company shall
require
<PAGE>
8
and cause any successor (whether direct or indirect by purchase, merger,
consolidation, or otherwise) to all, substantially all, or a substantial part,
of the business and/or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity
pertaining to an Indemnifiable Event even though he may have ceased to serve in
such capacity at the time of any Proceeding.
16. Severability.
If any provision (or portion thereof) of this Agreement shall be held by a
court of competent jurisdiction to be invalid, void, or otherwise unenforceable,
the remaining provisions shall remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the provisions of
this Agreement (including, without limitation, each portion of this Agreement
containing any provision held to be invalid, void, or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, void, or
unenforceable.
17. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in such State without giving effect to the principles of
conflicts of laws.
18. Notices.
All notices, demands, and other communications required or permitted
hereunder shall be made in writing and shall be deemed to have been duly given
if delivered by hand, against receipt, or mailed, postage prepaid, certified or
registered mail, return receipt requested, and addressed as follows:
COMPANY: DESTIA COMMUNICATIONS, INC.
ATTENTION: Chairman of the Board
[Address]
With copy to: DESTIA COMMUNICATIONS, INC.
ATTENTION: General Counsel
[Address]
INDEMNITEE: __________________________________
______________________________________________
______________________________________________
Notice of change of address shall be effective only when done in
accordance with this Section. All notices complying with this Section shall be
deemed to have been received on the earlier of the date of delivery or on the
third business day after mailing.
<PAGE>
9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
DESTIA COMMUNICATIONS, INC.,
By
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Name:
Title:
[INDEMNITEE]
By
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Name:
Title:
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Destia Communications, Inc.
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.
<TABLE>
<S> <C> <C>
/s/ ARTHUR ANDERSEN LLP
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Arthur Andersen LLP
</TABLE>
New York, New York
May 3, 1999
