<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
VIATEL, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
DELAWARE 4813 13-3787366
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification)
Incorporation or Classification Code
Organization) Number)
------------------------------
685 THIRD AVENUE
NEW YORK, NEW YORK 10017
(212) 350-9200
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
</TABLE>
------------------------------
JAMES P. PRENETTA, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
VIATEL, INC.
685 THIRD AVENUE
NEW YORK, NEW YORK 10017
(212) 350-9200
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
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JAY R. SCHIFFERLI, ESQ. RICHARD L. SHORTEN, JR., ESQ. RICHARD HALL, ESQ.
KELLEY DRYE & WARREN LLP DESTIA COMMUNICATIONS, INC. CRAVATH, SWAINE & MOORE
TWO STAMFORD PLAZA 95 RTE. 17 SOUTH WORLDWIDE PLAZA
281 TRESSER BOULEVARD PARAMUS, NEW JERSEY 07652 825 EIGHTH AVENUE
STAMFORD, CONNECTICUT 06901 (201) 226-4500 NEW YORK, NEW YORK 10019
(203) 324-1400 (212) 474-1000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, with par value of $.01 per 14,525,302
share shares(1) $10.8438(2) $353,953,875(2) $98,399(3)
</TABLE>
(1) The maximum number of shares of Viatel common stock issuable in connection
with the merger in exchange for shares of Destia common stock is based on
(i) the number of shares of Destia common stock outstanding on September 17,
1999, including shares issuable pursuant to certain exercisable warrants
(32,641,129 shares) and (ii) the exchange ratio used in the merger (0.445
shares of Viatel common stock for each share of Destia common stock).
However, the actual maximum number of shares will depend on the facts as
they exist on the date of the exchange.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c) of the Securities Act, based on
the market value of the Destia shares to be received by Viatel in the
merger, as established by the average of the high and low sales prices of
Destia common stock on September 17, 1999 as reported on the Nasdaq National
Market, which was $10.8438 times 32,641,129 shares (the number of shares of
Destia common stock outstanding as of September 17, 1999, including shares
issuable pursuant to certain exercisable warrants).
(3) This fee has been calculated pursuant to Section 6(b) of the Securities Act
by multiplying the aggregate offering amount of $353,953,875.00 by .000278.
A fee of $70,790.78 was paid on September 22, 1999 in connection with the
initial filing of the joint proxy statement included in this Registration
Statement. Pursuant to Rule 457(b) under the Securities Act, the
registration fee payable herewith has been reduced by $70,790.78, the amount
previously paid. Accordingly, an additional fee of $27,608.22 is being paid
herewith.
------------------------------
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 which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
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[LOGO] [LOGO]
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YOUR VOTE ON OUR PROPOSED MERGER IS VERY IMPORTANT!
To the stockholders of Viatel and Destia:
Viatel and Destia have agreed to combine in a merger. This merger will
create a stronger competitor in the rapidly changing telecommunications
industry. Accordingly, we believe that this merger will benefit the stockholders
of both companies, and we ask for your support in voting for the merger
proposals at our meetings.
When the merger is completed, Viatel will issue approximately 14.1 million
shares of its common stock to Destia stockholders based on the number of
outstanding Destia shares on October 13, 1999, at an exchange ratio of 0.445 of
a Viatel share for each Destia share. These shares will represent approximately
30.1% of the outstanding shares of Viatel common stock after the merger
(assuming that no Destia warrants, options or other equity-based awards are
exercised prior to or in connection with the merger). Viatel shares held by
Viatel stockholders before the merger will represent approximately 69.9% of the
outstanding Viatel shares after the merger (assuming that no Destia warrants,
options or other equity-based awards are exercised prior to or in connection
with the merger). Viatel's common stock and Destia's voting common stock are
listed on the Nasdaq National Market under the symbols "VYTL" and "DEST,"
respectively.
Information about the merger and the other items to be voted on at your
company's meeting is contained in this joint proxy statement/prospectus and in
the merger agreement attached as Annex A. WE URGE YOU TO READ THIS MATERIAL,
INCLUDING THE SECTION ENTITLED "RISK FACTORS," BEGINNING ON PAGE 9.
The boards of directors of both Viatel and Destia believe that the merger is
advisable, fair to and in the best interests of their respective stockholders,
have approved the merger and recommend that their respective stockholders vote
FOR the merger proposals as described in the attached materials. We cannot
complete the merger unless the stockholders of both companies approve their
respective proposals relating to the merger.
Three of Destia's principal stockholders own a majority of the outstanding
shares of Destia voting common stock and have agreed to vote all of their shares
in favor of the merger. Accordingly, when the Destia stockholders vote to
approve the adoption of the merger agreement, the merger should be approved
whether or not any Destia stockholder other than the three principal
stockholders supports the merger.
Your vote is very important, regardless of the number of shares you own.
Please vote as soon as possible to make sure that your shares are represented at
your company's special meeting. To grant your proxy to vote your shares, you
must complete and return the enclosed proxy card. You may also cast your vote in
person at the meeting.
Very truly yours,
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/s/ Michael J. Mahoney /s/ Alfred West
Michael J. Mahoney Alfred West
Chairman of the Board, President and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Viatel, Inc. Destia Communications, Inc.
</TABLE>
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this joint proxy statement/ prospectus. Any
representation to the contrary is a criminal offense.
------------------------
This joint proxy statement/prospectus is dated October 15, 1999, and is
first being mailed to stockholders on or about October 19, 1999.
<PAGE>
VIATEL, INC.
685 THIRD AVENUE
NEW YORK, NEW YORK 10017
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, NOVEMBER 19, 1999
------------------------
To the stockholders of Viatel, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Viatel,
Inc. will be held on Friday, November 19, 1999 in the Beekman Room at the Hotel
Intercontinental, 111 East 48th Street, New York, New York 10017, at 10:00 a.m.,
local time, for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of Viatel
common stock pursuant to an Agreement and Plan of Merger, dated as of
August 27, 1999, by and among Viatel, Inc., a wholly-owned subsidiary of
Viatel that was created to complete the merger, and Destia
Communications, Inc., and to approve any other transaction described in
the merger agreement; and
2. To transact such other business as may properly be presented at the
special meeting and at any adjournments or postponements thereof.
The board of directors of Viatel has fixed the close of business on October
14, 1999 as the record date for the purpose of determining stockholders who are
entitled to notice of and to vote at the special meeting and any adjournments or
postponements thereof. A list of such stockholders will be available during
regular business hours at Viatel's office, 685 Third Avenue, New York, New York
10017 for the ten days prior to the special meeting, for inspection by any
stockholder of record for any purpose germane to the special meeting.
By order of the board of directors,
/s/ Sheldon M. Goldman
Sheldon M. Goldman
Secretary
New York, New York
October 15, 1999
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN
PERSON IF YOU WISH, EVEN IF YOU PREVIOUSLY RETURNED OR GRANTED YOUR PROXY.
<PAGE>
DESTIA COMMUNICATIONS, INC.
95 RTE. 17 SOUTH
PARAMUS, NEW JERSEY 07652
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, NOVEMBER 19, 1999
------------------------
To the stockholders of Destia Communications, Inc.:
A special meeting of the stockholders of Destia Communications, Inc. will be
held on Friday, November 19, 1999, at 11:30 a.m., local time, in the Beekman
Room at the Hotel Intercontinental, 111 East 48th Street, New York, New York
10017, for the following purpose:
To consider and vote upon a proposal to adopt the merger agreement among
Viatel, Inc., Destia and a wholly-owned subsidiary of Viatel that was
created to complete the merger. Pursuant to the merger agreement, each
outstanding share of Destia common stock will be converted into the right to
receive 0.445 of a share of Viatel common stock, and Destia will become a
wholly-owned subsidiary of Viatel.
No other business will be transacted at the special meeting, except such
business as may properly be brought before the special meeting or any
adjournments or postponements thereof.
Only holders of record of shares of Destia common stock at the close of
business on October 14, 1999, the record date for the special meeting, are
entitled to notice of and to vote at the special meeting and any adjournments or
postponements thereof.
A list of the Destia stockholders entitled to vote at the special meeting
will be available for inspection by any such stockholder, for any purpose
germane to the special meeting, at Destia's office at 60 Hudson Street, Suite
319, New York, New York 10013, during regular business hours, for a period of
ten days prior to the special meeting.
The merger is subject to, among other things, the affirmative vote of the
holders of a majority of the outstanding shares of Destia voting common stock.
Three of Destia's principal stockholders own a majority of the outstanding
shares of Destia voting common stock and have agreed to vote all of their shares
in favor of the merger. Accordingly, when the Destia stockholders vote to
approve the adoption of the merger agreement, the merger should be approved
whether or not any Destia stockholder other than the three principal
stockholders supports the merger.
Holders of Destia voting common stock will not be entitled to appraisal
rights under Delaware law as a result of the merger. Holders of Destia
non-voting common stock will be entitled to appraisal rights under Delaware law
as described in the accompanying joint proxy statement/prospectus.
PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME.
By order of the board of directors,
/s/ Richard L. Shorten, Jr.
Richard L. Shorten, Jr.
Secretary
Paramus, New Jersey
October 15, 1999
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING. ELIGIBLE STOCKHOLDERS MAY BE ABLE TO VOTE BY TELEPHONE OR
THE INTERNET. IF YOU ATTEND THE MEETING, YOU MAY VOTE YOUR SHARES IN PERSON IF
YOU WISH, EVEN IF YOU PREVIOUSLY RETURNED OR GRANTED YOUR PROXY.
<PAGE>
TABLE OF CONTENTS
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I. THE MERGER PAGE
---
QUESTIONS AND ANSWERS ABOUT THE MERGER......................................... 1
SUMMARY
The Companies.............................................................. 4
Recommendations of the Viatel Board and the Destia Board................... 4
The Merger................................................................. 4
Opinions of Financial Advisors............................................. 5
Interests of Officers and Directors in the Merger.......................... 5
Conversion of Destia Stock Rights.......................................... 5
Conditions to the Completion of the Merger................................. 5
Termination of the Merger Agreement........................................ 6
Termination Fees........................................................... 7
Regulatory Approvals....................................................... 7
Material Federal Income Tax Consequences of the Merger..................... 7
Stockholder Agreements..................................................... 8
Comparative Per Share Market Price Information............................. 8
Listing of Viatel Common Stock............................................. 8
Ownership of Viatel After the Merger....................................... 8
Stockholder Votes Required................................................. 8
Appraisal Rights........................................................... 8
Accounting Treatment....................................................... 8
RISK FACTORS................................................................... 9
THE VIATEL SPECIAL MEETING..................................................... 21
THE DESTIA SPECIAL MEETING..................................................... 23
THE MERGER
Background of the Merger................................................... 25
Viatel's Reasons for the Merger; Recommendation of the Viatel
Board of Directors....................................................... 27
Destia's Reasons for the Merger; Recommendation of the Destia
Board of Directors....................................................... 29
Opinion of Financial Advisor to Viatel..................................... 31
Opinion of Financial Advisor to Destia..................................... 35
Interests of Officers and Directors in the Merger.......................... 42
Material Federal Income Tax Consequences of the Merger..................... 43
Regulatory Review Relating to the Merger................................... 45
Consents and Waivers Under Destia's Credit Facility........................ 46
Appraisal Rights........................................................... 47
Federal Securities Laws Consequences; Stock Transfer Restriction
Agreements............................................................... 49
Accounting Treatment....................................................... 49
</TABLE>
i
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PAGE
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THE MERGER AGREEMENT AND STOCKHOLDER AGREEMENTS
The Merger................................................................. 50
Timing of Closing.......................................................... 50
Conversion of Destia Common Stock.......................................... 50
Conversion of Destia Stock Options and Other Rights........................ 51
Representation on the Viatel Board......................................... 51
Representations and Warranties............................................. 51
Certain Covenants.......................................................... 52
Conditions to the Completion of the Merger................................. 56
Termination of the Merger Agreement........................................ 57
Other Expenses............................................................. 59
Amendments and Waivers..................................................... 59
Stockholder Agreements..................................................... 59
II. FINANCIAL INFORMATION
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION.................... 61
VIATEL SELECTED CONSOLIDATED FINANCIAL DATA.................................... 62
DESTIA SELECTED CONSOLIDATED FINANCIAL DATA.................................... 64
VIATEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................ 66
DESTIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................................................ 79
COMPARATIVE PER SHARE DATA..................................................... 90
VIATEL CAPITALIZATION TABLE.................................................... 91
VIATEL UNAUDITED PRO FORMA COMBINING FINANCIAL INFORMATION..................... 92
VIATEL BUSINESS................................................................ 98
VIATEL'S MANAGEMENT............................................................ 119
PRINCIPAL STOCKHOLDERS OF VIATEL............................................... 130
DESTIA BUSINESS................................................................ 131
DESTIA'S MANAGEMENT............................................................ 163
PRINCIPAL STOCKHOLDERS OF DESTIA............................................... 173
III. CERTAIN LEGAL INFORMATION
COMPARISON OF VIATEL-DESTIA STOCKHOLDER RIGHTS
Summary of Material Differences Between Current Rights of Viatel and Destia
Stockholders and Those Rights Which Destia Stockholders Will Have as
Viatel Stockholders Following the Merger................................. 174
DESCRIPTION OF VIATEL CAPITAL STOCK
Authorized Capital Stock................................................... 176
Viatel Common Stock........................................................ 176
Viatel Preferred Stock..................................................... 176
Transfer Agent and Registrar............................................... 177
Nasdaq National Market Listing; Delisting and Deregistration of Destia
Common Stock............................................................. 177
</TABLE>
ii
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PAGE
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DESCRIPTION OF DESTIA CAPITAL STOCK............................................ 177
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS............................... 177
LEGAL MATTERS.................................................................. 178
EXPERTS........................................................................ 178
IV. ADDITIONAL INFORMATION FOR STOCKHOLDERS
FUTURE STOCKHOLDER PROPOSALS
Viatel..................................................................... 179
Destia..................................................................... 179
WHERE YOU CAN FIND MORE INFORMATION............................................ 180
INCORPORATION OF DOCUMENTS BY REFERENCE........................................ 180
INDEX TO VIATEL FINANCIAL STATEMENTS........................................... F-1
INDEX TO DESTIA FINANCIAL STATEMENTS........................................... F-32
</TABLE>
<TABLE>
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ANNEXES
Annex A Agreement and Plan of Merger, dated as of August 27, 1999, by and
among Viatel, Inc., Viatel Acquisition Corp. and Destia
Communications, Inc............................................. A-1
Annex B Stockholder Agreement, dated as of August 27, 1999, among Alfred
West, AT Econ Limited Partnership, AT Econ Limited Partnership
No. 2, Viatel, Viatel Acquisition Corp. and Destia.............. B-1
Annex C Stockholder Agreement, dated as of August 27, 1999, among Steven
West, SS Econ Limited Partnership, SS Econ Limited Partnership
No. 2, Viatel, Viatel Acquisition Corp. and Destia.............. C-1
Annex D Stockholder Agreement, dated as of August 27, 1999, among Princes
Gate Investors II, L.P., Acorn Partnership II, L.P., PGI
Investments Limited, Investors Investments AB, Marinbeach United
S.A., Viatel, Viatel Acquisition Corp. and Destia............... D-1
Annex E Stockholder Agreement, dated as of August 27, 1999, among Gary
Bondi, GS Econ Limited Partnership, Viatel, Viatel Acquisition
Corp. and Destia................................................ E-1
Fairness Opinion of ING Barings LLC...............................
Annex F F-1
Fairness Opinion of Morgan Stanley & Co. Incorporated.............
Annex G G-1
Section 262 of the Delaware General Corporation Law...............
Annex H H-1
</TABLE>
iii
<PAGE>
I. THE MERGER
QUESTIONS AND ANSWERS ABOUT THE MERGER
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Q. WHY ARE VIATEL AND DESTIA PROPOSING A MERGER OF THE TWO COMPANIES?
A. The boards of directors of Viatel and Destia believe that combining the two companies'
complementary businesses will result in a larger enterprise with a stronger competitive
position in the rapidly changing telecommunications industry, will enhance efficiencies
and will create significant opportunities for growth.
Q. HOW WILL THE MERGER BE ACCOMPLISHED?
A. A wholly-owned subsidiary of Viatel will merge with and into Destia and, as a result,
Destia will become a wholly-owned subsidiary of Viatel.
Q. WHAT WILL DESTIA STOCKHOLDERS RECEIVE IF THE MERGER IS COMPLETED?
A. For each share of Destia common stock, Destia stockholders will receive 0.445 of a
share of Viatel common stock. Holders of Destia common stock will receive cash instead
of any fractional interest in a Viatel share. Once the merger is completed, shares of
Destia voting common stock will be delisted and will no longer trade on the Nasdaq
National Market.
Q. WHEN WILL THE MERGER BE COMPLETED?
A. Viatel and Destia are working to complete the merger prior to December 31, 1999.
Because the merger may not be completed without stockholder and certain regulatory
approvals, we cannot predict the exact timing.
Q. WHY AM I RECEIVING THIS JOINT PROXY STATEMENT/PROSPECTUS?
A. If you hold Viatel common stock, you are receiving this joint proxy
statement/prospectus because it describes a proposal to issue Viatel common stock in
connection with the merger that will be voted upon at a special meeting of Viatel
stockholders. If you hold Destia voting common stock, you are receiving this joint
proxy statement/prospectus because it describes the proposal to adopt the merger
agreement that will be voted upon at a special meeting of Destia stockholders. This
joint proxy statement/prospectus also gives stockholders information on Viatel and
Destia and certain other background information so that you can make an informed
decision.
If you hold Destia non-voting common stock, you are receiving this joint proxy
statement/ prospectus, even though you are not entitled to vote on the merger, because
you are entitled to appraisal rights in connection with the merger. This joint proxy
statement/prospectus constitutes the notice required by Delaware law concerning your
appraisal rights.
Q. WHAT ARE THE TAX CONSEQUENCES TO DESTIA STOCKHOLDERS OF THE MERGER?
A. If you are a U.S. holder of Destia common stock, the exchange of Destia common stock
for Viatel common stock is generally tax free for you, except for any gains on cash
received instead of any fractional interest in a Viatel share. If you are a non-U.S.
holder of Destia common stock, we advise you to consult your tax advisors to determine
the consequences of the merger to you.
</TABLE>
1
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Q. WHEN ARE THE SPECIAL MEETINGS AND WHAT IS THEIR PURPOSE?
A. The Viatel special meeting will be held at 10:00 a.m., local time, on Friday, November
19, 1999 in the Beekman Room at the Hotel Intercontinental, 111 East 48th Street, New
York, New York 10017. At the Viatel special meeting, record holders of Viatel common
stock will be asked to consider and vote upon a proposal to authorize the issuance of
Viatel common stock in the merger.
The Destia special meeting will be held at 11:30 a.m., local time, on Friday, November
19, 1999, also in the Beekman Room at the Hotel Intercontinental, 111 East 48th Street,
New York, New York 10017. At the Destia special meeting, record holders of Destia
voting common stock will be asked to consider and vote upon a proposal to adopt the
merger agreement.
Q. WHO CAN VOTE?
A. All record holders of Viatel common stock at the close of business on October 14, 1999
are entitled to vote at the Viatel special meeting.
All record holders of Destia voting common stock at the close of business on October
14, 1999 are entitled to vote at the Destia special meeting. Holders of Destia
non-voting common stock are not entitled to vote.
Q. HOW DO I VOTE?
A. You may vote by mail. Simply complete, date, sign and mail the proxy card that has been
included with this joint proxy statement/prospectus in the enclosed postage-paid
envelope. Votes submitted by mail must be received prior to the relevant special
meeting in order to be counted.
In addition, you may be eligible to vote either by telephone or by the Internet. For
information on alternative voting methods, you should call Corporate Investor
Communications, Inc. at 1-877-393-4956, toll-free from the U.S. and Canada. Votes cast
by telephone or the Internet must be submitted prior to the time of the relevant
special meeting in order to be counted.
You may also vote in person at your company's special meeting. If you hold your shares
in street name, you must contact and request a legal proxy from your stockbroker or
other nominee in order to vote in person at the special meeting.
When you cast your vote using the proxy card or by granting your proxy by telephone or
the Internet, you also appoint members of your company's management as your
representatives, or proxies, at the special meeting. They will vote your shares at the
special meeting in accordance with your instructions.
Q. WHAT HAPPENS IF I DO NOT INDICATE MY PREFERENCE FOR OR AGAINST ADOPTION OF THE MERGER
PROPOSAL?
A. If you submit a proxy without specifying the manner in which you would like your shares
to be voted, your shares will be voted for adoption of the merger proposal.
Q. WHAT IF I VOTE AND THEN CHANGE MY MIND?
A. You can revoke your proxy by writing to the Secretary of your company, by submitting a
new proxy with a later date or by attending the meeting and casting your vote in
person. Your last vote will be the vote that is counted.
Q. HOW MANY VOTES DO YOU NEED TO HOLD THE SPECIAL MEETING?
A. Shares will be counted as present at your special meeting if the record holder of the
shares either:
(1) is present and votes in person at the special meeting or
(2) has properly voted by submitting a proxy by mail.
</TABLE>
2
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Shares representing at least a majority of the issued and outstanding shares of common
stock entitled to vote must be present at each special meeting, either in person or by
proxy, in order to conduct business. This is called a quorum.
Q. WHAT IS THE VOTE NECESSARY TO ADOPT THE MERGER PROPOSAL?
A. In order for the Viatel stockholders to approve the proposal to issue Viatel common
stock in the merger, holders of more than 50% of the shares of Viatel common stock
voted at the Viatel special meeting must cast their votes in favor of the proposal.
In order for the Destia stockholders to adopt the merger agreement, holders of a
majority of the issued and outstanding shares of Destia voting common stock must vote
in favor of the proposal. Alfred West, Steven West and Princes Gate Investors II, L.P.,
and each of their related entities, who collectively own more than 50% of the
outstanding shares of Destia voting common stock, have entered into stockholder
agreements with Viatel pursuant to which they have agreed to vote all of their shares
of Destia voting common stock in favor of the merger. Accordingly, when the Destia
stockholders vote to approve the adoption of the merger agreement, the merger should be
approved whether or not any Destia stockholder other than the three principal
stockholders supports the merger.
Q. WHAT DOES IT MEAN IF I GET MORE THAN ONE PROXY CARD?
A. It means you have multiple accounts at the transfer agent and/or with stockbrokers.
Please sign and return all proxy cards to ensure that all your shares are voted.
Q. WHAT HAPPENS IF I DO NOT VOTE AT ALL?
A. If you are a Viatel stockholder and you fail to vote your shares, your shares will not
count as votes cast at the special meeting. If you are a Destia stockholder and you
fail to vote your shares, your inaction will have the same effect as a vote against the
adoption of the merger proposal.
IF YOUR SHARES ARE HELD IN STREET NAME, YOUR BROKERAGE FIRM WILL LEAVE YOUR SHARES
UNVOTED, UNLESS THEY RECEIVE YOUR INSTRUCTIONS. THE VIATEL BOARD AND THE DESTIA BOARD
ENCOURAGE YOU TO PROVIDE INSTRUCTIONS TO YOUR BROKERAGE FIRM BY SUBMITTING YOUR PROXY.
THIS ENSURES THAT YOUR SHARES WILL BE VOTED AT THE SPECIAL MEETINGS.
Q. WHAT APPRAISAL RIGHTS DO STOCKHOLDERS HAVE?
A. Under Delaware law, holders of Viatel common stock and holders of Destia voting common
stock are not entitled to exercise appraisal rights with respect to the merger. Holders
of Destia non-voting common stock, however, are entitled to appraisal rights.
Q. SHOULD STOCK CERTIFICATES BE SENT WITH THE ENCLOSED VOTING FORM?
A. No. If the merger is completed, Destia stockholders will be sent instructions for
exchanging their Destia stock certificates for Viatel stock certificates.
Q. WHO CAN HELP ANSWER QUESTIONS?
A. If you have more questions about the merger, you should contact:
</TABLE>
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Viatel stockholders: Destia stockholders:
Glenn Davidson Robert Juneja
Vice President, Corporate Communications & Vice President, Corporate Development
External Affairs (201) 226-4500
(212) 350-9200
</TABLE>
3
<PAGE>
SUMMARY
This summary highlights selected information from this joint proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete
description of the legal terms of the merger, you should carefully read this
document and the documents to which we have referred you. See "Where You Can
Find More Information" and "Incorporation of Documents by Reference" on page
180.
THE COMPANIES
Viatel, Inc.
685 Third Avenue
New York, New York 10017
(212) 350-9200
Viatel is a rapidly growing international communications company, providing
high quality, competitively priced, long distance communication and data
services to end-users, carriers and resellers. Viatel is a licensed provider of
telecommunications services in Belgium, France, Germany, Ireland, Italy, The
Netherlands, Spain, Switzerland, the United Kingdom and the United States. It
currently operates one of Europe's largest pan-European networks, with
international gateways in New York and London; international network operations
centers in Egham, England and Somerset, New Jersey; network points of presence
in over 45 European cities; a direct sales force in 12 Western European cities;
and an indirect sales force in more than 180 locations in Western Europe.
Destia Communications, Inc.
95 Rte. 17 South
Paramus, New Jersey 07652
(201) 226-4500
Destia is a rapidly growing, facilities-based provider of domestic and
international long distance telecommunications services in Europe and North
America. Destia's customer base consists of residential customers, commercial
customers, ethnic groups and other telecommunications carriers. Destia currently
offers a variety of retail telecommunications services, including international
and domestic long distance, calling card and prepaid card services, Internet
access and wireless and wholesale transmission services.
RECOMMENDATIONS OF THE VIATEL BOARD AND THE DESTIA BOARD
The board of directors of Viatel believes that the merger and the issuance
of the shares of Viatel common stock in connection therewith are advisable, fair
to and in the best interests of Viatel stockholders. The Viatel board has
unanimously approved the merger agreement, the merger and the issuance of shares
of Viatel common stock in connection therewith, and it unanimously recommends
that the Viatel stockholders vote FOR the issuance of such shares.
The Destia board has determined that the merger is advisable, fair to and in
the best interests of Destia stockholders. The Destia board has unanimously
approved the merger agreement and the merger, and it unanimously recommends that
the Destia stockholders vote FOR the adoption of the merger agreement.
THE MERGER
The merger agreement provides that a wholly-owned subsidiary of Viatel will
merge with and into Destia and, as a result, Destia will become a wholly-owned
subsidiary of Viatel. As a result of the merger, Viatel will issue 0.445 of a
share of Viatel common stock for each outstanding share of Destia common stock.
Holders of Destia common stock will receive cash instead of any fractional
interest in a Viatel share. The full text of the merger agreement is attached as
Annex A.
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OPINIONS OF FINANCIAL ADVISORS (SEE PAGES 31 AND 35)
ADVISOR TO VIATEL
ING Barings LLC acted as financial advisor to Viatel and has delivered to
the board of directors of Viatel a written opinion to the effect that, as of
August 26, 1999, the 0.445 exchange ratio was fair, from a financial point of
view, to Viatel. The full text of the written opinion of ING Barings is attached
as Annex F. The opinion describes important exceptions, assumptions and
limitations and should be read carefully and in its entirety. ING BARINGS'
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF VIATEL AND IS NOT A
RECOMMENDATION AS TO HOW VIATEL'S STOCKHOLDERS SHOULD VOTE ON THE MERGER
PROPOSAL.
ADVISOR TO DESTIA
Morgan Stanley & Co. Incorporated acted as financial advisor to Destia and
has delivered to the board of directors of Destia a written opinion to the
effect that, as of August 27, 1999, the 0.445 exchange ratio was fair, from a
financial point of view, to the holders of Destia common stock. The full text of
the written opinion of Morgan Stanley is attached as Annex G. The opinion
describes important exceptions, assumptions and limitations and should be read
carefully and in its entirety. MORGAN STANLEY'S OPINION IS DIRECTED TO THE BOARD
OF DIRECTORS OF DESTIA AND IS NOT A RECOMMENDATION AS TO HOW DESTIA'S
STOCKHOLDERS SHOULD VOTE ON THE MERGER PROPOSAL.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER (SEE PAGE 42)
When considering the recommendation of the Destia board in favor of the
merger, Destia stockholders should be aware that certain directors and executive
officers of Destia have interests in the merger that are in addition to the
interests of Destia stockholders. Some of Destia's executive officers and
directors will benefit from the accelerated vesting of their stock options and
will become executive officers and directors of Viatel after the merger.
CONVERSION OF DESTIA STOCK RIGHTS (SEE PAGE 51)
Stock options and warrants to acquire Destia common stock will be
automatically converted into stock options and warrants to purchase Viatel
common stock. Shares of Destia non-voting common stock (which are convertible
upon the payment of a nominal exercise price into Destia voting common stock)
will automatically be converted into Viatel common stock. The number of shares
of Viatel common stock subject to these options, warrants and shares of Destia
non-voting common stock, the exercise prices of the options and warrants will
give effect to the 0.445 exchange ratio.
CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGE 56)
Viatel and Destia will not complete the merger unless a number of conditions
are satisfied or waived by them. These include:
- approvals by the Viatel and Destia stockholders;
- receipt of all requisite approvals and consents from U.S. regulatory
authorities;
- absence of any law or court order prohibiting the merger;
- absence of an imposition by any regulatory authority of any condition,
requirement or restriction that would materially restrict Viatel's
ownership, control or operation of Destia and its business after the
merger; and
- receipt by Destia of an opinion of counsel that the merger will qualify as
a tax-free reorganization.
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TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 57)
The merger agreement may be terminated by mutual written consent of Viatel
and Destia. The merger agreement may also be terminated by either Viatel or
Destia if:
- the merger has not been completed by June 30, 2000 and the failure to
complete the merger by that date is not due to the action or failure to
act of the party seeking to terminate;
- a governmental authority takes a final and nonappealable action that
prohibits the merger or makes a condition to the closing obligations of
the terminating party incapable of being satisfied prior to June 30, 2000;
- a closing condition of the terminating party is not satisfied due to a
breach of any representation, warranty or covenant of the other party and
the breach is not cured within 30 days after notice is delivered by the
terminating party, except neither party may terminate the merger on this
basis if it is in material breach of any of its own representations,
warranties or covenants in the merger agreement; or
- the Viatel stockholders or the Destia stockholders fail to give the
necessary approval of the merger or related transactions at a duly held
meeting.
The merger agreement may be terminated by Destia if:
- the Viatel board enters into or publicly announces its intention to enter
into an acquisition transaction that is inconsistent with the merger;
- the Viatel board withdraws its recommendation of the approval of the
issuance of Viatel common stock in connection with the merger;
- the Viatel board, after receiving an alternative acquisition proposal,
fails to confirm publicly its recommendation of the merger within ten days
after Destia requests that a public confirmation be made;
- Viatel or its representatives solicit, negotiate or enter into an
acquisition transaction that is inconsistent with the merger; or
- the average of the last reported sales price of Viatel common stock for
the five trading days preceding the closing of the merger is less than $25
per share.
The merger agreement may be terminated by Viatel if:
- the Destia board enters into or publicly announces its intention to enter
into an alternative acquisition transaction;
- the Destia board withdraws its recommendation of the approval of the
merger;
- the Destia board, after receiving an alternative acquisition proposal,
fails to confirm publicly its recommendation of the merger within ten days
after Viatel requests that a public confirmation be made; or
- Destia or its representatives solicit, negotiate or enter into an
alternative acquisition transaction.
Although the boards of directors of Viatel and Destia each may withdraw its
recommendation of the approval of the merger in response to a superior
acquisition proposal if it determines in good faith that the failure to so
withdraw its recommendation would violate its fiduciary duties to its
stockholders, neither Viatel nor Destia is permitted to terminate the merger
agreement to accept a superior acquisition proposal made by a third party.
Accordingly, it is expected that the Viatel and Destia special meetings will be
held even if Viatel or Destia receives a superior acquisition proposal from a
third party.
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TERMINATION FEES (SEE PAGE 58)
Destia has agreed to pay Viatel a termination fee of $30 million in cash if:
- the merger agreement is terminated because the Destia stockholders fail to
approve the merger;
- Viatel terminates the merger agreement because the Destia board:
- enters into or publicly announces its intention to enter into an
alternative acquisition transaction;
- withdraws its recommendation of the approval of the merger; or
- after receiving an alternative acquisition proposal, fails to confirm
publicly its recommendation of the merger within ten days after Viatel
requests that a public confirmation be made;
- Viatel terminates the merger agreement because Destia or its
representatives solicit, encourage or enter into an alternative
acquisition transaction; or
- any person proposes an alternative acquisition transaction that remains in
effect on May 1, 2000, and the Destia stockholders do not approve the
merger prior to termination of the merger agreement as a result of the
failure to complete the merger by June 30, 2000.
Viatel has agreed to pay Destia a termination fee of $75 million in cash if:
- Destia terminates the merger agreement because the Viatel board:
- enters into or publicly announces its intention to enter into an
acquisition transaction that is inconsistent with the merger;
- withdraws its recommendation of the approval of the issuance of Viatel
common stock in connection with the merger; or
- after receiving an alternative acquisition proposal, fails to confirm
publicly its recommendation of the merger within ten days after Destia
requests that a public confirmation be made;
- Destia terminates the merger agreement because Viatel or its
representatives solicit, encourage or enter into an acquisition
transaction that is inconsistent with the merger;
- any person publicly proposes an acquisition transaction that is
inconsistent with the merger and has not been publicly withdrawn more than
ten days prior to the special meeting of the Viatel stockholders, and the
merger agreement is terminated because the Viatel stockholders do not
approve the issuance of Viatel common stock in connection with the merger;
or
- any person proposes an acquisition transaction that is inconsistent with
the merger and remains in effect on May 1, 2000, and the Viatel
stockholders do not approve the issuance of Viatel common stock in
connection with the merger prior to termination of the merger agreement as
a result of the failure to complete the merger by June 30, 2000.
Viatel has agreed to pay Destia a termination fee of $30 million in cash if
the merger agreement is terminated because the stockholders of Viatel fail to
approve the issuance of Viatel common stock in connection with the merger and a
termination fee of $75 million is not otherwise payable to Destia as described
above.
REGULATORY APPROVALS (SEE PAGE 45)
Completion of the merger will not occur until after receipt of all requisite
regulatory approvals and consents. The Federal Communications Commission and
certain state public utility commissions will, and foreign regulatory
authorities may, have jurisdiction to review and/or approve the merger.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (SEE PAGE 43)
A Destia stockholder's receipt of Viatel common stock in the merger
generally will be tax-free for U.S. federal income tax purposes, except for any
gains on cash received instead of any fractional interest in a share of Viatel
common stock. This tax treatment may not apply to all Destia stockholders.
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You should consult your own tax advisor for a full understanding of the tax
consequences of the merger.
STOCKHOLDER AGREEMENTS (SEE PAGE 59)
Three of Destia's stockholders, Alfred West, Steven West and Princes Gate
Investors II, L.P., and each of their related entities, who collectively own
more than 50% of the outstanding shares of Destia voting common stock, have
entered into stockholder agreements with Viatel pursuant to which they have
agreed to vote all of their shares of Destia voting common stock in favor of the
merger. Accordingly, when the stockholders vote to approve the adoption of the
merger agreement, the merger should be approved whether or not any Destia
stockholder other than the three principal stockholders supports the merger. The
terms of the stockholder agreements remain in effect even if the Destia board
withdraws its recommendation to vote in favor of the merger.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Viatel common stock and Destia voting common stock are quoted on the Nasdaq
National Market. On August 26, 1999, the last full trading day before the
announcement of the merger, Viatel common stock closed at $41 7/8 and Destia
voting common stock closed at $13 15/16. On October 13, 1999, the most recent
practicable date prior to the date of this joint proxy statement/prospectus,
Viatel common stock closed at $33 1/2 and Destia voting common stock closed at
$14 3/8.
LISTING OF VIATEL COMMON STOCK
The shares of Viatel common stock to be issued in the merger will be quoted
on the Nasdaq National Market under the ticker symbol "VYTL."
OWNERSHIP OF VIATEL AFTER THE MERGER
Viatel will issue approximately 14.1 million shares of its common stock to
Destia stockholders in the merger. These shares will represent approximately
30.1% of the outstanding Viatel common stock after the merger. This information
is based on the number of Viatel and Destia shares outstanding on October 13,
1999, and does not take into account outstanding warrants, stock options or
other equity-based awards or other transactions involving the issuance of stock,
including acquisitions that may be consummated after the date of this joint
proxy statement/prospectus.
STOCKHOLDER VOTES REQUIRED
A majority of the issued and outstanding shares of Viatel common stock
entitled to vote must be present at the Viatel special meeting, either in person
or by proxy, for a quorum to exist. A majority of the votes cast by Viatel
stockholders at their special meeting must vote to approve the issuance of the
Viatel common stock in connection with the merger for the proposal to be
approved.
A majority of the issued and outstanding shares of Destia voting common
stock must vote at the Destia special meeting to approve the merger agreement
for it to be adopted.
APPRAISAL RIGHTS (SEE PAGE 47)
Under Delaware law, holders of Viatel common stock and holders of Destia
voting common stock are not entitled to appraisal rights with respect to the
merger. Holders of Destia non-voting common stock are, however, entitled to
appraisal rights.
ACCOUNTING TREATMENT (SEE PAGE 49)
The merger will be accounted for by Viatel using the purchase method of
accounting.
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RISK FACTORS
STOCKHOLDERS OF VIATEL AND DESTIA SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS, WHICH ARE NOT LISTED IN ORDER OF PRIORITY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
THE EXCHANGE RATIO WILL NOT BE ADJUSTED FOR CHANGES IN STOCK PRICES
The number of shares of Viatel common stock into which each share of Destia
common stock is to be converted in the merger is fixed at 0.445 of a share of
Viatel common stock for each share of Destia common stock. The market value of
Viatel common stock and/or Destia common stock at the effective time of the
merger may vary significantly from the price as of the date the merger agreement
was executed, the date of this joint proxy statement/prospectus or the date on
which Viatel and Destia stockholders vote on the merger. These changes may
result from a number of factors, including:
- market perception of the synergies expected to be achieved by the merger;
- changes in the business, operations or prospects of Viatel or Destia;
- market assessments of the likelihood that the merger will be completed and
the timing of the merger; and
- general market and economic conditions.
Because the exchange ratio will not be adjusted to reflect changes in the
market value of Viatel common stock or Destia common stock, the market value of
the Viatel common stock issued in the merger, and the market value of the Destia
common stock surrendered in the merger, may be higher or lower than the value of
these shares at the time the merger was approved by the Viatel board and the
Destia board. Neither Viatel nor Destia is permitted to terminate the merger
agreement or resolicit the vote of its stockholders solely because of changes in
the market price of Viatel common stock or Destia common stock. However, the
merger agreement provides that Destia may terminate the merger agreement and
abandon the merger if the average closing price per share of Viatel common stock
on the Nasdaq National Market for the five trading days preceding the closing
date of the merger is less than $25. On August 26, 1999, the last trading day
before the announcement of the merger, the closing prices per share of Viatel
and Destia common stock were $41 7/8 and $13 15/16, respectively. On October 13,
1999, the most recent practicable date prior to the date of this joint proxy
statement/ prospectus, the closing prices per share of Viatel and Destia common
stock were $33 1/2 and $14 3/8, respectively.
VIATEL AND DESTIA MAY ENCOUNTER DIFFICULTIES IN COMBINING OPERATIONS AND
REALIZING SYNERGIES
Viatel and Destia have entered into the merger agreement with the
expectation that the merger will result in certain benefits, including operating
efficiencies, cost savings and synergies. Achieving the benefits of the merger
will depend in part upon the integration of the businesses of Viatel and Destia
in an efficient manner, which Viatel believes will require considerable effort.
In addition, the consolidation of operations will require substantial attention
from management. The diversion of management attention and any difficulties
encountered in the transition and integration process could have a material
adverse effect on the combined company. We cannot assure you that Viatel and
Destia will succeed in integrating their operations in a timely manner or that
the expected efficiencies, cost savings and synergies of the merger will be
realized.
FAILURE OR DELAYS IN COMPLETING THE MERGER COULD HURT VIATEL'S AND DESTIA'S
STOCK PRICES AND FUTURE OPERATIONS
If the merger is not completed for any reason, Viatel and Destia may be
subject to a number of material risks, including the following:
- Viatel or Destia may be required to pay the other a termination fee; and
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- the price of Viatel or Destia common stock may decline to the extent that
the current market price of the companies' common stock reflects a market
assumption that the merger will be completed.
In addition, in response to the announcement of the merger, Viatel's or
Destia's customers may delay or defer purchasing decisions. Any delay or
deferral of purchasing decisions by customers could have a material adverse
effect on the business of Viatel and Destia, regardless of whether the merger is
ultimately completed. Similarly, current and prospective employees of Viatel and
Destia may experience uncertainty about their future role with the respective
companies until after the merger is completed or if the merger is not completed.
This may adversely affect the ability of Viatel and Destia to attract and retain
key management, sales, marketing and technical personnel.
REGULATORY APPROVALS AND CONSENTS MAY BE DELAYED, CONDITIONED OR DENIED
Completion of the merger is conditioned on receipt of all material
regulatory approvals and consents. The Federal Communications Commission and
certain state public utility commissions will, and certain foreign regulatory
authorities may, have jurisdiction to review and/or approve the merger. There
can be no assurance that such approvals and consents will be granted on a timely
basis without materially adverse conditions, or at all.
THE COMBINED COMPANY WILL INCUR SIGNIFICANT MERGER-RELATED CHARGES
We estimate that, as a result of the merger, the combined company will incur
integration costs associated with consolidating corporate headquarters and other
administrative functions, terminating certain leases and severance and facility
closing costs associated with consolidating certain product lines. In addition,
the combined company will incur merger-related costs such as financial advisory,
legal and accounting fees, financial printing and other related charges.
OFFICERS AND DIRECTORS OF DESTIA MAY HAVE POTENTIAL CONFLICTS OF INTEREST
Certain officers and directors of Destia have interests in the merger that
are different from, or are in addition to, the interests of Destia stockholders.
In particular, the vesting of stock options to purchase shares of Destia common
stock held by certain Destia directors and officers will be accelerated upon the
closing of the merger. Furthermore, following the merger, Alfred West will
become the Vice Chairman of the Viatel board and Alan Levy will become the Chief
Operating Officer of Viatel and a member of its board. See "The
Merger--Interests of Officers and Directors in the Merger."
CERTAIN STOCKHOLDERS MAY BE ABLE TO INFLUENCE THE OUTCOME OF STOCKHOLDER VOTES
Upon completion of the merger, Alfred West and Steven West, who are brothers
and founding stockholders of Destia, will beneficially own 15.2% of the
outstanding shares of Viatel common stock and as a result may, if they act in
concert, be in a position to substantially influence actions that require
stockholder approval, including the election of the Viatel board.
THE MERGER MAY NOT BE TREATED AS A TAX-FREE REORGANIZATION
The merger is intended to be treated as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and generally tax free to the
stockholders of Destia. It is a condition to the obligation of Destia to
consummate the merger that it receives opinions from its counsel that the merger
will be treated as a tax-free reorganization. In rendering its opinions, counsel
to Destia will rely upon certain representations of Destia and Viatel. If such
representations are untrue, incorrect or incomplete, the merger may not be
treated as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, and the receipt in the merger by Destia stockholders of
Viatel common stock may be taxable.
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AFTER THE MERGER, DESTIA MAY HAVE TO REPURCHASE DESTIA'S 11% SENIOR DISCOUNT
NOTES DUE 2008 AND DESTIA'S 13.50% SENIOR NOTES DUE 2007, AND THE COMBINED
COMPANY MAY NOT HAVE THE FINANCIAL RESOURCES TO FUND BOTH THE REPURCHASE AND ITS
BUSINESS PLAN
The indentures governing the Destia 11% senior discount notes due 2008 and
the Destia 13.50% senior notes due 2007 require Destia to offer to repurchase
promptly after the merger all of the outstanding Destia notes at a purchase
price equal to 101% of the accreted value of the Destia 11% notes and 101% of
the outstanding principal amount of the Destia 13.50% notes. As of June 30,
1999, the total accreted value of the outstanding Destia 11% notes was
approximately $203.5 million and the total principal amount of the outstanding
Destia 13.50% notes was approximately $150.5 million. If the combined company is
required to divert its available cash to fund the repurchase of all or a
significant amount of the notes, the combined company's ability to implement its
business plan, which is currently fully funded, would be restricted. Failure to
complete the repurchase offer would result in a default on the Destia notes,
which, in turn, would be an event of default with respect to all of Viatel's
senior indebtedness. An event of default on Viatel's senior indebtedness would
enable the holders of such indebtedness to accelerate payment. As of June 30,
1999, Viatel had total senior indebtedness of approximately $1.3 billion, and
the obligation to repay this amount following consummation of the merger would
have a material adverse effect on the combined company, as described under the
risk factor captioned "The Combined Company's Cash Flow May Not Be Sufficient to
Permit Repayment of Its Indebtedness When Due," below.
Based on the current and historical trading prices of the Destia 13.50%
notes, Viatel does not expect that the holders of these notes will tender them
for repurchase. However, if there is a significant adverse change in the market
for debt securities or an adverse change with respect to either Viatel or
Destia, it is likely that some or all of the Destia 13.50% notes will be
tendered in the repurchase offer.
Based on the current and historical trading prices of the Destia 11% notes,
Viatel considers it likely that holders will tender them for repurchase.
Accordingly, Viatel intends to launch an exchange offer for the Destia 11% notes
in which Viatel will offer to exchange its 11.50% senior notes due 2009 for the
Destia 11% notes. To the extent the exchange offer is accepted, it will have the
effect of reducing the amount of Destia 11% notes that Destia may have to
repurchase. The exchange offer will be subject to certain conditions, including
the success of a simultaneous additional offering of approximately $40.6 million
of Viatel 11.50% senior notes due 2009 for cash in a private placement. Viatel
and Destia cannot assure you that the exchange offer will be consummated or, if
it is, that a significant amount of the Destia 11% notes will be tendered.
If Viatel and Destia conclude prior to the completion of the merger that it
is likely that the repurchase of Destia notes that will be tendered in the
repurchase offer will adversely affect the cash available to fund the combined
company's business plan, Viatel and Destia may restructure the merger in order
to avoid the obligation to make a repurchase offer. If Viatel and Destia
restructure the merger, the closing of the merger could be delayed. See "Viatel
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Viatel Unaudited Pro Forma
Combining Financial Information."
THE COMBINED COMPANY'S SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT ITS ABILITY
TO RUN ITS BUSINESS
Viatel and Destia each have a significant amount of indebtedness. As of June
30, 1999, Viatel had approximately $1.3 billion and Destia had approximately
$391.8 million of indebtedness. As of June 30, 1999, on a pro forma basis, after
giving effect to the merger, the combined company would have had approximately
$1.7 billion of indebtedness and a pro forma stockholders' equity of $619.0
million. Furthermore, Viatel's and Destia's discount notes (assuming for this
purpose that all of Destia's 11% notes remain outstanding) will accrete in value
(i.e., effectively increase in principal amount) by
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$227.8 million and $96.5 million, respectively, before they begin to pay
interest in cash. This substantial indebtedness could have important
consequences. For example, it could:
- limit the combined company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, joint ventures and
general corporate purposes;
- require the combined company to dedicate a substantial portion of its cash
flow from operations to payments on its indebtedness, thereby reducing the
funds available to it for other purposes, including working capital,
capital expenditures, acquisitions, joint ventures and general corporate
purposes;
- make the combined company more vulnerable to economic downturns, limiting
its ability to withstand competitive pressures and reducing its
flexibility in responding to changing business and economic conditions;
- limit the combined company's flexibility in planning for, or reacting to,
changes in its business and the industry in which it operates;
- place the combined company at a competitive disadvantage compared to its
competitors that have less debt; and
- limit the combined company's ability to borrow additional funds.
Any of the foregoing could have a material adverse effect on the price of
Viatel common stock after the merger.
DESTIA MUST OBTAIN CONSENTS AND WAIVERS UNDER THE TERMS OF ITS CREDIT FACILITIES
Destia's credit facility with NTFC Capital Corporation, under which Destia
had borrowed approximately $18.4 million as of June 30, 1999, requires Destia to
obtain NTFC's consent or prepay the borrowed amounts outstanding, prior to any
change in control transaction. Since the merger would be considered a change in
control, Destia obtained a preliminary waiver from NTFC prior to signing the
merger agreement. Before completing the merger, Destia will be required either
to (i) obtain a definitive waiver from NTFC or (ii) prepay the outstanding
amounts owed at a premium of not more than 105% of the amount outstanding.
Destia expects to obtain such waiver on acceptable terms. Destia cannot provide
any assurance, however, that NTFC will grant such a waiver, or that it will
grant such a waiver on terms that are acceptable to Destia. If NTFC does not
grant the waiver and Destia does not prepay the amount owed, then the
outstanding borrowings under the NTFC credit facility and other indebtedness may
be accelerated and all amounts owed by Destia as of such date may become due
immediately.
TO DATE, VIATEL AND DESTIA HAVE INCURRED SUBSTANTIAL NET LOSSES AND NEGATIVE
CASH FLOW FROM OPERATIONS AND, IF THIS CONTINUES, THE COMBINED COMPANY WILL BE
UNABLE TO MEET ITS WORKING CAPITAL AND FUTURE DEBT SERVICE REQUIREMENTS
Viatel's operating loss, negative EBITDA and net loss have increased for
each of the last four years. In 1998, Viatel had an operating loss of $48.1
million, negative EBITDA of $31.8 million and a net loss of $127.3 million and,
on a pro forma basis, after giving effect to the combination with Destia, would
have had an operating loss of $192.7 million, negative EBITDA of $58.7 million
and a net loss of $313.7 million. For the six months ended June 30, 1999, Viatel
had an operating loss of $34.7 million, negative EBITDA of $13.1 million and a
net loss of $82.6 million and, on a pro forma basis, after giving effect to the
combination with Destia, would have had an operating loss of $115.7 million,
negative EBITDA of $29.8 million and a net loss of $187.7 million. In 1998,
Viatel had interest expense of $79.2 million and, on a pro forma basis, after
giving effect to the combination with Destia, would have had interest expense of
$131.9 million. For the six months ended June 30, 1999, Viatel had interest
expense of $61.7 million and, on a pro forma basis, after giving effect to the
combination with Destia, would have had interest expense of $88.9 million.
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These losses and high interest expense present a significant risk to
stockholders of the combined company.
The combined company is likely to have negative EBITDA and negative cash
flow beyond 2000 if:
- the combined company continues its expansion plans,
- prices charged to end-users for capacity sales or telecommunications
services decline faster than anticipated,
- interconnection rates and wholesale prices paid by the combined company do
not decline as quickly as anticipated or
- any of the other risks described in this joint proxy statement/prospectus
materialize.
Accordingly, there can be no assurance that after the merger Viatel will achieve
or sustain profitability or positive cash flows from operating activities. If
Viatel cannot achieve profitability or positive cash flows from operating
activities, it may be unable to meet its working capital and future debt service
requirements, which would have a material adverse effect on its business,
financial condition, results of operations and the price of its common stock.
THE COMBINED COMPANY'S CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF
ITS INDEBTEDNESS WHEN DUE
The combined company's ability to make payments on and to refinance its
indebtedness will depend on its ability to generate cash in the future. There
can be no assurance that the combined company's business will generate
sufficient cash flow from operations to meet its debt service requirements. The
combined company's cash flow from operations may be insufficient to repay its
indebtedness at scheduled maturity and some or all of such indebtedness may have
to be refinanced. If the combined company is unable to refinance its debt or if
additional financing is not available on acceptable terms, or at all, the
combined company could be forced to dispose of assets under circumstances that
might not be favorable to realizing the highest price for the assets or to
default on its obligations with respect to its indebtedness, either of which
could have a material adverse effect on the price of Viatel common stock.
DUE TO RESTRICTIONS IN VIATEL'S AND DESTIA'S INDENTURES, THE COMBINED COMPANY
MAY NOT BE ABLE TO OPERATE ITS BUSINESS AS IT DESIRES
The indentures under which Viatel's and Destia's long-term debt was issued
contain a number of conditions and/or limitations on the way in which each
company can operate its business. These limitations may force each company to
pursue less than optimal business strategies or forego business arrangements
which could have been financially advantageous to the combined company and its
stockholders. The indentures restrict, and in some cases significantly limit or
prohibit, among other things, the ability of each company to:
- incur additional indebtedness,
- make prepayments of certain indebtedness,
- pay dividends,
- make investments,
- engage in transactions with stockholders and affiliates,
- issue capital stock,
- create liens,
- sell assets and
- engage in mergers and consolidations.
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Any of these limitations could have a material adverse effect on the price
of Viatel's common stock.
THE COMBINED COMPANY'S FUTURE GROWTH WILL REQUIRE SUBSTANTIAL ADDITIONAL CAPITAL
WHICH COULD EXCEED BUDGETED AMOUNTS AND CAUSE IT TO DELAY OR ABANDON EXPANSION
PROJECTS
The combined company's future growth will require substantial additional
capital which may exceed budgeted amounts. If it does not have sufficient cash
to fund its growth as planned, the combined company may be required to delay or
abandon some or all of its development and expansion plans or may have to seek
additional money earlier than anticipated. Viatel cannot provide any assurance
that additional financing arrangements will be available to the combined company
on acceptable terms or at all. Moreover, the amount of the combined company's
outstanding indebtedness may adversely affect its ability to engage in
additional financings. The combined company's inability to obtain additional
financing when required on acceptable terms could have a material adverse effect
on the price of Viatel common stock.
FAILURE TO IMPLEMENT ITS STRATEGY OF OWNING FACILITIES COULD SIGNIFICANTLY
IMPACT VIATEL'S FINANCIAL PERFORMANCE
If Viatel is unable to successfully implement its strategy of owning, rather
than leasing, telecommunications facilities, it could experience a significant
decrease in the margin which it makes on telecommunications traffic transmitted
on its network. Unless the combined company is able to significantly increase
the number of billable minutes which Viatel carries or the amount it can charge
for additional services, this decrease in margins would have a material adverse
effect on its business, financial condition, results of operations and on the
price of Viatel common stock.
FAILURE TO SELL CAPACITY ON VIATEL'S CIRCE NETWORK OR PRICE REDUCTIONS FOR
CROSS-BORDER CAPACITY IN EUROPE COULD HAVE AN ADVERSE EFFECT ON THE COMBINED
COMPANY'S BUSINESS
The combined company's success and ability to achieve its business
objectives depends, in part, upon its sales and marketing capabilities,
particularly on sales of capacity on Viatel's Circe Network. The market for
capacity has experienced significant price reductions, which are expected to
continue. Although Viatel has been successful in meeting capacity sales
objectives to date, there can be no assurance that such success will continue or
that it will be able to realize its business plan. Furthermore, even if capacity
sales projections are realized, price declines for cross-border capacity may
limit operating profitability or the ability to generate sufficient cash flow to
service the combined company's indebtedness. If the combined company is unable
to effectively sell capacity on its network, it would have a material adverse
effect on its business, financial condition, results of operations and the price
of Viatel common stock.
THE COMBINED COMPANY MAY NOT BE ABLE TO PROVIDE DATA TRANSMISSION SERVICES
EFFECTIVELY
Neither Viatel nor Destia has had direct experience in providing data
transmission services and, consequently, Viatel can provide no assurance that
the combined company will be successful in the data transmission business. The
combined company's ability to successfully enter the data transmission business
will depend upon, among other things, its ability to:
- select new equipment and software and integrate these into its network;
- hire and train qualified personnel;
- enhance its billing, back-office and information systems to accommodate
data transmission services; and
- obtain customer acceptance of its service offerings.
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If the combined company is not successful, there may be a material adverse
effect on its business and the price of Viatel common stock.
The data transmission business is also extremely competitive and prices have
declined substantially in recent years and are expected to continue to decline.
In providing these services, the combined company will be dependent upon vendors
for assistance in the planning and deployment of its data product offerings, as
well as ongoing training and support. The combined company's vendors may not
have adequate experience in providing equipment and configuring data networks in
the combined company's various markets. The combined company may also experience
technical difficulties in integrating its equipment and handling differing data
transmission protocols in its various markets.
Unlike some of its competitors, Viatel is not currently carrying voice
communications using Internet Protocol technology on its network. While Destia
currently carries portions of its traffic using Internet Protocol overlay, there
is a risk that the combined company will not be able to develop this Internet
Protocol technology well enough to be able to use it for voice traffic and
therefore, will not be able to realize the anticipated cost reductions. This
could have a material adverse effect on the price of Viatel common stock.
THE COMBINED COMPANY'S ABILITY TO USE VIATEL'S AND DESTIA'S NET OPERATING LOSS
CARRYFORWARDS MAY BE LIMITED
As of December 31, 1998, Viatel had federal income tax net operating loss
carryforwards of $218.8 million which begin to expire in 2007. A tax asset
related to this loss carryforward does not appear on Viatel's balance sheet
because it is unclear if Viatel will generate taxable income prior to the
expiration of the net operating loss carryforwards. The combined company's
ability to use Viatel's net operating loss carryforwards to reduce its future
tax payments would be limited if a 50% ownership change, as defined for these
purposes, were to occur over a three-year period. As a result of an ownership
change in October 1996, certain of Viatel's net operating loss carryforwards
from before such time are subject to this limitation. It is possible that the
combination with Destia, when combined with prior or subsequent direct or
indirect changes in the ownership of Viatel common stock within the relevant
three-year period, could trigger this limitation. In addition, as of December
31, 1998, Destia had federal income tax net operating loss carryforwards of
approximately $80.0 million. The extent to which the combined company may use
Destia's net operating loss carryforwards to reduce the combined company's
future tax liability may also be limited. As a result of these limitations, the
future tax liability of the combined company may be greater than the individual
tax liabilities of Viatel and Destia in the absence of the merger.
THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE WITH PARTICIPANTS THAT
HAVE GREATER RESOURCES THAN THE COMBINED COMPANY WOULD, AND THE COMBINED COMPANY
MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
The combined company's success will depend upon its ability to compete with
other telecommunications providers in each of its markets, many of which have
substantially greater financial, marketing and other resources than the combined
company will have. The markets in which the combined company intends to offer
its services are extremely competitive and competition is expected to intensify,
particularly in Western Europe as liberalization continues. Although the merger
is expected to create a company with increased revenues, purchasing power and
product offerings, if the combined company's competitors devote significant
additional resources to the provision of international or national long distance
telecommunications services to the combined company's current target customer
base, this action could have a material adverse effect on the combined company's
business, financial condition, results of operations and the price of Viatel
common stock. There can be no assurance that the combined company will be able
to compete successfully.
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The combined company's competitors include the incumbent telecommunications
operator in each country in which it operates, global alliances among some of
the world's largest telecommunications carriers and new entrants, such as
alternative carriers, Internet backbone networks and other service providers.
Two other broadband European networks are currently operational--KPN/Qwest and
GTS/Esprit, and other broadband networks in Europe are expected to be
operational in the next 12 months, which includes networks being constructed by
Global Crossing, Interoute and Concert, the joint venture between British
Telecom and AT&T. In addition, Colt Telecom Group and Level 3 Communications are
sharing the costs of constructing two networks -- one to link the German cities
of Berlin, Koln, Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart and the
other linking Paris, Frankfurt, Amsterdam, Brussels and London. Other potential
competitors include:
- Internet service providers,
- cable communications companies,
- wireless telephone companies,
- electric and other utilities with rights-of-way,
- railways,
- microwave carriers and
- large end-users which have private networks.
The intensity of competition in both billable minutes and capacity have
increased over the past several years and Viatel believes that competition will
continue to intensify, particularly in Western Europe, as other providers obtain
operative connectivity.
In the United States, the regional Bell operating companies also may, in the
near future, compete with the combined company for long distance customers in
their "in region" service areas. Regional Bell operating companies have to
satisfy a list of competitive requirements before they are authorized to offer
long distance service to their local customers. No regional Bell operating
company is authorized to do so yet, but Bell Atlantic, which serves the New York
metropolitan and mid-Atlantic regions, has long been considered by industry
observers to be the regional Bell operating company most likely to be permitted
to offer long distance services. On September 29, 1999, Bell Atlantic filed its
Section 271 application for authority to provide interLATA services within New
York with the Federal Communications Commission. The Federal Communications
Commission has 90 days to review Bell Atlantic's filing. The New York Public
Service Commission and the Department of Justice will make their recommendations
to the Federal Communications Commission before it makes its final decision.
Because a substantial portion of the combined company's U.S. customer base and
traffic will originate in the New York metropolitan area, Bell Atlantic will be
a particularly formidable competitor. For long distance calls, Bell Atlantic
will have a substantial cost advantage because it will not have to pay access
fees to a local carrier to originate the call. Access fees constitute a large
portion of a long distance carrier's cost of services. Moreover, should Bell
Atlantic's proposed acquisition of GTE be consummated, Bell Atlantic will have
even greater resources to compete in its service markets.
Viatel is aware that certain long distance carriers are expanding their
capacity and believes that other long distance carriers and data service
providers, as well as potential new entrants to the industry, will construct new
fiber optic and other long distance transmission networks. Since the cost of the
actual fiber is a relatively small portion of the cost of building new
transmission lines, persons building such lines are likely to install fiber that
provides substantially more transmission capacity than will be needed over the
short or medium term. Further, recent technological advances have shown the
potential to greatly expand the capacity of existing and new fiber optic cable.
In addition, sales or leases of capacity on the Circe Network to other carriers
may result in competitors having capacity on the combined company's routes along
the Circe Network, which may in turn result in pricing pressures with respect to
traffic carried along these routes. If capacity expansion in the
telecommunications
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industry results in capacity that exceeds overall demand in general or along any
of the combined company's routes, severe additional pricing pressure could
develop. In addition, strategic alliances or similar transactions could result
in additional competitive pressure on the combined company and could have a
material adverse effect on the combined company and the price of Viatel common
stock.
NETWORK CONSTRUCTION DELAYS AND SYSTEM DISRUPTIONS OR FAILURES COULD ADVERSELY
AFFECT THE COMBINED COMPANY'S BUSINESS
The combined company's success will depend, in part, on its ability to
continue to expand its network and on its ability to provide seamless technical
operation of this network. Furthermore, as the combined company continues to
expand its network to increase its capacity and reach, it will face increasing
demands and challenges including:
- effectively managing the construction of new fiber routes, obtaining any
necessary rights-of-way and required licenses for such construction, and
completing any such construction on budget and on time;
- increasing traffic volume on its network; and
- selling capacity on its network.
If the costs of construction projects significantly exceed the budget for
those projects, Viatel may be required to obtain additional financing or to
abandon or curtail portions of those projects. If the combined company
encounters construction delays, it will not be able to route its traffic over
its owned facilities as soon as it has planned, which could have a detrimental
effect on its ability to increase traffic volumes and gross margins. In
addition, construction delays could negatively affect its ability to sell
indefeasible rights-of-use or capacity to other carriers. The combined company's
network is also subject to several risks which would be outside of its control,
such as the risk of damage to software and hardware resulting from:
- fire,
- power loss,
- natural disasters and
- general transmission failures caused by a number of additional factors.
Any failure of the combined company's network or other systems or hardware
that causes significant interruptions to its operations could have a material
adverse effect on its business, financial condition, results of operations and
on the price of Viatel common stock.
The combined company's operations will also be dependent on its ability to
successfully integrate new and emerging technologies and equipment into its
network, which could increase the risk of system failure and result in further
strains upon its network. In the event of a system disruption, the combined
company could seek to minimize customer inconvenience by routing traffic to
other circuits and switches which may be owned by other carriers. However,
prolonged or significant system failures, or difficulties for customers in
accessing and maintaining connection with the combined company's network, could
seriously damage its reputation and result in customer attrition, reduced
margins and financial losses and, as a result, have a material adverse effect on
the price of its common stock. Additionally, any damage to the combined
company's switching centers could have a material adverse effect on the combined
company's ability to manage its network operations, generate accurate call
detail reports and monitor its systems.
The expansion and development of the combined company's network will require
the significant expenditure of resources in projecting growth in traffic volume
and routing preferences and determining the most cost effective means of growing
the network, for example, through variable or fixed lease arrangements, the
purchase of capacity or minimum investment units on digital fiber optic cables
or digital microwave equipment, or the further construction of transmission
infrastructure.
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Failure to project traffic volume and route preferences correctly or to
determine the optimal means of expanding its network would result in less than
optimal utilization of the combined company's network and could have a material
adverse effect on its business, financial condition, results of operations and
on the price of Viatel common stock.
THE COMBINED COMPANY'S BUSINESS WILL SUFFER IF IT LOSES CERTAIN KEY PERSONNEL OR
FAILS TO ATTRACT AND RETAIN OTHER QUALIFIED PERSONNEL
The success of the combined company's business will be dependent, to a
significant extent, upon the abilities and continued efforts of its senior
management, and particularly upon the abilities and efforts of Michael J.
Mahoney, who will be the combined company's Chairman, Chief Executive Officer
and President, and Alfred West, who will be the combined company's Vice
Chairman. Viatel does not currently have employment agreements with any employee
other than Mr. Mahoney, Allan L. Shaw, Senior Vice President of Finance and
Chief Financial Officer, and Sheldon M. Goldman, Senior Vice President, Business
and Legal Affairs, nor do we intend to enter into employment agreements, either
prior to or in connection with the merger, with any employee other than Lawrence
G. Malone, Senior Vice President, Global Sales and Marketing, Francis J. Mount,
Senior Vice President, Engineering and Network Operations, Mr. West, as Vice
Chairman of the combined company, and Alan L. Levy, as Chief Operating Officer
of the combined company. See "Viatel's Management--Employment Agreements."
Except for a $3.0 million key-man life insurance policy on the life of Mr.
Mahoney, the combined company will not maintain life insurance policies on any
of its employees. See "The Merger--Interests of Officers and Directors in the
Merger."
The success of the combined company's business will depend on its ability to
attract, retain and motivate qualified management, marketing, technical and
sales executives and other personnel who are in high demand and who often have
multiple employment options. In addition, the labor market for software
engineers and central office technicians has been extremely competitive recently
and Viatel and Destia may lose key employees or be forced to increase their
compensation. The loss of the services of key personnel, or the inability to
attract, retain and motivate qualified personnel, could have a material adverse
effect on the combined company's business, financial condition, results of
operations and the price of Viatel common stock.
FOREIGN CURRENCY EXCHANGE RATES COULD HAVE ADVERSE EFFECTS ON THE COMBINED
COMPANY'S BUSINESS
Viatel's payment obligations with respect to its outstanding indebtedness
are denominated in U.S. Dollars and the Euro, but certain of its revenues are
denominated in Pound Sterling. Any appreciation in the value of the U.S. Dollar
or the Euro relative to the Pound Sterling could have a material adverse effect
on its ability to make payments on such obligations.
In the future, the combined company may elect to manage exchange rate
exposure presented by its Euro denominated obligations through the use of
hedging transactions. There can be no assurance that exchange rate fluctuations
will not have a material adverse effect on the combined company's ability to
make payments on its outstanding indebtedness.
In addition, the laws or administrative practices relating to taxation,
foreign exchange or other matters in countries within which Viatel and Destia
operate may change, which could have a material adverse effect on the combined
company's business, financial condition, results of operations and the price of
Viatel common stock.
THE COMBINED COMPANY COULD EXPERIENCE SYSTEM FAILURES AND SERVICE DISRUPTIONS AS
A RESULT OF THE YEAR 2000 ISSUE
Viatel and Destia face certain risks arising from the Year 2000 issue which
could have a material adverse affect on the combined company's business,
financial condition, results of operations and the price of Viatel common stock.
See "Viatel Management's Discussion and Analysis of Financial
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Condition and Results of Operations--Year 2000" and "Destia Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000."
THE COMBINED COMPANY'S DEPENDENCE UPON THIRD PARTIES FOR LEASED CAPACITY AND
INTERCONNECTION ARRANGEMENTS MAY RESULT IN SUBOPTIMAL UTILIZATION OF ITS NETWORK
Viatel currently leases capacity for point-to-point circuits with fixed
monthly payments and buys minutes of use under agreements with maximum
twelve-month terms and is vulnerable to changes in its lease arrangements,
capacity limitations and service cancellations. These lease arrangements will
present the combined company with high fixed costs, while revenues generated by
the utilization of these leases will vary based on traffic volume and pricing.
Accordingly, if the combined company is unable to generate sufficient traffic
volume over particular routes or is unable to charge appropriate rates, it could
fail to generate revenue sufficient to meet the fixed costs associated with the
lease and may incur negative gross margins with respect to those routes. A
deterioration of its relationship with one or more carriers could have a
material adverse effect on the combined company's cost structure, service
quality, network coverage, financial condition, results of operations and the
price of Viatel common stock.
The combined company's ability to access customers and to utilize
effectively its network will depend upon its ability to secure operative
interconnection agreements, providing access to and an exit
from the public switched telephone network, with the respective incumbent
telecommunications operator in each market in which it operates. Difficulties or
delays in obtaining necessary operative interconnections in a satisfactory or
timely manner may significantly delay or prevent the maximum utilization of the
combined company's network which could have a material adverse effect on the
combined company and the price of Viatel common stock.
THE COMBINED COMPANY WILL BE DEPENDENT UPON THIRD-PARTY SALES ORGANIZATIONS OVER
WHICH IT CAN EXERCISE ONLY LIMITED CONTROL
The combined company will sell a substantial portion of its services through
indirect channels of distribution, which consist of independent sales agents,
distributors and, to a lesser extent, resellers. The combined company will not
have control over such agents, distributors and resellers and will therefore not
be able to ensure that they will perform in a satisfactory manner or that their
interests will be aligned with the combined company's interests. In addition,
such entities also may terminate their business relationships with the combined
company at any time, with little or no prior notice. Destia has found this risk
to be especially pronounced in its multilevel marketing program in the United
Kingdom, where a master agent could decide to terminate its business
relationship, and that of its sub-agents, and conduct business with a
competitor. Unsatisfactory performance by such entities, or the termination by
them of their business relationship with the combined company, would hinder the
combined company's ability to grow and could have a material adverse effect on
the combined company's business and on the price of Viatel common stock.
LOSS OF SIGNIFICANT CARRIER CUSTOMERS WOULD RESULT IN A SIGNIFICANT LOSS OF
REVENUES
Viatel currently derives a significant portion of its revenues from a
relatively small number of carrier customers. During the six months ended June
30, 1999 and the year ended December 31, 1998, carrier customers accounted for
29.8% and 58.3% of Viatel's total revenue, respectively, with one carrier
customer accounting for 10.6% of total revenue for the year ended December 31,
1998. Carrier customers generally are extremely price sensitive and move their
traffic from carrier to carrier based on small price changes. In the
deregulating markets in Europe, this risk is particularly acute. Accordingly,
the loss of revenue from significant carrier customers would have a material
adverse effect upon the combined company's business, financial condition,
results of operations and the price of Viatel common stock.
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CERTAIN PROVISIONS OF VIATEL'S CORPORATE DOCUMENTS AND ITS EMPLOYMENT CONTRACTS
MAY MAKE A TAKEOVER MORE DIFFICULT EVEN IF THE TAKEOVER WOULD BENEFIT
STOCKHOLDERS
Viatel's certificate of incorporation and by-laws include certain provisions
that are intended to enhance the likelihood of continuity and stability in the
composition of its board of directors. These provisions may render the removal
of its directors and management more difficult. In addition, Viatel's
certificate of incorporation authorizes the issuance of "blank check" preferred
stock. These provisions may have the effect of delaying, deterring or preventing
a future takeover or change in control of Viatel, unless such takeover or change
in control is approved by its board of directors, even though such a transaction
might offer holders of its common stock an opportunity to sell their shares at a
price above the current market price.
VIATEL AND DESTIA ARE SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION WHICH MAY
AFFECT THE COMBINED COMPANY'S ABILITY TO OFFER CERTAIN SERVICES
National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which
Viatel and Destia currently operate and intend to operate. See "Viatel
Business--Regulation" and "Destia Business--Government Regulation".
The interpretation and enforcement of such laws and regulations varies and
could limit the combined company's ability to provide telecommunications
services in certain markets. We cannot assure you that:
- future regulatory, judicial and legislative changes will not have a
material adverse effect on the combined company;
- domestic or international regulators or third parties will not raise
material issues with regard to the combined company's compliance with
applicable laws and regulations; or
- other regulatory activities will not have a material adverse effect on the
combined company's business, financial condition and results of
operations.
THE MARKET PRICE OF VIATEL'S COMMON STOCK IS VOLATILE
The market price of Viatel's common stock has been and can be expected to be
significantly affected by factors such as:
- quarterly variations in its results of operations,
- the announcement of new services or service enhancements by Viatel or its
competitors,
- technological innovations by Viatel or its competitors,
- changes in earnings estimates or buy/sell recommendations by analysts,
- the operating and stock price performance of other comparable companies
and
- general market conditions or market conditions specific to particular
industries.
In particular, the stock prices for many companies in the telecommunications
sector have experienced wide fluctuations which have often been unrelated to the
operating performance of such companies. Viatel has been, and is likely to
continue to be, subject to such fluctuations.
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THE VIATEL SPECIAL MEETING
DATE, TIME AND PLACE
The Viatel special meeting will be held in the Beekman Room at the Hotel
Intercontinental, 111 East 48th Street, New York, New York 10017, at 10:00 a.m.,
local time, on Friday, November 19, 1999.
PURPOSE OF THE VIATEL SPECIAL MEETING
At the Viatel special meeting, holders of Viatel common stock are being
asked to approve the issuance of shares of Viatel common stock in connection
with the merger. See "The Merger" and "The Merger Agreement and Stockholder
Agreements." The Viatel board has determined that the merger and the issuance of
shares of Viatel common stock in connection with the merger is advisable, fair
to and in the best interests of Viatel stockholders. The Viatel board has
unanimously approved the merger agreement, the merger and the issuance of shares
in connection therewith, and it unanimously recommends that Viatel stockholders
vote FOR the issuance of these shares of Viatel common stock in connection with
the merger.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of Viatel common stock at the close of business on
October 14, 1999, the record date, are entitled to notice of and to vote at the
Viatel special meeting. On the record date, 32,656,644 shares of Viatel common
stock were issued and outstanding and held by approximately 160 holders of
record. A majority of the shares of Viatel common stock issued and outstanding
and entitled to vote on the record date must be represented in person or by
proxy at the Viatel special meeting in order for a quorum to be present.
Abstentions and "broker non-votes" count as present for establishing a quorum.
Holders of record of Viatel common stock on the record date are entitled to one
vote per share at the Viatel special meeting.
VOTES REQUIRED
The approval of the issuance of Viatel common stock requires the affirmative
vote more than 50% of the shares voting at the special meeting in person or by
proxy. Abstentions and "broker non-votes" will not be counted as shares having
been voted at the special meeting.
VOTING BY VIATEL DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on the record date, directors and executive
officers of Viatel and their affiliates owned and were entitled to vote 849,714
shares of Viatel common stock, which represented approximately 2.6% of the
shares of Viatel common stock outstanding on that date. Every Viatel director
and senior executive officer has indicated his or her present intention to vote,
or cause to be voted, the Viatel common stock owned by such person for approval
of the issuance of the shares in connection with the merger.
VOTING OF PROXIES
All shares of Viatel common stock represented by properly executed proxies
received in time for the Viatel special meeting will be voted at the Viatel
special meeting in the manner specified by the holders thereof. Properly
executed proxies that do not contain voting instructions will be voted FOR
approval of the issuance of shares in connection with the merger.
For voting purposes at the Viatel special meeting, only shares affirmatively
voted for or against approval of the issuance of Viatel common stock, including
properly executed proxies that do not contain voting instructions, will be
counted as votes for that proposal. Under the applicable rules of the
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Nasdaq National Market, brokers who hold shares of Viatel common stock in street
name for customers who are the beneficial owners of such shares are prohibited
from giving a proxy to vote those customers' shares with respect to the proposal
to issue shares of Viatel common stock in the absence of specific instructions
from those customers. These non-voted shares are referred to as "broker
non-votes."
Viatel does not expect that any matter other than the proposal to approve
the issuance of shares of Viatel common stock in connection with the merger will
be brought before its special meeting. If, however, the Viatel board properly
presents other matters, the persons named as proxies will be entitled to vote in
accordance with their judgment.
Adjournments or postponements may be made for the purpose of, among other
things, soliciting additional proxies. Any adjournment or postponement may be
made from time to time by approval of the holders of shares representing a
majority of the votes present in person or by proxy at the meeting, whether or
not a quorum exists, without further notice other than by an announcement made
at the meeting. Viatel does not currently intend to seek an adjournment or
postponement of the meeting.
HOW TO VOTE BY PROXY
To vote in writing, complete, sign, date and return your proxy card in the
enclosed envelope. For information on possible alternative voting methods, such
as by telephone or the Internet, call Corporate Investor Communications, Inc. at
1-877-393-4956, toll-free in the U.S. and Canada.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
stockholder from voting in person at the Viatel special meeting. A stockholder
may revoke a proxy at any time prior to its exercise by filing with the
Secretary of Viatel a duly executed revocation of proxy, by submitting a new
proxy with a later date or by appearing at the Viatel special meeting and voting
in person. Attendance at the Viatel special meeting will not, in and of itself,
constitute revocation of a proxy. If your shares are held in the name of your
broker, bank or other nominee, you must bring a legal proxy from your broker,
bank or other nominee to the meeting in order to vote in person.
DEADLINE FOR VOTING BY PROXY
Votes must be received prior to the special meeting in order to be counted.
Revocations must be received prior to the special meeting to be effective.
SOLICITATION OF PROXIES
Viatel will bear the cost of the solicitation of proxies from its
stockholders. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
Viatel will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection with such activities.
Corporate Investor Communications, Inc. will assist in the solicitation of
proxies by Viatel. Viatel will pay Corporate Investor Communications, Inc. a fee
of $6,000, plus reimbursement of certain out-of-pocket expenses, and will
indemnify Corporate Investor Communications, Inc. against any losses arising out
of Corporate Investor Communications, Inc.'s proxy soliciting services on behalf
of Viatel.
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THE DESTIA SPECIAL MEETING
DATE, TIME AND PLACE
The Destia special meeting will be held in the Beekman Room at the Hotel
Intercontinental, 111 East 48th Street, New York, New York 10017, at 11:30 a.m.,
local time, on Friday, November 19, 1999.
PURPOSE OF THE DESTIA SPECIAL MEETING
At the Destia special meeting, holders of Destia common stock are being
asked to adopt the merger agreement. See "The Merger" and "The Merger Agreement
and Stockholder Agreements." The Destia board has determined that the merger is
advisable, fair to and in the best interests of Destia stockholders. The Destia
board has unanimously approved the merger agreement and the merger, and it
unanimously recommends that Destia stockholders vote FOR adoption of the merger
agreement.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of record of Destia common stock at the close of business on
October 14, 1999, the record date, are entitled to notice of and to vote at the
Destia special meeting. On the record date, 31,548,466 shares of Destia voting
common stock were issued and outstanding and held by approximately 85 holders of
record. A majority of the shares of Destia voting common stock issued and
outstanding and entitled to vote on the record date must be represented in
person or by proxy at the Destia special meeting in order for a quorum to be
present. Abstentions and "broker non-votes" count as present for establishing a
quorum. Holders of record of Destia voting common stock on the record date are
entitled to one vote per share at the Destia special meeting on the proposal to
adopt the merger agreement. Holders of Destia non-voting common stock are not
entitled to vote at the Destia special meeting.
VOTES REQUIRED
The adoption of the merger agreement requires the affirmative vote of a
majority of the shares of Destia voting common stock outstanding on the record
date. Three of Destia's principal stockholders own a majority of the outstanding
shares of Destia voting common stock and have agreed to vote all of their shares
in favor of the merger. Accordingly, when the three principal stockholders vote
to approve the adoption of the merger agreement, the merger should be approved
whether or not any other Destia stockholder supports the merger. IF A DESTIA
STOCKHOLDER ABSTAINS FROM VOTING OR DOES NOT VOTE EITHER IN PERSON OR BY PROXY,
IT WILL HAVE THE SAME EFFECT AS IF THAT DESTIA STOCKHOLDER HAD VOTED AGAINST
ADOPTION OF THE MERGER AGREEMENT.
VOTING BY DESTIA DIRECTORS AND EXECUTIVE OFFICERS
At the close of business on the record date, directors and executive
officers of Destia and their affiliates owned and were entitled to vote
26,382,894 shares of Destia voting common stock, which represented a majority of
the shares of Destia voting common stock outstanding on that date. Alfred West,
Steven West and Princes Gate Investors II, L.P. (of which Stephen Munger, a
member of the Destia board, is an affiliate) have entered into stockholder
agreements with Viatel pursuant to which they have agreed to vote all of their
shares of Destia voting common stock in favor of the merger. See "The Merger
Agreement and Stockholder Agreements." Every other Destia director and senior
executive officer has indicated his or her present intention to vote, or cause
to be voted, the Destia voting common stock owned by such person for adoption of
the merger agreement.
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VOTING OF PROXIES
All shares of Destia voting common stock represented by properly executed
proxies received in time for the Destia special meeting will be voted at the
Destia special meeting in the manner specified by the holders thereof. Properly
executed proxies that do not contain voting instructions will be voted FOR
adoption of the merger agreement.
For voting purposes at the Destia special meeting, only shares affirmatively
voted for adoption of the merger agreement, including properly executed proxies
that do not contain voting instructions, will be counted as favorable votes for
that proposal. If a Destia stockholder abstains from voting or does not vote,
either in person or by proxy, it will have the same effect as if that Destia
stockholder had voted against adoption of the merger agreement. Under the
applicable rules of the Nasdaq National Market, brokers who hold shares of
Destia voting common stock in street name for customers who are the beneficial
owners of such shares are prohibited from giving a proxy to vote those
customers' shares with respect to the proposal to adopt the merger agreement in
the absence of specific instructions from those customers. These "broker
non-votes" have the same effect as votes against adoption of the merger
agreement.
Destia does not expect that any matter other than the proposal to adopt the
merger agreement will be brought before the Destia special meeting. If, however,
the Destia board properly presents other matters, the persons named as proxies
will be entitled to vote in accordance with their judgment.
Adjournments or postponements may be made for the purpose of, among other
things, soliciting additional proxies. Any adjournment or postponement may be
made from time to time by approval of the holders of shares representing a
majority of the votes present in person or by proxy at the meeting, whether or
not a quorum exists, without further notice other than by an announcement made
at the meeting. Destia does not currently intend to seek an adjournment or
postponement of the meeting.
HOW TO VOTE BY PROXY
To vote in writing, complete, sign, date and return your proxy card in the
enclosed envelope. For information on possible alternative voting methods, such
as by telephone or the Internet, call Corporate Investor Communications, Inc. at
1-877-393-4956, toll-free in the U.S. and Canada.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
stockholder from voting in person at the Destia special meeting. A stockholder
may revoke a proxy at any time prior to its exercise by filing with the
Secretary of Destia a duly executed revocation of proxy, by submitting a new
proxy with a later date or by appearing at the Destia special meeting and voting
in person. Attendance at the Destia special meeting will not, in and of itself,
constitute revocation of a proxy. If your shares are held in the name of your
broker, bank or other nominee, you must bring a legal proxy from your broker,
bank or other nominee to the meeting in order to vote in person.
DEADLINE FOR VOTING BY PROXY
Votes must be received prior to the special meeting in order to be counted.
Revocations must be received prior to the special meeting to be effective.
SOLICITATION OF PROXIES
Destia will bear the cost of the solicitation of proxies from its
stockholders. Arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of stock held of record by such persons, and
Destia will reimburse such custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses in connection with such activities.
STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXIES. A
transmittal form with instructions for the surrender of Destia common stock
certificates will be mailed to Destia stockholders as soon as practicable after
completion of the merger.
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THE MERGER
BACKGROUND OF THE MERGER
As part of each company's strategy of enhancing stockholder value and
improving its competitive position within its industry segment, Viatel and
Destia have regularly considered acquisition opportunities, joint ventures and
other partnerships and strategic alliances. On July 1, 1999, Michael Mahoney,
Chairman, President and Chief Executive Officer of Viatel, met with Alan Levy,
President and Chief Operating Officer of Destia, to discuss the purchase by
Destia of transmission capacity or dark fiber on Viatel's Circe Network. During
the conversation, Mr. Mahoney raised the possibility of a combination of Viatel
and Destia. Mr. Mahoney and Mr. Levy then discussed the strategic fit, economic
rationale and potential synergies of the proposed combination.
On July 15, 1999, Mr. Mahoney and Alfred West, the Chairman of the Board,
Chief Executive Officer and a major stockholder of Destia, met to discuss
generally the possibility of combining the operations of the two companies. On
the same day, Allan Shaw, Senior Vice President and Chief Financial Officer of
Viatel, held extended conversations with Mr. Levy regarding potential synergies
that could be derived from a combination of Viatel and Destia.
On July 16 and 20, 1999, Mr. Mahoney and Mr. Levy discussed the potential
combination and the management structure of the combined company.
At a regularly scheduled meeting of the Viatel board held on July 23, 1999,
Mr. Mahoney updated the board on the status of various acquisitions being
considered by Viatel's management, including the potential acquisition of
Destia. At this meeting, Mr. Shaw provided the Viatel board with an overview of
the combined Viatel/Destia company. The Viatel board then authorized management
to submit an acquisition proposal to Destia.
On July 23, 1999, Mr. West received a letter from Viatel stating that Mr.
Mahoney and the Viatel board believed that Viatel and Destia had complementary
strengths and strategic objectives and that a combination of the two companies
would serve the best interests of the stockholders of both companies. The letter
proposed a stock-for-stock merger in which each share of Destia common stock
would be exchanged for Viatel common stock.
On July 29, 1999, Viatel retained the services of ING Barings to act as its
financial advisor for the potential combination with Destia. Viatel and ING
Barings began formulating an appropriate price range to propose to Destia for
its consideration.
On the same day, representatives of Destia discussed Viatel's proposal with
representatives of Morgan Stanley, Destia's financial advisor. Morgan Stanley
concluded that the economic terms of the letter needed further clarification and
that the letter did not address certain material matters.
Between July 29, 1999 and August 2, 1999, representatives of Morgan Stanley,
ING Barings and Viatel discussed Destia's concerns relating to Viatel's letter.
Following these discussions, Viatel clarified the economic terms of its offer
and reiterated that it was prepared to offer Viatel common stock in exchange for
Destia common stock.
On August 3, 1999, Mr. West received Viatel's revised proposal during a
regularly scheduled meeting of the Destia board. At this meeting, the Destia
board directed Mr. West and Mr. Levy to continue exploring a possible business
combination with Viatel and agreed to retain Morgan Stanley to act as its
financial advisor in connection with a possible strategic transaction.
On August 9, 1999, representatives of Viatel, Destia and their respective
financial and legal advisors met for initial discussions of the proposed
combination. At this meeting, Viatel outlined the terms of its proposal. It was
decided that further discussions should be deferred pending preliminary due
diligence visits by Mr. Mahoney and Mr. Levy to the facilities of Viatel and
Destia in the United States. Also on August 9, 1999, Viatel and Destia entered
into a confidentiality agreement containing customary terms and conditions.
Between August 9 and August 13, 1999, Mr. Mahoney and Mr. Levy visited
Destia's facilities in College Station, Texas and St. Louis, Missouri and
Viatel's facility in Omaha, Nebraska. On August 13, 1999, Viatel, Destia and
their respective financial and legal advisors met again. At this meeting, the
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parties agreed that the proposed transaction should offer significant strategic
and operational benefits and that the parties should proceed with more detailed
due diligence and begin to negotiate the definitive terms of a transaction.
Between August 16 and August 19, 1999, representatives of Viatel, Destia and
their respective financial advisors met to review detailed financial information
relating to the two companies and the potential synergies and cost savings which
could result from a combination of Viatel and Destia.
On August 18, 1999, Viatel's legal counsel distributed a draft merger
agreement.
On August 19, 1999, Mr. Mahoney and Mr. Levy visited Viatel's facility in
Somerset, New Jersey.
On August 20, 1999, representatives of Viatel, Destia and their respective
financial and legal advisors met to discuss the status of the proposed
combination. They also discussed the terms of the combination, including, among
others, a range of appropriate exchange ratios, the terms on which the principal
Destia stockholders would vote for the merger, the post-closing restrictions on
sales of Viatel common stock by the principal Destia stockholders and
post-merger integration issues.
From August 20 through August 26, 1999, representatives of Viatel, Destia
and their respective financial and legal advisors exchanged and discussed
certain business, personnel, legal, regulatory and financial information
relating to the two companies, and conducted further due diligence concerning
the business and operations of each of the respective companies. The parties
also negotiated the terms of the definitive documentation for the merger.
On August 26, 1999, the Viatel board held a meeting at which members of
Viatel's senior management and representatives of Viatel's financial and legal
advisors were present. Members of Viatel's senior management discussed their
views regarding the proposed combination and the strategic and operational
benefits which could result from the combination. See "--Viatel's Reasons for
the Merger; Recommendation of the Viatel Board of Directors." In addition,
Viatel's financial advisors discussed the financial analysis that they had
performed with respect to the proposed combination with Destia and the reasons
why they believed the transaction was fair to Viatel and its stockholders from a
financial point of view. See "--Opinion of Financial Advisor to Viatel."
Following the formal presentations, the Viatel board voted to approve the
proposed transaction and the forms of merger agreement and related documentation
presented at the meeting and vested Mr. Mahoney with authority to finalize the
preparation of the required documents. The Viatel board reconvened at 10:00 p.m.
to receive a final status update and take any further action that might be
required. At the 10:00 p.m. meeting, Mr. Mahoney advised the board that all
significant issues had been resolved, and that he expected the merger agreement
to be signed at 7:00 a.m. the next morning following receipt of final approval
from Destia's board.
Also on August 26, 1999, the Destia board held a meeting attended by members
of Destia's senior management and representatives of Destia's financial and
legal advisors. Members of Destia's senior management discussed their views of
the strategic rationale for the proposed combination and the strategic and
operational benefits of the proposed combination. See "--Destia's Reasons for
the Merger; Recommendation of the Destia Board of Directors." The Destia board,
assisted by Destia's legal and financial advisors, considered the proposed
merger agreement, stockholder agreements, employment agreements and the
transactions contemplated thereby. Representatives of Morgan Stanley described
the financial analysis performed by them with respect to the possible
combination with Viatel. See "--Opinion of Financial Advisor to Destia." The
meeting was then adjourned.
The following morning, the Destia board reconvened. Members of Destia's
senior management and its financial and legal advisors informed the Destia board
that negotiations had been completed and that agreement had been reached on all
outstanding issues. The representatives of Morgan Stanley then delivered the
oral opinion of Morgan Stanley, later confirmed in writing, that, as of the date
of the opinion, the exchange ratio was fair to Destia stockholders from a
financial point of view. The Destia board then concluded that the merger was
advisable, fair to and in the best interests of Destia and its stockholders and
unanimously approved the merger agreement, stockholder agreements and related
documents. Following the completion of the meeting of the Destia board, the
merger agreement was signed by the parties, and Viatel and Destia issued a joint
press release and conducted a joint press conference announcing the execution of
the merger agreement.
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VIATEL'S REASONS FOR THE MERGER; RECOMMENDATION OF THE VIATEL BOARD OF DIRECTORS
In the past several years, the telecommunications industry has experienced a
significant increase in mergers, acquisitions and consolidations. These
transactions have been driven by significant increases in competition,
resulting, in part, from technology and regulatory changes that have lowered the
cost of providing services and reduced many of the barriers to entry in many of
the world's largest telecommunications markets. The premise underlying many of
these transactions is the currently prevailing view in the telecommunications
industry that the most successful telecommunications companies will be able to
offer a complete array of products and services across a broad geographic
service area.
During the past two years, Viatel has been implementing its strategy of
becoming a fully integrated communications company that is well positioned to
take advantage of growth opportunities in the European communications market.
Viatel has positioned itself as a low-cost provider of services in Europe
through the construction and ownership of key network infrastructure. During
this time, Destia has grown rapidly as a facilities-based provider of domestic
and international long distance telecommunications services in Europe and North
America. Through its strong end-user focused business, Destia provides retail
customers with a variety of retail services, including international and
domestic long distance, calling card and prepaid services and wholesale
transmission services.
By combining with Destia, Viatel expects to bring together Viatel's Circe
Network, the largest dense-fiber, cross-border network on the European
continent, with Destia's sizeable operations and customer bases in the United
Kingdom, Belgium and Switzerland (three Circe Network countries), as well as
significant customer bases and operations in the United States and Canada, which
are markets that will generate significant origination minutes for the Circe
Network. The merger should also lead to a significant collective reduction in
operating costs and capital expenditures and should enable both companies to
achieve their strategic objectives more quickly than either company could have
achieved independently.
In reaching its decision to approve the merger agreement and the merger and
to recommend that Viatel stockholders vote to approve the issuance of shares of
Viatel common stock to Destia stockholders in the merger, the Viatel board
consulted with senior management and its financial and legal advisors and
independently considered a number of factors, including the following reasons,
among others:
- the complementary nature of the operations of Viatel and Destia in terms
of geography and the strategic fit of Destia's end-user customer base with
Viatel's state-of-the-art pan-European broadband fiber-optic network;
- the potential of the combined company to offer end-users a broad array of
competitively priced communications services, including voice, high speed
Internet access, dedicated access, virtual private network services and
other data applications;
- the ability of the combined company to accelerate the delivery of data
products and services to its targeted customer base;
- the fact that Viatel's stockholders will have the opportunity to
participate in potential diversified and enhanced growth after the merger;
- the operational and administrative cost savings that would result from the
merger;
- the fact that the merger will bring together the complementary assets,
resources and expertise of the two companies, giving the combined company
the critical mass to effectively compete in the rapidly consolidating
telecommunications markets;
- the fact that the merger significantly advances Viatel's goal of being an
Atlantic-basin-based telecommunications provider;
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- the strategic and financial alternatives to the merger available to
Destia, including remaining an independent public company;
- the written opinion of ING Barings, dated August 26, 1999, that, subject
to the assumptions and limitations contained in that opinion, the exchange
ratio was fair as of that date, from a financial point of view, to Viatel,
and the financial presentation made by ING Barings to the Viatel board in
connection with delivering that opinion;
- the terms and conditions of the merger agreement, including termination
fees and closing conditions;
- the stockholder agreements of certain Destia stockholders representing
more than 50% of the outstanding shares of Destia voting common stock,
which require such stockholders to vote in favor of the merger;
- the decreased likelihood of a third party making an acquisition proposal
with respect to Destia because of the stockholder agreements; and
- the qualification of the merger as a tax-free transaction for U.S. federal
income tax purposes (except for any tax resulting from any cash received
by Destia stockholders for fractional interests in Viatel shares).
In the course of its deliberations, the Viatel board reviewed with senior
management and outside legal and financial advisors a number of additional
factors relevant to the merger, including:
- historical information concerning Viatel's and Destia's respective
businesses, financial performance and condition, operations, technology,
management and competitive position;
- Viatel's view as to the financial condition, results of operations and
businesses of Viatel and Destia before and after giving effect to the
merger based on management due diligence and publicly available
information;
- reports from management and legal advisors as to the results of their due
diligence investigation of Destia and its operations; and
- current financial market conditions and historical market prices and
trading information with regard to Viatel's and Destia's common stock.
The Viatel board also identified and considered a variety of potentially
negative factors in its deliberations concerning the merger, including, but not
limited to:
- the risk that the integration of the two companies' respective operations
and employees might not occur in a timely manner and that the operations
of the two companies might not be successfully integrated;
- the risk that, despite the efforts of the combined company, key technical
and management personnel might not remain employed by the combined
company;
- the substantial charges to be incurred in connection with the merger,
including costs of integrating the businesses and transaction expenses
arising from the merger;
- the risk that estimated selling, general and administrative cost savings,
margin improvements and capital expenditure reductions may not be realized
or take longer to realize than expected;
- recognition of the fact that, as a result of the combination, holders of
Destia's outstanding senior notes and senior discount notes may require
Destia to offer to repurchase their notes; and
- the other risks described under the caption "Risk Factors" presented
earlier in this joint proxy statement/prospectus.
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The Viatel board believed that certain of these risks were unlikely to
occur, while others could be avoided or mitigated, and that, overall, these
risks were outweighed by the potential benefits of the merger.
The foregoing discussion is not an exhaustive list of all factors considered
by the Viatel board but is believed to include all material factors that the
board considered in connection with the merger. In view of the variety of
factors considered by the Viatel board in connection with its evaluation of the
merger agreement and the merger, the Viatel board did not find it practical to
and did not quantify or otherwise assign relative weight to the specific factors
considered in reaching its determination. In addition, individual members of the
Viatel board may have given different weight to different factors.
After careful consideration, the Viatel board unanimously determined that
the merger and the merger agreement are advisable, fair to and in the best
interests of Viatel and its stockholders and unanimously recommends that Viatel
stockholders vote FOR the issuance of shares of Viatel common stock in
connection with the merger.
DESTIA'S REASONS FOR THE MERGER; RECOMMENDATION OF THE DESTIA BOARD OF DIRECTORS
In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the merger agreement by Destia stockholders, the Destia
board consulted with its management team and advisors and independently
considered the proposed merger agreement and the transactions contemplated
thereby. The following potential benefits of the merger were considered by the
Destia board in making its decision:
- the strategic fit of Destia's customer base and operational skills with
Viatel's pan-European broadband fiber-optic network;
- the potential of the combined companies to offer end-users a broad array
of communications services, including voice, high speed Internet access,
dedicated access, virtual private network services and other data
applications;
- the potential of the combined companies to achieve the critical mass
required to compete more effectively in the telecommunications industry;
- the complementary geography of the companies' respective businesses and
the operating leverage expected to be achieved by combining Destia's
presence in the United States, United Kingdom and Switzerland with
Viatel's presence in France, Germany, Belgium and The Netherlands;
- the increase in gross margin that should result from improved global
routing of traffic, reduced costs of terminating international traffic
through better utilization of existing operating agreements with
terminating carriers, the elimination of leased line costs where Destia's
traffic could be moved onto the Circe Network and reduced access costs
through improved utilization of the combined company's interconnection
agreements;
- the avoidance of duplicative capital expenditures for network expansion
and the cost benefits realized from greater purchasing efficiencies in
relation to capital equipment, as well as the avoidance of duplicative
capital expenditures relating to continued investment in management
information systems;
- the reduction in selling, general and administrative expenses that would
result from a merger with Viatel, resulting from containing costs,
avoiding expenditures on duplicative activities such as network
engineering, provisioning and corporate marketing and utilizing the
combined company's greater purchasing power;
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- the 0.445 exchange ratio, which represented a significant premium to
Destia stockholders based on the closing prices of Destia common stock and
Viatel common stock on August 26, 1999, the day prior to the announcement
of the merger;
- the opinion of Morgan Stanley that, as of the date of the opinion and
subject to the considerations set forth therein, the 0.445 exchange ratio
was fair to the stockholders of Destia from a financial point of view; and
- the expected qualification of the merger as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code.
The Destia board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including:
- a recognition that under a fixed exchange ratio, the consideration
received by Destia stockholders could be adversely affected by a
significant decline in Viatel's stock price or a significant increase in
Destia's stock price (see "Risk Factors--The Exchange Ratio Will Not Be
Adjusted for Changes in Stock Prices");
- a recognition that Viatel common stock was volatile and had traded at high
valuation multiples, and the risk that such multiples might not be
sustained in the future (see "Risk Factors--The Exchange Ratio Will Not Be
Adjusted for Changes in Stock Prices" and "Risk Factors--The Market Price
of Viatel's Common Stock is Volatile");
- a recognition that the stockholder agreements effectively assured Viatel
of Destia's stockholder approval, whereas Destia did not have comparable
assurance of Viatel stockholder approval;
- the risk that Viatel may not be able to successfully execute its business
plan;
- the risk that the anticipated selling, general and administrative cost
savings, the gross margin improvements and avoidance of duplicative
capital expenditures may not be realized or may take longer to realize
than expected;
- the risk that the operations of Destia and Viatel might not be
successfully integrated;
- the risk that, despite the efforts of Destia and Viatel after the merger,
key personnel might leave the combined company;
- the difficulty of managing operations in the different geographic
locations in which Destia and Viatel operate; and
- a recognition that, as a result of the combination, holders of Destia's
outstanding senior notes and senior discount notes may require Destia to
offer to repurchase the notes. See "Risk Factors--After the Merger, Destia
May Have to Repurchase Destia's 11% Senior Discount Notes due 2008 and
Destia's 13.50% Senior Notes due 2007, and the Combined Company May Not
Have the Financial Resources to Fund Both the Repurchase and Its Business
Plan."
The Destia board believed that certain of these risks were unlikely to
occur, while others could be avoided or mitigated by Destia, and that, overall,
these risks were outweighed by the potential benefits of the merger.
The Destia board also considered the following additional factors:
- information relating to the business, assets, management, competitive
position, operating performance, trading performance and prospects of each
of Destia and Viatel;
- the prospects of Destia if it were to continue as an independent company
in the facilities-based telecommunications services business;
- current industry, market and economic conditions;
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- the possibility of strategic alternatives to the merger for enhancing
long-term stockholder value, including the possibility of other potential
strategic transactions;
- the fact that Destia had preliminary discussions with other participants
in the telecommunications industry regarding possible strategic
transactions and that these discussions had not been mutually fruitful;
- the terms and conditions of the merger agreement, including termination
fees and closing conditions; and
- the likelihood that the merger would be completed.
The foregoing discussion of the information and factors considered by the
Destia board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the merger agreement and the
merger, the Destia board did not find it practicable to and did not quantify or
otherwise assign relative weight to the specific factors considered in reaching
its determination. In addition, individual members of the Destia board may have
given different weight to different factors.
After careful consideration, the Destia board unanimously determined that
the terms of the merger agreement and the merger were advisable, fair to and in
the best interests of Destia and its stockholders and approved the merger
agreement and the merger. The Destia board unanimously recommends that the
stockholders of Destia vote FOR the adoption of the merger agreement and the
merger.
OPINION OF FINANCIAL ADVISOR TO VIATEL
Viatel retained ING Barings to act as its financial advisor in connection
with the merger. ING Barings delivered its written opinion, dated August 26,
1999, to the Viatel board to the effect that, and based upon and subject to the
assumptions, limitations and qualifications set forth therein, the exchange
ratio was fair, from a financial point of view, to Viatel.
THE FULL TEXT OF THE ING BARINGS FAIRNESS OPINION, WHICH SETS FORTH A
DESCRIPTION OF THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS SET OUT IN ANNEX F.
Viatel's stockholders are urged to carefully read the ING Barings fairness
opinion in its entirety, especially with regard to the assumptions made and
matters considered by ING Barings, as well as the limitations on the information
considered and analysis presented. The summary of the ING Barings fairness
opinion set forth in this document is qualified in its entirety by reference to
the full text of such opinion attached as Annex F.
The ING Barings fairness opinion, which was intended solely for the benefit
and use of Viatel's board, did not constitute a recommendation to the Viatel
board in connection with the merger and does not constitute a recommendation to
any holder of Viatel common stock as to how to vote their shares in connection
with the merger. ING Barings is not expressing any opinion as to the price or
range of prices at which Viatel stock may trade subsequent to the consummation
of the merger. The ING Barings fairness opinion is necessarily based upon
economic, monetary, market and other conditions, and the information made
available to it, as of the date of such opinion.
The exchange ratio and the form of consideration were determined by
arm's-length negotiations between Viatel and Destia and were not based on any
recommendation of ING Barings. Except as noted below, no limitations were
imposed by Viatel on ING Barings with respect to the investigations made, or the
procedures followed, by ING Barings in rendering its fairness opinion.
In arriving at their opinion, ING Barings, among other things:
- reviewed the merger agreement and certain related documents;
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- reviewed Viatel's annual reports on Form 10-K for each of the fiscal years
in the three-year period ended December 31, 1998, quarterly reports on
Form 10-Q for the quarters ended March 31 and June 30, 1999 and all
reports filed on Form 8-K since January 1, 1999;
- reviewed Destia's registration statement on Form S-1 dated May 6, 1999,
annual report on Form 10-K for the fiscal year ended December 31, 1998,
quarterly reports on Form 10-Q for the quarters ended March 31 and June
30, 1999 and all reports filed on Form 8-K since December 31, 1997;
- reviewed and discussed with Viatel management certain internal financial
information and other data relating to the business and financial
prospects of Viatel, including estimates and financial forecasts prepared
by management of Viatel which are not publicly available;
- reviewed and discussed with Viatel management certain financial
information and other data relating to the business and financial
prospects of Destia, including estimates and financial forecasts relating
to Destia prepared by management of Viatel which are not publicly
available;
- reviewed and discussed with Viatel management, certain estimates of
revenue enhancements, cost savings and other combination benefits and
synergies, and the timing thereof, expected to result from the merger,
prepared by management of Viatel which are not publicly available;
- attended certain discussions between members of management of Viatel and
Destia regarding certain financial, business and market information;
- reviewed histories of the price and trading volume of the common stock of
both Viatel and Destia, and compared such trading histories with other
companies which ING Barings deemed relevant;
- reviewed certain publicly available financial data, stock market data and
valuation parameters of companies which, in ING Barings' judgment, were
deemed comparable to Viatel or Destia or otherwise deemed generally
relevant;
- reviewed the financial terms, to the extent publicly available, and
premiums paid, in certain merger and acquisition transactions which, in
ING Barings' judgment, were deemed generally relevant; and
- conducted such other studies, analyses and investigations as were deemed
appropriate, but none of which was individually material.
In arriving at its opinion, and with the consent of Viatel, ING Barings
assumed and relied upon the accuracy and completeness of the financial and other
information used by it without assuming any responsibility for independent
verification of such information, and ING Barings further relied upon the
assurances of Viatel's management that they were not aware of any facts or
circumstances that would make such information inaccurate or misleading. With
respect to the financial projections, estimates, forecasts, contemplated tax and
accounting impacts, and calculations of revenue enhancements, cost savings and
synergies relied upon or provided to ING Barings, it assumed, upon the advice of
Viatel, that such information had been reasonably prepared on a basis reflecting
the best currently available estimates and judgments of management of Viatel as
to the future financial performance of Viatel and Destia. ING Barings also
assumed that the merger will be consummated in accordance with the terms set
forth in the merger agreement, that the merger will be treated as a tax-free
transaction pursuant to the Internal Revenue Code, and that the merger will be
treated as a purchase transaction in accordance with generally accepted
accounting principles. In arriving at its opinion, ING Barings did not conduct a
physical inspection of the properties and facilities of Viatel or Destia and did
not make or obtain any evaluations or appraisals of the assets or liabilities of
either company.
32
<PAGE>
In connection with rendering its opinion, ING Barings performed certain
financial, comparative and other analyses as described below. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and, therefore, such an
opinion is not readily susceptible to summary description. Furthermore, in
arriving at its fairness opinion, ING Barings did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, ING Barings believes that its analyses must be considered as a
whole and that considering any portion of such analyses and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying the opinion. In its
analyses, ING Barings made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Viatel or Destia. Any estimates contained in the
analyses are not necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less favorable than as set
forth therein. In addition, analyses relating to the value of businesses do not
purport to be appraisals or to reflect the prices at which businesses actually
may be sold.
ING Barings is an internationally recognized investment banking firm which,
as part of its investment banking business, regularly engages in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate, corporate
and other purposes. Viatel selected ING Barings on the basis of its experience
and independence. In the past, ING Barings and its affiliates have provided
investment banking services to Viatel and have received customary compensation
for such services. Viatel has paid ING Barings and its affiliates approximately
$3.7 million in compensation for services rendered over the past two years. In
the ordinary course of business, ING Barings and its affiliates may actively
trade or hold the equity securities of Viatel or Destia for their own account or
the accounts of their customers and, accordingly, may at any time, subject to
applicable laws, take a long or short position in such securities.
Pursuant to the original engagement letter between Viatel and ING Barings,
dated August 26, 1999, Viatel agreed to pay ING Barings an initial cash fee of
$50,000 plus a success fee equal to 0.50% of the aggregate transaction
consideration prior to closing, estimated as of August 26, 1999 to be $4.7
million, payable upon the consummation of the merger. Any amounts paid with
respect to the initial cash fee will be credited against the success fee. Viatel
has also agreed to reimburse ING Barings for its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of counsel, and to
indemnify ING Barings against certain liabilities in connection with the
engagement of ING Barings, including certain liabilities under the U.S. federal
securities law.
The following is a summary of the material valuation, financial and
comparative analyses performed by ING Barings in arriving at its fairness
opinion.
DISCOUNTED CASH FLOW ANALYSIS. ING Barings prepared a nine year discounted
cash flow model for Destia based on information and projections provided by
Viatel. With respect to the Destia discounted cash flow analysis, ING Barings
discounted after-tax cash flows on a stand-alone basis, i.e., excluding any
projected benefits resulting from the merger, by applying a weighted average
cost of capital range of 14% to 18%, based on several assumptions including
interest rates, capitalization ratios and systematic risk measures. ING Barings
calculated a terminal value by applying to projected 2008 free cash flow a range
of multiples of 10.0x to 14.0x EBITDA. ING Barings' determination of the
appropriate range of multiples was based on a comparison of multiples for
certain selected publicly-traded telecommunications companies with growth rates
generally similar to Destia's projected growth rates at the end of the
projection period. The discounted cash flow analysis, discounting all cash flows
as at January 1, 2000, resulted in a valuation range of $13.05 to $26.07 (with
an average of $19.22) per share of Destia common stock, as compared to the
equity value range implied by the exchange ratio of
33
<PAGE>
$16.94 to $18.63 per Destia share based on the average closing price of Viatel's
common stock during the 20 trading days prior to August 27, 1999 and the closing
price of Viatel's common stock of $41.88 on August 26, 1999, respectively.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES. Using publicly
available information, ING Barings compared the financial performance and stock
market valuation of Versatel Telecom International NV, RSL Communications Ltd.
and Primus Telecommunications Group with Destia. The companies were selected
based on general business, operating and financial characteristics
representative of emerging international carriers. The range of multiples for
these companies of enterprise value, defined as the market value of equity plus
minority interest plus the market value of debt and preferred stock, net of
cash, to trailing twelve month revenues was 1.3x to 17.7x, enterprise value to
estimated 1999 revenues was 1.1x to 14.6x and estimated 2000 revenues was 0.8x
to 6.9x. The average value range implied by these multiples is $3.69 to $114.95
(with an average of $41.94) per share of Destia common stock as compared to the
implied acquisition price range of $16.94 to $18.63 per share as calculated
above. The ratios for the selected companies are based on closing stock prices
on August 26, 1999, and the latest public financial statements and the most
recent public equity research reports that contained projections for revenue
available to ING Barings on August 26, 1999.
The multiple for Destia using the implied acquisition price was within the
range of multiples for the selected companies. However, ING Barings believes
that this benchmark was of limited use in evaluating the merger due to the
inherent differences between the businesses, operations, and prospects of Destia
and the businesses, operations and prospects of the selected companies and the
lack of meaningful EBITDA or net income projected for Destia in the near term.
ING Barings believes that it was inappropriate to, and therefore did not, rely
solely on the quantitative results of the analysis, and accordingly also made
qualitative judgments concerning differences between the characteristics of
Destia and the selected companies that would affect the public trading values of
Destia and these companies.
SUMMARY OF PRECEDENT MERGER AND ACQUISITION TRANSACTIONS. Using publicly
available information, ING Barings reviewed certain terms and financial
characteristics of both European and North American long distance company merger
and acquisition transactions, which ING Barings deemed to be generally
comparable for the purposes of this analysis. The North American transactions
considered by ING Barings in its analysis consisted of: Excel Communications,
Inc./Telco Communications Group, Inc.; LCI International, Inc./USLD
Communications Corp.; IXC Communications, Inc./Network Long Distance; Qwest
Communications International Inc./LCI International, Inc.; Teleglobe Inc./Excel
Communications, Inc.; IXC Communications/Coastal Telephone and World
Access/Facilicom International Inc. while the European transactions considered
by ING Barings in its analysis consisted of Esprit Telecom Group, plc/PlusNet;
Global Telesystems Group, Inc./Esprit Telecom Group plc; Global Telesystems
Group, Inc./Omnicom SA; and Versatel Telecom International NV/Svianed.
In conducting its analysis of comparable merger and acquisition
transactions, ING Barings analyzed Destia's North American and European segments
separately, applying multiples derived from acquisitions of companies with
operations primarily in Europe to Destia's European segment and multiples
derived from acquisitions of companies with operations primarily in North
America to Destia's North American segment. The range of multiples of enterprise
value to revenues, calculated on trailing twelve month, latest quarter
annualized and next forecast four quarters for both segments, derived from this
analysis implied a valuation range of $12.33 to $28.19 (with an average of
$19.80) per share of Destia common stock as compared to the equity value implied
by the exchange ratio of $18.63 per Destia share based on the closing price of
Viatel's stock of $41.88 on August 26, 1999. The ratios for the comparable
merger and acquisition transactions are based on public financial statements,
closing stock prices and public equity research reports available to ING Barings
at the time of the respective transactions.
34
<PAGE>
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
Destia and the acquired businesses analyzed, ING Barings believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the analysis and, accordingly, also made qualitative judgments concerning
differences between the characteristics of these transactions and the merger.
OPINION OF FINANCIAL ADVISOR TO DESTIA
Destia retained Morgan Stanley to act as its financial advisor in connection
with the merger and related matters based upon Morgan Stanley's qualifications,
expertise and reputation. On August 27, 1999, Morgan Stanley rendered an oral
opinion, which was confirmed in writing, to the Destia board of directors that,
as of such date, and based upon and subject to the considerations set forth in
the written opinion, the exchange ratio pursuant to the merger agreement was
fair, from a financial point of view, to holders of shares of Destia common
stock, other than Viatel, as of the date of the opinion.
ATTACHED AS ANNEX G TO THIS JOINT PROXY STATEMENT/PROSPECTUS IS THE FULL
TEXT OF THE MORGAN STANLEY OPINION, DATED AS OF AUGUST 27, 1999, WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN. THE MORGAN STANLEY OPINION IS DIRECTED TO
THE DESTIA BOARD AND ONLY ADDRESSES THE FAIRNESS OF THE EXCHANGE RATIO PURSUANT
TO THE MERGER AGREEMENT FROM A FINANCIAL POINT OF VIEW TO HOLDERS OF SHARES OF
DESTIA COMMON STOCK AS OF THE DATE OF SUCH OPINION AND DOES NOT ADDRESS ANY
OTHER ASPECT OF THE MERGER, NOR IS IT A RECOMMENDATION TO ANY DESTIA STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE DESTIA SPECIAL MEETING. THE
SUMMARY OF THE MORGAN STANLEY OPINION INCLUDED BELOW SHOULD NOT BE VIEWED AS A
SUBSTITUTE FOR THE FULL TEXT OF THE OPINION. DESTIA STOCKHOLDERS ARE URGED TO,
AND SHOULD, READ THE MORGAN STANLEY OPINION IN ITS ENTIRETY.
In arriving at the Morgan Stanley opinion, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information of Destia and Viatel, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning Destia and Viatel prepared by the respective
managements of such companies;
- reviewed certain financial projections for Destia and Viatel prepared by
the respective managements of such companies;
- discussed the past and current operations and financial conditions and the
prospects of Destia and Viatel, including information relating to certain
strategic, financial and operational benefits anticipated from the merger,
with the respective managements of such companies;
- analyzed the estimated pro forma impact of the merger on Viatel's cash
flow, consolidated capitalization and financial ratios;
- reviewed the reported prices and trading activity for Destia common stock
and Viatel common stock;
- compared the financial performance of Destia and Viatel and the prices and
trading activity of Destia common stock and Viatel common stock with those
of certain other comparable publicly traded companies and their
securities;
- reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions;
- participated in discussions and negotiations among representatives of
Destia and Viatel and their financial and legal advisors;
35
<PAGE>
- reviewed the merger agreement and certain related documents;
- performed such other analyses and considered such other factors as Morgan
Stanley deemed appropriate.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for the purposes of
its opinion. With respect to the financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the merger, Morgan Stanley assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
future financial performance of Destia and Viatel. Morgan Stanley did not make
any independent valuation or appraisal of the assets or liabilities of Destia,
nor were they furnished with any such appraisals.
The Morgan Stanley opinion was necessarily based on financial, economic,
market and other conditions as in effect on, and the information made available
to it as of, the date thereof.
Morgan Stanley further assumed, with Destia's consent, that the merger will
be consummated in accordance with the terms set forth in the merger agreement
without waiver of any material condition contained therein and will be treated
as a tax-free reorganization and/or exchange, for purposes of the Internal
Revenue Code.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition of
Destia or any of its assets.
Morgan Stanley acted as financial advisor to the Destia board in connection
with this transaction and will receive a fee for its services. In the past,
Morgan Stanley and its affiliates have provided financial advisory and/or
financing services for Destia and Viatel and have received fees for the
rendering of these services. In addition, Princes Gate Investors II, L.P., an
affiliate of Morgan Stanley, and certain related entities, owned approximately
11% of the outstanding shares of Destia as of the date thereof and Stephen
Munger, a Managing Director of Morgan Stanley, is a member of the Destia board.
The following is a brief summary of the material financial analyses
performed by Morgan Stanley in preparing its opinion to the Destia board on
August 27, 1999. Certain of these summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses used by Morgan Stanley, the tables must be read together with
the text of each summary. The tables alone do not represent a complete
description of the financial analyses.
HISTORICAL STOCK PRICE PERFORMANCE. Morgan Stanley reviewed the recent
stock price performance of Destia based on an analysis of historical intra-day
and closing prices and trading volumes during the period from the Destia initial
public offering on May 6, 1999 through August 25, 1999. The following table
summarizes the price performance of Destia's common stock over that period:
<TABLE>
<CAPTION>
HISTORICAL DESTIA
COMMON STOCK PRICES
---------------------
<S> <C>
August 25, 1999......................................................... $ 12.00
High Price (May 13, 1999)............................................... $ 15.50
Low Price (May 7, 1999)................................................. $ 8.50
</TABLE>
Morgan Stanley also reviewed the recent stock price performance of Viatel
based on an analysis of historical intra-day and closing prices and trading
volumes during the period from the Viatel initial
36
<PAGE>
public offering on October 18, 1996 through August 25, 1999. The following table
summarizes the price performance of Viatel's common stock over that period:
<TABLE>
<CAPTION>
HISTORICAL VIATEL
COMMON STOCK PRICES
---------------------
<S> <C>
August 25, 1999......................................................... $ 42.00
High Price (July 13, 1999).............................................. $ 58.88
Low Price (August 21, 1997)............................................. $ 4.13
</TABLE>
COMPARATIVE STOCK PRICE PERFORMANCE. Morgan Stanley reviewed the recent
stock price performance of Destia and compared this performance with that of the
Nasdaq National Market and the following international telecommunications
service providers: IDT, Pacific Gateway Exchange, Primus Telecommunications, RSL
Communications, Startec Global Communications, Viatel and World Access. Morgan
Stanley observed that over the period from May 6, 1999 (the date of the Destia
initial public offering) to August 25, 1999, the closing market prices
appreciated as set forth below:
<TABLE>
<CAPTION>
COMPANY % APPRECIATION
- ------------------------------------------------------------------------------ -----------------
<S> <C>
Destia........................................................................ 19%
IDT........................................................................... 11%
Pacific Gateway Exchange...................................................... -42%
Primus Telecommunications..................................................... 36%
RSL Communications............................................................ -33%
Startec Global Communications................................................. 77%
Viatel........................................................................ -11%
World Access.................................................................. 24%
Nasdaq National Market........................................................ 14%
</TABLE>
Morgan Stanley also reviewed the recent stock price performance of Viatel
and compared this performance with the Nasdaq National Market Index and the
following emerging telecommunications carriers: COLT Telecom, Energis, Equant,
Global Crossing, Global TeleSystems, Level 3 Communications and Qwest
Communications. Morgan Stanley observed that over the period from August 25,
1998 to August 25, 1999, the closing market prices appreciated as set forth
below:
<TABLE>
<CAPTION>
COMPANY % APPRECIATION
- ------------------------------------------------------------------------------ -----------------
<S> <C>
Viatel........................................................................ 246%
COLT Telecom.................................................................. 90%
Energis....................................................................... 74%
Equant........................................................................ 84%
Global Crossing............................................................... 165%
Global TeleSystems Group...................................................... 55%
Level 3 Communications........................................................ 66%
Qwest Communications.......................................................... 71%
Nasdaq National Market........................................................ 56%
</TABLE>
SECURITIES RESEARCH ANALYSTS' FUTURE PRICE TARGETS. Morgan Stanley reviewed
and analyzed future public market trading price targets for Destia common stock
prepared and published by certain securities research analysts in the period
from May 21, 1999 to August 25, 1999. These targets reflected each analyst's
estimate of the future public market trading price of Destia common stock at the
end of the particular time period considered for each time estimate (typically
12 months). Morgan Stanley discounted, at a cost of equity rate of 17%, each
Destia research analyst's public market trading price target to August 25, 1999.
Morgan Stanley also reviewed and analyzed future public market trading price
targets for Viatel common stock prepared and published by certain securities
research analysts in
37
<PAGE>
the period from July 29, 1999 to August 25, 1999. These targets reflected each
analyst's estimate of the future public market trading price of Viatel common
stock at the end of the particular time period considered for each time estimate
(typically 12 to 18 months).
<TABLE>
<CAPTION>
VALUE PER SHARE RANGE
--------------------------------
<S> <C> <C>
LOW HIGH
--------------- ---------------
Destia Public Market Trading Price Target........................... $ 17 $ 21
Present Value of Destia Public Market Trading Price Target.......... $ 15 $ 19
Viatel Public Market Trading Price Target........................... $ 51 $ 80
</TABLE>
Morgan Stanley noted that the public market trading price targets published
by the securities research analysts do not reflect current market trading prices
for Destia or Viatel common stock and that these estimates are subject to
uncertainties, including the availability of information, the future financial
performance of Destia and Viatel and future financial market conditions.
COMPARABLE COMPANY ANALYSIS. Morgan Stanley reviewed and analyzed the
financial information of six publicly-traded international telecommunications
service providers and compared the results to financial information relating to
Destia. Morgan Stanley analyzed, among other things, certain operating
statistics for each company, including percentage of revenues from European
operations, percentage of revenues from wholesale operations and gross margin.
Based on forecasts of 1999 operating results taken from selected securities
research analysts, the statistics derived from this analysis were as set forth
below:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
--------------------------
<S> <C> <C> <C>
EUROPE WHOLESALE GROSS MARGIN
----------- ------------- ---------------
Destia.................................................... 40% 11.8% 28.4%
IDT....................................................... 40% 37.7% 20.9%
Pacific Gateway Exchange.................................. 17% 75.9% 13.0%
Primus Telecommunications................................. 22% 17.8% 23.0%
RSL Communications........................................ 50% 30.0% 29.7%
Startec Global Communications............................. 10% 62.1% 11.6%
World Access.............................................. NA NA 20.8%
</TABLE>
Morgan Stanley also analyzed the current aggregate value of each company
expressed as a multiple of last quarter annualized revenues and forecast
revenues for 1999 and 2000. As of August 25, 1999 and based on forecasts of
revenues taken from selected securities research analysts, the statistics
derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
AGGREGATE VALUE AS A
MULTIPLE OF REVENUES
-------------------------------------
<S> <C> <C> <C>
LQA 1999E 2000E
----------- ----------- -----------
Destia............................................................. 2.2x 2.0x 1.3x
IDT................................................................ 1.4x 1.5x 1.2x
Pacific Gateway Exchange........................................... 0.7x 0.6x 0.4x
Primus Telecommunications.......................................... 1.2x 1.1x 0.8x
RSL Communications................................................. 1.2x 1.1x 0.8x
Startec Global Communications...................................... 1.0x 0.9x 0.7x
World Access....................................................... 1.0x 0.9x 0.7x
</TABLE>
The comparable company analysis implied a range of public market trading
values for Destia common stock of $8 to $12 per share.
38
<PAGE>
Morgan Stanley also reviewed and analyzed the financial information of seven
emerging telecommunications carriers and compared the results to financial
information relating to Viatel. Morgan Stanley analyzed, among other things, the
current aggregate value of each company expressed as a multiple of forecast
revenues and forecast EBITDA for 1999 and 2000. As of August 25, 1999 and based
on forecasts of revenues and EBITDA taken from selected securities research
analysts, the statistics derived from this analysis were as set forth below:
<TABLE>
<CAPTION>
AGGREGATE VALUE AS A AGGREGATE VALUE AS A
MULTIPLE OF REVENUES MULTIPLE OF EBITDA
------------------------ ------------------------
<S> <C> <C> <C> <C>
1999E 2000E 1999E 2000E
----------- ----------- ----------- -----------
Viatel........................................ 6.8x 3.7x NM 63.0x
COLT.......................................... 21.2x 13.4x NM NM
Energis....................................... 1.9x 1.4x 8.1x 4.9x
Equant........................................ 18.0x 13.1x NM 65.2x
Global Crossing............................... 7.2x 5.8x 24.1x 16.8x
Global TeleSystems Group...................... 6.5x 4.0x NM 39.5x
Level 3 Communications........................ 40.2x 23.2x NM NM
Qwest Communications.......................... 4.4x 3.9x 10.9x 9.7x
</TABLE>
No company used in the comparable company analysis is identical to Destia or
Viatel. In evaluating the comparable companies, Morgan Stanley made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Destia and Viatel, such as the impact of competition on Destia or
Viatel and the industry generally, industry growth and the absence of any
material adverse change in the financial condition and prospects of Destia or
Viatel or the industry or in the financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using comparable company data.
PRECEDENT TRANSACTION ANALYSIS. As part of its analysis, Morgan Stanley
reviewed the following twenty transactions involving long distance
telecommunications service providers since April 1995 (listed as
acquiror/acquiree):
- April 1995: Frontier / ALC Communications
- May 1995: LCI / Corporate Telemanagement Group
- May 1995: Frontier / Schneider Communications
- December 1995: LCI International / Teledial America
- June 1997: Excel Communications / Telco Communications
- September 1997: LCI International / USLD Communications
- November 1997: WorldCom / MCI
- November 1997: Teleport Communications Group / ACC
- December 1997: IXC Communications / Network Long Distance
- February 1998: Intermedia Communications / National Telecommunications of
Florida
- March 1998: Qwest Communications / LCI International
- April 1998: Primus Telecommunications / TresCom International
- June 1998: Call-Net Enterprises / Fonorola
- June 1998: Teleglobe / Excel Communications
39
<PAGE>
- August 1998: STAR Telecommunications / PT-1 Communications
- December 1998: Global TeleSystems Group / Esprit Telecom
- January 1999: IXC Communications / Coastal Telephone
- March 1999: Global Crossing / Frontier
- July 1999: Cincinnati Bell / IXC Communications
- August 1999: World Access / FaciliCom
For each transaction, Morgan Stanley reviewed aggregate value as a multiple
of last quarter annualized revenues and forecast revenues of the acquiree.
Morgan Stanley noted that the Global TeleSystems Group / Esprit Telecom
transaction was the most comparable transaction. As part of this analysis,
Morgan Stanley divided Destia's business into two parts: European operations and
North American operations. Morgan Stanley estimated the value of each of these
parts by applying a range of revenue multiples based on the multiples of
revenues paid in the relevant precedent transactions. This analysis implied a
range of private market, or acquisition, values for Destia common stock of $13
to $16 per share.
Morgan Stanley also reviewed the premium to unaffected share price paid in
the thirteen precedent acquisitions of publicly traded long distance
telecommunications service providers from the list of transactions above. Morgan
Stanley noted that premiums to unaffected share price paid in these transactions
ranged from 3% to 94%, with a median of 51%. This analysis implied a range of
private market, or acquisition, values for Destia common stock of $17 to $19 per
share.
No transaction used in the precedent transaction analysis is identical to
the merger. In evaluating these transactions, Morgan Stanley made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Destia and Viatel, such as the impact of competition on Destia or
Viatel and the industry generally, industry growth and the absence of any
material adverse change in the financial condition and prospects of Destia or
Viatel or the industry or in the financial markets in general. Mathematical
analysis, such as determining the average or median, is not in itself a
meaningful method of using precedent transaction data.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Stanley performed a discounted cash
flow analysis, which is an analysis of the present value of projected cash flows
using discount rates and terminal year EBITDA multiples (as indicated below), of
Destia. Morgan Stanley analyzed Destia's business using a Morgan Stanley equity
research analyst forecast for the period beginning June 30, 1999 and ending
December 31, 2007. Morgan Stanley estimated Destia's discounted cash flow value
using discount rates ranging from 13.5% to 14.5% and terminal multiples of
estimated 2007 EBITDA ranging from 8x to 10x. The discounted cash flow analysis
implied a range of values for Destia common stock of $16 to $22 per share.
Morgan Stanley also performed a discounted cash flow analysis of Viatel.
Morgan Stanley analyzed Viatel's business using a Morgan Stanley equity research
analyst forecast for the period beginning June 30, 1999 and ending December 31,
2008. Morgan Stanley estimated Viatel's discounted cash flow value using
discount rates ranging from 13.5% to 14.5% and terminal multiples of estimated
2008 EBITDA ranging from 10x to 12x. The discounted cash flow analysis implied a
range of values for Viatel common stock of $31 to $47 per share.
EXCHANGE RATIO ANALYSIS. Morgan Stanley compared the exchange ratio of
0.445 of a Viatel share to each Destia share provided in the merger agreement to
the ratio of the closing market prices of Destia and Viatel common stock on
August 25, 1999. Morgan Stanley also compared this ratio to selected average
historical ratios of the closing market prices of Destia common stock to Viatel
40
<PAGE>
common stock over various periods ending August 25, 1999. The results of this
analysis were as set forth below:
<TABLE>
<CAPTION>
MARKET PRICE RATIO
-------------------
<S> <C>
August 25, 1999........................................................... 0.29x
10-Trading Day Average.................................................... 0.27x
20-Trading Day Average.................................................... 0.27x
30-Trading Day Average.................................................... 0.27x
Since Destia IPO (May 6, 1999)............................................ 0.25x
</TABLE>
Morgan Stanley performed a variety of financial and comparative analyses
solely for purposes of providing its opinion to the Destia board as to the
fairness from a financial point of view to the holders of Destia common stock of
the exchange ratio pursuant to the merger agreement. The summary set forth above
does not purport to be a complete description of analyses performed by Morgan
Stanley in connection with the merger.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Morgan Stanley considered the results of all of its analyses as
a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, selecting any portion of its analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have given various
analyses and factors more or less weight than other analyses and factors, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be Morgan Stanley's view of the
actual value of Destia or Viatel. In performing its analyses, Morgan Stanley
made a number of assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which are beyond the
control of Destia or Viatel. Any estimates used by Morgan Stanley in rendering
its opinion or reflected herein are not necessarily indicative of future results
or actual values, which may be significantly more or less favorable than those
suggested by such estimates. The analyses performed were prepared solely as part
of Morgan Stanley's analysis of the fairness of the exchange ratio pursuant to
the merger agreement from a financial point of view to the holders of Destia
common stock and were conducted in connection with the delivery of its opinion
to the Destia board. The analyses are not intended to be appraisals or to
reflect the prices at which Destia or Viatel might actually be sold or the price
at which their securities may trade.
The merger consideration was determined through arm's-length negotiations
between Destia and Viatel and was approved by the Destia board. Morgan Stanley
did not recommend any specific merger consideration to Destia or that any
specific merger consideration constituted the only appropriate merger
consideration for the merger. Morgan Stanley's opinion to the Destia board was
one of many factors taken into consideration by the Destia board in making its
determination to approve the merger. Consequently, the Morgan Stanley analyses
described above should not be viewed as determinative of the opinion of the
Destia board with respect to the value of Destia or whether the Destia board
would have been willing to agree to different merger consideration. Morgan
Stanley was not authorized to solicit, and did not solicit, interest from any
party with respect to the acquisition of Destia or any of its assets, or any
other strategic alternative, other than the merger.
The Destia board retained Morgan Stanley based upon Morgan Stanley's
qualifications, expertise, and experience. Morgan Stanley is an internationally
recognized investment banking and advisory firm. Morgan Stanley, as part of its
investment banking business, is continuously engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. In the ordinary course of Morgan Stanley's trading,
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brokerage and financing activities, Morgan Stanley or its affiliates may at any
time hold long or short positions, may trade, make a market or otherwise effect
transactions, for its own account or for the accounts of customers, in the
securities of Destia or Viatel. Morgan Stanley has advised Destia that Morgan
Stanley holds such a long position, for its own account, in the Destia 11%
senior discount notes due 2008. See "Viatel Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a discussion of the contemplated exchange offer for these notes.
In the past, Morgan Stanley and its affiliates have provided financial advisory
and/or financing services for Destia and Viatel and have received fees for the
rendering of those services.
Pursuant to a letter agreement with Destia, Morgan Stanley provided advisory
services and a financial opinion in connection with the merger and Destia agreed
to pay a customary fee to Morgan Stanley. Destia also agreed to reimburse Morgan
Stanley for its out-of-pocket expenses incurred in performing its services. In
addition, Destia agreed to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain liabilities,
including liabilities under the U.S. federal securities laws, and expenses,
including the fees of its legal counsel, arising out of Morgan Stanley's
engagement and any related transactions in connection therewith.
INTERESTS OF OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendations of the Viatel board and the Destia board
with respect to the merger, stockholders of Viatel and Destia should be aware
that certain of the officers and directors of Viatel and Destia may have
interests in the merger that are different from, or in addition to, their
interests as stockholders of Viatel and Destia generally. The boards of
directors of Viatel and Destia were aware of these interests and considered
them, among other matters, in approving the merger agreement and the
transactions contemplated by the merger agreement.
VIATEL BOARD. Viatel has agreed in the stockholder agreement with Alfred
West that, as of the effective time of the merger, Mr. West and a nominee of his
choice reasonably acceptable to Viatel will become members of the Viatel board.
Mr. West's nominee will be an existing director of Destia. Following such
appointments, and continuing for so long as Mr. West owns at least 10% of the
outstanding shares of Viatel common stock, Viatel has agreed to cause the Viatel
board to nominate Mr. West and his nominee for election as members of the Viatel
board at each annual meeting of stockholders at which such director is up for
re-election. If at any time Mr. West owns less than 10% of the outstanding
shares of Viatel common stock, but at least 5% of such outstanding shares,
Viatel's obligations set forth above shall apply only to Mr. West, unless he
notifies Viatel within 30 days of such decrease in his percentage ownership that
Viatel's obligations should apply only to his nominee. Some or all of Viatel's
obligations under the stockholder agreement with Mr. West will cease if:
- Mr. West or his nominee chooses not to serve as a member of Viatel's
board,
- Viatel's stockholders do not re-elect Mr. West or his nominee or
- the Viatel board removes Mr. West or his nominee as a member of the board
in accordance with its fiduciary duties.
VESTING OF STOCK OPTIONS. Under the terms of Alan Levy's current employment
agreement with Destia, Mr. Levy received options to purchase 1,038,916 shares of
Destia common stock, which vest in equal amounts of 259,729 shares of common
stock on the second through fifth anniversaries of Destia's initial public
offering. The exercise price of the options that vest on the second and third
anniversaries is $10 per share. The exercise price of the options that vest on
the fourth and fifth anniversaries is $15 and $20 per share, respectively. Under
Mr. Levy's existing employment agreement, the completion of the merger will
constitute a change in control, whereupon Mr. Levy's unvested options will vest
immediately. Options to purchase an additional 215,900 shares of Destia common
stock that were
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granted to Mr. Levy under his previous employment agreement will also become
fully vested and exercisable upon the closing of the merger.
Upon the closing of the merger, 415,567 options held by Mr. Alward and
127,917 options held by Mr. Shorten will automatically become vested and
exercisable. Steven West, Gary Bondi and Edward Schmults, as non-employee
directors of Destia, were granted 36,000 stock options in the aggregate, at an
exercise price of $10 per share, pursuant to Destia's 1999 Flexible Incentive
Plan. Any of such stock options that are unvested will also become fully vested
and exercisable upon the closing of the merger.
EXECUTIVE EMPLOYMENT AGREEMENTS. Viatel and Mr. West have entered into an
employment agreement the provisions of which will become effective upon
completion of the merger. The initial term of the agreement is two years. Under
this employment agreement, Mr. West will be appointed as Vice Chairman of the
Viatel board, will be nominated for election as a Class C director and will be
renominated in 2002 so long as he continues to own at least 5% of the
outstanding shares of Viatel common stock. In his capacity as Vice Chairman, Mr.
West will also be responsible for development, marketing and implementation of
the Presto! Card calling card, Internet-telephony, web-hosting, e-commerce, data
services and other value-added products and services offered by the combined
company. Mr. West's base salary will be $400,000 and he will be entitled to a
bonus in the amount of 90% of his base salary multiplied by a bonus multiple
based on the variance between actual and budgeted EBITDA and revenue of Viatel.
In addition, Mr. West will be entitled to receive at least 20,000 shares of
restricted common stock of Viatel in 2000, with additional grants to be made by
Viatel's compensation committee at its discretion.
Viatel and Mr. Levy have entered into an employment agreement the provisions
of which will also become effective upon completion of the merger. The initial
term of the agreement is two years. Under this employment agreement, Mr. Levy
will be appointed Chief Operating Officer and will be nominated for election as
a Class A director of Viatel, and will be renominated in 2000 so long as he
remains in Viatel's active employment. Mr. Levy's base salary will be $345,000
and he will be entitled to a bonus in the amount of 80% of his base salary
multiplied by a bonus multiple based on the variance between actual and budgeted
EBITDA and revenue of Viatel. In addition, Mr. Levy will be entitled to receive,
in each of 2000 and 2001, a minimum of 16,123 shares of restricted common stock
of Viatel and options to purchase 42,642 shares of Viatel common stock at an
exercise price equal to their fair market value on the day before the completion
of the merger. Additional grants may be made by Viatel's compensation committee
at its discretion.
In connection with the vesting of Mr. Levy's Destia options and their
conversion into Viatel options, Viatel has agreed to indemnify Mr. Levy for up
to $3.0 million for any excise taxes payable by him in respect of such vesting
under Section 280G of the Internal Revenue Code, subject, in certain
circumstances, to a reduction equal to the amount of similar payments that
Viatel may be required to pay for other executives of Destia.
INDEMNIFICATION AND INSURANCE OF DESTIA DIRECTORS AND OFFICERS. Viatel has
agreed to insure and indemnify the existing directors and officers of Destia.
See "The Merger Agreement and Stockholder Agreements--Certain
Covenants--Indemnification and Insurance of Destia Directors and Officers."
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income tax
consequences of the merger. This discussion is based on the Internal Revenue
Code, applicable U.S. Treasury Regulations, administrative interpretations and
court decisions as in effect as of the date of this joint proxy
statement/prospectus, all of which may change, possibly with retroactive effect.
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This discussion does not address all aspects of federal income taxation that
may be important to a Destia stockholder in light of that stockholder's
particular circumstances or to a Destia stockholder subject to special rules,
such as:
- a stockholder who is a foreign person;
- a financial institution or insurance company;
- a tax-exempt organization;
- a dealer or broker in securities;
- a stockholder that holds its Destia common stock as part of a hedge,
appreciated financial position, straddle or conversion transaction;
- a stockholder who acquired its Destia common stock pursuant to the
exercise of employee stock options or otherwise as compensation;
- a stockholder, any expenses or liabilities of which, will be assumed or
paid by Destia or Viatel in connection with the merger; or
- holders of Destia non-voting common stock who exercise their appraisal
rights in connection with the merger.
In addition, no information is provided in this joint proxy
statement/prospectus with respect to the tax consequences of the merger under
any non-income tax or under any applicable foreign, state or local laws.
Destia has received an opinion of Cravath, Swaine & Moore as special tax
counsel, dated as of the date of this joint proxy statement/prospectus, that the
merger will be treated for U.S. federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code and that
Viatel, Viatel Acquisition Corp. and Destia will each be a party to that
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. It is a condition to the obligation of Destia to complete the merger that
tax counsel confirms its opinion as of the closing date. Destia does not intend
to waive this condition.
In delivering their opinion, Cravath, Swaine & Moore has relied, and, in
delivering their closing opinion, will rely, on (1) representations and
covenants made by Viatel and Destia, including those contained in certificates
of officers of Viatel and Destia, and (2) specified assumptions, including an
assumption regarding the completion of the merger in the manner contemplated by
the merger agreement. In addition, the opinion of tax counsel has assumed, and
tax counsel's ability to provide the closing date opinion will depend on, the
absence of changes in existing facts or in applicable law between the date of
this joint proxy statement/prospectus and the closing date. If any of those
representations, covenants or assumptions are inaccurate, tax counsel may not be
able to provide the required closing date opinion and/or the tax consequences of
the merger could differ from those described in the opinion that tax counsel has
delivered. Tax counsel's opinion neither binds the Internal Revenue Service nor
precludes the Internal Revenue Service or the courts from adopting a contrary
position. Viatel and Destia do not intend to obtain a ruling from the Internal
Revenue Service on the tax consequences of the merger.
Based upon the opinion of tax counsel described above, the following will be
the material U.S. federal income tax consequences of the merger:
- no gain or loss will be recognized for federal income tax purposes by
Viatel, Viatel Acquisition Corp. and Destia as a result of the merger;
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- except as described below with respect to cash received in lieu of
fractional shares, a holder of Destia common stock will not recognize gain
or loss on the exchange of shares of Destia common stock for Viatel common
stock pursuant to the merger;
- the aggregate tax basis of the Viatel common stock received by a holder,
including any fractional share deemed received, will be the same as the
aggregate tax basis of the Destia common stock exchanged therefor; and
- the holding period of the Viatel common stock, including any fractional
share deemed received, will include the holding period of the Destia
common stock surrendered therefor, provided that the shares of Destia
common stock are held as capital assets on the closing date of the merger.
Cash received by a holder of Destia common stock in lieu of a fractional
share of Viatel common stock will be treated as received in redemption of that
fractional share interest, and gain or loss will be recognized for U.S. federal
income tax purposes, measured by the difference between the amount of cash
received and the portion of the basis of the Destia common stock allocable to
the fractional share interest. The gain or loss should generally be capital gain
or loss provided that the shares of Destia common stock are held as capital
assets and should generally be long term capital gain or loss if the Destia
common stock has been held for more than one year on the closing date of the
merger.
Under the Internal Revenue Code, a holder of Destia common stock may be
subject, under certain circumstances, to information reporting and may be
subject to backup withholding at a rate of 31% with respect to the amount of
cash, if any, received in lieu of fractional shares of Viatel common stock
pursuant to the merger, unless the stockholder provides proof of an applicable
exemption or a correct taxpayer identification number, and otherwise complies
with applicable requirements of the backup withholding rules. Any amounts
withheld under the backup withholding rules are not an additional tax and may be
refunded or credited against the stockholder's United States federal income tax
liability, provided the required information is furnished to the Internal
Revenue Service.
This discussion of material federal income tax consequences is intended to
provide only a general summary, and is not a complete analysis or description of
all potential federal income tax consequences of the merger. This discussion
does not address tax consequences that may vary with, or are contingent on,
individual circumstances. Accordingly, we strongly urge each Destia stockholder
to consult its own tax advisor to determine the particular U.S. federal, state
or local or foreign income or other tax consequences to the stockholder
resulting from the merger.
REGULATORY REVIEW RELATING TO THE MERGER
In order to complete the merger, the companies must receive authorization
from or be subject to review by various U.S. federal and state governmental
agencies. It is possible that the Federal Communications Commission and/or one
or more other U.S. federal and/or state governmental agencies will not provide
the requested approvals or consents in a timely manner or at all or may seek, as
a condition to any such approvals or consents, various regulatory concessions.
Receipt of all requisite regulatory approvals and consents by each of Viatel and
Destia is a condition to the obligations of each of Viatel and Destia to
consummate the merger. There can be no assurance that the required regulatory
approvals and consents will be obtained within the time frame contemplated by
the merger agreement, on terms that are satisfactory to the parties, or at all.
ANTITRUST. The merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and
regulations thereunder, which provide that certain transactions may not be
consummated until required information and materials are furnished to the
Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade
Commission and the requisite waiting period has expired or has been terminated.
The required information and materials were filed with the Antitrust Division
and the Federal Trade Commission on September 10, 1999. The
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waiting period expired on October 9, 1999. Notwithstanding expiration of the
waiting period, at any time before or after the merger, the Federal Trade
Commission, the Department of Justice or others could take actions under the
antitrust laws with respect to the merger, including seeking to enjoin
consummation of the merger or seeking the divestiture by Viatel of all or part
of the stock or assets of Destia, or of other businesses conducted by Viatel. In
addition, under certain circumstances, state governments and private parties may
also seek to take action under federal or state antitrust laws with respect to
the merger.
OTHER U.S. FEDERAL AND STATE REGULATORY APPROVALS AND CONSENTS. The merger
is subject to certain other U.S. federal and state regulatory approvals and
consents. Both Viatel and Destia hold, either directly or indirectly, authority
from the Federal Communications Commission under Section 214 of the
Communications Act of 1934 to provide U.S. telecommunications services,
including facilities-based and resold switched international and domestic long
distance services, among other services. As a result, the merger will require
prior approval of the Federal Communications Commission. In evaluating the
application, the Federal Communications Commission will consider whether Viatel
is qualified to control such licenses and authorizations and whether the public
interest, convenience and necessity will be served by such transfer of control.
The parties believe that under current United States law and policy as
articulated by the Federal Communications Commission, there are no foreign
ownership or other considerations that would cause the Federal Communications
Commission to deny or specially condition the applications for transfer of
control of Destia's authorizations to Viatel. Viatel has already secured a full
complement of authorizations in its own right. No special operational or other
conditions, other than those generally applicable to such authorizations, were
attached by the Federal Communications Commission to such authorizations. The
merger will not result in any new circumstances that would warrant the
imposition of any such special operational or other conditions.
Certain state public utility commissions will require application for prior
approval of the merger and others will require notification. The governing legal
standards vary from state to state, but approval of or consent to the merger
generally requires a showing that it is consistent with the public interest,
convenience and necessity. As part of that evaluation, the public utility
commissions may examine the impact of the merger on competition and its effect
on the customers and employees of Destia, Viatel and other carriers. There can
be no guarantee of the timing of the receipt of the necessary approvals, or that
such approvals will be granted on terms that are satisfactory to the parties or
at all.
For a period of time after the Federal Communications Commission or public
utility commission approves of and consents to the merger, such approvals and
consents will be subject to judicial review upon appeal of a third party and
reconsideration by the Federal Communications Commission or public utility
commission, respectively. Closing the merger during this time period exposes the
parties to the risk of reversal or modification of previously obtained approvals
or consents. It is possible that Destia and Viatel will close the merger during
this period.
FOREIGN REGULATORY APPROVALS. The companies have determined that as long as
the merger closes in 1999, no prior foreign regulatory approvals will be
required prior to the conclusion of the merger. Moreover, Viatel and Destia
believe that even if the merger closes in 2000, it is reasonably likely that no
prior foreign regulatory approvals will be required. There can be no assurance
that this will be the case, however, since such filing requirements, if any,
depend upon revenue and certain other financial and operating data of Viatel and
Destia for 1999, which cannot currently be predicted with certainty. In
addition, post-closing notifications will be required by certain foreign
regulatory authorities.
CONSENTS AND WAIVERS UNDER DESTIA'S CREDIT FACILITY
Under Destia's credit facility with NTFC Capital Corporation, Destia is
required to either obtain NTFC's consent prior to any change in control
transaction or prepay the borrowed amounts
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outstanding. Since the merger would be considered a change in control under the
terms of the credit facility, Destia obtained a preliminary waiver from NTFC
Capital Corporation prior to signing the merger agreement. Before completing the
merger, Destia will be required to either (i) obtain a definitive waiver from
NTFC or (ii) prepay the outstanding amounts owed at a premium of not more than
105% of the amount outstanding. Destia expects to obtain this waiver on
acceptable terms.
APPRAISAL RIGHTS
Under Delaware law, holders of Destia voting common stock and holders of
Viatel common stock are not entitled to exercise appraisal rights with respect
to the merger. Holders of Destia non-voting common stock, however, are entitled
to appraisal rights.
Holders of Destia non-voting common stock have the right under Delaware law
to demand that the Delaware Court of Chancery appraise the fair value of their
shares and to receive payment in cash for the appraised value instead of 0.445
of a share of Viatel common stock pursuant to the merger agreement. Section 262
of the Delaware General Corporation Law governs appraisal rights. The full text
of this section is reprinted as Annex H to this joint proxy
statement/prospectus. Any holder of Destia non-voting common stock who wants to
exercise appraisal rights should review the following summary and Annex H
carefully because such stockholder's rights will be forfeited under Section 262
if the procedures outlined below and in Section 262 are not followed.
All references in this summary to a "holder" are to a record holder of
shares of Destia non-voting common stock immediately prior to the completion of
the merger. A person having a beneficial interest in shares of Destia non-voting
common stock held of record in the name of another person, such as a broker or
nominee, must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect appraisal rights.
Under Section 262 of the Delaware General Corporation Law, Destia must
notify each holder 20 days before its special meeting that appraisal rights are
available. THIS JOINT PROXY STATEMENT/PROSPECTUS CONSTITUTES THE REQUIRED NOTICE
CONCERNING THOSE APPRAISAL RIGHTS.
Before the taking of the vote on the merger agreement at the Destia special
meeting, holders who wish to exercise their appraisal rights must submit a
written demand to Destia for appraisal of their Destia non-voting common stock.
The demand must reasonably inform Destia of the identity of the holder, must be
executed by or on behalf of the holder fully and correctly as the holder's name
appears on the stock certificates, and must state that the holder intends to
demand an appraisal of the "fair value" of the shares held by the holder.
Holders who wish to exercise their appraisal rights must hold their non-voting
shares of record on the date the written demand for appraisal is made and must
continue to hold their shares through the completion of the merger.
If the Destia non-voting common stock is owned of record by a fiduciary of
the holder, such as a trustee, guardian or custodian, the fiduciary should
execute the demand for the holder's appraisal rights. If the shares of Destia
non-voting common stock are owned of record by more than one person, such as in
joint tenancy or tenancy in common, the demand for appraisal rights should be
executed by or on behalf of all joint owners. An authorized agent, including one
or more joint owners, may execute a demand for appraisal on behalf of a holder
of record of Destia non-voting common stock; however, the agent must identify
the record owner or owners and disclose that he or she is acting as an agent for
the owner or owners. A record holder such as a broker who holds shares of Destia
non-voting common stock as nominee for several beneficial owners may exercise
appraisal rights regarding the shares of Destia non-voting common stock held for
one or more beneficial owners while not exercising such rights regarding shares
of Destia non-voting common stock held for other beneficial owners; in that
case, the written demand should describe the number of shares to which it is
seeking appraisal. If the number of shares is not expressly mentioned, the
demand will be presumed to cover all shares of Destia non-voting common stock
held in the name of the record owner. Holders who hold their shares
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in nominee form and who wish to exercise appraisal rights should consult with
their nominees to determine the procedures for the demand of appraisal rights.
All written demands for appraisal of shares of Destia non-voting common stock
must be mailed or delivered to Destia, and these demands must be received by
Destia before the taking of the vote on the merger agreement at the Destia
special meeting. All written demands for appraisal in accordance with Section
262 should be sent or delivered to Destia at 95 Route 17 South, Paramus, NJ
07652, Attention: Richard L. Shorten, Jr., Senior Vice President, General
Counsel and Secretary.
Within 10 days after the completion of the merger, Destia must send a notice
as to the effectiveness of the merger to each person who has satisfied the
appropriate provisions of Section 262. Within 120 days after the completion of
the merger, but not thereafter, Destia or any holder who has appraisal rights
under Section 262 and who has complied with the requirements of Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares. Destia is under no obligation, and has no present
intention to file a petition regarding the appraisal of the fair value of the
shares of Destia non-voting common stock. ACCORDINGLY, IT IS THE OBLIGATION OF
THE HOLDERS OF DESTIA NON-VOTING COMMON STOCK TO INITIATE ALL NECESSARY ACTION
TO PERFECT THEIR APPRAISAL RIGHTS WITHIN THE TIME FRAME PROVIDED IN SECTION 262.
Within 120 days after the completion of the merger, any holder who has
complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from Destia a statement setting forth
the aggregate number of shares of Destia non-voting common stock for which
demands for appraisal have been received and the aggregate number of holders of
those shares. Destia is required to mail the statements within 10 days after it
has received the written request.
If a holder timely files a petition for an appraisal and a copy of the
petition is served upon Destia, Destia must, within 20 days, file with the
Delaware Register in Chancery a list containing the names and addresses of all
holders who have demanded an appraisal of their shares and with whom agreements
as to the value of their shares have not been reached. After notice to those
holders as required by the court, the Delaware Court of Chancery is empowered to
conduct a hearing on the petition to determine those holders who have complied
with Section 262 and who have become entitled to appraisal rights. The Delaware
Court of Chancery may require the holders who demanded payments for their shares
to submit their stock certificates to the Register in Chancery for a notation on
them of the appraisal proceeding; if any holder fails to comply with this
direction, the Delaware Court of Chancery may dismiss the proceedings as to that
holder.
After determining the holders entitled to appraisal, the Delaware Court of
Chancery will appraise the fair value of the shares of Destia non-voting common
stock. The fair value will exclude any element of value which is derived from
the completion or the expectation of the merger, together with any fair rate of
interest to be paid on the amount determined to be the fair value. Holders
considering seeking appraisal should be aware that the fair value of their
shares of Destia non-voting common stock as determined under Section 262 could
be more than, the same as, or less than the value of the consideration that they
would otherwise receive in the merger if they did not seek appraisal of their
shares. In addition, Delaware courts have decided that the appraisal remedy
provided by statute, depending on factual circumstances, may or may not be a
holder's exclusive remedy. The court will also determine the amount of interest,
if any, to be paid on the amounts to be received by holders whose shares have
been appraised. The costs of the action may be determined by the court and taxed
on the parties as the court considers equitable. The court may also order that
all or a portion of the expenses incurred by any holder in connection with an
appraisal, including, but not limited to, reasonable attorney's fees and the
fees and expenses of experts hired in connection with the appraisal proceeding,
be charged pro rata against the value of all of the shares of Destia non-voting
common stock entitled to appraisal.
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Any holder who has rightfully demanded appraisal in accordance with Section
262 will not, after the completion of the merger, be entitled to payment of
dividends or other distributions on those shares, except dividends or other
distributions payable to holders as of a date prior to the completion of the
merger.
If any holder who demands appraisal of shares under Section 262 fails to
perfect, or effectively withdraws or loses, the right to appraisal, as provided
in Section 262, each share of Destia non-voting common stock of that holder will
be converted into 0.445 of a share of Viatel common stock in accordance with the
merger agreement. A holder may withdraw a demand for appraisal by delivering to
Destia a written withdrawal of the demand for appraisal and acceptance of the
merger, except that any attempt to withdraw made more than 60 days after
completion of the merger will require the written approval of Destia and, once a
petition for appraisal is filed, the appraisal proceeding may not be dismissed
as to any holder absent court approval.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
This joint proxy statement/prospectus does not cover any resales of the
Viatel common stock to be received by the stockholders of Destia upon completion
of the merger, and no person is authorized to make any use of this joint proxy
statement/prospectus in connection with any such resale.
All shares of Viatel common stock received by Destia stockholders in the
merger will be freely transferable, except those shares of Viatel common stock
received by persons who are deemed to be "affiliates" of Destia under the
Securities Act, at the time of the Destia special meeting, may be resold by them
only in transactions permitted by Rule 145 under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Destia for such purposes generally include individuals or entities
that control, are controlled by or are under common control with Destia and
include directors and executive officers of Destia. The merger agreement
requires that Destia use reasonable efforts, prior to the merger, to cause each
such affiliate to execute a written agreement to the effect that such persons
will not offer, sell or otherwise dispose of any shares of Viatel common stock
issued to them in the merger in violation of the Securities Act or the related
rules of the SEC.
ACCOUNTING TREATMENT
Viatel will account for the merger under the purchase method of accounting,
with Viatel being the acquiror of Destia for accounting purposes. Under this
method of accounting, the assets and liabilities of Viatel will be brought
forward at their net book values, a new basis will be established for Destia's
assets and liabilities and any excess of the consideration over the fair value
of Destia's assets and liabilities will be accounted for as goodwill. The
revenues and expenses of Destia and Viatel will be consolidated from the date of
consummation of the merger.
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THE MERGER AGREEMENT AND STOCKHOLDER AGREEMENTS
The following is a summary of the material terms of the merger agreement, a
copy of which is attached as Annex A to this joint proxy statement/prospectus.
The following description does not purport to be complete and is qualified by
reference to the merger agreement. You should read the full text of the merger
agreement for details of the merger and the terms and conditions of the merger
agreement.
THE MERGER
When the merger occurs, Viatel Acquisition Corp., a direct wholly-owned
subsidiary of Viatel, will be merged with and into Destia in accordance with the
Delaware General Corporation Law. Destia will be the surviving corporation in
the merger. Each share of Destia common stock outstanding immediately before the
merger, other than shares owned or held by Viatel, Viatel Acquisition Corp. or
Destia, which will be canceled, will be converted into the right to receive
0.445 of a share of Viatel common stock. Accordingly, at the effective time of
the merger, Viatel will issue approximately 14.1 million shares of Viatel common
stock to existing Destia stockholders in exchange for their shares of Destia
common stock. This number does not take into account outstanding warrants, stock
options or other equity-based awards. Destia will become a wholly-owned
subsidiary of Viatel. The shares of Viatel common stock issued to Destia
stockholders in the merger will constitute approximately 30.1% of the
outstanding Viatel common stock after the merger.
TIMING OF CLOSING
The merger will become effective on the date that Viatel files a certificate
of merger with the Secretary of State of the State of Delaware. The certificate
of merger will be filed as soon as practicable after the conditions set forth in
the merger agreement have been satisfied or waived.
CONVERSION OF DESTIA COMMON STOCK
On the effective date of the merger, each outstanding share of Destia common
stock will be converted into 0.445 of a share of Viatel common stock. Viatel
will not issue any fractional shares of its common stock in the merger. Instead,
each Destia stockholder otherwise entitled to a fractional share of Viatel
common stock will be paid the cash value of the fractional share. The cash value
will be based on the average last reported sales price of Viatel common stock on
the Nasdaq National Market for the five consecutive trading days immediately
preceding the effective time of the merger.
Viatel will appoint an exchange agent to handle (1) the exchange of Destia
common stock in the merger for Viatel common stock and (2) the transfer of cash
to Destia stockholders instead of fractional shares of Viatel common stock.
Promptly after the effective time of the merger, the exchange agent will send to
each holder of Destia common stock a letter of transmittal for use in the
exchange and instructions explaining how to surrender Destia stock certificates
to the exchange agent. Holders of certificates representing shares of Destia
common stock that surrender their certificates to the exchange agent, together
with a properly completed letter of transmittal, will receive the appropriate
merger consideration. Holders of unexchanged shares of Destia common stock will
not be entitled to receive any dividends or other distributions payable by
Viatel after the effective time of the merger until their certificates are
surrendered or, with respect to uncertificated shares, if any, until a properly
completed letter of transmittal is delivered to the exchange agent.
At the effective time of the merger, each holder of a certificate
representing any shares of Destia common stock will no longer have any rights as
a holder of those shares, except the right to receive Viatel common stock and a
cash payment in lieu of any fractional share.
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CONVERSION OF DESTIA STOCK OPTIONS AND OTHER RIGHTS
At the effective time of the merger, each outstanding option, warrant and
other right granted by Destia to acquire shares of Destia common stock will be
converted into an option, warrant or other right to acquire Viatel common stock
that, except as described in the next sentence, has the same terms and
conditions as the Destia stock option, warrant or right had before the effective
time of the merger. The number of shares that the new Viatel option, warrant or
right will be exercisable for and the exercise price of the new Viatel option,
warrant or right will be adjusted to reflect the exchange ratio in the merger.
REPRESENTATION ON THE VIATEL BOARD
After the effective time of the merger, the Viatel board will be increased
from seven to ten directors and the three additional vacancies will be filled by
Destia and the two existing vacancies will be filled by Viatel. Destia will
nominate the following persons as directors of Viatel:
- Mr. Alfred West, the Chairman and Chief Executive Officer of Destia, will
be appointed as a Class C director, to serve until the annual meeting of
Viatel stockholders in 2002;
- One independent director, who must be an existing director of Destia,
designated by Mr. West, and one independent director designated by Viatel,
will be appointed as Class B directors, to serve until the annual meeting
of Viatel stockholders in 2001; and
- Mr. Alan Levy, the President and Chief Operating Officer of Destia, and
one person to be designated by Viatel, will be appointed as Class A
directors, to serve until the annual meeting of Viatel stockholders in
2000.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains essentially reciprocal representations and
warranties made by each of Viatel and Destia to the other, including
representations and warranties relating to:
- organization, standing and power;
- capitalization;
- subsidiaries and ownership of subsidiary stock;
- the absence of voting agreements affecting the merger;
- power and authority to enter into and consummate the transactions under
the merger agreement;
- absence of conflicts between organizational documents, laws and agreements
and the transactions under the merger agreement;
- consents necessary in connection with the transactions contemplated by the
merger agreement;
- filings with the SEC;
- financial statements and incurrence of liabilities since June 30, 1999;
- conduct of business since June 30, 1999;
- compliance with applicable laws;
- brokers and finders fees with respect to the merger;
- litigation and liabilities;
- tax matters;
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- receipt of fairness opinions;
- employee benefits;
- board of director's approval for purposes of Section 203 of the Delaware
General Corporation Law (Destia only);
- year 2000 compliance;
- environmental matters;
- intellectual property;
- insurance;
- status of the Circe project (Viatel only); and
- material contracts.
The merger agreement also contains representations and warranties relating
to Viatel Acquisition Corp.'s organization and corporate power, power and
authority to enter into and consummate the transactions under the merger
agreement, absence of conflicts between its organizational documents and the
transactions under the merger agreement and the absence of business activities
of Viatel Acquisition Corp. other than in connection with the completion of the
transactions contemplated by the merger agreement.
All representations and warranties of Viatel, Viatel Acquisition Corp. and
Destia expire at the effective time of the merger.
CERTAIN COVENANTS
Each of Viatel and Destia has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
COOPERATION. Viatel and Destia each will use reasonable efforts to take all
actions and do all things necessary under the merger agreement and applicable
laws to complete the merger and the other transactions contemplated by the
merger agreement.
CONDUCT OF BUSINESS OF DESTIA PENDING THE COMPLETION OF THE MERGER. Destia
has agreed to conduct its business in the ordinary course consistent with past
practice until the effective time of the merger. Without limiting the generality
of this obligation, Destia has agreed that, until the completion of the merger,
except as otherwise permitted by the merger agreement, or if Viatel consents in
writing, it will not, and will not permit its subsidiaries to:
- amend its organizational documents;
- issue additional capital stock or securities convertible into or
exercisable for, or any rights, warrants or options to acquire any capital
stock, except for specified permitted exceptions;
- sell or otherwise dispose of or encumber any assets, which individually or
in the aggregate are material to Destia and its subsidiaries, taken as a
whole;
- declare any dividends on its capital stock, except that this covenant does
not apply to wholly-owned subsidiaries;
- split, combine or reclassify its capital stock or repurchase its capital
stock;
- make or agree to make any acquisition, whether by merger or consolidation,
other than assets used by Destia in the operation of its business in the
ordinary course consistent with past practice;
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- incur capital expenditures other than those incurred or committed to in
the ordinary course of business consistent with past practice and which,
together with all expenditures incurred or committed since January 1,
1999, are not in excess of previously budgeted amounts;
- except in the ordinary course of business consistent with past practice,
(1) make any investments, (2) pay or discharge any claims or liabilities
and (3) incur any indebtedness except under existing facilities or
refinancings of existing facilities;
- increase the compensation of its employees, except for (1) customary
increases to employees who earn less than $75,000 in annual cash
compensation, (2) customary bonuses and (3) immaterial changes to employee
benefits; or
- materially change its methods of accounting or income tax elections,
except as required by generally accepted accounting principles.
CONDUCT OF BUSINESS OF VIATEL PENDING COMPLETION OF THE MERGER. Viatel has
agreed that, until the completion of the merger or as provided below, except as
otherwise permitted by the merger agreement, it will not, and will not permit
its subsidiaries to:
- amend its organizational documents in a manner that would have an adverse
effect on the merger and the transactions contemplated by the merger
agreement;
- without consulting with Destia in advance, issue additional capital stock
or securities convertible into or exercisable for, or any rights, warrants
or options to acquire any capital stock, except for specified permitted
exceptions;
- sell or otherwise dispose of or encumber any assets, in a single
transaction or series of related transactions, having a fair market value
greater than $100 million, other than a sale of capacity or fiber;
- declare any dividends on its capital stock, except that this covenant does
not apply to wholly-owned subsidiaries;
- split, combine or reclassify its capital stock or repurchase its capital
stock;
- without consulting with Destia in advance, incur capital expenditures
other than those incurred or committed to in the ordinary course of
business consistent with past practice;
- without consulting with Destia in advance, make any acquisition having a
fair market value in excess of $50 million;
- make any significant acquisitions either outside the telecommunications
services industry or in a geographic region other than North America and
Europe;
- without consulting with Destia in advance, (1) make any investments except
as permitted by the preceding bullet point, (2) pay or discharge any
claims or liabilities in excess of $25 million except in the ordinary
course of business consistent with past practice, or (3) incur any
indebtedness except in connection with actions permitted under the
preceding bullet point or under existing facilities or refinancings of
existing facilities; or
- without consulting with Destia in advance, change its methods of
accounting or income tax elections, except as required by generally
accepted accounting principles.
NO SOLICITATION OF ALTERNATIVE TRANSACTIONS BY DESTIA. Destia and its
subsidiaries and their officers, directors, employees and advisors have agreed
not to take action to solicit or encourage an offer for an alternative
acquisition transaction involving Destia of a nature defined in the merger
agreement.
Restricted actions include engaging in any discussions with or furnishing
any information to a potential bidder, or knowingly taking any other action
designed to facilitate an alternative acquisition
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transaction. Destia is permitted to take these actions in response to an
unsolicited offer, however, if the unsolicited offer is made prior to the time
that Destia stockholder approval is obtained and, if prior to taking any of
these actions:
- the Destia board determines in good faith, based on the advice of a
financial advisor of nationally recognized reputation, that the
unsolicited acquisition proposal is superior to the Viatel proposal;
- the Destia board determines in good faith, based on a written opinion of
outside legal counsel, that not taking any of these actions would violate
the Destia board's fiduciary duties to the Destia stockholders; and
- Destia receives from such person an executed confidentiality agreement
substantially similar to the existing confidentiality agreement between
Viatel and Destia.
Destia must provide prior notice to Viatel of any such action and must keep
Viatel reasonably informed of the status and details of any offer.
DESTIA BOARD'S COVENANT TO RECOMMEND. The Destia board has agreed to
recommend the approval and adoption of the merger agreement to Destia's
stockholders. However, the Destia board is permitted to withdraw or to modify
its recommendation in a manner adverse to Viatel if (1) the Destia board
determines in good faith, based on the advice of a nationally recognized
financial advisor, that an unsolicited acquisition proposal is superior to the
Viatel proposal, and (2) the Destia board determines in good faith, based on a
written opinion of outside legal counsel, that not withholding or modifying its
recommendation of the merger would violate the Destia board's fiduciary duties
to the Destia stockholders.
NO SOLICITATION BY VIATEL OF AN ACQUISITION TRANSACTION INCONSISTENT WITH
THE MERGER. Viatel and its subsidiaries and their officers, directors,
employees and advisors have agreed not to take action to solicit or encourage an
offer for an acquisition transaction involving Viatel that would:
- not be consistent with the merger agreement or the merger and the other
transactions contemplated by the merger agreement,
- result in a material delay of the merger, or
- materially and adversely impact the likelihood of obtaining any approval
or consent which is necessary to satisfy the closing conditions under the
merger agreement.
These transactions are referred to as "conflicting acquisition transactions"
in the rest of this section.
Restricted actions include engaging in any discussions with or furnishing
any information to a potential bidder, or knowingly taking any other action
designed to facilitate a conflicting acquisition transaction. Viatel is
permitted to take these actions in response to an unsolicited offer, however, if
the unsolicited offer is made prior to the time that Viatel stockholder approval
is obtained and, if prior to taking any of these actions:
- the Viatel board determines in good faith, based on the advice of a
financial advisor of nationally recognized reputation, that the
unsolicited proposal for a conflicting acquisition transaction is superior
to the merger;
- the Viatel board determines in good faith, based on a written opinion of
outside legal counsel, that not taking any of these actions would violate
the Viatel board's fiduciary duties to the Viatel stockholders; and
- Viatel receives from such person an executed confidentiality agreement
substantially similar to the existing confidentiality agreement between
Destia and Viatel.
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Viatel must keep Destia reasonably informed of the status and details of any
acquisition proposal it receives, regardless of whether the acquisition proposal
would be a conflicting acquisition transaction.
VIATEL BOARD'S COVENANT TO RECOMMEND. The Viatel board has agreed to
recommend to Viatel's stockholders their approval of the issuance of Viatel
common stock in connection with the merger. However, the Viatel board is
permitted to withdraw or to modify its recommendation in a manner adverse to
Destia if (1) the Viatel board determines in good faith, based on the advice of
a nationally recognized financial advisor, that an unsolicited acquisition
proposal is superior to the merger with Destia, and (2) the Viatel board
determines in good faith, based on a written opinion of outside legal counsel,
that not taking any of these actions would violate the Viatel board's fiduciary
duties to the Viatel stockholders.
COVENANT TO HOLD STOCKHOLDER MEETINGS. Viatel and Destia have agreed to
submit their respective merger proposals to their stockholders at the special
meetings even if their boards of directors no longer recommend that their
stockholders approve such proposals.
INDEMNIFICATION AND INSURANCE OF DESTIA DIRECTORS AND OFFICERS. After the
merger, the surviving corporation will, for a period of six years after the
effective time of the merger:
- provide directors' and officers' liability insurance for acts and
omissions occurring before the merger no less favorable in coverage or
amount than the insurance maintained by Destia prior to the merger,
provided, that if Destia's current liability insurance terminates for any
reason, the surviving corporation may substitute policies of at least the
same coverage and amounts, or if the cost of that policy would exceed 200%
of the last annual premiums paid by Destia, the surviving corporation will
obtain a policy with the greatest coverage available for a cost not
exceeding that amount;
- maintain the current provisions regarding elimination of liability of
directors and indemnification of officers, directors and employees
contained in the certificate of incorporation and by-laws of Destia; and
- if the measures outlined above are insufficient to indemnify a director or
officer, Viatel will indemnify such director or officer to the fullest
extent permitted under applicable law.
EMPLOYEE BENEFITS. After the merger, Viatel will arrange for each Destia
employee participating in any of the Destia employee benefit plans to
participate in any counterpart Viatel benefit plan in accordance with Viatel's
eligibility criteria. In this regard, Destia participants will:
- receive full credit for years of service with Destia, to the extent
recognized for the purpose of Destia's plans; and
- participate in the Viatel plans on terms no less favorable than those
offered by Viatel to its own similarly situated employees.
In addition, Viatel will give full credit under its employee welfare benefit
plans for all co-payments, deductibles and out-of-pocket maximums satisfied by
Destia employees and their dependents in the calendar year in which the merger
is consummated. Also, Viatel may cause the surviving corporation and its
subsidiaries to continue one or more of the Destia plans if those plans provide
benefits which are no less favorable than the benefits provided under the
counterpart plans of Viatel.
CONSENT SOLICITATION REGARDING DESTIA'S 11% SENIOR DISCOUNT NOTES. Viatel
and Destia have agreed to seek certain consents, waivers and other modifications
of the indenture governing Destia's 11% senior discount notes due 2008, in order
to avoid Destia's obligation to repurchase the notes upon completion of the
merger. If the necessary consents, waivers and modifications are not obtained
within 60 days of the date of the merger agreement, Viatel and Destia may
restructure the merger to avoid
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Destia's obligation to repurchase the notes. See "Viatel Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
CERTAIN OTHER COVENANTS. The merger agreement contains certain other mutual
covenants that are typical for a transaction similar to the merger.
CONDITIONS TO THE COMPLETION OF THE MERGER
The obligations of Viatel to complete the merger are subject to the
satisfaction or waiver of the following conditions:
- approval of the merger by Destia's stockholders;
- approval of the issuance of Viatel common stock in connection with the
merger;
- receipt by each party of consents or approvals from any person, including
any relevant regulatory bodies, required for completion of the merger,
except for those the failure of which to obtain would not reasonably be
expected to have a material adverse effect on Viatel or Destia;
- accuracy in all material respects as of closing of the representations and
warranties made by Destia in the merger agreement;
- performance in all material respects by Destia of the obligations required
to be performed by it at or prior to closing;
- absence of a legal prohibition on completion of the merger;
- absence of an imposition by any regulatory authority of any condition,
requirement or restriction which:
-- prohibits Viatel's ownership or operation of, or which compels Viatel
to dispose of, all or any significant portion of Destia's business as
a result of the merger,
-- imposes material limitations on the ability of Viatel to acquire or
hold or exercise effectively all rights with respect to the Destia
shares it acquires in the merger or
-- imposes any limitation on the ability of Viatel effectively to control
in any material respect the business and operations of Destia;
- expiration of the Hart-Scott-Rodino Antitrust Improvements Act waiting
period;
- approval for the listing on the Nasdaq National Market of the shares of
Viatel common stock to be issued in the merger; and
- absence of an order suspending the effectiveness of the registration
statement of which this joint proxy statement/prospectus is a part and the
absence of any SEC proceedings, or threatened SEC proceedings, for that
purpose.
The obligations of Destia to complete the merger are subject to the
satisfaction or waiver of the following conditions:
- approval of the merger by Destia's stockholders;
- approval of the issuance of Viatel common stock in connection with the
merger;
- receipt by each party of consents or approvals from any person, including
any relevant regulatory bodies, required for completion of the merger,
except for those the failure of which to obtain would not reasonably be
expected to have a material adverse effect on Viatel or Destia;
- accuracy in all material respects as of closing of the representations and
warranties made by Viatel in the merger agreement;
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- performance in all material respects by Viatel and Viatel Acquisition
Corp. of the obligations required to be performed by them at or prior to
closing;
- absence of a legal prohibition on completion of the merger;
- absence of an imposition by any regulatory authority of any condition,
requirement or restriction which prohibits Viatel's ownership or operation
of, or which compels Viatel to dispose of, all or any significant portion
of Destia's business as a result of the merger, or which makes the
purchase of, or payment for, Destia's shares illegal;
- receipt of an opinion from Cravath, Swaine & Moore that the merger will
qualify as a tax-free reorganization;
- expiration of the Hart-Scott-Rodino Antitrust Improvements Act waiting
period;
- approval for the listing on the Nasdaq National Market of the shares of
Viatel common stock to be issued in the merger; and
- absence of an order suspending the effectiveness of the registration
statement of which this joint proxy statement/prospectus is a part and the
absence of any SEC proceedings, or threatened SEC proceedings, for that
purpose.
TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE. The merger agreement may be terminated at any time
prior to the effective time of the merger by mutual written consent of Viatel
and Destia. The merger agreement may also be terminated by either Viatel or
Destia if:
- the merger has not been completed by June 30, 2000 and the failure to
complete the merger by that date is not due to the action or failure to
act of the party seeking to terminate;
- a governmental authority takes a final and nonappealable action that
prohibits the merger or makes a condition to the closing obligations of
the terminating party incapable of being satisfied prior to June 30, 2000;
- a closing condition of the terminating party is not satisfied due to a
breach of any representation, warranty or covenant of the other party and
the breach is not cured within 30 days after notice is delivered by the
terminating party; except neither party may terminate the merger on this
basis if it is in material breach of any of its own representations,
warranties or covenants in the merger agreement; or
- the Viatel stockholders or the Destia stockholders fail to give the
necessary approval of their respective proposals relating to the merger at
a duly held meeting.
The merger agreement also may be terminated by Destia if:
- the Viatel board enters into or publicly announces its intention to enter
into a conflicting acquisition transaction;
- the Viatel board withdraws its recommendation of the approval of the
issuance of Viatel common stock in the merger;
- the Viatel board, after receiving an alternative acquisition proposal,
fails to publicly confirm its recommendation of the merger within ten days
after Destia requests that a public confirmation be made;
- Viatel or its representatives engage in any activity that violates
Viatel's obligation not to solicit, encourage, or enter into a conflicting
acquisition transaction; or
- the average last reported sales price of Viatel common stock for the five
trading days preceding the closing is less than $25 per share.
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The merger agreement also may be terminated by Viatel if:
- the Destia board enters into or publicly announces its intention to enter
into an alternative acquistion transaction;
- the Destia board withdraws its recommendation of the approval of the
merger;
- the Destia board, after receiving an alternative acquisition proposal,
fails to publicly confirm its recommendation of the merger within ten
days after Viatel requests a public confirmation be made; or
- Destia or its representatives engage in any activity that violates
Destia's obligation not to solicit, encourage or enter into an
alternative acquisition transaction.
If the merger agreement is validly terminated, the agreement will become
void without any liability on the part of any party unless such party is in
willful breach of the merger agreement. However, the provisions of the merger
agreement relating to expenses and termination fees, as well as the
confidentiality agreement entered into between Viatel and Destia, will continue
in effect notwithstanding termination of the merger agreement.
Although the boards of directors of Viatel and Destia each may be entitled
to withdraw its recommendation of the approval of the merger in response to a
superior acquisition proposal if it determines in good faith that the failure to
so withdraw its recommendation would violate its fiduciary duties to its
stockholders, neither Viatel nor Destia is permitted to terminate the merger
agreement to accept a superior acquisition proposal made by a third party.
Accordingly, it is expected that the Viatel and Destia special meetings will be
held even if Viatel or Destia receives a superior acquisition proposal from a
third party.
TERMINATION FEES PAYABLE BY DESTIA. Destia has agreed to pay Viatel a
termination fee of $30 million in cash if:
- the merger agreement is terminated because the Destia stockholders fail to
approve the merger;
- Viatel terminates the merger agreement because the Destia board:
-- enters into or publicly announces its intention to enter into an
alternative acquisition transaction,
-- withdraws its recommendation that its stockholders approve the merger
or
-- after receiving an alternative acquisition proposal, fails to publicly
confirm its recommendation of the merger within ten days after Viatel
requests that a public confirmation be made;
- Viatel terminates the merger agreement because Destia or its
representatives solicit, encourage or enter into an alternative
acquisition transaction; or
- any person proposes an alternative acquisition transaction that remains in
effect on May 1, 2000 and the Destia stockholders do not approve the
merger prior to termination of the merger agreement as a result of the
failure to complete the merger by June 30, 2000.
TERMINATION FEES PAYABLE BY VIATEL. Viatel has agreed to pay Destia a
termination fee of $75 million in cash if:
- Destia terminates the merger agreement because the Viatel board:
-- enters into or publicly announces its intention to enter into a
conflicting acquisition transaction,
-- withdraws its recommendation that its stockholders approve the
issuance of Viatel common stock in the merger or
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-- after receiving an alternative acquisition proposal, fails to publicly
confirm its recommendation of the merger within ten days after Destia
requests a public confirmation
be made;
- Viatel terminates the merger agreement because Destia or its
representatives solicit, encourage or enter into a conflicting acquisition
transaction;
- any person publicly proposes a conflicting acquisition transaction that
has not been publicly withdrawn more than ten days prior to the special
meeting of the Viatel stockholders and the Viatel stockholders do not
approve the issuance of Viatel common stock in the merger; or
- any person proposes a conflicting acquisition transaction that remains in
effect on May 1, 2000 and the Viatel stockholders do not approve issuance
of Viatel common stock in the merger prior to termination of the merger
agreement as a result of the failure to complete the merger by June 30,
2000.
Viatel has agreed to pay Destia a termination fee of $30 million in cash if
the merger agreement is terminated because the stockholders of Viatel fail to
approve the issuance of Viatel common stock in the merger and a termination fee
of $75 million is not otherwise payable to Destia as described above.
OTHER EXPENSES
All expenses incurred by Viatel and Destia in connection with the merger
agreement and the transactions contemplated by the merger agreement will be paid
by the party incurring such expenses.
AMENDMENTS AND WAIVERS
AMENDMENTS. Any provision of the merger agreement may be amended prior to
the effective time of the merger if the amendment is in writing and signed by
Viatel and Destia. After the approval of the merger agreement by the
stockholders of either Viatel or Destia, no amendment may be made which would:
- alter or change the amount or kinds of consideration to be received by the
holders of Destia common stock upon completion of the merger,
- alter or change any term of the Viatel or Destia certificates of
incorporation or
- alter or change any of the terms and conditions of the merger agreement if
the alteration or change would adversely affect the holders of any class
or series of securities of Viatel or Destia.
WAIVER. At any time before the effective time of the merger, by a waiver in
writing and signed by the party against whom the waiver is to be effective, any
party may:
- extend the time for the performance of any of the obligations or other
acts of the other party,
- waive any inaccuracies in the representations and warranties contained in
the merger agreement or
- waive compliance with any of the agreements or conditions contained in the
merger agreement.
STOCKHOLDER AGREEMENTS
In connection with the merger agreement, Viatel has entered into the
following four stockholder agreements:
- stockholder agreement, dated as of August 27, 1999, among Alfred West, AT
Econ Limited Partnership, AT Econ Limited Partnership No. 2, Viatel,
Viatel Acquisition Corp. and Destia;
- stockholder agreement, dated as of August 27, 1999, among Steven West, SS
Econ Limited Partnership, SS Econ Limited Partnership No. 2, Viatel,
Viatel Acquisition Corp. and Destia;
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- stockholder agreement, dated as of August 27, 1999, among Princes Gate
Investors II, L.P., Acorn Partnership II, L.P., PGI Investments Limited,
Investors Investments AB, Marinbeach United S.A., Viatel, Viatel
Acquisition Corp. and Destia; and
- stockholder agreement, dated as of August 27, 1999, among Gary Bondi, GS
Econ Limited Partnership, Viatel, Viatel Acquisition Corp. and Destia.
The following summary of the stockholder agreements is qualified by
reference to the complete text of each stockholder agreement, which is
incorporated by reference and attached as Annexes B, C, D and E, respectively.
AGREEMENT TO VOTE. Under the terms of each stockholder agreement (except
for the stockholder agreement with Mr. Bondi and the other parties thereto),
each of the Destia stockholders has agreed to vote its or their shares of Destia
common stock in favor of the transactions contemplated by the merger agreement,
against any action that could reasonably be expected to impede consummation of
the merger and against any competing acquisition proposal involving Destia.
RESTRICTIONS ON TRANSFER. Prior to the merger and pursuant to the terms of
each Destia stockholder agreement, each stockholder is prohibited from selling,
encumbering or otherwise transferring its or his shares of Destia common stock;
provided, however, that certain transfers may be permitted if the person or
entity receiving the shares of Viatel common stock agrees to be bound by the
restrictions set forth in the respective stockholder's agreement.
LOCK-UP RESTRICTIONS. After the merger and pursuant to the terms of each
stockholder agreement (except for the stockholder agreement with Princes Gate
Investors II, L.P. and the other parties thereto), each Destia stockholder, for
a period of one year, has agreed not to sell, encumber or otherwise transfer its
or his shares of Viatel common stock, except for a limited number which has been
excepted. However, certain transfers may be permitted if the person or entity
receiving the shares of Viatel common stock agrees to be bound by the
restrictions set forth in the respective stockholder's agreement.
REGISTRATION RIGHTS. Under the terms of the stockholder agreement with
Alfred West, AT Econ Limited Partnership and AT Econ Limited Partnership No. 2,
Viatel has agreed to grant such stockholders the ability to request, on two
occasions, the registration with the SEC of the resale of their shares of Viatel
common stock received in the merger. Viatel has also agreed to grant these
stockholders piggyback registration rights to the extent Viatel decides to
register any of its securities under the Securities Act.
TERMINATION. Each stockholder's obligation to vote in favor of the merger
will terminate upon the first to occur of the following events:
- the completion of the merger; or
- 180 days after the termination of the merger agreement; provided, however,
each stockholder agreement will terminate immediately if the merger
agreement was terminated for reasons other than (i) a material breach of a
representation, warranty or covenant by Destia that is left uncured; (ii)
Destia having failed to comply with the restrictions relating to third
party transaction proposals for Destia; (iii) the Destia board having
withdrawn its recommendation to its stockholders that they should approve
the merger; or (iv) Destia stockholders having failed to approve the
merger.
60
<PAGE>
II. FINANCIAL INFORMATION
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Viatel common stock and Destia voting common stock are each listed on the
Nasdaq National Market. Viatel's ticker symbol on the Nasdaq National Market is
"VYTL" and Destia's ticker symbol is "DEST." The Destia non-voting common stock
is not listed or traded on any securities exchange. The following table shows,
for the calendar quarters indicated, based on published sources (1) the high and
low last reported sales prices per share of Viatel common stock as reported on
the Nasdaq National Market and (2) the high and low last reported sales prices
per share of Destia voting common stock as reported on the Nasdaq National
Market. Viatel and Destia have not paid any cash dividends on their common stock
to date. The payment of dividends, if any, in the future is within the
discretion of each of the Viatel and Destia boards and will depend on each
company's earnings, capital requirements and financial condition. It is the
present intention of the Viatel and Destia boards to retain future earnings, if
any, to finance growth of their businesses. The ability of Viatel and Destia to
pay cash dividends is currently restricted under the terms of their respective
indentures relating to their existing senior indebtedness and, in the case of
Destia, under the terms of its credit facility with NTFC Capital Corporation.
<TABLE>
<CAPTION>
DESTIA VOTING
VIATEL COMMON COMMON
STOCK STOCK(1)
---------------- --------------
<S> <C> <C> <C> <C>
HIGH LOW HIGH LOW
------- ------- ------ ------
1997
First Quarter............................................................. $ 9 1/2 $ 6 1/2 N/A N/A
Second Quarter............................................................ 7 6 N/A N/A
Third Quarter............................................................. 6 3/4 4 1/8 N/A N/A
Fourth Quarter............................................................ 7 7/8 4 1/2 N/A N/A
1998
First Quarter............................................................. 14 5 N/A N/A
Second Quarter............................................................ 17 5/8 6 3/4 N/A N/A
Third Quarter............................................................. 22 3/4 8 1/8 N/A N/A
Fourth Quarter............................................................ 23 1/2 6 7/8 N/A N/A
1999
First Quarter............................................................. 29 3/8 15 7/8 N/A N/A
Second Quarter............................................................ 56 1/2 28 1/8 $15 1/2 $ 8 1/2
Third Quarter............................................................. 58 7/8 23 7/16 17 1/4 8 5/8
Fourth Quarter (through October 13, 1999)................................. 34 1/8 27 1/16 14 3/8 11 1/2
</TABLE>
- ------------------------
(1) Because the initial public offering of Destia's voting common stock
occurred in the second quarter of 1999, price statistics are not available
for quarters prior to May 6, 1999.
On August 26, 1999, the last full trading day prior to the announcement of
the merger, the closing prices per share of Viatel and Destia common stock were
$41 7/8 and $13 15/16, respectively. On October 13, 1999, the most recent
practicable date prior to the date of this joint proxy statement/ prospectus,
the last reported closing prices per share of Viatel and Destia common stock
were $33 1/2 and $14 3/8, respectively. Stockholders are urged to obtain current
market quotations prior to making any decision with respect to the merger.
61
<PAGE>
VIATEL SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Viatel Management's Discussion and Analysis of Financial
Condition and Results of Operations," its consolidated financial statements,
including the notes thereto, and the other financial data of Viatel included
elsewhere in this joint proxy statement/prospectus. The statement of operations
data, other financial data and balance sheet data as of and for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 are derived from the consolidated
financial statements of Viatel and the notes related thereto, which were audited
by KPMG LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1997 and 1998 and for each of the years
in the three-year period ended December 31, 1998 and the report of KPMG LLP
thereon, are included elsewhere in this joint proxy statement/prospectus. The
selected consolidated statement of operations data, other financial data and
balance sheet data as of and for the six-month periods ended June 30, 1998 and
1999 are derived from the unaudited consolidated financial statements of Viatel
included elsewhere in this joint proxy statement/prospectus, which, in the
opinion of management, include all adjustments necessary for a fair presentation
of the financial condition and results of operations of Viatel for such periods.
The results of operations for interim periods are not necessarily indicative of
a full year's operations. Net loss per share is computed on the basis described
in the notes to Viatel's consolidated financial statements. EBITDA consists of
earnings before interest, income taxes, extraordinary loss, dividends on
preferred stock and depreciation and amortization. Capital additions for each
period consist of capital expenditures, the net increase in payables for
property and equipment purchases, assets acquired under capital lease
obligations and capitalized interest during the period. Restricted securities
represents government obligations purchased by Viatel which secure the payment
of certain interest payments on its outstanding senior notes.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Communication services revenue............. $ 26,268 $ 32,313 $ 50,419 $ 73,018 $ 131,938 $ 48,990 $ 96,243
Capacity sales............................. -- -- -- -- 3,250 -- 34,102
--------- --------- --------- --------- --------- --------- ---------
Total revenue............................ 26,268 32,313 50,419 73,018 135,188 48,990 130,345
Operating expenses:
Cost of services and sales................. 22,953 27,648 42,130 63,504 122,109 44,201 103,607
Selling, general and administrative........ 14,463 24,370 32,866 36,077 44,893 19,388 39,853
Depreciation and amortization.............. 789 2,637 4,802 7,717 16,268 7,037 21,582
Equipment impairment loss.................. -- 560 -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses................. 38,205 55,215 79,798 107,298 183,270 70,626 165,042
--------- --------- --------- --------- --------- --------- ---------
Operating loss............................... (11,937) (22,902) (29,379) (34,280) (48,082) (21,636) (34,697)
Interest income.............................. 214 3,282 1,852 3,686 28,259 9,813 13,766
Interest expense............................. (772) (8,856) (10,848) (12,450) (79,177) (26,331) (61,665)
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary loss............... (12,495) (28,476) (38,375) (43,044) (99,000) (38,154) (82,596)
Extraordinary loss on debt prepayment........ -- -- -- -- (28,304) (28,304) --
--------- --------- --------- --------- --------- --------- ---------
Net loss..................................... (12,495) (28,476) (38,375) (43,044) (127,304) (66,458) (82,596)
Dividends on redeemable convertible preferred
stock...................................... -- -- -- -- (3,301) (1,010) (1,341)
--------- --------- --------- --------- --------- --------- ---------
Net loss attributable to common
stockholders............................. $ (12,495) $ (28,476) $ (38,375) $ (43,044) $(130,605) $ (67,468) $ (83,937)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Loss per common share, basic and diluted:
Before extraordinary item.................. $ (1.22) $ (2.09) $ (2.47) $ (1.90) $ (4.44) $ (1.71) $ (3.42)
From extraordinary item.................... -- -- -- -- (1.23) (1.23) --
--------- --------- --------- --------- --------- --------- ---------
Net loss attributable to common
stockholders............................. $ (1.22) $ (2.09) $ (2.47) $ (1.90) $ (5.67) $ (2.94) $ (3.42)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average shares used in per share
calculation:
Basic and diluted.......................... 10,252 13,641 15,514 22,620 23,054 22,940 24,524
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA....................................... $ (11,148) $ (20,265) $ (24,577) $ (26,563) $ (31,814) $ (14,599) $ (13,115)
Net cash used in operating activities........ (11,571) (18,489) (26,331) (22,525) (60,318) (7,808) (54,931)
Net cash provided (used in) by investing
activities................................. (4,996) (37,057) (1,592) (43,164) (349,992) (146,900) (275,442)
Net cash provided by (used in) financing
activities................................. 80,984 (2,306) 94,772 11,286 729,035 735,573 542,885
Capital additions............................ 4,267 11,887 9,800 40,214 220,903 42,809 349,098
OTHER OPERATING DATA:
Billable minutes (000s)...................... 14,981 25,932 62,249 140,918 383,875 135,672 549,289
Switches..................................... 2 10 13 14 15 14 15
Points of presence........................... 3 11 13 33 34 33 45
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................. $66,762 $ 35,066 $ 92,982 $ 47,143 $ 501,282 $ 602,092 $ 536,659
Restricted cash equivalents and restricted
marketable securities...................... -- -- -- -- 144,523 157,140 196,580
Cash securing letters of credit for network
construction............................... -- -- -- -- -- -- 112,404
Working capital.............................. 58,549 26,214 79,434 7,666 428,657 595,019 411,337
Property and equipment, net.................. 6,933 15,715 21,074 54,094 266,256 92,487 587,903
Intangible assets, net....................... 5,225 5,502 5,021 4,339 46,968 40,537 68,349
Total assets................................. 83,923 65,613 134,664 126,809 1,009,111 920,644 1,594,512
Long-term debt, excluding current
installments............................... 59,955 67,283 77,904 99,610 921,139 860,304 1,240,487
Redeemable convertible preferred stock....... -- -- -- -- 47,121 44,830 --
Stockholders' equity (deficiency)............ 10,985 (17,618) 38,483 (8,564) (137,292) (73,488) 12,606
</TABLE>
63
<PAGE>
DESTIA SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (with the exception of
other data and regional data) for 1994, 1995, 1996, 1997 and 1998 are derived
from Destia's consolidated financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants. The following selected
financial information for the six months ended June 30, 1998 and 1999 and as of
June 30, 1999, was derived from the unaudited interim financial statements of
Destia and reflects all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of Destia's management, necessary for a fair
presentation of the consolidated financial information for those periods. The
selected consolidated financial data set forth below should be read in
conjunction with, and is qualified by reference to, "Destia Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
its financial statements and the related notes included elsewhere in this joint
proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT REVENUE PER MINUTE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737 $ 90,414 $ 138,590
Cost of services................................. 5,540 19,735 35,369 63,707 140,548 67,041 98,737
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................................... 2,983 7,755 9,734 19,296 53,189 23,373 39,853
Selling, general and administrative expense...... 2,013 7,087 16,834 37,898 80,092 34,756 56,526
Depreciation and amortization.................... 168 389 1,049 3,615 11,866 4,102 12,764
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations.................... 802 279 (8,149) (22,217) (38,769) (15,485) (29,437)
Interest income.................................. 6 19 84 3,689 11,516 6,226 3,866
Interest expense................................. (109) (167) (380) (11,437) (41,030) (18,502) (23,395)
Other income (expense)........................... 100 (10) 133 (163) (661) (155) (743)
Provision for income taxes....................... 73 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................ $ 726 $ 121 $ (8,312) $ (30,128) $ (68,944) $ (27,916) $ (49,709)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net earnings (loss) per share
(basic and diluted)............................ $ 0.03 $ 0.01 $ (0.41) $ (1.50) $ (3.31) $ (1.34) $ (2.07)
Weighted average number of shares of common stock
outstanding (basic and diluted)(1)............. 20,778 20,778 20,778 20,778 20,846 20,778 24,028
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
Capital expenditures and acquisitions............ $ 906 $ 1,677 $ 4,670 $ 19,021 $ 111,999 $ 56,625 $ 37,251
EBITDA(2)........................................ 1,070 658 (6,967) (18,765) (27,564) (11,538) (17,416)
Distributions to S Corporation shareholders(3)... -- 499 226 -- -- -- --
Series A Preferred Stock dividends(4)............ -- -- 281 879 -- -- --
Net cash provided by (used in) operating
activities..................................... 474 2,037 (6,006) (12,219) (26,414) (8,771) (35,573)
Net cash used in investing activities............ (801) (1,206) (4,247) (13,267) (119,092) (191,581) (13,895)
Net cash provided by (used in) financing
activities..................................... 292 (810) 16,419 145,844 177,561 168,465 40,676
Revenue per minute............................... .70 .57 .43 .25 .22 .24 .17
REGIONAL DATA:
Revenues
Continental Europe............................. $ 2,652 $ 5,025 $ 11,441 $ 15,741 $ 21,101 $ 9,482 $ 20,154
United Kingdom................................. 3,143 14,173 15,477 18,363 55,991 33,887 31,759
North America.................................. 2,728 8,292 18,185 48,899 116,645 47,045 86,677
--------- --------- --------- --------- --------- --------- ---------
Total........................................ $ 8,523 $ 27,490 $ 45,103 $ 83,003 $ 193,737 $ 90,414 $ 138,590
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Minutes
Continental Europe............................. 1,957 3,856 8,351 17,239 45,085 17,305 100,527
United Kingdom................................. 4,532 20,592 27,968 68,810 288,892 140,566 208,124
North America.................................. 5,707 23,411 68,247 244,095 549,654 212,300 524,561
--------- --------- --------- --------- --------- --------- ---------
Total........................................ 12,196 47,859 104,566 330,144 883,631 370,171 833,212
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------
<S> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............................................. $ 118,844
Restricted cash and securities(5)............................................................ 31,049
Total assets................................................................................. 401,408
Current portion of borrowings................................................................ 10,077
Long-term borrowings, less current portion................................................... 380,737
Total stockholders' equity (deficit)......................................................... (77,598)
</TABLE>
- ------------------------------
(1) Weighted average numbers of shares have been retroactively restated to give
effect to the 1.04 for 1 stock split which was effected prior to Destia's
initial public offering.
(2) "EBITDA" is defined as net income (loss) plus net interest expense, income
tax expense, and depreciation and amortization expense. Destia has included
information concerning EBITDA in this joint proxy statement/prospectus
because this type of information is commonly used in the telecommunications
industry as one measure of a company's operating performance and liquidity.
EBITDA is not determined using GAAP and, therefore, Destia's EBITDA is not
necessarily comparable to EBITDA of other companies. EBITDA also does not
indicate cash provided by operating activities. You should not use Destia's
EBITDA as a measure of its operating income and cash flows from operations
under GAAP. Both of those measures are presented above. You also should not
look at Destia's EBITDA in isolation, as an alternative to or as more
meaningful than measures of performance determined in accordance with GAAP.
(3) The distributions reflected in this line item were declared when Destia was
a subchapter S corporation under U.S. tax law.
(4) The Series A Preferred Stock accrued monthly dividends at a compounded
monthly rate of 12% per year. The dividends began to accrue and compound
interest from November 1, 1996, the issuance date of the Series A Preferred
Stock, and ceased to accrue on July 1, 1997.
(5) Destia used $57.4 million of the net proceeds from its 1997 Unit Offering to
purchase a portfolio of U.S. government securities that it reserved for the
payment of the first six scheduled interest payments due on the $155.0
million principal amount of the 1997 Notes that Destia issued in the 1997
Unit Offering. Warrants also were issued in the 1997 Unit Offering.
65
<PAGE>
VIATEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH VIATEL'S
FINANCIAL STATEMENTS, THE NOTES THERETO, AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THE FOLLOWING DISCUSSION
INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. FOR A DISCUSSION OF IMPORTANT
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE CONTINUED DEVELOPMENT OF VIATEL'S
BUSINESS, ACTIONS OF REGULATORY AUTHORITIES AND COMPETITORS, PRICE DECLINES AND
OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
RESULTS REFERRED TO IN THE FORWARD-LOOKING STATEMENTS, SEE "RISK FACTORS."
OVERVIEW
Since its inception in 1991, Viatel has invested heavily in developing its
ability to provide international communications services within Western Europe
and to expand its market presence. During the past seven years, Viatel has made
substantial investments in software and back office operations, administrative
infrastructure and a direct sales organization in Western Europe. Furthermore,
it has created an extensive commercial telecommunications network in Western
Europe which it believes is necessary to economically render the voice and data
services it offers and intends to offer. Viatel has also expanded its ability to
generate revenues in North America during 1998. Historically, Viatel's revenues
were derived from wholesale sales and retail sales, which is composed of sales
to end-users. Currently, Viatel's revenues also include revenues from the sale
of capacity on its network. Each revenue source has a different impact on its
results of operations. The sale of capacity on Viatel's Circe Network will vary
substantially from period-to-period and will result in fluctuations in Viatel's
operating results. For a discussion of the effects of the Circe Network on
communications services revenue and other line items, see "--The Circe Network."
REVENUE
Viatel's revenue is derived from communications services and capacity sales.
Its communications services revenue is currently based primarily on the number
of minutes of use billed, "billable minutes," and, to a lesser extent, on the
additional services and products provided through Viatel's network. Viatel
currently derives its communications services revenue principally from long
distance telecommunications services.
During recent years, the following key trends have affected the composition
of Viatel's communications services revenue:
- A growing portion of Viatel's customers, particularly in Western Europe,
now accesses its network using either "indirect access" or "dedicated
access" rather than call re-origination or international toll-free access.
See "Viatel Business--The Viatel Network".
- Viatel has continued to expand its wholesale business. Viatel's
acquisition of Flat Rate Communications, Inc. during 1998 resulted in a
significant increase in Viatel's wholesale business, and also increased
its North American revenues. Viatel believes that the revenues generated
in North America will continue to increase.
- The Western European market has increased in importance for Viatel. In
contrast, revenue from Latin America and the Asia/Pacific Rim has
declined, and is expected to continue to decline, as a percentage of total
communications revenue as Viatel continues to grow its business in Western
Europe.
66
<PAGE>
The table set forth below presents Viatel's communications services revenue,
as a percentage of total revenue, from different regions, based on where calls
originated on Viatel's network:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Western Europe.............................................. 39.5% 44.7% 46.6% 50.2% 73.3%
North America............................................... 18.9 21.9 41.6 32.4 22.6
Latin America............................................... 28.6 22.2 10.8 15.3 4.0
Asia/Pacific Rim and Other.................................. 13.0 11.2 1.0 2.1 0.1
</TABLE>
Viatel has experienced, and expects to continue to experience, declining
revenue per minute in all of its markets, in part as a result of increasing
worldwide competition within the telecommunications industry. Viatel believes,
however, that the impact on its results of operations from price decreases will
be at least partially offset by (1) continuing decreases in Viatel's cost of
providing telecommunications services, particularly those decreases resulting
from its continued efforts to convert from leased to owned infrastructure and
reduce interconnection costs through the use of the Circe Network as it is
expanded, (2) the introduction of new products and services and (3) Viatel's
ability to enter into additional interconnection agreements. There can be no
assurance, however, that the results referred to in the foregoing
forward-looking statements, including a decline in Viatel's cost of
communications services, can be achieved.
COST OF SERVICES AND SALES
Viatel's cost of services and sales can be classified into four general
categories: access costs, network costs, termination costs and cost of capacity
sold. Access costs generally represent the costs associated with transporting
the traffic from a customer's premises to the closest access point on Viatel's
network. Access costs vary depending upon the distance from Viatel's network to
the customer's premises and from country to country. Viatel currently expects
that its effective per minute access costs will be reduced as deregulation
continues and competition accelerates, as certain European Union directives
requiring cost-oriented pricing (i.e., costs that an effectively competitive
market would yield) by incumbent telecommunications operators are enforced and
as Viatel is able to obtain cost effective interconnection agreements. However,
Viatel can provide no assurance regarding the extent or timing of such cost
decreases. In the event that such access costs do not fall as fast as Viatel
expects or at all, its gross margins could be adversely impacted.
Network costs represent the costs of transporting calls over Viatel's
network from its point of entry to its point of exit. Network costs generally
consist of leased line rental costs, facility/network management costs and costs
associated with interconnection with facilities of incumbent telecommunications
operators. These costs will decrease substantially as each ring of the Circe
Network is placed into service and Viatel secures infrastructure ownership on
other routes, which will enhance gross margins. However, there will be an
associated increase in depreciation and amortization expense (which is not
included in network costs). In order to succeed, Viatel will need its per minute
network costs to decline substantially compared to its per minute revenue. See
"--Depreciation and Amortization."
Viatel utilizes least cost routing designed to terminate traffic in the most
cost-effective manner. It believes that local termination costs should decrease
as it (1) adds additional switches and points of presence, (2) interconnects
with additional incumbent telecommunications operators and other infrastructure
providers and (3) constructs or purchases additional transmission facilities.
Local termination costs should also decrease as new telecommunications service
providers emerge and, in Western Europe, as European Union member states
implement and enforce regulations requiring incumbent telecommunications
operators to establish rates which are set at the forward-looking, long
67
<PAGE>
run economic costs that would be incurred by an efficient provider using
state-of-the-art technology. Viatel cannot provide any assurance regarding the
results referred to in the foregoing forward-looking statements, including the
extent or timing of cost decreases. See "Risk Factors" and "Viatel Business--
Competition" and "Viatel Business--Government Regulation."
Termination costs currently represent the costs which Viatel is required to
pay to other carriers from the point of exit from its network to the point of
destination. Termination costs are generally variable with traffic volume and
traffic mix. If a call is terminated in a city in which Viatel has a switch or
point of presence, the call is usually transferred to the public switched
telephone network for local termination. If the call is to a location in which
Viatel does not have a switch or point of presence, then the call must be
transferred to another carrier with which Viatel is interconnected.
For a description of cost of capacity sold, see " -- The Circe Network."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Viatel's selling, general and administrative expenses include commissions
paid to independent sales representatives and overhead costs associated with its
headquarters, back office and network operations centers and sales offices.
Viatel's selling, general and administrative expenses have continued to increase
since its inception as it has developed and expanded its business, although
these expenses have fallen as a percentage of communications revenue. Viatel
anticipates that these expenses will continue to increase as its business is
expanded in the future, however, Viatel cannot provide any assurance that this
will be the case. Viatel anticipates that these expenses will continue to be
incurred in advance of anticipated related communications services revenue.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which consist principally of
telecommunications-related equipment such as switches and points of presence,
indefeasible rights of use and minimum investment units, furniture and
equipment, leasehold improvements, and amortization of intangibles assets,
including goodwill and costs associated with acquired employee bases and sales
forces. Viatel depreciates its network over periods ranging from five to 15
years and amortizes its intangible assets over periods ranging from three to 25
years. Viatel expects depreciation and amortization expense to increase as it
further expands its network, particularly as each ring of the Circe Network is
placed into service, at least until significant portions of the Circe Network
are sold.
THE CIRCE NETWORK
The Circe Network is expected to have significant effects on Viatel's
results of operations. The sale of capacity on the Circe Network will vary
substantially from period-to-period and, as a result, may result in fluctuations
in its operating results. During the first quarter of 1999, Viatel began selling
capacity on the Circe Network. These sales substantially increase Viatel's gross
profit (I.E., total revenue less cost of services and sales) because Viatel's
cost of communication services as a percentage of communications service revenue
is currently higher than the cost of capacity as a percentage of capacity sales.
Due to the timing of capacity sales and higher margin associated with such
sales, Viatel's gross profits and gross margin may also fluctuate substantially
in the future, in ways that will not necessarily reflect the trends in its
communications services business. Viatel capitalizes all of the costs associated
with designing, building, funding and placing each ring of the Circe Network
into service.
Revenue from capacity sales that qualify under generally accepted accounting
principles to be treated as sales are recognized under a line item titled
"Capacity sales." Capacity sales are recognized as revenue when the purchaser
obtains the right to use the capacity. The related cost of capacity is reported
in the same period. With respect to each sale of capacity, the related cost of
capacity sales is
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equal to a proportionate amount of the total capitalized cost of the related
network. Revenue from operating leases of private line circuits will be included
in communications services revenue and will be recognized on a straight line
basis over the life of the lease. The portion of the total capitalized cost of
the Circe Network used to provide communications services is included in
property and equipment and is being charged to depreciation and amortization
over its useful life.
Viatel expects to trade capacity on the Circe Network for capacity on other
cable systems. Depending upon structure, these trades of capacity may have a
material affect on its statement of operations. Viatel will continue to incur
sales and marketing and related expenses that will not be capitalized and will
affect its results of operations, particularly while the Circe Network is being
designed, built and placed into service. In addition, Viatel will continue to
incur additional operating and maintenance expenses as the remaining Circe
phases become operational. As a result of financing the Circe Network with debt,
Viatel is capitalizing a portion of the interest incurred that relates to the
construction of the Circe Network until it is placed in service and will incur
increases in interest expense thereafter.
The Circe Network will have a beneficial effect on Viatel's costs of
services and sales as well as net income (loss). This will occur as Viatel
brings traffic "on-net," to facilities it owns, as opposed to facilities that it
leases from other carriers. A large portion of the expenses associated with
facilities Viatel owns is accounted as depreciation and amortization, while
leased capacity is accounted for as a cost of services and sales. As a result,
Viatel expects that its gross margins and profit will be improved as Viatel
brings traffic "on-net." However, net income (loss) will not improve to the same
extent. The effect of bringing traffic "on-net" will be somewhat delayed because
Viatel's leased line agreements require minimum notification to terminate its
obligations.
RESULTS OF OPERATIONS
The following table summarizes the breakdown of Viatel's results of
operations as a percentage of total revenue. Viatel's total revenue, and
therefore these percentages, could fluctuate substantially from period-to-period
due to capacity sales, which have a substantially different impact on margins
than communications services.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Cost of services and sales.................................. 83.6% 87.0% 90.3% 90.2% 79.5%
Selling, general and administrative expenses................ 65.2 49.4 33.2 39.6 30.6
Depreciation and amortization............................... 9.5 10.6 12.0 14.4 16.6
EBITDA loss(1).............................................. (48.7) (36.4) (23.5) (29.8) (10.1)
</TABLE>
- ------------------------
(1) As used herein "EBITDA" consists of earnings before interest, income taxes,
extraordinary loss, dividends on convertible preferred stock and
depreciation and amortization. EBITDA is a measure commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance. EBITDA is not a measure of financial performance under
generally accepted accounting principles, is not necessarily comparable to
similarly titled measures of other companies and should not be considered as
an alternative to net income as a measure of performance nor as an
alternative to cash flow as a measure of liquidity.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1998
TOTAL REVENUE. Total revenue is derived from communications service and
capacity sales. Revenue increased by 165.9% from $49.0 million for the six
months ended June 30, 1998 to $130.3 million for the six months ended June 30,
1999. This growth was attributable to a 96.3% increase in communications
services revenue from $49.0 million on 135.7 million billable minutes for the
first half
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of 1998 to $96.2 million on 549.3 million billable minutes for the first half of
1999. Capacity sales represented $34.1 million for the first half of 1999.
Viatel had no capacity sales during the first half of 1998. Revenue growth for
the first six months of 1999 continues to be generated primarily by growth from
European revenues and capacity sales.
Although there was a substantial increase in billable minutes from the first
six months of 1998 to the first six months of 1999, the effects of such growth
were partially offset by a decline in revenue per billable minute, as revenue
per billable minute declined by 50.0% from $.36 in the first half of 1998 to
$.18 in the first half of 1999 primarily because of (1) a higher percentage of
lower-priced intra-European and national long distance traffic on Viatel's
network and (2) reductions in prices in response to price reductions by
incumbent telecommunications operators and other carriers in many of Viatel's
markets.
Communications services revenue per billable minute from the sale of
services to retail customers, which represented 49.1% of revenue for the six
months ended June 30, 1998 compared to 42.0% for the six months ended June 30,
1999, decreased 70.8% from $.48 in the first half of 1998 to $.14 in the first
half of 1999. Communications services revenue per billable minute from the sale
of services to carriers and other resellers decreased from $.28 in the first six
months of 1998 to $.27 in the first six months of 1999.
During the first half of 1999 as compared to the first half of 1998,
Viatel's carrier business has declined as a percentage of communications service
revenue, but has grown on an absolute basis because Viatel's retail services
grew at a faster rate. The carrier business represented approximately 49.6% of
revenue and approximately 63.3% of billable minutes for the six months ended
June 30, 1998 as compared to approximately 31.9% of revenue and approximately
28.5% of billable minutes for the six months ended June 30, 1999.
COST OF SERVICES AND SALES. Cost of services and sales increased from $44.2
million in the first half of 1998 to $103.6 million in the first half of 1999.
As a percentage of revenue, however, cost of services and sales decreased from
approximately 90.2% for the six months ended June 30, 1998 to approximately
79.5% for the six months ended June 30, 1999. Cost of services and sales for the
six months ended June 30, 1999 includes costs associated with the sale of
capacity on the network. The cost of the sold capacity represented non-cash
charges of the pro rata cost of the network asset and is determined based upon
the ratio of total capacity sold to total estimated capacity multiplied by the
total capitalized costs of the related network.
Cost of services and sales continued to increase in the six months ended
June 30, 1999 in part because of the relatively high cost of leased
infrastructure associated with the increase in minutes. These costs are expected
to decrease as a percentage of revenue as Viatel migrates from leased
infrastructure to the Circe Network and other owned capacity. The effect of
bringing traffic "on-net" will be somewhat delayed because Viatel's leased line
agreements require minimum notification to terminate its obligations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $19.4 million for the six months ended
June 30, 1998 to $39.9 million for the six months ended June 30, 1999 and, as a
percentage of revenue, decreased from approximately 39.6% for the six months
ended June 30, 1998 to approximately 30.6% for the corresponding period in 1999.
Much of these expenses are attributable to overhead costs associated with
Viatel's headquarters, back office and operations as well as maintaining a
physical presence in multiple jurisdictions. Viatel expects to incur additional
expenses as it continues to invest in operating infrastructure and actively
markets its products and services. Salaries and commissions, as a percentage of
total selling, general and administrative expenses, were approximately 49.9% and
45.2% for the six months ended June 30, 1998 and 1999, respectively. Advertising
and promotion expenses, as a percentage of total selling, general and
administrative expenses, were approximately 2.3% and 4.6% for the six months
ended June 30, 1998 and 1999, respectively.
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EBITDA LOSS. EBITDA loss decreased from $14.6 million for the six months
ended June 30, 1998 to $13.1 million for the six months ended June 30, 1999. As
a percentage of revenue, EBITDA loss decreased from approximately 29.8% in the
first half of 1998 to approximately 10.1% in the first half of 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of the network, increased from approximately $7.0 million
for the six months ended June 30, 1998 to approximately $21.6 million for the
six months ended June 30, 1999. The increase was due primarily to the $516.0
million increase in gross property and equipment from $110.5 million at June 30,
1998 to $626.5 million at June 30, 1999.
INTEREST. Interest expense increased from approximately $26.3 million in
the six months ended June 30, 1998 to approximately $61.7 million in the six
months ended June 30, 1999, primarily as a result of increases in Viatel's
outstanding indebtedness, which includes notes and capital lease obligations,
which increased from $870.4 million at June 30, 1998 to $1.3 billion at June 30,
1999. During the six months ended June 30, 1999, Viatel capitalized
approximately $4.6 million of interest costs. Interest income increased from
approximately $9.8 million in the six months ended June 30, 1998 to
approximately $13.8 million in the six months ended June 30, 1999, primarily as
a result of the interim investment of the net proceeds from Viatel's debt and
equity financings.
1998 COMPARED TO 1997
TOTAL REVENUE. Total revenue increased by 85.1% from $73.0 million on 140.9
million billable minutes for 1997 to $135.2 million on 383.9 million billable
minutes for 1998. Total revenue growth for 1998 was generated primarily from
increased European retail traffic and growth in Viatel's carrier business in
Western Europe and in North America which was partially offset by decreased
revenue from Viatel's Pacific Rim and Latin American operations. Total revenue
for 1998 also included $3.3 million of transatlantic capacity sales.
The overall increase of 172.4% in billable minutes from 1997 to 1998 was
partially offset by declining revenue per billable minute, primarily because of
(1) a higher percentage of lower-priced intra-European and national long
distance traffic on Viatel's network as compared to intercontinental traffic,
(2) a higher percentage of lower-priced carrier traffic as compared to retail
traffic and (3) reductions in certain rates charged to retail customers in
response to pricing reductions enacted by incumbent telecommunications operators
and other carriers in many of its markets.
Communications services revenue per billable minute from the sale of
services to retail customers, which represented 72.1% of total revenue for 1997,
compared to 41.7% for 1998, decreased 43.5% from $.69 in 1997 to $.39 in 1998.
Total revenue per billable minute from the sale of services to carriers and
other resellers increased by 3.3% from $.30 in 1997 to $.31 in 1998 due
primarily to changes in traffic mix. The number of contracted customers billed
declined 30.2% from 21,515 at December 31, 1997 to 15,010 at December 31, 1998.
This decline in contracted customers billed is primarily attributable to
Viatel's Pacific Rim operations where the number of customers billed declined
93.2% from 5,424 at December 31, 1997 to 369 at December 31, 1998, representing
a net loss of 5,055 customers, as a result of currency fluctuations caused by
the Asian economic crisis, which made Viatel's rates noncompetitive.
During 1998 as compared to 1997, Viatel significantly increased its carrier
business through which it sells switched minutes, private lines and ports to
carriers, Internet service providers and other resellers. The carrier business
has enabled Viatel to recover partially the costs associated with increased
capacity in advance of demand from retail customers. The resulting economies of
scale have allowed Viatel to use its network more profitably for network
originations and terminations within Europe. The carrier business represented
approximately 27.9% of total revenue and approximately 46.1% of billable minutes
for 1997 as compared to approximately 58.3% of total revenue and approximately
62.0% of billable minutes for 1998. The increase in total revenue derived from
carriers and other resellers is
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partially attributable to the acquisition of Flat Rate Communications on
February 27, 1998 which also significantly increased Viatel's North American
revenues.
COST OF SERVICES. Cost of services increased from $63.5 million in 1997 to
$122.1 million in 1998 and, as a percentage of total revenue, increased from
approximately 87.0% to approximately 90.3%. Viatel's gross margin decreased, as
a percentage of total revenue, from 13.0% for 1997 to 9.7% for 1998. This
decrease was primarily due to (1) decreased revenue per minute resulting from
price competition and foreign currency fluctuations which was not offset by
corresponding decreases in infrastructure costs, (2) increased sales to carrier
customers which generate substantially lower margins and (3) an increase in
intra-European and national long distance traffic compared to higher margin
international traffic. This decrease in gross margin, as a percentage of
revenue, is one of the principal reasons Viatel initiated a strategy to own key
elements of its network infrastructure.
Cost of services increased in 1998 in part because of the relatively high
cost of leased infrastructure. These costs are expected to decrease as a
percentage of total revenue as Viatel continues to migrate from leased
infrastructure to owned infrastructure. From 1997 to 1998, Viatel increased its
private line circuits capacity and, as a result, costs for private line circuits
increased from approximately $9.6 million for 1997 (approximately 13.1% of total
revenue) to approximately $17.1 million for 1998 (approximately 12.6% of total
revenue).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $36.1 million in 1997 to $44.9 million in
1998 and, as a percentage of total revenue, decreased from approximately 49.4%
in 1997 to approximately 33.2% in 1998. Much of these expenses are attributable
to overhead costs associated with Viatel's headquarters, back office and network
operations as well as maintaining sales offices. Salaries and commissions, as a
percentage of total selling, general and administrative expenses, were
approximately 51.6% and 49.3% for 1997 and 1998, respectively. Advertising and
promotion expenses, as a percentage of total selling, general and administrative
expenses, were approximately 1.2% and 3.6% for 1997 and 1998, respectively.
Viatel expects to incur additional expenses as it continues to invest in its
sales and marketing infrastructure and actively market its products and
services.
EBITDA LOSS. EBITDA loss increased from $26.6 million for 1997 to $31.8
million for 1998. As a percentage of total revenue, EBITDA loss decreased from
approximately 36.4% in 1997 to approximately 23.5% in 1998. These losses
resulted from lower gross margins as a percentage of total revenue due to the
relatively high cost of intra-European leased lines which was compounded by the
impact on revenue of aggressive price reductions implemented by incumbent
telecommunications operators.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of Viatel's network, increased from approximately $7.7
million in 1997 to approximately $16.3 million in 1998. The increase was due
primarily to (1) the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997 and (2) the amortization
of goodwill associated with the acquisition of Flat Rate Communications in
February 1998. Depreciation expense will increase substantially as each ring of
the Circe Network becomes operational.
INTEREST. Interest expense increased from approximately $12.5 million in
1997 to approximately $79.2 million in 1998 primarily as a result of Viatel's
1998 high yield offering. Interest income increased from approximately $3.7
million in 1997 to approximately $28.3 million for 1998 primarily as a result of
the interim investment of the net proceeds from Viatel's 1998 high yield
offering. During 1998, Viatel capitalized $3.3 million of interest costs.
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1997 COMPARED TO 1996
TOTAL REVENUE. Total revenue increased by 44.8% from $50.4 million on 62.2
million billable minutes for 1996 to $73.0 million on 140.9 million billable
minutes for 1997. Total revenue growth for 1997 was generated primarily from
increased traffic volume on Viatel's network, from growth in its carrier
business and, to a lesser extent, increased traffic volume in Latin America and
the Pacific Rim.
The overall increase of 126.4% in billable minutes from 1996 to 1997 was
partially offset by declining revenue per billable minute primarily because of
(1) a higher percentage of lower-priced intra-European and national long
distance traffic from Viatel's network as compared to intercontinental traffic,
(2) a higher percentage of lower-priced carrier traffic as compared to retail
traffic, (3) reductions in certain rates charged to retail customers in response
to pricing reductions enacted by certain incumbent telecommunications operators
and other carriers in many of Viatel's markets, (4) changes in customer access
methods and (5) foreign currency fluctuations.
Total revenue per billable minute from the sale of services to retail
customers, which represented 83.5% of total revenue in 1996, compared to 72.1%
in 1997, decreased from $1.04 in 1996 to $.69 in 1997. Total revenue per
billable minute from the sale of services to carriers and other resellers
decreased from $.38 in 1996 to $.30 in 1997, primarily as a result of price
competition. The number of customers billed rose 18.4% from 18,172 at December
31, 1996 to 21,515 at December 31, 1997.
The carrier business represented approximately 16.5% of total revenue and
approximately 35.2% of billable minutes for 1996 as compared to approximately
27.9% of total revenue and approximately 46.1% of billable minutes for 1997.
This increase in carrier revenue represents an increase of approximately 147.0%
over 1996.
COST OF SERVICES. Cost of services increased from $42.1 million in 1996 to
$63.5 million in 1997 and, as a percentage of total revenue, increased from
approximately 83.6% to approximately 87.0% for 1996 and 1997, respectively.
Viatel's gross margin decreased from 16.4% for 1996 to 13.0% for 1997. This
decrease was primarily due to (1) decreased revenue per minute resulting from
price competition and foreign currency fluctuations which were not offset by
corresponding decreases in infrastructure costs, (2) increased sales to carrier
customers which generate substantially lower margins, and (3) an increase in
intra-European and national long distance traffic compared to higher margin
intercontinental traffic.
Cost of services increased in 1997 because of the relatively high cost of
leased infrastructure and the accelerated rollout of European points of
presence. These costs are expected to decrease as a percentage of total revenue
as Viatel continues its efforts to convert from leased to owned capacity. Viatel
increased its private line circuits capacity by 311%, and as a result, the fixed
costs associated with its network costs for private line circuits increased from
approximately $4.1 million for 1996 (approximately 8.2% of total revenue) to
approximately $6.0 million for 1997 (approximately 8.2% of total revenue).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $32.9 million in 1996 to $36.1 million in
1997 and, as a percentage of total revenue, decreased from approximately 65.2%
in 1996 to approximately 49.4% in 1997. Much of these expenses are attributable
to overhead costs associated with Viatel's headquarters, back office and network
operations as well as maintaining a physical presence in seventeen different
jurisdictions. Salaries and commissions, as a percentage of total selling,
general and administrative expenses, were approximately 49.0% and 51.6% for 1996
and 1997, respectively.
EBITDA LOSS. EBITDA loss increased from $24.6 million for 1996 to $26.6
million for 1997. As a percentage of total revenue, EBITDA loss decreased from
approximately 48.7% in 1996 to approximately 36.4% in 1997. These losses
resulted from lower gross margins as a percentage of total
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revenue due to the relatively high cost of intra-European leased lines which was
compounded by the impact on revenue of aggressive price reductions implemented
by certain incumbent telecommunications operators.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense, which
includes depreciation of Viatel's network, increased from approximately $4.8
million in 1996 to approximately $7.7 million in 1997. The increase was due
primarily to the depreciation of equipment related to network expansion and
fiber optic cable systems placed in service during 1997.
INTEREST. Interest expense increased from approximately $10.8 million in
1996 to approximately $12.5 million in 1997 due to the accretion of non-cash
interest on the notes issued by Viatel in 1994. Interest income increased from
approximately $1.9 million for 1996 to approximately $3.7 million in 1997,
primarily as a result of the investment of the net proceeds from Viatel's
initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Viatel has incurred losses from operating activities in each year of
operations since its inception and expects to continue to incur operating and
net losses for the next several years. Since inception, Viatel has utilized cash
provided by financing activities to fund operating losses, interest expense and
capital expenditures. The sources of this cash have primarily been through
private and public equity and debt financings and, to a lesser extent,
equipment-based financing. As of June 30, 1999, Viatel had $649.1 million of
cash, cash equivalents, cash securing letters of credit for network construction
and marketable securities and $196.6 million of restricted cash equivalents and
other restricted marketable securities, which secure interest payments on its
notes through April 2001.
On June 29, 1999, Viatel completed an offering of 4,315,000 shares of its
common stock at $47.00 per share. The net proceeds from the offering were
approximately $192.2 million and will be used primarily to fund the further
development of Viatel's network as well as for working capital and general
corporate purposes.
On May 13, 1999, Viatel's series A preferred stock and subordinated
convertible debentures converted into shares of its common stock. The conversion
was based upon maintenance of Viatel's common stock above a certain per share
price for a specified time period. The series A preferred stock and the
subordinated convertible debentures converted at a conversion price equal to
$13.20 and DM24.473, at the then applicable exchange rate, respectively.
Accordingly, Viatel issued approximately 4.6 million shares of its common stock
and paid cash for any fractional shares due upon conversion. These transactions,
and their extinguishment of Viatel's related commitments, significantly
strengthened Viatel's financial position.
On March 19, 1999, Viatel completed a high yield offering through which it
raised $352.6 million of net proceeds in a combination of senior Dollar notes
and senior Euro notes.
On April 8, 1998, Viatel completed a high yield offering through which it
raised $856.6 million of net proceeds. A portion of the proceeds from this high
yield offering were utilized by Viatel to retire its 15% senior discount notes
due 2005 pursuant to a tender offer.
The proceeds of the 1999 and 1998 high yield offerings are being used by
Viatel to construct the Circe Network. The Circe Network, when completed, will
be one of the largest cross-border fiber optic networks in the major
metropolitan telecommunications markets in Western Europe. This five-ring system
is expected to encompass approximately 8,700 route kilometers.
Before the merger is completed, Viatel expects to raise approximately $40.6
million through the sale of additional 11.50% senior notes due 2009 in a private
placement exempt from registration under the Securities Act. The primary purpose
of this financing is to fund Viatel's obligation under the indenture governing
the 11.50% senior notes and to place in escrow U.S. government securities in an
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amount sufficient to secure interest payments on the notes through March 15,
2001. This obligation applies both to the 11.50% notes to be issued in the
private placement and the notes to be issued in the exchange offer for Destia's
11% senior discount notes due 2008, as described under the heading "Capital
Additions; Commitments," below. Viatel and Destia can provide no assurance that
this financing will be successfully completed.
Viatel believes that the net proceeds from the offerings discussed above,
together with cash and marketable securities on hand and future sales of
capacity on the Circe Network, will provide sufficient funds for it to expand
its business as planned and to fund operating losses for at least the next 12 to
18 months. However, the amount of Viatel's future capital requirements will
depend on a number of factors, including the success of its business, the
start-up dates of each ring of the Circe Network, the dates at which Viatel
further expands its network, the types of services it offers, staffing levels,
acquisitions and customer growth as well as other factors that are not within
Viatel's control, including an obligation to fund Destia's repurchase offer
obligation with respect to its senior notes and senior discount notes that will
be triggered upon completion of the merger, competitive conditions, government
regulatory developments and capital costs. In the event that Viatel's plan or
assumptions change or prove to be inaccurate, Viatel is unable to convert from
leased to owned infrastructure or obtain interconnection in accordance with its
current plans or the net proceeds from its debt and equity offerings, cash and
investments on hand and the proceeds from the sale of capacity on the Circe
Network prove to be insufficient to fund its growth in the manner and at the
rate currently anticipated, Viatel may be required to delay or abandon some or
all of its development and expansion plans or it may be required to seek
additional sources of financing earlier than currently anticipated. In the event
Viatel is required to seek additional financing, there can be no assurance that
such financing will be available on acceptable terms or at all. See "--Capital
Additions; Commitments."
CAPITAL ADDITIONS; COMMITMENTS
The development of Viatel's business has required substantial capital.
Capital additions consist of capital expenditures, the net increase in property
and equipment purchases payable, assets acquired under capital lease obligations
and capitalized interest during the period. During 1998, capital additions
totalled $220.9 million and consisted of capital expenditures of approximately
$94.7 million, a net increase of $92.5 million in property and equipment
purchases payable, $30.4 million of assets acquired under capital lease
obligations and capitalized interest of $3.3 million. For the six months ended
June 30, 1999, Viatel had capital additions of $349.1 million, which consisted
of capital expenditures of approximately $225.9 million, a net increase of
$105.0 million in property and equipment payable, $13.6 million of assets
acquired under capital lease obligations and capitalized interest of $4.6
million. Viatel has also entered into certain agreements associated with the
Circe Network, purchase commitments for network expansion and other items
aggregating in excess of $288.6 million at June 30, 1999. Additionally, Viatel
has minimum volume commitments to purchase transmission capacity from various
domestic and foreign carriers aggregating approximately $13.2 million for all of
1999.
When Destia becomes a wholly-owned subsidiary of Viatel as a result of the
merger, Destia will be required to offer to repurchase all of its outstanding
11% senior discount notes due 2008 and 13.50% senior notes due 2007 at a
purchase price equal to 101% of the accreted value of the Destia 11% notes and
101% of the outstanding principal amount of Destia 13.50% notes. As of June 30,
1999, the accreted value of the Destia 11% notes was $203.5 million and the
outstanding principal amount of the Destia 13.50% notes was $150.5 million.
Based on the current and historical trading prices of the Destia 13.50% notes,
Viatel does not expect that the holders of these notes will tender them for
repurchase. However, if there is a significant adverse change in the market for
debt securities or an adverse change with respect to either Viatel or Destia, it
is likely that some or all of the Destia 13.50% notes will be tendered in the
repurchase offer. Based on the current and historical trading prices of the
Destia 11% notes, Viatel considers it likely that holders will tender them for
repurchase. As a result,
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Viatel intends to launch an exchange offer for the Destia 11% notes in which
Viatel will offer to exchange its 11.50% senior notes due 2009 for the Destia
11% notes. To the extent the exchange offer is accepted, it will have the effect
of reducing the amount of Destia 11% notes that the combined company may have to
repurchase following completion of the merger.
If the combined company were to divert its available cash to fund the
repurchase of all or a significant amount of Destia notes, the combined
company's business plan, which is currently fully funded, could be restricted.
The closing of the merger is not subject to the condition that the exchange
offer be successfully completed. If Viatel and Destia conclude prior to the
completion of the merger that the terms on which the exchange offer can be
completed are likely to be unreasonable or that it is likely that the Destia
notes will be tendered in the repurchase offer in an amount or on terms that
could significantly deplete the combined company's available cash, Viatel and
Destia may restructure the merger in order to avoid Destia's obligation to make
a repurchase offer or effect the exchange offer. For information concerning the
financial impact of certain percentages of the outstanding notes being tendered
in the exchange offer, see "Viatel Unaudited Pro Forma Combining Financial
Information."
FOREIGN CURRENCY
Viatel has exposure to fluctuations in foreign currencies relative to the
U.S. Dollar as a result of billing portions of its communications services
revenue in the local European currency in countries where the local currency is
relatively stable while many of its obligations, including a substantial portion
of its transmission costs, are denominated in U.S. dollars. In countries with
less stable currencies, such as Brazil, Viatel bills in U.S. dollars. Debt
service on certain of the notes issued by Viatel is currently payable in Euros.
A substantial portion of its capital expenditures is and will continue to be
denominated in various European currencies, including the Euro. Most of the
European currencies in which Viatel does business converged effective January 1,
1999, with the exception of the British Pound Sterling. See "--Euro."
With the continued expansion of Viatel's network, a substantial portion of
the costs associated with the network, such as local access and termination
charges and a portion of the leased line costs, as well as a majority of local
selling expenses and debt service related to the Euro denominated notes, will be
charged to Viatel in the same currencies as revenue is billed. These
developments create a natural hedge against a portion of Viatel's foreign
exchange exposure. To date, much of the funding necessary to establish the local
direct sales organizations has been derived from communications services revenue
that was billed in local currencies. Consequently, Viatel's financial position
as of June 30, 1999 and its results of operations for the six months ended June
30, 1999 were not significantly impacted by fluctuations in the U.S. Dollar in
relation to foreign currencies.
YEAR 2000
The Year 2000 problem is the result of computer programs, microprocessors
and embedded date reliant systems using two digits rather than four to define
the applicable year. If these programs are not corrected, such date sensitive
computer programs, microprocessors and embedded systems may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions in operations.
In an effort to assess its Year 2000 state of readiness, during 1997 Viatel
began performing a complete inventory assessment of all of its internal systems,
which it has divided into two categories, business essential, or mission
critical, and support systems, or non-mission critical. As part of Viatel's Year
2000 program and as part of its overall procurement plan, it has sought to
ensure that fixed assets acquired were Year 2000 compliant. As part of this
process, Viatel has inventoried and tested Year 2000 compliance of its mission
critical systems and believes that they are Year 2000 compliant. Viatel's
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Nortel switches, a critical component of Viatel's network backbone, are Year
2000 compliant. Viatel's message processing and billing systems, which are used
to record and process millions of call detail records, and its transmission
equipment, which are Viatel's only other mission critical systems, are also Year
2000 compliant. The majority of Viatel's non-mission critical systems are Year
2000 compliant. Viatel anticipates its non-mission critical systems being Year
2000 compliant early in the fourth quarter of 1999. The total estimated cost of
ensuring Viatel's preparation for Year 2000 is approximately $200,000, a portion
of which has already been incurred and expensed.
Viatel continues to communicate formally with the key carriers and other
vendors on which its operations and infrastructure are dependent to determine
the extent to which Viatel is susceptible to a failure resulting from such third
parties' inability to remediate their own Year 2000 problems. Accordingly,
during the procurement process, Viatel has taken steps to ensure that its
vendors, carriers and products purchased are Year 2000 compliant or are
adequately addressing the Year 2000 issues. Viatel can provide no assurance that
the carriers and other vendors on which its operations and infrastructure rely
are or will be Year 2000 compliant in a timely manner. Interruptions in the
services provided to Viatel by these third parties could result in disruptions
in its services. Depending upon the extent and duration of any such disruptions
and the specific services affected, such disruptions could have a material
adverse effect on its business, financial condition and results of operations.
As a contingency against any possible disruptions in services provided by
vendors, Viatel has sought to diversify its vendor base. Viatel believes that
the diversity of its vendor base is sufficient to mitigate Year 2000 related
disruptions in service to its customers. In addition, Viatel believes that the
fact that it conducts business in, and derives revenue from, multiple Western
European countries helps to mitigate the potential impact of Year 2000 related
disruptions.
In addition, disruptions in the economy generally resulting from the Year
2000 problems could also have a material adverse effect on Viatel. Viatel could
be subject to litigation resulting from any disruption in its services. The
amount of potential liability or lost revenue which would result from these
disruptions in service could have a material adverse effect on Viatel's
business, financial condition, results of operations and the price of its common
stock.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union established irrevocable fixed conversion rates between their existing
sovereign currencies and a single currency called the Euro. The sovereign
currencies are scheduled to remain legal tender as denominations of the Euro
during a transition period from January 1, 1999 to January 1, 2002.
Viatel has completed an internal analysis regarding business and systems
issues related to the Euro conversion and, as a result, made necessary
modifications to its business processes and software applications. Viatel is now
able to conduct business in both the Euro and sovereign currencies on a parallel
basis, as required by the European Union.
Viatel believes that the Euro conversion has not and will not have a
significant impact on its business strategy in Europe. The costs to convert all
systems to be Euro compliant did not have a significant impact on Viatel's
results of operations.
INFLATION
Viatel does not believe that inflation has had a significant effect on its
operations to date.
PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998. SFAS 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
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requiring recognition of those instruments as assets and liabilities and to
measure them at fair value. Viatel has not completed its analysis of the impact
of this statement on its financial statements.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-- Deferral of the Effective Date of SFAS No.
133," which amends SFAS No. 133 to delay the date by which all companies must
comply with SFAS 133. Companies must comply with SFAS No. 133 for all fiscal
years beginning after June 15, 2000.
FASB Interpretation No. 43, "Real Estate Sales--An Interpretation of FASB
Statement No. 66," was issued in June 1999. It clarifies the standards for
recognition of profit on all real estate sales transactions including sales of
real estate with property improvements or integral equipment that cannot be
removed and used separately from the real estate without incurring significant
costs. This interpretation is effective for all applicable real estate sales
occurring after June 30, 1999. Viatel has not completed its analysis of the
impact of this interpretation on its financial statements.
MARKET RISK EXPOSURE
Viatel is subject to foreign currency exchange rate risk relating to
receipts from customers, payments to suppliers and interest and principal
payments on the outstanding Euro denominated senior notes and senior discount
notes in foreign currencies. Viatel does not consider the market risk exposure
relating to foreign currency exchange to be material. See "--Liquidity and
Capital Resources--Foreign Currency."
Viatel has financial instruments that are subject to interest rate risk,
principally short-term investments and debt obligations issued at a fixed rate.
Historically, Viatel has not experienced material gains or losses due to
interest rate changes when selling short-term investments and typically holds
these securities until maturity. Based on Viatel's current holdings of
short-term investments, its exposure to interest rate risk is not material.
Fixed-rate debt obligations issued by Viatel are generally not callable until
maturity.
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DESTIA MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. SEE "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS". SEE ALSO DESTIA'S FINANCIAL STATEMENTS AND THE
RELATED NOTES INCLUDED ELSEWHERE IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
OVERVIEW
Destia is a rapidly growing, facilities-based provider of domestic and
international telecommunications services. Destia provides its end users with a
variety of retail telecommunications services, including international and
domestic long distance, calling card and prepaid card services, Internet access
and wireless and wholesale transmission services. Destia's objective is to
become a leading facilities-based provider of integrated telecommunications
services to end users in the largest metropolitan markets in Europe and North
America.
On May 11, 1999, Destia completed an initial public offering of 6,500,000
shares of its common stock, which was priced at $10.00 per share. The net
proceeds to Destia, after deducting underwriters' discounts and expenses, were
approximately $59.0 million.
REVENUES
Destia's revenues are primarily based on usage and are derived from (1) the
number of minutes of telecommunications traffic carried and (2) generally, a
fixed per minute rate. The following table shows the total revenue and billable
minutes of use attributable to Destia's operations by region for 1996, 1997 and
1998 and the six months ended June 30, 1998 and June 30, 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
REVENUE
North America........................................ $ 18,185 $ 48,899 $ 116,645 $ 47,045 $ 86,677
United Kingdom....................................... 15,477 18,363 55,991 33,887 31,759
Continental Europe................................... 11,441 15,741 21,101 9,482 20,154
---------- ---------- ---------- ---------- ----------
Total............................................ $ 45,103 $ 83,003 $ 193,737 $ 90,414 $ 138,590
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
BILLABLE MINUTES OF USE
North America........................................ 68,247 244,095 549,654 212,300 524,561
United Kingdom....................................... 27,968 68,810 288,892 140,566 208,124
Continental Europe................................... 8,351 17,239 45,085 17,305 100,527
---------- ---------- ---------- ---------- ----------
Total............................................ 104,566 330,144 883,631 370,171 833,212
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
Destia generally prices its services at a discount to the dominant carrier,
or carriers, in each of its markets. Destia has experienced and expects to
continue to experience declining revenue per minute in all of its markets,
particularly European markets, as a result of increased competition. However,
Destia believes such declines in revenue per minute will be offset in part by an
increased demand for long distance services and declining costs of transmission.
Historically, transmission costs in the telecommunications industry have
declined at a more rapid rate than prices due to technological innovation and
the availability of substantial transmission capacity. There can be no assurance
that this cost trend will continue.
Destia's revenues are recorded upon completion of calls. For prepaid
services, Destia's revenues are reported net of selling discounts and
commissions and are recorded based upon usage rather than at the time of initial
sale.
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Revenues also include amounts billed to customers which are, in turn,
remitted to third parties, including universal service fund fees, fixed rate
access charges paid to local exchange carriers and payphone owner compensation
fees. These charges are expensed in cost of services in amounts similar to
corresponding amounts billed to customers and included in revenue.
COST OF SERVICES
The major components of Destia's cost of services are the cost of
origination, transmission and termination of traffic. Virtually all calls
carried by Destia must be originated or terminated on another carrier's local
facilities, for which Destia pays a per minute charge. These charges are known
as "access" or "termination" charges. In countries where Destia has
interconnection, it is able to originate and terminate calls more
cost-effectively, either pursuant to fixed price contractual arrangements with
the dominant carriers or local exchange carriers or pursuant to a tariff.
Destia's transmission cost of services consists of expenses related to
leased lines and switched minutes. Destia typically acquires leased lines for
specific point-to-point routes on a fixed cost basis, which involve monthly
payments regardless of usage levels. Leased lines have a shorter duration than
long-term capacity leases ("IRUs"). Because the cost of leased lines is
typically a fixed monthly payment, transmitting an increased portion of Destia's
calls over leased lines reduces its incremental transmission costs. Accordingly,
once certain traffic volume levels are reached, leased line capacity is more
cost effective than capacity acquired on a variable cost basis, such as switched
minutes.
To transmit calls to locations not covered by its network, Destia acquires
switched minutes from other carriers. Switched minutes are acquired on a per
minute basis, with volume discounts and, accordingly, are a variable cost. The
cost of switched minutes also includes termination charges. As Destia's minutes
of traffic carried have grown, Destia has obtained better pricing on switched
minute transmission capacity. In general, Destia expects its marginal cost of
services will decline over time due to greater usage of owned transmission
capacity, technological innovation, increased leverage with suppliers and the
increasing availability of substantial third-party transmission capacity.
A substantial and increasing portion of Destia's calls are also transmitted
over its IRUs. The cost of IRUs is expensed in depreciation and amortization and
is, therefore, not accounted for as part of cost of services. To the extent
Destia's increased use of IRUs reduces its utilization of leased lines and
switched minutes, the increase in depreciation expense of the IRUs will be
offset by a decrease in the cost of services of leased lines and switched
minutes. As a result, although Destia's gross margins and EBITDA are expected to
improve, Destia's net income (loss) will not necessarily improve to the same
extent.
Cost of services also includes certain fees imposed by regulators and third
parties that are typically billed to customers together with an administrative
fee. See "--Revenues."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
To date, Destia has sold its services primarily through independent sales
channels. Selling expenses have, therefore, primarily consisted of commissions
paid to agents. To a lesser extent, selling expenses have also included
advertising and promotion costs, salaries, benefits and commissions of Destia's
internal sales force and expenses related to its customer service department.
Since completing the acquisition of VoiceNet Corporation during the first
quarter of 1998, Destia's commissions paid to and retained by VoiceNet, i.e.,
commissions not subsequently paid by VoiceNet to its independent sales agents,
have been eliminated.
Destia is continuing to increase its internal sales force and this expansion
will significantly increase the selling expenses associated with operating and
staffing sales offices. In addition, as Destia expands its customer base in new
and existing markets, it intends to increase its advertising expenses. Destia
expects all of these costs to eventually decline as a percentage of its
revenues. General and administrative expenses have increased primarily as a
result of Destia's expansion of its customer service, network operations,
billing, financial reporting and other management information systems.
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These expenses have also increased as a result of implementing more extensive
network management systems and organizational expenses related to entering
additional markets.
DEPRECIATION AND AMORTIZATION EXPENSE
Destia's depreciation and amortization expense is primarily related to
depreciation on Destia's IRUs and switching equipment, amortization of costs
associated with the issuance of debt and amortization of goodwill from the
purchases of VoiceNet, the minority interest in its subsidiary, Telco Global
Communications, and other minor acquisitions.
As Destia expands its network, it will continue to add new switching
equipment and acquire additional IRUs, both of which will increase Destia's
depreciation expense. Transmission over IRUs involves only fixed costs, with no
per minute charges, and is a more cost-effective means of transmitting traffic
once certain volume levels are reached. Destia recently acquired a 20-year IRU
from Frontier Communications which provides Destia with fiber optic transmission
capacity in the United States. Destia intends to acquire additional IRUs,
particularly in Europe, from Viatel or other network capacity providers. To the
extent Destia's increased use of IRUs reduces its utilization of leased lines
and switched minutes, the increase in depreciation expense of the IRUs will be
offset by a decrease in the cost of services of leased lines and switched
minutes. As a result, although Destia's gross margins and EBITDA are expected to
improve, Destia's net income (loss) will not necessarily improve to the same
extent.
INTEREST EXPENSE
Prior to July 1, 1997, Destia's interest expense principally consisted of
interest payable in connection with equipment financing loans and short-term
indebtedness. Destia's 13.50% senior notes due 2007 and its 11% senior discount
notes due 2008 currently constitute most of Destia's interest expense. Annual
interest expense for the 13.50% senior notes and 11% senior discount notes will
aggregate $43.3 million in 1999. The 11% senior discount notes were issued at a
discount and accrete to their aggregate principal amount at maturity on February
15, 2003. Until that date, interest expense on these notes will increase in each
period. Thereafter, interest on the 11% senior discount notes will accrue and be
required to be paid in cash semi-annually.
RESULTS OF OPERATIONS
The following table presents certain data concerning Destia's results of
operations for 1996, 1997 and 1998 and for the six months ended June 30, 1998
and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues.............................................. $ 45,103 $ 83,003 $ 193,737 $ 90,414 $ 138,590
Cost of services...................................... 35,369 63,707 140,548 67,041 98,737
Selling, general and administrative expenses.......... 16,834 37,898 80,092 34,756 56,526
Depreciation and amortization......................... 1,049 3,615 11,866 4,102 12,764
Net income (loss)..................................... (8,312) (30,128) (68,944) (27,916) (49,709)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
TOTAL REVENUES. Total revenues for the six months ended June 30, 1999
increased 53% to $138.6 million from $90.4 million for the six months ended June
30, 1998. Billable minutes of use increased 125% to 833.2 million in the current
six-month period from 370.2 million in the comparable six-month period of the
prior year. The increases in revenues and billable minutes were primarily
attributable to
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strong retail customer growth in all of Destia's geographic markets. Retail
revenues in the first six months of 1999 increased 93% over the prior year
six-month period. Wholesale revenues in the first six months of 1999 as compared
to the first six months of 1998 declined significantly over this period and
represented approximately 10% of consolidated revenues in the first half of 1999
compared to 29% in the first half of 1998. The increase in billable minutes as a
percentage of overall revenue reflects changes in Destia's product mix, the
impact of deregulation in Destia's continental European markets and increased
competition in all of Destia's markets.
In North America, revenues grew by 84% to $86.7 million from $47.0 million.
This increase was due primarily to growth in prepaid and long distance revenues,
and in part to growth in wholesale revenues.
In the United Kingdom, revenues decreased 6% to $31.8 million in the first
half of 1999 from $33.9 million in the first half of 1998. Revenues from
Destia's direct dial and prepaid card products, collectively, increased
significantly over the prior year's first six-month level, which more than
offset the significant decline in wholesale revenues. The decline in wholesale
revenues was attributable to Destia's intentional shift away from certain low
margin wholesale customers in the U.K.
In continental Europe, revenues increased by 113% to $20.2 million from $9.5
million. Revenues from Destia's direct dial product increased significantly over
the prior year's first six months, which was primarily attributable to an
increase in Switzerland long distance revenues. The revenue increase in
Switzerland was due to both Destia's interconnection arrangement with Swisscom,
the dominant telecommunications provider in Switzerland, and its significant
increase in customers, many of whom purchased Destia's long distance services in
connection with its Internet access services.
GROSS MARGIN. Destia's gross margin for the first six months of 1999
increased 2.9% to 28.8% from 25.9% for the comparable six-month period of the
prior year. This increase was the result of the growth in retail revenues
supported by the continued expansion of Destia's network, which shifted some
expenses from cost of services to depreciation expense, increased utilization of
owned and leased transmission capacity and improved global routing, all of which
contributed to lower per-minute costs. The margin improvement was also due to a
planned increase in revenues derived from retail products, which have higher
gross margins than wholesale services. See "Overview--Cost of Services."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 63% from $34.8 million for the first six
months of 1998 to $56.5 million for the first six months of 1999. Selling,
general and administrative expenses as a percentage of revenues increased to
40.8% in the first six months of 1999 from 38.4% in the comparable period of the
prior year. This increase was primarily attributable both to an increase in
retail revenues, which have higher associated selling, marketing and
administrative expenses, as a percentage of overall revenues and to the
increased scale of Destia's operations resulting from the expansion of its
business, which contributed to increased staffing-related costs and marketing
and promotional expenses. During the first six months of 1999, Destia increased
staffing levels in its customer service, global operations, management
information systems and sales organizations. The increase in marketing and
promotional expenses was primarily the result of Destia's spending in developing
marketing and sales channels in Europe, as well as increased marketing
expenditures to grow the retail customer base in North America. Destia recorded
bad debt expense of $4.3 million, or 3.1% of revenue, for the first six months
of 1999, compared to bad debt expense of $3.8 million, or 4.2% of revenue, for
the first six months of 1998. This decline in bad debt expense as a percent of
revenue was primarily the result of improved credit and collection procedures
and controls.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $12.8 million for the six months ended June 30, 1999 from $4.1
million for the six months ended June 30, 1998. This increase was substantially
due to the continuing build-out of Destia's network in the United States, the
United Kingdom and continental Europe.
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INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $23.4
million for the first six months of 1999 from $18.5 million in the prior year
comparable period. This increase was primarily attributable to higher interest
expense incurred on the 11% Senior Discount Notes due to the increase of the
principal balance resulting from the accretion of interest expense, as well as
interest expense incurred related to borrowings to finance the cost to acquire
switches and other telecommunications equipment and IRUs. Interest income
decreased to $3.9 million in the first half of 1999 from $6.2 million in the
first half of 1998, primarily due to lower levels of cash and marketable
securities.
NET LOSS. Destia reported a net loss of $49.7 million for the first half of
1999 compared to a net loss of $27.9 million for the first half of 1998. The
increase in net loss reflects the increased selling, general and administrative
expenses associated with the development of Destia's sales and marketing
channels and the build out of its customer and network support infrastructure,
as well as increased depreciation and amortization expenses and a higher level
of net interest expense.
1998 COMPARED TO 1997
TOTAL REVENUES. Total revenues for 1998 increased by 133% to $193.7 million
from $83.0 million for 1997. Billable minutes of use increased 168% to 883.6
million in 1998 from 330.1 million in 1997. The increases in revenues and
billable minutes were primarily attributable to strong customer growth in both
the U.S. and U.K. markets. Revenues for all services increased substantially
from 1997 to 1998. The increase in revenues resulting from the growth in
billable minutes was partially offset by per-minute price reductions caused by
increased competition, most significantly in the U.K. and continental European
markets. This competition was a primary factor in the decrease in average
revenue per minute from $.25 per minute during 1997 to $.22 per minute in 1998.
In North America, revenues grew by 139% to $116.6 million from $48.9
million. This increase was due principally to prepaid and calling card revenues.
The remainder of the increase resulted from increases in long distance revenues.
Average North American revenue per minute increased to $.21 per minute during
1998 from $.20 per minute during 1997. This increase was due principally to the
substantial growth of prepaid card sales, which typically carry a higher per
minute rate than long distance service, offset in part by rate decreases for
long distance services.
In the United Kingdom, revenues increased 205% to $56.0 million in 1998 from
$18.4 million in 1997, while the average revenue per minute decreased from $.27
per minute during 1997 to $.19 per minute during 1998. This reduction was due
principally to increased price competition.
In continental Europe, revenues increased by 34% to $21.1 million from $15.7
million. A portion of this revenue growth was attributable to a full year of
revenue reported for certain country operations that commenced during 1997.
Average continental European revenue per minute decreased from $.91 per minute
during 1997 to $.47 per minute during 1998, as a result of increased competition
brought about by deregulation of Destia's continental European markets.
GROSS MARGIN. Destia's gross margin for 1998 increased to 27.5% from 23.2%
for 1997. This increase was attributable to (1) expansion of Destia's network,
which shifted some expenses from cost of services to depreciation expense, (2)
migration of additional switched traffic onto Destia's network, (3) "least-cost"
routing, (4) leveraging Destia's traffic volumes to negotiate lower usage-based
costs from domestic and foreign providers of transmission capacity and (5)
Destia's ability to obtain more cost effective interconnect agreements. An
improvement in gross margin does not necessarily result in an equal improvement
in net income (loss). See "--Overview--Cost of Services."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $80.1 million for 1998 from $37.9 million
for 1997, and, as a percentage of revenues, was 41% for 1998 and 46% for 1997.
The decrease in selling, general and administrative expenses as a percentage of
revenue during 1998 was primarily attributable to the significant increase in
revenues. The increase of $42.2 million in selling, general and administrative
expenses from 1997 was attributable
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to the expansion of the sales, operations and back office infrastructure to
support the significant retail sales growth Destia experienced in 1998. During
1998, Destia expanded its management team and significantly increased staffing
levels in its customer service, network management, management information
systems and finance organizations. In addition, substantial expenses were
incurred in connection with entering new markets and further developing existing
marketing and sales channels. Destia recorded bad debt expense of $7.4 million,
or 3.8% of revenue, for 1998, compared to bad debt expense of $3.9 million, or
4.7% of revenue, for 1997. This decline in bad debt expense as a percent of
revenue was primarily the result of improved credit and collection procedures
and controls.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $11.9 million for 1998 from $3.6 million for 1997. This increase
was substantially due to the continuing build-out of Destia's network in the
United States, the United Kingdom and continental Europe, amortization of costs
associated with Destia's issuance of the 13 1/2% Senior Notes and the 11% Senior
Discount Notes and amortization of goodwill from the purchases of VoiceNet and
the minority interest in Telco Global Communications, Destia's U.K. subsidiary.
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $41.0
million in 1998 from $11.4 million in 1997. This increase was attributable to
the issuance of the 13 1/2% Senior Notes and the 11% Senior Discount Notes.
Interest income increased to $11.5 million in 1998 from $3.7 million in 1997.
This increase was primarily due to interest income earned on the investment of
the net proceeds received from the 11% Senior Discount Notes.
NET LOSS. Destia reported a net loss of $68.9 million for 1998, compared to
a net loss of $30.1 million for 1997. The increase in net loss is primarily due
to the higher level of selling, general and administrative expenses and higher
interest expense.
1997 COMPARED TO 1996
REVENUES. Total revenues for 1997 increased by 84% to $83.0 million on
330.1 million billable minutes of use from $45.1 million on 104.6 million
billable minutes of use for 1996. Billable minutes of use increased by 216% for
1997 from 1996. Growth in revenues during 1997 primarily was attributable to
additional minutes of use, particularly in the United States, offset in part by
a substantial decline in prices as a result of increased competition. This
competition was a primary factor for the average revenue per minute decrease
from $.43 during 1996 to $.25 during 1997. An additional factor in the decrease
in revenues per minute was a larger portion of national, as opposed to
international, minutes of use. The increase in revenues was primarily
attributable to sales by VoiceNet of $23.6 million for 1997, compared to $1.9
million for 1996.
In the United Kingdom, revenues increased by 19% to $18.4 million from $15.5
million, primarily due to sales by Telco, which increased to $10.6 million in
1997 from $1.3 million in 1996. Increases in U.K. revenue were partially offset
by the termination of Destia's business relationship with Europhone
International, which accounted for $14.2 million in revenues in 1996. During the
fourth quarter of 1996, Destia began marketing efforts in the U.K. through
Telco. During 1997, U.K. revenues consisted principally of $10.6 million from
international and domestic long distance and prepaid card services attributable
to Telco, as well as $7.2 million from carrier services sold through Destia
Network Services, Ltd., a wholly-owned subsidiary of Destia. Average U.K.
revenue per minute decreased from $.55 per minute during 1996 to $.27 per minute
during 1997. This reduction was due principally to sales of a larger percentage
of domestic long distance minutes, which are sold at lower rates than
international minutes, and to increased price competition.
In continental Europe, revenues increased by 38% to $15.7 million from $11.4
million. This increase was attributable to an increase in prepaid card services,
primarily in France and Germany. Average continental European revenue per minute
decreased from $1.37 per minute during 1996 to $.91 per minute during 1997. This
decrease was due to lower rates in France and Germany.
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<PAGE>
In North America, revenues grew by 169% to $48.9 million from $18.2 million.
This increase was due principally to calling card revenues attributable to sales
by VoiceNet, which were $23.6 million during 1997, compared to $1.9 million
during 1996. VoiceNet began reselling Destia's calling card services to
end-users during the second quarter of 1996. The remainder of the increase
resulted from increases in sales of carrier services, and, to a lesser extent,
international and domestic long distance and prepaid card services. Average U.S.
revenue per minute decreased to $.20 per minute during 1997 from $.27 per minute
during 1996. This reduction was due principally to sales of a larger percentage
of domestic long distance minutes, which are sold at lower rates than
international minutes, and to increased price competition.
During 1997, Destia experienced an average customer turnover or "churn" rate
of approximately 5% relating to U.S., U.K. and continental European "1+", "1xxx"
and calling card services. To date, Destia's revenues and margins have not been
materially impacted by its "churn" rate. Destia's "churn" rate with respect to
any given period consists of the average number of customers that ceased using
Destia's services during any month of the period divided by the average monthly
number of customers for the period. Customers that have ceased using Destia's
services during any given month are those customers who used the Company's
services during the prior month but not during any subsequent month of the
applicable period.
GROSS MARGIN. Destia's gross margin for 1997 increased to 23.2% from 21.6%
for 1996. This increase was attributable to Destia's increased use of owned and
leased line transmission capacity and its ability to obtain lower prices on
switched transmission capacity because of increased traffic volumes and a
greater availability of capacity generally. An improvement in gross margin does
not necessarily result in an equal improvement in net income (loss). See
"--Overview--Cost of Services."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $37.9 million for 1997 from $16.8 million
for 1996, and, as a percentage of revenues, was 46% for 1997 and 37% for 1996.
The increase primarily consisted of commissions paid to resellers, principally
VoiceNet, and independent agents, an increase in payroll costs related to
additional management and staff in the areas of finance, sales, customer
service, network management and information systems at Destia's Manhattan, New
York, Brooklyn, New York and College Station, Texas facilities, as well as the
London, Brussels, Hamburg and Paris offices. For 1996, a majority of the
expenses consisted of expenses related to Europhone International and
commissions paid to independent sales agents.
In connection with the termination of Destia's joint venture with Europhone
International during June 1996, Europhone International granted Destia the right
to compete with Europhone International in the United Kingdom in exchange for
forgiveness of a net receivable due to Destia of $2.0 million. The forgiveness
of the receivable has been reclassified as an expense of the joint venture and
was charged to bad debt expense. Destia previously had capitalized the U.K.
territorial rights granted to it by Europhone International on its consolidated
balance sheet and was amortizing the rights over a 15-year life. Destia
subsequently decided to write off this asset, resulting in an additional $1.9
million charge in 1996.
Destia recorded bad debt expense of $3.9 million, or 4.7% of revenue, for
1997, compared to bad debt expense of $2.0 million, or 4.4% of revenue, for
1996. The charge in 1996 was related to Europhone International.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $3.6 million for 1997 from $1.0 million for 1996. This increase was
substantially due to the depreciation associated with upgrades in Destia's
switch in New York and installation of multiplexing equipment in New York and
London, as well as amortization of costs associated with Destia's 1997 offering
of 13 1/2% Senior Notes.
85
<PAGE>
INTEREST EXPENSE. Destia had $11.4 million of interest expense during 1997,
as compared to interest expense of $0.4 million during 1996. Interest expense
has increased substantially as a result of Destia's 13 1/2% Senior Notes with
$10.5 million of 1997 expense attributable to that offering.
NET LOSS. Destia had a net loss of $30.1 million during 1997, compared to a
net loss of $8.3 million during 1996. The increase is primarily due to costs
associated with increasing the internal infrastructure, building the network,
marketing, commissions paid to resellers and interest expense related to the
13 1/2% Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
Destia has incurred significant operating and net losses and made
substantial capital expenditures due in large part to the start-up and
development of Destia's operations and its network. Destia will continue to
incur additional losses and have substantial additional capital expenditures.
Destia has utilized cash provided from financing activities to fund losses and
capital expenditures. The sources of this cash have primarily been the proceeds
from Destia's initial public offering in May 1999, the issuance of the 11%
Senior Discount Notes, the issuance of the 13 1/2% Senior Notes and, to a lesser
extent, equipment-based financing and an equity investment in preferred stock of
Destia by Princes Gate Investors II, L.P. and its related entities.
At June 30, 1999, Destia had approximately $118.8 million in unrestricted
cash, cash equivalents and marketable securities, compared to $139.6 million in
unrestricted cash, cash equivalents and marketable securities at December 31,
1998. In addition, as of June 30, 1999, Destia had $31.0 million of restricted
cash and securities, which will be used to pay interest expense on the 13 1/2%
Senior Notes through July 15, 2000. Destia believes that the net proceeds of its
initial public offering in May 1999, as well as equipment loans it expects to
obtain and cash on hand, will provide sufficient funds for the foreseeable
future. However, the amount of Destia's future capital requirements will depend
on a number of factors, including the success of its business, its gross
margins, and its selling, general and administrative expenses, as well as other
factors, many of which are not within its control, including competitive
conditions and regulatory developments. In the event that Destia's plans or
assumptions change or prove to be inaccurate, it may be required to delay or
abandon some or all of its development and expansion plans or seek additional
sources of capital. Future sources may include public debt or equity offerings
or equipment financings. There can be no assurance that additional financing
arrangements will be available on acceptable terms.
Destia currently expects capital expenditures during 1999 to be less than
$100 million, of which $33.0 million was expended during the first six months of
1999. Actual capital expenditures may be significantly different from Destia's
current plans. These investments will be made principally to support the
continued growth of Destia's network, including the purchase of
telecommunications equipment and the purchase of additional network capacity, as
well as the continued development of Destia's back office capabilities,
including its management information and network management systems.
Destia anticipates financing those expenditures primarily through term
notes, capital leases with various lending institutions and its own cash
resources. Destia's operations, the development of its network and geographic
expansion will continue to require substantial capital investment. Destia's
management believes it has the ability to continue to secure long-term equipment
financing and to obtain funds from the debt and equity capital markets. Destia's
management also believes that these funding sources, combined with available
borrowing capacity under existing lines of credit and Destia's own cash
resources, will be sufficient to fund capital expenditures, working capital
needs and debt repayment requirements for the foreseeable future.
Destia's net cash used in operating activities was $35.6 million for the six
months ended June 30, 1999, and was primarily attributable to a net loss of
$49.7 million and an increase in accounts receivable of $13.7 million partially
offset by accreted interest expense of $10.9 million and depreciation
86
<PAGE>
and amortization expense of $12.8 million and by an increase in accounts
payable, accrued expenses and other current liabilities of $7.4 million. Net
cash used in investing activities of $13.9 million for the six months ended June
30, 1999 was attributable to investments made primarily in switches and other
telecommunications equipment, partially offset by the sale of marketable
securities of $21.3 million. Net cash provided by financing activities of $40.7
million was primarily related to the net proceeds from Destia's initial public
offering of approximately $59.0 million, which was partially offset by repayment
of long-term debt of $18.4 million.
In June 1999, Destia acquired U.K.-based Wavetech Ltd., an independent
service provider that uses Vodafone's U.K. wireless network.
At the end of 1998, Destia completed two small acquisitions. In November
1998, Destia acquired a controlling interest in America First Ltd., a prepaid
card distributor in the United Kingdom, for approximately $5.5 million. The
majority of the purchase price was recorded as goodwill and will be amortized
over 20 years. In December 1998, Destia also acquired the customer list of a
long distance reseller which is located in the United Kingdom. The purchase
price was allocated to the customer base and will be amortized over 5 years.
On July 17, 1998, Destia acquired the minority interest in Telco that it did
not already own in exchange for a note in the principal amount of approximately
$14.0 million, payable by Destia in quarterly installments together with
interest at a rate of 8.0% per annum, over approximately three years. The note
was paid in full on April 28, 1999. The entire purchase price is classified as
goodwill, which will be amortized over 20 years. In connection with this
acquisition, (1) Telco obtained ownership rights with respect to certain
proprietary software used in Telco's business and (2) Destia converted options
to acquire Telco shares held by Telco employees into grants of non-voting
restricted shares of Destia's common stock.
On February 12, 1998, Destia acquired VoiceNet, a major distribution channel
for Destia's calling card products. The initial purchase price was $21.0
million, which was paid in cash. The sellers of VoiceNet also are entitled to
receive an earn-out bonus based upon the revenue growth of the VoiceNet
business. The earn-out bonus will not have a material impact on Destia's
liquidity. The acquisition was accounted for under the purchase method of
accounting. Goodwill was recorded to the extent the purchase price exceeded the
fair value of the net assets purchased. Approximately $1.0 million of the
initial purchase price reflects the underlying value of the assets acquired and
$20.0 million reflects goodwill. The goodwill is being amortized over 20 years.
During the twelve months ended June 30, 1999, Destia incurred certain other
non-operating cash commitments which, as of June 30, 1999, included
approximately $42.3 million in the aggregate for a 20-year IRU from Frontier
Communications on portions of its U.S. fiber optic network and for the purchase
of a transatlantic IRU. As of June 30, 1999, Destia is required to pay
approximately $1.2 million per quarter as installments of principal on its
equipment facility. In addition, Destia pays $20.9 million per year as interest
expense on the 13 1/2% Senior Notes. Destia has placed funds in escrow to cover
this expense through July 15, 2000.
MARKET RISK
The carrying value of cash and cash equivalents approximates fair value due
to the short-term, highly liquid nature of the cash equivalents, which have
maturities of three months or less. Interest rate fluctuations would not have a
significant effect on the fair value of cash equivalents held by Destia.
As of June 30, 1999, Destia had debt in the amount of $389.3 million, of
which $370.7 million is fixed interest debt. Of the remaining $18.6 million,
$18.5 million carries adjustable interest rates equal to the 90-day commercial
paper rate plus 395 basis points and $100,000 carries adjustable interest rates
of 90-day LIBOR plus 500 basis points. A one percent change in the interest rate
would change interest payments by approximately $16,000 per month.
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<PAGE>
FOREIGN CURRENCY EXPOSURE
Destia is exposed to fluctuations in foreign currencies relative to the U.S.
dollar because Destia bills its end users in their local currency, while major
portions of its transmission costs are incurred in U.S. dollars, and interest
expense on the 13 1/2% senior notes due 2007 and 11% senior discount notes due
2008 is incurred in U.S. dollars. For the first six months of 1998 and 1999,
approximately 46% and 37%, respectively, of Destia's revenues were billed in
currencies other than the U.S. dollar, consisting primarily of British pounds,
Belgian francs, German marks and Swiss francs. As Destia expands its operations,
a higher percentage of revenues is expected to be billed in currencies other
than the U.S. dollar. Destia, from time to time, uses foreign exchange contracts
relating to its trade accounts receivables to hedge foreign currency exposure
and to control risks relating to currency fluctuations. Destia does not use
derivative financial instruments for speculative purposes. At June 30, 1998 and
1999, Destia had no open foreign currency hedging positions.
EURO CONVERSION
On January 1, 1999, several member countries of the European Union
established fixed conversion rates and adopted the euro as their new common
legal currency. Since that date, the euro has traded on currency exchanges,
although the legacy currencies will remain legal tender in the participating
countries for a transition period between January 1, 1999 and January 1, 2002.
During the transition period, parties can elect to pay for goods and services
and transact business using either the euro or a legacy currency. Between
January 1, 2002 and July 1, 2002, the participating countries will introduce
euro currency coins and withdraw all legacy currencies.
The euro conversion may affect cross-border competition by creating
cross-border price transparency. Destia is assessing its pricing and marketing
strategy in order to insure that it remains competitive in a broader European
market. In addition, Destia is reviewing whether certain existing contracts will
need to be modified. Destia's currency risks and risk management for operations
in participating countries may be reduced as the legacy currencies now trade at
a fixed exchange rate against the euro. Destia will continue to evaluate issues
involving introduction of the euro. However, based on current information and
assessments, Destia does not expect that the euro conversion will have a
material adverse effect on its results of operations or financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for internal
use, dividing the development into three stages: (1) the preliminary project
stage, during which conceptual formulation and evaluation of alternatives takes
place, (2) the application development stage, during which design, coding,
installation and testing takes place and (3) the operations stage during which
training and maintenance takes place. Costs incurred during the application
development stage are capitalized, all other costs are expensed as incurred. SOP
98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Destia has adopted the provisions of SOP 98-1, and it has not
had a material effect on Destia's results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, "Reporting on the Costs of Start Up Activities," SOP 98-5 requires
that all non-governmental entities expense the costs of start-up activities,
including organization costs, as those costs are incurred. SOP 98-5 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Destia has adopted the provisions of SOP 98-5, and it has not had a material
effect on its results of operations.
88
<PAGE>
YEAR 2000 COMPLIANCE
Destia is engaged in an ongoing process of assessing its exposure to the
Year 2000 issue -- the potential problems arising from computer systems that
were designed to use two digits, rather than four, to specify the year. Destia
has formed a project team, consisting of representatives from its information
technology, finance, business development, product development, sales, marketing
and legal departments, to address internal and external Year 2000 issues. By
December 31, 1998, Destia had completed its internal review of its financial and
other computer systems, which include switching, billing and other platforms, to
assess Year 2000 issues. Based on this review, Destia believes that the amount
of work and expense required to address Year 2000 issues relating to its
internal systems will not be material. Destia has migrated its billing software
that was not Year 2000 compliant to a billing platform that is Year 2000
compliant in the United States and United Kingdom. Destia is still in the
process of implementing the migration in Continental Europe. Destia has upgraded
certain of its Northern Telecom switches to make them and their related software
Year 2000 compliant. Destia had completed this upgrade as of June 30, 1999, at a
cost of approximately $1.3 million. In addition, Destia may be required to
modify or discontinue the use of some of its other existing software, including
its billing software. Destia estimates that it will have updated all of its
significant internal systems, including its billing software, to make them Year
2000 compliant and it began testing these systems during the third quarter of
1999.
In addition to assessing its own systems, Destia has retained a consulting
firm to assist it in conducting an external review of its significant customers,
suppliers and other third parties with which it does business, including
significant equipment and system providers and telecommunications service
providers, to determine their vulnerability to Year 2000 problems and any
potential impact that a lack of preparedness on such parties' behalf may have on
Destia. In particular, Destia may experience problems to the extent that other
telecommunications carriers are not Year 2000 compliant. Destia's external
review of Destia and related third parties will be substantially completed by
October 31, 1999. Destia's ability to determine the status of these third
parties' ability to address issues relating to Year 2000 is limited and there is
no assurance that these third parties will achieve full Year 2000 compliance
before the end of 1999.
Destia believes that its reasonably possible worst case Year 2000 scenario
is disruption of its ability to route traffic over portions of its own network
or an inability to terminate calls to certain destinations, which would require
Destia to utilize other transmission capacity at greater cost. To the extent
that a limited number of carriers experience disruption in service due to the
Year 2000 issue, Destia's contingency plan is to obtain service from alternate
carriers. However, there is no assurance that alternate carriers will be
available or, if available, that Destia can purchase transmission capacity at a
reasonable cost. In addition, in many continental European countries there are
no alternative carriers to use. Significant Year 2000 failures in the systems of
Destia, alternate carriers and other third parties, or third parties on whom
they depend, would have a material adverse effect on Destia's business.
Destia estimates the total cost for resolving its Year 2000 issues to be
approximately $2.0 million, of which approximately $1.4 million has been spent
through June 30, 1999, with the majority of the expenditures incurred in the
first two quarters of 1999 relating to upgrades of its Northern Telecom
switches. In addition, Destia spent approximately $100,000 for consultants
through June 30, 1999. Destia's overall estimate of Year 2000-related expenses
includes the accelerated cost of replacing systems that are not Year 2000
compliant. Actual costs may, however, differ materially.
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<PAGE>
COMPARATIVE PER SHARE DATA
The average common shares outstanding used in calculating pro forma loss per
common share from continuing operations are calculated assuming that the
estimated number of shares of Viatel common stock to be issued in the merger
were outstanding from the beginning of the periods presented. Options and
warrants to purchase shares of common stock were excluded in computing pro forma
diluted loss per common share as this would have resulted in a smaller loss per
common share.
The historical loss per common share amounts of Viatel and Destia were
calculated by dividing income (loss) available to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
The book value per share amounts of Viatel and Destia were calculated by
dividing stockholders' equity (deficit) by the number of common shares
outstanding at the end of period. The common stock outstanding used in
calculating pro forma combined book value per share are 32,586,000 of Viatel
common stock outstanding at June 30, 1999 plus 13,891,000 shares representing
the estimated number of common shares to be issued in the merger. These share
amounts are based on the number of Viatel and Destia shares outstanding on June
30, 1999. See "Viatel Notes to Unaudited Pro Forma Combining Financial
Information."
Destia pro forma equivalent amounts are calculated by multiplying the
respective Viatel pro forma combined per share amounts by the exchange ratio of
0.445.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
HISTORICAL VIATEL DESTIA VIATEL DESTIA
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Loss per common share from continuing operations......................... $ (3.42) $ (2.07) $ (4.44) $ (3.31)
Cash dividend declared per common share.................................. -- -- -- --
Book value per common share at end of period............................. $ 0.39 $ (2.49) $ (5.92) $ (4.93)
</TABLE>
<TABLE>
<CAPTION>
VIATEL DESTIA
PRO FORMA PRO FORMA
PRO FORMA AND PRO FORMA EQUIVALENT PER SHARE DATA COMBINED EQUIVALENT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Loss per common share from continuing operations for the:
Year ended December 31, 1998........................................ $ (7.81) $ (3.48)
Six months ended June 30, 1999...................................... $ (4.92) $ (2.19)
Cash dividends declared per common share:
Year ended December 31, 1998........................................ -- --
Six months ended June 30, 1999...................................... -- --
Book value per common share at June 30, 1999.......................... $ 13.32 $ 5.93
</TABLE>
90
<PAGE>
VIATEL CAPITALIZATION TABLE
The following table sets forth the capitalization of Viatel as of June 30,
1999 (i) as reported, and (ii) on a pro forma basis as adjusted to reflect its
merger with Destia. The table should be read in conjunction with the
consolidated financial statements of Viatel and Destia and the related notes
thereto included elsewhere in this joint proxy statement/prospectus and the
unaudited pro forma combining condensed financial information, which appears
elsewhere in the document.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------
VIATEL DESTIA ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents........................................ $ 536,659 $ 118,844 $ -- $ 655,503
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Restricted cash equivalents...................................... $ 11,987 -- -- $ 11,987
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Cash securing letters of credit on network construction.......... $ 112,404 -- -- $ 112,404
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Restricted marketable securities, current and non-current........ $ 184,593 $ 31,049 $ 39,380 $ 255,022
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Long-term liabilities, excluding current installments:
Long-term debt................................................. $ 1,240,487 $ 354,066 $ 207,840 $ 1,639,451
(203,547)
40,605
Notes payable and obligations under capital leases............. 32,929 26,671 -- 59,600
------------ ----------- ----------- ------------
Total long-term debt........................................... 1,273,416 380,737 44,898 1,699,051
------------ ----------- ----------- ------------
Stockholders' equity (deficiency)
Common stock, $.01 par value; 150,000,000 shares authorized;
32,586,190 shares issued and outstanding, actual, 46,476,744
shares issued and outstanding, pro forma for the merger...... 326 311 (311) 465
139
Non-voting common stock........................................ -- 1 (1) --
Additional paid-in capital..................................... 389,754 81,346 (81,346) 996,054
606,300
Unearned compensation.......................................... (6,442) -- -- (6,442)
Accumulated other comprehensive loss........................... (27,461) (1,003) 1,003 (27,461)
Accumulated deficit............................................ (343,571) (158,253) 158,253 (343,571)
------------ ----------- ----------- ------------
Total stockholders' equity (deficiency)...................... 12,606 (77,598) 684,037 619,045
------------ ----------- ----------- ------------
Total capitalization....................................... $ 1,286,022 $ 303,139 $ 728,935 $ 2,318,096
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
91
<PAGE>
VIATEL UNAUDITED PRO FORMA COMBINING FINANCIAL INFORMATION
The following Unaudited Pro Forma Combining Balance Sheet of Viatel as of
June 30, 1999 and Unaudited Pro Forma Combining Statement of Operations of
Viatel for the six months ended June 30, 1999 and the year ended December 31,
1998 illustrate the effect of the merger with Destia. The Unaudited Pro Forma
Combining Balance Sheet assumes that the merger with Destia had been completed
as of June 30, 1999 and the Unaudited Pro Forma Combining Statements of
Operations assumes that the merger with Destia had been completed as of the
beginning of the periods presented. Certain reclassifications have been made to
Destia's financial statements to conform with Viatel's presentation.
Under the terms of the transaction, the holders of Destia common stock will
receive shares of Viatel common stock on the basis of an exchange ratio of 0.445
of a Viatel share for each Destia share.
ACCOUNTING TREATMENT
Viatel will record the merger as a purchase transaction. For accounting
purposes, Viatel will be deemed to be the acquiring corporation in the merger.
The pro forma adjustments are based upon currently available information and
assumptions that management of Viatel believes are reasonable and certain
information provided by management of Destia. Viatel will account for the merger
based upon the estimated fair market value of the net tangible assets,
intangible assets and liabilities acquired at the date of acquisition. The
adjustments included in the Unaudited Pro Forma Combining Financial Information
represent the preliminary determination of these adjustments based upon
available information. Viatel cannot assure you that the actual adjustments will
not differ significantly from the pro forma adjustments reflected in the
Unaudited Pro Forma Combining Financial Information.
The Unaudited Pro Forma Combining Financial Information is not necessarily
indicative of either future results of operations or results that might have
been achieved if the merger with Destia had been consummated as of the indicated
dates. The Unaudited Pro Forma Combining Financial Information should be read in
conjunction with the historical financial statements of Viatel and Destia,
together with the related notes thereto, which are included elsewhere in this
joint proxy statement/ prospectus.
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<PAGE>
VIATEL UNAUDITED PRO FORMA COMBINING BALANCE SHEET AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA VIATEL PRO
VIATEL DESTIA MERGER FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Assets
Current assets:
Cash and cash equivalents................................ $ 536,659 $ 118,844 $ $ 655,503
Restricted cash equivalents.............................. 11,987 -- -- 11,987
Restricted marketable securities, current................ 90,308 9,591 13,100(5) 112,999
Trade accounts receivable, net........................... 44,520 46,447 -- 90,967
Other receivables........................................ 28,354 -- -- 28,354
Prepaid expenses......................................... 7,999 6,045 -- 14,044
--------- ----------- ----------- -----------
Total current assets................................. 719,827 180,927 13,100 913,854
--------- ----------- ----------- -----------
Restricted marketable securities, non-current.............. 94,285 21,458 26,280(5) 142,023
Property and equipment, net................................ 587,903 132,375 -- 720,278
Cash securing letters of credit for network construction... 112,404 -- -- 112,404
Intangible assets, net..................................... 68,349 62,385 758,440(1) 829,039
(62,385)(1)
2,250(5)
Other assets............................................... 11,744 4,263 -- 16,007
--------- ----------- ----------- -----------
Total assets......................................... $1,594,512 $ 401,408 $ 737,685 $2,733,605
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accrued telecommunications costs......................... $ 46,563 $ 18,137 $ -- $ 64,700
Accounts payable, other accrued expenses and deferred 21,910 60,464 7,725(1) 91,124
revenue................................................
1,025(5)
Property and equipment purchases payable................. 202,282 -- -- 202,282
Accrued interest......................................... 23,368 9,591 -- 32,959
Liability under joint construction agreement............. 3,266 -- -- 3,266
Current installments of notes payable, long-term debt and
obligations under capital leases....................... 11,101 10,077 -- 21,178
--------- ----------- ----------- -----------
Total current liabilities............................ 308,490 98,269 8,750 415,509
--------- ----------- ----------- -----------
Long-term liabilities:
Long term debt........................................... 1,240,487 354,066 207,840(1) 1,639,451
(203,547)(1)
40,605(5)
Notes payable and obligations under capital leases,
excluding current installments......................... 32,929 26,671 -- 59,600
--------- ----------- ----------- -----------
Total long-term liabilities.......................... 1,273,416 380,737 44,898 1,699,051
Commitments and contingencies
Stockholders' equity (deficiency):
Common stock............................................. 326 311 (311)(1) 465
139(1)
Non-voting common stock.................................. -- 1 (1)(1) --
Additional paid-in capital............................... 389,754 81,346 (81,346)(1) 996,054
544,510(1)
47,908(1)
13,882(1)
Unearned compensation.................................... (6,442) -- -- (6,442)
Accumulated other comprehensive loss..................... (27,461) (1,003) 1,003(1) (27,461)
Accumulated deficit...................................... (343,571) (158,253) 158,253(1) (343,571)
--------- ----------- ----------- -----------
Total stockholders' equity (deficiency).............. 12,606 (77,598) 684,037 619,045
--------- ----------- ----------- -----------
Total liabilities and stockholders' equity........... $1,594,512 $ 401,408 $ 737,685 $2,733,605
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combining financial information.
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<PAGE>
VIATEL UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
VIATEL
VIATEL DESTIA PRO FORMA MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Communication services revenue......................... $ 96,243 $ 138,590 $ -- $ 234,833
Capacity sales......................................... 34,102 -- -- 34,102
---------- ---------- ----------------- -----------
Total revenue........................................ 130,345 138,590 -- 268,935
---------- ---------- ----------------- -----------
Operating expenses
Cost of services and sales............................. 103,607 98,737 -- 202,344
Selling, general and administrative.................... 39,853 56,526 -- 96,379
Depreciation and amortization.......................... 21,582 12,764 54,174(2) 85,936
(2,584)(3)
---------- ---------- ----------------- -----------
Total operating expenses............................. 165,042 168,027 51,590 384,659
---------- ---------- ----------------- -----------
Operating loss........................................... (34,697) (29,437) (51,590) (115,724)
Interest income.......................................... 13,766 3,866 -- 17,632
Interest expense......................................... (61,665) (23,395) (14,286)(1) (88,850)
10,611(1)
(115)(5)
Other expense............................................ -- (743) -- (743)
---------- ---------- ----------------- -----------
Net loss................................................. (82,596) (49,709) (55,380) (187,685)
---------- ---------- ----------------- -----------
Dividends on redeemable convertible preferred stock...... (1,341) -- -- (1,341)
---------- ---------- ----------------- -----------
Net loss attributable to common stockholders............. $ (83,937) $ (49,709) $ (55,380) $ (189,026)
---------- ---------- ----------------- -----------
---------- ---------- ----------------- -----------
Loss per common share, basic and diluted:
Before extraordinary item.............................. $ (3.42) $ (2.07) $ (4.92)
From extraordinary item................................ -- -- --
---------- ---------- -----------
Net loss attributable to common stockholders........... $ (3.42) $ (2.07) $ (4.92)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common shares outstanding, basic and
diluted................................................ 24,524 24,028 38,415(4)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combining financial information.
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VIATEL UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VIATEL
VIATEL DESTIA PRO FORMA MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Communication services revenue........................ $ 131,938 $ 193,737 $ -- $ 325,675
Capacity sales........................................ 3,250 -- -- 3,250
----------- ---------- ----------------- -----------
Total revenue....................................... 135,188 193,737 -- 328,925
----------- ---------- ----------------- -----------
Operating expenses
Cost of services and sales............................ 122,109 140,548 -- 262,657
Selling, general and administrative................... 44,893 80,092 -- 124,985
Depreciation and amortization......................... 16,268 11,866 108,349(2) 133,937
(2,546)(3)
----------- ---------- ----------------- -----------
Total operating expenses............................ 183,270 232,506 105,803 521,579
----------- ---------- ----------------- -----------
Operating loss.......................................... (48,082) (38,769) (105,803) (192,654)
Interest income......................................... 28,259 11,516 -- 39,775
Interest expense........................................ (79,177) (41,030) (28,571)(1) (131,858)
17,151(1)
(231)(5)
Other expense........................................... -- (661) -- (661)
----------- ---------- ----------------- -----------
Loss before extraordinary loss.......................... (99,000) (68,944) (117,454) (285,398)
Extraordinary loss on debt prepayment................... (28,304) -- -- (28,304)
----------- ---------- ----------------- -----------
Net loss................................................ (127,304) (68,944) (117,454) (313,702)
Dividends on redeemable convertible preferred stock..... (3,301) -- -- (3,301)
----------- ---------- ----------------- -----------
Net loss attributable to common stockholders............ $ (130,605) $ (68,944) $ (117,454) $ (317,003)
----------- ---------- ----------------- -----------
----------- ---------- ----------------- -----------
Loss per common share, basic and diluted:
Before extraordinary item............................. $ (4.44) $ (3.31) $ (7.81)
From extraordinary item............................... (1.23) -- (0.77)
----------- ---------- -----------
Net loss attributable to common stockholders............ $ (5.67) $ (3.31) $ (8.58)
----------- ---------- -----------
----------- ---------- -----------
Weighted average common shares outstanding, basic and
diluted............................................... 23,054 20,846 36,945(4)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to unaudited pro forma combining financial information.
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VIATEL NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL INFORMATION
(1) Reflects the acquisition by Viatel Acquisition Corp. of Destia at June 30,
1999 as follows:
(i) the issuance of 13.9 million shares of Viatel common stock using an
exchange ratio of 0.445 of a share of Viatel common stock for each share
of Destia common stock; Viatel common stock is valued at $39.21 per
share, which represents the average of the closing stock price three
days prior to and three days after the announcement of the merger.
(ii) the exchange by holders of Destia's 11% senior discount notes due 2008
with accreted value of $203,547,000 at June 30, 1999, for Viatel's
11.50% senior dollar notes due 2009 with an estimated aggregate
principal amount of $207,840,000. Under the terms of the exchange,
holders of Destia's 11% senior discount notes will receive Viatel's
11.50% senior dollar notes. The pro forma calculations assume that 100%
of Destia's 11% senior discount notes will be tendered in the exchange
offer. For each 1% of Destia's 11% senior discount notes that are not
tendered in the exchange offer, the principal amount of Viatel pro
forma senior dollar notes issued will be reduced by $2,484,000. To the
extent that Destia's 11% senior discount notes are not exchanged,
Destia would have an obligation to repurchase any outstanding Destia
notes which are put back to Destia at 101% of accreted value. The pro
forma calculations also assume that none of Destia's 13.50% senior
notes due 2007 will be tendered to the combined company pursuant to the
offer to repurchase that Destia is required to make as a result of the
merger.
(iii) estimated transaction costs for Viatel of $7,725,000;
(iv) elimination of Destia goodwill and deferred financing costs;
(v) the value of Viatel stock options exchanged for outstanding Destia stock
options. Such value has been determined using the Black-Scholes method
assuming 92.5% volatility, a risk free interest rate of 5.6% and an
average exercise period of two years;
(vi) the value of Viatel warrants exchanged for outstanding warrants of
Destia. Such value has been determined using the Black-Scholes model
assuming 92.5% volatility, a risk free interest rate of 5.6% and an
average exercise period of two years; and
(vii) the elimination of historical net assets acquired comprised of Destia's
historical stockholders' equity reduced by goodwill and deferred
financing fees.
<TABLE>
<S> <C> <C>
Issuance of Common Stock (dollars in thousands)
Destia shares outstanding at June 30, 1999............... 31,119,397
Destia non-voting common shares outstanding at June 30,
1999................................................... 95,331
----------
Adjusted Destia shares outstanding June 30, 1999......... 31,214,728
Exchange ratio of 0.445 to 1 share....................... 0.445
----------
Number of shares issued to acquire Destia................ 13,890,554
Per share price.......................................... $ 39.21
Value of shares issued................................... $ 544,649
Value of debt exchanged.................................. 207,840
Value of options exchanged............................... 47,908
Value of warrants exchanged.............................. 13,882
Estimated Viatel transaction costs....................... 7,725
---------
Purchase price........................................... 822,004
Less net assets acquired:
Destia 11% senior discount notes due 2008 exchanged...... $ 203,547
Destia stockholders' deficit............................. (77,598)
Destia intangible assets................................. (50,809)
Destia deferred financing fees........................... (11,576)
----------
63,564
Excess of cost over historical net assets acquired....... $ 758,440
</TABLE>
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VIATEL NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL INFORMATION
For illustrative purposes, Viatel has made a preliminary allocation of
excess cost over estimated net assets acquired to goodwill as Destia's
assets and liabilities are estimated to approximate fair value. The final
allocation of purchase price to assets and liabilities acquired will depend
upon the final purchase price and the final estimates of fair values of
assets and liabilities of Destia at the closing date. Viatel will undertake
a study to determine the fair values of assets and liabilities acquired and
will allocate the purchase price accordingly. Viatel believes that the
carrying value of current assets and current liabilities approximates fair
value and that the excess of cost over historical net assets acquired will
be allocated to property and equipment, telecommunications licenses,
goodwill and other identifiable intangibles. However, there can be no
assurance that the actual allocation will not differ significantly from the
pro forma allocation.
(2) Reflects the amortization expense of the excess of cost over historical net
assets acquired in the merger by use of the straight-line method over 7
years. Should the allocation of such excess of cost over historical net
assets acquired differ significantly as described in note 1 above,
amortization expense could increase since the depreciable lives of assets
other than goodwill may be shorter.
(3) Reflects the elimination of Destia's historical amortization of goodwill and
deferred financing costs.
(4) The average common shares outstanding used in calculating pro forma loss per
common share from continuing operations are calculated assuming that the
estimated number of shares of Viatel common stock to be issued in the merger
were outstanding from the beginning of the periods presented. Options and
warrants to purchase shares of common stock were not included in computing
pro forma diluted earnings per common share because their inclusion would
result in a smaller loss per common share.
(5) Reflects the sale of $40,605,000 in principal amount of Viatel's 11.50%
senior dollar notes due 2009 for cash. The net proceeds from the offering of
$39,380,000 are assumed to be applied to purchase U.S. government securities
that are pledged to secure the payment of interest through March 15, 2001 on
$248,445,000 aggregate principal amount of Viatel's 11.50% senior dollar
notes. The related deferred financing costs of $2,250,000 are being
amortized over the term of the related debt.
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VIATEL BUSINESS
OVERVIEW
Viatel is a rapidly growing international communications company providing
high quality, competitively priced, long distance communication and data
services to end-users, carriers and resellers. Viatel's revenue has grown from
$32.3 million in 1995 to $135.2 million in 1998, and today Viatel has a direct
sales force in 12 Western European cities and an indirect sales force in more
than 180 locations in Western Europe.
To capitalize on the opportunities presented by deregulation of the
telecommunications industry in Western Europe, Viatel established an early
presence and sought aggressively to acquire licenses, interconnection and
infrastructure. Today, Viatel has licenses in each of Belgium, France, Germany,
Italy, The Netherlands and the United Kingdom and interconnection agreements
with the incumbent telecommunications operator in each of these countries.
Viatel also has licenses in Spain and Switzerland and expects to obtain
interconnection agreements in these countries during the fourth quarter of 1999.
Viatel currently operates one of Europe's largest pan-European networks,
with points of presence in 45 cities. Viatel believes that control of network
infrastructure is critical to becoming a high quality, low-cost provider of
communications services because it will enable Viatel to better manage service
offerings, quality of transmission and costs. Accordingly, Viatel is currently
in the process of migrating from a network composed of international and
domestic leased circuits to a network composed primarily of owned circuits. To
facilitate this transition, in 1998 Viatel commenced construction of a five-ring
fiber optic network in the largest telecommunications markets in Europe. These
five rings, which are expected to consist of approximately 8,700 route
kilometers, comprise Viatel's Circe Network. In March 1999, Viatel completed
construction of phase one of the Circe Network, which connects four European
countries and includes London, Paris, Amiens, Brussels, Antwerp, Rotterdam and
Amsterdam. In July 1999, Viatel completed construction of phase two of the Circe
Network, which extends through northern France, The Netherlands and into western
Germany. Viatel has begun construction of phase three, which will extend through
eastern Germany, and plans to begin construction of phases four and five, which
will extend into southern France and Switzerland, in the latter part of 1999. It
is currently anticipated that phases four and five will be completed during the
third quarter of 2000.
Viatel believes, and its experience to date has indicated, that demand from
end-users, carriers and other communications companies for high quality
transmission capacity in Europe will increase over the next several years due to
fundamental changes in the communications industry brought about by regulatory
and technical improvements. Viatel also believes that cost effective
transmission capacity in Europe will allow new capacity intensive applications
to be created which will, in turn, fuel the need for additional capacity.
Viatel's network should allow it to meet this increased demand by providing
abundant transmission capacity for:
- continued growth in existing long distance voice service business;
- additional provision of wholesale services to the large base of resellers
that is developing as deregulation continues in Western Europe;
- Internet, electronic commerce, multi-media and video services and other
new technologies and applications; and
- asynchronous transfer mode, frame relay, Internet protocol and other high
speed data transmission services.
As part of Viatel's strategy to capture a share of the rapidly growing data
market, in the first quarter of 1999 Viatel entered into an arrangement with
Lucent Technologies pursuant to which Lucent
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is installing asynchronous transfer mode backbone network equipment on Viatel's
Circe Network. This backbone equipment is designed to enable Viatel to provide
packet switched voice, video conferencing, private intranets and dedicated
Internet protocol transport over an integrated platform and offer end-users high
capacity, speed and reliability. Lucent has agreed to cooperate with Viatel in
developing marketing strategies to promote data services, to train Viatel's
personnel and to assist it in achieving network-to-network interfaces with
certain specified carriers. Viatel expects its data network to be commercially
operable in the second quarter of 2000.
MARKET OPPORTUNITIES
International telecommunications is one of the fastest growing segments of
the long distance industry, having experienced a compounded growth in total
minutes of 15.5% per annum from 1988 to 1998. In 1997, according to industry
sources, the European international long distance market for voice services was
the largest in the world, with approximately 29.6 billion minutes or 43% of
international calling volume originating in Europe. A substantial portion of the
traffic originating in Europe terminates in Europe or the United States, where
Viatel has international gateway switches.
INTERNATIONAL TRAFFIC PATTERNS
<TABLE>
<CAPTION>
DESTINATION
---------------------------------------
COUNTRY (MARKET DATA AS OF) EUROPE* USA OTHER
- -------------------------------------------------- OUTGOING MINUTES ------------- --- -----------
-----------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
United Kingdom (1997/1998)........................ 5,800 52% 13% 35%
Germany (1997).................................... 5,333 52 6 42
France (1997)..................................... 3,545 64 6 30
Italy (1997)...................................... 2,352 57 11 32
Switzerland (1997)................................ 2,164 70 4 26
Netherlands (1997)................................ 1,535 75 6 19
Belgium (1996).................................... 1,228 85 4 11
Spain (1995)...................................... 1,025 70 5 25
</TABLE>
- ------------------------
* Europe-EU member states and Switzerland.
Source: TeleGeography 1999.
In 1997, the market for total domestic and international long distance in
the Western European countries in which Viatel operates represented
approximately $104.3 billion, with $87.4 billion representing national long
distance and approximately $16.9 billion representing international long
distance (Source: "The European Telecommunications Fact File 1998"). In many
European Union member states, the ability to provide telecommunications services
was liberalized on January 1, 1998. Viatel believes that regulatory
liberalization in Western Europe and technological advancements eventually will
lead to market developments similar to those that have occurred in the United
States and the United Kingdom following deregulation, including an increase in
both international and national traffic volume, reduced prices, increased
service offerings and the emergence of new entrants. By 1997, new entrants had
amassed approximately 56.4% of the United States international long distance
market, from approximately 2.7% in 1985. (Source: FCC Common Carrier Bureau). In
addition, from 1991 to July 1998 the number of licensed long distance
competitors in the United Kingdom grew from 2 to 144. (Source: TeleGeography,
1999).
Viatel believes that there continues to be a shortage of cross-border
capacity in Europe. Most infrastructure in Europe is owned and operated by the
incumbent telecommunications operator. Under the traditional system of carrying
cross-border telecommunications traffic in Europe, the incumbent
telecommunications operators did not develop end-to-end cross-border circuits,
but rather connected their national networks with other carriers at the border
pursuant to bilateral agreements. Viatel
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believes the system of bilateralism resulted in a serious shortage of
cross-border capacity in Europe. Viatel also believes that cost-effective
transmission capacity in Europe will allow new capacity intensive applications
to be created which will, in turn, fuel the need for additional capacity.
Viatel believes that a substantial part of the capacity on existing routes
has a number of deficiencies including: (1) high costs, (2) lack of end-to-end
quality control, (3) limited availability of capacity, (4) long lead times for
provisioning, (5) lack of redundancy and (6) long delays for restoration. While
there have been significant reductions in leased line costs as a result of
deregulation, these deficiencies are exacerbated by the increase in demand for
capacity from new entrants, thereby resulting in artificially and significantly
higher costs. Viatel believes there is a significant opportunity to provide high
quality, cost-effective capacity to new entrants.
SERVICES
Viatel currently provides competitively priced long distance services with
value-added features that typically have not been provided by the respective
international telecommunications operator in many of the countries in which it
operates. The products and services include switched and dedicated long
distance, 800 services, calling cards, domestic and international private line,
debit cards, conference calling, advanced billing systems, enhanced fax and data
connections and management. Viatel is actively exploring the provision of new
services, including Internet access, web hosting, asynchronous transfer mode and
frame relay services, the provision and management of intranets and virtual
private networks and video conferencing. Viatel has an arrangement with Lucent
to facilitate the provision of these services in the future.
Viatel's principal services include:
VIADIRECT--permits domestic and international calling to more than 230
countries and territories through interconnect switched access. This service is
currently marketed exclusively in Belgium, France, Germany, The Netherlands and
the United Kingdom where Viatel has full interconnection and a national
operator's license. In addition, carrier preselection, eliminating the
requirement to dial carrier selection codes, is available in Germany.
VIADIRECT PLUS--provides dedicated access via a leased line from the
customer to Viatel's network, permitting calling without dialing access or
location codes.
VIACALL EXPRESS--provides a paid (local) access or toll free number
programmed to dial an existing phone number or system, generally in another
country, without the need for special circuits or modifications.
VIACALL--enables virtual private network calling to a pre-defined group of
locations within a closed user group that can be modified as required, subject
to regulatory limitations.
VIACONNECT--provides "anywhere to anywhere" international callback access
through manual, automatic or Internet initiated callback. These services are
also offered with international toll-free access, subject to pricing
considerations.
VIAGLOBE--provides calling card access from more than 50 countries. In
addition to offering savings over the calling cards of AT&T, MCI and other
providers of credit-based international calling cards, VIAGLOBE provides 24-hour
operator assistance and speed dialing.
VIACARD--is a prepaid international debit card which provides many of the
same features as VIAGLOBE on a prepaid basis.
VIALINK--is the new audio conference service, allowing automatic, manual or
operator assisted establishment of conference calls 24 hours a day, seven days a
week.
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VIA0800--is a personal 0800 number permitting users to call the sponsor at
no cost.
Viatel recently announced its offering of the "One World, One Rate" Club,
which is available to business and residential customers in Belgium, Canada,
France, Germany, The Netherlands, Switzerland, the United Kingdom and the United
States. Club members will be able to make domestic and international long
distance calls within these eight countries--24 hours as day, seven days a
week-- for only five cents per minute. Club subscribers will be able to choose
from three levels of membership which will entitle the member to a specified
number of minutes at the club rate. The club rate is scheduled to be rolled-out
on January 1, 2000. The "One World, One Rate" Club is a joint product offering
within Destia.
DATA SERVICES
The data communications industry is expected to grow in the near term. To
efficiently handle this growth, the industry has been shifting away from circuit
switching, where a route is maintained for the duration of an entire call, to
packet switching, where digital packets of information for various destinations
are routed over a frame relay, asynchronous transfer mode or Internet protocol
network in an efficient and cost-effective manner.
As part of Viatel's strategy to capture a share of the rapidly growing data
business market, in the first quarter of 1999 Viatel entered into an arrangement
with Lucent pursuant to which Lucent is installing asynchronous transfer mode
backbone network equipment on its Circe Network. This backbone equipment is
designed to enable Viatel to provide packet switched voice, video conferencing,
private intranets and dedicated Internet protocol transport over an integrated
platform and offer end-users high capacity, speed and reliability. Lucent has
agreed to cooperate with Viatel in developing marketing strategies to promote
Viatel's data services, to train Viatel's personnel and to assist Viatel in
achieving network-to-network interfaces with certain specified carriers. Viatel
believes that its data network will be commercially operable in the second
quarter of 2000.
Viatel has no direct experience in offering data services. See "Risk
Factors--The Combined Company May Not Be Able to Provide Data Transmission
Services Effectively."
THE VIATEL NETWORK
Viatel currently operates one of Europe's largest pan-European networks,
with international gateway switching centers in New York, New York; Somerset,
New Jersey; and London, England, points of presence in 45 Western European
cities, including switches in Amsterdam (The Netherlands), Barcelona and Madrid
(Spain), Brussels (Belgium), Frankfurt (Germany), Milan and Rome (Italy) and
Paris (France), and Viatel's Circe Network. Additional points of presence are
placed to enhance network use and as required by the various interconnection
agreements to which Viatel is a party. Viatel intends to install additional
points of presence in cities with both significant calling activity directed to
its switched-based cities and significant potential for originating and
terminating international and domestic long distance traffic.
Access to Viatel's services is obtained either through "indirect access" or
"dedicated access." Currently, substantially all of its business end-users use
one or more forms of indirect access. Indirect access requires the end-user to
use (1) carrier selection codes (e.g., "1623" in The Netherlands, Belgium and
France, "01079" in Germany), which require Viatel to pay a regulated tariff for
using the incumbent telecommunications operator's network to originate the
calls; (2) national or international toll-free, which accesses a Viatel switch
by direct dial; or (3) call reorigination, which enables the end-user to receive
a return call providing a dial tone originated from one of Viatel's U.S.
switching centers. End-users using dedicated access are connected to one of
Viatel's switches or points of presence by a private leased line connected to
the end-user's premises. Carrier selection and dedicated access are Viatel's
access methods of choice. As the regulatory environment permits, Viatel expects
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<PAGE>
more customers will pre-select it as their long distance provider. As Viatel's
service offering broadens, it anticipates the percentage of its customers who
utilize dedicated access will increase. Viatel currently has interconnection
agreements with Belgacom (Belgium), British Telecom (United Kingdom), Deutsche
Telekom (Germany), France Telecom (France), KPN (The Netherlands), Telecom
Italia (Italy) and Telefonica de Espana (Spain). Viatel also has interconnection
agreements with Cable & Wireless (United Kingdom) and Infostrada (Italy). Viatel
is currently negotiating an interconnection agreement with Swisscom
(Switzerland). Viatel can provide no assurance that it will be successful in
securing such interconnection agreement in a satisfactory or timely manner.
Viatel's ownership of transmission infrastructure and switches reduces its
reliance on other carriers, enables routing of telecommunications traffic over
multiple transmission paths, aids in controlling costs and permits the
compilation of call record data and other customer information.
THE EUROPEAN PORTION OF VIATEL'S NETWORK
Viatel's network in Europe currently consists of an international gateway
switching center in London, switches in the Western European cities mentioned
above and Viatel's Circe Network. The cities in which Viatel's switches are
located were chosen due to the substantial number of international calls
originating there. To date, Viatel's European network has been primarily used
for call origination. Viatel anticipates increasing use of its European network
to transport calls in Western Europe. See "--Carrier Contracts."
CIRCE NETWORK
Viatel's Circe Network is a series of state-of-the-art, high quality, high
capacity, self-healing rings, utilizing advanced synchronous digital hierarchy,
the current international standard for digital transmission, and dense wave
division multiplexing technology.
As currently planned, the Circe Network will be comprised of five
interlocking, bi-directional rings, consisting of approximately 8,700 route
kilometers of fiber optic cable. The first phase of the Circe Network,
consisting of approximately 1,850 route kilometers (including 312 route
kilometers of undersea fiber optic cable) was placed into operation during the
first half of March 1999. The second phase, which extends through northern
France, The Netherlands and into western Germany, was placed into service on
July 29, 1999. The third phase, which will extend through eastern Germany,
currently is scheduled to be placed into service during the first quarter of
2000. Viatel currently anticipates that the fourth and fifth phases of the Circe
Network, which will extend into southern France and Switzerland, will be
completed during the third quarter of 2000.
The Circe Network offers incumbent telecommunications operators and new
entrants a compelling, cost-effective, high quality alternative for the
transport of European cross-border telecommunications traffic. Under the
traditional system of carrying cross-border telecommunications traffic in
Europe, the incumbent telecommunications operator did not develop end-to-end
cross-border circuits, but rather connected their national networks with other
carriers at the border. The Circe Network's cross-border transport will offer
consistently high transmission quality at reduced cost.
Key characteristics of the Circe Network include:
STATE-OF-THE-ART-TECHNOLOGY. The Circe Network uses a laser-generated light
to transmit information bi-directionally over fiber optic glass strands with an
initial capacity of 20 gigabits per second. In addition, the Circe Network
employs dense wave division multiplexing technology. This technology allows more
discrete wavelengths of light to be transmitted through fiber, thereby
permitting the transfer of greater amounts of information at a lower cost than
was achievable with prior fiber optic technology.
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UNIFORM NETWORK ARCHITECTURE. The entire Circe Network will consist of a
single uniform configuration of Northern Telecom's optronics and Lucent's fiber
optic cable, thereby enhancing service quality while improving efficiency and
lowering costs.
SECURE AND RELIABLE. The Circe Network is being designed to provide high
security and reliability, employing such features as:
- two redundant network operating centers monitoring the network 24 hours a
day, seven days a week;
- a self-healing architecture to allow for instantaneous restoration in the
event of a single fiber cut;
- fiber optic cable generally installed in high-density polyethylene
conduits on terrestrial portions of the system; and
- advanced cable armoring techniques on the submarine portions of the
system.
SCALABLE AND FLEXIBLE. The Circe Network's high density network
architecture may be upgraded, without service interruptions, to at least 320
gigabits per second per fiber pair through the use of dense wave division
multiplexing technology, to support demand for bandwidth intensive data
applications. Viatel anticipates that each ring of the Circe Network will
contain multiple conduits containing at least 48 fibers. These conduits will
have excess space through which additional fibers may be run without the
necessity for any further material civil works.
PRIVATE LINE CIRCUITS
While some of Viatel's nine switches in Western Europe are currently still
connected to its international gateway switching center in London by private
line circuits, these switches will be connected by the Circe Network as the
various rings are constructed and placed into commercial operation. Private line
circuits are permanent point-to-point connections for voice and data
transmissions and, when certain levels of volume are reached, are less expensive
for Viatel than purchasing minutes of use on another carrier's network. The
private line circuits connecting Viatel's switches to the international gateway
switching center in London are leased directly, or indirectly through third
parties, from the incumbent telecommunications operator in the countries in
which these calls originate.
DIGITAL FIBER OPTIC CABLE OWNERSHIP
As part of Viatel's concerted effort to convert leased capacity to owned
capacity for the purpose of improving operating margins, it has continued to
purchase indefeasible rights-of-use or minimum investment units in digital fiber
optic cable systems, including indefeasible rights-of-use in (i)
CANUS-1/CANTAT-3 (8.192 megabits per second), a transatlantic cable originating
in the United States, Canada and the United Kingdom, (ii) TAT-12/13 (8.192
megabits per second), a transatlantic cable originating in the United States,
the United Kingdom and France, (iii) Atlantic Crossing-1 (1,555.0 megabits per
second), a transatlantic cable originating in the United States and the United
Kingdom, and (iv) Gemini (44.736 megabits per second), a transatlantic cable
originating in the United States and the United Kingdom, and minimum investment
units in (i) FLAG (2.048 megabits per second), a cable connecting Europe with
multiple locations in the Middle East and South and Eastern Asia, (ii) TAT-14
(311.0 megabits per second) and (iii) JUS-1 (155.5 megabits per second). Viatel
also intends to acquire additional interests in digital fiber optic cable
originating from its owned infrastructure and connected to certain European
Union member states in which it has a physical presence. These cables will be
used for transmission of traffic between the United States and Europe and within
Europe, resulting in improved service quality at lower cost. By combining
international gateway switching centers in New York and London with its
transatlantic fiber optic cable capacity,
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Viatel believes that it will be able to provide customers with improved quality,
while lowering its transmission costs. See "Viatel Management's Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of
the effect of bringing traffic on-net.
SWITCHING PLATFORMS
Viatel's entire network utilizes "intelligent switches" which incorporate
software designed to achieve least cost routing, the process by which Viatel
enhances the routing of calls over the network for more than 230 countries and
territories. Least cost routing is designed to allow calls that are not routed
over the Viatel network to be routed directly from its switches to carriers that
offer call completion at the lowest rate for each particular route at any given
time.
Viatel's network uses high capacity digital switching platforms designed to
provide services quickly and cost-effectively. The switches are modular and
scalable and incorporate some of the most advanced technologies such as
self-diagnosis, integrated services, digital network hierarchical, call control
and dynamic network management software. The backbone switches are primarily
Nortel Telecom DMS switches. As Viatel's network continues to evolve, the
installed base of switches can be augmented or upgraded to create a
cost-effective, scalable network.
INTERNATIONAL NETWORK OPERATIONS CENTERS
Viatel currently monitors the activity of its network from international
network operations centers in Egham, England and Somerset, New Jersey. These
international network operations centers have been fitted with sophisticated
surveillance and control capability, fraud detection and real time transmission
quality enhancements. Viatel's Omaha, Nebraska site houses back office systems
supporting the international network operations centers and Viatel's network.
Each international network operations center is capable of acting as a full
backup to the other and allows full monitoring capability and remote diagnostics
and testing on key elements of Viatel's network.
The international network operations centers utilize a portfolio of
telecommunications network management operations support systems from Lucent.
The Lucent systems are expected to be functionally integrated into one platform
supporting multi-vendor network elements. Service activation provides workflow
management from order entry through network provisioning and into billing.
Service assurance includes trouble receipt, trouble management, and switch
surveillance to include both traffic management and fault monitoring. Network
management includes inventory management, design and network performance. The
Lucent operations support systems provide Viatel with state-of-the-art service
activation, service assurance and network management capabilities.
SALES AND MARKETING; CUSTOMERS
The Circe Network is designed to allow end-users, carriers and resellers to
integrate high quality, cross-border capacity into their end-user offerings.
Prior to bringing the Circe Network into service, Viatel was limited in its
ability to provide high capacity services to other carriers and thus, focused
its business on selling to end-users and selling switched minutes to carriers
and resellers in order to help use the fixed capacity of leased lines. With the
high quality, low cost transmission capacity to be provided by the Circe
Network, Viatel will be well positioned to offer large capacity services to the
additional market segments listed below. Viatel is targeting the following seven
major market segments:
- RESELLERS. Resellers are carriers that do not own transmission facilities
but obtain communications services from another carrier for resale to the
public. Resellers are a growing portion of the market and are expected to
increase in conjunction with the liberalization of the European
telecommunications market.
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- INCUMBENT TELECOMMUNICATIONS OPERATORS. These customers consist of the
incumbent telecommunications operators that have historically employed
bilateral agreements with other incumbents for cross-border connectivity
but are now selling their own transborder connectivity by leasing capacity
on alternative networks.
- INTERNATIONAL CARRIERS. These customers consist of non-European carriers
with traffic between European and other international gateways. Viatel can
provide these customers a pan-European distribution network to gather and
deliver traffic to and from their own networks and other hubs.
- END-USERS. Small- to large-sized enterprises need inexpensive voice and
data services. The Circe Network should allow Viatel to satisfy this need
and provide bundled services. Viatel expects that additional demand for
alternative service providers will come from increased usage of dedicated
circuits for Internet access, private lines for the deployment of
wide-area networks by large enterprises, "single source" local and long
distance services by small and medium-sized enterprises and emerging high
capacity applications like cable TV programming distribution, other than
broadcast, to the end-user.
- ALTERNATIVE CARRIERS. These customers consist of new entrant carriers,
cable TV and mobile carriers and competitive access providers. These new
carriers have chosen to compete with the incumbent telecommunications
operators in their respective countries.
- INTERNET SERVICE PROVIDERS. Internet service providers are emerging
rapidly and are expected to generate significant requirements for the
services which Viatel offers. As capacity becomes available in Europe,
Internet usage also is expected to grow. These networks require large
capacity international connectivity services between Internet nodes,
points of interconnection among multiple local Internet service providers,
in all local European markets.
- VALUE ADDED NETWORKS AND OTHER SERVICE PROVIDERS. Value added networks are
data communications systems in which special service features enhance the
basic data transmission facilities offered to customers. Many of these
networks are targeted to the data transfer requirements of specific
international customer segments, such as financial institutions. Many
value added networks' basic network transmission requirement is to connect
data switches or processors. Value added networks' providers purchase
their own international circuits and build additional resiliency into
their network infrastructure. Viatel will allow them to meet these needs
cost-effectively, and to extend their services to new markets or customers
while minimizing capital investment. This market segment is expected to
experience substantial growth over the next several years.
During 1998, one customer, LD Exchange.com, accounted for 10.6% of Viatel's
revenues.
From 1991 to 1994, Viatel's sales and marketing efforts were conducted by
independent sales representatives in each of its markets. In late 1994, Viatel
began establishing its own direct sales forces in certain Western European
markets to take greater control over the sales and marketing functions and to
provide a higher level of customer service. Currently, Viatel has a direct sales
force in twelve cities in Western Europe and has established indirect sales
offices, through arrangements with independent sales representatives and
telemarketing agents, in more than 180 locations in Western Europe. Viatel has
sales professionals dedicated to marketing and maintaining relationships with
its wholesale customers in the United States and in the United Kingdom. In
Europe, Viatel's sales and marketing staff is currently divided into two
categories: direct sales representatives and indirect sales representatives.
Direct sales representatives are responsible for face-to-face sales efforts to
larger accounts and indirect sales representatives are responsible for telesales
to smaller accounts.
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Viatel's direct sales personnel are currently compensated on a salary and
commission basis, with potential commissions being paid on the basis of revenues
generated by new customers solely during their first three months as a customer.
After this three month period, the customer is turned over to proactive account
managers who manage the account and are compensated based on the monthly growth
of such account above certain minimum requirements. Viatel believes that this
compensation structure provides maximum incentive to its direct sales force to
continue to grow Viatel's customer base and revenue.
Viatel's independent sales representatives are retained on a
non-exclusive/commission-only basis, with commissions being subject to
charge-back for revenues not collectible by Viatel. Viatel believes that its
relationship with its independent sales representatives is good.
INFORMATION SYSTEMS
Viatel believes that integrated and reliable billing and information systems
are key elements for growth and success in the telecommunications industry.
Accordingly, Viatel has made significant investments to acquire and implement
sophisticated information systems which are designed to enable it to:
- monitor and respond to customer needs by developing new and customized
services,
- manage least cost routing,
- provide customized billing information,
- provide high quality customer service,
- detect and control fraud,
- verify payables to suppliers and
- rapidly integrate new customers.
Viatel believes that its network intelligence, billing and financial
reporting systems enhance its ability to competitively meet the increasingly
complex and demanding requirements of the international and national long
distance markets. While Viatel believes that these systems are currently
sufficient for its operations, these systems will require routine upgrades and
ongoing investments.
Viatel currently has a turnaround time of approximately 48 hours for new
account entry, subject to credit approval. However, commencement of service can
take substantially longer. Viatel's billing system provides multicurrency
billing, itemized call detail, city level detail for destination reporting and
electronic output for select accounts. Customers are provided with several
payment options, including automated credit card processing and automated direct
debiting.
Viatel has developed software to provide telecommunications services and
render customer support. Each switch has a call detail recording function which
is designed to enable Viatel to: (1) achieve accelerated collection of call
records; (2) detect fraud and unauthorized usage; and (3) permit rapid call
detail record analysis.
Viatel also uses software to assist in analyzing traffic patterns and
determining network usage and busy hour percentage, originating traffic by
switching center, terminating traffic by supplier and originating traffic by
customer. This data is utilized to provide least cost routing, which may result
in call traffic being transmitted over Viatel's transmission facilities, other
carriers' transmission facilities or a combination of such facilities. If
traffic cannot be handled over the least cost route due to overflow, the least
cost routing system is designed to transmit the traffic over the next least cost
route. The least
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cost routing system chooses among the several variables to minimize the cost of
a long distance call over more than 15 different suppliers and multiple choices
of terminating carrier per country. The performance of the least cost routing
system is verified based on a daily overflow report generated by Viatel's
network traffic management and a weekly/monthly average termination cost report
generated by its billing system.
CARRIER CONTRACTS
Viatel has entered into contracts to purchase switched minute capacity from
various domestic and foreign carriers and currently depends on such contracts
for origination and termination of traffic on its network as well as for resale
of this capacity to others. Carrier costs currently constitute a significant
portion of Viatel's variable costs. Pursuant to these contracts, Viatel obtains
guaranteed rates, which are generally more favorable than otherwise would be
available, by committing to purchase minimum amounts of switched minutes from
such carriers. If Viatel fails to meet its switched minute minimum requirements
under a carrier contract, it would still be required to pay its minimum monthly
commitment as a penalty. Viatel does not believe that the loss of any one
supplier or contract would have a material adverse impact on its business,
financial condition or results of operations. See "Viatel Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
Viatel's competitors include the incumbent telecommunications operator in
each country in which it operates, global alliances among some of the world's
largest telecommunications carriers and new entrants, such as alternative
carriers, Internet backbone networks and other service providers. Two other
broadband European networks are currently operational--KPN/Qwest and GTS/Esprit,
and other broadband networks in Europe are expected to be operational in the
next 12 months. These include networks being constructed by Global Crossing,
Interoute and Concert, and the joint venture between British Telecom and AT&T.
In addition, Colt Telecom Group and Level 3 Communications are sharing the costs
of constructing two networks--one to link the German cities of Berlin, Koln,
Dusseldorf, Frankfurt, Hamburg, Munich and Stuttgart and the other linking
Paris, Frankfurt, Amsterdam, Brussels and London. Other potential competitors
include:
- Internet service providers,
- cable communications companies,
- wireless telephone companies,
- electric and other utilities with rights-of-way,
- railways,
- microwave carriers and
- large end-users which have private networks.
The intensity of competition in both billable minutes and capacity has
increased over the past several years, and Viatel believes that competition will
continue to intensify, particularly in Western Europe, as other providers obtain
connectivity.
Viatel is aware that certain long distance carriers are expanding their
capacity and believes that other long distance carriers and data service
providers, as well as potential new entrants to the industry, will construct new
fiber optic and other long distance transmission networks. Since the cost of the
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actual fiber is a relatively small portion of the cost of building new
transmission lines, persons building such lines are likely to install fiber that
provides substantially more transmission capacity than will be needed over the
short- or medium- term. Further, recent technological advances have shown the
potential to greatly expand the capacity of existing and new fiber optic cable.
In addition, Viatel's sales or leases of capacity on the Circe Network to other
carriers may result in competitors having capacity on routes along the Circe
Network, which may in turn result in pricing pressures with respect to traffic
carried along these routes. If capacity expansion in the telecommunications
industry results in capacity that exceeds overall demand in general or along any
of Viatel's routes, severe additional pricing pressure could develop. In
addition, strategic alliances or similar transactions could result in additional
competitive pressure on Viatel and could have a material adverse effect on
Viatel. See "Viatel Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
Many of Viatel's current and potential competitors have substantially
greater financial, marketing and other resources than it does. If Viatel's
competitors devote significant additional resources to the provision of
international or national long distance telecommunications services to its
target customer base, this action could have a material adverse effect on
Viatel's business, financial condition and results of operations and Viatel
cannot make any assurance that it will be able to compete successfully.
Because all of Viatel's current and intended European markets (other than
the United Kingdom) have only liberalized the provision of switched voice
telephony during the past 22 months or still are in the process of liberalizing,
customers in most of the markets are not accustomed to obtaining services from
competitors to incumbent telecommunications operators and may be reluctant to
use emerging telecommunications providers such as Viatel. In particular,
Viatel's targeted customer base may be reluctant to entrust their
telecommunications needs to new operators that are believed to be unproven. In
addition, in continental Europe, certain of Viatel's competitors, including the
incumbent telecommunications operators, provide potential customers with a
broader range of services than Viatel is currently offering.
Competition for customers in the telecommunications industry is primarily
based on price and quality of services offered. Viatel prices its services
primarily by offering discounts to the prices charged by incumbent
telecommunications operators and other major competitors. However, over the past
few years, prices for long distance calls have decreased substantially in the
markets in which Viatel currently maintains operations and in which it expects
to establish operations. Some of Viatel's larger competitors may be able to use
their greater financial resources to cause severe price competition in the
countries in which Viatel operates or expects to operate. Incumbent
telecommunications operators in several Western European countries are
responding to deregulation far more rapidly and aggressively than occurred after
deregulation in the United States and the United Kingdom. Viatel expects that
prices for its services will continue to decrease for the foreseeable future and
that incumbent telecommunications operators and other dominant carriers will
continue to improve their product offerings.
The improvement in product offering and customer service by the incumbent
telecommunications operators could have a material adverse effect on Viatel's
competitiveness to the extent that Viatel is unable to provide similar levels of
offerings and services. If the incumbent telecommunications operator in any
jurisdiction uses its competitive advantages to their fullest extent, Viatel's
operations in that jurisdiction would be adversely affected. Furthermore, the
marginal cost of carrying calls over fiber optic cable is extremely low. As a
result, certain industry observers have predicted that, within a few years,
there may be dramatic and substantial price reductions and that long distance
calls will not be significantly more expensive than local calls. In addition,
numerous carriers currently offer or are implementing plans to offer
telecommunications services over the Internet at substantially reduced prices.
Any price competition could have a material adverse effect on Viatel's business,
financial condition and results of operations.
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Incumbent telecommunications operators generally have certain competitive
advantages that Viatel and other competitors do not have due to their control
over local connections. Viatel relies on the incumbent telecommunications
operator for access to the public switched telephone network and the provision
of leased lines, and the failure of the incumbent telecommunications operators
to provide this kind of access or leased lines at reasonable pricing or within a
reasonable time frame could have a material adverse effect on Viatel's business,
financial condition and results of operations. The reluctance of some national
regulators to grant regulatory approvals, provide operative interconnection and
enforce access to these operators' networks and essential facilities could have
a material adverse effect on Viatel's competitive position. Viatel cannot
provide any assurance that it would be able to compete effectively in any of its
current or proposed markets. The Circe Network will reduce Viatel's dependence
on incumbent telecommunications operators for leased long-haul lines, but it
will not reduce dependence on such carriers to "last mile" access to the vast
majority of Viatel's end-user customers.
GOVERNMENT REGULATION
OVERVIEW
National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which
Viatel currently operates and intends to operate. The interpretation and
enforcement of these laws and regulations varies and could limit Viatel's
ability to provide certain telecommunications services in certain markets.
Viatel cannot provide any assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on it, that domestic
or international regulators or third parties will not raise material issues with
regard to Viatel's compliance with applicable laws and regulations, or that
other regulatory activities will not have a material adverse effect on its
business, financial condition and results of operations.
INTERNATIONAL TRAFFIC
Under the World Trade Organization ("WTO") Agreement, concluded on February
15, 1997, 69 countries comprising 95% of the global market for basic
telecommunications services agreed to permit competition from foreign carriers.
In addition, 59 of these countries have subscribed to specific pro-competitive
regulatory principles. The WTO Agreement became effective on February 5, 1998
and has been implemented, to varying degrees, by the signatory countries. Viatel
believes that the WTO Agreement will increase opportunities for it and its
competitors. However, Viatel cannot provide any assurance that the WTO Agreement
will result in beneficial regulatory liberalization in all signatory countries.
On November 26, 1997, the Federal Communications Commission adopted the
Foreign Participation Order to implement the U.S. obligations under the WTO
Agreement. In this order, the Federal Communications Commission adopted an open
entry standard for carriers from World Trade Organization member countries,
generally facilitating market entry for such applicants by eliminating certain
existing tests. These tests remain in effect, however, for carriers from
non-member countries.
International carriers serving the United States, including Viatel, are
subject to the Federal Communications Commission's international settlements
policy which, as discussed below, has been susbtantially relaxed. The
international accounting rate system allows a U.S. facilities-based carrier to
negotiate an accounting rate with a foreign carrier for handling each minute of
international telephone service. Each carrier's portion of the accounting rate,
usually one-half, is referred to as the settlement rate. Historically,
international settlement rates have vastly exceeded the cost of terminating
telecommunications traffic. The Federal Communications Commission's
international settlements policy requires: (1) the equal division of the
accounting rate between the U.S. and foreign carrier,
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(2) nondiscriminatory treatment of U.S. carriers, and (3) proportionate return
of inbound traffic. To enforce the international settlements policy, the Federal
Communications Commission has required carriers to file publicly available
copies of their international settlement arrangements.
The Federal Communications Commission adopted rules regarding specific rate
levels for international settlements rates, which became effective on January 1,
1998 and which were substantially affirmed by the Federal Communications
Commission on reconsideration on June 11, 1999. Many parties appealed the
International Settlement Rates Order to the U.S. Court of Appeals for the D.C.
Circuit. On January 12, 1999, the U.S. Court of Appeals for the D.C. Circuit
issued an order resolving this appeal, upholding the International Settlement
Rates Order in all respects.
The International Settlement Rates Order generally requires U.S.
facilities-based carriers to negotiate settlement rates with their foreign
correspondent at no greater than Federal Communications Commission-established
benchmark prices. In addition, the International Settlement Rates Order imposed
new conditions upon certain carriers, including Viatel. First, as amended on
reconsideration, the Federal Communications Commission conditioned
facilities-based authorizations for service on a route on which a carrier has a
foreign affiliate with market power upon the foreign affiliate offering all
other U.S. carriers a settlement rate at or below the relevant benchmark. None
of Viatel's foreign affiliates have market power. Second, the Federal
Communications Commission conditioned any authorization to provide switched
services over either facilities-based or resold international private lines upon
the condition that at least half of the facilities-based international message
telephone service traffic on the subject route is settled at or below the
relevant benchmark rate. This condition applies whether or not the licensee has
a foreign affiliate on the route in question.
In the Foreign Participation Order described above, however, if the subject
route does not comply with the benchmark requirement, a carrier can demonstrate
that the foreign country provides "equivalent" resale opportunities.
Accordingly, since the February 9, 1998 effective date of the Foreign
Participation Order, Viatel has been permitted to resell private lines for the
provision of switched services, also known as international simple resale, to
any country that either has been found by the Federal Communications Commission
to comply with the benchmarks or has been determined to be equivalent. Viatel,
however, remains subject to prior Federal Communications Commission approval in
order to provide resold private lines to any country in which it has an
affiliated carrier that has not been found by the Federal Communications
Commission to lack market power.
In new rules released on May 6, 1999, and which became effective on July 29,
1999, the Federal Communications Commission removed the international
settlements policy for: (1) all settlement arrangements between U.S. carriers
and foreign carriers that lack market power, and (2) all settlement arrangements
on routes where U.S. carriers are able to terminate at least 50 percent of their
traffic in the foreign market at rates that are at least 25 percent below the
applicable benchmark settlement rate. In this international settlement policy
order, the Federal Communications Commission also eliminated the requirement
that carriers file the settlement arrangements where the international
settlements policy has been eliminated. Finally, the international settlement
policy order expanded its rules to permit carriers to provide international
simple resale on any route where the resale carrier exchanges switched traffic
with a foreign carrier that lacks market power. Accordingly, Viatel will have
more flexibility in negotiating settlement arrangements with many carriers on
many routes, which it expects will lower costs of terminating international
traffic, although Viatel's competitors will benefit from these new rules in the
same way.
Increasing regulatory liberalization in many countries' telecommunications
markets now permits more flexibility in the way Viatel can route calls. Although
certain Federal Communications Commission rules limit the way in which some
international calls can be routed, Viatel does not believe that its network
configuration, specifically the way in which traffic is routed through its
facilities in the U.K., is specifically prohibited by, or undermines in any way,
the intent of these rules. It is possible,
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however, that the Federal Communications Commission could find that Viatel's
network configuration violates these rules. If Viatel were found to be in
violation of these routing restrictions, and if the violation were sufficiently
severe, it is possible that the Federal Communications Commission could impose
sanctions and penalties upon it.
REGULATORY STATUS
A summary discussion of the regulatory environment in certain geographic
regions in which Viatel operates or has targeted for penetration is set forth
below.
EUROPEAN UNION. The European Union consists of the following member states:
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom. The
European Union was established by the Treaty of Rome and subsequent treaties.
European Union member states are required to implement directives issued by the
European Commission and the European Council by passing national legislation. If
a European Union member state fails to effect such directives with national (or,
as the case may be, regional, community or local) legislation and/or fails to
render the provisions of such directives effective within its territory, the
European Commission may take action against the European Union member state,
including in proceedings before the European Court of Justice, to enforce the
directives. Private parties may also bring actions against European Union member
states for failures to implement such legislation.
In an effort to promote competition and efficiency in the European Union
telecommunications market, the European Commission and European Council have
issued a number of key directives establishing basic principles for the
liberalization of the European Union telecommunications market. The general
framework for this liberalized environment has been set out in the European
Commission's Services Directive and its subsequent amendments, including, in
particular, the Full Competition Directive, adopted in March 1996. These
directives require most European Union member states to permit competition in
all telecommunications services and had set January 1, 1998 as the date by which
all restrictions on the provision of telecommunications services and
telecommunications infrastructure were to be removed, except in member states
receiving special derogations. These directives have been supplemented by
various harmonizing directives, which include the Open Network Provision
Directives, as well as two additional directives adopted in 1997, the Licensing
Directive and the Interconnection Directive.
The Licensing Directive established a framework for the granting of national
authorizations and licenses related to telecommunications services. It permits
European Union member states to establish different categories of licenses for
providers of infrastructure and services, but requires the overall scheme to be
transparent and non-discriminatory. The Interconnection Directive requires
member states to remove restrictions preventing negotiation of interconnection
agreements. The Interconnection Directive requires member states to remove
restrictions preventing negotiation of interconnection agreements. It imposes
certain rights and obligations on all operators deemed by the member state
regulator to be covered by the directive. It also imposes additional obligations
on operators deemed by the member state regulator to have significant market
power. These include obligations on fixed operators to offer cost oriented
interconnection charges on non-discriminatory and transparent terms to other
operators granted interconnection rights under the directive. The objective of
the directive is to ensure adequate and efficient interconnection for public
telecommunications networks and publicly available telecommunications services.
In October 1997, the European Commission issued a consultative document on
how the cost-orientation obligation on fixed operators with significant market
power should be interpreted. The Commission recommends that cost oriented
interconnection charges should be based on long running
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incremental costs. The Commission published benchmark interconnection rates
derived from some of the long range incremental cost-based charges being offered
at the time. For example, in the U.K. these rates were intended to be guidance
to member states of what should be considered an acceptable level of
interconnection charging by fixed operators with significant market power. They
could be adopted in lieu of true long range incremental cost based charges until
such time as an SMP operator's actual long range incremental costs could be
established using adequate accounting systems.
Several European Union member states have chosen to apply the provisions of
the Interconnection Directive within their jurisdictions in such ways as to give
more favorable treatment to infrastructure providers and network operators than
to carriers and resellers that have made no infrastructure investment. Such
distinctions must be objectively justified on the grounds of the type of
interconnection provided or because of relevant licensing conditions. The
Licensing Directive does not provide a clear definition of an infrastructure
investment, and many European Union member states have adopted inconsistent
approaches with respect to the level and type of infrastructure investment
required to justify differences in interconnection charges. While Viatel
believes that the European Commission will seek to minimize these disparities in
national interconnection policies, there can be no assurance that these
disparities will be eliminated or significantly reduced or that any such
differences in regulatory treatment will not have a material adverse effect on
Viatel. To the extent incumbent telecommunications operators deny or delay
granting Viatel interconnection, even if only for a limited period of time, in
any of the countries in which it has or will have points of presence, Viatel
will be forced to terminate traffic through refile or resale agreements with
other carriers, resulting in higher costs.
The current European Union rules are likely to remain in force until
2002/2003, at which time a revised European Union framework is likely to be
introduced which reflects the growth of competition since 1998. The European
Commision is currently considering what the new framework should look like. It
is too early to say what the impact might be on Viatel's activities.
Each European Union member state in which Viatel currently conducts its
business has a different regulatory regime and such differences are expected to
continue. The requirements for Viatel to obtain necessary approvals vary
considerably from country to country.
BELGIUM. In December 1997, the Belgian Federal Parliament provided for full
liberalization of the provision of telecommunications services. However, this
law and secondary legislation are not yet complete.
Under the existing licensing scheme, applicants seeking a network operator
license must commit to invest 400 million Belgian Francs or to deploy 500
kilometers of transmission infrastructure within three years of the date the
license is granted as well as investing an amount equal to 1% of annual turnover
in order to fund research and development and other initiatives. Notwithstanding
these stringent requirements, Viatel obtained a license for the provision of
voice telephony over the entire country on December 8, 1998, and a license for
the establishment and operation of a public telecommunications network, which
covers virtually the entire country on February 1, 1999.
Belgium is one of the European Union member states which differentiates
between interconnection for infrastructure providers and network operators and
switch-based carriers and resellers. The interconnection tariffs of Belgacom
(Belgium's incumbent telecommunications operator), which have been officially
approved by the Belgian Institute for Postal Services and Telecommunications,
provides more favorable interconnection rates for infrastructure providers and
network operators than for switch-based carriers and resellers. As a result of
the construction of the Circe Network, Viatel qualifies for these more favorable
rates.
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The modified Belgian Telecommunications Law also provides for the creation
of a Universal Service Fund, to be managed by the Belgian Institute for Postal
Services and Telecommunications, to which operators may be required to
contribute funds in proportion to their revenues from the Belgian
telecommunications market. However, the Universal Service Fund system will not
be activated before the year 2000, and then only insofar as: (i) Belgacom claims
a compensation for being the universal service provider, (ii) the Belgian
Institute for Postal Services and Telecommunications considers that universal
service provision represents a net cost, and (iii) the Belgian Federal
Government takes a formal decision to activate the Universal Service Fund. Since
1998, the Belgian Institute for Postal Services and Telecommunications has
"dry-run" the universal service costing model and kept operators informed of the
contributions that they may be required to make if and when the Universal
Service Fund is activated.
FRANCE. In July 1996, legislation was enacted providing for the
liberalization of all telecommunications activities in France by January 1,
1998.
The establishment and operation of public telecommunications networks and
the provision of voice telephony services to the public are subject to
individual licenses granted by the Minister in charge of telecommunications upon
recommendation of France's new independent regulatory authority, the Autorite de
Regulation des T elecommunications ("ART").
On June 5, 1998 Viatel was granted a regional license to be a public
telecommunications network operator (under Article L33.1 of the French Code des
Postes et T elecommunications) and a national license to be a provider of voice
telephony services to the public (under Article L34.1 of the French Code des
Postes et T elecommunications). An extension of the network operator license has
been requested by Viatel in order to obtain a nationwide license. The
application was sent to the ART on June 21, 1999. Viatel anticipates that the
ART will give its recommendation within the next several weeks and that the
Minister should grant the nation-wide license within one month from the date ART
makes its recommendation. However, Viatel can give no assurance that this
schedule will be met. In September 1998, an interconnection agreement was signed
with France T elecom. However, this agreement became operational in the greater
Paris region only in March 1999 and in the Strasbourg and Amiens regions only in
August 1999.
Viatel is subject to certain requirements in the operation of its public
telecommunications network, most notably in terms of non-discriminatory
treatment of customers and an obligation to accept reasonable requests for
interconnection from other carriers.
France is also one of the European Union member states which differentiates
between interconnection for public telecommunications network operators, holding
a L33.1 license, and voice telephony service providers, holding a L34.1 license.
The interconnection tariffs of France Telecom, which have been officially
approved by ART, provide substantially more favorable interconnection rates for
public telecommunications network operators than for voice telephony service
providers. As a result of the construction of the Circe Network, Viatel
qualifies for these more favorable rates.
GERMANY. The German Telecommunications Act of July 25, 1996 provided for
the liberalization of all telecommunications activities by January 1, 1998. The
German Telecommunications Act has been supplemented by several ordinances
concerning, among other things, license fees, rate regulation, interconnection,
universal service, frequencies and customer protection. The German
telecommunications sector is overseen by the Regulatory Authority for
Telecommunications and Post ("RegTP") that operates under the supervision of the
Ministry of Economics.
Under the German regulatory structure, licenses can be issued for different
types of infrastructure as well as for the provision of services based on
transmission lines provided by other service providers. Viatel has been issued a
nationwide class 3 infrastructure license and a nationwide class 4 license for
the provision of voice telephony.
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All existing interconnection agreements with Deutsche Telekom have been
terminated effective December 31, 1999, requiring all affected parties to seek
new interconnection with Deutsche Telekom. In a letter dated February 19, 1999,
the Federal Communications Commission expressed its concerns about the new
interconnection regime and argued that the action taken by Deutsche Telekom as
well as other actions taken by such carrier were designed to impede effective
and competitive market entry. Viatel is currently in the process of negotiating
a new interconnection agreement with Deutsche Telekom and believes that it will
be possible to come to an agreement with Deutsche Telekom prior to December 31,
1999. However, Viatel cannot provide any assurance that the new interconnection
arrangement will contain terms which are as favorable to it as those contained
in the current interconnection arrangement.
ITALY. In 1997, the Italian authorities enacted a legislative framework for
the full liberalization of telecommunications services by January 1, 1998. On
February 12, 1999, Viatel received a license to provide voice telephony as well
as to own and operate infrastructure.
On July 24, 1998, Telecom Italia published its Reference Interconnect Offer,
which has been amended earlier this year due to decisions by the Italian
regulator. The offer allows interconnection at one point of interconnect and has
brought interconnection rates down to a level much closer to the European Union
benchmarks. Viatel initiated interconnection negotiations towards the end of
1998 and obtained an interconnection agreement with Telecom Italia on April 30,
1999.
In Italy, providers of network infrastructure and switched voice services as
well as national mobile operators are generally required to contribute to a
universal service fund. Such a requirement is to take effect in 1999 provided
that Telecom Italia demonstrates by March 31, 1999, on the basis of audited
reports, that its universal service obligations impose on it net losses. Even in
these circumstances, the Italian regulator can exempt new entrants from an
obligation to contribute to such a universal service fund. Both the Italian
competition agency and the European Commission are likely to recommend such an
exemption scheme to the Italian regulator. However, Viatel cannot assess at this
time any possible impact of any such universal service obligations on its
operating margins.
THE NETHERLANDS. In the Netherlands the incumbent telecommunications
operator's monopoly regarding voice telephony was abolished effective July 1,
1997. Other European Union liberalization obligations, which took effect on
January 1, 1998, were implemented through the new Netherlands Telecommunications
Act as of December 15, 1998. With the exception of the use of radio frequencies
(e.g. for mobile telecommunications networks or services), all licensing
requirements have been abolished and replaced by mandatory registration
requirements with the Independent Post and Telecommunications Authority. In
principle, there are no barriers to registration, but there must be a public
offer of infrastructure or services which must be shown to the Independent Post
and Telecommunications Authority in order to qualify for registration.
Furthermore, registered parties must comply with all relevant obligations under
the Telecommunications Act. In February 1999, Viatel obtained registrations to
provide a public telecommunication service and to install and provide a public
telecommunications network with the Independent Post and Telecommunications
Authority. In April 1999, Viatel obtained registration to install and provide
leased lines.
SPAIN. Spain was required, under applicable European Union directives, to
implement full liberalization of public switched telephone services by December
1, 1998. In accordance with this requirement, the liberalization process began
in April 1998 with the approval of the General Telecommunications Act, and was
completed by the December 1, 1998 deadline, with the approval of subsequent
regulations. Viatel's subsidiary operating in Spain was granted a nationwide
infrastructure and voice telephony license in March 1999. In September 1999,
Viatel signed an interconnection agreement with Telefonica de Espana.
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SWITZERLAND. A new Telecommunications Act was adopted by the Swiss
Parliament in April 1997 and came into effect on January 1, 1998, together with
certain ordinances containing more detailed regulations covering
telecommunications services, frequency management, numbering, terminal equipment
and license fees. The new Telecommunications Act provides for liberalization of
the Swiss telecommunications market as of January 1, 1998.
The Swiss telecommunications regulatory framework facilitates market entry
by: (i) applying a notification procedure for resellers, (ii) applying a
procedure for operators wishing to be granted a concession for the establishment
and operation of transmission facilities and (iii) providing rights-of-way,
subject to a procedure of authorization, over the public domain to
facilities-based carriers. Pro-competitive regulation is also applicable in the
area of numbering.
Viatel has notified its activities as a provider of voice telephony services
in Switzerland but has not yet completed negotiation of an interconnection
agreement (in accordance with the notification procedure). On July 13, 1999,
OFCOM, the Swiss Office of Telecommunications, awarded Viatel a concession to
own and operate its own telecommunications infrastructure in Switzerland. The
concession not only allows Viatel to own and operate its own infrastructure in
Switzerland, but also gives the Company the right to build on publicly-owned
lands and to provide telecommunications services to third parties.
Switzerland is not a member of the European Union and, accordingly,
directives do not apply. Switzerland is, however, a party to the WTO Agreement.
UNITED KINGDOM. The Telecommunications Act 1984 (the "U.K. Act") provides a
licensing and regulatory framework for telecommunications activities in the
United Kingdom. The U.K. began liberalizing its telecommunications market
beginning in 1984 and has continued to liberalize since that date. The Licensing
Directive, which was partially brought into force by the Telecommunications
(Licensing) Regulations 1997 (SI 1997/2930), required that all U.K. licenses
that existed before January 1, 1998 be in line with the Licensing Directive
prior to January 1, 1999 and that all new licenses granted after January 1, 1998
be immediately in compliance with the Directive. The Department of Trade and
Industry received a six month deferral relating to the January 1, 1999 date.
Full implementation took place in September 1999. This legislation converts all
existing licenses into new form licenses which are compliant with the directive.
The international facilities license will also be subsumed into a new standard
public telecommunications operator license which will include an authorization
for the provision of both domestic and international services. The new PTO
license will also authorize the provision of international simple voice resale
services on the basis that the licensee does not hold a registrable
international simple voice resale license already.
Viatel UK has been granted an international simple voice resale standard
license and an international facilities license with code powers which allow
Viatel certain rights over land for the purpose of installing telecommunications
equipment and cabling under simplified planning procedures. In addition, Viatel
UK has interconnection agreements with Cable & Wireless and British
Telecommunications Plc.
OTHER EUROPEAN MARKETS. Viatel's ability to expand into other countries
will be affected by the degree to which liberalization has been implemented in
those countries. If, for strategic reasons, Viatel decides to build out
infrastructure in a particular market prior to full liberalization and
liberalization is delayed or not fully implemented, Viatel could sustain a loss
on its infrastructure investment.
LATIN AMERICA AND THE PACIFIC RIM. Outside of the European Union, Viatel
provides its customers with access to its services through the use of call
reorigination. A substantial number of countries have prohibited certain forms
of call reorigination. There can be no assurance that certain of Viatel's
services and transmission methods will not be or will not become prohibited in
certain jurisdictions.
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Viatel is subject to a different regulatory regime in each country in Latin
America and the Pacific Rim in which it conducts business. Local regulations
determine issues significant to Viatel's business, including whether Viatel can
obtain authorization to offer transmission of voice and voice band data directly
or through call reorigination. In general, competition is restricted in the
regions, with the result that Viatel's ability to offer service is limited.
Regulations governing enhanced services (such as facsimile, voice mail and data
transmission) tend to be more permissive than those covering voice telephony.
ARGENTINA. The telecommunications industry in Argentina was privatized in
1990, but opportunities for competitive entry in basic telephony services remain
restricted. The companies created at the time of privatization, Telecom and
Telefonica, respectively, were granted exclusive rights until 1997 to the
provision of domestic local and long distance fixed telephone service in the
northern and southern portions of Argentina, respectively. Telintar, a company
owned equally by Telecom and Telefonica, was given exclusive rights until 1997
for the provision of international telephony and data transmission services.
Value-added services may be competitively provided and are essentially
deregulated. Although a license must be obtained, such licenses are routinely
granted. Facilities for international value-added services must be obtained from
Telintar. Currently, call reorigination is legal in Argentina, although the
established carriers have advocated strenuously against it and the government's
view has changed from time to time. Telecom and Telefonica have instituted
significant rate rebalancing measures which are likely to lessen the
attractiveness of call reorigination. The Supreme Court ruled in favor of rate
rebalancing, rejecting several challenges to it.
Viatel has had a sales representative in Argentina since 1991 who has
focused on call reorigination, Internet-initiated international
business-to-business service and international calling card services. Viatel
does not currently hold any licenses in Argentina.
BRAZIL. In Brazil, value-added services are not considered to be
telecommunications services and currently can be provided on a completely
unregulated basis, without the necessity of obtaining a permit or a concession.
However, the service provider must operate through a Brazilian company. Call
reorigination is not prohibited in Brazil. There are presently no foreign
ownership limits for limited services, including specialized limited services,
or value-added services. Under the 1997 "General Telecommunications Law," the
President retains the authority to impose foreign ownership limits on other
services, but by decree dated May 15, 1998, the President expressly decided not
to impose any such limits.
Viatel's services in Brazil currently include call reorigination,
international calling cards and fax store and forward which are classified as
value added-services and therefore do not require a license. Viatel plans to
apply for licenses to offer specialized limited services, including private line
and data transmission services.
COLOMBIA. Under the Constitution adopted in 1991, the possibility of
private provision of public services in Colombia was ratified. This paved the
way for both privatization of the state-owned long distance company, TELECOM, as
well as the competitive entry of other entities. Specific plans for the
privatization of TELECOM have faltered due to, among other things, labor union
resistance. However, the government mandated that competition be introduced in
1998. Two competitors to TELECOM have been licensed. A federal judicial body
with jurisdiction over public contracts has recently issued a writ declaring
that the issuance of licenses for any additional competition in long distance
services must be authorized by new legislation. The implications of this
decision for Viatel are not clear.
In Colombia, there are in excess of 35 local operating companies, many
municipally owned. Under Colombian law, local service has been completely
deregulated and may be provided without a
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telecommunications concession or license. Other telecommunications services
require a concession or other authorization.
Value-added services are competitive, but must be licensed. There is
currently intense competition for value-added services, and the market for data
communications is one of the most dynamic segments of the telecommunications
sector. Although Colombian law requires that all telecommunications services be
rendered by Colombian entities, foreign investment is not limited.
Most of Viatel's customers in Colombia access its network via international
toll free numbers. Viatel has formed a Colombian subsidiary and has been awarded
a value-added services license. Viatel is working on the establishment and
operation of a network to utilize the value-added services license.
VENEZUELA. Pursuant to the Telecommunications Law of 1940, all
telecommunications activities in Venezuela are reserved to the government,
although concessions or permits for the provision of such services may be
granted to third parties. The administration, inspection and monitoring of all
communications systems in Venezuela are carried out by the Ministry of
Transportation and Communications through the Comision Nacional de
Telecommunicaciones.
The national telephone company of Venezuela, Compania Anonima Nacional de
Telefonos de Venezuela, was privatized in 1991 and its concession grants a
monopoly in the provision of basic telecommunications services until the year
2000. The only exceptions to this exclusivity are recently awarded concessions
for the provision of basic services to rural areas not reached by Compania
Anonima Nacional de Telefonos de Venezuela.
Other telecommunications services, such as cellular telephony and other
mobile radio services, private telecommunications networks, switched data
networks and value-added services (including e-mail, Internet, video text,
teletext, voicemail and fax service) are open to competition upon receipt of a
concession or permit, as applicable. Call reorigination is officially illegal in
Venezuela. The prohibition is supposed to be enforced by Comision Nacional de
Telecommunicaciones with the unofficial aid of Compania Anonima Nacional de
Telefonos de Venezuela through termination of subscriber service, but in
practice the prohibition is widely evaded.
Viatel does not have a local affiliate in Venezuela and does not hold any
Venezuelan concessions or authorizations. At present, Viatel's agents in
Argentina offer only Internet-initiated international business-to-business
services and international calling cards in Venezuela. Viatel does not believe
that these services are encompassed within the prohibition against call
reorigination, but it is possible that Venezuelan authorities may consider them
to raise similar policy concerns. If the call reorigination prohibition is
deemed to apply, Viatel may have to discontinue Internet-initiated services in
Venezuela.
UNITED STATES. Viatel's provision of international services to, from and
through the United States generally is subject to regulation by the Federal
Communications Commission. Section 214 of the Communications Act of 1934
requires a company to make application to, and receive authorization from, the
Federal Communications Commission to provide such international
telecommunications services. In May 1994, the Federal Communications Commission
authorized Viatel pursuant to Section 214 of the Communications Act of 1934 to
resell public switched telecommunications services of other United States
carriers. This authorization requires that services be provided in a manner that
is consistent with the laws of countries in which Viatel operates. Viatel also
has a license to resell international private lines for the provision of
switched services between the United States and the United Kingdom and between
the United States and Canada. Additionally, in September 1996 Viatel received
final approval for another Section 214 authorization from the Federal
Communications Commission to provide both facilities-based services and resale
services (including both the resale of switched services and the resale of
private lines for the provision of switched services) to all permissible
international points. Finally, in September 1996 Viatel also received final
approval for another Section 214 authorization from the Federal Communications
Commission to provide facilities-based
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service between the United States and the United Kingdom over the CANUS-1 and
CANTAT-3 cable systems. Through its acquisition of Flat Rate Communications,
Viatel also has a Section 214 license to provide global facilities-based and
global resale services.
EMPLOYEES
As of June 30, 1999, Viatel had 603 full-time employees, approximately 255
of whom were engaged in sales, marketing and customer service. None of its
employees is covered by a collective bargaining agreement. Viatel's management
believes that its relationship with its employees is good.
PROPERTIES
Viatel's tangible assets include a substantial investment in
telecommunications equipment. Viatel's network and its component assets are the
principal properties it owns. Viatel owns a significant portion of the
telecommunications equipment required for its business. Viatel's network
includes installed fiber optic cable consisting of lighted (used) and dark (not
used) fibers, which is either owned or leased and is laid pursuant to various
rights-of-way. Other fixed assets are located at various locations in Viatel's
service areas.
Viatel currently occupies two sites in New York City, one of which serves as
its principal executive office, while the other is one of its international
gateway switching centers. Viatel also leases space in Somerset, New Jersey,
which serves as its U.S. Network Operations Center, Egham, England, which serves
as its European Network Operations Center, and Omaha, Nebraska, where its
billing and operations center is located. Viatel leases locations pursuant to
the terms of the respective leases which expire at different times varying from
May 2004 to March 2009.
Viatel has European sales offices in the following locations: London,
England; Paris, France; Brussels, Belgium; Amsterdam, The Netherlands;
Frankfurt, Berlin, Munich and Dusseldorf, Germany; Milan and Rome, Italy; and
Barcelona and Madrid, Spain; all of which are leased. The lease terms for
Viatel's sales offices range from 5 to 25 years.
Viatel also maintains switching and transmission sites in numerous countries
throughout Europe. In general, these locations are leased for a minimum term of
20 years, including renewal options. Viatel attempts to structure its leases of
space for its network switching centers and rights-of-way for its fiber optic
networks with initial terms and renewal options so that the risk of relocation
is minimized. Viatel anticipates that prior to termination of any of the leases,
it will be able to renew such leases or make other suitable arrangements.
LEGAL PROCEEDINGS
Viatel is involved from time to time in litigation incidental to the conduct
of its business. Viatel believes that any potential adverse determination in any
pending action will not have a material adverse effect on its business,
financial condition or results of operations.
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VIATEL'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of Viatel as of October 15, 1999. Upon
completion of the merger, Alfred West will become Vice Chairman of the Viatel
board and Alan Levy will become a director and Chief Operating Officer of
Viatel. See "Destia's Management."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Michael J. Mahoney(1)(2)............................. 40 Chairman of the Board, Chief Executive Officer and
President
Allan L. Shaw(1)..................................... 35 Senior Vice President, Finance; Chief Financial
Officer and Director
Lawrence G. Malone................................... 47 Senior Vice President, Global Sales and Marketing
Sheldon M. Goldman................................... 40 Senior Vice President, Business and Legal Affairs and
Secretary
Francis J. Mount..................................... 57 Senior Vice President, Engineering and Network
Operations and Director
John G. Graham(1)(2)(3).............................. 61 Director
Paul G. Pizzani(1)(2)(3)............................. 39 Director
</TABLE>
- ------------------------
(1) Member of the Directors Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
MICHAEL J. MAHONEY. Mr. Mahoney has served as Chairman of the Board of
Viatel since September 1998, as its Chief Executive Officer since September
1997, as its President since September 1996 and as a director since 1995. Mr.
Mahoney was also Chief Operating Officer of Viatel from September 1996 to
September 1997, Executive Vice President, Operations and Technology of Viatel
from July 1994 to September 1996 and Managing Director, Intercontinental of
Viatel from January 1996 to September 1996. From August 1990 to June 1994, Mr.
Mahoney was employed by SITEL Corporation, a teleservices company, most recently
as President, Information Services Group. From August 1987 to August 1990, Mr.
Mahoney was employed by URIX Corporation, a manufacturer of telecommunications
hardware and software, in a variety of sales and marketing positions.
ALLAN L. SHAW. Mr. Shaw has served as Senior Vice President, Finance of
Viatel since December 1997 and as its Chief Financial Officer since January
1996. Mr. Shaw has served as a director of Viatel since June 1996. Mr. Shaw was
Vice President, Finance of Viatel from January 1996 to December 1997 and
Treasurer of Viatel from September 1996 to April 1998. Prior to becoming Vice
President, Finance and Chief Financial Officer, Mr. Shaw served as Corporate
Controller from November 1994 to December 1995. From August 1987 to November
1994, Mr. Shaw was employed by Deloitte & Touche LLP, most recently as a
Manager. Mr. Shaw is a Certified Public Accountant and a member of the American
Institute, United Kingdom Society and New York State Society of Certified Public
Accountants.
LAWRENCE G. MALONE. Mr. Malone has served as Senior Vice President, Global
Sales and Marketing of Viatel since May 1997. Mr. Malone served as Vice
President and Managing Director, Intercontinental of Viatel from September 1996
to May 1997 and served as its Vice President of Sales for Carriers/Wholesale
from January 1995 to September 1996. From December 1993 to December 1994, Mr.
Malone was employed by Frame Relay Technologies, a communications equipment
manufacturer, as Director of Sales. From December 1987 to November 1993, Mr.
Malone was
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employed by Republic Telcom Systems, a voice/data networking company, where he
most recently served as Vice President of Sales and Marketing.
SHELDON M. GOLDMAN. Mr. Goldman has served as Senior Vice President,
Business and Legal Affairs of Viatel since August 1999. Prior to becoming Senior
Vice President, Business and Legal Affairs, Mr. Goldman served as Senior Vice
President, Business Affairs and General Counsel from December 1997 to August
1999. Prior to becoming Senior Vice President, Business Affairs and General
Counsel of Viatel, Mr. Goldman served as Vice President, Business and Legal
Affairs from December 1996 to December 1997 and served as United States General
Counsel of Viatel from April 1996 to December 1996. From January 1987 to March
1996, Mr. Goldman was associated with the law firm of Wien, Malkin & Bettex.
Since March 1996, Mr. Goldman has been Of Counsel to the law firm of Brief
Kesselman Knapp & Schulman, LLP.
FRANCIS J. MOUNT. Mr. Mount has served as Senior Vice President,
Engineering and Network Operations of Viatel since December 1997 and as a
Director of Viatel since June 1998. Prior to joining Viatel, Mr. Mount was
Senior Vice President, Business Initiatives of Primus Telecommunications Group
from October 1997 to December 1997, responsible for Internet telephony, European
operations and network quality. From June 1997 to October 1997, Mr. Mount was
Executive Vice President and Chief Operating Officer of Telepassport, Inc. and
was Vice President and Chief Operating Officer of Telepassport, Inc. from
January 1996 to June 1997. From 1990 to January 1996, Mr. Mount was employed by
MCI, most recently as Director, Global Technical Services, responsible for
international development, alliance management and all technical operations and
services outside the United States, including the construction and maintenance
of large networks such as Hyperstream, "Concert" and private networks for large
accounts such as J.P. Morgan, Procter and Gamble and I.B.M. From March 1967 to
December 1989, Mr. Mount was employed by AT&T in various positions.
JOHN G. GRAHAM. Mr. Graham has served as a director of Viatel since June
1998. Mr. Graham has been the President and Chief Operating Officer of Utilities
Mutual Insurance Company since May 1, 1999, a position he assumed following his
retirement from GPU Service, Inc. From December 1998 to May 1999, Mr. Graham was
an Executive Vice President of GPU Service, Inc. and from 1987 to December 1998,
was Senior Vice President and Chief Financial Officer of GPU, Inc., a domestic
and international electric utility and independent power generation company. Mr
Graham was employed by GPU in various other capacities from 1976 to 1987. From
1970 to 1976, Mr. Graham was a Partner in the law firm of Ruprecht and Graham,
Newark, New Jersey. From 1993 to 1997, Mr. Graham served as a Director and
Chairman of the Audit Committee of Edisto Resources, Inc., which was engaged in
the exploration, production and marketing of natural gas and oil.
PAUL G. PIZZANI. Mr. Pizzani has served as a director of Viatel since April
1996. Mr. Pizzani is currently a partner at eVentures LLC. From November 1997 to
March 1999, Mr. Pizzani served as a Managing Director of Wasserstein Perella
Emerging Markets L.P. where he had been employed since November 1997. Prior to
November 1997, Mr. Pizzani was associated with COMSAT Corporation and its
subsidiaries in various capacities from November 1985 to October 1997, most
recently as Treasurer.
SENIOR MANAGEMENT
GLENN K. DAVIDSON. Mr. Davidson has served as Vice President, Corporate
Communications of Viatel since August 1998. Prior to joining Viatel, Mr.
Davidson was employed by the Computer & Communications Industry Association as
Executive Vice President, Chief Operating Officer and Corporate Secretary from
September 1995 to July 1998. From November 1994 to September 1995, Mr. Davidson
was an independent consultant. From May 1994 to November 1994, Mr. Davidson was
the Campaign Manager for Douglas Wilder's bid for election to the United States
Senate. From August 1991 to January 1994, Mr. Davidson was employed by the
Office of Governor, Commonwealth of Virginia, most recently as Chief of Staff.
From January 1990 to August 1991, Mr. Davidson was the
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Director of the Virginia Liaison Office, Commonwealth of Virginia. From 1985 to
1990, Mr. Davidson was employed by Computer & Communications Industry
Association in various capacities, most recently as Vice President and Chief of
Staff.
CHARLES T. FIELD. Mr. Field has served as Vice President and Treasurer of
Viatel since September 1998. Prior to becoming Vice President and Treasurer, Mr.
Field served as Treasurer from April 1998 to September 1998. Prior to joining
Viatel, Mr. Field was employed by Horsehead Industries, Inc., a diversified
manufacturing company, from August 1995 to April 1998. From October 1987 to
August 1995, Mr. Field was employed by Deloitte & Touche LLP, Independent
Certified Public Accountants, most recently as Manager. Mr. Field is a Certified
Public Accountant and a member of the American Institute, United Kingdom Society
and Illinois Society of Certified Public Accountants.
DEREK FOXWELL. Mr. Foxwell has served as Viatel's Vice President,
Construction and Transmission, since September 1999. Prior to becoming Vice
President, Construction and Transmission, Mr. Foxwell served as Vice President
of Infrastructure Programs from May 1998 to August 1999. Prior to becoming Vice
President of Infrastructure Programs, Mr. Foxwell served as Director of
Infrastructure Programs from May 1998 to January 1999. From December 1997 to May
1998, Mr. Foxwell served as a consultant to Viatel providing advice to Viatel in
connection with the development of the Circe Network. Prior to joining Viatel as
a consultant, Mr. Foxwell was a consultant to Nynex Network Service (Flag Ltd.)
from 1994 to 1997 where he chaired the Flag Assignment, Routing & Restoration
Subcommittee and served as a consultant to Sprint International (PTAT) from 1991
to 1994 and acted as the operations and maintenance manager for PTAT systems.
From 1972 to 1991, Mr. Foxwell was employed by British Telecom, most recently as
Transmission Engineering Planning Manager, International Cable Network;
International and National Elements. Mr. Foxwell is a chartered engineer with
more than 25 years of experience in international telecommunications networks.
SIMON JOLYON GILLING. Mr. Gilling has served as Vice President, European
Legal Affairs of Viatel since May 1999. Prior to joining Viatel, Mr. Gilling was
a consultant from July 1998 to May 1999. From June 1990 to July 1998, Mr.
Gilling was Partnership Secretary and Head of Legal Affairs of Mercury Personal
Communications, a personal mobile telecommunications company. From 1985 to May
1990, Mr. Gilling was the company secretary and Senior Legal Adviser for Mercury
Communications Ltd., a wholly owned subsidiary of Cable and Wireless PLC.
PAUL K. HEUN. Mr. Heun has been Vice President, Operations of Viatel since
January 1998. Prior to joining Viatel, Mr. Heun was Vice President, Network
Services of Primus Telecommunications Group from October 1997 to January 1998.
From April 1996 to October 1997, Mr. Heun was Vice President, Network Services
of Telepassport, Inc. From January 1995 to April 1996, Mr. Heun was employed by
AT&T as Manager, Customer Connectivity. From April 1989 to January 1995, Mr.
Heun was employed by MCI, most recently as Senior Manager, Network Operations.
FRED HUGHES. Mr. Hughes has served as Vice President, Engineering of Viatel
since December 1997. From July 1994 to December 1997, Mr. Hughes was Vice
President, Operations-Europe of Viatel. From August 1993 to July 1994, Mr.
Hughes served as Director of Telephony of Viatel. From January 1991 to August
1993, Mr. Hughes was President of Communications Services Group, a
Connecticut-based voice and data communications consulting company. From August
1988 to January 1991, Mr. Hughes was Director of Engineering at Millicom
Telecommunications Services, Inc.
EVAN MILLER. Mr. Miller has served as Vice President of Business
Development of Viatel since February 1999. Prior to joining Viatel, Mr. Miller
was Director, Equity Research at Credit Suisse First Boston from March 1995 to
December 1998 and was Director, Equity Research at Lehman Brothers from December
1990 to February 1995. From April 1988 to November 1990, Mr. Miller was a member
of the Senior Management Group, Corporate Strategy at British Telecom.
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WAYNE MYERS. Mr. Myers has been Vice President, European Sales of Viatel
since January 1999. Prior to becoming Vice President, European Sales, Mr. Myers
served as General Manager, European Sales of Viatel from July 1997 to January
1999. From February 1996 to June 1997, Mr. Myers was Channel Sales Director of
PSI Net. From November 1994 to February 1996, Mr. Myers was a Sales Director for
LDDS/WorldCom. From June 1993 to November 1994, Mr. Myers was President of the
Gold Club, a direct mail Company. From February 1988 to June 1993, Mr. Myers was
employed by Cable & Wireless Communications, Inc. in various capacities, most
recently as a National Account Director.
JAN S. PIAZZA. Ms. Piazza has been Vice President, Carrier Sales since
January 1999. Prior to becoming Vice President, Carrier Sales, Ms. Piazza served
as Viatel's General Manager, Carrier Sales from January 1998 to January 1999.
Prior to joining Viatel, Ms. Piazza was a Vice President of Primus
Telecommunications Group from October 1997 to December 1997. From September 1995
to October 1997, Ms. Piazza was a Vice President, Sales and Marketing of
Telepassport, Inc. From 1987 to August 1995, Ms. Piazza served in various
positions at a predecessor of WorldCom, most recently as Vice President of
Product Development and Carrier Sales. From 1983 until 1987, Ms. Piazza was
Director of Sales Administration and Customer Service for Argo Communications.
JAMES P. PRENETTA. Mr. Prenetta has served as Vice President, General
Counsel and Assistant Secretary of Viatel since August 1999. Prior to joining
Viatel, Mr. Prenetta was a partner at the law firm of Kelley Drye & Warren LLP
from January 1998 to August 1999, where he specialized in a variety of areas of
corporate representation, including securities, venture capital, finance and
mergers and acquisitions. Prior to becoming a partner at Kelley Drye & Warren
LLP, Mr. Prenetta was an associate at that firm from November 1995 to January
1998. From September 1987 to November 1995, Mr. Prenetta was an associate at the
law firm of Mudge Rose Guthrie Alexander & Ferdon. Since August 1999, Mr.
Prenetta has been Of Counsel to the law firm of Kelley Drye & Warren LLP.
ELLEN S. RUDIN. Ms. Rudin has served as Vice President and Deputy General
Counsel of Viatel since September 1998 and as Assistant Secretary since
September 1997. Prior to becoming Vice President and Deputy General Counsel, Ms.
Rudin served as Assistant General Counsel from October 1997 to September 1998,
as Counsel from March 1997 to October 1997 and as a staff attorney from August
1996 to March 1997. From September 1987 to August 1996, Ms. Rudin was associated
with the law firm of Wien, Malkin & Bettex.
PETER STEPHENS. Mr. Stephens has been Vice President, Operations--Europe of
Viatel since January 1999. Prior to becoming Vice President, Operations--Europe,
Mr. Stephens served as Technical Director for MCI's operations in Europe, the
Middle East and Africa from January 1993 to December 1998. Prior to January
1993, Mr. Stephens was employed by Reuters in various capacities for
approximately 19 years, most recently as Communications Quality Director.
BOARD OF DIRECTORS
The board of directors of Viatel currently is comprised of seven
directorships, two of which are vacant. The Viatel board consists of three
classes: Class A, Class B and Class C. One of the three classes, comprising
one-third of the directors, is elected each year to succeed the directors whose
terms are expiring. Class C directors were elected at Viatel's 1999 annual
meeting of stockholders, Class A directors will be elected at Viatel's annual
meeting of stockholders in 2000 and Class B directors will be elected at the
annual meeting to be held in the year 2001. Directors hold office until the
annual meeting for the year in which their terms expire and until their
successors are elected and qualified unless, prior to that date, they have
resigned, retired or otherwise left office. Upon completion of the merger with
Destia, Viatel's board will be increased from seven to ten. Alfred West, Alan
Levy and an existing independent director of Destia, and two directors to be
appointed by Viatel, will join the Viatel board.
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<PAGE>
The Viatel board has established three committees, a Compensation Committee,
an Audit Committee and a Directors Committee. The current members of the
Compensation Committee are Messrs. Mahoney, Graham and Pizzani; the current
members of the Audit Committee are Messrs. Graham and Pizzani; and the current
members of the Directors Committee are Messrs. Mahoney, Shaw, Graham and
Pizzani. The Compensation Committee reviews general policy matters relating to
compensation and benefits of employees and officers of Viatel and administers
Viatel's Stock Incentive Plan. The Audit Committee recommends to the Viatel
board the firm of independent public accountants to audit Viatel's financial
statements, reviews with management and the independent accountants Viatel's
interim and year-end operating results, considers the adequacy of the internal
controls and audit procedures of Viatel and reviews the nonaudit services to be
performed by the independent accountants. The Directors Committee searches for
and interviews prospective directors, makes recommendations to the Viatel board
regarding the size of the board and candidates to fill vacancies on the board,
including vacancies created by reason of an increase in the size of the board
and nominates candidates for election to the board.
Viatel pays an annual fee to non-employee directors of $30,000 (paid $15,000
in cash, in quarterly installments, and $15,000 in shares of restricted stock),
$1,200 for every board meeting attended and held separately and $600 for each
board meeting or committee meeting participated in by telephone. Directors who
are also employees of Viatel are not separately compensated for serving on the
Viatel board. All directors are reimbursed for out-of-pocket expenses incurred
in attending board meetings and committee meetings.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to, any person acting
as Viatel's Chief Executive Officer during 1998, regardless of the amount of
compensation paid, and the other most highly compensated executive officers of
Viatel during 1998 whose aggregate cash and cash equivalent compensation
exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------- LONG TERM COMPENSATION
OTHER -------------------------
ANNUAL RESTRICTED SECURITIES ALL
COMPENSATION STOCK UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($) OPTIONS(#) COMPENSATION(2)
- ------------------------------------------ ---- --------- -------- ------------ ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney(3),.................... 1998 $ 289,583 $260,000 $ -- $ -- 360,771 $10,000
President and Chief Executive Officer 1997 212,500 125,000 -- -- -- 9,500
1996 166,458 183,129 102,825 299,997(4) 253,333 --
Allan L. Shaw,............................ 1998 172,917 107,500 -- -- 195,019 10,000
Senior Vice President, Finance and Chief 1997 140,000 60,000 -- -- 60,666 8,400
Financial Officer 1996 108,333 115,000 -- -- 43,333 --
Lawrence G. Malone,....................... 1998 155,833 110,000 -- -- 138,140 9,350
Senior Vice President, Global Sales and 1997 141,750 35,588 -- -- 73,533 8,505
Marketing 1996 98,333 88,147 -- -- 33,333 --
Sheldon M. Goldman(5),.................... 1998 182,917 112,000 -- -- 162,500 10,000
Senior Vice President, Business Affairs 1997 143,750 60,000 -- -- 40,200 9,000
and General Counsel 1996 86,354 100,000 -- -- 20,000 --
Francis J. Mount(6),...................... 1998 175,000 107,500 -- -- 122,500 10,000
Senior Vice President, Engineering and
Network Operations
</TABLE>
- ------------------------
(1) The amount reflected for Mr. Mahoney includes $32,416 of tax equalization
payments, $28,227 of relocation expense reimbursement associated with Mr.
Mahoney's repatriation from London to New York and $9,263 of tax gross ups.
(2) Represents matching contributions under Viatel's 401(k) plan.
(3) Mr. Mahoney was appointed as Chief Executive Officer in September 1997.
(4) Calculated based on a value of $9.00 per share, the fair market value of
Viatel's common stock on December 31, 1996.
(5) Mr. Goldman began his employment with Viatel in March 1996.
(6) Mr. Mount began his employment with Viatel in December 1997.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase common stock made by Viatel during the fiscal year ended December 31,
1998 to each of the executives named in the Summary Compensation Table. No stock
appreciation rights were granted during 1998.
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<PAGE>
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME GRANTED (#) 1998 (1) ($/SHARE)(2) DATE (5%) (10%)
- -------------------------------- ----------- ------------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Mahoney.............. 90,000(4)(5) 5.0% $ 5.00 01/01/2008 $ 282,600 $ 717,300
90,000(4)(6) 5.0 5.50 01/01/2008 311,400 789,300
180,771(4)(7) 10.1 10.25 09/18/2008 1,165,973 2,953,798
Allan L. Shaw................... 60,000(4)(5) 3.3 5.00 01/01/2008 188,400 478,200
60,000(4)(6) 3.3 5.50 01/01/2008 207,600 526,200
75,019(4)(7) 4.2 10.25 09/18/2008 483,873 1,225,815
Lawrence G. Malone.............. 27,000(4)(5) 1.5 5.00 01/01/2008 84,780 215,190
60,000(4)(6) 3.3 5.50 01/01/2008 207,600 526,200
51,140(4)(7) 2.9 10.25 09/18/2008 329,853 835,628
Sheldon M. Goldman.............. 60,000(4)(5) 3.3 5.00 01/01/2008 188,400 478,200
60,000(4)(6) 3.3 5.50 01/01/2008 207,600 526,200
42,500(4)(7) 2.4 10.25 09/18/2008 274,125 694,450
Francis J. Mount................ 40,000(4)(5) 2.2 5.00 01/01/2008 125,600 318,800
60,000(4)(6) 3.3 5.50 01/01/2008 207,600 526,200
22,500(4)(7) 1.3 10.25 09/18/2008 145,125 367,650
</TABLE>
- ------------------------
(1) Viatel granted options to purchase a total of 1,793,736 shares of common
stock during 1998.
(2) The exercise price was equal to the fair market value of the shares of
common stock underlying the options on the grant date.
(3) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on the
common stock over the term of the options. These assumptions are based on
rules promulgated by the SEC and do not reflect Viatel's estimate of future
stock price appreciation. Actual gains, if any, on the stock option
exercises and common stock holdings are dependent on the timing of such
exercise and the future performance of the common stock. There can be no
assurance that the rates of appreciation assumed in this table can be
achieved or that the amounts reflected will be received by the option
holder.
(4) Options granted to the executives named in the Summary Compensation Table
vest upon a change in control. See "--Employment Agreements."
(5) Options to purchase shares of common stock vested and became exercisable as
to 33.34% of these options on January 1, 1999 and the remainder will vest
and become exercisable on each successive anniversary date thereafter to the
extent of 33.33% of these options.
(6) Options to purchase shares of common stock vested and became exercisable as
to 25% of these options on January 1, 1999 and the remainder will vest and
become exercisable on each successive anniversary date thereafter to the
extent of 25% of these options.
(7) Options to purchase shares of common stock vested and became exercisable as
to 33.34% of these options on September 18, 1999 and the remainder will vest
and become exercisable on each successive anniversary date thereafter to the
extent of 33.33% of these options.
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<PAGE>
On January 1, 1999, Viatel granted the following stock options, with an
exercise price of $22.875 per share: Michael J. Mahoney, 52,278 options; Allan
L. Shaw, 38,519 options; Lawrence G. Malone, 38,519 options; Sheldon M. Goldman,
38,519 options; and Francis J. Mount, 38,519 options.
On June 1, 1999, Viatel granted the following stock options, with an
exercise price of $43.00 per share, and shares of restricted stock: Michael J.
Mahoney, 38,196 options and 43,859 shares; Allan L. Shaw, 4,123 options and
16,123 shares; Lawrence G. Malone, 4,123 options and 16,123 shares; Sheldon M.
Goldman, 4,123 options and 16,123 shares; and Francis J. Mount, 4,123 options
and 16,123 shares.
YEAR-END OPTION VALUES
The following table sets forth information regarding the number and year-end
value of unexercised options held at December 31, 1998 by each of the executives
named in the Summary Compensation Table. No stock appreciation rights were
exercised by these executives during fiscal 1998.
FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES "IN-THE-MONEY"
UNDERLYING UNEXERCISED OPTIONS AT FISCAL
SHARES VALUE OPTIONS AT FISCAL YEAR-END ($)
ACQUIRED ON REALIZED YEAR-END (#) EXERCISABLE/UNEXERCISABLE
NAME EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE (1)
- ----------------------------- ------------- ----------- ----------------------- --------------------------
<S> <C> <C> <C> <C>
Michael J. Mahoney........... 46,666 $ 662,891(2) 217,820/368,265 $3,372,766/$5,179,939
Allan L. Shaw................ -- -- 132,116/180,235 2,144,123/2,724,471
Lawrence G. Malone........... -- -- 105,249/149,757 1,713,119/2,298,995
Sheldon M. Goldman........... -- -- 81,805/179,414 1,330,560/2,219,277
Francis J. Mount............. -- -- 28,360/94,140 499,435/1,542,128
</TABLE>
- ------------------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $22.875 per share, the fair market value of
Viatel common stock issuable upon exercise of options at December 31, 1998
and the exercise price of the option, multiplied by the applicable number of
options.
(2) The amounts set forth represent the difference between $19.00 per share, the
fair market value of Viatel common stock issuable upon exercise of options
at July 27, 1998, and the exercise price of the option, multiplied by the
applicable number of options.
EMPLOYMENT AGREEMENTS
Viatel intends to execute new employment agreements with Messrs. Mahoney,
Shaw and Goldman, pursuant to which Mr. Mahoney will continue to serve as
President and Chief Executive Officer of Viatel, Mr. Shaw will continue to serve
as Senior Vice President, Finance and Chief Financial Officer and Mr. Goldman
will serve as Senior Vice President, Business and Legal Affairs for Viatel. In
addition, Viatel intends to execute employment agreements with Messrs. Lawrence
Malone and Francis Mount, pursuant to which Mr. Malone will continue to serve as
Senior Vice President, Global Sales and Marketing and Mr. Mount will continue to
serve as Senior Vice President, Engineering and Network Operations. The term of
the Mahoney employment agreement will extend for a period of three years, and
the term of the employment agreement of each of Messrs. Shaw, Goldman, Malone
and Mount will extend for a period of two years, in each case unless earlier
terminated in accordance with the terms thereof. Each employment agreement will
be effective as of October 1, 1999. Pursuant to the respective employment
agreements, Mr. Mahoney will be entitled to receive an annual base salary of
$386,000 (subject to adjustments), Mr. Shaw will be entitled to receive an
annual base salary of $246,000, Mr. Goldman will be entitled to receive an
annual base salary of $257,000, Mr. Malone will be entitled to receive an annual
base salary of $250,000 and Mr. Mount will be entitled to receive
126
<PAGE>
an annual base salary of $246,000, subject, in each case, to increases approved
from time to time by the Viatel board. In addition, Mr. Mahoney's employment
agreement will provide for an annual cash bonus payment equal to 100% of his
base salary multiplied by a bonus multiple ranging from 0.6 to 2.0 determined
based upon a comparison of actual versus projected EBITDA and revenue figures
and each of Messrs. Shaw's, Goldman's, Malone's and Mount's employment
agreements will provide for an annual cash bonus payment equal to 80% of their
base salary multiplied by a bonus multiple ranging from 0.6 to 2.0, determined
based upon a comparison of actual versus projected EBITDA and revenue figures.
Each of the employment agreements will also (1) provide that the executive will
be entitled to receive annual grants of stock options or restricted stock in
amounts to be determined by the Viatel board in its sole and absolute
discretion, (2) provide that following a change in control (as to be defined
therein), Viatel will be obligated to pay the executive an amount equal to the
severance amount (as to be defined therein), together with any applicable excise
tax gross up on such amount, if the executive chooses to terminate his
employment, (3) include a non-competition covenant and (4) contain a prohibition
on the solicitation of Viatel employees.
For purposes of each of the foregoing employment agreements, "change in
control" is defined to mean such time as (1) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934,
becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 of the
Securities Exchange Act) of more than 50% of the total voting power of the then
outstanding voting stock of Viatel on a fully diluted basis or (2) individuals
who at the beginning of any period of two consecutive calendar years constituted
the Viatel board (together with any new directors whose election by the Viatel
board or whose nomination for election by Viatel's stockholders was approved by
a vote of at least two-thirds of the members of the Viatel board then still in
office who either were members of the Viatel board at the beginning of this
period or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the members of the Viatel board
then in office.
In connection with the proposed merger with Destia, Viatel has executed
employment agreements with Messrs. West and Levy, which agreements will become
effective on the effective date of the merger. For details regarding these
agreements see "The Merger--Executive Employment Agreements."
STOCK INCENTIVE PLAN
Viatel has adopted the Amended Stock Incentive Plan (the "Stock Incentive
Plan") under which "non-qualified" stock options to acquire shares of common
stock may be granted to employees, directors and consultants of Viatel and
"incentive" stock options to acquire shares of common stock may be granted to
employees, including employee-directors. The Stock Incentive Plan also provides
for the grant of stock appreciation rights and shares of restricted common stock
to Viatel's employees, directors and consultants.
The Stock Incentive Plan, which is currently administered by the
Compensation Committee of the Viatel board, allows for the issuance of up to a
maximum of 5.3 million shares of common stock. Under the Stock Incentive Plan,
the option price of any incentive stock option may not be less than the fair
market value of a share of common stock on the date on which the option is
granted. The option price of a non-qualified stock option may be less than the
fair market value on the date the non-qualified stock option is granted if the
Viatel board so determines. An incentive stock option may not be granted to a
"ten percent stockholder" (as that term is defined in Section 422A of the
Internal Revenue Code of 1986) unless the exercise price is at least 110.0% of
the fair market value of the common stock and the term of the option may not
exceed five years from the date of grant. Each option granted pursuant to the
Stock Incentive Plan is evidenced by a written agreement executed by Viatel and
the grantee, which contains the terms, provisions and conditions of the grant.
Stock options may not be assigned or transferred during the lifetime of the
holder except as may be required by law
127
<PAGE>
or pursuant to a qualified domestic relations order. Common stock subject to a
restricted stock purchase or bonus agreement is transferable only as provided in
that agreement. The maximum term of each stock option granted to persons other
than ten percent stockholders is ten years from the date of grant.
For options to qualify as incentive stock options, the aggregate fair market
value, determined on the date of grant, of the shares with respect to which the
incentive stock options are exercisable for the first time by the grantee during
any calendar year may not exceed $100,000. Payment by option holders upon
exercise of an option may be made in cash or, with the consent of the Viatel
board, in whole or in part,
- with shares of common stock,
- by irrevocable direction to an approved securities broker to sell shares
and deliver all or a portion of the proceeds to Viatel,
- by delivery of a promissory note with any provisions that the Viatel
board determines appropriate or
- in any combination of these three possibilities.
In addition, the board of directors of Viatel, in its sole discretion, may
authorize the surrender by an optionee of all or part of an unexercised stock
option and authorize a payment in consideration thereof of an amount equal to
the difference between the aggregate fair market value of the shares of common
stock subject to this stock option and the aggregate option price per share of
such common stock. In the discretion of the board, this payment may be made in
cash, shares of common stock with a fair market value on the date of surrender
equal to the payment amount or some combination of the two.
The Stock Incentive Plan provides that outstanding options, restricted
shares of common stock or stock appreciation rights vest in their entirety and
become exercisable, or with respect to restricted common stock, are released
from restrictions on transfer and repurchase rights, in the event of a
"corporate transaction," unless assumed by the successor corporation. For
purposes of the Stock Incentive Plan, a corporate transaction includes any of
the following stockholder-approved transactions to which Viatel is a party:
- a merger or consolidation in which Viatel is not the surviving entity,
other than a transaction the principal purpose of which is to change the
state of Viatel's incorporation, or a transaction in which Viatel's
stockholders immediately prior to the merger or consolidation hold (by
virtue of securities received in exchange for their shares in Viatel)
securities of the surviving entity representing more than 50.0% of the
total voting power of that entity immediately after the transaction,
- the sale, transfer or other disposition of all or substantially all of
the assets of Viatel unless Viatel's stockholders immediately prior to
the sale, transfer or other disposition hold (by virtue of securities
received in exchange for their shares in Viatel) securities of the
purchaser or other transferee representing more than 50.0% of the total
voting power of that entity immediately after the transaction, or
- any reverse merger in which Viatel is the surviving entity but in which
Viatel's stockholders immediately prior to the merger do not hold (by
virtue of their shares in Viatel held immediately prior to such
transaction) securities of Viatel representing more than 50.0% of the
total voting power of Viatel immediately after the transaction.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the members of the Compensation Committee were Messrs. Pizzani,
Mahoney and Graham. Mr. Mahoney is Viatel's President and Chief Executive
Officer. None of the executive officers of Viatel currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing functions similar to the Compensation
Committee. No interlocking relationships exist between the board of directors of
Viatel or its Compensation Committee and the board of directors or compensation
committee of any other company.
CERTAIN TRANSACTIONS
On June 3, 1998, Viatel entered into a Mutual Cooperation Agreement with
Martin Varsavsky and Jazz Telecom S.A. pursuant to which the parties made
certain agreements including the following: (1) subject to Jazz Telecom S.A.
completing a high yield offering with net proceeds to Jazz Telecom S.A. of at
least $100 million (the "Offering Condition"), Viatel and Jazz Telecom S.A.
agreed to use commercially reasonable efforts to execute and deliver a
construction agreement no later than January 1, 1999 to construct a fiber optic
submarine cable system between Spain and the United Kingdom, (2) subject to the
Offering Condition, Viatel agreed to purchase $6.0 million of Jazz Telecom S.A.
common stock, (3) Viatel and Jazz Telecom S.A. agreed to the purchase from the
other international switched minutes and Viatel agreed to transmit at least
one-third of its Spanish domestic switched minute traffic over Jazz Telecom
S.A.'s network, assuming the prices charged by Jazz Telecom S.A. are
competitive, (4) Viatel and Jazz Telecom S.A. agreed to sell capacity to each
other for fixed prices, (5) Mr. Varsavsky agreed to lock-up his Viatel shares
for a specified period, (6) Viatel agreed to release any past claims which it
had against either Jazz Telecom S.A. and Mr. Varsavsky in exchange for their
respective release of any claims against Viatel, and (7) Mr. Varsavsky agreed to
pay Viatel liquidated damages in the event that he violates certain provisions
of the agreement. Viatel and Jazz Telecom S.A. remain in discussions concerning
certain modifications to the terms of the Mutual Cooperation Agreement. There
can be no assurance, however, that the parties will reach an agreement
concerning any modifications.
On June 4, 1999, Mr. Varsavsky entered into an agreement with Viatel
pursuant to which he agreed that he would not, subject to certain exclusions,
(1) offer, pledge, sell or grant, any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
his Viatel common stock or any securities which are exercisable, or convertible
into or exchangeable for such common stock, or (2) enter into any swap or other
arrangement that transfers to another any of the economic consequences of
ownership of his common stock, from June 23, 1999 through December 31, 1999;
provided, however, that he may, under certain circumstances, pledge all, but not
less than all of his shares of Viatel common stock to secure a loan of up to
$15.0 million. In exchange for his agreement to lock up his shares, Viatel
included an aggregate of 1,293,000 shares of his Viatel common stock in its
registration statement for its offering completed in late July 1999.
Through August 1999, James Prenetta, Viatel's Vice President and General
Counsel, was a partner at the law firm of Kelley Drye & Warren LLP, Viatel's
primary U.S. outside counsel. Mr. Prenetta is currently Of Counsel to Kelley
Drye & Warren LLP and, in such capacity, continues to receive certain nominal
payments from such firm.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF VIATEL
The following table sets forth certain information regarding the beneficial
ownership of Viatel's common stock, as of October 13, 1999, by (1) each person
known to Viatel to own beneficially more than 5% of its outstanding shares of
common stock, (2) each director of Viatel, (3) each person named in the Summary
Compensation Table, and (4) all executive officers and directors of Viatel, as a
group, together with their respective percentage ownership of such shares before
and after the offering. All information with respect to beneficial ownership has
been furnished to Viatel by the respective stockholders of Viatel.
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OF
BENEFICIAL OWNER OWNERSHIP(1) CLASS
- --------------------------------------------- --------- -------
<S> <C> <C>
Martin Varsavsky
Parque Empresarial Edificio 2,
c/o Beatriz De Bobadilla
14,5 Ofic. B
Madrid, Spain.............................. 2,303,666 7.1%
Michael J. Mahoney(2)........................ 346,947 1.1
Allan L. Shaw(2)............................. 183,250 *
Lawrence G. Malone(2)........................ 149,532 *
Sheldon M. Goldman(2)(3)..................... 119,098 *
Francis J. Mount(2).......................... 44,961 *
John G. Graham(2)............................ 3,463 *
Paul G. Pizzani(2)........................... 2,463 *
All directors and executive
officers as a group (7 persons)............ 849,714 2.6%
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
common stock.
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to
options and warrants held by that person that are currently exercisable or
exercisable within 60 days of October 13, 1999 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person. Except as indicated in the
footnotes to this table, the stockholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
stockholder's name.
(2) Includes shares of common stock which these individuals have the right to
acquire through the exercise of options within 60 days of October 13, 1999,
as follows: Michael J. Mahoney 278,089; Allan L. Shaw 131,127; Lawrence G.
Malone 113,409; Sheldon M. Goldman 75,976; Francis J. Mount 12,838; John G.
Graham, 1,463; and Paul G. Pizzani, 1,463.
(3) Includes 1,000 shares owned by Mr. Goldman's wife. Mr. Goldman disclaims
"beneficial ownership" of such shares within the meaning of Rule 13d-3 under
the Securities Exchange Act.
130
<PAGE>
DESTIA BUSINESS
Destia is a rapidly growing, facilities-based provider of domestic and
international long distance telecommunications services in Europe and North
America. Destia's extensive international telecommunications network allows it
to provide services primarily to retail customers in many of the largest
metropolitan markets in the United States, Canada, the United Kingdom, Austria,
Belgium, France, Germany, The Netherlands and Switzerland, and Destia believes
that it is well positioned to capitalize on the continued growth in these
markets.
Destia provides its customers with a variety of retail telecommunications
services, including international and domestic long distance, calling card and
prepaid services, Internet access, wireless and wholesale transmission services.
Destia's approximately 490,000 end-user accounts are diverse and include
residential customers, commercial customers, ethnic groups and other
telecommunications carriers. In each of Destia's geographic markets, it utilizes
a multichannel distribution strategy to market its services to its target
customer groups. Destia believes this strategy greatly enhances its growth
prospects and reduces its dependence on any one service, end-user group or
channel of distribution.
Destia entered the U.S. market during 1993, the U.K. market during 1995, and
the Canadian market during 1998. In continental Europe, Destia commenced
offering its services before the January 1, 1998 full liberalization of
telecommunications services in those markets. Destia established operations in
Belgium, France, Germany and Switzerland in 1997 and Austria and The Netherlands
in the second quarter of 1999. Given its early entry into many of its
continental European markets, as well as its established network, sales and
marketing and customer support infrastructure, Destia believes it is well
positioned to further grow its business in continental Europe.
COMPETITIVE STRENGTHS
The European and North American telecommunications industries are rapidly
evolving following the reduction of regulatory barriers, investment in new
transmission capacity and the development of new services and technologies. In
this dynamic environment, Destia believes it has successfully distinguished
itself from many of its competitors and enjoys several competitive strengths:
ESTABLISHED INTERNATIONAL TELECOMMUNICATIONS NETWORK
Since 1996, Destia has made substantial investments in expanding its
network. Destia's network is comprised of:
- 14 operational carrier-grade switches with seven in North America and
seven in Europe;
- IRUs from Frontier and Qwest on portions of their respective U.S. fiber
optic networks, all of which are expected to be fully operational by the
end of 1999;
- transatlantic IRUs;
- leased capacity and IRUs in Europe; and
- leased capacity in Canada.
In addition, Destia has completed direct interconnections with the dominant
carrier in six of its major European markets (the United Kingdom, Belgium,
France, Switzerland, The Netherlands and Germany) and has signed an
interconnection agreement with the dominant carrier in Austria. Interconnection
allows Destia to offer services to customers as a domestic carrier through a
direct connection to the public switched telephone network and with lower access
costs. In expanding its network, Destia has used "carrier-grade" equipment,
which allows it to offer high quality services and expand its service offerings
on a cost-efficient basis. As a result of its network build-out program, Destia
believes that it is well-positioned to aggressively grow its revenues.
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COST-EFFECTIVE MULTICHANNEL MARKETING
Destia reaches a broad range of customer groups by using a variety of
marketing channels, including a direct sales force, independent sales agents,
multilevel marketing, customer incentive programs, advertising and the Internet.
Destia's multichannel approach allows it to tailor its marketing to specific
geographic markets and services. Destia believes this is an especially
cost-effective means of marketing to its target customers. For example, to sell
its residential long distance, calling card and prepaid services in the United
Kingdom, Destia uses a multilevel marketing program, affinity programs and
Internet advertising. For marketing its international and domestic long distance
and prepaid card services to metropolitan-area ethnic communities, Destia uses
independent sales representatives who are part of the targeted community, it
advertises in local, ethnic-oriented publications, and it co-sponsors ethnic
events. Destia also intends to cross-market many of its services. For example,
Destia recently started marketing its "1+" services to its VoiceNet customer
base. Destia expects that its multichannel marketing approach will facilitate
its continued rapid growth while reducing the risks associated with dependence
on a limited number of distribution channels.
COMMITMENT TO SUPERIOR CUSTOMER SERVICE
Destia is committed to providing its customers with superior customer
service and believes it has developed the infrastructure to deliver high levels
of customer satisfaction. For example, in all of its markets, Destia provides
customers with local customer service and billing support and, in the United
States and the United Kingdom, it provides this support 24 hours a day. In
addition, for its ethnic customers, Destia provides customer service in their
native language. As of June 30, 1999, Destia had 345 full-time equivalent
customer service representatives company-wide. Destia has also developed its own
proprietary software systems to better serve its customers. For example, in each
of its network countries, Destia's monthly bills are in the customer's native
language and local currency (and Destia has the ability to bill in Euros).
Destia also provides detailed billing information for commercial customers that
includes itemized breakdowns of usage by telephone number or by account code and
department. Destia believes that its customer support infrastructure, together
with its customer-oriented philosophy, differentiates it from many of its
competitors.
SOPHISTICATED OPERATIONAL CONTROL SYSTEMS
Destia has internally developed sophisticated software and intranet systems
that enable it to better manage its business and appropriately price its
services in each of its markets on a real-time basis. For example, Destia has
developed an interface with its network switches that allows it to compile
network information on a real-time basis, including the number of minutes being
routed through its switch (and corresponding revenue), points of origination and
termination, sources of traffic, by area code, city and carrier, and other
traffic information. Destia uses this information every day in connection with
"least cost" routing, pricing, cost and margin analysis, identifying market
opportunities and developing its sales and marketing and network expansion
strategies. Destia believes these analytical tools allow it to quickly identify
new market growth and cost saving opportunities as well as control its business
in an environment of rapid growth.
PRODUCTS AND SERVICES
Destia provides its customers with a variety of retail telecommunications
services, including international and domestic long distance, calling card,
prepaid, e-commerce and Internet access. Destia's retail customer base is
diverse and includes residential customers, commercial customers and ethnic
groups. In addition, Destia also provides wholesale transmission services to
carriers and other wholesale customers. Destia's services are discussed below.
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RETAIL SERVICES
The following table summarizes Destia's primary retail services in its
principal geographic markets.
<TABLE>
<CAPTION>
RETAIL SERVICES
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTERNATIONAL LONG DOMESTIC LONG CALLING CARD PREPAID
DISTANCE DISTANCE SERVICES SERVICES
----------------------- ------------------- ----------------- -----------------
Continental Europe
Belgium.......................... X X X X
France........................... X X X X
Germany.......................... X X X X
Switzerland...................... X X X X
United Kingdom..................... X X X X
North America
United States.................... X X X X
Canada........................... X X X X
<CAPTION>
<S> <C>
E-COMMERCE
AND INTERNET
SERVICES
---------------
Continental Europe
Belgium.......................... X
France........................... --
Germany.......................... X
Switzerland...................... X
United Kingdom..................... X
North America
United States.................... X
Canada........................... --
</TABLE>
INTERNATIONAL AND DOMESTIC LONG DISTANCE SERVICE. International and
domestic long distance service is service that is accessed from a customer's
billing location, I.E., their home or office, using "1xxx" access in the United
Kingdom and Belgium or "1+" access in the United States and Canada. In France
and Switzerland, long distance service is accessed by using either "1+" access
or by dialing "1xxxx" access. In Germany, long distance service is accessed by
using either "1+" access or by dialing "01099" prior to dialing "0+". Destia's
international and domestic long distance service generally enables customers to
call to any destination.
CALLING CARD SERVICES. Destia's calling card services are sold in all of
its principal markets and can be used in over 65 countries. In the United
States, Destia principally markets its calling cards under the VoiceNet-TM- and
Econocard-TM- brand names.
In continental Europe, Destia believes that a substantial portion of its
calling card customers use this service from their home or office as an
alternative to the dominant carrier for international calls. In contrast, in the
United Kingdom and the United States, Destia's calling cards are sold to
customers primarily for convenience when traveling. As Destia completes
interconnection in continental Europe and is able to provide both international
and domestic long distance service to its customers on a cost-efficient basis,
it intends to migrate its home- and office-based calling card customers to its
international and domestic long distance service. Destia's calling card service
will then be offered in continental Europe as a premium travel service.
In Europe and North America, Destia's calling card service is accessed by
dialing a national toll free number or a local access number. Calling card
customers can access Destia's services from outside their home country by
dialing an international toll-free number, a national toll-free number or a
local access number, depending on the country from which the customer is
calling. Destia can offer customers competitive domestic and international long
distance rates for calls from places where customers can use national toll-free
and local access numbers. For calls from places where customers can only use
international toll-free numbers, Destia can offer customers competitive rates
only on international long distance calls.
PREPAID SERVICES. Destia's prepaid card service is a prepaid version of its
calling card, with similar features and the same manner of use as its calling
card. Destia's prepaid cards generally can be used from the United Kingdom, the
United States, Belgium, Canada, Germany, France, Israel, Greece, The
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Netherlands and Switzerland. Destia also sells prepaid cards that can be used
only from the country in which they are sold.
In 1998, Destia introduced its Telco Prepaid-TM- service to residential
customers in the United Kingdom. Telco Prepaid allows customers to access
Destia's services from their homes on a prepaid basis utilizing "1xxx" and
toll-free access. When the customer makes a domestic or international long
distance call, Destia's switch automatically recognizes the customer's telephone
number and deducts the cost of the call from the customer's prepaid account
balance. Telco Prepaid customers are able to replenish their balances by
purchasing vouchers or by phone with a credit card. Customers also can access
their account balance by phone using voice prompts.
E-COMMERCE SERVICES. As part of Destia's strategy, it seeks to introduce
services that capitalize on the growing popularity of the Internet for everyday
commercial transactions. During the fourth quarter of 1998, Destia introduced
Presto! Card-TM- in the United States. During March 1999, Destia introduced
presto phone-TM- in the United Kingdom. Presto! Card and presto phone are
Destia's first e-commerce services and the first services offered through what
Destia intends to develop as an Internet-based portal for telecommunications
services. Presto! Card and presto phone allow users to establish a virtual
prepaid account that is purchased and recharged exclusively over the Internet at
WWW.PRESTOCARD.COM and WWW.PRESTOPHONE.COM, respectively. These services enable
users to make international and domestic long distance calls from over 35
countries at competitive rates and to view their call records on a real-time
basis. Destia believes that Presto! Card and presto phone are the first
international prepaid services that can be purchased and recharged instantly
over the Internet. Destia intends to offer these services in its continental
European markets and to develop additional e-commerce services that take
advantage of the growing use of the Internet.
Destia believes that e-commerce services offer it significant opportunities
for growth. In particular, Destia believes these services will appeal to a
highly desirable segment of the population that is technologically proficient,
makes a significant number of long distance calls and represents a broad
geographic base. In addition, e-commerce services offer a number of other
advantages. Presto! Card and presto phone, like Destia's other prepaid cards, do
not require any billing support and do not expose Destia to any credit risk.
Also, e-commerce services have lower associated sales and marketing and customer
service costs. Destia believes that e-commerce may, over time, become an
important distribution channel for certain other services.
INTERNET ACCESS SERVICES. Destia began offering Internet access to retail
customers in Switzerland in February 1999 and in Belgium and Berlin, Germany in
September 1999. In Switzerland and Berlin, Germany, Destia recently introduced a
promotional program offering free Internet access and a designated amount of
toll-free Internet access each day to customers who purchase Destia's long
distance services on a pre-select basis. In Belgium, Destia offers 100 minutes
of free Internet access to all customers who use Destia's 1xxx service to access
the Internet. Destia believes offering Internet access will increase usage of
its services, provide it with additional revenue and further enhance its ability
to attract and retain customers. Because retail customers in these countries pay
for the local call that originates the Internet connection, Destia receives
compensation on a per minute basis for its Internet access services. Destia
intends to offer Internet access during 1999 in selected additional European
countries in which it has interconnection, such as Austria, France and the
United Kingdom, as well as additional cities in Germany. The regulatory regime
concerning Internet access services in Europe is under development.
OTHER RETAIL SERVICES. Destia also provides the other retail services
described below. These services currently represent a relatively small portion
of Destia's revenues. Destia expects most of these services to continue as
ancillary service offerings.
- WIRELESS SERVICE. In the United Kingdom, Destia offers wireless services
to business customers through Wavetech Limited, a wireless reseller that
Destia acquired in June 1999. In the New
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York metropolitan area, Destia offers domestic and international long
distance services to cellular telephone users who access this service by
dialing a local access number or, in the case of Bell Atlantic Mobile
customers in certain area codes, by selecting Destia as their long
distance provider.
- DEDICATED ACCESS SERVICE. Customers using this service lease a
transmission line that connects the customer's business directly to one of
Destia's switches or points of presence. This service is marketed to
high-volume customers in the United States and can be used for voice,
data, video and the Internet. Destia intends to increase its sales and
marketing efforts for this service.
- TOLL-FREE SERVICE. Destia provides domestic toll-free service, I.E.,
"800", "888" or "877" service, to customers in the United States, the
United Kingdom, Belgium, Germany, Switzerland and The Netherlands. Destia
also provides international toll-free services ("ITFS") for its customers
in Europe.
- DIRECTORY ASSISTANCE. In the United States and the United Kingdom, Destia
provides nationwide directory assistance service for its long distance
customers 24 hours a day.
WHOLESALE SERVICES
CARRIER SERVICES. In the United Kingdom, Belgium, France, Germany and the
United States, Destia sells wholesale transmission capacity to carrier customers
who use the transmission capacity to service their end-user customers. Carrier
customers generally are extremely price sensitive, generate very low margins and
frequently move their traffic from carrier to carrier based solely on small
price changes in termination costs to particular destinations. Larger carrier
customers sometimes change providers on a daily basis. Furthermore, smaller
carrier customers are generally perceived in the telecommunications industry as
presenting a higher risk of payment delinquency or nonpayment than other
customers. In the deregulating markets in Europe, these risks are particularly
acute.
When Destia sells transmission capacity to carrier customers where all or a
portion of the traffic is transmitted over its IRUs or fixed-cost leased lines
that have unused capacity, Destia can generate additional revenues without
incurring significant marginal costs. When Destia sells carrier customers
transmission capacity which it purchases from third-party vendors, providing
these services allows it to increase the amount of transmission capacity that it
purchases overall. As a result, Destia is able to obtain even greater volume
discounts on its purchases of transmission capacity from these third-party
vendors and therefore generate higher margins and/or offer better pricing on its
retail services.
From January 1997 through June 30, 1999, sales of transmission capacity to
carrier customers ranged from 30% to 8% of Destia's consolidated revenues on a
quarterly basis, comprising 8% of its consolidated revenues for the first
quarter of 1999. In order to increase its carrier revenues, Destia has increased
its carrier services group to 14 people, located in the United States, the
United Kingdom and Germany, who are responsible for sales to carriers in each of
the cities that Destia's network serves. In addition to increasing carrier
revenues, Destia also seeks to diversify its carrier customer base to include
more higher margin continental European traffic.
OTHER WHOLESALE SERVICES. Destia sells transmission capacity to third
parties that offer their own branded products and services such as private label
calling cards. Destia believes that many of these customers buy transmission
from Destia not only for its prices, but also for access to its software
platform, which, among other things, allows them to utilize Destia's software
technology to process calls made with calling cards and prepaid cards and
perform specialized billing functions. In addition, Destia also sells
transmission capacity to resellers who in turn sell its long distance services
to their customers.
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DESTIA'S NETWORK
As of September 30, 1999, the Destia Network was comprised of:
- 14 operational carrier-grade Northern Telecom switches with seven in North
America and seven in Europe;
- 21 points of presence in North America and 13 points of presence in
Europe, in addition to Destia's switch locations;
- over 100 interconnections to local exchange carrier tandems and local
exchange carrier end-offices in the United States, which provide Destia
with direct interconnections to local exchange carriers;
- 35 points of interconnection to dominant carriers in the United Kingdom
and continental Europe;
- a U.S. fiber optic transmission network that will consist of IRUs covering
more than 27 million DS-0 miles of fiber optic cable connecting 43 U.S.
markets. This transmission network will be leased from Frontier on a
long-term basis and will replace Destia's existing Qwest network. In
addition, the Frontier arrangement gives Destia attractive origination and
termination rates in the continental United States;
- IRUs on Qwest's U.S. network that link New York, Dallas, Chicago and Los
Angeles, which are expected to be operational by the end of 1999;
- a U.S. fiber optic transmission network backbone that Destia currently
leases from Qwest;
- a transcontinental transmission network consisting of IRUs and other
ownership interests, including rights on the AC-1, PTAT, TAT 12/13 and
CANTAT-3 transatlantic cables;
- leased capacity and IRUs in Europe and leased capacity in Canada;
- 52 platform service switching points located in nine cities in continental
Europe, the United Kingdom and North America with globally centralized
databases supporting its enhanced services platform; and
- an Internet protocol network overlay that permits point-to-point
transmission using packet-switched voice and data transmission technology.
This network overlay is currently deployed between certain of Destia's
European switches and between those switches and Destia's switch in New
York.
NETWORK ECONOMICS
The major components of Destia's costs include the cost of origination,
transmission and termination. To the extent Destia can manage these costs
appropriately, it believes that it can significantly improve its gross margins.
ORIGINATION AND TERMINATION. In general, Destia pays a per minute fee to
originate and terminate calls. In the United States, Destia can reduce these
costs by having direct interconnection to local exchange carriers through local
exchange carrier tandems and end-offices, which allows it to carry a larger
portion of each call on its network. In Europe, Destia can reduce these costs
through implementing direct interconnection with the local dominant carriers. In
addition, by having these interconnections, Destia is able to provide network
access through abbreviated dialing and to originate calls on its network in a
greater number of cities. Direct interconnection also provides better
transmission quality and greater reliability. However, there are often delays in
executing and implementing interconnection.
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TRANSMISSION CAPACITY. At present, Destia's transmission capacity consists
primarily of:
- IRUs, which are leases of fiber optic cable for periods typically of up to
20 or 25 years (which is usually the entire economically useful life of
the transmission facility);
- leased lines, which as the term is generally used in the
telecommunications industry, represent transmission capacity leased for a
shorter duration under a long-term capital lease. Destia's leased lines
generally are leased for 12 to 36 months; and
- switched minutes, which are purchased from carriers on a per minute basis.
Switched minutes are used principally to carry traffic to destinations not
covered by the Destia network. These purchases are made on an as-needed
basis and do not involve significant minimum purchase requirements.
In order to effectively manage its transmission costs, Destia utilizes a mix
of IRUs, leased lines and switched minutes. It typically seeks to acquire IRUs
that connect network cities which have significant calling traffic between them.
Destia uses leased lines to operate on a fixed-cost basis for certain routes
where it has experienced increased traffic, but where the traffic does not yet
merit an investment in an IRU. Because the cost of IRUs and leased lines involve
an initial capital outlay or a fixed monthly payment, transmitting an increased
portion of calls over these IRUs and leased lines reduces Destia's incremental
transmission costs and thereby enables it to offer services on a competitive
basis and/or increase its gross margins. Once Destia has generated enough
traffic to cover the costs of IRUs and leased lines, there is no significant
marginal cost to Destia for carrying additional calls over these IRUs and leased
lines. In order to further increase the capacity of its IRUs, Destia in some
cases utilizes carrier grade compression or multiplexing equipment.
As part of its expansion strategy, Destia intends to acquire additional IRUs
for routes where Destia has, or expects to have, sufficient traffic. Although
Destia's IRUs are currently operated and maintained by third parties, Destia has
the right to transmit its telecommunications traffic through the fiber. To the
extent cost efficient, Destia may acquire additional IRUs including IRUs in
"dark fiber." Under certain circumstances, acquiring these types of IRUs may be
more cost advantageous than acquiring IRUs in transmission capacity that is
operated and maintained by third parties, although it also involves certain
additional operational costs and risks and, in some countries, additional
regulatory compliance requirements.
In addition, Destia can further reduce its transmission costs for traffic on
its network by increasing the amount of traffic routed by its switches. Because
Destia's switches are programmed to route traffic over the lowest cost network
service, depending upon cost and bandwidth availability, traffic routed by its
switches can be delivered on a "least cost" basis.
OTHER. In addition to the cost of origination, transmission and
termination, the other costs of Destia's network relate primarily to switching
equipment, compression equipment, its Internet protocol overlay and
facility/network management and related software.
NETWORK OPERATIONS
NETWORK OPERATIONS CENTER. During the fourth quarter of 1998, Destia
established a network operations center in St. Louis, Missouri, which operates
on a 24-hour-a-day, 7-day-per-week basis. From this facility, Destia monitors
its operations in the United Kingdom, continental Europe and North America.
Performing these tasks from a centralized location enables Destia to monitor the
network more effectively and on a more cost-efficient basis. In addition, Destia
also has the capability to monitor its European network from its network
operations center in London.
During 1998, Destia began rolling out its St. Louis network operations
center and developing and enhancing its network control systems. Destia has
invested a total of approximately $3.0 million for the build-out of the network
operations center. Among the most significant of the improvements Destia is
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undertaking is the installation of digital cross-connect systems equipment at
each of its switch locations, which will enable Destia to monitor, test and
re-configure network facilities from a central location to maintain transmission
quality on its network.
INTEGRATED INFORMATION SYSTEMS. The development and integration of the
information systems that interface with Destia's network are performed at
Destia's College Station, Texas, and Brooklyn, New York, facilities. One of the
principal development projects during 1998 was the development of a proprietary
integrated customer service database and billing system, called Service One-TM-,
which is currently in use for all of Destia's U.S. services. Service One will
afford greater flexibility as Destia increases service offerings and will
accommodate greater customer volume. In addition, Destia recently implemented an
interactive voice response system that will permit customers to obtain
up-to-date information concerning their account and their most recent invoice by
telephone.
During the first six months of 1999, Destia spent approximately $1.6 million
to enhance current, and develop new, network information systems. Destia expects
to invest approximately $3.5 million for these purposes during 1999. While
Destia believes that its current information systems are adequate for its near
term growth, additional investment will be required as Destia expands its
operations.
SOPHISTICATED OPERATIONAL CONTROL SYSTEMS. Destia's systems development
group has internally developed sophisticated proprietary software and intranet
systems to better manage business and appropriately price its services in each
of its markets on a real-time basis. For example, Destia has developed an
interface with its network switches that allows it to compile network
information on a real-time basis, including the number of minutes being routed
through its switch (and corresponding revenue), points of origination and
termination, sources of traffic, by area code, city and carrier, and other
traffic information. Destia uses this information every day in connection with
least cost routing, pricing, cost and margin analysis, identifying market
opportunities and developing its sales and marketing and network expansion
strategies, among other things. Destia believes that these analytical tools
allow its management team to quickly identify new market growth and cost saving
opportunities as well as control its business in an environment of rapid growth.
Destia believes that it is one of the few competitive telecommunications
companies that have these types of analytical tools and to have integrated them
into its daily operations.
EUROPEAN NETWORK
Destia has seven switches and 13 points of presence in continental Europe
and the United Kingdom. The location of its European switches and the date of
completed interconnection of each are as follows:
<TABLE>
<CAPTION>
DATE OF DATE OF
CITY OPERATION INTERCONNECTION
- ----------------------------------------- --------------- ---------------
<S> <C> <C>
Brussels, Belgium........................ 1Q97 4Q98
Paris, France............................ 1Q97 2Q99
London, United Kingdom................... 2Q97 2Q97
Frankfurt, Germany....................... 3Q98 4Q98
Zurich, Switzerland...................... 3Q98 4Q98
The Hague, The Netherlands............... 4Q98 3Q99
Berlin, Germany.......................... 4Q98 4Q98
</TABLE>
Destia has signed an interconnection agreement with Telecom Austria and
expects to complete its interconnection in Austria during the fourth quarter of
1999. Destia also has IRUs on the PTAT-1, CANTAT-3, TAT 12/13 and AC-1
transatlantic cables. Destia expects to acquire additional capacity on Circe to
support its increasing transmission requirements in Continental Europe. See
"--Network Economics--Transmission Capacity."
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Destia's European hub is located in London. A large portion of Destia's
transatlantic calls between continental Europe and the United States is routed
through London because it is the most cost-effective routing due to the low per
minute marginal costs associated with Destia's transatlantic IRUs. Destia also
routes a substantial portion of its international intra-European calls (E.G.,
Berlin to Paris) through its London hub to take advantage of favorable
transmission rates to and from London. These rates are often lower than the
costs of transmitting the call by a more direct "off-net" route where Destia
does not have a transmission line between the originating and terminating
switch.
As a result of deregulation and geography, Frankfurt is emerging as a
popular European hub for telecommunications carriers, especially for calls to
and from Eastern Europe. Destia believes that it is well positioned to take
advantage of these market developments due to its Frankfurt switch and intends
to market its carrier services to carriers that route calls through Frankfurt.
In addition to adding new switches in continental Europe, Destia has further
enhanced its network in continental Europe by entering into and implementing
direct interconnection agreements with the dominant carrier in Belgium, France,
Germany, The Netherlands and Switzerland, and it expects to implement
interconnection with the dominant carrier in Austria during the fourth quarter
of 1999. These agreements add to the interconnection that Destia has had in
place with British Telecom in the United Kingdom since the second quarter of
1997. Destia's interconnection arrangements provide it with a direct connection
to the public switched telephone network. By having a direct connection to the
PSTN, Destia is able to offer domestic long distance service, provide network
access through abbreviated dialing and originate and terminate calls in a
greater number of cities and at a substantially reduced cost.
In addition, within the next twelve months, Destia intends to upgrade its
points of presence in Hamburg, Germany and Vienna, Austria to switches and
install points of presence in Manchester, United Kingdom, Dublin, Ireland and
Milan, Italy.
NORTH AMERICAN NETWORK
Destia has seven switches and 21 points of presence in the United States and
Canada. Destia's North American switches, which are all interconnected and
operational, are located in the following cities:
<TABLE>
<CAPTION>
DATE OF
CITY OPERATION
- --------------------------------------------------------------- -----------
<S> <C>
New York....................................................... 3Q93
Los Angeles.................................................... 1Q98
Miami.......................................................... 3Q98
Washington, D.C................................................ 3Q98
Toronto........................................................ 3Q98
Chicago........................................................ 4Q98
Dallas......................................................... 4Q98
</TABLE>
U.S. NETWORK EXPANSION. In 1998, Destia substantially expanded its U.S.
network infrastructure by adding switches in Chicago, Dallas, Los Angeles, Miami
and Washington, D.C. Destia also added a number of points of presence connecting
various cities to its network. All of the foregoing reduce Destia's transmission
costs.
During 2000, Destia intends to upgrade its points of presence in Atlanta,
Georgia to a switch. In addition, during the remainder of 1999, Destia expects
to add additional connections to local exchange carrier tandem switches and
local exchange carrier end-offices on an ongoing basis.
Destia currently obtains most of its U.S. fiber optic transmission capacity
from Qwest, and recently obtained additional capacity on an IRU basis,
connecting New York, Dallas, Chicago and Los Angeles. This capacity is expected
to be operational by the end of 1999. Because of the substantial increase in
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Destia's domestic traffic and Destia's desire to provide services in more U.S.
markets, Destia recently acquired a 20-year IRU from Frontier to use portions of
its U.S. fiber optic network. This network will consist of more than 27 million
DS-0 miles of fiber optic cable connecting 43 markets and will replace Destia's
Qwest network. In addition, the Frontier arrangement also gives Destia favorable
origination and termination rates in the continental United States. This will
provide Destia with the cost benefits of having additional network access and
drop-off points in areas where it has not invested in its own switches or points
of presence. Destia believes that the extensive reach of its network in the
United States following the addition of transmission capacity from Frontier will
provide it with a significant cost advantage over many of its competitors,
although relying primarily on one network provider for U.S. transmission
capacity also results in additional risks.
Frontier is in the process of building the fiber optic network that Destia
will use, and Destia expects this network to be completed and substantially
operational by the end of 1999. Destia is currently using a portion of
Frontier's network.
GATEWAY SWITCH UPGRADES. Gateway switches permit Destia to convert
international protocols to U.S-based protocols. This ability to convert
protocols enables Destia to terminate inbound international traffic in the
United States for overseas carriers and to carry outbound international traffic
closer to its destination and at a lower cost before handing it off to another
carrier (such as the dominant local carrier) in the terminating country. Destia
currently has gateway switches in New York and London and intends to upgrade its
switches in Miami and Los Angeles by the second quarter of 2000 to have
international gateway capabilities, which will allow them to interface directly
with protocols used by non-U.S. carriers. The Miami gateway switch will
interface primarily with carriers from Latin America and the Caribbean and the
Los Angeles gateway switch will interface primarily with carriers from Asia.
CANADIAN EXPANSION. During the third quarter of 1998, Destia expanded its
network to include Canada by installing a switch in Toronto. Destia plans to
install a point of presence in Montreal by the end of 2000. This switch and
point of presence will enable Destia to originate calls in two of the largest
long distance markets in Canada.
NETWORK ACCESS AND CALL ROUTING
NETWORK ACCESS. The Destia network can be accessed through a variety of
methods, depending upon the service and the location from which the customer is
calling. These methods are as follows:
- "1+" ACCESS. "1+" access, also known as preselection, presubscription or
equal access, enables a long distance customer to access the Destia
network from the customer's premises by dialing "1" and then the number
that the customer is calling. "1+" access is currently available to
Destia's customers in the United States, Canada, Germany and Switzerland
where the Destia network has a switch or point of presence.
- "1XXX" ACCESS. "1xxx" access, or prefix dialing, enables a long distance
customer in Destia's European countries (as well as the United States) to
access the Destia network from the customer's premises by dialing "1", a
code number and the destination number.
- LOCAL DIAL-UP ACCESS. In continental European cities where Destia has
installed a switch or POP, customers can access Destia's international and
domestic long distance service and, in some cases, prepaid card service,
by dialing a local telephone number. Local dial-up access reduces Destia's
transmission costs for these calls because it shifts the cost of accessing
Destia's switch to the customer. The reduction in transmission costs
enables Destia to increase its margins and/or reduce its retail prices on
these calls, as well as to provide competitively priced intra-European
long distance service.
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- INTERNATIONAL TOLL-FREE ACCESS. Customers using this method can access
Destia's card-based services in selected continental European markets by
dialing an international toll-free number. This access method is
predominantly used by business travelers.
- NATIONAL TOLL-FREE ACCESS. Customers who access Destia's services in this
manner do so by dialing a national toll-free number. This access method is
available to customers who use Destia's calling card and prepaid card
services in the United States, Canada, the United Kingdom, Belgium,
Germany, The Netherlands and Switzerland.
- DEDICATED ACCESS. Carrier customers and high volume end-users can be
connected to Destia's switch by a dedicated leased line. The advantages to
the customer of dedicated access are simplified dialing, faster call setup
times and lower access costs if a sufficient volume of calls is
transmitted over the leased line. This service can be used for voice,
data, video and the Internet over a single leased line.
CALL ROUTING. Calls are routed to their destination through one or more of
Destia's switches. If the call originates in a network city with a switch, the
caller generally will dial into the network over local lines. These calls will
then be routed by the local service provider (a local exchange carrier in the
U.S. and typically a dominant carrier in Europe) to Destia's switch. A call
originating in a city with a point of presence, which acts solely as a
collection point for calls, generally will be originated using one of the
foregoing access methods and will be sent to the point of presence. The call
will then be transmitted from the point of presence to one of Destia's switches
on an owned or leased line comprising part of the Destia network. If the call
originates in a city where Destia does not have a switch or point of presence,
the caller generally dials into the network using national or international
toll-free access, which is substantially less cost-efficient for Destia than
"1xxx," "1+" or local dial-up access. From Destia's switch, least cost routing
techniques are used to determine whether the call should be transferred directly
to the public switched telephone network or routed to another one of Destia's
switches over an owned or leased line and then transferred to the public
switched telephone network for termination. See "--Network Hardware and
Software--Least Cost Routing."
NETWORK HARDWARE AND SOFTWARE
CARRIER GRADE SWITCHES AND TECHNOLOGY. Destia uses Northern Telecom carrier
grade switches throughout Destia's network. The principal benefits of carrier
grade switches are their ability to (1) handle large, simultaneous call volumes,
(2) provide better quality service to customers, and (3) seamlessly interconnect
with local operators. Each of these benefits is discussed below:
- CALL CAPACITY. Carrier grade switches generally have more port capacity
than smaller switches, which enables them to route a greater number of
simultaneous calls.
- BETTER QUALITY SERVICE. Carrier grade switches provide higher transmission
quality, faster call setup times and better call completion rates than
smaller, less powerful switches. Destia's carrier grade switches also have
call completion capabilities that reduce the time needed to connect calls
and allow for more efficient use of transmission capacity.
- DIRECT INTERCONNECTION WITH DOMINANT CARRIERS AND LOCAL EXCHANGE CARRIER
NETWORKS. Carrier grade switches enable Destia's network to interconnect
directly with the networks of dominant carriers and local exchange
carriers, subject to applicable regulatory requirements and an
interconnection arrangement being in place. The benefits of direct
interconnection generally include better quality service, lower costs,
improved reliability and the ability to rapidly increase call-handling
capacity.
Destia believes that by utilizing the equipment of a single principal
supplier it is able to minimize the difficulties associated with integrating
equipment from various sources and with differing specifications. In addition,
it also enables Destia to develop proprietary software to compile its network
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information since Destia does not need to accommodate switches of different
manufacturers. However, using equipment principally from one supplier does
entail certain risks.
SS7 TECHNOLOGY. Signaling System 7 technology, also known as "SS7", which
is used primarily in the United States, performs two significant functions
within the Destia Network. SS7 facilitates faster call setup by sending messages
that precede the call and obtain information about its destination, such as
whether the destination number is available or engaged in a call. Second, SS7 is
able to look up destination numbers, such as toll-free "800" numbers, in a
central database. This allows the Destia network to use intelligent call
routing.
Destia is currently migrating from SS7 services provided by third parties on
a per switch basis to using its own SS7 equipment throughout its U.S. network.
Destia will then use one centralized provider to enable it to make SS7
connections with local exchange carrier offices nationwide. This will provide
Destia with greater flexibility and will enable it to control equipment usage,
maintain network integrity and reduce costs.
Destia's SS7 technology will be supported from its St. Louis network
operations center. This will provide real time information on network usage and
integrity while allowing for instantaneous call tracing, monitoring, and fraud
detection.
LEAST COST ROUTING. Through a combination of hardware and software,
Destia's network enables it to perform least cost routing analysis, which
enables Destia to transmit a call over the most cost-efficient route during that
time of day. Prices for various destinations fluctuate on a daily basis.
Destia's least cost routing software enables it to continually revise its
routing tables, including accounting for fluctuations in currency exchange
rates, as the cost of certain routes change. Destia has a dedicated group that
is responsible for monitoring the routing of calls and seeking to minimize its
transmission costs.
DIGITAL CROSS-CONNECT CAPABILITY. Destia is in the process of installing
digital cross-connect systems hardware and software at each of its switches and
major points of presence. Digital cross-connect systems will enable Destia to
monitor, test and re-configure network facilities from a central location to
maintain transmission quality on its network.
INTERNET PROTOCOL OVERLAY. Currently, voice calls are carried by keeping a
circuit open between two or more parties. This is inefficient because it uses
transmission capacity even when the parties are silent. Destia's carrier grade
switches are capable of interfacing with TCP/IP, an Internet protocol software,
and the related hardware. TCP/IP technology would enable Destia to provide
simultaneous voice and data transmission over a single line, since the
technology compartmentalizes voice, data and/or video into digital pieces of
information, I.E., into "packets", before they are transmitted. The packets can
be sent separately over one or more lines and are then reassembled at the
destination switch prior to being converted into their original format. This is
a much more efficient use of transmission capacity than keeping a circuit open.
Packet-based transmission would enable Destia to transmit data and video using
less transmission capacity, thus increasing the amount of information it can
transmit over a given line and its network overall.
Destia has installed TCP/IP hardware and software manufactured by third
parties on selected transatlantic and European routes, which enable it to carry
traffic using Internet protocol technology over a portion of the Destia network.
Destia is currently exploring various potential service applications. For
example, packet-based transmission would allow Destia to offer integrated voice,
fax and video services as well as Internet access over an ordinary telephone
line. However, Destia has very limited experience with IP technology and many of
Destia's competitors are making substantial IP investments. There can be no
assurance that Destia will be successful with IP technology.
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OPERATING AGREEMENTS; TRANSIT AGREEMENTS
Through affiliates, Destia has entered into operating, termination and/or
transit agreements with a number of overseas dominant carriers and competitive
carriers, including carriers in Denmark, Greece, Hungary, Ireland, Israel,
Italy, Poland, Romania, Russia, Slovenia, Sweden, Turkey and Ukraine. As part of
Destia's strategy, and as market and regulatory conditions warrant, it intends
to enter into more of these agreements with additional overseas carriers.
Operating and termination agreements provide Destia with more favorable
termination rates in the home country of the foreign carrier who is a party to
the agreement with Destia. Destia can directly interconnect with the local
carrier who then locally terminates all calls. Operating and termination
agreements also afford Destia more control over the quality of the terminating
segment of its international calls. On routes on which the Federal
Communications Commission's international settlement policy still applies,
operating agreements increase Destia's overall gross margins because the
correspondent carriers party to such agreements are required to send Destia a
specified portion of their U.S.-bound traffic. The Federal Communications
Commission recently enacted rules, however, removing these requirements for
arrangements with foreign carriers lacking market power, I.E., possessing less
than 50% market share in the relevant destination market, and for arrangements
with all carriers on liberalized routes, where pricing on such rates is
competitive.
Transit agreements are advantageous to Destia because they provide it with
more favorable transit rates to third countries. Such agreements and switched
hubbing arrangements may allow Destia to pay less than the full settlement rate
Destia would otherwise have to pay if it had a direct operating agreement with
the terminating dominant carrier. See "--Government Regulation."
SALES AND MARKETING
Destia reaches a broad range of customer groups through a variety of
marketing channels, including a direct sales force, independent sales agents,
multilevel marketing, customer incentive programs, advertising and the Internet.
As part of Destia's multichannel marketing approach, Destia tailors its
marketing to specific geographic markets and services. Destia believes this is
an especially cost effective means of marketing to its target customers.
Destia markets its services at the local level through both independent
sales agents and an internal sales force, depending upon the particular
geographic market, customer group and service. Destia's independent sales
representatives, who generally are retained on a commission-only basis,
concentrate primarily on residential sales and sales to commercial accounts.
Destia's internal sales force concentrates primarily on sales to commercial
accounts, wholesale customers and other carriers. This internal sales force
includes a recently expanded carrier services group of 14 people located in the
United States, the United Kingdom and Germany who are responsible for sales to
carriers in each of the Destia network cities. Destia's local internal sales
forces also typically advertise locally and provide support for its independent
sales representatives.
CONTINENTAL EUROPE
Destia's sales and marketing strategy in most of its continental European
markets has been initially to concentrate on sales of prepaid services through
independent distribution channels since prepaid services operations present a
limited credit risk and independent distribution does not require substantial
initial investments. After gaining market acceptance and establishing its local
sales and marketing infrastructure, Destia typically has then introduced calling
card services and, once a point of presence or switch is installed,
international long distance services. Concurrently, Destia has also aggressively
pursued interconnection arrangements with the local dominant carrier, which
allow it to provide national origination on a cost effective basis. Following
interconnection, Destia further increases its sales and marketing activities in
a market in order to promote its services. As part of Destia's initial entry
into a new market, Destia also typically has concentrated on sales in ethnic
communities since these market segments can be effectively targeted with limited
resources, enabling Destia to rapidly generate revenues, create brand awareness
and promote customer loyalty.
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While Destia's general sales and marketing strategy in continental Europe
remains consistent, Destia also tailors it to meet the needs of each particular
market. For example, in Belgium, Destia has generated significant revenues by
placing its prepaid cards (together with point of purchase displays) in many
highly visible locations such as bookstores, newsstands, kiosks and convenience
stores. In France, Destia concentrates on commercial accounts and employs an
internal sales force for this purpose. In Germany, Destia has an internal sales
force in Hamburg, Frankfurt and Berlin that primarily markets prepaid cards and
commercial long distance services. Destia also began marketing its "1+" long
distance services in Germany during the first quarter of 1999 through a
multilevel marketing program that is similar to its U.K. program. In
Switzerland, Destia markets its services through indirect channels, supported by
direct advertising in national media. Destia also cross-markets its services in
Switzerland. For example, Destia began providing Internet services in
Switzerland in February 1999 and recently introduced a promotional program in
Switzerland, Belgium and Berlin, Germany offering free Internet access and a
designated amount of toll-free Internet access each day to customers who
purchase selected Destia services.
Destia also adapts successful marketing approaches from certain countries to
other continental European markets. For example, Destia intends to advertise in
national magazines and newspapers in Germany, which has been effective in
Switzerland. In addition, Destia intends to replicate the success of its
multilevel marketing program in the United Kingdom in other European markets.
Destia has an internal sales force based in each city in which it has a
switch except The Hague. In each of these cities, Destia is expanding its
internal sales forces and recruiting additional independent sales
representatives.
UNITED KINGDOM
In the United Kingdom, Destia markets its services nationally. Destia offers
the majority of its U.K. services through Telco, its wholly-owned U.K.
subsidiary.
Destia's residential domestic and international long distance service, local
services and calling cards are marketed primarily by independent sales
representatives through multilevel marketing. Destia believes that multilevel
marketing is the most cost effective way to continue to increase its U.K.
residential and card-based customer revenues since it encourages independent
sales representatives to both sell services and recruit additional independent
sales representatives. Sales representatives are motivated to both sell and
recruit because they receive a commission based on their own sales and sales of
representatives recruited by them. A substantial number of these sales
representatives operate on a part-time basis, using the commissions from sales
of services as a secondary source of income. During June 1999, Destia had
approximately 3,500 active independent sales representatives. In addition,
Destia is one of only 150 companies, and the first telecommunications company,
to be accepted for full membership in the Direct Sellers Association, a
nationally recognized U.K. industry trade group for multilevel marketing.
Destia markets domestic and international long distance services, as well as
local services, to U.K. commercial accounts and carrier services to carrier
customers through a direct sales force and certified independent agents. Destia
has adopted this approach for these services since they are more complex and
usually require a longer sales cycle. Destia markets and distributes its Presto
phone virtual prepaid service, which is currently available only to its long
distance customers, directly to customers over the Internet.
Destia markets its prepaid cards primarily through prepaid card
distributors. Destia has increased its U.K. prepaid card distribution
capabilities through its acquisition of a controlling interest in America First,
a well recognized prepaid card distributor, during the fourth quarter of 1998.
NORTH AMERICA
UNITED STATES. During 1998, Destia significantly expanded its marketing
efforts beyond the New York metropolitan area to include other U.S. network
cities. Destia now has independent sales
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representatives in all of its network cities and has internal sales
representatives in Chicago, Dallas, New York, Los Angeles, Miami and Washington,
D.C.
Destia's international and domestic residential long distance services,
which are marketed primarily to ethnic communities, are sold primarily through
independent sales representatives. Destia targets ethnic communities for these
services because it believes that members of these communities generate above
average international calling volumes, are not as heavily targeted by other long
distance providers as the general population and enable Destia to build brand
recognition in a well defined community. Destia intends to expand the use of
independent sales representatives to market its residential services in the
United States beyond the ethnic markets.
Destia's international and domestic long distance services for commercial
accounts are sold primarily through its internal sales force, which targets
accounts with significant calling volumes to European destinations. Destia's
United States sales force dedicated to commercial accounts has 25 sales
executives. Many business customers also require unified or other specialized
billing formats. Members of Destia's sales force work with customers to address
their billing needs such as providing monthly bills with breakdowns of usage by
account code, area code or department.
Destia's calling card services are marketed and co-branded under both the
VoiceNet and EconoCard brand names. VoiceNet calling cards are marketed
primarily through in-flight magazines, national magazines and newspapers and
through advertising materials placed in high traffic locations, such as
restaurants. Destia also markets VoiceNet calling cards through independent
sales representatives. EconoCard calling cards are marketed to ethnic groups in
conjunction with Destia's residential services.
Prepaid cards are sold under a variety of brand names in major metropolitan
areas and are primarily sold through wholesale distributors and other
independent sales representatives. These distinctively branded prepaid cards can
be accessed by dialing a local access number in the area in which the card was
purchased, which reduces Destia's costs and permits it to offer lower rates than
most of its competitors. This is important because prepaid card customers are
particularly price sensitive and frequently purchase prepaid cards based on
small differences in price for calls to specific destinations.
Destia has initiated a cross-marketing program to VoiceNet customers to
offer them its "1+" long distance service in the United States. Destia also has
expanded its marketing of new services to existing residential long distance
customers by describing these services regularly in the "DESTIADVISOR" monthly
insert included with each customer bill. In addition, Destia has entered into
affinity programs with major credit card companies, such as First USA and GE
Capital, to promote its VoiceNet calling cards. These affinity programs include
mass mailings in customers' monthly billing statements that contain a
preapproved VoiceNet calling card which, when used by the customer, is
automatically billed to the customer's credit card account.
Destia markets and distributes its Presto! Card virtual prepaid service to
customers over the Internet and through an affinity program with the New Jersey
Devils professional hockey team.
Destia uses an internal sales force to market to carrier customers and other
wholesale customers that purchase privately branded calling cards and prepaid
cards. Destia has adopted this sales approach for these services since they are
more complex and usually require a longer sales cycle.
CANADA. In Canada, Destia currently markets its services in Toronto and
Montreal, primarily to ethnic communities that generate substantial
international calling volume. Marketing is being done primarily through
independent sales representatives and Destia's internal sales representatives in
Canada. As Destia expands its customer base in Toronto and Montreal, it intends
to broaden its target customer groups, introduce additional services and
increase its internal sales and marketing capabilities.
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CUSTOMER SERVICE
Destia is committed to providing its customers with superior customer
service and believes that it has developed the infrastructure necessary to serve
both its existing customer base and accommodate substantial growth with minimal
additional investment. Destia has a 24-hour-a-day customer service department
located in College Station, Texas, which, at June 30, 1999, had 206 full-time
equivalent customer service representatives. In the United Kingdom, Destia also
maintains a 24-hour-a-day customer service department that, at June 30, 1999,
had 97 full-time equivalent customer service representatives located at the
Telco facility in London, England. In continental Europe, each country in the
Destia network has a customer call center, which in the aggregate totalled 42
full-time equivalent customer service representatives at June 30, 1999. At all
of Destia's customer service facilities, its customer service representatives
handle both service and billing inquiries. In addition, Destia's call centers
all have representatives that are multilingual.
Destia also has developed its own proprietary software systems to better
serve its customers. For example, in each of Destia's network countries, its
monthly bills are in the customer's native language and local currency (and it
has the ability to bill in euros). Destia also provides detailed billing
information for commercial customers that includes itemized breakdowns of usage
by account code and department. In addition, Destia has implemented an
interactive voice response system that will permit customers to obtain
up-to-date information concerning their account and their most recent invoice.
Destia believes that its customer-oriented philosophy backed by the strength of
its customer support infrastructure allows it to differentiate itself from its
competitors.
COMPANY OPERATIONS
Currently, Destia's extensive international telecommunications network
allows it to provide services in many of the largest metropolitan markets in the
United States, Canada, the United Kingdom, Austria, Belgium, France, Germany,
The Netherlands and Switzerland. Destia's operations in each of its principal
markets are briefly described below.
CONTINENTAL EUROPE
A significant component of Destia's growth strategy is focused on the
continued development of its business in the deregulating telecommunications
markets of continental Europe. Prior to January 1, 1998, there were significant
regulatory limitations on Destia's ability to provide services in most
continental European countries. Now, as a result of European Union and national
regulatory initiatives, Destia may provide a range of services in many of these
countries that is comparable to the services it provides in the United States
and the United Kingdom. In some cases, however, national regulatory restrictions
and technology issues (such as credit card verification for e-commerce
purchases) may limit Destia's ability to do so. Subject only to these
limitations, in continental Europe, Destia intends to offer the same range of
services that it offers in the United States and the United Kingdom.
BELGIUM. Sales of prepaid cards comprised the largest portion of Destia's
Belgian revenues for the six-month period ended June 30, 1999, followed by
revenues derived from long distance from commercial and residential customers.
Revenues for 1xxx services have grown rapidly and are expected to exceed
revenues derived from sales of prepaid cards.
Prior to January 1, 1998, due to regulatory limitations, Destia was only
able to provide a limited number of services in Belgium, including international
service utilizing international toll-free access and local access for card-based
services, but excluding domestic long distance service. Since regulatory
liberalization on January 1, 1998, Destia has expanded its services to include
both domestic and international long distance service. In addition, during the
fourth quarter of 1998, Destia completed its interconnection with Belgacom, the
dominant Belgian carrier. This interconnection provides Destia with a total of
10 connection points with Belgacom, including Destia's switch in Brussels, and
permits Destia to provide its services to customers anywhere in Belgium. This
interconnection also permits Destia to
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provide network access to its customers through abbreviated dialing and enables
it to originate and terminate calls in Belgium on a more cost-effective basis.
In September 1999, Destia began offering Internet access services throughout
Belgium. It has initiated a promotional program offering 100 minutes of free
Internet access to customers who use Destia's 1xxx services to access the
Internet.
FRANCE. Destia has offered international long distance service to customers
in Paris since the first quarter of 1997, in Marseilles and Nice since the
fourth quarter of 1997 and in Lyon and Toulouse since the fourth quarter of
1998. Destia began offering domestic long distance services in selected markets
in France in July 1998. Destia's revenues in France are currently predominantly
generated from prepaid card services. Sales of international long distance
services comprise virtually all of the other revenues. Most of Destia's
customers have calling line identity, which allows its switches to recognize the
number that the customer is calling from, so that the customer can access
Destia's network without the need for a personal identification number. In
addition, Destia provides automatic dialers free of charge to its commercial
accounts. Automatic dialers eliminate the need for a customer to dial a prefix
to use Destia's services.
Destia's network includes a switch in Paris and points of presence in
Marseilles, Toulouse, Nice, Lyon and Nantes. During the fourth quarter of 1998,
Destia entered into an interconnection agreement with France Telecom that will
enable its customers to access its long distance service from their home or
office through abbreviated dialing, although certain carriers, including France
Telecom, are able to provide access through a one-digit access code. Destia is
currently interconnected with France Telecom in Paris, Marseilles, Toulouse,
Nice and Lyon. See "--Government Regulation."
GERMANY. Germany is the largest market for telecommunications services in
continental Europe. Destia's current principal service in Germany is its prepaid
card service, which it offers predominantly to commercial accounts. In addition,
Destia also provides long distance service, which it markets primarily to
commercial customers. Destia has offered this service in Hamburg since the first
quarter of 1997, in Berlin since the fourth quarter of 1997 and in Frankfurt
since the third quarter of 1998. Destia began marketing domestic long distance
services in the third quarter of 1998 because it completed interconnection in
the fourth quarter of 1998. Destia also began marketing long distance services
to residential accounts. Destia introduced its Presto! Card in Berlin, Germany
in September 1999. In September 1999, Destia introduced Internet access services
in Berlin, Germany. It has initiated a promotional program offering free
Internet access and a designated amount of toll-free Internet access each day to
customers who purchase Destia's long distance services on a pre-select basis.
Destia plans to expand the Presto! Card and its Internet access services to
additional cities in Germany in the first quarter of 2000. In addition, Destia
has also introduced its successful U.K. multilevel marketing program in Berlin,
Germany and plans to expand its sales force of independent agents in other
cities in Germany. See "--Sales and Marketing--United Kingdom."
As of June 30, 1999, Destia had switches in Berlin and Frankfurt and a point
of presence in Hamburg. Destia expects to upgrade its Hamburg point of presence
to a switch during the next twelve months. Destia believes that its Frankfurt
switch will allow it to take advantage of the growing popularity of Frankfurt as
a European hub for telecommunication carriers, especially for calls to and from
Eastern Europe, and Destia intends to market its carrier services to carriers
that route calls through Frankfurt.
During the fourth quarter of 1998, Destia implemented its interconnection
with Deutsche Telekom, enabling it to offer customers in its German network
cities and the surrounding metropolitan areas, both domestic and international
long distance service through direct access. Destia has already ordered five
additional interconnection points in Germany. Destia expects that Munich and
Dusseldorf will be established in the fourth quarter of 1999, and Hanover,
Nurnberg and Stuttgart will be established in the first quarter of 2000.
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Destia's interconnection agreement in Germany granting it access to Deutsche
Telekom's network expired at the end of February 1999, and Destia initiated
legal action before Reg TP, the German regulatory authority, to maintain
continued interconnection with Deutsche Telekom's network. Reg TP ruled in
Destia's favor and ordered Deutsche Telekom to grant Destia interconnection
rights and network access in Germany. As a result of this ruling, Destia
originates and terminates traffic throughout Germany. Deutsche Telekom recently
filed suit in administrative court in Cologne, Germany to challenge this ruling.
Destia's German subsidiary has been summoned to the proceedings between Deutsche
Telekom and Reg TP. If Deutsche Telekom were successful in its attempt to modify
the conditions for interconnection and to impose more onerous interconnection
requirements, Destia's transmission costs in Germany would increase and the
services it could offer might be limited. Destia expects to be able to maintain
its interconnection to Deutsche Telekom's network under current forms although
there can be no assurance that Deutsche Telekom will not impose more onerous
interconnection requirements.
SWITZERLAND. Switzerland has been substantially deregulated and is
currently Destia's third largest market based on revenues for the six month
period ended June 30, 1999. Destia's principal service in Switzerland is long
distance. Customers may preselect Destia as their long distance carrier and make
long distance calls on its network using "1+" dialing. During 1998, a large
portion of Destia's customers were commercial accounts. In February 1999, Destia
began providing Internet services in Switzerland and introduced a promotional
program offering free Internet access and a designated 99 minutes each day of
toll-free Internet access to customers who purchase Destia's long distance
services on a pre-select basis.
Destia established a point of presence in Zurich during the third quarter of
1997 and upgraded it to a switch in the third quarter of 1998. In addition,
during October 1998, Destia was one of the first telecommunications carriers to
be interconnected to Swisscom, the dominant carrier in Switzerland. This
interconnection enables Destia to originate and terminate traffic in Switzerland
more cost effectively, which provides it with a competitive advantage over those
of its competitors who do not currently have interconnection. Since Destia
completed its interconnection in October 1998, its revenue and number of
customers has increased significantly. Destia intends to significantly expand
its customer base in Switzerland during the next twelve months. Destia
anticipates, however, that additional carriers will obtain interconnection
rights from Swisscom, which will lead to increased competition.
UNITED KINGDOM
Since 1991, the U.K. government has sought to encourage increased
competition in telecommunications services. As a result of regulatory
initiatives, the telecommunications market in the United Kingdom now resembles
the United States in terms of services and pricing.
International and domestic long distance services generated the largest
percentage of Destia's U.K. revenues during the first six months of 1999. Destia
has provided these services in the London area since the fourth quarter of 1996
and nationwide in the United Kingdom since the second quarter of 1997. Destia's
other principal services in the United Kingdom are prepaid cards and sales to
resellers and carrier customers. In March 1999, Destia launched the presto phone
virtual prepaid service.
Destia offers all of its residential, calling card and prepaid services in
the United Kingdom primarily through Telco. Destia believes that Telco has been
particularly successful marketing its services in the United Kingdom through its
multilevel marketing program. Destia's prepaid card services are currently
offered by Telco and by its subsidiary America First. See "--Sales and
Marketing--United Kingdom."
Destia offers wireless services through Wavetech Limited, which Destia
acquired in June 1999. Wavetech is an independent service provider that uses
Vodafone's U.K. wireless network. Wavetech uses its direct sales force to market
its services throughout the United Kingdom.
Destia currently has five interconnection points in London that enable it to
provide its services throughout the United Kingdom. However, Destia's U.K.
customers currently are unable to preselect
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any carrier except British Telecom as their long distance carrier and thus
cannot access Destia's services without first dialing a four-digit access code.
Under European Union regulations, preselection is scheduled to become available
by January 1, 2000, although the U.K. regulator is seeking a waiver of this
requirement until a later date. In order to migrate more traffic on to Destia's
network, Destia is marketing automatic dialers to its residential and commercial
customers in order to compete more effectively against British Telecom, which
provides long distance service without requiring the user to dial an access
code. Customers purchase or lease the dialer, which automatically dials Destia's
network access code for the customer.
Destia's European network, including the United Kingdom, is monitored by
Destia Network Services, one of Destia's wholly-owned subsidiaries, in London
and by Destia through its network operations center in St. Louis, Missouri.
NORTH AMERICA
UNITED STATES. The United States is one of Destia's original markets.
Destia has been providing international and domestic long distance service in
the New York metropolitan area since 1993. Destia now also provides its calling
cards, prepaid cards, wireless access to long distance, and directory assistance
services nationally and provides its other services, primarily residential and
commercial long distance, in the 27 U.S. cities in which the Destia network has
a switch or point of presence. Because of the U.S. market's size and
receptiveness to new services, Destia typically introduces new services in the
United States before its other markets. For example, during the last quarter of
1998, Destia first introduced its Presto! Card virtual prepaid service in the
United States over the Internet. Destia also intends to test, and cross-market,
additional e-commerce services to Presto! Card customers due to their
predisposition to making purchases on-line.
As of September 15, 1999, Destia had six switches and 21 points of presence
in the United States, which enable it to originate domestic and international
long distance calls in many of the largest U.S. metropolitan areas. Because of
the substantial increase in its domestic traffic and its desire to provide
services in more U.S. markets, Destia recently acquired a 20-year IRU from
Frontier to use portions of Frontier's U.S. fiber optic network. This will
substantially replace Destia's use of the Qwest network. Frontier is in the
process of completing the fiber optic network that Destia will use, and Destia
expects this network to be completed and substantially operational by the end of
1999. Destia has already begun using a portion of Frontier's network. In
addition, the Frontier arrangement will give Destia favorable origination and
termination rates throughout the continental United States. See "--Destia's
Network--North American Network--U.S. Network Expansion."
CANADA. Destia expanded its network into Canada during the third quarter of
1998 by installing a switch in Toronto. Destia also plans to install a point of
presence in Montreal by the end of 2000. This switch and point of presence will
enable Destia to originate and terminate calls in Toronto and Montreal, two of
the largest long distance markets in Canada. Like most of western Europe, Canada
also has recently liberalized its telecommunication laws. Since October 1, 1998,
private carriers have been able to provide international long distance service
originating in Canada. Destia began providing services in Canada late in the
fourth quarter of 1998 and intends to further expand its internal sales force in
Canada in 2000.
COMPETITION
The international telecommunications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions of
the larger industry participants and the introduction of new services and
transmission methods made possible by technological advances. Destia believes
that long distance service providers compete principally on the basis of price,
customer service, product quality and breadth of services offered. In each
country of operation, Destia has numerous competitors. Destia believes that as
the international telecommunications markets continue to deregulate, competition
in these markets will increase, similar to the competitive environment that has
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developed in the United States following the AT&T divestiture in 1984. Prices
for long distance calls in the markets in which Destia competes have declined
historically and are likely to continue to decrease. Many of Destia's
competitors are significantly larger, have substantially greater financial,
technical and marketing resources and larger networks than Destia.
Privatization and deregulation have had, and are expected to continue to
have, significant effects on competition in the industry. For example, as a
result of legislation enacted in the United States, regional Bell operating
companies will be allowed to enter the long distance market, AT&T, MCI WorldCom
and other long distance carriers can now enter the local telephone service
markets, and cable television companies and utilities can now enter both the
local and long distance telecommunications markets. In addition, competition has
begun to increase in the European Union telecommunications markets in connection
with the deregulation of the telecommunications industry in most European Union
countries, which began in January 1998. This increase in competition is likely
to affect revenue per minute and gross margin as a percentage of revenue.
NORTH AMERICA
UNITED STATES. In the United States, which is among the most competitive
and deregulated long distance markets in the world, competition is based
primarily upon pricing, customer service, network quality, and the ability to
provide value-added services. As such, the long distance industry is
characterized by a high level of customer attrition or "churn," with customers
frequently changing long distance providers in response to the offering of lower
rates or promotional incentives by competitors. Destia competes with major
carriers such as AT&T, MCI WorldCom and Sprint, as well as other national and
regional long distance carriers and resellers, many of whom are able to provide
services at costs that are lower than its current costs. Many of these
competitors have greater financial, technological and marketing resources than
Destia does. If any of its competitors were to devote additional resources to
the provision of international and/or domestic long distance telecommunications
services to Destia's target customer base, there could be a material adverse
effect on Destia's business and the price of its common stock. Several companies
have recently introduced flat rate long distance calling plans with very low
per-minute charges. Destia cannot predict the effect that these plans will have
on the industry generally and on Destia in particular.
As a result of the 1996 Telecommunications Act, the regional Bell operating
companies can compete with Destia in the long distance telecommunications
industry, both outside of their service territory and, upon satisfaction of
certain conditions, within their service territory. The 1996 Telecommunications
Act prospectively eliminated the restrictions on incumbent local exchange
carriers, such as the regional Bell operating companies, from providing long
distance service. These provisions permit a regional Bell operating company to
enter an "out-of-region" long distance market immediately upon the receipt of
any state and/or federal regulatory approvals otherwise applicable in the
provision of long distance service. Regional Bell operating companies must
satisfy certain procedural and substantive requirements, including obtaining
Federal Communications Commission approval upon a showing that, in certain
instances, facilities-based competition is present in its market, that it has
entered into interconnection agreements that satisfy a 14-point checklist of
competitive requirements and that its entry into the in-region long distance
market is in the public interest before they are authorized to offer long
distance service in their regions. No regional Bell operating company is
authorized to do so yet, but they are expected to be authorized soon. When they
are authorized, they will be very formidable competitors. In particular, Bell
Atlantic, which serves the New York metropolitan and mid-Atlantic regions, has
long been considered by industry observers to be the most likely regional Bell
operating company to be the first to be permitted to offer long distance
services. On September 29, 1999, Bell Atlantic filed its Section 271 application
for authority to provide interLATA services within New York with the Federal
Communications Commission. The Federal Communications Commission has 90 days to
review Bell Atlantic's filing. The New York Public Service Commission and the
Department of Justice will make their recommendations to the Federal
Communications Commission before it makes its final decision. Because a
substantial portion of
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Destia's customer base and traffic originates in the New York metropolitan area,
Bell Atlantic will be a particularly formidable competitor. For long distance
calls, Bell Atlantic will have a substantial cost advantage, because it will not
have to pay access fees to a local carrier to originate the call. Access fees
constitute a large portion of a long distance carrier's cost of services,
including Destia's. Moreover, should Bell Atlantic's proposed acquisition of GTE
be consummated, Bell Atlantic will have even greater resources to compete in its
service markets.
The continuing trend toward business combinations and alliances in the
telecommunications industry is also creating significant new or more powerful
competitors to Destia. The proposed acquisition of Sprint Corporation by MCI
Worldcom, the proposed acquisition of GTE by Bell Atlantic, the proposed
acquisition of US West by Qwest, the proposed acquisition of Ameritech by SBC,
the merger of WorldCom and MCI, AT&T's acquisitions of Telecommunications, Inc.
and Teleport Communications Group, Global Crossing's acquisition of Frontier
Communications (the primary provider of Destia's U.S. transmission capacity
beginning in late 1999), Teleglobe's acquisition of Excel Communications and
SBC's acquisition of SNET are examples of some of the business combinations that
are being formed. Many of these combined entities have, or will have, resources
far greater than those of Destia. These combined entities may, now or in the
future, be able to provide bundled packages of telecommunications products,
including local and long distance services, data services and prepaid services,
in direct competition with the products offered or to be offered by Destia, and
may be capable of offering these products sooner and at more competitive rates
than Destia.
For example, AT&T earlier this year acquired SmarTalk, which sells prepaid
cards. This acquisition provides AT&T with access to a major distribution
network for inexpensive prepaid cards, a market where AT&T has not historically
competed on the basis of price. AT&T's significant marketing resources and
extensive network will make it a formidable competitor in the prepaid card
market.
During 1998, the World Trade Organization concluded an agreement on trade in
basic telecommunications services, known as the WTO Agreement, that has resulted
in additional competitors entering the U.S. telecommunications markets. Under
the WTO Agreement, the U.S. and other members of the World Trade Organization
committed themselves to, among other things, opening their telecommunications
markets to foreign carriers. The Federal Communications Commission has adopted
streamlined procedures for processing market entry applications from foreign
carriers, making it easier for such carriers to compete in the U.S. There can be
no assurance that the WTO Agreement will not have a material impact on Destia's
business.
Destia also expects increasing competition from Internet telephony service
providers, including Internet service providers. The use of the Internet to
provide telephone service is a recent development. To date, the Federal
Communications Commission has determined not to subject such services to Federal
Communications Commission regulation as telecommunications services.
Accordingly, Internet service providers are, today, not subject to universal
service contributions, access charge requirements, or traditional common carrier
regulation. On April 5, 1999, US West filed a petition with the Federal
Communications Commission asking the Federal Communications Commission to find
that Internet telephony services are telecommunications services, not enhanced
services or information services, and therefore should be subject to access
charge and universal service obligations. On April 7, 1999, US West filed
similar petitions with the Colorado and Nebraska Commissions. Destia cannot
predict how the Federal Communications Commission or any state public service
commissions will rule on US West's petition. Should the Federal Communications
Commission and/or the state public service commissions rule adversely to U.S.
West; however, Destia cannot predict the impact that this continuing lack of
regulation will have on its business.
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CANADA. The Canadian telecommunications market is highly competitive and is
dominated by a few established carriers whose marketing and pricing decisions
have a significant impact on the other industry participants, including Destia.
Destia competes with facilities-based carriers, other resellers and rebillers,
primarily on the basis of price. The principal facilities-based competitors
include the former Stentor partner companies, in particular, Bell Canada, the
dominant supplier of local and long distance services in the provinces of
Ontario and Quebec, BC Tel and Telus Communications, the next largest Stentor
companies merged their operations earlier this year as well as non-Stentor
companies, such as AT&T Canada, Teleglobe Canada, and Sprint Canada. Destia also
competes with ACC TelEnterprises which, until its recent merger with AT&T
Canada, was one of the largest resellers in Canada. The former Stentor partner
companies discontinued their partnership on January 1, 1999 and are now
competing against one another.
EUROPE
In continental Europe, Destia's competitors include:
- the dominant carriers in each country;
- alliances such as Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and AT&T's alliance with both British
Telecom and Japan Telecom (the members of which have recently announced a
plan to contribute their international facilities and personnel to a newly
formed company that is likely to be a substantially more formidable
competitor);
- companies offering resold international telecommunications services; and
- other companies with business plans similar in varying degrees to Destia,
including emerging public telephone operators who are constructing their
own networks and wireless network operators.
Destia believes that its continental European markets will continue to
experience increased competition and will begin to resemble the competitive
landscape in the United States and the United Kingdom. In addition, Destia
anticipates that numerous new competitors will enter the continental European
telecommunications market.
Competition is strong in the liberalized U.K. telecommunications market. In
the United Kingdom Destia's principal competitors are British Telecom, the
U.K.'s dominant carrier, First Telecom and Cable & Wireless. Destia also faces
competition from emerging licensed public telephone operators, which are
constructing their own facilities-based networks, and from resellers. Destia
also competes with wireless service providers and cable companies.
Furthermore, in certain European countries, including in France and Belgium,
"facilities-based" carriers that make investments in infrastructure receive
lower interconnection rates than non-facilities based providers. Destia does not
expect to qualify for such a discount until it purchases more fiber optic
transmission capacity in Europe (particularly in France and Belgium). In
addition, certain of Destia's competitors offer customers an integrated full
service telecommunications package consisting of local and long distance voice,
data and Internet transmission. Destia does not currently offer all of these
types of service, which could have a material adverse effect on its
competitiveness.
GOVERNMENT REGULATION
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. As an international telecommunications company,
Destia is subject to varying degrees of regulation in each of the jurisdictions
in which it provides its services. Laws and regulations, and the interpretation
of such laws and regulations, differ significantly among the jurisdictions in
which Destia operates. Destia has transferred its licenses and certain operating
assets to a wholly-owned subsidiary primarily for regulatory and tax purposes.
Destia expects to complete this transfer by early 2000. There can be no
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assurance that future regulatory, judicial and legislative changes will not have
a material adverse effect on Destia or that domestic or international regulators
or third parties will not raise material issues with regard to its compliance or
noncompliance with applicable regulations.
The regulatory framework in certain jurisdictions in which Destia provides
its services is described below:
UNITED STATES
In the United States, Destia's services are subject to the provisions of the
Communications Act of 1934, as amended by the 1996 Telecommunications Act, the
regulations of the Federal Communications Commission thereunder, as well as the
applicable laws and regulations of the various states administered by the
relevant public service commission. The recent trend in the United States for
both federal and state regulation of telecommunications service providers has
been in the direction of reduced regulation. Although this trend facilitates
market entry and competition by multiple providers, it has also given AT&T, the
largest international and domestic long distance carrier in the United States,
increased pricing and market entry flexibility that has permitted it to compete
more effectively with smaller carriers, such as Destia. In addition, the 1996
Telecommunications Act has opened the United States market to increased
competition from the regional Bell operating companies. Destia cannot be certain
whether future regulatory, judicial and legislative changes in the United States
will materially affect its business.
The Federal Communications Commission currently regulates Destia as a
non-dominant carrier with respect to both its international and domestic
interstate long distance services. Although the Federal Communications
Commission has generally chosen not to closely regulate the charges, practices
or classifications of non-dominant carriers, the Federal Communications
Commission has broad authority which includes the power to impose more stringent
regulatory requirements on Destia, to change its regulatory classification, to
impose monetary forfeiture, and to revoke Destia's authority. In this
increasingly deregulated environment, however, Destia believes that the Federal
Communications Commission is unlikely to do so.
The Federal Communications Commission and certain state public service
commissions require prior approval or notification of transfers of control,
assignments of regulatory authorizations and name changes, among other types of
corporate action. The Federal Communications Commission and certain state public
service commissions will require prior approval or notification of the merger.
The governing legal standards vary, but approval of or consent to a corporate
action requiring the same generally requires a showing that it is consistent
with the public interest, convenience and necessity. As part of its evaluation
of the merger, the Federal Communications Commission and state public service
commissions may examine the impact of the merger on competition and its effect
on the customers and employees of Destia, Viatel and other carriers. There can
be no guarantee of the timing of the receipt of the necessary approvals, that
such approvals will be granted on terms that are satisfactory to the parties, or
at all.
FCC INTERNATIONAL. In addition to the general requirement that Destia
obtain authority under Section 214 of the Communications Act and file a tariff
containing the rates, terms and conditions applicable to its U.S. international
services, Destia is also subject to the Federal Communications Commission's
international service policies, certain of which may affect Destia's ability to
provide its services in the most economical fashion. For example, the Federal
Communications Commission's private line resale policy prohibits a carrier from
reselling interconnected international private leased circuits to provide
switched services (known as "ISR") to or from a country absent Federal
Communications Commission authorization. The Federal Communications Commission
will allow ISR between the U.S. and a World Trade Organization member country
for which it has not previously authorized such service upon a demonstration
that (1) settlement rates for at least 50 percent of the settled U.S.-billed
traffic between the U.S. and the country at the foreign end of the private line
are at
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or below the benchmark settlement rate adopted by the Federal Communications
Commission, or (2) where the country at the foreign end affords resale
opportunities "equivalent" to those available under U.S. law. Both conditions
must be present before the Federal Communications Commission will authorize
private line resale between the U.S. and a non-World Trade Organization member
country for which the Federal Communications Commission has not previously
authorized the provision of private line resale. The Federal Communications
Commission has authorized ISR to the following countries: Australia, Austria,
Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Iceland, Ireland,
Israel, Italy, Japan, Luxembourg, New Zealand, The Netherlands, Norway, Spain,
Sweden, Switzerland, and the United Kingdom. The practical implication for
Destia of this policy is that it is restricted from (i) transmitting calls
routed over leased lines between New York and London onward over a leased line
to continental Europe (other than to a country approved for ISR); and (ii)
transmitting calls from continental European countries (other than those
approved for ISR) over leased lines from London and then onward over a leased
line between London and New York. The policy may materially limit the best use
of Destia's leased lines between New York and London and may result in increased
transmission costs on certain calls, which it is not able to pass through to its
customers. Destia notes, however, that the Federal Communications Commission
recently enacted new rules reducing both the amount of information required of a
carrier seeking authority to provide ISR to a particular country and the Federal
Communications Commission's decision making time.
Destia is also subject to the Federal Communications Commission
international settlement policy which governs the exchange of traffic and
settlement between U.S. carriers and their foreign correspondents of the cost of
terminating traffic over each other's network. However, as discussed further
below, the Federal Communications Commission has substantially relaxed its
international settlement policy in recent months. Specifically, the Federal
Communications Commission has eliminated the international settlement policy for
arrangements with foreign carriers lacking market power, I.E., less than 50%
market share in the relevant destination market, and for arrangements with all
carriers on liberalized routes, I.E., those routes where the settlement rate to
terminate U.S. calls is at least 25 percent below the Federal Communications
Commission's relevant benchmark rate set for that country. While the new rules
afford Destia additional flexibility, they may also increase competition on
certain routes. On routes where Destia is still subject to the international
settlement policy, the Federal Communications Commission could find that, absent
a waiver, certain terms of Destia's foreign carrier agreements or its actions do
not meet the requirements of the international settlement policy. Although the
Federal Communications Commission generally has not issued penalties in this
area, it has recently issued a Notice of Apparent Liability against a U.S.
company for violating the international settlement policy, and it could take
other action against a carrier violating the international settlement policy,
including issuing a cease and desist order or imposing fines. If the Federal
Communications Commission were to impose such fines or other penalties on
Destia, Destia does not believe that it would have a material adverse effect on
its business.
FCC DOMESTIC INTERSTATE. Destia is considered a non-dominant domestic
interstate carrier subject to minimal regulation by the Federal Communications
Commission. Destia is not required to obtain Federal Communications Commission
authority to provide domestic interstate telecommunications services, but it is
required to maintain, and does maintain, a domestic interstate tariff on file
with the Federal Communications Commission. The Federal Communications
Commission presumes the tariffs of non-dominant carriers to be lawful.
Therefore, the Federal Communications Commission does not carefully review such
tariffs. The Federal Communications Commission could, however, investigate
Destia's tariffs upon its own motion or upon complaint by a member of the
public. As a result of any such investigation, the Federal Communications
Commission could order Destia to revise its tariffs, or the Federal
Communications Commission could prescribe revised tariffs.
In late 1996, the Federal Communications Commission ruled that interexchange
carriers are no longer required to file their tariffs for domestic interstate
interexchange services. In August 1997, the
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Federal Communications Commission affirmed its decision to end tariff filing
requirements for domestic interstate long distance services provided by
non-dominant carriers. The Federal Communications Commission also eliminated the
requirement that non-dominant long distance carriers disclose information on
rates and terms of their products. These detariffing orders have been stayed by
the U.S. Court of Appeals for the District of Columbia. Most recently, on March
18, 1999, the Federal Communications Commission adopted an order that would
permit the alternative of posting rates on a carrier's web site. This order will
not become effective until the Court affirms the Federal Communications
Commission's mandatory detariffing scheme.
The 1996 Telecommunications Act is intended to increase competition in the
U.S. telecommunications markets. Among other things, the legislation contains
special provisions that eliminate the restrictions on incumbent local exchange
carriers such as the regional Bell operating companies from providing long
distance service. These provisions permit a regional Bell operating company to
enter an "out-of-region" long distance market immediately upon the receipt of
any state and/or federal regulatory approvals otherwise applicable in the
provision of long distance service. The provisions also permit a regional Bell
operating company to enter the "in-region" long distance market if it satisfies
procedural and substantive requirements, including showing that facilities-based
competition is present in its market, that it has entered into interconnection
agreements which satisfy a 14-point "checklist" of competitive requirements and
that its entry into the "in-region" long distance market is in the public
interest. Bell Atlantic, which serves the New York metropolitan and mid-Atlantic
regions, is considered by industry observers to be the most likely regional Bell
operating company to be the first to be permitted to offer long distance
services. On September 29, 1999, Bell Atlantic filed its Section 271 application
for authority to provide interLATA services within New York with the Federal
Communications Commission. The Federal Communications Commission has 90 days to
review Bell Atlantic's filing. The New York Public Service Commission and the
Department of Justice will make their recommendations to the Federal
Communication Commission before it makes its final decision.
The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact Destia's operations. It is
unknown at this time precisely the nature and extent of the impact that the
legislation will have on Destia. On August 1, 1996, the Federal Communications
Commission adopted an Interconnection Order implementing the requirements that
incumbent local exchange carriers make available to new entrants interconnection
and unbundled network elements, and offer retail local services for resale at
wholesale rates. Important portions of the Federal Communications Commission's
order were subsequently overturned by a court order. However, on January 25,
1999, the U.S. Supreme Court upheld most of the challenged rules, finding that
the Federal Communications Commission has significant jurisdiction to establish
rules to promote competition for competitive local exchange services but
required the Federal Communications Commission to re-evaluate the standard it
uses to determine which network elements the incumbent local exchange carriers
must unbundle. On September 15, 1999, the Federal Communications Commission
adopted an order setting forth a revised standard and reaffirming that incumbent
local exchange carriers must provide access to six of the original seven network
elements.
Section 706 of the 1996 Telecommunications Act gives the Federal
Communications Commission the right to forbear from regulating a market if it
concludes that such forbearance is necessary to encourage the rapid deployment
of advanced telecommunications capability. In January 1998, Bell Atlantic filed
a petition under Section 706 seeking to have the Federal Communications
Commission deregulate entirely its provision of packet-switched
telecommunications services. Similar petitions were filed later by the Alliance
for Public Technology and US West (currently Media One Group Inc.).
On August 7, 1998, the Federal Communications Commission released an order
denying requests by the regional Bell operating companies that it use Section
706 of the 1996 Telecommunications Act to forbear from regulating advanced
telecommunications services. Instead, the Federal Communications
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Commission determined that advanced services are telecommunications services and
that incumbent local exchange carriers providing advanced services are still
subject to unbundling and resale obligations of Section 251(c) and the in-region
interLATA restrictions of Section 271.
On the same day, the Federal Communications Commission released a Notice of
Proposed Rulemaking proposing that incumbent local exchange carriers be
permitted to offer advanced services through separate affiliates. Such
affiliates would continue to be prohibited from completing interLATA calls but
would not be required to unbundle network elements under Section 251(c).
The Federal Communications Commission has also significantly revised the
universal service subsidy regime. Beginning January 1, 1998, interstate
carriers, such as Destia, as well as certain other entities, became obligated to
make Federal Communications Commission-mandated contributions to universal
service funds. These funds subsidize the provision of telecommunications
services in high cost areas and to low-income customers, as well as the
provision of telecommunications and certain other services to eligible schools,
libraries and rural health care providers. Destia's revenues that are subject to
the high cost and low income fund are its interstate and international gross
end-user telecommunications revenues. Destia's revenues for the schools and
libraries and rural health care fund are currently its intrastate, interstate
and international gross end-user telecommunications revenues. Contribution
factors vary quarterly and Destia and other carriers are billed monthly.
Contribution factors for fourth quarter of 1999 are: (i) 2.887% for the high
cost, insular and low income funds (currently interstate and international
revenues); and (ii) 1.1% for the schools, libraries, and rural health care funds
(currently intrastate, interstate and international revenues). Because the
contribution factors do vary quarterly, the annual impact on Destia cannot be
estimated at this time, although Destia does not expect it to be material. The
Federal Communications Commission orders implementing the universal service
contribution obligation are subject to petitions seeking reconsideration by the
Federal Communications Commission and to certain appeals. Until such petitions
and appeals are decided, there can be no assurance as to how the orders will be
ultimately implemented or enforced or what effect the orders will have on
competition within the telecommunications industry or specifically on Destia's
competitive position. On July 30, 1999, the United States Court of Appeals for
the Fifth Circuit released its decision reviewing the Federal Communications
Commission's UNIVERSAL SERVICE ORDER. The Fifth Circuit addressed the Federal
Communications Commission's rules concering universal service assessment and
recovery, high-cost and low-income support, the schools and libraries and rural
health care programs and the obligations of wireless carriers. Although the
Fifth Circuit upheld the basic tenets of the Federal Communications Commission's
universal service program, its decision to reverse and/or remand certain aspects
of the program could have a significant impact on carriers' universal service
obligations. In particular, the Fifth Circuit found that the Federal
Communications Commission does not have the authority to include intrastate
revenues in the calculation of universal service contributions and reversed and
remanded the FCC's decision to include the international revenues of interstate
carriers in the universal service contribution base. On September 9, 1999, the
Federal Communications Commission filed a motion for stay of the Fifth Circuit
mandate and, in that motion, reportedly, stated an intent to file a petition for
rehearing of the July 30, 1999 opinion.
Destia's costs of providing long distance services will also be affected by
changes in the access charge rates imposed by local exchange carriers for
origination and termination of calls over local facilities. The Federal
Communications Commission has significantly revised its access charge rules in
recent years to permit incumbent local exchange carriers greater pricing
flexibility and relaxed regulation of new switched and special access services
in those markets where there are other providers of access services. The most
recent pricing flexibility rules, which were adopted August 5, 1999, have not
yet been released. These rules would, among other things, grant certain local
exchange carriers the ability to file access tariffs on a streamlined basis. The
Federal Communications Commission has also restructured the charges certain
local exchange carriers assess for switched access, moving from usage-sensitive
to non-usage sensitive charges to recover certain costs. For example, the
Federal
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Communications Commission created a new presubscribed interexchange carrier
charge rate element. The presubscribed interexchange carrier charge is a
flat-rate, per line charge that is recovered by certain local exchange carriers
from interexchange providers. Effective July 1, 1999, the initial maximum
permitted interstate presubscribed interexchange carrier charge increased to
$1.04 per month for primary residential lines and single-line business lines and
$2.53 per month for second and additional residential lines. The initial maximum
interstate presubscribed interexchange carrier charge for multi-line businesses
is $4.36 per month, per line. The ceilings will continue to increase yearly.
The Federal Communications Commission continues to adjust its access charge
rules and has indicated that it will promulgate additional rules sometime in
1999 that may grant certain local exchange carriers further flexibility. Most
recently, the Federal Communications Commission issued an order that clearly
established the definition of a "primary line." The Federal Communications
Commission defines a primary residential line to be "one residential line
provided by a price cap local exchange carrier per service location." The
Federal Communications Commission retained its price cap rule definition of a
single line business subscriber line as a line for which the subscriber pays a
rate that is not described as a residential rate in the local exchange service
tariff and does not obtain more than one such line from a particular telephone
company.
While Destia currently intends to pass through the costs of both the
presubscribed interexchange carrier charge and its universal service fund
contributions to its customers, there can be no assurance that it will be able
to do so or that doing so will not result in a loss of customers. Additionally,
Destia currently has agreements to terminate, originate or exchange traffic with
a variety of carriers who, in turn, may be subject to similar agreements with
other carriers or local exchange carriers. Any change in any of these
agreements, whether by operation of law or otherwise, may affect Destia's costs
or could disrupt its ability to terminate, originate or exchange traffic and,
therefore, have a material adverse effect on it.
The 1996 Telecommunications Act also requires interexchange carriers to
compensate payphone owners when a payphone is used to originate a telephone call
using a calling card. In orders issued in September and October of 1996, the
Federal Communications Commission established a compensation scheme that
required all carriers to begin compensating payphone owners on a per-call basis
beginning October 7, 1997 at a rate of $.35 per call. On July 1, 1997, the
United States Court of Appeals for the District of Columbia issued an opinion
reversing in part the Federal Communications Commission's payphone orders. The
court ruled that the rate of $.35 per call was arbitrary and capricious and
remanded the case to the Federal Communications Commission for further
proceedings. The Federal Communications Commission, thereafter, issued a further
rulemaking on compensation for payphone owners. On October 9, 1997, the Federal
Communications Commission ruled that interexchange carriers are required to
compensate payphone owners at a rate of $.284 for all payphone calls. The
Federal Communications Commission ruled that this compensation method will be
effective from October 7, 1997 through October 7, 1999. On May 15, 1998, the
United States Court of Appeals for the District of Columbia remanded the order
to the Federal Communications Commission, ruling that the $.284 rate established
was arbitrary and capricious, but did not vacate it. On February 4, 1999 the
Federal Communications Commission released an order which lowered the payphone
compensation rate to $.240, effective April 21, 1999. For amounts already due,
the Federal Communications Commission determined that the payphone owners should
be compensated at a rate of $.238. MCI WorldCom, Sprint, the regional Bell
operating companies and the American Public Communications Council have filed
Petitions for Review of this latest order with the United States Court of
Appeals for the District of Columbia Circuit. Additionally, a coalition
comprised of the regional Bell operating companies, SNET and GTE have filed a
Petition for Clarification with the Federal Communications Commission, seeking
clarification as to which long distance carriers are responsible for payment of
per-call compensation and urging that the obligation be placed on the entity
identified by the Carrier Identification Code used to route the call from the
local exchange network. As a result of many factors, including a complex and
shifting regulatory scheme, many long distance carriers have been the subject
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of compensation claims by payphone service providers. Destia recently settled a
lawsuit filed against Destia by payphone service providers alleging that Destia
owed such payphone service providers compensation for completed access code and
toll free calls that have been made since October 9, 1997 using the plaintiffs'
payphones and carried over Destia's network.
The Federal Communications Commission also imposes requirements for the
marketing of telephone services and for obtaining customer authorization for
changes in a customer's primary long distance carriers. The Federal
Communications Commission has recently imposed severe penalties on a number of
carriers for "slamming." Under an order recently issued by the Federal
Communications Commission, carriers such as Destia are required to take certain
additional steps to prevent slamming. The Federal Communications Commission is
continuing to reexamine its slamming rules.
STATES. Destia's predecessor corporation, Econophone, Inc., which was
incorporated in New York, received authorization, where necessary, either
pursuant to certification, the fulfillment of tariff requirements or
notification requirements, to provide long distance services in 49 states.
Following the reorganization of Econophone, Inc. as a Delaware corporation, the
authorizations were transferred to Destia. Destia in turn transferred the
authorizations to its wholly-owned subsidiary, Econophone Services, Inc., which
changed its name to Destia Communications Services, Inc. Destia is in the
process of notifying the various state public service commissions and, where
necessary, seeking approval of the name change and, in a few states, seeking
approval of the transfer of authorization from Destia to its wholly-owned
subsidiary, Destia Communications Services, Inc. Destia cannot be certain that
it will obtain all necessary regulatory approvals in connection with the name
change.
Many states also impose various reporting and other requirements. A number
of state public service commissions have adopted rules governing the marketing
of telephone services and obtaining customer authorizations for changes of a
customers' primary long distance carrier. State public service commissions also
regulate access charges and other pricing for telecommunications services within
each state. Destia may also be required to contribute to universal service funds
in some states. State public service commissions generally retain the right to
sanction a carrier or to condition, modify, cancel, terminate or revoke
authorization to provide telecommunications services within the state for
failure to comply with state law and/or rules, regulations and policies of the
state regulatory authorities.
REGULATION OF THE INTERNET. The use of the Internet to provide telephone
service is a recent development. Currently, the Federal Communications
Commission is considering whether or not to impose surcharges or additional
regulations upon certain providers of Internet telephony. In an April 1998
report to Congress, the Federal Communications Commission indicated that it
would examine the question of whether certain forms of "phone-to-phone" Internet
protocol telephony are information services or telecommunications services. It
noted that certain forms of phone-to-phone Internet telephony appeared to have
the same functionality as non-Internet protocol telecommunications services and
lacked the characteristics that would render them information services. On April
5, 1999, US West filed a petition with the Federal Communications Commission
asking the Federal Communications Commission to find that IP telephony services
are telecommunications services, not enhanced services or information services,
and therefore should be subject to access charge and universal service
obligations. On April 7, 1999, US West filed similar petitions with the Colorado
and Nebraska Commissions. No significant action has been taken on these
petitions, although it should be noted that the Federal Communications
Commission has recently initiated a public inquiry on the separate subject of
access to Internet telephony by the disabled. Destia cannot predict how the
Federal Communications Commission and/or state public service commissions will
rule on US West's petition. If the Federal Communications Commission and/or
state public service commissions were to determine that certain services are
subject to Federal Communications Commission regulations as telecommunications
services, these service providers could be required to make universal service
contributions, pay access charges or be subject to traditional common carrier
regulation. State public
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service commissions may also retain jurisdiction to regulate the provision of
intrastate Internet telephony services and could initiate proceedings to do so.
PATENT RIGHTS RELATING TO PREPAID SERVICES. Various parties have claimed
that certain prepaid card providers are infringing upon patent rights held by
these parties relating to the provision of prepaid
card services. Destia does not expect that its prepaid card services will be
found to infringe upon any third-party patent rights, although there can be no
assurance that Destia would prevail if a claim was asserted by a third party. If
Destia were unable to provide its prepaid card services in the manner in which
they currently are provided, it could have a material adverse effect on its
business and the price of our common stock.
EUROPEAN UNION
In Europe, the regulation of the telecommunications industry is governed at
a supra-national level by legislation passed by the European Commission, the
Council and the Parliament of the European Union consisting of the European
Union member states: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and
the United Kingdom. The European Union has adopted pan-European policies through
legislation and developed a regulatory framework to ensure an open and
competitive telecommunications market.
As of January 1, 1998 the European Union required all special or exclusive
rights that restrict the provision of telecommunications services to be
abolished. Specific directives have been adopted, which include the Open Network
Provision Framework Directive, the Leased Lines Directive, the Revised Voice
Telephony Directive, the Open Network Provision Full Competition Amending
Directive and the Interconnection Directive, the latter of which has been
amended to provide for carrier preselection and number portability on or before
January 1, 2000. Carrier preselection would enable a customer to access Destia's
network over the fixed public telephone network of operators with significant
market power without dialing an access code, by "preselecting" Destia as its
long distance carrier. However, Oftel, the U.K. regulatory authority, already
has indicated that it will seek to defer the implementation of carrier
preselection in the United Kingdom. Number portability would enable customers to
retain their existing telephone numbers when switching to alternative carriers
and is already available, although not universally, in the United Kingdom. Some
European Union member states have been granted temporary waivers from
implementing certain European Union liberalization requirements and have only
fully liberalized recently. Portugal continues to have derogations until January
1, 2000 and Greece until January 1, 2001.
National governments are obliged to give effect to European Union directives
in their respective jurisdictions and, if necessary, pass appropriate
legislation. Each European Union member state in which Destia currently conducts
business has implemented the European Union directives differently and Destia
will therefore continue, in part, to operate under different national regulatory
regimes. The requirements for Destia to obtain necessary approvals vary between
member states and are expected to continue to so vary.
WORLD TRADE ORGANIZATION INITIATIVES. The World Trade Organization recently
concluded the WTO Agreement, which opens the telecommunications markets of the
signatory countries to entry by foreign carriers on varying dates and to varying
degrees. The WTO Agreement became effective on February 5, 1998. Pursuant to the
WTO Agreement, U.S. companies would have foreign market access for local, long
distance and international services, either on a facilities basis or through
resale of existing network capacity on a reasonable and non-discriminatory
basis. Although the WTO Agreement may open additional markets to Destia or
broaden the permissible services that it can provide in certain markets, the WTO
Agreement also may subject Destia to greater competitive pressures in its
markets, with the risk of losing customers to other carriers and reductions in
its rates.
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UNITED KINGDOM. Licenses are needed to provide all the international
services that Destia provides in the United Kingdom. Licenses are granted by the
Secretary of State for Trade and Industry but enforced by the U.K. regulatory
authority under powers granted by the Telecommunications Act, 1984. Destia has
all of the necessary licenses to provide its services in the United Kingdom.
International simple resellers, such as Destia, operate under registrable
class licenses. Through its U.K. subsidiary, DNS, Destia has an International
Simple Voice Resale Class License, which entitles it to resell international
message, telephone and private line services. This license also enables DNS to
interconnect with, and lease capacity at wholesale rates from, British Telecom
and other public telecommunications operators. Destia also has an International
Facilities License, which authorizes it to provide international
telecommunication services over its own international infrastructure.
Destia's U.K. customers currently are unable to preselect Destia as their
long distance carrier. Carrier preselection is scheduled to become available in
the United Kingdom on January 1, 2000 pursuant to relevant European Union
directives. However, the national regulatory authority is seeking to defer the
implementation of carrier preselection in the United Kingdom until a later date.
BELGIUM. Since January 1, 1998, licensed operators have been able to
provide telephony services in Belgium. On July 15, 1998, the Royal Decree of
Voice Telephony removing the last remaining monopolies of Belgacom, the dominant
Belgian carrier, was published. These permitted services include all of the
services that Destia currently provides in Belgium. The Royal Decree of Voice
Telephony has not yet been implemented.
Providers of voice telephony services must apply for a voice telephony
license. Destia has been granted a permanent license, which expires in 2014, by
the Belgium Minister for Telecommunications.
In Belgium, "facilities-based" carriers that make investments in
infrastructure receive lower interconnection rates than non facilities-based
providers. These incentives provide carriers that own infrastructure with a cost
advantage over carriers that do not own infrastructure. Because Destia is not a
facilities-based carrier within the meaning of Belgian regulations, it is not
eligible for these incentives.
Although preselection currently is not available to Destia's customers in
Belgium it is expected to become available by the first quarter of 2000. The
Belgian regulatory authorities have not yet introduced the regulations setting
forth the criteria that private carriers must satisfy in order to be able to
offer preselection to their customers.
Destia has entered into an interconnection agreement with Belgacom and is
able to originate and terminate traffic throughout Belgium.
FRANCE. Since January 1, 1998, licensed private service providers have been
able to offer domestic and international long distance voice telephony services
to the general public in France after obtaining a voice telephony license.
Destia's French subsidiary, Econophone France (whose name was changed in April
1999 to Destia Communications S.A.), obtained its voice telephony license during
the third quarter of 1998. This license enables Destia to provide all of its
current services in France.
In order to own and control transmission infrastructure in France, a carrier
must obtain an infrastructure license (L33-1) from the Autorite de Regulation de
T elecommunications. Because Destia leases, rather than owns, its transmission
lines in France, it is not required to have an infrastructure license. France
Telecom's standard interconnection offer provides carriers that own
infrastructure with a cost advantage over carriers that do not own
infrastructure and is not available to Destia.
Although preselection currently is unavailable to Destia's customers in
France, recent announcements by France Telecom have indicated that it will
become available by January 15, 2000. Customers can currently access the public
switched telephone network using either 4-digit or 1-digit access codes. In
addition, seven carriers (including France Telecom) that have agreed to
interconnect on a national basis to the French public switched telephone network
in a substantial number of markets
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have been granted single digit access for their customers. Customers of other
carriers (including Destia) must dial a 4-digit code in order to access the
public switched telephone network in France.
GERMANY. On January 1, 1998, the German telecommunications market was
substantially liberalized. In Germany, Destia's activities are governed by the
Telecommunications Act of July 25, 1996. Under this Act, the provision of "voice
telephony," which includes services involving switching in Germany on the basis
of self-operated networks over a privately owned telecommunications network,
requires a Class 4 license. Destia's Class 4 license enables it to provide voice
telephony services throughout Germany.
Through Destia's interconnection with Deutsche Telekom and on the basis of
its carrier identification code, Destia's customers are able to pre-select it as
their carrier for certain services.
The German Telecommunications Act and the Network Access Ordinance require
public telecommunications network operators to offer interconnection at the
request of other network interconnection operators. This requires Deutsche
Telekom to allow other providers interconnection to its telecommunications
networks. Destia's interconnection agreement with Deutsche Telekom expired at
the end of February 1999. Destia initiated legal action before Reg TP on
February 25, 1999 requesting the Reg TP to issue a preliminary order and a final
order which would ensure continued interconnection of Destia's network with
Deutsche Telekom's network. Reg TP ruled in Destia's favor and ordered Deutsche
Telekom to grant Destia interconnection rights and network access in Germany. As
a result of this ruling, Destia originates and terminates traffic throughout
Germany. Deutsche Telekom recently filed suit in administrative court in
Cologne, Germany to challenge this ruling. Destia's German subsidiary has joined
the proceedings at the request of the administrative court.
At the end of 1999, both the Reg TP's ruling and most interconnection
agreements between competitive telecommunications providers and Deutsche Telekom
will expire. Although the interested parties, including Destia, are currently
negotiating with Deutsche Telekom concerning its interconnection rates, there
can be no assurance that an agreement will be reached prior to 2000. If Deutsche
Telekom were permitted to impose onerous conditions for interconnection and to
increase its rates after such date, Destia might need to obtain interconnection
from another carrier, which would increase its transmission costs in Germany and
may limit the coverage of services which Destia could offer. If Deutsche Telekom
prevails in the dispute, it could put Destia and other competitive carriers at
an additional cost disadvantage versus Deutsche Telekom.
SWITZERLAND. With the implementation of the Telecommunication Act of 1997
on January 1, 1998, Switzerland became a fully liberalized telecommunications
market. The provision of Destia's services in Switzerland does not require a
license, although Destia is required to make certain notice filings.
Destia's Swiss subsidiary, Econophone AG, signed an interconnection
agreement with Swisscom, the dominant Swiss carrier, during the second quarter
of 1998. Destia's interconnection with Swisscom enables its customers to
preselect Destia as their long distance carrier in Switzerland.
AUSTRIA. In March, 1999 the Austrian regulator, Telekom-Control-Kommission,
granted Destia the license for fixed network public voice telephony throughout
Austria for an unlimited time period. Destia signed its interconnection
agreement with Austria Telekom in June 1999 and plans to implement its
interconnection by the fourth quarter of 1999.
CANADA
The domestic long distance market in Canada was first opened to resale
competition in 1990 and then to facilities-based competition in 1992. Although
Canada's international market was also opened to competition in 1992, most
facilities-based competitors were not permitted to enter this market due to a
long-standing monopoly held by Teleglobe Canada. As a signatory to the WTO
Agreement, Canada agreed to end Teleglobe Canada's monopoly on Canada-overseas
transmission facilities
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effective on October 1, 1998. Destia received a license early in the first
quarter of 1999 which authorizes it to provide international long distance
services to its customers in Canada. The provision of domestic long distance
services in Canada does not require a license, although Destia is required to
make certain notice filings. As a reseller of long distance services, Destia is
currently not subject to any foreign ownership restrictions in Canada.
EMPLOYEES
As of June 30, 1999, Destia had 1,158 full-time equivalent employees, an
increase from the 877 employees that it had at December 31, 1998. The breakdown
of Destia's employees by region as of June 30, 1999 was as follows:
<TABLE>
<CAPTION>
NUMBER
REGION OF EMPLOYEES
- ------------------------------------------------------------ -------------
<S> <C>
Continental Europe.......................................... 197
United Kingdom.............................................. 320
North America............................................... 641
-----
Total....................................................... 1,158
</TABLE>
Destia's North American employees are based principally in its offices in
Paramus, New Jersey (executive offices); New York, New York; Brooklyn, New York;
College Station, Texas; and St. Louis, Missouri. In Europe, Destia's employees
are based principally in offices located in cities where it has a switch. Destia
has never experienced a work stoppage and its employees are not represented by a
labor union or a collective bargaining agreement. Destia considers its employee
relations to be good.
LEGAL PROCEEDINGS
Destia is from time to time a party to litigation that arises in the
ordinary course of its business operations or otherwise. Destia believes that it
is not presently a party to any legal proceedings that, if decided in a manner
adverse to Destia, would have a material adverse effect on its business or
operations.
PROPERTIES
All of Destia's facilities are leased from third parties. Destia's principal
facilities are located in Paramus, New Jersey; College Station, Texas; Brooklyn,
New York; and London, England. Destia's network operations center is located in
St. Louis, Missouri. Destia also maintains sales offices in several cities in
the United States including in most switch locations and in the following
European cities, among others:
- Amsterdam, The Netherlands
- Antwerp, Belgium
- Athens, Greece
- Berlin, Germany
- Brussels, Belgium
- Frankfurt, Germany
- Hamburg, Germany
- London, England
- Lyon, France
- Marseilles, France
- Nantes, France
- Nice, France
- Paris, France
- Toulouse, France
- Vienna, Austria
- Zurich, Switzerland
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DESTIA'S MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors, executive officers and other senior management of Destia and Telco as
of October 15, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --------- ----------------------------------------------------------------------
<S> <C> <C>
Alfred West........................ 38 Chief Executive Officer and Chairman of the Board of Directors
Alan L. Levy....................... 40 President, Chief Operating Officer and Director
Kevin A. Alward.................... 33 President--North America
Richard L. Shorten, Jr............. 32 Senior Vice President and General Counsel
Abe Grohman........................ 39 Chief Information Officer
Daran M. Churovich................. 44 Vice President of Global Network Engineering
Ines C. LeBow...................... 53 Vice President of Global Network Operations
Barry Toser........................ 40 Vice President of Global Carrier Services
Paolo Di Fraia..................... 38 Managing Director--Continental Europe
Michael Whittingham................ 48 Director of International Project Development
Mark St. J. Courtney............... 40 Director of European Commercial and Regulatory Affairs
Eli Katz........................... 30 Managing Director, Telco Global Communications Limited
Gary S. Bondi...................... 48 Director
Stephen R. Munger.................. 41 Director
Edward C. Schmults................. 68 Director
Steven West........................ 49 Director
</TABLE>
ALFRED WEST, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF
DIRECTORS. Mr. West founded Destia in 1992. Prior to founding Destia, Mr. West
managed a family-owned textile trading company. Mr. West is the brother of
Steven West, a Director of Destia.
ALAN L. LEVY, PRESIDENT, CHIEF OPERATING OFFICER AND DIRECTOR. Mr. Levy has
served as Destia's Chief Operating Officer since August 1996, as a Director
since January 1997 and as President since August 1997. Mr. Levy also served as
Chief Financial Officer from August 1996 to January 1998. As a result of the
departure of Phillip J. Storin, Destia's former Chief Financial Officer, Mr.
Levy will share the duties of Chief Financial Officer with Richard L. Shorten,
Jr. until the merger is completed. From October 1993 to July 1996, Mr. Levy
served as Executive Vice President and Managing Director, Europe, as well as
Chief Financial Officer, of Viatel, where, among other things, Mr. Levy was
responsible for the implementation of Viatel's European strategy. Mr. Levy is a
Certified Public Accountant.
KEVIN A. ALWARD, PRESIDENT--NORTH AMERICA. Mr. Alward has served as
Destia's President--North America since February 1998. From October 1996 to
January 1998, Mr. Alward served as Director, President and Chief Operating
Officer of TotalTel USA Communications. From September 1994 to October 1996, Mr.
Alward served as President of TotalTel, Inc., the principal operating subsidiary
of TotalTel USA Communications. From 1992 to 1994, Mr. Alward served as Senior
Vice President at TotalTel USA Communications and assumed the additional
responsibilities of Chief Operating Officer in 1993, a position he held until
1998. Mr. Alward also served from 1991 to 1992 as Vice President of Marketing at
TotalTel USA Communications, and from 1990 to 1991 as Manager of Sales. Mr.
Alward served as a sales account executive at TotalTel USA Communications from
1988 to 1990.
RICHARD L. SHORTEN, JR., SENIOR VICE PRESIDENT AND GENERAL COUNSEL. Mr.
Shorten has served as a Senior Vice President and the General Counsel of Destia
since December 1997. As a result of Mr. Storin's departure, Mr. Shorten will
share the duties of Chief Financial Officer with Mr. Levy until
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the merger is completed. From September 1992 to December 1997, Mr. Shorten was
an associate at the New York law firm Cravath, Swaine & Moore, where he
specialized in a variety of areas of corporate representation, including
securities, finance and mergers and acquisitions.
ABE GROHMAN, CHIEF INFORMATION OFFICER. Mr. Grohman has served as Destia's
Chief Information Officer since October 1997. From September 1994 to September
1997, Mr. Grohman was the Director of Management Information Systems for LDM
Systems Inc., a switchless reseller. From May 1986 to September 1994, Mr.
Grohman was President of DBA Consulting, an independent data processing
consulting company.
DARAN M. CHUROVICH, VICE PRESIDENT OF GLOBAL NETWORK ENGINEERING. Mr.
Churovich has served as Destia's Vice President of Global Network Engineering
since 1998. From 1996 to 1998, Mr. Churovich served as Director of Switch
Engineering at Brooks Fiber Properties, Inc. and was later promoted to Senior
Director--Network Engineering. Following a merger with Worldcom in 1997, Mr.
Churovich assumed the position of Director--Network Technology and Integration.
Prior to 1996, Mr. Churovich maintained a variety of positions within different
divisions at Western Electric, Inc., a subsidiary of AT&T.
INES C. LEBOW, VICE PRESIDENT OF GLOBAL NETWORK OPERATIONS. Ms. LeBow has
served as Vice President, Global Network Operations since June 1998. From May
1997 to May 1998, Ms. LeBow served as Vice President, Network Implementation of
Brooks Fiber Properties. From May 1995 to May 1997, Ms. LeBow served as National
Director, Planning and Engineering of MFS. From May 1982 to May 1995, Ms. LeBow
served in various engineering and operations positions at Contel ASC and GTE.
BARRY TOSER, VICE PRESIDENT OF GLOBAL CARRIER SERVICES. Mr. Toser has
served as Destia's Vice President of Global Carrier Services since January 1999.
Previously, Mr. Toser was the Vice President of Sales for the North American
business unit of Alphanet Telecom from October 1997 to December 1998. Prior to
this, he was Vice President of U.S. Sales for Teleglobe International, an
international telecommunications organization. While at Teleglobe, Mr. Toser
directed the sales and service responsibilities for all carrier, commercial, and
regional Bell operating company accounts. Before joining Teleglobe, he was
involved in sales, marketing and customer retention activities for Cable and
Wireless, Inc. from 1987 through 1995. Previous to Cable and Wireless, Inc. Mr.
Toser spent six years with US Sprint in sales, sales management, and marketing
management.
PAOLO DI FRAIA, MANAGING DIRECTOR--CONTINENTAL EUROPE. Mr. Di Fraia has
served as Destia's Managing Director of Continental Europe since December 1998
and as European Finance Director since March 1998. Mr. Di Fraia served as
Viatel, Inc.'s European Finance Director from January 1996 to February 1998.
From November 1994 to December 1995, Mr. Di Fraia served as European Controller
of Viatel. From April 1989 to August 1994, Mr. Di Fraia was employed by Philip
Crosby Associates, S.A. as European Controller.
MICHAEL WHITTINGHAM, DIRECTOR OF INTERNATIONAL PROJECT DEVELOPMENT. Mr.
Whittingham has been with Destia since 1995. Since joining Destia, Mr.
Whittingham has been responsible for the build-out of the European Network.
Prior to joining Destia. Mr. Whittingham was employed by Worldexchange Limited
as a Technologies Director for Europe from 1994 to 1995. From 1992 to 1994, Mr.
Whittingham served as a Vice President in charge of the European
Telecommunications Department at Marsh & McLennan.
MARK ST. J. COURTNEY, DIRECTOR OF EUROPEAN COMMERCIAL AND REGULATORY
AFFAIRS. Mr. Courtney has served as Destia's Director of European Commercial
and Regulatory Affairs since September 1997. Mr. Courtney served as Viatel,
Inc.'s European General Counsel from August 1995 and as Secretary of
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Viatel from March 1996 to September 1997. From December 1992 to July 1995, Mr.
Courtney served as European and International Counsel for Legent, Inc., a
software company.
ELI KATZ, MANAGING DIRECTOR, TELCO GLOBAL COMMUNICATIONS LIMITED. Mr. Katz
has served as Managing Director of Telco since January 1999. Mr. Katz served as
Executive Director of Telco from January 1997 to January 1999. From July 1992 to
January 1997, Mr. Katz served as President of A. Katz Consultancy.
GARY S. BONDI, DIRECTOR. Mr. Bondi has served as a Director of Destia since
1993. Mr. Bondi served as Treasurer of Destia from 1993 to May 1999. Mr. Bondi
is the President of Bondi, Inc., a multinational trading firm specializing in
non-ferrous metals that he founded in 1987. Mr. Bondi is also the Chairman and
Chief Executive Officer of ECONergy Energy Company, Inc., a competitive energy
provider that he founded in 1996.
STEPHEN R. MUNGER, DIRECTOR. Mr. Munger has served as a Director of Destia
since November 1997. Mr. Munger is a Managing Director in the Mergers,
Acquisitions and Restructuring Department of Morgan Stanley & Co. Incorporated
and is head of the Private Investment Department. He joined Morgan Stanley in
1988 as a Vice President in the Corporate Finance Department. He became a
Principal in 1990 and a Managing Director in 1993. In 1994, Mr. Munger was
Administrative Director of the Corporate Finance Department.
EDWARD C. SCHMULTS, DIRECTOR. Mr. Schmults has served as a director of
Destia since May 1999. Mr. Schmults served as Senior Vice President and General
Counsel of GTE Corporation from February 1984 to June 1994. Mr. Schmults has
held various positions in government, including Deputy Attorney General of the
United States and Under Secretary of the U.S. Treasury Department. Mr. Schmults
was a partner with White & Case, a law firm in New York City. Mr. Schmults is a
Director of Greenpoint Financial Corp., The Germany Fund, The Central European
Equity Fund, Deutsche Portfolio and Deutsche Funds, Inc.
STEVEN WEST, DIRECTOR. Mr. West has served as a Director of Destia since
1993. Mr. West is a founding partner of SO Accurate Group., a refiner and
reprocessor of precious metals in the New York/New Jersey metropolitan area that
was founded in 1982. Steven West is the brother of Alfred West, the Chief
Executive Officer and Chairman of the Board of Directors of Destia.
BOARD OF DIRECTORS
The Destia's board is comprised of six directors. Destia's bylaws provide
that the authorized number of directors shall be determined by the Destia board.
Vacancies on the board may be filled only by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director.
BOARD COMMITTEES
The Destia board has a Compensation Committee and an Audit Committee.
Messrs. Munger and Schmults, Destia's outside directors, are members of both the
Compensation Committee and the Audit Committee. The Compensation Committee
establishes remuneration levels for certain officers of Destia, approves
periodic equity-based compensation grants to employees and performs such other
functions as maybe delegated to it under Destia's benefit and executive
compensation programs. The Audit Committee selects and engages the independent
public accountants to audit Destia's annual financial statements. The Audit
Committee also reviews and approves the planned scope of the annual audit and
reviews the results of the annual audit.
The Destia board may from time to time establish certain other committees to
facilitate the management of Destia. Regular meetings of the Destia board are
held quarterly.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee has determined executive officer compensation
since May 1999. Stephen R. Munger is a Managing Director of Morgan Stanley and
the President of the General Partner of Princes Gate Investors II, L.P., which
is an affiliate of Morgan Stanley and which owns 3,533,821 shares of Destia
common stock. Morgan Stanley was the placement agent in connection with the
Destia 1997 units offering and its 1998 debt offering, was a managing
underwriter in connection with Destia's initial public offering and is Destia's
financial advisor in connection with the merger. See "--Executive Compensation"
and "The Merger--Opinion of Financial Advisor to Destia."
COMPENSATION OF DIRECTORS
Non-employee directors of Destia are paid an annual board fee of $10,000 and
an attendance fee of $750 for each meeting of the Destia board and for each
committee meeting. In addition, non-employee directors receive an initial
options grant to purchase 12,000 shares of common stock upon appointment to the
board and thereafter annual option grants to purchase 6,000 shares of common
stock during their term as director. All such grants have an exercise price
equal to the market price at the time of grant and vest over a six-month period
from the date of the grant.
EXECUTIVE COMPENSATION
At December 31, 1998, the chief executive officer and four other most highly
compensated executive officers of Destia were Mr. Alfred West and Messrs. Levy,
Alward, Storin and Shorten. The following table summarizes all compensation
awarded to, earned by or paid to Mr. West and Messrs. Levy, Alward, Storin and
Shorten.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
SHARES OF
ANNUAL COMPENSATION COMMON STOCK
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS (2) OPTIONS GRANTED COMPENSATION(1)
- ---------------------------------------------- --------- ---------- ---------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Alfred West (3)............................... 1998 $ 323,784 $ 404,730 -- $ 4,725(4)
Chief Executive Officer 1997 323,784 295,306 -- $ 4,725(4)
Alan L. Levy (5).............................. 1998 250,000 250,000 -- --
President and Chief Operating Officer 1997 210,000 157,500 -- --
Kevin A. Alward (6)........................... 1998 198,000 110,000 519,458 --
President--North America
Phillip J. Storin (7)......................... 1998 165,000 82,110 103,892 --
Senior Vice President and Chief Financial
Officer
Richard L. Shorten, Jr. (8)................... 1998 165,000 41,250 25,973 --
Senior Vice President and General Counsel 1997 6,875 -- 51,946 --
</TABLE>
- ------------------------
(1) Does not include the value of certain personal benefits. The estimated
value of such personal benefits for each executive officer named in the
above table did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus paid to such executive officer in 1998.
(2) Bonus amounts apply to the year during which such bonuses were earned and
are recorded on an accrual basis instead of a cash basis.
(3) See "--Employment Agreements and Arrangements" for a description of Mr.
West's employment agreement.
(4) Consists of compensation in respect of life insurance, of which Mr. West's
designee is the beneficiary, paid by Destia.
(5) See "--Employment Agreements and Arrangements" for a description of Mr.
Levy's employment agreement.
(6) Mr. Alward commenced employment with Destia during February 1998.
(7) Mr. Storin commenced employment with Destia during February 1998 and
terminated his employment on September 30, 1999. As part of his separation
agreement, Mr. Storin received a pro rata portion of his options that would
have vested at the end of his second year of employment. Accordingly, Mr.
Storin received options to purchase 23,087 shares of Destia common stock.
See "--Employment Agreements and Arrangements." His former duties are being
assumed by Mr. Levy and Mr. Shorten until completion of the merger.
(8) Mr. Shorten commenced employment with Destia on December 15, 1997.
DESTIA'S STOCK OPTION PLANS
The following summary of certain provisions of Destia's stock option plans
does not purport to be complete, and is subject to, and qualified in its
entirety by, the 1996 Flexible Incentive Plan, as amended, and the 1999 Flexible
Incentive Plan. These plans have previously been filed by Destia with the
Securities and Exchange Commission.
Destia's 1996 Flexible Incentive Plan (the "1996 Plan") and 1999 Flexible
Incentive Plan (the "1999 Plan" and, together with the 1996 Plan, the "Option
Plans") authorize the Destia board to make various equity grants that are based
on Destia common stock. Under the 1996 Plan, the Destia board can make the
following grants to employees, directors and consultants: incentive stock
options to acquire shares of common stock may be granted to employees of Destia
or any of its subsidiaries; non-qualified stock options to acquire shares of
common stock or stock appreciation rights may be granted to employees, directors
and consultants. The Destia board can also sell or grant Restricted Shares and
Unrestricted Shares (each, as defined in the Option Plans) to employees,
directors and consultants. The Option Plans also provide for Tax Offset Payments
(as defined in the Option Plans) to employees. The Option Plans are administered
either by the Destia Board's Compensation Committee.
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<PAGE>
As of October 13, 1999, Destia had issued stock options to purchase
6,446,190 shares of common stock under the Option Plans, 2,508,281 of which were
exercisable as of such date.
The Option Plans provide that, in the event of a merger, consolidation,
combination, exchange of shares, separation, spin-off, reorganization,
liquidation or other similar transaction, the Destia board may, in its sole
discretion, accelerate the lapse of restricted periods for Restricted Share
grants and other vesting periods and waiting periods and extend exercise periods
applicable to any awards made under the Option Plans. In addition, upon a Change
in Control (as defined below), (i) options issued under the 1996 Plan will
automatically accelerate so long as the optionee either has been employed by
Destia for at least twelve months preceding the Change in Control or is eligible
for acceleration pursuant to his option agreement, and (ii) all options issued
under the 1999 Plan will automatically accelerate and become vested. As used in
both the 1996 Plan and the 1999 Plan, a Change in Control shall occur under the
following circumstances:
(i) any person (as defined in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act), other than Mr. West, his designee(s) or affiliate(s) (as
defined in Rule 12b-2 under the Securities Exchange Act) or any
combination thereof, is or becomes the beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act), directly or indirectly,
of securities of Destia representing 50 percent or more of the combined
voting power of Destia's then outstanding securities;
(ii) Destia merges, combines or consolidates with another entity and persons
beneficially owning more than 50 percent of the combined voting power
of Destia's then outstanding securities prior to the merger,
combination or consolidation, cease to beneficially own more than 50
percent of the combined voting power of the securities of the surviving
entity;
(iii) a sale of all or substantially all of the assets of Destia occurs; or
(iv) during any period of two consecutive years, individuals who at the
beginning of such period constitute the board of directors of Destia
cease for any reason to constitute at least a majority thereof, unless
the election of each director who was not a director at the beginning
of such period has been approved in advance by directors representing
at least a majority of the directors then in office who were directors
at the beginning of the period.
Under each of the Option Plans, the merger contemplated by this joint proxy
statement/prospectus would constitute a Change in Control.
Holders of Restricted Shares may elect, for a nominal exercise price, to
convert Restricted Shares held by them into an equivalent number of shares of
voting stock to be issued that shall have the same terms and conditions as the
Restricted Shares.
The following table sets forth grants of options to purchase shares of
common stock of the Company made during 1998 to each of the executive officers
named in Destia's Summary Compensation Table.
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<PAGE>
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
OPTIONS RATES OF STOCK PRICE
NUMBER OF GRANTED TO APPRECIATION FOR OPTION
SECURITIES EMPLOYEES EXERCISE TERM
UNDERLYING IN FISCAL YEAR PRICE PER EXPIRATION --------------------------
NAME OPTIONS 1998 SHARE($) DATE 5%($) 10%($)
- ----------------------------------------- ----------- --------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Alfred West.............................. -- -- -- -- -- --
Alan L. Levy............................. -- -- -- -- -- --
Kevin A. Alward.......................... 519,458 33.3% 7.22 2/2/2008 $ 1,036,056 $ 2,289,413
Phillip J. Storin(1)..................... 103,892 6.66% 4.81 2/2/2008 78,813 165,500
Richard L. Shorten, Jr................... 25,973 1.67% 7.22 7/1/2008 29,555 62,063
</TABLE>
- ------------------------------
(1) Mr. Storin terminated his employment on September 30, 1999. See
"--Employment Agreements and Arrangements."
On May 6, 1999, the Destia board authorized the grant of 1,038,916 options
to Alan Levy at the following exercise prices: $10.00 per share for options to
purchase up to 519,458 shares of Destia common stock in two equal amounts of up
to 259,729 shares that vest on the second and third anniversaries of Destia's
initial public offering; $15.00 and $20.00 per share for options to purchase up
to 519,458 shares of Destia common stock in two equal amounts of up to 259,729
shares that vest on the fourth and fifth anniversaries of Destia's initial
public offering, respectively.
On August 3, 1999, the Destia board authorized the grant of 50,000 options
to Richard L. Shorten, Jr. at an exercise price of $10.13 per share.
The following table sets forth options exercised during 1998 and the fiscal
year-end value of unexercised options for each executive officer named in
Destia's Summary Compensation Table.
OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT DECEMBER 31, 1998 DECEMBER 31, 1998
ACQUIRED ON VALUE ------------------------- ---------------------------
NAME EXERCISE (1) REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- --------------- ----------------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Alfred West............................ -- -- -- -- -- --
Alan L. Levy........................... -- -- 1,617,384 460,448 $ 6,616,400 $ 1,883,600
Kevin A. Alward........................ -- -- -- 519,458 -- --
Phillip J. Storin(2)................... -- -- -- 103,892 -- 175,000
Richard L. Shorten, Jr................. -- -- 17,316 60,603 29,167 58,333
</TABLE>
- ------------------------
(1) No options were exercised during 1998.
(2) Mr. Storin terminated his employment on September 30, 1999. Under the terms
of his separation agreement, he must exercise his vested and unexercised
options on or prior to January 14, 2000. See "--Employment Agreements and
Arrangements."
1999 EMPLOYEE STOCK PURCHASE PLAN
Destia has reserved for issuance 500,000 shares of common stock under
Destia's 1999 Employee Stock Purchase Plan, which became effective in May 1999.
The Employee Stock Purchase Plan is designed to allow eligible employees of
Destia and participating subsidiaries to purchase shares of Destia common stock
at six-month intervals through periodic payroll deductions.
The Employee Stock Purchase Plan will be implemented in a series of
successive offering periods. The initial offering period began on the date of
Destia's initial public offering and will end on the last business day in
November 1999. The next offering period will commence on the first business day
in
169
<PAGE>
December 1999 and end on the last business day in May 2000. Thereafter, offering
periods will continue for six months unless otherwise designated by the
Compensation Committee.
Individuals who are eligible employees on the start date of any offering
period may participate in the Employee Stock Purchase Plan. Participants in the
Employee Stock Purchase Plan are entitled to suspend or withdraw their
participation during the offering period. Terminated employees who are
participants in the Employee Stock Purchase Plan will have their contributions
automatically refunded upon termination of employment.
Payroll deductions may not exceed 20% of the participant's total cash
compensation for each semi-annual period of participation, and the accumulated
payroll deductions will be applied to the purchase of shares on the
participant's behalf on each semi-annual purchase date, which is the last
business day in May and November of each year, at a purchase price per share not
less than 85% of the lower of the fair market value of the common stock on the
first day of the offering period or the fair market value on the semi-annual
purchase date. During the first participation period after Destia's initial
public offering, if the offering price of the initial public offering is lower
than the per share market price at the end of the participation period, then the
purchase price will be the initial public offering offering price and no
discount shall apply.
Destia's board of directors may amend or modify the Employee Stock Purchase
Plan following any semi-annual purchase date. The Employee Stock Purchase Plan
will terminate on the last business day in May 2009, unless terminated sooner by
the Destia board.
EFFECT OF THE MERGER ON THE DESTIA OPTION PLANS, EMPLOYEE STOCK PURCHASE PLAN
AND OUTSTANDING WARRANTS
STOCK OPTION PLANS. Pursuant to the merger agreement, at the effective time
of the merger, Viatel will assume each Option Plan of Destia and all outstanding
equity-based awards. Each option to acquire shares of Destia common stock
pursuant to Destia's stock option plans will be converted into an option to
acquire Viatel common stock on the same terms and conditions as were applicable
under the Destia option. The number of shares of Viatel common stock subject to
a Viatel option will be equal to the number of shares of Destia common stock
subject to the Destia option multiplied by the 0.445 exchange ratio (rounded up
to the nearest whole share). The exercise price per share of Viatel common stock
under a Viatel option will be equal to the exercise price for the shares of
Destia common stock subject to the Destia option divided by the 0.445 exchange
ratio (rounded as provided in the instrument governing the Destia option).
Completion of the merger will result in a "Change in Control" under the Option
Plans and, as a result, (1) Destia options granted under the 1996 Plan to
employees who have been employed by Destia for at least twelve months or who are
eligible for acceleration pursuant to their option agreement and (2) Destia
options granted to members of the Destia board under the 1999 Plan will become
fully vested at the effective time of the merger. See "The Merger--Interests of
Officers and Directors in the Merger" and "Destia Stock Option Plans."
EMPLOYEE STOCK PURCHASE PLAN. Prior to completing the merger, the
Compensation Committee will determine a termination date for the Employee Stock
Purchase Plan, which must be no more that 60 days prior to the expected closing
date of the merger, for the Employee Stock Purchase Plan. Amounts contributed by
employees during the participation period prior to completing the merger will be
used to purchase shares on behalf of the participants in the plan. As indicated
above, this purchase price will be no less than 85% of the lower of the fair
market value of the Destia common stock on (i) the first day of the
participation period, or (ii) the semi-annual purchase date. If the merger is
consummated prior to the end of the first participation period, which is the
last business day in November, the purchase price will most likely be $10 per
share, which was the price per share in Destia's initial public offering. Upon
completion of the merger, each share of Destia common stock purchased pursuant
to
170
<PAGE>
the Employee Stock Purchase Plan and held by employees as of the closing date of
the merger will be converted to 0.445 of a share of Viatel common stock.
WARRANTS TO PUCHASE DESTIA COMMON STOCK. Each warrant to purchase Destia
common stock will, at the effective time of the merger, be converted into the
right to receive the number of shares of Viatel common stock (rounded up to the
nearest whole share) equal to the number of shares of Destia common stock
subject to such warrant immediately prior to the effective time of the merger,
multiplied by the 0.445 exchange ratio. As of October 13, 1999, the number of
shares of Destia common stock reserved for issuance upon the exercise of
outstanding warrants was approximately 1.1 million shares.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
Destia has entered into an employment agreement with Alfred West, pursuant
to which Mr. West serves as Chief Executive Officer and Chairman of the Destia
Board. The term of the West employment agreement extends until the fifth
anniversary of Destia's initial public offering, subject to any earlier
termination in accordance with the terms thereof. Pursuant to the West
employment agreement, Mr. West is entitled to receive an annual base salary of
$500,000 during each year of the term thereof. Mr. West is entitled to receive
an annual bonus of between 50% and 100% of his annual base salary, subject to
attainment of certain performance goals as determined by the Destia board or the
compensation committee thereof. If there is no change in control and his
termination is (x) without cause, (y) voluntary and for good reason on Mr.
West's behalf or (z) due to Destia's failure to renegotiate the West employment
agreement at the end of its term, Mr. West is entitled to receive the greater of
(i) his base salary payable for the remainder of the term and (ii) two years'
base salary and two years' target bonus based on amounts previously earned,
either of which shall be paid together with any related benefits ("West
Severance Package") for the greater of the remaining term of the West employment
agreement or two years. If there is a change in control, and within two years of
such event Mr. West's termination is (i) without cause or (ii) voluntary and for
good reason on Mr. West's behalf, then Mr. West will be entitled to receive the
West Severance Package calculated based on a three-year term, as well as
reimbursement for any tax liability pursuant to the Internal Revenue Code of
1986. Under the terms of Mr. West's employment agreement, a change in control
would occur upon the closing of the merger.
Destia has an employment agreement with Alan L. Levy pursuant to which Mr.
Levy serves as President and Chief Operating Officer of Destia. The term of the
Levy employment agreement extends until the third anniversary of Destia's
initial public offering, subject to an earlier termination in accordance with
the terms thereof. Pursuant to the Levy employment agreement, Mr. Levy is
entitled to receive an annual base salary of $325,000 during each year of the
term thereof. In addition, Mr. Levy is entitled to receive an annual bonus of
between 50% and 100% of his annual base salary, subject to attainment of certain
performance goals as determined by the Destia board or the compensation
committee thereof. Mr. Levy also received options to purchase 1,038,916 shares
of common stock vesting in equal amounts of 259,729 shares of common stock on
the second through fifth anniversaries of Destia's initial public offering. The
exercise price of options that vest on the second and third anniversaries of the
offering is the offering price per share. The exercise price of options that
vest on the fourth and fifth anniversaries of the offering is 1.5 and 2.0 times
the offering price per share, respectively. In the event of a change in control,
unvested options will vest immediately, while options whose exercise price is
greater than Destia's common stock price at the time of the change in control
will automatically convert into options to acquire common stock of the acquiring
entity at an equivalent exercise price. Mr. Levy also is entitled to receive
severance benefits under certain circumstances. If there is no change in control
and his termination is (x) without cause, (y) voluntary and for good reason on
Mr. Levy's behalf or (z) due to Destia's failure to renegotiate the Levy
employment agreement at the end of its term, Mr. Levy is entitled to receive the
greater of (i) his base salary payable for the remainder of the term and (ii)
two years' base salary and two years' target bonus
171
<PAGE>
based on amounts previously earned, either of which shall be paid together with
related benefits ("Levy Severance Package"). If there is a change in control,
and within two years of such event Mr. Levy's termination is (i) without cause
or (ii) voluntary and for good reason on Mr. Levy's behalf, then Mr. Levy is
entitled to receive the Levy Severance Package calculated based on a three-year
period and an additional amount determined according to the his target bonus, as
well as reimbursement for any tax liability pursuant to the Internal Revenue
Code of 1986. Under the terms of Mr. Levy's employment agreement, a change in
control would occur upon the closing of the merger.
Destia has employment agreements with Phillip J. Storin, Kevin A. Alward and
Richard L. Shorten, Jr. The term of the Alward employment agreement each extends
until February 2, 2001, and the term of the Shorten employment agreement extends
until January 1, 2001, in each instance subject to earlier termination in
accordance with the terms thereof. Pursuant to their employment agreements,
Messrs. Shorten and Alward are entitled to receive an annual base salary of
$180,000 and $216,000, respectively, during each year of the term. In each case,
increases in compensation shall be at the discretion of the Destia board. In
addition, Messrs. Shorten and Alward are each eligible to participate in
Destia's incentive compensation programs and to receive such annual bonus or
other compensation, including restricted stock or incentive stock options, as
may be determined by the Destia board. If either of Messrs. Shorten's or
Alward's employment is terminated prior to January 1, 2001 by Destia without
cause, they will be entitled to a severance payment equal to one year's base
salary.
Phillip J. Storin has left his position as Destia's Chief Financial Officer.
Under the terms of his separation agreement with Destia, Mr. Storin will receive
a pro rata portion of his compensation and stock option grants through his last
date of employment with Destia. In addition, Mr. Storin's separation agreement
contains customary provisions concerning mutual release of claims. Mr. Levy,
Destia's former Chief Financial Officer, and Mr. Shorten will share Mr. Storin's
former duties until the completion of the merger.
As part of the acquisition of VoiceNet on February 12, 1998, Destia entered
into employment contracts with the sellers of VoiceNet providing for an annual
base salary of $180,000 each. In total, during 1998, the sellers of VoiceNet
also were granted 311,675 options at an exercise price of $4.81 per share under
the 1996 Plan.
CERTAIN TRANSACTIONS
Destia had outstanding loans of $308,000 due to Mrs. Rose West, the mother
of Messrs. Alfred West and Steven West. Destia has repaid these loans in full.
Alfred West has borrowed $232,441 from Destia pursuant to unsecured,
interest bearing notes, repayable upon demand.
Sonja Gross, the sister of Mr. Alfred West, previously owned a 28% interest
in Destia's Swiss subsidiary, Econophone Services GmbH. On March 30, 1999,
Destia acquired Ms. Gross' interest in Econophone Services GmbH in exchange for
103,981 shares of Restricted Voting Common Stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS OF DESTIA
The following table sets forth certain information with respect to the
beneficial ownership of Destia common stock as of October 13, 1999, by (i) each
person known by Destia to beneficially own more than 5% of its voting
securities, (ii) each of Destia's directors, (iii) each of the executive
officers named in the Destia Summary Compensation Table and (iv) all directors
and executive officers of Destia as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- -------------------------------------------------------------------------------------- ------------ ---------
<S> <C> <C>
Alfred West........................................................................... 11,428,076(2) 36.2%
Steven West........................................................................... 4,531,285(3) 14.4
Gary Bondi............................................................................ 4,431,832(4) 14.0
PG Investors II, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway New York, New York 10036.............................................. 3,553,821 11.3
Kevin A. Alward....................................................................... 415,566 (6) 1.3
Alan L. Levy.......................................................................... 1,926,624(7) 6.1
Stephen R. Munger(10)................................................................. -- --
Edward C. Schmults.................................................................... 12,000 *
Richard L. Shorten, Jr................................................................ 25,973(8) *
Phillip J. Storin(11)................................................................. 57,717(9) *
------------ ---------
All Directors and Executive Officers as a Group (9 persons)........................... 22,829,073 72.4%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except where otherwise indicated, Destia believes that all persons listed in
the table, based on information provided by such persons, have sole voting
and dispositive power over the securities beneficially owned by them,
subject to community property laws, where applicable. For purposes of this
table, a person is deemed to be the "beneficial owner" of any shares that
such person has the right to acquire within 60 days from October 13, 1999.
Shares which a person does not have the right to acquire within 60 days from
October 13, 1999 are not reflected in this table. For purposes of computing
the percentage of outstanding shares held by each person named above on a
given date, any security that such person has the right to acquire within 60
days is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
Except where otherwise indicated, the address of each person listed in the
table is c/o Destia Communications, Inc., 95 Rte. 17, Paramus, NJ 07652.
Attn: General Counsel.
(2) Includes 893,468 shares held by AT Econ Ltd. Partnership and 88,308 held by
AT Econ Ltd. Partnership No. 2.
(3) Includes 893,468 shares held by SS Econ Ltd. Partnership and 108,226 shares
held by SS Econ Ltd. Partnership No. 2. Includes options to purchase 12,000
shares of Destia common stock issued to each non-employee director under the
1999 Plan. Also includes shares held jointly by spouse.
(4) Includes 893,468 shares held by GS Econ Ltd. Partnership. Includes options
to purchase 12,000 shares of Destia common stock issued to each non-employee
director under the 1999 Plan.
(5) Includes 212,978 shares held by Kevin Alward, 20,778 shares held by Alward
Investment Associates LLC and 77,919 shares held by Kevin and Belinda Alward
Grantor Retained Annuity Trust. The remainder includes shares issuable upon
the exercise of options.
(6) Does not include options to purchase 415,567 shares of Destia common stock
under the 1996 Plan which are not exercisable within 60 days after October
13, 1999.
(7) Does not include options to purchase 1,190,127 shares of Destia common stock
under the 1996 Plan which are not exercisable within 60 days after October
13, 1999. Includes 400,000 shares held by Levy Investment Partners, L.P.
(8) Does not include options to purchase 127,917 shares of Common Stock under
the 1996 Plan which are not exercisable within 60 days after October 13,
1999.
(9) No additional options to purchase shares of Common Stock under the 1996 Plan
will become exercisable.
(10) Mr. Munger is the President of PG Investors II, Inc. and disclaims
beneficial ownership of the shares controlled by PG Investors II, Inc.
(11) Mr. Storin terminated his employment on September 30, 1999. Under the terms
of his separation agreement, he must exercise his vested and unexercised
options on or prior to January 14, 2000. See "--Employment Agreements and
Arrangements."
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<PAGE>
III. CERTAIN LEGAL INFORMATION
COMPARISON OF VIATEL-DESTIA STOCKHOLDER RIGHTS
Upon consummation of the merger, the stockholders of Destia will become
stockholders of Viatel, a Delaware corporation, and their rights will be
governed by Viatel's certificate of incorporation and bylaws which differ in
certain material respects from Destia's certificate of incorporation and bylaws.
As stockholders of Viatel, the rights of the former stockholders of Destia will
continue to be governed by the Delaware General Corporation Law. Copies of the
Viatel certificate of incorporation, the Viatel bylaws, the Destia certificate
of incorporation and the Destia bylaws, in each case as in effect on the date of
this joint proxy statement/prospectus, are incorporated herein by reference and
will be sent to holders of shares of Viatel and Destia common stock upon
request. See "Where You Can Find More Information." The summary contained in the
following chart is not intended to be complete and is qualified by reference to
Delaware law, the Viatel certificate of incorporation, the Viatel bylaws, the
Destia certificate of incorporation and the Destia bylaws, in each case as in
effect on the date of this joint proxy statement/prospectus.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF VIATEL AND DESTIA
STOCKHOLDERS AND THOSE RIGHTS WHICH DESTIA STOCKHOLDERS WILL HAVE AS VIATEL
STOCKHOLDERS FOLLOWING THE MERGER
<TABLE>
<CAPTION>
VIATEL STOCKHOLDER RIGHTS DESTIA STOCKHOLDER RIGHTS
------------------------------------ ------------------------------------
<S> <C> <C>
Authorized Capital Stock: The authorized capital stock of The authorized capital stock of
Viatel consists of 150,000,000 Destia consists of 72,000,000 shares
shares of common stock and 2,000,000 of voting common stock, 500,000
shares of preferred stock. shares of non-voting common stock
and 2,500,000 shares of preferred
stock.
Number of Directors: The Viatel board currently consists The Destia board currently consists
of five directors. of six directors.
If the merger is completed, the size
of the Viatel board will be
increased from five to ten
directors. The additional directors
that will be added to the Viatel
board will consist of the Chairman
and Chief Executive Officer of
Destia, one independent director
designated by the Viatel board, one
director, who must be an existing
director of Destia, designated by
the Chairman and Chief Executive
Officer of Destia, the President and
Chief Operating Officer of Destia
and one person designated by the
Viatel board.
</TABLE>
174
<PAGE>
<TABLE>
<CAPTION>
VIATEL STOCKHOLDER RIGHTS DESTIA STOCKHOLDER RIGHTS
------------------------------------ ------------------------------------
<S> <C> <C>
Classification of Board of The Viatel board is divided into Destia does not currently have a
Directors: three classes, as nearly equal in classified board. The Destia by- laws
number of directors as possible, currently require that all directors
with each class serving a three-year be elected at each annual meeting of
staggered term. stockholders for a term of one year.
Removal of Directors: Viatel directors may only be removed Destia directors may be removed,
for cause, on the vote of a majority with or without cause, on the vote
of the outstanding capital stock of a majority of the outstanding
entitled to vote for the election of capital stock entitled to vote for
directors. the election of directors.
Stockholder Action by Written The stockholders of Viatel may act The stockholders of Destia may not
Consent: by written consent in lieu of a take any action without a meeting of
meeting of stockholders. stockholders.
Calling of Special Meetings of The Viatel bylaws provide that a The Destia bylaws provide that a
Stockholders: special meeting of the Viatel special meeting of the Destia
stockholders may be called by the stockholders may be called by the
Viatel board or the holder or Destia board, the Chairman of the
holders of more than 50% of the Destia board or the President of
outstanding shares entitled to vote Destia.
with respect to the matter to be
considered at the proposed special
meeting.
Amendment of Certificate of The bylaws of Viatel may be amended The bylaws of Destia may be amended
Incorporation and by a majority of the Viatel by the Destia board or by at least
Bylaws: stockholders entitled to vote in the 80% of the Destia shares entitled to
election of directors or by the vote, except that at least 66 2/3%
Viatel board, but any amendment of the Destia shares entitled to
adopted by the Viatel board may be vote is required in order to amend
amended, repealed or altered by a or repeal Article VII of the Destia
majority of the stockholders certificate of incorporation, which
entitled to vote. The Viatel article specifically denies the
certificate of incorporation may be power of Destia stockholders to take
amended by Viatel in any manner action without a meeting of
prescribed by statute. stockholders. The Destia certificate
of incorporation may be amended by
Destia in any manner prescribed by
statute.
</TABLE>
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<PAGE>
DESCRIPTION OF VIATEL CAPITAL STOCK
The following summary of the terms of the capital stock of Viatel prior to,
and after completion of, the merger is not meant to be complete and is qualified
by reference to Viatel's certificate of incorporation and bylaws. Copies of
Viatel's certificate of incorporation and bylaws are incorporated herein by
reference and will be sent to holders of shares of Viatel common stock and
Destia common stock upon request. See "Where You Can Find More Information."
AUTHORIZED CAPITAL STOCK
Under Viatel's certificate of incorporation, its authorized capital stock
consists of 150,000,000 shares of common stock, $.01 par value per share, and
2,000,000 shares of preferred stock, $.01 par value per share.
VIATEL COMMON STOCK
VIATEL COMMON STOCK OUTSTANDING. The outstanding shares of Viatel common
stock are, and the shares of Viatel common stock issued pursuant to the mergers
will be, duly authorized, validly issued, fully paid and nonassessable.
VOTING RIGHTS. Each holder of Viatel common stock is entitled to one vote
for each share of Viatel common stock held of record on the applicable record
date on all matters submitted to a vote of stockholders.
DIVIDEND RIGHTS; RIGHTS UPON LIQUIDATION. The holders of Viatel common
stock are entitled to receive, from funds legally available for the payment
thereof, dividends when and as declared by resolution of the Viatel board,
subject to any preferential dividend rights granted to the holders of any
outstanding Viatel preferred stock. In the event of liquidation, each share of
Viatel common stock is entitled to share pro rata in any distribution of
Viatel's assets after payment or providing for the payment of liabilities and
the liquidation preference of any outstanding Viatel preferred stock.
PREEMPTIVE RIGHTS. Holders of Viatel common stock have no preemptive rights
to purchase, subscribe for or otherwise acquire any unissued or treasury shares
or other securities.
VIATEL PREFERRED STOCK
VIATEL PREFERRED STOCK OUTSTANDING. As of October 13, 1999, no shares of
Viatel preferred stock were issued and outstanding.
BLANK CHECK PREFERRED STOCK. Under Viatel's certificate of incorporation,
the Viatel board has the authority, without stockholder approval, to create one
or more classes or series within a class of preferred stock, to issue shares of
preferred stock in such class or series up to the maximum number of shares of
the relevant class or series of preferred stock authorized, and to determine the
preferences, rights, privileges and restrictions of any such class or series,
including the dividend rights, voting rights, the rights and terms of
redemption, the rights and terms of conversion, liquidation preferences, the
number of shares constituting any such class or series and the designation of
such class or series. Acting under this authority, the Viatel board could create
and issue a class or series of preferred stock with rights, privileges or
restrictions, and adopt a stockholder rights plan, having the effect of
discriminating against an existing or prospective holder of securities as a
result of such stockholder beneficially owning or commencing a tender offer for
a substantial amount of Viatel common stock. One of the effects of authorized
but unissued and unreserved shares of capital stock may be to render more
difficult or discourage an attempt by a potential acquiror to obtain control of
Viatel by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of Viatel's
176
<PAGE>
management. The issuance of such shares of capital stock may have the effect of
delaying, deferring or preventing a change in control of Viatel without any
further action by the stockholders of Viatel.
TRANSFER AGENT AND REGISTRAR
The Bank of New York is the transfer agent and registrar for the Viatel
common stock.
NASDAQ NATIONAL MARKET LISTING; DELISTING AND DEREGISTRATION OF DESTIA COMMON
STOCK
It is a condition to the merger that the shares of Viatel common stock
issuable in the merger be approved for quotation on the Nasdaq National Market,
subject to official notice of issuance. If the merger is completed, Destia
common stock will cease to be listed on the Nasdaq National Market.
DESCRIPTION OF DESTIA CAPITAL STOCK
The total authorized shares of capital stock of Destia consist of (1)
72,000,000 shares of voting common stock, $0.01 par value per share, (2) 500,000
shares of non-voting common stock, $0.01 par value per share and (3) 2,500,000
shares of preferred stock, $0.01 par value per share. At the close of business
on October 13, 1999, there were approximately 31.5 million shares of Destia
voting common stock outstanding, approximately 100,000 shares of Destia
non-voting common stock outstanding and no shares of Destia preferred stock
outstanding.
The holders of voting common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. The holders of Destia non-voting
common stock do not have voting rights, except to the extent required by law.
Except as indicated below, the other terms of the voting common stock and Destia
non-voting common stock are the same.
The Destia board is authorized to issue preferred stock in one or more
series, and to fix rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The Destia board, without
stockholder approval, can issue Destia preferred stock with voting, conversion
or other rights that could adversely affect the voting power and other rights of
the holders of Destia common stock.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this joint proxy statement/prospectus that are
not historical facts are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Management of Viatel and Destia
wish to caution the reader that the forward-looking statements referred to above
and contained in this joint proxy statement/prospectus regarding matters that
are not historical facts involve predictions. No assurance can be given that the
future results will be achieved as actual events or results may differ
materially as a result of risks facing Viatel and Destia. Such risks include,
but are not limited to, changes in business conditions, changes in the
telecommunications industry and the general economy, competition, changes in
service offerings and risks associated with Viatel's and Destia's limited
operating history, entry into developing markets (including that resulting from
the merger), managing rapid growth (including that resulting from the merger),
international operations (including that resulting from the merger), effects of
natural disasters, dependence on effective information systems and development
networks, as well as regulatory developments that could cause actual results to
vary materially from the future results indicated, expressed or implied in such
forward-looking statements.
177
<PAGE>
LEGAL MATTERS
The validity of the Viatel common stock to be issued to Destia stockholders
in the merger will be passed upon by Kelley Drye & Warren LLP, counsel to
Viatel. It is a condition to the completion of the merger that Destia receive
opinions from its counsel, Cravath, Swaine & Moore, that the merger will qualify
as a tax-free reorganization.
EXPERTS
The consolidated financial statements and schedule of Viatel, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for each of the years in the
three-year period ended December 31, 1998, have been included herein in reliance
upon the report of KPMG LLP, independent certified public accountants appearing
elsewhere herein, and upon the authority of such firm as experts in accounting
and auditing.
The consolidated financial statements of Destia Communications, Inc. and
subsidiaries as of December 31, 1997 and 1998 and for the three years ended
December 31, 1998, included herein and in the registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
178
<PAGE>
IV. ADDITIONAL INFORMATION FOR STOCKHOLDERS
FUTURE STOCKHOLDER PROPOSALS
VIATEL
Stockholder proposals submitted for inclusion in the proxy statement to be
issued in connection with Viatel's 2000 annual meeting of stockholders must be
mailed to the Secretary, Viatel, Inc., 685 Third Avenue, 24(th) Floor, New York,
New York 10017, and must be received by the Secretary on or before March 24,
2000. In addition, stockholder proposals for presentation at the 2000 annual
meeting must also be received on or before March 24, 2000.
Viatel's bylaws provide, in general, that if a stockholder intends to
propose business or make a nomination for the election of directors at an annual
meeting, Viatel must receive notice of such intention at least 120 days prior to
the first anniversary of the preceding year's annual meeting. If the date of the
meeting is changed more than 30 days from the prior anniversary date, notice
must be delivered ten days following the day on which notice of the annual
meeting is first mailed to stockholders. The notice must include all information
relating to the proposed nominee required by the SEC to be disclosed in
solicitations of proxies for election of directors or, in the case of a
proposal, a brief description of the proposal, and any material interest of the
stockholder in the proposal. The notice must also include (i) the name and
address of the stockholder giving the notice and any other stockholders known by
such stockholder to be supporting the nominees or proposal and (ii) the class
and number of shares of Viatel that are owned beneficially by such stockholder
and by any other stockholders known by such stockholder to be supporting such
nominee or proposal. The foregoing is only a summary of detailed provisions of
Viatel's bylaws and is qualified by reference to the text thereof.
DESTIA
Destia will hold an annual meeting of its stockholders in 2000 only if the
merger is not completed before the time of such meeting. The deadline for
submission of stockholder proposals for inclusion in Destia's proxy materials
for its annual meeting in 2000 is December 15, 1999.
If the merger is not completed, Destia stockholders may present proper
proposals for consideration at the Destia annual meeting in 2000 by submitting
their proposals in writing to the Secretary of Destia in a timely manner.
The Destia bylaws establish an advance notice procedure with regard to
certain matters, including stockholder proposals not included in Destia's proxy
statement, to be brought before an annual meeting of stockholders. In general,
nominations for the election of directors at the Destia annual meeting in 2000
may be made by: (1) the Destia board, (2) a committee appointed by the Destia
board, or (3) any stockholder entitled to vote in the election of directors
generally who has delivered written notice to the Secretary of Destia by
December 15, 1999. This notice must contain specified information concerning the
nominees and concerning the stockholder proposing the nominations.
The only business that will be conducted at the annual meeting is business
that is properly brought before the meeting. To be properly brought, business
must be (1) specified in the notice of meeting given by or at the direction of
the Destia board, the Chairman of the Destia board or the President of Destia;
(2) brought by or at the direction of the Destia board, the Chairman of the
Destia board or the President of Destia; or (3) brought by any stockholder
entitled to vote who has delivered written notice to the Secretary of Destia by
December 15, 1999. This notice must contain specific information concerning the
matters to be brought before the meeting and concerning the stockholder
proposing those matters.
179
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Viatel and Destia file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information filed by Viatel and Destia at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC filings of Viatel and Destia are also available
to the public from commercial document retrieval services and at the web site
maintained by the SEC at "http://www.sec.gov."
Viatel filed a registration statement on Form S-4 to register with the SEC
the Viatel common stock to be issued to Destia stockholders in the merger. This
joint proxy statement/prospectus is a part of that registration statement and
constitutes a prospectus of Viatel in addition to being a proxy statement of
Viatel and Destia for their respective meetings. As allowed by SEC rules, this
joint proxy statement/prospectus does not contain all the information you can
find in the registration statement or the exhibits to the registration
statement.
You may request a copy of Viatel's and Destia's annual, quarterly and
special reports, proxy statements and other information, at no cost, by writing
or telephoning them at the following addresses:
<TABLE>
<S> <C>
Viatel, Inc. Destia Communications, Inc.
Attention: Investor Relations Attention: Investor Relations
685 Third Avenue 95 Rte. 17 South
New York, NY 10017 Paramus, NJ 07652
Telephone: (212) 350-9200 Telephone: (201) 226-4500
</TABLE>
Viatel has supplied all information contained in this joint proxy
statement/prospectus relating to Viatel, and Destia has supplied all such
information relating to Destia.
You can get more information by visiting Viatel's web site at www.viatel.com
and Destia's web site at www.destia.com. Web site materials are not part of this
joint proxy statement/prospectus.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote on the Viatel proposal or the Destia proposal, as
the case may be. Neither Viatel nor Destia has authorized anyone to provide you
with information that is different from what is contained in this joint proxy
statement/prospectus. This joint proxy statement/prospectus is dated October 15,
1999. You should not assume that the information contained in the joint proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement/prospectus to stockholders nor
the issuance of Viatel common stock in the merger shall create any implication
to the contrary.
INCORPORATION OF DOCUMENTS BY REFERENCE
Viatel is incorporating certain information into this joint proxy
statement/prospectus by reference. This means that Viatel can disclose important
information to you by incorporating it by reference herein and referring you to
such document filed with the SEC between the date of this joint proxy
statement/prospectus and the date of completion of the merger. The information
incorporated by reference is considered to be part of this joint proxy
statement/prospectus, except for any information that is superseded by
information that is included directly in this document.
You can obtain copies of the documents incorporated by reference herein
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference into this document. You can also obtain
the documents incorporated by reference in this joint proxy statement/prospectus
by requesting them in writing or by telephone to the Viatel address or telephone
number set forth above in "Where You Can Find More Information."
180
<PAGE>
INDEX TO VIATEL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
VIATEL, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............................................. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998........................................................................ F-4
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 1996, 1997 and 1998........ F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
Years Ended December 31, 1996, 1997 and 1998............................................................ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998........................................................................ F-7
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1997 and 1998.................................................................. F-8
Condensed Consolidated Balance Sheets as of June 30, 1999................................................. F-22
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 1998 and June 30, 1999
(Unaudited)............................................................................................. F-23
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and June 30, 1999
(Unaudited)............................................................................................. F-24
Notes to Condensed Consolidated Financial Statements...................................................... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Viatel, Inc.:
We have audited the accompanying consolidated balance sheets of Viatel, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' equity (deficiency),
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Viatel, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
February 26, 1999
F-2
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................................................. $ 21,096 $ 329,511
Restricted cash equivalents............................................................ -- 10,310
Restricted marketable securities, current.............................................. -- 50,870
Marketable securities, current......................................................... 3,500 171,771
Trade accounts receivable, net of allowance for doubtful accounts of $1,041 and $3,093,
respectively......................................................................... 10,981 28,517
Other receivables...................................................................... 6,505 13,404
Prepaid expenses....................................................................... 1,348 2,417
---------- -----------
Total current assets................................................................. 43,430 606,800
---------- -----------
Restricted marketable securities, non-current............................................ -- 83,343
Marketable securities, non-current....................................................... 22,547 --
Property and equipment, net.............................................................. 54,094 266,256
Intangible assets, net................................................................... 4,338 46,968
Other assets............................................................................. 2,400 5,744
---------- -----------
$ 126,809 $ 1,009,111
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Accrued telecommunications costs....................................................... $ 16,898 $ 26,518
Accounts payable and other accrued expenses............................................ 10,753 23,656
Property and equipment purchases payable............................................... 4,739 97,288
Accrued interest....................................................................... -- 12,240
Liability under joint construction agreement........................................... -- 9,523
Current installments of notes payable and obligations under capital leases............. 3,373 8,918
---------- -----------
Total current liabilities............................................................ 35,763 178,143
---------- -----------
Long term liabilities:
Long term debt......................................................................... 89,855 896,503
Notes payable and obligations under capital leases, excluding current installments..... 8,255 24,636
Equipment purchase obligation.......................................................... 1,500 --
---------- -----------
Total long term liabilities.......................................................... 99,610 921,139
---------- -----------
Series A Redeemable Convertible Preferred Stock, $.01 par value; Authorized 718,042
Shares; issued and outstanding no shares and 461,258, respectively..................... -- 47,121
---------- -----------
Commitments and contingencies
Stockholders' deficiency:
Preferred Stock, $.01 par value. Authorized 1,281,958 shares, no shares issued and
outstanding.......................................................................... -- --
Common Stock, $.01 par value. Authorized 150,000,000 shares, issued and outstanding
22,635,267 and 23,184,465 shares, respectively....................................... 226 232
Additional paid-in capital............................................................. 125,661 128,357
Unearned compensation.................................................................. (65) --
Accumulated other comprehensive loss................................................... (5,356) (6,246)
Accumulated deficit.................................................................... (129,030) (259,635)
---------- -----------
Total stockholders' deficiency....................................................... (8,564) (137,292)
---------- -----------
$ 126,809 $ 1,009,111
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Communication services revenue............................................... $ 50,419 $ 73,018 $ 135,188
---------- ---------- -----------
Operating expenses:
Cost of communication services............................................. 42,130 63,504 122,109
Selling, general and administrative expenses............................... 32,866 36,077 44,893
Depreciation and amortization.............................................. 4,802 7,717 16,268
---------- ---------- -----------
Total operating expenses................................................. 79,798 107,298 183,270
---------- ---------- -----------
Other income (expenses):
Interest income............................................................ 1,852 3,686 28,259
Interest expense........................................................... (10,848) (12,450) (79,177)
---------- ---------- -----------
Loss before extraordinary loss............................................... (38,375) (43,044) (99,000)
Extraordinary loss on debt prepayment...................................... -- -- (28,304)
---------- ---------- -----------
Net loss..................................................................... (38,375) (43,044) (127,304)
Dividends on redeemable convertible preferred stock........................ -- -- (3,301)
---------- ---------- -----------
Net loss attributable to common stockholders................................. $ (38,375) $ (43,044) $ (130,605)
---------- ---------- -----------
---------- ---------- -----------
Loss per common share, basic and diluted:
Before extraordinary item................................................ $ (2.47) $ (1.90) $ (4.44)
From extraordinary item.................................................. $ -- $ -- $ (1.23)
---------- ---------- -----------
Net loss attributable to common stockholders............................. $ (2.47) $ (1.90) $ (5.67)
---------- ---------- -----------
---------- ---------- -----------
Weighted average common shares outstanding................................. 15,514 22,620 23,054
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net loss..................................................................... $ (38,375) $ (43,044) $ (127,304)
Foreign currency translation adjustments................................... (698) (4,494) (890)
---------- ---------- -----------
Comprehensive loss........................................................... $ (39,073) $ (47,538) $ (128,194)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF CLASS A ACCUMULATED
COMMON COMMON CLASS A ADDITIONAL OTHER
STOCK STOCK COMMON COMMON PAID-IN UNEARNED COMPREHENSIVE
SHARES SHARES STOCK STOCK CAPITAL COMPENSATION LOSS
------------ ----------- ----------- ----------- ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 10,736,135 2,904,846 $ 107 $ 29 $ 30,099 $ (78) $ (164)
Issuance of restricted
common stock........... 66,666 -- 1 -- 389 (52) --
Issuance of common stock,
net of $9,541,954 issue
costs.................. 8,667,000 -- 87 -- 94,375 -- --
Conversion of Class A
common stock to common
stock.................. 2,904,846 (2,904,846) 29 (29) -- -- --
Stock options exercised.. 138,579 -- 1 -- 373 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (698)
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1996................... 22,513,226 -- 225 -- 125,236 (130) (862)
Stock options exercised.. 122,041 -- 1 -- 425 -- --
Earned compensation...... -- -- -- -- -- 65 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (4,494)
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1997................... 22,635,267 -- 226 -- 125,661 (65) (5,356)
Stock options exercised.. 174,198 -- 2 -- 945 -- --
Issuance costs of Series
A Redeemable
Convertible Preferred
Stock.................. -- -- -- -- (1,620) -- --
Issuance of common stock
related to business
purchase............... 375,000 -- 4 -- 3,371 -- --
Earned compensation...... -- -- -- -- -- 65 --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (890)
Dividends on redeemable
convertible preferred
stock.................. -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- --
------------ ----------- ----- --- ----------- ----- --------------
Balance at December 31,
1998................... 23,184,465 -- $ 232 $ -- $ 128,357 $ -- $ (6,246)
------------ ----------- ----- --- ----------- ----- --------------
------------ ----------- ----- --- ----------- ----- --------------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- -------------
<S> <C> <C>
Balance at January 1,
1996................... $ (47,611) $ (17,618)
Issuance of restricted
common stock........... -- 338
Issuance of common stock,
net of $9,541,954 issue
costs.................. -- 94,462
Conversion of Class A
common stock to common
stock.................. -- --
Stock options exercised.. -- 374
Foreign currency
translation
adjustment............. -- (698)
Net loss................. (38,375) (38,375)
------------- -------------
Balance at December 31,
1996................... (85,986) 38,483
Stock options exercised.. -- 426
Earned compensation...... -- 65
Foreign currency
translation
adjustment............. -- (4,494)
Net loss................. (43,044) (43,044)
------------- -------------
Balance at December 31,
1997................... (129,030) (8,564)
Stock options exercised.. -- 947
Issuance costs of Series
A Redeemable
Convertible Preferred
Stock.................. -- (1,620)
Issuance of common stock
related to business
purchase............... -- 3,375
Earned compensation...... -- 65
Foreign currency
translation
adjustment............. -- (890)
Dividends on redeemable
convertible preferred
stock.................. (3,301) (3,301)
Net loss................. (127,304) (127,304)
------------- -------------
Balance at December 31,
1998................... $ (259,635) $ (137,292)
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (38,375) $ (43,044) $ (127,304)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 4,802 7,717 16,268
Accreted interest expense on long term debt................................ 10,783 12,479 35,417
Provision for losses on accounts receivable................................ 2,225 2,733 4,225
Extraordinary loss on debt repayment....................................... -- -- 28,304
Earned compensation........................................................ 338 65 65
Changes in assets and liabilities:
Increase in accounts receivable............................................ (6,058) (6,221) (20,302)
Increase in accrued interest expense on Senior Notes....................... -- -- 11,969
Increase in prepaid expenses and other receivables......................... (1,384) (3,482) (8,291)
Increase in other assets and intangible assets............................. (315) (1,022) (12,625)
Increase in accrued telecommunications costs, accounts payable, and other
accrued expenses......................................................... 1,653 8,250 11,956
----------- ----------- -----------
Net cash used in operating activities.................................... (26,331) (22,525) (60,318)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, equipment and software............................... (9,423) (34,190) (94,674)
Payment for business acquired excluding cash acquired of $364.............. -- -- (5,000)
Purchase of marketable securities.......................................... (30,571) (49,098) (310,625)
Proceeds from maturity of marketable securities............................ 38,807 40,124 60,307
Investment in affiliate.................................................... (102) -- --
Issuance of notes receivable............................................... (303) -- --
----------- ----------- -----------
Net cash used in investing activities...................................... (1,592) (43,164) (349,992)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long term debt................................... -- -- 845,752
Proceeds from issuance of redeemable convertible preferred stock........... -- -- 42,198
Prepayment of senior discount notes........................................ -- -- (119,282)
Deferred financing costs................................................... -- -- (31,547)
Proceeds from issuance of Common Stock..................................... 94,836 426 947
Borrowings on notes payable................................................ -- 11,121 --
Payments under capital leases.............................................. (64) (525) (5,480)
Repayment of notes payable and bank credit line............................ -- (336) (3,553)
Borrowings under bank credit line.......................................... -- 600 --
----------- ----------- -----------
Net cash provided by financing activities.................................. 94,772 11,286 729,035
----------- ----------- -----------
Effects of exchange rate changes on cash....................................... 12 (297) --
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........................... 66,861 (54,700) 318,725
Cash and cash equivalents at beginning of year................................. 8,935 75,796 21,096
----------- ----------- -----------
Cash and cash equivalents at end of year....................................... $ 75,796 $ 21,096 $ 339,821
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Interest paid................................................................ $ 65 $ 134 $ 31,560
----------- ----------- -----------
----------- ----------- -----------
Assets acquired under capital lease obligations.............................. $ 310 $ 1,122 $ 30,359
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Viatel, Inc. (the "Company") is an international facilities-based global
provider of communications services offering international and domestic long
distance telecommunications services, primarily to small and medium-sized
businesses, carriers and resellers. The Company operates a pan-European
communication network with international gateway switching centers in New York
and London and network points of presence throughout Western Europe. The Company
is constructing a fiber optic ring which will connect five European countries
(the "Circe Network").
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. Investments in affiliates in
which the Company has significant influence but does not exercise control are
accounted for under the equity method.
(C) CASH AND CASH EQUIVALENTS
The Company's policy is to maintain its uninvested cash at minimum levels.
Unrestricted cash equivalents, which include highly liquid debt instruments
purchased with a maturity of three months or less, were $8.2 million and $278.9
million at December 31, 1997 and 1998, respectively.
(D) REVENUE
The Company records communication services revenue as earned, at the time
services are provided. Network capacity sales are recorded at the time the
capacity is provided to the customer.
(E) PROPERTY AND EQUIPMENT
Property and equipment consist principally of telecommunications related
equipment such as switches, fiber optic cable systems, remote nodes and related
computer software and is stated at cost. Assets acquired under capital leases
are stated at the present value of the future minimum lease payments.
Maintenance and repairs are expensed as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are amortized over
the life of the lease or useful life of the improvement, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Communications systems....................................... 5 to 7 years
Fiber optic cable systems.................................... 15 years
Leasehold improvements....................................... 2 to 5 years
Furniture, equipment and other............................... 5 years
</TABLE>
(F) INTANGIBLE ASSETS
Deferred financing and registration fees represent costs incurred to issue
and register debt and are being amortized over the term of the related debt.
F-8
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Licenses issued by governing bodies are being amortized over the lesser of
25 years or the term of the license.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefitted, five to seven years.
Acquired employee base and sales force in place represents the intangible
assets associated with the acquisition of independent sales organizations and is
being amortized over three years.
The costs of all other intangible assets are being amortized over their
useful lives, ranging from three to seven years.
(G) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(H) FOREIGN CURRENCY TRANSLATION
Foreign currency assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency assets and
liabilities into U.S. dollars are accumulated as part of the foreign currency
translation adjustment in stockholders' equity. Gains and losses from foreign
currency transactions are included in selling, general and administrative
expenses in the period in which they occur. For the years ending December 31,
1996, 1997 and 1998, the Company experienced no material exchange transaction
gains or losses.
(I) NET LOSS PER SHARE
Basic earnings per share ("EPS") is computed by dividing income or loss
attributable to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise or conversion of securities into common stock.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1996, 1997 and 1998.
The Company had potentially dilutive common stock equivalents of 1.0
million, 1.1 million and 7.2 million for the years ended December 31, 1996, 1997
and 1998, respectively. These common stock equivalents were not included in the
computation of diluted net loss per common share because they were antidilutive
for the periods presented.
(J) CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of temporary cash investments and trade
receivables. The Company restricts investment of
F-9
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
temporary cash investments to financial institutions with high credit standing.
The Company does not believe there is any concentration of credit risk on trade
receivables as a result of the large and diverse nature of the Company's
worldwide customer base.
During 1998, one customer, LD Exchange.com, accounted for 10.6% of the
Company's revenues.
(K) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(M) ADDITIONAL ACCOUNTING POLICIES
Additional accounting policies are incorporated into the notes herein.
(N) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123 which allows entities to
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method, as defined in SFAS No. 123, had been applied. The
Company has elected to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure required by SFAS No. 123. See Note 12.
(O) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(2) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to maturity
or available for sale. These investments are diversified among high credit
quality securities in accordance with the Company's investment policy.
F-10
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(2) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
Debt securities that the Company has both the intent and ability to hold to
maturity are carried at amortized cost. Debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale. Securities available for sale are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of stockholders' equity. The Company does not invest in securities for
the purpose of trading and as such does not classify any securities as trading.
The cost of debt securities classified as held to maturity are adjusted for
amortization of premiums and accretion of discounts to maturity over the
estimated life of the security. Such amortization and accretion are included in
interest income. There were no securities classified as held to maturity as of
December 31, 1997 and no securities classified as available for sale as of
December 31, 1998.
The following is a summary of the amortized cost, which approximates fair
value of restricted securities held to maturity at December 31, 1998 (in
thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations......................................... $ 105,508
German government obligations..................................... 28,705
---------
Total......................................................... $ 134,213
---------
---------
</TABLE>
The following is a summary of the amortized cost, which approximates fair
value of securities held to maturity at December 31, 1998 (in thousands):
<TABLE>
<S> <C>
European corporate debt securities................................ $ 122,299
U.S. corporate debt securities.................................... 49,472
---------
Total......................................................... $ 171,771
---------
---------
</TABLE>
The following is a summary of the fair value of securities available for
sale at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations.......................................... $ 2,028
Corporate debt securities.......................................... 13,482
Federal agencies obligations....................................... 10,537
---------
Total.......................................................... $ 26,047
---------
---------
</TABLE>
Unrealized gains or losses on securities classified as available for sale
are not material at December 31, 1997.
The amortized cost, which approximates fair value, of restricted securities
held to maturity at December 31, 1998 are shown below (in thousands):
<TABLE>
<S> <C>
Due within one year............................................... $ 50,870
Due after one year through two years.............................. 54,328
Due after two years............................................... 29,015
---------
Total......................................................... $ 134,213
---------
---------
</TABLE>
F-11
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(2) INVESTMENTS IN DEBT SECURITIES (CONTINUED)
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Communications system..................................................................... $ 43,322 $ 70,971
Construction in progress.................................................................. 10,094 172,630
Fiber optic cable systems................................................................. 1,432 25,222
Furniture, equipment and other............................................................ 8,924 16,450
Leasehold improvements.................................................................... 3,254 6,651
---------- ----------
67,026 291,924
Less accumulated depreciation and amortization............................................ 12,932 25,668
---------- ----------
$ 54,094 $ 266,256
---------- ----------
---------- ----------
</TABLE>
At December 31, 1997, construction in progress represents a portion of the
expansion of the Company's European network. At December 31, 1998, construction
in progress represents construction of the Circe Network. For the years ended
December 31, 1996, 1997 and 1998, $0.1 million, $0.2 million and $3.3 million of
interest was capitalized.
The Company trades indefeasible rights-of-use or capacity on the Circe
Network for indefeasible rights-of-use or capacity on other cable systems. These
trades of indefeasible rights-of-use or capacity are accounted for as
non-monetary exchanges and did not have a material effect on the Company's
statement of operations.
At December 31, 1998, the Company has entered into a letter of intent with
Metromedia Fiber Networks, Inc. and Carrier 1, Inc. to jointly construct the
civil works associated with a national communications networks being constructed
by each party in Germany. As part of the letter of intent, Metromedia Fiber
Networks, Inc. and Carrier 1, Inc. were required to place in escrow with the
Company an amount of $9.3 million which is included in restricted cash
equivalents in the accompanying consolidated balance sheets. In February 1999,
the parties entered into a definitive agreement which required each party to
supply a standby letter of credit to cover the construction costs related to
their portion of the network.
F-12
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(4) INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred financing and registration costs................................................... $ 3,789 $ 31,547
Licenses, trademarks and servicemarks....................................................... 464 10,031
Goodwill.................................................................................... 474 8,744
Purchased software.......................................................................... 1,494 1,859
Acquired employee base and sales force in place............................................. 1,607 --
Other....................................................................................... 385 206
--------- ---------
8,213 52,387
Less accumulated amortization............................................................... 3,875 5,419
--------- ---------
$ 4,338 $ 46,968
--------- ---------
--------- ---------
</TABLE>
(5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accounts payable............................................................................ $ 6,231 $ 5,566
Accrued expenses............................................................................ 3,253 16,224
Accrued compensation and benefits........................................................... 1,269 1,866
--------- ---------
$ 10,753 $ 23,656
--------- ---------
--------- ---------
</TABLE>
(6) LINE OF CREDIT AND LETTERS OF CREDIT
The Company has a revolving line of credit agreement which provides for
secured borrowings of up to $11.2 million. Borrowings under this line of credit
agreement can be made under either of the following interest rate formulas: (i)
the lending institution's prime rate or (ii) the LIBOR rate plus two hundred
basis points. The Company had $0.6 million in borrowings under the line of
credit agreement at December 31, 1997 and no borrowings under the line of credit
agreement at December 31, 1998. The terms of the line of credit agreement
include, among other provisions, requirements for maintaining defined levels of
securities and other liquid collateral. At December 31, 1998, standby letters of
credit of approximately $3.3 million have been issued under this line of credit
agreement.
In connection with the Company's joint construction of the civil works
associated with national communications networks being constructed by each party
in Germany, in February 1999 the Company was required to obtain a letter of
credit of approximately $123 million (DM219.1 million) in support of its
obligations.
The weighted-average interest rate on short-term borrowings under the line
of credit agreement at December 31, 1997 was 8.0%.
F-13
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(7) LONG-TERM LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
(A) LONG TERM DEBT AND REDEEMABLE CONVERTIBLE PREFERRED STOCK
On April 8, 1998, the Company completed an offering of units (the "Units
Offering") consisting of senior notes or senior discount notes due 2008 and
shares of 10% Series A Redeemable Convertible Preferred Stock due 2010 ("Series
A Preferred"), $.01 par value per share, of the Company and units consisting of
senior notes or senior discount notes due 2008 and subordinated convertible
debentures due 2011 (the "Subordinated Debentures") through which it raised
approximately $889.6 million of gross proceeds ($856.6 million of net proceeds).
The Company utilized $118.9 million of the proceeds from the Units Offering to
retire its 15% Senior Discount Notes due 2005 resulting in an extraordinary loss
of $28.3 million. Additionally, a portion of the proceeds from the Units
Offering were used to purchase approximately $122.8 million of U.S. government
securities which were pledged as security for the first six interest payments on
the U.S. dollar denominated senior notes and approximately $30.6 million of
German government obligations which were pledged as security for the first six
interest payments on the Deutsche Mark denominated senior notes issued in the
Units Offering. The senior discount notes accrete through April 15, 2003 and
interest becomes payable in cash in semi-annual installments thereafter. The
interest on the senior notes is payable in semi-annual installments. The Series
A Preferred and the subordinated convertible debentures require quarterly
payments which are paid in additional securities, cash or any combination
thereof through April 15, 2003 and payable in cash thereafter. The Series A
Preferred and the subordinated convertible debentures are mandatorily
convertible in the event the closing price of the Company's common stock exceeds
certain predetermined annual price targets. The Series A Preferred and the
Subordinated Debentures conversion rates are $13.20 and DM24.473 ($14.58),
respectively. In addition, the terms of the Series A Preferred and Subordinated
Debentures provide for special dividends and special interest payments,
respectively, under certain conditions.
The indentures pursuant to which the senior notes and the senior discount
notes were issued contain certain covenants that, among other things, limit the
ability of the Company to incur additional indebtedness, pay dividends or make
certain other distributions, enter into transactions with stockholders and
affiliates and create liens on its assets. In addition, upon a change of
control, the Company is required to make an offer to purchase the senior notes
and the senior discount notes at a purchase price equal to 101% of the principal
amount, in the case of the senior notes, and 101% of the accreted value of the
notes, in the case of the senior discount notes. The indenture pursuant to which
the subordinated convertible debentures were issued also requires that the
Company offer to repurchase the debentures at 101% of the principal amount in
the event of a change of control.
On September 30, 1998, the Company consummated an offer to exchange senior
notes and senior discount notes due 2008 which have been registered under the
Securities Act of 1933, as amended, for outstanding notes of each such series
which were not registered under the Securities Act of 1933, as amended.
F-14
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(7) LONG-TERM LIABILITIES AND REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Long term debt consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
11.25% Senior Notes........................................................................ $ -- $ 400,000
11.15% Senior Notes (DM178,000)............................................................ -- 106,015
12.50% Senior Discount Notes, less discount of $202,716.................................... -- 297,284
12.40% Senior Discount Notes (DM134,916), less discount of $54,249
(DM91,084)............................................................................... -- 80,355
10% Subordinated Convertible Debentures (DM21,573)......................................... -- 12,849
15% Senior Discount Notes, less discount of $30,845........................................ 89,855 --
--------- ----------
$ 89,855 $ 896,503
--------- ----------
--------- ----------
</TABLE>
(B) EQUIPMENT FINANCING
In November and December 1997, the Company entered into Loan and Security
Agreements, as amended, with Charter Financial, Inc. ("Charter") pursuant to
which the Company borrowed an aggregate of $11.1 million, of which $7.8 million
was outstanding as of December 31, 1998. Repayment of these loans commenced in
December 1997 and January 1998 and are repayable in thirty-two or thirty-six
successive monthly installments respectively. Under the terms of these
arrangements, the Company is required to satisfy certain EBITDA and unrestricted
cash requirements. As of December 31, 1998, the Company was either in compliance
with, or had received waivers to, these covenants. Obligations under these Loan
and Security Agreements are secured by the grant to Charter of a security
interest in certain designated telecommunications equipment. A portion of the
payment obligations under these borrowing arrangements are also secured by
letters of credit.
(8) STOCKHOLDERS' EQUITY
On October 23, 1996, the Company completed an initial public offering
("IPO") of its Common Stock, through which it sold 8,667,000 shares of Common
Stock at $12 a share and raised approximately $104 million of gross proceeds
($94.5 million of net proceeds).
In connection with the IPO, all shares of then Class A Common Stock were
converted into shares of Common Stock at a ratio of one-to-one and all then
outstanding shares of Common Stock were subject to a reverse stock split at a
ratio of 3-to-2. In addition, the Company's stockholders approved an amendment
to the Company's Certificate of Incorporation which (i) authorized the Board of
Directors to issue up to two million shares of Preferred Stock, $.01 par value
per share, of which no shares were issued and outstanding at December 31, 1996,
in one or more series and to fix the powers, voting rights, designations and
preferences of each series and (ii) eliminated the Class A Common Stock.
All earnings per share and share data presented herein reflect the
conversion of the Class A Common Stock into Common Stock and the reverse stock
split of all then outstanding shares of Common Stock.
(9) ACQUISITION
On February 27, 1998, the Company acquired Flat Rate Communications, Inc.
("Flat Rate"), a long distance telecommunications reseller, for $5.0 million of
cash, 375,000 shares of Common Stock
F-15
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(9) ACQUISITION (CONTINUED)
and a contingent payment based upon key operating performance targets for the
twelve month period ending February 28, 1999 which will range from zero to $21.0
million in cash and zero to 1.0 million shares of Common Stock. The Company
recorded the acquisition under the purchase method of accounting. The purchase
price has been allocated to the assets acquired and liabilities assumed, based
upon the estimated fair values at the date of acquisition. The excess purchase
price was $8.3 million and will be amortized on a straight line basis over a
five-year period. If the acquisition had occurred on January 1, 1996 (i)
communication services revenue for the years 1996, 1997 and 1998 would have been
$53.4 million, $101.8 million and $138.5 million, respectively, (ii) loss before
extraordinary loss for 1998 would have been $(98.9) million, (iii) net loss
attributable to common stockholders for the years 1996, 1997 and 1998 would have
been $(38.5) million, $(42.8) million and $(130.5) million, respectively and
(iv) net loss per common share for the years 1996, 1997 and 1998 would have been
$(2.43), $(1.86) and $(5.65), respectively.
(10) INCOME TAXES
The statutory Federal tax rates for the years ended December 31, 1996, 1997
and 1998 were 35%. The effective tax rates were zero for the years ended
December 31, 1996, 1997 and 1998 due to the Company incurring net operating
losses for which no tax benefit was recorded.
For Federal and foreign income tax purposes, the Company has unused net
operating loss carryforwards of approximately $218.8 million expiring in 2007
through 2018. The availability of the net operating loss carryforwards to offset
income in future years is restricted as a result of the Company's issuance of
its Common Stock and may be further restricted as a result of future sales of
Company stock and other events.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1997 1998
---------- ----------
Accounts receivable principally due to
allowance for doubtful accounts..................................... $ 587 $ 1,506
OID Interest not deductible in current period......................... 11,149 11,125
Federal net operating loss carryforwards.............................. 29,093 68,579
Foreign net operating loss carryforwards.............................. 3,777 7,989
---------- ----------
Total gross deferred tax assets................................. 44,606 89,199
Less valuation allowance.............................................. (44,606) (89,199)
---------- ----------
Net deferred tax assets......................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. During 1997 and 1998, the
valuation allowance increased by $14.7 million and $44.6 million, respectively.
F-16
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(11) SEGMENT AND GEOGRAPHIC DATA
All of the Company's operations are in a single industry segment,
communications services. While the Company's chief decision maker monitors the
revenue streams of the various products and geographic locations, operations are
managed and financial performance is evaluated based on the delivery of
multiple, integrated services to customers over a single network. As a result,
there are many shared expenses generated by the various revenue streams and
management believes that any allocation of the expenses incurred to multiple
revenue streams or geographic locations would be impractical and arbitrary.
Management does not currently make such allocations internally.
The Company groups its products and services by two customers types,
wholesale and retail. The information below summarizes communication services
revenue by customer type (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Wholesale....................................................................... $ 9,516 $ 20,397 $ 78,777
Retail.......................................................................... 40,903 52,621 56,411
--------- --------- ----------
Consolidated.................................................................... $ 50,419 $ 73,018 $ 135,188
--------- --------- ----------
--------- --------- ----------
</TABLE>
The information below summarizes communication services revenue by
geographic area (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- --------- ----------
<S> <C> <C> <C>
Western Europe................................................................. $ 19,917 $ 32,647 $ 62,946
North America.................................................................. 9,516 15,936 56,172
Latin America.................................................................. 14,402 16,240 14,653
Asia/Pacific Rim and other..................................................... 6,584 8,195 1,417
---------- --------- ----------
Consolidated................................................................. $ 50,419 $ 73,018 $ 135,188
---------- --------- ----------
---------- --------- ----------
</TABLE>
The information below summarizes long lived assets by geographic area (in
thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Western Europe............................................................................. $ 32,640 $ 237,443
North America.............................................................................. 25,626 75,492
Latin America.............................................................................. 166 289
--------- ----------
Consolidated............................................................................... $ 58,432 $ 313,224
--------- ----------
--------- ----------
</TABLE>
(12) STOCK OPTION PLAN
During 1993, the Board of Directors approved the 1993 Flexible Stock
Incentive Plan, as amended (the "Stock Incentive Plan") under which
"non-qualified" stock options ("NQSOs") to acquire shares of Common Stock may be
granted to employees, directors and consultants of the Company and "incentive"
stock options ("ISOs") to acquire shares of Common Stock may be granted to
employees, including non-employee directors. The Stock Incentive Plan also
provides for the grant of stock appreciation rights ("SARs") and shares of
restricted stock to the Company's employees, directors and consultants.
The Stock Incentive Plan provides for the issuance of up to a maximum of
4,166,666 shares of Common Stock and is currently administered by the
Compensation Committee of the Board of Directors. Under the Stock Incentive
Plan, the option price of any ISO may not be less than the fair
F-17
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(12) STOCK OPTION PLAN (CONTINUED)
market value of a share of Common Stock on the date on which the option is
granted. The option price of an NQSO may be less than the fair market value on
the date the NQSO is granted if the Board of Directors so determines. An ISO may
not be granted to a "ten percent stockholder" (as such term is defined in
Section 422A of the Internal Revenue Code) unless the exercise price is at least
110% of the fair market value of the Common Stock and the term of the option may
not exceed five years from the date of grant. Common Stock subject to a
restricted stock purchase or bonus agreement is transferable only as provided in
such agreement. The maximum term of each stock option granted to persons other
than ten percent stockholders is ten years from the date of grant.
The per share weighted average fair value of stock options granted during
1996, 1997 and 1998 was $2.29, $5.99 and $6.40, respectively, on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: (1) a risk free interest rate of 5.5% in 1996 and 1997 and 5.0% in
1998, (2) an expected life of 10 years for all years, (3) volatility of
approximately 35.9% for 1996, 52.2% for 1997 and 92.7% for 1998 and (4) an
annual dividend yield of 0% for all years.
The Company applies the provisions of APB Opinion No. 25 in accounting for
its Stock Incentive Plan and, accordingly, no compensation cost has been
recognized for its stock options in the financial statements since the exercise
price was equal to or greater than the fair market value at the date of grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net loss, as reported (in thousands)..................... $ (38,375) $ (43,044) $ (130,605)
Net loss, pro forma (in thousands)....................... (38,986) (44,171) (135,458)
Net loss per common share, as reported................... (2.47) (1.90) (5.67)
Net loss per common share, pro forma..................... (2.51) (1.95) (5.88)
</TABLE>
Pro forma net loss reflects only options granted since January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net loss amounts because
compensation cost is reflected over the options' vesting period of three years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
F-18
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(12) STOCK OPTION PLAN (CONTINUED)
Stock option activity under the Stock Incentive Plan is shown below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
EXERCISE SHARES
PRICES (IN THOUSANDS)
----------- ---------------
<S> <C> <C>
Outstanding at January 1, 1996.......................................................... 4.01 474
Granted................................................................................. 6.75 823
Forfeited............................................................................... 5.77 (188)
Exercised............................................................................... 2.70 (139)
----- ------
Outstanding at December 31, 1996........................................................ 6.18 970
Granted................................................................................. 8.61 428
Forfeited............................................................................... 6.68 (197)
Expired................................................................................. 5.46 (27)
Exercised............................................................................... 3.49 (122)
----- ------
Outstanding at December 31, 1997........................................................ 7.40 1,052
Granted................................................................................. 7.19 1,794
Forfeited............................................................................... 7.14 (64)
Expired................................................................................. 5.05 (14)
Exercised............................................................................... 5.44 (174)
----- ------
Outstanding at December 31, 1998........................................................ 7.41 2,594
----- ------
----- ------
</TABLE>
The following table summarizes weighted-average option exercise price
information:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER
OUTSTANDING AT WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF DECEMBER 31, AVERAGE AVERAGE EXERCISABLE AT AVERAGE
EXERCISE 1998 REMAINING EXERCISE DECEMBER 31, 1998 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- -------------------------------- --------------- ---------- ----------- --------------------- -----------
$0.75 - $3.50 2 5 Years 0.75 2 0.75
3.51 - 5.75 999 9 Years 5.22 19 3.74
5.76 - 8.75 552 8 Years 6.17 291 5.90
8.76 - 12.00 1,041 9 Years 10.13 148 10.22
----- ----- --- -----
2,594 7.41 460 7.18
----- ----- --- -----
----- ----- --- -----
</TABLE>
Prior to the adoption of the Stock Incentive Plan, 5,913 options were
granted. These options were exercised at $0.75 per share during the year ended
December 31, 1996.
The exercise price of all options approximates the fair market value of the
Common Stock on the date of grant.
In addition, prior to the adoption of the Stock Incentive Plan, the Board of
Directors authorized the issuance of up to 233,333 shares of Common Stock as
compensation to employees and consultants of the Company of which 219,639 are
available for issuance at December 31, 1998.
F-19
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(13) COMMITMENTS AND CONTINGENCIES
(A) LEASES
At December 31, 1998, the Company was committed under non-cancelable
operating and capital leases for the rental of office space, network locations
and for fiber optic cable systems.
The Company's future minimum capital and operating lease payments are as
follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1999.................................................................... $ 6,890 $ 3,917
2000.................................................................... 6,952 4,277
2001.................................................................... 4,372 4,206
2002.................................................................... 1,635 4,263
2003.................................................................... 1,635 4,231
Thereafter.............................................................. 32,692 28,853
--------- -----------
54,176 $ 49,747
-----------
-----------
Less interest costs..................................................... 28,453
---------
$ 25,723
---------
---------
</TABLE>
Total rent expense amounted to $1.5 million, $1.3 million and $1.8 million
for the years ended December 31, 1996, 1997 and 1998, respectively.
(B) CARRIER CONTRACTS
The Company has entered into contracts to purchase transmission capacity
from various domestic and foreign carriers. By committing to purchase minimum
volumes of transmission capacity from carriers, the Company is able to obtain
guaranteed rates which are more favorable than those generally offered in the
marketplace. The minimum volume commitments are approximately $13.2 million for
the year ending December 31, 1999. The Company is involved in disputes with
carriers arising in the ordinary course of business. The Company believes the
outcome of all current disputes will not have a material effect on the Company's
financial position or results of operations.
(C) PURCHASE COMMITMENTS
The Company is continually upgrading and expanding its network and its
switching facilities. In connection therewith, the Company has entered into
purchase commitments to expend approximately $38.2 million.
The Company is developing a fiber-optic ring which will connect over 30
cities in Western Europe (the "Circe Network"). In connection with the Circe
Network, the Company has entered into purchase commitments to expend
approximately $130.6 million.
(D) EMPLOYMENT CONTRACTS
The Company has employment contracts with certain officers at amounts
generally equal to such officers' current levels of compensation. The Company's
remaining commitments at December 31, 1998 for the next three years under such
contracts aggregates approximately $1.4 million.
F-20
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996, 1997 AND 1998
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(E) LITIGATION
From time to time, the Company is subject to litigation in the normal course
of business. The Company believes that any adverse outcome from litigation would
not have a material adverse effect on its financial position or results of
operations.
(14) REGULATORY MATTERS
The Company is subject to regulation in countries in which it does business.
The Company believes that an adverse determination as to the permissibility of
the Company's services under the laws and regulations of any such country would
not have a material adverse long-term effect on its business.
(15) RELATED PARTY TRANSACTIONS
During 1998, the Company entered into an agreement with Cignal Global
Communications, Inc. ("Cignal"), pursuant to which the Company sold
transatlantic capacity. Consideration received was in the form of 650,000 shares
of Cignal's common stock. The Company recognized $3.25 million of revenue, the
fair value of the transatlantic capacity. In addition, the Company agreed to
sell capacity on the Circe Network in exchange for an additional 350,000 shares
of Cignal's common stock. Pending delivery of the capacity to Cignal, these
350,000 shares are being held in escrow. The Company's Chairman and Chief
Executive Officer is a director of Cignal.
On June 3, 1998, the Company entered into a Mutual Cooperation Agreement
with Martin Varsavsky, a greater than ten percent stockholder of the Company,
and Jazz Telecom S.A. pursuant to which the parties made certain agreements
including the following: (1) subject to Jazz Telecom S.A. completing a high
yield offering with net proceeds to Jazz Telecom S.A. of at least $100 million
(the "Offering Condition"), the Company and Jazz Telecom S.A. agreed to use
commercially reasonable efforts to execute and deliver a construction agreement
no later than January 1, 1999 to construct a fiber optic submarine cable system
between Spain and the United Kingdom, (2) subject to the Offering Condition the
Company agreed to purchase $6.0 million of Jazz Telecom S.A. common stock, (3)
the Company and Jazz Telecom S.A. agreed to the purchase from the other
international switched minutes and to transmit at least one-third of our Spanish
domestic switched minute traffic over Jazz Telecom S.A.'s network, assuming the
prices charged by Jazz Telecom S. A. are competitive, (4) the Company and Jazz
Telecom S.A. agreed to sell capacity to each other for fixed prices, (5) Mr.
Varsavsky agreed to lock-up his Viatel shares for a specified period, (6) the
Company agreed to release any past claims which the Company had against either
Jazz Telecom S.A. and Mr. Varsavsky in exchange for their respective release of
any claims against the Company and (7) Mr. Varsavsky agreed to pay the Company
liquidated damages in the event that he violates certain provisions of the
agreement. The Company and Jazz Telecom S.A. are currently in discussions to
certain modifications to the terms of the Mutual Corporation Agreement.
On November 13, 1998, Mr. Varsavsky entered into an additional lock-up
agreement with us pursuant to which Mr. Varsavsky agreed that he would not sell,
contract to sell, announce an intention to sell, pledge or otherwise dispose of
his shares of our common stock, either directly or indirectly, without the prior
written consent of the Company until after August 12, 1999.
F-21
<PAGE>
VIATEL , INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 536,659
Restricted cash equivalents...................................................................... 11,987
Restricted marketable securities, current........................................................ 90,308
Trade accounts receivable, net of allowance for doubtful accounts of $2,983...................... 44,520
Other receivables................................................................................ 28,354
Prepaid expenses................................................................................. 7,999
-------------
Total current assets........................................................................... 719,827
-------------
Restricted marketable securities, non-current...................................................... 94,285
Property and equipment, net........................................................................ 587,903
Cash securing letters of credit for network construction........................................... 112,404
Intangible assets, net............................................................................. 68,349
Other assets....................................................................................... 11,744
-------------
$ 1,594,512
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accrued telecommunications costs................................................................. $ 46,563
Accounts payable and other accrued expenses...................................................... 21,910
Property and equipment purchases payable......................................................... 202,282
Accrued interest................................................................................. 23,368
Liability under joint construction agreement..................................................... 3,266
Current installments of notes payable and obligations under capital leases....................... 11,101
-------------
Total current liabilities...................................................................... 308,490
-------------
Long-term liabilities:
Long- term debt.................................................................................. 1,240,487
Notes payable and obligations under capital leases, excluding current installments............... 32,929
-------------
Total long-term liabilities.................................................................... 1,273,416
-------------
Commitments and contingencies
Stockholders' equity:
Common Stock, $.01 par value. Authorized 150,000,000 shares, issued and outstanding 32,586,190
shares......................................................................................... 326
Additional paid-in capital....................................................................... 389,754
Unearned compensation............................................................................ (6,442)
Accumulated other comprehensive loss............................................................. (27,461)
Accumulated deficit.............................................................................. (343,571)
-------------
Total stockholders' equity..................................................................... 12,606
-------------
$ 1,594,512
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
Revenue:
Communication services revenue............................................................ $ 48,990 $ 96,243
Capacity sales............................................................................ -- 34,102
---------- ----------
Total revenue....................................................................... 48,990 130,345
---------- ----------
Operating expenses:
Cost of services and sales.............................................................. 44,201 103,607
Selling, general and administrative..................................................... 19,388 39,853
Depreciation and amortization........................................................... 7,037 21,582
---------- ----------
Total operating expenses............................................................ 70,626 165,042
---------- ----------
Other income (expense):
Interest income......................................................................... 9,813 13,766
Interest expense........................................................................ (26,331) (61,665)
---------- ----------
Loss before extraordinary loss............................................................ (38,154) (82,596)
Extraordinary loss on debt prepayment................................................... (28,304) --
---------- ----------
Net loss.................................................................................. (66,458) (82,596)
Dividend on redeemable convertible preferred stock...................................... (1,010) (1,341)
---------- ----------
Net loss attributable to common stockholders.............................................. $ (67,468) $ (83,937)
---------- ----------
---------- ----------
Loss per common share, basic and diluted:
Before extraordinary item............................................................... $ (1.71) $ (3.42)
From extraordinary item................................................................. (1.23) --
---------- ----------
Net loss attributable to common stockholders.............................................. $ (2.94) $ (3.42)
---------- ----------
---------- ----------
Weighted average common shares outstanding, basic and diluted............................. 22,940 24,524
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
<S> <C> <C>
1998 1999
----------- -----------
Cash flows from operating activities:
Net loss.............................................................................. $ (66,458) $ (82,596)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization....................................................... 7,037 21,582
Accreted interest expense on long term debt......................................... 25,517 20,935
Provision for losses on accounts receivable......................................... 1,955 4,036
Extraordinary loss on debt prepayment............................................... 28,305 --
Earned compensation................................................................. 33 108
Changes in assets and liabilities:
Increase in accounts receivable and accrued interest................................ (14,730) (16,588)
Increase in accrued interest expense on Senior Notes................................ -- 11,129
(Increase) decrease in prepaid expenses and other receivables....................... 3,502 (25,478)
Increase in other assets and intangible assets...................................... (440) (901)
Increase in accrued telecommunication costs, accounts payable and other accrued
expenses.......................................................................... 7,471 12,842
----------- -----------
Net cash used in operating activities............................................. (7,808) (54,931)
----------- -----------
Cash flows from investing activities:
Purchase of property, equipment and software.......................................... (12,721) (225,864)
Payment for business acquired, net of cash acquired................................... (5,000) (12,000)
Purchase of marketable securities..................................................... (159,264) (219,725)
Proceeds from maturity of marketable securities....................................... 30,085 299,049
Cash securing letters of credit....................................................... -- (112,404)
Issuance of notes receivable.......................................................... -- (4,498)
----------- -----------
Net cash used in investing activities............................................. (146,900) (275,442)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of senior notes and senior discount notes...................... 834,703 365,471
Proceeds from issuance of convertible debentures and convertible preferred stock...... 53,246 --
Repayment of senior discount notes.................................................... (119,282) --
Deferred financing costs.............................................................. (31,547) (12,880)
Proceeds from issuance of Common Stock................................................ 623 194,150
Repayment of notes payable and bank credit line....................................... (2,033) (1,615)
Payments under capital leases......................................................... (137) (2,241)
----------- -----------
Net cash provided by financing activities......................................... 735,573 542,885
----------- -----------
Effects of exchange rate changes on cash................................................ 131 (3,688)
----------- -----------
Net increase in cash and cash equivalents............................................... 580,996 208,824
Cash and cash equivalents at beginning of period........................................ 21,096 339,822
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 602,092 $ 548,646
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Interest paid......................................................................... $ 673 $ 28,651
----------- -----------
----------- -----------
Assets acquired under capital lease obligations....................................... -- $ 13,550
----------- -----------
----------- -----------
Conversion of preferred stock and convertible debentures.............................. -- $ 60,791
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Viatel Inc. and subsidiaries (collectively, the "Company") is a global
integrated services provider of long distance communication and data services to
end users, carriers and resellers. The Company operates a pan-European network
with points of presence in 45 cities, direct sales forces in twelve Western
European cities and an indirect sales force in more than 180 locations in
Western Europe. The Company is currently constructing a series of interconnected
state-of-the-art, high quality, high capacity, self-healing fiber optic rings
utilizing the synchronous digital hierarchy standard for digital transmission
which will connect major cities in six European countries (the "Circe Network").
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements as of June 30, 1999 and for the
six-month periods ended June 30, 1998 and 1999, respectively, have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the consolidated financial position, results of operations
and cash flows for each period presented have been made on a consistent basis.
Certain information and footnote disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and regulations
although management believes that the disclosures herein are adequate to make
the information presented not misleading. It is suggested that these financial
statements be read in conjunction with the Company's annual consolidated
financial statements. Certain reclassifications have been made to the prior
years' condensed consolidated financial statements to conform to the current
year's presentation. Operating results for the three and six months ended June
30, 1999 may not be indicative of the results that may be expected for the full
year.
CAPACITY SALES
Customers of the Company can purchase capacity on the Company's network.
Revenues from the sale of network capacity are recognized in the period that the
rights and obligations of ownership transfer to the purchaser.
Cost of capacity sales in any period is determined based upon the ratio of
total capacity sold and total anticipated capacity to be utilized multiplied by
the related total costs of the relevant portion of the Company's network.
NEW PRONOUNCEMENTS
On January 1, 1999, the Company adopted Statement of Position 98-5 (SOP
98-5), "Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. SOP 98-5 requires that certain
start-up expenditures and organization costs previously capitalized must now be
expensed. The adoption of this statement did not have a material effect on our
consolidated financial statements.
F-25
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(3) INVESTMENTS IN DEBT SECURITIES
Management determines the appropriate classification of its investments in
debt securities at the time of purchase and classifies them as held to maturity
or available for sale. These investments are diversified among high credit
quality securities in accordance with the Company's investment policy. Debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. Debt securities for which the Company does not
have the intent or ability to hold to maturity are classified as available for
sale. Securities available for sale are carried at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. The Company does not invest in securities for the purpose
of trading and therefore does not classify any securities as trading.
Debt securities classified as held to maturity are adjusted for amortization
of premiums and accretion of discounts to maturity over the estimated life of
the security. Such amortization and interest are included in interest income.
There were no securities classified as available for sale as of June 30, 1999.
The following is a summary of the amortized cost, which approximates fair
value, of restricted securities held to maturity at June 30, 1999 (in
thousands):
<TABLE>
<S> <C>
U.S. Treasury obligations......................................... $ 129,351
German corporate obligations...................................... 55,242
---------
Total......................................................... $ 184,593
---------
---------
</TABLE>
The amortized cost, which approximates fair value, of restricted securities
held to maturity at June 30, 1999 are shown below (in thousands):
<TABLE>
<S> <C>
Due within one year............................................... $ 90,308
Due after one through two years................................... 94,285
---------
Total......................................................... $ 184,593
---------
---------
</TABLE>
There were no changes in the classification of any securities held to
maturity or securities available for sale from the time of purchase to the time
of maturity or sale.
F-26
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
Communication system.............................................................. $ 385,621
Construction in progress.......................................................... 212,179
Furniture, equipment and other.................................................... 20,106
Leasehold improvements............................................................ 8,611
----------
626,517
Less accumulated depreciation and amortization.................................... 38,614
----------
$ 587,903
----------
----------
</TABLE>
At June 30, 1999, construction in progress primarily represents construction
of the Circe Network. For the six month periods ended June 30, 1998 and 1999,
$0.9 million and $4.6 million, respectively, of interest was capitalized.
In connection with the Company's joint construction of the civil works
associated with a national communications network being constructed in Germany
during 1999, the Company was required to obtain a letter of credit in support of
its obligation. At June 30, 1999, the total amount outstanding relating to this
letter of credit was approximately $112.4 million (DM212.8 million).
(5) INTANGIBLE ASSETS
Intangible assets consist of the following as of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1999
---------
<S> <C>
Deferred financing and registration fees........................................... $ 44,427
Licenses, trademarks, and servicemarks............................................. 9,347
Goodwill........................................................................... 20,270
Purchased software................................................................. 3,524
Other.............................................................................. --
---------
77,568
Less accumulated amortization...................................................... 9,219
---------
$ 68,349
---------
---------
</TABLE>
During the first half of 1999, the Company recognized and paid its
obligation for contingent consideration for its 1998 acquisition of Flat Rate
based upon key operating performance targets being met during the period ended
March 31, 1999. Such contingent consideration has been recorded as goodwill.
F-27
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(6) LONG-TERM DEBT AND CONVERTIBLE SECURITIES
On March 19, 1999 the Company completed a high yield offering through which
it raised $365.5 million of gross proceeds ($352.6 million of net proceeds).
At June 30, 1999, the Company has aggregate long term debt consisting of
senior notes due 2008 and senior discount notes due 2009 which totals $1.3
billion. A portion of the proceeds from the senior notes were used to purchase
U.S. and German government securities which were pledged as security for the
first six and four interest payments on the senior notes due 2008 and 2009,
respectively. The amount of restricted securities remaining pledged as security
for these notes is $184.6 million. The senior discount notes accrete through
April 15, 2003 and interest becomes payable in cash in semi-annual installments
thereafter. The interest on the senior notes is payable in semi-annual
installments. The indentures pursuant to which the senior notes and the senior
discount notes were issued contain certain covenants that, among other things,
limit the ability of the Company to incur additional indebtedness, pay dividends
or make certain other distributions, enter into transactions with stockholders
and affiliates and create liens on its assets. In addition, upon a change of
control, the Company is required to make an offer to purchase the senior notes
and the senior discount notes at a purchase price equal to 101% of the principal
amount, in the case of the senior notes, and 101% of the accreted value of the
notes, in the case of the senior discount notes.
Long term debt consists of the following as of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1999
------------
<S> <C>
11.25% Senior Notes................................................................................. $ 400,000
11.15% Senior Notes (E91,010)....................................................................... 94,009
11.50% Senior Notes................................................................................. 200,000
11.50% Senior Notes (E150,000)...................................................................... 154,943
12.50% Senior Discount Notes, less discount of $184,136............................................. 315,864
12.40% Senior Discount Notes, (E115,552), less discount of $43,688 (E42,294)........................ 75,671
10% Subordinated Convertible Debentures............................................................. --
------------
$ 1,240,487
------------
------------
</TABLE>
The Company's 10% Series A Preferred Stock and the Subordinated Convertible
Debentures issued in connection with the Company's 1998 high yield offering were
mandatorily convertible in the event the closing price of the Company's common
stock exceeded certain predetermined annual price targets. On May 13, 1999, the
conditions for mandatory conversion were met for both the Series A Preferred
Stock and the Subordinated Convertible Debentures. The conversion rates for the
Series A Preferred Stock and Subordinated Convertible Debentures were $13.20 and
DM24.473, at the then applicable exchange rates, respectively. Accordingly, the
Company issued approximately 4.6 million shares of its common stock and paid
cash for any fractional shares due upon conversion.
During 1997, the Company entered into Loan and Security Agreements pursuant
to which the Company borrowed an aggregate of $11.1 million. Under the terms of
these agreements, the Company is required to satisfy certain covenants and
restrictions. As of June 30, 1999, the Company was either in compliance with, or
had received waivers to, these covenants. Obligations under these Loan and
F-28
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(6) LONG-TERM DEBT AND CONVERTIBLE SECURITIES (CONTINUED)
Security Agreements are secured by the grant of a security interest in certain
telecommunications equipment as well as a portion of the payment obligations
also being secured by letters of credit.
(7) STOCK INCENTIVE PLAN
The Amended Stock Incentive Plan (the "Stock Incentive Plan") allows for the
issuance of approximately 3.6 million shares of the Company's common stock, of
which approximately 0.2 million shares are available for future grants as of
June 30, 1999.
Stock option activity for the six months ended June 30, 1999 under the Stock
Incentive Plan is shown below (in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF
EXERCISE PRICES SHARES
----------------- -----------
<S> <C> <C>
Outstanding at December 31, 1998................................ $ 7.41 2,594
Granted......................................................... 26.57 703
Exercised....................................................... 6.01 (329)
Forfeited....................................................... 5.85 (1)
------ -----
Outstanding at June 30, 1999.................................... $ 12.10 2,967
------ -----
------ -----
</TABLE>
As of June 30, 1999, approximately 1.4 million options were exercisable
under the Stock Incentive Plan.
(8) COMPREHENSIVE LOSS
The Company's comprehensive loss is as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
-----------------------
<S> <C> <C>
1998 1999
---------- -----------
Net loss............................................................. $ (66,458) $ (82,596)
Foreign currency translation adjustment.............................. 135 (21,215)
---------- -----------
Comprehensive loss................................................... $ (66,323) $ (103,811)
---------- -----------
---------- -----------
</TABLE>
(9) SEGMENT AND GEOGRAPHIC DATA
While the Company's chief decision maker monitors revenue streams of the
various products and geographic locations, operations are managed and financial
performance is evaluated based on the delivery of multiple, integrated services
to customers over a single network. As a result, there are many shared expenses
generated by the various revenue streams and management believes that any
allocation of the expenses incurred to multiple revenue streams or geographic
locations would be impractical and arbitrary. Management does not currently make
such allocations internally.
F-29
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(9) SEGMENT AND GEOGRAPHIC DATA (CONTINUED)
The Company groups its products and services by wholesale, retail, and
capacity. The information below summarizes revenue by customer type for the six
months ended June 30, 1998 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
---------------------
<S> <C> <C>
1998 1999
--------- ----------
Retail................................................................. $ 24,066 $ 54,688
Wholesale.............................................................. 24,924 41,555
Capacity............................................................... -- 34,102
--------- ----------
Consolidated........................................................... $ 48,990 $ 130,345
--------- ----------
--------- ----------
</TABLE>
The information below summarizes revenue by geographic area for the six
months ended June 30, 1998 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
JUNE 30,
---------------------
<S> <C> <C>
1998 1999
--------- ----------
Western Europe......................................................... $ 24,577 $ 95,558
North America.......................................................... 15,885 29,524
Latin America.......................................................... 7,500 5,184
Asia/Pacific Rim and other............................................. 1,028 79
--------- ----------
Consolidated........................................................... $ 48,990 $ 130,345
--------- ----------
--------- ----------
</TABLE>
The information below summarizes long lived assets by geographic area as of
June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
Western Europe.................................................................... $ 544,703
North America..................................................................... 71,817
Latin America..................................................................... 205
----------
Consolidated...................................................................... $ 616,725
----------
----------
</TABLE>
(10) EQUITY OFFERING
On June 29, 1999, the Company completed an offering of 4,315,000 shares of
its common stock at $47 per share. The net proceeds of the offering were
approximately $192.2 million and will be used primarily to fund the further
development of the network as well as for working capital and general corporate
purposes.
F-30
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1999 AND FOR THE PERIODS
ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
(11) SUBSEQUENT EVENTS
(A) DESTIA ACQUISITION. On August 27, 1999, the Company, Viatel Acquisition
Corp., a wholly-owned subsidiary of the Company, and Destia Communications, Inc.
entered into an Agreement and Plan of Merger which provides, among other things,
for the merger of Viatel Acquisition Corp. with and into Destia. Upon
consummation of the merger, Destia will become a wholly-owned subsidiary of
Viatel. Under the terms of the merger agreement, Destia stockholders will
receive 0.445 share of Viatel's common stock in exchange for each share of
Destia common stock held by such stockholders at the effective time of the
merger. The transaction is contingent upon, among other things, approval of both
Viatel's and Destia's stockholders, certain regulatory approvals and other
customary conditions. The merger is intended to constitute a tax-free
reorganization, and is expected to be completed by year-end.
(B) INCREASE IN CAPITAL STOCK. At Viatel's 1999 Annual Meeting of
Stockholders held on September 14, 1999 (the "1999 Annual Meeting"), Viatel's
stockholders approved an amendment to Viatel's certificate of incorporation
increasing the number of shares of common stock which may be issued without
further stockholder approval from 50,000,000 to 150,000,000.
(C) STOCK INCENTIVE PLAN. At the 1999 Annual Meeting, Viatel's stockholders
also approved an amendment to Viatel's Stock Incentive Plan increasing the
number of shares of common stock available for issuance thereunder from 3.4
million to 5.3 million shares.
F-31
<PAGE>
INDEX TO DESTIA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-33
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................... F-34
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1996, 1997
and 1998................................................................................................. F-35
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1996, 1997 and 1998...... F-36
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998................. F-37
Notes to Consolidated Financial Statements................................................................. F-39
Condensed Consolidated Statements of Operations--Three and Six Months Ended June 30, 1998 and June 30, 1999
(unaudited).............................................................................................. F-55
Consolidated Balance Sheets--December 31, 1998 (derived from audited financial statements) and June 30,
1999 (unaudited)......................................................................................... F-56
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1998 and June 30, 1999 (unaudited)........ F-57
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-58
</TABLE>
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Destia Communications, Inc. (formerly Econophone, Inc.):
We have audited the accompanying consolidated balance sheets of Destia
Communications, Inc. (formerly Econophone, Inc.) (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, comprehensive loss, stockholders' deficit and cash
flows for each of the three years ended December 31, 1998. These financial
statements are the responsibility of Destia's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Destia
Communications, Inc. (formerly Econophone, Inc.) and subsidiaries as of December
31, 1997 and 1998, and the results of their operations and their cash flows for
each of the three years ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
February 2, 1999
F-33
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................................
$ 67,202 $ 118,218
Marketable securities.................................................................
-- 21,343
Accounts receivable, net of allowance for doubtful accounts of $1,594 and $4,086,
respectively........................................................................
16,796 33,351
Prepaid expenses and other current assets.............................................
1,868 3,409
Restricted cash and securities........................................................
10,463 9,590
--------- ---------
Total current assets............................................................
96,329 185,911
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS net of accumulated depreciation and
amortization of $3,690 and $12,418, respectively (Note 5)...........................
24,113 107,249
Debt issuance costs...................................................................
6,356 12,244
Intangible assets, net of accumulated amortization of $0 and $1,324, respectively.....
-- 49,488
Other assets..........................................................................
2,242 2,439
Restricted cash and securities........................................................
48,965 30,877
--------- ---------
Total assets....................................................................
$ 178,005 $ 388,208
---------
--------- ---------
---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable......................................................................
$ 21,101 $ 33,352
Accrued expenses and other current liabilities (Note 7)...............................
5,356 31,131
Interest accrued on Senior Notes......................................................
10,462 9,590
Current maturities of other long-term debt (Note 9)...................................
1,829 16,232
Current maturities of obligations under capital lease (Note 15).......................
156 154
Current maturities of notes payable-related party (Note 13)...........................
315 308
Deferred revenue......................................................................
2,568 4,739
--------- ---------
Total current liabilities.......................................................
41,787 95,506
OTHER LONG-TERM DEBT (Note 9).........................................................
5,657 37,379
OBLIGATIONS UNDER CAPITAL LEASE (Note 15).............................................
279 193
SENIOR NOTES (Note 9).................................................................
149,680 343,176
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 12).............................
14,328 14,421
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' DEFICIT (Note 11):
Common stock--voting, par value $.01; authorized 29,250,000 shares; 20,778,321 shares
issued and outstanding at December 31, 1997 and 1998................................
2 208
Common stock--non-voting, par value $.01; authorized
500,000 shares; 0, and 135,890 issued and outstanding at December 31, 1997 and 1998,
respectively........................................................................
-- 1
Additional paid-in capital............................................................
6,082 6,923
Accumulated other comprehensive loss..................................................
(104) (856)
Accumulated deficit...................................................................
(39,706) (108,743)
--------- ---------
Total stockholders' deficit.....................................................
(33,726) (102,467)
--------- ---------
Total liabilities and stockholders' deficit.....................................
$ 178,005 $ 388,208
---------
--------- ---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-34
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- ----------
REVENUES....................................................................... $ 45,103 $ 83,003 $ 193,737
COST OF SERVICES............................................................... 35,369 63,707 140,548
--------- ---------- ----------
Gross profit............................................................. 9,734 19,296 53,189
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................... 16,834 37,898 80,092
DEPRECIATION AND AMORTIZATION.................................................. 1,049 3,615 11,866
--------- ---------- ----------
Loss from operations..................................................... (8,149) (22,217) (38,769)
OTHER INCOME (LOSS)............................................................ 106 102 (747)
FOREIGN CURRENCY EXCHANGE GAIN (LOSS), net..................................... 27 (265) 86
INTEREST EXPENSE, net.......................................................... (296) (7,748) (29,514)
--------- ---------- ----------
Net loss................................................................. $ (8,312) $ (30,128) $ (68,944)
--------- ---------- ----------
--------- ---------- ----------
LOSS PER SHARE (basic and diluted) (Note 2).................................... $ (0.41) $ (1.50) $ (3.31)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (basic and diluted) (Note
2)........................................................................... 20,778 20,778 20,846
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
DESTIA COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- ----------
NET LOSS........................................................................ $ (8,312) $ (30,128) $ (68,944)
OTHER COMPREHENSIVE LOSS, net of tax:
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS.................................. -- (104) (752)
--------- ---------- ----------
COMPREHENSIVE LOSS.............................................................. $ (8,312) $ (30,232) $ (69,696)
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
RETAINED
VOTING NON VOTING ADDITIONAL EARNINGS ACCUMULATED
------------------------ ------------------------ PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) LOSS
----------- ----------- ----------- ----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995........ 20,778 $ 2 -- -- $ 392 $ 316 $ --
Distribution of S corporation
earnings........................ -- -- -- -- (316) --
Contribution of capital to C
corporation..................... -- -- -- -- 90 -- --
Net loss.......................... -- -- -- -- (8,312) --
Accretion of preferred stock...... -- -- -- -- (15) --
Dividends on preferred stock...... -- -- -- -- (281) --
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1996........ 20,778 2 -- -- 482 (8,608) --
Net loss.......................... -- -- -- -- -- (30,128) --
Warrants.......................... -- -- -- -- 5,600 -- --
Accretion of preferred stock...... -- -- -- -- -- (91) --
Dividends on preferred stock...... -- -- -- -- -- (879) --
Cumulative translation
adjustment...................... -- -- -- -- -- -- (104)
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1997........ 20,778 2 -- -- 6,082 (39,706) (104)
Net loss.......................... -- -- -- -- -- (68,944) --
Issuance of non voting restricted
shares.......................... -- -- 136 1 994 -- --
Accretion of preferred stock...... -- -- -- -- -- (93) --
Change in par value............... -- 206 -- -- (206) -- --
Cumulative translation
adjustment...................... -- -- -- -- -- -- (752)
Other............................. -- -- -- -- 53 -- --
----------- ----- --- ----- ----------- ------------ -------
BALANCE, December 31, 1998........ 20,778 $ 208 136 $ 1 $ 6,923 $ (108,743) $ (856)
----------- ----- --- ----- ----------- ------------ -------
----------- ----- --- ----- ----------- ------------ -------
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, December 31, 1995........ $ 710
Distribution of S corporation
earnings........................ (316)
Contribution of capital to C
corporation..................... 90
Net loss.......................... (8,312)
Accretion of preferred stock...... (15)
Dividends on preferred stock...... (281)
---------
BALANCE, December 31, 1996........ (8,124)
Net loss.......................... (30,128)
Warrants.......................... 5,600
Accretion of preferred stock...... (91)
Dividends on preferred stock...... (879)
Cumulative translation
adjustment...................... (104)
---------
BALANCE, December 31, 1997........ (33,726)
Net loss.......................... (68,944)
Issuance of non voting restricted
shares.......................... 995
Accretion of preferred stock...... (93)
Change in par value............... --
Cumulative translation
adjustment...................... (752)
Other............................. 53
---------
BALANCE, December 31, 1998........ $(102,467)
---------
---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-36
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................... $ (8,312) $ (30,128) $ (68,944)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 1,049 3,615 11,866
Provision for doubtful accounts............................ 291 832 2,603
Accreted interest expense.................................. -- 280 17,711
Changes in assets and liabilities:
Increase in accounts receivable............................ (887) (9,682) (22,100)
Increase in prepaid expenses and other current assets...... (350) (1,004) (2,175)
Increase in other assets................................... (1,514) (3,277) (791)
Increase in accounts payable, accrued expenses and other
current liabilities...................................... 3,352 14,975 34,745
Increase (decrease) in interest accrued on senior notes.... -- 10,462 (872)
Increase in deferred revenue............................... 365 1,708 1,543
--------- --------- ---------
Net cash used in operating activities.................. (6,006) (12,219) (26,414)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid in acquisitions................................ -- -- (21,063)
Purchase of marketable securities, net....................... -- -- (21,343)
Purchases of property and equipment.......................... (4,247) (13,267) (76,686)
--------- --------- ---------
Net cash used in investing activities.................. (4,247) (13,267) (119,092)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock.................... 13,061 -- --
Proceeds from line of credit................................. 800 -- --
Repayment of line of credit.................................. (1,000) -- --
Proceeds from short-term borrowings.......................... 5,437 -- --
Repayments of short-term borrowings.......................... (3,309) (2,128) --
Proceeds from long-term debt and capital leases.............. 2,232 -- 16,390
Repayments of long-term debt and capital leases.............. (566) (661) (7,497)
Repayments of notes payable-related party.................... (10) (12) (7)
Dividends paid............................................... (226) -- --
Proceeds from senior discount notes.......................... -- 149,400 175,785
Proceeds from issuance of warrants........................... -- 5,600 --
Payment of debt issuance costs............................... -- (6,355) (7,110)
Proceeds from bridge loan.................................... -- 7,000 --
Repayments of bridge loan.................................... -- (7,000) --
--------- --------- ---------
Net cash provided by financing activities.............. 16,419 145,844 177,561
--------- --------- ---------
Increase in cash and cash equivalents, (including restricted
cash)...................................................... 6,166 120,358 32,055
Cash and cash equivalents, beginning of period, (including
restricted cash)........................................... 106 6,272 126,630
--------- --------- ---------
Cash and cash equivalents, end of period, (including
restricted cash)........................................... $ 6,272 $ 126,630 $ 158,685
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-37
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................... $ 210 $ 505 $ 24,329
Income Taxes............................................... -- -- --
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Note issued for purchase of minority interest--Telco......... $ -- $ -- $ 14,035
Accretion of preferred stock................................. 15 91 93
Accrued dividends on preferred stock......................... 281 879 --
Capital leases executed and notes issued for asset
purchases.................................................. 423 5,754 14,250
DETAILS OF ACQUISITIONS:
Fair Value of assets acquired................................ -- -- $ 1,896
Goodwill..................................................... -- -- (50,759)
Liabilities assumed and notes issued......................... -- -- 27,800
--------- --------- ---------
Net cash paid for acquisitions............................... -- -- $ (21,063)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-38
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. NATURE OF BUSINESS
Destia Communications, Inc. (formerly Econophone Inc.) ("Destia") is a
rapidly growing, facilities-based provider of domestic and international long
distance telecommunications services in North America and Europe. Its extensive
international telecommunications network allows it to provide services primarily
to retail customers in many of the largest metropolitan markets in the United
States, Canada, the United Kingdom, Belgium, France, Germany and Switzerland.
The Company provides its customers with a variety of retail
telecommunications services, including international and domestic long distance,
calling card and prepaid services, and wholesale transmission services. The
Company's 350,000 customer accounts are diverse and include residential
customers, commercial customers, ethnic groups and telecommunications carriers.
In each of the Company's geographic markets, it utilizes a multichannel
distribution strategy to market its services to its target customer groups.
Destia entered the US market in 1993 and the UK market in 1995. In continental
Europe, Destia commenced offering its service before the January 1, 1998
liberalization of telecommunications services in those markets.
In February 1998, the New York corporation "Econophone, Inc." (now known as
Destia Communications, Inc.) was merged into its wholly owned subsidiary named
"Econophone, Inc." (now known as Destia Communications, Inc.) which had been
incorporated in the State of Delaware, for the sole purpose of changing the
state of incorporation of the Company. The Delaware corporation was the
surviving entity in the merger. In connection with the foregoing, the par value
of the Company's common stock was changed to $.01 per share of voting and
non-voting common stock from $.0001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Destia and its
wholly owned subsidiaries, its 72% owned subsidiary, Econophone Services GmbH
(Switzerland) and its 81.25% owned subsidiary America First, Ltd. (England)
(collectively, the "Company"). The full amount of the net loss for the year
ended December 31, 1997 and 1998 for Econophone Services GmbH and America First,
Ltd. have been recorded in the consolidated financial statements of the Company.
All significant intercompany balances and transactions have been eliminated in
consolidation. See Note 17.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company's revenues are primarily based on usage and are derived from (1)
the number of minutes of telecommunications traffic carried and, (2) generally,
a fixed per minute rate. For prepaid services, the Company's revenues are
reported net of selling discounts and commissions and are recorded based upon
usage rather than time of initial sale.
F-39
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
PROPERTY AND EQUIPMENT
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the respective assets, which range
from one to fifteen years. Depreciation of IRUs is computed using the
straight-line method over the lease term. Amortization of leasehold improvements
is computed using the straight-line method over the lesser of the lease term or
estimated useful lives of the improvements.
INTERNAL-USE SOFTWARE
The Company capitalizes certain software development costs for internal use.
For the years ended December 31, 1997 and 1998, the Company incurred
approximately $897,000 and $1,925,000 respectively, of such costs and has
included them in Property, Equipment and Leasehold Improvements. The capitalized
software are amortized on a straight-line basis over the estimated useful life,
generally two years. Prior to 1997, such costs were immaterial.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost of acquired businesses over
the underlying fair value of the tangible net assets acquired. Intangible assets
are amortized on a straight-line basis over their estimated period of benefit,
generally 5 - 20 years. The carrying value of goodwill is periodically reviewed
for impairment whenever events or changes in circumstances indicate that it may
not be recoverable.
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," these assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. Furthermore, the assets are evaluated for continuing value and
proper useful lives by comparison to expected future cash projections. The
Company amortizes these costs over the expected useful life of the related
asset. As of December 31, 1998 the Company does not believe any impairment
exists with its long-lived assets.
INCOME TAXES
Prior to 1996, the Company was an S-Corporation for federal and state income
tax purposes and, as a result, the earnings of the Company were treated as
taxable income of the shareholders. During 1996, the Company changed its tax
status to a C-Corporation.
F-40
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Deferred income taxes are
not provided on undistributed earnings of foreign subsidiaries since such
earnings are currently expected to be permanently reinvested outside the United
States.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation awards to employees and directors using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options awarded to employees and
directors is measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the amount an employee or director must pay to
acquire the stock.
The Company accounts for stock-based compensation awards to outside
consultants and affiliates based on the fair value of such awards. Accordingly,
compensation costs for stock option awards to outside consultants and affiliates
is measured at the date of grant based on the fair value of the award using the
Black-Scholes option pricing model (See Note 14).
NEW ACCOUNTING PRONOUNCEMENTS
These standards increase disclosure only and have no impact on the Company's
financial position or results of operations. These standards have been adopted
in 1998 and have been reflected in the financial statements and notes for the
year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use software, dividing the development into three stages: (1) the
preliminary project stage, during which conceptual formulation and evaluation of
alternatives takes place, (2) the application development stage, during which
design, coding, installation and testing takes place and (3) the operations
stage during which training and maintenance takes place. Costs incurred during
the application development stage are capitalized, all other costs are expensed
as incurred. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has reviewed the provisions of
SOP 98-1 and does not believe adoption of this standard will have a material
effect on its results of operations, financial position or cash flows.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires that all non-governmental entities
expense the costs of start-up activities, including organization costs, as those
costs are incurred. SOP 98-5 is effective for financial statements for fiscal
F-41
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
years beginning after December 15, 1998. The Company has reviewed the provisions
of SOP 98-5 and does not believe adoption of this standard will have a material
effect on its results of operations.
FOREIGN CURRENCY EXCHANGE
The financial statements of all foreign subsidiaries were prepared in their
respective local currencies and translated into U.S. dollars based on the
current exchange rate at the end of the period for the balance sheets and an
average rate for the period on the statements of operations. Translation
adjustments generally are reflected as foreign currency translation adjustments
in the statement of stockholders' equity and, accordingly, have no effect on net
income. Foreign currency transaction adjustments are reflected in the statements
of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
PER SHARE DATA
During 1997, SFAS No. 128 "Earnings per Share" was issued and became
effective for the Company's December 31, 1997 financial statements. SFAS No. 128
establishes new standards for computing and presenting earnings per share
("EPS"). The new standard requires the presentation of basic EPS and diluted
EPS. Basic EPS is calculated by dividing income available to common shareholders
by the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding
adjusted to reflect potentially dilutive securities. All outstanding options,
warrants and convertible preferred shares would be antidilutive. Therefore,
their effect has been excluded from the calculation of diluted EPS.
The following is the reconciliation of net loss per share as of December 31,
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
NUMERATOR
Net loss................................................ $ (8,312,000) $ (30,128,000) $ (68,944,000)
Less dividends on preferred stock....................... (281,000) (879,000) --
Less accretion of preferred stock....................... (15,000) (91,000) (93,000)
------------- -------------- --------------
Loss available to common shareholders................... $ (8,608,000) $ (31,098,000) $ (69,037,000)
------------- -------------- --------------
------------- -------------- --------------
DENOMINATOR
Weighted Average shares outstanding..................... 20,778,000 20,778,000 20,846,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued SFAS No. 107 entitled
"Disclosures about Fair Value of Financial Instruments," which requires entities
to disclose information about the fair values of their financial instruments.
F-42
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
3. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
LONG-TERM DEBT
The carrying amount of the Company's current portion of long-term borrowings
approximates fair value. The fair value of the Company's long-term debt,
including current portions, is determined based on market prices for similar
debt instruments or on the current rates offered to the Company for debt with
similar maturities. As of December 31, 1998, the Company's senior notes were
made up of the 13 1/2% Senior Notes due 2007 (the "1997 Notes") issued July 1,
1997, and the 11% Senior Discount Notes due 2008 (the "1998 Notes") issued
February 12, 1998 (together the "Senior Notes"). The fair value of the 1997
Notes and the 1998 Notes, based upon quotes from securities dealers, were
$157,325,000 and $151,500,000, respectively.
4. DEBT AND EQUITY SECURITIES
The Company accounts for short-term investments in accordance with SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities."
Short-term investments have an original maturity of more than three months and a
remaining maturity of less than one year. These investments are stated at cost
as it is the intent of the Company to hold these securities until maturity. The
funds are invested in compliance with the Company's bond indentures which
restrict the type, quality and maturity of investments. The table below
discloses the fair value of held-to-maturity securities as of December 31, 1998.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE FAIR VALUE GROSS GROSS
AMORTIZED DECEMBER 31, UNREALIZED UNREALIZED
COST BASIS 1998 HOLDING GAINS HOLDING LOSSES
-------------- ----------------- ------------- --------------
<S> <C> <C> <C> <C>
U.S. treasury notes........................... $ 38,949,000 $ 39,246,000 $ 365,000 $ (68,000)
Government agency notes....................... 54,438,000 54,611,000 173,000 --
Commercial paper.............................. 14,914,000 14,960,000 47,000 (1,000)
Other debt securities......................... 19,976,000 19,975,000 -- (1,000)
-------------- ----------------- ------------- --------------
$ 128,277,000 $ 128,792,000 $ 585,000 $ (70,000)
-------------- ----------------- ------------- --------------
-------------- ----------------- ------------- --------------
Included in cash and cash equivalents......... $ 66,467,000
Included in marketable securities............. 21,343,000
Included in current portion of restricted
cash........................................ 9,590,000
Included in non-current restricted cash....... 30,877,000
--------------
$ 128,277,000
--------------
--------------
</TABLE>
F-43
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
5. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Equipment......................................................... $23,403,000 $102,696,000
Computer software................................................. 2,263,000 9,257,000
Furniture and fixture............................................. 634,000 4,841,000
Leasehold improvements............................................ 1,503,000 2,873,000
---------- -----------
27,803,000 119,667,000
Less accumulated depreciation and amortization.................... (3,690,000) (12,418,000)
---------- -----------
Property, equipment and leasehold improvements, net............... $24,113,000 $107,249,000
---------- -----------
---------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1997 and 1998,
was $1,008,000, $2,297,000 and $8,728,000, respectively.
6. TERRITORIAL RIGHTS
In September 1994, the Company entered into a joint venture with Europhone
International Ltd. ("EI") to jointly market Destia's services in the United
Kingdom. EI engaged in sales and marketing, while Destia provided network
support, billing and transmission services.
In connection with the modification of this joint marketing arrangement,
which occurred in June 1996, EI granted the Company the right to compete with EI
in exchange for forgiveness of the net receivable due to the Company of
$2,000,000. The Company charged this to operations in 1996 as an expense of the
joint venture.
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist primarily of accrued
carrier cost of $1,658,000 and $17,408,000 for 1997 and 1998, respectively.
F-44
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. FOREIGN OPERATIONS AND CONCENTRATIONS
FOREIGN OPERATIONS
The Company's trade accounts receivable are subject to credit risk, although
the customer base is diversified due its size and geographic dispersion. The
Company does not require collateral or other security to support its
receivables. The Company closely monitors extensions of credit and performs
ongoing evaluations of customer accounts to control the exposure to bad debt
risks. Bad debt expense is recorded quarterly and is based on the Company's
historical bad debt write-off experience. Actual write-offs are charged against
the bad debt allowance as certain accounts are determined to be uncollectable.
The Company's total sales, operating income (before interest, foreign currency
exchange and other income) and identifiable assets by geographical area for the
years ended and as of December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
NORTH OTHER
UNITED KINGDOM AMERICA BELGIUM EUROPE CONSOLIDATED
--------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
1996
Revenues........................ $ 15,477,000 $ 18,185,000 $ 9,038,000 $ 2,403,000 $ 45,103,000
--------------- -------------- ------------- -------------- --------------
Operating loss.................. $ (2,473,000) $ (3,855,000) $ (1,472,000) $ (349,000) $ (8,149,000)
Corporate expenses.............. (163,000)
--------------
$ (8,312,000)
--------------
Accounts receivable............. $ 2,283,000 $ 3,718,000 $ 1,488,000 $ 457,000 $ 7,946,000
Property, equipment and
leasehold improvements........ 1,423,000 4,001,000 847,000 201,000 6,472,000
Corporate assets................ 8,337,000
--------------
$ 22,755,000
--------------
1997
Revenues........................ $ 18,363,000 $ 48,899,000 $ 7,981,000 $ 7,760,000 $ 83,003,000
--------------- -------------- ------------- -------------- --------------
Operating loss.................. $ (2,966,000) $ (18,213,000) $ (374,000) $ (664,000) $ (22,217,000)
Corporate expenses.............. (7,911,000)
--------------
$ (30,128,000)
--------------
Accounts receivable............. $ 5,252,000 $ 9,034,000 $ 1,250,000 $ 1,260,000 $ 16,796,000
Property, equipment and
leasehold improvements........ 6,731,000 16,515,000 463,000 405,000 24,114,000
Corporate assets................ 137,095,000
--------------
$ 178,005,000
--------------
1998
Revenues........................ $ 55,991,000 $ 116,645,000 $ 11,515,000 $ 9,586,000 $ 193,737,000
--------------- -------------- ------------- -------------- --------------
Operating income(loss).......... $ (16,474,000) $ (17,138,000) $ 905,000 $ (6,062,000) $ (38,769,000)
Corporate expenses.............. (30,175,000)
--------------
$ (68,944,000)
--------------
Accounts receivable............. $ 11,367,000 $ 19,096,000 $ 1,430,000 $ 1,458,000 $ 33,351,000
Property, equipment and
leasehold improvements........ 15,899,000 74,700,000 3,673,000 12,977,000 107,249,000
Corporate assets................ 247,608,000
--------------
$ 388,208,000
--------------
</TABLE>
F-45
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
8. FOREIGN OPERATIONS AND CONCENTRATIONS (CONTINUED)
The revenues of EI accounted for $14.2 million or 32% in 1996. The
relationship was terminated in December 1996.
9. BORROWINGS
At December 31, 1997, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------ -------------- --------------
<S> <C> <C> <C>
Long-term debt:
NTFC note (a).................................. $ 1,633,000 $ 5,522,000 $ 7,155,000
Notes Payable (b).............................. 196,000 135,000 331,000
1997 Notes (c)................................. -- 149,680,000 149,680,000
------------ -------------- --------------
$ 1,829,000 $ 155,337,000 $ 157,166,000
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
At December 31, 1998, the Company was obligated under the following debt
agreements:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
Long-term debt:
NTFC note (a)................................ $ 4,708,000 $ 16,434,000 $ 21,142,000
Notes payable (b)............................ 11,524,000 20,945,000 32,469,000
1997 Notes (c)............................... -- 150,240,000 150,240,000
1998 Notes (d)............................... -- 192,936,000 192,936,000
------------- -------------- --------------
$ 16,232,000 $ 380,555,000 $ 396,787,000
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
(a) On May 28, 1996, Destia entered into a credit facility with NTFC, which the
terms and amount of have been amended and increased, respectively, on
several occasions. On January 28, 1998, the NTFC credit facility was amended
and restated in its entirety in order to effect various amendments and
increase the amount of NTFC's commitment thereunder (such credit facility,
as amended and restated, is referred to herein as the "NTFC Facility"). The
NTFC Facility provides for borrowings by Destia and its subsidiaries to fund
certain equipment acquisition costs and related expenses. The NTFC Facility
provides for an aggregate commitment of NTFC of $24.0 million pursuant to
three tranches of $2.0 million, $3.0 million and $19.0 million. Loans
borrowed under each tranche of the NTFC Facility amortize in equal monthly
installments over a five year period ending on July 1, 2001, April 1, 2002
and January 1, 2003, respectively. Loans under the NTFC Facility accrue
interest at an interest rate equal to the 90-day commercial paper rate plus
395 basis points, subject to certain quarterly adjustments depending upon
financial performance. All of the equipment purchased with the proceeds of
the NTFC Facility has been pledged to NTFC. The NTFC Facility requires
Destia to maintain certain Debt Service Coverage Ratios, EBITDA (each
defined in the NTFC Facility) and minimum cash balances. Destia was in
compliance with these covenants at December 31, 1997. Destia obtained a
waiver of these covenants so that it was in compliance at December 31, 1998.
F-46
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
9. BORROWINGS (CONTINUED)
(b) At December 31, 1998 the Company has seven notes payable related to the
purchase of cable lines and acquisitions. These notes bear interest at rates
ranging from 5% to 12%, and have maturity dates from April 2001 to November
2008.
At December 31, 1997 the Company has six notes payable related to the
purchase of cable lines. Three of these notes bear interest at 12%, and
matures through September 1998. The remaining three notes bear interest at
LIBOR plus 5%, and mature on June 30, 2001. These notes have quarterly
principal and interest payments ranging from $5,849 to $30,291.
(c) Destia completed on July 1, 1997 the offering (the "1997 Unit Offering") of
155,000 units (each a "Unit"), each Unit consisting of one 1997 Note and one
warrant (each a "Warrant") to purchase 8.485 shares of common stock of
Destia. The Units were sold for an aggregate gross purchase price of $155.0
million. On December 5, 1997, the Company consummated an offer to exchange
the notes issued in the 1997 Unit Offering for $155.0 million of notes that
had been registered under the Securities Exchange Act of 1933.
The 1997 Notes are unsecured unsubordinated obligations of Destia, limited
to $155.0 million aggregate principal amount at maturity, and mature on July
15, 2007. Interest on the 1997 Notes accrues at the rate of 13 1/2% per
annum from the most recent interest payment date on which interest has been
paid or provided for, payable semiannually (to holders of record at the
close of business on the January 1 or July 1 immediately preceding the
interest payment date) on January 15 and July 15 of each year, commencing
January 15, 1998. At the closing of the 1997 Unit Offering, Destia used
$57.4 million of the net proceeds of the 1997 Unit Offering to purchase
restricted cash and securities, which were pledged as security for the
payment of interest on the principal of the 1997 Notes. Proceeds from the
restricted cash and securities are being used by Destia to make interest
payments on the 1997 Notes through July 15, 2000. The restricted cash and
securities are being held by a trustee pending disbursement.
(d) During February 1998, the Company issued the 1998 Notes. The 1998 Notes are
unsecured unsubordinated obligations of the Company, initially limited to
$300.0 million aggregate principal amount at maturity, and mature on
February 15, 2008. Although for Federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, was
recognized by the holders as such discount accrues from the closing date, no
interest is payable on the 1998 Notes prior to February 15, 2003. Interest
on the 1998 Notes will accrue at 11.0% from February 15, 2003 or from the
most recent Interest Payment Date to which interest has been paid or
provided for, payable semiannually (to holders of record at the close of
business on the February 1 or August 1 immediately preceding the Interest
Payment Date) on February 15 and August 15 of each year, commencing August
15, 2003.
F-47
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
9. BORROWINGS (CONTINUED)
Maturities of long-term debt (excluding the accretion of the 1998 Notes) over
the next five years are as follows:
<TABLE>
<S> <C>
1999.................................................................. $16,232,000
2000.................................................................. 14,567,000
2001.................................................................. 10,808,000
2002.................................................................. 4,837,000
2003 and thereafter................................................... 350,343,000
-----------
Total................................................................. $396,787,000
-----------
-----------
</TABLE>
10. TAXES
As a telephone carrier and reseller doing business in the U.S., the Company
is required to file annual telephone and transmission tax returns in accordance
with state tax laws. These returns include taxes on net worth, gross sales and
gross profit. In addition, each type of tax requires an additional tax
surcharge. The Company also remits federal and state excise taxes and other
state and local sales taxes.
As of December 31, 1997 and 1998, the Company had a net operating loss
carryforward of approximately $36,000,000 and $80,000,000, respectively, which
is available to reduce its future taxable income and expires at various dates
through 2012. A full valuation allowance of approximately $14,000,000 and
$31,000,000, respectively, has been established against the deferred tax assets
due to the uncertainties surrounding the utilization of the carryforward. There
are no other significant timing differences.
A value added tax "VAT" is a tax charged on goods and services that is
designed to be borne by the ultimate end user of the goods and services.
Pursuant to the Sixth European Commission VAT Directive adopted in 1977 ("VAT
Directive"), providers of telecommunications services in the European Union (the
EU) are liable for VAT in the EU member state where the provider of the services
is established. The provider, in turn, charges VAT to its customers at the rate
prevailing in the provider's country of establishment. To date, the collection
of VAT by Destia does not appear to have a material adverse effect on its
ability to attract or retain customers and the collection of VAT has not
required Destia to reduce its prices to remain competitive.
Destia's non-U.S. subsidiaries file separate tax returns and provide for
taxes accordingly.
11. STOCKHOLDERS' EQUITY (DEFICIT)
In February 1998, the New York corporation "Econophone, Inc." was merged
into its wholly-owned subsidiary named "Econophone, Inc." (now known as Destia
Communications, Inc.) which had been incorporated in the State of Delaware for
the sole purpose of changing the state of incorporation of the Company. The
Delaware corporation was the surviving entity in the merger. In connection with
the foregoing, the par value of the Company's common stock was changed to $.01
per share of voting and non-voting common stock.
On July 17, 1998, the Company acquired the minority interest in Telco that
it did not already own. In connection with such acquisition the Company
converted options to acquire Telco shares held by
F-48
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
11. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Telco employees into grants of non-voting restricted shares of the Company's
common stock. The shares carry the same rights as the voting common stock, other
than voting rights.
On November 1, 1996, the Company's Articles of Incorporation were amended to
change all of the authorized shares of common stock and non-voting common stock
from no par value per share to $.0001 par value per share, to increase the
number of shares of authorized common stock from 400 shares to 29,250,000
shares, to increase the number of authorized shares of non-voting common stock
from 19,600 shares to 500,000 shares and to authorize the issuance of 250,000
shares of preferred stock. Additionally, the Company effected a recapitalization
whereby the outstanding shares of common stock were converted on a 73,125:1
basis.
All information contained in the accompanying financial statements and
footnotes have been retroactively restated to give effect to these transactions.
Included within additional paid in capital, is $5.6 million attributable to
the Warrants, which represents the portion of the issue price for the Units
attributable to the fair value of the Warrants. Such amount has been recognized
as a discount on the 1997 Notes and will be amortized over the term of the 1997
Notes. Each Warrant may be exercised for 8.167 shares of common stock at an
exercise price of $.01 per share. The Warrants are exercisable for 1,315,148
shares of common stock, in the aggregate. The fair value of the shares issuable
upon exercise of the Warrants was determined to be $4.26 per share. Among the
factors considered in making such determinations were the history of the
prospects for the industry in which Destia competes, an assessment of Destia's
management, the present operations of Destia, the historical results of
operations of Destia and the trend of its revenues and earnings, the prospects
for future earnings of Destia, the general condition of the securities markets
at the time of the 1997 Unit Offering and the prices of similar securities of
generally comparable companies. The Warrants expire on June 30, 2007.
12. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 1, 1996, the Company entered into a Securities Purchase
Agreement (the "Agreement") with Princes Gate Investors II, L.P., an affiliate
of Morgan Stanley & Co., Incorporated, whereby it authorized and issued 140,000
shares of $.01 par value Redeemable Convertible Preferred Stock (the "Series A
Preferred") for a purchase price of approximately $13,061,000, net of issuance
costs. The stated redemption value on the preferred stock is $14,000,000 (or
$100 per share). The Series A Preferred is senior to all other capital stock of
the Company.
The Series A Preferred accrue monthly cumulative dividends on each
outstanding share at a rate of $1.00 per month. The accrued and unpaid dividends
compound monthly at a rate of 12% per year. The dividends began to accrue and
compound interest from the issuance date of the preferred stock and ceased to
accrue on July 1, 1997, when the Senior Notes were issued.
The mandatory redemption of the Series A Preferred is October 31, 2006. The
redemption shall be in cash.
F-49
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
12. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
Each holder of the Series A Preferred shall have the right, at the option of
the holder, to convert any of its shares of Series A Preferred into a number of
fully paid and nonassessable shares of common stock. At any time, any holder of
Series A Preferred Stock may convert all or any portion thereof into common
stock of Destia. As of December 31, 1997 and 1998, the shares of Series A
Preferred Stock outstanding were convertible into 3,553,821 shares of common
stock and would convert automatically upon the Company closing an initial public
offering of common stock. The number of shares of common stock that each share
of Series A Preferred Stock is convertible into is equal to the number of shares
of common stock outstanding on November 1, 1996 (on a diluted basis), which was
22,564,000, multiplied by a fraction (i) the numerator of which is equal to the
stated value with respect to the shares of Series A Preferred Stock being so
converted, plus any dividends accrued thereon, and (ii) the denominator of which
is equal to $100.0 million plus the number of dollars received by Destia since
November 1, 1996 from the exercise of specified options or warrants.
13. RELATED PARTY TRANSACTIONS
The Company has notes payable due to various related parties. These notes
are unsecured, and accrue interest at annual rates ranging from 9% to 18%. These
notes are demand obligations. (See Note 17 for a discussion of the repayment of
certain indebtedness).
The Company has an interest bearing note receivable at December 31, 1997 and
1998 for approximately $215,000 and $230,000, respectively, from a related
party.
The sister of Alfred West owns a 28% interest in Destia's Swiss subsidiary,
Econophone Services GmbH. (See Note 17 for a discussion of the Company's
acquisition of such interest)
14. STOCK-BASED COMPENSATION PLANS
On October 31, 1996, the Board of Directors adopted the Destia
Communications, Inc. 1996 Flexible Incentive Plan (the "1996 Plan") and an
Incentive Stock Option Agreement with the then Chief Operating Officer and Chief
Financial Officer of the Company. The Company accounts for awards granted to
employees and directors under APB No. 25, under which no compensation cost has
been recognized for stock options granted. Had compensation cost for these stock
options been determined consistent with SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- --------------
<S> <C> <C> <C>
Net Loss:
Available to Common Shareholders............ $ (8,608,000) $ (31,098,000) $ (69,037,000)
Pro Forma................................... (9,103,000) (31,889,000) (70,737,000)
Basic EPS:
As Reported................................. $ (0.41) $ (1.50) $ (3.31)
Pro Forma................................... $ (0.44) $ (1.53) $ (3.39)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts since the Company anticipates additional awards in
the future.
F-50
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
14. STOCK-BASED COMPENSATION PLANS (CONTINUED)
Under the 1996 Plan, the Company granted 20,778 options to outside
consultants. All transactions with individuals other than those considered
employees, as set forth within the scope of APB No. 25, must be accounted for
under the provisions of SFAS No. 123. Under SFAS No. 123, the fair value of the
options granted to the consultants as of the date of grant using the
Black-Scholes pricing model is $33,019. The NQSOs (as hereinafter defined) were
granted to the consultants for terms of up to ten years and are exercisable in
whole or in part at stated times from the date of grant up to three years from
the date of grant. The 10,389 options granted to consultants during 1996 and the
10,389 options granted to consultants during 1998 have an exercise price of
$2.41 and $4.81, respectively. As of December 31, 1997 and 1998, 3,463 and
12,121 of the options granted to the consultants were exercisable, respectively,
and the expense recognized in 1996, 1997 and 1998 relating to these options was
$496, $2,976 and $9,666, respectively.
The 1996 Plan as amended authorizes the granting of awards, the exercise of
which would allow up to an aggregate of 4,600,000 shares of the Company's common
stock to be acquired by the holders of said awards. The awards can take the form
of Incentive Stock Options ("ISOs"), Non-qualified Stock Options ("NQSOs"),
Stock Appreciation Rights ("SARs"), Restricted Stock and Unrestricted Stock. The
SARs may be awarded either in tandem with options or on a stand-alone basis.
Awards may be granted to key employees, directors and consultants. ISOs and
NQSOs are granted in terms not to exceed ten years and become exercisable as set
forth when the award is granted. Options may be exercised in whole or in part.
The exercise price of the ISOs is the market price of the Company's common stock
on the date of grant. The exercise price of NQSOs shall never be less than the
par value of the Company's common stock. Any plan participant who is granted
ISOs and possesses more than 10% of the voting rights of the Company's
outstanding common stock must be granted an option price with at least 110% of
the fair market value on the date of grant and the option must be exercised
within five years from the date of grant. Under the Company's 1996 Plan, ISOs
and NQSOs have been granted to key employees and directors for terms of up to
ten years, at various exercise prices and are exercisable in whole or in part at
stated times from the date of grant up to three years from the date of grant. At
December 31, 1997 and 1998, 1,152,418 and 2,239,583 options respectively, were
exercisable under the Company's 1996 Plan.
Option activity during 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
Outstanding at beginning of year.................... 2,707,935 $ 2.41 3,014,358 $ 2.64
Granted............................................. 316,812 4.81 1,598,429 6.13
Cancelled........................................... (10,389) 2.41 (175,672) 2.93
Outstanding at end of year.......................... 3,014,358 2.64 4,437,115 3.85
Exercisable at end of year.......................... 1,152,418 2.41 2,239,583 2.74
Weighted average fair value of options granted...... 1.84 2.36
</TABLE>
F-51
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
14. STOCK-BASED COMPENSATION PLANS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998: risk-free interest rate of 6.23%
and 5.43% for 1997 and 1998; expected life of three years for 1997 and 1998;
expected volatility of 47% for 1997 and 66% for 1998 and expected dividend yield
of zero percent for 1997 and 1998.
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
---------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT REMAINING WEIGHTED AVERAGE AT WEIGHTED AVERAGE
PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1998 EXERCISE PRICE
- ------------- ------------------- ------------------- ------------------- ------------------ -------------------
2$.41--$4.81.. 3,568,062 8.03 $ 3.05 2,239,583 $ 2.64
6$.50--$7.22.. 869,053 9.28 $ 7.14 -- --
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
The Company has various lease agreements for offices, automobiles and other
property. Future minimum annual lease payments under the Company's operating and
capital leases with initial or remaining terms of one year or more at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- ----------
<S> <C> <C>
1999............................................................... $ 5,389,000 $ 154,000
2000............................................................... 4,140,000 91,000
2001............................................................... 3,529,000 67,000
2002............................................................... 2,988,000 35,000
2003 and thereafter................................................ 6,919,000 --
------------- ----------
Total minimum lease payments....................................... $ 22,965,000 $ 347,000
------------- ----------
------------- ----------
</TABLE>
The rent expense for the years ended December 31, 1996, 1997 and 1998 was
approximately $394,000, $1,378,000 and $2,824,000, respectively.
As of December 31, 1998, The Company has entered into employment agreements
with certain officers which expire by December 31, 1999. The aggregate
commitment for future compensation under these agreements is approximately
$1,350,000. These officers are also eligible for annual bonuses based on
performance. See Note 17 for a discussion regarding employment agreements
entered into after such date.
LONG-TERM LEASE AGREEMENT
On November 17, 1998, Destia reached an agreement with Frontier
Communications ("Frontier") to acquire a 20-year IRU to use portions of its U.S.
fiber optic network. The Company expects to begin using some of Frontier's
network by July 1999. Additionally, management expects that Frontier's fiber
optic network will be fully operational by the end of 1999. A portion of the
acquisition price was paid on November 17, 1998. The balance of the obligation
will be discharged over the next 36 months based
F-52
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
upon the terms and conditions of the agreement. Beginning in June 1999, Frontier
shall have the right to purchase on a monthly basis up to a cumulative average
of one million dollars in Destia services that will be offset against the
remaining obligation in lieu of additional cash payments. At the end of the
36-month period the balance remaining will be settled with a cash payment. The
acquisition price will be amortized over 20 years and will commence at the date
that the network becomes substantially operational. The Company's total
commitments are approximately $42.3 million in the aggregate for the 20-year IRU
from Frontier and for the purchase of a transatlantic IRU.
16. ACQUISITIONS
VOICENET ACQUISITION
A definitive agreement to acquire VoiceNet was entered into on January 28,
1998. The closing of the VoiceNet Acquisition occurred on February 12, 1998. The
initial purchase price for VoiceNet was $21.0 million and was paid out of cash
on hand. The sellers of VoiceNet also are entitled to receive an earn-out based
upon the revenue growth of the VoiceNet business for a period of up to one year
following the closing of the acquisition.
VoiceNet provides travellers and other callers with calling card services,
which are advertised primarily in in-flight magazines. Destia has provided
substantially all of VoiceNet's transmission, billing and customer service
functions since April 1996.
TELCO MINORITY INTEREST ACQUISITION
In the United Kingdom, the majority of Destia's sales are made through Telco
Global Communications ("Telco"), its majority owned subsidiary that was
established during the fourth quarter of 1996. Telco's revenues are derived
primarily from international and domestic long distance services and the sale of
prepaid cards. On July 17, 1998, the Company acquired the 30% minority interest
in Telco it did not already own in exchange for approximately $14.0 million in
cash, payable by the Company in quarterly installments, together with interest
at a rate of 8.0% per annum, over approximately three years. The entire purchase
price is classified as goodwill, which will be amortized over 20 years. In
connection with such acquisition, (i) Telco obtained ownership rights with
respect to certain proprietary software used in Telco's business and (ii) the
Company converted options to acquire Telco shares held by Telco employees into
grants of non-voting restricted shares of the Company's common stock.
OTHER ACQUISITIONS
During November 1998, the Company completed two small acquisitions. It
acquired a controlling interest in America First Ltd. ("America First"), a
prepaid card distributor in the United Kingdom for approximately $5.5 million.
The majority of the purchase price was recorded as goodwill and will be
amortized over 20 years. The Company also acquired the customer list of a long
distance reseller, also located in the United Kingdom. The purchase price was
allocated to the customer base and will be amortized over 5 years.
F-53
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
17. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
The Company has announced that it had filed a registration statement with
the Securities and Exchange Commission for an initial public offering of its
common stock, for 6,500,000 shares at $10.00 per share excluding over allotment.
STOCK SPLIT
The financial statements retroactively reflect the 1.04 for 1 stock split
which occurred in connection with the above offering.
ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On March 30, 1999, the Company acquired the 28% minority interest in
Econophone Services GmbH (Switzerland). The entire purchase price is classified
as goodwill, which is amortized over 20 years.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
For a discussion on recent employment agreements and arrangements with
certain officers of the Company, see "Management--Employment Agreements and
Arrangements" in the Registration Statement.
REPAYMENT OF CERTAIN INDEBTEDNESS
The related party notes described in Note 13 have been repaid in full.
CAPITAL STOCK INCREASES
Subsequent to year end, the Board of Directors approved a change in the
authorized shares of common stock from 29,250,000 to 72,000,000 shares and in
the preferred stock from 250,000 to 2,500,000 shares. In addition, the Company
increased the number of authorized shares reserved for the issuance of stock
options under the 1996 Plan from 4,600,000 to 5,500,000 shares.
F-54
<PAGE>
PART I
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES.......................................................... $ 48,754 $ 75,971 $ 90,414 $ 138,590
COST OF SERVICES.................................................. 35,585 54,367 67,041 98,737
---------- ---------- ---------- ----------
Gross profit.................................................... 13,169 21,604 23,373 39,853
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................... 19,272 29,911 34,756 56,526
DEPRECIATION AND AMORTIZATION..................................... 2,424 6,915 4,102 12,764
---------- ---------- ---------- ----------
Loss from operations............................................ (8,527) (15,222) (15,485) (29,437)
INTEREST EXPENSE, net............................................. (6,597) (9,640) (12,276) (19,529)
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN, net........................ (2) 7 114 (37)
OTHER EXPENSE, net................................................ (196) (356) (269) (706)
---------- ---------- ---------- ----------
Net loss........................................................ $ (15,322) $ (25,211) $ (27,916) $ (49,709)
---------- ---------- ---------- ----------
BASIC AND DILUTED LOSS PER SHARE.................................. $ (0.74) $ (0.93) $ (1.34) $ (2.07)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON SHARES
OUTSTANDING..................................................... 20,778 27,239 20,778 24,028
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-55
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
(SEE NOTE) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 118,218 $ 118,844
Marketable securities............................................................ 21,343 --
Accounts receivable, net of allowance for doubtful accounts of $4,086 and $5,523,
respectively................................................................... 33,351 46,447
Prepaid expenses and other current assets........................................ 3,409 6,045
Restricted cash and securities................................................... 9,590 9,591
-------- -------------
Total current assets........................................................... 185,911 180,927
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of accumulated depreciation and
amortization of $12,418 and $21,878 at December 31, 1998 and June 30, 1999,
respectively..................................................................... 107,249 132,375
Debt issuance costs................................................................ 12,244 11,576
Intangibles........................................................................ 49,488 50,809
Other assets....................................................................... 2,439 4,263
Restricted cash and securities..................................................... 30,877 21,458
-------- -------------
Total assets................................................................... $ 388,208 $ 401,408
-------- -------------
-------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................................................. $ 33,352 $ 34,543
Accrued expenses and other current liabilities................................... 31,131 39,224
Interest accrued on Senior Notes................................................. 9,590 9,591
Current maturities of other long-term debt....................................... 16,232 9,487
Current maturities of obligations under capital lease............................ 154 590
Current maturities of notes payable--related party............................... 308 --
Deferred revenue................................................................. 4,739 4,834
-------- -------------
Total current liabilities...................................................... 95,506 98,269
OTHER LONG-TERM DEBT............................................................... 37,379 25,725
OBLIGATIONS UNDER CAPITAL LEASE.................................................... 193 946
SENIOR NOTES....................................................................... 343,176 354,066
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK.................................... 14,421 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Voting common stock, par value $.01; 29,250,000 and 72,000,000 shares authorized
at December 31, 1998 and June 30, 1999, respectively; 20,778,321 and 31,119,397
shares issued and outstanding at December 31, 1998 and June 30, 1999,
respectively................................................................... 208 311
Non-voting common stock, par value $.01; 500,000 shares authorized; 135,890 and
95,331 shares issued and outstanding at December 31, 1998 and June 30, 1999,
respectively................................................................... 1 1
Additional paid-in capital....................................................... 6,923 81,346
Accumulated other comprehensive loss............................................. (856) (1,003)
Accumulated deficit.............................................................. (108,743) (158,253)
-------- -------------
Total stockholders' equity (deficit)........................................... (102,467) (77,598)
-------- -------------
Total liabilities and stockholders' equity (deficit)........................... $ 388,208 $ 401,408
-------- -------------
-------- -------------
</TABLE>
NOTE: The December 31, 1998 Balance Sheet is derived from audited financial
statements.
The accompanying notes to the financial statements are an integral part of these
statements.
F-56
<PAGE>
DESTIA COMMUNICATIONS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (27,916) $ (49,709)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 4,102 12,764
Provision for doubtful accounts................................................. 3,244 1,437
Accreted interest expense....................................................... 7,645 10,890
Changes in assets and liabilities:
Increase in accounts receivable................................................. (15,739) (13,734)
Increase in prepaid expenses and other current assets........................... (2,769) (2,085)
Decrease (increase) in other assets............................................. 501 (2,601)
Increase in accounts payable, accrued expenses and other current liabilities.... 20,646 7,370
Increase in deferred revenue.................................................... 1,515 95
---------- ----------
Net cash used in operating activities......................................... (8,771) (35,573)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................................ (35,645) (32,983)
Net cash paid in acquisitions..................................................... (20,980) (2,255)
(Purchase) sale of marketable securities--net..................................... (134,956) 21,343
---------- ----------
Net cash used in investing activities......................................... (191,581) (13,895)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock........................................ -- 59,000
Net proceeds from exercise of stock options....................................... -- 532
Proceeds from long-term debt...................................................... 922 --
Repayments of long-term debt...................................................... (984) (18,399)
Repayments of capital leases...................................................... (92) (149)
Repayments of notes payable--related party........................................ (7) (308)
Proceeds from senior notes........................................................ 175,785 --
Payment of debt issuance costs.................................................... (7,159) --
---------- ----------
Net cash provided by financing activities..................................... 168,465 40,676
---------- ----------
Decrease in cash and cash equivalents, (including restricted cash).................. (31,887) (8,792)
Cash and cash equivalents, beginning of period (including restricted cash).......... 126,629 158,685
---------- ----------
Cash and cash equivalents, end of period (including restricted cash)................ $ 94,742 $ 149,893
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................................ $ 11,710 $ 11,854
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of preferred stock...................................................... $ 46 $ --
Capital leases executed........................................................... -- 1,338
Acquisition in exchange for common stock.......................................... -- 675
Conversion of preferred stock into common stock................................... -- 14,421
DETAILS OF ACQUISITIONS:
Fair value of assets acquired..................................................... (1,068) (1,615)
Goodwill.......................................................................... (20,613) (2,555)
Liabilities assumed............................................................... 701 1,915
---------- ----------
Net cash paid for acquisitions................................................ $ (20,980) $ (2,255)
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-57
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Destia Communications, Inc. (formerly Econophone, Inc.) ("Destia" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, although management believes that the disclosures herein are adequate
to make the information presented not misleading. All significant intercompany
balances and transactions have been eliminated in consolidation. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three-month or
six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. It is
suggested that these financial statements be read in conjunction with Destia's
audited annual consolidated financial statements.
NOTE B--CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
NOTE C--COMPREHENSIVE LOSS
The comprehensive loss for the three months ended June 30, 1998 and 1999
includes the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
Net Loss.............................................................. $ (15,322) $ (25,211)
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments.............................. (313) (282)
---------- ----------
Comprehensive Loss.................................................... $ (15,635) $ (25,493)
---------- ----------
---------- ----------
</TABLE>
F-58
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C--COMPREHENSIVE LOSS (CONTINUED)
Accumulated other comprehensive loss, (all of which relates to foreign
currency translation adjustments) as of December 31, 1998 and June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- ---------
<S> <C> <C>
Balance at beginning of period....................................... $ (104) $ (856)
Translation Adjustments.............................................. (752) (147)
----- ---------
Balance at end of period............................................. $ (856) $ (1,003)
----- ---------
----- ---------
</TABLE>
NOTE D--LOSS PER SHARE
Loss per share is based on the standards of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share", which requires the
presentation of basic EPS and diluted EPS. Basic EPS is calculated by dividing
income available to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Weighted average shares
outstanding has been calculated to reflect additional issuances of shares of
common stock during the second quarter (including shares of common stock issued
as a result of the exercise of warrants or options or the conversion of shares
of restricted non-voting common stock or preferred stock). A total of 6,500,000
shares of common stock were issued in connection with Destia's initial public
offering in May ("IPO") and, upon consummation of the IPO, shares of preferred
stock automatically converted into 3,553,821 shares of common stock. If these
shares had been included for the entire second quarter, the weighted average
shares outstanding as of June 30, 1999 would have been 31,214,728 shares of
common stock. Loss available to common stockholders is calculated as net loss
reduced by accretion on preferred stock. Upon the conversion of preferred stock
at the IPO, accretion of preferred stock ceased, and the accumulated accretion
to date was converted to additional paid-in capital (see Note E). Diluted EPS
has not been presented separately since the inclusion of outstanding options and
warrants would be antidilutive.
NOTE E--ACCUMULATED DEFICIT
The change in the accumulated deficit reflects net loss for the period,
which is offset by the reclassification, as a result of the IPO, of the
preferred stock accretion, in the amount of approximately $199,000, from the
accumulated deficit to additional paid-in capital. At the IPO, the preferred
stock automatically converted to common stock. Prior to May, 1999 accretion of
preferred stock was recorded within the accumulated deficit.
NOTE F--INITIAL PUBLIC OFFERING
On May 11, 1999, the Company completed an initial public offering of
6,500,000 shares of its common stock, par value $.01 per share ("Common Stock"),
which was priced at $10.00 per share. The net proceeds to the Company (after
deducting underwriter discounts and expenses) were approximately $59.0 million.
The Company intends to use the net proceeds from the offering to expand its
sales and marketing activities and to make capital expenditures, particularly in
Europe, as well as to fund working capital
F-59
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE F--INITIAL PUBLIC OFFERING (CONTINUED)
and general corporate purposes, including to fund losses. Upon consummation of
the IPO, all outstanding shares of Preferred Stock were converted into Common
Stock and the following material changes to the Company's certificate of
incorporation were effected: (i) the number of authorized shares of Common Stock
was increased from 29,250,000 to 72,000,000; (ii) the number of authorized
shares of preferred stock was increased from 250,000 to 2,500,000; and (iii) a
stock split of 1.04 shares of Common Stock for every 1.0 shares was completed.
NOTE G--ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On March 30, 1999, the Company acquired the 28% minority interest in
Econophone Services GmbH (Switzerland). The entire purchase price is classified
as goodwill, which is being amortized over 20 years.
NOTE H--GEOGRAPHIC INFORMATION
In accordance with quarterly reporting requirements of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", the
following revenue by segment information is shown for the three-month and
six-month periods ended June 30, 1998 and June 30, 1999.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
<S> <C> <C> <C>
1998 1999 % CHANGE
--------- --------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
North America............................................... $ 26,007 $ 46,174 78%
United Kingdom.............................................. 17,849 18,524 4%
Continental Europe.......................................... 4,898 11,273 130%
--------- --------- ---
Total....................................................... $ 48,754 $ 75,971 56%
--------- --------- ---
--------- --------- ---
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
<S> <C> <C> <C>
1998 1999 % CHANGE
--------- ---------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
North America.............................................. $ 47,045 $ 86,677 84%
United Kingdom............................................. 33,887 31,759 (6)%
Continental Europe......................................... 9,482 20,154 113%
--------- ---------- ---
Total...................................................... $ 90,414 $ 138,590 53%
--------- ---------- ---
--------- ---------- ---
</TABLE>
F-60
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
DESTIA COMMUNICATIONS, INC.,
VIATEL ACQUISITION CORP.
AND
VIATEL, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
1. DEFINITIONS......................................................................................... A-1
2. THE TRANSACTION..................................................................................... A-6
(a) The Merger............................................................................... A-6
(b) The Closing.............................................................................. A-6
(c) Actions at the Closing................................................................... A-6
(d) Effect of Merger......................................................................... A-7
(e) Procedure for Exchange................................................................... A-9
(f) Closing of Transfer Records.............................................................. A-10
(g) Dissenters' Rights....................................................................... A-10
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................................................... A-11
(a) Organization, Qualification and Corporate Power.......................................... A-11
(b) Capitalization........................................................................... A-11
(c) Subsidiaries............................................................................. A-11
(d) Voting Arrangements...................................................................... A-12
(e) Authorization of Transaction............................................................. A-12
(f) Noncontravention......................................................................... A-12
(g) Filings with the SEC..................................................................... A-13
(h) Financial Statements..................................................................... A-13
(i) Events Subsequent to June 30, 1999....................................................... A-13
(j) Compliance............................................................................... A-14
(k) Brokers' and Other Fees.................................................................. A-14
(l) Litigation and Liabilities............................................................... A-14
(m) Taxes.................................................................................... A-14
(n) Fairness Opinion......................................................................... A-15
(o) Employee Benefits........................................................................ A-15
(p) Delaware General Corporation Law......................................................... A-16
(q) Year 2000................................................................................ A-16
(r) Environmental Matters.................................................................... A-16
(s) Intellectual Property.................................................................... A-17
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
(t) Insurance................................................................................ A-17
(u) Certain Contracts........................................................................ A-17
4. REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PARENT SUBSIDIARY................................ A-18
(a) Organization, Qualification and Corporate Power.......................................... A-18
(b) Capitalization........................................................................... A-18
(c) Subsidiaries............................................................................. A-18
(d) Voting Arrangements...................................................................... A-19
(e) Authorization of Transaction............................................................. A-19
(f) Noncontravention......................................................................... A-19
(g) Filings with the SEC..................................................................... A-19
(h) Financial Statements..................................................................... A-20
(i) Events Subsequent to June 30, 1999....................................................... A-20
(j) Compliance............................................................................... A-20
(k) Brokers' and Other Fees.................................................................. A-20
(l) Litigation and Liabilities............................................................... A-21
(m) Taxes.................................................................................... A-21
(n) Fairness Opinion......................................................................... A-21
(o) Employee Benefits........................................................................ A-21
(p) Year 2000................................................................................ A-22
(q) Environmental Matters.................................................................... A-22
(r) Intellectual Property.................................................................... A-23
(s) Insurance................................................................................ A-23
(t) Certain Contracts........................................................................ A-23
(u) Activities of Parent Subsidiary.......................................................... A-24
(v) Circe.................................................................................... A-24
5. COVENANTS......................................................................................... A-24
(a) General.................................................................................. A-24
(b) Notices and Consents..................................................................... A-24
(c) Regulatory Matters and Approvals......................................................... A-24
</TABLE>
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<TABLE>
<CAPTION>
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<S> <C> <C> <C>
(d) Operation of the Company's Business...................................................... A-27
(e) Operation of Parent's Business........................................................... A-29
(f) Access................................................................................... A-30
(g) Notice of Developments................................................................... A-30
(h) Company Exclusivity...................................................................... A-31
(i) Parent Exclusivity....................................................................... A-32
(j) Insurance and Indemnification............................................................ A-34
(k) Financial Statements..................................................................... A-36
(l) Continuity of Business Enterprise........................................................ A-36
(m) Parent Board of Directors................................................................ A-36
(n) Rule 145 Affiliates...................................................................... A-37
(o) Nasdaq Listing........................................................................... A-37
(p) Tax Free Treatment....................................................................... A-37
(q) Company Employee Plans................................................................... A-37
(r) Notice of Adverse Circe Network Developments............................................. A-37
(s) Discount Notes........................................................................... A-37
(t) Year 2000 Budgets........................................................................ A-38
6. CONDITIONS TO OBLIGATION TO CLOSE................................................................. A-38
(a) Conditions to Obligation of Parent and the Parent Subsidiary............................. A-38
(b) Conditions to Obligation of the Company.................................................. A-39
7. TERMINATION....................................................................................... A-40
(a) Termination of Agreement................................................................. A-40
(b) Effect of Termination.................................................................... A-42
8. MISCELLANEOUS..................................................................................... A-42
(a) Survival................................................................................. A-42
(b) Press Releases and Public Announcements.................................................. A-43
(c) No Third-Party Beneficiaries............................................................. A-43
(d) Entire Agreement......................................................................... A-43
(e) Binding Effect; Assignment............................................................... A-43
(f) Counterparts............................................................................. A-43
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
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<S> <C> <C> <C>
(g) Headings................................................................................. A-43
(h) Notices.................................................................................. A-43
(i) GOVERNING LAW............................................................................ A-44
(j) Amendments and Waivers................................................................... A-44
(k) Severability............................................................................. A-44
(l) Expenses................................................................................. A-45
(m) Construction............................................................................. A-45
(n) Incorporation of Exhibits................................................................ A-45
(o) Definition of Knowledge.................................................................. A-45
(p) WAIVER OF JURY TRIAL..................................................................... A-45
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of August 27,
1999, by and among VIATEL, INC., a Delaware corporation ("Parent"), VIATEL
ACQUISITION CORP., a Delaware corporation and a direct wholly-owned Subsidiary
of Parent (the "Parent Subsidiary"), and DESTIA COMMUNICATIONS, INC., a Delaware
corporation (the "Company"). Parent, the Parent Subsidiary and the Company are
referred to collectively herein as the "Parties."
WITNESSETH:
WHEREAS, this Agreement contemplates a transaction in which Parent will
acquire all of the outstanding capital stock of the Company through a merger of
the Parent Subsidiary with and into the Company;
WHEREAS, the Board of Directors of each of Parent, the Parent Subsidiary
and the Company has approved the acquisition of the Company by Parent, including
the merger of the Parent Subsidiary with and into the Company (the "Merger"),
upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of the Company has determined that the
Merger is advisable and is fair to and in the best interests of the holders of
the Company's voting common stock, par value $.01 per share (the "Voting
Shares"), and the holders of the Company's non-voting common stock, par value
$.01 per share (the "Nonvoting Shares" and together with the Voting Shares, the
"Company Shares"), and has resolved to recommend the approval of the Merger and
the adoption of this Agreement by the Company Stockholders (as defined in
Section1 below);
WHEREAS, the Board of Directors of Parent has determined that the Merger
is advisable and is fair to and in the best interests of the holders of Parent's
common stock, par value $0.01 per share (the "Parent Shares");
WHEREAS, the Parent Shares are listed for trading on the Nasdaq National
Market ("Nasdaq") and the Board of Directors of the Parent has resolved to
recommend the approval of the issuance of Parent Shares in connection with the
Merger as provided in this Agreement by the Parent Stockholders (as defined in
Section1 below) as required by the rules of Nasdaq and, if necessary, approval
of an amendment to the certificate of incorporation of Parent by the Parent
Stockholders to increase the authorized number of Parent Shares;
WHEREAS, to induce Parent and the Parent Subsidiary to enter into this
Agreement, Parent, the Parent Subsidiary and the Company have entered into a
Stockholder Agreement (each a "Stockholder Agreement") with each of Alfred West,
Steven West, Gary Bondi and PG Investors, L.P. (collectively, the
"Stockholders," and individually, a "Stockholder");
WHEREAS, this Agreement contemplates that for U.S. Federal income tax
purposes the Merger will qualify as a reorganization within the meaning of Code
Section368(a);
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth herein, and in consideration of the representations, warranties and
covenants set forth herein, the Parties agree as follows:
1. Definitions.
"Acquisition Proposal" means any proposal or offer (including,
without limitation, any proposal or offer to the Company Stockholders) with
respect to a merger, acquisition, consolidation, recapitalization,
reorganization, liquidation, tender offer or exchange offer or similar
transaction involving,
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or any purchase of 25% or more of the consolidated assets of, or any equity
interest representing 25% or more of the outstanding shares of capital stock in,
the Company.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Agreement" has the meaning set forth in the preambles.
"Blue Sky Filings" has the meaning set forth in Section5(c)(i)
below.
"Certificate of Merger" has the meaning set forth in Section2(c)
below.
"Circe Network" means Parent's fiber-optic broadband networks
completed or being constructed, in Western Europe.
"Circe Rights" means the authority, approvals, consents,
franchises, rights of way, way leaves, easements, permits, licenses and/or other
rights (contractual, governmental or otherwise) necessary for the construction
and operation of the Circe Network.
"Closing" has the meaning set forth in Section2(b) below.
"Closing Date" has the meaning set forth in Section2(b) below.
"Closing Sales Price per Parent Share" means, on any day, the
average of the last reported sale price of one Parent Share on the Nasdaq Stock
Market for each of the five trading days immediately preceding such day.
"Code" has the meaning set forth in Section3(o)(ii) below.
"Company" has the meaning set forth in the preambles.
"Company 10-K" has the meaning set forth in Section3(h) below.
"Company 10-Q" has the meaning set forth in Section3(h) below.
"Company Benefit Plan" and "Company Benefit Plans" have the
meanings set forth in Section3(o)(i) below.
"Company Board" means the board of directors of the Company.
"Company Contracts" has the meaning set forth in Section3(u)
below.
"Company Disclosure Letter" has the meaning set forth in
Section3(a) below.
"Company Employees" has the meaning set forth in Section3(o)(i)
below.
"Company ERISA Affiliate" has the meaning set forth in
Section3(o)(iii) below.
"Company Fairness Opinion" means an opinion of Morgan Stanley &
Co. Incorporated, addressed to the Company Board, as to the fairness of the Per
Share Merger Consideration to the Company Stockholders (other than Parent and
the Parent Subsidiary) from a financial point of view.
"Company Intellectual Property" has the meaning set forth in
Section3(s) below.
"Company Material Adverse Effect" has the meaning set forth in
Section3(a) below.
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"Company Pension Plan" has the meaning set forth in
Section3(o)(ii) below.
"Company Reports" has the meaning set forth in Section3(g)
below.
"Company Shares" has the meaning set forth in the preambles.
"Company Special Meeting" has the meaning set forth in
Section5(c)(ii) below.
"Company Stockholder" means any Person who or which holds any
Company Shares.
"Confidentiality Agreement" means the letter agreement dated
August 4, 1999 between Parent and the Company, providing that, among other
things, each Party would maintain confidential certain information of the other
Party.
"Confidential Information" means Information, as defined in the
Confidentiality Agreement.
"Delaware General Corporation Law" means Title 8, Chapter 1 of
the Delaware Code, as amended.
"Dissenting Shares" has the meaning set forth in Section2(g)
below.
"Effective Time" has the meaning set forth in Section2(d)(i)
below.
"Environmental Law" has the meaning set forth in Section3(r)
below.
"ERISA" has the meaning set forth in Section3(o)(i) below.
"Exchange Agent" has the meaning set forth in Section2(e)(i)
below.
"Exchange Fund" has the meaning set forth in Section2(e)(i)
below.
"Foreign Competition Laws" means foreign statutes, rules,
regulations, orders, decrees and administrative and judicial directives that are
designed or intended to prohibit, restrict or regulate actions having the
purpose or effect of monopolization, lessening of competition or restraint of
trade.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Government Entity" has the meaning set forth in Section3(f)
below.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Hazardous Substance" has the meaning set forth in Section3(r)
below.
"Indemnified Party" has the meaning set forth in Section5(j)(ii)
below.
"Joint Proxy Statement/Prospectus" has the meaning set forth in
Section5(c)(i) below.
"Merger" has the meaning set forth in the preambles.
"Merger Consideration" has the meaning set forth in
Section5(d)(v) below.
"Nasdaq" has the meaning set forth in the preambles.
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"Nonvoting Shares" has the meaning set forth in the preambles.
"Order" has the meaning set forth in Section6(a)(v) below.
"Outside Date" has the meaning set forth in Section7(a)(ii)
below.
"Parent" has the meaning set forth in the preambles.
"Parent 10-K" has the meaning set forth in Section4(h) below.
"Parent 10-Q" has the meaning set forth in Section4(h) below.
"Parent Acquisition Proposal" means any proposal or offer
(including, without limitation, any proposal or offer to Parent Stockholders)
with respect to a merger, acquisition, consolidation, recapitalization,
reorganization, liquidation, tender offer or exchange offer or similar
transaction involving, or any purchase of 25% or more of the consolidated assets
of, or any equity interest representing 25% or more of the outstanding shares of
capital stock in, Parent.
"Parent Benefit Plan" and "Parent Benefit Plans" have the
respective meanings set forth in Section4(o)(i) below.
"Parent Board" means the board of directors of Parent.
"Parent Contracts" has the meaning set forth in Section4(t)
below.
"Parent Disclosure Letter" has the meaning set forth in
Section4(a) below.
"Parent Employees" has the meaning set forth in Section4(o)(i)
below.
"Parent ERISA Affiliate" has the meaning set forth in
Section4(o)(iii) below.
"Parent Fairness Opinion" means an opinion of ING Barings LLC,
addressed to the Parent Board, as to the fairness of the Merger to Parent from a
financial point of view.
"Parent Intellectual Property" has the meaning set forth in
Section4(r) below.
"Parent Material Adverse Effect" has the meaning set forth in
Section4(a) below.
"Parent Pension Plan" has the meaning set forth in
Section4(o)(ii) below.
"Parent Reports" has the meaning set forth in Section4(g) below.
"Parent Shares" has the meaning set forth in the preambles.
"Parent Special Meeting" has the meaning set forth in
Section5(c)(ii) below.
"Parent Stockholder" means any Person who or which holds any
Parent Shares.
"Parent Subsidiary" has the meaning set forth in the preambles.
"Parent Superior Proposal" has the meaning set forth in
Section5(i)(ii) below.
"Parent Third Party" means any Person (or group of Persons)
other than the Company or its respective Affiliates.
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<PAGE>
"Party" has the meaning set forth in the preambles.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental entity (or any
department, agency or political subdivision thereof).
"Per Share Merger Consideration" has the meaning set forth in
Section2(d)(v) below.
"Prior Consultation" means oral or written notice to the chief
executive officer of the Company at least two (2) days (one of which must be a
business day) prior to the earlier of (x) taking the action or (y) committing to
take the action with respect to which Prior Consultation is necessary pursuant
to Section5(e) below and subsequent to such notice making the chief executive
officer of Parent reasonably available to the chief executive officer of the
Company to discuss such action prior to taking such action.
"Prohibited Parent Acquisition Proposal" has the meaning set
forth in Section5(i)(i) below.
"Representatives" has the meaning set forth in Section5(h)(i)
below.
"Registration Statement" has the meaning set forth in
Section5(c)(i) below.
"Required Company Consent" has the meaning set forth in
Section3(f) below.
"Required Parent Consent" has the meaning set forth in
Section4(f) below.
"Requisite Stockholder Approval" means, with respect to the
Company, the affirmative vote of the holders of the outstanding Company Shares
in favor of the adoption of this Agreement in accordance with the Delaware
General Corporation Law or, with respect to Parent, the affirmative vote of the
holders of the outstanding Parent Shares in favor of (a) approval of the
issuance of Parent Shares in connection with the Merger as provided in this
Agreement in accordance with the rules of Nasdaq and (b) if, necessary, an
amendment to Parent's certificate of incorporation to increase the authorized
capital stock of Parent in accordance with the Delaware General Corporation Law.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
"Security Interest" means any mortgage, pledge, lien,
encumbrance, charge or other security interest, other than (a) mechanic's,
materialman's and similar liens; (b) liens for taxes not yet due and payable or
for taxes that the taxpayer is contesting in good faith through appropriate
proceedings; (c) purchase money liens and liens securing rental payments under
capital lease arrangements; and (d) other liens arising in the ordinary course
of business and not incurred in connection with the borrowing of money.
"Stock Rights" means each option, warrant, purchase right,
subscription right, conversion right, exchange right or other contract,
commitment or security providing for the issuance or sale of any capital stock,
or otherwise causing to become outstanding any capital stock, including with
respect to the Company, the right of holders of Nonvoting Shares to exchange
such shares for Voting Shares.
"Stockholder" has the meaning set forth in the preambles.
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<PAGE>
"Stockholder Agreement" has the meaning set forth in the
preambles.
"Subsidiary" of a specified Person means any corporation,
limited liability company, partnership, joint venture or other legal entity of
which the specified Person (either alone or together with any other Subsidiary
of the specified Person) owns, directly or indirectly, more than 50% of the
stock or other equity, partnership, limited liability company or equivalent
interests, the holders of which are generally entitled to vote for the election
of the board of directors or other governing body of such corporation or other
legal entity, or otherwise has the power to vote or direct the voting of
sufficient securities to elect a majority of such board of directors or other
governing body.
"Superior Proposal" has the meaning set forth in Section5(h)(ii)
below.
"Surviving Corporation" has the meaning set forth in Section2(a)
below.
"Tax Return" means any report, return, declaration or other
information required to be supplied to a taxing authority in connection with
Taxes.
"Taxes" means all taxes or other like assessments including,
without limitation, income, withholding, gross receipts, excise, ad valorem,
real or personal property, asset, sales, use, license, payroll, transaction,
capital, net worth and franchise taxes imposed by or payable to any federal,
state, county, local or foreign government, taxing authority, subdivision or
agency thereof, including interest, penalties, additions to tax or additional
amounts thereto.
"Third Party" means any Person (or group of Persons) other than
Parent or its respective Affiliates.
"Voting Shares" has the meaning set forth in the preambles.
"Year 2000 Compliant" has the meaning set forth in Section3(q)
below.
2. The Transaction.
(a) The Merger. On and subject to the terms and conditions
of this Agreement, the Parent Subsidiary will merge with and into the Company at
the Effective Time. The Company shall be the corporation surviving the Merger
(the "Surviving Corporation").
(b) The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Kelley Drye & Warren LLP, 101 Park Avenue, New York, New York, commencing at
9:00 a.m. local time on the third business day following the satisfaction or
waiver of all conditions to the obligations of the Parties to consummate the
transactions contemplated hereby (other than conditions with respect to actions
the respective Parties will take at the Closing itself) or such other date as
the Parties may mutually determine (the "Closing Date").
(c) Actions at the Closing. At the Closing, (i) the Company
will deliver to Parent and the Parent Subsidiary the various certificates,
instruments and documents referred to in Section6(a) below; (ii) Parent and the
Parent Subsidiary will deliver to the Company the various certificates,
instruments and documents referred to in Section6(b) below; (iii) the Company
and the Parent Subsidiary will file with the Secretary of State of the State of
Delaware a Certificate of Merger in the form attached hereto as Exhibit A (the
"Certificate of Merger"); and (iv) Parent will deliver or cause to be delivered
the Exchange Fund to the Exchange Agent in the manner provided below in this
Section2.
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<PAGE>
(d) Effect of Merger.
(i) General. The Merger shall become effective at
the time (the "Effective Time") the Company and the Parent
Subsidiary file the Certificate of Merger with the Secretary of
State of the State of Delaware or at such later time as the
Parties may agree and specify in the Certificate of Merger. The
Merger shall have the effects set forth in the Delaware General
Corporation Law. The Surviving Corporation may, at any time
after the Effective Time, take any action (including executing
and delivering any document) in the name and on behalf of either
the Company or the Parent Subsidiary in order to carry out and
effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. At the Effective
Time, the certificate of incorporation of the Surviving
Corporation shall be amended to read in its entirety in the form
of Exhibit B and, as so amended, shall be the certificate of
incorporation of the Surviving Corporation until thereafter
amended in accordance with its terms and as provided by law.
(iii) By-laws. The By-laws of the Surviving
Corporation shall be amended and restated at and as of the
Effective Time to read in their entirety as did the By-laws of
the Parent Subsidiary in effect immediately prior to the
Effective Time and shall be the By-laws of the Surviving
Corporation (except that the name of the Surviving Corporation
will be changed to a name designated by Parent prior to the
Effective Time) until amended in accordance with their terms and
as provided by law.
(iv) Directors and Officers. The directors and
officers of the Parent Subsidiary immediately prior to the
Effective Time shall be the directors and officers of the
Surviving Corporation at and as of the Effective Time (retaining
their respective positions and terms of office), until the
earlier of their respective resignation, removal or otherwise
ceasing to be a director or officer, respectively, or until
their respective successors are duly elected and qualified, as
the case may be.
(v) Conversion of Company Shares. At and as of the
Effective Time, (A) each issued and outstanding Company Share
(other than any Company Shares owned by Parent, the Parent
Subsidiary or the Company) shall be converted into the right to
receive 0.445 Parent Shares (the "Per Share Merger
Consideration"), and all such Company Shares shall no longer be
outstanding, shall be canceled and shall cease to exist, and
each holder of a certificate representing any such Company
Shares shall thereafter cease to have any rights with respect to
such Company Shares, except the right to receive the Per Share
Merger Consideration for each such Company Share and any unpaid
dividends and distributions, if any, to which the holder of such
Company Shares is entitled pursuant to Section2(e) upon the
surrender of such certificate in accordance with Section2(e)
below (collectively, the "Merger Consideration"), PROVIDED,
HOWEVER, that the Per Share Merger Consideration shall be
subject to proportionate adjustment in the event of any stock
split, stock dividend or reverse stock split, and (B) each
Company Share owned by Parent, Parent Subsidiary or the Company
shall be canceled without payment therefor. No Company Share
shall be deemed to be outstanding or to have any rights other
than those set forth above in this Section2(d)(v) after the
Effective Time. Notwithstanding anything to the contrary in this
Section2(d)(v), no fractional Parent Shares shall be issued to
then former holders of Company Shares. In lieu thereof, each
then former holder of a Company Share who would otherwise have
been entitled to receive a fraction of a Parent Share (after
taking into account all certificates delivered by such then
former holder at any one time) shall receive an amount in cash
equal to such
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fraction of a Parent Share multiplied by the Closing Sales Price
per Parent Share on the date of the Effective Time.
(vi) Conversion of Stock Rights. The Company shall
take all such action as may be necessary to cause, at the
Effective Time, each Stock Right (but excluding rights of
holders of Nonvoting Shares to exchange such shares for Voting
Shares) granted by the Company to purchase Company Shares which
is outstanding and unexercised immediately prior thereto
(whether or not vested or exercisable), to be converted
automatically into an equivalent Stock Right to purchase Parent
Shares in an amount and at an exercise price determined as
follows:
(x) The number of Parent Shares to be subject to the
new Stock Right shall be equal to the product of the
number of Company Shares subject to the original Stock
Right multiplied by the Per Share Merger Consideration,
provided that any fractional Parent Shares resulting
from such multiplication shall be rounded as provided in
the instrument governing such Stock Right or, if there
is no such instrument, up to the next whole share; and
(y) The exercise price per Parent Share under the
new Stock Right shall be equal to the quotient of the
exercise price per Company Share under the original
Stock Right divided by the Per Share Merger
Consideration, provided that the exercise price
resulting from such division shall be rounded as
provided in the instrument governing such Stock Right
or, if there is no such instrument, up to the next whole
cent.
The adjustments provided herein with respect to any original
Stock Rights which are "incentive stock options" (as defined in
Section 422 of the Code) shall be and are intended to be
effected in a manner which is consistent with Section 424(a) of
the Code. The option plan of the Company under which the
original Stock Rights were issued shall be assumed by Parent,
and the duration and other terms of the new Stock Rights shall
be the same as the original Stock Rights, except that all
references to the Company shall be deemed to be references to
Parent. At the Effective Time, Parent shall deliver to then
former holders of original Stock Rights appropriate agreements
representing the right to acquire Parent Shares on the terms and
conditions set forth in this Section 2(d)(vi).
The Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of Parent Shares for delivery
upon exercise of the new Stock Rights in accordance with this
Section 2(d)(vi). At the Effective Time, Parent shall file a
registration statement on Form S-8 (or any successor form) or
another appropriate form, and seek to cause such Form S-8 to
become effective at or as soon as practicable after the
Effective Time, with respect to Parent Shares subject to new
employee stock options included in the Stock Rights and shall
use reasonable efforts to maintain the effectiveness of such
registration statement or registration statements (and maintain
the current status of the prospectus or prospectuses contained
therein) for so long as such options remain outstanding. With
respect to those individuals who subsequent to the Merger will
be subject to the reporting requirements under Section 16(a) of
the Securities Exchange Act, Parent shall administer the option
plans assumed pursuant to this Section 2(d)(vi) in a manner that
complies with Rule 16b-3 promulgated under the Securities
Exchange Act to the extent the Company option plan complied with
such rule prior to the Merger. Prior to the Effective Time,
Parent shall take all actions as may be required to cause the
acquisition of equity securities of Parent, as contemplated by
this Section 2(d)(vi), by any Person who is or will become a
director or officer of Parent to be
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eligible for exemption under Rule 16b-3(d) promulgated under the
Securities Exchange Act.
(vii) Conversion of Capital Stock of the Parent
Subsidiary. At and as of the Effective Time, each share of
common stock, $.01 par value per share, of the Parent Subsidiary
shall be converted into one share of common stock, $.01 par
value per share, of the Surviving Corporation.
(e) Procedure for Exchange.
(i) Immediately after the Effective Time, (A) Parent
will furnish to The Bank of New York, its transfer agent, or
such other bank or trust company reasonably acceptable to the
Company, to act as exchange agent (the "Exchange Agent") a
corpus (the "Exchange Fund") consisting of Parent Shares and
cash sufficient to permit the Exchange Agent to make full
payment of the Merger Consideration to the holders of all of the
issued and outstanding Company Shares (other than any Company
Shares owned by Parent, Parent Subsidiary or the Company), and
(B) Parent will cause the Exchange Agent to mail a letter of
transmittal (with instructions for its use) in a form to be
mutually agreed upon by the Company and Parent prior to Closing
to each holder of issued and outstanding Company Shares (other
than any Company Shares owned by Parent, the Parent Subsidiary
or the Company) for the holder to use in surrendering the
certificates which, immediately prior to the Effective Time,
represented his or its Company Shares against payment of the
Merger Consideration to which such holder is entitled pursuant
to Section2(d)(v). Upon surrender to the Exchange Agent of such
certificates, together with such letter of transmittal, duly
executed and completed in accordance with the instructions
thereto, Parent shall promptly cause to be issued a certificate
representing that number of whole Parent Shares and a check
representing the amount of cash in lieu of any fractional shares
and unpaid dividends and distributions, if any, to which such
Persons are entitled, after giving effect to any required tax
withholdings. No interest will be paid or accrued on the cash in
lieu of fractional shares and unpaid dividends and
distributions, if any, payable to recipients of Parent Shares.
If payment is to be made to a Person other than the registered
holder of the certificate surrendered, it shall be a condition
of such payment that the certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and
that the Person requesting such payment shall pay any transfer
or other taxes required by reason of the payment to a Person
other than the registered holder of the certificate surrendered
or establish to the reasonable satisfaction of the Surviving
Corporation or the Exchange Agent that such tax has been paid or
is not applicable. In the event any certificate representing
Company Shares shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the Person claiming
such certificate to be lost, stolen or destroyed, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed
certificate the Merger Consideration deliverable in respect
thereof; PROVIDED, HOWEVER, the Person to whom such Merger
Consideration is paid shall, as a condition precedent to the
payment thereof, give the Surviving Corporation a bond in such
sum as it may direct or otherwise indemnify the Surviving
Corporation in a manner reasonably satisfactory to it against
any claim that may be made against the Surviving Corporation
with respect to the certificate alleged to have been lost,
stolen or destroyed. No dividends or other distributions
declared after the Effective Time with respect to Parent Shares
and payable to the holders of record thereof shall be paid to
the holder of any unsurrendered certificate until the holder
thereof shall surrender such certificate in accordance with this
Section2(e). After the surrender of a certificate in accordance
with this Section2(e), the record holder thereof shall be
entitled to receive any such dividends or other
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distributions, without any interest thereon, which theretofore
had become payable with respect to the Parent Shares represented
by such certificate. No holder of an unsurrendered certificate
shall be entitled, until the surrender of such certificate, to
vote the Parent Shares into which his or its Company Shares
shall have been converted into the right to receive.
(ii) The Company will cause its transfer agent to
furnish promptly to the Parent Subsidiary a list, as of a recent
date, of the record holders of Company Shares and their
addresses, as well as mailing labels containing the names and
addresses of all record holders of Company Shares and lists of
security positions of Company Shares held in stock depositories.
The Company will furnish the Parent Subsidiary with such
additional information (including, but not limited to, updated
lists of holders of Company Shares and their addresses, mailing
labels and lists of security positions) and such other
assistance as Parent or the Parent Subsidiary or their agents
may reasonably request.
(iii) The Parent may cause the Exchange Agent to
invest the cash included in the Exchange Fund in one or more
investments selected by Parent; PROVIDED, HOWEVER, that the
terms and conditions of the investments shall be such as to
permit the Exchange Agent to make prompt payment of the Merger
Consideration as necessary. The Parent may cause the Exchange
Agent to pay over to the Surviving Corporation any net earnings
with respect to the investments, and Parent will replace
promptly any portion of the Exchange Fund which the Exchange
Agent loses through investments.
(iv) The Parent may cause the Exchange Agent to pay
over to the Surviving Corporation any portion of the Exchange
Fund (including any earnings thereon) remaining 180 days after
the Effective Time, and thereafter all former stockholders of
the Company shall be entitled to look to the Surviving
Corporation (subject to abandoned property, escheat and other
similar laws) as general creditors thereof with respect to the
Per Share Merger Consideration and any cash payable upon
surrender of their certificates.
(v) The Parent shall pay, or shall cause the
Surviving Corporation to pay, all charges and expenses of the
Exchange Agent.
(f) Closing of Transfer Records. After the Effective Time,
no transfer of Company Shares outstanding prior to the Effective Time shall be
made on the stock transfer books of the Surviving Corporation. If, after the
Effective Time, certificates representing such shares are presented for transfer
to the Exchange Agent, they shall be canceled and exchanged for certificates
representing Parent Shares, cash in lieu of fractional shares, if any, and
unpaid dividends and distributions, if any, as provided in Section2(e).
(g) Dissenters' Rights. The holders of Nonvoting Shares as
to which dissenters' rights shall have been duly demanded under applicable law
(the "Dissenting Shares"), if any, shall be entitled to payment by the Surviving
Corporation only of the fair value of such Nonvoting Shares plus accrued
interest to the extent permitted by and in accordance with the provisions of
applicable law; PROVIDED, HOWEVER, that (i) if any holder of Dissenting Shares
shall, under the circumstances permitted by applicable law, subsequently deliver
a written withdrawal of such holder's demand or (ii) if any holder fails to
establish such holder's entitlement to rights of payment as provided under
applicable law, such holder or holders (as the case may be) shall forfeit such
right to payment for such Nonvoting Shares and such Nonvoting Shares shall
thereupon be deemed to have been converted into Parent Shares as of the
Effective Time.
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3. Representations and Warranties of the Company. The Company
represents and warrants to Parent and the Parent Subsidiary:
(a) Organization, Qualification and Corporate Power. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of Delaware. If applicable to such country, each of the Company's
Subsidiaries operating in such country has been duly incorporated or otherwise
organized, is validly existing and, in jurisdictions where the concept is
applicable, in good standing under the laws of the jurisdiction of its
incorporation or organization. Each of the Company and its Subsidiaries is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification or failure to be in good standing would not reasonably be expected
to have a material adverse effect on the business, financial condition or
results of operations of the Company and its Subsidiaries taken as a whole or on
the ability of the Company to consummate the transactions contemplated by this
Agreement (a "Company Material Adverse Effect"). Each of the Company and its
Subsidiaries has full corporate power and corporate authority, and all foreign,
federal, state and local governmental permits, licenses and consents, required
to carry on the businesses in which it is engaged and to own and use the
properties owned and used by it, except for such permits, licenses and consents
the failure of which to have would not reasonably be expected to have a Company
Material Adverse Effect. The Company does not own any equity interest in any
corporation, partnership, limited liability company, joint venture or other
legal entity other than the Subsidiaries listed in Section3(a) of the Company
Disclosure Letter accompanying this Agreement (the "Company Disclosure Letter").
(b) Capitalization. The entire authorized capital stock of
the Company consists of 2,500,000 shares of preferred stock, $.01 par value per
share, none of which are issued and outstanding as of August 26, 1999,
75,000,000 Voting Shares, of which 31,226,052 Voting Shares were issued and
outstanding as of August 26, 1999 and no Voting Shares were held in treasury as
of August 26, 1999, and 500,000 Nonvoting Shares, of which 99,929 Nonvoting
Shares were issued and outstanding as of August 26, 1999 and no Nonvoting Shares
were held in treasury as of August 26, 1999. All of the issued and outstanding
Company Shares have been duly authorized and are validly issued, fully paid and
nonassessable, and none have been issued in violation of any preemptive or
similar right. As of August 26, 1999, 155,000 warrants of the Company were
outstanding, each such warrant entitling the holder thereof to purchase
1,315,175 Voting Shares at an exercise price of $0.01 per Voting Share (the
"Warrants"). As of August 26, 1999, 1,315,148 Voting Shares were subject to
issuance pursuant to the Warrants and 6,652,923 Voting Shares were subject to
issuance pursuant to employee stock options issued under Company Benefit Plans.
Except as set forth above, neither the Company nor any of its Subsidiaries has
any outstanding or authorized Stock Rights. Except for stock appreciation rights
authorized under Company Benefit Plans, of which none are outstanding as of
August 26, 1999, there are no outstanding or authorized stock appreciation,
phantom stock, profit participation or similar rights with respect to the
Company or any of its Subsidiaries. Except as set forth in Section3(b) of the
Company Disclosure Letter, there are no rights, contracts, commitments or
arrangements obligating the Company to redeem, purchase or acquire, or offer to
purchase, redeem or acquire, any outstanding shares of, or any outstanding
options, warrants or rights of any kind to acquire any shares of, or any
outstanding securities that are convertible into or exchangeable for any shares
of, capital stock of the Company.
(c) Subsidiaries. The Company owns, directly or indirectly,
100% of the outstanding shares of capital stock of each of its Subsidiaries free
and clear of any Security Interest and each such share of capital stock has been
duly authorized and is validly issued, fully paid and nonassessable, and none of
such shares of capital stock has been issued in violation of any preemptive or
similar right. No shares of capital stock of, or other equity interests in, any
Subsidiary of the Company are reserved for issuance, and there are no contracts,
agreements, commitments or arrangements obligating the Company or any of its
Subsidiaries (i) to offer, sell, issue, grant, pledge, dispose of or encumber
any
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<PAGE>
shares of capital stock of, or other equity interests in, or any options,
warrants or rights of any kind to acquire any shares of capital stock of, or
other equity interests in, any of the Subsidiaries of the Company or (ii) to
redeem, purchase or acquire, or offer to purchase or acquire, any outstanding
shares of capital stock of, or other equity interests in, or any outstanding
options, warrants or rights of any kind to acquire any shares of capital stock
of, or other equity interest in, or any outstanding securities that are
convertible into or exchangeable for, any shares of capital stock of, or other
equity interests in, any of the Subsidiaries of the Company.
(d) Voting Arrangements. Except as set forth in Section3(d)
of the Company Disclosure Letter or in Company Reports filed prior to the date
hereof, there are no voting trusts, proxies or other similar agreements or
understandings to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound with respect to the voting
of any shares of capital stock of the Company or any of its Subsidiaries or with
respect to the registration of the offering, sale or delivery of any shares of
capital stock of the Company or any of its Subsidiaries under the Securities
Act. There are no issued or outstanding bonds, debentures, notes or other
indebtedness of the Company having the right to vote on any matters on which
stockholders of the Company may vote.
(e) Authorization of Transaction. The Company has full
power and authority (including full corporate power and corporate authority),
and has taken all required action necessary to properly execute and deliver this
Agreement and to perform its obligations hereunder, and this Agreement
constitutes the valid and legally binding obligation of the Company, enforceable
in accordance with its terms and conditions, except as limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally and (ii)
general principles of equity, regardless of whether asserted in a proceeding in
equity or at law; PROVIDED, HOWEVER, that the Company cannot consummate the
Merger unless and until it receives the Requisite Stockholder Approval of the
Company Stockholders.
(f) Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree or other restriction of any
government, governmental agency or court of competent jurisdiction (a
"Government Entity") to which the Company or any of its Subsidiaries is subject
or any provision of the charter or by-laws of the Company or any of its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify or cancel or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
the Company or any of its Subsidiaries is a party or by which it is bound or to
which any of its assets is subject, except where the violation, conflict,
breach, default, acceleration, termination, modification, cancellation, or
failure to give notice would not reasonably be expected to have a Company
Material Adverse Effect or except as set forth in Section3(f) of the Company
Disclosure Letter. Other than as required under the provisions of the
Hart-Scott-Rodino Act, Foreign Competition Laws, the Delaware General
Corporation Law, Nasdaq, the Securities Exchange Act, the Securities Act and
state securities laws, neither the Company nor any of its Subsidiaries needs to
give any notice to, make any filing with or obtain any authorization, consent or
approval of any Government Entity in order for the Parties to consummate the
transactions contemplated by this Agreement, except where the failure to give
notice, to file or to obtain any authorization, consent or approval would not
reasonably be expected to have a Company Material Adverse Effect or except as
set forth in Section3(f) of the Company Disclosure Letter. "Required Company
Consents" means any authorization, consent or approval of a Government Entity or
other Third Party required to be obtained pursuant to any Foreign Competition
Laws or state securities laws or so that a matter set forth in Section3(f) of
the Company Disclosure Letter would not be reasonably expected to have a Company
Material Adverse Effect for purposes of this Section3(f).
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<PAGE>
(g) Filings with the SEC. The Company has made all filings
with the SEC that it has been required to make under the Securities Act and the
Securities Exchange Act (collectively, the "Company Reports"). Each of the
Company Reports has complied with the Securities Act and the Securities Exchange
Act in all material respects. None of the Company Reports, as of their
respective dates, contained any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
(h) Financial Statements.
(i) The Company has filed an Annual Report on Form
10-K (the "Company 10-K") for the fiscal year ended December 31,
1998 and a Quarterly Report on Form 10-Q (the "Company 10-Q")
for the fiscal quarter ended June 30, 1999. The financial
statements included in the Company 10-K and the Company 10-Q
(including the related notes and schedules) have been prepared
from the books and records of the Company and its Subsidiaries
in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby, and present fairly in all material
respects the financial condition of the Company and its
Subsidiaries as of the indicated dates and the results of
operations and cash flows of the Company and its Subsidiaries
for the periods set forth therein, (subject in the case of
quarterly financial statements to the absence of complete
footnotes and subject to normal year-end audit adjustments).
(ii) From June 30, 1999 until the date of this
Agreement, the Company and its Subsidiaries have not incurred
any liabilities that are of a nature that would be required to
be disclosed on a balance sheet of the Company and its
Subsidiaries or the footnotes thereto prepared in conformity
with GAAP, other than (A) liabilities incurred in the ordinary
course of business or (B) liabilities that would not,
individually or in the aggregate, reasonably be expected to have
a Company Material Adverse Effect or (C) liabilities disclosed
in Section3(h) of the Company Disclosure Letter or in Company
Reports filed prior to the date hereof.
(i) Events Subsequent to June 30, 1999. From June 30, 1999
to the date of this Agreement, except as disclosed in the Company Reports filed
prior to the date hereof or except as set forth in Section3(i) of the Company
Disclosure Letter, (i) the Company and its Subsidiaries have conducted their
respective businesses only in, and have not engaged in any transaction other
than according to, the ordinary and usual course of such businesses, and (ii)
there has not been (A) any change in the financial condition, business or
results of operations of the Company or any of its Subsidiaries, or any
development or combination of developments relating to the Company or any of its
Subsidiaries of which management of the Company has knowledge, and which would
reasonably be expected to have a material adverse effect upon the business,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole; (B) any declaration, setting aside or payment of any dividend
or other distribution with respect to the capital stock of the Company, or any
redemption, repurchase or other reacquisition of any of the capital stock of the
Company; (C) any change by the Company in accounting principles, practices or
methods materially affecting the reported consolidated assets, liabilities or
results of operations of the Company; (D) any increase in the compensation of
any officer of the Company or any of its Subsidiaries or grant of any general
salary or benefits increase to the employees of the Company or any of its
Subsidiaries other than in the ordinary course of business consistent with past
practices; (E) any issuance or sale of any capital stock or other securities
(including any Stock Rights) by the Company or any of its Subsidiaries of any
kind, other than upon exercise of Stock Rights issued by or binding upon the
Company; (F) any modification, amendment or change to the terms or conditions of
any Stock Right; or (G) any split,
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<PAGE>
combination, reclassification, redemption, repurchase or other reacquisition of
any capital stock or other securities of the Company or any of its Subsidiaries.
(j) Compliance. Except as set forth in Section3(j) of the
Company Disclosure Letter or in Company Reports filed prior to the date hereof,
the Company and its Subsidiaries are in compliance with all applicable foreign,
federal, state and local laws, rules and regulations except where the failure to
be in compliance would not reasonably be expected to have a Company Material
Adverse Effect.
(k) Brokers' and Other Fees. Except as set forth in
Section3(k) of the Company Disclosure Letter, none of the Company and its
Subsidiaries has any liability or obligation to pay any fees or commissions to
any broker, finder or agent with respect to the transactions contemplated by
this Agreement.
(l) Litigation and Liabilities. Except as disclosed in
Section3(l) of the Company Disclosure Letter or in Company Reports filed prior
to the date hereof, there are (i) no actions, suits or proceedings pending or,
to the knowledge of the management of the Company, threatened against the
Company or any of its Subsidiaries, or any facts or circumstances known to the
management of the Company which may give rise to an action, suit or proceeding
against the Company or any of its Subsidiaries, which (x) would reasonably be
expected to have a Company Material Adverse Effect, and (ii) no obligations or
liabilities of the Company or any of its Subsidiaries, whether accrued,
contingent or otherwise, known to the management of the Company which would
reasonably be expected to have a material adverse effect upon the business,
financial condition or results of operations of the Company and its Subsidiaries
taken as a whole.
(m) Taxes. Except as set forth in Section3(m) of the
Company Disclosure Letter or in Company Reports filed prior to the date hereof,
the Company and each of its Subsidiaries have duly filed or caused to be duly
filed on their behalf all federal, state, local and foreign Tax Returns required
to be filed by them, and have duly paid, caused to be paid or made adequate
provision for the payment of all Taxes required to be paid in respect of the
periods covered by such Tax Returns, except where the failure to file such Tax
Returns or to pay such Taxes would not reasonably be expected to have a material
adverse effect upon the business, financial condition or results of operations
of the Company and its Subsidiaries taken as a whole. Except as set forth in
Section3(m) of the Company Disclosure Letter, no claims for Taxes have been
asserted against the Company or any of its Subsidiaries and no material
deficiency for any Taxes has been proposed, asserted or assessed which has not
been resolved or paid in full. To the knowledge of the Company's management, no
Tax Return or taxable period of the Company or any of its Subsidiaries is under
examination by any taxing authority, and neither the Company nor any of its
Subsidiaries has received written notice of any pending audit by any taxing
authority. There are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any Tax Return for any period of
the Company or any or its Subsidiaries. Except as set forth in Section3(m) of
the Company Disclosure Letter, there are no tax liens other than liens for Taxes
not yet due and payable relating to the Company or any of its Subsidiaries. The
Company has no reason to believe that any conditions exist that could reasonably
be expected to prevent the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code. Except as provided in Section3(m) of the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries is a
party to any agreement or contract which would result in payment of any "excess
parachute payment," within the meaning of Section 280G of the Code, as of the
date of this Agreement. Neither the Company nor any of its Subsidiaries has
filed any consent pursuant to Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset
owned by the Company or any of its Subsidiaries. The Company has not been and is
not a United States real property holding company (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code. None of the Company or its Subsidiaries (x) has
been a member of an "affiliated group," within the meaning of Section 1504(a) of
the Code, other than a group
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the common parent of which was the Company or (y) has any liability for the
Taxes of any person, other than any of the Company or its Subsidiaries under
Treasury Regulation Section1.1502-6 (or any similar provision of state, local or
foreign law) as a transferee, successor, by contract or otherwise.
(n) Fairness Opinion. Morgan Stanley & Co. Incorporated has
delivered to the Company Board the Company Fairness Opinion, and a true and
complete copy thereof has been furnished to Parent.
(o) Employee Benefits.
(i) All material pension, profit-sharing, deferred
compensation, savings, stock bonus and stock option plans, and
all employee benefit plans, whether or not covered by the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which are sponsored by the Company or any Company
ERISA Affiliate (as defined below) of the Company or to which
the Company or any Company ERISA Affiliate of the Company makes
contributions, and which cover employees of the Company (the
"Company Employees") or former employees of the Company, all
employment or severance contracts with employees of the Company
or its Subsidiaries who receive more than $75,000 in total cash
compensation per annum, and any applicable "change of control"
or similar provisions in any plan, contract or arrangement that
cover Company Employees (collectively, "Company Benefit Plans"
and individually a "Company Benefit Plan") are accurately and
completely listed in Section3(o) of the Company Disclosure
Letter. No Company Benefit Plan is a multi-employer plan, money
purchase plan, defined benefit plan, multiple employer plan or
multiple employer welfare arrangement and no Company Benefit
Plan is covered by Title IV of ERISA. True and complete copies
of all Company Benefit Plans (other than medical and other
similar welfare plans made generally available to all Company
Employees) have been made available to Parent.
(ii) All Company Benefit Plans to the extent subject
to ERISA, are in compliance in all material respects with ERISA
and the rules and regulations promulgated thereunder. Each
Company Benefit Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA ("Company Pension
Plan") and which is intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), has received a favorable determination letter from the
Internal Revenue Service, which determination letter is
currently in effect, and there are no proceedings pending or, to
the knowledge of the management of the Company, threatened, or
any facts or circumstances known to the management of the
Company, which are reasonably likely to result in revocation of
any such favorable determination letter. There is no pending or,
to the knowledge of the management of the Company, threatened
litigation relating to the Company Benefit Plans. Neither the
Company nor any of its Subsidiaries has engaged in a transaction
with respect to any Company Benefit Plan that, assuming the
taxable period of such transaction expired as of the date
hereof, is reasonably likely to subject the Company or any of
its Subsidiaries to a tax or penalty imposed by either Section
4975 of the Code or Section 502(i) of ERISA.
(iii) No liability under Title IV of ERISA has been
or is reasonably likely to be incurred by the Company or any of
its Subsidiaries with respect to any ongoing, frozen or
terminated Company Benefit Plan that is a "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of
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them, or the single-employer plan of any entity which is
considered a predecessor of the Company or one employer with the
Company under Section 4001 of ERISA (a "Company ERISA
Affiliate"). All contributions required to be made under the
terms of any Company Benefit Plan have been timely made or
reserves therefor on the balance sheet of the Company have been
established, which reserves are adequate. Except as required by
Part 6 of Title I of ERISA, the Company does not have any
unfunded obligations for retiree health and life benefits under
any Company Benefit Plan.
(p) Delaware General Corporation Law. For purposes of
Section 203 of the Delaware General Corporation Law, the execution and delivery
of this Agreement and the Stockholder Agreements and consummation of
transactions contemplated hereby and thereby, including without limitation the
purchase by Parent of Company Shares or other securities issued by the Company,
has received the prior approval of the Board of Directors of the Company and,
accordingly, Parent will not be subject to the restrictions of Section 203(b) of
the Delaware General Corporation Law in the consummation of the Merger or this
Agreement or the Stockholder Agreements or the transactions contemplated by
either thereof.
(q) Year 2000. Except as disclosed in the previously filed
Company Reports, the Company's products and information systems are Year 2000
Compliant except to the extent that their failure to be Year 2000 Compliant
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the business, financial condition or results of
operations of the Company and its Subsidiaries taken as a whole. For purposes of
this Agreement, "Year 2000 Compliant" shall mean that a Person's products and
information systems accurately process date/time data (including, but not
limited to, calculating, comparing and sequencing) from, into and between the
twentieth and twenty-first centuries, and the years 1999 and 2000 and leap year
calculations.
(r) Environmental Matters. Except for such matters that,
individually or in the aggregate, are not reasonably likely to have a material
adverse effect on the business, financial condition or results of operations of
the Company and its Subsidiaries taken as a whole, or would not otherwise
require disclosure pursuant to the Securities Exchange Act, or are listed in
Section3(r) of the Company Disclosure Letter or described in Company Reports
filed prior to the date hereof, (i) each of the Company and its Subsidiaries has
complied and is in compliance with all applicable Environmental Laws (as defined
below); (ii) the properties currently owned or operated by the Company or any of
its Subsidiaries (including soils, groundwater, surface water, buildings or
other structures) are not contaminated with Hazardous Substances (as defined
below); (iii) neither the Company nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any third
party property; (iv) neither the Company nor any or its Subsidiaries has had any
release or threat of release of any Hazardous Substance; (v) neither the Company
nor any of its Subsidiaries has received any notice, demand, threat, letter,
claim or request for information alleging that it or any of its Subsidiaries may
be in violation of or liable under any Environmental Law (including any claims
relating to electromagnetic fields or microwave transmissions); (vi) neither the
Company nor any of its Subsidiaries is subject to any orders, decrees,
injunctions or other arrangements with any governmental or regulatory authority
of competent jurisdiction or is subject to any indemnity or other agreement with
any third party relating to liability under any Environmental Law or relating to
Hazardous Substances; and (vii) there are no circumstances or conditions
involving the Company or any of its Subsidiaries that would reasonably be
expected to result in any claims, liabilities, investigations, costs or
restrictions on the ownership, use or transfer of any of its properties pursuant
to any Environmental Law.
As used herein, the term "Environmental Law" means any federal,
state, local, foreign or other law (including common law), statutes, ordinances
or codes relating to: (i) the protection, investigation or restoration of the
environment, health, safety or natural resources, (ii) the handling, use,
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presence, disposal, release or threatened release of any Hazardous Substance, or
(iii) noise, odor, wetlands, pollution, contamination or any injury or threat of
injury to person or property in connection with any Hazardous Substance.
As used herein, the term "Hazardous Substances" means any
substance that is listed, classified or regulated pursuant to any Environmental
Law, including any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon.
(s) Intellectual Property. Except as disclosed in
Section3(s) of the Company Disclosure Letter or in the Company Reports filed
prior to the date hereof, the Company and its Subsidiaries have all right, title
and interest in, or a valid and binding license to use, all Company Intellectual
Property (as defined below). Except as disclosed in Section3(s) of the Company
Disclosure Letter or in the Company Reports filed prior to the date hereof, the
Company and its Subsidiaries (i) have not defaulted in any material respect
under any license to use any Company Intellectual Property, (ii) are not the
subject of any proceeding or litigation for infringement of any third party
intellectual property, (iii) have no knowledge of circumstances that would be
reasonably expected to give rise to any such proceeding or litigation and (iv)
have no knowledge of circumstances that are causing or would be reasonably
expected to cause the loss or impairment of any Company Intellectual Property,
other than a default, proceeding, litigation, loss or impairment that is not
having or would not be reasonably expected to have, individually or in the
aggregate, a material adverse effect on the business, financial condition or
results of operation of the Company and its Subsidiaries taken as a whole.
For purposes of this Agreement, "Company Intellectual Property"
means patents and patent rights, trademarks and trademark rights, trade names
and trade name rights, service marks and service mark rights, copyrights and
copyright rights, trade secret and trade secret rights, and other intellectual
property rights, and all pending applications for and registrations of any of
the foregoing that are individually or in the aggregate material to the conduct
of the business of the Company and its Subsidiaries taken as a whole.
(t) Insurance. Except as set forth in Section3(t) of the
Company Disclosure Letter, each of the Company and its Subsidiaries is insured
with financially responsible insurers in such amounts and against such risks and
losses as are customary for companies conducting the business as conducted by
the Company and its Subsidiaries during such time period.
(u) Certain Contracts. Except as set forth in Section3(u)
of the Company Disclosure Letter, all material contracts to which the Company or
any of its Subsidiaries is a party or may be bound that are required by Item
610(b)(10) of Regulation S-K to be filed as exhibits to, or incorporated by
reference in, the Company 10-K or the Company 10-Q have been so filed or
incorporated by reference. All material contracts to which the Company or any of
its Subsidiaries is a party or may be bound that have been entered into as of
the date hereof and will be required by Item 610(b)(10) of Regulation S-K to be
filed or incorporated by reference into the Company's Quarterly Report on Form
10-Q for the period ending September 30, 1999, but which have not previously
been filed or incorporated by reference into any Company Report, are set forth
in Section3(u) of the Company Disclosure Letter. All contracts, licenses,
consents, royalty or other agreements which are material to the Company and its
Subsidiaries, taken as a whole, to which the Company or any of its Subsidiaries
is a party (the "Company Contracts") are valid and in full force and effect on
the date hereof except to the extent they have previously expired in accordance
with their terms or, to the extent such invalidity would not reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company and its Subsidiaries taken as a whole
and, to the Company's knowledge, neither the Company nor any of its Subsidiaries
has violated any provision of, or committed or failed to perform any act which
with or without
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notice, lapse of time or both would constitute a default under the provisions
of, any Company Contract, except for defaults which individually and in the
aggregate would not reasonably be expected to result in a material adverse
effect on the business, financial condition or results of operations of the
Company and its Subsidiaries taken as a whole.
4. Representations and Warranties of Parent and the Parent
Subsidiary. Each of Parent and the Parent Subsidiary represents and warrants to
the Company:
(a) Organization, Qualification and Corporate Power. Each
of Parent and Parent Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware. If applicable to such country, each of Parent's Subsidiaries operating
in such country has been duly incorporated or otherwise organized, is validly
existing and, in jurisdictions where the concept is applicable, in good standing
under the laws of the jurisdiction of its incorporation or organization. Each of
Parent and its Subsidiaries is duly authorized to conduct business and, if
applicable to such country, is in good standing under the laws of each
jurisdiction where such qualification is required, except where the lack of such
qualification or failure to be in good standing would not reasonably be expected
to have a material adverse effect on the business, financial condition or
results of operations of Parent and its Subsidiaries taken as a whole or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement (a "Parent Material Adverse Effect"). Each of Parent and its
Subsidiaries has full corporate power and corporate authority, and all foreign,
federal, state and local governmental permits, licenses and consents, required
to carry on the businesses in which it is engaged and to own and use the
properties owned and used by it, except for such permits, licenses and consents
the failure of which to have would not reasonably be expected to have a Parent
Material Adverse Effect. Parent does not own any equity interest in any
corporation, partnership, limited liability company, joint venture or other
entity other than the Subsidiaries listed in Section4(a) of Parent's disclosure
letter accompanying this Agreement (the "Parent Disclosure Letter").
(b) Capitalization. The entire authorized capital stock of
Parent consists of 1,281,958 shares of preferred stock, $.01 par value per
share, none of which are issued and outstanding, and 50,000,000 Parent Shares,
of which 32,601,087 Parent Shares were issued and outstanding as of August 23,
1999 and no Parent Shares were held in treasury on August 23, 1999. All of the
issued and outstanding Parent Shares have been duly authorized and are validly
issued, fully paid and nonassessable, and none have been issued in violation of
any preemptive or similar right. Except as set forth in Section4(b) of the
Parent Disclosure Letter, neither Parent nor any of its Subsidiaries has any
outstanding or authorized Stock Rights. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation or similar rights with
respect to Parent or any of its Subsidiaries. There are no rights, contracts,
commitments or arrangements obligating Parent or any of its Subsidiaries to
redeem, purchase or acquire, or offer to purchase, redeem or acquire, any
outstanding shares of, or any outstanding options, warrants or rights of any
kind to acquire any shares of, or any outstanding securities that are
convertible into or exchangeable for any shares of, capital stock of Parent.
(c) Subsidiaries. Except as set forth in Section4(a) of the
Parent Disclosure Letter, Parent, directly or indirectly, owns 100% of the
outstanding shares of capital stock of each of its Subsidiaries free and clear
of any Security Interest and each such share of capital stock has been duly
authorized and is validly issued, fully paid and nonassessable, and none of such
shares of capital stock has been issued in violation of any preemptive or
similar right. No shares of capital stock of, or other equity interests in, any
Subsidiary of Parent are reserved for issuance, and there are no contracts,
agreements, commitments or arrangements obligating Parent or any of its
Subsidiaries (i) to offer, sell, issue, grant, pledge, dispose of or encumber
any shares of capital stock of, or other equity interests in, or any options,
warrants or rights of any kind to acquire any shares of capital stock of, or
other equity interests in, any of the Subsidiaries of Parent or (ii) to redeem,
purchase or acquire, or offer to purchase or acquire, any
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outstanding shares of capital stock of, or other equity interests in, or any
outstanding options, warrants or rights of any kind to acquire any shares of
capital stock of, or other equity interest in, or any outstanding securities
that are convertible into or exchangeable for, any shares of capital stock of,
or other equity interests in, any of the Subsidiaries of Parent.
(d) Voting Arrangements. There are no voting trusts,
proxies or other similar agreements or understandings to which Parent or any of
its Subsidiaries is a party or by which Parent or any of its Subsidiaries is
bound with respect to the voting of any shares of capital stock of Parent or any
of its Subsidiaries. There are no issued or outstanding bonds, debentures, notes
or other indebtedness of Parent having the right to vote on any matters on which
stockholders of Parent may vote.
(e) Authorization of Transaction. Each of Parent and the
Parent Subsidiary has full power and authority (including full corporate power
and corporate authority), and has taken all required action, necessary to
properly execute and deliver this Agreement and to perform its obligations
hereunder, and this Agreement constitutes the valid and legally binding
obligation of each of Parent and the Parent Subsidiary, enforceable in
accordance with its terms and conditions, except as limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors' rights generally and (ii)
general principles of equity, regardless of whether asserted in a proceeding in
equity or at law; PROVIDED, HOWEVER, that Parent cannot consummate the Merger
unless and until it receives the Requisite Stockholder Approval of the Parent
Stockholders.
(f) Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree or other restriction of any Government
Entity to which Parent or any of its Subsidiaries is subject or any provision of
the charter or by-laws of Parent or any of its Subsidiaries or (ii) conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify
or cancel or require any notice under any agreement, contract, lease, license,
instrument or other arrangement to which either Parent or any of its
Subsidiaries is a party or by which it is bound or to which any of its assets is
subject, except in the case of clause (ii) where the violation, conflict,
breach, default, acceleration, termination, modification, cancellation or
failure to give notice would not reasonably be expected to have a Parent
Material Adverse Effect. Other than as required under the provisions of the
Hart-Scott-Rodino Act, Foreign Competition Laws, Nasdaq, the Securities Exchange
Act, the Securities Act and state securities laws, neither Parent nor any of its
Subsidiaries needs to give any notice to, make any filing with or obtain any
authorization, consent or approval of any Government Entity in order for the
Parties to consummate the transactions contemplated by this Agreement, except
where the failure to give notice, to file or to obtain any authorization,
consent or approval would not reasonably be expected to have a Parent Material
Adverse Effect or except as set forth in Section4(f) of the Parent Disclosure
Letter. "Required Parent Consents" means any authorization, consent or approval
of a Government Entity or other Third Party required to be obtained pursuant to
any Foreign Competition Laws or state securities laws or so that a matter set
forth in Section4(f) of the Parent Disclosure Letter would not be reasonably
expected to have a Parent Material Adverse Effect for purposes of this
Section4(f).
(g) Filings with the SEC. Parent has made all filings with
the SEC that it has been required to make under the Securities Act and the
Securities Exchange Act (collectively, the "Parent Reports"). Each of the Parent
Reports has complied with the Securities Act and the Securities Exchange Act in
all material respects. None of the Parent Reports, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.
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(h) Financial Statements.
(i) Parent has filed an Annual Report on Form 10-K
(the "Parent 10-K") for the fiscal year ended December 31, 1998
and a Quarterly Report on Form 10-Q (the "Parent 10-Q") for the
fiscal quarter ended June 30, 1999. The financial statements
included in the Parent 10-K and the Parent 10-Q (including the
related notes and schedules) have been prepared from the books
and records of Parent and its Subsidiaries in accordance with
GAAP applied on a consistent basis throughout the periods
covered thereby, and present fairly in all material respects the
financial condition of Parent and its Subsidiaries as of the
indicated dates and the results of operations and cash flows of
Parent and its Subsidiaries for the periods set forth therein,
(subject in the case of quarterly financial statements to the
absence of complete footnotes and subject to normal year-end
audit adjustments).
(ii) From June 30, 1999 until the date of this
Agreement, Parent and its Subsidiaries have not incurred any
liabilities that are of a nature that would be required to be
disclosed on a balance sheet of Parent and its Subsidiaries or
the footnotes thereto prepared in conformity with GAAP, other
than (A) liabilities incurred in the ordinary course of business
or (B) liabilities that would not, individually or in the
aggregate, reasonably be expected to have a Parent Material
Adverse Effect or (C) liabilities disclosed in Section4(h) of
the Parent Disclosure Letter or in Parent Reports filed prior to
the date hereof.
(i) Events Subsequent to June 30, 1999. From June 30, 1999
to the date of this Agreement, except as disclosed in the Parent Reports filed
prior to the date hereof or except as set forth in Section4(i) of the Parent
Disclosure Letter, (i) Parent and its Subsidiaries have conducted their
respective businesses only in, and have not engaged in any transaction other
than according to, the ordinary and usual course of such businesses, and (ii)
there has not been (A) any change in the financial condition, business or
results of operations of Parent or any of its Subsidiaries, or any development
or combination of developments relating to Parent or any of its Subsidiaries of
which management of Parent has knowledge, and which would reasonably be expected
to have a material adverse effect upon the business, financial condition or
results of operations of Parent and its Subsidiaries taken as a whole; (B) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the capital stock of Parent, or any redemption, repurchase or other
reacquisition of any of the capital stock of Parent; (C) any change by Parent in
accounting principles, practices or methods; (D) any increase in the
compensation of any officer of Parent or any of its Subsidiaries or grant of any
general salary or benefits increase to the employees of Parent or any of its
Subsidiaries other than in the ordinary course of business consistent with past
practices; (E) any issuance or sale of any capital stock or other securities
(including any Stock Rights) by Parent or any of its Subsidiaries of any kind,
other than upon exercise of Stock Rights issued by or binding upon Parent; (F)
any modification, amendment or change to the terms or conditions of any Stock
Right; or (G) any split, combination, reclassification, redemption, repurchase
or other reacquisition of any capital stock or other securities of Parent or any
of its Subsidiaries.
(j) Compliance. Except as set forth in Section4(j) of the
Parent Disclosure Letter or in Parent Reports filed prior to the date hereof,
Parent and its Subsidiaries are in compliance with all applicable foreign,
federal, state and local laws, rules and regulations except where the failure to
be in compliance would not reasonably be expected to have a Parent Material
Adverse Effect.
(k) Brokers' and Other Fees. Except as set forth in
Section4(k) of the Parent Disclosure Letter, none of Parent and its Subsidiaries
has any liability or obligation to pay any fees or commissions to any broker,
finder or agent with respect to the transactions contemplated by this Agreement.
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(l) Litigation and Liabilities. Except as disclosed in
Section4(l) of the Parent Disclosure Letter or in Parent Reports filed prior to
the date hereof, there are (i) no actions, suits or proceedings pending or, to
the knowledge of the management of Parent, threatened against Parent or any of
its Subsidiaries, or any facts or circumstances known to the management of
Parent which may give rise to an action, suit or proceeding against Parent or
any of its Subsidiaries, which (x) would reasonably be expected to have a Parent
Material Adverse Effect and (ii) no obligations or liabilities of Parent or any
of its Subsidiaries, whether accrued, contingent or otherwise, known to the
management of Parent which would reasonably be expected to have a material
adverse effect upon the business, financial condition or results of operations
of Parent and its Subsidiaries taken as a whole.
(m) Taxes. Except as set forth in Section4(m) of the Parent
Disclosure Letter or in Parent Reports filed prior to the date hereof, Parent
and each of its Subsidiaries have duly filed or caused to be duly filed on their
behalf all federal, state, local and foreign Tax Returns required to be filed by
them, and have duly paid, caused to be paid or made adequate provision for the
payment of all Taxes required to be paid in respect of the periods covered by
such Tax Returns, except where the failure to file such Tax Returns or pay such
Taxes would not reasonably be expected to have a material adverse effect upon
the business, financial condition or results of operations of Parent and its
Subsidiaries taken as a whole. Except as set forth in Section4(m) of the Parent
Disclosure Letter, no claims for Taxes have been asserted against Parent or any
of its Subsidiaries and no material deficiency for any Taxes has been proposed,
asserted or assessed which has not been resolved or paid in full. To the
knowledge of Parent's management, no Tax Return or taxable period of Parent or
any of its Subsidiaries is under examination by any taxing authority, and
neither Parent nor any of its Subsidiaries has received written notice of any
pending audit by any taxing authority. There are no outstanding agreements or
waivers extending the statutory period of limitation applicable to any Tax
Return for any period of Parent or any or its Subsidiaries. Except as set forth
in Section4(m) of the Parent Disclosure Letter, there are no tax liens other
than liens for Taxes not yet due and payable relating to Parent or any of its
Subsidiaries. Parent has no reason to believe that any conditions exist that
could reasonably be expected to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code. Neither Parent
nor any of its Subsidiaries is a party to any agreement or contract which would
result in payment of any "excess parachute payment" within the meaning of
Section 280G of the Code as a result of the transactions contemplated hereby.
Neither Parent nor any of its Subsidiaries has filed any consent pursuant to
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset owned by Parent or any of its
Subsidiaries. Parent has not been and is not a United States real property
holding company (as defined in Section 897(c)(2) of the Code) during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code. None of
Parent or its Subsidiaries (x) has been a member of an "affiliated group,"
within the meaning of Section 1504(a) of the Code, other than a group the common
parent of which was Parent or (y) has any liability for the Taxes of any person,
other than any of Parent or its Subsidiaries under Treasury Regulation
Section1.1502-6 (or any similar provision of state, local or foreign law) as a
transferee, successor, by contract or otherwise.
(n) Fairness Opinion. ING Barings LLC has delivered to the
Parent Board the Parent Fairness Opinion, and a true and complete copy thereof
has been furnished to the Company.
(o) Employee Benefits.
(i) All pension, profit-sharing, deferred
compensation, savings, stock bonus and stock option plans, and
all employee benefit plans, whether or not covered by ERISA
which are sponsored by Parent or any Parent ERISA Affiliate (as
defined below) of Parent or to which Parent or any Parent ERISA
Affiliate of Parent makes contributions, and which cover
employees of Parent (the "Parent Employees") or former employees
of Parent, all employment or severance contracts with executive
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officers of Parent, and any applicable "change of control" or
similar provisions in any plan, contract or arrangement that
cover Employees (collectively, "Parent Benefit Plans" and
individually a "Parent Benefit Plan") are accurately and
completely listed in Section4(o) of the Parent Disclosure
Letter. No Parent Benefit Plan is a multi-employer plan, money
purchase plan, defined benefit plan, multiple employer plan or
multiple employer welfare arrangement and no Parent Benefit Plan
is covered by Title IV of ERISA. True and complete copies of all
Parent Benefit Plans (other than medical and other similar
welfare plans made generally available to all Parent Employees)
have been made available to the Company.
(ii) All Parent Benefit Plans to the extent subject
to ERISA, are in compliance in all material respects with ERISA
and the rules and regulations promulgated thereunder. Each
Parent Benefit Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA ("Parent Pension
Plan") and which is intended to be qualified under Section
401(a) of the Code, has received a favorable determination
letter from the Internal Revenue Service, which determination
letter is currently in effect, and there are no proceedings
pending or, to the knowledge of the management of Parent,
threatened, or any facts or circumstances known to the
management of Parent, which are reasonably likely to result in
revocation of any such favorable determination letter. There is
no pending or, to the knowledge of the management of Parent,
threatened litigation relating to the Parent Benefit Plans.
Neither Parent nor any of its Subsidiaries has engaged in a
transaction with respect to any Parent Benefit Plan that,
assuming the taxable period of such transaction expired as of
the date hereof, is reasonably likely to subject Parent or any
of its Subsidiaries to a tax or penalty imposed by either
Section 4975 of the Code or Section 502(i) of ERISA.
(iii) No liability under Title IV of ERISA has been
or is reasonably likely to be incurred by Parent or any of its
Subsidiaries with respect to any ongoing, frozen or terminated
Parent Benefit Plan that is a "single-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any
entity which is considered a predecessor of Parent or one
employer with Parent under Section 4001 of ERISA (a "Parent
ERISA Affiliate"). All contributions required to be made under
the terms of any Parent Benefit Plan have been timely made or
reserves therefor on the balance sheet of Parent have been
established, which reserves are adequate. Except as required by
Part 6 of Title I of ERISA, Parent does not have any unfunded
obligations for retiree health and life benefits under any
Parent Benefit Plan.
(p) Year 2000. Except as disclosed in the previously filed
Parent Reports, Parent's products and information systems are Year 2000
Compliant except to the extent that their failure to be Year 2000 Compliant
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the business, financial condition or results of
operations of Parent and its Subsidiaries taken as a whole.
(q) Environmental Matters. Except for such matters that,
individually or in the aggregate, are not reasonably likely to have a material
adverse effect on the business, financial condition or results of operations of
Parent and its Subsidiaries taken as a whole, or would not otherwise require
disclosure pursuant to the Securities Exchange Act, or are listed in Section4(q)
of the Parent Disclosure Letter or described in Parent Reports filed prior to
the date hereof, (i) each of Parent and its Subsidiaries has complied and is in
compliance with all applicable Environmental Laws; (ii) the properties currently
owned or operated by Parent or any of its Subsidiaries (including soils,
groundwater, surface water, buildings or
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other structures) are not contaminated with Hazardous Substances (as defined
below); (iii) neither Parent nor any of its Subsidiaries is subject to liability
for any Hazardous Substance disposal or contamination on any third party
property; (iv) neither Parent nor any or its Subsidiaries has had any release or
threat of release of any Hazardous Substance; (v) neither Parent nor any of its
Subsidiaries has received any notice, demand, threat, letter, claim or request
for information alleging that it or any of its Subsidiaries may be in violation
of or liable under any Environmental Law (including any claims relating to
electromagnetic fields or microwave transmissions); (vi) neither Parent nor any
of its Subsidiaries is subject to any orders, decrees, injunctions or other
arrangements with any governmental or regulatory authority of competent
jurisdiction or is subject to any indemnity or other agreement with any third
party relating to liability under any Environmental Law or relating to Hazardous
Substances; and (vii) there are no circumstances or conditions involving Parent
or any of its Subsidiaries that could reasonably be expected to result in any
claims, liabilities, investigations, costs or restrictions on the ownership, use
or transfer of any of its properties pursuant to any Environmental Law.
(r) Intellectual Property. Except as disclosed in
Section4(r) of the Parent Disclosure Letter or in the Parent Reports filed prior
to the date hereof, Parent and its Subsidiaries have all right, title and
interest in, or a valid and binding license to use, all Parent Intellectual
Property (as defined below). Except as disclosed in Section4(r) of the Parent
Disclosure Letter or in the Parent Reports filed prior to the date hereof,
Parent and its Subsidiaries (i) have not defaulted in any material respect under
any license to use any Parent Intellectual Property, (ii) are not the subject of
any proceeding or litigation for infringement of any third party intellectual
property, (iii) have no knowledge of circumstances that would be reasonably
expected to give rise to any such proceeding or litigation and (iv) have no
knowledge of circumstances that are causing or would be reasonably expected to
cause the loss or impairment of any Parent Intellectual Property, other than a
default, proceeding, litigation, loss or impairment that is not having or would
not be reasonably expected to have, individually or in the aggregate, a material
adverse effect on the business, financial condition or results of operation of
Parent and its Subsidiaries taken as a whole.
For purposes of this Agreement, "Parent Intellectual Property"
means patents and patent rights, trademarks and trademark rights, trade names
and trade name rights, service marks and service mark rights, copyrights and
copyright rights, trade secret and trade secret rights, and other intellectual
property rights, and all pending applications for and registrations of any of
the foregoing that are individually or in the aggregate material to the conduct
of the business of Parent and its Subsidiaries taken as a whole.
(s) Insurance. Except as set forth in Section4(s) of the
Parent Disclosure Letter, each of Parent and its Subsidiaries is insured with
financially responsible insurers in such amounts and against such risks and
losses as are customary for companies conducting the business as conducted by
Parent and its Subsidiaries during such time period.
(t) Certain Contracts. Except as set forth in Section4(t)
of the Parent Disclosure Letter, all material to which Parent or any of its
Subsidiaries is a party or may be bound that are required by Item 610(b)(10) of
Regulation S-K to be filed as exhibits to, or incorporated by reference in, the
Parent 10-K or the Parent 10-Q have been so filed or incorporated by reference.
All material contracts to which Parent or any of its Subsidiaries is a party or
may be bound that have been entered into as of the date hereof and will be
required by Item 610(b)(10) of Regulation S-K to be filed or incorporated by
reference into Parent's Quarterly Report on Form 10-Q for the period ending
September 30, 1999, but which have not previously been filed or incorporated by
reference into any Parent Reports, are set forth in Section4(t) of the Parent
Disclosure Letter. All contracts, licenses, consents, royalty or other
agreements which are material to Parent and its Subsidiaries, taken as a whole,
to which Parent or any of its Subsidiaries is a party (the "Parent Contracts")
are valid and in full force and effect on the date hereof except to the extent
they have previously expired in accordance with their terms or, to the extent
such invalidity would not reasonably be
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expected to have a material adverse effect on the business, financial condition
or results of operations of Parent and its Subsidiaries taken as a whole and, to
Parent's knowledge, neither Parent nor any of its Subsidiaries has violated any
provision of, or committed or failed to perform any act which with or without
notice, lapse of time or both would constitute a default under the provisions
of, any Parent Contract, except for defaults which individually and in the
aggregate would not reasonably be expected to result in a material adverse
effect on the business, financial condition or results of operations of Parent
and its Subsidiaries taken as a whole.
(u) Activities of Parent Subsidiary. Since the date of its
incorporation, Parent Subsidiary has not carried on any business or conducted
any operations other than the execution of this Agreement, the performance of
its obligations hereunder and matters ancillary thereto. Parent Subsidiary has a
positive net worth under GAAP.
(v) Circe. Parent and/or its Subsidiaries have all Circe
Rights necessary for the operation of Rings 1 and 2 of the Circe Network, except
to the extent the failure to have any such Circe Rights, would not, in the
aggregate, be reasonably expected to have a Parent Material Adverse Effect. All
material Circe Rights relating to Rings 1 and 2 have terms or are renewable
without material cost, for the entire expected useful life of such rings. To
Parent's knowledge, as of the date of this Agreement, there is no existing or
anticipated fact or circumstance that would be reasonably expected to cause a
material delay in the scheduled in-service date of Circe Rings 3, 4 or 5 as
described in the most recent Parent Reports filed prior to the date hereof.
5. Covenants. The Parties agree as follows with respect to the
period from and after the execution of this Agreement through and including the
Effective Time (except for Section5(j), Section5(l) and Section5(q), which will
apply from and after the Effective Time in accordance with their respective
terms and Section5(p) which will apply from the date hereof and shall survive
after the Closing).
(a) _General. Each of the Parties will use all reasonable
efforts to take all actions and to do all things necessary in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section6 below).
(b) _Notices and Consents. The Company and Parent will give
any notices (and will cause each of their respective Subsidiaries to give any
notices) to third parties, and will use all reasonable efforts to obtain (and
will cause each of their respective Subsidiaries to use all reasonable efforts
to obtain) any third-party consents, that may be required in connection with the
matters referred to in Section3(f) and Section4(f) above (regardless of whether
the failure to give such notice or obtain such consent would result in a Company
Material Adverse Effect or a Parent Material Adverse Effect).
(c) _Regulatory Matters and Approvals. Each of the Parties,
promptly after the date hereof, will (and the Company, promptly after the date
hereof, will cause each of its Subsidiaries to) give any notices to, make any
filings with and use all reasonable efforts to obtain any authorizations,
consents and approvals of Government Entities in connection with the matters
referred to in Section3(f) and Section4(f) above. Without limiting the
generality of the foregoing:
(i) Federal Securities Laws. As promptly as
practicable following the date hereof, Parent and the Parent
Subsidiary shall, in cooperation with the Company, prepare and
file with the SEC preliminary proxy materials which shall
constitute the Joint Proxy Statement/Prospectus (such proxy
statement/prospectus, and any amendments or supplements thereto,
the "Joint Proxy Statement/Prospectus") and a registration
statement on Form S-4 with respect to the issuance of Parent
Shares in
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connection with the Merger (the "Registration Statement"), and
file with state securities administrators such registration
statements or other documents as may be required under
applicable blue sky laws to qualify or register such Parent
Shares in such states as are designated by the Company (the
"Blue Sky Filings"). The Joint Proxy Statement/Prospectus will
be included in the Registration Statement as Parent's
prospectus. The Registration Statement and the Joint Proxy
Statement/Prospectus shall comply as to form in all material
respects with the applicable provisions of the Securities Act
and the Exchange Act and the rules and regulations thereunder.
Each of Parent and the Parent Subsidiary shall use all
reasonable efforts to have the Registration Statement declared
effective by the SEC as promptly as practicable after filing
with the SEC and to keep the Registration Statement effective as
long as is necessary to consummate the Merger. Parent and the
Parent Subsidiary agree that none of the information supplied or
to be supplied by Parent or the Parent Subsidiary for inclusion
or incorporation by reference in the Registration Statement
and/or the Joint Proxy Statement/Prospectus and each amendment
or supplement thereto, at the time of mailing thereof and at the
time of the Company Special Meeting (as defined below) or the
Parent Special Meeting (as defined below), will contain an
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. The Company agrees that none of
the information supplied or to be supplied by the Company for
inclusion or incorporation by reference in the Joint Proxy
Statement/ Prospectus and each amendment or supplement thereto,
at the time of mailing thereof and at the time of the Company
Special Meeting or the Parent Special Meeting, will contain an
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading. For purposes of the foregoing,
it is understood and agreed that information concerning or
related to Parent and the Parent Special Meeting will be deemed
to have been supplied by Parent and information concerning or
related to the Company and the Company Special Meeting shall be
deemed to have been supplied by the Company. Parent will provide
the Company with a reasonable opportunity to review and comment
on the Joint Proxy Statement/Prospectus and any amendment or
supplement thereto prior to filing such with the SEC, will
provide the Company with a copy of all such filings made with
the SEC and will notify the Company as promptly as practicable
after the receipt of any comments from the SEC or its staff or
from any state securities administrators and of any request by
the SEC or its staff or by any state securities administrators
for amendments or supplements to the Registration Statement or
any Blue Sky Filings or for additional information, and will
supply the Company and its legal counsel with copies of all
correspondence between Parent or any of its representatives, on
the one hand, and the SEC, its staff or any state securities
administrators, on the other hand, with respect to the
Registration Statement. No change, amendment or supplement to
the information supplied by the Company for inclusion in the
Joint Proxy Statement/ Prospectus shall be made without the
approval of the Company, which approval shall not be
unreasonably withheld or delayed. If, at any time prior to the
Effective Time, any event relating to the Company or Parent or
any of their respective Affiliates, officers or directors is
discovered by the Company or Parent, as the case may be, that is
required by the Securities Act, the Securities Exchange Act, or
the rules or regulations thereunder, to be set forth in an
amendment to the Registration Statement or a supplement to the
Joint Proxy Statement/Prospectus, the Company or Parent, as the
case may be, will as promptly as practicable inform the other,
and such amendment or supplement will be promptly filed with the
SEC and disseminated to the stockholders of the Company and
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<PAGE>
Parent, to the extent required by applicable securities laws.
All documents which the Company or Parent files or is
responsible for filing with the SEC and any other regulatory
agency in connection with the Merger (including, without
limitation, the Registration Statement and the Joint Proxy
Statement/Prospectus) will comply as to form and content in all
material respects with the provisions of applicable law.
Notwithstanding the foregoing, the Company, on the one hand, and
Parent and the Parent Subsidiary, on the other hand, make no
representations or warranties with respect to any information
that has been supplied in writing by the other, or the other's
auditors, attorneys or financial advisors, specifically for use
in the Registration Statement or the Joint Proxy
Statement/Prospectus, or in any other documents to be filed with
the SEC or any other regulatory agency expressly for use in
connection with the transactions contemplated hereby.
(ii) Delaware General Corporation Law. The Company
will take all action, to the extent necessary in accordance with
applicable law, its certificate of incorporation and by-laws to
convene a special meeting of its stockholders (the "Company
Special Meeting"), as soon as reasonably practicable in order
that the stockholders may consider and vote upon the adoption of
this Agreement and the approval of the Merger in accordance with
the Delaware General Corporation Law. Parent will take all
action, to the extent necessary in accordance with applicable
law, its certificate of incorporation and by-laws to convene a
special meeting of its stockholders (the "Parent Special
Meeting"), as soon as reasonably practicable in order that the
stockholders may consider and vote upon the issuance of Parent
Shares in connection with the Merger as provided in the
Agreement as required by the rules of Nasdaq and, if necessary,
an amendment to the certificate of incorporation of Parent to
increase the number of authorized Parent Shares. The Company and
Parent shall mail the Joint Proxy Statement/Prospectus to their
respective stockholders simultaneously and as soon as reasonably
practicable. Subject to Section5(h)(iv) and Section5(i)(iv)
below, the Joint Proxy Statement/Prospectus shall contain the
affirmative unanimous recommendations of the Company Board in
favor of the adoption of this Agreement and the approval of the
Merger and of the Parent Board in favor of issuance of Parent
Shares in connection with the Merger as provided in the
Agreement as required by the rules of Nasdaq and, if necessary,
increase the number of authorized Purchaser Shares in accordance
with the Delaware General Corporation Law.
(iii) Hart-Scott-Rodino Act. As soon as possible
after the date hereof, each of the Parties will file any
Notification and Report Forms and related material that it may
be required to file with the Federal Trade Commission and the
Antitrust Division of the United States Department of Justice
under the Hart-Scott-Rodino Act, will use all reasonable efforts
to obtain (and the Company will cause each of its Subsidiaries
to use all reasonable efforts to obtain) an early termination of
the applicable waiting period, and will make any further filings
pursuant thereto that may be necessary.
(iv) Periodic Reports. Parent and the Parent
Subsidiary, and their counsel, shall be given an opportunity to
review each Form 10-K and Form 10-Q (and any amendments thereto)
to be filed by the Company under the Securities Exchange Act
prior to their being filed with the SEC and Nasdaq, and shall be
provided with final copies thereof concurrently with their
filing with the SEC.
(v) Telecommunications Laws. Parent shall be
responsible for preparing and filing the appropriate
applications, notifications and other
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<PAGE>
documentation necessary or appropriate to request from
Government Entities with jurisdiction over the
telecommunications industry all necessary authorizations,
consents and approvals to the Merger and the transactions
contemplated hereby. The Company, at its sole cost and expense,
will cooperate with Parent in this regard, providing such
assistance as Parent shall reasonably request. Parent shall
provide the Company with drafts of all applications and other
documents to be filed with any such regulatory authority prior
to such filing and shall give Company a reasonable opportunity
to review and comment thereon.
(d) Operation of the Company's Business. Except as set
forth in Section5(d) of the Company Disclosure Letter or as otherwise expressly
contemplated by this Agreement, the Company will not (and will not cause or
permit any of its Subsidiaries to), without the written consent of Parent, take
any action or enter into any transaction other than in the ordinary course of
business consistent with past practice. Without limiting the generality of the
foregoing, except as expressly provided in this Agreement or Section5(d) of the
Company Disclosure Letter, without the written consent of Parent:
(i) none of the Company and its Subsidiaries will
authorize or effect any change in its charter or by-laws or
comparable organizational document;
(ii) none of the Company and its Subsidiaries will
grant any Stock Rights or issue, sell, authorize or otherwise
dispose of any of its capital stock, (x) except upon the
conversion or exercise of Stock Rights outstanding as of the
date of this Agreement and (y) except for stock options issued
to employees of the Company and its Subsidiaries in a manner
consistent with past practice which (I) do not provide for the
issuance of more than 250,000 Company Shares in any calendar
quarter, (II) are issued only to new employees and employees
promoted after the date hereof, (III) are issued at not less
than the market price of the Company Stock on the date of grant
and (IV) are not issued to any executive officer or director of
the Company;
(iii) none of the Company and its Subsidiaries will
sell, lease, encumber or otherwise dispose of, or otherwise
agree to sell, lease, encumber or otherwise dispose of, any of
its assets which are material, individually or in the aggregate,
to the Company and its Subsidiaries, taken as a whole;
(iv) none of the Company and its Subsidiaries (other
than wholly-owned Subsidiaries) will declare, set aside or pay
any dividend or distribution with respect to its capital stock
(whether in cash or in kind);
(v) none of the Company and its Subsidiaries will
split, combine or reclassify any of its capital stock or redeem,
repurchase or otherwise acquire any of its capital stock;
(vi) none of the Company and its Subsidiaries will
acquire or agree to acquire by merger or consolidation with, or
by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business
of any Person or division thereof or otherwise acquire or agree
to acquire any assets (other than assets used in the operation
of the business of the Company and its Subsidiaries in the
ordinary course consistent with past practice);
(vii) none of Company or its Subsidiaries will incur
or commit to any capital expenditures other than capital
expenditures incurred or committed to in the
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<PAGE>
ordinary course of business consistent with past practice and
which, together with all such expenditures incurred or committed
since January 1, 1999, are not in excess of the respective
amounts by category or in the aggregate set forth in the
Company's capital expenditure budget, as previously disclosed to
Parent or, if the Closing Date has not occurred prior to
December 31, 1999, such additional amounts for any subsequent
period as may be consented to by Parent, such consent not to be
unreasonably withheld, or, if Parent shall not have so
consented, an amount not greater than an amount equal to a pro
rata portion of the Company's 1999 capital expenditure budget;
(viii) none of the Company or its Subsidiaries will
(x) other than in connection with actions permitted by
Section5(d)(vi), make any loans, advances or capital
contributions to, or investments in, any other Person, other
than by the Company or a Subsidiary of the Company to or in the
Company or any Subsidiary of the Company and other than loans
and advances to employees in an aggregate outstanding amount not
to exceed $100,000 at any time, (y) pay, discharge or satisfy
any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than
payments, discharges or satisfactions incurred or committed to
in the ordinary course of business consistent with past practice
or (z) other than in connection with actions permitted by
Section5(d)(vi), create, incur, assume or suffer to exist any
indebtedness, issuances of debt securities, guarantees, Security
Interests, loans or advances not in existence as of the date of
this Agreement except pursuant to the credit facilities,
indentures and other arrangements in existence on the date of
this Agreement and incurred in the ordinary course of business
consistent with past practice, and any other indebtedness
existing on the date of this Agreement, in each case as such
credit facilities, indentures, other arrangements and other
existing indebtedness may be amended, extended, modified,
refunded, renewed or refinanced after the date of this
Agreement, but only if the aggregate principal amount thereof is
not increased thereby, the term thereof is not extended thereby
and the other terms and conditions thereof, taken as a whole,
are not less advantageous to the Company and its Subsidiaries
than those in existence as of the date of this Agreement;
(ix) none of the Company and its Subsidiaries will
make any change in employment terms for any of its directors,
officers and employees other than (A) customary increases to
employees whose total annual cash compensation is less than
$75,000 awarded in the ordinary course of business consistent
with past practices, and (B) customary employee bonuses
(including to employees who are officers) approved by the
Company Board and paid in the ordinary course of business
consistent with past practices and (C) immaterial changes to
Company Benefit Plans;
(x) except as disclosed in the Company Reports filed
prior to the date of this Agreement, the Company will not change
its methods of accounting in effect at June 30, 1999 in a manner
materially affecting the consolidated assets, liabilities or
results of operations of the Company, except as required by
changes in GAAP as concurred in by the Company's independent
auditors, and the Company will not (i) change its fiscal year or
(ii) make any material tax election, other than in the ordinary
course of business consistent with past practice; and
(xi) none of the Company and its Subsidiaries will
resolve or commit to any of the foregoing.
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<PAGE>
In the event the Company shall request Parent to consent in
writing to an action otherwise prohibited by this Section5(d), Parent shall use
reasonable efforts to respond in a prompt and timely fashion (but in no event
later than ten (10) business days following such request), but may otherwise
respond affirmatively or negatively in its sole discretion.
(e) Operation of Parent's Business. Except as set forth in
Section5(e) of the Parent Disclosure Letter or as otherwise contemplated by this
Agreement:
(i) none of Parent and its Subsidiaries will
authorize or effect any change in its charter or by-laws or
comparable organizational document except for such amendments to
its charter, by-laws or other comparable charter or
organizational documents that do not have an adverse affect on
the Merger and the other transactions contemplated hereby;
(ii) without Prior Consultation, none of Parent and
its Subsidiaries will grant any Stock Rights or issue, sell,
authorize or otherwise dispose of any of its capital stock
(except (A) employee stock option grants made in the ordinary
course consistent with past practice, (B) Stock Rights and
capital stock issued as consideration for acquisitions permitted
by Section5(e) and (C) upon the conversion or exercise of Stock
Rights outstanding as of the date of this Agreement or issued
pursuant to the preceding clauses (A) or (B));
(iii) none of Parent and its Subsidiaries will sell
or otherwise dispose of, or otherwise agree to sell or otherwise
dispose of, in any individual transaction or series of related
transactions (other than a capacity or fiber (either lit or
dark) sale) any of its assets having a fair market value greater
than $100,000,000;
(iv) none of Parent and its Subsidiaries (other than
wholly owned Subsidiaries) will declare, set aside or pay any
dividend or distribution with respect to its capital stock
(whether in cash or in kind);
(v) none of Parent and its Subsidiaries will split,
combine or reclassify any of its capital stock or redeem,
repurchase or otherwise acquire any of its capital stock;
(vi) without Prior Consultation, none of Parent or
its Subsidiaries will incur or commit to any capital
expenditures other than capital expenditures incurred or
committed to in the ordinary course of business consistent with
past practice;
(vii) none of Parent and its Subsidiaries will
acquire or agree to acquire by merger or consolidation with, or
by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business
of any Person or division thereof or otherwise acquire or agree
to acquire any substantial assets in a single transaction or
series of related transactions either outside the
telecommunications services industry or in a geographic region
other than North America and Europe;
(viii) without Prior Consultation, none of Parent and
its Subsidiaries will acquire or agree to acquire by merger or
consolidation with, or by purchasing a substantial equity
interest in or a substantial portion of the assets of, or by any
other manner, any business of any Person or division thereof or
otherwise acquire or agree to
A-29
<PAGE>
acquire any assets in a single transaction or series of related
transactions for consideration having a fair market value in
excess of $50,000,000;
(ix) without Prior Consultation, none of Parent or
its Subsidiaries will (x) other than in connection with actions
permitted by Section5(e)(vii), make any loans, advances or
capital contributions to, or investments in, any other Person,
other than by Parent or a Subsidiary of Parent to or in Parent
or any Subsidiary of Parent, (y) pay, discharge or satisfy any
claims, liabilities or obligations (absolute, accrued, asserted
or unasserted, contingent or otherwise) in excess of $25,000,000
in each instance, other than loans, advances, capital
contributions, investments, payments, discharges or
satisfactions incurred or committed to in the ordinary course of
business consistent with past practice or (z) other than in
connection with actions permitted by Section5(e)(vii), create,
incur, assume or suffer to exist any indebtedness, issuances of
debt securities, guarantees, Security Interests, loans or
advances not in existence as of the date of this Agreement
except pursuant to the credit facilities, indentures and other
arrangements in existence on the date of this Agreement and
incurred in the ordinary course of business consistent with past
practice, and any other indebtedness existing on the date of
this Agreement, in each case as such credit facilities,
indentures, other arrangements and other existing indebtedness
may be amended, extended, exchanged, modified, refunded, renewed
or refinanced after the date of this Agreement, but only if the
aggregate principal amount thereof is not increased thereby, the
term thereof is not extended thereby and the other terms and
conditions thereof, taken as a whole, are not less advantageous
to Parent and its Subsidiaries than those in existence as of the
date of this Agreement;
(x) without Prior Consultation, Parent will not
change its methods of accounting in effect at June 30, 1999 in a
manner materially affecting the consolidated assets, liabilities
or operating results of Parent, except as required by changes in
GAAP as concurred in by Parent's independent auditors, and
Parent will not (i) change its fiscal year or (ii) make any
material tax election, other than in the ordinary course of
business consistent with past practice; and
(xi) none of Parent and its Subsidiaries will
resolve or commit to any of the foregoing (A) which requires the
Company's consent unless it has obtained such consent or (B)
which requires Prior Consultation unless it has afforded Prior
Consultation.
In the event Parent shall request the Company to consent in
writing to an action otherwise prohibited by this Section 5(e), the Company
shall use reasonable efforts to respond in a prompt and timely fashion (but in
no event later than ten (10) business days following such request), but may
otherwise respond affirmatively or negatively in its sole discretion.
(f) Access. Each Party will (and will cause each of its
Subsidiaries to) permit representatives of the other Party to have access at all
reasonable times and in a manner so as not to materially interfere with the
normal business operations of the Company and its Subsidiaries, or Parent and
its Subsidiaries, as applicable, to all premises, properties, personnel, books,
records (including without limitation tax and financial records), contracts and
documents of or pertaining to such Party. Each Party and all of its respective
representatives will treat and hold as such any Confidential Information it
receives from the other Party or any of its representatives in accordance with
the Confidentiality Agreement.
(g) Notice of Developments. Each Party will give prompt
written notice to the others of any material adverse development causing a
breach of any of its own representations and
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<PAGE>
warranties in Section3 and Section4 above. No disclosure by any Party pursuant
to this Section5(g), however, shall be deemed to amend or supplement the Company
Disclosure Letter or Parent Disclosure Letter or to prevent or cure any
misrepresentation, breach of warranty or breach of covenant.
(h) Company Exclusivity.
(i) The Company shall, and shall cause its
Subsidiaries and Representatives to, immediately cease and
terminate any existing solicitation, initiation, encouragement,
activity, discussion or negotiation with any Persons conducted
heretofore by the Company, its Subsidiaries or any of their
respective Affiliates, officers, directors, employees, financial
advisors, agents or representatives (each a "Representative")
with respect to any proposed, potential or contemplated
Acquisition Proposal.
(ii) From and after the date hereof, without the
prior written consent of Parent, the Company will not authorize
or permit any of its Subsidiaries to, and shall cause any and
all of its Representatives not to, directly or indirectly, (A)
solicit, initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, an
Acquisition Proposal, or (B) engage in negotiations or
discussions with any Third Party concerning, or provide any
non-public information to any person or entity relating to, an
Acquisition Proposal, or (C) enter into any letter of intent,
agreement in principle or any acquisition agreement or other
similar agreement with respect to any Acquisition Proposal;
PROVIDED, HOWEVER, that nothing contained in this
Section5(h)(ii) shall prevent the Company or the Company Board
prior to receipt of the Requisite Stockholder Approval of the
Company Stockholders, from furnishing non-public information to,
or entering into discussions or negotiations with, any Third
Party in connection with an unsolicited, bona fide written
proposal for an Acquisition Proposal by such Third Party, if and
only to the extent that (1) such Third Party has made a written
proposal to the Company Board to consummate an Acquisition
Proposal, (2) the Company Board determines in good faith, based
upon the advice of a financial advisor of nationally recognized
reputation, that such Acquisition Proposal is reasonably capable
of being completed on substantially the terms proposed, and
would, if consummated, result in a transaction that would
provide greater value to the holders of the Company Shares than
the transaction contemplated by this Agreement (a "Superior
Proposal"), (3) the failure to take such action would, in the
reasonable good faith judgment of the Company Board, based upon
a written opinion of Company outside legal counsel, be a
violation of its fiduciary duties to the Company's stockholders
under applicable law, and (4) prior to furnishing such
non-public information to, or entering into discussions or
negotiations with, such Person, the Company Board receives from
such Person an executed confidentiality agreement with material
terms no less favorable to the Company than those contained in
the Confidentiality Agreement and provides prior notice of its
decision to take such action to the Parent. The Company agrees
not to release any Third Party from, or waive any provision of,
any standstill agreement to which it is a party or any
confidentiality agreement between it and another Person who has
made, or who may reasonably be considered likely to make, an
Acquisition Proposal, unless the failure to take such action
would, in the reasonable good faith judgment of the Company
Board, based upon written opinion of Company outside legal
counsel, be a violation of its fiduciary duties to the Company's
stockholders under applicable law and such action is taken prior
to receipt of the Requisite Stockholder Approval of the Company
Stockholders. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in
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<PAGE>
the preceding sentence by any Representative of the Company or
any of its Subsidiaries shall be deemed to be a breach of this
Section5(h) by the Company.
(iii) The Company shall notify Parent promptly after
receipt by the Company or the Company's knowledge of the receipt
by any of its Representatives of any Acquisition Proposal or any
request for non-public information in connection with an
Acquisition Proposal or for access to the properties, books or
records of the Company by any Person that informs such party
that it is considering making or has made an Acquisition
Proposal. Such notice shall be made orally and in writing and
shall indicate the identity of the offeror and the terms and
conditions of such proposal, inquiry or contact. The Company
shall keep Parent informed of the status (including any change
to the material terms) of any such Acquisition Proposal or
request for non-public information.
(iv) The Company Board may not withdraw or modify,
or propose to withdraw or modify, in a manner adverse to Parent,
the approval or recommendation by the Company Board of this
Agreement or the Merger unless, following the receipt of a
Superior Proposal and prior to receipt of the Requisite
Stockholder Approval of the Company Stockholders, in the
reasonable good faith judgment of the Company Board, based upon
the written opinion of Company's outside legal counsel, the
failure to do so would be a violation of the Company Board's
fiduciary duties to the Company's stockholders under applicable
law; PROVIDED, HOWEVER, that, the Company Board shall submit
this Agreement and the Merger to the Company's stockholders for
adoption and approval, whether or not the Company Board at any
time subsequent to the date hereof determines that this
Agreement is no longer advisable or recommends that the
stockholders of the Company reject it or otherwise modifies or
withdraws its recommendation. Unless the Company Board has
withdrawn its recommendation of this Agreement in compliance
herewith, the Company shall use its best efforts to solicit from
the Company stockholders proxies in favor of the adoption and
approval of this Agreement and the Merger and to secure the vote
or consent of the Company's stockholders required by the
Delaware General Corporation Law and its certificate of
incorporation and by-laws to adopt and approve this Agreement
and the Merger.
(i) Parent Exclusivity.
(i) Parent shall, and shall cause its Subsidiaries
and Representatives to, immediately cease and terminate any
existing solicitation, initiation, encouragement, activity,
discussion or negotiation with any Persons conducted heretofore
by Parent, its Subsidiaries or any of its Representatives with
respect to any proposed, potential or contemplated Parent
Acquisition Proposal the consummation of which would (x) not be
consistent with this Agreement or the Merger and the other
transactions contemplated by this Agreement, (y) result in a
material delay in the Effective Time or (z) materially and
adversely impact the likelihood of obtaining any Required
Company Consent or Required Parent Consent other than those the
failures to obtain would not result in either a Company Material
Adverse Effect or a Parent Material Adverse Effect (a
"Prohibited Parent Acquisition Proposal").
(ii) From and after the date hereof, Parent will
notify the Company of any Parent Acquisition Proposal of which
notice is given to the Parent Board. Such notice to the Company
will be made promptly after such notice to the Parent Board, but
will be conditional upon an appropriate confidentiality
agreement. Without the prior written consent of the Company,
Parent will not authorize or permit any of its
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<PAGE>
Subsidiaries to, and shall cause any and all of its
Representatives not to, directly or indirectly, (A) solicit,
initiate, or encourage any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a
Prohibited Parent Acquisition Proposal, or (B) engage in
negotiations or discussions with any Parent Third Party
concerning, or provide any nonpublic information to any person
or entity relating to, a Prohibited Parent Acquisition Proposal,
or (C) enter into any letter of intent, agreement in principle
or any acquisition agreement or other similar agreement with
respect to any Prohibited Parent Acquisition Proposal; PROVIDED,
HOWEVER, that nothing contained in this Section5(i)(ii) shall
prevent Parent or the Parent Board from, prior to receipt of the
Requisite Stockholder Approval of the Parent Stockholders,
furnishing nonpublic information to, or entering into
discussions or negotiations with, any Parent Third Party in
connection with an unsolicited, bona fide written proposal for a
Prohibited Parent Acquisition Proposal by such Parent Third
Party, if and only to the extent that (1) such Parent Third
Party has made a written proposal to the Parent Board to
consummate a Prohibited Parent Acquisition Proposal, (2) the
Parent Board determines in good faith, based upon the advice of
a financial advisor of nationally recognized reputation, that
such Prohibited Parent Acquisition Proposal is reasonably
capable of being completed on substantially the terms proposed,
and would, if consummated, result in a transaction that would
provide greater value to the holders of the Parent Shares than
the transaction contemplated by this Agreement (a "Parent
Superior Proposal"), (3) the failure to take such action would,
in the reasonable good faith judgment of the Parent Board, based
upon a written opinion of Parent's outside legal counsel, be a
violation of its fiduciary duties to the Parent's stockholders
under applicable law, and (4) prior to furnishing such nonpublic
information to, or entering into discussions or negotiations
with, such Person, the Parent Board receives from such Person an
executed confidentiality agreement with material terms no less
favorable to Parent than those contained in the Confidentiality
Agreement. Parent agrees not to release any Parent Third Party
from, or waive any provision of, any standstill agreement to
which it is a party or any confidentiality agreement between it
and another Person who has made, or who may reasonably be
considered likely to make, a Prohibited Parent Acquisition
Proposal, unless the failure to take such action would, in the
reasonable good faith judgment of the Parent Board, based upon
the written opinion of Parent's outside legal counsel, be a
violation of its fiduciary duties to the Parent's stockholders
under applicable law and such action is taken prior to receipt
of the Requisite Stockholder Approval of the Parent
Stockholders. Without limiting the foregoing, it is understood
that any violation of the restrictions set forth in the
preceding sentence by any Representative of Parent or any of its
Subsidiaries shall be deemed to be a breach of this
Section5(i)(ii) by Parent. A Parent Acquisition Proposal shall
be deemed a Prohibited Parent Acquisition Proposal at the time
(and not before) the Parent Board is first notified of such
Parent Acquisition Proposal, and at any time that the Parent
Board is notified of a significant development with respect to
such Parent Acquisition Proposal, unless the Parent Board in
good faith determines that such Parent Acquisition Proposal is
not, and is not reasonably likely to become, a Prohibited Parent
Acquisition Proposal.
(iii) Parent shall notify the Company promptly after
receipt by Parent or Parent's knowledge of the receipt by any of
its Representatives of any Prohibited Parent Acquisition
Proposal or any request for non-public information in connection
with a Prohibited Parent Acquisition Proposal or for access to
the properties, books or records of Parent by any Person that
informs such party that it is considering making or has made a
Prohibited Parent Acquisition Proposal. Such notice shall be
made orally and in writing and shall indicate the identity of
the offeror and the terms and conditions of such proposal,
inquiry or contact. Parent shall keep the Company informed of
the status
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<PAGE>
(including any change to the material terms) of any such
Prohibited Parent Acquisition Proposal or request for nonpublic
information.
(iv) The Parent Board may not withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the
Company, the approval or recommendation by the Parent Board of
this Agreement or the Merger unless, following the receipt of a
Parent Superior Proposal but prior to receipt of the Requisite
Stockholder Approval of the Parent Stockholders, in the
reasonable good faith judgment of the Parent Board, based upon
the written opinion of Parent's outside legal counsel, the
failure to do so would be a violation of the Parent Board's
fiduciary duties to the Parent's stockholders under applicable
law; PROVIDED, HOWEVER, that the Parent Board shall submit the
Merger to Parent's stockholders for adoption and approval,
whether or not the Parent Board at any time subsequent to the
date hereof determines that this Agreement is no longer
advisable or recommends that the stockholders of Parent reject
the Merger or otherwise modifies or withdraws its
recommendation. Unless the Parent Board has withdrawn its
recommendation of the Merger in compliance herewith, Parent
shall use its best efforts to solicit from the Parent
stockholders proxies in favor of the adoption and approval of
the Merger and to secure the vote or consent of Parent's
stockholders required by Nasdaq and the Delaware General
Corporation Law.
(v) Prior to taking any action with respect to a
Parent Acquisition Proposal which is not a Prohibited Parent
Acquisition Proposal equivalent to those permitted by clauses
(A), (B) or (C) of Section5(i)(ii), Parent shall notify each
Parent Third Party which is the object of or a party to such
action of the limitation on Prohibited Parent Acquisition
Proposals set forth in this Section5(i), and Parent shall not
enter into any letter of intent, agreement in principle or any
acquisition agreement or other similar agreement with respect to
any Parent Acquisition Proposal unless such letter or agreement
includes a covenant of the applicable Parent Third Party not to
take any action which would cause such Parent Acquisition
Proposal to become a Prohibited Parent Acquisition Proposal.
(j) Insurance and Indemnification.
(i) Parent will provide each individual who served
as a director or officer of the Company at any time prior to the
Effective Time with liability insurance for a period of six
years after the Effective Time no less favorable in coverage and
amount than any applicable insurance of the Company in effect
immediately prior to the Effective Time provided, however, if
the existing liability insurance expires, or is terminated or
canceled by the insurance carrier during such six year period,
the Surviving Corporation will use its best efforts to obtain as
much liability insurance (no less favorable in coverage) as can
be obtained for the remainder of such period for a premium not
in excess (on an annualized basis) of 200% of the last annual
premium paid prior to the date hereof.
(ii) After the Effective Time, Parent (A) will not
take or permit to be taken any action to alter or impair any
exculpatory or indemnification provisions now existing in the
certificate of incorporation, by-laws or indemnification and
employment agreements of the Company or any of its Subsidiaries
for the benefit of any individual who served as a director or
officer of the Company or any of its Subsidiaries (an
"Indemnified Party") at any time prior to the Effective Time
(except as may be required by applicable law), and (B) shall
cause the Surviving Corporation to honor and fulfill
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such provisions until the date which is six years from the
Effective Time (except as may be required by applicable law);
PROVIDED, HOWEVER, in the event any claim or claims are asserted
within such period, all rights to indemnification in respect of
such claim or claims shall continue until the final disposition
thereof.
(iii) To the extent clauses (i) and (ii) above shall
not serve to indemnify and hold harmless an Indemnified Party,
Parent, subject to the terms and conditions of this clause
(iii), will indemnify, for a period of six years from the
Effective Time, to the fullest extent permitted under applicable
law, each Indemnified Party from and against any and all
actions, suits, proceedings, hearings, investigations, charges,
complaints, claims, demands, injunctions, judgments, orders,
decrees, rulings, damages, dues, penalties, fines, costs,
amounts paid in settlement, liabilities, obligations, taxes,
liens, losses, expenses and fees, including all court costs and
reasonable attorneys' fees and expenses, resulting from, arising
out of, relating to or caused by this Agreement or any of the
transactions contemplated herein; PROVIDED, HOWEVER, in the
event any claim or claims are asserted or threatened within such
six-year period, all rights to indemnification in respect of any
such claim or claims shall continue until final disposition of
any and all such claims. Any Indemnified Party wishing to claim
indemnification under this clause (iii), notwithstanding
anything to the contrary in the provisions set forth in the
Company's certificate of incorporation, by-laws or other
agreements respecting indemnification of directors or officers,
upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify Parent thereof, but the
failure to so notify shall not relieve Parent of any liability
it may have to such Indemnified Party if such failure does not
materially prejudice Parent. In the event of any such claim,
action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (A) Parent or the Surviving
Corporation shall have the right following the Effective Time to
assume the defense thereof and Parent shall not be liable to
such Indemnified Parties for any legal expenses of other counsel
or any other expenses subsequently incurred by such Indemnified
Parties in connection with the defense thereof, except that if
Parent or the Surviving Corporation fails to assume such defense
or counsel for Parent advises that there are issues which raise
conflicts of interest between Parent or the Surviving
Corporation, on the one hand, and the Indemnified Parties, on
the other hand, the Indemnified Parties may retain counsel
satisfactory to them, and the Company, Parent or the Parent
Subsidiary shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements
therefor are received; PROVIDED, HOWEVER, that Parent shall be
obligated to pay for only one firm of counsel for all
Indemnified Parties in any jurisdiction unless the use of one
counsel for such Indemnified Parties would present such counsel
with a conflict of interest, in which case Parent need only pay
for separate counsel to the extent necessary to resolve such
conflict; (B) the Indemnified Parties will reasonably cooperate
in the defense of any such matter; and (C) Parent shall not be
liable for any settlement effectuated without its prior written
consent, which consent shall not be unreasonably withheld or
delayed. Parent shall not settle any action or claim identified
in this Section5(j)(iii) in any manner that would impose any
liability or penalty on an Indemnified Party not paid by Parent
or the Surviving Corporation without such Indemnified Party's
prior written consent, which consent shall not be unreasonably
withheld or delayed.
(iv) Notwithstanding anything contained in clause
(iii) above, Parent shall not have any obligation hereunder to
any Indemnified Party (A) if the indemnification of such
Indemnified Party by Parent in the manner contemplated hereby is
prohibited by applicable law, (B) the conduct of the Indemnified
Party relating to the matter for which indemnification is sought
involved bad faith or willful misconduct of such
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Indemnified Party, or (C) with respect to actions taken by any
such Indemnified Party in his or its individual capacity,
including, without limitations, with respect to any matters
relating, directly or indirectly, to the purchase, sale or
trading of securities issued by the Company other than a tender
or sale pursuant to a stock tender agreement or (D) if such
Indemnified Party shall have breached its obligation to
cooperate with Parent in the defense of any claim in respect of
which indemnification is sought and such breach (x) materially
and adversely affects Parent's defense of such claim or (y) will
materially and adversely affect Parent's defense of such claim
if such breach is not cured within ten days after notice of such
breach is delivered to the Indemnified Party and such breach is
not cured during such period.
(k) Financial Statements.
(i) As soon as they are made available to and
reviewed by senior management of the Company, the Company shall
make available to Parent the internally generated monthly,
quarterly (including quarterly statements for the three-month
period ended September 30, 1999) and annual financial statements
of the Company, consisting of consolidated balance sheets, and
consolidated statements of income and of cash flows.
(ii) As soon as they are made available to and
reviewed by senior management of Parent, Parent shall make
available to the Company the internally generated monthly,
quarterly (including, quarterly statements for the three-month
period ended September 30, 1999) and annual financial
statements, consisting of consolidated balance sheets, and
consolidated statements of income and of cash flows.
(l) Continuity of Business Enterprise. Parent, Surviving
Corporation or any other member of the qualified group (as defined in Treasury
Regulation Section1.368-1(d)) shall, for the foreseeable future, continue at
least one significant historic business line of the Company or use at least a
significant portion of the Company's historic business assets in a business, in
each case within the meaning of Treasury Regulation Section1.368-1(d).
(m) Parent Board of Directors. At or before the Effective
Time, the Board of Directors of Parent will take all action necessary to expand
the size of the Parent Board of Directors by five directors and to:
(i) Elect the Chairman of the Board of the Company
as a Class C director, to serve until the annual meeting of the
Parent Stockholders in 2002;
(ii) Elect one independent director (as defined in
National Association of Securities Dealers Rule 4200(a)(13))
designated by the Parent Board and one independent director (as
so defined in relation to the Company) designated by Alfred
West, who is currently serving on the Company Board, as Class B
directors, to serve until the annual meeting of the Parent
Stockholders in 2001; and
(iii) Elect the Chief Operating Officer of the
Company and one person designated by the Parent Board (who need
not qualify as an independent director) as Class A directors, to
serve until the annual meeting of the Parent Stockholders in
2000.
In the event the Chairman of the Board of the Company is so elected and agrees
to serve as a director of Parent, the Parent Board of Directors will appoint him
as Vice Chairman of the Board of Parent.
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(n) Rule 145 Affiliates. Prior to the Closing Date, the
Company shall deliver to Parent a letter identifying all persons who were, at
the date of the Company Special Meeting, "affiliates" of the Company for
purposes of Rule 145 under the Securities Act. The Company shall use its
reasonable efforts to cause each such person to deliver to Parent on or prior to
the Closing Date a written agreement substantially in the form attached as
Exhibit C.
(o) Nasdaq Listing. Parent shall use all reasonable efforts
to cause the Parent Shares to be issued in connection with the Merger and under
the Company Benefit Plans to be approved for listing on Nasdaq, subject to
official notice of issuance, prior to the Closing Date.
(p) Tax Free Treatment. The Parties intend the Merger to
qualify as a reorganization under Section 368(a) of the Code. Each Party and its
Affiliates shall use reasonable efforts to cause the Merger to so qualify and to
obtain the opinion referred to in Section 6(b)(vii). For purposes of the tax
opinion described in Section 6(b)(vii), Parent and the Company shall provide
customary representation letters substantially in the form of Exhibits D and E,
each dated on or about the date that is two business days prior to the date the
Joint Proxy Statement/Prospectus is mailed to the stockholders of Parent and the
Company and reissued as of the Closing Date. Each of Parent, Parent Subsidiary
and the Company and each of their respective Affiliates shall not take any
action and shall not fail to take any action or suffer to exist any condition
which action or failure to act or condition would prevent, or would be
reasonably likely to prevent, the Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
(q) Company Employee Plans. After the Effective Time,
Parent shall arrange for each employee participating in any of the Company
Benefits Plans to participate in any counterpart benefit plans of Parent or its
Subsidiaries (as appropriate) in accordance with the eligibility criteria
thereof, provided that (i) such participants shall receive full credit for years
of service with the Company or any of its Subsidiaries prior to the Effective
Time for all purposes for which such service was recognized under the Company
Benefit Plans and (ii) such participants shall participate in the Parent Benefit
Plans on terms no less favorable than those offered by Parent to similarly
situated employees of Parent or its Subsidiaries. Parent shall give credit under
its applicable employee welfare benefit plans for all copayments, deductibles
and out-of-pocket maximums satisfied by employees (and their eligible
dependents) of the Company (and its Subsidiaries), in respect of the calendar
year in which the Closing Date occurs. Parent shall waive all pre-existing
conditions (to the extent waived under the applicable employee welfare benefit
plans of the Company and its Subsidiaries) otherwise applicable to employees of
the Company and its Subsidiaries under Parent's employee welfare benefit plans
in which employees of the Company (and its Subsidiaries) become eligible to
participate on or following the Closing. Notwithstanding the foregoing, Parent
may continue (or cause the Surviving Corporation to continue) one or more of the
Company Benefit Plans, in which case Parent shall have satisfied its obligations
hereunder with respect to the benefits so provided if the terms of the Company
Benefit Plans which are continued are no less favorable than the terms of the
counterpart plans of Parent and its Subsidiaries (as applicable).
(r) Notice of Adverse Circe Network Developments. Parent
will notify Company promptly after it becomes aware of any fact or circumstance
that would be reasonably expected to materially delay or prevent the completion
in all material respects of the Circe Network within the periods described in
the most recent Parent Report filed prior to the date hereof.
(s) Discount Notes. Parent and the Company agree to
cooperate and use their reasonable efforts to obtain within 60 days after the
date hereof any necessary consents, waivers or other modifications of the
indenture dated as of April 8, 1998, between the Company and The Bank of New
York, as trustee, governing the 11% Senior Discount Notes due 2008 issued by the
Company, so as to avoid the obligation to conduct an Offer to Purchase pursuant
to Section 4.12 thereof as a result of the transactions contemplated by this
Agreement, provided that in connection with obtaining such consents,
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waivers or modifications neither the Company nor Parent will be required to make
any payment or take any other action which is not commercially reasonable. The
Company and Parent each shall pay one-half of all fees and expenses, including
fees paid to holders of such notes, incurred by the Parties pursuant to this
Section5(s). If such consent, waiver or modification is not obtained within such
60 day period, the Parties may mutually agree to modify the terms of this
Agreement so as to achieve the results of the transactions contemplated hereby
in a manner that will not require such an Offer to Purchase to be undertaken.
(t) Year 2000 Budgets. Each of Parent and the Company
shall, and shall seek to cause its executive officers to, (a) cooperate in good
faith to develop a year 2000 combined budget for Parent and (b) provide such
assistance as the other Party may reasonably require to develop a year 2000
combined budget.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of Parent and the Parent
Subsidiary. The obligation of each of Parent and the Parent Subsidiary to
consummate the Merger is subject to satisfaction or waiver by Parent or Parent
Subsidiary of the following conditions at or prior to the Closing Date:
(i) this Agreement and the Merger shall have
received the Requisite Stockholder Approvals;
(ii) the Company and its Subsidiaries shall have
obtained the Required Company Consents, other than those
Required Company Consents the failure of which to obtain would
not reasonably be expected to have a Company Material Adverse
Effect and the Purchaser shall have obtained the Required Parent
Consents, other than those Required Parent Consents the failure
of which to obtain would not reasonably be expected to have a
Parent Material Adverse Effect;
(iii) the representations and warranties set forth
in Section3 above shall be true and correct in all material
respects at and as of the Closing Date, except for those
representations and warranties which address matters only as of
a particular date (which shall have been true and correct as of
such date);
(iv) the Company shall have performed and complied
with all of its covenants hereunder in all material respects
through the Closing;
(v) neither any statute, rule, regulation, order,
stipulation or injunction (each an "Order") shall be enacted,
promulgated, entered, enforced or deemed applicable to the
Merger nor any other action shall have been taken by any
Government Entity (A) which prohibits the consummation of the
transactions contemplated by the Merger; (B) which prohibits
Parent's or the Parent Subsidiary's ownership or operation of
all or any material portion of their or the Company's business
or assets, or which compels Parent or the Parent Subsidiary to
dispose of or hold separate all or any material portion of
Parent's or the Parent Subsidiary's or the Company's business or
assets as a result of the transactions contemplated by the
Merger; (C) which makes the purchase of, or payment for, some or
all of the Company Shares illegal; (D) which imposes material
limitations on the ability of Parent or the Parent Subsidiary to
acquire or hold or to exercise effectively all rights of
ownership of Company Shares, including, without limitation, the
right to vote any Company Shares purchased by Parent on all
matters properly presented to the Company Stockholders; or (E)
which imposes any limitations on the ability of Parent or the
Parent Subsidiary, or any of their respective
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Subsidiaries, effectively to control in any material respect the
business or operations of the Company or any of its
Subsidiaries;
(vi) the Company shall have delivered to Parent and
the Parent Subsidiary a certificate to the effect that each of
the conditions specified above in
Section6(a)(i)--Section6(a)(iv) is satisfied in all respects;
PROVIDED, HOWEVER, with respect to Section6(a)(i), the Company
shall only be required to certify that this Agreement and the
Merger received the Requisite Stockholder Approval of the
Company Stockholders;
(vii) all applicable waiting periods (and any
extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated;
(viii) the Parent Shares to be issued in connection
with the Merger shall have been approved upon official notice of
issuance for quotation on Nasdaq, subject to official notice of
issuance; and
(ix) the Registration Statement shall have been
declared effective by the SEC under the Securities Act. No stop
order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
Subject to the provisions of applicable law, Parent and the
Parent Subsidiary may waive, in whole or in part, any condition specified in
this Section6(a) if they execute a writing so stating at or prior to the
Closing.
(b) Conditions to Obligation of the Company. The obligation
of the Company to consummate the Merger is subject to satisfaction or waiver by
the Company of the following conditions at or prior to the Closing Date:
(i) this Agreement and the Merger shall have
received the Requisite Stockholder Approvals;
(ii) Parent and its Subsidiaries shall have obtained
the Required Parent Consents, other than those Required Parent
Consents the failure of which to obtain would not reasonably be
expected to have a Parent Material Adverse Effect, and the
Company and its Subsidiaries shall have obtained the Required
Company Consents other than those Required Company Consents the
failure of which to obtain would not reasonably be expected to
have a material adverse effect on the business, financial
condition or results of operations of Parent, the Surviving
Corporation and their Affiliates taken as a whole;
(iii) the representations and warranties set forth
in Section4 above shall be true and correct in all material
respects at and as of the Closing Date, except for those
representations and warranties which address matters only as of
a particular date (which shall have been true and correct as of
such date);
(iv) each of Parent and the Parent Subsidiary shall
have performed and complied with all of its covenants hereunder
in all material respects through the Closing;
(v) neither any Order shall be enacted, promulgated,
entered, enforced or deemed applicable to the Merger nor any
other action shall have been taken by any
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Government Entity (A) which prohibits the consummation of the
transactions contemplated by the Merger; (B) which prohibits
Parent's or the Parent Subsidiary's ownership or operation of
all or any material portion of their or the Company's business
or assets, or which compels Parent or the Parent Subsidiary to
dispose of or hold separate all or any material portion of
Parent's or the Parent Subsidiary's or the Company's business or
assets as a result of the transactions contemplated by the
Merger; or (C) which makes the purchase of, or payment for, some
or all of the Company Shares illegal;
(vi) each of Parent and the Parent Subsidiary shall
have delivered to the Company a certificate to the effect that
each of the conditions specified above in Section6(b)(i)-(iv) is
satisfied in all respects; PROVIDED, HOWEVER, with respect to
Section6(b)(i), each of Parent and the Parent Subsidiary shall
only be required to certify that this Agreement and the Merger
received the Requisite Stockholder Approval of the Parent
Stockholders;
(vii) The Company shall have received a written
opinion, dated as of the Closing Date, from Cravath, Swaine &
Moore, counsel to the Company, to the effect that the Merger
will be treated for U.S. Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code,
and that Parent, Parent Subsidiary and the Company will each be
a party to that reorganization within the meaning of Section
368(b) of the Code; it being understood that in rendering such
opinion, such tax counsel shall be entitled to rely upon
customary representations provided by the Parties substantially
in the form of Exhibits D and E;
(viii) all applicable waiting periods (and any
extensions thereof) under the Hart-Scott-Rodino Act shall have
expired or otherwise been terminated;
(ix) the Parent Shares to be issued in connection
with the Merger shall have been approved upon official notice of
issuance for quotation on Nasdaq, subject to official notice of
issuance; and
(x) the Registration Statement shall have been
declared effective by the SEC under the Securities Act. No stop
order suspending the effectiveness of the Registration Statement
shall have been issued by the SEC and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
Subject to the provisions of applicable law, the Company may
waive, in whole or in part, any condition specified in this Section6(b) if it
executes a writing so stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. The Parties may terminate
this Agreement with the prior authorization of their respective board of
directors as provided below:
(i) The Parties may terminate this Agreement, and
the Merger may be abandoned, by mutual written consent at any
time prior to the Effective Time before or after the approval by
the Company Stockholders, the Parent Subsidiary stockholder or
the Parent Stockholders;
(ii) This Agreement may be terminated and the Merger
may be abandoned by action of the Board of Directors of either
Parent or the Company, before
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or after the approval by the Company Stockholders, the Parent
Subsidiary stockholders or the Parent Stockholders, (A) if the
Effective Time shall not have occurred by June 30, 2000 (the
"Outside Date") (unless the failure to consummate the Merger by
such date is due to the action or failure to act of the Party
seeking to terminate) or (B) if any condition to the obligation
of the terminating Party to consummate the Merger shall have
become incapable of being satisfied prior to the Outside Date as
of a result of an Order that is final and non-appealable;
(iii) This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time,
before or after the approval by the Company Stockholders, the
Parent Subsidiary stockholder or the Parent Stockholders, by
action of the Company Board, in the event that Parent or the
Parent Subsidiary shall have breached any of their
representations, warranties or covenants under this Agreement
which breach (A) would give rise to the failure of a condition
set forth in Section6(b) above, and (B) cannot be or has not
been cured within 30 days after the giving of written notice by
the Company to Parent of such breach (provided that the Company
is not then in material breach of any representation, warranty
or covenant contained in this Agreement);
(iv) This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before
or after the approval by the Company Stockholders, the Parent
Subsidiary stockholder or the Parent Stockholders, by action of
the Parent Board, in the event that the Company shall have
breached any of its representations, warranties or covenants
under this Agreement which breach (A) would give rise to the
failure of a condition set forth in Section6(a) above, and (B)
cannot be or has not been cured within 30 days after the giving
of written notice by the Parent to the Company of such breach
(provided that Parent is not then in material breach of any
representation, warranty or covenant contained in this
Agreement);
(v) This Agreement may be terminated by Parent, and
the Merger may be abandoned, (A) if the Company Board (i) enters
into or publicly announces its intention to enter into an
agreement or agreement in principle with respect to an
Acquisition Proposal, (ii) withdraws its recommendation to the
Company Stockholders of this Agreement or the Merger or (iii)
after the receipt of an Acquisition Proposal, fails to confirm
publicly, within ten days after the request of Parent, its
recommendation to the Company Stockholders that the Company
Stockholders adopt and approve this Agreement and the Merger or
(B) if the Company or any of its Representatives takes any of
the actions that would be proscribed by Section5(h) above, but
for the exceptions therein allowing certain actions to be taken
pursuant to the proviso in the first sentence of Section5(h)(ii)
above;
(vi) This Agreement may be terminated by the
Company, and the Merger may be abandoned, (A) if the Parent
Board (i) enters into or publicly announces its intention to
enter into an agreement or agreement in principle with respect
to a Prohibited Parent Acquisition Proposal, (ii) withdraws its
recommendation to the Parent Stockholders that the Parent
Stockholders approve the issuance of Parent Shares in connection
with the Merger as provided by the Agreement or, if necessary,
that the Parent Stockholders approve an amendment to the
certificate of incorporation of Parent to increase the
authorized number of Parent Shares or (iii) after receipt of a
Parent Acquisition Proposal, fails to publicly confirm, within
ten days after the request of the Company, its recommendation to
the Parent Stockholders described in the foregoing clause (ii)
or (B) if Parent or any of its Representatives takes any of the
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actions that would be proscribed by Section5(i) but for the
exceptions therein allowing certain actions to be taken pursuant
to the proviso in the first sentence of Section5(i)(ii);
(vii) This Agreement may be terminated by the
Company, and the Merger may be abandoned, in the event that the
Closing Sales Price per Parent Share on the Closing Date is less
than $25;
(viii) Any Party may terminate this Agreement, and
the Merger may be abandoned, by giving written notice to the
other Parties at any time after the Company Special Meeting in
the event that this Agreement and the Merger fail to receive the
Requisite Stockholder Approval by the Company Stockholders; or
(ix) Any Party may terminate this Agreement, and the
Merger may be abandoned, by giving written notice to the other
Parties at any time after the Parent Special Meeting in the
event that this Agreement and the Merger fail to receive the
Requisite Stockholder Approval by the Parent Stockholders.
(b) Effect of Termination.
(i) Except as provided in clauses (ii) or (iii) of
this Section7(b), if any Party terminates this Agreement
pursuant to Section7(a) above, all rights and obligations of the
Parties hereunder shall terminate without any liability of any
Party to any other Party (except for any liability of any Party
then in breach); PROVIDED, HOWEVER, that the provisions of the
Confidentiality Agreement, this Section7(b) and Section8 below,
shall survive any such termination.
(ii) If this Agreement is terminated (A) by the
Company pursuant to Section7(a)(viii) or (B) by Parent pursuant
to Section7(a)(v) or Section7(a)(viii), or (C) any Person makes
an Acquisition Proposal that remains in effect on the date 60
days prior to the Outside Date and the Requisite Stockholder
Approval of the Company Stockholders is not obtained prior to
termination of this Agreement pursuant to Section7(a)(ii), then,
within five (5) days after such termination, the Company shall
pay Parent the sum of $30,000,000 in immediately available
funds.
(iii) If (A) this Agreement is terminated pursuant
to Section7(a)(vi) or (B) any person makes a Prohibited Parent
Acquisition Proposal that was publicly disclosed prior to the
Parent Special Meeting but not publicly withdrawn more than ten
days prior to the date of the Parent Special Meeting and
thereafter this Agreement is terminated pursuant to
Section7(a)(ix) or (C) any person makes a Prohibited Parent
Acquisition Proposal that remains in effect on the date 60 days
prior to the Outside Date and the Requisite Stockholder Approval
of the Parent Stockholders is not obtained prior to termination
of this Agreement pursuant to Section7(a)(ii), then, within five
(5) days after such termination, Parent shall pay the Company
the sum of $75,000,000 in immediately available funds. If this
Agreement is terminated pursuant to Section7(a)(ix) and clause
(B) or the preceding sentence is not applicable, then, within
five (5) days after such termination, Parent shall pay the
Company the sum of $30,000,000 in immediately available funds.
8. Miscellaneous.
(a) Survival. None of the representations, warranties and
covenants of the Parties (other than the provisions in Section2 concerning
payment of the Merger Consideration, the provisions in Section5(j), Section5(l),
Section5(m), Section5(p) and Section5(q) shall survive the Effective Time.
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(b) Press Releases and Public Announcements. No Party shall
issue any press release or make any public announcement relating to the subject
matter of this Agreement without the prior written approval of the other
Parties; PROVIDED, HOWEVER, that any Party may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case the
disclosing Party will use all reasonable efforts to advise the other Parties
prior to making the disclosure).
(c) No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns; PROVIDED, HOWEVER, that (i) the
provisions in Section2 above (A) concerning payment of the Merger Consideration
are intended for the benefit of the Company Stockholders and (B) concerning the
conversion of the stock options are intended for the benefit of the holders of
such stock options, (ii) the provisions in Section5(j) above concerning
insurance and indemnification are intended for the benefit of the individuals
specified therein and their respective legal representatives and (iii) the
provisions of Section5(l), Section5(m) and Section5(p) are intended for the
benefit of the Company Stockholders.
(d) Entire Agreement. This Agreement (including the
Confidentiality Agreement and the other documents referred to herein)
constitutes the entire agreement among the Parties and supersedes any prior
understandings, agreements or representations by or among the Parties, written
or oral, to the extent they related in any way to the subject matter hereof.
(e) Binding Effect; Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties and their respective
successors and permitted assigns. No Party may assign or delegate either this
Agreement or any of its rights, interests or obligations hereunder, by operation
of law or otherwise, without the prior written approval of the other Parties.
Any purported assignment or delegation without such approval shall be void and
of no effect.
(f) Counterparts. This Agreement may be executed (including
by facsimile) in one or more counterparts, each of which shall be deemed an
original but all of which together will constitute one and the same instrument.
(g) Headings. The section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims and
other communications hereunder shall be in writing. Any notice, request, demand,
claim or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid and addressed to the intended recipient as
set forth below:
<TABLE>
<S> <C>
If to the Company: Destia Communications, Inc.
95 Route 17 South
Paramus, New Jersey 07652
Attention: General Counsel
Facsimile: (201) 226-4575
with a Copy to: Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Richard Hall
Facsimile: (212) 474-3700
</TABLE>
A-43
<PAGE>
<TABLE>
<S> <C>
If to Parent: Viatel, Inc.
685 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (203) 351-8023
with a Copy to: Kelley Drye & Warren LLP
2 Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901
Attention: John Capetta
Facsimile: (212) 350-7493
If to the Parent Viatel, Inc.
Subsidiary: 685 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (212) 350-7493
with a Copy to: Kelley Drye & Warren LLP
2 Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901
Attention: John Capetta
Facsimile: (203) 351-8023
</TABLE>
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using
personal delivery, expedited courier, messenger service, telecopy or ordinary
mail, but no such notice, request, demand, claim or other communication shall be
deemed to have been duly given unless and until it actually is received by the
intended recipient. Any Party may change the address to which notices, requests,
demands, claims and other communications hereunder are to be delivered by giving
the other Parties notice in the manner set forth in this Section8(h), provided
that no such change of address shall be effective until it actually is received
by the intended recipient.
(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE WITHOUT
GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
(j) Amendments and Waivers. The Parties may mutually amend
any provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; PROVIDED, HOWEVER,
that any amendment effected subsequent to Requisite Stockholder Approval will be
subject to the restrictions contained in the Delaware General Corporation Law,
to the extent applicable. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by all of the Parties.
No waiver by any Party of any default, misrepresentation or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the
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<PAGE>
remaining terms and provisions hereof or the validity or enforceability of the
offending term or provision in any other situation or in any other jurisdiction.
(l) Expenses. Except as expressly set forth elsewhere in
this Agreement, each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(m) Construction. The Parties have participated jointly in
the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation. The phrase "business
day" shall mean any day other than a day on which banks in the State of New York
are required or authorized to be closed. Any disclosure made with reference to
one or more sections of the Company Disclosure Letter shall be deemed disclosed
with respect to each other section therein as to which such disclosure is
relevant provided that such relevance is reasonably apparent. Disclosure of any
matter in the Company Disclosure Letter or the Parent Disclosure Letter shall
not be deemed an admission that such matter is material.
(n) Incorporation of Exhibits. The Exhibits identified in
this Agreement are incorporated herein by reference and made a part hereof.
(o) Definition of Knowledge. As used herein, the words
"knowledge", "best knowledge" or "known" shall, (i) with respect to the Company
or Company management, mean the actual knowledge of the corporate executive
officers of the Company, in each case after such individuals have made due and
diligent inquiry as to the matters which are the subject of the statements which
are "known" by the Company or made to the "knowledge" or "best knowledge" of the
Company, (ii) with respect to Parent or Parent management, mean the actual
knowledge of the corporate executive officers of Parent, in each case after such
individuals have made due and diligent inquiry as to the matters which are the
subject of the statements which are "known" by Parent or made to the "knowledge"
or "best knowledge" of Parent, and (iii) with respect to the Parent Subsidiary
or the Parent Subsidiary management, mean the actual knowledge of the corporate
executive officers of Parent or the Parent Subsidiary, in each case after such
individuals have made due and diligent inquiry as to the matters which are the
subject of the statements which are "known" by the Parent Subsidiary or made to
the "knowledge" or "best knowledge" of the Parent Subsidiary.
(p) WAIVER OF JURY TRIAL. EACH OF PARENT, THE PARENT
SUBSIDIARY AND THE COMPANY, AND EACH INDEMNIFIED PARTY, HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
A-45
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the date first above written.
<TABLE>
<S> <C> <C>
DESTIA COMMUNICATIONS, INC.
By: /s/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: Chief Executive Officer
VIATEL ACQUISITION CORP.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President
</TABLE>
A-46
<PAGE>
EXHIBIT A
CERTIFICATE OF MERGER
OF
VIATEL ACQUISITION CORP.
AND
DESTIA COMMUNICATIONS, INC.
It is hereby certified that:
1. The constituent business corporations participating in the
merger herein certified are:
(i) Viatel Acquisition Corp., which is incorporated under
the laws of the State of Delaware; and
(ii) Destia Communications, Inc., which is incorporated
under the laws of the State of Delaware.
2. An Agreement and Plan of Merger has been approved, adopted,
certified, executed, and acknowledged by each of the aforesaid constituent
corporations in accordance with the provisions of subsection (c) of Section 251
of the General Corporation Law of the State of Delaware.
3. The name of the surviving corporation in the merger herein
certified is Destia Communications, Inc., which will continue its existence as
said surviving corporation under the name [NAME TO BE DETERMINED] upon the
effective date of said merger pursuant to the provisions of the General
Corporation Law of the State of Delaware.
4. The Certificate of Incorporation of Destia Communications, Inc.,
as now in force and effect, shall continue to be the Certificate of
Incorporation of said surviving corporation until amended and changed pursuant
to the provisions of the General Corporation Law of the State of Delaware.
5. The executed Agreement and Plan of Merger between the aforesaid
constituent corporations is on file at an office of the aforesaid surviving
corporation, the address of which is as follows:
685 Third Avenue
New York, New York 10178
6. A copy of the aforesaid Agreement and Plan of Merger will be
furnished by the aforesaid surviving corporation, on request, and without cost,
to any stockholder of each of the aforesaid constituent corporations.
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<PAGE>
7. The Agreement and Plan of Merger between the aforesaid
constituent corporations provides that the merger herein certified shall be
effective on ____________, 1999.
<TABLE>
<S> <C> <C>
Dated: VIATEL ACQUISITION CORP.
By:
-----------------------------------------
Name:
Title:
Dated:
DESTIA COMMUNICATIONS, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
A-48
<PAGE>
EXHIBIT B
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VIATEL ACQUISITION CORP.
It is hereby certified that:
1. The present name of the corporation is Viatel Acquisition Corp.
(the "Corporation"), which is the name under which the Corporation was
originally incorporated, and the date of filing of the original Certificate of
Incorporation of the Corporation with the Secretary of State of the State of
Delaware is August 25, 1999.
2. The Certificate of Incorporation of the Corporation is hereby
amended by striking out Article First thereof and by substituting in lieu
thereof new Article First which is set forth in the Restated Certificate of
Incorporation hereinafter provided for.
3. The provisions of the Certificate of Incorporation of the
Corporation, as herein amended, are hereby restated and integrated into the
single instrument that is hereinafter set forth, and that is entitled "Restated
Certificate of Incorporation of [NAME TO BE DETERMINED]" without any further
amendments other than the amendment herein certified and without any discrepancy
between the provisions of the Certificate of Incorporation as heretofore amended
and supplemented and the provisions of the said single instrument hereinafter
set forth.
4. The amendment and the restatement of the Restated Certificate of
Incorporation herein certified have been duly adopted by the stockholders of the
Corporation in accordance with the provisions of Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware.
5. The certificate of incorporation of the corporation, as amended
and restated herein, shall at the effective time of the restated certificate of
Incorporation, read as follows:
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
[NAME TO BE DETERMINED]
FIRST: The name of the corporation is [NAME TO BE DETERMINED] (the
"Corporation").
SECOND: The address of its registered office in the State of Delaware
is Corporate Service Company, 1013 Centre Road, in the City of Wilmington 19805,
County of New Castle. The name of its registered agent at such address is
Corporate Service Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is One Thousand (1,000) shares of Common Stock,
par value $.01 per share.
FIFTH: The Corporation is to have perpetual existence.
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<PAGE>
SIXTH: The power to adopt, amend or repeal the Corporation's By-Laws
is conferred upon the Board of Directors, but this shall not divest the
stockholders of the power, nor limit their power, to adopt, amend or repeal the
Corporation's By-Laws.
SEVENTH: Elections of directors need not be by ballot unless the
By-Laws of the Corporation shall so provide, and the meetings of stockholders
may be held within or without the State of Delaware, as the By-Laws may provide.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
NINTH: No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of such director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware or (iv) for any transaction from which a director derives an
improper personal benefit. If the General Corporation Law of the State of
Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended. No repeal or modification of this Article TENTH shall adversely affect
any right of or protection afforded to a director of the Corporation existing
immediately prior to such repeal or modification.
TENTH: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it shall
have power to indemnify under said Section from and against any and all of the
expenses, liabilities or other matters referred to in or covered by such
Section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-Law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such person.
Signed on , 1999
- ---------------------------------------------
Name:
Title:
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<PAGE>
EXHIBIT C
Form of Company Affiliate Letter
Dear Sirs:
The undersigned refers to the Agreement and Plan of Merger (the
"Merger Agreement") dated as of August 27, 1999, among Viatel, Inc., a Delaware
corporation, Viatel Acquisition Corp., a Delaware corporation, and Destia
Communications, Inc., a Delaware corporation. Capitalized terms used but not
defined in this letter have the meanings given such terms in the Merger
Agreement.
The undersigned, a holder of Company Shares, is entitled to receive
Parent Shares in connection with the Merger. The undersigned acknowledges that
the undersigned may be deemed an "affiliate" of the Company within the meaning
of Rule 145 ("Rule 145") promulgated under the Securities Act, although nothing
contained herein should be construed as an admission of such fact.
If in fact the undersigned were an affiliate under the Act, the
undersigned's ability to sell, assign or transfer the Parent Shares received by
the undersigned in exchange for any Company Shares pursuant to the Merger may be
restricted unless such transaction is registered under the Act or an exemption
from such registration is available. The undersigned (i) understands that such
exemptions are limited and (ii) has obtained advice of counsel as to the nature
and conditions of such exemptions, including information with respect to the
applicability to the sale of such securities of Rules 144 and 145(d) promulgated
under the Securities Act.
The undersigned hereby represents to and covenants with Parent that
the undersigned will not sell, assign or transfer any of the Parent Shares
received by the undersigned in exchange for Company Shares pursuant to the
Merger except (i) pursuant to an effective registration statement under the
Securities Act or (ii) in a transaction that, in the opinion of independent
counsel (the reasonable fees of which counsel will be paid by Parent) or as
described in a "no-action" or interpretive letter from the Staff of the SEC, is
not required to be registered under the Securities Act.
In the event of a sale or other disposition by the undersigned
pursuant to Rule 145, of Parent Shares received by the undersigned in the
Merger, the undersigned will supply Parent with evidence of compliance with such
Rule, in the form of a letter in the form of Annex I hereto and the opinion of
counsel or no-action letter referred to above. The undersigned understands that
Parent may instruct its transfer agent to withhold the transfer of any Parent
Securities disposed of by the undersigned, but that upon receipt of such
evidence of compliance the transfer agent shall effectuate the transfer of the
Parent Shares sold as indicated in the letter.
The undersigned acknowledges and agrees that appropriate legends
will be placed on any certificates representing Parent Shares received by the
undersigned in the Merger or held by a transferee thereof, which legends will be
removed by delivery of substitute certificates upon receipt of an opinion in
form and substance reasonably satisfactory to Parent from independent counsel
(the reasonable fees of which counsel will be paid by Parent) to the effect that
such legends are no longer required for purposes of the Securities Act.
The undersigned acknowledges that (i) the undersigned has carefully
read this letter and understands the requirements hereof and the limitations
imposed upon the distribution, sale, transfer or other disposition of the Parent
Shares and (ii) the receipt by Parent of this letter is an inducement and a
condition to Parent's obligations to consummate the Merger.
Very truly yours,
Dated:
A-51
<PAGE>
ANNEX I
TO EXHIBIT C
VIATEL, INC.
685 Third Avenue
New York, NY 10017
On , the undersigned sold the securities of Viatel, Inc.
("Parent") described below in the space provided for that purpose (the
"Securities"). The Securities were received by the undersigned in connection
with the merger of Viatel Acquisition Corp., a subsidiary of Parent, with and
into Destia Communications, Inc.
Based upon the most recent report or statement filed by Parent with
the Securities and Exchange Commission, the Securities sold by the undersigned
were within the prescribed limitations set forth in Rule 144(e) promulgated
under the Securities Act of 1933, as amended (the "Securities Act").
The undersigned hereby represents that the Securities were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Securities Act
or in transactions directly with a "market maker" as that term is defined in
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended. The
undersigned further represents that the undersigned has not solicited or
arranged for the solicitation of orders to buy the Securities, and that the
undersigned has not made any payment in connection with the offer or sale of the
Securities to any person other than to the broker who executed the order in
respect of such sale.
Very truly yours,
Dated:
[Space to be provided for description of securities.]
A-52
<PAGE>
EXHIBIT D
[Letterhead of VIATEL, INC.]
, 1999
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Ladies and Gentlemen:
In connection with the opinion to be delivered pursuant to Section
6(b)(vii) of the Agreement and Plan of Merger (the "Merger Agreement") dated as
of August 27, 1999, among VIATEL, INC., a Delaware corporation (the "Parent"),
VIATEL ACQUISITION CORP., a Delaware corporation and a direct wholly owned
subsidiary of the Parent (the "Parent Subsidiary"), and DESTIA COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), and in connection with the filing
with the Securities and Exchange Commission (the "SEC") of the registration
statement on Form S-4 (the "Registration Statement"), which includes the Joint
Proxy Statement/Prospectus of the Parent and the Company, the undersigned
certifies and represents on behalf of the Parent and the Parent Subsidiary and
as to the Parent and the Parent Subsidiary, after due inquiry and investigation,
as follows (any capitalized term used but not defined herein having the meaning
given to such term in the Merger Agreement):
1. The facts relating to the contemplated merger of the Parent
Subsidiary with and into the Company (the "Merger") as described in the
Registration Statement and the documents described in the Registration Statement
are, insofar as such facts pertain to the Parent and the Parent Subsidiary,
true, correct and complete in all material respects. The Merger will be
consummated in accordance with the Merger Agreement.
2. The formula set forth in the Merger Agreement pursuant to which
each issued and outstanding share of voting common stock, par value $.01 per
share, of the Company (the "Voting Shares") and each issued and outstanding
share of non-voting common stock, par value $.01 per share, of the Company (the
"Nonvoting Shares" and, together with the Voting Shares, the "Company Shares")
will be converted into common shares of the Parent (the "Parent Shares") is the
result of arm's length bargaining.
3. Cash payments to be made to stockholders of the Company in lieu of
fractional shares of Parent Shares that would otherwise be issued to such
stockholders in the Merger will be made for the purpose of saving the Parent the
expense and inconvenience of issuing and transferring fractional shares of
Parent Shares, and do not represent separately bargained for consideration. The
total cash consideration that will be paid in the Merger to stockholders of the
Company in lieu of fractional shares of Parent Shares is not expected to exceed
one percent of the total consideration that will be issued in the Merger to
stockholders of the Company in exchange for their shares of Company Shares.
4. (i) The Parent has no present plan or intention, following the
Merger, to reacquire, or to cause any corporation that is related to the Parent
to acquire, any Parent Shares, except for repurchases of Parent Shares by the
Parent in connection with a repurchase program meeting the requirements of
Section 4.05(1)(b) of Revenue Procedure 96-30, which program was not entered
into or amended in any way in contemplation of or connection with the Merger. To
the best knowledge of the management of the Parent, no corporation that is
related to the Parent has a plan or intention to purchase any Parent Shares.
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<PAGE>
(ii) For purposes of this representation letter, a corporation shall
be treated as related to the Parent if such corporation is related to The Parent
within the meaning of Treasury Regulation Section 1.368-1(e)(3).
5. The Parent has no present plan or intention to make any
distributions after the Merger to holders of Parent Shares (other than dividends
made in the ordinary course of business).
6. Neither the Parent nor the Parent Subsidiary (nor any other
subsidiary of the Parent) has acquired, or, except as a result of the Merger,
will acquire, or has owned in the past five years, any Company Shares.
7. Prior to the Merger, the Parent will own all the capital stock of
the Parent Subsidiary. The Parent has no present plan or intention to cause the
Company to issue additional shares of its stock that would result in the Parent
owning less than all the capital stock of the Company after the Merger.
8. The Parent has no present plan or intention, following the Merger,
to liquidate the Company, to merge the Company with and into another
corporation, to sell or otherwise dispose of any of the stock of the Company, to
cause the Company to distribute to the Parent or any of its subsidiaries any
assets of the Company or the proceeds of any borrowings incurred by the Company,
or to cause the Company to sell or otherwise dispose of any of the assets held
by the Company at the time of the Merger, except for dispositions of such assets
in the ordinary course of business and transfers described in Section
368(a)(2)(C) of the Internal Revenue Code of 1986, as amended (the "Code") or
Treasury Regulation Section 1.368-2(k).
9. Immediately following the Merger, the Company will hold (i) at
least 90% of the fair market value of the net assets and at least 70% of the
fair market value of the gross assets that were held by the Company immediately
prior to the Merger and (ii) at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets that were
held by the Parent Subsidiary immediately prior to the Merger. For purposes of
this representation, amounts paid by the Company or by the Parent Subsidiary to
stockholders who receive cash or other property (including cash in lieu of
fractional shares of Parent Shares and cash paid with respect to Dissenting
Shares) in connection with the Merger, assets of the Company used to pay its
reorganization expenses and all redemptions and distributions made by the
Company (other than dividends made in the ordinary course of business)
immediately preceding, or in contemplation of, the Merger will be included as
assets held by the Company immediately prior to the Merger.
10. Except as otherwise specifically contemplated under the Merger
Agreement, the Parent, the Parent Subsidiary, the Company and holders of Company
Shares will each pay their respective expenses, if any, incurred in connection
with the Merger. Except to the extent specifically contemplated under the Merger
Agreement or the Stockholder Agreements, neither the Parent nor the Parent
Subsidiary has paid, directly or indirectly, or has agreed to assume any expense
or other liability, whether fixed or contingent, incurred or to be incurred by
the Company or any holder of Company Shares in connection with or as part of the
Merger or any related transactions.
11. Following the Merger, the Parent intends to cause the Company to
continue its "historic business" or to use a significant portion of its
"historic business assets" in a business (as such terms are defined in Treasury
Regulation Section 1.368-1(d)).
12. Neither the Parent nor the Parent Subsidiary is an investment
company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
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<PAGE>
13. Neither the Parent nor the Parent Subsidiary will take any
position on any Federal, state or local income or franchise tax return, or take
any other tax reporting position, that is inconsistent with the treatment of the
Merger as a reorganization within the meaning of Section 368(a) of the Code,
unless otherwise required by a "determination" (as defined in Section 1313(a)(1)
of the Code) or by applicable state or local tax law (and then only to the
extent required by such applicable state or local tax law).
14. None of the compensation received by any stockholder-employee of
the Company in respect of periods at or prior to the Effective Time represents
separate consideration for any of its Company Shares. None of the Parent Shares
that will be received by any stockholder-employee of the Company in the Merger
represents separately bargained for consideration which is allocable to any
employment agreement or arrangement. The compensation paid to any
stockholder-employees will be for services actually rendered and will be
determined by bargaining at arm's-length.
15. There is no intercorporate indebtedness existing between the
Parent (or any of its subsidiaries, including the Parent Subsidiary) and the
Company (or any of its subsidiaries) that was issued or acquired, or will be
settled, at a discount.
16. Neither the Parent nor the Parent Subsidiary is under the
jurisdiction of a court in a Title 11 or similar case within the meaning of
Section 368(a)(3)(A) of the Code.
17. In connection with the Merger, Company Shares will be converted
solely into Parent Shares (except for cash paid in lieu of fractional shares of
Parent Shares or cash paid with respect to Dissenting Shares). For purposes of
this representation, Company Shares (including Dissenting Shares) redeemed for
cash or other property furnished, directly or indirectly, by the Parent will be
considered as exchanged for other than Parent Shares. Further, no liabilities of
the Company or any of the holders of Company Shares will be assumed by the
Parent, nor will any of the Company Shares acquired by the Parent in connection
with the Merger be subject to any liabilities.
18. Any payments with respect to Dissenting Shares shall be made
solely by the Company or the Surviving Corporation, and no cash or other
property shall be furnished, directly or indirectly, by the Parent to the
Company, the Surviving Corporation or to any holder of Dissenting Shares with
respect to any Dissenting Shares. The total fair market value of all Company
Nonvoting Shares issued and outstanding as of the date of the Merger Agreement
is equal to (i) less than 1% of the fair market value of the net assets and (ii)
less than 1% the fair market value of the gross assets that were held by the
Company immediately prior to the Merger.
19. The Merger Agreement, the Registration Statement and the other
documents described in the Registration Statement represent the entire
understanding of the Parent and the Parent Subsidiary with respect to the
Merger.
20. The Parent Subsidiary is a corporation newly formed for the
purpose of participating in the Merger and at no time prior to the Merger has
had assets (other than nominal assets contributed upon the formation of the
Parent Subsidiary, which assets will be held by the Parent Subsidiary following
the Merger) or business operations.
21. The Merger is being undertaken for purposes of enhancing the
business of the Parent and for other good and valid business purposes of the
Parent.
22. The undersigned is authorized to make all the representations set
forth herein on behalf of the Parent and the Parent Subsidiary.
A-55
<PAGE>
The undersigned acknowledges that (i) the opinion to be delivered
pursuant to Section [6(b)(vii)] of the Merger Agreement will be based on the
accuracy of the representations set forth herein and on the accuracy of the
representations and warranties and the satisfaction of the covenants and
obligations contained in the Merger Agreement and the various other documents
related thereto, and (ii) such opinion will be subject to certain limitations
and qualifications including that it may not be relied upon if any such
representations or warranties are not accurate or if any such covenants or
obligations are not satisfied in all material respects.
The undersigned acknowledges that such opinion will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinions.
<TABLE>
<S> <C> <C>
Very truly yours,
VIATEL, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
A-56
<PAGE>
EXHIBIT E
[Letterhead of DESTIA COMMUNICATIONS, INC.]
, 1999
Cravath, Swaine & Moore
825 Eighth Avenue
New York, New York 10019
Ladies and Gentlemen:
In connection with the opinion to be delivered pursuant to Section
6(b)(vii) of the Agreement and Plan of Merger (the "Merger Agreement"), dated as
of August 27, 1999, among VIATEL, INC., a Delaware corporation (the "Parent"),
VIATEL ACQUISITION CORP., a Delaware corporation and a direct, wholly owned
subsidiary of the Parent (the "Parent Subsidiary"), and DESTIA COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), and in connection with the filing
with the Securities and Exchange Commission (the "SEC") of the registration
statement on Form S-4 (the "Registration Statement"), which includes the Joint
Proxy Statement/Prospectus of the Parent and the Company, the undersigned
certifies and represents on behalf of the Company and as to the Company, after
due inquiry and investigation, as follows (any capitalized term used but not
defined herein shall have the meaning given to such term in the Merger
Agreement):
1. The facts relating to the contemplated merger of the Parent
Subsidiary with and into the Company (the "Merger") as described in the
Registration Statement and the documents described in the Registration Statement
are, insofar as such facts pertain to the Company, true, correct and complete in
all material respects. The Merger will be consummated in accordance with the
Merger Agreement.
2. The formula set forth in the Merger Agreement pursuant to which
each issued and outstanding share of voting common stock, par value $.01 per
share, of the Company (the "Voting Shares"), and each issued and outstanding
share of non-voting common stock, par value $.01 per share, of the Company (the
"Nonvoting Shares" and, together with the Voting Shares, the "Company Shares")
will be converted into common shares of the Parent (the "Parent Shares") is the
result of arm's length bargaining.
3. Cash payments to be made to stockholders of the Company in lieu
of fractional shares of Parent Shares that would otherwise be issued to such
stockholders in the Merger will be made for the purpose of saving the Parent the
expense and inconvenience of issuing and transferring fractional shares of
Parent Shares, and do not represent separately bargained for consideration. The
total cash consideration that will be paid in the Merger to stockholders of the
Company in lieu of fractional shares of Parent Shares is not expected to exceed
one percent of the total consideration that will be issued in the Merger to
stockholders of the Company in exchange for their Company Shares.
4. (i) Neither the Company nor any corporation related to the
Company has acquired or has any present plan or intention to acquire any Company
Shares in contemplation of the Merger, or otherwise as part of a plan of which
the Merger is a part, other than Nonvoting Shares with respect to which
dissenters' rights have been duly demanded under applicable law ("Dissenting
Shares").
(ii) For purposes of this representation letter, a
corporation shall be treated as related to the Company if such corporation is
related to the Company within the meaning of Treasury Regulation Section
1.368-1(e)(3).
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5. The Company has not made and does not have any present plan or
intention to make any distributions (other than dividends made in the ordinary
course of business) prior to, in contemplation of, or otherwise in connection
with, the Merger.
6. Except as otherwise specifically contemplated under the Merger
Agreement, the Parent, the Parent Subsidiary, the Company and holders of Company
Shares will each pay their respective expenses, if any, incurred in connection
with the Merger. The Company has not agreed to assume, nor will it directly or
indirectly assume, any expense or other liability, whether fixed or contingent,
of any holder of Company Shares. Except to the extent specifically contemplated
under the Merger Agreement or the Stockholder Agreements, the Company has not
entered into any arrangement pursuant to which the Parent or the Parent
Subsidiary has agreed to assume, directly or indirectly, any expense or other
liability, whether fixed or contingent, of the Company or any holder of Company
Shares.
7. Immediately following the Merger the Company will hold (i) at
least 90% of the fair market value of the net assets and at least 70% of the
fair market value of the gross assets that were held by the Company immediately
prior to the Merger and (ii) at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets that were
held by the Parent Subsidiary immediately prior to the Merger. For purposes of
this representation, amounts paid by the Company or by the Parent Subsidiary to
stockholders who receive cash or other property (including cash in lieu of
fractional shares of Parent Shares and cash paid with respect to Dissenting
Shares) in connection with the Merger, assets of the Company used to pay its
reorganization expenses and all redemptions and distributions made by the
Company (other than dividends made in the ordinary course of business)
immediately preceding, or in contemplation of, the Merger will be included as
assets held by the Company immediately prior to the Merger.
8. Except as provided in the Merger Agreement, immediately prior to
the time of the Merger the Company will not have outstanding any warrants,
options, convertible securities or any other type of right pursuant to which any
person could acquire Company Shares.
9. In connection with the Merger, Company Shares will be converted
solely into Parent Shares (except for cash paid in lieu of fractional shares of
Parent Shares or cash paid with respect to Dissenting Shares). For purposes of
this representation, Company Shares (including Dissenting Shares) redeemed for
cash or other property furnished, directly or indirectly, by the Parent will be
considered as exchanged for other than Parent Shares. Further, no liabilities of
the Company or any of the holders of Company Shares will be assumed by the
Parent, nor will any of the Company Shares acquired by the Parent in connection
with the Merger be subject to any liabilities.
10. The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended (the
"Code").
11. The Company will not take, and to the best knowledge of the
management of the Company there is no present plan or intention by stockholders
of the Company to take, any position on any Federal, state or local income or
franchise tax return, or to take any other tax reporting position, that is
inconsistent with the treatment of the Merger as a reorganization within the
meaning of Section 368(a) of the Code, unless otherwise required by a
"determination" (as defined in Section 1313(a)(1) of the Code) or by applicable
state or local tax law (and then only to the extent required by such applicable
state or local tax law).
12. None of the compensation received by any stockholder-employee of
the Company in respect of periods at or prior to the Effective Time represents
separate consideration for any of its Company Shares. None of the Parent Shares
that will be received by any stockholder-employee of the Company in the Merger
represents separately bargained for consideration which is allocable to any
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employment agreement or arrangement. The compensation paid to any
stockholder-employees will be for services actually rendered and will be
determined by bargaining at arm's-length.
13. There is no intercorporate indebtedness existing between the
Parent (or any of its subsidiaries, including the Parent Subsidiary) and the
Company (or any of its subsidiaries) that was issued, acquired, or will be
settled, at a discount.
14. The Company is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
15. The Merger Agreement, the Registration Statement and the other
documents described in the Registration Statement represent the entire
understanding of the Company with respect to the Merger.
16. No assets of the Company have been sold, transferred or
otherwise disposed of which would prevent the Parent from continuing the
"historic business" of the Company or from using a significant portion of the
"historic business assets" of the Company in a business following the Merger (as
such terms are defined in Treasury Regulation Section 1.368-1(d)).
17. On the date of the Merger, the fair market value of the assets
of the Company will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which such assets are subject.
18. No holders of Voting Shares have dissenter's rights with respect
to the Merger under applicable law. Any payments with respect to Dissenting
Shares shall be made solely by the Company or the Surviving Corporation, and no
cash or other property shall be furnished, directly or indirectly by the Parent
to the Company, the Surviving Corporation or to any holder of Dissenting Shares
with respect to any Dissenting Shares.
19. The total fair market value of all Company Nonvoting Shares
issued and outstanding as of the date of the Merger Agreement is equal to (i)
less than 1% of the fair market value of the net assets and (ii) less than 1%
the fair market value of the gross assets that were held by the Company
immediately prior to the Merger.
20. The undersigned is authorized to make all the representations
set forth herein on behalf of the Company.
The undersigned acknowledges that (i) the opinion to be delivered
pursuant to Section 6(b)(vii) of the Merger Agreement will be based on the
accuracy of the representations set forth herein and on the accuracy of the
representations and warranties and the satisfaction of the covenants and
obligations contained in the Merger Agreement and the various other documents
related thereto, and (ii) such opinion will be subject to certain limitations
and qualifications including that it may not be relied upon if any such
representations or warranties are not accurate or if any of such covenants or
obligations are not satisfied in all material respects.
The undersigned acknowledges that such opinion will not address any tax
consequences of the Merger or any action taken in connection therewith except as
expressly set forth in such opinion.
<TABLE>
<S> <C> <C>
Very truly yours,
DESTIA COMMUNICATIONS, INC.
By:
-----------------------------------------
Name:
Title:
</TABLE>
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ANNEX B
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT (the "Agreement") dated as of August 27, 1999
among ALFRED WEST, a resident of the State of New York, AT ECON LIMITED
PARTNERSHIP and AT ECON LTD. PARTNERSHIP NO. 2 (collectively, "Stockholder"),
VIATEL, INC., a Delaware corporation ("Parent"), VIATEL ACQUISITION CORP., a
Delaware corporation and a wholly-owned subsidiary of Parent ("Parent
Subsidiary"), and DESTIA COMMUNICATIONS, INC., a Delaware corporation
("Company").
W I T N E S S E T H:
WHEREAS, Parent, Company and Parent Subsidiary are entering into an
Agreement and Plan of Merger of even date herewith (the "Merger Agreement"),
pursuant to which Parent will acquire all of the outstanding shares of voting
common stock, $0.01 par value per share (the "Voting Shares"), and all of the
outstanding shares of non-voting common stock, $0.01 par value per share (the
"Non-Voting Shares," and together with the Voting Shares, the "Common Stock"),
of the Company pursuant to a merger of Parent Subsidiary with and into Company
(the "Merger");
WHEREAS, Stockholder collectively owns, as of the date hereof,
11,428,076 shares of Common Stock (the "Existing Shares," and together with any
shares of Common Stock acquired by Stockholder after the date hereof and prior
to the termination hereof, the "Shares");
WHEREAS, as a condition to their willingness to enter into the
Merger Agreement, and in reliance upon Stockholder's representations,
warranties, covenants and agreements hereunder, Parent and Parent Subsidiary
have requested that Stockholder agree, and Stockholder has agreed, to enter into
this Agreement; and
WHEREAS, this Agreement is being entered into concurrently with the
execution of the Merger Agreement;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained and for such other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, it is agreed as follows. Capitalized terms
not otherwise defined herein shall have the meaning set forth in the Merger
Agreement.
1. Agreement to Vote. Stockholder hereby agrees that, during the term of
this Agreement, at any meeting of the stockholders of Company, however called,
and in any action by consent of the stockholders of Company, however taken,
Stockholder shall cause the Shares to be present for quorum purposes and to vote
at such meeting and shall cause the Shares to be voted in any such consent, and
in either case, shall: (a) vote the Shares in favor of the adoption of the
Merger Agreement; (b) vote the Shares against any action or agreement that
would, or could reasonably be expected to, result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Company under
the Merger Agreement or that would result in a failure to satisfy any condition
on the part of the Company or its stockholders to be satisfied under the Merger
Agreement; (c) vote the Shares against any action or agreement that would, or
could reasonably be expected to, impede, interfere with, delay, postpone or
attempt to discourage the Merger, including, but not limited to, (i) any
extraordinary corporate transaction (other than the Merger), such as a merger,
other business combination, recapitalization, reorganization or liquidation,
involving Company (a "Business Combination Transaction"), (ii) a sale or
transfer of a material amount of assets of Company or any of its Subsidiaries
(as defined in the Merger Agreement),
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(iii) any change in the management or board of directors of Company, except as
otherwise agreed to in writing by Parent, (iv) any material change in the
present capitalization of the Company or (v) any other material change in the
corporate structure or business of Company; and (d) without limiting the
foregoing, consult with Parent prior to any such meeting or consent and, in
either case, vote such Shares in such manner as is determined by Parent to be in
compliance with the provisions of this Section 1. Stockholder acknowledges
receipt and review of a copy of the Merger Agreement. In furtherance of this
Section 1, Stockholder hereby irrevocably grants to, and appoints, Parent, and
any individual designated in writing by it, and each of them individually, as
its proxy and attorney-in-fact (with full power of substitution), for and in its
name, place and stead, to vote the Shares at any meeting of the stockholders of
the Company called with respect to any of the matters specified in this
Agreement. The Stockholder understands and acknowledges that Parent is entering
into the Merger Agreement in reliance upon Stockholder's execution and delivery
of this Agreement. The Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 1 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of Stockholder under this Agreement. Except as otherwise provided for
herein, Stockholder hereby (i) affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked, (ii) ratifies and
confirms all that the proxies appointed hereunder may lawfully do or cause to be
done by virtue hereof and (iii) affirms that such irrevocable proxy is executed
and intended to be irrevocable in accordance with the provisions of Section
212(e) of the Delaware General Corporation Law (as defined in the Merger
Agreement). Notwithstanding any other provision of this Agreement, the
irrevocable proxy granted hereunder shall automatically terminate upon the
termination of this Agreement pursuant to Section 4.
2. Representations and Warranties of Stockholder. Alfred West, AT Econ
Ltd. Partnership and AT Econ Ltd. Partnership No. 2 represent and warrant to
Parent and Parent Subsidiary with respect to that part of the Existing Shares
owned by it as follows:
2.1 Ownership of Shares. On the date hereof, Stockholder is the
sole record and beneficial owner of the Existing Shares, except as set forth on
Schedule 2.1 attached hereto. For purposes of this Agreement, beneficial
ownership of securities shall be determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On the
date hereof and at the Closing Date (as defined in the Merger Agreement),
neither Stockholder nor any Affiliate (as defined in the Merger Agreement) of
Stockholder (other than Company) owns or will own, of record or beneficially,
solely or jointly with others, (i) any shares of Common Stock other than the
Existing Shares and shares of Common Stock acquired upon the exercise of
employee stock options granted by the Company and listed on Schedule 2.1
attached hereto or (ii) any securities convertible into or exchangeable or
exercisable for shares of Common Stock or any rights to acquire any shares of
Common Stock other than employee stock options granted by Company and listed on
Schedule 2.1 attached hereto. Except as set forth on Schedule 2.1 attached
hereto, Stockholder currently has with respect to the Existing Shares, and at
Closing will have with respect to the Shares, good, valid and marketable title,
free and clear of all liens, encumbrances, restrictions, options, warrants,
rights to purchase, voting agreements or voting trusts, and claims of every kind
(other than the encumbrances created by this Agreement and other than
restrictions on transfer under applicable federal and state securities laws).
Stockholder has not and will not pledge more than 2,730,000 of the Existing
Shares.
2.2 Power; Binding Agreement. Stockholder has the full legal right,
power and authority to enter into and perform all of Stockholder's obligations
under this Agreement. The execution, delivery and performance of this Agreement
by Stockholder will not violate any other agreement to which Stockholder is a
party including, without limitation, any voting agreement, stockholder agreement
or voting trust. This Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding agreement of Stockholder,
enforceable in accordance with its terms. Neither the execution or delivery of
this Agreement nor the consummation by Stockholder of the transactions
contemplated hereby will (a) require any consent or approval of or filing with
any third party, including any
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governmental or other regulatory body, other than filings required under the
federal securities laws and consents or waivers listed on Schedule 2.2 attached
hereto, all of which have been obtained, or (b) constitute a violation of,
conflict with or constitute a default under, any material contract, commitment,
agreement, understanding, arrangement or other restriction of any kind to which
Stockholder is a party or by which Stockholder or his material property is
bound.
2.3 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fees from Stockholder in connection with this
Agreement or the transactions contemplated hereby exclusive of any commission or
finder's fees referred to in the Merger Agreement.
3. Representations and Warranties of Parent. Each of Parent and Parent
Subsidiary represents and warrants to Stockholder as follows:
3.1 Authority. Each of Parent and Parent Subsidiary has the full
legal right, power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by each of Parent and Parent Subsidiary will not violate or
conflict with any other agreement to which it is a party. This Agreement has
been duly executed and delivered by each of Parent and Parent Subsidiary and
constitutes a legal, valid and binding agreement of each of Parent and Parent
Subsidiary, enforceable against Parent and Parent Subsidiary in accordance with
its terms. Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby by each of Parent and
Parent Subsidiary will (a) require any consent or approval of or filing with any
third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws, or (b) constitute a
violation of, conflict with or default under, any material contract (including
any registration rights), commitment, agreement, understanding, arrangement or
other restriction of any kind to which Parent or Parent Subsidiary is a party or
by which either of them or their material property is bound.
3.2 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fee from Parent or Parent Subsidiary in connection
with this Agreement or the transactions contemplated hereby exclusive of any
commission or finder's fees referred to in the Merger Agreement.
4. Termination. The term of this Agreement commences upon the execution
and delivery of this Agreement by all of the parties hereto and continues until
it is terminated in accordance with its terms. This Agreement shall terminate on
the earliest of (a) the Effective Time (as defined in the Merger Agreement) or
(b) the date 180 days after the termination of the Merger Agreement in
accordance with its terms; PROVIDED, HOWEVER, the termination of this Agreement
shall be immediate if the Merger Agreement is terminated pursuant to Sections
7(a)(i), 7(a)(ii), 7(a)(iii), 7(a)(vi), 7(a)(vii) or 7(a)(ix); and, PROVIDED,
FURTHER, (i) the provisions of Sections 5 and 9 through 18 shall survive any
termination of this Agreement, (ii) the provisions of Sections 6.3, 6.4 and 7
shall survive the termination of this Agreement if this Agreement terminates
pursuant to clause (a) above and (iii) the provisions of Sections 2 and 3 shall
survive for a period of one year after any termination of this Agreement.
5. Expenses. Except as provided in Section 7, each party hereto will pay
all of its expenses in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of its counsel
and other advisers.
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6. Covenants.
6.1 Except in accordance with the provisions of this Agreement,
Stockholder (and the Company, pursuant to Section 6.8 hereof) agrees, prior to
the termination of this Agreement as provided in Section 4 above, not to,
directly or indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of (including by merger, testamentary disposition, interspousal
disposition pursuant to a domestic relations proceeding or otherwise or
otherwise by operation of law), or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Shares, PROVIDED,
HOWEVER, that Stockholder may transfer Shares, with the prior written consent of
Parent, which shall not be unreasonably withheld, to a trust of which there are
no beneficiaries other than the parents, spouse or children of Stockholder, or
otherwise make transfers for estate planning purposes, so long as the trust and
the trustee(s), or other transferee, thereof deliver a written agreement to
Parent, reasonably acceptable to Parent, to be bound by the restrictions set
forth in this Agreement, and Parent receives an opinion of counsel reasonably
satisfactory to it that this Agreement is binding upon such trust and the
trustee(s), or other transferee, thereof, as if such trust and trustee(s), or
other transferee, were Stockholder. Any action taken in violation of this
Section 6.1(a) shall be void and of no effect;
(b) grant any proxies with respect to any Shares, deposit
any Shares into a voting trust or enter into a voting agreement with respect to
any Shares; or
(c) take any action to solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, an Acquisition Proposal (as defined in the Merger Agreement) or engage in
negotiations or discussions with any person or entity (or group of persons
and/or entities) other than Parent or its Affiliates concerning, or provide any
non-public information to any person or entity relating, to an Acquisition
Proposal or otherwise assist or facilitate any effort or attempt by any person
or entity (other than Parent and Parent Subsidiary) to make or implement an
Acquisition Proposal. Stockholder will immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation on his part with any parties conducted heretofore with respect to
any proposed, potential or contemplated Acquisition Proposal, and will notify
Parent promptly if he becomes aware of any Acquisition Proposal or any request
for non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company by any person or
entity that informs the Company (or its officers, directors, representatives,
agents, Affiliates or associates) that it is considering making or has made an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact. The foregoing provisions of this Section 6.1(c),
however, shall not restrict Stockholder, solely in his capacity as a member of
the Company Board (as defined in the Merger Agreement), from voting to take
actions permitted under Section 5(h) of the Merger Agreement, and shall not
restrict Stockholder, solely in his capacity as an executive officer of the
Company, from taking actions authorized and directed by the Company Board so
long as such actions will not cause the Company to breach or result in the
Company being in breach of any provisions of the Merger Agreement.
6.2 Stockholder agrees, during the term of this Agreement, to notify
Parent promptly of the number of any shares of Common Stock acquired by
Stockholder after the date hereof.
6.3 Stockholder agrees that neither he nor any of his Affiliates
will, directly or indirectly, unless in any such case specifically invited in
writing to do so by the board of directors of Parent, for a period of two years
after the Effective Time, except as otherwise expressly set forth in this
Agreement or in the Merger Agreement: (i) individually or together with one or
more persons or entities, acquire, offer to acquire or agree to acquire, or
participate in the financing of any acquisition of, beneficial ownership of any
securities of Parent entitled to vote in the general election of directors
(other than securities
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distributed generally to all holders of a class of securities, and restricted
stock distributed to Stockholder pursuant to his employment agreement with
Parent), or securities convertible into or exchangeable or exercisable for such
securities (other than stock options) (collectively, "Securities"); (ii)
initiate, propose, engage or otherwise participate in the solicitation of
stockholders or their proxies for approval of one or more stockholder proposals
(including, without limitation, the election of directors, any amendment to the
charter or bylaws, or any Business Combination Transaction) with respect to
Parent; (iii) otherwise act alone or in concert with any other person or entity
to seek to influence or control the management, board of directors, policies or
affairs of Parent, or to solicit, propose or encourage any other person or
entity with respect to any form of Business Combination Transaction with Parent,
or to solicit, make or propose or encourage any other person or entity with
respect to, or announce an intent to make, any tender offer or exchange offer
for any Securities; (iv) request Parent or its board of directors, officers,
employees or agents, to amend or waive, or seek any modification to, any
provision of this Section 6.3; or (v) take any action designed to or which can
reasonably be expected to require Parent to make a public announcement regarding
any of the matters referred to in this Section 6.3. This Section 6.3 shall not
prohibit any action by Stockholder solely in his capacity as a director of
Parent, or solely in his capacity as an executive officer of the Company, from
taking actions authorized and directed by the Parent Board (as defined in the
Merger Agreement). Notwithstanding the provisions of Section 4, this Section 6.3
shall terminate immediately if Stockholder ceases to be a director of the Parent
Board because Parent has breached its obligations under Section 6.7.
6.4 Stockholder agrees that for a period of one year following the
Effective Time (the "Lock-up Period"), Stockholder will not, without the prior
written consent of Parent, directly or indirectly, offer, offer to sell, sell,
contract to sell, grant any option for the purchase of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any beneficial interest
in (including by merger, testamentary disposition, interspousal disposition
pursuant to a domestic relations proceeding or otherwise or otherwise by
operation of law) ("Transfer") any Parent common stock, par value $0.01 per
share ("Parent Common Stock"), or any securities convertible into or
exchangeable or exercisable for any shares of Parent Common Stock or any other
rights to acquire shares of Parent Common Stock (either pursuant to Rule 144 of
the regulations under the Securities Act of 1933, as amended (the "Securities
Act"), or otherwise) either beneficially owned by Stockholder as of the
Effective Time or acquired by Stockholder during the Lock-up Period as a result
of the exercise of options. Notwithstanding the foregoing, the undersigned may
(i) Transfer shares of Parent Common Stock as a BONA FIDE gift or gifts,
provided that Stockholder provides prior written notice of such gift or gifts to
Parent and the donee or donees thereof deliver a written agreement to Parent,
reasonably acceptable to Parent, to be bound by the restrictions set forth
herein as if such donee or donees were Stockholders; (ii) on one occasion,
Transfer up to 225,000 shares of Parent Common Stock; and (iii) Transfer shares
of Parent Common Stock, with the prior written consent of Parent, which shall
not be unreasonably withheld, to a trust of which there are no beneficiaries
other than the parents, spouse or children of Stockholder, or otherwise make
transfers for estate planning purposes, so long as the trust and the trustee(s),
or other transferee, thereof deliver a written agreement to Parent, reasonably
acceptable to Parent, to be bound by the restrictions set forth in this
Agreement, and Parent receives an opinion of counsel reasonably satisfactory to
it that this Agreement is binding upon such trust and the trustee(s), or other
transferee, thereof, as if such trust and trustee(s), or other transferee, were
Stockholder. Any Transfer of Parent Common Stock in violation of this Section
6.4 shall be void and of no effect.
6.5 Notwithstanding the provisions of Section 4, Sections 6.3 and
6.4 shall terminate immediately upon any termination of Stockholder's employment
agreement with Parent by Stockholder for Good Reason or any termination of
Stockholder's employment agreement by Parent without Cause ("Good Reason" and
"Cause" shall have the meanings set forth in such employment agreement).
6.6 For purposes of clause (i) of the definition of "Change of
Control" in the Company's 1999 Flexible Incentive Plan, Stockholder hereby
designates Parent and Parent Subsidiary. From the date
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hereof through the termination of this Agreement pursuant to Section 4, this
designation shall be irrevocable.
6.7 Parent agrees that Stockholder and a Stockholder Nominee (as
defined below) will become members of the Parent Board as of the Effective Time.
Following the time when Stockholder and Stockholder Nominee, respectively,
become members of the Parent Board, and continuing for so long as Stockholder
directly owns at least 10% of the outstanding shares of Parent Common Stock,
Parent agrees to cause Parent Board to nominate Stockholder and Stockholder
Nominee, respectively, for election as members of the Parent Board at each
annual meeting of stockholders of Parent at which such director is up for
re-election and to recommend to its stockholders a vote in favor of, and to
solicit proxies from its stockholders voting in favor of, the election of
Stockholder and Stockholder Nominee as members of Parent Board, all in the same
manner and to the same extent, and in accordance with the same procedures
applicable to the election of members of the Parent Board generally. If at any
time Stockholder directly owns less than 10% of the outstanding shares of Parent
Common Stock, but at least 5% of the outstanding shares of Parent Common Stock,
Parent's obligations set forth above in this Section 6.7 shall apply to
Stockholder (and not Stockholder Nominee) unless, at the first such time or
within 30 days thereafter, Stockholder gives written notice to Parent that such
obligations shall thereafter apply to Stockholder Nominee (and not Stockholder).
As used herein, "Stockholder Nominee" shall mean such person designated by
Stockholder, who qualifies as an independent director of Parent for purposes of
Rule 4200(a)(13) of the Rules of the National Association of Securities Dealers,
Inc. and is reasonably acceptable to the non-employee directors of Parent, to
serve on the Parent Board. Notwithstanding the foregoing, Parent's obligations
under this Section 6.7 as to Stockholder shall immediately cease upon the
occurrence of any of the following events: (i) Stockholder chooses not to serve
as a member of the Parent Board, (ii) the stockholders of Parent do not re-elect
Stockholder as a member of Parent Board at the annual meeting of stockholders of
Parent at which Stockholder is up for re-election or (iii) the Parent Board
removes Stockholder as a member of the Parent Board in accordance with the
Parent Board's fiduciary duties (provided, that no such removal shall be
affected without at least 15 days prior written notice to Stockholder stating
with specificity the grounds for such removal, and a reasonable opportunity for
Stockholder to be heard as to why such contemplated removal should not be
approved). Notwithstanding the foregoing, Parent's obligations under this
Section 6.7 as to Stockholder Nominee shall immediately cease upon the
occurrence of any of the following events: (i) Stockholder Nominee chooses not
to serve as a member of the Parent Board, (ii) the stockholders of Parent do not
re-elect Stockholder Nominee as a member of Parent Board at the annual meeting
of stockholders of Parent at which Stockholder Nominee is up for re-election or
(iii) the Parent Board removes Stockholder Nominee as a member of the Parent
Board in accordance with the Parent Board's fiduciary duties (provided, that no
such removal shall be affected without prior written notice to Stockholder
Nominee stating with specificity the grounds for such removal, and a reasonable
opportunity for Stockholder Nominee to be heard as to why such contemplated
removal should not be approved); PROVIDED, HOWEVER, Stockholder shall be
entitled to designate a replacement Stockholder Nominee so long as Stockholder
continues to directly own at least 10% of the outstanding shares of Parent
Common Stock.
6.8 The Company recognizes and agrees to use commercially reasonable
efforts to enforce the Transfer restrictions placed on the Shares under this
Agreement.
7. Registration Rights.
7.1 Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
"Commission" means the United States Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
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"Registrable Securities" means all the shares of Parent Common Stock
received by Stockholder at the Effective Time, together with any additional
Parent Common Stock received by Stockholder as a result of any stock dividend,
extraordinary dividend or distribution, split-up, recapitalization, combination,
exchange of shares, exercise of stock options or the like and involving the
Parent Common Stock received by Stockholder at the Effective Time; PROVIDED,
HOWEVER, such securities shall cease to be Registrable Securities when they
become freely saleable to the public under Rule 145(d) and Rule 144(k) under the
Securities Act, without volume limitation, as the case may be.
"Registration Expenses" means all expenses incurred by Parent incident
to Parent's performance of this Section 7, including, without limitation, all
registration, filing and National Association of Securities Dealers, Inc. fees,
all listing fees, all fees and expenses of complying with securities or blue sky
laws (including, without limitation, reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
Registrable Securities), all printing expenses, the fees and disbursements of
counsel for Parent and of Parent's independent public accountants, the fees and
disbursements of one counsel for Stockholder (provided that such expense shall
be limited to $3,500 for registration statements filed pursuant to Section 7.3,
and shall be available on only two occasions for registration statements filed
pursuant to Section 7.3), including the expenses of "comfort" letters, its
expenses incurred in connection with any "roadshow" presentations in which it
may participate and any fees and disbursements of underwriters customarily paid
by issuers or sellers of securities.
"Selling Expenses" means all expenses incurred by Stockholder incident
to Stockholder's performance of this Section 7, including, without limitation,
all underwriting discounts and commissions, the fees and disbursements of its
advisors, including his counsel (other than the fees and expenses covered under
the defined term "Registration Expenses") and his accountants, and his expenses
incurred in connection with any "roadshow" presentations in which he may
participate.
"Effective Period" means the period Parent is required to maintain the
effectiveness of a registration statement pursuant to Section 7.2 or 7.3, as the
case may be.
7.2 Requested Registration.
(a) Upon the written request (the "Request") of Stockholder,
on two occasions, Parent shall promptly cause to be filed under the Securities
Act a registration statement on such form as selected by Stockholder (which form
shall be subject to the approval of Parent, which shall not be unreasonably
withheld) of all or such portion of the Registrable Securities so requested by
Stockholder, and Parent shall take reasonable actions to effect, as soon as
practicable, subject to the reasonable cooperation of Stockholder, within 90
days after the Request is received from Stockholder, the registration under the
Securities Act, of the Registrable Securities which Parent has been so requested
to register by Stockholder.
(b) Expenses. Parent shall pay the Registration Expenses in
connection with any registration effected pursuant to this Section 7.2 and
Stockholder shall pay the Selling Expenses in connection with any registration
effected pursuant to this Section 7.2.
(c) Effective Registration Statement. Notwithstanding
anything to the contrary herein, a registration requested pursuant to this
Section 7.2 shall not be deemed to have been effected unless a registration
statement with respect thereto has become effective and remains effective,
without interruption by any stop order for a period of more than five days
(whether or not contiguous), until the earlier of (i) 120 days following the
effective date of such registration or (ii) the date when Parent Shares sought
to be offered and sold pursuant thereto are in fact offered and sold in
accordance with the terms of such offering. Notwithstanding the foregoing, a
registration statement used in connection with a non-underwritten offering shall
not be deemed to have been effected if (i) except during a Delay Period (as
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defined in Section 7.6), such registration statement is not amended or
supplemented within 10 business days after the date on which it becomes
necessary to amend or supplement it or (ii) during a Delay Period, Stockholder
elects, within 10 days after the commencement of the Delay Period, to
discontinue his resale participation in such registration statement.
(d) Priority of Rights. Whenever Parent shall effect a
registration pursuant to Section 7.2(a), holders of securities of Parent who
have "piggyback" registration rights may include all or a portion of such
securities in such registration statement; PROVIDED, HOWEVER, that if such
registration relates to an underwritten offering, and the managing underwriter
shall inform Parent by letter of its belief that the number or type of
securities of Parent requested by holders of the securities of Parent other than
Stockholder to be included in such registration would materially and adversely
affect the underwritten public offering, then Parent shall include in such
registration, to the extent of the number and type of securities which Parent is
so advised can be sold in such Public Offering, first, all of the Registrable
Securities specified by Stockholder in the Request and second, for each holder
of Parent's securities other than Stockholder, the fraction of each holder's
securities proposed to be registered which is obtained by dividing (i) the
number of the securities of Parent that such holder proposes to include in such
registration by (ii) the total number of securities proposed to be included in
such registration by all holders other than Stockholder.
(e) Selection of Underwriters. If Stockholder so requests,
the registration contemplated by Section 7.2(a) shall be for an underwritten
public offering. In connection with any such underwritten public offering, (a)
Parent shall promptly select the managing underwriter subject to the approval of
Stockholder (which approval shall not be unreasonably withheld, delayed or
conditioned by Stockholder), and (b) if he so desires, Stockholder may promptly
select the co-managing underwriter subject to the approval of Parent (which
approval shall not be unreasonably withheld, delayed or conditioned by Parent).
(f) Limitations on Registration. Parent shall not be
required to file a registration statement pursuant to this Section 7.2 which
would become effective within 180 days following the effective date of a
registration statement (other than a registration statement filed on Form S-4 or
S-8 or any successor form of limited purpose) filed by Parent with the
Commission pertaining to any public offering of common stock, or securities
convertible into or exchangeable for common stock, for the account of Parent or
an underwritten offering of common stock, or securities convertible into or
exchangeable for common stock, for another holder of securities of Parent. In
addition, if, in the good faith determination of Parent's board of directors, a
registration would adversely affect certain activities of Parent to the material
detriment of Parent, then Parent may at its option direct that such registration
be delayed for a period not in excess of 90 days in the aggregate from the date
of Parent's receipt of the Request or from the first date upon which Parent is
required to effect the registration contemplated by Section 7.2, as applicable.
(g) Registration Procedures. In connection with a
registration statement prepared by Parent pursuant to this Section 7.2, Parent
(a) shall furnish to Stockholder, a reasonable period of time prior to the
filing thereof with the Commission, a copy of the registration statement and
each amendment thereto or each amendment or supplement to the prospectus
included therein, and shall use its reasonable efforts to reflect in each such
document, when so filed with the Commission, such comments as Stockholder
reasonably may propose; and (b) if at any time the Commission shall issue any
stop order suspending the effectiveness of a registration statement, or any
state securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption from qualification of the sale of
securities under state securities or blue sky laws, Parent shall use
commercially reasonable efforts to obtain the withdrawal or lifting of such
order at the earliest possible time.
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7.3 Piggyback Registration.
(a) Right to Include Registrable Securities. If Parent at
any time proposes to register any of its securities under the Securities Act by
registration on Forms S-1, S-2, S-3 or any successor or similar form(s) (except
registrations on such forms or similar forms solely for registration of
securities in connection with (i) an employee benefit plan or dividend
reinvestment plan or a merger or consolidation or (ii) debt securities which are
not convertible into Common Stock), whether or not for sale for its own account,
it shall each such time give written notice to Stockholder of its intention to
do so at least 20 days prior to the anticipated filing date of a registration
statement with respect to such registration with the Commission. Upon the
written request of Stockholder made as promptly as practicable and in any event
within 10 days after the receipt of any such notice, which request shall specify
the Registrable Securities intended to be disposed of by Stockholder, Parent
shall use reasonable efforts to effect the registration under the Securities Act
of all Registrable Securities which Parent has been so requested to register by
Stockholder; PROVIDED, HOWEVER, that at any time after giving written notice of
its intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, Parent may
elect to delay or not proceed with such registration. If Parent elects to delay
or not proceed with such registration, it shall give written notice of such
determination to Stockholder and Parent shall be relieved of its obligation to
register any Registrable Securities in connection with such registration. If
such registration relates to an underwritten offering, any right of Stockholder
to participate in such registration pursuant to this Section 7.3 shall be
conditioned upon his agreeing to offer and sell Registrable Securities in
accordance with the plan of distribution applicable to the other Parent Common
Stock sought to be offered and sold in such registration.
(b) Expenses. Parent shall pay the Registration Expenses in
connection with any registration effected pursuant to this Section 7.3 and
Stockholder shall pay the Selling Expenses in connection with any registration
effected pursuant to this Section 7.3.
(c) Selection of Underwriters and Form of Registration
Statement. In connection with each public offering effected pursuant to this
Section 7.3, Parent (or, if the proposed registration by Parent is pursuant to a
contractual demand registration right, the persons or entities who caused such
registration statement to be filed) shall select the managing underwriters, if
any, and the form of registration statement to be used in connection with any
such offering.
(d) Priority in Piggyback Registrations. Notwithstanding
anything in Section 7.3 above to the contrary, if the managing underwriter of
any underwritten public offering shall inform Parent by letter of its belief
that the number or type of Registrable Securities requested to be included in
such registration would materially and adversely affect such public offering,
then Parent shall promptly notify Stockholder of such fact. If the managing
underwriter does not agree to include all (or such lesser amount as Stockholder
shall, in his discretion, agree to) of the number of the Registrable Securities
initially requested by Stockholder to be included in such registration, then
Parent shall include in such registration, to the extent of the number and type
which Parent is so advised can be sold in such Public Offering, (i) first, the
Parent securities proposed to be sold by Parent or, if the proposed registration
by Parent is pursuant to a contractual demand registration right, the Parent
Common Stock proposed to be sold by the party making the demand and (ii) second,
to the extent additional Parent Shares may be included, that number of
Registrable Securities equal to the product of (x) the total number of such
additional Parent Shares to be included in such registration multiplied by (y)
the fraction whose numerator is the number of Registrable Securities sought to
be included in such registration by Stockholder and whose denominator is the
total number of Parent Shares sought to be included in such registration by all
persons or entities entitled to participate in such registration on a
"piggyback" basis.
(e) Effective Period. Parent shall use commercially
reasonable efforts to maintain the effectiveness of any registration pursuant to
this Section 7.3 until the earlier (i) 90 days following the effective date of
such registration or (ii) the date when the securities sought to be offered and
sold pursuant thereto are in fact offered and sold in accordance with the terms
of such offering.
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7.4 Registration Procedures.
(a) In connection with the registration of any Registrable
Securities under the Securities Act as provided in Sections 7.2 or 7.3, and
subject to the provisions of this Section 7, Parent shall as promptly as
practicable:
(i) prepare and file with the Commission the
requisite registration statement to effect such registration and thereafter use
reasonable efforts to cause such registration statement to become and remain
effective for the applicable effective period;
(ii) use reasonable efforts to prepare and file with
the Commission such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with provisions of the Securities
Act with respect to the disposition of all Registrable Securities covered by
such registration statement for the applicable effective period;
(iii) furnish to Stockholder such number of
conformed copies of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including each
preliminary prospectus and any summary prospectus) and any other prospectus
filed under Rule 424 under the Securities Act, in conformity with the
requirements of the Securities Act;
(iv) use reasonable efforts to register or qualify
all Registrable Securities covered by such registration statement under such
other securities or blue sky laws of such States of the United States of America
where an exemption is not available and as Stockholder shall reasonably request;
PROVIDED, HOWEVER, that Parent shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it would not, but for the requirements of this paragraph (iv), be
obligated to be so qualified or to consent to general service of process in any
such jurisdiction;
(v) notify Stockholder when a prospectus relating
thereto is required to be delivered under the Securities Act and, upon discovery
that there has occurred any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, in the light
of the circumstances under which they were made, and at the request of
Stockholder use its reasonable efforts to promptly prepare and furnish to
Stockholder such number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the Parents
of such securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(vi) otherwise use its reasonable efforts to comply
with all applicable rules and regulations of the Commission;
(vii) provide and cause to be maintained a transfer
agent and registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement;
(viii) furnish to Stockholder, prior to the filing
thereof with the Commission, a copy of the registration statement and each
amendment thereto or each amendment or supplement to the prospectus included
therein, and shall use its reasonable efforts to reflect in each such document,
when so filed with the Commission, such comments as Stockholder reasonably may
propose;
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(ix) use reasonable efforts to list all Registrable
Securities covered by such registration statement on any national securities
exchange or over-the-counter market, if any, on which Registrable Securities of
the same class covered by such registration statement are then listed; and
(x) subject to customary confidentiality
obligations, Parent shall permit reasonable access to Stockholder and its
counsel and other advisors to its financial statements and its other books and
records to permit Stockholder to perform reasonable due diligence.
Stockholder agrees that upon receipt of any notice from Parent
of the happening of an event of the kind described in Section 7.4(v),
Stockholder shall forthwith discontinue its disposition of Registrable
Securities pursuant to the registration statement relating to such Registrable
Securities until Stockholder's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 7.4(v). Stockholder agrees to
promptly provide such information regarding himself and his Registrable
Securities as Parent may from time to time reasonably require for inclusion in
any registration statement under Section 7.2 or 7.3.
7.5 Underwritten Offerings. If requested by the underwriters for
any underwritten public offering by Stockholder pursuant to a registration
requested under Section 7.2, Parent shall enter into an underwriting agreement
with such underwriters for such public offering, such agreement to be reasonably
satisfactory in substance and form to Parent, Stockholder and the underwriters,
and to contain such representations and warranties by Parent and Stockholder and
such other terms as are generally prevailing in agreements of that type,
including, without limitation, customary indemnities and contribution provisions
generally prevailing in agreements of that type. Stockholder shall cooperate
with Parent in the negotiation of the underwriting agreement and shall give
consideration to the reasonable suggestions of Parent regarding the form and
substance thereof. Stockholder shall be a party to such underwriting agreement.
7.6 Delay Periods. If at any time after the effectiveness of a
registration statement under Section 7.2 or 7.3 but prior to the expiration of
the related effectiveness period, counsel to Parent (which counsel shall be
experienced in securities laws matters) determines in good faith that it is
reasonable to conclude that the compliance by Parent with its disclosure
obligations in connection with such registration statement may require the
disclosure of information which the Board of Directors of Parent has identified
as material and which the Board of Directors has determined that Parent has a
BONA FIDE business purpose for preserving as confidential, then Parent shall not
be required to maintain the effectiveness thereof or amend or supplement such
registration statement for a period (a "Delay Period") expiring three business
days after the earlier to occur of (A) the date on which such material
information is disclosed to the public or ceases to be material or Parent is
able to so comply with its disclosure obligations and Commission requirements or
(B) 90 days after Parent notifies Stockholder of such good faith determination.
The effectiveness period of such registration statement will be extended for a
period equal to the duration of such Delay Period. Parent will notify
Stockholder of such Delay Period as soon as practicable after the Board of
Directors makes such determination. Such notice shall state to the extent, if
any, as is practicable, an estimate of the duration of such Delay Period.
Stockholder agrees that (x) upon receipt of such notice of a Delay Period he
will forthwith discontinue disposition of securities pursuant to such
registration statement and (y) will not deliver any prospectus forming a part of
the registration statement in connection with any sale of Registrable Securities
until the expiration of such Delay Period.
7.7 Holdback Agreements. Stockholder agrees that, upon the request
of and only to the extent required of other executive officers of Parent by the
underwriter(s) managing any registration of Parent Common Stock under the
Securities Act by Parent (except to the extent Stockholder is participating as a
selling securityholder pursuant to this Agreement), he will not, without the
prior written consent of such underwriters, during the 7-day period prior to,
and during the 90-day period beginning on, the effective date of such
registration, sell, make any short sale of, pledge, grant any option for the
purchase of
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or otherwise dispose of, or enter into any other hedging or similar transaction
with respect to, any Parent Shares, or any securities convertible into or
exchangeable for Parent Shares.
7.8 Indemnification and Contribution.
(a) Indemnification by Parent. In the event of any
registration of any securities of Parent under the Securities Act in which
Stockholder is a selling stockholder, Parent shall, and hereby does, indemnify
and hold harmless, in the case of any registration statement filed pursuant to
this Section 7, Stockholder and his agents and Affiliates and, to the extent
required by any underwriting agreement entered into by Parent, each other person
or entity who participates as an underwriter in the registration statement and
each other person or entity who controls any such underwriter within the meaning
of the Securities Act, against any and all losses, claims, damages or
liabilities insofar as such losses, claims, damages or liabilities (whether
arising in connection with any actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a fact required to be stated therein or necessary to
make the statements therein in light of the circumstances under which they were
made not misleading, and Parent shall reimburse Stockholder and each such agent
or Affiliate and, to the extent required by an underwriting agreement entered
into by Parent, any underwriter and controlling person for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding described in
this clause (a); PROVIDED THAT, Parent shall be required to reimburse fees and
expenses with respect to more than one firm of attorneys (in addition to any
local counsel) for all of the indemnified parties only to the extent that any of
the indemnified parties shall have differing interests from any other
indemnified party; and, PROVIDED, FURTHER, that Parent shall not be liable in
any such case to the extent that: (i) any such loss, claim, damage or liability
(or action or proceeding in respect thereof) or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such preliminary
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to Parent by or on behalf of
Stockholder specifically stating that it is for inclusion in such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement, (ii) with respect to any preliminary prospectus or
prospectus (if such prospectus has then been amended or supplemented) to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon a sale of Registrable
Securities to a person or entity to whom there was not sent or given, at or
prior to the written confirmation of such sale, a copy of the prospectus (or of
the prospectus as then amended or supplemented) if Parent has previously
furnished copies thereof to Stockholder a reasonable time in advance and the
loss, claim, damage, liability or expense of Stockholder results from an untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in the preliminary prospectus (or the prospectus) which
was corrected in the prospectus (or the prospectus as amended or supplemented),
or (iii) to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon any action or failure to act by Stockholder that
is found in a final judicial determination (or a settlement tantamount thereto)
to constitute bad faith, willful misconduct or gross negligence on the part of
Stockholder. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of Stockholder or any such director,
officer, agent or Affiliate or controlling person and shall survive the transfer
of such securities by Stockholder.
(b) Indemnification by Stockholder. If any Registrable
Securities are included in any registration statement, Stockholder shall
indemnify and hold harmless (in the same manner and to the same extent as set
forth in Section 7.8(a)) Parent, each director, officer and employee, agent and
Affiliate of Parent and, to the extent required by any underwriting agreement
entered into by Stockholder, each
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other person or entity who participates as an underwriter in the registration
statement or sale of such securities and each other person or entity who
controls any such underwriter within the meaning of the Securities Act, with
respect to any statement or alleged statement in or omission or alleged omission
from such registration statement, any preliminary prospectus, final prospectus
or summary prospectus contained therein, or any amendment or supplement thereto,
if such statement or alleged statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to Parent
by or on behalf of Stockholder specifically stating that it is for inclusion in
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; PROVIDED, HOWEVER, in no event shall the
liability of Stockholder under this Section 7.8(b) exceed the proceeds obtained
by the sale of Stockholder's Registrable Securities in any such registration.
(c) Notice of Claims, Etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding Sections 7.8(a) and (b), such
indemnified party shall, if a claim in respect thereof is to be made against an
indemnifying party, promptly give written notice to the latter of the
commencement of such action; PROVIDED, HOWEVER, that the failure of any
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding paragraphs of this
Section 7.8, except to the extent that the indemnifying party is prejudiced by
such failure. The indemnified party shall be entitled to receive the
indemnification payments described herein after providing such written notice to
the indemnifying party. In case any such action is brought against an
indemnified party, the indemnifying party shall be entitled to participate in
and to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof. The indemnified party shall be entitled to separate counsel to
the extent contemplated in Sections 7.8(a) and 7.8(b). Each indemnified party
shall furnish such information regarding itself or the claim in question as an
indemnifying party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation resulting
therefrom. No indemnifying party shall be liable for any settlement of any
action or proceeding effected without its written consent, which shall not be
unreasonably withheld, delayed or conditioned, unless such indemnifying party
shall not have satisfied its current reimbursement obligations hereunder within
30 days after the initial written request by the indemnified party therefor.
Notwithstanding the previous sentence, the indemnifying party shall not be
liable for any settlement unless the indemnifying party receives an
unconditional release from all liability on claims that are the subject matter
of such action, suit or proceeding. Consent of the indemnified party shall be
required for the entry of any judgment or to enter into a settlement only when
such judgment or settlement does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such indemnified party of a release
from all liability in respect of such claim or litigation or if such judgment or
settlement includes an admission of fault by the indemnified party.
(d) Contribution. If the indemnification provided for in
this Section 7.8 shall for any reason be held by a court to be unavailable to an
indemnified party in respect of any loss, claim, damage or liability, or any
action in respect thereof, then, in lieu of the amount paid or payable under
Sections 7.8(a) and 7.8(b) hereof, the indemnified party and the indemnifying
party shall contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating the same) in such proportion as is appropriate to reflect the
relative fault of Parent on one hand and Stockholder on the other that resulted
in such loss, claim, damage or liability, or action in respect thereof, as well
as any other relevant equitable considerations or, to the extent both Parent and
Stockholder sell shares pursuant to such registration statement, and if the
allocation provided above is not permitted by applicable law, in such proportion
as shall be appropriate to reflect the relative benefits received by Parent on
one hand and Stockholder on the other. No person or entity guilty of fraudulent
misrepresentation (within the meaning of the Securities Act) shall be entitled
to contribution from any person or entity who was not guilty of such fraudulent
misrepresentation. In addition, no person
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or entity shall be obligated to contribute hereunder any amounts in payment for
any settlement of any action or claim, effected without such person's or
entity's written consent, which consent shall not be unreasonably withheld;
PROVIDED, HOWEVER, in no event shall the liability of any Stockholder under this
subsection exceed the proceeds obtained by the sale of such Stockholder's
Registrable Securities in any such registration.
7.9 Limitation. Nothing in this Section 7 shall be construed to
confer upon Stockholder the right to sell Parent Common Stock in an amount
exceeding that allowed by Section 6.4 of this Agreement.
8. Survival of Representations and Warranties. Except as expressly
provided otherwise, all representations, warranties, covenants and agreements
made by Stockholder or Parent in this Agreement shall survive the termination of
this Agreement as set forth in Section 4 and any investigation at any time made
by or on behalf of any party.
9. Notices. All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided herein), given in
the manner provided in the Merger Agreement, and shall be deemed duly given when
received, addressed as follows:
If to Parent or Parent Subsidiary:
Viatel, Inc.
605 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (212) 350-7493
With a copy to:
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Blvd.
Stamford, Connecticut 06901-3229
Attention: John T. Capetta, Esq.
Facsimile: (203) 964-3188
If to Stockholder:
Alfred West
1712 57(th) Street
Brooklyn, New York 11201
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Michael R. Littenberg,
Esq.
Facsimile: (212) 593-5955
If to Company:
Destia Communications, Inc.
95 Route 17 South
Paramus, New Jersey 07651
Attention: Richard Shorten
Facsimile: (201) 226-4524
B-14
<PAGE>
<TABLE>
<S> <C>
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Richard Hall, Esq.
Facsimile: (212) 474-3700
</TABLE>
10. Entire Agreement: Amendment. This Agreement, together with the
documents expressly referred to herein, constitute the entire agreement among
the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings among the parties with respect
to such subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by Parent, Parent
Subsidiary and Stockholder.
11. Legend. In addition to any other legend which may be required by
applicable law, each share certificate representing shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
ASSIGNED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT
PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE
SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION UNDER SUCH
ACT, OR APPLICABLE STATE SECURITIES LAW, RELATING TO THE
DISPOSITION OF SECURITIES, INCLUDING RULE 144, PROVIDED AN OPINION
OF COUNSEL IS FURNISHED TO THE COMPANY, IN FORM AND SUBSTANCE
REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND/OR
APPLICABLE STATE SECURITIES LAW IS AVAILABLE.
IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY
NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED, HYPOTHECATED
OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE
PROVISIONS OF A STOCKHOLDER AGREEMENT DATED AS OF AUGUST 27, 1999
(THE "STOCKHOLDER AGREEMENT"), A COPY OF WHICH IS ON FILE AND MAY
BE INSPECTED AT THE PRINCIPAL OFFICE OF THE COMPANY. NO TRANSFER
OF THE SECURITIES WILL BE MADE ON THE BOOKS OF THE COMPANY UNLESS
ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH
STOCKHOLDER AGREEMENT. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO OTHER RIGHTS AND OBLIGATIONS AS
SET FORTH IN THE STOCKHOLDER AGREEMENT.
12. Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, assigns and personal
representatives, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
B-15
<PAGE>
13. GOVERNING LAW. EXCEPT AS EXPRESSLY SET FORTH BELOW, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF STOCKHOLDER,
PARENT, PARENT SUBSIDIARY AND COMPANY HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT SHALL BE HEARD IN THE APPROPRIATE COURT OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK AND, IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS
TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT MAY BE GIVEN TO ANY
OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AT THE
RESPECTIVE ADDRESSES SET FORTH IN SECTION 9 ABOVE.
14. Injunctive Relief. The parties agree that in the event of a breach of
any provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party shall be entitled to obtain in
any court of competent jurisdiction a decree of specific performance or to
enjoin the continuing breach of such provision, in each case without the
requirement that a bond be posted and without having to prove actual damages, as
well as to obtain damages for breach of this Agreement. By seeking or obtaining
such relief, the aggrieved party will not be precluded from seeking or obtaining
any other relief to which it may be entitled.
15. Counterparts; Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same document.
16. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
17. Further Assurances. Each party hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable to consummate the transactions contemplated by this Agreement.
18. Third-Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person or entity other than the parties
hereto any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
B-16
<PAGE>
IN WITNESS WHEREOF, Parent, Parent Subsidiary, Stockholder and
Company have executed this Agreement or caused this Agreement to be executed by
their duly authorized officers, as the case may be, each as of the date and year
first above written.
<TABLE>
<S> <C> <C>
ALFRED WEST
/s/ ALFRED WEST
---------------------------------------------
AT ECON LTD. PARTNERSHIP
By: /s/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: General Partner
AT ECON LTD. PARTNERSHIP NO. 2
By: /s/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: General Partner
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President and Chief Executive Officer
VIATEL ACQUISITION CORP.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President
DESTIA COMMUNICATIONS, INC.
By: /s/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: Chief Executive Officer
</TABLE>
B-17
<PAGE>
SCHEDULES 2.1 AND 2.2
Alfred and Tamara West have entered into a Loan and Pledge Agreement
with Morgan Stanley & Co., International Limited ("MSIL"), dated October 8, 1997
and amended on May 3, 1999, pursuant to which Mr. West pledged 2,730,000 shares
of Destia Communications, Inc. as collateral for the loan. A waiver to enter
into this Agreement, to be effective as of the date hereof, is being obtained.
B-18
<PAGE>
ANNEX C
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT (the "Agreement") dated as of August 27, 1999
among STEVEN WEST, a resident of the State of New York, SS ECON LTD.
PARTNERSHIP, SS ECON LTD. PARTNERSHIP NO. 2 (collectively, the "Stockholder"),
VIATEL, INC., a Delaware corporation ("Parent"), VIATEL ACQUISITION CORP., a
Delaware corporation and a wholly-owned subsidiary of Parent ("Parent
Subsidiary"), and DESTIA COMMUNICATIONS, INC., a Delaware corporation
("Company").
W I T N E S S E T H:
WHEREAS, Parent, Company and Parent Subsidiary are entering into an
Agreement and Plan of Merger of even date herewith (the "Merger Agreement"),
pursuant to which Parent will acquire all of the outstanding shares of voting
common stock, $0.01 par value per share (the "Voting Shares"), and all of the
outstanding shares of non-voting common stock, $0.01 par value per share (the
"Non-Voting Shares," and together with the Voting Shares, the "Common Stock"),
of the Company pursuant to a merger of Parent Subsidiary with and into Company
(the "Merger");
WHEREAS, Stockholder collectively owns, as of the date hereof,
4,519,285 shares of Common Stock (the "Existing Shares," and together with any
shares of Common Stock acquired by Stockholder after the date hereof and prior
to the termination hereof, the "Shares");
WHEREAS, as a condition to their willingness to enter into the
Merger Agreement, and in reliance upon Stockholder's representations,
warranties, covenants and agreements hereunder, Parent and Parent Subsidiary
have requested that Stockholder agree, and Stockholder has agreed, to enter into
this Agreement; and
WHEREAS, this Agreement is being entered into concurrently with the
execution of the Merger Agreement;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained and for such other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, it is agreed as follows. Capitalized terms
not otherwise defined herein shall have the meaning set forth in the Merger
Agreement.
1. Agreement to Vote. Stockholder hereby agrees that, during the term of
this Agreement, at any meeting of the stockholders of Company, however called,
and in any action by consent of the stockholders of Company, however taken,
Stockholder shall cause the Shares to be present for quorum purposes and to vote
at such meeting and shall cause the Shares to be voted in any such consent, and
in either case, shall: (a) vote the Shares in favor of the adoption of the
Merger Agreement; (b) vote the Shares against any action or agreement that
would, or could reasonably be expected to, result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Company under
the Merger Agreement or that would result in a failure to satisfy any condition
on the part of the Company or its stockholders to be satisfied under the Merger
Agreement; (c) vote the Shares against any action or agreement that would, or
could reasonably be expected to, impede, interfere with, delay, postpone or
attempt to discourage the Merger, including, but not limited to, (i) any
extraordinary corporate transaction (other than the Merger), such as a merger,
other business combination, recapitalization, reorganization or liquidation,
involving Company (a "Business Combination Transaction"), (ii) a sale or
transfer of a material amount of assets of Company or any of its Subsidiaries
(as defined in the Merger Agreement),
C-1
<PAGE>
(iii) any change in the management or board of directors of Company, except as
otherwise agreed to in writing by Parent, (iv) any material change in the
present capitalization of the Company or (v) any other material change in the
corporate structure or business of Company; and (d) without limiting the
foregoing, consult with Parent prior to any such meeting or consent and, in
either case, vote such Shares in such manner as is determined by Parent to be in
compliance with the provisions of this Section 1. Stockholder acknowledges
receipt and review of a copy of the Merger Agreement. In furtherance of this
Section 1, Stockholder hereby irrevocably grants to, and appoints, Parent, and
any individual designated in writing by it, and each of them individually, as
its proxy and attorney-in-fact (with full power of substitution), for and in its
name, place and stead, to vote the Shares at any meeting of the stockholders of
the Company called with respect to any of the matters specified in this
Agreement. The Stockholder understands and acknowledges that Parent is entering
into the Merger Agreement in reliance upon Stockholder's execution and delivery
of this Agreement. The Stockholder hereby affirms that the irrevocable proxy set
forth in this Section 1 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of Stockholder under this Agreement. Except as otherwise provided for
herein, Stockholder hereby (i) affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked, (ii) ratifies and
confirms all that the proxies appointed hereunder may lawfully do or cause to be
done by virtue hereof and (iii) affirms that such irrevocable proxy is executed
and intended to be irrevocable in accordance with the provisions of Section
212(e) of the Delaware General Corporation Law (as defined in the Merger
Agreement). Notwithstanding any other provision of this Agreement, the
irrevocable proxy granted hereunder shall automatically terminate upon the
termination of this Agreement pursuant to Section 4.
2. Representations and Warranties of Stockholder. Steven West, SS Econ
Ltd. Partnership and SS Econ Ltd. Partnership No. 2 represent and warrant to
Parent and Parent Subsidiary with respect to that part of the Existing Shares
owned by it as follows:
2.1 Ownership of Shares. On the date hereof, Stockholder is the
sole record and beneficial owner of the Existing Shares, except as set forth on
Schedule 2.1 attached hereto. For purposes of this Agreement, beneficial
ownership of securities shall be determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On the
date hereof and at the Closing Date (as defined in the Merger Agreement),
neither Stockholder nor any Affiliate (as defined in the Merger Agreement) of
Stockholder (other than Company) owns or will own, of record or beneficially,
solely or jointly with others, (i) any shares of Common Stock other than the
Existing Shares and shares of Common Stock acquired upon the exercise of
employee stock options granted by the Company and listed on Schedule 2.1
attached hereto or (ii) any securities convertible into or exchangeable or
exercisable for shares of Common Stock or any rights to acquire any shares of
Common Stock other than employee stock options granted by Company and listed on
Schedule 2.1 attached hereto. Except as set forth on Schedule 2.1 attached
hereto, Stockholder currently has with respect to the Existing Shares, and at
Closing will have with respect to the Shares, good, valid and marketable title,
free and clear of all liens, encumbrances, restrictions, options, warrants,
rights to purchase, voting agreements or voting trusts, and claims of every kind
(other than the encumbrances created by this Agreement and other than
restrictions on transfer under applicable federal and state securities laws).
Stockholder has not and will not pledge more than 2,730,000 of the Existing
Shares.
2.2 Power; Binding Agreement. Stockholder has the full legal right,
power and authority to enter into and perform all of Stockholder's obligations
under this Agreement. The execution, delivery and performance of this Agreement
by Stockholder will not violate any other agreement to which Stockholder is a
party including, without limitation, any voting agreement, stockholder agreement
or voting trust. This Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding agreement of Stockholder,
enforceable in accordance with its terms. Neither the execution or delivery of
this Agreement nor the consummation by Stockholder of the transactions
contemplated hereby will (a) require any consent or approval of or filing with
any third party, including any
C-2
<PAGE>
governmental or other regulatory body, other than filings required under the
federal securities laws and consents or waivers listed on Schedule 2.2 attached
hereto, all of which have been obtained, or (b) constitute a violation of,
conflict with or constitute a default under, any material contract, commitment,
agreement, understanding, arrangement or other restriction of any kind to which
Stockholder is a party or by which Stockholder or his material property is
bound.
2.3 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fees from Stockholder in connection with this
Agreement or the transactions contemplated hereby exclusive of any commission or
finder's fees referred to in the Merger Agreement.
3. Representations and Warranties of Parent. Each of Parent and Parent
Subsidiary represents and warrants to Stockholder as follows:
3.1 Authority. Each of Parent and Parent Subsidiary has the full
legal right, power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by each of Parent and Parent Subsidiary will not violate or
conflict with any other agreement to which it is a party. This Agreement has
been duly executed and delivered by each of Parent and Parent Subsidiary and
constitutes a legal, valid and binding agreement of each of Parent and Parent
Subsidiary, enforceable against Parent and Parent Subsidiary in accordance with
its terms. Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby by each of Parent and
Parent Subsidiary will (a) require any consent or approval of or filing with any
third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws, or (b) constitute a
violation of, conflict with or default under, any material contract (including
any registration rights), commitment, agreement, understanding, arrangement or
other restriction of any kind to which Parent or Parent Subsidiary is a party or
by which either of them or their material property is bound.
3.2 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fee from Parent or Parent Subsidiary in connection
with this Agreement or the transactions contemplated hereby exclusive of any
commission or finder's fees referred to in the Merger Agreement.
4. Termination. The term of this Agreement commences upon the execution
and delivery of this Agreement by all of the parties hereto and continues until
it is terminated in accordance with its terms. This Agreement shall terminate on
the earliest of (a) the Effective Time (as defined in the Merger Agreement) or
(b) the date 180 days after the termination of the Merger Agreement in
accordance with its terms; PROVIDED, HOWEVER, the termination of this Agreement
shall be immediate if the Merger Agreement is terminated pursuant to Sections
7(a)(i), 7(a)(ii), 7(a)(iii), 7(a)(vi), 7(a)(vii) or 7(a)(ix); and, PROVIDED,
FURTHER, (i) the provisions of Sections 5 and 9 through 18 shall survive any
termination of this Agreement, (ii) the provisions of Sections 6.3, 6.4 and 7
shall survive the termination of this Agreement if this Agreement terminates
pursuant to clause (a) above and (iii) the provisions of Sections 2 and 3 shall
survive for a period of one year after any termination of this Agreement.
5. Expenses. Except as provided in Section 7, each party hereto will pay
all of its expenses in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of its counsel
and other advisers.
C-3
<PAGE>
6. Covenants.
6.1 Except in accordance with the provisions of this Agreement,
Stockholder (and the Company, pursuant to Section 6.8 hereof) agrees, prior to
the termination of this Agreement as provided in Section 4 above, not to,
directly or indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of (including by merger, testamentary disposition, interspousal
disposition pursuant to a domestic relations proceeding or otherwise or
otherwise by operation of law), or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Shares, PROVIDED,
HOWEVER, that Stockholder may transfer Shares, with the prior written consent of
Parent, which shall not be unreasonably withheld, to a trust of which there are
no beneficiaries other than the parents, spouse or children of Stockholder, or
otherwise make transfers for estate planning purposes, so long as the trust and
the trustee(s), or other transferee, thereof deliver a written agreement to
Parent, reasonably acceptable to Parent, to be bound by the restrictions set
forth in this Agreement, and Parent receives an opinion of counsel reasonably
satisfactory to it that this Agreement is binding upon such trust and the
trustee(s), or other transferee, thereof, as if such trust and trustee(s), or
other transferee, were Stockholder. Any action taken in violation of this
Section 6.1(a) shall be void and of no effect;
(b) grant any proxies with respect to any Shares, deposit
any Shares into a voting trust or enter into a voting agreement with respect to
any Shares; or
(c) take any action to solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, an Acquisition Proposal (as defined in the Merger Agreement) or engage in
negotiations or discussions with any person or entity (or group of persons
and/or entities) other than Parent or its Affiliates concerning, or provide any
non-public information to any person or entity relating, to an Acquisition
Proposal or otherwise assist or facilitate any effort or attempt by any person
or entity (other than Parent and Parent Subsidiary) to make or implement an
Acquisition Proposal. Stockholder will immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation on his part with any parties conducted heretofore with respect to
any proposed, potential or contemplated Acquisition Proposal, and will notify
Parent promptly if he becomes aware of any Acquisition Proposal or any request
for non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company by any person or
entity that informs the Company (or its officers, directors, representatives,
agents, Affiliates or associates) that it is considering making or has made an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
6.2 Stockholder agrees, during the term of this Agreement, to notify
Parent promptly of the number of any shares of Common Stock acquired by
Stockholder after the date hereof.
6.3 [INTENTIONALLY OMITTED]
6.4 Stockholder agrees that for a period of one year following the
Effective Time (the "Lock-up Period"), Stockholder will not, without the prior
written consent of Parent, directly or indirectly, offer, offer to sell, sell,
contract to sell, grant any option for the purchase of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any beneficial interest
in (including by merger, testamentary disposition, interspousal disposition
pursuant to a domestic relations proceeding or otherwise or otherwise by
operation of law) ("Transfer") any Parent common stock, par value $0.01 per
share ("Parent Common Stock"), or any securities convertible into or
exchangeable or exercisable for any shares of Parent Common Stock or any other
rights to acquire shares of Parent Common Stock (either pursuant to Rule 144 of
the regulations under the Securities Act of 1933, as amended (the "Securities
Act"), or
C-4
<PAGE>
otherwise) either beneficially owned by Stockholder as of the Effective Time or
acquired by Stockholder during the Lock-up Period as a result of the exercise of
options. Notwithstanding the foregoing, the undersigned may (i) Transfer shares
of Parent Common Stock as a BONA FIDE gift or gifts, provided that Stockholder
provides prior written notice of such gift or gifts to Parent and the donee or
donees thereof deliver a written agreement to Parent, reasonably acceptable to
Parent, to be bound by the restrictions set forth herein as if such donee or
donees were Stockholders; (ii) Transfer up to $5,000,000 worth of Parent Common
Stock; and (iii) Transfer shares of Parent Common Stock, with the prior written
consent of Parent, which shall not be unreasonably withheld, to a trust of which
there are no beneficiaries other than the parents, spouse or children of
Stockholder, or otherwise make transfers for estate planning purposes, so long
as the trust and the trustee(s), or other transferee, thereof deliver a written
agreement to Parent, reasonably acceptable to Parent, to be bound by the
restrictions set forth in this Agreement, and Parent receives an opinion of
counsel reasonably satisfactory to it that this Agreement is binding upon such
trust and the trustee(s), or other transferee, thereof, as if such trust and
trustee(s), or other transferee, were Stockholder. Any Transfer of Parent Common
Stock in violation of this Section 6.4 shall be void and of no effect.
6.5 [INTENTIONALLY OMITTED]
6.6 [INTENTIONALLY OMITTED]
6.7 [INTENTIONALLY OMITTED]
6.8 The Company recognizes and agrees to use commercially reasonable
efforts to enforce the Transfer restrictions placed on the Shares under this
Agreement.
7. Registration Rights. [INTENTIONALLY OMITTED]
8. Survival of Representations and Warranties. Except as expressly
provided otherwise, all representations, warranties, covenants and agreements
made by Stockholder or Parent in this Agreement shall survive the termination of
this Agreement as set forth in Section 4 and any investigation at any time made
by or on behalf of any party.
9. Notices. All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided herein), given in
the manner provided in the Merger Agreement, and shall be deemed duly given when
received, addressed as follows:
If to Parent or Parent Subsidiary:
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (212) 350-7493
With a copy to:
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Blvd.
Stamford, Connecticut 06901-3229
Attention: John T. Capetta, Esq.
Facsimile: (203) 964-3188
C-5
<PAGE>
<TABLE>
<S> <C>
If to Stockholder:
Steven West
55 Parker Boulevard
Monsey, New York 10952-1441
Facsimile: (212) 465-1281
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Michael R. Littenberg,
Esq.
Facsimile: (212) 593-5955
If to Company:
Destia Communications, Inc.
95 Route 17 South
Paramus, New Jersey 07651
Attention: Richard Shelton
Facsimile: (201) 226-4524
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Richard Hall, Esq.
Facsimile: (212) 474-3700
</TABLE>
10. Entire Agreement: Amendment. This Agreement, together with the
documents expressly referred to herein, constitute the entire agreement among
the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings among the parties with respect
to such subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by Parent, Parent
Subsidiary and Stockholder.
11. Legend. In addition to any other legend which may be required by
applicable law, each share certificate representing shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY
JURISDICTION. SUCH SECURITIES MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, ASSIGNED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (I) A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES
THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE
SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION
UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES LAW,
RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING RULE
144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE
COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO
THE COMPANY, TO
C-6
<PAGE>
THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES
LAW IS AVAILABLE.
IN ADDITION, THE SECURITIES REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED, SOLD, TRANSFERRED,
PLEDGED, ASSIGNED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
STOCKHOLDER AGREEMENT DATED AS OF AUGUST 27, 1999 (THE
"STOCKHOLDER AGREEMENT"), A COPY OF WHICH IS ON FILE AND
MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE COMPANY.
NO TRANSFER OF THE SECURITIES WILL BE MADE ON THE BOOKS OF
THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE
WITH THE TERMS OF SUCH STOCKHOLDER AGREEMENT. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO OTHER RIGHTS AND OBLIGATIONS AS SET FORTH IN
THE STOCKHOLDER AGREEMENT.
12. Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, assigns and personal
representatives, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
13. GOVERNING LAW. EXCEPT AS EXPRESSLY SET FORTH BELOW, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF STOCKHOLDER,
PARENT, PARENT SUBSIDIARY AND COMPANY HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT SHALL BE HEARD IN THE APPROPRIATE COURT OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK AND, IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS
TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT MAY BE GIVEN TO ANY
OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AT THE
RESPECTIVE ADDRESSES SET FORTH IN SECTION 9 ABOVE.
14. Injunctive Relief. The parties agree that in the event of a breach of
any provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party shall be entitled to obtain in
any court of competent jurisdiction a decree of specific performance or to
enjoin the continuing breach of such provision, in each case without the
requirement that a bond be posted and without having to prove actual damages, as
well as to obtain damages for breach of this Agreement. By seeking or obtaining
such relief, the aggrieved party will not be precluded from seeking or obtaining
any other relief to which it may be entitled.
15. Counterparts; Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same document.
16. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability
C-7
<PAGE>
without rendering invalid or unenforceable the remaining terms and provisions of
this Agreement or affecting the validity or enforceability of any of the terms
or provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
17. Further Assurances. Each party hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable to consummate the transactions contemplated by this Agreement.
18. Third-Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person or entity other than the parties
hereto any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
C-8
<PAGE>
IN WITNESS WHEREOF, Parent, Parent Subsidiary, Stockholder and
Company have executed this Agreement or caused this Agreement to be executed by
their duly authorized officers, as the case may be, each as of the date and year
first above written.
<TABLE>
<S> <C> <C>
STEVEN WEST
/S/ STEVEN WEST
---------------------------------------------
SS ECON LTD. PARTNERSHIP
BY: /S/ STEVEN WEST
-----------------------------------------
Name: Steven West
Title: General Partner
SS ECON LTD. PARTNERSHIP NO. 2
BY: /S/ STEVEN WEST
-----------------------------------------
Name: Steven West
Title: General Partner
VIATEL, INC.
BY: /S/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President and Chief Executive Officer
VIATEL ACQUISITION CORP.
BY: /S/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President
DESTIA COMMUNICATIONS, INC.
BY: /S/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: Chief Executive Officer
</TABLE>
C-9
<PAGE>
SCHEDULE 2.1
NONE
C-10
<PAGE>
SCHEDULE 2.2
NONE
C-11
<PAGE>
ANNEX D
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT (the "Agreement") dated as of August 27, 1999
among PRINCES GATE INVESTORS II, L.P., ACORN PARTNERSHIP II, L.P., PGI
INVESTMENTS LIMITED, INVESTORS INVESTMENTS AB and MARINBEACH UNITED S.A.
(collectively, "Stockholder"), VIATEL, INC., a Delaware corporation ("Parent"),
VIATEL ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary
of Parent ("Parent Subsidiary"), and DESTIA COMMUNICATIONS, INC., a Delaware
corporation ("Company").
W I T N E S S E T H:
WHEREAS, Parent, Company and Parent Subsidiary are entering into an
Agreement and Plan of Merger of even date herewith (the "Merger Agreement"),
pursuant to which Parent will acquire all of the outstanding shares of voting
common stock, $0.01 par value per share (the "Voting Shares"), and all of the
outstanding shares of non-voting common stock, $0.01 par value per share (the
"Non-Voting Shares," and together with the Voting Shares, the "Common Stock"),
of the Company pursuant to a merger of Parent Subsidiary with and into Company
(the "Merger");
WHEREAS, Stockholder collectively owns, as of the date hereof,
3,613,823 shares of Common Stock (the "Existing Shares," and together with any
shares of Common Stock acquired by Stockholder after the date hereof and prior
to the termination hereof, the "Shares");
WHEREAS, as a condition to their willingness to enter into the
Merger Agreement, and in reliance upon Stockholder's representations,
warranties, covenants and agreements hereunder, Parent and Parent Subsidiary
have requested that Stockholder agree, and Stockholder has agreed, to enter into
this Agreement; and
WHEREAS, this Agreement is being entered into concurrently with the
execution of the Merger Agreement;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained and for such other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, it is agreed as follows. Capitalized terms
not otherwise defined herein shall have the meaning set forth in the Merger
Agreement.
1. Agreement to Vote. Stockholder hereby agrees that, during the term of
this Agreement, at any meeting of the stockholders of Company, however called,
and in any action by consent of the stockholders of Company, however taken,
Stockholder shall cause the Shares to be present for quorum purposes and to vote
at such meeting and shall cause the Shares to be voted in any such consent, and
in either case, shall: (a) vote the Shares in favor of the adoption of the
Merger Agreement; (b) vote the Shares against any action or agreement that
would, or could reasonably be expected to, result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Company under
the Merger Agreement or that would result in a failure to satisfy any condition
on the part of the Company or its stockholders to be satisfied under the Merger
Agreement; (c) vote the Shares against any action or agreement that would, or
could reasonably be expected to, impede, interfere with, delay, postpone or
attempt to discourage the Merger, including, but not limited to, (i) any
extraordinary corporate transaction (other than the Merger), such as a merger,
other business combination, recapitalization, reorganization or liquidation,
involving Company (a "Business Combination Transaction"), (ii) a sale or
transfer of a
D-1
<PAGE>
material amount of assets of Company or any of its Subsidiaries (as defined in
the Merger Agreement), (iii) any change in the management or board of directors
of Company, except as otherwise agreed to in writing by Parent, (iv) any
material change in the present capitalization of the Company or (v) any other
material change in the corporate structure or business of Company; and (d)
without limiting the foregoing, consult with Parent prior to any such meeting or
consent and, in either case, vote such Shares in such manner as is determined by
Parent to be in compliance with the provisions of this Section 1. Stockholder
acknowledges receipt and review of a copy of the Merger Agreement. In
furtherance of this Section 1, Stockholder hereby irrevocably grants to, and
appoints, Parent, and any individual designated in writing by it, and each of
them individually, as its proxy and attorney-in-fact (with full power of
substitution), for and in its name, place and stead, to vote the Shares at any
meeting of the stockholders of the Company called with respect to any of the
matters specified in this Agreement. The Stockholder understands and
acknowledges that Parent is entering into the Merger Agreement in reliance upon
Stockholder's execution and delivery of this Agreement. The Stockholder hereby
affirms that the irrevocable proxy set forth in this Section 1 is given in
connection with the execution of the Merger Agreement, and that such irrevocable
proxy is given to secure the performance of the duties of Stockholder under this
Agreement. Except as otherwise provided for herein, Stockholder hereby (i)
affirms that the irrevocable proxy is coupled with an interest and may under no
circumstances be revoked, (ii) ratifies and confirms all that the proxies
appointed hereunder may lawfully do or cause to be done by virtue hereof and
(iii) affirms that such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of Section 212(e) of the Delaware
General Corporation Law (as defined in the Merger Agreement). Notwithstanding
any other provision of this Agreement, the irrevocable proxy granted hereunder
shall automatically terminate upon the termination of this Agreement pursuant to
Section 4.
2. Representations and Warranties of Stockholder. Princes Gate Investors
II, L.P., Acorn Partnership II, L.P., PGI Investments Limited, Investors
Investments AB and Marinbeach United S.A. represent and warrant to Parent and
Parent Subsidiary with respect to that part of the Existing Shares owned by it
as follows:
2.1 Ownership of Shares. On the date hereof, Stockholder is the sole
record and beneficial owner of the Existing Shares, except as set forth on
Schedule 2.1 attached hereto. For purposes of this Agreement, beneficial
ownership of securities shall be determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On the
date hereof and at the Closing Date (as defined in the Merger Agreement),
neither Stockholder nor any Affiliate (as defined in the Merger Agreement) of
Stockholder (other than Company) owns or will own, of record or beneficially,
solely or jointly with others, (i) any shares of Common Stock other than the
Existing Shares and shares of Common Stock acquired upon the exercise of
employee stock options granted by the Company and listed on Schedule 2.1
attached hereto or (ii) any securities convertible into or exchangeable or
exercisable for shares of Common Stock or any rights to acquire any shares of
Common Stock other than employee stock options granted by Company and listed on
Schedule 2.1 attached hereto. Except as set forth on Schedule 2.1 attached
hereto, Stockholder currently has with respect to the Existing Shares, and at
Closing will have with respect to the Shares, good, valid and marketable title,
free and clear of all liens, encumbrances, restrictions, options, warrants,
rights to purchase, voting agreements or voting trusts, and claims of every kind
(other than the encumbrances created by this Agreement and other than
restrictions on transfer under applicable federal and state securities laws).
Stockholder has not and will not pledge more than 2,730,000 of the Existing
Shares.
2.2 Power; Binding Agreement. Stockholder has the full legal right,
power and authority to enter into and perform all of Stockholder's obligations
under this Agreement. The execution, delivery and performance of this Agreement
by Stockholder will not violate any other agreement to which Stockholder is a
party including, without limitation, any voting agreement, stockholder agreement
or voting trust. This Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding agreement of Stockholder,
enforceable in accordance with its terms. Neither the execution or delivery of
D-2
<PAGE>
this Agreement nor the consummation by Stockholder of the transactions
contemplated hereby will (a) require any consent or approval of or filing with
any third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws and consents or waivers
listed on Schedule 2.2 attached hereto, all of which have been obtained, or (b)
constitute a violation of, conflict with or constitute a default under, any
material contract, commitment, agreement, understanding, arrangement or other
restriction of any kind to which Stockholder is a party or by which Stockholder
or his material property is bound.
2.3 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fees from Stockholder in connection with this
Agreement or the transactions contemplated hereby exclusive of any commission or
finder's fees referred to in the Merger Agreement.
3. Representations and Warranties of Parent. Each of Parent and Parent
Subsidiary represents and warrants to Stockholder as follows:
3.1 Authority. Each of Parent and Parent Subsidiary has the full
legal right, power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by each of Parent and Parent Subsidiary will not violate or
conflict with any other agreement to which it is a party. This Agreement has
been duly executed and delivered by each of Parent and Parent Subsidiary and
constitutes a legal, valid and binding agreement of each of Parent and Parent
Subsidiary, enforceable against Parent and Parent Subsidiary in accordance with
its terms. Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby by each of Parent and
Parent Subsidiary will (a) require any consent or approval of or filing with any
third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws, or (b) constitute a
violation of, conflict with or default under, any material contract (including
any registration rights), commitment, agreement, understanding, arrangement or
other restriction of any kind to which Parent or Parent Subsidiary is a party or
by which either of them or their material property is bound.
3.2 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fee from Parent or Parent Subsidiary in connection
with this Agreement or the transactions contemplated hereby exclusive of any
commission or finder's fees referred to in the Merger Agreement.
4. Termination. The term of this Agreement commences upon the execution and
delivery of this Agreement by all of the parties hereto and continues until it
is terminated in accordance with its terms. This Agreement shall terminate on
the earliest of (a) the Effective Time (as defined in the Merger Agreement) or
(b) the date 180 days after the termination of the Merger Agreement in
accordance with its terms; PROVIDED, HOWEVER, the termination of this Agreement
shall be immediate if the Merger Agreement is terminated pursuant to Sections
7(a)(i), 7(a)(ii), 7(a)(iii), 7(a)(vi), 7(a)(vii) or 7(a)(ix); and, PROVIDED,
FURTHER, (i) the provisions of Sections 5 and 9 through 18 shall survive any
termination of this Agreement, (ii) the provisions of Sections 6.3, 6.4 and 7
shall survive the termination of this Agreement if this Agreement terminates
pursuant to clause (a) above and (iii) the provisions of Sections 2 and 3 shall
survive for a period of one year after any termination of this Agreement.
5. Expenses. Except as provided in Section 7, each party hereto will pay
all of its expenses in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of its counsel
and other advisers.
D-3
<PAGE>
6. Covenants.
6.1 Except in accordance with the provisions of this Agreement,
Stockholder (and the Company, pursuant to Section 6.8 hereof) agrees, prior to
the termination of this Agreement as provided in Section 4 above, not to,
directly or indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of (including by merger, testamentary disposition, interspousal
disposition pursuant to a domestic relations proceeding or otherwise or
otherwise by operation of law), or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Shares, PROVIDED,
HOWEVER, that Stockholder may transfer Shares, with the prior written consent of
Parent, which shall not be unreasonably withheld, to a trust of which there are
no beneficiaries other than the parents, spouse or children of Stockholder, or
otherwise make transfers for estate planning purposes, so long as the trust and
the trustee(s), or other transferee, thereof deliver a written agreement to
Parent, reasonably acceptable to Parent, to be bound by the restrictions set
forth in this Agreement, and Parent receives an opinion of counsel reasonably
satisfactory to it that this Agreement is binding upon such trust and the
trustee(s), or other transferee, thereof, as if such trust and trustee(s), or
other transferee, were Stockholder. Any action taken in violation of this
Section 6.1(a) shall be void and of no effect;
(b) grant any proxies with respect to any Shares, deposit
any Shares into a voting trust or enter into a voting agreement with respect to
any Shares; or
(c) take any action to solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, an Acquisition Proposal (as defined in the Merger Agreement) or engage in
negotiations or discussions with any person or entity (or group of persons
and/or entities) other than Parent or its Affiliates concerning, or provide any
non-public information to any person or entity relating, to an Acquisition
Proposal or otherwise assist or facilitate any effort or attempt by any person
or entity (other than Parent and Parent Subsidiary) to make or implement an
Acquisition Proposal. Stockholder will immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation on its part with any parties conducted heretofore with respect to
any proposed, potential or contemplated Acquisition Proposal, and will notify
Parent promptly if it becomes aware of any Acquisition Proposal or any request
for non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company by any person or
entity that informs the Company (or its officers, directors, representatives,
agents, Affiliates or associates) that it is considering making or has made an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
6.2 Stockholder agrees, during the term of this Agreement, to notify
Parent promptly of the number of any shares of Common Stock acquired by
Stockholder after the date hereof.
6.3 [INTENTIONALLY OMITTED]
6.4 [INTENTIONALLY OMITTED]
6.5 [INTENTIONALLY OMITTED]
6.6 [INTENTIONALLY OMITTED]
6.7 [INTENTIONALLY OMITTED]
6.8 The Company recognizes and agrees to use commercially reasonable
efforts to enforce the Transfer restrictions placed on the Shares under this
Agreement.
D-4
<PAGE>
7. Registration Rights. [INTENTIONALLY OMITTED]
8. Survival of Representations and Warranties. Except as expressly provided
otherwise, all representations, warranties, covenants and agreements made by
Stockholder or Parent in this Agreement shall survive the termination of this
Agreement as set forth in Section 4 and any investigation at any time made by or
on behalf of any party.
9. Notices. All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided herein), given in
the manner provided in the Merger Agreement, and shall be deemed duly given when
received, addressed as follows:
If to Parent or Parent
Subsidiary:
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (212) 350-7493
With a copy to:
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Blvd.
Stamford, Connecticut
06901-3229
Attention: John T.
Capetta, Esq.
Facsimile: (203) 964-3188
If to Stockholder:
Princes Gate Investors II,
L.P.
c/o Morgan Stanley & Co.
1585 Broadway
New York, New York 10036
Attention: David Powers
Facsimile: (212) 761-9869
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Michael R.
Littenberg, Esq.
Facsimile: (212) 593-5955
D-5
<PAGE>
If to Company:
Destia Communications,
Inc.
95 Route 17 South
Paramus, New Jersey 07651
Attention: Richard Shorten
Facsimile: (201) 226-4524
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Richard Hall,
Esq.
Facsimile: (212) 474-3700
10. Entire Agreement: Amendment. This Agreement, together with the documents
expressly referred to herein, constitute the entire agreement among the parties
hereto with respect to the subject matter contained herein and supersede all
prior agreements and understandings among the parties with respect to such
subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by Parent, Parent
Subsidiary and Stockholder.
11. Legend. In addition to any other legend which may be required by
applicable law, each share certificate representing shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
ASSIGNED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT
TO SUCH SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR
APPLICABLE STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM
REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES
LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING
RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE
COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE
SECURITIES LAW IS AVAILABLE.
IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE
MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER
COMPLIES WITH THE PROVISIONS OF A STOCKHOLDER AGREEMENT DATED
AS OF AUGUST 27, 1999 (THE "STOCKHOLDER AGREEMENT"), A COPY
OF WHICH IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL
OFFICE OF THE COMPANY.
D-6
<PAGE>
NO TRANSFER OF THE SECURITIES WILL BE MADE ON THE BOOKS OF
THE COMPANY UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH
THE TERMS OF SUCH STOCKHOLDER AGREEMENT. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO OTHER
RIGHTS AND OBLIGATIONS AS SET FORTH IN THE STOCKHOLDER
AGREEMENT.
12. Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, assigns and personal
representatives, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
13. GOVERNING LAW. EXCEPT AS EXPRESSLY SET FORTH BELOW, THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF STOCKHOLDER,
PARENT, PARENT SUBSIDIARY AND COMPANY HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT SHALL BE HEARD IN THE APPROPRIATE COURT OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK AND, IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS
TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT MAY BE GIVEN TO ANY
OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AT THE
RESPECTIVE ADDRESSES SET FORTH IN SECTION 9 ABOVE.
14. Injunctive Relief. The parties agree that in the event of a breach of
any provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party shall be entitled to obtain in
any court of competent jurisdiction a decree of specific performance or to
enjoin the continuing breach of such provision, in each case without the
requirement that a bond be posted and without having to prove actual damages, as
well as to obtain damages for breach of this Agreement. By seeking or obtaining
such relief, the aggrieved party will not be precluded from seeking or obtaining
any other relief to which it may be entitled.
15. Counterparts; Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same document.
16. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
17. Further Assurances. Each party hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable to consummate the transactions contemplated by this Agreement.
18. Third-Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person or entity other than the parties
hereto any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
D-7
<PAGE>
IN WITNESS WHEREOF, Parent, Parent Subsidiary, Stockholder, Princes
Gate Investors II, L.P., Acorn Partnership II, L.P., PGI Investments Limited,
Investors Investments AB, Marinbeach United S.A. and Company have executed this
Agreement or caused this Agreement to be executed by their duly authorized
officers, as the case may be, each as of the date and year first above written.
<TABLE>
<S> <C>
PRINCES GATE INVESTORS II, L.P.
By: /s/ DAVID POWERS
---------------------------------------
Name: David Powers
Title: Vice President & General Partner
ACORN PARTNERSHIP II, L.P.
By: /s/ DAVID POWERS
---------------------------------------
Name: David Powers
Title: Vice President & General Partner
PGI INVESTMENTS LIMITED
By: /s/ DAVID POWERS
---------------------------------------
Name: David Powers
Title: Vice President & Attorney-in-Fact
INVESTORS INVESTMENTS AB
By: /s/ DAVID POWERS
---------------------------------------
Name: David Powers
Title: Vice President & Attorney-in-Fact
MARINBEACH UNITED S.A.
By: /s/ DAVID POWERS
---------------------------------------
Name: David Powers
Title: Vice President & Attorney-in-Fact
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
---------------------------------------
Name: Michael J. Mahoney
Title: President & Chief Executive Officer
</TABLE>
D-8
<PAGE>
<TABLE>
<S> <C>
VIATEL ACQUISITION CORP.
By: /s/ MICHAEL J. MAHONEY
---------------------------------------
Name: Michael J. Mahoney
Title: President
DESTIA COMMUNICATIONS, INC.
By: /s/ ALFRED WEST
---------------------------------------
Name: Alfred West
Title: Chief Executive Officer
</TABLE>
D-9
<PAGE>
SCHEDULE 2.1
NONE
D-10
<PAGE>
SCHEDULE 2.2
NONE
D-11
<PAGE>
ANNEX E
STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT (the "Agreement") dated as of August 27, 1999
among
GARY BONDI, a resident of the State of New York, GS ECON LTD. PARTNERSHIP
(collectively, "Stockholder"), VIATEL, INC., a Delaware corporation ("Parent"),
VIATEL ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary
of Parent ("Parent Subsidiary"), and DESTIA COMMUNICATIONS, INC., a Delaware
corporation ("Company").
W I T N E S S E T H:
WHEREAS, Parent, Company and Parent Subsidiary are entering into an
Agreement and Plan of Merger of even date herewith (the "Merger Agreement"),
pursuant to which Parent will acquire all of the outstanding shares of voting
common stock, $0.01 par value per share (the "Voting Shares"), and all of the
outstanding shares of non-voting common stock, $0.01 par value per share (the
"Non-Voting Shares," and together with the Voting Shares, the "Common Stock"),
of the Company pursuant to a merger of Parent Subsidiary with and into Company
(the "Merger");
WHEREAS, Stockholder collectively owns, as of the date hereof,
4,473,832 shares of Common Stock (the "Existing Shares," and together with any
shares of Common Stock acquired by Stockholder after the date hereof and prior
to the termination hereof, the "Shares");
WHEREAS, as a condition to their willingness to enter into the
Merger Agreement, and in reliance upon Stockholder's representations,
warranties, covenants and agreements hereunder, Parent and Parent Subsidiary
have requested that Stockholder agree, and Stockholder has agreed, to enter into
this Agreement; and
WHEREAS, this Agreement is being entered into concurrently with the
execution of the Merger Agreement;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained and for such other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, and
intending to be legally bound hereby, it is agreed as follows. Capitalized terms
not otherwise defined herein shall have the meaning set forth in the Merger
Agreement.
1. Agreement to Vote. [INTENTIONALLY OMITTED]
2. Representations and Warranties of Stockholder. Gary Bondi and GS Econ
Ltd. Partnership represent and warrant to Parent and Parent Subsidiary with
respect to that part of the Existing Shares owned by it as follows:
2.1 Ownership of Shares. On the date hereof, Stockholder is the
sole record and beneficial owner of the Existing Shares, except as set forth on
Schedule 2.1 attached hereto. For purposes of this Agreement, beneficial
ownership of securities shall be determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). On the
date hereof and at the Closing Date (as defined in the Merger Agreement),
neither Stockholder nor any Affiliate (as defined in the Merger Agreement) of
Stockholder (other than Company) owns or will own, of record or beneficially,
solely or jointly with others, (i) any shares of Common Stock other than the
Existing Shares and shares of Common Stock acquired upon the exercise of
employee stock options granted by the
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<PAGE>
Company and listed on Schedule 2.1 attached hereto or (ii) any securities
convertible into or exchangeable or exercisable for shares of Common Stock or
any rights to acquire any shares of Common Stock other than employee stock
options granted by Company and listed on Schedule 2.1 attached hereto. Except as
set forth on Schedule 2.1 attached hereto, Stockholder currently has with
respect to the Existing Shares, and at Closing will have with respect to the
Shares, good, valid and marketable title, free and clear of all liens,
encumbrances, restrictions, options, warrants, rights to purchase, voting
agreements or voting trusts, and claims of every kind (other than the
encumbrances created by this Agreement and other than restrictions on transfer
under applicable federal and state securities laws). Stockholder has not and
will not pledge more than 2,730,000 of the Existing Shares.
2.2 Power; Binding Agreement. Stockholder has the full legal right,
power and authority to enter into and perform all of Stockholder's obligations
under this Agreement. The execution, delivery and performance of this Agreement
by Stockholder will not violate any other agreement to which Stockholder is a
party including, without limitation, any voting agreement, stockholder agreement
or voting trust. This Agreement has been duly executed and delivered by
Stockholder and constitutes a legal, valid and binding agreement of Stockholder,
enforceable in accordance with its terms. Neither the execution or delivery of
this Agreement nor the consummation by Stockholder of the transactions
contemplated hereby will (a) require any consent or approval of or filing with
any third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws and consents or waivers
listed on Schedule 2.2 attached hereto, all of which have been obtained, or (b)
constitute a violation of, conflict with or constitute a default under, any
material contract, commitment, agreement, understanding, arrangement or other
restriction of any kind to which Stockholder is a party or by which Stockholder
or his material property is bound.
2.3 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fees from Stockholder in connection with this
Agreement or the transactions contemplated hereby exclusive of any commission or
finder's fees referred to in the Merger Agreement.
3. Representations and Warranties of Parent. Each of Parent and Parent
Subsidiary represents and warrants to Stockholder as follows:
3.1 Authority. Each of Parent and Parent Subsidiary has the full
legal right, power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by each of Parent and Parent Subsidiary will not violate or
conflict with any other agreement to which it is a party. This Agreement has
been duly executed and delivered by each of Parent and Parent Subsidiary and
constitutes a legal, valid and binding agreement of each of Parent and Parent
Subsidiary, enforceable against Parent and Parent Subsidiary in accordance with
its terms. Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby by each of Parent and
Parent Subsidiary will (a) require any consent or approval of or filing with any
third party, including any governmental or other regulatory body, other than
filings required under the federal securities laws, or (b) constitute a
violation of, conflict with or default under, any material contract (including
any registration rights), commitment, agreement, understanding, arrangement or
other restriction of any kind to which Parent or Parent Subsidiary is a party or
by which either of them or their material property is bound.
3.2 Finder's Fees. No person or entity is, or will be, entitled to
any commission or finder's fee from Parent or Parent Subsidiary in connection
with this Agreement or the transactions contemplated hereby exclusive of any
commission or finder's fees referred to in the Merger Agreement.
4. Termination. The term of this Agreement commences upon the execution
and delivery of this Agreement by all of the parties hereto and continues until
it is terminated in accordance with its terms. This Agreement shall terminate on
the earliest of (a) the Effective Time (as defined in the Merger
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<PAGE>
Agreement) or (b) the date 180 days after the termination of the Merger
Agreement in accordance with its terms; PROVIDED, HOWEVER, the termination of
this Agreement shall be immediate if the Merger Agreement is terminated pursuant
to Sections 7(a)(i), 7(a)(ii), 7(a)(iii), 7(a)(vi), 7(a)(vii) or 7(a)(ix); and,
PROVIDED, FURTHER, (i) the provisions of Sections 5 and 9 through 18 shall
survive any termination of this Agreement, (ii) the provisions of Sections 6.3,
6.4 and 7 shall survive the termination of this Agreement if this Agreement
terminates pursuant to clause (a) above and (iii) the provisions of Sections 2
and 3 shall survive for a period of one year after any termination of this
Agreement.
5. Expenses. Except as provided in Section 7, each party hereto will pay
all of its expenses in connection with the transactions contemplated by this
Agreement, including, without limitation, the fees and expenses of its counsel
and other advisers.
6. Covenants.
6.1 Except in accordance with the provisions of this Agreement,
Stockholder (and the Company, pursuant to Section 6.8 hereof) agrees, prior to
the termination of this Agreement as provided in Section 4 above, not to,
directly or indirectly:
(a) sell, transfer, pledge, encumber, assign or otherwise
dispose of (including by merger, testamentary disposition, interspousal
disposition pursuant to a domestic relations proceeding or otherwise or
otherwise by operation of law), or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Shares, PROVIDED,
HOWEVER, that Stockholder may transfer Shares, with the prior written consent of
Parent, which shall not be unreasonably withheld, to a trust of which there are
no beneficiaries other than the parents, spouse or children of Stockholder, or
otherwise make transfers for estate planning purposes, so long as the trust and
the trustee(s), or other transferee, thereof deliver a written agreement to
Parent, reasonably acceptable to Parent, to be bound by the restrictions set
forth in this Agreement, and Parent receives an opinion of counsel reasonably
satisfactory to it that this Agreement is binding upon such trust and the
trustee(s), or other transferee, thereof, as if such trust and trustee(s), or
other transferee, were Stockholder. Any action taken in violation of this
Section 6.1(a) shall be void and of no effect;
(b) grant any proxies with respect to any Shares, deposit
any Shares into a voting trust or enter into a voting agreement with respect to
any Shares; or
(c) take any action to solicit, initiate or encourage any
inquiries or proposals that constitute, or could reasonably be expected to lead
to, an Acquisition Proposal (as defined in the Merger Agreement) or engage in
negotiations or discussions with any person or entity (or group of persons
and/or entities) other than Parent or its Affiliates concerning, or provide any
non-public information to any person or entity relating, to an Acquisition
Proposal or otherwise assist or facilitate any effort or attempt by any person
or entity (other than Parent and Parent Subsidiary) to make or implement an
Acquisition Proposal. Stockholder will immediately cease and terminate any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation on his part with any parties conducted heretofore with respect to
any proposed, potential or contemplated Acquisition Proposal, and will notify
Parent promptly if he becomes aware of any Acquisition Proposal or any request
for non-public information in connection with an Acquisition Proposal or for
access to the properties, books or records of the Company by any person or
entity that informs the Company (or its officers, directors, representatives,
agents, Affiliates or associates) that it is considering making or has made an
Acquisition Proposal. Such notice shall be made orally and in writing and shall
indicate the identity of the offeror and the terms and conditions of such
proposal, inquiry or contact.
6.2 Stockholder agrees, during the term of this Agreement, to notify
Parent promptly of the number of any shares of Common Stock acquired by
Stockholder after the date hereof.
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6.3 [INTENTIONALLY OMITTED]
6.4 Stockholder agrees that for a period of one year following the
Effective Time (the "Lock-up Period"), Stockholder will not, without the prior
written consent of Parent, directly or indirectly, offer, offer to sell, sell,
contract to sell, grant any option for the purchase of, assign, transfer,
pledge, hypothecate or otherwise encumber or dispose of any beneficial interest
in (including by merger, testamentary disposition, interspousal disposition
pursuant to a domestic relations proceeding or otherwise or otherwise by
operation of law) ("Transfer") any Parent common stock, par value $0.01 per
share ("Parent Common Stock"), or any securities convertible into or
exchangeable or exercisable for any shares of Parent Common Stock or any other
rights to acquire shares of Parent Common Stock (either pursuant to Rule 144 of
the regulations under the Securities Act of 1933, as amended (the "Securities
Act"), or otherwise) either beneficially owned by Stockholder as of the
Effective Time or acquired by Stockholder during the Lock-up Period as a result
of the exercise of options. Notwithstanding the foregoing, the undersigned may
(i) Transfer shares of Parent Common Stock as a BONA FIDE gift or gifts,
provided that Stockholder provides prior written notice of such gift or gifts to
Parent and the donee or donees thereof deliver a written agreement to Parent,
reasonably acceptable to Parent, to be bound by the restrictions set forth
herein as if such donee or donees were Stockholders; (ii) Transfer up to
$5,000,000 worth of Parent Common Stock; and (iii) Transfer shares of Parent
Common Stock, with the prior written consent of Parent, which shall not be
unreasonably withheld, to a trust of which there are no beneficiaries other than
the parents, spouse or children of Stockholder, or otherwise make transfers for
estate planning purposes, so long as the trust and the trustee(s), or other
transferee, thereof deliver a written agreement to Parent, reasonably acceptable
to Parent, to be bound by the restrictions set forth in this Agreement, and
Parent receives an opinion of counsel reasonably satisfactory to it that this
Agreement is binding upon such trust and the trustee(s), or other transferee,
thereof, as if such trust and trustee(s), or other transferee, were Stockholder.
Any Transfer of Parent Common Stock in violation of this Section 6.4 shall be
void and of no effect.
6.5 [INTENTIONALLY OMITTED]
6.6 [INTENTIONALLY OMITTED]
6.7 [INTENTIONALLY OMITTED]
6.8 The Company recognizes and agrees to use commercially reasonable
efforts to enforce the Transfer restrictions placed on the Shares under this
Agreement.
7. Registration Rights. [INTENTIONALLY OMITTED]
8. Survival of Representations and Warranties. Except as expressly
provided otherwise, all representations, warranties, covenants and agreements
made by Stockholder or Parent in this Agreement shall survive the termination of
this Agreement as set forth in Section 4 and any investigation at any time made
by or on behalf of any party.
9. Notices. All notices or other communications required or permitted
hereunder shall be in writing (except as otherwise provided herein), given in
the manner provided in the Merger Agreement, and shall be deemed duly given when
received, addressed as follows:
If to Parent or Parent
Subsidiary:
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Attention: General Counsel
Facsimile: (212) 350-7493
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With a copy to:
Kelley Drye & Warren LLP
Two Stamford Plaza
281 Tresser Blvd.
Stamford, Connecticut
06901-3229
Attention: John T.
Capetta, Esq.
Facsimile: (203) 964-3188
If to Stockholder:
Gary Bondi
160 Grandview Avenue
Monsey, New York
10952-1419
Facsimile: (914) 354-7182
With a copy to:
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Michael R.
Littenberg, Esq.
Facsimile: (212) 593-5955
If to Company:
Destia Communications,
Inc.
95 Route 17 South
Paramus, New Jersey 07651
Attention: Richard Shorten
Facsimile: (201) 226-4524
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Richard Hall,
Esq.
Facsimile: (212) 474-3700
10. Entire Agreement: Amendment. This Agreement, together with the
documents expressly referred to herein, constitute the entire agreement among
the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings among the parties with respect
to such subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by Parent, Parent
Subsidiary and Stockholder.
11. Legend. In addition to any other legend which may be required by
applicable law, each share certificate representing shares which are subject to
this Agreement shall have endorsed, to the extent appropriate, upon its face the
following words:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH
SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED,
ASSIGNED, ENCUMBERED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT PURSUANT
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<PAGE>
TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE
STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION
UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES LAW, RELATING
TO THE DISPOSITION OF SECURITIES, INCLUDING RULE 144,
PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE COMPANY,
IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY,
TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES
LAW IS AVAILABLE.
IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE
MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, ASSIGNED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER
COMPLIES WITH THE PROVISIONS OF A STOCKHOLDER AGREEMENT DATED
AS OF AUGUST 27, 1999 (THE "STOCKHOLDER AGREEMENT"), A COPY
OF WHICH IS ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL
OFFICE OF THE COMPANY. NO TRANSFER OF THE SECURITIES WILL BE
MADE ON THE BOOKS OF THE COMPANY UNLESS ACCOMPANIED BY
EVIDENCE OF COMPLIANCE WITH THE TERMS OF SUCH STOCKHOLDER
AGREEMENT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
ALSO SUBJECT TO OTHER RIGHTS AND OBLIGATIONS AS SET FORTH IN
THE STOCKHOLDER AGREEMENT.
12. Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, assigns and personal
representatives, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
13. GOVERNING LAW. EXCEPT AS EXPRESSLY SET FORTH BELOW, THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
DELAWARE, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF. IN ADDITION, EACH OF STOCKHOLDER,
PARENT, PARENT SUBSIDIARY AND COMPANY HEREBY AGREE THAT ANY DISPUTE ARISING OUT
OF THIS AGREEMENT SHALL BE HEARD IN THE APPROPRIATE COURT OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK AND, IN CONNECTION THEREWITH, EACH PARTY TO THIS AGREEMENT HEREBY CONSENTS
TO THE JURISDICTION OF SUCH COURTS AND AGREES THAT ANY SERVICE OF PROCESS IN
CONNECTION WITH ANY DISPUTE ARISING OUT OF THIS AGREEMENT MAY BE GIVEN TO ANY
OTHER PARTY HERETO BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, AT THE
RESPECTIVE ADDRESSES SET FORTH IN SECTION 9 ABOVE.
14. Injunctive Relief. The parties agree that in the event of a breach of
any provision of this Agreement, the aggrieved party may be without an adequate
remedy at law. The parties therefore agree that in the event of a breach of any
provision of this Agreement, the aggrieved party shall be entitled to obtain in
any court of competent jurisdiction a decree of specific performance or to
enjoin the continuing breach of such provision, in each case without the
requirement that a bond be posted and without having to prove actual damages, as
well as to obtain damages for breach of this Agreement. By seeking or obtaining
such relief, the aggrieved party will not be precluded from seeking or obtaining
any other relief to which it may be entitled.
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<PAGE>
15. Counterparts; Facsimile Signatures. This Agreement may be executed,
including execution by facsimile, in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
and the same document.
16. Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
17. Further Assurances. Each party hereto shall execute and deliver such
additional documents and take such additional actions as may be necessary or
desirable to consummate the transactions contemplated by this Agreement.
18. Third-Party Beneficiaries. Nothing in this Agreement, expressed or
implied, shall be construed to give any person or entity other than the parties
hereto any legal or equitable right, remedy or claim under or by reason of this
Agreement or any provision contained herein.
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<PAGE>
IN WITNESS WHEREOF, Parent, Parent Subsidiary, Stockholder, GS Econ
Ltd. Partnership and Company have executed this Agreement or caused this
Agreement to be executed by their duly authorized officers, as the case may be,
each as of the date and year first above written.
<TABLE>
<S> <C> <C>
GARY BONDI
/s/ GARY BONDI
---------------------------------------------
GS ECON LTD. PARTNERSHIP
By: /s/ GARY BONDI
-----------------------------------------
Name: Gary Bondi
Title: General Partner
VIATEL, INC.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President and Chief Executive Officer
VIATEL ACQUISITION CORP.
By: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Name: Michael J. Mahoney
Title: President
DESTIA COMMUNICATIONS, INC.
By: /s/ ALFRED WEST
-----------------------------------------
Name: Alfred West
Title: Chief Executive Officer
</TABLE>
E-8
<PAGE>
SCHEDULES 2.1 AND 2.2
Gary and Susan Bondi have entered into a Continuing General Security
Agreement with Safra National Bank of New York ("Safra"), dated June 14, 1999,
pursuant to which Mr. Bondi pledged 1,000,000 shares of Destia Communications,
Inc. as collateral for the loan. A waiver to enter into this Agreement, to be
effective as of the date hereof, is being obtained
E-9
<PAGE>
ING BARINGS LLC
ANNEX F
August 26, 1999
Board of Directors
Viatel, Inc.
685 Third Avenue
New York, NY 10017
Gentlemen:
We understand that Viatel, Inc. (the "Company") and Destia
Communications, Inc. ("Destia") intend to enter into an Agreement and Plan of
Merger to be dated as of August 27, 1999 (the "Merger Agreement") pursuant to
which a wholly-owned subsidiary of the Company will be merged with and into
Destia and each outstanding share of common stock of Destia will be exchanged
for 0.445 shares (the "Exchange Ratio") of the Company's common stock (the
"Proposed Transaction"). In addition, each outstanding option and warrant to
purchase common stock of Destia will be converted into options and warrants to
purchase common stock of the Company based upon the Exchange Ratio. The terms
and conditions of the Proposed Transaction are set forth in more detail in the
Merger Agreement.
You have requested our opinion as to the fairness, from a financial
point of view, of the Exchange Ratio to the Company. We have acted as financial
advisor to the Company in connection with the Proposed Transaction and will
receive a customary fee for our services, a substantial portion of which is
contingent on the completion of the Proposed Transaction. As you are aware, ING
Barings has also performed other investment banking services for the Company in
the past three years for which we were also paid customary fees.
In conducting our analysis and arriving at our opinion as expressed
herein, we have reviewed and analyzed, among other things, the following:
(i) the Merger Agreement and certain other related documents;
(ii) the Company's Annual Reports on Form 10-K for each of the
fiscal years in the three year period ended December 31, 1998, Quarterly Reports
on Form 10-Q for the quarters ended March 31 and June 30, 1999, and any Reports
filed on Form 8-K since January 1, 1998;
(iii) Destia's Registration Statement on Form S-1 dated May 6, 1999,
Annual Report on Form 10-K for the year ended December 31, 1998, Quarterly
Report on Form 10-Q for the quarters ended March 31 and June 30, 1999, and any
Reports filed on Form 8-K since December 31, 1997;
(iv) certain internal financial information and other data relating
to the Company, its business and prospects, including forecasts and projections,
provided to us by the management of the Company;
(v) certain internal financial information and other data relating
to Destia, its business and prospects, including forecasts and projections,
provided to us by the management of Destia and the Company;
(vi) a history of the price and trading volume of the Company's
common stock since October 18, 1996, and a comparison of that trading history
with those of other companies which we deemed relevant;
F-1
<PAGE>
ING BARINGS LOGO
Viatel, Inc.
August 26, 1999
Page 2
(vii) a history of the price and trading volume of Destia's common
stock since May 6, 1999, and a comparison of that trading history with those of
other companies which we deemed relevant;
(viii) certain publicly available information concerning certain
other companies engaged in businesses which we believe to be generally
comparable to the Company and Destia, respectively;
(ix) the financial terms of, and premium paid in, certain other
business combinations which we believe to be relevant.
We have also met with certain officers and employees of the Company and Destia
concerning their respective businesses, operations, assets, present conditions
and prospects and undertook such other studies, analyses and investigations as
we deemed appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information reviewed by us and have
not attempted independently to verify such information, nor do we assume any
responsibility to do so. With respect to the financial projections of the
Company and Destia, upon advice of the Company, we have assumed that such
projections have been reasonably prepared based on the best current estimates
and judgment of the management of the Company as to their future financial
condition and results of operations. In arriving at our opinion, with your
consent, we also relied upon without independent verification the financial
projections of the Company and Destia on a combined basis following consummation
of the Proposed Transaction (including the cost savings and operating synergies
expected to result from a combination of the businesses) that have been prepared
by the Company's management. Upon advice of the Company and its legal and
accounting advisors, we have assumed that the Proposed Transaction (i) will
qualify as a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended, and therefore as a tax-free transaction to the
Company and the stockholders of Destia, and (ii) upon obtaining regulatory
consents, no material restrictions or conditions will be imposed on either
party. We have not conducted a physical inspection of the properties and
facilities of the Company or Destia, nor we have made or obtained any
evaluations of the assets or liabilities of the Company or Destia. We have also
taken into account our assessment of general economic, market and financial
conditions and our experience in similar transactions, as well as our experience
in securities valuation in general. Our opinion necessarily is based upon
economic, market, financial and other conditions as they exist and can be
evaluated on the date hereof and we assume no responsibility to update or revise
our opinion based upon events or circumstances occurring after the date hereof.
We reserve, however, the right to withdraw, revise or modify our opinion based
upon additional information which may be provided to or obtained by us, which
suggests, in our judgment, a material change in the assumptions upon which our
opinion is based.
This letter and the opinion expressed herein are for the use of the
Board of Directors of the Company. This opinion does not address the Company's
underlying business decision to approve the Proposed Transaction or constitute a
recommendation to the shareholders of the Company as to how such shareholders
should vote or as to any other action such shareholders should take regarding
the Proposed Transaction. This opinion may not be reproduced, summarized,
excerpted from or otherwise publicly referred to or disclosed in any manner
without our prior written consent except the Company may include this opinion in
its entirety in any proxy statement or information statement relating to the
Proposed Transaction sent to the Company's shareholders.
Based upon and subject to the foregoing, it is our opinion that the
Exchange Ratio in the Proposed Transaction is fair, from a financial point of
view, to the Company.
Very truly yours,
/s/ ING Barings LLC
ING BARINGS LLC
F-2
<PAGE>
MORGAN STANLEY & CO. INCORPORATED
ANNEX G
August 27, 1999
Board of Directors
Destia Communications, Inc.
95 Route 17 South
Paramus, NJ 07651
Members of the Board:
We understand that Destia Communications, Inc. (the "Company"), Viatel, Inc.
(the "Parent") and Viatel Acquisition Corp., a wholly owned subsidiary of the
Parent ("Parent Subsidiary"), have entered into an Agreement and Plan of Merger
dated August 27, 1999 (the "Merger Agreement"), which provides, among other
things, for the merger (the "Merger") of Parent Subsidiary with and into the
Company. Pursuant to the Merger, the Company will become a wholly owned
subsidiary of the Parent, and each outstanding share of voting common stock, par
value $0.01 per share, and each outstanding share of nonvoting common stock, par
value $0.01 per share (collectively, the "Company Shares"), of the Company,
other than shares held in the treasury of the Company or owned by the Company,
any subsidiary of the Company, the Parent or Parent Subsidiary, shall be
converted into the right to receive 0.445 shares (the "Exchange Ratio") of
common stock, par value $0.01 per share, of the Parent (the "Parent Shares").
The terms and conditions the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether, as of the date hereof, the
Exchange Ratio pursuant to the Merger Agreement is fair from a financial point
of view to the holders of Company Shares.
For purposes of the opinion set forth herein, we have:
- reviewed certain publicly available financial statements and other
information of the Company and the Parent, respectively;
- reviewed certain internal financial statements and other financial and
operating data concerning the Company and the Parent prepared by the
respective managements of such companies;
- reviewed certain financial projections of the Company and the Parent
prepared by the respective managements of such companies;
- discussed the past and current operations and financial conditions and the
prospects of the Company and the Parent, including information relating to
certain strategic, financial and operational benefits anticipated from the
Merger, with the respective managements of such companies;
- analyzed the estimated pro forma impact of the Merger on the Parent's cash
flow, consolidated capitalization and financial ratios;
- reviewed the reported prices and trading activity for the Company Shares
and the Parent Shares;
- compared the financial performance of the Company and the Parent and the
prices and trading activity of the Company Shares and the Parent Shares
with those of certain other comparable publicly traded companies and their
securities;
- reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions;
G-1
<PAGE>
- participated in discussions and negotiations among representatives of the
Company and the Parent and their financial and legal advisors;
- reviewed the Merger Agreement and certain related documents;
- performed such other analyses and considered such other factors as we have
deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including information
relating to certain strategic, financial and operational benefits anticipated
from the Merger, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
future financial performance of the Company and the Parent. We have not made any
independent valuation or appraisal of the assets or liabilities of the Company,
nor have we been furnished with any such appraisals. Our opinion is necessarily
based on financial, economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement
without waiver of any material condition contained therein and will be treated
as a tax-free reorganization and/or exchange, for purposes of the Internal
Revenue Code of 1986.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and/or financing services for the Company and the Parent and
have received fees for the rendering of these services. In addition, Princes
Gate Investors II, L.P., an affiliate of Morgan Stanley & Co. Incorporated, and
certain related entities, own approximately 11% of the outstanding shares of the
Company as of the date hereof and Stephen Munger, a Managing Director of Morgan
Stanley, is a member of the Board of Directors of the Company.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by the Company in respect of the Merger with the Securities
and Exchange Commission. In addition, this opinion does not in any manner
address the prices at which the Parent Shares will trade following announcement
or consummation of the Merger, and we express no opinion or recommendation as to
how the holders of Company Shares should vote at the stockholders' meeting held
in connection with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of Company Shares.
<TABLE>
<S> <C> <C>
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ JEFFREY N. HOGAN
-----------------------------------------
Jeffrey N. Hogan
Principal
</TABLE>
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<PAGE>
ANNEX H
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS--(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the
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<PAGE>
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such
a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation
may fix, in advance, a record date that shall be not more than 10 days prior
to the date the notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the record date
shall be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
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(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
H-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporations Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation 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, whether civil, criminal, administrative or
investigative (a "proceeding") (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Delaware corporation may indemnify any person under such
Section in connection with a proceeding by or in the right of the corporation to
procure judgment in its favor, as provided in the preceding sentence, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action, except that no
indemnification shall be made with respect thereto unless, and then only to the
extent that, a court of competent jurisdiction shall determine upon application
that such person is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper. A Delaware corporation must indemnify
present or former directors and officers who are successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter in any proceeding, by reason of the fact that he is or
was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith. A Delaware corporation may pay for the expenses (including attorneys'
fees) incurred by an officer or director in defending a proceeding in advance of
the final disposition upon receipt of an undertaking by or on behalf of such
officer or director to repay such amount if it shall ultimately be determined
that he is not entitled to be indemnified by the corporation. Article Tenth of
Viatel's Amended and Restated Certificate of Incorporation and Article X of
Viatel's Amended and Restated Bylaws provide for indemnification of directors
and officers to the fullest extent permitted by Section 145 of the DGCL.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director shall not be personally liable to
the corporation or its stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for any
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) with respect to certain unlawful dividend
payments or stock redemptions or repurchases or (iv) for any transaction from
which the director derived an improper personal benefit. Article Ninth of
Viatel's Amended and Restated Certificate of Incorporation eliminates the
liability of directors to the fullest extent permitted by Section 102(b)(7) of
the DGCL.
Section 145 of the DGCL permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other employee against any liability asserted against
such person and incurred by such person in such capacity, or arising out of
their status as such, whether or not the corporation would have the power to
indemnify directors and officers against such liability. Viatel has obtained
officers' and directors' liability insurance of $15 million for members of its
Board of Directors and executive officers. In addition, Viatel has entered into
agreements to indemnify its directors and
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officers from and against any Expenses (as defined in the indemnity agreement)
incurred by such person in connection with investigating, defending, serving as
a witness in, participating in (including on appeal) or preparing for any of the
foregoing in any threatened, pending or contemplated action, suit or proceeding
(including an action by or in the right of the Registrant), or any inquiry,
hearing or investigation, to the fullest extent permitted by law, as such law
may be amended or interpreted (but only to the extent that such amendment or
interpretation provides for broader indemnification rights). The indemnity
agreement contains certain provisions to ensure that the indemnitee receives the
benefits contemplated by the agreement in the event of a "change in control" (as
defined in the indemnity agreement) such as the establishment and funding of a
trust in an amount sufficient to satisfy any and all expenses reasonably
anticipated to be incurred by the indemnitee in connection with investigating,
preparing for, participating in and/or defending a proceeding.
The merger agreement provides that for six years after completion of the
merger, Viatel will provide each individual who served as a director or officer
of Destia prior to the merger with officers' and directors' liability insurance
no less favorable in coverage and amount than any applicable Destia insurance in
effect immediately prior to the merger. If the existing liability insurance
expires or is terminated during the six year period, then Viatel will use its
best efforts to obtain as much liability insurance (no less favorable in
coverage) as can be obtained for the remainder of the six year period for a
premium not to exceed 200% (on an annualized basis) of the last annual premium
paid prior to August 27, 1999.
Viatel shall also honor for a period of six years from the completion of the
merger (and shall not alter or impair) any exculpatory or indemnification
provisions in Destia's certificate of incorporation, by-laws or indemnification
and employment agreements, except as may be required by law. Any rights to
indemnification in respect to claims asserted within the six year period shall
continue until final disposition of such claims.
Viatel will also indemnify for a period of six years from the completion of
the merger, to the fullest extent permitted by law, each director and officer of
Destia from any claims relating to the merger. Such indemnification is not
required, however, for actions of any director or officer of Destia which were
made in bad faith or constitute willful misconduct, taken in the individual
capacity of such director or officer, or such director or officer breached its
obligation to cooperate in the defense of the claim for which indemnification is
sought and such breach had or will have (if not cured within 10 days) a material
adverse effect on Viatel's defense of the claim.
At present, there is no pending litigation or other proceeding involving a
director or officer of Viatel as to which indemnification is being sought, nor
is Viatel aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 27, 1999, by and among Viatel, Inc., Viatel Acquisition
Corp. and Destia (included as Annex A to the Joint Proxy Statement/Prospectus contained in this
Registration Statement).
3.1(i) Amended and Restated Certificate of Incorporation of Viatel, Inc. (incorporated herein by reference to
Exhibit 3.1(i)(b) to Viatel, Inc.'s Registration Statement on Form S-1, Registration No. 333-09699, filed
on August 7, 1996 ("Viatel's Form S-1")); Certificate of Designations, Preferences and Rights of 10%
Series A Redeemable Convertible Preferred Stock, $.01 par value per share (incorporated herein by
reference to Exhibit 3(i)(b) to Viatel, Inc.'s Registration Statement on Form S-4, filed on July 10,
1998, File No. 333-58921 ("Viatel's 1998 Form S-4")); Certificate of Amendment to Viatel, Inc.'s Amended
and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 4.9 to Viatel,
Inc.'s quarterly report on Form 10-Q for the quarter ended September 30, 1998, File No. 000-21261);
Second Certificate of Amendment to Viatel, Inc.'s Amended and Restated Certificate of Incorporation
(filed herewith).
3.1(ii) Third Amended and Restated Bylaws of Viatel, Inc. (filed herewith).
3.2(i) Amended and Restated Certificate of Incorporation of Destia Communications, Inc. (incorporated herein by
reference to Exhibit 3.1 of Destia's Registration Statement on Form S-1, File No. 333-71463, filed on
January 29, 1999 ("Destia's Form S-1")).
3.2(ii) Amended and Restated Bylaws of Destia Communications, Inc. (incorporated herein by reference to Exhibit
3.2 of Destia's Form S-1)
4.1 Specimen of Viatel common stock certificate (incorporated by reference to Exhibit 4.4 of Viatel's Form
S-1).
4.2 Indenture, dated as of April 8, 1998, between Viatel, Inc. and The Bank of New York, as Trustee, relating
to Viatel, Inc.'s 12.50% Senior Discount Notes Due 2008 (including form of 12.50% Senior Discount Note)
(incorporated herein by reference to Exhibit 4.1 to Viatel's 1998 Form S-4).
4.3 Indenture, dated as of April 8, 1998, between Viatel, Inc. and The Bank of New York, as Trustee, relating
to Viatel, Inc.'s 11.25% Senior Notes Due 2008 (including form of 11.25% Senior Note) (incorporated
herein by reference to Exhibit 4.2 to Viatel's 1998 Form S-4).
4.4 Indenture, dated as of April 8, 1998, among Viatel, Inc., The Bank of New York, as Trustee, and Deutsche
Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel, Inc.'s 12.40%
Senior Discount Notes Due 2008 (including form of 12.40% Senior Discount Note) (incorporated herein by
reference to Exhibit 4.3 to Viatel's 1998 Form S-4).
4.5 Indenture, dated as of April 8, 1998, among Viatel, Inc., The Bank of New York, as Trustee, and Deutsche
Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel, Inc.'s 11.15%
Senior Notes Due 2008 (including form of 11.15% Senior Note) (incorporated herein by reference to Exhibit
4.4 to Viatel's 1998 Form S-4).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
4.6 Indenture, dated as of March 19, 1999, between Viatel, Inc. and The Bank of New York, as Trustee,
relating to Viatel, Inc.'s U.S. dollar denominated 11.50% Senior Notes Due 2009 (including form of 11.50%
Senior Note) (incorporated herein by reference to Exhibit 4.9 to Viatel, Inc.'s Registration Statement on
Form S-3, filed on February 12, 1999, File No. 333-72309 ("Viatel's February 1999 Form S-3")).
4.7 Indenture, dated as of March 19, 1999, between Viatel, Inc. and The Bank of New York, as Trustee,
relating to Viatel, Inc.'s Euro denominated 11.50% Senior Notes due 2009 (including form of 11.50% Senior
Note) (incorporated herein by reference to Exhibit 4.10 of Viatel's February 1999 Form S-3).
4.8 Registration Rights Agreement, dated as of March 12, 1999, among Viatel, Inc., Morgan Stanley & Co. Inc.,
and ING Baring Furman Selz LLC (incorporated herein by reference to Exhibit 4.11 of Viatel's February
1999 Form S-3).
4.9 Purchase Agreement, dated March 12, 1999, among Viatel, Inc., Morgan Stanley & Co. Inc., and ING Baring
Furman Selz LLC (incorporated herein by reference to Exhibit 4.8 of Viatel, Inc.'s Registration Statement
on Form S-4, filed on July 16, 1999, File No. 333-83053).
4.10 Specimen of Destia Communications, Inc.'s 11% Senior Discount Note due 2008 (incorporated herein by
reference to Exhibit 4.1 of Destia's Registration Statement on Form S-4, File No. 333-47711, filed on
March 10, 1998 ("Destia's 1998 Form S-4")).
4.11 Indenture, dated as of February 18, 1998, between Destia Communications, Inc. and The Bank of New York,
as Trustee (incorporated herein by reference to Exhibit 4.2 of Destia's 1998 Form S-4).
4.12 Specimen of Destia Communications, Inc.'s 13.50% Senior Note due 2007 (incorporated herein by reference
to exhibit 4.4 of Destia's Registration Statement on Form S-4, File No. 333-47711, filed on August 7,
1997 ("Destia's 1997 Form S-4")).
4.13 Indenture, dated as of July 1, 1997, between Destia Communications, Inc. and The Bank of New York, as
Trustee (incorporated herein by reference to Exhibit 4.5 of Destia's 1997 Form S-4).
4.14 Specimen of Destia common stock certificate (incorporated herein by reference to Exhibit 4.5 of Destia's
Form S-1).
5.1 Opinion of Kelley Drye & Warren LLP regarding the validity of the securities being registered (filed
herewith).
8.1 Opinion of Cravath, Swaine & Moore regarding material federal income tax consequences relating to the
merger (filed herewith).
10.1 Stockholder Agreement dated as of August 27, 1999 among Alfred West, AT Econ Limited Partnership, AT Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex B to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
10.2 Stockholder Agreement dated as of August 27, 1999 among Steven West, SS Econ Limited Partnership, SS Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex C to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.3 Stockholder Agreement dated as of August 27, 1999 among Gary Bondi, GS Econ Limited Partnership, GS Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex E to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
10.4 Stockholder Agreement dated as of August 27, 1999 among Princess Gate Investors II, L.P., Acorn
Partnership II, L.P., PGI Investements Limited, Investor Investments AB, Marinbeach United S.A., Viatel,
Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included as Annex D to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
10.5 Mercury Carrier Services Agreement, dated as of March 1, 1994, between Viatel, Inc. and Mercury
Communications Limited (incorporated herein by reference to Exhibit 10.8 to Viatel's 1995 Form S-4, filed
on May 24, 1995 ("Viatel's 1995 S-4")).
10.6 Shareholders' Agreement, dated as of April 5, 1994, and as amended as of November 22, 1994 and December
21, 1994, by and among Viatel, Inc., Martin Varsavsky, Juan Manuel Aisemberg and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.19 to Viatel's 1995 Form S-4).
10.7 Shareholders' Agreement, dated as of September 30, 1993, as amended as of December 9, 1993 and as further
amended as of April 5, 1994, November 22, 1994 and December 21, 1994, by and among Viatel, Inc., Martin
Varsavsky and S-C V-Tel Investments, L.P. (incorporated herein by reference to Exhibit 10.21 to Viatel's
1995 Form S-4).
10.8 Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated as of December 8, 1994,
between Viatel, Inc. and 123rd Street Partnership in connection with the Company's premises located in
Omaha, Nebraska (incorporated herein by reference to Exhibit 10.24 to Viatel's 1995 Form S-4).
10.9 Facilities Management and Services Agreement, dated as of August 4, 1995, between Viatel U.K. Limited and
Telemedia International Ltd. (incorporated herein by reference to Exhibit 10.32 to Viatel's 1995 Form
S-4).
10.10 Agreement of Lease, dated August 7, 1995, between Viatel, Inc. and Joseph P. Day Realty Corp.
(incorporated herein by reference to Exhibit 10.33 to Viatel's 1995 Form S-4).
10.11 Employment Agreement between Viatel, Inc. and Michael J. Mahoney (incorporated herein by reference to
Exhibit 10.12 to Viatel, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997
("Viatel's 1997 Form 10-K")).
10.12 Viatel, Inc. 1999 Amended Stock Incentive Plan (filed herewith).
10.13 Employment Agreement between Viatel, Inc. and Allan L. Shaw (incorporated herein by reference to Exhibit
10.14 to Viatel's 1997 Form 10-K).
10.14 Employment Agreement between Viatel, Inc. and Sheldon M. Goldman (incorporated herein by reference to
Exhibit 10.15 to Viatel's 1997 Form 10-K).
10.15 Mutual Cooperation Agreement, dated as of June 3, 1998, among Viatel, Inc., Martin Varsavsky and Jazz
Telecom S.A. (incorporated herein by reference to Exhibit 10.16 to Viatel, Inc.'s Current Report on Form
8-K, dated June 8, 1998, File No. 000-21261).
10.16 Equipment Purchase Agreement, dated June 29, 1998, between Viatel, Inc. and Nortel PLC (incorporated
herein by reference to Exhibit 10.16 to Viatel's 1998 Form S-4).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.17 Agreement of Lease, dated June 24, 1998, between 685 Acquisition Corp. and Viatel, Inc., as amended by a
letter agreement, dated July 27, 1998 (incorporated herein by reference to Exhibit 10.17 to Viatel's 1998
Form S-4).
10.18 Lease, dated June 23, 1998, between VC Associates and Viatel New Jersey, Inc. (incorporated herein by
reference to Exhibit 10.18 to Viatel's 1998 Form S-4).
10.19* Software License Agreement, dated October 22, 1998, between Viatel, Inc. and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.19 to Viatel, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998 ("Viatel's 1998 Form 10-K")).
10.20* Engineering, Procurement and Construction Contract, dated as of November 10, 1998, between Viatel Global
Communications, Inc. and Alcatel Submarine Network S.A. (incorporated by reference to Exhibit 10.20 of
Viatel's 1998 Form 10-K).
10.21* Equipment Purchase Agreement, dated December 31, 1998, between Viatel, Inc. and Nortel plc. (incorporated
by reference to Exhibit 10.21 to Viatel's 1998 Form 10-K).
10.22* Project Services Agreement, dated as of January 11, 1999, between Viatel, Inc. and Bechtel Limited
(incorporated by reference to Exhibit 10.22 to Viatel, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 ("Viatel's March 1999 Form 10-Q")).
10.23* Development Agreement by and among Vicaine Infrastructure Development GMBH, Viatel German Asset GMBH,
Carrier 1 Fiber Network GMBH & Co. OH, Metromedia Fiber Network GMBH, Viatel, Inc. and Metromedia Fiber
Network, Inc., dated as of February 19, 1999 (incorporated by reference to Exhibit 10.23 to Viatel's
March 1999 Form 10-Q).
10.24 Securityholders Agreement, dated as of November 1, 1996, between Alfred West, Destia Communications, Inc.
and Princes Gate Investors II, L.P. (incorporated herein by reference to Exhibit 4.1 of Destia's 1997
Form S-4).
10.25 Securities Purchase Agreement, dated as of November 1, 1996, between Destia Communications, Inc. and
Princes Gate Investors II, L.P. (incorporated herein by reference to Exhibit 10.1 of Destia's 1997 Form
S-4).
10.26 Note Purchase Agreement, dated as of April 24, 1997, between Destia Communications, Inc. and Morgan
Stanley Group Inc. (incorporated herein by reference to Exhibit 4.2 of Destia's 1997 Form S-4).
10.27 Form of Note under Note Purchase Agreement (incorporated herein by reference to Exhibit 4.3 of Destia's
1997 Form S-4).
10.28 Second Amended and Restated Equipment Loan and Security Agreement, dated as of January 28, 1998, between
Destia Communications, Inc. and NTFC Capital Corporation (incorporated herein by reference to Exhibit
10.13 of Destia's 1998 Form S-4).
10.29 Stock Purchase Agreement, dated January 28, 1998, between Destia Communications, Inc. and the
shareholders of Voicenet Corporation (incorporated herein by reference to Exhibit 10.17 of Destia's 1998
Form S-4).
10.30 Amendment, dated April 16, 1998, to Stock Purchase Agreement between Destia Communications, Inc. and the
shareholders of Voice Net Corporation (incorporated by reference to Exhibit 10.7 Destia's Form 10-K for
the year ended December 31, 1998 ("Destia's 1998 Form 10-K")).
10.31 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alan Levy
(incorporated herein by reference to Exhibit 10.8 of Destia's Form S-1).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.32 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alfred West
(incorporated herein by reference to Exhibit 10.9 of Destia's Form S-1).
10.33 Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Phillip J. Storin
(incorporated by reference to Destia's 1998 Form 10-K).
10.34 Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Kevin Alward
(incorporated herein by reference to Exhibit 10.11 of Destia's Form S-1).
10.35 Employment Agreement, dated January 1, 1999, between Destia Communications, Inc. and Richard L. Shorten,
Jr. (incorporated herein by reference to Exhibit 10.12 of Destia's Form S-1).
10.36 Amended and Restated Destia Communications, Inc. 1996 Flexible Incentive Plan (incorporated herein by
reference to Exhibit 10.14 of Destia's 1997 Form S-4).
10.37 Amendment to Destia's 1996 Flexible Incentive Plan (incorporated by reference to Exhibit 10.12 to
Destia's 1998 Form 10-K).
10.38 Stock Purchase Agreement, dated July 17, 1998, between Destia Communications, Inc. and certain
shareholders of Telco Global Communications (incorporated by reference to Exhibit 10.13 to Destia's 1998
Form 10-K).
10.39* Telecommunications Services Agreement between Frontier Communications of the West, Inc. and Destia
Communications, Inc., dated November 17, 1998 (incorporated herein by reference to Exhibit 10.16 of
Destia's Form S-1).
10.40 Destia's 1999 Flexible Incentive Plan (incorporated herein by reference to Exhibit 10.17 of Destia's Form
S-1).
10.41 Second Amendment to 1996 Flexible Incentive Plan (incorporated herein by reference to Exhibit 10.18 of
Destia's Form S-1).
10.42 Modification Agreement No. 1 dated as of March 31, 1999 to the Second Amended and Restated Equipment Loan
and Security Agreement between Destia Communications, Inc. and NTFC Capital Corporation (incorporated
herein by reference to Exhibit 10.19 of Destia's Form S-1).
10.43 Form of Indemnification Agreement with directors and officers (incorporated herein by reference to
Exhibit 10.20 of Destia's Form S-1).
10.44 Employment Agreement, dated August 27, 1999, by and between Viatel and Alfred West (filed herewith).
10.45 Employment Agreement, dated August 27, 1999, by and between Viatel and Alan Levy (filed herewith).
21.1 Subsidiaries of Viatel, Inc. (filed herewith).
21.2 Subsidiaries of Destia Communications, Inc. (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
23.3 Consent of Kelley Drye & Warren LLP (included in the opinion filed as Exhibit 5.1 to this Registration
Statement).
23.4 Consent of Cravath, Swaine & Moore (included in the opinion filed as Exhibit 8.1 to this Registration
Statement).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
23.5 Consent of ING Barings LLC (included in the opinion filed as Annex F to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
23.6 Consent of Morgan Stanley & Co. Incorporated (included in the opinion filed as Annex G to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
24 Power of Attorney (included in signature page).
99.1 Form of Viatel Proxy Card (filed herewith).
99.2 Form of Destia Proxy Card (filed herewith).
</TABLE>
- ------------------------
* Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(b) Supplemental Financial Statement Schedules:
Schedule II--Valuations and Qualifying Accounts of Viatel and Destia
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons
II-8
<PAGE>
who may be deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(6) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement 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.
(7) To respond to requests for information that is incorporated by
reference into the Joint Proxy Statement/Prospectus pursuant to Item 4,
10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the 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 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 Act and will be governed by the final adjudication of
such issue.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, 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, State of New
York, on this 15th day of October, 1999.
VIATEL, INC.
BY: /s/ MICHAEL J. MAHONEY
-----------------------------------------
Michael J. Mahoney
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Michael J. Mahoney, Sheldon M. Goldman and James
P. Prenetta, Jr., and each of them as his true and lawful attorneys-in-fact and
agents for the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned to sign and file with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, (i) any
and all pre-effective and post-effective amendments to this registration
statement, (ii) any exhibits to any such pre-effective or post-effective
amendments, (iii) any and all applications and other documents in connection
with any such pre-effective or post-effective amendments, and (iv) generally to
do all things and perform any and all acts and things whatsoever requisite and
necessary or desirable to enable the Registrant to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on October 15, 1999.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board,
/s/ MICHAEL J. MAHONEY President and Chief
- ------------------------------ Executive Officer October 15, 1999
Michael J. Mahoney (Principal Executive
Officer)
Senior Vice President,
/s/ ALLAN L. SHAW Finance, Chief Financial
- ------------------------------ Officer and Director October 15, 1999
Allan L. Shaw (Principal Financial and
Accounting Officer)
/s/ PAUL G. PIZZANI Director
- ------------------------------ October 15, 1999
Paul G. Pizzani
/s/ FRANCIS J. MOUNT Director
- ------------------------------ October 15, 1999
Francis J. Mount
/s/ JOHN G. GRAHAM Director
- ------------------------------ October 15, 1999
John G. Graham
II-10
<PAGE>
VIATEL, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATIONS AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF PERIOD EXPENSES RETIREMENTS CHANGES OF PERIOD
- -------------------------------------------------------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from asset accounts (in
thousands):
Allowances for uncollectible accounts receivable
Year ended December 31, 1996.......................... $ 473 $ 2,225 $ 2,096 -- $ 602
Year ended December 31, 1997.......................... 602 2,733 2,294 -- 1,041
Year ended December 31, 1998.......................... 1,041 4,225 2,173 -- 3,093
Allowances for asset impairment
Year ended December 31, 1996.......................... 560 -- -- -- 560
Year ended December 31, 1997.......................... 560 -- -- -- 560
Year ended December 31, 1998.......................... 560 -- -- -- 560
</TABLE>
<PAGE>
DESTIA COMMUNICATIONS, INC.
SCHEDULE II--SCHEDULE OF VALUATIONS AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COSTS AND BALANCE AT END
OF PERIOD EXPENSES DEDUCTIONS(A) OF PERIOD
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31,
1998................................................... $ 1,593,531 $ 7,392,234 $(4,899,663) $ 4,086,102
1997................................................... 761,372 3,890,525 (3,058,366) 1,593,531
1996................................................... 470,610 290,762 -- 761,372
</TABLE>
- ------------------------
(a) Represents write-offs, recoveries and other deductions.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of August 27, 1999, by and among Viatel, Inc., Viatel Acquisition
Corp. and Destia (included as Annex A to the Joint Proxy Statement/Prospectus contained in this
Registration Statement).
3.1(i) Amended and Restated Certificate of Incorporation of Viatel, Inc. (incorporated herein by reference to
Exhibit 3.1(i)(b) to Viatel, Inc.'s Registration Statement on Form S-1, Registration No. 333-09699, filed
on August 7, 1996 ("Viatel's Form S-1")); Certificate of Designations, Preferences and Rights of 10%
Series A Redeemable Convertible Preferred Stock, $.01 par value per share (incorporated herein by
reference to Exhibit 3(i)(b) to Viatel, Inc.'s Registration Statement on Form S-4, filed on July 10,
1998, File No. 333-58921 ("Viatel's 1998 Form S-4")); Certificate of Amendment to Viatel, Inc.'s Amended
and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 4.9 to Viatel,
Inc.'s quarterly report on Form 10-Q for the quarter ended September 30, 1998, File No. 000-21261);
Second Certificate of Amendment to Viatel, Inc.'s Amended and Restated Certificate of Incorporation
(filed herewith).
3.1(ii) Third Amended and Restated Bylaws of Viatel, Inc. (filed herewith).
3.2(i) Amended and Restated Certificate of Incorporation of Destia Communications, Inc. (incorporated herein by
reference to Exhibit 3.1 of Destia's Registration Statement on Form S-1, File No. 333-71463, filed on
January 29, 1999 ("Destia's Form S-1")).
3.2(ii) Amended and Restated Bylaws of Destia Communications, Inc. (incorporated herein by reference to Exhibit
3.2 of Destia's Form S-1)
4.1 Specimen of Viatel common stock certificate (incorporated by reference to Exhibit 4.4 of Viatel's Form
S-1).
4.2 Indenture, dated as of April 8, 1998, between Viatel, Inc. and The Bank of New York, as Trustee, relating
to Viatel, Inc.'s 12.50% Senior Discount Notes Due 2008 (including form of 12.50% Senior Discount Note)
(incorporated herein by reference to Exhibit 4.1 to Viatel's 1998 Form S-4).
4.3 Indenture, dated as of April 8, 1998, between Viatel, Inc. and The Bank of New York, as Trustee, relating
to Viatel, Inc.'s 11.25% Senior Notes Due 2008 (including form of 11.25% Senior Note) (incorporated
herein by reference to Exhibit 4.2 to Viatel's 1998 Form S-4).
4.4 Indenture, dated as of April 8, 1998, among Viatel, Inc., The Bank of New York, as Trustee, and Deutsche
Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel, Inc.'s 12.40%
Senior Discount Notes Due 2008 (including form of 12.40% Senior Discount Note) (incorporated herein by
reference to Exhibit 4.3 to Viatel's 1998 Form S-4).
4.5 Indenture, dated as of April 8, 1998, among Viatel, Inc., The Bank of New York, as Trustee, and Deutsche
Bank, Aktiengesellschaft, as German Paying Agent and Co-Registrar, relating to Viatel, Inc.'s 11.15%
Senior Notes Due 2008 (including form of 11.15% Senior Note) (incorporated herein by reference to Exhibit
4.4 to Viatel's 1998 Form S-4).
4.6 Indenture, dated as of March 19, 1999, between Viatel, Inc. and The Bank of New York, as Trustee,
relating to Viatel, Inc.'s U.S. dollar denominated 11.50% Senior Notes Due 2009 (including form of 11.50%
Senior Note) (incorporated herein by reference to Exhibit 4.9 to Viatel, Inc.'s Registration Statement on
Form S-3, filed on February 12, 1999, File No. 333-72309 ("Viatel's February 1999 Form S-3")).
4.7 Indenture, dated as of March 19, 1999, between Viatel, Inc. and The Bank of New York, as Trustee,
relating to Viatel, Inc.'s Euro denominated 11.50% Senior Notes due 2009 (including form of 11.50% Senior
Note) (incorporated herein by reference to Exhibit 4.10 of Viatel's February 1999 Form S-3).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
4.8 Registration Rights Agreement, dated as of March 12, 1999, among Viatel, Inc., Morgan Stanley & Co. Inc.,
and ING Baring Furman Selz LLC (incorporated herein by reference to Exhibit 4.11 of Viatel's February
1999 Form S-3).
4.9 Purchase Agreement, dated March 12, 1999, among Viatel, Inc., Morgan Stanley & Co. Inc., and ING Baring
Furman Selz LLC (incorporated herein by reference to Exhibit 4.8 of Viatel, Inc.'s Registration Statement
on Form S-4, filed on July 16, 1999, File No. 333-83053).
4.10 Specimen of Destia Communications, Inc.'s 11% Senior Discount Note due 2008 (incorporated herein by
reference to Exhibit 4.1 of Destia's Registration Statement on Form S-4, File No. 333-47711, filed on
March 10, 1998 ("Destia's 1998 Form S-4")).
4.11 Indenture, dated as of February 18, 1998, between Destia Communications, Inc. and The Bank of New York,
as Trustee (incorporated herein by reference to Exhibit 4.2 of Destia's 1998 Form S-4).
4.12 Specimen of Destia Communications, Inc.'s 13.50% Senior Note due 2007 (incorporated herein by reference
to exhibit 4.4 of Destia's Registration Statement on Form S-4, File No. 333-47711, filed on August 7,
1997 ("Destia's 1997 Form S-4")).
4.13 Indenture, dated as of July 1, 1997, between Destia Communications, Inc. and The Bank of New York, as
Trustee (incorporated herein by reference to Exhibit 4.5 of Destia's 1997 Form S-4).
4.14 Specimen of Destia common stock certificate (incorporated herein by reference to Exhibit 4.5 of Destia's
Form S-1).
5.1 Opinion of Kelley Drye & Warren LLP regarding the validity of the securities being registered (filed
herewith).
8.1 Opinion of Cravath, Swaine & Moore regarding material federal income tax consequences relating to the
merger (filed herewith).
10.1 Stockholder Agreement dated as of August 27, 1999 among Alfred West, AT Econ Limited Partnership, AT Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex B to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
10.2 Stockholder Agreement dated as of August 27, 1999 among Steven West, SS Econ Limited Partnership, SS Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex C to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
10.3 Stockholder Agreement dated as of August 27, 1999 among Gary Bondi, GS Econ Limited Partnership, GS Econ
Ltd. Partnership No. 2, Viatel, Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included
as Annex E to the Joint Proxy Statement/Prospectus contained in this Registration Statement).
10.4 Stockholder Agreement dated as of August 27, 1999 among Princess Gate Investors II, L.P., Acorn
Partnership II, L.P., PGI Investements Limited, Investor Investments AB, Marinbeach United S.A., Viatel,
Inc., Viatel Acquisition Corp. and Destia Communications, Inc. (included as Annex D to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
10.5 Mercury Carrier Services Agreement, dated as of March 1, 1994, between Viatel, Inc. and Mercury
Communications Limited (incorporated herein by reference to Exhibit 10.8 to Viatel's 1995 Form S-4, filed
on May 24, 1995 ("Viatel's 1995 S-4")).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.6 Shareholders' Agreement, dated as of April 5, 1994, and as amended as of November 22, 1994 and December
21, 1994, by and among Viatel, Inc., Martin Varsavsky, Juan Manuel Aisemberg and COMSAT Investments, Inc.
(incorporated herein by reference to Exhibit 10.19 to Viatel's 1995 Form S-4).
10.7 Shareholders' Agreement, dated as of September 30, 1993, as amended as of December 9, 1993 and as further
amended as of April 5, 1994, November 22, 1994 and December 21, 1994, by and among Viatel, Inc., Martin
Varsavsky and S-C V-Tel Investments, L.P. (incorporated herein by reference to Exhibit 10.21 to Viatel's
1995 Form S-4).
10.8 Commercial Lease Agreement, dated as of November 1, 1993, and Addendum, dated as of December 8, 1994,
between Viatel, Inc. and 123rd Street Partnership in connection with the Company's premises located in
Omaha, Nebraska (incorporated herein by reference to Exhibit 10.24 to Viatel's 1995 Form S-4).
10.9 Facilities Management and Services Agreement, dated as of August 4, 1995, between Viatel U.K. Limited and
Telemedia International Ltd. (incorporated herein by reference to Exhibit 10.32 to Viatel's 1995 Form
S-4).
10.10 Agreement of Lease, dated August 7, 1995, between Viatel, Inc. and Joseph P. Day Realty Corp.
(incorporated herein by reference to Exhibit 10.33 to Viatel's 1995 Form S-4).
10.11 Employment Agreement between Viatel, Inc. and Michael J. Mahoney (incorporated herein by reference to
Exhibit 10.12 to Viatel, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997
("Viatel's 1997 Form 10-K")).
10.12 Viatel, Inc. 1999 Amended Stock Incentive Plan (filed herewith).
10.13 Employment Agreement between Viatel, Inc. and Allan L. Shaw (incorporated herein by reference to Exhibit
10.14 to Viatel's 1997 Form 10-K).
10.14 Employment Agreement between Viatel, Inc. and Sheldon M. Goldman (incorporated herein by reference to
Exhibit 10.15 to Viatel's 1997 Form 10-K).
10.15 Mutual Cooperation Agreement, dated as of June 3, 1998, among Viatel, Inc., Martin Varsavsky and Jazz
Telecom S.A. (incorporated herein by reference to Exhibit 10.16 to Viatel, Inc.'s Current Report on Form
8-K, dated June 8, 1998, File No. 000-21261).
10.16 Equipment Purchase Agreement, dated June 29, 1998, between Viatel, Inc. and Nortel PLC (incorporated
herein by reference to Exhibit 10.16 to Viatel's 1998 Form S-4).
10.17 Agreement of Lease, dated June 24, 1998, between 685 Acquisition Corp. and Viatel, Inc., as amended by a
letter agreement, dated July 27, 1998 (incorporated herein by reference to Exhibit 10.17 to Viatel's 1998
Form S-4).
10.18 Lease, dated June 23, 1998, between VC Associates and Viatel New Jersey, Inc. (incorporated herein by
reference to Exhibit 10.18 to Viatel's 1998 Form S-4).
10.19* Software License Agreement, dated October 22, 1998, between Viatel, Inc. and Lucent Technologies Inc.
(incorporated by reference to Exhibit 10.19 to Viatel, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998 ("Viatel's 1998 Form 10-K")).
10.20* Engineering, Procurement and Construction Contract, dated as of November 10, 1998, between Viatel Global
Communications, Inc. and Alcatel Submarine Network S.A. (incorporated by reference to Exhibit 10.20 of
Viatel's 1998 Form 10-K).
10.21* Equipment Purchase Agreement, dated December 31, 1998, between Viatel, Inc. and Nortel plc. (incorporated
by reference to Exhibit 10.21 to Viatel's 1998 Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.22* Project Services Agreement, dated as of January 11, 1999, between Viatel, Inc. and Bechtel Limited
(incorporated by reference to Exhibit 10.22 to Viatel, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 ("Viatel's March 1999 Form 10-Q")).
10.23* Development Agreement by and among Vicaine Infrastructure Development GMBH, Viatel German Asset GMBH,
Carrier 1 Fiber Network GMBH & Co. OH, Metromedia Fiber Network GMBH, Viatel, Inc. and Metromedia Fiber
Network, Inc., dated as of February 19, 1999 (incorporated by reference to Exhibit 10.23 to Viatel's
March 1999 Form 10-Q).
10.24 Securityholders Agreement, dated as of November 1, 1996, between Alfred West, Destia Communications, Inc.
and Princes Gate Investors II, L.P. (incorporated herein by reference to Exhibit 4.1 of Destia's 1997
Form S-4).
10.25 Securities Purchase Agreement, dated as of November 1, 1996, between Destia Communications, Inc. and
Princes Gate Investors II, L.P. (incorporated herein by reference to Exhibit 10.1 of Destia's 1997 Form
S-4).
10.26 Note Purchase Agreement, dated as of April 24, 1997, between Destia Communications, Inc. and Morgan
Stanley Group Inc. (incorporated herein by reference to Exhibit 4.2 of Destia's 1997 Form S-4).
10.27 Form of Note under Note Purchase Agreement (incorporated herein by reference to Exhibit 4.3 of Destia's
1997 Form S-4).
10.28 Second Amended and Restated Equipment Loan and Security Agreement, dated as of January 28, 1998, between
Destia Communications, Inc. and NTFC Capital Corporation (incorporated herein by reference to Exhibit
10.13 of Destia's 1998 Form S-4).
10.29 Stock Purchase Agreement, dated January 28, 1998, between Destia Communications, Inc. and the
shareholders of Voicenet Corporation (incorporated herein by reference to Exhibit 10.17 of Destia's 1998
Form S-4).
10.30 Amendment, dated April 16, 1998, to Stock Purchase Agreement between Destia Communications, Inc. and the
shareholders of Voice Net Corporation (incorporated by reference to Exhibit 10.7 Destia's Form 10-K for
the year ended December 31, 1998 ("Destia's 1998 Form 10-K")).
10.31 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alan Levy
(incorporated herein by reference to Exhibit 10.8 of Destia's Form S-1).
10.32 Employment Agreement, dated as of May 3, 1999, between Destia Communications, Inc. and Alfred West
(incorporated herein by reference to Exhibit 10.9 of Destia's Form S-1).
10.33 Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Phillip J. Storin
(incorporated by reference to Destia's 1998 Form 10-K).
10.34 Employment Agreement, dated February 2, 1998, between Destia Communications, Inc. and Kevin Alward
(incorporated herein by reference to Exhibit 10.11 of Destia's Form S-1).
10.35 Employment Agreement, dated January 1, 1999, between Destia Communications, Inc. and Richard L. Shorten,
Jr. (incorporated herein by reference to Exhibit 10.12 of Destia's Form S-1).
10.36 Amended and Restated Destia Communications, Inc. 1996 Flexible Incentive Plan (incorporated herein by
reference to Exhibit 10.14 of Destia's 1997 Form S-4).
10.37 Amendment to Destia's 1996 Flexible Incentive Plan (incorporated by reference to Exhibit 10.12 to
Destia's 1998 Form 10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.38 Stock Purchase Agreement, dated July 17, 1998, between Destia Communications, Inc. and certain
shareholders of Telco Global Communications (incorporated by reference to Exhibit 10.13 to Destia's 1998
Form 10-K).
10.39* Telecommunications Services Agreement between Frontier Communications of the West, Inc. and Destia
Communications, Inc., dated November 17, 1998 (incorporated herein by reference to Exhibit 10.16 of
Destia's Form S-1).
10.40 Destia's 1999 Flexible Incentive Plan (incorporated herein by reference to Exhibit 10.17 of Destia's Form
S-1).
10.41 Second Amendment to 1996 Flexible Incentive Plan (incorporated herein by reference to Exhibit 10.18 of
Destia's Form S-1).
10.42 Modification Agreement No. 1 dated as of March 31, 1999 to the Second Amended and Restated Equipment Loan
and Security Agreement between Destia Communications, Inc. and NTFC Capital Corporation (incorporated
herein by reference to Exhibit 10.19 of Destia's Form S-1).
10.43 Form of Indemnification Agreement with directors and officers (incorporated herein by reference to
Exhibit 10.20 of Destia's Form S-1).
10.44 Employment Agreement, dated August 27, 1999, by and between Viatel and Alfred West (filed herewith).
10.45 Employment Agreement, dated August 27, 1999, by and between Viatel and Alan Levy (filed herewith).
21.1 Subsidiaries of Viatel, Inc. (filed herewith).
21.2 Subsidiaries of Destia Communications, Inc. (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
23.3 Consent of Kelley Drye & Warren LLP (included in the opinion filed as Exhibit 5.1 to this Registration
Statement).
23.4 Consent of Cravath, Swaine & Moore (included in the opinion filed as Exhibit 8.1 to this Registration
Statement).
23.5 Consent of ING Barings LLC (included in the opinion filed as Annex F to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
23.6 Consent of Morgan Stanley & Co. Incorporated (included in the opinion filed as Annex G to the Joint Proxy
Statement/Prospectus contained in this Registration Statement).
24 Power of Attorney (included in signature page).
99.1 Form of Viatel Proxy Card (filed herewith).
99.2 Form of Destia Proxy Card (filed herewith).
</TABLE>
- ------------------------
* Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
<PAGE>
Exhibit 3.1(i)
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
VIATEL, INC.
VIATEL, INC., a Delaware corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that:
FIRST: By unanimous written consent, the Board of Directors of the
Corporation duly adopted a resolution recommending that the Corporation's
Amended and Restated Certificate of Incorporation be further amended to increase
the total number of shares of the Corporation's common stock, par value $.01 per
share, from Fifty Million (50,000,000) to One Hundred Fifty Million
(150,000,000) and that the total authorized capital stock of the Corporation be
increased from Fifty-two Million (52,000,000) to One Hundred Fifty-Two Million
(152,000,000) (the "Amendment").
SECOND: At the 1999 Annual Meeting of the Stockholders of the
Corporation held on September 14, 1999, which meeting was duly called and held
upon notice in accordance with Section 222 of the General Corporation law of the
State of Delaware (the "DGCL"), the necessary number of shares of the
Corporation's common stock, par value $.01 per share, were voted in favor of the
Amendment.
THIRD: The Amendment was duly adopted in accordance with the provisions
of Section 242 of the DGCL.
FOURTH: The first paragraph of Article IV of the Corporation's Amended
and Restated Certificate of Incorporation is hereby further amended and restated
to read as follows:
"The total authorized capital stock of the Corporation shall be One
Hundred Fifty-Two Million (152,000,000) shares consisting of One Hundred Fifty
Million (150,000,000) shares of common stock, par value $.01 per share (the
"Common Stock"), and Two Million (2,000,000) shares of preferred stock, par
value $.01 per share."
IN WITNESS WHEREOF, VIATEL, INC. has caused this Certificate of
Amendment to be signed by its duly authorized officer this 17th day of
September, 1999.
/s/ Michael J. Mahoney
--------------------------
Michael J. Mahoney
Chairman, President and Chief Executive Officer
<PAGE>
Exhibit 3.1(ii)
THIRD AMENDED AND RESTATED BYLAWS
OF
VIATEL, INC.
(A Delaware corporation)
------------------------
ARTICLE I
Meetings of Stockholders
------------------------
SECTION 1. Annual Meeting. The annual meeting of the stockholders of
Viatel, Inc. (hereinafter, the "Corporation") for the election of directors and
for the transaction of such other proper business shall be held on such date and
at such time as may be fixed by the Board of Directors or, if no date and time
are so fixed, on the second Tuesday in July of each year at the office of the
Corporation or at such other place and at such hour as shall be designated by
the Board of Directors or, if no such time be fixed, then at 10:00 am.
SECTION 2. Special Meetings. Special meetings of the stockholders,
unless otherwise prescribed by statute or the Corporation's Amended and Restated
Certificate of Incorporation, as amended (the "Restated Certificate"), may be
called at any time by the Board of Directors or by the holder or holders of more
than 50% of the outstanding shares of stock entitled to vote with respect to the
matter to be considered at the proposed special meeting.
SECTION 3. Notice of Meetings. Written notice of each meeting of the
stockholders, which shall state the place, date and hour of the meeting and, in
case of a special meeting, the purpose or purposes for which it is called, shall
be given, not less than ten (10) nor more than sixty (60) days before the date
of such meeting, either personally or by mail, to each stockholder entitled to
vote at such meeting. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail, postage prepaid, directed to the
stockholder at the address of such stockholder as it appears on the records of
the Corporation. Whenever notice is required to be given, a written waiver
thereof signed by the stockholder entitled thereto, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
stockholder at a meeting shall constitute a waiver of notice of such meeting,
except when the stockholder attends a meeting for the express purpose of
objecting to the transaction of any business because
<PAGE>
the meeting is not lawfully called or convened and such objection occurs at the
beginning of the meeting. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken. If the
adjournment is for more than thirty (30) 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 stockholder of record entitled to vote at the
meeting. If, at any meeting of stockholders, action is proposed to be taken
which would, if taken, entitle stockholders to perfect appraisal rights with
respect to their shares of the Corporation's capital stock, the notice of
meeting shall include a statement to that effect and such notice shall comply
with the requirements specified in Section 262 of the General Corporation Law of
the State of Delaware.
SECTION 4. Quorum. Except as required by the General Corporation Law of
the State of Delaware or the Restated Certificate, at any meeting of the
stockholders, the holders of the majority of the shares, issued and outstanding
and entitled to vote, present in person or represented by proxy, shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, the holders of a majority of the shares present in person or represented
by proxy and entitled to vote may adjourn the meeting from time to time. At any
such adjourned meeting at which a quorum may be present, the Corporation may
transact any business which might have been transacted at the original meeting.
Shares of its own stock belonging to the Corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the Corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity.
SECTION 5. Organization. At each meeting of the stockholders, the
Chairman or, in such officer's absence or inability to act and subject to the
provisions of Article III, the Vice-Chairman, the Chief Executive
orOfficer,Officer or the Presidentor of the Corporation or, in the absence or
inability of
2
<PAGE>
each such officer to act, any person chosen by the majority of those
stockholders present in person or represented by proxy shall act as chairman of
the meeting. The Secretary or Assistant Secretary of the Corporation or, in such
officers' absence or inability of each such officer to act, any person appointed
by the chairman of the meeting shall act as secretary of the meeting and keep
the minutes thereof.
SECTION 6. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 7. Voting. Unless otherwise provided in the Restated
Certificate and subject to Section 213 of the General Corporation Law of the
State of Delaware regarding fixing the date for the determination of
stockholders of record, each holder of Common Stock shall be entitled to one
vote for each share of Common Stock held by such stockholder and each holder of
Preferred Stock shall be entitled to such voting rights, if any, as are provided
in the Series Term Resolution (as such term is defined in the Restated
Certificate) establishing the respective series of Preferred Stock.
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by proxy. Any such proxy
shall be delivered to the secretary of such meeting at or prior to the time
designated in the order of business for so delivering such proxies. Except as
otherwise provided by law, every proxy shall be revocable at the pleasure of the
stockholder executing it. No proxy shall be valid after the expiration of three
(3) years from the date thereof unless otherwise provided in the proxy.
Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Except as otherwise required by statute, the Restated
Certificate, or these Bylaws, a majority of the votes cast at a meeting of the
stockholders shall be necessary to authorize any other corporate action to be
taken by vote of the stockholders. Unless required by statute or determined by
the chairman of the meeting to be advisable, the vote on any question need not
be by ballot. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by his proxy if there be such proxy, and shall state the
number of shares voted.
SECTION 8. List of Stockholders. The officer who has charge of the
stock ledger of the Corporation shall prepare and make or cause to be prepared
and made, at least ten (10) days
3
<PAGE>
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting of stockholders, arranged in alphabetical order,
and showing the address of each stockholder and the kind, class or series 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 (10) days
prior to the meeting of stockholders, either at a place within the city or other
municipality or community where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list required by this section or the books of the Corporation, or to vote at
any meeting of stockholders.
SECTION 9. Inspectors. The Board of Directors, in advance of any
meeting of stockholders, shall appoint one or more inspectors to act at such
meeting or any adjournment thereof and to make a written report thereon. The
Board of Directors may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at the meeting of stockholders, the chairman of the meeting shall appoint
one or more inspectors to act at the meeting. Each inspector before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of his ability. The inspectors shall ascertain the number
of shares of each kind, class or series of stock outstanding and the voting
power of each, determine the number of shares of stock represented at the
meeting, the existence of a quorum, the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the chairman of the meeting or any stockholder entitled to vote thereat, the
inspectors shall make a report in writing of any challenge, question or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as an inspector of an
election of directors. Inspectors need not be stockholders.
4
<PAGE>
SECTION 10. Business Brought Before a Meeting. At an annual meeting of
stockholders, only such business shall be conducted, and only such proposals
shall be acted upon, as shall have been properly brought before the meeting of
stockholders. To be properly brought before an annual meeting of stockholders,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) brought
before the meeting by or at the direction of the Board of Directors, or (c)
otherwise properly brought before the meeting by a stockholder who was a
stockholder of record at the time of giving of the notice provided for in this
section, who is entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 10. For business to be properly brought
before an annual meeting by a stockholder, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation and such
business must otherwise be a proper matter for stockholder action. To be timely,
a stockholder's notice must be delivered to or mailed and received by the
Corporation's Secretary at the principal executive offices of the Corporation,
not less than one hundred and twenty (120) days prior to the first anniversary
of the preceding year's annual meeting of stockholders; provided, however, that
in the event that the date of the annual meeting of stockholders is changed by
more than thirty (30) days from such anniversary date, notice by the stockholder
to be timely must be so received no later than the close of business on the
tenth (10) day following the day on which notice of the date of the meeting was
mailed. A stockholder's notice to the Corporation's Secretary shall set forth
(a) as to each person whom the stockholder proposes to nominate for election or
re-election as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business sought to be
brought before the meeting; (c) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such nominee or business and
any other stockholders known by such stockholder to be supporting such nominee
or proposal; (d) the class and number of shares of the Corporation which, on the
date of such stockholder's
5
<PAGE>
notice, are beneficially owned by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominee or proposal; and (e) any
material interest of the stockholder in such business. Notwithstanding anything
in these Bylaws to the contrary, no business shall be conducted at an annual
meeting of stockholders except in accordance with the procedures set forth in
this Section 10. The chairman of the annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 10; and if
the chairman should so determine, the chairman shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Any action
required or permitted to be taken at any annual or special meeting of
stockholders of the Corporation may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE II
Board of Directors
------------------
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of a Board of Directors. The Board of
Directors may exercise all such authority and powers of the Corporation and do
all such lawful acts and things as are not by statute, the Restated Certificate
or these Bylaws directed or required to be exercised or done by the
stockholders.
SECTION 2. Number and Qualifications. The Board of Directors shall
consist of at least one director. Directors need not be stockholders. The Board
of Directors, by the affirmative vote of a majority of the entire Board of
Directors, may increase the number of directors to a number not exceeding
twelve. Vacancies occurring by reason of any such increase
6
<PAGE>
shall be filled in accordance with Section 4 of this Article II. The Board of
Directors, by the vote of a majority of the entire Board of Directors, may
decrease the number of directors to a number not less than one but any such
decrease shall not affect the term of office of any director.
SECTION 3. Classes, Election and Term of Office. The Board of Directors
shall be divided into three classes serving staggered three-year terms. Except
for directors elected to fill vacancies, all directors shall be elected at the
annual meeting of stockholders and shall be nominated in accordance with the
provisions of Section 5 of this Article. Directors elected to fill vacancies
shall be appointed and elected in accordance with the provisions of Section 4 of
this Article. At each meeting of stockholders for the election of directors at
which a quorum is present, the persons receiving the greatest number of votes,
up to the number of directors to be elected, shall be the directors. Each
director shall hold office until his successor is elected and qualified, or
until his earlier resignation by written notice to the Secretary of the
Corporation, or until his removal from office.
SECTION 4. Vacancies. Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the affirmative vote of a majority of the directors
then in office, though less than a quorum of the Board of Directors, or by a
sole remaining director. A director elected to fill a vacancy resulting from an
increase in the number of directors shall hold office for a term that shall
coincide with the remaining term of the class of directors to which he is
elected. A 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 or her
predecessor. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board of Directors (as constituted immediately prior to such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten (10) percent of the total number of the then
outstanding shares of the Corporation's capital stock having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office, in the manner provided by statute. When one or
more director shall resign from the Board of Directors, effective at a future
date, a majority of the directors then in office, including those who have so
resigned, shall have the power to fill such vacancy or vacancies, the vote
thereon to take effect
7
<PAGE>
when such resignation or resignations shall become effective and each director
so chosen shall hold office until the next election of such class or classes for
which such director or directors have been chosen and until their successors
shall be elected and qualified.
SECTION 5. Nominations. (a) Only persons who are nominated in
accordance with the procedures set forth in these Bylaws shall be eligible to
serve as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of stockholders (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of the notice
provided for in these Bylaws, who is entitled to vote for the election of
directors at the meeting and who shall have complied with the notice procedures
set forth in Article I, Section 10. At the request of the Board of Directors,
any person nominated by the Board of Directors for election as a director shall
furnish to the Secretary of the Corporation that information required to be set
forth in a stockholder's notice of nomination which pertains to the nominee.
(b) No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in
these Bylaws. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by these Bylaws, and if the chairman should so declare,
the defective nomination shall be disregarded. A stockholder seeking to nominate
a person to serve as a director must also comply with all applicable
requirements of the Securities Exchange Act of 1934, and the rules and
regulations promulgated thereunder, with respect to the nomination and election
of directors matters set forth in this Section 5.
SECTION 6. Place of Meetings. The Board of Directors shall hold its
meetings at such place, within or without the State of Delaware, as it may from
time to time determine or as shall be specified in the notice of any such
meeting.
SECTION 7. Annual Meeting. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business as soon as practicable after each annual meeting of the stockholders,
on the same day and at the same place where such annual meeting of stockholders
shall be held. Notice of such meeting need not be given. Such
8
<PAGE>
meeting may be held at any other time or place, within or without the State of
Delaware, which shall be specified in a notice thereof given as hereinafter
provided in Section 10 of this Article II.
SECTION 8. Regular Meetings. Regular meetings, other than the annual
meeting, of the Board of Directors shall be held at such time as the Board of
Directors may fix. If any day fixed for a regular meeting shall be a legal
holiday at the place where the meeting is to be held, then the meeting which
would otherwise be held on that day shall be held at the same hour on the next
succeeding business day. Notice of regular meetings of the Board of Directors
need not be given except as otherwise required by statute or these Bylaws.
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the Chief Executive Officer, the
President or by a majority of the entire Board of Directors.
SECTION 10. Notice of Meetings. Notice of each special meeting of the
Board of Directors (and of each annual or regular meeting for which notice shall
be required) shall be given by the Secretary as hereinafter provided in this
Section 10, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these Bylaws, such notice need not state the
purposes of such meeting. Notice of each such meeting shall be mailed, postage
prepaid, to each director, addressed to him at his residence or usual place of
business, by first-class mail, at least five (5) days before the day on which
such meeting is to be held, or shall be sent addressed to him at such place by
telegraph, telex, cable or wireless, or be delivered to him personally, by
facsimile or by telephone, at least 24 hours before the time at which such
meeting is to be held. A written waiver of notice, signed by the director
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance by a director at a meeting shall
constitute a waiver of notice of such meeting, except when the director attends
a 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.
SECTION 11. Quorum and Manner of Acting. Except as hereinafter
provided, a majority of the entire Board of Directors shall be present in order
to constitute a quorum for the transaction of business at such meeting; and,
except as otherwise required by the Restated
9
<PAGE>
Certificate or these Bylaws, the act of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum at any meeting of the Board of Directors,
a majority of the directors present thereat may adjourn such meeting to another
time and place. Notice of the time and place of any such adjourned meeting shall
be given to the directors who were not present at the time of the adjournment
and, unless such time and place were announced at the meeting at which the
adjournment was taken, to the other directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The directors shall act only as
a board and the individual directors shall have no power as such.
SECTION 12. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting if all members of the Board of Directors consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors.
SECTION 13. Telephonic Participation. Members of the Board of Directors
may participate in meetings of the Board of Directors or any committee of the
Board of Directors by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation in such a meeting shall constitute
presence in person at such meeting.
SECTION 14. Chairman of the Board. The Board of Directors may designate
a Chairman of the Board. The Chairman of the Board shall preside at all meetings
of the Board. He shall perform such other duties as the Board may from time to
time assign to him.
SECTION 15. Organization. In the absence or inability to act of the
Chairman of the Board, another director chosen by a majority of the directors
present shall act as chairman of the meeting and preside thereat. The Secretary
or, in such person's absence or inability to act, any person appointed by the
chairman of the meeting shall act as secretary of the meeting and keep the
minutes thereof.
SECTION 16. Resignations. Any director may resign at any time upon
written notice to the Corporation. Any such resignation shall take effect at the
time specified therein or, if the
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time when it shall become effective shall not be specified therein, immediately
upon its receipt; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 17. Removal of Directors. Any director or directors may be
removed, at any time, with cause, by the affirmative vote of the holders of
record of a majority of the issued and outstanding capital stock entitled to
vote for the election of directors of the Corporation given at a special meeting
of the stockholders duly called and held expressly for such purpose; and the
vacancy or vacancies on the Board of Directors caused by such removal may be
filled as provided in these Bylaws.
SECTION 18. Compensation. The Board of Directors shall have authority
to fix the compensation, including fees and reimbursement of expenses, of
directors for services to the Corporation in the capacity as a director. The
payment of such compensation shall not preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
ARTICLE III
Executive and Other Committees
------------------------------
SECTION 1. Executive and Other Committees. The Board of Directors may,
by resolution passed by a majority of the whole 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 the committee. In the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution, 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 with the exception of any authority the delegation of
which is prohibited by the
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General Corporation Law of the State of Delaware, and may authorize the seal of
the Corporation to be affixed to all papers which may require it. Each committee
shall keep written minutes of its proceedings and shall report such minutes to
the Board of Directors when required.
SECTION 2. General. A majority of any committee may determine its
action and fix the time and place of its meetings unless the Board of Directors
shall otherwise provide. Notice of such meeting shall be given to each member of
the committee in the manner provided for in Article II, Section 10. The Board of
Directors shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall be deemed
to prevent the Board of Directors from appointing one or more committees
consisting in part of persons who are not directors of the Corporation.
SECTION 3. Action Without a Meeting. Any action required or permitted
to be taken at any meeting by any committee may be taken without a meeting if
all of the members of the committee consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the committee.
SECTION 4. Telephone Participation. Members of a committee may
participate in a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time. Participation in such a meeting
shall constitute presence in person at such meeting.
ARTICLE IV
Officers
--------
SECTION 1. Number, Qualifications, Election and Term. The officers of
the Corporation shall include a Chief Executive Officer, one or more
Vice-Chairman, a President, a Chief Operating Officer, a Chief Financial
Officer, a Chief Technology Officer, a Treasurer and a Secretary. Any number of
offices may be held by the same person. Such officers shall be elected from time
to time by the Board of Directors. Each officer shall hold office until such
officer's successor is elected and qualified or until such officer's earlier
resignation or removal. The Board of Directors may from time to time elect such
other officers (including one or more Executive Vice Presidents, Senior Vice
Presidents, or Vice Presidents, one or more Assistant
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Treasurers and one or more Assistant Secretaries) and such agents as may be
necessary or desirable for the conduct of the business of the Corporation. Such
other officers and agents shall have such duties and shall hold office for such
terms as may be prescribed by the Board of Directors.
SECTION 2. Resignations. Any officer may resign at any time upon
written notice to the Corporation. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become effective shall not
be specified therein, immediately upon its receipt; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 3. Removal. Any officer or agent of the Corporation may be
removed, either with or without cause, at any time, by the Board of Directors at
any meeting thereof. Removal shall be without prejudice to the contract rights,
if any, of the officer or agent so removed. Election or appointment of an
officer or agent shall not of itself create contract rights.
SECTION 4. Vacancies. Any vacancy occurring in any office of the
Corporation by death, resignation, removal or otherwise, shall be filled for the
unexpired portion of the term of the office which shall be vacant, in the manner
prescribed in these Bylaws for the regular election to such office.
SECTION 5. Chief Executive Officer. The Chief Executive Officer,
subject to the control of the Board of Directors, shall have general
responsibility for the business and affairs of the Corporation and shall be the
chief policy making officer of the Corporation. The Chief Executive Officer
shall preside at all meetings of the stockholders, and in the absence of the
Chairman of the Board, shall preside at all meetings of the Board of Directors
and he shall have such other powers and duties as may be assigned to or required
of such officer from time to time by the Board of Directors or these Bylaws.
SECTION 6. Vice-Chairman. Any Vice-Chairman of the Board shall perform
such duties as the Chief Executive Officer may from time to time determine.
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SECTION 7. President. The President shall have the general powers and
duties incident to the office of the president of a corporation, shall perform
such duties and services and shall have such other powers and duties as may be
assigned to or required of such officer from time to time by the
orDirectorsChief Executive Officer or these Bylaws. In the absence of the
Chairman of the Board, the Vice-Chairman and the Chief Executive Officer, he
shall preside at all meetings of the Board of Directors.
SECTION 7.8. Chief Operating Officer. The Chief Operating Officer,
subject to the powers of theBoard of Directors and the Chief Executive Officer,
shall have directsuch responsibility for the business and affairs of
theCorporation, including supervisory responsibility for the officers, agents,
employees and properties ofthe Corporationand shall have such other powers and
duties as may be assigned to or required of such officer from time to time by
theBoard of Directors, the Chief Executive Officer or these Bylaws. In the
absence of the Chairman of the Board, the Chief Executive Officer and the
President, he shall preside at all meetings of the Board of Directors.
8. SECTION 8.9. Chief Financial Officer. The Chief Financial Officer shall
have responsibility for all financial and accounting matters, including
supervisory responsibilities for the Treasurer and any Assistant Treasurer of
the Corporation. The Chief Financial Officer shall have the general powers and
duties incident to the office of the chief financial officer of a corporation
and shall have such other powers and duties as may be assigned to or required of
such officer from time to time by the Board of Directors or these Bylaws.
SECTION 10. Chief Technology Officer. The Chief Technology Officer
shall have the general powers and duties incident to the office of a chief
technology officer of a corporation and shall have such other powers and duties
as may be assigned to or required of such officer from time to time by the Board
of Directors or these Bylaws.
SECTION 9.11. Vice Presidents. Each Vice President, including any
Executive Vice President and any Senior Vice President, shall have such powers
and perform such duties incident to the office of the vice president of a
corporation, and shall have such other powers and
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duties as may be assigned to or required of such officer from time to time by
the Board of Directors or these Bylaws.
SECTION 12. The Treasurer. The Treasurer shall, in the absence or
disability of the Chief Financial Officer, act with all of the powers and have
the responsibilities assigned to the Chief Financial Officer. The Treasurer
shall also have the general powers and duties incident to the office of the
treasurer of a corporation and shall have such other powers and duties as may be
assigned to or required of such officer from time to time by the Board of
Directors or these Bylaws.
SECTION 13. The Secretary. The Secretary shall (a) record the
proceedings of the meetings of the stockholders and the Board of Directors in a
minute book to be kept for that purpose; (b) cause notices to be duly given in
accordance with the provisions of these Bylaws and as required by law; (c) be
the custodian of the records and the seal of the Corporation and affix and
attest the seal to all stock certificates of the Corporation (unless the seal of
the Corporation on such certificates shall be a facsimile, as hereinafter
provided) and affix and attest the seal to all other documents to be executed on
behalf of the Corporation under its seal; (d) cause the books, reports,
statements, certificates and other documents and records required by law to be
kept and filed to be properly kept and filed; and (e) in general, have all the
powers and perform all the duties incident to the office of secretary of a
corporation and shall have such other powers and duties as may be assigned to or
required of such officer from time to time by the Board of Directors or these
Bylaws.
SECTION 14. Officers' Bonds or Other Security. The Corporation may
secure the fidelity of any or all of its officers or agents by bond or
otherwise, in such amount and with such surety or sureties as the Corporation
may require.
SECTION 15. Compensation. The compensation of the officers of the
Corporation for their services as such officers shall be fixed from time to time
by the Board of Directors or a committee thereof; provided, however, that the
Board of Directors or a committee thereof may delegate to the Chief
ExecutiveOfficer or Officer the power to fix the compensation of other officers
and agents. An officer of the Corporation shall not be prevented from receiving
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compensation by reason of the fact that such officer is or was a director of the
Corporation, but any such officer who shall also be a director (except in the
event there is only one director of the Corporation) shall not have any vote in
the determination of the compensation to be paid to him.
ARTICLE V
Shares, etc.
------------
SECTION 1. Stock Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation,
by the Chairman of the Board, or the President or a Vice President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary,
certifying the kind, class or series and number of shares of the Corporation's
capital stock owned by such holder. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may nevertheless be issued by the
Corporation with the same effect as if such person was such officer, transfer
agent or registrar at the date of issue.
SECTION 2. Books of Account and Record of Stockholders. The books and
records of the Corporation may be kept at such places, within or without the
State of Delaware, as the Board of Directors may from time to time determine.
The stock record books and the blank stock certificate books shall be kept by
the Secretary of the Corporation or by any other officer or agent designated by
the Board of Directors.
SECTION 3. Transfer of Stock; Registered Stockholders. Transfers of
shares of stock of the Corporation shall be made on the stock records of the
Corporation only upon authorization by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary or with a transfer agent or transfer clerk, and on surrender of
the certificate or certificates for such shares properly endorsed or accompanied
by a duly executed stock transfer power and the payment of all taxes thereon.
Except as otherwise provided by law, the Corporation shall be entitled to
recognize the exclusive right of a person in whose name any share or shares
stand on the record of stockholders as the owner of such share
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or shares for all purposes, including, without limitation, the rights to receive
dividends or other distributions, and to vote as such owner, and the Corporation
may hold any such stockholder of record liable for calls and assessments and the
Corporation shall not be bound to recognize any equitable or legal claim to or
interest in any such share or shares on the part of any other person whether or
not it shall have express or other notice thereof. Whenever any transfers of
shares shall be made for collateral security and not absolutely, and both the
transferor and transferee request the Corporation to do so, such fact shall be
stated in the entry of the transfer.
SECTION 4. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these Bylaws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. It may appoint, or authorize any officer or officers
to appoint, one or more transfer agents and one or more registrars and may
require all certificates for shares of stock to bear the signature or signatures
of any of them.
SECTION 5. Fixing of Record Date. In order that the Corporation may
determine the stockholders entitled to: (i) notice of or to vote at any meeting
of stockholders or any adjournment thereof, (ii) express consent to corporate
action in writing without a meeting, (iii) receive payment of any dividend or
other distribution or allotment of any rights, (iv) exercise any rights in
respect of any change, conversion or exchange of stock or (v) for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall (i) not be more than sixty (60) nor less than ten (10) days
before the date of such meeting, (ii) not be more than ten (10) days after the
date upon which the resolution fixing the record date for consent to corporate
action in writing is adopted by the Board of Directors, and (iii) not be more
than sixty (60) days prior to such payment, exercise of rights or such other
action.
SECTION 6. Lost, Stolen or Destroyed Stock Certificates. The holder of
any certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, destruction or mutilation of
such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it, alleged to have been
lost, stolen or destroyed, and the Corporation may, in its discretion, require
the owner of the lost, stolen or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient, as the Corporation in
its absolute discretion shall determine, to indemnify the
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Corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate. Anything herein to the contrary notwithstanding, the
Corporation, in its absolute discretion, may refuse to issue any such new
certificate, except pursuant to judicial proceedings under the laws of the State
of Delaware.
ARTICLE VI
Contracts, Checks, Drafts, Bank Accounts, Etc.
----------------------------------------------
SECTION 1. Execution of Contracts. Except as otherwise required by
statute, the Restated Certificate or these Bylaws, any contract or other
instrument may be executed and delivered in the name and on behalf of the
Corporation by such officer or officers (including any assistant officer) of the
Corporation as the Board of Directors may from time to time direct. Such
authority may be general or confined to specific instances as the Board of
Directors may determine. Unless authorized by the Board of Directors or
expressly permitted by these Bylaws, no officer, agent or employee shall have
any power or authority to bind the Corporation by any contract or engagement or
to pledge its credit or to render it pecuniarily liable for any purpose or to
any amount.
SECTION 2. Loans. Unless the Board of Directors shall otherwise
determine, the Chief Executive Officer, the President, the Chief Financial
Officer, the Controller and any Vice President may effect loans and advances at
any time for the Corporation from any bank, trust company or other institution,
or from any firm, corporation or individual, and for such loans and advances may
make, execute and deliver promissory notes, bonds or other certificates or
evidences of indebtedness of the Corporation, but no officer or officers shall
mortgage, pledge, hypothecate or transfer any securities or other property of
the Corporation other than in connection with the purchase of chattels for use
in the Corporation's operations, except when authorized by the Board of
Directors.
SECTION 3. Checks, Drafts, etc. All checks, drafts, bills of exchange
or other orders for the payment of money out of the funds of the Corporation,
and all notes or other evidence of indebtedness of the Corporation, shall be
signed in the name and on behalf of the Corporation by
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such persons and in such manner as shall from time to time be authorized by the
Board of Directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may from time to time designate or as may be designated by any officer or
officers of the Corporation to whom such power of designation may from time to
time be delegated by the Board of Directors. For the purpose of deposit and for
the purpose of collection for the account of the Corporation, checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation may be endorsed, assigned and delivered by any officer or agent of
the Corporation.
SECTION 5. General and Special Bank Accounts. The Board of Directors
may from time to time authorize the opening and keeping of general and special
bank accounts with such banks, trust companies or other depositories as the
Board of Directors may designate or as may be designated by any officer or
officers of the Corporation to whom such power of designation may from time to
time be delegated by the Board of Directors. The Board of Directors may make
such special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VII
Offices
-------
SECTION 1. Registered Office. The registered office and registered
agent of the Corporation will be as specified in the Restated Certificate.
SECTION 2. Other Offices. The Corporation may also have such offices,
both within or without the State of Delaware, as the Board of Directors may from
time to time determine or the business of the Corporation may require.
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ARTICLE VIII
Fiscal Year
-----------
The fiscal year of the Corporation shall end on the last day of
December.
ARTICLE IX
Seal
----
The seal of the Corporation shall be circular in form, shall bear the
name of the Corporation and shall include the words and numbers "Corporate
Seal", "Delaware" and the year of incorporation.
ARTICLE X
Indemnification
---------------
ARTICLE X
SECTION 1.
SECTION 1. General. Each person who was or is a party or is threatened
to be made a party to or is involved in any manner (including, without
limitation as a witness) in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, including,
without limitation, any action or proceeding by or in right of the Corporation
to procure a judgement in its favor (a "Proceeding"), by reason of the fact that
he or she, or a person of whom he or she is or was the legal representative, is
or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such Proceeding is an alleged action in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, shall be indemnified and held harmless by the
Corporation to the fullest extent authorized by the General Corporation Law of
the State of Delaware, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expenses, liabilities and losses (including
20
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attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement), actually and reasonably incurred or suffered
by such person in connection therewith and such indemnification shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such
person; provided, however, that, except as set forth in Section 2 of this
Article X, the Corporation shall indemnify any such person seeking
indemnification in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred in
this Article X shall be a contract right and shall include the right to be paid
by the Corporation the expenses incurred in defending any such Proceeding in
advance of its final disposition; provided, however, that, if the General
Corporation Law of the State of Delaware requires the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
Proceeding, such advancement shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Article X or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 2. Claims. If a claim under Section 1 of this Article X is not
paid in full by the Corporation within thirty (30) days after a written claim
has been received by the Corporation, the claimant may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant also shall be entitled to
be paid the expenses of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such
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defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because the claimant has met the applicable standard of conduct set forth in the
General Corporation Law of the State of Delaware, nor an actual determination by
the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the claimant has not met such applicable standard of
conduct, shall not create a presumption that the claimant has not met the
applicable standard of conduct.
SECTION 3. Non-Exclusivity of Rights. The right to indemnification and
the advancement of expenses incurred in defending a Proceeding in advance of its
final disposition conferred in this Article X shall not be exclusive of any
other right which any person seeking indemnification or advancement of expenses
may have or hereafter acquire under any applicable statute, provision of the
Restated Certificate, these Bylaws, agreement, vote of stockholders or
disinterested directors, or otherwise.
SECTION 4. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any person who is or was a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss asserted against it or such person and incurred by it or such
person, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the General Corporation Law
of the State of Delaware.
ARTICLE XI
Amendment
---------
The Bylaws may be adopted, amended, or repealed by vote of the holders
of a majority of the shares of stock at the time entitled to vote in the
election of directors, except as otherwise provided in the Restated Certificate.
The Bylaws may also be adopted, amended or repealed by the vote of a majority of
the Board of Directors present at any regular meeting of said Board of
Directors, or at a special meeting of the Board of Directors called for such
purpose, but any
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Bylaws adopted by the Board of Directors may be amended, repealed or altered by
the stockholders entitled to vote thereon as herein provided.
ARTICLE XII
Severability
------------
The provisions of these Bylaws shall be separable each from any and all
other provisions of these Bylaws, and if any such provision shall be adjudged to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision hereof, or the powers granted to this Corporation by
the Restated Certificate or these Bylaws.
Certification:
The undersigned officer of Viatel, Inc. (the "Company"),
hereby certifies that the foregoing Third Amended
and Restated Bylaws were adopted in accordance with
the resolutions adopted by the Board of Directors
of the Company on August 26, 1999.
/s/ Michael J. Mahoney
- --------------------------------------
Michael J. Mahoney
Chief Executive Officer and President
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EXHIBIT 5.1
[LETTERHEAD OF KELLEY DRYE & WARREN LLP]
October 15, 1999
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Re: Registration Statement on Form S-4
--------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Viatel, Inc., a Delaware corporation ("Viatel"),
in connection with the preparation and filing of a Registration Statement on
Form S-4 (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), relating to the registration by Viatel of shares (the
"Shares") to be issued in connection with the merger of Viatel Acquisition
Corp., a Delaware corporation, with and into Destia Communications, Inc., a
Delaware corporation ("Destia"), pursuant to the terms of the Agreement and Plan
of Merger, dated as of August 27, 1999, by and among Viatel, Viatel Acquisition
Corp. and Destia (the "Merger Agreement").
In connection with this opinion, we have examined and relied upon copies
certified or otherwise identified to our satisfaction of: (i) the Registration
Statement, and each amendment thereto through the date hereof, together with the
exhibits and schedules thereto, in the form filed with the Commission; (ii)
Viatel's Certificate of Incorporation and By-laws, each as amended to date; and
(iii) the minute books and other records of corporate proceedings of Viatel
through the date hereof, as made available to us by officers of Viatel. In
addition, we have conducted such other investigations and have reviewed such
matters of law and fact as we have deemed necessary or appropriate for the
purpose of rendering this opinion.
In rendering this opinion, we have assumed the authenticity of all documents
submitted to us as originals, the conformity to originals of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of all documents submitted to us as copies. We have also assumed the
legal capacity of all natural persons, the genuineness of all signatures on all
documents examined by us, the authority of such persons signing on behalf of
parties thereto other than Viatel, as the case may be, and the due
authorization, execution and delivery of all documents by the parties thereto
other than Viatel. As to certain factual matters material to the opinion
expressed herein, we have relied, to the extent we deemed proper, upon
representations, warranties and statements as to factual matters of officers and
other representatives of Viatel. In addition, in rendering this opinion we have
assumed that at the time of issuance of any of the Shares (i) the Registration
Statement, as then amended, will be effective under the Securities Act, (ii) the
common stockholders of Destia will have approved and adopted the Merger
Agreement, (iii) the common stockholders of Viatel will have approved and
adopted the Merger Agreement, including the issuance of shares of Viatel common
stock as contemplated in the Merger Agreement and (iv) the transactions
contemplated by the Merger Agreement are consummated in accordance with the
terms of the Merger Agreement.
Our opinion expressed below is subject to the qualification that we express
no opinion as to any law of any jurisdiction other than the law of the State of
Connecticut, the corporate law of the State of Delaware and the federal laws of
the United States of America. Without limiting the foregoing, we express no
opinion with respect to the applicability thereto or effect of municipal laws or
the rules, regulations or orders of any municipal agencies within any such
state.
<PAGE>
October 15, 1999
Viatel, Inc.
Page 2
Based upon and subject to the foregoing qualifications, assumptions and
limitations and the further limitations set forth below, it is our opinion that
the Shares have been duly authorized and, when issued and delivered in
accordance with the terms and conditions of the Merger Agreement, will be
validly issued, fully paid and non-assessable.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the State of Connecticut, the corporate law of the State of Delaware or
the federal laws of the United States of America be changed by legislative
action, judicial decision or otherwise.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to our firm in the joint proxy
statement/prospectus included therein under the caption "Legal Matters." In
giving such consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission promulgated thereunder.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Very truly yours,
/S/ KELLEY DRYE & WARREN LLP
KELLEY DRYE & WARREN LLP
<PAGE>
EXHIBIT 8.1
[Letterhead of]
CRAVATH, SWAINE & MOORE
October 15, 1999
Re: Agreement and Plan of Merger Dated as of August 27, 1999, By and
Among Viatel, Inc., Viatel Acquisition Corp. and Destia Communications,Inc.
Dear Sirs:
We have acted as counsel for Destia Communications, Inc., a Delaware
corporation ("Destia"), in connection with the proposed merger (the "Merger") of
Viatel Acquisition Corp., a Delaware corporation (the "Parent Subsidiary") that
is a direct wholly-owned subsidiary of Viatel Inc., a Delaware corporation
("Viatel") with and into Destia pursuant to an Agreement and Plan of Merger, by
and among Destia, the Parent Subsidiary and Viatel, dated as of August 27, 1999
(the "Merger Agreement").
In that connection, you have requested our opinion regarding certain U.S.
Federal income tax consequences of the Merger. In providing our opinion, we
have examined the Merger Agreement, the registration statement on Form S-4
(the "Registration Statement"), which includes the Joint Proxy
Statement/Prospectus of Destia and Viatel, filed with the Securities and
Exchange Commission (the "SEC") on October 15, 1999, and such other documents
and corporate records as we have deemed necessary or appropriate for purposes
of our opinion. In addition, we have assumed that (i) the Merger will be
consummated in accordance with the provisions of the Merger Agreement and the
Registration Statement, (ii) the statements concerning the Merger set forth
in the Merger Agreement and the Registration Statement are true, complete and
correct, (iii) the representations made by Destia and Viatel, in their
respective letters delivered to us for purposes of this opinion (the
"Representation Letters") are true, complete and correct and will remain
true, complete and correct at all times up to and including the Effective
Time (as defined in the Merger Agreement) and (iv) any representations made
in the Representation Letters "to the best knowledge of" or similarly
qualified are correct without such qualification. If any of the above
described assumptions are untrue for any reason or if the Merger is
consummated in a manner that is different from the manner in which it is
described in the Merger Agreement or the Registration Statement, our opinions
as expressed below may be adversely affected and may not be relied upon.
Based upon the foregoing, for U.S. Federal income tax purposes, we are of
opinion that (i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and (ii) Destia, the Parent Subsidiary and Viatel will each be a party to
such reorganization within the meaning of Section 368(b) of the Code. We also
confirm that the material Federal income tax consequences of the Merger to
Destia shareholders set forth in the Registration Statement, in the sixth
paragraph under the heading "The Merger--Material Federal Income Tax
Consequences of the Merger", represent our opinion, subject to the limitations
set forth therein.
Our opinions are based on current provisions of the Code, Treasury
Regulations promulgated thereunder, published pronouncements of the Internal
Revenue Service and case law, any of which may be changed at any time with
retroactive effect. Any change in applicable laws or the facts and circumstances
surrounding the Merger, or any inaccuracy in the statements, facts, assumptions
or representations upon which we have relied, may affect the continuing validity
of our opinions as set forth herein. We assume no responsibility to inform you
of any such change or inaccuracy that may occur or come to our attention.
Finally, our opinions are limited to the tax matters specifically covered
hereby, and we have not been asked to address, nor have we addressed, any other
tax consequences of the Merger.
<PAGE>
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references to this opinion therein. In giving this consent,
we do not admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
or regulations of the SEC promulgated thereunder. This opinion is being provided
for the benefit of Destia so that Destia may comply with its obligations under
the Federal securities laws. The filing of this opinion as an exhibit to the
Registration Statement and the references to such opinion and our Firm therein
are not intended to create liability under applicable state law to any person
other than Destia, our client.
Sincerely,
/s/ Cravath, Swaine & Moore
Cravath, Swaine & Moore
Destia Communications, Inc.
95 Route 17 South
Paramus, NJ 07652
2
<PAGE>
EXHIBIT 10.12
VIATEL, INC.
AMENDED STOCK INCENTIVE PLAN
1. ESTABLISHMENT, PURPOSE, AND DEFINITIONS.
(a) There is hereby adopted the Amended Stock Incentive Plan (the "Plan") of
VIATEL, INC. (the "Company").
(b) The purpose of the Plan is to provide a means whereby Eligible
Individuals (as defined in paragraph 4, below) can acquire Common Stock, $.01
par value, of the Company (the "Stock"). The Plan provides employees (including
officers and directors who are employees) of the Company and of its Affiliates
(as defined in subparagraph (c) below) an opportunity to purchase shares of
Stock pursuant to options which may qualify as incentive stock options (referred
to as "Incentive Stock Options") under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and employees, officers, directors,
independent contractors, and consultants of the Company and of its Affiliates an
opportunity to purchase shares of Stock pursuant to options which are not
described in Sections 422 or 423 of the Code (referred to as "Nonqualified Stock
Options"). The Plan also provides for the sale or bonus of Stock to Eligible
Individuals in connection with the performance of services for the Company or
its Affiliates. Further, the Plan authorizes the grant of stock appreciation
rights ("SARs"), either separately or in tandem with options, entitling holders
to cash compensation measured by appreciation in the value of the Stock.
Finally, the Plan authorizes the grant of any other stock benefit or
stock-related benefit that the Committee (as defined in paragraph 2(a) below)
deems appropriate.
(c) The term "Affiliates" as used in the Plan means parent or subsidiary
corporations, as defined in Sections 424(e) and (f) of the Code (but
substituting "the Company" for "employer corporation"), including parents or
subsidiaries which become such after adoption of the Plan.
2. ADMINISTRATION OF THE PLAN.
(a) The Plan shall, unless otherwise determined by the Board of Directors,
be administered by the Compensation Committee of the Board (the "Committee").
The Committee shall consist of not less than two non-employee director members
within the meaning of the rules promulgated under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Members of the
Committee shall serve at the pleasure of the Board. The Committee shall select
one of its members as chairman, and shall hold meetings at such times and places
as it may determine. A majority of the Committee shall constitute a quorum and
acts of the Committee at which a quorum is present, or acts reduced to or
approved in writing by all the members of the Committee, shall be the valid acts
of the Committee. If the Board does not delegate administration of the Plan to
the Committee, then each reference in this Plan to "the Committee" shall be
construed to refer to the Board.
(b) The Committee shall determine which Eligible Individuals shall be
granted options under the Plan, the timing of such grants, the terms thereof
(including any restrictions on the Stock), and the number of shares subject to
such options.
(c) The Committee may amend the terms of any outstanding option granted
under this Plan, but any amendment which would adversely affect the optionee's
rights under an outstanding option shall not be made without the optionee's
written consent. The Committee may, with the optionee's written consent, cancel
any outstanding option or accept any outstanding option in exchange for a new
option.
(d) The Committee shall also determine which Eligible Individuals shall be
issued Stock, SARs or other stock benefits or stock-related benefits under the
Plan, the timing of such grants, the terms thereof (including any restrictions),
and the number of shares of Stock, SARs or stock benefits or stock-related
benefits to be granted. The Stock, stock benefits or stock-related benefits
shall be issued for such consideration (if any) as the Committee deems
appropriate. Stock issued subject to restrictions
<PAGE>
shall be evidenced by a written agreement (the "Restricted Stock Purchase
Agreement" or the "Restricted Stock Bonus Agreement") and stock benefits or
stock-related benefits shall be evidenced by written agreement (the "Stock
Benefit Agreement"). The Committee may amend any Restricted Stock Purchase
Agreement, Restricted Stock Bonus Agreement or Stock Benefit Agreement, but any
amendment which would adversely affect the stockholder's rights to the Stock,
stock benefits or stock-related benefits shall not be made without his or her
written consent.
(e) The Committee shall have the sole authority, in its absolute discretion,
to adopt, amend, and rescind such rules and regulations as, in its opinion, may
be advisable for the administration of the Plan, to construe and interpret the
Plan, the rules and the regulations, and the instruments evidencing options,
Stock, SARs or stock benefits or stock-related benefits granted under the Plan
and to make all other determinations deemed necessary or advisable for the
administration of the Plan. All decisions, determinations, and interpretations
of the Committee shall be binding on all participants.
3. STOCK SUBJECT TO THE PLAN.
(a) An aggregate of not more than 5.3 million shares of Stock shall be
available for the grant of options, the issuance of Stock or the issuance of
stock benefits or stock-related benefits under the Plan. If an option is
surrendered (except surrender for shares of Stock) or for any other reason
ceases to be exercisable in whole or in part, the shares which were subject to
such option but as to which the option had not been exercised shall continue to
be available under the Plan. Any Stock which is retained by the Company upon
exercise of an option in order to satisfy the exercise price for such option or
any withholding taxes due with respect to such option exercise shall be treated
as issued to the optionee and will thereafter not be available under the Plan.
(b) If there is any change in the Stock subject to either the Plan, an
Option Agreement (as defined below), a Restricted Stock Purchase Agreement, a
Restricted Stock Bonus Agreement, a SAR Agreement (as defined in paragraph 8) or
Stock Benefit Agreement through merger, consolidation, reorganization,
recapitalization, reincorporation, stock split, stock dividend, or other change
in the capital structure of the Company, appropriate adjustments shall be made
by the Committee in order to preserve but not to increase the benefits to the
individual, including adjustments to the aggregate number, kind of shares, and
price per share subject to either the Plan, an Option Agreement, a Restricted
Stock Purchase Agreement, a Restricted Stock Bonus Agreement, a SAR Agreement or
a Stock Benefit Agreement.
4. ELIGIBLE INDIVIDUALS. Individuals who shall be eligible to have granted
to them the options, Stock, SARs or other stock benefits or stock-related
benefits provided for by the Plan shall be such employees, officers, directors,
independent contractors, and consultants of the Company or an Affiliate as the
Committee in its discretion, shall designate from time to time ("Eligible
Individuals"). Notwithstanding the foregoing, only employees of the Company or
an Affiliate (including officers and directors who are bona fide employees)
shall be eligible to receive Incentive Stock Options.
5. THE OPTION PRICE. The exercise price of the Stock covered by each
Incentive Stock Option shall be not less than the per share fair market value of
such Stock on the date the option is granted. The exercise price of the Stock
covered by each Nonqualified Stock Option shall be as determined by the
Committee. Notwithstanding the foregoing, in the case of an Incentive Stock
Option granted to a person possessing more than ten percent of the combined
voting power of the Company or an Affiliate, the exercise price shall be not
less than 110 percent of the fair market value of the Stock on the date the
option is granted. The exercise price of an option shall be subject to
adjustment to the extent provided in paragraph 3(b), above.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) Each option granted pursuant to the Plan will be evidenced by a written
agreement (the "Option Agreement") executed by the Company and the person to
whom such option is granted.
<PAGE>
(b) The Committee shall determine the term of each option granted under the
Plan; PROVIDED, HOWEVER, that the term of an Incentive Stock Option shall not be
for more than 10 years and that, in the case of an Incentive Stock Option
granted to a person possessing more than ten percent of the combined voting
power of the Company or an Affiliate, the term shall be for no more than five
years.
(c) In the case of Incentive Stock Options, the aggregate fair market value
(determined as of the time such option is granted) of the Stock with respect to
which Incentive Stock Options are exercisable for the first time by an Eligible
Individual in any calendar year (under this Plan and any other plans of the
Company or its Affiliates) shall not exceed $100,000.
(d) The Stock Option Agreement may contain such other terms, provisions and
conditions consistent with this Plan as may be determined by the Committee. If
an option, or any part thereof, is intended to qualify as an Incentive Stock
Option, the Option Agreement shall contain those terms and conditions which are
necessary to so qualify it.
7. TERMS AND CONDITIONS OF STOCK PURCHASES AND BONUSES.
(a) Each sale or grant of Stock pursuant to the Plan will be evidenced by a
written Restricted Stock Purchase Agreement or Restricted Stock Bonus Agreement
executed by the Company and the person to whom such Stock is sold or granted.
(b) The Restricted Stock Purchase Agreement or Restricted Stock Bonus
Agreement may contain such other terms, provisions and conditions consistent
with this Plan as may be determined by the Committee, including not by way of
limitation, restrictions on transfer, forfeiture provisions, repurchase
provisions and vesting provisions.
8. TERMS AND CONDITIONS OF SARS. The Committee may, under such terms and
conditions as it deems appropriate, authorize the issuance of SARs evidenced by
a written SAR agreement (which, in the case of tandem options, may be part of
the Option Agreement to which the SAR relates) executed by the Company and the
person to whom such SAR is granted (the "SAR Agreement"). The SAR Agreement may
contain such terms, provisions and conditions consistent with this Plan as may
be determined by the Committee.
9. TERMS AND CONDITIONS OF STOCK BENEFITS AND STOCK-RELATED BENEFITS. The
Committee may, under such terms and conditions as it deems appropriate,
authorize the issuance of other forms of stock benefits and stock-related
benefits evidenced by a Stock Benefit Agreement executed by the Company and the
person to whom such stock benefit or stock-related benefit is granted. The Stock
Benefit Agreement may contain such terms, provisions and conditions consistent
with the Plan as may be determined by the Committee.
10. USE OF PROCEEDS. Cash proceeds realized from the issuance of Stock
under the Plan shall constitute general funds of the Company.
11. AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate the Plan as it
deems advisable; provided that such amendment, suspension or termination
complies with all applicable requirements of state and federal law, including
any applicable requirement that the Plan or an amendment to the Plan be approved
by the Company's stockholders, and provided further that, except as provided in
paragraph 3(b) above, the Board shall in no event amend the Plan in the
following respects without the consent of stockholders then sufficient to
approve the Plan in the first instance:
(i) To increase the maximum number of shares subject to Incentive Stock
Options issued under the Plan; or
(ii) To change the designation or class of persons eligible to receive
Incentive Stock Options under the Plan.
<PAGE>
(b) No option, stock benefit or stock-related benefit may be granted nor any
Stock issued under the Plan during any suspension or after the termination of
the Plan, and no amendment, suspension, or termination of the Plan shall,
without the affected individual's consent, alter or impair any rights or
obligations under any option, stock benefit or stock-related benefit previously
granted under the Plan. The Plan shall terminate with respect to the grant of
Incentive Stock Options on September 29, 2003, unless previously terminated by
the Board pursuant to this paragraph 11.
12. ASSIGNABILITY. Each option granted pursuant to this Plan shall, during
the optionee's lifetime, be exercisable only by him, and neither the option nor
any right hereunder shall be transferable by the optionee by operation of law or
otherwise other than by will or the laws of descent and distribution. Stock
subject to a Restricted Stock Purchase Agreement, a Restricted Stock Bonus
Agreement or a Stock Benefit Agreement shall be transferable only as provided in
such Agreement.
13. PAYMENT UPON EXERCISE OF OPTIONS.
(a) Payment of the purchase price upon exercise of any option granted under
this Plan shall be made in cash (including for purposes of this Plan the
following cash equivalents: certified check, bank draft, postal or express money
order payable to the order of the Company in lawful money of the United States);
PROVIDED, HOWEVER, that the Committee, in its sole discretion, may permit an
optionee to pay the option price in whole or in part (i) with shares of Stock
owned by the optionee; (ii) by delivery on a form prescribed by the Committee of
an irrevocable direction to a securities broker approved by the Committee to
sell shares and deliver all or a portion of the proceeds to the Company in
payment for the Stock; (iii) by delivery of the optionee's promissory note with
such recourse, interest, security, and redemption provisions as the Committee in
its discretion determines appropriate; or (iv) in any combination of the
foregoing. Any Stock used to exercise options shall be valued at its fair market
value on the date of the exercise of the option. In addition, the Committee, in
its sole discretion, may authorize the surrender by an optionee of all or part
of an unexercised option and authorize a payment in consideration thereof of an
amount equal to the difference between the aggregate fair market value of the
Stock subject to such option and the aggregate option price of such Stock. In
the Committee's discretion, such payment may be made in cash, shares of Stock
with a fair market value on the date of surrender equal to the payment amount,
or some combination thereof.
(b) In the event that the exercise price is satisfied by the Committee
retaining from the shares of Stock otherwise to be issued to the optionee shares
of Stock having a value equal to the exercise price, the Committee may issue the
optionee an additional option, with terms identical to the Option Agreement
under which the option was received, entitling the optionee to purchase
additional Stock in an amount equal to the number of shares so retained.
14. WITHHOLDING TAXES.
(a) No Stock shall be granted or sold under the Plan to any participant, and
no SAR or other stock benefit or stock-related benefit may be exercised, until
the participant has made arrangements acceptable to the Committee for the
satisfaction of federal, state, and local income and employment tax withholding
obligations, including without limitation obligations incident to the receipt of
Stock under the Plan, the lapsing of restrictions applicable to such Stock, the
failure to satisfy the conditions for treatment as Incentive Stock Options under
applicable tax law, or the receipt of cash payments. Upon exercise of a stock
option or lapsing of restrictions on Stock issued under the Plan, the Company
may satisfy its withholding obligations by withholding from the optionee or
requiring the stockholder to surrender shares of Stock sufficient to satisfy
federal, state and local income and employment tax withholding obligations.
(b) In the event that such withholding is satisfied by the Company or the
optionee's employer retaining from the shares of Stock otherwise to be issued to
the optionee shares of Stock having a value equal to such withholding tax, the
Committee may issue the optionee an additional option, with terms identical to
the Option Agreement under which the option was received, entitling the optionee
to purchase additional Stock in an amount equal to the number of shares so
retained.
<PAGE>
15. RESTRICTIONS ON TRANSFER OF SHARES. The Stock acquired pursuant to the
Plan shall be subject to such restrictions and agreements regarding sale,
assignment, encumbrances or other transfer as are in effect among the
stockholders of the Company at the time such Stock is acquired, as well as to
such other restrictions as the Committee shall deem advisable.
16. CORPORATE TRANSACTION.
(a) For purposes of this paragraph 16, a "Corporate Transaction" shall
include any of the following stockholder-approved transactions to which the
Company is a party:
(i) a merger or consolidation in which the Company is not the surviving
entity, except (1) for a transaction the principal purpose of which is to
change the state of the Company's incorporation, or (2) a transaction in
which the Company's stockholders immediately prior to such merger or
consolidation hold (by virtue of securities received in exchange for their
shares in the Company) securities of the surviving entity representing more
than fifty percent (50%) of the total voting power of such entity
immediately after such transaction;
(ii) the sale, transfer or other disposition of all or substantially all
of the assets of the Company unless the Company's stockholders immediately
prior to such sale, transfer or other disposition hold (by virtue of
securities received in exchange for their shares in the Company) securities
of the purchaser or other transferee representing more than fifty (50%) of
the total voting power of such entity immediately after such transaction; or
(iii) any reverse merger in which the Company is the surviving entity but
in which the Company's stockholders immediately prior to such merger do not
hold (by virtue of their shares in the Company held immediately prior to
such transaction) securities of the Company representing more than fifty
percent (50%) of the total voting power of the Company immediately after
such transaction.
(b) In the event of any Corporate Transaction, any option, restricted Stock,
SAR, stock benefit or stock-related benefit shall vest in its entirety and
become exercisable, or with respect to restricted Stock, be released from
restrictions on transfer and repurchase rights, immediately prior to the
specified effective date of the Corporate Transaction unless assumed by the
successor corporation or its parent company, pursuant to options, restricted
Stock, SARs or stock benefits or stock-related benefits providing substantially
equal value and having substantially equivalent provisions as the options,
restricted Stock, SARs or stock benefits or stock-related benefits granted
pursuant to this Plan.
17. STOCKHOLDER APPROVAL. This Plan shall only become effective with regard
to the issuance of additional Incentive Stock Options upon its approval by a
majority of the stockholders voting (in person or by proxy) at a stockholders'
meeting held within 12 months of the Board's adoption of the Plan. The Committee
may grant additional Incentive Stock Options under the Plan prior to the
stockholders' meeting, but until stockholder approval of the Plan is obtained,
no such additional Incentive Stock Option shall be exercisable.
<PAGE>
Exhibit 10.44
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
August 27, 1999 by and between Viatel, Inc., a Delaware corporation with an
office at 685 Third Avenue, New York, New York 10017 (the "Company"), and Alfred
West (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Executive and Executive desires
to provide services to the Company; and
WHEREAS, the Company and the Executive desire that the Company employs
the Executive as the Company's Vice Chairman of the Board of Directors.
NOW THEREFORE, each of the Company and the Executive, intending to be
legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
Definitions
-----------
The following terms used in this Agreement shall have the meanings set
forth below.
1.1 "Accrued Obligations" shall mean, as of the date of Termination,
the sum of Executive's aggregate accrued but unpaid (A) Base Salary, (B) Bonus
Award, (C) other cash compensation and (D) vacation pay, expense reimbursements
and other cash entitlements, all determined through the date of Termination.
1.2 "Acquisition Date" shall have the meaning set forth in Section 2.2
hereof.
1.3 "Base Salary" shall mean the amount set forth in Section 3.1
hereof, or if the Executive has received different Base Salaries during the
course of a year, the most recent of such Base Salaries.
1.4 "Bonus Award" shall mean a cash bonus equal to ninety percent (90%)
of the Executive's Base Salary multiplied by the Bonus Multiple for the
applicable Performance Year.
1.5 "Bonus Multiple" shall mean the amount determined by reference to
Section 3.2 hereof.
1.6 "Board" shall mean the Board of Directors of the Company.
1.7 "Cause" shall mean Executive's (i) material violation of Section
2.3 hereof, which violation has not been cured within 20 days of the date that
written notice thereof is received by Executive from the Board; (ii) material
violation of Section 4.1 or 4.2 hereof; (iii) violation of Section 4.3 hereof;
(iv) any attempt by Executive to secure any personal profit in connection with
the business of the Company; (v) gross negligence, dishonesty, moral turpitude
or other misconduct in the performance of his duties hereunder or habitual
neglect in managing his responsibilities; provided, however, that the Board
undertakes a comprehensive review and determines that such
<PAGE>
conduct is materially injurious or materially damaging to the Company or its
reputation; or (vi) conviction of, or a plea of nolo contendere to, a felony or
a misdemeanor involving fraud, misrepresentation or dishonesty, whether or not
relating to the business and affairs of the Company.
1.8 "Change of Control" is defined to mean such time as (i) a "person"
or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.9 "Common Stock" shall mean the common stock, par value $0.01 a
share, of the Company.
1.10 "Competitive Activities" shall have the meaning set forth in
Section 4.3 hereof.
1.11 "Confidential Material" shall have the meaning set forth in
Section 4.2 hereof.
1.12 "Control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.
1.13 "Disability" shall mean Executive's death or inability to perform
his material duties to the Company by reason of a physical or mental disability,
which has existed for an aggregate of four months during any twelve-month
period. In the event of any dispute between the Company and Executive as to
whether Executive has suffered a Disability, the determination of whether
Executive has suffered a Disability shall be made by an independent physician
selected by the Company (subject to Executive's reasonable consent), and the
decision of such physician shall be binding upon the Company and Executive.
1.14 "Disability Payment" shall mean, for purposes of Section 5.3(d)
hereof, an amount equal to 60% of the Base Salary in effect for the calendar
year in which such Disability occurred (or the average Base Salary if such
Disability occurred over more than one calendar year).
1.15 "EBITDA" shall mean, with respect to the Company on a consolidated
basis for any Performance Year, the Company's consolidated earnings before
interest, taxes, extraordinary loss, dividends on preferred stock and
depreciation and amortization, as such is reported in the Company's financial
statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
1.17 "Good Reason" shall mean any (i) reduction in Executive's Base
Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.2 hereof), (iv) failure to be reappointed as Vice Chairman during
any period during which Executive is serving on the Board and remains a full
time employee of the Company, (v) transaction resulting in a Change of Control,
if Executive has provided written notice to the Company within 60 days of such
Change of Control of his intentions to cease employment hereunder, (vi) material
diminution in executive's authority, function, position or title. with the
Company which continues after 15 days of the date that written notice thereof is
given to the Board by Executive.
1.18 "Intellectual Property" shall mean any idea, process, trademark,
service mark, trade or business secret, invention, technology, computer program
or hardware, original work of authorship, design, formula, discovery, patent or
copyright, application, record, design, plan or specification and any
improvement, right or claim related to the foregoing.
1.19 "Participation", which includes correlative meanings, the term
"participate", shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.20 "Performance Year" shall mean each calendar year.
1.21 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.22 "Severance Amount" shall mean, for purposes of Section 5.3(b)
hereof, an amount equal to the sum of (A) the Base Salary for the calendar year
in the Term in which the date of Termination occurs plus (B) the prior year's
Bonus Award multiplied by the Severance Period Multiple.
1.23 "Severance Period Multiple" shall mean, except as provided in
Section 5.3(b), the quotient obtained by dividing the Severance Period by 12;
provided, however, that the Severance Period Multiple shall not be less than
one.
1.24 "Severance Period" shall mean the number of full calendar months
remaining in the Term on the date of any Termination.
1.25 "Term" shall have the meaning set forth in Section 2.2 hereof and
shall include any renewal or extension as set forth therein.
1.26 "Termination" shall mean termination of Executive's employment
with the Company for any reason.
1.27 "Voting Stock" shall mean any share, interest, participation or
other equivalent, however designated, in equity of the Company, whether now
outstanding or issued after the date hereof, including, without limitation, any
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Common Stock or any preferred stock or other class or kind, ordinarily having
the power to vote for the election of directors, managers or other voting
members of the Board.
ARTICLE II
Employment and Term
-------------------
2.1 Employment. (a) Effective as of the Acquisition Date (as defined
below) the Executive shall be employed as Vice Chairman of the Company and
Executive shall accept such employment. In addition, Executive agrees that he
will serve in any similar capacity on behalf of any existing or future
subsidiary of the Company as reasonably requested by the Board.
(b) Effective as of the Acquisition Date, the Company shall cause
Executive to be nominated for election to the Board as a Class C director (which
term will expire at the Company's Annual Meeting of Stockholders occurring in
the year 2002). The Company shall renominate Executive for an additional term as
a Class C director at the Company's Annual Meeting occurring in the year 2002 so
long as he continues to own at least 5% of the outstanding Common Stock on a
fully-diluted basis.
(c) Executive shall be employed at the Company's offices to be
located in Brooklyn, New York, or such other location in the New York
metropolitan area, as the Chief Executive Officer shall designate from time to
time. The Company shall maintain offices for Executive at both the Brooklyn, New
York office and at the Company's headquarters located at 685 Third Avenue, New
York, New York.
2.2 Term. (a) The Term shall commence on the date on which the Company
acquires at least 50.1% of the voting stock of Destia Communications, Inc., a
Delaware corporation (the "Acquisition Date"), and shall end on the earlier of
(i) the second anniversary of the Acquisition Date and (ii) the date of any
Termination. This Agreement shall automatically terminate without liability of
either party to the other if the Merger Agreement, dated August 27, 1999, among
the Company, Viatel Acquisition Corp. and Destia Communications, Inc. is
terminated prior to the effective date of the merger contemplated thereby.
(b) Subject to Section 5.2 hereof, if six (6) months' advance
written notice terminating this Agreement is not received by either party prior
to the expiration of the initial term, or any subsequent renewal term, then this
Agreement shall be automatically renewed for successive one year-periods.
2.3 Duties; Full Time Employment. The Executive shall serve as Vice
Chairman of the Board and shall, subject to the direction and supervision of the
Chief Executive Officer, have responsibility for (i) the development of business
plans for "Presto!" Internet telephony, web-hosting, e-commerce, IP access
services and other value-added products or services; (ii) development of market
entry strategies for new voice and data products and services once their
business plan(s) are approved; (iii) implementation, marketing and expansion of
"Presto" Internet telephony, web-hosting, e-commerce and other value-added
products and services once approved; and (iv) such other duties and
responsibilities as may be assigned to, or required of, Executive from time to
time by the Chief Executive Officer. The Executive shall faithfully and
diligently perform his duties and responsibilities, shall adhere to the
instructions of the Chief Executive Officer and shall
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devote his entire business time, attention, energy and skill in performing his
duties hereunder and to the business and affairs of the Company. Executive shall
also use his best efforts to promote the interests of the Company consistent
with the foregoing and shall adhere to all corporate policies of the Company to
the extent applicable to Executive's duties hereunder. Executive shall not,
directly or indirectly, alone or as a member of any partnership, or as an
officer, director or executive of any other corporation, partnership or other
organization, be actively engaged in or concerned with any other duties or
pursuits which interfere with the performance of his duties hereunder, or which
may be inimical to or contrary to the best interests of the Company.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
Compensation and Benefits
-------------------------
3.1 Base Salary. For all services performed by Executive for the
Company and/or any of its subsidiaries hereunder, including, without limitation,
as an executive, officer or member of any committee of the Board, the Company
shall pay Executive an annual Base Salary of $400,000 payable in equal
installments in accordance with the Company's prevailing payroll practices
applicable to its senior executives in effect from time to time. The Base Salary
shall be increased at such time and in such amount as determined by the
Compensation Committee of the Board in its sole and absolute discretion.
3.2 Bonuses. (a)No later than January 15 of each calendar year, the
Company shall pay to Executive an annual bonus in respect of the prior fiscal
year in an amount equal to the Bonus Award multiplied by the Bonus Multiple. For
purposes of this Agreement, the term "Bonus Multiple" shall mean the multiple,
if any, determined by reference to the matrix set forth below, based on the
Company's overall financial performance for the relevant year, by providing the
percentage variance between "Revenue" and "EBITDA" actually reported for the
fiscal year and "Revenue" and "EBITDA" as set forth in the annual budget for the
Company adopted by the Board.
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EBITDA Variance (Actual vs. Budget)
<TABLE>
<CAPTION>
-15% to -5% -5% to 5% +5.1% to 15% + 15%
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue -15% to -5% 0.6 0.7 0.8 1.0
Variance -4.99% to 5% 0.8 1.0 1.1 1.2
(Actual +5% to 15% 1.0 1.1 1.2 1.4
Vs. +15.1% to 25% 1.2 1.5 1.7 1.8
Budget) + 25% 1.4 1.7 1.8 2.0
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance Year, he
shall receive a pro rated Bonus Award, determined by computing the Bonus Award
as if Executive were employed for the entire Performance Year and multiplying
such Award by a fraction, of which (i) the numerator is the number of days he
was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid,
in respect of a Performance Year, if, during such Performance Year, Executive's
employment was terminated either (x) by the Board for Cause or (y) by the
Executive without Good Reason. The Bonus Award shall be paid no later than
January 31 of the succeeding year.
(d) Any compensation which may be otherwise authorized from time to
time by the Board (or an appropriate committee thereof) shall be in addition to
the Base Salary and any Bonus Award.
3.3 Long-term Incentives. With respect to each of calendar year 2000
and 2001, Executive shall be entitled to receive a minimum of 20,000 shares of
restricted Common Stock. Any additional grants of stock options or restricted
stock shall be in amounts determined by the Compensation Committee in its sole
and absolute discretion.
3.4 Other Benefits. In addition to Base Salary and any Bonus Award,
Executive shall also be entitled to the following:
(a) Participation in Benefit Plans. Executive shall be entitled to
participate in, and receive benefits under, all present and future life,
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accident, disability, medical, pension, savings and all other similar benefits
made available by the Company to its senior executive officers on terms at least
as favorable as those granted to other senior executives of the Company.
Executive shall also be entitled to participate in all other welfare and benefit
plans maintained by the Company and/or its subsidiaries, as the case may be, for
their respective employees generally on terms at least as favorable as those
granted to other senior executives.
(b) Vacation. Executive shall be entitled to annual vacation and
paid holidays consistent with the Company's practices for other senior
executives as adopted from time to time; provided, however, that such vacation
shall not be less than 20 days each year (without deduction in salary or other
compensation or benefits). Executive shall take such vacation at such time or
times as may be reasonably convenient to the operations of the Company.
(c) Reimbursement of Expenses. The Company shall reimburse
Executive for reasonable travel expenses and other reasonable out of pocket
business expenses incurred by Executive in the performance of his duties
hereunder, provided appropriate itemized documentation supporting such expenses
is submitted in accordance with the Company's prevailing expense reimbursement
policy for senior executives of the Company.
(d) Parking Spot. The Company shall provide Executive with a
parking spot in close proximity to the Company's headquarters at 685 Third
Avenue, New York, New York.
ARTICLE IV
Covenants
---------
4.1 Non-Interference. During the Term and a period of eighteen months
thereafter, Executive agrees not to directly or indirectly solicit, induce,
counsel, advise or encourage any employee of the Company who is employed in an
executive, managerial, administrative or professional capacity or who possesses
Confidential Material to leave the employment of the Company.
4.2 Nondisclosure of Confidential Material. (a) In the performance of
his duties hereunder, Executive shall have access to confidential records and
information, including, but not limited to, information relating to (i) any
Intellectual Property or (ii) the Company's business plans and practices,
financial data, operational methods, development plans or projects, customers,
affairs, marketing or sales or purchasing strategy, costs and specifications of
Company products and services and any other information of a proprietary nature
(collectively, clauses (i) and (ii) of this Section 4.2(a) are referred to as
the "Confidential Material").
(b) All Confidential Material shall be disclosed to Executive in
confidence. Except in performing his duties hereunder, Executive shall not,
during the Term and at all times thereafter, communicate or disclose or use any
Confidential Material for the benefit of, any person (including Executive) other
than the Company, its subsidiaries or affiliates.
(c) All records, files, drawings, documents, equipment and other
tangible items containing Confidential Material shall be the Company's exclusive
property, and, upon termination of this Agreement for any reason, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and all copies and extracts
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thereof and any notes relating thereto) that may be in Executive's possession or
control. Executive shall, if so requested by the Company, promptly deliver to
the Company a written confirmation that all such Confidential Information has
been returned to the Company.
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; provided, however, that Executive
shall, prior to any such disclosure, promptly notify the Company of such
requirement; provided, further, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 Non-Competition. (a) The Executive shall not, during the Term (i)
Control any Person which is engaged, directly or indirectly, or Participate in
any business that is competitive with the Company's business as constituted
immediately following the completion of the Company's acquisition of Destia
Communications, Inc. or in which the Company becomes engaged in business or
proposes to be so engaged in business in accordance with its strategic business
plan current at the time of the Termination or (ii) solicit, attempt to solicit,
induce, counsel, advise or encourage any customer, agent, dealer, distributor or
consultant of the Company on behalf of any Competitor or any other business,
directly or indirectly on behalf of himself or any other Person ((i) and (ii)
collectively referred to as, "Competitive Activities"); provided, however, that
nothing in this Agreement shall preclude Executive from owning less than 5% of
any class of publicly traded equity of any Person engaged in any Competitive
Activity. Notwithstanding the immediately preceding sentence, if the Company has
ceased to so provide such services within any such country at the time of
Executive's Termination (or any time thereafter), the covenant set forth in the
immediately preceding sentence shall no longer be applicable to any such
business in such country.
(b) Upon Termination for Disability or Cause or without Good Reason
the Executive shall not, for himself or any third party, directly or indirectly,
for a period of one year following the date of such Termination engage in any
Competitive Activities.
(c) Upon Termination without Cause, for Good Reason, or for failure
of the Company to renew this Agreement for an additional term, Executive shall
not, for himself or any third party, directly or indirectly, engage in
Competitive Activities for a period of 30 days following the date of such
Termination.
Notwithstanding the foregoing, Executive shall be permitted to make
minority investments in private businesses in which he is neither actively
employed or serving as a director, provided that Executive (i) did not learn of
such opportunity while employed by the Company, or (ii) if Executive learned of
the opportunity while so employed, Executive offered the opportunity to the
Company and the Company declined to pursue the opportunity.
4.4 Executive Inventions and Ideas.
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(a) Executive hereby agrees to assign to the Company, without
further consideration, his entire right, title and interest (within the United
States and all foreign jurisdictions), to any Intellectual Property created,
conceived, developed or reduced to practice by Executive (alone or with others),
free and clear of any lien or encumbrance. If any Intellectual Property shall be
deemed patentable or otherwise registrable, Executive shall assist the Company
(at its expense) in obtaining letters patent or other applicable registration
therein and shall execute all documents and do all things (including testifying
at the Company's expense) necessary or appropriate to obtain letters patent or
other applicable registration therein and to vest in the Company, or any
affiliate specified by the Board.
(b) Should Company be unable to secure Executive's signature on any
document necessary to apply for, prosecute, obtain or enforce any patent,
copyright or other right or protection relating to any Intellectual Property,
whether due to Executive's Disability or other reason, Executive hereby
irrevocably designates and appoints the Company and each of its duly authorized
officers and agents as Executive's agent and attorney-in-fact to act for and on
Executive's behalf and stead and to execute and file any such document and to do
all other lawfully permitted acts to further the prosecution, issuance and other
enforcement of patents, copyrights or other rights or protections with the same
effect as if executed and delivered by Executive.
4.5 Enforcement.
(a) Executive acknowledges that violation of any covenant or
agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights, which the Company may have for money damages,
and all of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application thereof to
any person, place or circumstance, shall be held by a court of competent
jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this Agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
(c) The Executive understands that the provisions of this Article
IV may limit his ability to earn a livelihood in a business similar to the
business of the Company but nevertheless agrees and hereby acknowledges that (i)
such provisions do not impose a greater restraint than is necessary to protect
the goodwill or other business interests of the Company; (ii) such provisions
contain reasonable limitations as to time and the scope of activity to be
restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of
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<PAGE>
Executive's education, skills and abilities, Executive agrees that he will not
assert, and it should not be considered, that any provisions of this Article IV
prevented him from earning a living or otherwise are void, voidable or
unenforceable or should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by Executive
as part of the consideration for this Agreement and as an inducement to the
Company to enter into this Agreement and accept the obligations hereunder.
ARTICLE V
Termination
-----------
5.1 Termination of Agreement. Except as otherwise provided, this
Agreement shall become invalid upon any Termination of employment.
5.2 Procedures Applicable to Termination.
(a) Termination for Cause. The Executive may be Terminated for
Cause, upon at least 30 days' prior written notice from the Board to Executive
for termination for Cause provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
concerning such determination.
(b) Resignation for Good Reason. The Executive may terminate his
employment for Good Reason upon at least 30 days' prior written notice from
Executive to the Board of his intent to resign for Good Reason, provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign.
(c) Termination without Cause or for Disability. The Executive may
be terminated without Cause or for Disability, upon at least 30 days' prior
written notice from the Board to Executive, by a vote of the Board, provided
that Executive, with his counsel, shall have had the opportunity during such
period to be heard at a meeting of the Board with respect to such determination.
(d) No Effect on Rights. The Executive's right or obligation to be
heard in connection with a Termination shall not otherwise effect the rights and
obligations of the Executive and the Company hereunder.
5.3 Obligations of the Company upon Termination.
(a) All Terminations. Upon any Termination, the Company shall pay
to Executive, or, upon Executive's Disability, if applicable, to his heirs,
estate or legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 15 days after the
date of Termination; and
(ii) all benefits accrued by Executive as of the date of
Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar
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plans of the Company to such extent, in such manner and at such time as are
provided under the terms of such plans and arrangements.
(b) Termination without Cause, Resignation for Good Reason, or
Failure to Renew Contract. If the Board terminates Executive's employment
without Cause (excluding Termination because of Disability), if Executive
resigns for Good Reason or if the Company fails to renew this Agreement, in
addition to the amounts payable under Section 5.3(a) hereof the Company shall
pay Executive two months Base Salary in a lump sum.
Notwithstanding the foregoing, in the event that Executive's
employment is terminated following a Change in Control, the Executive shall
receive the Severance Amount. The Severance Period Multiple used in calculating
the Severance Amount shall be increased to one and one half and Executive shall
be entitled to an additional payment equal to the amount of any excise taxes
payable by Executive pursuant to Section 4999 of the Internal Revenue Code as a
result of such termination plus all federal, state and local taxes applicable to
the Company's payment of such excise taxes, including any additional excise
taxes due under Section 4999 of the Internal Revenue Code with respect to the
payments made pursuant to this provision, including any such taxes resulting
from the acceleration of any other benefits hereunder. The determination of the
amounts required to be paid under this Agreement shall be made by a nationally
recognized United States public accounting firm which may be the independent
public accounting firm used by the Company to audit its financial statements.
(c) Termination for Cause or Resignation without Good Reason. If
the Board terminates Executive's employment for Cause, or if Executive resigns
without Good Reason, Executive shall only be entitled to the amounts payable
under Section 5.3(a) hereof.
(d) Termination for Disability. Upon Termination of Executive
because of a Disability, in addition to the amounts payable under Section 5.3(a)
hereof, the Company shall pay the aggregate Disability Payment for three years
in accordance with the Company's regular payroll practices then in existence.
(e) Exclusivity. Any amount payable to Executive pursuant to this
Article V shall be Executive's sole remedy upon a Termination, and Executive
waives any and all rights to pursue any other remedy at law or in equity;
provided, however, that Executive does not hereby waive any right provided under
any federal, state or local law or regulation relating to employment
discrimination.
ARTICLE VI
Miscellaneous
-------------
6.1 Executive Acknowledgment. The Executive acknowledges that he has
consulted with or has had the opportunity to consult with independent counsel of
his own choice concerning this Agreement and has been advised to do so by the
Company, and that he has read and understands the Agreement, is fully aware of
its legal effect, and has entered into it freely based on his own judgment.
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6.2 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.3 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Tel.: (212) 350-9200
Fax.: (212) 350-9245
Attention: Chief Executive Officer
(b) if to Executive, to:
the then current address of Executive maintained in the
Company's employee files.
with a copy to:
Michael Littenberg, Esq.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Tel: (212) 756-2000
Fax: (212) 593-5953
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.4 Tax Withholding. The Company shall provide for the withholding of
any taxes required to be withheld under federal, state and local law (other than
the employer's portion of such taxes) with respect to any payment in cash and/or
other property made by or on behalf of the Company to or for the benefit of
Executive under this Agreement or otherwise. The Company may, at its option: (i)
withhold such taxes from any cash payments owing from the Company to Executive,
(ii) require Executive to pay to the Company in cash such amount as may be
required to
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satisfy such withholding obligations and/or (iii) make other satisfactory
arrangements with Executive to satisfy such withholding obligations.
6.5 No Assignment; No Third Party Beneficiaries. Except as otherwise
expressly provided in Section 6.2 hereof, this Agreement is not assignable by
any party, and no payment to be made hereunder shall be subject to alienation,
sale, transfer, assignment, pledge, encumbrance or other charge. Except for the
Company and its existing and future subsidiaries, no Person shall be, or deemed
to be, a third party beneficiary of this Agreement.
6.6 Expenses. Each party hereto shall assume and pay its own expenses
incident to the negotiation and execution of this Agreement, the preparation for
carrying it into effect and the consummation of the transactions contemplated
hereby. Without limiting the generality of the foregoing, each party shall pay
all legal fees and other fees to consultants and advisors incurred by it
relating to this Agreement and such transactions and shall indemnify and hold
the other party harmless from and against any claims for such expenses and fees
of the first party's consultants and advisors; provided, however, in the event
of any dispute hereunder between the Company and the Executive, the Company
shall pay all costs and expenses incurred by Executive in enforcing his rights
hereunder in any suit or proceeding in which Executive is awarded damages or
otherwise prevails on the merits or procedural grounds.
6.7 Execution in Counterparts. This Agreement may be executed by the
parties hereto in one or more counterparts, each of which shall be deemed to be
an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.8 Jurisdiction and Governing Law. Jurisdiction over disputes with
regard to this Agreement shall be exclusively in the courts of the State of New
York, and this Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.9 Entire Agreement; Amendment. Except as otherwise provided in
Section 3.3 hereof, this Agreement and the Exhibits attached hereto embody the
entire understanding of the parties hereto, and, beginning on the Acquisition
Date, supersede all prior agreements regarding the subject matter hereof,
including the Employment Agreement, dated May 3, 1999 between Executive and
Destia Communications, Inc. No change, alteration or modification hereof may be
made except in writing, signed by both of the parties hereto.
6.10 Headings. The headings in this Agreement are for convenience of
reference only and shall not be construed as part of this Agreement or to limit
or otherwise affect the meaning hereof.
6.11 Survival. Notwithstanding anything to the contrary herein, Section
Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day first written above.
VIATEL, INC.
By: /s/ Michael J. Mahoney
----------------------------------
President and Chief Executive Officer
EXECUTIVE
/s/ Alfred West
-----------
<PAGE>
Exhibit 10.45
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
August 27, 1999 by and between VIATEL, INC., a Delaware corporation with an
office at 685 Third Avenue, New York, New York 10017 (the "Company"), and Alan
L. Levy (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Executive and Executive desires
to provide services to the Company; and
WHEREAS, the Company and the Executive desire that the Company employs
the Executive as the Company's Chief Operating Officer.
NOW THEREFORE, each of the Company and the Executive, intending to be
legally bound, hereby mutually covenant and agree as follows:
ARTICLE I
Definitions
-----------
The following terms used in this Agreement shall have the meanings set
forth below.
1.1 "Accrued Obligations" shall mean, as of the date of Termination,
the sum of Executive's aggregate accrued but unpaid (A) Base Salary, (B) Bonus
Award, (C) other cash compensation and (D) vacation pay, expense reimbursements
and other cash entitlements, all determined through the date of Termination.
1.2 "Acquisition Date" shall have the meaning set forth in Section 2.2
hereof.
1.3 "Base Salary" shall mean the amount set forth in Section 3.1
hereof, or if the Executive has received different Base Salaries during the
course of a year, the most recent of such Base Salaries.
1.4 "Bonus Award" shall mean a cash bonus equal to eighty percent (80%)
of the Executive's Base Salary multiplied by the Bonus Multiple for the
applicable Performance Year.
1.5 "Bonus Multiple" shall mean the amount determined by reference to
Section 3.2 hereof.
1.6 "Board" shall mean the Board of Directors of the Company.
<PAGE>
1.7 "Cause" shall mean Executive's (i) material violation of Section
2.3 hereof, which violation has not been cured within 20 days of the date that
written notice thereof is received by Executive from the Board; (ii) material
violation of Section 4.1 or 4.2 hereof; (iii) violation of Section 4.3 hereof;
(iv) any attempt by Executive to secure any personal profit in connection with
the business of the Company; (v) gross negligence, dishonesty, moral turpitude
or other misconduct in the performance of his duties hereunder or habitual
neglect in managing his responsibilities; provided, however, that the Board
undertakes a comprehensive review and determines that such conduct is materially
injurious or materially damaging to the Company or its reputation; or (vi)
conviction of, or a plea of nolo contendere to, a felony or a misdemeanor
involving fraud, misrepresentation or dishonesty, whether or not relating to the
business and affairs of the Company.
1.8 "Change of Control" is defined to mean such time as (i) a "person"
or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act), becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis or (ii)
individuals who at the beginning of any period of two consecutive calendar years
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then still
in office who either were members of the Board at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of the Board then in
office.
1.9 "Common Stock" shall mean the common stock, par value $0.01 a
share, of the Company.
1.10 "Competitive Activities" shall have the meaning set forth in
Section 4.3 hereof.
1.11 "Confidential Material" shall have the meaning set forth in
Section 4.2 hereof.
1.12 "Control" (including, with correlative meanings, the terms
"controlling," "controlled by," and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.
1.13 "Disability" shall mean Executive's death or inability to perform
his material duties to the Company by reason of a physical or mental disability,
which has existed for an aggregate of four months during any twelve-month
period. In the event of any dispute between the Company and Executive as to
whether Executive has suffered a Disability, the determination of whether
Executive has suffered a Disability shall be made by an independent physician
selected by the Company (subject to Executive's reasonable consent), and the
decision of such physician shall be binding upon the Company and Executive.
2
<PAGE>
1.14 "Disability Payment" shall mean, for purposes of Section 5.3(d)
hereof, an amount equal to 60% of the Base Salary in effect for the calendar
year in which such Disability occurred (or the average Base Salary if such
Disability occurred over more than one calendar year).
1.15 "EBITDA" shall mean, with respect to the Company on a consolidated
basis for any Performance Year, the Company's consolidated earnings before
interest, taxes, extraordinary loss, dividends on preferred stock and
depreciation and amortization, as such is reported in the Company's financial
statements.
1.16 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.17 "Good Reason" shall mean any (i) reduction in Executive's Base
Salary, (ii) failure by the Company to continue any material benefit or
compensation plan, life insurance plan, health and accident plan, disability
plan (or plan providing Executive with substantially similar benefits) in which
Executive is participating or the material reduction by the Company of
Executive's benefits under any such plan, (iii) failure by the Company to obtain
an assumption of this Agreement by any successor of the Company (as contemplated
in Section 6.3 hereof), (iv) transaction resulting in a Change of Control, if
Executive has provided written notice to the Company within 60 days of such
Change of Control of his intentions to cease employment hereunder, (v) Executive
ceases to be a member of the Company's Board of Directors (except in the case of
a voluntary resignation), or (vi) material dimunition in Executive's authority,
function, position or title with the Company which continues after 15 days of
the date that written notice thereof is given to the Board by Executive.
1.18 "Intellectual Property" shall mean any idea, process, trademark,
service mark, trade or business secret, invention, technology, computer program
or hardware, original work of authorship, design, formula, discovery, patent or
copyright, application, record, design, plan or specification and any
improvement, right or claim related to the foregoing.
1.19 "Participation", which includes correlative meanings, the term
"participate", shall mean the direct or indirect participation in any
Competitive Activity, whether as an operator, manager, consultant, and whether
individually or jointly.
1.20 "Performance Year" shall mean each calendar year.
1.21 "Person" shall mean any individual or entity, whether a
governmental or other agency or political subdivision thereof or otherwise.
1.22 "Severance Amount" shall mean, for purposes of Section 5.3(b)
hereof, an amount equal to the sum of (A) the Base Salary for the calendar year
in the Term in which the date of Termination occurs plus (B) the prior year's
Bonus Award multiplied by the Severance Period Multiple.
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<PAGE>
1.23 "Severance Period Multiple" shall mean, except as provided in
Section 5.3(b), the quotient obtained by dividing the Severance Period by 12;
provided, however, that the Severance Period Multiple shall not be less than one
(1), except that in the case of a Change of Control, the Severance Period
Multiple shall not be less than one and one-half
1.24 "Severance Period" shall mean the number of full calendar months
remaining in the Term on the date of any Termination.
1.25 "Term" shall have the meaning set forth in Section 2.2 hereof and
shall include any renewal or extension as set forth therein.
1.26 "Termination" shall mean termination of Executive's employment
with the Company for any reason.
1.27 "Voting Stock" shall mean any share, interest, participation or
other equivalent, however designated, in equity of the Company, whether now
outstanding or issued after the date hereof, including, without limitation, any
Common Stock or any preferred stock or other class or kind, ordinarily having
the power to vote for the election of directors, managers or other voting
members of the Board.
ARTICLE II
Employment and Term
-------------------
2.1 Employment. (a) Effective as of the Acquisition Date (as defined
below) the Executive shall be employed as Chief Operating Officer of the Company
and Executive shall accept such employment. In addition, Executive agrees that
he will serve in any similar capacity on behalf of any existing or future
subsidiary of the Company as reasonably requested by the Chief Executive
Officer. In the event that Executive is assigned a different position in the
Company, the Company and Executive will execute a new employment agreement with
terms at least as favorable as the terms contained in this Agreement.
(b) Effective as of the Acquisition Date, the Company shall cause
Executive to be nominated for election to the Board as a Class A director (which
term will expire at the Company's Annual Meeting of Stockholders occurring in
the year 2000). The Company shall renominate Executive for an additional term as
a Class A director at the Company's Annual Meeting occurring in the year 2000 so
long as he remains actively employed by the Company at such date under the terms
of this Agreement. Executive shall resign his directorship upon any Termination.
(c) Executive shall be employed at the Company's headquarters at
685 Third Avenue, New York, New York or such other location in the New York
metropolitan area as the Chief Executive Officer shall designate from time to
time.
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<PAGE>
2.2 Term. (a)The Term shall commence on the date on which the Company
acquires at least 50.1% of the voting stock of Destia Communications, Inc., a
Delaware corporation (the "Acquisition Date"), and shall end on the earlier of
(i) the second anniversary of the Acquisition Date and (ii) the date of any
Termination. This Agreement shall automatically terminate without liability of
either party to the other if the Merger Agreement, dated August 27, 1999, among
the Company, Viatel Acquisition Corp. and Destia Communications, Inc. is
terminated prior to the effective date of the merger contemplated thereby.
(b) Subject to Section 5.2 hereof, if six (6) months' advance
written notice terminating this Agreement is not received by either party prior
to the expiration of the initial term, or any subsequent renewal term, then this
Agreement shall be automatically renewed for successive one-year-periods.
2.3 Duties; Full Time Employment. The Executive shall serve as Chief
Operating Officer of the Company and shall, subject to the direction and
supervision of the President and Chief Executive Officer of the Company, have
control of the following segments of the Company's operations (i) internal
management information systems, (ii) billing systems, (iii) least cost routing
and margin systems, (iv) switched network operations, (v) end-user sales and
marketing organizations and other end-user channels of distributions and
switched carrier services sales force and shall have such other duties and
responsibilities as may be assigned to, or required of Executive from time to
time by the Chief Executive Officer. With respect to Executive's control over
global accounts and data products and services, Executive shall share
responsibility with the Company's Senior Vice President of Sales and Marketing
and Senior Vice President, Chief Technology Officer and such other people as may
be identified from time to time by the Chief Executive Officer. The Executive
shall faithfully and diligently perform his duties and responsibilities, shall
adhere to the instructions of the Chief Executive Officer and shall devote his
entire business time, attention, energy and skill in performing his duties
hereunder and to the business and affairs of the Company. Executive shall also
use his best efforts to promote the interests of the Company consistent with the
foregoing and shall adhere to all corporate policies of the Company to the
extent applicable to Executive's duties hereunder. Executive shall not, directly
or indirectly, alone or as a member of any partnership, or as an officer,
director or executive of any other corporation, partnership or other
organization, be actively engaged in or concerned with any other duties or
pursuits which interfere with the performance of his duties hereunder, or which
may be inimical to or contrary to the best interests of the Company.
Notwithstanding the foregoing, nothing in this Agreement shall restrict
Executive from managing his personal investments, personal business affairs and
other personal matters, or serving on civic or charitable boards or committees,
if such activities do not interfere with the performance of his duties hereunder
or conflict with the Company's interests.
ARTICLE III
Compensation and Benefits
-------------------------
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<PAGE>
3.1 Base Salary. For all services performed by Executive for the
Company and/or any of its subsidiaries hereunder, including, without limitation,
as an executive, officer or member of any committee of the Board, the Company
shall pay Executive an annual Base Salary of $345,000 payable in equal
installments in accordance with the Company's prevailing payroll practices
applicable to its senior executives in effect from time to time. The Base Salary
shall be increased at such time and in such amount as determined by the
Compensation Committee of the Board in its sole and absolute discretion.
3.2 Bonuses. (a) No later than January 15 of each calendar year, the
Company shall pay to Executive an annual bonus in respect of the prior fiscal
year in an amount equal to the Bonus Award multiplied by the Bonus Multiple. For
purposes of this Agreement, the term "Bonus Multiple" shall mean the multiple,
if any, determined by reference to the matrix set forth below, based on the
Company's overall financial performance for the relevant year, by providing the
percentage variance between "Revenue" and "EBITDA" actually reported for the
fiscal year and "Revenue" and "EBITDA" as set forth in the annual budget for the
Company adopted by the Board.
EBITDA Variance (Actual vs. Budget)
<TABLE>
<CAPTION>
-15% to -5% -5% to 5% +5.1% to 15% + 15%
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue -15% to -5% 0.6 0.7 0.8 1.0
Variance -4.99% to 5% 0.8 1.0 1.1 1.2
(Actual +5% to 15% 1.0 1.1 1.2 1.4
vs. +15.1% to 25% 1.2 1.5 1.7 1.8
Budget) + 25% 1.4 1.7 1.8 2.0
</TABLE>
(b) The final determination of EBITDA with respect to any
Performance Year shall be subject to the approval of the Compensation Committee.
If such approval is not obtained within 15 days after completion of the
Company's audited financial statements for the related Performance Year, the
Compensation Committee shall appoint a nationally recognized accounting firm
(which may be the Company's auditors) to determine EBITDA in respect of such
Performance Year.
(c) If Executive is employed for a part of a Performance Year, he
shall receive a pro rated Bonus Award, determined by computing the Bonus Award
as if Executive were employed for the entire Performance Year and multiplying
such Award by a fraction, of which (i) the numerator is the number of days he
was employed by the Company during such Performance Year and (ii) the
denominator is 365. Notwithstanding the foregoing, no Bonus Award shall be paid,
in respect of a Performance Year, if during such Performance Year, Executive's
employment was terminated either (x) by the Board for Cause or (y) by the
Executive without Good Reason. The Bonus Award shall be paid no later than
January 31 of the succeeding year.
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(d) Any compensation which may be otherwise authorized from time to
time by the Board (or an appropriate committee thereof) shall be in addition to
the Base Salary and any Bonus Award.
3.3 Long-term Incentives. With respect to each of calendar year 2000
and 2001, Executive shall be entitled to receive a minimum of 16,123 shares of
restricted Common Stock and options to purchase 42,642 shares of Common Stock
with an exercise price equal to the fair market value of the Common Stock on the
day before the Acquisition Date and subject to such other terms and conditions
customary for such a grant and otherwise applicable to senior executives of the
Company. Any additional grants of stock options or restricted stock shall be in
amounts determined by the Compensation Committee in its sole and absolute
discretion.
3.4 Other Benefits. In addition to Base Salary and any Bonus Award,
Executive shall also be entitled to the following:
(a) Participation in Benefit Plans. Executive shall be entitled to
participate in, and receive benefits under, all present and future life,
accident, disability, medical, pension, savings and all other similar benefits
made available by the Company to its senior executive officers on terms at least
as favorable as those granted to other senior executives of the Company.
Executive shall also be entitled to participate in all other welfare and benefit
plans maintained by the Company and/or its subsidiaries, as the case may be, for
their respective employees generally on terms at least as favorable as those
granted to other senior executives.
(b) Vacation. Executive shall be entitled to annual vacation and
paid holidays consistent with the Company's practices for other senior
executives as adopted from time to time; provided, however, that such vacation
shall not be less than 20 days each year (without deduction in salary or other
compensation or benefits). Executive shall take such vacation at such time or
times as may be reasonably convenient to the operations of the Company.
(c) Reimbursement of Expenses. The Company shall reimburse
Executive for reasonable travel expenses and other reasonable out of pocket
business expenses incurred by Executive in the performance of his duties
hereunder, provided appropriate itemized documentation supporting such expenses
is submitted in accordance with the Company's prevailing expense reimbursement
policy for senior executives of the Company.
(d) Parking Spot. The Company shall provide Executive with a
parking spot in close proximity to the Company's headquarters at 685 Third
Avenue, New York, New York.
(e) Tax Indemnity. The Company shall select and retain a law firm
or accounting firm with a national reputation (which may be the Company's
current law firm or auditors) to determine whether Executive has a reasonable
reporting position determining that the acceleration of certain stock options
under Executive's Employment
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<PAGE>
Agreement, dated May 3, 1999, with Destia Communications, Inc. is not subject to
the excise tax under Section 280G of the Internal Revenue Code of 1986, as
amended. Executive shall provide the law firm or accounting firm selected by the
Company with such information and cooperation as may be reasonably requested to
complete the required analysis. Upon reciept of written advice confirming the
existance of such a reasonable reporting position, Executive agrees that he will
not make any payment in respect of such taxes. In such event, the Company shall
indemnify Executive for up to $3.0 million of any excise tax liabilities
resulting from the acceleration of stock options, provided, however, that the
$3.0 million indemnity shall be reduced to the extent that similar payments are
required in respect of any other Destia Communications, Inc. employee. In the
event Executive does not have such a reasonable reporting position, the Company
will pay up to $3.0 million of any such excise taxes payable by Executive.
ARTICLE IV
Covenants
---------
4.1 Non-lnterference. During the Term and a period of eighteen months
thereafter, Executive agrees not to directly or indirectly solicit, induce,
counsel, advise or encourage any employee of the Company who is employed in an
executive, managerial, administrative or professional capacity or who possesses
Confidential Material to leave the employment of the Company.
4.2 Nondisclosure of Confidential Material. (a) In the performance of
his duties hereunder, Executive shall have access to confidential records and
information, including, but not limited to, information relating to (i) any
Intellectual Property or (ii) the Company's business plans and practices,
financial data, operational methods, development plans or projects, customers,
affairs, marketing or sales or purchasing strategy, costs and specifications of
Company products and services and any other information of a proprietary nature
(collectively, clauses (i) and (ii) of this Section 4.2(a) are referred to as
the "Confidential Material").
(b) All Confidential Material shall be disclosed to Executive in
confidence. Except in performing his duties hereunder, Executive shall not,
during the Term and at all times thereafter, communicate or disclose or use any
Confidential Material for the benefit of, any person (including Executive) other
than the Company, its subsidiaries or affiliates.
(c) All records, files, drawings, documents, equipment and other
tangible items containing Confidential Material shall be the Company's exclusive
property, and, upon termination of this Agreement for any reason, or whenever
requested by the Company, Executive shall promptly deliver to the Company all of
the Confidential Material (and all copies and extracts thereof and any notes
relating thereto) that may be in Executive's possession or control. Executive
shall, if so requested by the Company, promptly deliver to
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<PAGE>
the Company a written confirmation that all such Confidential Information has
been returned to the Company.
(d) The foregoing restrictions shall not apply if (i) such
Confidential Material has been publicly disclosed (not due to a breach by
Executive of his obligations hereunder or by breach of any other person of a
fiduciary or confidential obligation to the Company) or (ii) Executive is
required to disclose Confidential Material by or to any court of competent
jurisdiction or any governmental or quasi-governmental agency, authority or
instrumentality of competent jurisdiction; provided, however, that Executive
shall, prior to any such disclosure, promptly notify the Company of such
requirement; provided, further, that the Company shall have the right, at its
expense, to object to such disclosures and to seek confidential treatment of any
Confidential Material to be so disclosed on such terms as it shall determine.
4.3 Non-Competition. (a) The Executive shall not, during the Term (i)
Control any Person which is engaged, directly or indirectly, or Participate in
any business that is competitive with the Company's business as constituted
immediately following the completion of the Company's acquisition of Destia
Communications, Inc. or in which the Company is engaged in business or proposes
to be so engaged in business in accordance with its strategic business plan
current at the time of the Termination or (ii) solicit, attempt to solicit,
induce, counsel, advise or encourage any customer, agent, dealer, distributor or
consultant of the Company on behalf of any Competitor or any other business,
directly or indirectly on behalf of himself or any other Person ((i) and (ii)
collectively referred to as, "Competitive Activities"); provided, however, that
nothing in this Agreement shall preclude Executive from owning less than 5% of
any class of publicly traded equity of any Person engaged in any Competitive
Activity. Notwithstanding the immediately preceding sentence, if the Company has
ceased to so provide such services within any such country at the time of
Executive's Termination (or any time thereafter), the covenant set forth in the
immediately preceding sentence shall no longer be applicable to any such
business in such country.
(b) Upon Termination for Disability or Cause or without Good Reason
the Executive shall not, for himself or any third party, directly or indirectly,
for a period of one year following the date of such Termination engage in any
Competitive Activities.
(c) Upon Termination either without Cause, for Good Reason or
failure of Company to renew this Agreement for an additional Term, the Executive
shall not, for himself or any third party, directly or indirectly, engage in
Competitive Activities for a period of 30 days following the date of such
Termination.
Notwithstanding the foregoing, Executive shall be permitted to make
minority investments in private businesses in which he is neither actively
employed or serving as a director, provided that Executive (i) did not learn of
such opportunity while employed by the Company, or (ii) if Executive learned of
the opportunity while so employed, Executive
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<PAGE>
offered the opportunity to the Company and the Company declined to pursue the
opportunity.
4.4 Executive Inventions and Ideas.
(a) Executive hereby agrees to assign to the Company, without
further consideration, his entire right, title and interest (within the United
States and all foreign jurisdictions), to any Intellectual Property created,
conceived, developed or reduced to practice by Executive (alone or with others),
free and clear of any lien or encumbrance. If any Intellectual Property shall be
deemed patentable or otherwise registrable, Executive shall assist the Company
(at its expense) in obtaining letters patent or other applicable registration
therein and shall execute all documents and do all things (including testifying
at the Company's expense) necessary or appropriate to obtain letters patent or
other applicable registration therein and to vest in the Company, or any
affiliate specified by the Board.
(b) Should Company be unable to secure Executive's signature on any
document necessary to apply for, prosecute, obtain or enforce any patent,
copyright or other right or protection relating to any Intellectual Property,
whether due to Executive's Disability or other reason, Executive hereby
irrevocably designates and appoints the Company and each of its duly authorized
officers and agents as Executive's agent and attorney-in-fact to act for and on
Executive's behalf and stead and to execute and file any such document and to do
all other lawfully permitted acts to further the prosecution, issuance and other
enforcement of patents, copyrights or other rights or protections with the same
effect as if executed and delivered by Executive.
4.5 Enforcement.
(a) Executive acknowledges that violation of any covenant or
agreement set forth in this Article IV would cause the Company irreparable
damage for which the Company cannot be reasonably compensated in damages in an
action at law, and, therefore, upon any breach by Executive of this Article IV,
the Company shall be entitled to make application to a court of competent
jurisdiction for equitable relief by way of injunction or otherwise (without
being required to post a bond). This provision shall not, however, be construed
as a waiver of any of the rights, which the Company may have for money damages,
and all of the Company's rights and remedies shall be unrestricted.
(b) If any provision of this Agreement, or application thereof to
any person, place or circumstance, shall be held by a court of competent
jurisdiction or be found in an arbitration proceeding to be invalid,
unenforceable or void, the remainder of this Agreement and such provisions as
applied to any other person, place and circumstance shall remain in full force
and effect. It is the intention of the parties hereto that the covenants
contained herein shall be enforced to the maximum extent (but no greater extent)
in time, area, and degree of participation as is permitted by the law of the
jurisdiction whose law is found to be applicable to the acts allegedly in breach
of this Agreement, and the parties hereby agree that the court making any such
determination shall have the power to so reform the Agreement.
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<PAGE>
(c) The Executive understands that the provisions of this Article
IV may limit his ability to earn a livelihood in a business similar to the
business of the Company but nevertheless agrees and hereby acknowledges that (i)
such provisions do not impose a greater restraint than is necessary to protect
the goodwill or other business interests of the Company; (ii) such provisions
contain reasonable limitations as to time and the scope of activity to be
restrained; and (iii) the consideration provided under this Agreement,
including, without limitation, any amounts or benefits provided under Article V
hereof, is sufficient to compensate Executive for the restrictions contained in
this Article IV. In consideration of the foregoing and in light of Executive's
education, skills and abilities, Executive agrees that he will not assert, and
it should not be considered, that any provisions of this Article IV prevented
him from earning a living or otherwise are void, voidable or unenforceable or
should be voided or held unenforceable.
(d) Each of the covenants of this Article IV is given by Executive
as part of the consideration for this Agreement and as an inducement to the
Company to enter into this Agreement and accept the obligations hereunder.
ARTICLE V
Termination
-----------
5.1 Termination of Agreement. Except as otherwise provided, this
Agreement shall become invalid upon any Termination of employment.
5.2 Procedures Applicable to Termination.
(a) Termination for Cause. The Executive may be Terminated for
Cause, upon at least 30 days' prior written notice from the Board to Executive
for termination for Cause provided that Executive, with his counsel, shall have
had the opportunity during such period to be heard at a meeting of the Board
concerning such determination.
(b) Resignation for Good Reason. The Executive may terminate his
employment for Good Reason upon at least 30 days' prior written notice from
Executive to the Board of his intent to resign for Good Reason, provided that
Executive, with his counsel, shall have met with the Board, if requested by the
Board, during such period with respect to his intent to resign.
(c) Termination without Cause or for Disability. The Executive may
be terminated without Cause or for Disability, upon at least 30 days' prior
written notice from the Board to Executive, by a vote of the Board, provided
that Executive, with his counsel, shall have had the opportunity during such
period to be heard at a meeting of the Board with respect to such determination.
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<PAGE>
(d) No Effect on Rights. The Executive's right or obligation to be
heard in connection with a Termination shall not otherwise effect the rights and
obligations of the Executive and the Company hereunder.
5.3 Obligations of the Company upon Termination.
(a) All Terminations. Upon any Termination, the Company shall pay
to Executive, or, upon Executive's Disability, if applicable, to his heirs,
estate or legal representatives, as the case may be, the following:
(i) all Accrued Obligations in a lump sum within 15 days after the
date of Termination; and
(ii) all benefits accrued by Executive as of the date of
Termination under all qualified and nonqualified retirement, pension, profit
sharing and similar plans of the Company to such extent, in such manner and at
such time as are provided under the terms of such plans and arrangements.
(b) Termination without Cause, Resignation for Good Reason, or
Failure To Renew Contract. If the Board terminates Executive's employment
without Cause (excluding Termination because of Disability), if Executive
resigns for Good Reason (other than following a Change of Control) or if the
Company fails to renew this Agreement, in addition to the amounts payable under
Section 5.3(a) hereof, Executive shall also be entitled to receive two months of
Base Salary paid in a lump sum.
Notwithstanding the foregoing, in the event that Executive's employment
is terminated following a Change in Control, the Executive shall receive the
Severance Amount. The Severance Period Multiple used in calculating the
Severance Amount shall be one and one-half and Executive shall be entitled to an
additional payment equal to the amount of any excise taxes payable by Executive
pursuant to Section 4999 of the Internal Revenue Code as a result of such
termination plus all federal, state and local taxes applicable to the Company's
payment of such excise taxes, including any additional excise taxes due under
Section 4999 of the Internal Revenue Code with respect to the payments made
pursuant to this provision, including any such taxes resulting from the
acceleration of any other benefits hereunder. The determination of the amounts
required to be paid under this Agreement shall be made by a nationally
recognized United States public accounting firm which may be the independent
public accounting firm used by the Company to audit its financial statements.
(c) Termination for Cause or Resignation without Good Reason. If
the Board terminates Executive's employment for Cause, or if Executive resigns
without Good Reason, Executive shall only be entitled to the amounts payable
under Section 5.3(a) hereof.
(d) Termination for Disability. Upon Termination of Executive
because of a Disability, in addition to the amounts payable under Section 5.3(a)
hereof, the
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Company shall pay the aggregate Disability Payment for three years in accordance
with the Company's regular payroll practices then in existence.
(e) Exclusivity. Any amount payable to Executive pursuant to this
Article V shall be Executive's sole remedy upon a Termination, and Executive
waives any and all rights to pursue any other remedy at law or in equity;
provided, however, that Executive does not hereby waive any right provided under
any federal, state or local law or regulation relating to employment
discrimination.
ARTICLE VI
Miscellaneous
-------------
6.1 Executive Acknowledgment. The Executive acknowledges that he has
consulted with or has had the opportunity to consult with independent counsel of
his own choice concerning this Agreement and has been advised to do so by the
Company, and that he has read and understands the Agreement, is fully aware of
its legal effect, and has entered into it freely based on his own judgment.
6.2 Lock-Up. Executive agrees that, for a period of six months from the
Acquisition Date, he will not offer, pledge, sell, contract to sell, sell any
option or contract to purchase or purchase any option, or contract to sell,
grant any option, right or warrant to purchase, lend, or otherwise transfer or
dispose of, directly or indirectly, any shares of the Company's Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Common Stock,
provided, however, that the foregoing restrictions shall cease upon a
Termination for Good Reason or without Cause or upon a Change of Control and
shall not apply (i) to a single sale by Executive of up to 100,000 shares of
Common Stock sold by Executive in connection with a sale of Common Stock by
Alfred West and (ii) the sale of such number of shares as required to cover the
payment of amounts in excess of the $3.0 million indemnity or payment
contemplated by Section 3.4(e) hereof.
6.3 Binding Effect. This Agreement shall be binding upon and inure to
the benefit of Executive's heirs and representatives and the Company's
successors and assigns. The Company shall require any successor (whether direct
or indirect, by purchase, merger, reorganization, consolidation, acquisition of
assets or stock, liquidation, or otherwise), by agreement in form and substance
reasonably satisfactory to Executive, to assume performance of this Agreement in
the same manner that the Company would have been required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Company in accordance with the operation of law.
6.4 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand
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or mailed within the continental United States by first class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Company, to:
Viatel, Inc.
685 Third Avenue
New York, New York 10017
Tel.: (212) 350-9200
Fax.: (212) 350-9245
Attention: Chief Executive Officer
(b) if to Executive, to:
the then current address of Executive maintained in the
Company's employee files
with a copy to:
Michael Littenberg, Esq.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Tel.: (212) 756-2000
Fax.: (212) 593-5953
Any such address may be changed by written notice sent to the other party at the
last recorded address of that party.
6.5 Tax Withholding. The Company shall provide for the withholding of
any taxes required to be withheld under federal, state and local law (other than
the employer's portion of such taxes) with respect to any payment in cash and/or
other property made by or on behalf of the Company to or for the benefit of
Executive under this Agreement or otherwise. The Company may, at its option: (i)
withhold such taxes from any cash payments owing from the Company to Executive,
(ii) require Executive to pay to the Company in cash such amount as may be
required to satisfy such withholding obligations and/or (iii) make other
satisfactory arrangements with Executive to satisfy such withholding
obligations.
6.6 No Assignment; No Third Party Beneficiaries. Except as otherwise
expressly provided in Section 6.3 hereof, this Agreement is not assignable by
any party, and no payment to be made hereunder shall be subject to alienation,
sale, transfer, assignment, pledge, encumbrance or other charge. Except for the
Company and its existing and future subsidiaries, no Person shall be, or deemed
to be, a third party beneficiary of this Agreement.
6.7 Expenses. Each party hereto shall assume and pay its own expenses
incident to the negotiation and execution of this Agreement, the preparation for
carrying it
-14-
<PAGE>
into effect and the consummation of the transactions contemplated hereby.
Without limiting the generality of the foregoing, each party shall pay all legal
fees and other fees to consultants and advisors incurred by it relating to this
Agreement and such transactions and shall indemnify and hold the other party
harmless from and against any claims for such expenses and fees of the first
party's consultants and advisors; provided, however, in the event of any dispute
hereunder between the Company and the Executive, the Company shall pay all costs
and expenses incurred by Executive in enforcing his rights hereunder in any suit
or proceeding in which Executive is awarded damages or otherwise prevails on the
merits or procedural grounds.
6.8 Execution in Counterparts. This Agreement may be executed by the
parties hereto in one or more counterparts, each of which shall be deemed to be
an original, but all such counterparts shall constitute one and the same
instrument, and all signatures need not appear on any one counterpart.
6.9 Jurisdiction and Governing Law. Jurisdiction over disputes with
regard to this Agreement shall be exclusively in the courts of the State of New
York, and this Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of New York as applied to contracts
capable of being wholly performed in such State.
6.10 Entire Agreement; Amendment. Except as otherwise provided in
Section 3.3 hereof, this Agreement and the Exhibits attached hereto embody the
entire understanding of the parties hereto, and, beginning on the Acquisition
Date, supersede all prior agreements regarding the subject matter hereof,
including the Employment Agreement, dated May 3, 1999 between Executive and
Destia Communications, Inc. No change, alteration or modification hereof may be
made except in writing, signed by both of the parties hereto.
6.11 Headings. The headings in this Agreement are for convenience of
reference only and shall not be construed as part of this Agreement or to limit
or otherwise affect the meaning hereof.
6.12 Survival. Notwithstanding anything to the contrary herein, Section
Article IV, Section 5.3 and Article VI of this Agreement shall survive
termination of this Agreement or Termination for any reason whatsoever.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day first written above.
VIATEL, INC.
By: /s/Michael J. Mahoney
------------------------------
President and
Chief Executive Officer
EXECUTIVE
/s/Alan Levy
----------------------------------
-16-
<PAGE>
Exhibit 21.1
<TABLE>
<CAPTION>
SUBSIDIARIES OF VIATEL, INC.
----------------------------
Jurisdiction of Percentage
Incorporation Outstanding
Or Organization/ Owned by
Name of Subsidiary Foreign Qualifications Viatel, Inc.
- ------------------ ---------------------- ------------
<S> <C> <C>
Viatel, Inc. DE (Foreign -
qualifications in
CT, NE, NJ)
Viatel Acquisition Corp. Delaware 100%(100)
Viatel Argentina Holdings, Inc. Delaware 100%(100)
Viatel Argentina Management, Inc. Delaware 100%(100)
Viatel Brazil Holdings, Inc. Delaware 100%(100)
Viatel Brazil Management, Inc. Delaware 100%(100)
Viatel Circe Cable System, Limited Delaware 100%(100)
Viatel Colombia Holdings, Inc. Delaware 100%(100)
Viatel Colombia Management, Inc. Delaware 100%(100)
Viatel Development Company Delaware 100%(100)
Viatel Finance Company L.L.C. Delaware 100%(100)
Viatel Finland, Inc. Delaware 100%(100)
Viatel Global Communications, Ltd. Delaware 100%(100)
Viatel Nebraska, Inc. Delaware 100%(100)
Viatel New Jersey, Inc. DE, NJ 100%(100)
Viatel Sales U.S.A., Inc. DE, IN, CA, IL, CO 100%(100)
Viatel Sweden, Inc. Delaware 100%(100)
Viatel Maryland, Inc. Maryland 100%(100)
Viatel Virginia, Inc. Virginia 100%(100)
YYC Communications, Inc. DE, NY 100%(1)
Viaphone NV/SA Belgium 2,499 shares/1 share
Viatel Belgium NV/SA Belgium 100%
Viacol Ltda. Colombia 100%
Viatel Austria, Ltd. UK 100%(100)
Viatel Network Managed Services Limited UK 80%
Viatel (I) Limited UK 1 share
Viatel Belgium Limited UK 1 share
Viatel Spain Limited UK 1 share
Viatel U.K. Limited UK 2 shares
Viatel UK Holding Ltd. (formerly Viatel Staines Ltd) UK 2 shares
Viatel Operations, S.A. France 99.76%
Viatel S.A. France 99.76%
VPN S.A.R.L. France 99.8%
Viatel Communications GmbH Germany 2 shares
(formerly Viaphone GmbH)
Viatel GmbH Germany 100%
Viatel Global Communications S.p.A. (formerly Italy 99%
Viaphone S.R.L.). 1%
Viatel S.R.L. Italy 95%/5%
Strijk B.V. Netherlands -
Viafoperations Communications B.V. Netherlands 99%
Viatel Global Communications B.V. Netherlands 99%
Viafon Dat Iberica, S.A. Spain 95%*
Viatel Global Communications Espana S.A. Spain 95%*
Viaphone AG Switzerland 95%
Viatel AG Switzerland 95%
*Capital stock is not currently fully paid; an audit has been performed and additional payments will be made.
</TABLE>
S-1
<PAGE>
Exhibit 21.2
LIST OF SUBSIDIARIES OF DESTIA COMMUNICATIONS, INC.
Name Jurisdiction
- ---- ------------
Amber Hold, Ltd.* United Kingdom
America First Ltd.* United Kingdom
Call BvBa* Belgium
Call the World Ireland
destia.com, Inc. Delaware
Destia Communications BV The Netherlands
Destia Communications, Ltd. Ireland
Destia Communications, Ltd. United Kingdon
Destia Communications SA* France
Destia Communications Holdings, Ltd. United Kingdom
Destia Communications Services, Inc. Delaware
Destia Communications Services, Ltd. Ireland
Destia Network Services Ltd. United Kingdom
Econophone AG Switzerland
Econophone GmbH Austria
Econophone GmbH Germany
Econophone, Ltd. United Kingdom
Econophone NV Belgium
Econophone Services GmbH Switzerland
Econophone (Hellas), SA Greece
Microdoor United Kingdom
Off the Mall Advertising Inc. Delaware
Phonecentre GmbH Switzerland
Telco Global Communications Ltd. United Kingdom
Teleriffic Global Communications GmbH Germany
Voicenet Corporation New York
WaveTech, Ltd. United Kingdom
WaveTech Network Services Ltd. United Kingdom
3461386 Canada, Inc. Canada
- ---------------
* Ownership is less than 100%. See disclosure contained in Section 3(c) below.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders
Viatel, Inc.:
We consent to the use of our report included herein and to the references to our
firm under the heading "Viatel Selected Consolidated Financial Data" and
"Experts" in the registration statement.
/s/ KPMG LLP
KPMG LLP
New York, New York
October 14, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Destia Communications, Inc.:
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
New York, New York
October 12, 1999
<PAGE>
Exhibit 99.1
FORM OF
VIATEL, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 19, 1999
The undersigned stockholder of Viatel, Inc. ("Viatel"), revoking all
prior proxies, hereby appoints Michael J. Mahoney, Sheldon M. Goldman and
James P. Prenetta, or any of them acting singly, proxies, with full power of
substitution, to vote all shares of capital stock of Viatel which the
undersigned is entitled to vote at the special meeting of stockholders to be
held in the Beekman Room at the Hotel Intercontinental, 111 East 48th Street,
New York, New York, on Friday, November 19, 1999, beginning at 10:00 a.m.,
local time, and at any adjournments or postponements thereof, upon matters
set forth in the Notice of Special Meeting dated October 15, 1999, and the
related Joint Proxy Statement/Prospectus, copies of which have been received
by the undersigned, and in their discretion upon any adjournment or
postponement of the meeting or upon any other business that may properly be
brought before the meeting by the Viatel board of directors. Attendance of
the undersigned at the meeting or any adjourned or postponed session thereof
will not be deemed to revoke this proxy unless the undersigned shall
affirmatively indicate the intention of the undersigned to vote the shares
represented hereby in person prior to the exercise of this proxy.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF VIATEL, INC.
A STOCKHOLDER WISHING TO VOTE IN ACCORDANCE WITH THE RECOMMENDATION OF THE
VIATEL BOARD OF DIRECTORS NEED ONLY SIGN AND DATE THIS PROXY AND RETURN IT IN
THE ENCLOSED ENVELOPE.
(Continued, and to be signed and dated on the reverse side.)
<PAGE>
To approve the issuance of Viatel common stock under
the Agreement and Plan of Merger, dated as of August
27, 1999, by and among Viatel, Inc., a wholly-owned
subsidiary of Viatel, Inc. and Destia Communications,
Inc. and to approve any other transaction described
in the Merger Agreement.
For Against Abstain
The shares represented by this proxy will be voted | | | | | |
as directed or, if no direction is given with
respect to the proposal set forth above, will be
voted for such proposal.
Change of Address and/or Comments Mark Here | |
Please promptly complete, date and sign this proxy and mail it
in the enclosed envelope to assure representation of your
shares. No postage need be affixed if mailed in the United
States. PLEASE SIGN EXACTLY AS NAME(S) APPEAR ON THE STOCK
CERTIFICATE.
If stockholder is a corporation, please sign full corporate
name by president or other authorized officer and, if a
partnership, please sign full partnership name by an
authorized partner or other persons.
DATED___________________________________________________, 1999
SIGNED________________________________________________________
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK. | |
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
<PAGE>
Exhibit 99.2
FORM OF
DESTIA COMMUNICATIONS, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 19, 1999
The undersigned stockholder of Destia Communications, Inc. ("Destia"),
revoking all prior proxies, hereby appoints Richard L. Shorten, Jr., Alfred
West and Alan L. Levy, or any of them acting singly, proxies, with full power
of substitution, to vote all shares of capital stock of Destia which the
undersigned is entitled to vote at the special meeting of stockholders to be
held in the Beekman Room at the Hotel Intercontinental, 111 East 48th Street,
New York, New York, on Friday, November 19, 1999, beginning at 11:30 a.m.,
local time, and at any adjournments or postponements thereof, upon matters
set forth in the Notice of Special Meeting dated October 15, 1999, and the
related Joint Proxy Statement/Prospectus, copies of which have been received
by the undersigned, and in their discretion upon any adjournment or
postponement of the meeting or upon any other business that may properly be
brought before the meeting by the Destia board of directors. Attendance of
the undersigned at the meeting or any adjourned or postponed session thereof
will not be deemed to revoke this proxy unless the undersigned shall
affirmatively indicate the intention of the undersigned to vote the shares
represented hereby in person prior to the exercise of this proxy.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DESTIA
COMMUNICATIONS, INC. A STOCKHOLDER WISHING TO VOTE IN ACCORDANCE WITH THE
RECOMMENDATION OF THE DESTIA BOARD OF DIRECTORS NEED ONLY SIGN AND DATE THIS
PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
(Continued, and to be signed and dated on the reverse side.)
<PAGE>
To adopt the Agreement and Plan of Merger, dated as
of August 27, 1999, by and among Viatel, Inc., Destia
Communications, Inc. and a wholly-owned subsidiary
of Viatel, Inc.
For Against Abstain
The shares represented by this proxy will be voted | | | | | |
as directed or, if no direction is given with
respect to the proposal set forth above, will be
voted for such proposal.
Change of Address and/or Comments Mark Here | |
Please promptly complete, date and sign this proxy and
mail it in the enclosed envelope to assure
representation of your shares. No postage need be
affixed if mailed in the United States. PLEASE SIGN
EXACTLY AS NAME(S) APPEAR ON THE STOCK CERTIFICATE.
If stockholder is a corporation, please sign full
corporate name by president or other authorized
officer and, if a partnership, please sign full
partnership name by an authorized partner or other
persons.
DATED___________________________________________, 1999
SIGNED________________________________________________
VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK. | |
SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
