<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTATHREE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 13-4006766
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
430 PARK AVENUE, SUITE 500
NEW YORK, NEW YORK 10022
(212) 588-3670
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
AMOS SELA
CHIEF EXECUTIVE OFFICER
DELTATHREE.COM, INC.
430 PARK AVENUE, SUITE 500
NEW YORK, NEW YORK 10022
(212) 588-3670
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
DAVID J. GOLDSCHMIDT, ESQ. DAVID S. LEFKOWITZ, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP WEIL, GOTSHAL & MANGES LLP
919 THIRD AVENUE 767 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10153
(212) 735-3000 (212) 310-8000
</TABLE>
------------------------
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,
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, 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,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(1)
<S> <C> <C>
Class A common stock, $0.001 par value......................... $57,500,000 $15,985
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
------------------------
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 SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID 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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, dated September 3, 1999
PROSPECTUS
SHARES
[LOGO]
deltathree.com
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock.
We are offering shares.
No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"DDDC". We anticipate the public offering price to be between $ and $
per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 5.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ----------
<S> <C> <C>
Public Offering Price.............................................................. $ $
Underwriting Discount.............................................................. $ $
Proceeds to deltathree.com......................................................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to additional
shares within 30 days to cover any over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
WARBURG DILLON READ LLC
LAZARD FRERES & CO. LLC
, 1999
<PAGE>
[DESCRIPTION OF INSIDE FRONT AND BACK COVER GRAPHIC:
GRAPHIC DEPICTS WORLD MAP SHOWING THE COMPANY'S PRIVATELY-MANAGED, GLOBAL IP
NETWORK, SCREEN SHOTS OF THE COMPANY'S COMMUNICATIONS PORTAL AND SCREEN SHOTS OF
CO-BRANDED COMMUNICATIONS CENTERS]
[THE COMPANY INTENDS TO DISTRIBUTE WITH PRELIMINARY PROSPECTUSES CDS CONTAINING
THE COMPANY'S PC-TO-PHONE SOFTWARE.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 5
Forward-Looking Statements..................... 15
Use of Proceeds................................ 16
Dividend Policy................................ 16
Capitalization................................. 17
Dilution....................................... 18
Selected Consolidated Financial Data........... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 30
Management..................................... 46
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders......................... 54
Related Party Transactions..................... 55
Description of Capital Stock................... 58
Shares Eligible for Future Sale................ 61
Important United States Federal Tax
Consequences of Our Common Stock to Non-U.S.
Holders...................................... 62
Underwriting................................... 65
Legal Matters.................................. 67
Experts........................................ 67
Where You Can Find Additional
Information.................................. 67
Index to Consolidated Financial Statements..... F-1
</TABLE>
ABOUT THIS PROSPECTUS
INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO PROVIDE ANY DIFFERENT OR
ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY COMMON STOCK IN ANY JURISDICTION WHERE IT IS
UNLAWFUL. 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 COMMON STOCK. THIS PRELIMINARY PROSPECTUS IS
SUBJECT TO COMPLETION PRIOR TO THIS OFFERING.
Unless otherwise indicated, the information in this prospectus:
o assumes our certificate of incorporation is amended to provide for two
classes of common stock, as described in this prospectus
o reflects a -for- stock split which will be effected prior to this
offering
o assumes an initial public offering price of $ per share
o assumes no exercise of the underwriters' over-allotment option
o assumes RSL Communications, Ltd. (RSL COM), our parent company, obtains
consents from its noteholders to amend indentures governing the notes
issued by RSL COM to allow us to (1) use the proceeds from this offering
for all of the purposes described under "Use of Proceeds" in this
prospectus and (2) issue our shares of common stock to participants under
our various compensation and other benefit plans, as described under
"Management" in this prospectus
o assumes no exercise of outstanding options to purchase our common stock
o assumes conversion of 470,870 restricted units granted by RSL COM under
its stock incentive plan to options to purchase shares of our common
stock and no exercise of those options
We have submitted trademark applications for the names
"deltathree.com(Trademark)," "V-Greetings(Trademark)," "D3 Box(Trademark),"
"Click IT(Trademark)," "D3 Fax(Trademark)" and "Delta Three(Trademark)." All
other trademarks and trade names appearing in this prospectus are the property
of their respective holders.
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. You should read the entire prospectus, including the section
entitled "Risk Factors" and our consolidated financial statements and related
notes, before deciding to invest in our common stock.
DELTATHREE.COM
We are a leading provider of Internet Protocol (IP) telephony services and
other enhanced, Web-based communications services to individuals and businesses
worldwide. We use our privately-managed, global IP network to enable our users
to make low-cost, high quality phone calls from either a personal computer or a
standard telephone. Through our interactive communications portal,
www.deltathree.com, our users can also retrieve and forward voice mail, e-mail
and faxes and send e-mail using one unified mailbox from anywhere in the world
at any time.
We were founded in June 1996 to capitalize on the growth of the Internet as
a communications tool, and we believe we were the first company to commercially
provide phone-to-phone, IP telephony services over a privately-managed network.
We are using our expertise in IP telephony to provide our users with a package
of enhanced IP communications services that includes the following:
o PC-to-phone: a low-cost service allowing a user to initiate a call
through a personal computer and speak to a party who uses a standard
telephone
o D3 Box: a unified messaging service permitting convenient single-source
retrieval of voice mail, e-mail and faxes through the Web or by phone
o Click IT: a Web-based, e-commerce service allowing a party to
simultaneously view a Web site and click through to talk directly with
the individual or business hosting the Web site
o Phone-to-phone: a low-cost voice and fax service allowing a user to place
a call or send a fax from a standard telephone or fax machine that is
carried primarily over our privately-managed, global IP network, with
quality that is virtually indistinguishable from traditional calls over
the public switched telephone network
o Global roaming: a low-cost service enabling businesses and individuals to
use a single account number to place phone-to-phone calls over our IP
network from locations throughout the world using country-specific,
toll-free access numbers, thereby bypassing local access charges
We intend to introduce additional enhanced IP communications services that
meet the communications needs of individuals and businesses. These services are
expected to include D3 Fax, a Web-based, PC-to-fax service allowing users to
conveniently send faxes directly from their computer to a standard fax machine
anywhere in the world, and white boarding, a service allowing multiple users to
simultaneously edit a document while speaking with each other over their
computers.
We believe that we currently operate the largest privately-managed, IP
telephony network with 43 points of presence in 27 countries. In order to
maximize the use of available capacity on our network, in addition to the
services we provide our users, we have been transmitting and terminating voice
and fax traffic over our network for RSL Communications, Ltd., our parent
company, and other telecommunications carriers. As a result, historically, most
of our revenues have been generated from services provided to RSL COM and other
carriers.
We market our services through relationships we have developed with leading
Internet companies and Web portals, such as CBS.com, Sony.com and Xoom.com, to
create "communications centers" on their Web sites. In addition, we have
developed a unique on-line agent program, in which our agents market our
services through their own Web sites. To date, we have established relationships
with more than 790 on-line agents. We also have entered into distribution and
marketing arrangements with communications equipment and software companies such
as Ericsson.
1
<PAGE>
OUR STRATEGY
Our goal is to be a leading provider of enhanced IP communications services
and to make our interactive communications portal the leading one-stop solution
for communications needs. To achieve our goal, we intend to:
o build strong recognition of the deltathree.com brand through aggressive
marketing efforts
o expand and enhance our service offerings
o ensure a high-quality user experience
o establish additional sources of revenue
o pursue strategic acquisitions and alliances
OUR HISTORY AND PARENT COMPANY
We were incorporated in November 1996 as a Delaware corporation. In July
1997, RSL COM, a global facilities-based telecommunications company, acquired a
controlling 51% interest in us. By April 1998, RSL COM had acquired the
remaining 49% interest in us from existing shareholders, and we became a wholly-
owned subsidiary of RSL COM. After this offering, RSL COM's shares of our
Class B common stock will represent approximately % of the combined voting
power of all classes of our capital stock and approximately % of the economic
interest in our company. For more information about our relationship with RSL
COM and certain services they provide to us, see the section of this prospectus
entitled "Related Party Transactions--RSL COM."
Our executive offices are located at 430 Park Avenue, Suite 500, New York,
New York 10022, where our telephone number is (212) 588-3670. Our Web site is
www.deltathree.com. The information contained on our Web site does not
constitute a part of this prospectus.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered ......................... shares
Capital stock to be outstanding after
this offering:
Common stock................................ shares
Class B common stock........................ shares
Total capital stock...................... shares
Over-allotment option......................... shares of common stock
Use of proceeds............................... We estimate that the net proceeds from this offering will be
approximately $ million. We intend to use the net proceeds for
working capital requirements, capital expenditures and general
corporate purposes. We expect to use a portion of the net proceeds
to develop additional enhanced IP communications services, fund
advertising and marketing activities and pursue strategic and
marketing alliances.
Voting rights:
Common stock................................ One vote per share
Class B common stock........................ Ten votes per share. Upon completion of this offering, RSL COM
will be the only holder of our Class B common stock.
Conversion of Class B common stock............ Each share of Class B common stock is convertible into one share
of common stock at any time and automatically converts into common
stock upon transfer, other than to permitted transferees.
Other capital stock provisions................ The holders of common stock and Class B common stock have
identical rights except with respect to voting and transfer.
Proposed Nasdaq National Market symbol .... .. "DDDC"
</TABLE>
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present summary consolidated financial data derived
from our consolidated financial statements. You should read this along with the
sections of this prospectus entitled "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------ ----------------------
1996 1997 1998 1998 1999
------------------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 1 $ 1,246 $ 5,638 $ 2,171 $ 4,243
Costs and operating expenses.............. 179 3,576 12,796 5,243 10,260
------- ------- ------- ------- -------
Loss from operations...................... (178) (2,330) (7,158) (3,072) (6,017)
Interest expense, net..................... -- (38) (186) 66 (757)
Minority interests........................ -- -- 223 -- --
------- ------- ------- ------- -------
Net loss.................................. $ (178) $(2,368) $(7,121) $(3,006) $(6,774)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loss per share--basic and diluted..... $ (0.07) $ (0.47) $ (0.92) $ (0.39) $ (0.86)
Weighted average shares outstanding--
basic and diluted....................... 2,584 4,986 7,749 7,622 7,876
</TABLE>
The as adjusted balance sheet data gives effect to this offering of common
stock.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,396
Working capital (deficiency)........................................................... (2,656)
Total assets........................................................................... 24,452
Long-term debt due to affiliates....................................................... 9,616
Total stockholders' equity............................................................. 7,723
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock.
If we do not successfully address any of the risks described below, there
could be a material adverse effect on our business, financial condition or
results of operations, and the trading price of our common stock may decline and
you may lose all or part of your investment. We cannot assure you that we will
successfully address these risks.
RISKS RELATED TO OUR COMPANY
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE US
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations in June 1996. We do not have
historical financial data for any significant period of time on which you can
base an evaluation of our performance and an investment in our common stock. You
should consider our prospects in light of the risks, expenses and difficulties
we may encounter as an early stage company in the new and rapidly evolving
market for IP communications services.
OUR BUSINESS STRATEGY TO EXPAND OUR REVENUE SOURCES MAY NOT BE PROFITABLE
Our business strategy is to expand our revenue sources to enhanced IP
communications services and advertising on the Internet. We can neither assure
you that we will be able to do this or that providing these services will be
profitable. Currently our revenues are primarily generated from carrier
transmission services for RSL COM and other telecommunication carriers. In the
future, we intend to generate increased revenues from multiple sources, many of
which are unproven, including the commercial sale of enhanced IP communications
services and advertising on the Internet. We expect our revenues for the
foreseeable future will be dependent on, among other factors:
o sale of enhanced IP communications services
o acceptance and use of Internet communications
o continued rapid growth of the Internet consumer market
o expansion of service offerings
o user traffic levels
o the effect of competition, regulatory environment, international long
distance rates and access and transmission costs on our prices
o sale of carrier transmission services
o continued improvement of our global network quality
o sale of Internet advertising
We may not be able to sustain our current revenues or successfully generate
revenues from the sale of carrier transmission services, enhanced IP
communications services and advertising on the Internet in the future.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR SERVICES WILL DEVELOP
We are uncertain whether a market will develop for our enhanced IP
communications services. Our market is new and rapidly evolving. Our ability to
sell our services to new users may be inhibited by, among other factors, the
reluctance of some users to switch from traditional communications carriers to
IP communications carriers and by concerns with the quality of Internet and IP
telephony and adequacy of security in the exchange of information over the
Internet. Users in markets serviced by recently deregulated telecommunications
providers are not familiar with obtaining services from competitors of these
providers and may be reluctant to use new providers, such as our company. Our
ability to increase revenues from enhanced IP communications services depends on
the migration of traditional telephone network traffic to our IP network. We
will need to devote substantial resources to educate users about the benefits of
IP communications solutions in general and our services in particular. Many
potential users who have already invested substantial resources in traditional
telephone service may be reluctant or slow to adopt a new
5
<PAGE>
technology that makes their existing equipment obsolete. If users do not accept
our enhanced IP communications services as a means of sending and receiving
communications we will not be able to increase our number of users or
successfully generate revenues in the future.
OUR FUTURE SUCCESS DEPENDS ON THE CONTINUED GROWTH IN THE USE OF THE INTERNET AS
A MEANS OF COMMUNICATIONS
If the market for IP communications, in general, and our services in
particular, does not grow at the rate we anticipate, we will not be able to
increase our number of users or generate revenues from our enhanced IP
communications services or from advertising on the Internet at the rate we
anticipate. We currently rely on revenues generated primarily from the sale of
carrier transmission services but expect in the future to increasingly rely on
revenues generated from enhanced IP communications services and from advertising
on the Internet. To be successful, IP communications requires validation as an
effective, quality means of communication and as a viable alternative to
traditional telephone service. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The Internet may not prove to be a
viable alternative to traditional telephone service for reasons including:
o inconsistent quality or speed of service
o traffic congestion on the Internet
o potentially inadequate development of the necessary infrastructure
o lack of acceptable security technologies
o lack of timely development and commercialization of performance
improvements
o unavailability of cost-effective, high-speed access to the Internet
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our
communications portal and our services, could be adversely affected.
IF WE DO NOT DEVELOP THE DELTATHREE.COM BRAND, WE MAY NOT BE ABLE TO IMPLEMENT
OUR STRATEGY OF BECOMING A LEADING COMMUNICATIONS PORTAL
To become a leading communications portal, we must establish and strengthen
the brand awareness of the deltathree.com brand. If we fail to create and
maintain brand awareness, it could adversely affect our ability to attract
sufficient Web traffic and reduce our attractiveness to advertisers. Brand
recognition may become more important in the future with the growing number of
Internet sites and IP communications providers.
IF WE FAIL TO ESTABLISH STRATEGIC ALLIANCES, WE MAY NOT BE ABLE TO SUFFICIENTLY
INCREASE OUR SALES
We believe that our success depends, in part, on our ability to develop and
maintain strategic alliances with leading Internet companies and communications
equipment and software companies that will market and promote our services and
build brand awareness. If we are unable to establish and maintain these
relationships, we may not be able to increase sales of our services, and we may
lose users.
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE OUR LOSSES WILL CONTINUE
We have incurred significant losses since inception, and we expect to
continue to incur significant losses for the foreseeable future. We reported a
net loss of approximately $6.8 million for the six months ended June 30, 1999
and a net loss of approximately $7.1 million for the year ended December 31,
1998. As of June 30, 1999, our accumulated deficit was approximately $16.4
million. Our revenues may not continue to grow or even continue at their current
level. In addition, we expect our operating expenses and capital expenditures to
increase significantly as we develop and expand our business. As a result, we
will need to increase our revenues significantly to become profitable. In order
to increase our revenues, we need to add users, thereby increasing the fees and
usage charges that we collect and enabling us to generate additional
6
<PAGE>
advertising revenues. If our revenues do not increase as much as we expect or if
our expenses increase at a greater pace than revenues, we may never be
profitable or, if we become profitable, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE
We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for service
quality, capacity and competitive pricing. Also, the introduction of our new
enhanced IP communications services will require significant marketing and
promotional expenses that we often incur before we begin to receive the related
revenue. If our cash flow from operations is not sufficient to meet our capital
expenditure and working capital requirements, we will need to raise additional
capital from other sources. The indentures governing certain outstanding
indebtedness of RSL COM restrict our ability to incur indebtedness.
Consequently, if we are unable to raise additional capital through the issuance
of equity, we may need to rely upon RSL COM to provide any additional capital to
meet our working capital and capital expenditure requirements and we cannot
assure you that RSL COM or any other third party will be willing or able to
provide additional capital on favorable terms. If we are unable to obtain
additional capital, we may be required to reduce the scope of our business or
our anticipated growth, which would reduce our revenues.
WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY
We have grown and expect to continue to grow rapidly. This growth has
placed, and is likely to continue to place, a significant strain on our
managerial, operational and financial resources. To manage our growth, we must
continue to implement and improve our operational and financial systems, as well
as our managerial controls and procedures. We cannot assure you that we have
made adequate allowances for the costs and risks associated with this expansion,
that our systems, procedures or controls will be adequate to support our
operations or that our management will be able to successfully offer and expand
our services. If we are unable to effectively manage our expanding operations,
our revenues may not increase, our cost of operations may rise and we may not be
profitable.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE IT DIFFICULT FOR
INVESTORS TO PREDICT OUR FUTURE PERFORMANCE
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
These factors include:
o the rate at which we are able to attract users to purchase our enhanced
IP communications services
o the amount and timing of expenses to enhance marketing and promotion
efforts and to expand our infrastructure
o the announcement or introduction of new or enhanced services by us or our
competitors
o technical difficulties or network interruptions
o general economic and competitive conditions specific to our industry
We believe that quarter-to-quarter comparisons of our historical operating
results may not be a good indication of our future performance, nor would our
operating results for any particular quarter be indicative of our future
operating results. It is likely that in some future periods our operating
results may be below the expectations of public market analysts and investors.
If this happens, the trading price of our common stock may fall.
WE DEPEND ON A LIMITED NUMBER OF THIRD PARTIES FOR THE OPERATION OF OUR BUSINESS
We rely on a limited number of third parties, including our suppliers,
telecommunications carriers and marketing partners, for the operation of our
business. Our operations would be impaired if we are unable to obtain the
services and products of the third parties upon which we are dependent.
7
<PAGE>
Suppliers
We are dependent upon our suppliers of equipment, hardware and software to
develop and maintain our network and services. In particular, we are dependent
on LM Ericsson Telephone Company for the supply of Internet gateway switches.
Should our suppliers cease to supply us with the equipment, hardware and
software necessary for the operation of our network or to maintain our current
network equipment, we may not be able to identify and integrate alternative
sources of supply in a timely fashion. Any transition to alternate suppliers
would likely result in delays, operational problems or increased expenses and
may limit our ability to provide services to our users or expand our operations.
Telecommunications Carriers
We do not own any domestic or international communications lines. All of
our services are provided through leased transmission lines and facilities.
Consequently, we rely and will continue to rely on third party
telecommunications carriers for leased transmission lines and facilities. We
also rely on carriers to terminate our traffic. We do not have long-term
contracts with these carriers. If any of these carriers raise their rates,
change their pricing structure, provide us with a reduced amount of capacity,
cease to provide the services that they currently provide to us on similar terms
or suffer operational problems or failure, and we are unable to find a
replacement carrier offering comparable terms in a timely manner, our services
may be disrupted, our cost of operations may rise and we may not be profitable.
Marketing Partners
We depend, in part, on third parties to market our services. Most of these
parties do not market our services on an exclusive basis. As a result, we cannot
assure you that these parties will devote sufficient efforts to selling our
services.
OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
WE FACE A RISK OF FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS USED IN OUR
BUSINESS
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems in five facilities in New York, Los
Angeles, London, Frankfurt and Jerusalem. Our systems and those that connect to
our network are subject to disruption from natural disasters or other sources of
power loss, communications failure, hardware or software malfunction, network
failures and other events both within and beyond our control. At times, we have
experienced system disruptions which temporarily prevented users from using our
services. Any system interruptions that cause our services to be unavailable,
including significant or lengthy telephone network failures or difficulties for
users in communicating through our network or portal, could damage our
reputation and result in a loss of users.
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OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES
Our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches which could cause interruptions, delays or loss of services to
our users. We believe that the secure transmission of confidential information
over the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
We cannot guarantee you that our security measures will prevent security
breaches.
OUR FUTURE SUCCESS DEPENDS ON OUR KEY MANAGEMENT AND TECHNICAL PERSONNEL
Our future success depends in significant part on the continued service of
our senior management team and key technical personnel, as well as our
continuing ability to attract and retain highly qualified technical, sales and
managerial personnel. Competition for such personnel is intense, and we cannot
assure you that we can retain our key employees or that we can attract,
assimilate or retain other highly qualified technical, sales and managerial
personnel. We do not carry key person life insurance on any of our senior
management personnel. The inability to attract and retain qualified personnel
would substantially impair our ability to manage our operations and growth.
Our chief executive officer and chief financial officer joined us in 1999.
In addition, we have recently hired and plan to hire additional technical
personnel. These individuals have not previously worked together and are
becoming integrated as management and technology teams. As a result, our senior
managers and technical personnel may not work together effectively as a team to
successfully manage our growth.
YEAR 2000 COMPLICATIONS MAY HARM OUR BUSINESS
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for system failures encompasses all aspects of our business, including
our computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our Web site and a temporary
inability to engage in normal business activities.
Based on our internal testing, we are not currently aware of any Year 2000
compliance issues relating to our systems that would cause disruptions in our
operations or impede our ability to provide services to our users. We cannot
predict the extent to which the Year 2000 issue will affect our users, vendors,
suppliers or service providers, or the extent to which we would be vulnerable if
such parties fail to resolve any Year 2000 issues on a timely basis. If our
assessment and implementation of Year 2000 compliance is completed without
identifying any material non-compliant systems operated by us or our vendors,
suppliers and service providers, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond our control, such as a prolonged
disruption or failure of the Internet or the telecommunications infrastructure.
Any failures or disruptions could prevent us from operating our network or
prevent users from accessing our Web site and services, which could result in
loss of users, lost revenues, increased operating costs and material disruptions
in the operation of our business.
OUR PROFITABILITY COULD SUFFER IF THIRD PARTIES INFRINGE UPON OUR PROPRIETARY
TECHNOLOGY
Our profitability could suffer if third parties infringe upon our
intellectual property rights or misappropriate our technologies and trademarks
for their own businesses. To protect our rights to our intellectual property, we
rely on a combination of trademark and patent law, trade secret protection,
confidentiality agreements and other contractual arrangements with our
employees, affiliates, strategic partners and others. We do not currently own
any issued patents or trademarks. We have pending applications for
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<PAGE>
trademarks and patents in the United States and some foreign countries. The
protective steps we have taken may be inadequate to deter misappropriation of
our proprietary information. We may be unable to detect the unauthorized use of,
or take appropriate steps to enforce, our intellectual property rights.
Effective trademark, copyright and trade secret protection may not be available
in every country in which we offer or intend to offer our services. Failure to
adequately protect our intellectual property could harm our brand, devalue our
proprietary content and affect our ability to compete effectively. Further,
defending our intellectual property rights could result in the expenditure of
significant financial and managerial resources.
OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties may assert claims that we have violated a patent or infringed
a copyright, trademark or other proprietary right belonging to them. We
incorporate licensed third-party technology in some of our services. In these
license agreements, the licensors have generally agreed to indemnify us with
respect to any claim by a third party that the licensed software infringes any
patent or other proprietary right. We cannot assure you that these provisions
will be adequate to protect us from infringement claims. Any infringement
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS
We intend to continue to enter additional markets and to expand our
operations outside the United States. International operations are subject to
inherent risks, including:
o potentially weaker protection of intellectual property rights
o political instability
o unexpected changes in regulatory requirements and tariffs
o fluctuations in exchange rates
o varying tax consequences
o uncertain market acceptance due to language differences and other factors
WE HAVE EXPERIENCED LOSSES AS A RESULT OF FRAUD
We have experienced losses due to fraud. Callers have obtained our services
without rendering payment by unlawfully using our access numbers and personal
identification numbers. Although we have implemented anti-fraud measures in
order to control losses relating to these practices, these measures may not be
sufficient to effectively limit our exposure in the future from fraud. While we
have established reserves for bad debts in accordance with historical levels of
uncollectible receivables resulting primarily from these fraudulent practices,
our losses may exceed our reserves and could rise significantly above
anticipated levels.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
Competition in the market for enhanced IP communications services and
carrier transmission services is becoming increasingly intense and is expected
to increase significantly in the future. We expect that competition from
companies both in the Internet and telecommunications industries will increase
in the future. Many of our existing competitors and potential competitors have
longer operating histories, broader portfolios of services, greater financial,
management and operational resources, greater brand-name recognition and
customer loyalty, larger subscriber bases and more experience than we have.
If we are unable to provide competitive service offerings, we may lose
existing users and be unable to attract additional users. In addition, many of
our competitors enjoy economies of scale that can result in a lower cost
structure for transmission and related costs, which could cause significant
pricing pressures within the industry.
In addition to these competitive factors, recent and pending deregulation
in some of our markets may encourage new entrants. We cannot assure you that
additional competitors will not enter markets that we plan to serve or that we
will be able to compete effectively.
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<PAGE>
DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR COMPETITIVE
PRICING ADVANTAGE
Decreasing telecommunications rates may diminish or eliminate the
competitive pricing advantage of our enhanced IP communications services and
carrier transmission services. International and domestic telecommunications
rates have decreased significantly over the last few years in most of the
markets in which we operate, and we anticipate that rates will continue to be
reduced in all of the markets in which we do business or expect to do business.
Users who select our enhanced IP communications services to take advantage of
the current pricing differential between traditional telecommunications rates
and our rates may switch to traditional telecommunications carriers as such
pricing differentials diminish or disappear, and we will be unable to use such
pricing differentials to attract new customers in the future. In addition, our
ability to market our carrier transmission services to telecommunications
carriers depends upon the existence of spreads between the rates offered by us
and the rates offered by traditional telecommunications carriers, as well as a
spread between the retail and wholesale rates charged by the carriers from which
we obtain wholesale service. Continued rate decreases will require us to lower
our rates to remain competitive and will reduce or possibly eliminate our gross
profit from our carrier transmission services. If telecommunications rates
continue to decline, we may lose users for our enhanced IP communications
services and carrier transmission services.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO INTERNET TELEPHONY
COULD HARM OUR BUSINESS
Traditionally, voice communications services have been provided by
regulated telecommunications common carriers. We offer voice communications to
the public for international and domestic calls using IP telephony, and we do
not operate as a licensed telecommunications common carrier in any jurisdiction.
We may qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the legal status of our services is
generally uncertain and may be subject to change as a result of future
regulatory action, judicial decisions or legislation in any of the jurisdictions
in which we operate.
Established regulated telecommunications carriers have sought and may
continue to seek regulatory actions to restrict the ability of companies such as
our company to provide services or to increase the cost of providing such
services. In addition, regulators may distinguish phone-to-phone telephony
service using IP technologies over privately-managed networks such as our
services from integrated PC-to-PC and PC-originated voice services over the
Internet, and treat the former as regulated common carrier services and the
latter as unregulated enhanced or information services.
Application to us of new regulatory restrictions or requirements could
increase our costs of doing business and prevent us from delivering our services
by our current arrangements. In such event, we would consider a variety of
alternative arrangements for providing our services, including obtaining
appropriate regulatory authorizations for our local network partners or
ourselves, changing our service arrangements with RSL COM for a particular
country or limiting our service offerings. Such regulations could limit our
service offerings, raise our costs and restrict our pricing flexibility, and
potentially limit our ability to compete effectively. Further, regulations and
laws which affect the growth of the Internet could hinder our ability to provide
our services over the Internet.
WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE
COMMUNICATIONS INDUSTRY
Our industry is subject to rapid technological change. We cannot predict
the effect of technological changes on our business. In addition, widely
accepted standards have not yet developed for the technologies we use. We expect
that new services and technologies will emerge in the market in which we
compete. These new services and technologies may be superior to the services and
technologies that we use, or these new services may render our services and
technologies obsolete.
To be successful, we must adapt to our rapidly changing market by
continually improving and expanding the scope of services we offer and by
developing new services and technologies to meet customer needs. Our success
will depend, in part, on our ability to license leading technologies and respond
to
11
<PAGE>
technological advances and emerging industry standards on a cost-effective and
timely basis. We will need to spend significant amounts of capital to enhance
and expand our services to keep pace with changing technologies.
RISKS RELATED TO OUR RELATIONSHIP WITH RSL COM
WE DEPEND ON SALES TO RSL COM
We currently depend on sales to RSL COM, our controlling stockholder, for a
substantial majority of our revenues. RSL COM accounted for 37.6%, 69.1% and
72.7% of our revenues for the years ended December 31, 1997 and December 31,
1998 and for the six months ended June 30, 1999. RSL COM is not contractually
required to purchase services from us. RSL COM resells a significant portion of
the carrier transmission services it purchases from us to third parties.
Although we could market our services directly to these third parties if RSL COM
ceased purchasing services from us, we cannot assure you that we would succeed
in attracting these customers or that these customers would purchase our
services in the same volume or on the same terms as from RSL COM.
WE DEPEND ON THE SERVICES RSL COM PROVIDES TO US
We are currently dependent upon RSL COM for leased line capacity, data
communications facilities, traffic termination services and physical space for
our equipment. Through our relationship with RSL COM, which owns or leases
substantial bandwidth for its own business, we have access to bandwidth. We are
able to take advantage of RSL COM's volume discounts and achieve cost
efficiencies that we could not achieve on our own. Although we have entered into
a services agreement with RSL COM for it to provide these services through 2004,
if RSL COM becomes unwilling or unable to provide its current level of services
to us during the term of such agreement or thereafter, we may not be able to
find replacement service providers on a timely basis. If we are required to
change providers, we would likely experience delays, operational difficulties
and increased expenses, and our ability to provide services to our users or
expand our operations may be impaired.
RSL COM HAS SIGNIFICANT CONTROL OVER OUR COMPANY
After completion of this offering, RSL COM will own all of our Class B
common stock and will therefore own approximately % of the voting power of our
company, or approximately % of the voting power if the underwriters'
over-allotment option is exercised in full.
As long as RSL COM continues to beneficially own shares of capital stock
representing more than 50% of the voting power of our outstanding capital stock,
RSL COM will be able to exercise a controlling influence over decisions
affecting our company, including:
o composition of our board of directors and, through it, the direction and
policies of our company, including the appointment and removal of
officers
o mergers or other business combinations involving our company
o acquisitions or dispositions of assets by our company
o future issuances of capital stock or other securities by our company
o incurrence of debt by our company
o amendments, waivers and modifications to any agreements between us and
RSL COM
o payment of dividends on our capital stock
o approval of our business plans and general business development
In addition, four of our six directors are officers and/or directors of RSL COM.
As a result, the ability of any of our other stockholders to influence the
management of our company is limited, which could have an adverse effect on the
market price of our stock.
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<PAGE>
WE ARE SUBJECT TO THE COVENANTS OF RSL COM'S INDENTURES WHICH RESTRICT OUR
ABILITY TO CONDUCT OUR BUSINESS
We are subject to covenants by reason of our status as a restricted
subsidiary of RSL COM under the indentures that govern a substantial amount of
RSL COM's debt. These restrictions significantly limit the ability of RSL COM
and its restricted subsidiaries, including our company, to incur additional
indebtedness or create liens on their assets. Effectively, our ability to incur
indebtedness is limited by the amount of indebtedness that RSL COM and its
restricted subsidiaries, including our company, are permitted to incur under the
indentures. In addition, such restrictions also limit our ability to pay
dividends or make other distributions in respect of our capital stock, sell
assets, engage in mergers or acquisitions or make some types of investments.
Such restrictions also limit the ability of a third party to acquire a
controlling interest in our company. These restrictions may prohibit
transactions that would otherwise be beneficial to our company.
THE INTERESTS OF RSL COM MAY CONFLICT WITH OUR INTERESTS
The interests of RSL COM, our controlling stockholder and principal
customer, may conflict with our interests. We have entered into a services
agreement with RSL COM for the provision of traffic termination services,
colocation rights and other network support services. We provide carrier
transmission services to RSL COM. Because of these transactions and RSL COM's
controlling position in our company, conflicts of interest could arise relating
to the nature, quality and pricing of services or products provided by us to RSL
COM or by RSL COM to us, any payment of dividends by us to RSL COM, any
prepayment of the borrowings by us from RSL COM and general issues relating to
maintaining or increasing our profitability.
Four of our six directors are officers and/or directors of RSL COM. Our
directors who are also directors or officers of RSL COM will have obligations to
both companies and may have conflicts of interest with respect to matters
potentially or actually involving or affecting us, such as acquisitions,
financings or other corporate opportunities that may be suitable for both us and
RSL COM. Some of these individuals and a number of our executive officers own
substantial amounts of RSL COM capital stock and/or options for shares of RSL
COM capital stock. Although we believe that these directors and officers will be
able to fulfill their fiduciary duties to our stockholders despite their
positions with RSL COM and their ownership of RSL COM capital stock and options,
there could be potential conflicts of interest when these directors and officers
are faced with decisions that could have different implications for our company
and RSL COM.
RSL COM MAY COMPETE WITH OUR COMPANY
RSL COM is in the communications business. Under the services agreement
between us and RSL COM, RSL COM is prohibited from competing with us in
providing Internet telephony services as described in the services agreement.
However, this non-competition provision terminates on the second anniversary of
the date of the services agreement and the scope of such provision is subject to
important limitations set forth in the services agreement. For a description of
the terms of the non-competition provision, see "Related Party Transactions--RSL
COM--Services Agreement--Non-Competition."
RSL COM'S CLASS B COMMON STOCK MAY BE TRANSFERRED TO A THIRD PARTY THAT WOULD
EFFECTIVELY CONTROL US
Although our Class B common stock generally converts to common stock
automatically upon transfer, RSL COM may transfer our Class B common stock to
permitted transferees, including entities controlled by RSL COM or its principal
stockholder, Ronald S. Lauder, and successors in interest of RSL COM. As a
result, a third party could acquire our Class B common stock and may become
party to our intercompany agreements. We cannot assume that a third party would
maintain good relations with us or maintain or renew our agreements with RSL
COM.
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RISKS RELATED TO THIS OFFERING
FUTURE SALES OF CAPITAL STOCK MAY ADVERSELY AFFECT OUR STOCK PRICE
Future sales of capital stock in the market after this offering or the
perception that such sales could occur may adversely affect the market price of
our stock and make it difficult for us to raise additional capital through the
sale of equity at prices acceptable to us. Following this offering, we will have
approximately shares of common stock and shares of
Class B common stock outstanding, or approximately shares of common stock
and shares of Class B common stock outstanding if the
underwriters exercise their over-allotment option in full. Of these shares,
persons other than our affiliates (as this term is defined under the Securities
Act, and which includes RSL COM) may freely transfer the shares of common stock
sold in this offering without restriction or further registration under the
Securities Act. However, we have given RSL COM both demand and piggyback
registration rights with respect to common stock into which Class B common stock
will convert. For more information about these registration rights, see "Related
Party Transactions--Registration Rights Agreement."
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. We, RSL COM and all of our officers and directors have
agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and holders of options to purchase our common stock on
the closing of this offering (other than those subject to the 180-day lock-up)
will be prohibited from disposing shares of common stock for a period of
90 days after the date of this prospectus. Shares of capital stock subject to
these lock-up agreements will become eligible for sale in the public market upon
expiration of these lock-up agreements, subject to limitations imposed by Rule
144 under the Securities Act for holders who are our affiliates.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER SHARE
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $ per share, if you purchase our common stock in
this offering, you will incur immediate dilution of approximately $ in the
net tangible book value per share of common stock from the price you pay for our
common stock in this offering.
A THIRD PARTY MAY BE DETERRED FROM ACQUIRING OUR COMPANY
The disproportionate voting rights of our Class B common stock relative to
our common stock could delay, deter or prevent a third party from attempting to
acquire control of us. This provision may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of our company, even though such a change in ownership would be economically
beneficial to our company and our stockholders.
WE CANNOT GUARANTEE THAT A TRADING MARKET WILL DEVELOP FOR OUR COMMON STOCK
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiation between the representative of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
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<PAGE>
POSSIBLE VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as:
o actual or anticipated variations in our quarterly operating results or
those of our competitors
o announcements by us or our competitors of technological innovations
o new products or services
o changes in financial estimates by securities analysts
o conditions or trends in the Internet industry
o changes in the market valuations of other Internet companies
o announcements by us or our competitors of significant acquisitions
o strategic partnerships or joint ventures
o additions or departures of key personnel
o sales of our capital stock
Many of these factors are beyond our control and may materially adversely affect
the market price of our common stock regardless of our performance.
Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. The trading prices of many Internet-related and technology companies'
stocks have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During the same
period, such companies' stocks have also been highly volatile and have recorded
lows well below such historical highs. We cannot assure you that our stock will
trade at the same levels of other Internet stocks or that Internet stocks in
general will sustain their current market prices.
WE DO NOT INTEND TO PAY DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance our operations and to expand our
business and, therefore, do not expect to pay any cash dividends in the
foreseeable future. In addition, indentures governing outstanding indebtedness
of RSL COM restrict our ability to declare or pay cash dividends, and, for the
foreseeable future, effectively prohibit such payments or declarations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things: e-commerce strategy; communications strategy; development of
services; expansion strategy; use of proceeds; projected capital expenditures;
liquidity; development of additional revenue sources; development and expansion
of alliances; market acceptance of Internet telephony; technological
advancement; ability to develop "brand" awareness and global expansion. These
statements may be found in the sections of this prospectus entitled "Prospectus
Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" and in
this prospectus generally. Our actual results could differ materially from those
anticipated in these forward-looking statements as of result of various factors,
including all the risks discussed in "Risk Factors" and elsewhere in this
prospectus.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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Market data and forecasts used in this prospectus, including, for example,
estimates of growth in the Internet, have been obtained from independent
industry sources. Although we believe these sources are reliable, we do not
guarantee the accuracy and completeness of historical data obtained from these
sources, and we have not independently verified these data. Forecasts and other
forward-looking information obtained from these sources are subject to the same
qualifications and the additional uncertainties accompanying any estimates of
future market size.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares of common stock will be approximately $ million
(approximately $ if the underwriters exercise their over-allotment option
in full) after deducting the underwriting discount and estimated expenses of
this offering.
We expect to use the net proceeds from this offering for working capital
requirements, capital expenditures and general corporate purposes. We expect
that we will use a portion of the net proceeds to develop additional enhanced IP
communications services, fund advertising and marketing activities and pursue
strategic and marketing alliances. As of the date of this prospectus, we have
not made any specific expenditure plans with respect to the proceeds of this
offering and, accordingly, we cannot specify with certainty the allocation of
the net proceeds we will have upon completion of this offering.
Pending such uses, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance our operations and to expand our business. In addition, indentures
governing outstanding indebtedness of RSL COM restrict our ability to declare or
pay cash dividends, and, for the foreseeable future, effectively prohibit such
payments or declarations. Any future determination to pay cash dividends will be
at the discretion of our board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that our board of directors considers appropriate.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
o on an actual basis
o on an as adjusted basis to give effect to:
o the amendment of our certificate of incorporation to provide for two
classes of common stock (common stock and Class B common stock) and
preferred stock
o the conversion of each share of our existing common stock into one
share of Class B common stock
o the sale of shares of common stock offered by us in this offering
at an assumed initial public offering price of $ per share
after deducting the underwriting discount and estimated expenses of
this offering
The table excludes shares of common stock issuable upon the exercise of
options outstanding as of June 30, 1999 under our 1999 Stock Incentive Plan and
our 1999 Directors' Plan at a weighted average exercise price of $ per share.
Please read this table together with the sections of this prospectus
entitled "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................................... $ 1,396
--------- ---------
--------- ---------
Long-term debt due to affiliates........................................................ $ 9,616
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value per share;
no shares authorized (actual) and shares authorized (as adjusted); no shares
issued and outstanding (actual and as adjusted).................................... -
Common stock, $0.001 par value per share;
20,000,000 shares authorized (actual) and shares authorized (as adjusted);
7,875,554 shares issued and outstanding (actual) and shares issued and
outstanding (as adjusted).......................................................... 8
Class B common stock, $0.001 par value per share;
no shares authorized (actual) and shares authorized (as adjusted); no shares
issued and outstanding (actual) and shares issued and outstanding (as
adjusted).......................................................................... -
Additional paid-in capital.............................................................. 33,828
Deferred compensation................................................................... (9,672)
Accumulated deficit..................................................................... (16,441)
--------- ---------
Total stockholders' equity............................................................ 7,723
--------- ---------
Total capitalization............................................................... $ 17,339
--------- ---------
--------- ---------
</TABLE>
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DILUTION
As of June 30, 1999, our consolidated net tangible book value was $ , or
$ per share of capital stock. "Consolidated net tangible book value per share"
represents the total amount of our consolidated tangible assets reduced by the
amount of our consolidated liabilities and divided by the number of shares of
capital stock outstanding. After giving effect to the sale of shares of
common stock in this offering and application of the net proceeds from this
offering, after deducting estimated underwriting discount and estimated expenses
of this offering, our consolidated net tangible book value at June 30, 1999
would have been approximately $ , or $ per share. This represents an immediate
increase in consolidated net tangible book value of approximately $ per share
to RSL COM and an immediate dilution of $ per share to new investors.
"Dilution per share" represents the difference between the price per share
to be paid by new investors and the consolidated net tangible book value per
share immediately after this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............................ $
Consolidated net tangible book value per share at June 30, 1999..........
Increase in consolidated net tangible book value per share attributable
to new investors......................................................
Consolidated net tangible book value per share after this offering.........
------------
Dilution per share to new investors........................................ $
------------
------------
</TABLE>
The following table summarizes, as of June 30, 1999, the differences
between the total consideration paid and the average price per share paid by RSL
and the new investors with respect to the number of shares of common stock
purchased from us. The table excludes shares of common stock issuable
upon the exercise of options outstanding as of June 30, 1999 under our 1999
Stock Incentive Plan and our 1999 Directors' Plan at a weighted average exercise
price of $ per share.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ----------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
RSL COM..................................................... % $ % $
New investors...............................................
---- ----- ---- -----
Total..................................................... 100.0% $ 100.0%
---- ----- ---- -----
---- ----- ---- -----
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated financial data presented below from
our consolidated financial statements and related notes included in this
prospectus. You should read the selected consolidated financial data together
with our consolidated financial statements and related notes and the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, independent certified public accountants, audited our
historical financial statements for the period June 1996 (inception) through
December 31, 1996 and as of and for the years ended December 31, 1997 and 1998.
Their report appears elsewhere in this prospectus. The selected balance sheet
data as of December 31, 1996 is derived from an audited financial statement not
included in this prospectus.
Statement of operations data and balance sheet data as of and for the six
months ended June 30, 1998 and 1999 have been derived from our unaudited
consolidated financial statements that have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
these periods. Operating results for the six months ended June 30, 1998 and 1999
are not necessarily indicative of the results that may be expected for the full
year.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 YEAR ENDED DECEMBER SIX MONTHS ENDED
(INCEPTION) TO 31, JUNE 30,
DECEMBER 31, ------------------- -------------------
1996 1997 1998 1998 1999
--------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Affiliates....................................... $ -- $ 468 $ 3,896 $ 1,210 $ 3,086
Non-affiliates................................... 1 778 1,742 961 1,157
--------- ------- ------- ------- -------
Total revenues................................. 1 1,246 5,638 2,171 4,243
Costs and operating expenses:
Cost of revenues................................. -- (1,065) (4,657) (1,738) (3,314)
Research and development expenses................ -- (294) (651) (549) (429)
Selling and marketing expenses................... -- (632) (2,431) (918) (1,461)
General and administrative expenses.............. (179) (1,388) (1,842) (596) (1,414)
Non-cash compensation expense.................... -- -- (743) (485) (2,126)
Amortization of goodwill......................... -- (197) (2,472) (957) (1,516)
--------- ------- ------- ------- -------
Total costs and operating expenses............. (179) (3,576) (12,796) (5,243) (10,260)
--------- ------- ------- ------- -------
Loss from operations............................... (178) (2,330) (7,158) (3,072) (6,017)
Interest income (expense), net..................... -- (38) (186) 66 (757)
Minority interests................................. -- -- 223 -- --
--------- ------- ------- ------- -------
Net loss........................................... $ (178) $(2,368) $(7,121) $(3,006) $(6,774)
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Net loss per share--basic and diluted.............. $ (0.07) $ (0.47) $ (0.92) $ (0.39) $ (0.86)
Weighted average shares outstanding--basic and
diluted.......................................... 2,584 4,986 7,749 7,622 7,876
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
---- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $130 $ 3,196 $ 1,357 $ 1,346 $ 1,396
Working capital (deficiency)............................... 70 2,763 (3,232) 427 (2,656)
Total assets............................................... 396 8,403 25,676 18,987 24,452
Long-term debt due to affiliates........................... 344 -- 5,107 -- 9,616
Total stockholder's equity (deficiency).................... (30) 6,272 12,370 16,227 7,723
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in those forward-looking statements as a result of certain factors, including
those set forth in the section of this prospectus entitled "Risk Factors."
OVERVIEW
We are a leading provider of IP telephony services and other enhanced,
Web-based communications services to individuals and businesses worldwide. We
were founded in June 1996 to capitalize on the growth of the Internet as a
communications tool. In July 1997, RSL COM acquired a majority interest in our
company, and in April 1998, we became a wholly-owned subsidiary of RSL COM after
RSL COM acquired the remaining outstanding shares of our capital stock from
third parties.
Since our inception, our primary activities have included:
o developing our business model
o hiring management and other key personnel
o building our IP network
o offering PC-to-phone, phone-to-phone and carrier transmission services
o entering into strategic alliances
o developing new services
o developing our interactive communications portal and customer care center
Since RSL COM's investment in our company in July 1997, we have relied on
RSL COM almost exclusively for our financing needs. With the proceeds of this
offering, we will be less dependent upon RSL COM for our immediate funding
needs. For these and other reasons described in this prospectus, our historical
operating results may not necessarily be indicative of our future operating
performance.
In addition, since RSL COM's investment in our company, we have provided
RSL COM with a majority of our network capacity which has enabled us to maximize
the use of our available network capacity. We currently generate revenues
primarily from carrier transmission services for RSL COM and other
telecommunications carriers. As we continue to expand our marketing and
promotional efforts to target individuals and businesses, we expect this revenue
mix to shift to our enhanced IP communications services, including PC-to-phone,
unified messaging, Click IT, phone-to-phone and global roaming, and thereby
minimize our reliance upon carrier transmission services for our revenues.
Revenues
Revenues are derived from affiliates and non-affiliates. Revenues from
affiliates consist of revenues received from RSL COM for carrier transmission
services we provide to RSL COM. The majority of the services we provide to RSL
COM are resold by RSL COM to other communications companies, and the remainder
are used directly by RSL COM's customers. Revenues from non-affiliates consist
of revenues from carriers other than RSL COM for carrier transmission services
and revenues from users of our enhanced IP communications services, including
PC-to-phone and phone-to-phone. All revenues are recognized as the service is
performed. Revenues are currently derived from usage charges on a per minute
basis.
20
<PAGE>
Costs and Operating Expenses
Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expenses and amortization of goodwill.
o Cost of revenues consist primarily of access, termination and
transmission costs paid to carriers that we incur when providing enhanced
IP communications services and fixed costs associated with leased
transmission lines. During 1998, we incurred extraordinary costs in
integrating the hardware and software purchased from Ericsson into our
network, and anticipate that we will incur additional costs through the
end of 1999. To compensate us for our costs, Ericsson agreed to provide
us at no cost with network telecommunications equipment with a fair
market value of $3 million, representing Ericsson's participation in such
research and development costs, which we recognize as an offset to cost
of revenues and research and development expenses as they are incurred.
o Research and development expenses consist primarily of costs associated
with establishing our network and the initial testing of our services and
compensation expenses of software developers involved in new product
development and software maintenance. In the future, these expenses may
fluctuate as a percentage of revenue depending on the project undertaken
during the reporting period. Since our inception, we have expensed all
research and development costs in each of the periods in which they were
incurred.
o Selling and marketing expenses consist primarily of advertising and
promotional expenses incurred to attract potential users and network
partners. We expect to substantially increase our selling and marketing
expenses as we increase our marketing efforts in order to grow our user
base and increase the frequency of use by our registered users and new
users of our services. We anticipate that as we add new paid users we
will be able to spread these costs over a larger revenue base and
accordingly improve our operating margins.
o General and administrative expenses consist primarily of compensation and
benefits for management, finance and administrative personnel, occupancy
costs, depreciation of fixed assets and legal and accounting fees. We
expect to hire additional personnel and to incur expenses associated with
being a public company, including costs of directors' and officers'
insurance and increased legal and accounting fees.
o Amortization of goodwill consists of amortization of the goodwill related
to the purchase by RSL COM of all of the outstanding shares of our
capital stock. The acquisition of our company by RSL COM has been
accounted for in our consolidated financial statements as an increase in
both goodwill and additional paid-in capital of approximately
$15.2 million. The goodwill is being amortized by us over a five-year
period.
We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to June 30, 1999. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.
We have a diverse global user base for our enhanced IP communications
services. As of September 1, 1999, we had more than 680,000 users worldwide,
approximately 75% of which were located outside the United States.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data presented
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------- ----------------------------------
1997 1998 1998 1999
------ ------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Affiliates............................................................ 37.6% 69.1% 55.7% 72.7%
Non-affiliates........................................................ 62.4 30.9 44.3 27.3
------ ------ ------- -------
Total revenues..................................................... 100.0 100.0 100.0 100.0
Costs and operating expenses:
Cost of revenues...................................................... 85.5 82.6 80.0 78.1
Research and development expenses..................................... 23.6 11.5 25.3 10.1
Selling and marketing expenses........................................ 50.7 43.1 42.3 34.5
General and administrative expenses................................... 111.4 32.7 27.4 33.3
Non-cash compensation expense......................................... -- 13.2 22.4 50.1
Amortization of goodwill.............................................. 15.9 43.9 44.1 35.7
------ ------ ------- -------
Total costs and operating expenses................................. 287.1 227.0 241.5 241.8
------ ------ ------- -------
Loss from operations.................................................... (187.1) (127.0) (141.5) (141.8)
Interest income (expense), net.......................................... (3.0) (3.3) 3.0 (17.8)
Minority interests...................................................... -- 4.0 -- --
------ ------ ------- -------
Net loss................................................................ (190.1)% (126.3)% (138.5)% (159.6)%
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
Affiliates. Revenues from affiliates were $3.1 million for the six months
ended June 30, 1999 compared to $1.2 million for the six months ended June 30,
1998, an increase of $1.9 million, or 155.2%. The increase in revenues from
affiliates was due to an increase in sales of our services to RSL COM. The
increase in sales to RSL COM was due to the growth in our network resulting in
our ability to provide additional capacity to RSL COM and an increase in demand
for our services from RSL COM.
Non-affiliates. Revenues from non-affiliates were $1.2 million for the six
months ended June 30, 1999 compared to $961,212 for the six months ended
June 30, 1998, an increase of $195,627, or 20.4%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
$487,494 for the six months ended June 30, 1999 compared to $85,147 for the six
months ended June 30, 1998, an increase of $402,347, or 472.5%. The increase was
due primarily to an increased demand from a larger customer base. Revenues from
enhanced IP communications services were $652,581 for the six months ended
June 30, 1999 compared to $528,405 for the six months ended June 30, 1998, an
increase of $124,176, or 23.5%. The increase in revenues from enhanced IP
communications services was due to a greater number of PC-to-phone and
phone-to-phone calls being placed by an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 84.2% and 59.6% of revenues for the
periods ended June 30, 1999 and June 30, 1998, respectively. Other than RSL COM,
no other customer accounted for greater than 5% of our revenues during these
periods. We expect that revenues from carrier transmission services to RSL COM
and other carriers will continue to account for a majority of our revenues
through at least the end of 2000.
22
<PAGE>
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $3.3 million for the six months
ended June 30, 1999 compared to $1.7 million for the six months ended June 30,
1998. During the six months ended June 30, 1999, we recognized $299,136 as the
reimbursement of certain costs from Ericsson, our primary equipment vendor. Such
reimbursement reduced our cost of revenues during the six months ended June 30,
1999. Excluding this reimbursement, cost of revenues would have been $3.6
million, an increase of $1.9 million, or 107.9%. The increase in cost of
revenues (excluding the reimbursement) was due primarily to the increased costs
associated with the increase in carrier transmission services.
Research and development expenses. Research and development expenses were
$428,700 for the six months ended June 30, 1999 compared to $549,484 for the six
months ended June 30, 1998. During the six months ended June 30, 1999, we
recognized reimbursement from Ericsson for expenses we incurred in research and
development of $460,285. Excluding this reimbursement, research and development
costs would have been $888,985, an increase of $339,501, or 61.8%. The increase
in research and development expenses (excluding the reimbursement) was due to
greater costs incurred in hiring personnel to develop new services and
enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses were
$1.5 million for the six months ended June 30, 1999 compared to $918,304 for the
six months ended June 30, 1998, an increase of $542,732, or 59.1%. The increase
in selling and marketing expenses was due to the expansion of our marketing and
promotional activities. Selling and marketing expenses for the six months ended
June 30, 1998 include expenses related to a promotional campaign we conducted
during this period.
General and administrative expenses. General and administrative expenses
were $1.4 million for the six months ended June 30, 1999 compared to $595,515
for the six months ended June 30, 1998, an increase of $817,985, or 137.4%. The
increase in general and administrative expenses was primarily due to additional
personnel and increased occupancy costs. We expect that general and
administrative expenses will continue to increase as we pay executive
compensation previously paid by RSL COM.
Non-cash compensation expenses. Non-cash compensation expenses were
$2.1 million for the six months ended June 30, 1999 compared to $485,508 for the
six months ended June 30, 1998, an increase of $1.6 million, or 338.0%. The
increase in non-cash compensation expenses was due to the recognition of
compensation expense for grants of employee stock options and units.
Amortization of goodwill. Amortization of goodwill was $1.5 million for
the six months ended June 30, 1999 compared to $956,564 for the six months ended
June 30, 1998, an increase of $559,193 or 58.5%. The increase in amortization of
goodwill was due to an increase in goodwill which grew significantly during 1998
as a result of RSL COM acquiring the remaining outstanding shares of our
company.
Loss from Operations
Loss from operations was $6.0 million for the six months ended June 30,
1999 compared to approximately $3.1 million for the six months ended June 30,
1998, an increase of $2.9 million,or 95.8%. The increase in loss from operations
was due primarily to the increase in costs and operating expenses and to a
decrease in prices we charged for carrier transmission services. We expect to
continue to incur losses for the foreseeable future.
Interest Income (Expense), Net
Interest expense, net was $757,039 for the six months ended June 30, 1999
compared to interest income of $66,080 for the six months ended June 30, 1998,
an increase of $823,119. The increase in interest expense was due to increased
borrowings from RSL COM and Ericsson to finance our working capital and capital
expenditure requirements.
23
<PAGE>
Net Loss
Net loss was $6.8 million for the six months ended June 30, 1999 compared
to $3.0 million for the six months ended June 30, 1998, an increase of
$3.8 million, or 125.3%. The increase in net loss was due to the foregoing
factors.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Affiliates. Revenues from affiliates were $3.9 million for the year ended
December 31, 1998 compared to $467,842 for the year ended December 31, 1997, an
increase of $3.4 million, or 732.8%. The increase in revenues from affiliates
was due to an increase in sales of our services to RSL COM. The increase in
sales to RSL COM was attributable to the growth in our network resulting in our
ability to provide additional capacity to RSL COM and an increase in demand for
our services from RSL COM.
Non-affiliates. Revenues from non-affiliates were $1.7 million for the
year ended December 31, 1998 compared to $777,799 for the year ended
December 31, 1997, an increase of $964,142, or 124.0%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
$174,588 for the year ended December 31, 1998 compared to $56,882 for the year
ended December 31, 1997, an increase of $117,706, or 206.9%. Revenues from
enhanced IP communications services were $1.2 million for the year ended
December 31, 1998 compared to $202,643 for the year ended December 31, 1997, an
increase of $951,151, or 469.4%. The increase in revenues from carrier
transmission and enhanced IP communications services was due to an increase in
the destinations we could terminate traffic to as a result of the expansion of
our network and an increasing user base. Revenues from equipment sales were
$270,644 for the year ended December 31, 1998 compared to $498,504 for the year
ended December 31, 1997, a decrease of $227,860, or 45.7%. The decrease was due
primarily to our decision to focus on enhanced IP communications services rather
than equipment sales. Equipment sales are not expected to constitute a material
portion of revenues in the future.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $4.7 million for the year ended
December 31, 1998 compared to $1.1 million for the year ended December 31, 1997.
For the year ended December 31, 1998, we recognized $694,250 as the
reimbursement for certain costs from Ericsson. Excluding this reimbursement,
cost of revenues would have totalled $5.4 million, an increase of $4.3 million,
or 402.5%. The increase in cost of revenues (excluding the reimbursement) was
due primarily to the increased costs associated with the significant increase in
carrier transmission services.
Research and development expenses. Research and development expenses were
$650,140 for the year ended December 31, 1998 compared to $294,150 for the year
ended December 31, 1997. For the year ended December 31, 1998, we recognized
reimbursement from Ericsson for expenses we incurred in research and development
of $901,385. Excluding this reimbursement, research and development expenses
would have been $1.6 million, an increase of $1.3 million, or 427.5%. The
increase in research and development expenses (excluding the reimbursement) was
due to greater costs incurred in hiring personnel to develop new services and
enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses were
$2.4 million for the year ended December 31, 1998 compared to $631,970 for the
year ended December 31, 1997, an increase of $1.8 million, or 284.7%. The
increase in selling and marketing expenses was due to the expansion of our
marketing and promotional activities.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1998 were $1.8 million compared to $1.4 million
for the year ended December 31, 1997, an increase of $454,764, or 32.8%. The
increase in general and administrative expenses was primarily due to additional
personnel and increased occupancy costs.
Non-cash compensation expense. Non-cash compensation expenses were
$742,780 for the year ended December 31, 1998 compared to zero for the year
ended December 31, 1997. The increase in non-cash compensation expense was due
to the recognition of compensation expense for grants of employee stock units.
24
<PAGE>
Amortization of goodwill. Amortization of goodwill was $2.5 million for
the year ended December 31, 1998 compared to $197,249 for the year ended
December 31, 1997, an increase of $2.3 million or 1,153.3%. The increase in
amortization of goodwill is due to an increase in goodwill which grew
significantly during 1998 as a result of RSL COM acquiring the remaining
outstanding shares of our company.
Loss from Operations
Loss from operations was $7.2 million for the year ended December 31, 1998
compared to $2.3 million for the year ended December 31, 1997, an increase of
$4.9 million, or 207.2%. The increase in loss from operations was due primarily
to the increase in costs and operating expenses and to a decrease in prices we
charged for carrier transmission services.
Interest Expense, Net
Interest expense, net was $186,295 for the year ended December 31, 1998
compared to $37,232 for the year ended December 31, 1997, an increase of
$149,063, or 400.4%. The increase in interest expense was due to increased
borrowings from RSL COM and Ericsson to support our working capital and capital
expenditure requirements.
Net Loss
Net loss was $7.1 million for the year ended December 31, 1998 compared to
$2.4 million for the year ended December 31, 1997, an increase of $4.7 million,
or 200.8%. The increase in net loss was due to the foregoing factors.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM JUNE 1996 (INCEPTION)
TO DECEMBER 31, 1996
Revenues
Affiliates. Revenues from affiliates were $467,842 for the year ended
December 31, 1997. Revenues from RSL COM commenced in August 1997 shortly
following RSL COM's investment in us, and, accordingly, we did not generate any
revenues from RSL COM in 1996.
Non-affiliates. Revenues from non-affiliates were $777,799 for the year
ended December 31, 1997 compared to $933 for the seven month period ended
December 31, 1996. We commenced sales activities during the fourth quarter of
1996 and did not realize any material sales during 1996. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM
commenced in 1997 and were $56,882 for the year. We did not commence the
commercial sale of enhanced IP communications services until the first quarter
of 1997. Revenues from enhanced IP communications services were $202,643 for the
year ended December 31, 1997. Revenues from equipment sales for the year ended
December 31, 1997 were $498,504.
Costs and Operating Expenses
Cost of revenues. Cost of revenues was $1.1 million for the year ended
December 31, 1997. No such costs were incurred during 1996 since sales and
services had not yet commenced.
Research and development expenses. Research and development expenses were
$294,150 for the year ended December 31, 1997. No such costs were incurred in
1996 since research and development activities had not yet commenced.
Selling and marketing expenses. Selling and marketing expenses were
$631,970 for the year ended December 31, 1997. No such costs were incurred in
1996 since marketing efforts had not yet commenced.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1997 were $1.4 million compared to $179,138 for
the seven month period ended December 31, 1996, an increase of $1.2 million, or
674.6%. The increase in general and administrative expenses was primarily due to
additional personnel and increased occupancy costs that we incurred in
connection with the commencement of our commercial activities, as well as fees
and expenses incurred in connection with a private placement during 1997.
25
<PAGE>
Amortization of goodwill. Amortization of goodwill was $197,249 for the
year ended December 31, 1997. We did not have any intangible assets during 1996.
Loss from Operations
Loss from operations was $2.3 million for the year ended December 31, 1997
compared to $178,205 for the seven month period ended December 31, 1996. The
increase in loss from operations was due to the increased costs associated with
our commencing commercial operations and establishing our network
infrastructure.
Interest Expense, Net
Interest expense, net was $37,232 for the year ended December 31, 1997
compared to $397 for the seven month period ended December 31, 1996. The
increase in interest expense was primarily due to accrued interest on our
convertible notes issued in a private placement during 1996.
Net Loss
Net loss was $2.4 million for the year ended December 31, 1997 compared to
$178,602 for the seven month period ended December 31, 1996. The increase in net
loss was a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in June 1996, we have incurred significant operating
and net losses due in large part to the start-up and development of our
operations. As of June 30, 1999, we had an accumulated deficit of approximately
$16.3 million.We anticipate that we will continue to incur operating and net
losses as we implement our growth strategy.
From our inception through July 1997, we funded losses and capital
expenditures from cash provided from financing activities, primarily the net
proceeds of the private placement of:
o capital stock sold to RSL COM for an aggregate amount of approximately
$5.0 million
o capital stock and units of convertible notes and warrants to purchase our
capital stock sold to unrelated third parties for an aggregate amount of
approximately $1.2 million
In July 1997, RSL COM acquired a 51% interest in our company for
approximately $5.0 million. Between July 1997 and April 1998, RSL COM acquired
all of the remaining shares of our outstanding capital stock from our
shareholders for approximately $14.7 million. In April 1998, our company was
merged into a wholly-owned subsidiary of RSL COM. Since RSL COM's acquisition of
a controlling interest in us in July 1997, RSL COM has funded our cash
requirements, which we have accounted for as inter-company loans bearing
interest at the rate of 14% per annum, due on demand after June 30, 2000. Upon
completion of an initial public offering by us, the maturity date will be
extended to the first anniversary of the completion of such offering. As of June
30, 1999, we owed approximately $9.6 million (principal and accrued interest) to
RSL COM. On the first anniversary of the closing of this offering, this debt
will become payable on demand.
We are subject to financial restrictions by reason of our status as a
restricted subsidiary of RSL COM under indentures relating to outstanding
indebtedness of RSL COM. Such restrictions significantly limit and could
prohibit the ability of RSL COM and its restricted subsidiaries, including our
company, to incur additional indebtedness or to create liens on their assets.
Prior to the closing of this offering, RSL COM will provide us with a
$10 million line of credit (exclusive of the existing $9.6 million), due on
demand after November 1, 2000 and bearing interest at the rate of 14% per annum,
which will be available to fund our operating expenses.
As of June 30, 1999, we had approximately $1.4 million in cash and cash
equivalents. Principal uses of cash have been to fund operating losses, working
capital requirements and capital expenditures. We have had significant negative
cash flows from operating activities for each fiscal and quarterly period to
date.
Net cash used in operating activities was $186,247 for the period from June
1996 to December 31, 1996, $1.6 million for the year ended December 31, 1997 and
$3.8 million for the year ended December 31, 1998. Net cash used in operating
activities was $822,846 for the six months ended June 30, 1998 and $3.0 million
for the six months ended June 30, 1999. Net cash used in operating activities in
these periods consisted
26
<PAGE>
mostly of net operating losses and increases in accounts receivable, partially
offset by increases in trade payables and accrued expenses.
Net cash used in investing activities was $205,809 for the period from June
1996 to December 31, 1996, $949,137 for the year ended December 31, 1997 and
$3.1 million for the year ended December 31, 1998. Net cash used in investing
activities was $1.0 million for the six months ended June 30, 1998 and $917,037
for the six months ended June 30, 1999. Net cash used in investing activities in
these periods consisted mostly of capital expenditures for the purchase of
computer software and network equipment.
Net cash provided by financing activities was $522,048 for the period from
June 1996 to December 31, 1996, $5.6 million for the year ended December 31,
1997 and $5.0 million for the year ended December 31, 1998. Net cash provided by
financing activities was zero for the six months ended June 30, 1998 and
$4.0 million for the six months ended June 30, 1999. Cash provided by financing
activities in these periods consisted primarily of proceeds from sales of
capital stock and the issuance of convertible notes and warrants to purchase
capital stock, which was partially offset by repayment of shareholder loans,
short-term bank loans and loans from RSL COM.
We believe that the net proceeds from this offering and the line of credit
from RSL COM, together with our existing cash and cash equivalents, will be
sufficient to meet our working capital and capital expenditure requirements for
at least the next 24 months. Thereafter, we may be required to raise additional
funds. Additional financing may not be available when needed or, if available,
such financing may not be on terms favorable to us. If additional funds are
raised through the issuance of equity securities, our existing stockholders may
experience significant dilution. In addition, the indentures governing
outstanding indebtedness of RSL COM restrict our ability to incur indebtedness.
Consequently, we may need to rely upon RSL COM to provide any additional capital
to meet our working capital requirements, and we cannot assure you that RSL COM
will be willing or able to provide additional capital on favorable terms or at
all.
FRAUD PREVENTION
With the recent substantial growth of Internet use and e-commerce, the
Internet business community has been subject to significant credit card fraud.
We have attempted to reduce our exposure to such fraud by introducing various
advanced procedures and proprietary fraud prevention systems that monitor and
identify patterns and sources of credit card fraud and prevent fraudulent
transactions. We employ a full-time staff dedicated to monitoring fraudulent
activities. Once a fraud pattern is detected, the fraud pattern is brought to
the attention of our data programmers who seek to take appropriate action to
counter the fraudulent activity. As a result, we have been able to reduce our
credit card fraud exposure, which reached a peak of 19% of gross revenues during
1998, to less than 1% of gross revenues for the second quarter ended June 30,
1999.
Although we have established reserves for bad debts in accordance with
historical levels of uncollectible receivables resulting primarily from such
fraudulent practices, our losses may exceed such reserves and could rise
significantly above anticipated levels. We cannot assure you that we will
continue to be successful in reducing or maintaining our current level of credit
card fraud exposure.
YEAR 2000 COMPLIANCE
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for failures encompasses all aspects of our business, including our
computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our interactive communications
portal and a temporary inability to engage in normal business activities.
Our State of Readiness
We may be affected by the Year 2000 issue related to our information
technology (IT) systems and non-IT systems operated by us or third parties.
Our IT systems include:
o gateways and gatekeepers developed by Ericsson
o routers developed by Cisco Systems, Inc.
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o Hewlett-Packard Company Open View software
o software developed in-house to manage our network and support our portal
Our non-IT systems include:
o internal telephone systems
o leased office spaces and facilities
o office equipment
We are engaged in a comprehensive assessment of the Year 2000 readiness of
our and third parties' IT and non-IT systems to ensure that these systems are,
or prior to December 31, 1999 will be, Year 2000 compliant. Our assessment plan
consists of:
o conducting a comprehensive inventory of our IT and non-IT systems to
assess Year 2000 compliance
o testing our internally developed software and the commercial hardware and
software that support our network, Web site and other systems
o contacting third party vendors, suppliers and service providers of
material hardware, software and services necessary for the delivery of
our services to our users
o remediating any Year 2000 issues by repairing or, if necessary, replacing
any non-compliant systems
We are currently developing and implementing testing and validation
procedures for all software, hardware and other IT and non-IT systems that we
believe may be affected by Year 2000 issues. We believe that the IT systems that
we have developed internally to operate our business are Year 2000 compliant
because all of the software code for the systems that we have internally
developed is written with four digits to define the applicable year. We expect,
prior to December 31, 1999, to resolve any Year 2000 compliance issues relating
to off-the-shelf commercial software used in our business through upgrades of
our software or, when necessary, through replacement of existing software with
Year 2000 compliant applications. In addition, we have begun to assess our
non-IT systems which we have identified as containing embedded technology. At
this point of our assessment, we are not aware of any Year 2000 issues relating
to our non-IT systems which would cause disruptions in our operations or impede
our ability to provide services to our users.
Because third parties have developed and currently support many of the
systems we use, in addition to assessing our internal systems, a significant
part of our efforts have been to ensure that our externally developed IT and
non-IT systems are Year 2000 compliant. We have obtained confirmation from our
principal third party vendors, suppliers and service providers, including
Ericsson, Cisco and Hewlett-Packard, either directly or via their Web sites,
that they believe they have resolved the Year 2000 issues relating to the
systems, services and products supplied to us.
We plan to complete our assessment and testing process prior to the end of
the third quarter of 1999. Until such assessments and testing are completed and
our other vendors, suppliers and service providers are contacted, we will not be
able to completely evaluate whether any of our systems will need to be repaired
or replaced.
Costs to Address Our Year 2000 Issues
To date, we have spent an immaterial amount on Year 2000 compliance issues,
but we expect to incur increased costs in the third quarter of 1999 in
identifying, evaluating and addressing Year 2000 compliance issues. We expect
that our costs will primarily relate to the operating costs associated with time
spent by employees in the evaluation process and Year 2000 compliance matters
generally. We anticipate that the total costs that we will incur on Year 2000
compliance will not exceed $100,000.
Risks of Our Year 2000 Issues
We are not currently aware of any Year 2000 compliance issues relating to
our systems that would cause disruptions in our operations or impede our ability
to provide our services. We cannot predict the extent to which the Year 2000
issue will affect our vendors, suppliers or service providers, or the extent to
which we would be vulnerable if such parties fail to resolve any Year 2000
issues on a timely basis. If our assessment and implementation of Year 2000
compliance is completed without identifying any material non-compliant systems
operated by us or our vendors, suppliers and service providers, the most
reasonably likely worst case Year 2000 scenario is a systemic failure beyond our
control, such as a prolonged disruption or
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failure of the Internet or the telecommunications infrastructure. Any failures
or disruptions could prevent us from operating our network or prevent users from
accessing our portal and services, which could result in loss of users, lost
revenues, increased operating costs and material disruptions in the operation of
our business.
Our Contingency Plan
We do not currently have a contingency plan to handle the most reasonably
likely worst case Year 2000 scenario that may occur if systems we are dependent
upon are not Year 2000 compliant and fail to operate effectively after
December 31, 1999. We are engaged in an ongoing Year 2000 assessment. Following
the completion of our assessment, we will evaluate the nature and extent of any
contingency plan. The cost of developing and implementing such a plan, if
necessary, could be material.
INFLATION
We do not believe that inflation has had a significant impact on our
consolidated results of operations or financial condition.
FOREIGN CURRENCY EXPOSURE
We are exposed to fluctuations in foreign currencies relative to the U.S.
dollar because we collect revenues in U.S. dollars and incur access and
termination costs in foreign currencies, and a portion of the cost of our
Israeli operations, mainly personnel and facility-related, is incurred in New
Israeli shekels. The effect of foreign currency fluctuations on our cost of
revenues for 1997 and 1998 was immaterial. As we expand our operations, we may
begin to collect revenues from our customers in currencies other than the U.S.
dollar. We do not currently engage in any hedging activities.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP No. 98-1). This statement is applicable to our 1999
financial statements and requires us to capitalize certain payroll and payroll
related costs and other costs that are directly related to the development of
certain of our systems. We amortize these costs over the anticipated life of the
systems. The adoption of SOP No. 98-1 did not have a material impact on our
financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. We have expensed
these costs historically and therefore the adoption of this standard had no
impact on our results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," (SFAS No. 133) which establishes accounting and reporting standards
for derivative instruments and hedging activities. Generally, it requires that
an entity recognize all derivatives as either an asset or liability and measure
those instruments at fair value, as well as identify the conditions for which a
derivative may be specifically designed as a hedge. SFAS No. 133 is effective
for all fiscal years beginning after June 15, 2000. We do not currently engage
or plan to engage in derivative or hedging activities and therefore there will
be no material impact to our results of operations, financial position or cash
flows upon the adoption of this standard.
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BUSINESS
OVERVIEW
We are a leading provider of IP telephony and other enhanced, Web-based
communications services to individuals and businesses worldwide. We use our
privately-managed, global IP network to enable our users to make low-cost, high
quality phone calls from either a personal computer or a standard telephone. We
were founded in June 1996 to capitalize on the growth of the Internet as a
communications tool, and we believe we were the first company to commercially
provide phone-to-phone, IP telephony services over a privately-managed network.
We believe our network, which contains 43 POPs in 27 countries, is the largest
privately-managed, IP telephony network in the world. By using our own network
rather than relying exclusively on the Internet, we are better able to manage
and control the quality of our services.
Our interactive communications portal, www.deltathree.com, is a single
on-line source for the communications needs of our users anywhere in the world.
By combining user-friendly, Web-based access with the advanced functionality of
our privately-managed, global IP telephony network, we offer our users a
comprehensive solution for high-quality, low-cost IP communications services.
We currently offer the following services:
o PC-to-phone service, which enables our users to make low-cost calls using
their personal computers
o D3 Box, our unified messaging service, which permits our users to
conveniently retrieve through a single-source all voice mails, e-mails
and faxes through the Web or by phone
o Click IT, which allows a party to simultaneously view a Web site and talk
directly with the individual or business sponsoring the Web site
o Phone-to-phone service, which enables our users to make low-cost calls
and send low-cost faxes using a traditional telephone and fax machine
o Global roaming service, which enables businesses and individuals to use a
single account number to access our network from locations throughout the
world using country-specific, toll-free access numbers
We also provide carrier transmission services over our privately-managed IP
network for RSL COM and other telecommunications carriers. This has enabled us
to maximize the use of available capacity on our network as we continue to
expand our user base and increase revenues from enhanced IP communications
services.
Our user base for enhanced IP communications services is expanding. At
December 31, 1998, we had more than 250,000 users of our enhanced IP
communications services, and as of September 1, 1999, we had more than 680,000
users, which include users of both our prepaid and promotional services. We
offer some of our services on a prepaid basis while we offer other services on a
promotional basis to attract and retain users. Over 50,000 of our users pay for
our services and approximately 20% of these paid users have re-charged their
deltathree.com accounts.
OUR OPPORTUNITY
GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has emerged as a significant global communications and
commercial medium, enabling millions of people worldwide to communicate and
providing businesses with an attractive means of marketing and selling their
products and services. International Data Corporation (IDC), a market research
firm, estimates that there were approximately 142 million Internet users
worldwide at the end of 1998, and that the number of users worldwide will
increase to approximately 500 million at the end of 2003. Internet users are
increasingly using the Web as a way to communicate. Jupiter Communications, a
market research firm, estimates that approximately 98% of all Internet users use
e-mail and 53% of all Internet users participate in on-line "chat" rooms. In
addition, a recent study by E-Marketer, a market research firm, estimates that
9.4 billion e-mail messages are delivered daily. Internet users are also
increasingly using the Web to purchase goods and services. IDC estimates that
Internet users worldwide purchased more than $50.0 billion of goods and services
in 1998, and that commerce over the Internet will grow to approximately $1.3
trillion of goods and services in 2003.
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THE INCREASING SIGNIFICANCE OF IP COMMUNICATIONS
Historically, the communications services industry has transmitted voice
and data over separate networks using different technologies. Traditional
carriers have typically built telephone networks based on circuit switching
technology, which establishes and maintains a dedicated path for each telephone
call until the call is terminated. Although a circuit-switched system reliably
transmits voice communications, circuit switching does not efficiently use
transmission capacity. When a telephone call is placed, a circuit is
established, and the circuit remains dedicated for transmission of the call and
unavailable to transmit any other call.
Data networks have typically been built utilizing packet switching
technology, such as IP, which divides signals into packets that are
simultaneously routed over different channels to a final destination where they
are reassembled in the original order in which they were transmitted. Packet
switching provides for more efficient use of the capacity in the network because
the network does not establish dedicated circuits and does not require a fixed
amount of bandwidth to be reserved for each transmission. As a result,
substantially greater traffic can be transmitted over a packet-switched network,
such as the Internet, than a circuit-switched network.
Traditional telecommunications carriers have historically avoided the use
of packet switching for transmitting voice calls due to poor sound quality
attributable to delays and lost packets which prevent real-time transmission.
However, recent improvements in packet switching, compression and broadband
access technologies, improved hardware and the use of privately-managed networks
(such as our network) have significantly improved the quality of packet-switched
voice calls, allowing for real-time transmission.
As a result, packet switching technology is now allowing service providers
to converge their traditional voice and data networks and more efficiently
utilize their networks by carrying voice, fax and data traffic over the same
network. These improved efficiencies of packet-switching technology create
network cost savings that can be passed on to the consumer in the form of lower
long distance rates. In addition, international telephone calls carried over the
Internet or private IP networks are less expensive than similar calls carried
over circuit-switched networks primarily because they bypass the international
settlement process, which represents a significant portion of international long
distance tariffs.
Accordingly, service providers are beginning to migrate voice and fax
traffic from the PSTN to packet-switched networks. IDC estimates that in 1999,
approximately 2.7 billion minutes will be carried over IP networks, generating
approximately $0.6 billion in revenues. IDC also estimates that IP minutes and
revenues will grow to approximately 135.0 billion and approximately
$20.7 billion, respectively, in 2004 representing compound annual growth rates
of 119% and 103%.
Beyond cost savings, we believe that advanced IP communications
technologies will further the potential for the Internet to become the preferred
medium of communications and commerce. For example, the integration of voice
communications into the Web could serve to enhance existing text-based modes of
Internet communications, such as e-mail and online chat, by adding a live,
low-cost means to communicate. In addition, the advanced functionality of IP
communications will provide e-commerce shoppers with the ability to speak
directly with customer service representatives of on-line retailers providing
the on-line retailer with the ability to offer responsive, real-time customer
support and service.
INCREASE IN MODES OF COMMUNICATION
The global communications services industry, encompassing voice, fax and
data transmission, is experiencing significant growth. We believe the growth in
global communications services is being driven by:
o globalization of the world's economies and the worldwide trend toward
communications deregulation and liberalization
o the growth of data and Internet traffic
o declining prices and a wider choice of products and services
o technological advances and greater investment in communications
infrastructure
o increased business and leisure travel
In addition, technological advancements have allowed for multiple modes of
communication, such as cellular, voice-mail, e-mail and fax. We believe that due
to the proliferation of modes of communication and the difficulty and expense of
managing these multiple modes of communication, consumers increasingly value the
convenience of a one-stop solution for communications services. Accordingly, we
expect rapid growth in
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demand for services that unify and simplify the communications needs of users.
For example, IDC expects that the market for unified messaging services, such as
our D3 Box, will grow from approximately 90,000 unified messaging mailboxes in
1998 to more than 12.9 million unified messaging mailboxes in 2002 in the United
States alone and that the market for unified messaging services will be more
than $3.0 billion in 2002.
LIMITATIONS OF EXISTING IP COMMUNICATIONS SOLUTIONS
Although the growth of IP telephony historically has been limited by poor
sound quality attributable to delays and packet loss, recent technological
advancements have significantly improved the quality of packet-switched
telephone calls. As a result, several large long distance carriers, including
AT&T and Sprint, have announced IP telephony service offerings. However, these
traditional carriers have substantial investments in circuit-switched
technology, and therefore have been slow to embrace IP technology and generally
offer these services on a small scale.
In addition, smaller service providers have begun to offer low-cost
Internet telephony services from PCs to telephones and from telephones to
telephones. These smaller service providers, however, generally offer their
services only in certain geographic areas, provide limited services and lack
advanced customer service and billing capabilities required for enhanced,
Web-based communications. In addition, many of the smaller service providers use
the Internet for transmission, as opposed to a privately-managed IP network, and
lack network management and monitoring capabilities to ensure quality of
service. Most of these service providers have not had the benefit of a
well-capitalized parent company to help finance a global, privately-managed
network.
OUR SOLUTION
To capitalize on the above trends, we offer a comprehensive communications
solution that combines the power of the Internet's communications and e-commerce
capabilities with the advanced functionality of a privately-managed IP network.
Key advantages we offer our users include:
o A SINGLE SOURCE FOR ACCESSING EVERYDAY MODES OF COMMUNICATION. Our
interactive communications portal is a one-stop source which allows our
users to manage and access everyday modes of communication, including
voice, fax and e-mail.
o USER-FRIENDLY, WEB-BASED ACCESS. Simply by clicking on our interactive
communications portal, our users can make PC-to-phone calls directly from
their computers and access their D3 Box to send e-mail and retrieve and
forward voice mail, e-mail and faxes from anywhere in the world at any
time. We believe that this offers users a more convenient and efficient
communications experience than that of traditional methods.
o A PRIVATELY-MANAGED IP NETWORK PROVIDING HIGH-QUALITY SERVICE. Our
privately-managed IP network enables us to achieve quality of service
levels that are generally not available by utilizing the often congested
Internet, where voice calls are mixed with unpredictable traffic from the
Web. For our phone-to-phone service, we offer quality that is virtually
indistinguishable from circuit-switched calls carried over the public
switched telephone network (PSTN). Our network operations center allows
us to monitor all aspects of our network 24 hours a day, 7 days a week to
ensure high quality of service to our users.
o VOICE INTEGRATED ON-LINE RETAILING. Our Click IT service allows
e-commerce shoppers to place a call to customer service representatives
of on-line retailers and other Web-based businesses while viewing the
retailers' or businesses' Web sites. This provides e-commerce shoppers
with the opportunity to receive live customer service and the ability to
provide credit card information directly to a customer service
representative, thereby increasing the likelihood of consummating an
on-line transaction.
o GLOBAL REACH. We believe that we operate the largest privately-managed,
IP telephony network, with 43 POPs in 27 countries. We are able to offer
services to our users by providing local access to our network as well as
global access to our services through the Web. In addition, through our
POPs and the call termination services provided to us by RSL COM, we are
able to cost-effectively terminate IP voice and fax communications to
over 200 countries.
o LOWER COSTS. We are able to charge lower rates than traditional long
distance carriers because of the cost efficiencies associated with
packet-switched technology and due to the fact that international long
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distance calls routed over our privately-managed IP network bypass the
international settlement process.
o COMPREHENSIVE USER SUPPORT THROUGH OUR ON-LINE INTERACTIVE CUSTOMER CARE
CENTER. Through our interactive communications portal, we have moved and
consolidated traditional customer care functions onto the Web. Through
our comprehensive customer care and real-time billing center, which is
accessible directly on the Web, our users have the ability to access
their deltathree.com account to check billing and usage information,
increase their prepaid accounts and electronically communicate with a
deltathree.com customer service representative.
OUR STRATEGY
Our goal is to be a leading provider of enhanced IP communications services
and to make our interactive communications portal the leading one-stop solution
for the communications needs of individuals and businesses. To achieve our goal,
we plan to:
o BUILD STRONG BRAND RECOGNITION. To date, we have used both on-line and
traditional marketing programs to create what we believe to be one of the
leading brand names in enhanced IP communications. We believe that
aggressive brand-building is important to sustain our leadership position
and to continue to attract users to our interactive communications
portal. We intend to continue to invest in branding through traditional,
direct media advertising. We also intend to increase significantly our
investment in on-line branding through strategic alliances with leading
Internet companies and Web portals, our on-line agent program and
partnerships with major hardware manufacturers and software developers.
o EXPAND AND ENHANCE OUR SERVICE OFFERINGS. We believe that expanding our
services will be critical to establishing ourselves as the leading
communications portal. We intend to capitalize upon our experience in
providing IP telephony services by introducing additional enhanced IP
communications services that appeal to the communications needs of
individuals and businesses. We also seek opportunities to bring
e-commerce and other enhanced IP communications tools to individuals and
businesses who want to fully utilize the multimedia capabilities of their
existing Web sites. For example, we intend to introduce new services,
including D3 Fax, IP-initiated conference calls, phone-to-PC, information
services and white boarding, to further complement our current services.
o ENSURE A HIGH-QUALITY USER EXPERIENCE. We believe that user satisfaction
and loyalty are heavily influenced by a user's experience with our
interactive communications portal. In order to enhance our appeal to
users, we intend to continue developing our interactive communications
portal by adding new features and technology to make it more user
friendly and efficient.
o ESTABLISH ADDITIONAL SOURCES OF REVENUE. Currently our revenues are
derived from usage charges on a per minute basis for carrier transmission
services as well as from our enhanced IP communications services. We
intend to establish additional sources of revenues from advertising
sources, including the sale of banner advertisements on our interactive
communications portal to leading retailers and marketers, and from
monthly charges combined with usage charges for services.
o PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to bolster our
number of users and our services through strategic acquisitions,
including the acquisition of new technologies, and alliances that offer
opportunities to acquire users or accelerate our entry into offering
additional enhanced IP communications services.
OUR INTERACTIVE COMMUNICATIONS PORTAL
Our interactive communications portal, www.deltathree.com, acts as a
single-source, on-line solution for our users and on-line marketing agents.
Through our interactive communications portal, our users can:
o view a description of all of our services, including pricing information
o sign up for any of our services, including PC-to-phone, unified
messaging and phone-to-phone
o download our software
o recharge their account, either by entering their credit card information
or authorizing automatic recharging
o send a PC-to-phone call
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o retrieve and forward their voice mail, e-mail and faxes through their D3
Box
o check real-time billing and usage information
o communicate by e-mail with a deltathree.com customer service
representative
o view answers to frequently-asked questions
Through our interactive communications portal, our on-line marketing agents
can:
o view a description of our on-line agent program
o sign up to serve as an on-line agent
o receive marketing tools to put on their own Web sites
o monitor their daily results
o view trends
o view commissions by promotions
OUR SERVICES
We provide a comprehensive package of high-quality enhanced IP
communications services. We provide some of our services on a prepaid or a per
usage basis, while we offer other services for free to attract and retain users.
CURRENT SERVICES
We currently provide the following services:
PC-to-phone. Our PC-to-phone service enables a user to conveniently and
inexpensively place a call to a standard telephone anywhere in the world
directly from a personal computer while remaining on-line. In order to use this
service, a user need only download our software for free from our Web site and
have access to the Internet. Once the software is downloaded, the user is able
to place a call from the user's PC and, while browsing the Web, speak to a party
who uses a standard telephone.
Our PC-to-phone service is low cost because it utilizes packet-switched
technology and because it routes calls directly from the Internet onto our
privately-managed IP network and to the called destination, thus avoiding the
high costs associated with traditional international and domestic long distance
telecommunications services. Our PC-to-phone service allows ease of use by
enabling a user to make a call directly from a personal computer.
D3 Box. Our unified messaging service enables a user to conveniently
retrieve e-mail, voice mail and faxes, as well as send e-mail, from a single
source. We offer a user the flexibility of retrieving messages by either logging
on to www.deltathree.com or by placing a call using a standard telephone. A user
retrieving messages through a computer can conveniently access and forward all
e-mail, voice mail and faxes, while a user retrieving messages through a
standard telephone can hear voice mail and have e-mail read by a
computer-simulated voice.
Click IT. Our Click IT service enables individuals and businesses to place
a Web link on their Web sites which, when clicked on by a user viewing the site,
automatically initiates a telephone call from the user's computer to a
designated telephone number specified by the host of the Web site. In addition,
a pop-up screen appears which advertises the host's products and services. This
service allows e-commerce and business Web pages to support real-time voice
calls from on-line customers.
Phone-to-phone. Our phone-to-phone service enables a user to inexpensively
place a call or send a fax from a standard telephone or a fax machine to
anywhere in the world. Phone-to-phone calls originate and terminate on the PSTN,
but travel primarily over our privately-managed IP network. Through our
privately-managed IP network, we are able to carry phone-to-phone voice
communications traffic that we believe offers quality virtually
indistinguishable from circuit-switched calls over the PSTN. Similar to our
PC-to-phone service, our phone-to-phone service is low cost as a result of
utilizing IP technology.
Global roaming. Our global roaming service enables businesses and
individuals to use a single account number to place phone-to-phone calls over
our network from locations throughout the world using country-specific,
toll-free access numbers, thereby bypassing local access charges. We currently
offer toll-free access numbers in Austria, Canada, Finland, Germany, Italy,
Sweden, Switzerland, the United Kingdom and the United States.
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Carrier transmission services. To maximize use of our available network
capacity, we offer carrier transmission services over our privately-managed IP
network to telecommunications carriers. RSL COM is currently our largest carrier
customer. RSL COM utilizes our network primarily to resell our transmission
services to other communications carriers, as well as for the traffic RSL COM
carries for its own retail customers.
FUTURE SERVICES
We intend to leverage our network to provide, and utilize our technological
expertise to develop, additional enhanced IP communications services. These
services will be accessible through our interactive communications portal.
We currently expect our future services will include the following:
<TABLE>
<CAPTION>
ENHANCED SERVICE SUMMARY DESCRIPTION
<S> <C>
IP-initiated conference calls............. Enables a user to set up a conference call through our interactive
communications portal either by sending a notice of the planned call
to all of the participants and having each participant dial a
toll-free number or by arranging for each of the participants to be
called by the automated system at the designated call time. This
service eliminates the need for a conference operator, thereby saving
time and money.
Phone-to-PC............................... Enables a user to receive phone calls directly through the user's PC
while remaining on-line. For example, a user on the Internet will
receive a pop-up screen stating that someone is calling. The user can
then choose to forward the call to voice mail or to answer the call
from the computer without logging off the Internet. We believe this
service will be attractive to users with a single telephone line, who
would otherwise miss incoming calls while on-line or would need to
install additional phone lines.
D3 Fax.................................... Enables users to conveniently send faxes directly from their computer
to a standard fax machine anywhere in the world over the Internet. To
use this service, a user only need download our software, set up a
deltathree.com account and be connected to the Web when they wish to
send a fax.
Information services...................... Enables a user to have easy access to communications information,
such as phone and e-mail directory services, with a single click on
our interactive communications portal. We believe this service will
further the use of our interactive communications portal as a single
source for users' communications needs.
White boarding............................ Enables multiple users to view and edit the same document on their
computers while speaking with each other through their PCs. We
believe this service will be an efficient and cost-effective tool for
businesses.
</TABLE>
CUSTOMER CARE
Our services are supported by our on-line interactive customer care and
billing center, which enables a user to set up a deltathree.com account, receive
an account number and a personal identification number, pay by credit card for
services, find answers to frequently asked questions and contact our customer
service representatives. Once a user has established an account, the user can
prepay for additional usage by credit card as well as access real-time detailed
information which includes call logs and transaction records. Through our
on-line billing system, a user can personalize the billing information to select
the data most relevant to the user.
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Since most user concerns can be addressed on-line, we only need a small,
focused customer support department that responds to user inquiries primarily
through e-mail with limited telephone support. We strive to continually improve
our customer care center on our interactive communications portal to meet the
evolving needs of our users.
OUR MARKETING AND PROMOTIONAL PROGRAMS
We have developed and will continue to develop diversified marketing and
promotional programs to stimulate demand for our services by increasing brand
awareness. In the past, we have allocated limited resources to marketing and
promoting our services, relying primarily on RSL COM to generate demand for our
services. We intend to increase our independent marketing efforts substantially
in order to increase our user base and to increase the frequency of use of our
services by our registered users and new users. We will also seek to form new
alliances with Internet businesses which we believe can promote our services to
a wide range of potential users and generate demand for our services. In
addition, we seek innovative ways to educate the market about the existence and
range of our services.
Our marketing and promotional programs include:
ON-LINE PARTNERSHIPS. We encourage other companies to link their Web sites
to us by placing a deltathree.com banner on their Web sites and directing their
customers to us for their communications needs. We generally offer these
companies a percentage of the revenue generated by users that click-through
their Web site to use our services. We have entered into a variety of strategic
marketing partnerships with leading Internet businesses.
o CBS.com. In August 1999, we entered into a marketing agreement with
CBS.com. Under this agreement, we are the exclusive provider of enhanced IP
communications services, including PC-to-phone, phone-to-phone, unified
messaging and Click It services, on the CBS.com Web site. CBS will provide links
from its Web pages to our Web site and promote our services through co-branded
areas on its Web site, known as the "DeltaThree/CBS Communication Center," and
through a dedicated monthly e-mail to its entire user base. In addition, CBS
will arrange for the placement of advertising banners on the CBSMarketWatch.com
Web site.
o Sony.com. In August 1999, we entered into a marketing agreement with
Sony.com. Under this agreement, we are the preferred provider of enhanced IP
communications services on the Sony.com Web site, which includes sonymusic.com,
sonyspc.com, sony.com and infobeat.com. As part of this agreement, a co-branded
area known as the "Communication Center" will be established and will offer
users our enhanced IP communications services.
o Xoom.com. In June 1999, we entered into a co-marketing agreement with
Xoom.com, Inc. Under this agreement, we are the preferred supplier of enhanced
IP communications services on Xoom's Web site. Xoom provides links to our
interactive communications portal and promotes our services through co-branded
areas on its Web site and through periodic e-mails to its customers. Xoom has
established an IP "Communications Hub" on its home page. In addition, under this
agreement, Xoom will:
o integrate our services with the Xoom chat network of 250,000 chat
rooms
o offer our services with Xoom greeting cards
o integrate our services with Xoom's directory services (White Pages &
Yellow Pages)
o Tribal Voice. In March 1999, we entered into an agreement with Tribal
Voice, the developer of PowWow(Registered), a leading provider of instant
messaging and on-line community solutions. Under this agreement, Tribal Voice
will feature our services in multiple locations on its Web site.
PRIVATE LABELING. We have entered into agreements with various service
providers to distribute our services under their own private labels. Instead of
sending customers to the deltathree.com interactive communications portal, a
service provider markets our services under its own brand name, while
contracting with us to provide the services under their private label. In our
agreements with these providers, we often stipulate that the provider's Web site
will say "powered by deltathree.com." Our private label customers include both
on-line and off-line providers who market our services to their customer base.
We believe service providers are attracted to our private label services because
it allows them to capitalize on their name recognition in their home market
while providing our high-quality, low-cost services.
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In January 1999, we entered into an agreement with MediaRing Pte Ltd. Under
this agreement, we integrate our PC-to-phone service into its PC-to-PC service,
thereby providing MediaRing's customers with a bundled package of communications
services. Our services are provided under MediaRing's brand name; however,
MediaRing's Web site states that it is "powered by deltathree.com." In addition,
we also provide the back-office and billing support for MediaRing.
ON-LINE AGENT COMMISSION PROGRAM. We have developed a Web-based agent
program that allows for rapid agent enrollment and agent account maintenance.
Through our interactive communications portal, any individual with their own Web
site can:
o take a tour of our on-line agent program
o complete an application to be an on-line agent
o be approved within hours after completing the application
o if approved, execute our on-line agent agreement through a secured site
o receive an agent identification number and instructions on how to
proceed as an agent
o download deltathree.com banners to post on their Web site
o track the number of people who have clicked through to
www.deltathree.com and signed up for our services
o track the commissions that are due to them
Agents may devise their own marketing programs, including Web-links, direct
mail campaigns or co-branding of our services in select markets. Agents receive
as commissions a percentage of revenue generated from end users who sign up for
our services through the agent's Web site. We believe that providing our agents
with easy, on-line access to these marketing tools helps us to maximize the
number of agents selling our services while significantly reducing the resources
needed to recruit agents. We currently have relationships with more than 790
on-line agents who market deltathree.com services on their Web sites.
OFF-LINE AGENT COMMISSION PROGRAM. Our off-line agent commission program
allows non-Web agents to design their own marketing programs to solicit sales of
our services. Off-line agents market and advertise through traditional channels
such as newspaper and magazine advertisements, direct mail campaigns and
telemarketing campaigns. Off-line agents receive a percentage of revenue
generated from users who sign up for our services through the agent's programs.
We currently have relationships with more than 125 off-line agents.
RESELLER PROGRAM. We offer individuals and businesses the opportunity to
become resellers of our services through our reseller program. Resellers are
able to purchase bulk deltathree.com account numbers at wholesale rates that
they are then able to resell to private individuals as either phone-to-phone
calling cards or PC-to-phone accounts.
DIRECT SALES. We have a direct sales force that is targeting organizations
that are currently not optimizing the marketing potential of their Web sites. As
with other on-line agents, we offer these on-line agents the opportunity to
market our services and products through their Web pages to generate revenue
from services we deliver as a result of links from their Web sites.
TRADITIONAL AND ON-LINE ADVERTISING. We intend to continue to advertise in
both traditional advertising mediums, such as direct mail, newspapers and
magazines, and through emerging on-line formats, such as banners. For example,
under an agreement with Ericsson, Ericsson will prominently refer to us in all
of its marketing materials for its IP telephony gateways as well as market our
services to its potential IP telephony customers and assist us with customer
contacts.
INNOVATIVE MARKETING TOOLS. We intend to continue to develop innovative
marketing products and promotions to increase our user base. For example, in
December 1998, we introduced innovative voice-enabled electronic greeting cards
on a promotional basis. Sent over the Web, V-Greetings enable the recipient to
click on a link in the greeting card, automatically downloading our PC-to-phone
software allowing the recipient to place a free PC-to-phone call to the card
sender's standard telephone. V-Greeting cards are available on-line and are
designed to promote different holidays, such as Christmas, Chanukah, Valentine's
Day, Mother's Day and Chinese New Year and other special occasions. To date,
over 580,000 V-Greeting cards have been sent. Of those V-Greeting cards that
have been sent, approximately 95,000 of the recipients
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have downloaded our PC-to-phone software and made a free PC-to-phone call. We
believe that V-Greeting cards is an effective marketing tool to introduce our
services to potential users.
OUR NETWORK
In order to provide high-quality, low-cost service, we operate a
privately-managed, IP telephony network. By managing our network, we have the
ability to regulate traffic volumes for the communications traffic we carry and
directly control the quality of our services from our originating POP to the
termination point. In addition, our network allows us to avoid the significant
transmission delays associated with the highly congested Internet, which may
impede delivery of high-quality, reliable services to our users. As of
September 1, 1999, our network consisted of:
o 43 POPs in 27 countries
o gateways, gatekeepers and routers at each POP
o hubs in New York, Los Angeles, London and Frankfurt
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with some of the largest backbone providers
o a technologically-advanced network operations center
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POPS
We intend to further develop our network to increase our number of POPs. We
currently have 43 POPs in the following locations:
Austria (Vienna)
Bangladesh (Dhaka)
Belgium (Brussels)
Brazil (Rio de Janeiro)
Brazil (Sao Paulo)
Brazil (Sao Paulo 2)
China (Beijing)
China (Beijing 2)
China (Beijing 3)
China (Shanghai)
Colombia (Bogota)
Colombia (Cali)
Czech Republic (Prague)
Finland (Helsinki)
France (Paris)
Germany (Frankfurt)
Greece (Athens)
Greece (Heraklion)
Greece (Rhodes)
Greece (Saloniki)
Holland (Rotterdam)
Hong Kong
Hungary (Budapest)
Iceland (Reykjavik)
India (Bombay)
Israel (Jerusalem)
Israel (Rosh Ha'ayin)
Israel (Tel Aviv)
Japan (Tokyo)
Korea (Seoul1)
Korea (Seoul2)
Malaysia (Kuala Lumpur)
Norway (Oslo)
Russia (Moscow)
Russia (Nijnei)
Russia (Samara)
Russia (St. Petersburg)
Singapore
Sweden (Stockholm)
Turkey (Istanbul)
United Kingdom (London)
United States (Los Angeles)
United States (New York)
GATEWAYS, GATEKEEPERS AND ROUTERS
The gateway acts as an entrance into and exit from our network for
communications traffic. At the origination POP, the gateway accepts the
communications traffic from the PSTN and compresses this traffic into IP packets
for transmission over our network. The gatekeeper determines the most
cost-effective route for each packet of communications traffic and the routers
then direct the packets to their destination. Upon termination, the gateway
decompresses and reconverts the packets into a circuit-switched signal, thereby
enabling the traffic to exit our network on to the PSTN. We use gateways and
gatekeepers developed by Ericsson and routers developed by Cisco.
HUBS
Our network has four hubs located in New York, Los Angeles, London and
Frankfurt which serve as backbone points for our network and which allow our
network to directly interconnect with the PSTN and the Internet. In addition, at
each of our four hubs, we co-locate our gateways with the Ericsson international
gateway switches on RSL COM's network. Our multiple hub structure provides us
with the ability to handle high volumes of traffic transmitted over our network.
By establishing multiple hubs, we have greater flexibility to choose from
multiple bandwidth suppliers, allowing us to optimize quality and cost savings.
In addition, our multiple hub structure enables us to more efficiently direct
the routing of traffic. For example, communications traffic between Belgium and
France does not need to be routed to our New York hub but can be sent through
our London hub. This enables better use of allocated bandwidth and reduces delay
between originating and terminating sites.
LEASED BANDWIDTH
We connect our hubs and POPs through a network of dedicated leased
bandwidth. By leasing bandwidth, we can avoid using the Internet as our primary
means for the transmission of communications traffic. We can therefore avoid the
significant transmission delays associated with the highly-congested Internet,
which may
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impede delivery of high-quality, reliable services to our users. Through our
relationship with RSL COM, which owns or leases substantial bandwidth for its
own business, we have access to bandwidth. We are able to take advantage of RSL
COM's volume discounts and achieve cost efficiencies that we could not achieve
on our own. In addition, we also lease bandwidth directly from leading bandwidth
providers such as MCI WorldCom Inc., Teleglobe Inc. and AT&T Corp.
INTERCONNECTIONS WITH RSL COM NETWORK
RSL COM interconnects its network with our network in addition to supplying
us with low-cost bandwidth. The interconnections with RSL COM provide us with
access to major PSTNs throughout the world, the ability to terminate
communications traffic virtually anywhere in the world and the ability to
terminate traffic over RSL COM's network in the event of a network failure.
PEERING ARRANGEMENTS
Our network also connects with major Internet exchange points to provide
access to and from the Internet for our PC-to-phone service. We have entered
into peering arrangements with MCI WorldCom and AT&T, two of the largest
Internet backbone providers, as well as Inter Nap, in order to support IP
services to and from the Internet. These arrangements allow us to access the
Internet directly, minimizing the amount of time our users' communications
traffic has to travel over the Internet.
NETWORK OPERATIONS CENTER
To service our network effectively, we have established a network
operations center (NOC) which monitors and manages our network from a central
location, 7 days a week, 24 hours a day. The NOC monitors all aspects of our
network, including the routers, databases, switches, leased lines, Internet
connections, gatekeepers and gateways, to ensure that they are functioning at
optimal levels. In the event of a failure of any of these network components,
NOC personnel are provided with a real-time, systems-generated notification via
an instant messaging system consisting of pagers, cellular phones, screen
pop-ups and e-mail, which identifies the malfunction so that proper measures can
be taken to restore service in a timely fashion. Our NOC utilizes a combination
of proprietary and leading industry technologies based upon Hewlett-Packard Open
View software. By utilizing technologically-advanced, real-time management and
monitoring systems, we seek to reduce system downtime and ensure that our users
will not experience any noticeable interruption in their service.
ADVANTAGES OF OUR NETWORK
Our network is engineered to provide the following advantages:
o scalability. The software and hardware that we use in our network is
scalable, allowing for new POPs to be easily integrated into our network
with minimal incremental investment.
o flexibility. Our multiple hub structure and our interconnections with
RSL COM and other carriers provide us with numerous routing options and
greater flexibility to handle changing traffic patterns.
o rapid integration of services. We can introduce new services and
duplicate existing services without having to deploy additional equipment
at each POP on our network.
o manageability. Our privately-managed network allows us to directly
control the quality of our services over our network from one central
location.
o accessibility. Our privately-managed network allows users to gain access
to our enhanced services from any country in which a POP has been
established.
o global reach. By using our network, we are able to cost-effectively
terminate communications traffic to over 200 countries.
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PROPRIETARY RIGHTS
We rely or expect to be able to rely on patent, trademark and trade secret
laws, confidentiality agreements and other contractual arrangements with our
employees, strategic partners and others to protect our proprietary rights.
We have submitted trademark applications for the name "Delta
Three(Trademark)" for the following jurisdictions: Brazil, Colombia, Japan,
Mexico, the Russian Federation, the United States, Venezuela and the European
Community under EC trademark regulation. In addition, we have submitted
trademark applications in the United States for the names
"V-Greetings(Trademark)," "Click IT(Trademark)," "D3 Fax(Trademark),"
"deltathree.com(Trademark)" and "D3 Box(Trademark)." We do not currently own any
registered copyrights. In addition, we have filed one patent application in each
of the United States and Israel for a remote telephone configuration in
connection with our V-Greeting product. These applications may not result in any
patents or trademarks being issued and, if issued, these patents or trademarks
may not provide adequate protection against competitive technology and may not
be held valid and enforceable if challenged. In addition, other parties may
assert rights as inventors of the underlying technologies, which could limit our
ability to fully exploit the rights conferred by any patents that we receive.
Our competitors may be able to design around any of the patents that we receive,
and other parties may obtain patents that we would need to license or circumvent
in order to exploit our patents.
To further safeguard our intellectual property, we have a policy that
requires our employees to execute confidentiality and technology ownership
agreements when they begin their relationships with us.
REGULATORY ENVIRONMENT
REGULATION OF INTERNET TELEPHONY
The use of the Internet to provide telephone service is a recent market
development. While we believe that the provision of voice communications
services over the Internet is currently permitted under United States law, some
foreign countries have laws or regulations that may prohibit voice
communications over the Internet.
United States. We believe that, under United States law, the enhanced IP
communications services that we provide constitute information services (as
opposed to regulated telecommunications services) and, therefore, are not
currently regulated by the Federal Communications Commission (FCC) or any state
agencies charged with regulating telecommunications carriers. Nevertheless,
aspects of our operations may be subject to state or federal regulation,
including regulation governing universal service funding, disclosure of
confidential communications, copyright and excise tax issues. However, we cannot
assure you that our services will not be regulated in the future. Several
efforts have been made in the United States to enact federal legislation that
would either regulate or exempt from regulation communications services provided
over the Internet. Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations. Such regulation may
negatively impact the cost of doing business over the Internet and materially
adversely affect our business, operating results, financial condition and future
prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon some providers of Internet and IP
telephony, primarily those which provide IP telephony services to end users
located within the United States. Although the FCC decided that information
service providers, including Internet and IP telephony providers, are not
telecommunications carriers, various companies have challenged that decision.
Congressional dissatisfaction with FCC conclusions could result in requirements
that the FCC impose greater or lesser regulation, which in turn could materially
adversely affect our business, financial condition, operating results and future
prospects. On April 10, 1998, the FCC issued a report to Congress discussing its
implementation of universal service provisions contained in the 1996 amendments
to the Communications Act of 1934. In the report, the FCC indicated that it
would examine the question of whether certain forms of phone-to-phone IP
telephony are information services or telecommunications services. The two are
treated differently in several respects, with certain information services being
more lightly regulated and not subject to universal service contribution
obligations. The FCC noted that it did not have, as of the date of the report,
an adequate record on which to make a definitive ruling, but that the record
suggested that certain forms of phone-to-phone IP telephony appear to have the
same functionality as non-Internet protocol telecommunications services and lack
the characteristics that would render them information services. In September
1998, two regional Bell operating companies advised
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Internet and IP telephony providers that they would impose access charges on
Internet and IP telephony traffic. It is uncertain at this time whether these
companies will actually impose access charges or when such charges will become
effective. In addition, one of these regional Bell operating companies has
recently filed a petition with the FCC seeking the imposition of access charges
on phone-to-phone Internet and IP telephony services. If the FCC were to
determine that certain services are subject to FCC regulations as
telecommunications services, the FCC may require providers of Internet and IP
telephony services to be subject to traditional common carrier regulation, make
universal service contributions, and/or pay access charges. It is also possible
that the FCC may adopt a regulatory framework other than traditional common
carrier regulation which would apply to Internet and IP telephony providers. Any
such determinations could materially adversely affect our business, financial
condition, operating results and future prospects to the extent that they
negatively affect the cost of doing business over the Internet or otherwise slow
the growth of the Internet.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet and IP telephony services. Several state
regulatory authorities have initiated proceedings to examine the regulation of
such services. Others could initiate proceedings to do so.
International. The regulatory treatment of Internet and IP telephony
outside of the United States varies widely from country to country. A number of
countries that currently prohibit competition in the provision of voice
telephony also prohibit Internet and IP telephony. Other countries permit but
regulate Internet and IP telephony. Some countries will evaluate proposed
Internet and IP telephony service on a case-by-case basis and determine whether
it should be regulated as a voice service or as another telecommunications
service. Finally, in many countries, Internet and IP telephony has not yet been
addressed by legislation or regulatory action. Increased regulation of the
Internet and/or Internet and IP telephony providers or the prohibition of
Internet and IP telephony in one or more countries could materially adversely
affect our business, financial condition, operating results and future
prospects.
The European Union regulatory regime, for example, distinguishes between
voice telephony services and other telecommunications services. In Services
Directive 90/388/EEC, issued in 1990, the European Commission required Member
States to allow competition for all telecommunications services except voice
telephony and certain other services. The Services Directive was amended in 1996
by Commission Directive 96/19/EC, which required the liberalization of all
telecommunications services, including voice telephony, by January 1, 1998,
except in certain member states that were granted extended compliance periods.
In addition, Directive 96/19/EC requires that services other than voice
telephony be subjected to no more than a general authorization or declaration
procedure. For purposes of these Directives, "voice telephony" is defined as the
commercial provision for the public of the direct transport and switching of
speech in real time between public switch network termination points.
On January 10, 1998, the Commission issued a Notice addressing whether IP
telephony was voice telephony and thus subject to regulation as voice telephony
by the Member States. As noted by the Commission, a determination that IP
telephony constitutes "voice telephony" may trigger significant regulatory
consequences with respect to, among other things, licensing requirements and
contributions to universal service funding. Consistent with its earlier
directives, the Commission stated that Internet telephony could properly be
considered voice telephony only if all elements of its "voice telephony"
definition were met. In this January 1998 Notice, the Commission concluded that
no form of IP telephony currently meets the definition of "voice telephony"
subject to Member States' regulation. The Commission stated that only
phone-to-phone communications reasonably could be considered voice telephony and
that, at present, even phone-to-phone IP telephony does not meet all elements of
its voice telephony definition. The Commission noted, however, that its
conclusion that IP telephony cannot be considered voice telephony may not apply
to particular forms of service provisions where, for example, an IP telephony
service is marketed as an alternative form of voice telephony service, users can
dial out to any telephone number, and the provider guarantees the quality of the
IP voice service by bandwidth reservation and claims that the quality of the IP
voice service is the same as traditional voice telephony service. Accordingly,
the Commission concluded that while voice over the Internet services cannot "for
the time being" be generally classified as "voice telephony," the situation must
be kept under review in light of technological and market developments. The
Commission intends to review its Notice periodically, and its next review is
scheduled to occur before January 1, 2000.
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In light of this conclusion, providers of IP telephony should be subjected
to no more than a general authorization or declaration requirement by the
European Union Member States. The Member States of the European Union are:
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom.
However, we cannot assure you that more stringent regulatory requirements will
not be imposed by individual Member States, since the Commission's Notice is not
binding on the Member States. The Member States therefore are not obligated to
reach the same conclusions as the Commission on this subject so long as they
adhere to the definition of "voice telephony" in the Services Directive. In
fact, France is currently conducting an investigation into how IP telephony
should be regulated. We cannot assure you that the services provided over our
network will not be deemed voice telephony subject to heightened regulation by
one or more EU Member States. Moreover, we cannot assure you that our failure or
the failure of any of our partners to obtain any necessary authorizations will
not have a material adverse effect on our business, financial condition,
operating results and future prospects.
As we make our services available in foreign countries, and as we
facilitate sales by our partners to end users located in foreign countries, such
countries may claim that we are required to qualify to do business in the
particular foreign country. Such countries may also claim that we are subject to
regulation, including requirements to obtain authorization for the provision of
voice telephony or other telecommunications services, or for the operation of
telecommunications networks. It is also possible that such countries may claim
that we are prohibited in all cases from providing our services or conducting
our business as conducted in those countries. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could materially adversely affect our
business, financial condition, operating results and future prospects, including
by subjecting us to taxes and penalties and/or by precluding us from, or
limiting us in, enforcing contracts in such jurisdictions.
Our partners may also currently be, or in the future may become, subject to
requirements to qualify to do business in a particular foreign country, comply
with regulations, including requirements to obtain authorizations for the
provision of voice telephony or other telecommunications services or for the
operation of telecommunications networks, or to cease providing services or
conducting their business as conducted in that country. We cannot be certain
that our partners either are currently in compliance with any such requirements,
will be able to comply with any such requirements, and/or will continue in
compliance with any such requirements. The failure of our partners to comply
with such requirements could materially adversely affect our business, financial
condition, operating results and future prospects.
OTHER REGULATION AFFECTING THE INTERNET
United States. Congress has recently adopted legislation that regulates
certain aspects of the Internet, including on-line content, user privacy and
taxation. In addition, Congress and other federal entities are considering other
legislative and regulatory proposals that would further regulate the Internet.
Congress is, for example, currently considering legislation on a wide range of
issues including Internet spamming, database privacy, gambling, pornography and
child protection, Internet fraud, privacy and digital signatures. Various states
have adopted and are considering Internet-related legislation. Increased United
States regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects.
International. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive on data protection that imposes restrictions on the processing of
personal data which are more restrictive than current United States privacy
standards. Under the directive, personal data may not be collected, processed or
transferred outside the European Union unless certain specified conditions are
met. In addition, persons whose personal data is processed within the European
Union are guaranteed a number of rights, including the right to access and
obtain information about their data, the right to have inaccurate data
rectified, the right to object to the processing of their data for direct
marketing purposes and in certain other circumstances, and rights of legal
recourse in the event of unlawful processing. The Directive will affect all
companies that process personal data in, or receive personal data processed in,
the European Union, and may affect companies that collect or transmit
information over the Internet from individuals in the European Union Member
States. In particular, companies with
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establishments in the European Union may not be permitted to transfer personal
data to countries that do not maintain adequate levels of data protection.
In addition, the European Union has adopted a separate, complementary
directive which pertains to privacy and the processing of personal data in the
telecommunications sector. This directive establishes certain requirements with
respect to, among other things, the processing and retention of subscriber
traffic and billing data, subscriber rights to non-itemized bills, and the
presentation and restriction of calling and connected line identification. In
addition, a number of European countries outside the European Union have
adopted, or are in the process of adopting, rules similar to those set forth in
the European Union directives. Although we do not engage in the collection of
data for purposes other than routing calls and billing for our services, the
data protection directives are quite broad and the European Union privacy
standards are stringent. Accordingly, the potential effect of these data
protection rules on the development of our business is uncertain.
COMPETITION
We compete in both the market for enhanced IP communications services and
the market for carrier transmission services. Each of these markets on a
stand-alone basis is highly competitive and has numerous service providers.
ENHANCED IP COMMUNICATIONS SERVICES
The market for enhanced Internet and IP communications services is new and
rapidly evolving. We believe that the primary competitive factors determining
success in the Internet and IP communications market are:
o quality of service
o the ability to meet and anticipate customer needs through multiple
service offerings
o responsive customer care services
o price
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. These industries include major
companies who have greater resources and larger subscriber bases than we have,
and have been in operation for many years.
Internet and IP Telephony Providers. Many companies provide, or are
planning to provide, certain portions of the complete communications solution we
offer, including Net2Phone and JFAX.COM.
Traditional Telecommunications Carriers. Several traditional
telecommunications companies, including industry leaders such as AT&T, Sprint,
Deutsche Telekom, MCI WorldCom and Qwest Communications International, have
recently announced their intention to offer enhanced Internet and IP
communications services in both the United States and internationally. All of
these competitors are significantly larger than we and have:
o substantially greater financial, technical and marketing resources
o larger networks
o a broader portfolio of services
o stronger name recognition and customer loyalty
o well-established relationships with many of our target customers
o an existing user base to which they can cross-sell their services
These and other competitors may be able to bundle services and products
that are not offered by us together with enhanced Internet and IP communications
services, which could place us at a significant competitive disadvantage. Many
of our competitors enjoy economies of scale that can result in lower cost
structure for transmission and related costs, which could cause significant
pricing pressures within the industry.
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CARRIER TRANSMISSION SERVICES
We compete with telecommunications providers, long distance carriers and
other long distance resellers and providers of carrier services for our carrier
transmission services. Our primary competitors in providing carrier transmission
services include:
o long distance carriers, including AT&T, MCI WorldCom and Sprint
Corporation
o foreign carriers, including British Telecom, Deutsche Telekom and Nippon
Telegraph and Telephone Corporation
o global telecommunications alliances, including Global One and BT/AT&T
o emerging carriers providing transmission services over the Internet,
including ITXC Corp., iBasis and AT&T Global Clearinghouse
o wholesale carrier providers, including STAR Telecommunications, Inc. and
Pacific Gateway Exchange
Competition for carrier traffic is primarily based on price. Decreasing
telecommunications rates have resulted in intense price competition and we
expect that competition will continue to increase significantly as
telecommunications rates decrease. Increased competition could force us to
further reduce our prices and profit margins, and may reduce our market share.
PROPERTIES
We maintain our executive offices at 430 Park Avenue, New York, New York,
which we sub-lease from RSL COM. This sub-lease extends until June 29, 2001. We
pay RSL COM annual rent of $96,000 for this space.
We lease a 1,184 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem, Israel. The
term of this lease extends until January 31, 2003, with an option to extend the
lease for an additional five year period. We pay annual rent of approximately
$240,000 plus Israeli value-added tax. We sublease a portion of our facility to
third parties.
Under a services agreement with RSL COM, we share space for employees and
equipment at eight locations with RSL COM. One of these locations is 60 Hudson
Street, New York, New York. This space houses our international gateway and
domestic switches. RSL COM provides these facilities to us at no direct cost.
The services agreement expires July 2006 with automatic extensions for
additional one-year terms unless terminated by one of the parties upon 30 days
notice prior to the end of the term.
EMPLOYEES
As of September 1, 1999, we employed 74 full-time and 11 part-time
employees, of which 65 are located in Israel and 20 are located in New York. We
consider our relationship with our employees to be good. None of our employees
is covered by collective bargaining agreements.
Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are, unless exempt, obligated to perform up to 31 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of the our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business if conditions should change, and no prediction can
be made as to the effect on us of any expansion of such obligations.
LEGAL PROCEEDINGS
We are not a party to any material litigation and are not aware of any
pending or threatened litigation that would have a material adverse effect on us
or our business taken as a whole.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Elie C. Wurtman...................................... 30 Chairman of the Board of Directors
Amos Sela............................................ 56 Chief Executive Officer and Director
Jacob A. Davidson.................................... 30 President
Mark J. Hirschhorn................................... 35 Vice President and Chief Financial Officer
Noam Bardin.......................................... 28 Vice President of Technology and Chief Technology
Officer
Shimmy Zimels........................................ 34 Vice President of Operations
Dr. Baruch D. Sterman................................ 38 Vice President of Research and Development and
Product Integration
Marc M. Tobin........................................ 33 General Counsel
Itzhak Fisher........................................ 43 Director
Nir Tarlovsky........................................ 33 Director
Donald R. Shassian................................... 44 Director
Jacob Z. Schuster.................................... 50 Director
</TABLE>
ELIE C. WURTMAN co-founded our company and has been the chairman of our
board of directors since April 1999. Mr. Wurtman was president and chief
executive officer of our company from November 1996 until March 1999 and acting
vice president of sales and marketing for our company from August 1998 to March
1999. Mr. Wurtman has served as vice president of emerging technologies for RSL
COM from April 1998 to May 1999. In November 1995, Mr. Wurtman co-founded
Ambient Corporation, Inc., a company which develops smartcard technology, and is
a director of Ambient. Mr. Wurtman co-founded Pioneer Management Corporation, a
holding company involved in several high-tech ventures, and was a director from
January 1992 to June 1996.
AMOS SELA has been chief executive officer and a director of our company
since April 1999. Prior to joining our company, Mr. Sela was the director and
deputy managing director of ISIS Information Systems, a leading South African
information technology systems integrator, since September 1996. From 1991 to
1996, Mr. Sela served as vice president of DCL Technologies Ltd, a company
specializing in the growth and management of high technology start-up companies.
JACOB A. DAVIDSON co-founded our company and has been president of our
company since April 1999. From May 1996 to March 1999, Mr. Davidson served as
chairman of the board of our company. Mr. Davidson co-founded Ambient
Corporation and served as its chairman and chief executive officer from June
1996 to March 1999. Mr. Davidson co-founded Pioneer Management Corporation and
was the managing director from January 1992 to June 1996.
MARK J. HIRSCHHORN has been our vice president and chief financial officer
since April 1999. Prior to joining our company, Mr. Hirschhorn served in various
positions at RSL COM, including vice president-finance from August 1997 to May
1999, global controller from January 1996 to May 1999 and assistant secretary
from September 1996 to May 1999. From October 1987 to December 1995,
Mr. Hirschhorn was employed at Deloitte & Touche LLP, most recently as senior
manager.
NOAM BARDIN co-founded our company and has been vice president of
technology and chief technology officer since June 1997. Prior to serving as
vice president, Mr. Bardin served as our global network director from November
1996 to May 1997. From November 1995 to October 1996, Mr. Bardin served as
director of operations for Ambient Corporation. From January 1995 to October
1995, Mr. Bardin worked for several
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Israeli high-tech companies in helping to secure government grants and
assistance. Prior to 1995, Mr. Bardin attended Hebrew University.
SHIMMY ZIMELS has been our vice president of operations since July 1997.
Prior to joining our company, Mr. Zimels was the controller and vice president
of finance of Net Media Ltd., a leading Israeli-based Internet service provider,
from June 1995 to June 1997. From April 1991 to May 1995, Mr. Zimels was a
senior tax auditor for the Income Tax Bureau of the State of Israel.
DR. BARUCH D. STERMAN has been our vice president of research and
development and product integration since May 1998. Prior to joining our
company, Dr. Sterman worked as a consultant for Israeli businesses in database
design, billing systems, and automated data flow from August 1996 to May 1998.
After receiving a doctorate in Physics in June 1993, Dr. Sterman founded a
start-up company, Gal-Or Lasers, that developed a compact laser (of his own
design) for industrial and medical use.
MARC M. TOBIN has been our general counsel since August 1998 and our
corporate secretary since September 1999. Prior to joining our company, Mr.
Tobin served as corporate counsel to Slim Fast Foods Company from October 1991
to July 1998 and assistant secretary from March 1995 to July 1998.
ITZHAK FISHER has been a director of our company since July 1997.
Mr. Fisher was a co-founder of RSL COM and has been a director, president and
chief executive officer of RSL COM since its inception in 1994. From 1992 to
1994, Mr. Fisher served as general manager of Clalcom Inc., the
telecommunications subsidiary of Clal (Israel), Ltd., Israel's largest
investment corporation. From 1990 to 1992, Mr. Fisher served as the special
consultant to the president of BEZEQ, the Israel Telecommunication Corp.,
Israel's national telecommunications company. Mr. Fisher co-founded, and was a
director, president and chief executive officer of Medic Media, Inc., a company
engaged in the business of renting telephone and television systems in hospitals
throughout Israel.
NIR TARLOVSKY has been a director of our company since July 1997.
Mr. Tarlovsky has served as the vice president of business development of RSL
COM since April 1995, and was a director of RSL COM from April 1995 until March
1997. Mr. Tarlovsky is also vice president of RSL COM North America, Inc., a
subsidiary of RSL COM. Mr. Tarlovsky has also served as a director of Telegate,
a German operator services company, since December 1998. From 1992 to March
1995, Mr. Tarlovsky served as senior economist of Clalcom. While at Clalcom, he
was responsible for the development of new international telecommunications
ventures.
DONALD R. SHASSIAN has been a director of our company since May 1999. Mr.
Shassian has served as chief operating officer of RSL COM since August 1999, and
he has served as executive vice president, chief financial officer and treasurer
of RSL COM since January 1999. From 1993 through 1998, Mr. Shassian served as
senior vice president and chief financial officer of Southern New England
Telecommunications. From 1988 through 1993, Mr. Shassian served as a partner of
Arthur Andersen LLP, providing audit and business advisory services to companies
in the telecommunications industry. In 1992, Mr. Shassian was named the
partner-in-charge of Arthur Andersen's telecommunications industry practice
group for North America.
JACOB Z. SCHUSTER has been a director of our company since May 1999. He has
been a director, executive vice president and assistant secretary of RSL COM
since 1994. Mr. Schuster served as treasurer of RSL COM from 1994 through 1998,
and was chief financial officer from February 1997 until December 1998.
Mr. Schuster has been president and treasurer of RSL Management Corporation
since November 1995 and executive vice president of RSL Investments Corporation
since March 1994. From 1986 to 1992, Mr. Schuster was a general partner and
treasurer of Goldman Sachs.
By the time this offering is completed, we intend to appoint at least two
independent directors to our board of directors.
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DIRECTOR COMPENSATION
We do not pay our directors cash compensation. Directors are reimbursed for
the expenses they incur in attending meetings of the board or board committees.
Non-employee directors will be eligible to receive options to purchase common
stock and awards of stock under an equity compensation plan for directors. See
"1999 Directors' Plan."
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to or upon the completion of this offering, our board of directors
will create an executive committee, a compensation committee and an audit
committee.
We expect that our executive committee will be composed of at least three
directors. The executive committee will have such powers and duties as shall be
determined by the board of directors.
We expect that our compensation committee will be composed of at least two
independent directors to be named prior to the completion of this offering. The
compensation committee will have the authority to evaluate our compensation
policies, determine our executive compensation policies and guidelines and
administer our stock option and compensation plans.
We expect that our audit committee will be composed of Messrs. Shassian,
Schuster and an independent director to be named prior to the completion of this
offering. The audit committee will be charged with the following
responsibilities:
o recommending the engagement of independent accountants to audit our
financial statements
o discussing the scope and results of the audit with our independent
accountants
o reviewing the functions our management and our independent accountants
pertaining to our financial statements
o performing such other related duties and functions as are deemed
appropriate by the audit committee and the board of directors
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers or directors presently serve, or in the past
served, on the compensation committee of any other company, nor do we expect any
member of our compensation committee to serve, or in the past to have served, on
the compensation committee of any other company.
EXECUTIVE COMPENSATION
We employed Mr. Sela as our chief executive officer beginning on April 1,
1999, with an annual base salary of $220,000.
Mr. Hirschhorn became our chief financial officer on April 1, 1999, with an
annual base salary of $200,000. Previously, Mr. Hirschhorn served as vice
president of finance of RSL COM, with an annual base salary of $200,000 in 1999
and $180,000 in 1998.
Mr. Davidson has been our president since April 1, 1999, and Mr. Wurtman
has been our chairman since April 1, 1999. Following RSL COM's purchase of Mr.
Davidson's and Mr. Wurtman's remaining interests in us, Mr. Davidson and Mr.
Wurtman entered into employment agreements with RSL COM providing for an annual
base salary of $180,000 for Mr. Wurtman and an annual base salary of $81,250 for
Mr. Davidson. Mr. Davidson's employment agreement with RSL COM provided that Mr.
Davidson would devote 50% of his time to the Company's business. Commencing
April 1, 1999, both Mr. Wurtman's and Mr. Davidson's annual base salary is
$180,000. Both Mr. Davidson and Mr. Wurtman will devote 100% of their time to
our business.
In 1998, we paid Mr. Bardin $120,000. As of April 1, 1999, Mr. Bardin's
annual base salary is $150,000.
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STOCK OWNERSHIP OF OUR DIRECTORS AND EXECUTIVE OFFICERS
None of our executive officers or directors currently own any of our
capital stock. However, two of our executive officers hold restricted units
granted under the RSL COM 1997 stock incentive plan described below. Mr. Bardin
holds 100,000 restricted units, and Mr. Zimels holds 35,000 restricted units. We
also intend to grant options to purchase our common stock to our executive
officers under our proposed 1999 Stock Incentive Plan and to our non-employee
directors under our proposed 1999 Directors' Plan. In addition, we expect that
our executive officers, directors and employees and RSL COM employees will be
offered the opportunity to purchase shares of our common stock at the initial
public offering price in this offering from the shares reserved for employees
and directors of our company and RSL COM.
We have adopted a policy to encourage all of our executive officers and
directors not to sell in excess of 50% of their holdings in us while they are
our employees or directors, except for personal estate planning or tax purposes.
STOCK OPTION INFORMATION; RSL COM 1997 STOCK INCENTIVE PLAN
Historically, we have not had a stock option plan. RSL COM granted an
aggregate of 470,870 restricted units to some of our executive officers, key
employees and directors under its 1997 stock incentive plan. These restricted
units are redeemable for shares of RSL COM or cash (at RSL COM's discretion)
based on the value of RSL COM attributable to us. The restricted units generally
vest over three-year periods and must be redeemed by the employee before the
seventh anniversary of their date of grant.
Upon completion of this offering, we expect that the restricted units will
be converted into options to purchase shares of our common stock. The conversion
basis will be determined prior to completion of this offering. We do not yet
know what the conversion or exercise price will be or the level of participation
of the restricted unit holders in a transaction to convert their restricted
units.
1999 STOCK INCENTIVE PLAN
We expect to adopt a stock incentive plan prior to the completion of this
offering. The purpose of the plan is to foster and promote the long-term
financial success of our company and materially increase shareholder value by
(a) motivating superior performance by means of performance-related incentives,
(b) encouraging and providing for the acquisition of an ownership interest in
our company by executive officers, other employees and consultants and
(c) enabling us to attract and retain the services of an outstanding management
team upon whose judgment, interest and effort the successful conduct of our
operations is largely dependent.
GENERAL. The plan provides for the grant of (i) incentive stock options
and non-incentive stock options to purchase our common stock; (ii) stock
appreciation rights, which may be granted in tandem with or independently of
stock options; (iii) restricted stock and restricted units; (iv) incentive stock
and incentive units; (v) deferred stock units; and (vi) stock in lieu of cash.
We have reserved shares of our common stock for issuance upon exercise
of awards to be granted under the plan.
ADMINISTRATION. The plan will be administered and interpreted by the
compensation committee, which will consist of two or more members of our board
of directors who are each outside directors within the meaning of Section
162(m) of the Code and non-employee directors within the meaning of Rule 16b-3
under the Securities Exchange Act of 1934.
ELIGIBILITY AND EXTENT OF PARTICIPATION. The plan provides for
discretionary grants of awards to officers of the company within the meaning of
Rule 16a-1(f) of the Exchange Act and to other employees and consultants of the
company. Directors who are non-employees are prohibited from participating in
the plan. The maximum number of shares for which options or stock appreciation
rights may be granted to any one participant in a calendar year is of
the shares of common stock available under the plan.
STOCK OPTIONS. Under the plan, the compensation committee may grant both
incentive and non-incentive stock options for common stock of the company. The
options generally will have a term of seven years and will become exercisable in
three equal installments commencing on the first anniversary of the date of
grant. The purchase price per share payable upon exercise of an option will be
established by the
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compensation committee; provided, however, that such option exercise price may
be no less than the fair market value of a share of our common stock on the date
of grant. The option exercise price is payable by one of the following methods
or a combination of methods to the extent permitted by the compensation
committee: (i) in cash or its equivalent, or (ii) subject to the approval of the
compensation committee, in shares of common stock owned by the participant for
at least six months prior to the date of exercise. The compensation committee
may provide that a participant who delivers shares of common stock to exercise
an option when the market value of the common stock exceeds the exercise price
of the option will be automatically granted reload options for the number of
shares delivered to exercise the option. Reload options will be subject to the
same terms and conditions as the related option except that the exercise price
will be the fair market value on the date the reload option is granted and such
reload option will not be exercisable for six months.
STOCK APPRECIATION RIGHTS. The compensation committee may grant stock
appreciation rights in tandem with or independently of a stock option. Stock
appreciation rights entitle the participant to receive the excess of the fair
market value of a stated number of shares of common stock on the date of
exercise over the base price of the stock appreciation right. The base price may
not be less than 100% of the fair market value of the common stock on the date
the stock appreciation right is granted. The compensation committee will
determine when a stock appreciation right is exercisable, the method of
exercise, and whether settlement of the stock appreciation right is to be made
in cash, shares of common stock or a combination of cash and shares.
RESTRICTED STOCK AND RESTRICTED UNITS. The compensation committee may
grant awards in the form of restricted stock and restricted units. For purposes
of the plan, restricted stock is an award of common stock and a restricted unit
is a contractual right to receive common stock (or cash based on the fair market
value of common stock). Such awards are subject to such terms and conditions, if
any, as the compensation committee deems appropriate. Unless otherwise
determined by the compensation committee, participants are entitled to receive
either currently or at a future date, dividends or other distributions paid with
respect to restricted stock and, if and to the extent determined by the
compensation committee, either to be credited with or receive currently an
amount equal to dividends paid with respect to the corresponding number of
shares covered by restricted units. Restricted stock and restricted units become
vested and nonforfeitable and the restricted period shall lapse upon the third
anniversary of the date of grant unless the compensation committee determines
otherwise.
INCENTIVE STOCK AND INCENTIVE UNITS. The plan allows for the grant of
awards in the form of incentive stock and incentive units. For purposes of the
plan, incentive stock is an award of common stock and an incentive unit is a
contractual right to receive common stock. Such awards will be contingent upon
the attainment, in whole or in part, of certain performance objectives over a
period to be determined by the compensation committee. With regard to a
particular performance period, the compensation committee has the discretion,
subject to the plan's terms, to determine the terms and conditions of such
awards, including the performance objectives to be achieved during such period
and the determination of whether and to what degree such objectives have been
attained. Unless otherwise determined by the compensation committee,
participants are entitled to receive, either currently or at a future date, all
dividends and other distributions paid with respect to the incentive stock and,
if and to the extent determined by the compensation committee, either to be
credited with or receive currently an amount equal to dividends paid with
respect to the corresponding number of shares covered by the incentive units.
ELECTIVE UNITS. On such date or dates established by the compensation
committee and subject to such terms and conditions as the compensation committee
will determine, a participant may be permitted to defer receipt of all or a
portion of his annual compensation and/or annual incentive bonus ("deferral
annual amount") and receive the equivalent amount in elective stock units based
on the fair market value of the common stock on the date of grant. To the extent
determined by the compensation committee, a participant may also receive
supplemental stock units for a percentage of the deferral annual amount. On the
date of a participant's termination of employment, the participant will receive
a number of shares of common stock equal to the number of elective units and
supplemental units held on that date. Elective units carry no voting rights
until the shares have been issued. The compensation committee will determine
whether any dividend equivalents attributable to elective units are paid
currently or credited to the participant's account and deemed
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reinvested in common stock. Elective units and dividend equivalents with respect
to the elective units are fully vested at all times. Unless the compensation
committee provides otherwise, supplemental stock units and dividend equivalents
with respect to the supplemental stock units will become fully vested on the
third anniversary of the date the corresponding deferred amount would have been
paid.
STOCK IN LIEU OF CASH. The plan authorizes the compensation committee to
grant awards of common stock to executive officers in lieu of all or a portion
of an award otherwise payable in cash pursuant to any bonus or incentive
compensation plan of the company, based on the fair market value of the common
stock.
AMENDMENT AND TERMINATION. The plan will terminate not later than ten
years from the date of its adoption. The board of directors or the compensation
committee may amend, suspend or terminate the plan or any portion of it at any
time. However, no amendment may be made to the plan without shareholder approval
if such amendment would (1) increase the number of shares of common stock
subject to the plan, (2) change the price at which awards may be granted, or
(3) remove the administration of the plan from the compensation committee.
1999 PERFORMANCE INCENTIVE PLAN
We expect to adopt a performance incentive plan prior to the completion of
this offering. The purpose of the plan is to assist the company and its
subsidiaries to attract, retain, motivate and reward the best qualified
executive officers and key employees by providing them with the opportunity to
earn competitive compensation directly linked to our performance.
GENERAL. Under the plan, bonuses are payable if we meet any one or more of
several performance criteria, which are to be set annually by the compensation
committee, after receipt of the proposed annual budget for the coming year from
management. Both the targets and proposed budget must be approved by the board
of directors. It is expected that the proposed targets, including revenues and
end users, and budget for the coming year will be presented by management in the
fourth quarter of the current year and approved not later than March 31 of the
next year.
It is expected that the period over which performance is to be measured
will be one year.
The compensation committee recommends to the board of directors whether
bonuses payable under the plan will be paid in cash, shares of common stock or
in any combination thereof. No more than shares common stock may be
issued under the plan.
ADMINISTRATION. The plan shall be administered and interpreted by the
compensation committee, which shall consist of two or more members of the board
of directors who are each "outside directors" within the meaning of Section
162(m) of the Code and "non-employee directors" within the meaning of
Rule 16b-3 under the Exchange Act. The compensation committee will establish the
performance targets and certify whether such performance targets have been
achieved.
BONUS. Bonus amounts are determined as follows: if 100% of the
pre-established targets are achieved, participants will generally be eligible to
receive a bonus equal to their base salary for such year. If 120% of such
targets are achieved, the bonus potentially payable to participants will
generally equal twice their base salary for such year and, if 80% of such
targets are achieved, the bonus potentially payable to participants will
generally equal 25% of their base salary for such year. To the extent the
Company's results exceed 80% of the targets but is less than 120% of the
targets, the amount of the bonus payable to participants will be adjusted
proportionately based on where such results fall within the ranges set forth
above.
To be eligible for any bonus, the company must meet or exceed its annual
targets. Once eligibility has been determined, a bonus, if applicable, will
consist of two components. Fifty percent of the amount determined pursuant to
the formula described above will be payable if the targets are achieved. Up to
an additional 50% of such amount will be payable in the discretion of the
compensation committee. In addition, the plan permits the compensation committee
to grant discretionary bonuses to participants, notwithstanding that a bonus
would not otherwise be payable under the plan, to recognize extraordinary
individual performance.
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ELIGIBILITY. Each executive officer of the company and each key employee
who is recommended by the chief executive officer and selected by the
compensation committee and approved by the board of directors is eligible to
receive a bonus under the plan.
OTHER TERMS. No plan participant may receive a bonus with respect to any
plan year in excess of $500,000. The compensation committee may impose
conditions with respect to an award of common stock, including conditioning the
vesting of shares on the performance of additional service. The compensation
committee may permit a participant to receive all or a portion of his bonus
payable in common stock. If a participant's employment terminates prior to the
completion of performance period, the compensation committee shall determine
whether a prorated bonus may be paid to such a participant. In addition, the
plan permits a participant to elect to defer payment of his or her bonus on
terms and conditions established by the compensation committee.
AMENDMENT AND TERMINATION. Any amendment or termination of the plan
requires stockholder approval.
1999 EMPLOYEE STOCK PURCHASE PLAN
We expect to adopt an employee stock purchase plan prior to the completion
of this offering. The purpose of the employee stock purchase plan is to align
employee and shareholder long-term interests by facilitating the purchase of
common stock by employees and to enable employees to develop and maintain
significant ownership of common stock.
GENERAL. The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code, and to assure the
participants of the tax advantages provided thereby. We have reserved
shares of our common stock for issuance under the employee stock
purchase plan.
ADMINISTRATION. The employee stock purchase plan will be administered by
the compensation committee established by the board of directors comprised
solely of non-employee directors who are not eligible to participate in the
employee stock purchase plan. The compensation committee may make such rules and
regulations and establish such procedures for the administration of the employee
stock purchase plan as it deems appropriate.
ELIGIBILITY. All employees of the company and its designated subsidiaries
who have at least one year of service and work more than 20 hours per week will
be eligible to participate in the employee stock purchase plan, except that
employees who are "highly compensated" within the meaning of Section 414(q) of
the Code and employees who are five percent or more stockholders of the company
or any subsidiary of the company will not be eligible to participate.
Designations of corporations participating in the employee stock purchase plan
may be made from time to time by the committee from among any subsidiary
corporations of the company, including corporations which become subsidiaries
after the adoption and approval of the employee stock purchase plan.
GRANTS. Pursuant to the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of common stock up to four times
per calendar year through regular payroll deductions and/or cash payments in an
aggregate amount equal to 1% to 10% of the employee's base pay, as elected by
the employee, for each payroll period. Under the employee stock purchase plan, a
participant's right to purchase shares of common stock may not accrue at a rate
that exceeds $25,000 of fair market value of common stock during any calendar
year.
EXERCISE PRICE. As of the last day of each "Purchase Period" ending within
an "Offering Period," participating employees will be able to purchase shares of
common stock with payroll deductions for a purchase price equal to the lesser
of:
o 85% of the fair market value of common stock on the date the Offering
Period begins and
o 85% of the fair market value of common stock on the last day of the
Purchase Period.
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OTHER TERMS. The initial Offering Period will commence on the first
trading day on or after the effective date of the employee stock purchase plan
and end on the last trading day on or prior to the second anniversary of the
commencement date. Each subsequent Offering Period will have a duration of
approximately one year, commencing on the first trading day and ending on the
last trading day of each calendar year (commencing with calendar year 2001).
Each "Purchase Period" will have a duration of approximately six months.
A right to purchase shares of a series which is granted to a participant
under the employee stock purchase plan is not transferable otherwise than by
will or the laws of descent and distribution, and is exercisable, during the
participant's lifetime, only by the participant.
1999 DIRECTORS' PLAN
We expect to adopt a directors' stock compensation plan prior to the
completion of this offering. The purposes of the directors' plan are to enable
us to attract, maintain and motivate qualified directors and to enhance a
long-term mutuality of interest between our directors and shareholders of our
common stock by granting our directors shares and options to purchase our
shares.
Under the directors' plan, on the first business day following each annual
meeting of our shareholders during the 10-year term of the directors' plan, each
non-employee director will be granted a number of options to acquire a number of
shares of our common stock with an aggregate fair market value on the date of
grant equal to $ ($ in the case of a non-executive chairman of the
board of directors so long as any such person does not receive compensation for
services to us other than as a non-executive chairman). Each option will have a
10-year term. The options become exercisable in five equal annual installments
commencing on the first anniversary of the date of grant. In addition, on the
date of the annual meeting of our shareholders occurring in each of 2000 through
2010, each non-employee director will be granted a number of shares of common
stock with an aggregate fair market value on the date of grant equal to
$ . The maximum number of shares that may be issued under the Directors'
Plan is .
EMPLOYMENT AGREEMENTS
We expect to enter into employment agreements with each of Messrs. Sela,
Wurtman, Davidson, Hirschhorn, Bardin and Zimels, with the following principal
terms:
o The agreement will be effective as of April 1, 1999 and will end on March
31, 2002.
o The employee is entitled to receive a base salary as stated below,
increased on each January 1, commencing January 1, 2001, by an amount
equal to his base salary then in effect, multiplied by the applicable
cost of living index during the prior year. The employee's base salary,
as adjusted for cost of living increases, may be further increased at the
option and in the discretion of the board of directors.
o The employee shall be granted options to purchase shares of our common
stock as set forth below, under our proposed 1999 Stock Incentive Plan,
at an exercise price of $12.70 per share. The employee's options are
exercisable in three equal installments, as long as the employee is
employed by us on the applicable vesting date, and after an option is
exercisable, that option remains exercisable until the expiration of
seven years from the date of the agreement. If the employee is terminated
for any reason prior to September 30, 2000, following such date, any
unvested options will expire. If the employee is terminated for cause,
following such date, all options will expire.
o The employee's options are immediately exercisable in full upon a change
of control. The employee's options, following any termination of the
employee's employment, other than for cause, remain exercisable for the
lesser of two years and the remaining term of his options.
o If the employee's employment is terminated by us without cause or by the
employee for good reason, the employee is entitled to receive previously
earned but unpaid salary, vested benefits and a payment equal to his base
salary as in effect immediately prior to the termination date.
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o If the employee dies or is unable to perform his duties, he or his
representative or estate or beneficiary will be paid, in addition to any
previously earned but unpaid salary and vested benefits, 12 months' total
base salary reduced, in the case of disability, by any disability
benefits he receives.
o If the employee's employment is terminated for any other reason, he is
entitled to his earned salary and vested benefits.
The following table sets forth the position, base salary and number of
shares of common stock represented by the options granted for each of Messrs.
Wurtman, Sela, Davidson, Hirschhorn, Bardin and Zimels:
<TABLE>
<CAPTION>
SHARES OF
POSITION BASE SALARY COMMON STOCK
---------------------------------------- ----------- ------------
<S> <C> <C> <C>
Elie C. Wurtman......................... Chairman of the Board of Directors $ 180,000
Amos Sela............................... Chief Executive Officer $ 220,000
Jacob A. Davidson....................... President $ 180,000
Mark J. Hirschhorn...................... Vice President and Chief Financial $ 200,000
Officer
Noam Bardin............................. Vice President of Technology and $ 150,000
Operations and Chief Technology
Officer
Shimmy Zimels........................... Vice President of Operations $ 140,000
</TABLE>
We also have an employment agreement with Jerry Norton. Under an employment
agreement dated May 1, 1998, Mr. Norton agreed to be our Vice President of Site
Development. Mr. Norton receives a base salary of $135,000 per year and a bonus
of up to 25% of his base salary upon the attainment of certain performance
objectives to be established by our board of directors, subject to the approval
of our board of directors. Mr. Norton is entitled to be granted 35,000 units
under the RSL COM 1997 Stock Incentive Plan. The agreement is for a three year
term. If we terminate Mr. Norton without cause, he is entitled to receive a
severance payment equal to one year of his base salary or such shorter period
remaining under the agreement.
PRINCIPAL STOCKHOLDERS
Prior to this offering, RSL COM owned 100% of our capital stock. In this
offering, we will be selling shares, or % of our common
stock. Following this offering, RSL COM will own 100% of our outstanding
Class B common stock, which will represent approximately % of the combined
voting power of all classes of our voting stock and approximately % of the
economic interest in our company. Our Class B common stock is transferable only
to permitted transferees, as defined in the section of this prospectus entitled
"Description of Capital Stock." RSL COM has informed us that it currently has no
plans to dispose of the shares of Class B common stock owned by it. In addition,
we have given RSL COM both demand and piggyback registration rights with respect
to the shares of common stock it holds. For more information about these
registration rights, see "Related Party Transactions--RSL COM." The address of
RSL COM is 767 Fifth Avenue, Suite 4300, New York, New York 10153.
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RELATED PARTY TRANSACTIONS
AMBIENT
In January 1998, we entered into a cooperation agreement with Ambient
Corporation, a public company founded by Elie Wurtman, our chairman, and Jacob
Davidson, our president.Mr. Wurtman is a director of Ambient. Mr. Davidson was
chairman and chief executive officer of Ambient from June 1996 to March 1999.
Mr. Davidson owns a 7% interest in Ambient. Under the cooperation agreement, we
rent approximately 150 square meters of our facility in Jerusalem, Israel to
Ambient and provide them with office and accounting services for approximately
$1,000 per month. In addition, Ambient rented office space to us before we moved
into our new facilities in Jerusalem. We and Ambient will review the schedule of
services and fees every six months, and we may amend the schedule upon terms and
conditions mutually agreed upon by us and Ambient. The agreement was amended on
March 1, 1999 to reduce the amount of space rented to Ambient and the related
rent. We believe the rent and fees for such services are provided at fair market
value.
P.M.C.
In January 1998, we entered into a cooperation agreement with P.M.C.
Holdings Group Inc. BVI, a company founded by Elie Wurtman and Jacob Davidson.
Mr. Wurtman was a director of P.M.C. from January 1992 to June 1996, and
Mr. Davidson was a managing director of P.M.C. from January 1992 to June 1996.
Under the cooperation agreement, we rent one office in our facility in
Jerusalem, Israel to P.M.C. and provide them with accounting and support
services. In addition, P.M.C. provides us with consulting and management
services for a fee of $10,000 per month. We and P.M.C. will review the schedule
of services and fees every six months, and we may amend the schedule upon terms
and conditions mutually agreed upon by us and P.M.C. The agreement was amended
on March 1, 1999 to revise the rental fee. We believe all fees under the amended
agreement are at fair market value.
RSL COM
On July 23, 1997, RSL COM acquired 51% of our outstanding share capital.
From that date through March 31, 1998, RSL COM continued to purchase additional
shares from our other stockholders. On March 31, 1998, we entered into a merger
agreement with RSL COM and our remaining minority stockholders. Pursuant to the
agreement, we merged with and into a newly formed wholly-owned subsidiary of RSL
COM. Since RSL COM's acquisition of a controlling interest in us, RSL COM has
funded our cash requirements through inter-company loans bearing interest at the
rate of 14% per annum. As of June 30, 1999, we owed approximately $9.6 million
(principal and accrued interest) to RSL COM. The inter-company loan is due on
demand after June 30, 2000. Upon completion of an initial public offering by us,
the maturity date will be extended to the first anniversary of the completion of
such offering. RSL COM will, upon completion of this offering, provide a
$10 million line of credit (in addition to the existing $9.6 million), bearing
interest at the rate of 14% per annum, due on demand after November 1, 2000, and
to be used by us for working capital purposes.
RSL COM currently owns all of our capital stock. Following the completion
of this offering, RSL COM will continue to be our controlling shareholder and
will own 100% of the outstanding Class B common stock, which will represent
approximately % of the combined voting power of all of our outstanding
capital stock and approximately % of the economic interest in our company (or
% and % if the underwriters' over-allotment option is exercised in full).
For so long as RSL COM continues to beneficially own shares of capital
stock representing more than 50% of the combined voting power of our outstanding
capital stock, it will be able to approve any matter submitted to a vote of our
stockholders, including, among other things, the election of all members of the
board of directors. In addition, there currently are only limited restrictions
on RSL COM's ability to compete with us. See "--Services Agreement." Therefore,
various conflicts of interest could arise between ourselves and RSL COM.
RSL COM has advised us that it currently has no plans to dispose of the
shares of Class B common stock owned by it. However, RSL COM has no contractual
obligation to retain its shares of our Class B common stock, except RSL COM has
agreed, subject to specified exceptions, not to sell or otherwise dispose
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of any shares of our Class B common stock for a period of 180 days from the date
of this prospectus without the prior written consent of Lehman Brothers Inc.
This lock-up agreement does not restrict RSL COM from selling shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. As a result, there can be no assurance
concerning the period of time during which RSL COM will retain its ownership of
our Class B common stock owned by it following the offering. See "--Registration
Rights Agreement."
SERVICES AGREEMENT
We entered into a services agreement with RSL COM on July 23, 1997, which
was subsequently amended and restated as of , 1999. As amended
and restated, the agreement extends to , 2004, and is
automatically extended for additional one-year terms unless terminated by RSL
COM or us. The services agreement may be terminated by us or RSL COM for cause,
by the non-bankrupt party in the event of bankruptcy of the other party or by
RSL COM should RSL COM and/or its affiliates hold less than 50% of the voting
control of our outstanding common stock.
Services and Facilities
Under the agreement, if we require equipment space or limited office space
at any location where RSL COM maintains an office or equipment, RSL COM is
required to use its reasonable best efforts to provide us such space, subject to
limitations. We are required to pay RSL COM our proportionate share of all lease
payments associated with such office or equipment space. However, RSL COM may
decline to provide us office and equipment space in Latin America. In addition,
RSL COM is required to make reasonable efforts to assist us in obtaining
Internet, frame relay and dedicated lines from third parties in countries where
RSL COM has communication switches colocated with our network servers at the
same price that RSL COM pays such third parties. As of June 30, 1999, we
colocated offices in five locations and equipment in five locations. RSL COM is
also required to use its reasonable efforts to purchase dedicated bandwidth
connectivity on our behalf from third party bandwidth suppliers at the same
price as RSL COM pays such third party suppliers. As a result, we realize
certain bulk pricing benefits received by RSL COM.
Under the services agreement, RSL COM is also required to provide us with
the following services:
o domestic inbound traffic termination--RSL COM is required to
terminate our domestic inbound traffic through RSL COM's switches in
countries where our servers and RSL COM's switches are co-located.
This termination service is provided to us at the then prevailing
fair market rates for such service.
o international outbound termination--RSL COM is required to terminate
our international outbound telephone traffic in each country where
our servers and RSL COM's switches are co-located. This termination
service is provided to us at the then prevailing fair market rates
for such service.
o traffic origination--RSL COM is required to use its best efforts to
assist us in obtaining services, including toll-free services, from
local third parties which will provide our users with the ability to
access our network at the same rates offered by such third parties
to RSL COM in countries where our servers and RSL COM's switches are
colocated.
o use of RSL COM switches--RSL COM is required to provide us with use
of RSL's switches to connect our carrier customers in each location
where our servers and RSL COM's switches are colocated. The
termination rate is $0.01 per minute. We are charged for a minimum
usage of 100,000 minutes per month per switch per connection,
whether or not such minutes are used. In addition, RSL COM provides
our carrier customers billing and other similar customer-related
services at a charge of $0.01 per minute of carrier traffic usage.
o use of prepaid calling platform--RSL COM is required to provide us
with access to, and use of, RSL COM's prepaid calling platform in
each location where our servers and RSL COM's switches are
colocated. The fee for using RSL COM's prepaid calling card platform
is $0.01 per minute of traffic usage. In addition, RSL COM provides
us with additional customer-related services for our prepaid calling
services at a rate of $0.015 per minute of traffic usage, all
subject to certain minimum minutes per month per service.
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In the event any of RSL COM's current or future strategic partner objects to RSL
COM providing us with any of the foregoing services, RSL COM can cease providing
the service to us. A strategic partner is a minority shareholder in RSL COM or
any RSL COM subsidiary owning more than 10% of the common stock of such entity.
However, RSL COM is required to use reasonable efforts to encourage its
strategic partners not to object. To date no strategic partner has objected to
RSL COM providing us with these services.
Under the services agreement, we are required to provide Internet telephony
services and facilities to RSL COM necessary to route RSL COM's international
telecommunications traffic between all originations and destinations we service.
The agreement provides that we are required to use, at RSL COM's request, up to
50% of our network capacity to route RSL COM's international telecommunications
traffic between our origination and termination points. These services are
provided to RSL COM at the then prevailing fair market rates.
Marketing
Under the services agreement, we and RSL COM will engage in joint
marketing. Each of us is required to place, in a prominent location, a link on
our home page Web site to the other's home page Web site. We will also
cross-sell each other's products and services, including through promotional
materials and customer service representatives and other additional promotional
efforts. However, neither we nor RSL COM are required to market or promote a
product or service of the other if such product or service competes with the
other party's product or service.
Non-Competition
Under the services agreement, until the second anniversary of the date of
the services agreement RSL COM and all subsidiaries in which it has 50% or more
of the voting power are prohibited from providing Internet telephony services,
other than through us, so long as we provide Internet telephony services to RSL
COM and its subsidiaries. During this period, RSL COM and its subsidiaries are
also prohibited from becoming a stockholder, partner or owner of an entity that
provides Internet telephony services except:
o RSL COM and its subsidiaries may acquire a passive interest of up to 20%
in an entity that provides Internet telephony services
o RSL COM and its subsidiaries may acquire an interest in an entity that
provides Internet telephony services, so long as promptly following the
date of its investment Internet telephony services are or become
ancillary to the business of such entity
For purposes of the services agreement, Internet telephony services means
(1) the provision of "phone to phone" service marketed as IP to the general
public and (2) Web-based voice telecommunications services marketed to the
general public, in each case to the extent such services are offered or
contemplated to be offered to our customers as of the date of the agreement.
The non-compete clause of the services agreement does not apply to any of
RSL COM's publicly-traded subsidiaries.
REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with RSL COM under which we have given
RSL COM the right to require us on three occasions to register for sale the
shares of common stock they hold. RSL COM will not be allowed to exercise these
registration rights during the 180-day lock-up period. RSL COM also has an
unlimited number of "piggyback" registration rights. This means that any time we
register our common stock for sale, RSL COM will have the right to include their
common stock in that offering and sale.
We have agreed to pay all expenses that result from registration of
RSL COM's common stock under the registration rights agreement (other than the
expenses RSL COM would pay for its counsel for such registration, underwriting
commissions for the common stock it sells and RSL COM's taxes). We have also
agreed to indemnify RSL COM against liabilities that may result from their sale
of common stock they hold, including Securities Act liabilities.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of our capital
stock. This summary does not purport to be complete. For a more detailed
description, see our amended and restated certificate of incorporation and
by-laws, copies of which we have filed as exhibits to the registration
statement, and the applicable provisions of Delaware law.
Immediately prior to the closing of this offering, we will restate our
certificate of incorporation to change our authorized capital stock to
shares of Class A common stock (which we refer to as common stock in
this prospectus), shares of Class B common stock and
shares of preferred stock, par value $0.001 per share, and to convert each
outstanding share of our current common stock into shares of our
newly created Class B common stock (totaling shares of Class B
common stock).
COMMON STOCK AND CLASS B COMMON STOCK
General
The rights of holders of common stock are subject to the rights of holders
of any preferred stock which may be issued in the future. All outstanding shares
of common stock are, and the shares of common stock to be sold by us in this
offering when issued will be, duly authorized, validly issued, fully paid and
nonassessable. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to share ratably in all net assets
available for distribution to stockholders after payment to creditors. The
holders of common stock and Class B common stock have identical rights except
with respect to voting, conversion and transfer. The common stock is not
redeemable and has no preemptive or conversion rights.
Voting Rights
Holders of our common stock are entitled to one vote per share on all
matters submitted for stockholder vote, except matters submitted to the vote of
another class or series of shares, while holders of Class B common stock are
entitled to ten votes per share. Holders of common stock and Class B common
stock are not entitled to cumulative voting rights. Cumulative voting for the
election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
Dividends
Holders of common stock and Class B common stock are entitled to receive
dividends out of assets legally available for this purpose at the times and in
the amounts as the board of directors may from time to time determine. Holders
of our common stock and Class B common stock will share equally on a per share
basis in any dividend declared by the board of directors, subject to any
preferential rights of any outstanding preferred stock. Dividends consisting of
shares of common stock and Class B common stock may be paid only as follows:
(1) shares of common stock may be paid only to holders of common stock, and
shares of Class B common stock may be paid only to holders of Class B common
stock; and (2) the number of shares so paid will be equal on a per share basis
with respect to each outstanding share of common stock and Class B common stock.
We have not paid any dividends on our common stock and do not anticipate paying
any cash dividends on such stock in the foreseeable future. See the section of
this prospectus entitled "Dividend Policy" for more information.
Merger or Consolidation
In the event of a merger or consolidation, the holders of common stock and
Class B common stock will be entitled to receive the same per share
consideration, if any, except that if the consideration includes voting
securities (or the right to acquire voting securities, or securities
exchangeable for, or convertible into, voting securities), we are required,
unless the holders of Class B common stock agree, to provide for the holders of
Class B common stock to receive consideration entitling them to ten times the
number of votes per share as the consideration being received by holders of the
common stock.
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Conversion of Class B Common Stock
Our Class B common stock will be convertible into common stock on a
share-for-share basis at the option of the holder at any time, or automatically
upon transfer to a person or entity which is not a permitted transferee.
Permitted transferees will include RSL COM, its direct and indirect
majority-owned subsidiaries, successors of RSL COM following a merger,
consolidation or reorganization if RSL COM is not the surviving entity, or
Ronald S. Lauder or members of his family, a trust established by him for his
family members or entities controlled by him. Ronald S. Lauder is the
controlling shareholder of RSL COM. In the event a permitted transferee receives
Class B common stock and after that time ceases to qualify as a permitted
transferee, all Class B common stock held by that permitted transferee will
automatically convert into shares of our common stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and the board of directors may fix the number of shares of each series
and the designation, powers, privileges, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The specific matters that our board of directors may determine include the
following:
o the designation of each series
o the number of shares of each series
o the rate of any dividends
o whether any dividends shall be cumulative or non-cumulative
o the terms of any redemption
o the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of affairs of our company
o rights and terms of any conversion or exchange
o restrictions on the issuance of shares of the same series or any other
series
o any voting rights
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our by-laws provide that directors and officers shall be indemnified by our
company to the fullest extent authorized by Delaware law, as it now exists or
may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with services for or on behalf of us. The by-laws also
authorize us to enter into one or more agreements with any person that provide
for indemnification greater or different from that provided in the by-laws. To
the extent that indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of our company,
we have been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LIMITATION OF LIABILITY OF DIRECTORS
Our amended and restated certificate of incorporation provides, as
authorized by Section 102(b)(7) of the Delaware General Corporation Law (DGCL),
that our directors will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability imposed by law, as in effect from time to time, for the following:
o any breach of the director's duty of loyalty to our company or our
stockholders
o any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law
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o unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL
o any transaction from which the director derived an improper personal
benefit
The inclusion of this provision in our amended and restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
our company and our stockholders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
Our amended and restated certificate of incorporation provides that we have
opted-out of the provisions of Section 203 of the Delaware General Corporation
Law. Section 203 restricts certain business combinations with interested
stockholders in certain situations.
LISTING
We will apply to have our common stock quoted on the Nasdaq National Market
under the symbol "DDDC."
TRANSFER AGENT
Our transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. Its address is 40 Wall Street, New York, New York
10005, and its telephone number at this location is (212) 936-5100.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have shares of common stock outstanding.
If the underwriters exercise their over-allotment option in full, we will have
shares of common stock outstanding. In addition, we will have shares
of Class B common stock outstanding, all of which will be owned by RSL COM. All
of the common stock sold in this offering will be freely transferable without
restriction or further registration under the Securities Act, except for shares
acquired by our directors and executive officers and our affiliates. The shares
of Class B common stock to be retained by RSL COM are not being acquired under
this offering and will have restrictions on resale.
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM and all of our officers and directors have agreed
under lock-up agreements that, without the prior written consent of Lehman
Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and employees holding options to purchase our common
stock on the closing of this offering (other than those subject to the 180-day
lock-up) will be prohibited from disposing shares of common stock for a period
of 90 days after the date of this prospectus. We can give no assurance as to how
long RSL COM or any of the other parties subject to the lock-up agreements will
continue to hold its common stock after this offering.
The shares of Class B common stock held by RSL COM and the shares of common
stock acquired by any of our affiliates will be subject to the resale
limitations of Rule 144 of the Securities Act. Rule 144 defines an affiliate as
a person that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, the issuer.
In general, a stockholder subject to Rule 144 who has beneficially owned
shares of common stock of an issuer for at least one year may, within any
three-month period, sell up to the greater of:
o 1% of the total number of shares of common stock then outstanding or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the stockholder's required filing of notice of
sale
Rule 144 requires stockholders to aggregate their sales with other
stockholders with which it is affiliated for purposes of complying with this
volume limitation. A stockholder who has owned common stock for at least two
years, and who has not been an affiliate of the issuer for at least 90 days, may
sell common stock free from the volume limitation and notice requirements of
Rule 144.
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because these sales will depend on market prices and
other factors.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that future sales of shares of our
common stock or the availability of our shares for sale would have on the
prevailing market price of our common stock. Sales of a significant number of
shares of our common stock, or the perception that these sales could occur,
could adversely affect the prevailing market price of our common stock and could
impair our future ability to raise capital through an offering of equity
securities. See "Risk Factors--Futures Sales of Capital Stock May Adversely
Affect Our Stock Price."
After the closing of this offering, RSL COM or its transferees will be
entitled to request that we register their shares under the Securities Act. See
"Related Party Transactions--RSL COM."
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IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
OF OUR COMMON STOCK TO NON-U.S. HOLDERS
This is a general discussion of certain U.S. federal tax consequences of
the acquisition, ownership, and disposition of our common stock issued pursuant
to this offering by a holder that, for U.S. federal income tax purposes, is not
a "U.S. person" as we define that term below (a "Non-U.S. Holder"). We assume in
this discussion that you will hold our common stock as a capital asset
(generally, property held for investment). We do not discuss all aspects of U.S.
federal taxation that may be important to you in light of your individual
investment circumstances, such as special tax rules that apply to you, for
example, if you are a dealer in securities, financial institution, bank,
insurance company, tax-exempt organization, partnership or owner of more than 5%
of our common stock. Our discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended, Treasury Regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service, or the IRS,
and other applicable authorities, all as in effect on the date of this
prospectus and all of which are subject to differing interpretations or change,
possibly with retroactive effect. We have not sought, and will not seek, any
ruling from the IRS with respect to the tax consequences discussed in this
prospectus, and there can be no assurance that the IRS will not take a position
contrary to the tax consequences discussed below or that any position taken by
the IRS would not be sustained. We urge you to consult your tax advisor about
the U.S. federal tax consequences of acquiring, holding, and disposing of our
common stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
For purposes of this discussion, a "U.S. person" means any one of the
following:
o a citizen or resident of the U.S.
o a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
o an estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source
o a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
DIVIDENDS
Dividends paid to a Non-U.S. Holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30%. If, however, the
dividend is effectively connected with the conduct of a trade or business in the
U.S. by the Non-U.S. Holder, the dividend will be subject to U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax. Non-U.S. Holders should consult any applicable income tax treaties
that may provide for a reduction of, or exemption from, withholding taxes. For
purposes of determining whether tax is to be withheld at a reduced rate as
specified by a treaty, we generally will presume that dividends we pay on or
before December 31, 2000, to an address in a foreign country are paid to a
resident of that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a Non-U.S. Holder generally will be required to
provide certification as to that Non-U.S. Holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay to a Non-U.S. Holder that
is an entity should be treated as paid to holders of interests in that entity.
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<PAGE>
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to U.S. federal income tax,
including by way of withholding, on gain recognized on a sale or other
disposition of our common stock unless any one of the following is true:
o the gain is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder
o the Non-U.S. Holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
o the Non-U.S. Holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
o we are or have been during certain periods a "U.S. real property holding
corporation" for U.S. federal income tax purposes
If we are or have been a U.S. real property holding corporation, a Non-U.S.
Holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
o the Non-U.S. Holder does not hold (and has not held during certain
periods), directly or indirectly, more than 5% of our outstanding common
stock and
o our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes
We believe that our common stock will be traded on an established
securities market for this purpose in any quarter during which it is quoted on
Nasdaq.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a Non-U.S. Holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax (generally
at a rate of 10% of the proceeds). Any amount withheld pursuant to a withholding
tax will be creditable against a Non-U.S. Holder's U.S. federal income tax
liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders and under certain circumstances, the
branch profits tax, but will generally not be subject to withholding. Non-U.S.
Holders should consult any applicable income tax treaties that may provide for
different rules.
UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S. (as specially defined for U.S. federal
estate tax purposes) on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the Non-U.S. Holder resides.
Under current U.S. Treasury Regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a Non-U.S. Holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its Non-U.S. Holder status under penalties of perjury or
63
<PAGE>
otherwise establishes an exemption. Information reporting requirements, but not
backup withholding tax, will also apply to payments of the proceeds of a sale or
other taxable disposition of our common stock by foreign offices of U.S. brokers
or foreign brokers with certain types of relationships to the U.S., unless the
broker has documentary evidence in its records that the holder is a Non-U.S.
Holder and certain other conditions are met or the holder otherwise
established an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
Non-U.S. Holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
64
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., U.S. Bancorp Piper Jaffray Inc.,
Warburg Dillon Read LLC and Lazard Freres & Co. LLC are acting as
representatives, has agreed to purchase from us the respective number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Lehman Brothers Inc.........................................................
U.S. Bancorp Piper Jaffray Inc..............................................
Warburg Dillon Read LLC.....................................................
Lazard Freres & Co. LLC.....................................................
Total.....................................................................
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include the requirement that the representations and
warranties made by us to the underwriters are true, that there is no material
change in the financial markets and that we deliver customary closing documents
to the underwriters.
The representatives had advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and
the selected dealers may reallow, a concession not in excess of $ per
share to brokers and dealers. After the offering, the underwriters may change
the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions
we will pay.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions to be paid by us..... $ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ .
We have granted to the underwriters an option to purchase up to an
aggregate of additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time, and from time
to time, until 30 days after the date of the underwriting agreement. To the
extent the underwriters exercise this option, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to that underwriter's initial commitment as indicated in the
preceding table, and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM and all of our officers and directors have agreed
under lock-up agreements that, without the prior written consent of Lehman
Brothers Inc., they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL
65
<PAGE>
COM may sell shares of Class B common stock to a purchaser or purchasers of the
shares who agree to be bound by the same restrictions that bind RSL COM.
Individuals participating in the directed share program and employees holding
options to purchase our common stock on the closing of this offering (other than
those subject to the 180-day lock-up) will be prohibited from disposing shares
of common stock for a period of 90 days after the date of this prospectus. See
"Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
We will apply to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "DDDC."
We have agreed to indemnify the underwriters against liabilities relating
to the offering, including liabilities under the Securities Act and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares of
common stock than are set forth on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option described in this prospectus.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in such transactions or that any such transaction, once commenced,
will not be discontinued without notice.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, the underwriters have reserved up to shares of the
common stock offered by this prospectus for sale to our and RSL COM's officers,
directors, employees and their family members and to our business associates at
the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this
66
<PAGE>
prospectus. The number of shares available for sale to the general public will
be reduced to the extent these persons purchase the reserved shares.
Lehman Brothers Inc. has provided financial advisory services to RSL COM in
the past and has received customary compensation for these services. Lehman
Brothers Inc. has also served as the solicitation agent in connection with RSL
COM's recent solicitation of consents from certain of its noteholders and has
received customary compensation for this service.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
for the period from June 1996 (inception) through December 31, 1996 and the
years ended December 31, 1997 and 1998 included in this prospectus and in the
registration statement have been audited by Brightman Almagor & Co., a member
firm of Deloitte Touche Tohmatsu, independent auditors, as stated in their
report appearing in this prospectus, and are included in reliance upon the
report of that firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
are not necessarily summaries of the material provisions of those documents, and
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. You can inspect and copy the
registration statement and the reports and other information we file with the
Commission under the Exchange Act at the public reference room maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You can obtain information on the operation of the public reference
room by calling the Commission at 1-800-SEC-0330. The same information will be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, N.Y. 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You can also obtain copies of this material from the public reference room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a Web site which provides on-line access to
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at the address
http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You can inspect and copy these reports and other information of our
company at the locations set forth above or download these reports from the
Commission's Web site.
We will apply to have our common stock quoted on The Nasdaq National
Market. Reports, proxy statements and other information concerning us can be
inspected at the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
67
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DELTATHREE.COM, INC.
<TABLE>
<S> <C>
Independent Auditors' Report..................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited)....... F-3
Consolidated Statements of Operations for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
six months ended June 30, 1998 and 1999 (unaudited)............................................ F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficiency) for the period from
June 1996 (inception) to December 31, 1996 and for the years ended December 31, 1997 and 1998
and for the six months ended June 30, 1999 (unaudited)......................................... F-5
Consolidated Statements of Cash Flows for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
six months ended June 30, 1998 and 1999 (unaudited)............................................ F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDER OF
DELTATHREE.COM, INC.
We have audited the accompanying consolidated balance sheets of
deltathree.com, Inc. (the "Company") as of December 31, 1997 and 1998, and the
related consolidated statements of operations, changes in stockholder's equity
(deficiency) and cash flows for the period from June 1996 (inception) to
December 31, 1996 and each of the two years in the period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1998, and the consolidated results of its operations and
cash flows for the period from June 1996 (inception) to December 31, 1996 and
each of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
Brightman Almagor & Co.
(a member firm of Deloitte Touche Tohmatsu)
Tel Aviv, Israel
May 17, 1999
F-2
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 3,196,082 $ 1,356,562 $ 1,396,057
Accounts receivable--net........................................... 825,200 543,335 484,234
Due from affiliates................................................ -- 2,191,903 1,670,130
Prepaid expenses and other current assets.......................... 166,287 620,676 603,838
------------ ------------ ------------
Total current assets.................................................. 4,187,569 4,712,476 4,154,259
------------ ------------ ------------
Investments........................................................... 105,000 90,000 90,000
------------ ------------ ------------
Property and equipment:
Telecommunications equipment....................................... 849,824 7,910,224 8,816,132
Furniture, fixtures and other...................................... 200,122 735,991 745,805
------------ ------------ ------------
1,049,946 8,646,215 9,561,937
Less accumulated depreciation...................................... (177,738) (376,792) (484,590)
------------ ------------ ------------
Property and equipment--net........................................ 872,208 8,269,423 9,077,347
------------ ------------ ------------
Goodwill--net......................................................... 3,183,875 12,488,125 10,972,368
Deposits.............................................................. 54,549 115,497 157,677
------------ ------------ ------------
Total assets.......................................................... $ 8,403,201 $25,675,521 $ 24,451,651
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................... $ 949,716 $ 4,301,763 $ 3,707,584
Due to affiliates.................................................. 120,487 1,403,163 710,749
Deferred revenues.................................................. 159,778 1,610,081 967,769
Other current liabilities.......................................... 194,295 629,096 1,424,489
------------ ------------ ------------
Total current liabilities............................................. 1,424,276 7,944,103 6,810,591
------------ ------------ ------------
Long-term liabilities:
Long-term debt due to affiliates................................... -- 5,106,602 9,615,709
Severance pay obligations.......................................... 26,775 233,247 302,813
------------ ------------ ------------
Total long-term liabilities........................................... 26,775 5,339,849 9,918,522
------------ ------------ ------------
Convertible notes payable to affiliates............................... 679,965 -- --
------------ ------------ ------------
Minority interests.................................................... -- 21,399 --
------------ ------------ ------------
Total liabilities..................................................... 2,131,016 13,305,351 16,729,113
------------ ------------ ------------
Commitments and contingencies
Stockholder's equity:
Common stock --par value $0.001; 100,000,000, 20,000,000 and
20,000,000 shares authorized at December 31, 1997 and 1998 and
June 30, 1999, respectively; 7,621,529, 7,875,554 and 7,875,554
issued and outstanding at December 31, 1997 and 1998 and
June 30, 1999, respectively...................................... 7,622 7,876 7,876
Additional paid-in capital......................................... 8,810,747 23,095,331 33,827,853
Deferred compensation.............................................. -- (1,065,882) (9,672,117)
Accumulated deficit................................................ (2,546,184) (9,667,155) (16,441,074)
------------ ------------ ------------
Total stockholder's equity............................................ 6,272,185 12,370,170 7,722,538
------------ ------------ ------------
Total liabilities and stockholder's equity............................ $ 8,403,201 $25,675,521 $ 24,451,651
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
TO DECEMBER 31, -------------------------- --------------------------
1996 1997 1998 1998 1999
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Affiliates......................... $ -- $ 467,842 $ 3,896,106 $ 1,209,395 $ 3,085,893
Non-affiliates..................... 933 777,799 1,741,941 961,212 1,156,839
--------- ----------- ----------- ----------- -----------
Total revenues....................... 933 1,245,641 5,638,047 2,170,607 4,242,732
Costs and operating expenses:
Cost of revenues................... -- 1,064,940 4,657,373 1,737,772 3,314,332
Research and development
expenses........................ -- 294,150 650,140 549,484 428,700
Selling and marketing
expenses........................ -- 631,970 2,431,371 918,304 1,461,036
General and administrative
expenses........................ 179,138 1,387,682 1,842,446 595,515 1,413,500
Non-cash compensation expense...... -- -- 742,780 485,508 2,126,287
Amortization of goodwill........... -- 197,249 2,472,214 956,564 1,515,757
--------- ----------- ----------- ----------- -----------
Total costs and operating
expenses........................... 179,138 3,575,991 12,796,324 5,243,147 10,259,612
--------- ----------- ----------- ----------- -----------
Loss from operations................. (178,205) (2,330,350) (7,158,277) (3,072,540) (6,016,880)
Interest income (expense), net....... (397) (37,232) (186,295) 66,080 (757,039)
Minority interests................... -- -- 223,601 -- --
--------- ----------- ----------- ----------- -----------
Net loss............................. $(178,602) $(2,367,582) $(7,120,971) $(3,006,460) $(6,773,919)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net loss per share--basic and
diluted............................ $ (0.07) $ (0.47) $ (0.92) $ (0.39) $ (0.86)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Weighted average shares
outstanding--basic and
diluted............................ 2,583,750 4,986,262 7,748,542 7,621,529 7,875,554
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DELTATHREE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDER'S
------------------- PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIENCY)
--------- ------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
at June 1996 (Inception)..................... -- $ -- $ -- $ -- $ -- $ --
Issuance of capital stock...................... 3,082,500 3,083 145,407 -- -- 148,490
Net loss....................................... (178,602) (178,602)
--------- ------ ----------- ------------ ------------ -----------
BALANCE
at December 31, 1996......................... 3,082,500 3,083 145,407 (178,602) -- (30,112)
Issuance of capital stock...................... 4,539,029 4,539 5,326,716 5,331,255
Recognition of pushdown of goodwill............ 3,338,624 3,338,624
Net loss....................................... (2,367,582) (2,367,582)
--------- ------ ----------- ------------ ------------ -----------
BALANCE
at December 31, 1997......................... 7,621,529 7,622 8,810,747 (2,546,184) -- 6,272,185
Conversion of debt and warrants to equity...... 254,025 254 656,958 657,212
Deferred compensation expense.................. 1,808,662 (1,808,662) --
Amortization of deferred compensation
expense...................................... 742,780 742,780
Recognition of pushdown of goodwill............ 11,818,964 11,818,964
Net loss....................................... (7,120,971) (7,120,971)
--------- ------ ----------- ------------ ------------ -----------
BALANCE
at December 31, 1998......................... 7,875,554 7,876 23,095,331 (9,667,155) (1,065,882) 12,370,170
Deferred compensation expense (unaudited)...... 10,732,522 (10,732,522) --
Amortization of deferred compensation
(unaudited).................................. 2,126,287 2,126,287
Net loss (unaudited)........................... (6,773,919) (6,773,919)
--------- ------ ----------- ------------ ------------ -----------
BALANCE
at June 30, 1999
(unaudited).................................. 7,875,554 $7,876 $33,827,853 $(16,441,074) $(9,672,117) $ 7,722,538
--------- ------ ----------- ------------ ------------ -----------
--------- ------ ----------- ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ---------------------------------------------------
1996 1997 1998
--------------- ------------------------ ------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(178,602) $ (2,367,582) $ (7,120,971)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 5,371 369,616 2,671,268
Amortization of deferred compensation............ -- -- 742,780
Write-down of investment......................... -- -- 25,000
Minority interests............................... -- -- (223,601)
Increase in liability for severance pay.......... -- 26,775 147,628
Provision for losses on accounts receivable...... -- 100,000 226,542
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... (22,173) (925,200) 78,216
Decrease (increase) in other current assets and
due from affiliates............................ (42,900) (198,263) (2,269,872)
Increase (decrease) in accounts payable.......... 23,547 926,169 1,733,912
Increase (decrease) in deferred revenues......... -- -- (1,595,635)
Increase in current liabilities and due to
affiliates..................................... 28,510 446,050 1,826,832
--------- ------------ ------------
(7,645) 745,147 3,363,070
--------- ------------ ------------
Net cash used in operating activities................ (186,247) (1,622,435) (3,757,901)
--------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................. (160,809) (889,137) (3,003,004)
Increase in deposits............................... -- -- (60,948)
Equity investments................................. (45,000) (60,000) (25,000)
Other.............................................. -- -- 15,000
--------- ------------ ------------
Net cash used in investing activities................ (205,809) (949,137) (3,073,952)
--------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock............ 148,490 5,331,255 --
Proceeds from issuance of convertible notes........ 343,558 520,000 --
Retirement of convertible notes.................... -- (208,298) --
Proceeds (repayment) of long-term debt from
affiliates....................................... 30,000 (30,000) 5,000,000
Proceeds from short-term borrowings................ -- 24,705 --
Payment of other long-term debt.................... -- -- (7,667)
--------- ------------ ------------
Net cash provided by financing activities............ 522,048 5,637,662 4,992,333
--------- ------------ ------------
Increase (decrease) in cash and cash equivalents..... 129,992 3,066,090 (1,839,520)
Cash and cash equivalents at beginning of period..... -- 129,992 3,196,082
--------- ------------ ------------
Cash and cash equivalents at end of period........... $ 129,992 $ 3,196,082 $ 1,356,562
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................... $ -- $ -- $ --
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock.................................... $ -- $ -- $ 657,212
--------- ------------ ------------
--------- ------------ ------------
Assets acquired with vendor research and
development
credits.......................................... $ -- $ -- $ 3,000,000
--------- ------------ ------------
--------- ------------ ------------
Recognition of pushdown of goodwill................ $ -- $ 3,338,624 $ 11,818,964
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------------
1998 1999
------------------ ------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (3,006,460) $ (6,773,919)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,126,342 1,623,555
Amortization of deferred compensation............ 485,508 2,126,287
Write-down of investment......................... -- --
Minority interests............................... -- (21,399)
Increase in liability for severance pay.......... 10,294 28,701
Provision for losses on accounts receivable...... -- 24,296
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... 360,673 34,805
Decrease (increase) in other current assets and
due from affiliates............................ (1,117,029) 538,611
Increase (decrease) in accounts payable.......... (6,857) (594,179)
Increase (decrease) in deferred revenues......... 78,015 (642,312)
Increase in current liabilities and due to
affiliates..................................... 1,246,668 609,411
------------ ------------
2,183,614 3,727,776
------------ ------------
Net cash used in operating activities................ (822,846) (3,046,143)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................. (1,026,513) (915,722)
Increase in deposits............................... (305) (1,315)
Equity investments................................. -- --
Other.............................................. -- --
------------ ------------
Net cash used in investing activities................ (1,026,818) (917,037)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock............ -- --
Proceeds from issuance of convertible notes........ -- --
Retirement of convertible notes.................... -- --
Proceeds (repayment) of long-term debt from
affiliates....................................... -- 4,080,562
Proceeds from short-term borrowings................ -- --
Payment of other long-term debt.................... -- (77,887)
------------ ------------
Net cash provided by financing activities............ -- 4,002,675
------------ ------------
Increase (decrease) in cash and cash equivalents..... (1,849,664) 39,495
Cash and cash equivalents at beginning of period..... 3,196,082 1,356,562
------------ ------------
Cash and cash equivalents at end of period........... $ 1,346,418 $ 1,396,057
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest......................................... $ -- $ --
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock.................................... $ -- $ --
------------ ------------
------------ ------------
Assets acquired with vendor research and
development
credits.......................................... $ -- $ --
------------ ------------
------------ ------------
Recognition of pushdown of goodwill................ $ 11,818,964 $ --
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
1 -- BUSINESS DESCRIPTION
Description of business
Deltathree.com, Inc. (the "Company"), a Delaware corporation,
is a leading provider of Internet Protocol ("IP") telephony
services and other enhanced, Web-based communications
services to individuals and businesses worldwide.
The Company was founded in 1996 to capitalize on the growth
of the Internet as a communications tool. The Company
commercially provides IP telephony services over a
privately-managed IP network. The Company currently operates
a privately-managed IP network with 43 points of presence
(POPs) in 27 countries.
The Company has a limited operating history and its prospects
are subject to the risks, expenses and uncertainties
frequently encountered by companies in the new and rapidly
evolving markets for Internet products and telecommunications
services. In addition, the Company is financially dependent
on RSL Communications Ltd. ("RSL COM") (see below). In the
event that the Company does not successfully implement its
business plan, certain assets may not be recoverable.
The Company's research and development activities are
conducted in Israel by its wholly owned subsidiary, Delta
Three Israel Ltd. ("Delta Ltd.").
In 1997, the Company established a 95%-owned subsidiary,
Internet Technologies Colombia SA ("SA"), to provide the
Company's network services in Colombia. In 1998, the Company
established a 51%-owned subsidiary, Eltel Services Company
Ltd. ("Eltel"), to provide the Company's network services in
the Philippines. Eltel ceased operations in 1998 and the
Company's investment in Eltel was written-off. In 1998, the
Company also established a 51%-owned subsidiary, Delta Three
Direct LLC ("Direct"), to provide direct marketing for the
Company. The Company is in the process of dissolving Direct.
As of June 30, 1999, the Company also had a 5% interest in
the share capital of Internet Telecom, Ltd., an Israeli
corporation engaged in research and development of Internet
telephony.
Acquisition of the Company by RSL COM
The Company is a wholly owned subsidiary of RSL COM, a
publicly traded multinational telecommunications company. RSL
COM and its subsidiaries and affiliates (excluding the
Company) are collectively referred to herein as "RSL COM" or
"Affiliates." Approximately 69% of the Company's revenues for
the year ended December 31, 1998 were derived from
transactions with RSL COM. RSL COM has also provided the
Company with substantially all of the Company's working
capital since July 1997.
In July 1997, the Company issued 3,260,358 shares of capital
stock to RSL COM pursuant to a stock purchase agreement with
RSL COM (representing 51% of the Company's outstanding
capital stock at that time) for aggregate gross consideration
of $5,000,000. In addition, at the time of the closing under
the stock purchase agreement, the Company issued 941,376
shares of capital stock into escrow, which were released to
RSL COM in 1997 for no additional consideration under the
anti-dilution provisions of the stock purchase agreement
relating to the July 1997 issuance. During the remainder of
1997, RSL COM acquired additional shares of capital stock
from the Company's existing stockholders for aggregate
consideration of $2,856,750. As of December 31, 1997, RSL COM
held approximately 75% of the Company's outstanding capital
stock.
F-7
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
1 -- BUSINESS DESCRIPTION (CONTINUED)
By April 1998, RSL COM acquired the remaining outstanding
capital stock of the Company held by the Company's remaining
stockholders for total consideration of $11,818,964 and
merged the Company with a newly formed, wholly owned
subsidiary of RSL COM, with the Company remaining as the
surviving corporation.
The acquisition of the Company by RSL COM has been
"pushed-down" into the Company's financial statements with an
increase to both goodwill and additional paid-in capital in
the amount of $15,157,588. The goodwill is being amortized by
the Company over a five-year period.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The
consolidated financial statements include the accounts of
deltathree.com, Inc. and its subsidiaries. The results of
subsidiaries acquired or disposed of during the year are
included from the date of acquisition to the date of
disposal, if applicable. All significant intercompany
accounts and transactions have been eliminated in
consolidation. Each of the Company's subsidiaries has a
December 31 fiscal year end.
Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions,
primarily for allowances for doubtful accounts receivable and
the useful lives of fixed assets and intangible assets, 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.
Cash and Cash Equivalents--The Company considers all highly
liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Investments--Investments in less than 20% of the share
capital of other companies are presented at cost. In the
event that management identifies a decline of an other than
temporary nature in the estimated fair value of an
investment, to an amount below cost, such investment is
written down to fair market value.
Property and Equipment and Related Depreciation--Property and
equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful
lives of the depreciable assets, which range from two to ten
years. Improvements are capitalized, while repair and
maintenance costs are charged to operations as incurred.
Impairment of Assets--The Company's long-lived assets and
identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When such events
occur, the Company reviews for impairment by comparing the
carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from the
use of the assets and their eventual disposition. If the sum
of the expected undiscounted future cash flows is less than
the carrying amount of assets, the Company would recognize an
impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the
asset based on estimated future discounted cash flows.
F-8
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company determined that, as of December 31, 1997 and 1998
and June 30, 1999, there had been no impairment in the
carrying value of long-lived assets.
Goodwill and Related Amortization--Goodwill represents the
excess of cost over the fair value of the Company's net
assets, pushed down as a result of RSL COM's acquisition of
the Company, and is being amortized using the straight-line
method over five years.
Revenue Recognition and Deferred Revenue--The Company records
revenue based on minutes (or fractions thereof) of customer
usage. The Company records payments received in advance for
prepaid services and services to be supplied under
contractual agreements as deferred revenue until such related
services are provided.
Cost of Revenues--Cost of revenues is comprised primarily of
access, transmission and termination costs based on actual
minutes in addition to monthly circuit lease costs and is net
of reimbursements from vendors.
Research and Development Expenses--Research and development
expenses, net of reimbursements from vendors, are expensed as
incurred.
Advertising Expenses--Advertising expenses are expensed as
incurred.
Income Taxes--The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109
establishes financial accounting and reporting standards for
the effect of income taxes that result from activities during
the current and preceding years. SFAS No. 109 requires an
asset and liability approach for financial reporting for
income taxes. The Company's foreign subsidiaries file
separate income tax returns in the jurisdiction of their
operations.
Net Loss per Share--In accordance with the Company's adoption
of SFAS No. 128, "Earnings Per Share", the net loss per share
is calculated by dividing the net loss attributable to
capital stock by the weighted average number of shares
outstanding. Outstanding common stock options are not
included in the net loss per share calculation as their
effect is anti-dilutive. The adoption of SFAS No. 128 did not
materially affect the Company's presentation of net loss per
share.
Concentration of Credit Risk--The Company is subject to
concentrations of credit risk which consist principally of
trade accounts receivable and cash and cash equivalents.
The Company maintains its cash with various financial
institutions. The Company performs periodic evaluations of
the relative credit standing of these institutions.
The majority of the Company's noncarrier customers prepay for
their services. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit
risk of customers, historical trends and other information.
Fair Value of Financial Instruments--The carrying amounts of
cash and cash equivalents, accounts and other receivables and
accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of
outstanding borrowings approximate fair value due to their
short-term interest rate.
Effects of Recently Issued Accounting Standards--In June
1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income."
F-9
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. The
Company has no elements of comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. Generally, it requires
that an entity recognize all derivatives as either an asset
or liability and measure those instruments at fair value, as
well as identify the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000. The Company
does not currently engage or plan to engage in any derivative
or hedging activities. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company.
During 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use"
("SOP No. 98-1"). The Company amortizes these costs over the
anticipated life of the systems. The adoption of SOP No. 98-1
did not have a material impact on the Company's financial
statements.
Stock-based Compensation--The Company has adopted the
disclosure provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation," and elected to continue the
accounting set forth in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has provided the necessary pro forma disclosures
as if the fair value method had been applied (See Note 12B).
Segment Reporting--Effective January 1, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes
standards for the way business enterprises report information
about operating segments, as well as enterprise-wide
disclosures about products and services, geographic areas and
major customers. See Note 15 for enterprise-wide disclosures
required by SFAS No. 131.
Unaudited Financial Statements--The unaudited interim June
30, 1998 and 1999 financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
which are, in management's opinion, necessary for a fair
presentation of the results for the interim periods
presented.
Reclassifications--Certain previously reported amounts have
been reclassified to conform with the current period
presentation.
3 -- ACCOUNTS RECEIVABLE-NET
Accounts receivable are stated net of an allowance for
doubtful accounts of $100,000, $326,542 and $124,296 at
December 31, 1997 and 1998, and June 30, 1999 (unaudited),
respectively.
4 -- DUE FROM/TO AFFILIATES
The balances due from and due to Affiliates are for services
rendered and are non-interest bearing.
F-10
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Prepaid commissions...................................... $ -- $144,768 $ 32,550
Deposits with credit card companies...................... -- 199,401 213,767
Government of Israel (VAT refund and other).............. -- 59,763 54,950
Deposits with suppliers.................................. -- 86,799 67,043
Prepaid expenses......................................... 20,455 28,055 57,216
Loan to employee......................................... -- 31,917 --
Other.................................................... 145,832 69,973 178,312
-------- -------- ---------
Total prepaid expenses and other current assets.......... $166,287 $620,676 $ 603,838
-------- -------- ---------
-------- -------- ---------
</TABLE>
6 -- GOODWILL-NET
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Goodwill from acquisition of the Company by RSL COM
(see Note 1)......................................... $3,338,624 $15,157,588 $15,157,588
Deferred financing costs............................... 42,500 -- --
Less -- accumulated amortization....................... (197,249) (2,669,463) (4,185,220)
----------- ------------ -----------
Total goodwill--net.................................... $3,183,875 $12,488,125 $10,972,368
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accrued expenses....................................... $ -- $361,187 $ 726,535
Employees and related expenses......................... 64,750 144,013 673,673
Deposits from customers................................ -- 118,672 3,000
Other.................................................. 129,545 5,224 21,281
-------- -------- -----------
Total other current liabilities........................ $194,295 $629,096 $ 1,424,489
-------- -------- -----------
-------- -------- -----------
</TABLE>
F-11
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
8 -- LONG-TERM DEBT DUE TO AFFILIATES
The long-term debt issued in 1998 to RSL COM bears interest at an
annual rate of 14% and is due on demand after June 30, 2000. Upon
completion of an initial public offering by the Company, the
maturity date will be extended to the first anniversary of the
completion of such offering.
9 -- SEVERANCE PAY OBLIGATIONS
Delta Ltd., the Company's Israeli subsidiary, is subject to
certain Israeli law and labor agreements that determine the
obligations of Delta Ltd. to make severance payments to dismissed
employees and to employees leaving employment under certain other
circumstances. The obligation for severance pay benefits, as
determined by Israeli law, is based upon length of service and
the employee's most recent salary. This obligation is partially
funded through regular deposits made by Delta Ltd. into
unaffiliated severance pay funds and by the purchase from
unaffiliated insurance companies of managers' insurance policies.
Amounts funded are controlled by the fund trustees and insurance
companies and are not under the control and management of Delta
Ltd.
Expenses relating to employee termination benefits were
approximately $26,775, $147,628 and $28,701 for the years ended
December 31, 1997 and 1998 and for the six months ended June 30,
1999 (unaudited), respectively. No expenses were incurred for the
period from June 1996 (inception) to December 31, 1996 and for
the six months ended June 30, 1998 (unaudited).
10 -- CONVERTIBLE NOTES PAYABLE TO AFFILIATES
During 1996 and 1997, RSL COM purchased from third parties
convertible notes issued by the Company. The notes were
convertible into capital stock at conversion rates of $2.00 and
$3.25, respectively. In connection with the issuance of the
notes,warrants were issued to purchase capital stock with
exercise prices of $2.00 and $3.25 per share. During 1998, all of
the notes were converted into, and warrants were exercised for,
shares of capital stock, in each case under their original terms.
11 -- COMMITMENTS AND CONTINGENCIES
A. Services agreement with RSL COM
In July 1997, the Company entered into a three-year services
agreement with RSL COM. Pursuant to the services agreement with
RSL COM, RSL COM is required to use its reasonable best efforts
to provide the Company with certain office and equipment space
and to assist the Company in obtaining Internet, frame-relay
and dedicated lines from third parties. In addition, RSL COM is
required under the agreement to provide the Company with
various communications services at rates set forth in the
agreement. The agreement also provides that the Company is
required to use up to 50% of its network capacity to route RSL
COM's international telecommunications traffic at rates set
forth in the agreement.
Based on a cost analysis performed by the Company, management
believes that the amounts reflected in the financial statements
pursuant to the above services agreement do not materially
differ from amounts which the Company would have recognized or
incurred in providing or obtaining equivalent services on an
arms-length basis. Subsequent to June 30, 1999, this agreement
was amended.
F-12
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
B. Technology and marketing agreement with Ericsson
In October 1997, the Company entered into a technology and
marketing alliance with Ericsson for the development and
deployment of advanced IP telephony gateways and communications
software. Under the agreement, the Company is entitled to
purchase hardware and software on preferential terms.
During 1998, due to difficulties in integrating the hardware
and software purchased from Ericsson into the Company's
network, the Company incurred significant costs and anticipates
that it will incur additional costs in 1999. To compensate the
Company for its costs, Ericsson agreed to provide the Company
with network telecommunications equipment with a fair value of
$3 million, representing Ericsson's participation in such
research and development costs. For the year ended December 31,
1998 and the six months ended June 30, 1999 (unaudited), the
Company recognized $901,385 and $460,285, respectively, as an
offset to research and development expenses, and $694,250 and
$299,136, respectively, as an offset to cost of revenues
incurred in respect of the network telecommunications
equipment. The remaining balance is reflected as deferred
revenue and will be recorded as an offset to such costs as they
are incurred.
The Company is dependent upon its suppliers of equipment,
hardware and software to develop and maintain its network and
services. In particular, the Company is dependent on Ericsson
for the supply of gateways. If the Company's suppliers cease to
supply the Company with the equipment, hardware and software
necessary for the operation of its network or to maintain its
current network equipment, the Company may not be able to
acquire and integrate alternative sources of supply in a timely
fashion. Any transition to alternate suppliers would likely
result in delays, operational problems, or increased expenses
and may limit the Company's ability to provide services to its
users or expand its operations.
C. Other marketing and cooperation agreements
The Company has entered into marketing and cooperation
agreements with various other companies that maintain sites on
the Web. Pursuant to these agreements, the Company is obligated
to pay commissions based on revenues derived from such Web
links.
D. Lease commitments
The Company leases office space from RSL COM in New York at an
annual cost of $96,000. The lease term extends until June 2001.
In addition, the Company leases offices in Israel at an annual
cost of $240,000. The lease term extends until February 2003,
with an option to extend the lease for an additional five
years.
F-13
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
E. Indentures governing debt of RSL COM
The Company is subject to covenants by reason of its status as
a restricted subsidiary of RSL COM under the indentures
governing a substantial amount of RSL COM's debt. These
restrictions significantly limit the ability of the Company to
incur additional indebtedness or create liens on its assets.
The Company's ability to incur indebtedness is limited by the
amount of indebtedness that RSL COM and the Company are
permitted to incur under the indentures. Such restrictions also
limit the Company's ability to pay dividends or make other
distributions in respect of the Company's capital stock, sell
assets, engage in mergers or acquisitions or make some types of
investments. These restrictions also limit the ability of a
third party to acquire a controlling interest in the Company.
These restrictions may prohibit transactions that would
otherwise be beneficial to the Company.
12 -- STOCKHOLDERS' EQUITY
A. Description of common stock
As of December 31, 1997, the Company's authorized share capital
was 100,000,000 shares of common stock, par value $0.001, of
which 7,621,529 were issued and outstanding.
As of December 31, 1998 and June 30, 1999 (unaudited), the
Company's authorized share capital was 20,000,000 shares of
common stock, par value $0.001, of which 7,875,554 shares of
common stock were issued and outstanding at each date.
B. Restricted Units
As of December 31, 1998 and June 30, 1999 (unaudited), a total
of 432,270 restricted units had been granted to employees of
the Company under the 1997 RSL COM Stock Incentive Plan. Of
these restricted units, 346,170 have a nominal exercise price
and 86,100 have an exercise price of $5.175. The majority of
the restricted units vest over a three-year period from the
date of grant and are exercisable for a period of seven years
from the date of grant. Upon completion of the Company's
contemplated initial public offering and receipt by RSL COM of
the requisite consents to amend its indentures, the restricted
units will be exercisable for shares of the Company's common
stock. The conversion basis will be determined on or prior to
the completion of such offering. The Company has not yet
determined the conversion price or the exercise price for
purchasing shares of the Company's common stock related to the
restricted units, nor does the Company know what the level of
participation of the restricted unit holders in a transaction
to convert their restricted units will be.
Pursuant to generally accepted accounting principles, the
restricted units are considered variable grants. Consequently,
changes in the fair value of the underlying shares at each
balance sheet date affect the aggregate amount of deferred
compensation recorded by the Company. As a result, the Company
recorded deferred compensation related to the restricted units
of approximately $1,800,000 through December 31, 1998 and an
additional $6,700,000 during the six month period ended June
30, 1999 (unaudited), representing the difference between the
exercise price and the deemed fair value of the Company's
common stock at such date. Such amount is included as a
reduction of stockholder's equity and is being amortized by
charges to operations over the vesting period. Amortization of
the deferred compensation amounted to $742,780 and $1,796,287
for the year ended December 31, 1998 and the six months ended
June 30, 1999 (unaudited), respectively.
F-14
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
C. Stock Options
Upon completion of the Company's contemplated initial public
offering and receipt by RSL COM of the requisite consents to
amend its indentures, the Company has agreed to grant options
to purchase an aggregate of 520,000 shares of the Company's
common stock at an exercise price of $12.70. Such options are
expected to vest over a three year period from the date of
grant and to be exercisable for a period of seven years from
the date of grant.
The Company's stock options were granted on April 1, 1999 below
the then fair market value of the Company. As a result, the
Company recorded deferred compensation related to the stock
options of $4,000,000 as of June 30, 1999 (unaudited),
representing the difference between the exercise price and the
deemed fair market value of the Company's common stock at such
date. Such amount is included as a reduction of stockholder's
equity and is being amortized by charges to operations over the
three year vesting period. Amortization of the deferred
compensation amounted to $330,000 for the six months ended June
30, 1999 (unaudited).
The fair value of the restricted units and option grants have
been estimated on the date of grant using the Black-Scholes
option pricing model with a risk-free interest rate of 6%, a
3-year expected life, zero expected volatility and no dividend.
Had compensation cost for the Company's stock options and
restricted units been determined based on fair value at the
grant date in accordance with SFAS No. 123, the Company's pro
forma net loss and pro forma diluted net loss per share would
have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) SIX MONTHS
TO YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ----------------------------------------- -----------------------------
1996 1997 1998 1998 1999
------------ ------------------ --------------------- ----------- ------------
(UNAUDITED)
<C> <C> <C> <C> <C>
Net loss:
As reported $ (178,602) $(2,367,582) $(7,120,971) $(3,006,460) $(6,773,919)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Pro forma $ (178,602) $(2,367,582) $(6,475,211) $(2,575,977) $(4,968,181)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Net loss per share--
basic and diluted
As reported $ (0.07) $ (0.47) $ (0.92) $ (0.39) $ (0.86)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Pro forma $ (0.07) $ (0.47) $ (0.84) $ (0.34) $ (0.63)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
F-15
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
13 -- RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses (which commenced in 1997)
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Salaries and related expenses $ 91,318 $ 947,943
Consulting and advisory fees -- 196,981
Depreciation and amortization 83,057 41,214
Travel -- 146,432
Other 119,775 218,955
------------ ------------
294,150 1,551,525
Less--participation by Ericsson
(see Note 11B) -- 901,385
------------ ------------
Total research and development expenses $ 294,150 $ 650,140
------------ ------------
------------ ------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Salaries and related expenses $ 317,897 $ 689,085
Consulting and advisory fees -- --
Depreciation and amortization 20,500 26,448
Travel 64,441 46,407
Other 146,646 127,045
------------ ------------
549,484 888,985
Less--participation by Ericsson
(see Note 11B) -- 460,285
------------ ------------
Total research and development expenses $ 549,484 $ 428,700
------------ ------------
------------ ------------
</TABLE>
14 -- INCOME TAXES
A. Tax loss carryforwards
As of December 31, 1998, the Company has net operating loss
carryforwards generated in the U.S. and Israel of approximately
$3,000,000 and $3,300,000, respectively. The Company's U.S. net
operating loss carryforwards will expire at various dates
beginning in 2011 if not utilized. In addition, a portion of
those net operating loss carryforwards could be subject to
limitation due to RSL COM's acquisition of the Company. The
Company's net operating losses generated in Israel may be
carried forward indefinitely.
B. In accordance with SFAS No. 109, the Company has computed the
components of deferred income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1997 1998 1999
--------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets $900,000 $3,500,000 $ 4,200,000
Less valuation allowance (900,000) (3,500,000) (4,200,000)
--------- ---------- -----------
Net deferred tax assets $ -- $ -- $ --
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The deferred tax assets were generated primarily from the Company's
net operating loss carryforwards. As of December 31, 1997 and 1998
and as of June 30, 1999 (unaudited), a valuation allowance of
$900,000, $3,500,000 and $4,200,000, respectively, is provided as
the realization of the deferred tax assets are not assured.
F-16
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
15 -- SEGMENT REPORTING, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment, IP
communications services, and makes business decisions and allocates
resources accordingly.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1997 1998 1998 1999
---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues by geographical location:
United States $ 679,821 $4,922,073 $1,611,279 $3,033,170
Europe 37,339 528,157 322,519 532,156
Argentina 284,202 33,432 38,757 54,910
Hong Kong and China 149,232 -- 81,450 168,961
Other 95,047 154,385 116,602 453,535
---------- ---------- ---------- ----------
Total revenues $1,245,641 $5,638,047 $2,170,607 $4,242,732
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Revenues from principal customers:
Affiliates $ 467,842 $3,896,106 $1,209,395 $3,085,893
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Other principal customer $ 276,000 $ -- $ -- $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-lived assets:
United States $448,424 $4,375,898 $3,837,980
Israel 250,535 2,077,091 2,295,776
Other 173,249 1,816,434 2,943,591
-------- ---------- -----------
Total long-lived assets $872,208 $8,269,423 $9,077,347
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
16 -- SUBSEQUENT EVENTS (UNAUDITED)
A. Initial public offering.
The Board of Directors of the Company has decided to pursue
an initial public offering of its capital stock.
F-17
<PAGE>
SHARES
[LOGO]
deltathree.com
COMMON STOCK
------------------------------------------------------------
PROSPECTUS
, 1999
------------------------------------------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
WARBURG DILLON READ LLC
LAZARD FRERES & CO. LLC
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of common stock being registered, all of which will
be paid by the Registrant*:
<TABLE>
<S> <C>
SEC registration fee......................................................................... $ 15,985
NASD filing fee.............................................................................. 6,250
Nasdaq National Market listing fee........................................................... **
Transfer agent and registrar fees............................................................ **
Printing and engraving fees.................................................................. **
Legal fees and expenses...................................................................... **
Blue sky fees and expenses................................................................... 5,000
Accounting fees and expenses................................................................. **
Miscellaneous................................................................................ **
---------
Total...................................................................................... $ **
---------
---------
</TABLE>
- ------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL"), as amended,
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that the Company may
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 (other than
an action by or in the right of the Company) by reason of the fact that the
person is or was a director, officer, agent or employee of the Company or is or
was serving at the Company's request as a director, officer, agent or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the Company as well
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgement or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to the Company, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
II-1
<PAGE>
dissented at the time, may avoid liability by causing his or her dissent to such
actions be entered in the books containing the minutes of the meetings of the
board of directors at the time such action occurred or immediately after such
absent director receives notice of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to deltathree.com, Inc.
or its stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated By-laws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
o we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our Board of Directors; and
o we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-laws are not
exclusive of any other rights to which a person may be entitled by law,
agreement, vote of stockholders or disinterested directors or otherwise. In
addition, the Company maintains insurance on behalf of its directors and
executive directors or officers insuring them against any liability asserted
against them in their capacities as directors or officers or arising out of such
status.
The Company has also purchased insurance for its directors and officers for
certain losses arising from claims or charges made against them in their
capacities as directors and officers of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in June 1996, the Company has issued and sold
unregistered securities in the transactions described below.
A predecessor company to the Registrant, Delta Three, Inc., was formed in
June 1996 ("Old Delta Three"). During 1996, Old Delta Three issued a total of
3,032,500 shares of its common stock to investors in transactions exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) of the Securities Act. These shares
were issued as follows:
<TABLE>
<CAPTION>
DATE NO. OF INVESTORS NO. OF SHARES TOTAL CONSIDERATION
- -------------------------------------------------------------- ---------------- ------------- -------------------
<S> <C> <C> <C>
July 2, 1996.................................................. 1 25,000 $25,000
July 15, 1996................................................. 2 12,500 12,500
July 16, 1996................................................. 6 38,500 38,500
August 1, 1996................................................ 7 2,512,500 16,265
August 15, 1996............................................... 3 51,000 51,000
October 15, 1996.............................................. 1 10,000 10,000
November 5, 1996.............................................. 3 383,000 11,490
</TABLE>
In the first half of 1997, Old Delta Three issued 50,000 shares of its
common stock to each of two investors in exchange for investment banking
services in transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof.
II-2
<PAGE>
On December 23, 1996, Old Delta Three conducted a $300,000 private
placement of units consisting of convertible notes and warrants to individual
subscribers in transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof. There were twelve investors in
the December placement, each investing $25,000 for which each investor received
one unit consisting of a $25,000 convertible note (at a conversion price of
$2.00 per share) and a warrant permitting the purchase of up to 12,500 shares at
an exercise price of $2.00 per share. In addition, one investor made a short
term loan to Old Delta Three for $5,000 for which it received a warrant to
purchase up to 5,000 shares at an exercise price of $2.00 per share. An
additional investor was paid a 10% commission and 3% expense allowance, in the
form of convertible notes and warrants, for acting as a placement agent.
Old Delta Three conducted a similar private placement of units in April
1997 consisting of convertible notes and warrants for an aggregate of $520,000
in transactions exempt from the registration requirements of the Securities Act
in reliance on Rule 505 thereof. There were eleven investors in the April
placement. A total of 16 units were issued. The price of each unit was $32,500
and consisted of a $32,500 convertible note (at a conversion price of $3.25 per
share) and a warrant permitting the purchase of up to 10,000 shares at an
exercise price of $3.25 per share.
In June 1997, Old Delta Three granted shares to certain employees and
consultants of Old Delta Three totaling 198,000 shares of common stock of Old
Delta Three, pursuant to transactions exempt from the registration requirements
of the Securities Act pursuant to Section 4(2) thereof. These grants were to
have vested over a two year period. Upon the merger described below, these
grants were converted to restricted units granted by RSL Communications, Ltd.
("RSL COM"), the Registrant's parent company, under RSL COM's 1997 Stock
Incentive Plan, pursuant to RSL COM's registration statement on Form S-8 related
to such plan.
Pursuant to a stock purchase agreement among RSL COM, Old Delta Three and
shareholders of Old Delta Three representing a controlling interest in Old Delta
Three, dated July 23, 1997, Old Delta Three issued to RSL COM 3,260,358 shares
of its common stock. An additional 941,376 shares of common stock were issued
into escrow. The shares were issued in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. The escrowed shares were released from escrow to RSL COM prior to
completion of the merger described below. The total consideration for the
transaction was $5 million. At or about the same time as the July 23, 1997
transaction, RSL COM purchased shares from most of the then existing
shareholders of Old Delta Three as well as the units sold in December 1996 and
April 1997 from the then existing unitholders.
Pursuant to an Agreement and Plan of Merger dated March 31, 1998, Old Delta
Three was merged into RSL Acquisition Corp., a wholly-owned subsidiary of RSL
COM, the name of which new entity was changed to Delta Three, Inc. Old Delta
Three ceased to exist upon consummation of the merger. Shareholders of Old Delta
Three, other than RSL COM, received cash and shares of RSL COM in exchange for
their shares of Old Delta Three. As of the consummation of the merger, RSL COM
was the only shareholder of the Registrant and was issued 7,268,539 shares of
common stock. Subsequent to the merger, RSL COM exercised all the warrants and
convertible notes held by it in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
The Registrant changed its name to its current name, deltathree.com, Inc.,
on May 17, 1999.
In connection with this offering, shares of common stock outstanding prior
to the offering will be converted into shares of Class B common stock. This
conversion will be effected without registration under the Securities Act in
reliance on Section 3(a)(9) of the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.
4.1 Specimen Certificate of Common Stock.*
4.2 Specimen Certificate of Class B Common Stock.*
4.3 Registration Rights Agreement dated September , 1999, between RSL Communications,
Ltd. and deltathree.com, Inc.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.*
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated , 1999.*
10.2 Credit Facility dated September , 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.*
10.3 deltathree.com, Inc. 1999 Stock Incentive Plan.*
10.4 deltathree.com, Inc. 1999 Employee Stock Purchase Plan.*
10.5 deltathree.com, Inc. 1999 Performance Incentive Plan.*
10.6 deltathree.com, Inc. 1999 Directors' Plan.*
10.7 Employment Agreement dated May 1, 1998, between Jerry Norton and Delta Three, Inc.*
10.8 Employment Agreement dated September , 1999, between Amos Sela and deltathree.com, Inc.*
10.9 Employment Agreement dated September , 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.*
10.10 Employment Agreement dated September , 1999, between Noam Bardin and deltathree.com,
Inc.*
10.11 Employment Agreement dated September , 1999, between Shimmy Zimels and deltathree.com,
Inc.*
10.12 Employment Agreement dated September , 1999, between Elie C. Wurtman and deltathree.com,
Inc.*
10.13 Employment Agreement dated September , 1999, between Jacob A. Davidson and
deltathree.com, Inc.*
21.1 Subsidiaries of Registrant.
23.1 Consent of Brightman Almagor & Co.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page to this Registration Statement).
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
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 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 of any action, suit or
II-4
<PAGE>
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus 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.
(3) It will provide to the underwriters at the closing specified in
the underwriting agreements certificates in such denominations and
registered in such amount as required by the underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York on the third day of September, 1999.
DELTATHREE.COM, INC.
By: /s/ Amos Sela
------------------------
Amos Sela
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Amos Sela AND Mark J. Hirschhorn his true and
lawful attorney-in-fact, each acting alone, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any and all additional registration
statements pursuant to Rule 462(b) relating to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact or his substitutes, each acting alone,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- ------------------
<S> <C> <C>
/s/ Amos Sela Chief Executive Officer and Director September 3, 1999
- ------------------------------------------ (Principal Executive Officer)
Amos Sela
/s/ Mark J. Hirschhorn Chief Financial Officer (Principal September 3, 1999
- ------------------------------------------ Accounting and Financial Officer)
Mark J. Hirschhorn
/s/ Elie C. Wurtman Chairman of the Board of Directors September 3, 1999
- ------------------------------------------
Elie C. Wurtman
/s/ Jacob A. Davidson President September 3, 1999
- ------------------------------------------
Jacob A. Davidson
/s/ Itzhak Fisher Director September 3, 1999
- ------------------------------------------
Itzhak Fisher
/s/ Nir Tarlovsky Director September 3, 1999
- ------------------------------------------
Nir Tarlovsky
/s/ Donald R. Shassian Director September 3, 1999
- ------------------------------------------
Donald R. Shassian
/s/ Jacob Z. Schuster Director September 3, 1999
- ------------------------------------------
Jacob Z. Schuster
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.
4.1 Specimen Certificate of Common Stock.*
4.2 Specimen Certificate of Class B Common Stock.*
4.3 Registration Rights Agreement dated September , 1999, between RSL Communications,
Ltd. and deltathree.com, Inc.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.*
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated , 1999.*
10.2 Credit Facility dated September , 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.*
10.3 deltathree.com, Inc. 1999 Stock Incentive Plan.*
10.4 deltathree.com, Inc. 1999 Employee Stock Purchase Plan.*
10.5 deltathree.com, Inc. 1999 Performance Incentive Plan.*
10.6 deltathree.com, Inc. 1999 Directors' Plan.*
10.7 Employment Agreement dated May 1, 1998, between Jerry Norton and Delta Three, Inc.*
10.8 Employment Agreement dated September , 1999, between Amos Sela and deltathree.com, Inc.*
10.9 Employment Agreement dated September , 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.*
10.10 Employment Agreement dated September , 1999, between Noam Bardin and deltathree.com,
Inc.*
10.11 Employment Agreement dated September , 1999, between Shimmy Zimels and deltathree.com,
Inc.*
10.12 Employment Agreement dated September , 1999, between Elie C. Wurtman and deltathree.com,
Inc.*
10.13 Employment Agreement dated September , 1999, between Jacob A. Davidson and
deltathree.com, Inc.*
21.1 Subsidiaries of Registrant.
23.1 Consent of Brightman Almagor & Co.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page to this Registration Statement).
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
-------------------------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
-------------------------------------------------------------------
DELTATHREE.COM, INC. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the "GCL"),
does hereby certify as follows:
(1) The name of the Corporation is deltathree.com, Inc. The
Corporation was originally incorporated under the name RSL Acquisition Corp. The
original certificate of incorporation of the Corporation was filed with the
office of the Secretary of State of the State of Delaware on January 27, 1998.
Such certificate of incorporation was amended on May 17, 1999.
(2) This Amended and Restated Certificate of Incorporation was
duly adopted by the Board of Directors of the Corporation (the "Board of
Directors") and by the stockholders of the Corporation in accordance with
Sections 228, 242 and 245 of the GCL.
(3) This Amended and Restated Certificate of Incorporation
restates and integrates and further amends the certificate of incorporation of
the Corporation, as heretofore amended or supplemented.
(4) The text of the Certificate of Incorporation is amended
and restated in its entirety as follows:
FIRST: The name of the Corporation is deltathree.com, Inc. (the
"Corporation").
<PAGE>
SECOND: The address of the registered office of the Corporation is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, State of Delaware 19801. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of
stock which the Corporation shall have authority to issue is [ ],000,000 shares
of capital stock, consisting of (i) [ ],000,000 shares of Class A common stock,
par value $0.001 per share (the "Class A Common Stock"), (ii) [ ],000,000 shares
of Class B common stock, par value $0.001 per share (the "Class B Common Stock")
and (iii) [ ],000,000 shares of preferred stock, par value $0.001 per share (the
"Preferred Stock"). The Class A Common Stock and the Class B Common Stock are
hereinafter referred to collectively as the "Common Stock."
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of each class of the Common Stock
are as follows:
(1) Voting Rights. Subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of this Amended and
Restated Certificate of Incorporation, as it may be amended from time to time,
the shares of Common Stock shall have the following voting rights: (i) each
share of Class A Common Stock shall entitle the holder thereof to one (1) vote
upon all matters upon which stockholders shall have the right to vote; and (ii)
each share of Class B Common Stock shall entitle the holder thereof to ten (10)
votes upon all matters which stockholders shall have the right to vote.
2
<PAGE>
The holders of Common Stock are not entitled to cumulative voting rights.
(2) Dividends; Stock Splits. Subject to the rights of the
holders of Preferred Stock, and subject to any other provisions of this Amended
and Restated Certificate of Incorporation, as it may be amended from time to
time, holders of shares of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Corporation
when, as and if declared thereon by the Board of Directors from time to time out
of assets or funds of the Corporation legally available therefor. Holders of
Class A Common Stock and Class B Common Stock will share equally on a per share
basis in any dividend declared by the Board of Directors, subject to any
preferential rights of any outstanding Preferred Stock. No dividend or other
distribution may be declared or paid on any share of Class A Common Stock
unless a like dividend or other distribution is simultaneously declared or paid,
as the case may be, on each share of Class B Common Stock, nor shall any
dividend or other distribution be declared or paid on any share of Class B
Common Stock unless a like dividend or other distribution is simultaneously
declared or paid, as the case may be, on each share of Class A Common Stock, in
each case without preference or priority of any kind; provided, however, that
all dividends and distributions on the Class A Common Stock and Class B Common
Stock payable in shares of Common Stock of the Corporation shall be made in
shares of Class A Common Stock and Class B Common Stock, respectively. In no
event will shares of either class of Common Stock be split, divided or combined
unless the outstanding shares of the other class of Common Stock shall be
proportionately split, divided or combined.
(3) Liquidation, Dissolution, etc. In the event of any
liquidation, dissolution or winding up (either voluntary or involuntary) of the
Corporation, the holders of shares of Class A and Class B Common Stock shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution after
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payments to creditors and to the holders of any Preferred Stock of the
Corporation that may at the time be outstanding, ratably in proportion to the
number of shares of Common Stock held by them, respectively. In any such
distribution, shares of Class A Common Stock and Class B Common Stock shall be
treated equally on a per share basis.
(4) Merger, etc. In the event of a merger or consolidation
of the Corporation with or into another entity (whether or not the Corporation
is the surviving entity), the holders of each share of Class A Common Stock and
Class B Common Stock shall be entitled to receive the same per share
consideration as the per share consideration, if any, received by the holders of
each share of the other class of Common Stock, except that if the consideration
includes voting securities (or the right to acquire voting securities, or
securities exchangeable for, or convertible into, voting securities), holders
of Class B Common Stock shall receive consideration entitling them to ten times
the number of votes per share as the consideration being received by holders of
the Class A Common Stock.
(5) Conversion of Class B Common Stock.
(i) Voluntary Conversion. Each share of Class B
Common Stock shall be convertible, at the option of its record holder, into one
validly issued, fully paid and non-assessable share of Class A Common Stock at
any time.
(ii) Automatic Conversion. In the event of any
transfer of any share of Class B Common Stock to a person or entity that is not
a permitted transferee, such share of Class B Common Stock shall automatically,
without any further action, convert into one validly issued, fully paid and
non-assessable share of Class A Common Stock. Permitted transferees shall
include (A) RSL Communications, Ltd. ("RSL COM"), (B) a majority-owned
subsidiary of RSL COM, (C) a successor of RSL COM following a merger,
consolidation or reorganization of RSL COM whereby RSL COM is not the surviving
entity or (D) Ronald S. Lauder or members of
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his family or a trust established by Ronald S. Lauder for his family members, or
entities controlled by or under common control with Ronald S. Lauder.
Majority-owned subsidiary for these purposes shall mean an entity, more than 50%
of the voting shares of which are owned either directly or indirectly through
one or more intermediaries, by RSL COM.
(6) No Preemptive or Subscription Rights. No holder of
shares of Common Stock shall be entitled to preemptive or subscription rights.
(7) Power to Sell and Purchase Shares. Subject to the
requirements of applicable law, the Corporation shall have the power to issue
and sell all or any part of any shares of any class of stock herein or
hereafter authorized to such persons, and for such consideration, as the Board
of Directors shall from time to time, in its discretion, determine, whether or
not greater consideration could be received upon the issue or sale of the same
number of shares of another class, and as otherwise permitted by law. Subject to
the requirements of applicable law, the Corporation shall have the power to
purchase any shares of any class of stock herein or hereafter authorized from
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not less consideration
could be paid upon the purchase of the same number of shares of another class,
and as otherwise permitted by law.
(c) Preferred Stock. The Board of Directors is hereby
expressly authorized to provide for the issuance of all or any shares of the
Preferred Stock in one or more classes or series, and to fix for each such class
or series such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such class or
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series and as may be permitted by the GCL, including, without limita tion, the
authority to provide that any such class or series may be (i) subject to
redemption at such time or times and at such price or prices; (ii) entitled to
receive dividends (which may be cumulative or non-cumulative) at such rates, on
such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as
from time to time fixed by the Board of Directors, and such number shall never
be less than three nor more than thirteen. Election of directors need not be by
written ballot unless the By-Laws so provide.
(c) A director shall hold office until the annual meeting for
the year in which his or her term expires and until his or her successor shall
be elected and shall qualify, subject, however, to prior death,
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resignation, retirement, disqualification or removal from office.
(d) Any director may be elected by a majority of the Board of
Directors to fill a vacancy. If the vacancy results from an increase in the
number of directors, such director shall hold office for a term that shall
coincide with the remaining term of directors then in office. Any director
elected to fill a vacancy not resulting from an increase in the number of
directors shall have the same remaining term as that of his predecessor.
Subject to the rights, if any, of the holders of shares of Preferred Stock then
outstanding, any or all of the directors of the Corporation may be removed from
office at any time, with or without cause by the affirmative vote of the
holders of at least a majority of the voting power of the Corporation's then
outstanding capital stock entitled to vote generally in the election of
directors. Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Amended and Restated Certificate of Incorporation applicable
thereto.
(e) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Amended and Restated Certificate of Incorporation, and any By-Laws adopted
by the stockholders; provided, however, that no By-Laws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such By-Laws had not been adopted.
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SIXTH: No director shall be personally liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. If the GCL is amended hereafter to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent authorized
by the GCL, as so amended. Any repeal or modification of this Article SIXTH by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SEVENTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of his or her heirs, executors and personal and legal representatives;
provided, however, that, except for proceedings to enforce rights to
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) 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. The right to indemnification conferred
by this Article SEVENTH shall include the right to be paid by the Corporation
the expenses incurred in defending or otherwise participating in any proceeding
in advance of its final disposition.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, provide rights to indemnification and to the
advancement of
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expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and Restated
Certificate of Incorporation, the By-Laws of the Corporation, any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer of
the Corporation existing at the time of such repeal or modification with
respect to any acts or omissions occurring prior to such repeal or modification.
EIGHTH: The Corporation hereby elects not to be governed by Section
203 of the GCL pursuant to Section 203(b)(3) therein.
NINTH: Meetings of stockholders may be held within or without the State
of Delaware, as the By-Laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
TENTH: In furtherance and not in limitation of the powers conferred
upon it by the laws of the State of Delaware, the Board of Directors or the
stockholders shall have the power to adopt, amend, alter or repeal the
Corporation's By-Laws. The affirmative vote of at least a majority of the entire
Board of Directors or a majority of the voting power of the Corporation's then
outstanding
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capital stock entitled to vote shall be required to adopt, amend, alter or
repeal the Corporation's By-Laws.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Amended and
Restated Certificate of Incorporation, the Corpora tion's By-Laws or the GCL,
and all rights herein con ferred upon stockholders are granted subject to such
reservation.
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IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be executed on its behalf this
day of , 1999.
deltathree.com, Inc.
By:
-----------------------------
Name:
Title:
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<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
DELTATHREE.COM, INC.
A Delaware Corporation
Effective __, 1999
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
DELTATHREE.COM, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have
offices at such other places, both within and without the State of Delaware,
as the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders
for the election of directors or for any other purpose shall be held at such
time and place, either within or without the State of Delaware, as shall be
designated from time to time by the Board of Directors and stated in the
notice of the meeting or in a duly executed waiver of notice thereof.
<PAGE>
Section 2. Annual Meetings. The annual meetings of
stockholders shall be held on such date and at such time as shall be
designated from time to time by the Board of Directors and stated in the
notice of the meeting, at which meetings the stockholders shall elect
directors, and transact such other business as may properly be brought before
the meeting. Written notice of the annual meeting stating the place, date and
hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 3. Special Meetings. Unless otherwise prescribed by
law or by the certificate of incorporation of the Corporation, as amended and
restated from time to time (the "Certificate of Incorporation"), special
meetings of stockholders, for any purpose or purposes, may be called by either
(i) the Chairman of the Board of Directors, (ii) the President, (iii) the
Board of Directors or (iv) a majority of the holders of Class B Common Stock
in accordance with the provisions of the Certificate of Incorporation in
effect as of the date hereof. Such request shall state the purpose or purposes
of the proposed meeting. At a special meeting of the stockholders, only such
business shall be conducted as shall be specified in the notice of meeting (or
any supplement thereto). Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Notice. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a Special Meeting, the purpose or purposes for which the
meeting is called. Unless otherwise required by law, the written notice of
any meeting shall
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be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting.
Section 5. Quorum. Except as otherwise required by law or
by the Certificate of Incorporation, the holders of at least a majority of the
voting power of the common stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
at all meetings of the stockholders for the transaction of business. A quorum,
once established, shall not be broken by the withdrawal of enough votes to
leave less than a quorum. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, in the manner provided in Section 6,
until a quorum shall be present or represented.
Section 6. Adjournments. Any meeting of the Stockholders
may be adjourned from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted
at the meeting as originally noticed. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stock holder entitled to vote at the meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 7. Proxies. Any stockholder entitled to vote may do
so in person or by his or her proxy appointed by an instrument in writing
subscribed by such stockholder or by his or her attorney thereunto autho-
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rized, delivered to the Secretary of the meeting; provided, however, that no
proxy shall be voted or acted upon after three years from its date, unless
said proxy provides for a longer period. Without limiting the manner in which
a stockholder may authorize another person or persons to act for him or her
as proxy, either of the following shall constitute a valid means by which a
stockholder may grant such authority:
(i) A stockholder may execute a writing
authorizing another person or persons to act for him or her as proxy.
Execution may be accomplished by the stockholder or his or her
authorized officer, director, employee or agent signing such writing
or causing his or her signature to be affixed to such writing by any
reasonable means, including, but not limited to, by facsimile
signature.
(ii) A stockholder may authorize another person or
persons to act for him or her as proxy by transmitting or authorizing
the transmission of a telegram or other means of electronic
transmission to the person who will be the holder of the proxy or to
a proxy solicitation firm, proxy support service organization or
like agent duly authorized by the person who will be the holder of
the proxy to receive such transmission, provided that any such
telegram or other means of electronic transmission must either set
forth or be submitted with information from which it can be
determined that the telegram or other electronic transmission was
authorized by the stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
for a stockholder may be substituted or used in lieu of the original writing
or transmission for any and all purposes for which the original writing or
transmission could be used;
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provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or
transmission.
Section 8. Voting. At all meetings of the stockholders at
which a quorum is present, except as otherwise required by law, the
Certificate of Incorporation or these By-Laws, any question brought before
any meeting of stockholders shall be decided by the affirmative vote of the
holders of a majority of the voting power of the common stock present in
person or represented by proxy and entitled to vote on such question, voting
as a single class.
Section 9. Nature of Business at Meetings of Stockholders.
No business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any
duly authorized committee thereof) or (c) otherwise properly brought before
the annual meeting by any stockholder of the Company (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section
9 and on the record date for the determination of stockholders entitled to
vote at such annual meeting and (ii) who complies with the notice procedures
set forth in this Section 9.
In addition to any other applicable requirements, for
business to be properly brought before an annual meeting by a stockholder,
such stockholder must have given timely notice thereof in proper written form
to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must
be delivered to or mailed and received at the principal executive offices of
the Company not less
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than ninety (90) days nor more than one hundred and twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) 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, (ii) the name and record address of such
stockholder, (iii) the class or series and number of shares of capital stock
of the Company which are owned beneficially or of record by such stockholder,
(iv) a description of all arrangements or understandings between such
stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a
representation that such stockholder intends to appear in person or by proxy
at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of
stockholders except business brought before the annual meeting in accordance
with the procedures set forth in this Section 9, provided, however, that, once
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 9 shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an
annual meeting determines that business was not prop-
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<PAGE>
erly brought before the annual meeting in accordance with the foregoing
procedures, the Chairman shall declare to the meeting that the business was
not properly brought before the meeting and such business shall not be
transacted.
Section 10. List of Stockholders Entitled to Vote. The
officer of the Corporation who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list 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 ten 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 of the Corporation who is present.
Section 11. Stock Ledger. The stock ledger of the
Corporation shall be the only evidence as to who are the stockholders entitled
to examine the stock ledger, the list required by Section 10 of this Article
II or the books of the Corporation, or to vote in person or by proxy at any
meeting of stockholders.
Section 12. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the
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<PAGE>
purpose of any other lawful 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 of Directors and which record
date: (1) in the case of determination of stockholders entitled to vote at any
meeting of stockholders or adjournment thereof, shall not be more than sixty
nor less than ten days before the date of such meeting; and (2) in the case of
any other action, shall not be more than sixty days prior to such other
action. If no record date is fixed: (1) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held; and (2) the record date
for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
Section 13. Inspectors of Election. In advance of any
meeting of stockholders, the Board by resolution or the Chairman or President
shall appoint one or more inspectors of election to act at the meeting and
make a written report thereof. One or more other persons may be designated as
alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is present, ready and willing to act at a meeting of
stockholders, the Chairman of the meeting shall appoint one or more inspectors
to act at the meeting. Unless otherwise required by law, inspectors may be
officers, employees or agents of the Corporation. Each inspector, before
entering upon the discharge of his or her duties, shall take and sign an oath
faithfully to execute the
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<PAGE>
duties of inspector with strict impartiality and according to the best of his
or her ability. The inspector shall have the duties prescribed by law and
shall take charge of the polls and, when the vote is completed, shall make a
certificate of the result of the vote taken and of such other facts as may be
required by law.
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The Board of
Directors shall initially consist of eight (8) members, which number may be
changed from time to time by resolution adopted by the Board of Directors, in
accordance with the provisions of Article FIFTH of the Amended and Restated
Certificate of Incorporation. Except as provided in Section 3 of this Article
III, directors shall be elected by the stockholders at the annual meetings of
stockholders, and each director so elected shall hold office until such
director's successor is duly elected and qualified, or until such director's
death, or until such director's earlier resignation or removal. Directors need
not be stockholders.
Section 2. Nomination of Directors. Only persons who are
nominated in accordance with the following procedures shall be eligible for
election as directors of the Company, except as may be otherwise provided in
the Certificate of Incorporation with respect to the right of holders of
preferred stock of the Corporation to nominate and elect a specified number of
directors in certain circumstances. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of stockholders, or at
any special meeting of stockholders called for the purpose of electing
directors, (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (b) by any stockholder of the Company (i)
who is a stockholder of record
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on the date of the giving of the notice provided for in this Section 2 and on
the record date for the determination of stockholders entitled to vote at
such meeting and (ii) who complies with the notice procedures set forth in
this Section 2.
In addition to any other applicable requirements, for a
nomination to be made by a stockholder, such stockholder must have given
timely notice thereof in proper written form to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must
be delivered to or mailed and received at the principal executive offices of
the Company (a) in the case of an annual meeting, not less than ninety (90)
days nor more than one hundred and twenty (120) days prior to the anniversary
date of the immediately preceding annual meeting of stockholders; provided,
however, that in the event that the annual meeting is called for a date that
is not within thirty (30) days before or after such anniversary date, notice
by the stockholder in order to be timely must be so received not later than
the close of business on the tenth (10th) day following the day on which such
notice of the date of the annual meeting was mailed or such public disclosure
of the date of the annual meeting was made, whichever first occurs; and (b) in
the case of a special meeting of stockholders called for the purpose of
electing directors, not later than the close of business on the tenth (10th)
day following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the spe cial meeting was made,
whichever first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth (a) as to each person whom the stockholder proposes
to nominate for election as a director (i) the name, age, business address
and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class or series and number of shares of
capital stock
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of the Company which are owned beneficially or of record by the person and
(iv) any other information relating to the person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations promulgated thereunder; and (b) as to the
stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Company which are owned beneficially or of record by such stockholder,
(iii) a description of all arrangements or understandings between such
stockholder and each proposed nominee and any other person or persons
(including their names) pursuant to which the nomination(s) are to be made by
such stockholder, (iv) a representation that such stockholder intends to
appear in person or by proxy at the meeting to nominate the persons named in
its notice and (v) any other information relating to such stockholder that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a
written consent of each proposed nominee to being named as a nominee and to
serve as a director if elected.
No person shall be eligible for election as a director of
the Company unless nominated in accordance with the procedures set forth in
this Section 2. If the Chairman of the meeting determines that a nomination
was not made in accordance with the foregoing procedures, the Chairman shall
declare to the meeting that the nomination was defective and such defective
nomination shall be disregarded.
Section 3. Vacancies. The filling of any vacancy on the
Board of Directors that results from an
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increase in the number of directors or otherwise shall be governed by the
Amended and Restated Certificate of Incorporation. Whenever the holders of any
one or more class or classes or series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall also be
governed by the Amended and Restated Certificate of Incorporation.
Section 4. Duties and Powers. The business of the
Corporation shall be managed by or under the direction of the Board of
Directors which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws required to be exercised or done by the
stockholders.
Section 5. Organization. At each meeting of the Board of
Directors, the Chairman of the Board of Directors, or, in his or her absence,
a director chosen by a majority of the directors present, shall act as
Chairman. The Secretary of the Corporation shall act as Secretary at each
meeting of the Board of Directors. In case the Secretary shall be absent from
any meeting of the Board of Directors, an Assistant Secretary shall perform
the duties of Secretary at such meeting; and in the absence from any such
meeting of the Secretary and all the Assistant Secretaries, the Chairman of
the meeting may appoint any person to act as Secretary of the meeting.
Section 6. Resignations and Removals of Directors. Any
director of the Corporation may resign at any time, by giving written notice
to the Chairman of the Board of Directors, the President or the Secretary of
the Corporation. Such resignation shall take effect at the time therein
specified or, if no time is specified, immediately; and, unless otherwise
specified in such notice,
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the acceptance of such resignation shall not be necessary to make it
effective. Except as otherwise required by law and subject to the rights, if
any, of the holders of shares of preferred stock then outstanding, any
director or the entire Board of Directors may be removed from office at any
time, with or without cause, by the affirmative vote of the holders of at
least a majority in voting power of the issued and outstanding common stock of
the Corporation entitled to vote in the election of directors.
Section 7. Meetings. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware. Regular meetings of the Board of Directors may
be held at such time and at such place as may from time to time be determined
by the Board of Directors and, unless required by resolution of the Board of
Directors, without notice. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors, the Vice Chairman, if there
be one, or a majority of the directors then in office. Notice thereof stating
the place, date and hour of the meeting shall be given to each director either
by mail not less than forty-eight (48) hours before the date of the meeting,
by telephone, facsimile or telegram on twenty-four (24) hours' notice, or on
such shorter notice as the person or persons calling such meeting may deem
necessary or appropriate in the circumstances.
Section 8. Quorum. Except as may be otherwise required by
law, the Certificate of Incorporation or these By-Laws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority
of the directors present at any meeting at which there is a quorum shall be
the act of the Board of Directors. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, with-
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out notice other than announcement at the meeting of the time and place of the
adjourned meeting, until a quorum shall be present.
Section 9. Actions of Board. Unless otherwise provided by
the Certificate of Incorporation or these By-Laws, 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 the members of the
Board of Directors 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 of Directors or committee.
Section 10. Meetings by Means of Conference Telephone.
Unless otherwise provided by the Certificate of Incorporation or these
By-Laws, members of the Board of Directors of the Corporation, or any
committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors or such committee by means of a conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 10 shall constitute presence in person at
such meeting.
Section 11. Committees. The Board of Directors may, by
resolution passed by a majority of the entire Board of Directors, designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unani-
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mously appoint another member of the Board of Directors to act at the meeting
in the place of any absent or disqualified member. Any committee, to the
extent permitted by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation. Each committee shall keep regular minutes and report to the Board
of Directors when required.
Section 12. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary, or such other emoluments as the Board of
Directors shall from time to time determine. No such payment shall preclude
any director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be
allowed like compensation for attending committee meetings.
Section 13. Interested Directors. No contract or transaction
between the Corporation and one or more of its directors or officers, or
between the Corporation and any other corporation, partnership, association,
or other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present
at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because such
person's or their votes are counted for such purpose if (i) the material facts
as to such person's or their relationship or interest and as to the contract
or transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes
the contract or transaction by the affirmative votes of a majority of the
disinterested
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directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to such person's or their relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee
thereof or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors
or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a Chief Executive Officer,
a President, a Secretary and a Treasurer. The Board of Directors, in its
discretion, may also choose a Chairman of the Board of Directors (who must be
a director) and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation
or these By-Laws. The Chairman of the Board of Directors shall not also be the
Chief Executive Officer of the Corporation. The officers of the Corporation
need not be stockholders of the Corporation nor, except in the case of the
Chairman of the Board of Directors, need such officers be directors of the
Corporation.
Section 2. Election. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect the
officers of the Corporation
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who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors; and all officers of the Corporation shall hold office until their
successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors. The salaries of all officers of the Corporation shall be
fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation.
Powers of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed
in the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any
corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident
to the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman
of the Board of Directors, if there be one, shall preside at all meetings of
the stockholders and of the Board of Directors. Except where by law the
signature of the President is required, the Chairman of the Board of Directors
shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized
by the Board of Directors. During the absence or
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disability of the President, the Chairman of the Board of Directors shall
exercise all the powers and discharge all the duties of the President. The
Chairman of the Board of Directors shall also perform such other duties and
may exercise such other powers as from time to time may be assigned to him or
her by these By-Laws or by the Board of Directors.
Section 5. Chief Executive Officer. The Chief Executive
Officer shall, subject to the control of the Board of Directors and, if there
be one, the Chairman of the Board of Directors, have general supervision of
the business of the Corporation and shall see that all orders and resolutions
of the Board of Directors are carried into effect. The Chief Executive Officer
shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except
that the other officers of the Corporation may sign and execute documents
when so authorized by these By-Laws, the Board of Directors or the Chief
Executive Officer. In the absence or disability of the Chairman of the Board
of Directors, or if there be none, the Chief Executive Officer shall preside
at all meetings of the stockholders and the Board of Directors. The Chief
Executive Officer shall also perform such other duties and may exercise such
other powers as from time to time may be assigned to him or her by these
By-Laws or by the Board of Directors.
Section 6. President. At the request of the Chief Executive
Officer or in his or her absence or in the event of his or her inability or
refusal to act, the President shall perform the duties of the Chief Executive
Officer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Chief Executive Officer. The President shall
perform such other duties and have such other powers as the Board of Directors
from time to time may prescribe. If there be no President, the Board of
Directors shall designate the
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officer of the Corporation who, in the absence of the Chief Executive Officer
or in the event of the inability or refusal of the Chief Executive Officer to
act, shall perform the duties of the Chief Executive Officer, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the Chief Executive Officer.
Section 7. Vice Presidents. At the request of the President
or in his or her absence or in the event of his or her inability or refusal to
act (and if there be no Chairman of the Board of Directors), the Vice
President or the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President. Each Vice President shall perform
such other duties and have such other powers as the Board of Directors from
time to time may prescribe. If there be no Chairman of the Board of Directors
and no Vice President, the Board of Directors shall designate the officer of
the Corporation who, in the absence of the President or in the event of the
inability or refusal of the President to act, shall perform the duties of the
President, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
Section 8. Secretary. The Secretary shall attend all
meetings of the Board of Directors and all meetings of stockholders and record
all the proceedings thereat in a book or books to be kept for that purpose;
the Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision the Secretary shall be. If the
Secretary shall be unable or shall refuse to cause to be given
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notice of all meetings of the stockholders and special meetings of the Board
of Directors, and if there be no Assistant Secretary, then either the Board of
Directors or the President may choose another officer to cause such notice to
be given. The Secretary shall have custody of the seal of the Corporation and
the Secretary or any Assistant Secretary, if there be one, shall have
authority to affix the same to any instrument requiring it and when so
affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation
and to attest the affixing by his or her signature. The Secretary shall see
that all books, reports, statements, certificates and other documents and
records required by law to be kept or filed are properly kept or filed, as the
case may be.
Section 9. Treasurer. The Treasurer shall have the custody
of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation
and shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the
Board of Directors. The Treasurer shall disburse the funds of the Corporation
as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors,
at its regular meetings, or when the Board of Directors so requires, an
account of all transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give
the Corporation a bond in such sum and with such surety or sureties as shall
be satisfactory to the Board of Directors for the faithful performance of the
duties of the office of Treasurer and for the restoration to the Corporation,
in case of the Treasurer's death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
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kind in the Treasurer's possession or under control of the Treasurer belonging
to the Corporation.
Section 10. Assistant Secretaries. Except as may be
otherwise provided in these By-Laws, Assistant Secretaries, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Secretary, and in the absence of the Secretary or in
the event of his or her disability or refusal to act, shall perform the duties
of the Secretary, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any
Vice President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of the Treasurer's disability or refusal to act,
shall perform the duties of the Treasurer, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of the office of Assistant Treasurer and for the restoration to the
Corporation, in case of the Assistant Treasurer's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in the Assistant Treasurer's possession or
under control of the Assistant Treasurer belonging to the Corporation.
Section 12. Other Officers. Such other officers as the
Board of Directors may choose shall perform such duties and have such powers
as from time to time may
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be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such
other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in
the Corporation shall be entitled to have a certificate signed, in the name of
the Corporation, (i) by the Chairman of the Board of Directors, the President
or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such holder of stock in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with
the same effect as if such person were such officer, transfer agent or
registrar at the date of issue.
Section 3. Lost, Destroyed, Stolen or Mutilated
Certificates. The Board of Directors may direct a new certificate to be issued
in place of any certificate theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate, or
such
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person's legal representative, to advertise the same in such manner as
the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-Laws. Transfers
of stock shall be made on the books of the Corporation only by the person
named in the certificate or by such person's attorney lawfully constituted in
writing and upon the surrender of the certificate therefor, properly endorsed
for transfer and payment of all necessary transfer taxes; provided, however,
that such surrender and endorsement or payment of taxes shall not be required
in any case in which the officers of the Corporation shall determine to waive
such requirement. Every certificate exchanged, returned or surrendered to the
Corporation shall be marked "Cancelled," with the date of cancellation, by
the Secretary or Assistant Secretary of the Corporation or the transfer agent
thereof. No transfer of stock shall be valid as against the Corporation for
any purpose until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
Section 5. Transfer and Registry Agents. The Corporation
may from time to time maintain one or more transfer offices or agencies and
registry offices or agencies at such place or places as may be determined from
time to time by the Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and to
hold liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest
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in such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, such notice may be given by
mail, addressed to such director, member of a committee or stockholder, at
such person's address as it appears on the records of the Corporation, with
postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Written
notice may also be given personally or by telegram, facsimile, telex or cable.
Section 2. Waivers of Notice.
(a) Whenever any notice is required by
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting, present by person or represented by
proxy, shall constitute a waiver of notice of such meeting, except where the
person attends the meeting for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened.
(b) Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the stockholders,
directors or members of a committee of directors need be specified in any
written waiver of
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notice unless so required by law, the Certificate of Incorporation or these
By-Laws.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Subject to the requirements of the
GCL and the provisions of the Certificate of Incorporation, dividends upon the
capital stock of the Corporation, if any, may be declared by the Board of
Directors at any regular or special meeting of the Board of Directors, and may
be paid in cash, in property, or in shares of the Corporation's capital stock.
Before payment of any dividend, there may be set aside out of any funds of
the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for purchasing any of the
shares of capital stock, warrants, rights, options, bonds, debentures, notes,
scrip or other securities or evidences of indebtedness of the Corporation, or
for equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any other proper purpose, and the Board of Directors may
modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money
and notes of the Corporation shall be signed by such officer or officers or
such other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of
the Corporation shall be fixed by resolution of the Board
of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation,
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the year of its organization and the words "Corporate Seal, Delaware". The
seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or
Proceedings Other than Those by or in the Right of the Corporation. Subject to
Section 3 of this Article VIII, 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
or officer of the Corporation, or is or was a director or officer of the
Corporation serving at the request of the Corporation as a director or
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person 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, with respect to any criminal action or proceeding, such
person had no reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that such person did not act in
good faith and in a manner which such person reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to
any criminal action or pro-
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ceeding, had reasonable cause to believe that his or her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or
Proceedings by or in the Right of the Corporation. Subject to Section 3 of
this Article VIII, 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 or officer of the Corporation, or is or was a director or officer of
the Corporation serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such
person 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; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any
indemnification under this Article VIII (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because such person has met the applicable standard of conduct
set forth in Section 1 or
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Section 2 of this Article VIII, as the case may be. Such determination shall
be made (i) by a majority vote of the directors who are not parties to such
action, suit or proceeding, even though less than a quorum, or (ii) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (iii) by the stockholders. To the extent,
however, that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith, without the
necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any
determination under Section 3 of this Article VIII, a person shall be deemed
to 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, or, with
respect to any criminal action or proceeding, to have had no reasonable cause
to believe his or her conduct was unlawful, if such person's action is based
on the records or books of account of the Corporation or another enterprise,
or on information supplied to such person by the officers of the Corporation
or another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or
records given or reports made to the Corporation or another enterprise by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or another enterprise. The
term "another enterprise" as used in this Section 4 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of this
Section 4 shall not be deemed to
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be exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 1
or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to the Court of Chancery of the State of
Delaware or any other court of competent jurisdiction in the State of Delaware
for indemnification to the extent otherwise permissible under Sections 1 and 2
of this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
standards of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under
Section 3 of this Article VIII nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director or officer seeking indemnification has not met any applicable
standard of conduct. Notice of any application for indemnification pursuant to
this Section 5 shall be given to the Corporation promptly upon the filing of
such application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred
by a director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that such person is not entitled
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to be indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and
Advancement of Expenses. The indemnification and advancement of expenses
provided by or granted pursuant to this Article VIII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under the Certificate of
Incorporation or any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of
any court of competent jurisdiction or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that indemnification of
the persons specified in Sections 1 and 2 of this Article VIII shall be made
to the fullest extent permitted by law. The provisions of this Article VIII
shall not be deemed to preclude the indemnification of any person who is not
specified in Section 1 or 2 of this Article VIII but whom the Corporation has
the power or obligation to indemnify under the provisions of the GCL, or
otherwise.
Section 8. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power or the obligation to indemnify such person against such liability under
the provisions of this Article VIII.
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Section 9. Certain Definitions. For purposes of this
Article VIII, references to "the Corporation" shall include, in addition to
the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors or officers, so that any person who is or was a
director or officer of such constituent corporation, or is or was a director
or officer of such constituent corporation serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of
this Article VIII with respect to the resulting or surviving corporation as
such person would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this Article VIII,
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to
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the benefit of the heirs, executors and administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for
proceedings to enforce rights to indemnification (which shall be governed by
Section 5 hereof), the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) or advance expenses 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 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended
or repealed, in whole or in part, or new By-Laws may be adopted by the Board
of Directors or by the stockholders as provided in the Certificate of
Incorporation.
Section 2. Entire Board of Directors. As used in this
Article IX and in these By-Laws generally, the term "entire Board of
Directors" means the total number of directors which the Corporation would
have at a particular time if there were then no vacancies.
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TABLE OF CONTENTS
ARTICLE I - OFFICES............................................................1
Section 1. Registered Office...................................1
Section 2. Other Offices.......................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS..........................................1
Section 1. Place of Meetings...................................1
Section 2. Annual Meetings.....................................1
Section 3. Special Meetings....................................2
Section 4. Notice..............................................2
Section 5. Quorum..............................................2
Section 6. Adjournments........................................3
Section 7. Proxies.............................................3
Section 8. Voting..............................................4
Section 9. Nature of Business at Meetings
of Stockholders.....................................4
Section 10. List of Stockholders Entitled
to Vote.............................................6
Section 11. Stock Ledger........................................6
Section 12. Record Date. ......................................6
Section 13. Inspectors of Election..............................7
ARTICLE III - DIRECTORS........................................................7
Section 1. Number and Election of Directors....................7
Section 2. Nomination of Directors.............................8
Section 3. Vacancies..........................................10
Section 4. Duties and Powers..................................10
Section 5. Organization.......................................10
Section 6. Resignations and Removals
of Directors.......................................11
Section 7. Meetings...........................................11
Section 8. Quorum.............................................11
Section 9. Actions of Board...................................12
Section 10. Meetings by Means of Conference
Telephone..........................................12
Section 11. Committees.........................................12
Section 12. Compensation.......................................13
Section 13. Interested Directors...............................13
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ARTICLE IV - OFFICERS.........................................................14
Section 1. General............................................14
Section 2. Election...........................................14
Section 3. Voting Securities Owned by
the Corporation....................................14
Section 4. Chairman of the Board of Directors.................15
Section 5. President..........................................15
Section 6. Vice Presidents....................................16
Section 7. Secretary..........................................16
Section 8. Treasurer..........................................17
Section 9. Assistant Secretaries..............................17
Section 10. Assistant Treasurers...............................17
Section 11. Other Officers.....................................18
ARTICLE V - STOCK.............................................................18
Section 1. Form of Certificates...............................18
Section 2. Signatures.........................................18
Section 3. Lost, Destroyed, Stolen or Mutilated
Certificates.......................................19
Section 4. Transfers..........................................19
Section 5. Transfer and Registry Agents.......................19
Section 6. Beneficial Owners..................................20
ARTICLE VI - NOTICES..........................................................20
Section 1. Notices............................................20
Section 2. Waivers of Notice..................................20
ARTICLE VII - GENERAL PROVISIONS..............................................21
Section 1. Dividends..........................................21
Section 2. Disbursements......................................21
Section 3. Fiscal Year........................................21
Section 4. Corporate Seal.....................................21
ARTICLE VIII - INDEMNIFICATION................................................22
Section 1. Power to Indemnify in Actions,
Suits or Proceedings Other than
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PAGE
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Those by or in the Right of the
Corporation........................................22
Section 2. Power to Indemnify in Actions,
Suits or Proceedings by or in
the Right of the Corporation.......................22
Section 3. Authorization of Indemnification...................23
Section 4. Good Faith Defined.................................23
Section 5. Indemnification by a Court.........................24
Section 6. Expenses Payable in Advance........................25
Section 7. Nonexclusivity of Indemnification
and Advancement of Expenses........................25
Section 8. Insurance..........................................25
Section 9. Certain Definitions................................26
Section 10. Survival of Indemnification and
Advancement of Expenses............................26
Section 11. Limitation on Indemnification......................27
Section 12. Indemnification of Employees and
Agents.............................................27
ARTICLE IX - AMENDMENTS.......................................................27
Section 1. Amendments.........................................27
Section 2. Entire Board of Directors..........................27
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Subsidiaries of the Registrant
- ------------------------------
Delta Three Israel Ltd.
Internet Technologies Colombia SA
Delta Three Direct LLC(1)
- ---------------------
(1) The Company is in the process of dissolving this subsidiary.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of deltathree.com, Inc. on
Form S-1 of our report dated May 17, 1999, appearing in the Prospectus, which is
part of this Registration Statement. We also consent to the reference to us
under the headings "Selected Consolidated Financial Data" and "Experts" in such
Prospectus.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
(a member firm of Deloitte Touche Tohmatsu)
Tel Aviv, Israel
September 3, 1999
