-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYYB1NSHRylD9MjiGkKafrKzJ484uxvazQpe294v2gUYnXRil5nstbckF4pnx5vD WuBQZhE6xVbUZaL4WSn+HA== 0000940180-99-000556.txt : 19990519 0000940180-99-000556.hdr.sgml : 19990519 ACCESSION NUMBER: 0000940180-99-000556 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19990518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NET2PHONE INC CENTRAL INDEX KEY: 0001086472 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 223559037 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-78713 FILM NUMBER: 99629802 BUSINESS ADDRESS: STREET 1: 17 MAIN STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019282990 MAIL ADDRESS: STREET 1: 17 MAIN STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on May 18, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- Net2Phone, Inc. (Exact name of registrant as specified in its charter)
Delaware 4813 22-3559037 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
171 Main Street Hackensack, New Jersey 07601 (201) 928-2990 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Howard S. Balter Chief Executive Officer Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 (201) 928-2990 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Copies to: Ira A. Greenstein, Esq. Alexander D. Lynch, Esq. Morrison & Foerster LLP Kenneth R. McVay, Esq. 1290 Avenue of the Americas Brobeck, Phleger & Harrison LLP New York, New York 10104-0012 1633 Broadway, 47th Floor (212) 468-8000 New York, New York 10019 (212) 581-1600
-------------- Approximate date of commencement of the proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
Proposed Maximum Aggregate Offering Amount of Registration Title of Each Class of Securities to be Registered Price(1) Fee - ------------------------------------------------------------------------------------------------------ Common Stock, $.01 par value....................... $50,000,000 $13,900 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. We hereby amend the registration statement on such date or dates as may be necessary to delay its effective date until we shall file a further amendment which specifically states that the registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and it is not soliciting an offer to buy these + +securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 18, 1999 PROSPECTUS Shares [LOGO] Common Stock This is an initial public offering of common stock by Net2Phone, Inc. Net2Phone is selling shares of common stock. The estimated initial public offering price is between $ and $ per share. Upon completion of this offering, IDT will own approximately % of our outstanding capital stock. IDT owns Class A stock that has twice the voting power of our common stock. As a result, IDT will control % of the vote with respect to Net2Phone. -------- Prior to this offering, there has been no public market for the common stock. The shares of common stock have been proposed to be listed for quotation on the Nasdaq National Market under the symbol NTOP. --------
Per Share Total --------- ----- Initial public offering price................................... $ $ Underwriting discounts and commissions.......................... $ $ Proceeds to Net2Phone, before expenses.......................... $ $
Net2Phone has granted the underwriters an option for a period of 30 days to purchase up to additional shares of our common stock. -------- Investing in the common stock involves a high degree of risk. See "Risk Factors" beginning on page 5. -------- 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 prospectus. Any representation to the contrary is a criminal offense. Hambrecht & Quist BT Alex. Brown -------- Bear, Stearns & Co. Inc. , 1999 ---------------- [Insert Cover Art Work] TABLE OF CONTENTS
Page ---- Prospectus Summary................................................... 1 Risk Factors......................................................... 5 Forward-Looking Statements........................................... 13 Use of Proceeds...................................................... 14 Dividend Policy...................................................... 14 Capitalization....................................................... 15 Dilution............................................................. 16 Selected Financial Data.............................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 18 Business............................................................. 27 Management........................................................... 44 Principal Stockholders............................................... 52 Certain Transactions................................................. 54 Description of Capital Stock......................................... 60 Shares Eligible for Future Sale...................................... 63 Underwriting......................................................... 65 Legal Matters........................................................ 67 Experts.............................................................. 67 Additional Information............................................... 67 Index to Financial Statements ....................................... F-1
We maintain Web sites at www.net2phone.com and www.ezsurf.com. Information contained on Net2Phone's Web sites does not constitute part of this prospectus. "Net2Phone" and "Net2Fax" are our registered marks. Applications to register the service marks "Phone2Phone", "Click2Talk", "N2P", "Net2Phone Pro" and "Fax2Fax" have been filed with the United States Patent and Trademark Office. This prospectus also includes references to registered service marks and trademarks of other entities. PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision. Net2Phone Net2Phone is a leading provider of voice-enhanced Internet communication services to individuals and businesses worldwide. Our services enable our customers to make low-cost, high-quality phone calls over the Internet using their personal computers or traditional telephones. According to Frost & Sullivan, a leading market research firm, we were the largest provider of Internet telephony services in the world in 1997 with a 30% market share. As of March 31, 1999, we were serving approximately 250,000 active customers and handling over 20 million minutes of use per month. Our revenue has grown substantially, increasing from approximately $2.7 million in the fiscal year ended July 31, 1997 to approximately $12.0 million in the fiscal year ended July 31, 1998. In addition, we had revenue of approximately $13.2 million for the six months ended January 31, 1999. In August 1996, we introduced our first service, "PC2Phone." According to Probe Research, a market research firm, PC2Phone was the first commercial telephone service to connect calls between personal computers and telephones over the Internet. In September 1997, we introduced "Phone2Phone," a service that enables international and domestic calls to be made over the Internet using traditional telephones. Long distance calls made using our services are often substantially less expensive than long distance calls routed over traditional voice networks. We are leveraging our Internet telephony expertise to integrate real-time voice communication capabilities into the Web. Our simple, easy to use software operates on a user's personal computer and allows individuals and businesses to: . speak with sales or customer service representatives of online retailers and other Web-based businesses while visiting their Web sites; . speak with individuals or businesses listed on various online directories, such as Yahoo! People Search; and . call almost any telephone number in the world. Netscape Communications agreed in January 1999 to embed our PC2Phone software into future versions of its Internet browser released during the term of our agreement, including Netscape Navigator and Netscape Communicator. Netscape will also include a Net2Phone icon on the Netscape Navigator Personal Toolbar and integrate our services into Netscape Netcenter, allowing Netscape users to access our services from anywhere on the Web. According to International Data Corporation, a leading market research firm, Netscape had 41.5% of the browser market in mid-1998. Our services are also integrated into several leading Web portals, including Yahoo!, Excite, GeoCities, InfoSpace.com and ZDNet. Additionally, we have entered into distribution and software-bundling arrangements with leading computer equipment and software companies, including IBM, Packard Bell-NEC Europe and Creative Labs. We plan to introduce new products and services, including PC2PC, which will allow high-quality Internet telephony from one personal computer to another, and anonymous chat, which will enable two parties to engage in an online chat room discussion and establish direct voice communication with each other while maintaining anonymity. 1 Our strategy for building on our leadership position in the Internet telephony market and making our communications services ubiquitous on the Internet includes the following key elements: . marketing our services through multiple channels; . pursuing multiple sources of revenue; . enhancing brand recognition; . making our software ubiquitous; and . expanding and enhancing our products and services. We were formed as a Delaware subsidiary of IDT Corporation in October 1997. From inception in January 1996 to October 1997, our business was conducted as a division of IDT. In May 1999, we entered into a number of agreements with IDT relating to our business. IDT will continue to provide us with administrative services, including accounting and payroll services, and will continue to cover our employees under IDT's group health insurance policies. Our Internet and telecommunications network will be comprised of the right to use or access circuits leased by IDT. Upon completion of this offering, IDT will own approximately % of our outstanding capital stock. IDT owns Class A stock that has twice the voting power of our common stock. As a result, IDT will control % of our vote. Our principal executive offices are located at 171 Main Street, Hackensack, New Jersey 07601, and our telephone number at that address is (201) 928-2990. 2 The Offering Common stock offered by Net2Phone............ shares Capital stock to be outstanding after this offering.................................... shares Common stock................................ shares Class A stock............................... shares Use of proceeds.............................. $7.0 million of the net proceeds from this offering will be used to repay a portion of a note outstanding to IDT. The balance of the proceeds will be used for the development of strategic Internet relationships, for advertising and promotion, for research and development, for upgrading and expanding our network and for general corporate purposes, including working capital. See "Use of Proceeds." Nasdaq National Market symbol................ NTOP
-------------------- Unless otherwise noted, the information in this prospectus takes into account a 10,320-for-one stock split, which took place in April 1999, and a three-for-one stock split, which is expected to occur prior to the consummation of this offering. This information assumes 4,683,129 shares of common stock and 37,042,090 shares of Class A stock outstanding on May 17, 1999. These numbers give effect to the exercise of options to purchase 1,345,219 shares of our common stock and the conversion of all outstanding shares of our Series A preferred stock into 9,420,000 shares of Class A stock upon the consummation of this offering. Each share of Class A stock entitles the holder to two votes, while holders of our common stock are entitled to only one vote. This information excludes: . 3,671,399 shares subject to options outstanding as of May 17, 1999 at a weighted average exercise price of $3.33 per share; and . Warrants to purchase 272,400 shares of our common stock at a price of $3.33 per share. -------------------- Our fiscal year ends on July 31 of each calendar year. All references to fiscal years in this prospectus refer to the fiscal years ending in the indicated calendar years. For example, "fiscal 1998" refers to the fiscal year ended July 31, 1998. 3 The table below sets forth summary financial information for the periods indicated. This information is not necessarily indicative of the results of operations or financial position which would have resulted had we operated as an independent entity during the periods indicated. It is important that you read this information together with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus. Summary Financial Information
Period from Year Ended Six Months Ended January 2, 1996 July 31, January 31, (inception) to ------------------------ ---------------------- July 31, 1996 1997 1998 1998 1999 --------------- ----------- ----------- ---------- ----------- Statement of Operations: Revenue............... $ -- $ 2,652,303 $12,005,972 $5,014,922 $13,165,886 (Loss) income from operations........... (507,758) (1,697,647) (3,544,689) 896,306 (2,075,635) Net (loss) income..... $(507,758) $(1,697,647) $(3,544,689) $ 896,306 $(2,075,635) Net (loss) income per share--basic and diluted.............. $ (0.02) $ (0.05) $ (0.11) $ 0.03 $ (0.07) Shares used in calculation of basic and diluted (loss) income per share..... 30,960,000 30,960,000 30,960,000 30,960,000 30,960,000
The pro forma balance sheet data summarized below gives effect to: . the sale of 9,420,000 shares of Series A preferred stock and associated warrants to purchase our common stock in May 1999 for net proceeds of $29.9 million and the conversion of the Series A preferred stock into Class A stock; and . the exercise of stock options to purchase 1,345,219 shares of common stock by our officers and employees in May 1999 for $3.1 million in promissory notes and $1.3 million in cash. The pro forma as adjusted balance sheet summarized below reflects the sale of shares of common stock in this offering and the application of $7.0 million of the estimated net proceeds from this offering to pay a portion of the amounts due to IDT.
January 31, 1999 -------------------------------------- Pro Forma Actual Pro Forma As Adjusted ------------ ----------- ------------ Balance Sheet Data: Cash and cash equivalents.............. $ 10,074 $31,244,144 Working capital........................ (19,969,475) 17,560,032 Total assets........................... 12,446,271 43,680,341 Due to IDT............................. 13,862,833 13,862,833 Total stockholders' (deficit) equity... (7,725,629) 23,508,441
4 RISK FACTORS You should carefully consider the risks described below before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In that event, the trading price of our shares could decline, and you may lose part or all of your investment. Risks Related to Our Business We have a limited operating history on which to evaluate our potential for future success. We were formed as a subsidiary of IDT in October 1997. Prior to our inception in January 1996, our business was conducted as a division of IDT. Therefore, we have only a limited operating history. As an early stage company in the new and rapidly evolving Internet telephony market, we face numerous risks and uncertainties. We cannot assure you that our business strategy will be successful or that we will successfully address these risks. We have a history of operating losses and anticipate losses for the foreseeable future. We incurred net losses of approximately $3.5 million during fiscal 1998 and approximately $2.1 million for the six months ended January 31, 1999. As of January 31, 1999 we had an accumulated deficit of approximately $7.8 million. We have not achieved profitability to date and expect to continue to incur operating losses for the forseeable future. We expect that operating and marketing expenses will increase significantly during the next several years. In order to achieve and maintain profitability we will need to generate significant revenue and we cannot assure you that we will generate sufficient revenue for profitability. Even if we do achieve profitability, we cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenue grows more slowly than we anticipate or if operating and marketing expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be materially adversely affected. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for detailed information on our history of losses and anticipation of continued losses. We intend to pursue multiple streams of revenue, many of which are unproven. To date, we have generated revenue from routing minutes of use of our services over the Internet. In the future, we intend to pursue new revenue streams by leveraging our Internet telephony expertise to integrate real-time voice communication capabilities into the Web. For example, we intend to pursue new Web-based revenue opportunities from banner and audio advertising, as well as from sponsorship opportunities on our user interface and our EZSurf.com shopping portal. We intend to explore the availability of transaction-based revenue opportunities. We have not generated this type of revenue before. We intend to devote significant capital and resources to create these new revenue streams and we cannot ensure that our investments will be profitable. To be successful, we must, among other things, develop and market products and services that achieve broad market acceptance by individuals, businesses, online retailers and advertisers. We cannot assure you that the market for our new products and services will develop or that demand for our new products and services will emerge or grow. We may have difficulties managing our expanding operations, which may reduce our chances of achieving profitability. Our rapid growth has placed a significant strain on our managerial, operating, financial and other resources. We expect this rapid growth to continue and expect these strains to continue over time. Our future performance will depend, in part, on our ability to manage this growth effectively. To that end, we will have to undertake the following tasks, among others: . develop our operating, administrative and financial and accounting systems and controls; . improve coordination among our engineering, accounting, finance, marketing and operations personnel; 5 . enhance our management information systems capabilities; and . hire and train additional qualified personnel. We cannot assure you that we will be able to accomplish these tasks, and if we are unable to accomplish any of them, our business would be materially adversely affected. A failure to establish and maintain strategic relationships could limit our ability to increase our sales. We believe that our success depends, in part, on our ability to develop and maintain strategic relationships with leading Internet companies and computer hardware and software companies as well as key marketing distribution partners. If any of our strategic relationships are discontinued, sales of our products and services and our ability to maintain or increase our customer base may be substantially diminished. We currently have strategic relationships with Netscape, Yahoo!, Excite and others. We depend on these relationships to: . distribute our products to potential customers; . increase usage of our services; . build brand awareness; and . cooperatively market our products and services. We depend on resellers to market and distribute our products and services internationally and to provide local customer support. We must forge relationships with resellers in markets where our products and services are not adequately marketed and maintain relationships in those markets we are seeking to penetrate further. Resellers also typically provide local customers with front-line support. If we hire a reseller who fails to market our products and services effectively, we could lose market share. Additionally, if a reseller provides poor customer service, we could lose brand equity. Therefore, we must maintain and hire additional resellers throughout the world that are capable of providing high-quality sales and service efforts. The loss of a reseller in a key market, or the failure of a current or future reseller to adequately provide customer support could materially adversely affect our business, results of operations and financial condition. Competition could reduce our market share and decrease our revenue. The market for our services has been extremely competitive, and is expected to be so for the foreseeable future. Many companies offer Internet telephony products and services, and many of these companies have a substantial presence in this market. Most of the current Internet telephony products permit voice communications over the Internet between two parties that are both connected to the Internet with sound-equipped personal computers and where both parties are using identical Internet telephony software products. Current product offerings include VocalTec Communications' Internet Phone, QuarterDeck's WebPhone and Microsoft's NetMeeting. In addition, a number of large telecommunications providers and equipment manufacturers, such as Cisco, Lucent, Northern Telecom and Dialogic, have announced that they intend to offer server-based products. These products are expected to allow voice communications over the Internet between parties using a personal computer and a telephone and between two parties using telephones. Cisco Systems has also taken a further step by recently acquiring two companies that produce devices that help Internet service providers transition voice and data traffic to cell and packet networks while maintaining traditional phone usage and infrastructure. Internet telephony service providers, such as ICG Communications, IPVoice.com, ITXC, RSL Communications (through its Delta Three subsidiary) and VIP Calling, route Internet telephony traffic to destinations on a worldwide basis. In addition, major long distance providers, such as AT&T, Deutsche Telekom, Frontier, MCI WorldCom, and Qwest Communications, as well as other major companies such as Motorola and Intel, have all entered or plan to enter the Internet telephony market. Many of our competitors are larger than and have substantially greater financial, distribution and marketing resources than we do. We cannot be certain that we will be able to compete successfully in the developing Internet telephony market. 6 We face pricing pressures, which may lessen our competitive pricing advantage. The success of our current product and service offerings is based on our ability to provide discounted voice communications by taking advantage of cost savings achieved through Internet telephony. In recent years, the price of traditional domestic and international long distance calls has been declining. In response to these declines, we have lowered the price of our service offerings. Should prices of traditional long distance calls decline to a point where we no longer have a price advantage over our competitors, we would lose a significant competitive advantage and would have to rely on factors other than price to differentiate our product and service offerings. If we fail to do so, our business could be materially adversely affected. We need to hire and retain personnel to sustain our business. Our performance is highly dependent on the continued services of our executive officers and other key personnel, the loss of any of whom could materially adversely affect our business, results of operations and financial condition. We have an employment agreement with only one of our executive officers, Clifford M. Sobel, our Chairman and President. We need to attract and retain other highly-skilled technical and managerial personnel for whom there is intense competition. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The inability to attract and retain qualified technical and managerial personnel would materially adversely affect our business, results of operations and financial condition. We may not succeed in maintaining our brand and name recognition. We believe that establishing and maintaining a brand and name recognition is critical for attracting and expanding our targeted client base and that the importance of reputation and name recognition will increase as competition in the Internet telephony market increases. Promotion and enhancement of our name will depend on the effectiveness of our marketing and advertising efforts and on our success in continuing to provide high-quality products and services, neither of which can be assured. If our customers do not perceive our service to be effective or of high quality, our brand and name recognition would be materially adversely affected. We are subject to risks associated with our international operations. As of January 31, 1999, approximately 60% of our customers were based outside of the United States, generating approximately 58% of our revenues during the six months ended on that date. A significant component of our strategy is to continue to expand internationally. We cannot assure you that we will be successful in expanding into additional international markets. In addition to the uncertainty regarding our ability to generate revenue from foreign operations and expand our international presence, there are certain risks inherent in doing business on an international basis, including: . changing regulatory requirements; . increased bad debt and subscription fraud; . legal uncertainty regarding liability, tariffs and other trade barriers; . political instability; and . potentially adverse tax consequences. We cannot assure you that one or more of these factors will not materially adversely affect our business, results of operations and financial condition. 7 We depend on other telecommunications carriers to route our traffic. We do not own any local exchange transmission facilities and own only limited intra-national transmission facilities. All of the telephone calls made by our customers are connected at least in part through leased transmission facilities. In many of the foreign jurisdictions in which we conduct or plan to conduct business, the primary provider of significant intra-national transmission facilities is the national telephone company. Accordingly, we may be required to lease transmission capacity at artificially high rates from a monopolistic provider. These rates may prevent us from generating a profit on those calls. In addition, national telephone companies may not be required by law to allow us to lease necessary transmission lines or, if applicable law requires national telephone companies to lease transmission lines to us, we may encounter delays in negotiating leases and interconnection agreements, and commencing operations. Additionally, disputes may result with respect to pricing terms and billing. In the United States, the providers of local exchange transmission facilities are generally the incumbent local exchange carriers, including the regional Bell operating companies. The permitted pricing of local exchange facilities that we lease in the United States is subject to uncertainties. The Federal Communications Commission issued an order requiring incumbent local exchange carriers to price those facilities at total element long-run incremental cost, and the United States Supreme Court recently upheld the FCC's jurisdiction to set a pricing standard for incumbent local exchange carrier facilities provided to competitors. However, the incumbent local exchange carriers can be expected to bring further legal challenges to the FCC's total element long-run incremental cost standard and, if they succeed, the result may be to increase the cost of incumbent local exchange carrier facilities obtained by us. Many of the international telephone calls made by our customers are transported via transmission facilities that we lease from our current and potential competitors, including AT&T Global Networks, Frontier and MCI WorldCom. We lease facilities from local exchange carriers that are our competitors, such as the regional Bell operating companies. We generally lease lines on a fixed-cost basis. These include leases of transmission capacity for point-to-point circuits on a monthly or longer-term fixed-cost basis. Our systems may not accommodate significant growth in the number of users. Our success depends on our ability to handle a large number of simultaneous calls. We expect that the volume of simultaneous calls will increase significantly as we expand our operations. If this occurs, additional stress will be placed upon the network hardware and software that manages our traffic. We cannot assure you of our ability to efficiently manage a large number of simultaneous calls. If we are not able to maintain an appropriate level of operating performance, or if our service is disrupted, then we may develop a negative reputation and our business, results of operations and financial condition would be materially adversely affected. Because we are unable to predict the volume of usage and our capacity needs, we may enter into disadvantageous contracts. We expect that the number of calls that we handle over our network will continue to grow in the future. In order to ensure that we are able to handle such additional usage, we have agreed to pay IDT a one-time fee of approximately $6.0 million for a 20-year right to use part of the capacity of a new DS3 network which is under construction. This network has been pledged by IDT to its lenders under a credit facility. We may have to enter into additional long-term agreements for leased capacity. To the extent that we overestimate the volume of calls, we may be obligated to pay for more transmission capacity than we actually use, resulting in our incurring costs without corresponding revenue. Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity through more expensive means. We cannot assume that such capacity will be available. The occurrence of either of these situations could significantly reduce our operating margins. 8 We are uncertain about our need for and availability of additional funds. Due to our limited operating history and the early stage of the Internet telephony market, our future capital needs are difficult to predict. We may require additional capital in order to take advantage of unanticipated opportunities, including strategic alliances and potential acquisitions, or to respond to changing business conditions and unanticipated competitive pressures. Additionally, funds from operations may be less than anticipated. Should these circumstances arise, we may need to raise additional funds either by borrowing money or issuing additional equity. We cannot assure you that we will be able to raise such funds on favorable terms or at all. If we are unable to obtain additional funds, then we may be unable to take advantage of new opportunities or take other actions that otherwise might be important to our business, results of operations and financial condition. We are subject to risks associated with system failures, delays and inadequacies. Our success depends on our ability to provide efficient and uninterrupted, high-quality Internet telephony services. Any damage to or failure of our systems or operations could result in reductions in, or terminations of, our services. In addition, in the case of frequent or persistent system failures, our brand and reputation could be materially adversely affected. Our systems and operations are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, physical or electronic break-ins, sabotage, intentional acts of vandalism and similar events that may be or may not be beyond our control. The occurrence of any or all of these events could materially adversely affect our business, results of operations and financial condition. Unauthorized use of our intellectual property by third parties may damage our brand. We regard our copyrights, service marks, trademarks, trade secrets and other intellectual property as critical to our success. Unauthorized use of our intellectual property by third parties may damage our brand and reputation. We rely on trademark and copyright law, trade secret protection and confidentiality agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual property without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving. The laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States. See "Business--Intellectual Property." Defending against intellectual property infringement claims could be expensive and could disrupt our business. We cannot be certain that our products do not or will not infringe upon valid patents, trademarks, copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the ordinary course of our business. We may incur substantial expenses in defending against these third-party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business. See "Business--Intellectual Property." Our products and services are aubject to risks related to the year 2000 problem. Many computer systems and software products are coded to understand only dates that have two digits for the relevant year. These systems and products need upgrading to accept four digit entries in order to distinguish 21st century dates from 20th century dates. Without upgrading, many computer applications could fail or create erroneous results beginning in the year 2000. We are conducting an assessment to ensure that our computer-related applications will not fail or create erroneous results as a result of these issues. The "Year 2000" problems of companies on the Internet generally could affect our systems or operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Systems Costs" for a more complete description of the Year 2000 risks that we face and the steps we have taken to reduce those risks. 9 Risks Related to IDT We depend on IDT. We have historically been dependent on IDT for various services, including accounting, human resources, legal and marketing, as well as for working capital. We also have been substantially dependent upon IDT's telecommunications network to carry our Internet telephony services. In May 1999, we entered into agreements with IDT under which IDT will continue to provide these services. When the terms of these agreements expire, we will need either to extend the term of these agreements, engage other entities to perform these services or perform these services ourselves. In addition, after the initial term, these agreements are terminable by either party upon prior written notice. We cannot assure you that IDT will not terminate these agreements or continue to provide these services after the initial term of the agreements, or that the cost of these services will not be significantly higher if we purchase services from other parties or devote resources to handle these functions internally. See "Certain Transactions--Relationship with IDT." We may experience conflicts of interest with IDT, which may not be resolved in our favor. After this offering, two members of our board of directors will also be officers of IDT, and one of them will be a member of IDT's board of directors as well. Clifford Sobel, our Chairman and President, has an option to transfer his interest in us to IDT in exchange for an option to purchase 875,000 shares of IDT common stock at a purchase price of $6.50 per share. See "Certain Transactions." In addition, certain of our executive officers, directors and employees hold shares of IDT common stock and options to acquire shares of IDT common stock. These individuals may have conflicts of interest with respect to certain decisions involving business opportunities and similar matters that may arise in the ordinary course of our business or the business of IDT. If conflicts arise with IDT, we expect to resolve those conflicts on a case-by- case basis, and in the manner required by applicable law and customary business practices, subject to our agreement with IDT to resolve disputes involving $5.0 million or less through mandatory, binding arbitration. Conflicts, if any, could be resolved in a manner adverse to us and our stockholders, which could materially adversely affect our business, results of operations and financial condition. Through its ownership of our stock, IDT may be able to exert substantial influence over our management and corporate affairs. Immediately following this offering, IDT will own approximately % of the outstanding shares of our Class A stock. Because the holders of Class A stock are entitled to two votes per share, IDT will control % of the voting power of our outstanding capital stock. IDT's ownership will increase further if Clifford Sobel exercises his option to transfer his interest in us to IDT in exchange for an option to purchase shares of IDT. Therefore, IDT will have the power to determine the election of our directors, the appointment of new management and the approval of any other action requiring the approval of our stockholders, including any amendments to our certificate of incorporation and mergers or sales of all of our assets. In addition, without the consent of IDT, we could be prevented from entering into certain transactions that could be beneficial to us. Third parties could be discouraged from making a tender offer or bid to acquire us because of IDT's stockholdings and voting rights. See "Principal Stockholders." IDT has pledged shares of our stock to secure a credit facility, which may be transferred to a third party. IDT's shares of our capital stock are pledged as collateral to secure a credit facility. The lenders under the credit facility have agreed to release IDT's shares in order to permit IDT to transfer our shares free and clear of any liens as and when IDT seeks to transfer our shares. Such transferability will cease if IDT's ownership of our capital stock drops below 50% of that which it owns 72 hours after the consummation of this offering. If IDT defaults in its obligations under the pledge agreement, then a third party would acquire the voting rights with respect to the pledged stock and become party to our intercompany agreements. We cannot assume that a third party would maintain good relations with us or maintain or renew our agreements with IDT. 10 Risks Related to Our Industry Our future growth depends upon an increase in the use of the Internet as a medium for voice communications. The Internet telephony market is new and rapidly evolving, and the technology is still in the early stages of development. Historically, the sound quality of Internet telephony calls was poor. As the industry has grown, substantial improvements to sound quality have been made but technological hurdles still need to be resolved. Additionally, the capacity constraints of the public Internet network may, if not resolved, impede further development of Internet telephony to the extent that callers experience delays, errors in transmissions or other difficulties. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for our services are subject to a high level of uncertainty and risk. In particular, the Internet must be accepted as a viable alternative to traditional telephony service. Customers that have already invested substantial resources in integrating traditional telephony service with their operations may be particularly reluctant or slow to adopt a new technology that makes their existing infrastructure obsolete. Because this market is new and evolving, it is difficult to predict the size of this market and its growth rate. If the Internet telephony market fails to develop, develops more slowly than we expect or becomes saturated with competitors, then our business, results of operations and financial condition will be materially adversely affected. Our future success depends upon the increased use of the Internet. The use of the Internet as a commercial marketplace is at an early stage of development. Demand and market acceptance for recently introduced products and services over the Internet are still uncertain. We cannot predict whether customers will be willing to shift their traditional activities online. For example, we do not know if people will increase their usage of online directories or make online purchases. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including: . concerns about security; . Internet network congestion; . inconsistent quality of service; and . lack of cost-effective, high-speed access. If the use of the Internet as a commercial marketplace does not continue to grow, then our business, results of operations and financial condition will be materially adversely affected. Our success depends, in part, on our ability to keep pace with rapid technological change. Our continued success depends, in part, on our ability to keep pace with rapid technological change, new product development and industry standards and practices. Technological advancements have allowed the use of packet-switching technology for the transmission of calls. The development of voice applications for the Internet is part of a larger trend of convergence of standard voice and data networks. We believe that the providers of packet-switching technology will be able to offer quality communications services at rates that are significantly less than the rates currently charged for long distance calls. However, our failure to respond quickly and cost-effectively to these developments would materially adversely affect our business, results of operations and financial condition. Governmental regulations regarding the Internet may be enacted, which could impede our business. To date, governmental regulations have not materially restricted use of the Internet in our markets. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. Uncertainty and new regulations could increase our costs of doing business and prevent us from delivering our products and services over the Internet. The growth of the Internet may also be significantly slowed. This could delay growth in demand for our products and services and limit the growth of our revenue. 11 In addition to new regulations being adopted, existing laws may be applied to the Internet. See "Business--Regulation." New and existing laws may cover issues which include: . sales and other taxes; . access charges; . user privacy; . pricing controls; . characteristics and quality of products and services; . consumer protection; . cross-border commerce; . copyright, trademark and patent infringement; and . other claims based on the nature and content of Internet materials. We may be the victim of fraud or theft of service. From time to time, callers have obtained our services without rendering payment by unlawfully using our access numbers and personal identification numbers. We attempt to manage these theft and fraud risks through our internal controls and our monitoring and blocking systems. To date, we have not experienced material losses from the unauthorized use of access numbers and personal identification numbers. However, we can provide no assurance that our risk management practices will be sufficient to protect us in the future from unauthorized transactions or thefts of services that could materially adversely affect our business. Risks Related to this Offering Market volatility may affect our stock price. The market price for our common stock could be highly volatile and subject to wide fluctuations in response to the following factors: . quarterly variations in our operating results; . announcements of technological innovations by us or our competitors; . announcements of new products or services by us or our competitors; . investor perception of us, the Internet telephony market or the Internet in general; . changes in financial estimates by securities analysts; and . general economic and market conditions. The stock of many Internet-related companies has experienced significant fluctuations in trading price and volume. Often these fluctuations have been unrelated to operating performance. In the past, following periods of market volatility, security holders of these companies have instituted class action litigation. If the market value of our stock experiences adverse fluctuations, and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and management's attention could be diverted. These developments could materially adversely affect our business, results of operations and financial condition. Declines in the market price of our common stock could also materially adversely affect employee morale and retention, our access to capital and other aspects of our business. 12 The sale of a substantial number of shares of our common stock after this offering may affect our stock price. The market price of our common stock could drop as a result of sales of substantial amounts of common stock in the public market after the closing of this offering or the perception that substantial sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common stock. We will have broad discretion over the use of the proceeds from this offering. We have significant flexibility in applying the proceeds we receive in this offering. Other than repayment of $7.0 million on an outstanding note to IDT, the proceeds are not required to be allocated to any specific investment or transaction. Therefore, you cannot determine the value or propriety of our use of proceeds. See "Use of Proceeds" for a more detailed description of how we intend to apply the proceeds from this offering. We do not expect to pay dividends to our stockholders. We have not paid any cash dividends on our common stock and anticipate for the foreseeable future that any earnings will be retained for the operation and expansion of our business. See "Dividend Policy." Our certificate of incorporation, our bylaws and Delaware law make it difficult for a third party to acquire us, despite the possible benefit to our stockholders. Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For example, our certificate of incorporation provides for a classified board of directors, meaning that only approximately one-third of our directors will be subject to re-election at each annual stockholder meeting. Moreover, our certificate of incorporation creates a class of stock with super-voting rights. The holders of Class A stock are entitled to two votes per share while the holders of common stock are entitled to one vote per share. Except as otherwise required by law or as described below, the holders of Class A stock and common stock will vote together as a single class on all matters presented to the stockholders for their vote or approval, including the election of directors. The holders of Class A stock may have the ability to elect all of our directors and to effect or prevent certain corporate transactions. These provisions could discourage takeover attempts and could materially adversely affect the price of our stock. FORWARD-LOOKING STATEMENTS This prospectus contains "forward-looking statements." These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, and the adequacy of our available cash resources. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described above and elsewhere in this prospectus. 13 USE OF PROCEEDS Net2Phone will receive net proceeds of $ from the sale of shares of common stock (and an additional $ from the sale of shares if the underwriters over-allotment option is exercised in full) at the initial public offering price of $ per share after deducting underwriting commissions and discounts of $ (and an additional $ if the underwriters' over-allotment option is exercised in full) and estimated expenses of $ . We intend to use $7.0 million of the net proceeds from this offering to repay a portion of the $14.0 million note outstanding to IDT. The note accrues interest at the rate of 9% per annum and matures on May 30, 2004. The balance of the proceeds will be used for the following purposes: . for developing and maintaining strategic Internet relationships; . for advertising and promotion; . for research and development; . for upgrading and expanding our network; and . for general corporate purposes, including working capital. Pending application, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have not paid any dividends in the past and do not intend to pay cash dividends on our capital stock for the foreseeable future. Instead, we intend to retain all earnings for use in the operation and expansion of our business. 14 CAPITALIZATION The following table sets forth: . our actual capitalization as of January 31, 1999; . our pro forma capitalization to give effect to: . the conversion of IDT's common stock into Class A stock, . our private placement of 9,420,000 shares of Series A convertible preferred stock and associated warrants to purchase common stock in May 1999, . the exercise of stock options to purchase 1,345,219 shares of common stock in exchange for promissory notes and cash, and . the conversion of 9,420,000 shares of Series A convertible preferred stock into Class A stock; and . pro forma capitalization, as adjusted to give further effect to the sale of shares of common stock offered by us in this offering at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds from this offering. See "Use of Proceeds." All of the data below exclude 3,671,399 shares of common stock issuable upon exercise of stock options and warrants to purchase 272,400 shares at a weighted average exercise price of $3.33 per share. See "Management--1999 Stock Incentive Plan" and "Certain Transactions--Relationship with Other Investors."
January 31, 1999 ------------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- Due to IDT.............................. $13,862,833 $13,862,833 $ 6,862,833 Redeemable convertible preferred stock, Series A, $.01 par value; 3,150,000 shares authorized, no shares issued and outstanding............................ -- -- -- Stockholders' (deficit) equity: Preferred stock, $.01 par value; 6,850,000 shares authorized, no shares issued and outstanding........ -- -- -- Common stock, $.01 par value; 95,000,000 shares authorized; 30,960,000 (actual) 4,683,129 (pro forma) and (pro forma as adjusted) shares issued and outstanding.......................... 100,100 46,831 Class A stock, $.01 par value; 15,000,000 shares authorized; none (actual) 37,042,090 (pro forma) and (pro forma as adjusted) shares issued and outstanding........ -- 370,421 Additional paid-in capital............ -- 34,066,908 Loans to stockholders................. -- (3,149,990) Accumulated deficit................... (7,825,729) (7,825,729) (7,825,729) ----------- ----------- ----------- Total stockholders' (deficit) equity............................. (7,725,629) 23,508,441 ----------- ----------- ----------- Total capitalization............. $ 6,137,204 $37,371,274 $ =========== =========== ===========
15 DILUTION The net tangible book value of Net2Phone common stock and Class A stock as of January 31, 1999, as adjusted to give effect to a private placement of 9,420,000 shares of Series A preferred stock in May 1999 and the exercise of stock options to purchase 1,345,219 shares of common stock, was $18.5 million, or $0.44 per share of common stock and Class A stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the total number of shares of common stock outstanding. After giving effect to this offering and the receipt of an assumed $ million of net proceeds from this offering (based on an assumed initial public offering price of $ per share) and the issuance of 9,420,000 shares of Series A preferred stock in May 1999, the pro forma net tangible book value of the common stock as of January 31, 1999 would have been approximately $ million, or $ per share. This amount represents an immediate increase in net tangible book value of $ per share to the existing stockholder and an immediate dilution in net tangible book value of $ per share to purchasers of common stock in this offering. Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the amount of cash paid by a new investor for a share of common stock. The following table illustrates such dilution: Assumed initial public offering price per share....................... $ Net tangible book value per share at ............................... $ --- Increase per share attributable to new investors.................... Pro forma net tangible book value per share after this offering....... --- Dilution per share to new investors................................... $ ===
The following table sets forth, as of January 31, 1999, on the pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and by new investors who purchase shares of common stock in this offering, before deducting the estimated underwriting discounts and commissions and offering expenses.
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ---------- ---------- ------------- Existing stockholders.......... 41,725,219 % $ % $ New investors......... ---------- ----- ---------- --------- Total............. 100.0% $ % ========== ===== ========== =========
16 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the period from January 2, 1996 (date of inception) to July 31, 1996, fiscal 1997 and fiscal 1998 and the balance sheet data as of July 31, 1996, 1997 and 1998 are derived from our financial statements that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere in this prospectus. The statement of operations data for the six months ended January 31, 1998 and 1999 and the balance sheet data as of January 31, 1999 have been derived from our unaudited financial statements that have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial data for the periods presented. The financial data for the interim periods is not necessarily indicative of results that may be expected for any other interim period or for the year as a whole.
Period from January 2, 1996 Year Ended Six Months Ended (inception) July 31, January 31, to July 31, 1996 ------------------------ -------------------------- 1997 1998 1998 1999 ---------------- ----------- ----------- ------------ ------------ Statement of Operations Data: Revenue: PC2Phone.............. $ -- $ 2,170,442 $ 7,962,821 $ 3,071,410 $ 8,586,422 Phone2Phone........... -- 272 2,030,516 219,422 3,567,781 Other................. -- 481,589 2,012,635 1,724,090 1,011,683 ---------- ----------- ----------- ------------ ------------ Total Revenue....... -- 2,652,303 12,005,972 5,014,922 13,165,886 ---------- ----------- ----------- ------------ ------------ Cost and expenses: Direct cost of revenue.............. -- 1,553,443 6,848,759 1,672,440 7,323,751 Sales and marketing... 34,468 76,724 2,887,766 450,105 2,991,713 General and administrative....... 465,015 2,599,283 5,087,628 1,804,058 4,187,024 Depreciation.......... 8,275 120,500 726,508 192,013 739,033 ---------- ----------- ----------- ------------ ------------ Total costs and expenses........... 507,758 4,349,950 15,550,661 4,118,616 15,241,521 ---------- ----------- ----------- ------------ ------------ (Loss) income from operations and net (loss) income......... $(507,758) $(1,697,647) $(3,544,689) $ 896,306 $ (2,075,635) ========== =========== =========== ============ ============ Net (loss) income per share--basic and diluted............... $ (0.02) $ (0.05) $ (0.11) $ 0.03 $ (0.07) ========== =========== =========== ============ ============ Shares used in calculation of basic and diluted net (loss) income per share................. 30,960,000 30,960,000 30,960,000 30,960,000 30,960,000
July 31, January 31, -------------------------------------- ------------ 1996 1997 1998 1999 ----------- ----------- ------------ ------------ Balance Sheet Data: Cash and cash equivalents............... $ -- $ -- $ 10,074 $ 10,074 Working capital......................... (681,532) (3,004,830) (11,149,553) (19,969,475) Total assets............................ 174,674 916,025 6,975,108 12,446,271 Due to IDT.............................. 681,532 2,860,329 11,814,988 13,862,833 Total stockholders' (deficit)........... (507,758) (2,105,305) (5,649,994) (7,725,629)
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and notes thereto. The historical financial information included in this prospectus does not necessarily reflect what our financial condition and results of operations would have been had we been operated as an independent entity during the periods presented. Overview Net2Phone is a leading provider of voice-enhanced Internet communications services to individuals and businesses worldwide. Our services enable our customers to make low-cost, high-quality phone calls over the Internet using their personal computers or traditional telephones. We began our operations in January 1996, launched our first Net2Phone product in August 1996, and were established as a separate subsidiary of IDT in October 1997. During the period ended July 31, 1996, we incurred approximately $500,000 in start-up costs, primarily for research and development. We have incurred net operating losses since inception and expect to incur additional losses for the foreseeable future, primarily as a result of increased sales and marketing efforts. As of January 31, 1999, we had accumulated net losses of approximately $7.8 million. Sources of Revenue To date, approximately 68% of our revenue has been derived from fees we charged our customers on a prepaid basis to use our PC2Phone service, and approximately 20% of our revenue has been derived from fees we charged our customers on a prepaid basis to use our Phone2Phone service. The remainder of our revenue has been derived from the sale of certain equipment such as Internet telephony gateways or Net2Phone Pro, a product that bundles our software with hardware for the personal computer, and for services we provide to IDT. In the future, in order to diversify and further enhance our revenue sources, we plan to introduce a variety of value-added services and Internet commerce solutions. In addition, we plan to sell Web-based advertising to further leverage our customer reach. To date, these additional products and services have provided no revenue and we do not anticipate material revenue from these additional products and services in fiscal 1999. Approximately 88% of our revenue is generated from fees we charge our customers on a prepaid basis to use our PC2Phone and Phone2Phone services. As of March 31, 1999, we were serving approximately 250,000 active customers who spent an average of 60 minutes per month using their personal computers to place calls over the Internet. We recognize revenue as our customers utilize the balances in their prepaid accounts by placing calls. As such, we typically have deferred revenue for all unutilized balances in our customers' accounts. The remaining 12% of our revenue, which is derived from equipment sales and from services provided to IDT, is recognized upon installation of the equipment and performance of the services. Cost Structure Our costs and expenses include: . direct cost of revenue; . sales and marketing; . general and administrative; and . depreciation. 18 Direct Cost of Revenue Direct cost of revenue consists primarily of network costs associated with the routing and termination of our customers' traffic. These costs include: . amounts paid to carriers and Internet service providers to carry our traffic on both the Internet and traditional phone networks; . the cost of leased routers and access servers; . recurring telecommunications costs, including the cost of local telephone lines to carry subscriber calls to our points of presence; . the costs associated with leased lines connecting our points of presence directly to the Internet or to our operations centers and connecting our operations centers to the Internet; and . Internet backbone costs, which are the amounts we pay to Internet service providers for bandwidth. We expect our direct cost of revenue to increase in absolute terms over time to support our growing customer base. While some of these costs are fixed, other costs vary on a per minute basis. Therefore, there may be some volatility in our direct cost of revenue as a percentage of revenue, particularly as we expand our network. We try to terminate calls on our own network whenever possible. When we cannot terminate calls on our network, we terminate calls on the network of other suppliers, primarily IDT. We expect to continue to utilize this process. We also expect the volume of traffic we terminate on IDT will decline in the future as we expand our own network infrastructure. Sales and Marketing. Sales and marketing includes the expenses associated with acquiring customers, including commissions paid to our sales personnel, advertising costs and referral fees. We expect sales and marketing expenses to increase over time as we aggressively market our products and services. Historically, sales and marketing expenses have been a relatively variable cost and are expected to increase both in terms of absolute dollars and as a percentage of revenue as our revenue grows. We expect to spend significant capital to build brand recognition. Most of our sales and marketing expenses will go toward securing significant and strategic relationships with a variety of portals, content providers, and other key destinations on the Web. We have concluded strategic alliances with Netscape, Yahoo!, ZDNet, and InfoSpace.com, and intend to continue to pursue relationships with other companies. General and Administrative. General and administrative expenses consist of the salaries of our employees and associated benefits, and the cost of travel, entertainment, rent and utilities. A large portion of our general and administrative expenses include operations and customer support. These include the expenses associated with customer service and technical support, and consist primarily of the salaries and employment costs of the employees responsible for those efforts. We expect operations and customer support expenses to increase over time to support new and existing customers. We expect general and administrative costs to increase to support our growth, particularly as we establish a larger organization to implement our business plan. Historically, we have included our research and development costs, comprised primarily of payroll expenses for our technical team of engineers and developers, in general and administrative expenses. We plan to incur additional costs for research and development, though they are not expected to increase as a percentage of revenue. Over time, we expect these relatively fixed general and administrative expenses to decrease as a percentage of revenue. Depreciation. Depreciation primarily relates to our hardware infrastructure. We depreciate our infrastructure over its estimated five-year useful life using the straight-line method. We plan to acquire a domestic DS3 network to provide additional capacity to handle the expected increase in customer traffic as our business grows. In addition, we will be adding more originating and terminating switch servers as traffic volumes justify, each of which can handle approximately 48 simultaneous calls. We expect depreciation to 19 increase in absolute terms as we grow our networks to support new and acquired customers, but to decrease as a percentage of total revenue. We have entered into a strategic agreement with Netscape, part of which includes the purchase of software and trademark licenses. We expect to amortize the costs relating to the software and trademark licenses acquired from Netscape over the two-year term of the agreement. Dependence on IDT. Historically, we have been dependent on IDT for the termination of calls, for working capital, and for administrative services. In connection with establishing ourselves as an independent operating entity, we recently contracted with IDT for telecommunications services and administrative support on an arms-length basis. We believe that the terms of our agreements with IDT are no less favorable than those we would have obtained from unaffiliated third parties. Results of Operations The following table sets forth certain items in our statement of operations as a percentage of total revenues for the periods indicated:
Percentage of Revenue ---------------------------------------------- Period from January 2, 1996 Year Ended Six Months Ended (inception) July 31, January 31, to July 31, ------------- ------------------ 1996 1997 1998 1998 1999 ----------- ----- ----- -------- -------- Revenue: PC2Phone.............. -- 81.8% 66.3% 61.2% 65.2% Phone2Phone........... -- -- 16.9 4.4 27.1 Other................. -- 18.2 16.8 34.4 7.7 ----- ----- ----- -------- -------- Total Revenue.. -- 100.0 100.0 100.0 100.0 ----- ----- ----- -------- -------- Cost and expenses: Direct cost of revenue............... -- 58.6 57.0 33.3 55.6 Sales and marketing... -- 2.9 24.1 9.0 22.7 General and administrative........ -- 98.0 42.4 36.0 31.8 Depreciation.......... -- 4.5 6.1 3.8 5.6 ----- ----- ----- -------- -------- Total costs and expenses....... -- 164.0 129.6 82.1 115.7 ----- ----- ----- -------- -------- (Loss) income from operations and net (loss) income.......... -- (64.0)% (29.6)% 17.9% (15.7)% ===== ===== ===== ======== ========
Comparison of Six Months Ended January 31, 1998 and 1999 Revenue. Revenue increased 164% from $5.0 million for the six months ended January 31, 1998 to $13.2 million for the six months ended January 31, 1999. Of total revenue for the six-months ended January 31, 1999, PC2Phone generated $8.6 million and Phone2Phone generated $3.6 million. The increase in revenue was primarily due to an increase in billed-minute usage resulting from additional marketing of our Internet telephony products and services. Specifically, revenue from PC2Phone services increased 177% from $3.1 million for the six months ended January 31, 1998 to $8.6 million in revenue for the corresponding six-month period in 1999. Revenue from Phone2Phone increased by a factor of 15 from $219,000 for the six months ended January 31, 1998 to $3.6 million for the six months ended January 31, 1999. We anticipate that revenue from PC2Phone and Phone2Phone will increase in absolute terms as our products become more widely distributed. However, as a percentage of revenue, we expect revenue from these products to decline over the next several years as we begin to market additional products and services and pursue additional sources of revenue. 20 In addition, we recognized revenue from certain amounts charged to IDT and equipment sales, as shown above in the category "Other." From these intercompany transactions, including monitoring IDT's network operations center for Internet customers, we recognized revenue of approximately $209,000 and $333,000 for the six months ended January 31, 1998 and 1999, respectively. We also realized revenue from the sale of equipment, totaling approximately $1.5 million for the six months ended January 31, 1998 as compared to equipment sales of $338,000 for the six months ended January 31, 1999. Equipment sales for the six months ended January 31, 1999 were derived from our Net2Phone Pro product, while equipment sales for the six months ended January 31, 1998 represented Internet telephony servers sold to an international Phone2Phone reseller for deployment abroad. Revenue from equipment sales reflect events that we believe to be non-recurring and do not represent any trend. Direct Cost of Revenue. Direct cost of revenue increased by 329% from $1.7 million for the six months ended January 31, 1998 to $7.3 million for the six months ended January 31, 1999. As a percentage of total revenue, these costs increased from 33.3% for the six months ended January 31, 1998 to 55.6% for the six months ended January 31, 1999. This increase is primarily attributable to the fact that we sold $1.5 million of equipment in the six months ended January 31, 1998 as compared to $338,000 in the six months ended January 31, 1999. Such equipment sales have a low cost of sales associated with them. Over time, we expect direct cost of revenue to go down as a percentage of revenue. These costs should decrease as international competition among carriers intensifies, resulting in lower prices from our suppliers, and as we leverage our position as a large provider of services and deploy our own communications infrastructure. We expect to continue to utilize IDT's international and domestic networks at the current fair market value rates for termination. We also expect to incur additional costs in connection with the growth of our business, especially in connection with increasing our own network capacity to handle increased traffic volumes. Sales and Marketing. Sales and marketing expenses increased 567% from $450,000 for the six months ended January 31, 1998 to $3.0 million for the six months ended January 31, 1999. As a percentage of total revenue, these costs increased from 9.0% for the six months ended January 31, 1998 to 22.7% for the six months ended January 31, 1999. This increase primarily reflects the increased marketing and advertising expenses associated with the agreements established with Yahoo!, Excite and other strategic partners. We expect to continue to increase our advertising and marketing expenditures to further build brand recognition, and to enhance the distribution of our products and services. General and Administrative. General and administrative expenses increased 133% from $1.8 million for the six months ended January 31, 1998 to $4.2 million for the six months ended January 31, 1999. As a percentage of total revenue, these costs decreased from 36.0% for the six months ended January 31, 1998 to 31.8% for the six months ended January 31, 1999. This decrease primarily reflects the efficiencies we have begun to realize from our sales and support infrastructure. We believe that general and administrative expenses will continue to decline as a percentage of total revenue as a result of greater economies of scale and further efficiencies. In absolute terms, we expect these expenses to continue to increase as we incur additional costs in product development and costs associated with hiring additional personnel and adding new office space. Moreover, in absolute terms, our research and development expenses will increase as we hire the additional engineers necessary to continue the development of new products and services to compliment our existing customer platform. However, these research and development expenses are not expected to significantly increase as a percentage of our total revenue. Depreciation. Depreciation increased from $192,000 for the six months ended January 31, 1998 to $739,000 for the six months ended January 31, 1999. This increase is primarily attributable to the increase in capital expenditures for the deployment of communications equipment both domestically and internationally to manage increased customer volume. Depreciation will continue to increase as we build and acquire additional infrastructure, most notably through the acquisition of fiber transmission networks. (Loss) Income from Operations. Income from operations was $896,000 for the six months ended January 31, 1998 as compared to loss from operations of $2.1 million for the six months ended January 31, 1999. This change is due to the substantial increase in both sales and marketing expenses as well as general 21 and administrative expenses we incurred as we expanded our corporate infrastructure and resources to gain additional market share. We anticipate continued and increasing losses as we pursue our strategy of maintaining our position as the premier provider of Internet telephony services. Comparison of Fiscal Years Ended July 31, 1997 and 1998 Revenue. Revenue increased 344% from $2.7 million for fiscal 1997 to $12.0 million for fiscal 1998. The increase in revenue was primarily due to an increase in billed-minute usage resulting from increased marketing of our Internet telephony products and services. Of total revenue for the year ended July 31, 1998, PC2Phone generated approximately $8.0 million in revenue and Phone2Phone generated approximately $2.0 million. The increase in revenue was primarily due to an increase in billed-minute usage due to the marketing of our Internet telephony products and services. Specifically, revenue from PC2Phone services increased 264% from $2.2 million in revenue for fiscal 1997 to $8.0 million in revenue for fiscal 1998. We realized significant revenue for the first time from our Phone2Phone services for fiscal 1998, as well as recorded revenue of approximately $1.5 million from the sale of equipment. In addition, we recognized revenue from amounts charged to IDT including monitoring the network operations center for IDT's Internet customers, of $297,000 and $453,000, respectively, for fiscal 1997 and 1998. We do not expect to realize significant revenue from the sale of equipment in the future. Direct Cost of Revenue. Direct cost of revenue increased by 325% from $1.6 million for fiscal 1997 to $6.8 million for fiscal 1998. As a percentage of total revenue, these costs decreased from 58.6% for fiscal 1997 to 57.0% for fiscal 1998. This decrease is primarily attributable to the impact of the higher margin Internet protocol gateways sold in the first half of fiscal 1998. Since we do not expect to realize significant revenue from the sale of Internet protocol gateways in the future, our direct costs will reflect our ability to terminate our traffic worldwide through our own network relationships or via those of IDT, our primary supplier. As a percentage of revenue we anticipate direct costs to remain approximately the same as our network expansion efforts mitigate potential pricing pressures. Sales and Marketing. Sales and marketing expenses increased by a factor of 37 from $77,000 for fiscal 1997 to $2.9 million for fiscal 1998. As a percentage of total revenue, these costs increased from 2.9% for fiscal 1997 to 24.1% for fiscal 1998. This increase primarily reflects the increased marketing and advertising expenses associated with the agreements established with Yahoo!, Excite and other strategic partners. We expect to continue to increase significantly our advertising and marketing expenditures to further build brand recognition, and to enhance the distribution of our products and services. General and Administrative. General and administrative expenses increased 96% from $2.6 million for fiscal 1997 to $5.1 million for fiscal 1998. As a percentage of total revenue, these costs decreased from 98.0% for fiscal 1997 to 42.4% for fiscal 1998. This decrease primarily reflects the efficiencies we have begun to realize from our sales and support infrastructure. We expect to continue to see further efficiencies with revenue per employee increasing and greater economies of scale, so that general and administrative expenses will continue to decline as a percentage of total revenue. In absolute terms, we expect these expenses to continue to increase as we incur additional costs associated with developing new products, hiring of additional personnel and adding new office space. Depreciation. Depreciation increased from $121,000 for fiscal 1997 to $727,000 for fiscal 1998. This increase is primarily attributable to the increase in capital expenditures for the deployment of communications equipment both domestically and internationally to manage increased customer volume. (Loss) Income from Operations. Loss from operations was $1.7 million for fiscal 1997 as compared to $3.5 million for fiscal 1998. The increased losses reflect the substantial increase in marketing and general and administrative costs we incurred as we expanded our corporate infrastructure and resources to gain additional market share for our products and services. 22 Period from January 2, 1996 (date of inception) to July 31, 1996 During the period from January 2, 1996 (date of inception) to July 31, 1996, we did not generate any revenue. During this period, we incurred approximately $508,000 in start-up costs, primarily for research and development, as we prepared to introduce our products and services. Quarterly Results of Operations The following table sets forth certain quarterly financial data for the six quarters ended January 31, 1999. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements, and, in our opinion, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the information for periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.
Quarter Ended ---------------------------------------------------------------------------- Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, 1997 1998 1998 1998 1998 1999 ---------- ---------- ----------- ----------- ----------- ---------- Revenue: PC2Phone............... $1,371,598 $1,693,812 $ 2,019,766 $ 2,831,645 $ 3,776,777 $4,809,844 Phone2Phone............ 70,939 148,572 799,324 1,011,701 1,287,415 2,280,366 Other.................. 825,000 905,000 120,362 208,253 599,227 412,456 ---------- ---------- ----------- ----------- ----------- ---------- Total revenue........ 2,267,537 2,747,384 2,939,452 4,051,599 5,663,419 7,502,466 Cost and expenses: Direct cost of revenue............... 602,389 1,070,051 1,916,861 3,259,456 3,353,247 3,970,504 Sales and marketing.... 133,963 316,141 912,955 1,524,708 1,299,903 1,691,610 General and administrative........ 730,893 1,073,165 1,450,229 1,833,341 1,900,234 2,286,790 Depreciation........... 68,169 123,844 229,635 304,861 338,469 400,584 ---------- ---------- ----------- ----------- ----------- ---------- Total costs and expenses............ 1,535,414 2,583,201 4,509,680 6,922,366 6,891,853 8,349,868 ---------- ---------- ----------- ----------- ----------- ---------- (Loss) income from operations and net (loss) income.......... $ 732,123 $ 164,163 $(1,570,228) $(2,870,767) $(1,228,434) $ (847,202) ========== ========== =========== =========== =========== ========== As a Percentage of Revenue ---------------------------------------------------------------------------- Revenue: PC2Phone............... 60.5% 61.7% 68.7% 69.9% 66.7% 64.1% Phone2Phone............ 3.1 5.4 27.2 25.0 22.7 30.4 Other.................. 36.4 32.9 4.1 5.1 10.6 5.5 ---------- ---------- ----------- ----------- ----------- ---------- Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 Cost and expenses: Direct cost of revenue............... 26.6 38.9 65.2 80.4 59.2 52.9 Sales and marketing.... 5.9 11.5 31.1 7.6 23.0 22.6 General and administrative........ 32.2 39.1 49.3 45.2 33.6 30.5 Depreciation........... 3.0 4.5 7.8 7.5 6.0 5.3 ---------- ---------- ----------- ----------- ----------- ---------- Total costs and expenses............ 67.7 94.0 153.4 170.9 121.7 111.3 ---------- ---------- ----------- ----------- ----------- ---------- (Loss) income from operations and net (loss) income.......... 32.3% 6.0% (53.4)% (70.9)% (21.7)% (11.3)% ========== ========== =========== =========== =========== ==========
23 We have experienced growth in revenue in each quarter since inception, reflecting greater acceptance and usage of our products and services by our expanded customer base. Since we derive revenue from more than one source, mainly from both services and the sale of certain equipment, we have experienced volatility in our direct costs of revenue. Specifically, our direct costs in the first two quarters of fiscal 1998 were low as a percentage of total revenue due to the $1.5 million sale of certain Internet protocol gateways. Since these sales were on a non-recurring basis, we realized a significant, albeit temporary, reduced direct cost of revenue for these two quarters. In the second half of fiscal 1998, we increased our advertising expenditures as we began marketing our Phone2Phone service. Revenue from our Phone2Phone service grew from approximately 5% of total revenue in the first half of the year to 25% of total revenue in the latter half. We experienced start-up costs for Phone2Phone that increased our direct costs for those two quarters. However, we have been able to reduce direct costs for our Phone2Phone product as we expanded our network and infrastructure in the first two quarters of 1999, which resulted in lower total direct costs. In the most recent quarter, direct costs as a percentage of revenue accounted for approximately 53% as compared to 80% in the quarter ended July 31, 1998. Our increased sales and marketing expenses reflect the relationships we have with various online strategic partners with whom we advertise our PC2Phone and Phone2Phone services. We anticipate increased investment in sales and marketing to further build brand recognition of our products and services. As a result of our limited operating history and the emerging nature of the markets in which we compete, we are unable to accurately forecast our revenue and direct costs as they may be impacted by a variety of factors. These factors include the level of use of the Internet as a communications medium, seasonal trends, bandwidth constraints, the amount and timing of our capital expenditures, introduction of new services by us or our competitors, price competition, technical difficulties or system downtime, and the development of regulatory restrictions. Liquidity And Capital Resources Since inception in January 1996, we have financed our operations through capital advances from IDT and through cash flow from operations. In May 1999 we raised net proceeds of $29.9 million from the sale of Series A preferred stock and warrants. As of January 31, 1999, we had $10,000 in cash and cash equivalents. Our operating activities generated positive cash flow of $353,000 in the six months ended January 31, 1998 compared to $428,000 in the six months ended January 31, 1999. Cash used in investing activities was $1.6 million and $2.5 million for the six months ended January 31, 1998 and 1999, respectively. Our use of cash in investing activities was principally for the purchase of telecommunications and Internet equipment. We have a $14.0 million note payable to IDT. This debt represents advances for working capital and capital expenditures since inception. $7.0 million of this note will be repaid with proceeds from this offering. The remaining balance of $7.0 million will be self amortizing and payable to IDT in 60 monthly installments of principal and interest at a rate of 9% per annum. Our principal commitments following the closing of this offering are expected to consist primarily of . repayment of indebtedness principally to IDT; . leases on corporate facilities; . network expenditures; and . one-time payments often required by portals in connection with marketing our products and services. As of May 17, 1999 we had commitments totaling approximately $15.0 million. 24 Our future capital requirements will depend on numerous factors, including market acceptance of our services, brand promotions, the amount of resources we devote to the development of our current and future products, and the expansion of our sales force and marketing our services. We may experience a substantial increase in our capital expenditures and lease arrangements consistent with the growth in our operations and staffing. Additionally, we will evaluate possible investments in businesses, products and technologies. We believe that our current cash balances, expected cash flow from our operations and the proceeds of this offering will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. However, there can be no assurance that we will have sufficient capital to finance potential acquisitions or other growth oriented activities, and may issue additional equity securities, incur debt or obtain other financing. Year 2000 Systems Costs Computer systems, software packages, and microprocessor dependent equipment may cease to function or generate erroneous data on January 1, 2000. The problem affects those systems or products that are programmed to accept a two- digit code in date code fields. For example, computer programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. To correctly identify the year 2000, and therefore be "year 2000 compliant," a four-digit date code field is required. We are conducting a comprehensive review of our computer hardware and software to ensure that our computer-related applications are year 2000 compliant. Our cost of addressing the year 2000 issue is not expected to be material to our operations or financial position. However, the consequences of an incomplete or untimely resolution of the year 2000 issue could be expected to have a material adverse effect upon our financial results. In the absence of such a resolution, our ability to route traffic in a cost effective manner, to deliver a material portion of our services, to properly obtain payment for these services, and/or to maintain accurate records of our business and operations, could be substantially impaired until this issue is remedied. We may become liable for substantial damages in the event that, as a result of the year 2000 issue, we fail to deliver any services that we have contracted to provide. Also, our name and reputation may be harmed if our services are disrupted due to year 2000 problems. We expect that our year 2000 issues will be satisfactorily resolved before the year 2000. Our plan to ensure year 2000 compliance includes the following phases: . conducting a comprehensive inventory of internal systems, including information technology systems and non-information technology systems (which include switching, billing and other platforms and electrical systems); . assessing and prioritizing any required remediation; . repairing or, if appropriate, replacing any non-compliant systems; . testing all remediated systems for year 2000 compliance; and . developing contingency plans that may be employed in the event that any system used by us is unexpectedly affected by a previously unanticipated year 2000 problem. We currently expect to complete all phases of this process and be fully year 2000 compliant before the end of 1999. We are conducting an external review of our customers and suppliers, and any other third parties with whom we do business, to determine their vulnerability to year 2000 problems and any potential impact on us. These parties include our equipment and systems providers. In particular, we may experience problems 25 to the extent that telecommunications carriers whose networks connect with ours are not year 2000 compliant. Our ability to determine the ability of these third parties to address issues relating to the year 2000 problem is limited. To the extent that a limited number of carriers experience disruptions in service due to the year 2000 issue, we believe that we will be able to obtain service from alternate carriers. However, our ability to provide certain services to customers in selected geographic locations may be limited. There can be no assurance that such problems will not have a material adverse effect on our business, reputation or operating results. We are also in the process of developing contingency plans with regard to potential year 2000 problems. We believe that, in the event that one or more of our systems is impaired due to unanticipated year 2000 issues, our contingency plans will enable us to temporarily conduct operations on a temporarily modified basis until such impaired system or systems is remediated. There can be no assurances that our suppliers and customers will achieve full year 2000 compliance before the end of 1999 or that we will develop or implement effective contingency plans on a timely basis. A failure of our computer systems or the failure of our suppliers or customers to effectively upgrade their software and systems for transition to the year 2000 could have a material adverse effect on our business, financial conditions and results of operations. To date, we have incurred expenses of less than $1.0 million in connection with remediation of year 2000 related issues. We do not expect to incur significant costs to become year 2000 compliant, although our evaluation of the year 2000 problem is not yet complete and actual costs may be significantly higher. We expense costs associated with year 2000 remediation when they are incurred. Effects of Inflation Due to relatively low levels of inflation over the last several years, inflation has not had a material effect on our results of operations. Impact of Recently Issued Accounting Standards SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, was issued in June 1997. We will be required to adopt this new statement for fiscal 1999. This statement requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company. We do not anticipate that the adoption of this statement will have significant impact on our financial statements. 26 BUSINESS Overview Net2Phone is a leading provider of voice-enhanced Internet communications services to individuals and businesses worldwide. Our services enable our customers to make low-cost, high-quality phone calls over the Internet using their personal computers or traditional telephones. We are leveraging our Internet telephony expertise to integrate real-time voice communication capabilities into the Web. We currently offer Web-based Internet telephony services, which enable customers to make calls and send faxes over the Internet using their personal computers, and basic Internet telephony services, which enable customers to make calls using traditional telephones and fax machines. We have developed a sophisticated PC2Phone software application that enables the use of our Web-based Internet telephony services. We distribute this software free of charge through the Internet and through bundling agreements with strategic partners. In January 1999, Netscape agreed to embed our PC2Phone software into all versions of Netscape's Internet browser released during the term of our agreement, including Netscape Navigator and Netscape Communicator. Netscape also agreed to include a Net2Phone icon on the Netscape Navigator Personal Toolbar. We also have entered into strategic marketing and distribution relationships with leading Internet companies, including Yahoo!, Excite, GeoCities, InfoSpace.com and ZDNet, and distribution and software-bundling arrangements with leading computer equipment and software companies, including IBM, Packard Bell-NEC Europe and Creative Labs. We sell our Internet telephony services internationally through resellers who buy minutes of use from us in bulk, and resell them to customers in their respective countries. Our software is currently available in eight languages (English, Spanish, Japanese, French, Dutch, Portuguese, Italian and German). We intend to make our software available in additional languages as we expand our international customer base and distribution channels. As of March 31, 1999, we were serving approximately 250,000 active customers and handling over 20 million minutes of use per month. Our revenue has grown substantially, increasing from approximately $2.7 million in fiscal 1997 to approximately $12.0 million in fiscal 1998. Our revenue for the six months ended January 31, 1999 was approximately $13.2 million. Industry Background The Internet is experiencing unprecedented growth as a global medium for communications and commerce. International Data Corporation estimates that the number of Internet users worldwide will grow from approximately 142 million at the end of 1998 to 399 million by the end of 2002. These users are increasingly using the Internet as a communications medium. A recent study by E-Marketer, a market research firm, estimated that 9.4 billion e-mail messages are delivered daily. Real-time text communications through online "chat" rooms is also gaining widespread acceptance. Jupiter Communications, a market research firm, estimates that approximately 53% of all Internet users participate in online "chat" rooms. Online commerce is also becoming widely accepted as a means of doing business. According to International Data Corporation, Internet users worldwide purchased more than $50.0 billion of goods and services in 1998. International Data Corporation projects that commerce over the Internet will to grow to approximately $1.3 trillion of goods and services in 2003. Emergence of Internet Telephony TeleGeography, a market research firm, estimates that the international long distance market will grow from $26.8 billion in 1998 to $79.0 billion in 2001, with consumers and businesses making an estimated 143.1 billion minutes of international long distance calls in 2001. Despite the large size of this market and the number of minutes of calls made, traditional international long distance calls routed over domestic and foreign public switched telephone networks are still relatively expensive for the consumer. The primary reason for this expense is tariffs set by foreign governments and carriers that are passed on to consumers in the form of higher long distance rates. 27 Internet telephony has emerged as a low cost alternative to traditional long distance telephony. International Data Corporation projects that the Internet telephony market will grow rapidly to over $23.4 billion in 2003. Internet telephone calls are less expensive than traditional international long distance calls primarily because these calls are routed over the Internet, bypassing a significant portion of international long distance tariffs. Also, routing calls over the Internet is more cost-effective than routing calls over traditional circuit-switched networks, because the packet-switching technology that enables Internet telephony is more efficient than traditional circuit- switched voice technology. Packet-based networks, unlike circuit-based networks, do not require a fixed amount of bandwidth to be reserved for each call. This allows voice and data calls to be pooled, which means that packet networks can carry more calls with the same amount of bandwidth. This greater efficiency creates network cost savings that can be passed on to the consumer in the form of lower long distance rates. Integration of Voice into the Web We believe that Internet telephony offers significant benefits to consumers and businesses over and above international long distance cost savings. The technologies that enable Internet telephony can be applied to integrate real- time voice communication into the Web. We believe that this integration can further enhance the potential for the Internet to become the preferred medium for both communications and commerce. For example, the integration of voice into the Web would supplement existing text-based modes of Internet communication such as e-mail and online chat by adding a real-time, secure, low-cost or free voice communication alternative. We believe that this will be attractive both to consumers and businesses. In addition, voice-enabling the Web would give Internet shoppers the ability to speak directly with customer service representatives of online retailers to ask questions and alleviate concerns about online security. This may increase the probability that a sale is made and may give online retailers a key competitive advantage by providing them with cross- and up-sell opportunities. It will also give online retailers the ability to provide more responsive customer support and service. Integrating real-time voice into the Web would also enable portals and destination sites to offer enhanced communications services, such as providing Internet users with a central source for retrieving voicemail, e-mail, faxes and pages. We believe this would allow these portals and destination sites to attract more users to their sites and to increase the amount of time these users spend on their sites. This increased usage will allow them to attract advertisers and secure higher advertising rates, thereby increasing revenue. Limitations of Existing Internet Telephony Solutions The growth of Internet telephony has been limited to date due to poor sound quality attributable to technological issues such as delays in packet transmission and bandwidth limitations related to Internet network capacity and local access constraints. However, recent improvements in packet-switching and compression technology, new software algorithms and improved hardware have substantially reduced delays in packet transmissions. In addition, the use of private networks to transmit calls as an alternative to the public Internet is helping to alleviate capacity constraints. Finally, the emergence of new, lower cost broadband access technologies, such as digital subscriber lines and cable modems, are addressing local access bandwidth issues. Several large long distance carriers, including AT&T and Sprint, have announced Internet telephony service offerings. However, many of these service offerings have not been deployed on a large scale. Many also require users to purchase other telecommunications services or allow only domestic calling. Smaller Internet telephony service providers also offer low-cost Internet telephony services from personal computers to telephones and from telephones to telephones. These services, however, are available only in limited geographic areas and require payment by credit card which may preclude many international customers from signing up for these services. We also believe that existing Internet telephony service providers rely 28 upon technologies and systems that lack large-scale billing, network management and monitoring systems, and customer service capabilities required for the integration of voice communication into the Web. In addition, many other companies currently provide Internet telephony software and services that allow Internet telephone calls to be made between personal computers. However, most of these companies require both the initiator and the recipient of the call to have the same software installed on their personal computers and to be online at the same time. The Net2Phone Solution We deliver high-quality Internet telephony services and voice enabling Web applications to consumers and businesses. Our solutions are enabled by our unique PC2Phone software, our billing platform, our UNIX-based Internet protocol gateways and gatekeepers, and our live customer support that is available at no charge 24 hours a day, seven days a week in multiple languages. Our solution provides the following benefits to our customers: . Low Cost. Our PC2Phone software is distributed free of charge, and our services allow our customers to make telephone calls often at a fraction of the cost of traditional long distance service. Because international long distance calls routed over the Internet bypass the international settlement process, we are able to charge lower rates than traditional long distance carriers. . High Voice Quality. We offer high voice quality through our proprietary voice and data compression and packet-switching technologies, which reduce packet loss and delay, route packets efficiently and perform quality enhancing functions, such as echo cancellation. We intend to continue to enhance the voice quality of our services as our customer base and business grow. . Ease of Use and Access. Our services are designed to be convenient and easy to access from anywhere in the world. To make a call using our Web- based services, a customer need only install our free software on a sound-enabled personal computer, register and be connected to the Internet. No additional telephone lines or special equipment are required. Our Phone2Phone service is also easy to use and requires a customer only to register and dial a toll-free or local access number on the customer's telephone or fax machine. . Voice-Enabled Online Retailing. Our services enable users anywhere in the world to speak with sales or customer service representatives of online retailers and other Web-based businesses while visiting their Web sites. This provides customers an opportunity to ask questions of and to provide credit card information directly to a customer service representative if they are concerned about Internet security, thereby increasing the likelihood of consummating an online sale. In addition, our services allow our customers outside of the United States and Canada to access telephone numbers that might otherwise be inaccessible to them through their local carriers. For example, users of our services in other countries may call United States or Canadian toll-free numbers (i.e., telephone numbers with 800, 877 or 888 prefixes), which are not otherwise available to them, at no charge. The ability to communicate with international customers in this manner provides United States and Canadian-based online retailers and other Web-based businesses with cost effective access to an expansive international customer base. . Reliable Service. Our network is reliable because of its technologically advanced modular design. This allows us to create additional capacity simply by adding switches to the existing network. Our system also provides seamless service and high-quality voice transmission through our ability to reroute packets if problems arise. We believe that our ability to provide reliable service is essential to voice-enable the Web. . Ease of Payment and Online Account Access. Once registered, our customers are able to make unlimited toll-free calls. In addition, they can make toll calls by opening a prepaid account using 29 credit cards, wire transfers or checks payable in United States dollars. Acceptance of payment in multiple forms enables international customers who may not necessarily have credit cards to use our services. Our customers can access their accounts via the Internet in order to view their call history and account balances, and to increase their prepaid amounts. . Customer Support. We offer live customer support 24 hours a day, seven days a week in multiple languages. Our customer support center can be accessed from anywhere in the world at no charge either by calling our toll-free number, where available, or by using our Web-based Internet telephony service. Our integrated billing platform and call management system provide our customer support staff with immediate access to user accounts, calling patterns and billing history to help us provide better, more responsive customer support. Strategy Our mission is to become the premier Web-based communications enabler. We intend to leverage our leadership position in the Internet telephony market to make our communications services ubiquitous on the Internet and to develop and market online commerce and related products based on our existing platform. Our strategy includes the following key elements: . Drive Usage Through Multiple Channels. We promote our services through direct sales and marketing and through relationships with international resellers and leading Internet hardware, software and content companies. We intend to build on these relationships and to add more partners and resellers to drive usage of our Internet telephony services. We also intend to partner with large telecommunications companies to enable them to offer our Internet telephony services under their brand. . Pursue Multiple Sources of Revenue. In addition to our minutes-based revenue, we intend to pursue new Web-based revenue opportunities from banner and audio advertising, as well as sponsorship opportunities on our PC2Phone software user interface and our EZSurf.com shopping portal. We also intend to explore the availability of transaction-based revenue opportunities. . Enhance Brand Recognition. We have established strong brand identity in the Internet telephony market in large part due to the high-quality of our services and our marketing efforts. We have entered into advertising relationships with leading Web companies such as Netscape, Yahoo! and Excite in order to promote our services. We intend to continue to implement aggressive advertising and sales campaigns to increase brand awareness. In addition, we intend to enhance our brand recognition by cooperatively marketing our Internet telephony services with leading computer hardware and software companies and Internet services providers. . Make Our Software Ubiquitous. We have entered into strategic distribution relationships with leading computer equipment and software companies to expand the availability of our software. For example, our software will be embedded into future versions of Netscape's Internet browser and a Net2Phone icon will be prominently positioned next to AOL's Instant Messenger icon on the Netscape Navigator Personal Tool Bar. We intend to build upon these relationships and enter into new distribution relationships with other leading companies in order to enhance the distribution of our software worldwide. . Expand and Enhance Products and Services. We have committed significant resources to expand our network, enhance our existing product and service offerings and to develop and market additional products and services in order to continue to provide customers with high-quality Internet telephony services. For example, we plan to introduce new products and services, including: . PC2PC, which will allow high-quality Internet telephony from one personal computer to another; . voice enabled chat, which will allow two participants in an online chat room discussion to establish direct voice communication with each other while maintaining anonymity; 30 . unified messaging services, which we anticipate will include voice, fax and electronic messaging with multiple points of access, including the Web and conventional telephones; . online commerce applications which will provide customer service representatives of online retailers with real-time access to a caller's profile, enable them to "push" specific content onto a caller's personal computer screen in order to better assist the caller in answering their inquiries; . customer payment applications which will allow customers to pay for online commerce transactions by debiting their Net2Phone account; and . real-time video communications between two or more personal computer users over the Internet. Strategic Relationships We have entered into strategic distribution, integration and advertising relationships with leading Internet and computer hardware and software companies. We believe that these relationships are important because they allow us to leverage the strong brand names and distribution channels of these companies to market our products and services. Our strategic partners include: Netscape Netscape has agreed to embed our software in future versions of Netscape's Internet browser released during the term of our agreement, including Netscape Navigator and Netscape Communicator. Netscape also has agreed to: . place a Net2Phone icon on the Netscape Navigator Personal Toolbar immediately to the right of the AOL Instant Messenger icon, which will allow Netscape users to use our Web-based Internet telephony services from anywhere on the Web simply by clicking on our icon; . integrate our services into, and prominently display our services on, Netscape Netcenter, including Netscape's Address Book Contacts section and Voice Communications section, which will allow Netscape users to make calls using our services simply by clicking on a displayed telephone number; and . include the software for our Web-based Internet telephony services in Netscape's suite of in-line plug-in software and Netscape Smart Update programs (both domestically and when available internationally) for downloading by Netscape users from centralized locations on Netscape's Web site. We also have the right to place a specified amount of banner and other advertisements on Web pages of our choice on Netscape's domestic and international Web site. The two-year term of our exclusive agreement with Netscape commences with the beta release of the next version of Netscape's Internet browser, which we believe will occur later this year. Yahoo!, Excite and InfoSpace.com Our Web-based Internet telephony service is integrated into Yahoo!'s People Search online telephone directory. As a result of this integration, an Internet user who performs a search on Yahoo! People Search can simply click on a displayed telephone number to initiate a call to that number. Under this agreement, we also have the exclusive right to have our banner advertising appear when an Internet user performs a word- or category-search for "Internet Telephony" or related phrases on Yahoo! We are currently negotiating with Yahoo! to integrate our PC2Phone service into Yahoo!'s Yellow Pages online directory. 31 Our Web-based Internet telephony software will also be integrated into Excite's Web sites in its International Network, which includes the United Kingdom, Germany, France, Japan, Italy, Australia, Sweden and the Netherlands. As a result, an Internet user in any of these countries will be able to click on any telephone number that appears on any page on these sites to initiate a call to that number using our PC2Phone service. In addition, our services will be prominently featured within the Excite International Network via advertising and promotion on various channels, including each member's homepage, business, technology/computer and travel channels, as well as the localized versions of My Excite, What's New/What's Cool and Mail Excite. We are negotiating with Excite to have our services integrated into Excite's United States Web sites as well. In addition, our Web-based Internet telephony software is integrated into InfoSpace.com's network of white and yellow page directory services. This network of sites includes all the white and yellow page listings in Netscape's Netcenter portal, the Microsoft Network, the GO Network and Xoom.com. Other Strategic Relationships We also have entered into other important strategic relationships with other leading Internet and computer hardware and software companies, including: . ZDNet. We are the preferred provider of Internet telephony services for ZDNet and our Web-based Internet telephony service will be integrated throughout the ZDNet Web site. . Quicknet Technologies. Our PC2Phone software is integrated into Quicknet's telephone handset product called Internet PhoneJACK. . Bigfoot International, WorldPages/Web YP and Internet 800 Directory. Our PC2Phone service is integrated into these three popular online directories, which allow Internet users to call any listed telephone number simply by clicking on the displayed number. Products and Services Current Products and Services Our services enable our customers to make low-cost, high-quality phone calls over the Internet using their personal computers or traditional telephones. Our principal current product and service offerings are described in the table below. 32
Product/Service Description Benefits - -------------------------------------------------------------------------------- Basic Internet Telephony Services: . Enables customers to . International long make calls over traditional distance rates are . Phone2Phone telephones and fax machines typically 50% to that are routed over the 70% lower than the . Fax2Fax Internet. Customers must rate charged by dial a local toll-free traditional long . Net2Phone Pro access number to access the distance carriers Net2Phone network. for calls originating in the . Customers are charged United States, and for toll and long up to 95% lower for distance calls on a calls originating per-minute basis. There outside the United is no charge for States. calling United States and Canadian toll-free . Users do not need numbers. to purchase expensive hardware . Available in the United or software. States and in many international . High voice quality. locations. . Faxes are transmitted real- . We market Phone2Phone time and users under the brand receive immediate "Net2Phone Direct." delivery confirmations. - -------------------------------------------------------------------------------- Web-based Internet . Enables customers to . Services are Telephony Services: make calls and send available to any faxes over the Internet Internet user with . PC2Phone using their personal a sound-equipped . Click2Talk computers. Customers personal computer. . PC2Fax must install our software on their . International long personal computers, distance rates are register with us and be typically 50% to online in order to make 70% lower than the calls. When browsing rates charged by Web sites that have a traditional long Click2Talk icon, distance carriers customers may initiate for calls calls to the company originating in the whose site they are United States, and browsing simply by up to 95% lower for clicking on the calls originating Click2Talk icon. outside the United States. . Customers are charged for toll and long . United States and distance calls on a Canadian toll-free per-minute basis. There numbers can be is no charge for accessed from calling United States outside the United and Canadian toll-free States and Canada. numbers. . Facilities online commerce by providing real-time voice contact between online retailers and Internet shoppers. . Customers do not require multiple telephone lines and need not log off the Internet to initiate a call. - -------------------------------------------------------------------------------- EZSurf.com Shopping . A shopping portal . Enables voice Portal powered by our Web- communications with based Internet over 300 Web sites. telephony services from which Internet users . Educates users by can initiate calls to providing them with listed online retailers essential by clicking on an icon information on the Web site. required to buy products online. . Lists useful information for key online retailers, including payment and shipping options and return policies.
33 Sales, Marketing and Distribution We distribute our software through the Internet, bundling agreements with strategic partners and international resellers. In addition, our software will be embedded into future versions of Netscape's browser, which, according to International Data Corporation, was used by 41.5% of all consumer Internet users in mid-1998. Customers can also download our software at no charge from our Web site and other Web sites, including Yahoo!'s People Search and Lands' End's home page. We also distribute our software through strategic relationships with leading Internet and computer hardware and software companies, including Packard Bell- NEC Europe and Creative Labs. Our software is bundled with our partners' products and services and distributed domestically and internationally. We expect to distribute over 25.0 million units of our software in 1999 as a result of these and other bundling arrangements. We promote our services through online and Internet-based advertising venues and traditional print advertising in domestic and international publications. Another way we sell our services internationally is by entering into exclusive agreements with resellers in other countries. We sell these resellers bulk amounts of minutes of use of our products and services to be resold in the resellers' respective countries. For example, in Asia, we have agreements with Daewoo and Naray Mobile Telecom in South Korea and Marubeni in Japan. In Europe and the Middle East, we have agreements with CAPCOM in Spain and Dot.LB in Lebanon, among others. To facilitate distribution and attract users in foreign countries, we have developed our software in eight languages (English, Spanish, Japanese, French, Dutch, Portuguese, Italian and German) and intend to increase the number of languages as our distribution broadens. Customer Service As part of our mission to attract and retain customers, we offer free voice to voice real-time customer support in multiple languages. We employ approximately 67 customer service representatives, who offer live customer support to our users 24 hours a day, seven days a week. These services can be reached from anywhere in the world at no cost using either our toll-free number, where available, or our Web-based Internet telephony services. The customer support staff provides technical assistance, as well as general service assistance, for all of our products and services. We also offer customer support via e-mail and fax. Our integrated billing platform and call management system provide our customer support staff with immediate access to user accounts, calling patterns and billing history, thereby enhancing the quality of service provided to our customers. In addition, our international resellers typically provide their own front-line customer support. Technology PC2Phone Software The PC2Phone client software is simple to install and to use and has won various industry awards. The client installation process is wrapped in the industry-standard "Install Shield" product. During installation, the Net2Phone "wizard" verifies that the user's microphone and speakers are properly set for Internet telephony. The installation also has a service registration process that allows the customer to quickly register for paid time with the product. The client has several buttons and drop down headings to enable customization. These buttons allow the user to change specific properties, access and modify customer account information, program and use speed dialing, and verify rates. The PC client has gone through fourteen releases, each improving upon our Internet telephony capabilities. The client is a Windows-compliant, 32-bit application written in a high-level PC language. The code is extendible allowing us to easily add new functionality, yet is relatively compact. The newest client can record and play sound files allowing us to deliver voice-mail services and can interface with existing PC mail clients such as Eudora and Microsoft Outlook. 34 We have developed a third-party software development kit allowing other companies to quickly and easily integrate their products with the PC2Phone client. One such successful integration effort is with Quicknet's line of sound cards and telephone interface cards. This integration enables the deployment of inexpensive online gateways that are currently being deployed throughout the world. Call Management System To maintain our leadership position in the Internet telephony market, we believe that reliable and flexible billing, information management, monitoring and control systems are critical. Accordingly, we have invested substantial resources to develop and implement our sophisticated real-time call management information system. Key elements of this system include: . Customer Provisioning. The system provides automated Web-based, call center-based or reseller- based customer registration and online credit card authorization and batch billing capabilities that streamline customer registration. A special remote access application program interface allows other people access to our database, enabling sophisticated partners to remotely provision customers through our system and tying our system directly to their own business systems. This remote capability includes remote account management and continuous real-time call detail and billing information. Additionally, the system makes customer account records readily available to call center representatives in the event of customer billing problems. . Customer Access. Our system allows customers to independently access their billing records online without the need to contact customer service representatives. . Fraud Control. Fraud detection and prevention features include caller authentication, prevention of multiple calls in progress using the same account, all pin fail and long call duration timers. Reports on suspicious calling patterns are also employed in detecting fraud. Registrations are controlled by originating network address and are routinely scanned for fraudulent content before credit card purchases are allowed. . Network Security. Firewalls are employed to prevent network attacks on the platform and gateways. Network hiding techniques are used to hide systems containing sensitive database information. In addition, call requests and certain portions of the call are encrypted to prevent "network sniffers" from unauthorized access to data. . Call Routing. The network management system identifies and routes calls to the most efficiently priced carrier for call termination. The system also automatically routes calls around links or servers that are experiencing problems, have failed or have been manually taken out of service for maintenance or upgrades. This system provides remote administration facilities for maintaining routing tables and system monitoring. . Monitoring. The management system provides for real-time monitoring of all call information, hardware and software components, and system performance to report potential problems such as too many short calls on a server or a low percentage of call completions. The system also provides filtered remote management that allows partners to monitor and manage their own components. . Reliability. We maintain two separate network operations centers in Hackensack and Lakewood, New Jersey. These facilities house redundant gatekeeper complexes and replicate in-progress call information and call detail in real-time. This redundant system gives our network a high degree of reliability, enabling each network operations center to serve as a back-up to the other. . Detailed Call Records. The management software maintains detailed records for each call, including the account number of the caller, the caller's phone number, access number used, the originating gateway, the terminating gateway, the account owner, the calling party, the server/service phone number, the number of the called party and a running account balance, rate and billing information including surcharges applied to the call. 35 The Net2Phone Network Through an agreement with IDT, we lease bandwidth on an Internet network comprised of leased DS3 fiber optic lines connecting eight major cities across the United States, and lease dedicated T1 fiber optic lines connecting smaller cities to the network. We have a right to use network capacity leased by IDT. The network backbone uses state-of-the-art routing platforms including Cisco Series 7000 routers and Nortel Passport switches. The DS3 backbone connects traffic at four major public Internet exchange points and is also facilitated by a growing number of private peering sessions where switching and routing equipment is maintained. Through peering arrangements, we exchange Internet traffic with 25 other Internet backbone providers at these points. We operate IDT's network, one of the largest Internet access networks, providing local dial-up access through 36 points of presence. Our Internet network also includes more than 700 additional points of presence owned by local and regional Internet service providers. We are able to provide service in areas where we do not have dial-up equipment by utilizing call-forwarding technology to expand our coverage areas by increasing the total number of local access numbers. We have been closing down multiple points of presence in a number of states in order to consolidate our equipment into central "Super Points of Presence" locations. For example, one point of presence in New Jersey can supply local access for the entire state of New Jersey. The diagram below illustrates the routing of an Internet telephony call initiated by a customer using a telephone, fax or a personal computer to a terminating telephone or fax machine over our network. [Call routing diagram] We seek to retain flexibility and maximize our opportunities by utilizing a continuously changing mix of routing alternatives. This approach is intended to enable us to take advantage of the rapidly evolving Internet market in order to provide low-cost service to our customers. Accordingly, the network employs an "Open Shortest Path First" protocol that promotes efficient routing of traffic. Additionally, secondary servers are remotely positioned for all configuration and authentication hosts and multiple data segments are used in high traffic areas to minimize packet loss and to reduce network congestion. To minimize the potential detrimental effects of single points of failure, each Internet backbone node employs routing switches for directing network traffic and a minimum of two dedicated leased data lines. The network gateways connect the Internet backbone to the public-switched telephone network by compressing voice transmissions into electronic data packets, providing real-time audio and fax service over the network. The gateways are managed remotely, and are adaptable to a variety of telephony interfaces. The gateways can be maintained and upgraded remotely, and are operated in accordance with Internet communication standards. We believe our real-time platform can currently support approximately 5,000 simultaneous calls. This platform is scalable to 10 times its current capacity through the purchase and installation of certain additional hardware. To date, the highest number of simultaneous calls serviced by the network was approximately 1,590 simultaneous calls made on May 9, 1999. Based on current bandwidth usages, the DS3 backbone can support approximately 4,000 simultaneous calls at this time. 36 The Network Operations Center Our Network Operations Center, located in Hackensack, New Jersey, currently employs a staff of 25 people. There are two groups that work within the network operations center, the network analysis group and the Internet telephony monitoring group. Both groups have 24 hours a day, seven days a week coverage to quickly respond to any issues. The network analysis group works around-the-clock monitoring network issues, handling customer requests, repairing outages and solving security problems. The key objective is to provide quality service upon which customers can rely. The Internet protocol telephony monitoring group monitors a nationwide real- time network analysis map, which notifies our staff of network errors. The Internet protocol telephony monitoring group uses software we developed to monitor our gateways around the world. This group can dynamically stop or start any gateways and re-route Internet telephony traffic, as necessary. Customers We have a diverse, global customer base. Approximately 75% of our customers were based outside of the United States. As of March 31, 1999, we were serving approximately 250,000 active customers who had used our services during the preceding three months. As of May 17, 1999, we had installed the Click2Talk service on 121 commercial Web sites. Competition Long Distance Market The long distance telephony market and, in particular, the Internet telephony market, is highly competitive. There are several large and numerous small competitors, and we expect to face continuing competition based on price and service offerings from existing competitors and new market entrants in the future. The principal competitive factors in the market include price, quality of service, breadth of geographic presence, customer service, reliability, network capacity and the availability of enhanced communications services. Our competitors include AT&T, MCI WorldCom and Sprint in the United States and foreign telecommunications carriers. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we have. As a result, certain of these competitors may be able to adopt more aggressive pricing policies, which could hinder our ability to market our Internet telephony services. One of our key competitive advantages is the ability to originate and terminate calls to and from the gateway of an Internet service provider, which allows us to bypass the international settlement process and realize substantial savings compared to traditional telephony. Any change in the regulation of an Internet service provider could force us to increase prices and offer rates that are comparable to traditional telephony providers. Web-Based Internet Telephony Services As consumers and telecommunications companies have grown to understand the benefits that may be obtained from transmitting voice over the Internet, a substantial number of companies have emerged to provide voice over the Internet. In addition, companies currently in related markets have begun to provide voice over the Internet services or adapt their products to enable voice over the Internet services. These related companies may potentially migrate into the Internet telephony market as direct competitors. . Internet Telephony Service Providers. During the past several years, a number of companies have introduced services that make Internet telephony services available to businesses and consumers. In addition to us, AT&T Jens (a Japanese affiliate of AT&T), ICG Communications, IPVoice.com, ITXC, OzEmail, which was recently acquired by MCI WorldCom, RSL Communications (through 37 its Delta Three subsidiary) and VIP Calling, provide a range of voice over the Internet services to consumers and businesses. These companies may offer both PC-to-phone services, and phone-to-phone services that are similar to those offered by us. Some, such as AT&T Jens and OzEmail offer these services primarily to users within limited geographic areas. . Software/Hardware Providers. Many companies produce software and other computer equipment that may be installed on a user's computer to permit voice communications over the Internet. These products generally require each user to have compatible software and hardware equipment, and generally rely on the public Internet for the transmission of traffic, which often results in reduced quality of communications. These competitors benefit from a "point of contact" brand opportunity. However, their client software is generally dependent on third-party termination service, is not easily scalable and relies on the public Internet rather than higher transmission quality private networks. Representative companies include VocalTec and Netspeak. VocalTec's software and low-end gateways are unable to handle large scale client needs. Netspeak focuses on delivering call center solutions which require significant development for call center administration and operation. . Telecommunications Companies. A number of telecommunications companies, including AT&T, Deutsche Telekom, Frontier, MCI WorldCom and Qwest Communications, currently maintain, or plan to maintain, packet switched networks to route the voice traffic of other telecommunications companies. These companies, which tend to be large entities with substantial resources, generally have large budgets available for research and development, and therefore may further enhance the quality and acceptance of the transmission of voice over the Internet. However, many of these companies are new to the Internet telephony market, and therefore may not build brand recognition among consumers for these services. These companies also may not have the range of product and service offerings that are necessary to independently provide a broad set of voice-enabled Web services. AT&T, for example, has attempted to enter the market but has focused its effort in cable-phone support and it is unclear if it will continue to pursue voice over the Web at this time. Qwest has also taken steps to enter the market by building a high bandwidth infrastructure in the United States, but it is dependent on large-scale gateway manufacture which is not currently available. Qwest has also entered into three-year strategic alliance with Netscape to provide one-stop access to Internet services including long distance calls, email, voice mail, faxes, internet access and conference calls. . Network Hardware Manufacturers. Several of the world's major providers of telecommunications equipment, such as Alcatel, Cisco and Lucent have developed or plan to develop network equipment that may be used in connection with the provision of voice over the Web services, including routers, servers and related hardware and software. By developing this equipment, these manufacturers may exert substantial influence over the technology that is used in connection with transmission of voice over the Web, and may develop products that facilitate the quality and timely roll-out of these networks. However, these companies are dependent upon the operators of Internet telephony networks to purchase and install their equipment into their networks. They are also dependent upon the developers of client hardware and software to market their systems to end users. Cisco currently has low to medium scale gateways built into routers, but currently does not manufacture high-end gateways and gatekeepers for large networks. However, Cisco recently acquired two companies which produce devices that help Internet service providers transition voice and data traffic to cell and packet networks while maintaining tradition phone usage and infrastructure. Lucent has recently co-developed with VocalTec a set of industry standards which have been adopted by major competitors and is currently marketing an Internet telephony gateway system, including servers (for enterprises and Internet service providers) that allow multiple-user voice and fax over Internet networks, but these face scalability challenges. Lucent also offers related support products such as billing centers and "Internet call centers" which allow Internet access and conversation with a customer support agent on a single line. 38 Research and Development Strategic Research and Development At our primary research and development center in Lakewood, New Jersey, we currently employ 11 engineers, whose specialties include software, hardware, switching, Internet security, voice compression, engineering real-time online transactions, billing and network and call management. This staff is devoted to the improvement and enhancement of our existing product and service offerings, as well as to the development of new products and services. Current research and development activities include enhancements to our billing platform and call management system to increase the capacity of these systems, enhancements to our Internet telephony gateway to increase capacity and enhancements to our client software to increase functionality. Our future success will depend, in part, on our ability to improve existing technology and develop new products services that incorporate leading technology in order to remain a leader within the industry. We incurred $473,000 and $481,000 in product development expenses during fiscal 1997 and fiscal 1998, respectively. For the six months ended January 31, 1999, we incurred product development expenses of $278,000. Management Information Systems Research and Development Our management information systems development team, located in Hackensack, New Jersey, has eleven programmers and a development manager dedicated to traditional management information systems development and upgrades. The group supports back-office accounting and reporting software, customer service support software and database support. The development schedule is primarily focused on a detailed list of upgrades that have been identified and properly prioritized by a team manager. The database architecture is managed by a senior developer in our Lakewood laboratory who was responsible for similar database functions at AT&T's WorldNet division. Web Research and Development The majority of our Web research and development is done by a separate Web development group located in our headquarters in Hackensack. The group of nine consists of five developers, two programmers, one graphics designer and one development manager. The team is responsible for our multiple language Web site, the EZSurf.com portal and specialized Web interfaces, including the integration of our PC2Phone client software into Netscape's Internet browser. Regulation Regulation of Internet Telephony The use of the Internet to provide telephone service is a recent market development. Currently, the Federal Communications Commission is considering whether to impose surcharges or additional regulations upon certain providers of Internet telephony. On April 10, 1998, the FCC issued its Report to Congress concerning the implementation of the universal service provisions of the Telecommunications Act. In the Report, the FCC indicated that it would examine the question of whether certain forms of "phone-to-phone" Internet telephony are information services or telecommunications services. The FCC noted that it did not have, as of the date of the Report, an adequate record on which to make a definitive pronouncement, but that the record suggested that certain forms of phone-to-phone Internet telephony appear to have the same functionality as non- Internet telecommunications services and lack the characteristics that would render them information services. If the FCC were to determine that certain services are subject to FCC regulation as telecommunications services, the FCC may require providers of Internet telephony services to make universal service contributions, pay access charges or be subject to traditional common carrier regulation. It is also possible that PC2Phone and Phone2Phone services may be regulated by the FCC differently. In addition, the FCC sets the access charges on traditional telephony traffic and if it reduces these access charges, the cost of traditional long distance telephone calls will probably be lowered, thereby decreasing our competitive pricing advantage. 39 In September 1998, two regional Bell operating companies, U S WEST and BellSouth, advised Internet telephony providers that the regional companies would impose access charges on Internet telephony traffic. In addition, U S WEST has petitioned the FCC for a declaratory ruling that providers of interstate Internet telephony must pay federal access charges, and has petitioned the public utilities commissions of two states for similar rulings concerning payment of access charges for intrastate Internet telephone calls. At this time, it is not known whether these companies, U S WEST and BellSouth, will actually impose access charges or when such charges will become effective. If these companies succeed in imposing access charges that may reduce the cost savings of using Internet telephony as compared to traditional telephone service. The existence of such access charges would materially adversely affect the development of our Internet telephony business. In February 1999, the FCC adopted an order concerning payment of reciprocal compensation that provides support for a possible finding by the FCC that providers of Internet telephony must pay access charges for at least some subset of Internet telephony services. If the FCC were to make such a finding, the payment of access charges could materially adversely effect our business, results of operations and financial condition. Many of our competitors are lobbying the FCC for the imposition of access charges on Internet telephony traffic. To our knowledge, there are currently no domestic and few foreign laws or regulations that prohibit voice communications over the Internet. State public utility commissions may retain jurisdiction to regulate the provision of intrastate Internet telephony services. A number of countries that currently prohibit competition in the provision of voice telephony have also prohibited Internet telephony. Other countries permit but regulate Internet telephony. If Congress, the FCC, state regulatory agencies or foreign governments begin to regulate Internet telephony, such regulation may materially adversely affect our business, financial condition or results of operations. Regulation of the Internet Congress has recently adopted legislation that regulates certain aspects of the Internet, including online content, user privacy, taxation, access charges, liability for third-party activities and jurisdiction. The European Union has also enacted several directives relating to the Internet, one of which addresses online commerce. In addition, federal, state, local and foreign governmental organizations are considering other legislative and regulatory proposals that would regulate the Internet. Increased regulation of the Internet may decrease its growth, which may negatively impact the cost of doing business via the Internet or otherwise materially adversely affect our business, results of operations and financial condition. The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. These regulations may include requirements that companies establish certain procedures to disclose and notify users of privacy and security policies, obtain consent from users for certain collection and use of information and to provide users with the ability to access, correct and delete personal information stored by the company. These regulations may also include enforcement and redress provisions. There can be no assurance that we will adopt policies that conform with any regulations adopted by the FTC. Moreover, even in the absence of those regulations, the FTC has begun investigations into the privacy practices of companies that collect information on the Internet. One investigation resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the principles noted above. We may become subject to a similar investigation, or the FTC's regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on our ability to provide highly targeted opportunities for advertisers and electronic commerce marketers. Any of these developments would materially adversely affect our business, results of operations and financial condition. The European Union has adopted a directive that imposes restrictions on the collection and use of personal data. Under the directive, citizens of the European Union are guaranteed rights to access their data, rights to know where the data originated, rights to have inaccurate data rectified, rights to recourse in 40 the event of unlawful processing and rights to withhold permission to use their data for direct marketing. The directive could, among other things, affect United States companies that collect information over the Internet from individuals in European Union member countries, and may impose restrictions that are more stringent than current Internet privacy standard in the United States. In particular, companies with offices located in European Union countries will not be allowed to send personal information to countries that do not maintain adequate standards of privacy. The directive does not, however, define what standards of privacy are adequate. As a result, the directive may adversely affect the activities of entities such as us that engage in data collection from users in European Union member countries. Intellectual Property Our performance and ability to compete are dependent to a significant degree on our proprietary and licensed technology. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect our technology. We do not currently have any issued patents or registered copyrights. All key employees have signed confidentiality agreements and we intend to require each newly hired employee to execute a confidentiality agreement. These agreements provide that confidential information developed by or with an employee or consultant, or disclosed to such person during his or her relationship with us, may not be disclosed to any third party except in certain specified circumstances. These agreements also require our employees to assign their rights to any inventions to us. The steps taken by us may not, however, be adequate to prevent the misappropriation of our proprietary rights or technology. In addition, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. We own the registered service mark for two of the marks used in our Internet telephony business and have applications pending to register several other service marks relating to our Internet telephony business. We have received correspondence from a company claiming that our use of the mark "Net2Phone" in connection with Internet telephony services infringes one of the company's United States registered trademarks, and requesting that we cease and desist from using the Net2Phone mark. We have responded by denying any infringement and no legal proceedings have been commenced against us with respect to this matter. We are also aware of several other parties that employ marks that are the same or similar to marks that we employ, though these parties are not in the same business as us. There can be no assurance that the company which notified us or other companies with similar marks to our marks will not bring suit to prevent us from using the Net2Phone mark or other marks. Defending or losing any suits could materially adversely affect our business, results of operations and financial condition. In addition, a company known as ITM operates a Web site at www.net2phone.net without our permission or authorization, and in violation of the agency agreement ITM entered into with us for the distribution of the Net2Phone software bundled with certain ITM software. Furthermore, ITM has also taken steps to secure registration and ownership of the Net2Phone mark in France. We have notified them of this violation and will pursue our claim against them, if necessary, but there can be no assurances that we can prevent, through litigation or otherwise, ITM from continuing its operation of the net2phone.net Web site or prevent ITM from obtaining registration and ownership of the Net2Phone mark in France. Another company, NetPhone, currently operates a Web site at www.netphone.com where it sells a family of computer telephony communications servers, boards and applications. There can be no assurance that the existence of NetPhone's business and Web site will not materially adversely affect our business. Furthermore, we have not taken steps to assure foreign protection of our trademarks, except for our recent filing for registration of the Net2Phone mark in certain European countries. To the extent trademark rights are acquired through registration in countries outside the United States, we may not be able to protect our marks or assure that we are not infringing other parties' marks in those countries. There can be no assurance that we will be able to secure significant protection for all our service marks or trademarks. It is possible that competitors of ours or others will adopt product or service names similar to our marks, or try to prevent us from using our marks, thereby impeding our ability to build brand identity and possible leading to customer confusion. 41 We have been assigned the rights to patent applications claiming a number of the technologies underlying our products and services. Our initial United States patent application has been rejected, but we are continuing to pursue patent protection for the claimed subject material. There can be no assurance that the applications will result in the issuance of patents or that, if issued, such patents would adequately protect us against competitive technology or that they would be held valid and enforceable against a challenge. In addition, it is possible that our competitors may be able to design around any such patents. Also, our competitors may obtain patents that we would need to license or circumvent in order to make, use, sell or offer for sale the technology. We believe that we do not infringe upon the proprietary rights of any third party, and no third party has asserted a patent infringement claim against us. It is possible, however, that such a claim might be asserted successfully against us in the future. Our ability to make, use, sell or offer for sale our products and services depends on our freedom to operate. That is, we must ensure that we do not infringe the proprietary rights of others or have licensed all such rights. We have not requested or obtained Freedom of Operations Opinions. We are aware that patents have recently been granted to others based on fundamental technologies in the Internet telephony area. In addition, we are aware of at least one other patent application involving potentially similar technologies to our own which if issued could materially adversely affect our business. Because patent applications in the Unites States are not publicly disclosed until issued, other applications may have been filed which, if issued as patents, could relate to our services and products. However, foreign patent applications do publish before issuance. We are aware of several such publications that relate to Internet telephony. One such published application claims as an inventor a previous consultant to IDT and has been assigned to another company. Issuance of a patent or patents from this application could materially adversely affect our ability to operate. A party making an infringement claim could secure a substantial monetary award or obtain injunctive relief which could effectively block our ability to provide services or products in the United States or abroad. If any of these risks materialize, we could be forced to suspend operations, to pay significant amounts to defend our rights, and a substantial amount of the attention of our management may be diverted from our ongoing business, each of which could materially adversely affect our ability to operate. We rely on a variety of technology, primarily software, that we license from third parties. Most of this technology was purchased or licensed on our behalf by IDT. Continued use of this technology by us may require that we purchase new or additional licenses from third parties or obtain consents from third parties to assign the applicable licenses from IDT. There can be no assurances that we can obtain those third party licenses needed for our business or that the third party technology licenses that we do have will continue to be available to us on commercially reasonable terms or at all. The loss or inability to maintain or obtain upgrades to any of these technology licenses could result in delays or breakdowns in our ability to continue developing and providing our products and services or to enhance and upgrade our products and services. Employees As of May 12, 1999, we had approximately 174 full-time employees, including approximately 67 in technical support and customer service, 31 in sales and marketing, 24 in management and finance, 41 in operations, and 11 in research and development. Our future success depends in large part on our ability to attract and retain highly qualified employees. Competition for such personnel is intense and there can be no assurance that we will be able to retain our senior management or other key personnel in the future. Our employees are not represented by any union, and we consider our employee relations to be good. We have never experienced a work stoppage. Properties Our primary facilities consist of approximately 15,445 square feet located in two buildings in Hackensack, New Jersey leased from corporations that are owned and controlled by Howard S. Jonas, a 42 director of IDT. These leases expire at the end of February 2002 and require us to make annual rental payments of $186,144. We also sublease rack space in Piscataway, New Jersey from IDT, which leases this space from a company owned and controlled by Howard Jonas, a director of IDT. This lease runs for a three- year term, beginning in April 1999, with monthly rent of $8,400. In addition, we lease office space in Lakewood, New Jersey for our research and development center. Pursuant to this lease, which expires at the end of August 2001, we are required to make annual rental payments of $48,125. See "Certain Transactions-- Facility Leases." Legal Proceedings We are not currently a party to any material legal proceedings. 43 MANAGEMENT Executive Officers, Directors and Key Employees Our officers and directors, as of the closing of this offering, are expected to include the following persons:
Name Age Position ---- --- -------- Clifford M. Sobel......... 49 Chairman of the Board and President Howard S. Balter.......... 37 Chief Executive Officer, Vice Chairman of the Board David Greenblatt.......... 47 Chief Operating Officer and Director Nominee Ilan M. Slasky............ 28 Chief Financial Officer and Director Nominee H. Jeff Goldberg.......... 46 Chief Technology Officer Jonathan Reich............ 32 Executive Vice President- Marketing and Corporate Development Martin Rothberg........... 29 Executive Vice President- Strategic Sales Jonathan Rand............. 36 Executive Vice President- International Sales and Treasurer Ira A. Greenstein......... 39 General Counsel and Secretary James A. Courter.......... 57 Director Michael Fischberger....... 30 Director Nominee Gary E. Rieschel.......... 43 Director Nominee
Clifford M. Sobel has been our President since October 1997, our Chairman of the board of directors since May 1999 and served as our Chief Executive Officer from October 1997 to January 1999. Since 1994, Mr. Sobel has been Chairman and Chief Executive Officer of SJJ Investment Corp., which has invested in Internet, cable, real estate and cosmetics companies. Prior to this, Mr. Sobel founded several companies in the design and manufacturing of retail interiors and themed environments, including DVMI, Bon-Art International and Bauchet International. These companies were sold in 1994 by Bear, Stearns & Co. Inc. Mr. Sobel has testified before Congress on foreign trade issues and, by Presidential appointment, served on the Holocaust Memorial Council in Washington, D.C. Howard S. Balter has been a director since November 1997, our Chief Executive Officer since January 1999, and our Vice Chairman of the board of directors since May 1999. Prior to his employment with us, Mr. Balter was IDT's Chief Operating Officer from 1993 to 1998 and Chief Financial Officer from 1993 to 1995. Mr. Balter was a director of IDT from December 1995 to January 1999 and Vice Chairman of IDT's board from 1996 to 1998. From 1985 to 1993, Mr. Balter operated his own real estate development firm. David Greenblatt has been our Chief Operating Officer since January 1999 and is expected to become a director before the consummation of this offering. Prior to his employment with IDT in January 1998, Mr. Greenblatt was Senior Vice President of Research and Development for Nextwave Communications from 1996 to 1997. From January 1984 to August 1996, Mr. Greenblatt was a principal of Financial Technologies, Inc., where he managed the process of software conversion for large and medium-sized businesses. From January 1980 to December 1984, Mr. Greenblatt was an information technologies consultant for various money center banks. From 1970 to 1980, Mr. Greenblatt lectured in the areas of Computer Science and Mathematics at Queen College, New York University, Hunter College and Pace University. Ilan M. Slasky has been our Chief Financial Officer since January 1999 and is expected to become a director before the consummation of this offering. Prior to his employment with us, Mr. Slasky was IDT's Executive Vice President of Finance from December 1997 to January 1999, IDT's director of carrier services from November 1996 to July 1997 and IDT's Director of Finance from May 1996 to November 1996. From 1991 to 1996, Mr. Slasky worked for Merrill Lynch in various capacities, including risk management, fixed income trading and equity derivatives. 44 H. Jeff Goldberg has been our Chief Technology Officer since January 1999 and a key employee since June 1998. From inception to June 1998, Mr. Goldberg was our Director of Technology and a consultant to IDT. Mr. Goldberg was an independent software consultant from 1985 to 1995, Vice President of Software and a member of the board of directors at Charles River Data Systems in Massachusetts from 1979 to 1985 and a developer of multimedia communications software at AT&T Bell Laboratories from 1977 to 1979. Mr. Goldberg is a founding member of the UNIX standards committee. Jonathan Reich has been our Executive Vice President--Marketing and Corporate Development since January 1999. Prior to his employment with us, Mr. Reich was IDT's Senior Vice President of Advertising, Marketing and Business Development in charge of strategic relationships for both us and IDT from June 1997 to December 1998 and IDT's director of advertising from January 1995 to November 1997. From 1992 to 1993, Mr. Reich worked for Sanford Bernstein & Co. as an associate analyst. Prior to this, Mr. Reich was an internal consultant for Morgan Stanley & Co. Martin Rothberg has been our Executive Vice President--Strategic Sales since January 1999 and a key employee since June 1997. Prior to his employment with us, Mr. Rothberg was IDT's Director of International Sales from September 1996 to June 1997 and IDT's Director of Domestic Sales from June 1995 to September 1996. Jonathan Rand has been our Executive Vice President--International Sales and Treasurer since January 1999 and a key employee since January 1998. Prior to joining us, Mr. Rand was a member of IDT's senior management from 1992 to January 1999. His responsibilities included Senior Vice President-- International Sales, the co-founder and director of the International Internet Association and the Senior Vice President--Finance. Prior to joining IDT, Mr. Rand operated his own magazine publishing business from 1986 to 1992 and was employed by Procter & Gamble from 1985 to 1986 in Brand Management. Ira A. Greenstein has been our General Counsel and Secretary since May 1999. Mr. Greenstein has been a partner in the law firm of Morrison & Foerster LLP since 1997 where he serves as the chair of that firm's New York office's Corporate Department. Prior to 1997, Mr. Greenstein was an associate in the New York and Toronto offices of Skadden, Arps, Slate, Meagher & Flom LLP. From 1991 to 1992, Mr. Greenstein served as visiting counsel to the Ontario Securities Commission advising on the implementation of the Multijurisdictional Disclosure System with the Securities and Exchange Commission. Mr. Greenstein also served on the Securities Advisory Committee to the Ontario Securities Commission from 1992 to 1996. James A. Courter has been a director since May 1999. Mr. Courter has been President of IDT since October 1996 and a director of IDT since March 1996. Mr. Courter has been a senior partner in the New Jersey law firm of Courter, Kobert, Laufer & Cohen, P.C. since 1972. He was also a partner in the Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson & Hand from January 1994 to September 1996. From 1991 to 1994, Mr. Courter was chairman of the President's Defense Base Closure and Realignment Commission. Mr. Courter was a member of the United States House of Representatives for 12 years, retiring in January 1991. Mr. Courter also serves on the board of directors of Envirogen and The Berkeley School. Michael Fischberger is expected to become a director before the consummation of this offering. Mr. Fischberger is Senior Vice President of Domestic Telecommunications and Internet services for IDT and is in charge of IDT's domestic telecom divisions, including prepaid and private-label calling cards, rechargeable debit cards, dedicated voice, and retail and corporate Internet services. Since joining IDT in December 1993, Mr. Fischberger has been involved in virtually all aspects of IDT's business, and has led the technical support, client service and Internet groups. 45 Gary E. Rieschel is expected to become a director before the consummation of this offering. Mr. Rieschel is the Executive Managing Director of SOFTBANK Technology Ventures, which he joined in January 1996. Mr. Rieschel has extensive overseas experience, having spent over four years in Tokyo as General Manager of Sequent Computer Systems' Asian operations. He serves as a Director for several SOFTBANK Technology Ventures' portfolio companies and is a member of SOFTBANK Corporation's Global Executive Board. In addition, we employ the following additional key employees: Chaim Ackerman has been a senior software engineer of ours since February 1996. Prior to his employment with us, Mr. Ackerman was a member of the technical staff at AT&T Bell Laboratories from 1986 to 1996. From 1984 to 1986, Mr. Ackerman was a member of the technical staff at AT&T Consumer Products. From 1980 to 1984, Mr. Ackerman worked for Computer Horizons Corporation as a consultant to Bell Laboratories. Sarah Hofstetter has been our Vice President-Corporate Communications since May 1999. Prior to her employment with us, Ms. Hofstetter was IDT's Vice President of Corporate Communications, in charge of public relations and brand imaging from April 1996 to January 1999. From 1995 to 1996, Ms. Hofstetter worked at The New York Times Syndicate as an editor of the New America News Service, a wire service specializing in issues related to diversity in the marketplace. Ms. Hofstetter sits on the editorial boards of Telecom Business and TeleCard World magazines, and on the Editorial Roundtable of Intel-Card News magazine. Board of Directors and Committees of the Board Our certificate of incorporation, as amended and restated, provides that the number of members of our board of directors shall be not less than five and not more than 11. The number of directors is currently six. Upon consummation of this offering, the board of directors will be divided into three classes, with each class to be as nearly equal in number as possible. At each annual meeting of stockholders, the successors to the class of directors whose term expires at that time will be elected to hold office for a term of three years and until their respective successors are elected and qualified. None of the outside directors are or will be employed by us or affiliated with IDT. All of the officers identified above serve at the discretion of our board of directors. Upon consummation of this offering, we intend to establish an audit committee and a compensation committee. The audit committee will have the power to oversee the retention, performance and compensation of the independent public accountants, and the establishment and oversight of such systems of internal accounting and auditing control as it deems appropriate. The compensation committee will review and approve the compensation of our executive officers, including payment of salaries, bonuses and incentive compensation, determine our compensation policies and programs, and administer our stock option plans. The board of directors does not have a nominating committee. However, the board of directors will consider nomination recommendations from stockholders, which should be addressed to our secretary at our principal executive offices. 46 Executive Compensation The following table identifies our most highly compensated executive officers whose salaries and bonuses exceeded $100,000 during fiscal 1998 and who served as executive officers of Net2Phone during fiscal 1998. All of the below named executive officers were compensated by IDT during fiscal 1998. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ------------------ -------------- Securities Name and Principal Fiscal Underlying All Other Position Year Salary($) Bonus($) IDT Options(#) Compensation($) - ------------------ ------ --------- -------- -------------- --------------- Clifford M. Sobel....... 1998 100,000 -- -- -- Chairman and President David Greenblatt........ 1998 113,174 -- 20,000 -- Chief Operating Officer H. Jeff Goldberg........ 1998 206,169 -- 50,000 -- Chief Technology Officer
Option Grants During Fiscal 1998 No options to purchase shares of Net2Phone were granted to the executive officers named above during fiscal 1998. The following table describes the options to acquire shares of common stock of IDT granted to the individuals named above during fiscal 1998:
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ----------------- % of Number of Total Securities Options Under- Granted lying IDT to Exercise Options Employees of Granted in Fiscal Base Price Expiration Name (#) Year (%) ($/Sh) Date 5% ($) 10% ($) - ---- ---------- --------- ---------- ---------- ------- --------- David Greenblatt.. 20,000 1.6 $18.00 Nov. 2007 226,402 573,747 H. Jeff Goldberg.. 50,000 4.0 $24.25 June 2008 762,534 1,932,413
47 Value of Options at Year End The following table describes the value of IDT options exercised in fiscal 1998 and the value of unexercised options held by the individuals named above at July 31, 1998:
Number of Securities Underlying Unexercised Value of Options at Fiscal Year- Unexercised in-the-Money End Options at Fiscal Year-End ------------------------- ----------------------------- Number of Shares Acquired on Names Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable (1) - ----- ----------- -------------- ------------------------- ----------------------------- Clifford Sobel(2)....... 100,000 $1,701,500 100,000/0 1,775,000/-- David Greenblatt........ -- -- 20,000/0 125,000/-- H. Jeff Goldberg........ 5,000 111,250 210,000/50,000 3,556,500/0
- -------- (1) The closing price of the Common Stock on July 31, 1998, as reported by the Nasdaq National Market, was $24.25 per share. (2) Mr. Sobel also received options to purchase an aggregate of 11% of Net2Phone's capital stock in connection with his May 1997 employment agreement. Mr. Sobel exercised his option to purchase 10% of Net2Phone's capital stock in January 1998, and his option to purchase the additional 1% of Net2Phone's capital stock terminated under an amendment to his employment agreement entered into in May 1999. Compensation of Directors We intend to grant options to purchase shares of common stock to all of our non-employee directors under the 1999 Stock Incentive Plan. See "1999 Stock Incentive Plan." Other than as will be provided in that plan and the reimbursement of reasonable expenses incurred with attending board and committee meetings, we have not yet adopted specific policies on directors' compensation and benefits following the closing of this offering. Employment Agreements Clifford M. Sobel, our Chairman and President, is employed pursuant to an employment agreement that was entered into in May 1997 and amended in May 1999. The agreement commenced in September 1997 and will expire in September 2000, and will automatically be extended though September 2001 unless either we or Mr. Sobel notifies the other that the extension will not take effect. Mr. Sobel receives an annual base salary of $100,000. In January 1998, in connection with an option set forth in his employment agreement, Mr. Sobel purchased 10% of our common stock for $100,000. On the closing date of this offering, Mr. Sobel will receive from IDT that number of shares of our common stock which will maintain his holdings, when combined with shares owned by a trust for the benefit of his offspring, at 8% as of that date. Mr. Sobel's employment agreement also provides him with an option to transfer his interest in us to IDT in exchange for an option from IDT to purchase 875,000 registered shares of IDT common stock at a purchase price of $6.50 per share. This option is exercisable at any time from September 15, 1999 through September 15, 2000, so long as he is employed by us as of September 15, 1999 and owns and holds all of the stock he received, other than shares that he donated to a trust for the benefit of his offspring. At present, none of the other named executive officers or key employees is party to an employment agreement with us. 1999 Stock Incentive Plan Our 1999 Stock Option and Incentive Plan was adopted in April 1999. Pursuant to the plan, our officers, directors, key employees and consultants, together with those of IDT and its subsidiaries, are eligible to receive awards of stock options, stock appreciation rights, limited stock appreciation rights and 48 restricted stock. Options granted under the plan may be incentive stock options or nonqualified stock options. Stock appreciation rights and limited stock appreciation rights may be granted simultaneously with the grant of an option or, in the case of nonqualified stock options, at any time during its term. Restricted stock may be granted in addition to or in lieu of any other award made under the plan. A total of 5,040,000 shares of common stock have been authorized to date for issuance under the plan, all of which were granted through May 17, 1999, and 1,345,219 of which have been exercised. These options have a weighted average exercise price of $3.33 per share. In connection with loans granted to several grantees under the plan to exercise a portion of these options, 23,382 outstanding options were cancelled. The 1999 Stock Option and Incentive Plan is currently administered by the board of directors and will be administered by the compensation committee of the board. Subject to the provisions of the plan, the board of directors or the compensation committee, as the case may be, will determine the type of award, when and to whom awards will be granted, the number of shares covered by each award and the terms, provisions and kind of consideration payable, if any, with respect to awards. The board of directors or the compensation committee, as the case may be, may interpret the plan and may at any time adopt the rules and regulations for the plan as it deems advisable. In determining the persons to whom awards shall be granted and the number of shares covered by each award, the board of directors or the compensation committee, as the case may be, may take into account the duties of the respective persons, their present and potential contribution to our success and other factors as shall be deemed relevant. Stock Options. An option may be granted on the terms and conditions as the board of directors or the compensation committee, as the case may be, may approve, and generally may be exercised for a period of up to ten years from the date of grant. Generally, incentive stock options will be granted with an exercise price equal to the "Fair Market Value" (as defined in the 1999 Stock Option and Incentive Plan) on the date of grant. In the case of incentive stock options, certain limitations will apply with respect to the aggregate value of option shares that can become exercisable for the first time during any one calendar year. Certain additional limitations will apply to incentive stock options granted to "Ten Percent Stockholders" (as defined in the 1999 Stock Option and Incentive Plan). The board of directors or the compensation committee, as the case may be, may provide for the payment of the option price in cash, by delivery of common stock having a fair market value equal to that option price, by a combination thereof or by any other method. The board of directors or compensation committee, as the case may be, may authorize loans to individuals to finance their exercise of vested options. See "'Certain Transactions--Officer Loans." Options granted under the 1999 Stock Option and Incentive Plan will become exercisable at those times and under those conditions as the board of directors or the compensation committee, as the case may be, shall determine, subject to acceleration of the exercisability of options in the event of a "Corporate Transaction" (as defined in the 1999 Stock Option and Incentive Plan). The 1999 Stock Option and Incentive Plan provides for automatic formula option grants to eligible non-employee directors assuming shares are available for grant under the plan. Options to purchase 10,000 shares of common stock will be granted to each non-employee director upon consummation of this offering and options to purchase 10,000 shares of common stock will be granted to each new non-employee director upon the director's initial election and qualification for the board. In addition, options to purchase 10,000 shares of common stock are granted annually to each non-employee director on the anniversary date of each director's election to the board. Each of those options will have an exercise price equal to the Fair Market Value of a share of common stock on the date of grant. All options granted to non-employee directors will be immediately exercisable. All options held by non-employee directors, to the extent not exercised, expire on the earliest of: . the tenth anniversary of the date of grant; . one year following the optionee's termination of directorship other than for cause; or . three months following the optionee's termination of directorship for cause. Stock Appreciation Rights and Limited Stock Appreciation Rights. The 1999 Stock Option and Incentive Plan also permits the board of directors or the compensation committee, as the case may be, to 49 grant stock appreciation rights and/or limited stock appreciation rights with respect to all or any portion of the shares of common stock covered by options. Generally, stock appreciation rights and limited stock appreciation rights may be exercised only at that time as the related option is exercisable. In addition, limited stock appreciation rights may be exercised only during the 90 days immediately following a change in control or immediately prior to the effective date of a corporate transaction. However, in the case of an "Insider" (as defined in the 1999 Stock Option and Incentive Plan), a stock appreciation right and a limited stock appreciation right must be held for at least six months before it becomes exercisable and a limited stock appreciation right must automatically be paid out in cash. Limited stock appreciation rights will be exercisable only if, and to the extent, that the option to which the limited stock appreciation rights relate is then exercisable, and if the option is an incentive stock option, only to the extent the fair market value per share of common stock exceeds the option price per share. Upon exercise of a stock appreciation right, a grantee will receive for each share for which an stock appreciation right is exercised, an amount in cash or common stock, as determined by the board of directors or the compensation committee, as the case may be, equal to the excess of the fair market value of a share of common stock on the date the stock appreciation right is exercised over the exercise price per share of the option to which the stock appreciation right relates. Upon exercise of a limited stock appreciation right, a grantee will receive for each share for which a limited stock appreciation right is exercised, an amount in cash equal to the excess, if any, of (i) the greater of (x) the highest fair market value of a share of common stock during the 90-day period ending on the date the limited stock appreciation right is exercised, and (y) whichever of the following is applicable: (1) the highest per share price paid in any tender or exchange offer which is in effect at any time during the 90 days ending on the date of exercise of the limited stock appreciation right; (2) the fixed or formula price for the acquisition of shares of common stock in a merger in which we will not continue as the surviving corporation, or upon a consolidation, or a sale, exchange or disposition of all or substantially all of our assets, approved by our stockholders (if that price is determinable on the date of exercise); and (3) the highest price per share of common stock shown on Schedule 13D, or any amendment thereto, filed by the holder of the specified percentage of common stock, the acquisition of which gives rise to the exercisability of the limited stock appreciation right over (ii) the exercise price per share of the option to which the limited stock appreciation right relates. In no event, however, may the holder of a limited stock appreciation right granted in connection with an incentive stock option receive an amount in excess of the maximum amount that will enable the option to continue to qualify as an incentive stock option. When an stock appreciation right or limited stock appreciation right is exercised, the option to which it relates will cease to be exercisable to the extent of the number of shares with respect to which the stock appreciation right or limited stock appreciation right is exercised, but will be deemed to have been exercised for purposes of determining the number of shares available for the future grant of awards under the 1999 Stock Option and Incentive Plan. Restricted Stock. The 1999 Stock Option and Incentive Plan further provides for the granting of restricted stock awards, which are awards of common stock that may not be disposed of, except by will or the laws of descent and distribution, for that period as the compensation committee or the Board determines known as the restricted period. The board of directors or the compensation committee, as the case may be, may also impose those other conditions and restrictions, if any, on the shares as it deems appropriate, including the satisfaction of performance criteria. All restrictions affecting the awarded shares lapse in the event of a change in control, a corporate transaction or a related entity disposition. During the restricted period, the grantee will be entitled to receive dividends with respect to, and to vote the shares awarded to him or her. If, during the restricted period, the grantee's service with us terminates for any reason, any shares remaining subject to restrictions will be forfeited. The compensation committee or Board has the authority to cancel any or all outstanding restrictions prior to the end of the restricted period, including cancellation of restrictions in connection with certain types of termination of service. During any one calendar year, no grantee may be granted options to acquire more than 750,000 shares of common stock or be awarded more than 750,000 shares of restricted stock (in each case subject to adjustment as provided in the 1999 Stock Option and Incentive Plan). 50 The board may at any time and from time to time suspend, amend, modify or terminate the 1999 Stock Option and Incentive Plan; provided however, that, to the extent required by any law, regulation or stock exchange rule, no change shall be effective without the requisite approval of our stockholders. In addition, no change may adversely affect an award previously granted, except with the written consent of the grantee. No awards may be granted under the 1999 Stock Option and Incentive Plan after the tenth anniversary of its initial adoption. Options and Awards Under the 1999 Stock Option and Incentive Plan. We cannot now determine the number of options or awards to be granted in the future under the 1999 Stock Option and Incentive Plan to officers, directors and employees. 401(k) Plan Prior to May 1999, our employees participated in IDT's 401(k) Savings and Retirement Plan. We are in the process of establishing our own 401(k) plan that is intended to qualify for preferential tax treatment under section 401(k). We intend that most of our employees will be eligible to participate in our 401(k) Savings and Retirement Plan upon adoption. 51 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our outstanding common stock as of May 17, 1999 and as adjusted to reflect the sale of the common stock offered hereby by: . each person who is the beneficial owner of more than 5% of our capital stock; . each of our directors and director nominees; . each of our named executive officers; and . all of our directors, director nominees and named executive officers as a group.
Number of Shares Percentage Beneficially Beneficially Owned Owned ----------------------- Prior to Prior to After Holders Offering Offering(1) Offering(1) - ----------------------------------------- ------------ ----------- ----------- IDT Corporation(2)....................... 27,622,090 66.2% 190 Main Street Hackensack, New Jersey 07601 SOFTBANK Technology Ventures IV, L.P.(3)................................. 4,590,000 10.8% 333 West San Carlos Street, Suite 1225 San Jose, California 95110 Clifford M. Sobel(4)..................... 3,337,910 8.0% c/o Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 America Online, Inc.(5).................. 2,295,000 5.4% 22000 AOL Way Dulles, Virginia 20166 GE Capital Equity Investments, Inc.(6)... 2,295,000 5.4% 120 Long Ridge Road Stamford, Connecticut 06927 Howard S. Balter(7)...................... 669,138 1.6% David Greenblatt(8)...................... 105,840 * Ilan M. Slasky(9)........................ 105,840 * H. Jeff Goldberg(10)..................... 105,840 * James A. Courter......................... 36,000 * Michael Fischberger...................... 35,280 * Gary E. Rieschel(3)...................... -- -- Officers, Directors and Director Nominees as a Group (12 Persons)................. 4,460,318 10.7%
- --------------------- * Less than one percent. (1) Percentage of beneficial ownership prior to this offering is based on 4,683,129 shares of common stock and 27,622,090 shares of Class A stock outstanding at May 17, 1999 plus 9,420,000 shares of Class A stock issuable upon conversion of the Series A preferred stock at the same date. Percentage of beneficial ownership after this offering is based on total shares outstanding, which includes all shares outstanding prior to this offering, plus shares of common stock to be sold to the public in this offering. All percentage calculations assume that all shares of Net2Phone's Class A stock have been converted into shares of Net2Phone's common stock. 52 (2) IDT has pledged its shares of our common stock as collateral to secure a credit facility. The lenders under the credit facility have agreed to release IDT's shares from collateral to permit IDT to transfer our shares free and clear of any liens as and when IDT seeks to transfer our shares. Such transferability will cease if IDT's ownership of our common stock drops below 50% of the common stock owned by IDT 72 hours after the consummation of this offering. Unless IDT defaults in its obligations under the pledge agreement, it has the voting rights with respect to the pledged stock. Mr. Howard Jonas, together with a number of entities formed for the benefit of charities and members of his family, owns shares of IDT's capital stock that enable him to vote more than 50% of IDT's capital stock. As a result, he may be deemed to be the beneficial owner of the shares of Net2Phone capital stock owned by IDT. (3) Gary E. Rieschel, a director nominee, is the Executive Managing Director of SOFTBANK Technology Ventures, and as a result, he may exercise the power to vote and to dispose of these shares. Includes presently exercisable warrants to purchase shares of common stock. (4) Mr. Sobel transferred 1% of our common stock to a trust for the benefit of his offspring. All of these shares are deemed to be beneficially owned by Mr. Sobel. (5) Includes presently exercisable warrants to purchase shares of common stock. (6) GE Capital Equity Investments is a wholly-owned subsidiary of General Electric Capital Corporation. Includes presently exercisable warrants to purchase shares of common stock. (7) Includes 360,000 shares held of record by a trust for the benefit of Mr. Balter's family members, of which Mr. Balter and his spouse are the trustees. Also includes an aggregate of 138,000 shares held of record by trusts for the benefit of the family members of Messrs. Greenblatt, Slasky and Rothberg, for which Mr. Balter acts as trustee. (8) Includes 54,000 shares held of record by a trust for the benefit of Mr. Greenblatt's family members, of which Mr. Balter is the trustee. (9) Includes 30,000 shares held of record by a trust for the benefit of Mr. Slasky's family members, of which Mr. Balter is the trustee. (10) Includes 72,000 shares held of record by a trust for the benefit of Mr. Goldberg's family members, of which Mr. Goldberg's spouse is the trustee. 53 CERTAIN TRANSACTIONS Relationship with IDT Upon consummation of this offering IDT will own approximately % of our capital stock. IDT owns Class A stock that has twice the voting power of our common stock. Therefore, upon the consummation of this offering IDT will have % of our voting power. Since inception, we have received various services from IDT, including administration (accounting, human resources, legal), customer support, Internet/telecommunications and joint marketing. IDT has also provided us with the services of a number of its executives and employees. In consideration for these services, IDT has historically allocated a portion of its overhead costs related to those services to us. We believe that the amounts allocated to us have been no greater than the expenses we would have incurred if we obtained those services on our own or from unaffiliated third parties. Prior to the execution of the agreements with IDT described below, none of these services had been provided to us pursuant to any written agreement. We entered into a suite of agreements with IDT in May 1999, including an assignment agreement, a separation agreement, an IDT services agreement, a Net2Phone services agreement, a tax sharing and indemnification agreement, a joint marketing agreement and an Internet/telecommunications agreement. Assignment Agreement In connection with this agreement, IDT assigned to us certain proprietary products, information, patent applications, trademarks and related intellectual property rights used in connection with our business. IDT also licensed to us certain proprietary business information that relates to our business. We licensed back to IDT certain software that IDT will use in connection with its business. IDT Services Agreement In connection with this agreement, IDT will continue to provide us with various administrative services, including general accounting services, payroll and benefits administration and customer support. . General Accounting Services. IDT will provide us with accounts payable services and general ledger services. IDT will charge us cost plus 20% for these services. This portion of the IDT services agreement may be cancelled by either party on 30-days prior written notice and may be renewed by mutual agreement of the parties. . Payroll and Benefits Administration. IDT will administer our payroll. Until we terminate this agreement or establish our own benefit plan for our employees, our employees will continue to be covered under IDT's health insurance policies. We will pay IDT for administering our payroll and benefits plans at IDT's cost plus 20%. Additionally, we will reimburse IDT for the employer's cost of health insurance attributable to each of our employees participating in IDT's group health insurance plan and for any other direct costs attributable to our employees' participation in IDT's benefit plans. . Customer Support. IDT has agreed to provide customer support services to our customers on a cost-plus 20% basis. In the event we request additional services from IDT and IDT agrees to provide those services, we will enter into an addendum to the IDT Services Agreement covering those services. We will negotiate in good faith any fees payable to IDT for those additional services. Net2Phone Services Agreement In connection with this agreement, we will support IDT's debit card platform, provide technical support for the debit card platform, order lines to handle calls, manage the debit card database and monitor the network, 24 hours per day, seven days per week. We will provide these services at the greater of cost-plus 54 20% and $.0025 per minute of IDT usage of the debit card platform. In addition, IDT will reimburse us for all of our direct costs in connection with the acquisition, maintenance or support of any and all additional or replacement equipment needed for the debit card platform. The Net2Phone services agreement has an initial term of one year, which automatically renews for subsequent one-year periods unless one party gives the other 30-days prior written notice. In addition, following the initial term, the Net2Phone services agreement may be terminated at any time at either party's option upon 30-days prior written notice. In the event IDT requests services in addition to those described in the Net2Phone services agreement and we agree to provide those services, we will enter into an addendum to the Net2Phone services agreement covering those services. We will negotiate in good faith any fees payable to us for those additional services. Tax Sharing and Indemnification Agreement. In connection with this agreement, IDT and Net2Phone will share certain past tax liabilities and benefits, including: . the allocation and payment of taxes for periods during which we and our subsidiaries, if any, were included in the same consolidated group with IDT for federal income tax purposes, and are, or were, included in the same consolidated, combined or unitary returns for state, local or foreign tax purposes; . the allocation of responsibility for the filing of tax returns; . the conduct of tax audits and the handling of tax controversies; and . various related matters. For periods during which we and our subsidiaries, if any, were or are included in IDT's consolidated federal income tax returns or state, local or foreign consolidated, combined, or unitary tax returns, we are required to pay an amount of tax equal to the amount we would have paid had we and our subsidiaries, if any, had filed a tax return as a separate affiliated group of corporations filing a consolidated federal income tax return or state, local or foreign consolidated, combined, or unitary tax returns. We are responsible for our own separate tax liabilities that are not determined on a consolidated or combined basis with IDT. As a result of leaving the IDT consolidated group, certain tax attributes of the IDT group attributable to our operations, such as net operating loss carryforwards, may be allocated to us. The tax sharing and indemnification agreement obligates us, where permitted by law, to elect to carry any post- deconsolidation losses forward, rather than to carry back such losses to tax years when we were included in the IDT consolidated or combined returns. We were included in IDT's consolidated group for federal income tax purposes from our incorporation in October 1997 until May 1999 when we concluded the sale of our Series A preferred stock. Each corporation that is a member of a consolidated group during any portion of the group's tax year is jointly and severally liable for the federal income tax liability of the group for that year. While the tax sharing and indemnification agreement allocates tax liabilities between us and IDT during the period on or prior to the closing date of this offering, in which we are included in IDT's consolidated group, we could be liable in the event federal tax liability allocated to IDT is incurred, but not paid, by IDT or any other member of IDT consolidated group for IDT's tax years that include such periods. In such event, we would be entitled to seek indemnification from IDT pursuant to the tax sharing and indemnification agreement. 55 Joint Marketing Agreement. In connection with this agreement, we agreed to: . continue to offer links to the other's Web site; . cross-sell one another's products, including through their promotional materials and customer services representatives; and . undertake additional promotions as to which the parties shall agree from time to time. IDT will pay to us a fee of $8.00 for each of our customers who becomes a new customer of IDT as a result of our referral. We will pay IDT a fee of $8.00 for each customer of IDT who becomes a new customer of ours as a result of an IDT referral. However, in either case, these fees will be payable only with respect to any new customers who incur and pay $50.00 or more in charges. The joint marketing agreement has an initial term of one year, which automatically renews for subsequent one-year periods unless one party gives the other party 60-days prior written notice. In addition, following the initial term, the joint marketing agreement may be terminated at any time at either party's option upon 60-days prior written notice. Internet/Telecommunications Agreement. IDT has granted us an indefeasible right to use portions of its current DS3 Network. We have the right to require IDT to terminate portions of the existing network when we no longer need them, to the extent that IDT is permitted to do so under its contracts with its carriers. We are obligated to reimburse IDT for all termination or cancellation charges which it incurs. We have agreed to pay IDT $60,000 per month for the right to use those portions of its existing network. This amount will be reduced as IDT terminates portions of the existing network at our request. IDT also granted us an indefeasible right to use portions of a new DS3 Network, which it will have the right to use for 20 years. This grant will be effective as construction of this new network is completed and delivered to IDT. This network has been pledged by IDT to the lenders under a credit facility. We have agreed to pay IDT an installation fee of $600,000 for this network, which we will pay as each portion of the new network is delivered. We also will reimburse IDT for the one-time fee of approximately $6.0 million payable in monthly installments over a five-year period, with interest of 9% per annum. We will reimburse IDT for all of maintenance and upgrade costs incurred by IDT with respect to those portions of the network that we use. Further, IDT has granted us a right to use IDT's equipment and other assets at its backbone points of presence and its network operations center for a two- year period. We will pay IDT an aggregate of $1.2 million for this right over the two-year period. At the end of the two-year period, we have the right to purchase any of this equipment then owned by IDT at fair market value. We must pay for all repairs, maintenance and upgrades of equipment and other facilities we use pursuant to this agreement. IDT also has agreed to enter into transit relationship agreements with us giving us access substantially identical to IDT's at five different core locations for a period of one year commencing May 1999. Following the initial term, the transit relation agreements automatically renew for one-year periods unless one party gives the other 60-days prior written notice terminating the rights of access. Following the initial term, the transit relationship agreements may be terminated at any time at either party's option upon 60-days prior written notice. IDT retains primary control over the equipment covered by this agreement but may require assistance from us in gaining Internet access. We have agreed to assist in facilitating access for a one-year period commencing May 1999. For each month during the effectiveness of the agreement, IDT will pay us: . $1.00 for each of IDT's dial-up Internet customers; . the lesser of $100.00 and 20% of the fee IDT charges its dedicated-line Internet customers; and . 25% of all fees charged by IDT for installation of dedicated lines. Following the initial one year term, this agreement automatically renews for one-year periods unless one party gives the other 60-days prior written notice of termination. 56 Separation Agreement The separation agreement with IDT provides for the following: . Releases. This agreement provides for mutual general releases between us and IDT for alleged liability to the date of the agreement, with certain limited exceptions, including: . liability, specifically excluded by any of the other agreements between us and IDT, and . liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by one party at the request or on behalf of the other. . Indemnification by us. We have agreed to indemnify IDT and each of IDT's directors, officers and employees from all liabilities relating to, arising out of or resulting from: . our failure or the failure of any other person to pay, perform or otherwise promptly discharge any of our liabilities in accordance with their respective terms, and . any breach by us of the agreements between us and IDT. . Indemnification by IDT. IDT has agreed to indemnify us and each of our directors, officers and employees from all liabilities relating to, arising out of or resulting from: . the failure of IDT or any other person to pay, perform or otherwise promptly discharge any liabilities of IDT other than our liabilities, and . any breach by IDT of the agreements between us and IDT. . Dispute Resolution. We will attempt to resolve disputes by referring a controversial matter to senior management (or other mutually agreed upon) representatives of the parties. If these efforts are not successful, either party may submit the dispute to mandatory, binding arbitration. This agreement contains procedures that are intended to expedite dispute resolution, including the selection of an arbitrator and certain limitations on discovery. In the event that any dispute may be in excess of $5.0 million, or in the event that an arbitration award in excess of $5.0 million is issued, either party may submit the dispute to a court of competent jurisdiction. If the parties disagree that the amount in controversy is in excess of $5.0 million, the parties are required to submit the disagreement to arbitration. . Noncompetition; Certain Business Transactions. For a period of 36 months commencing May 1999, IDT may not directly or indirectly, engage in the provision of or developmental efforts related to Internet telephony services and voice enabling Web applications anywhere in the world or become a stockholder, partner or owner of any entity that is engaged in such business anywhere in the world. However, subject to our approval, which will not be unreasonably withheld, IDT may acquire a passive interest of up to 20% in such entity so long as IDT does not assist that entity in developing an Internet telephony business or otherwise engaging in our business. Neither we nor IDT will have any duty to communicate or offer any corporate opportunity to the other party and may pursue or acquire any such opportunity for itself or direct such opportunity to any other person. Expenses We have agreed to pay all third-party costs, fees and expenses relating to this offering, all of the reimbursable expenses of the underwriters pursuant to the underwriting agreement, all of the costs of producing, printing, mailing and otherwise distributing this prospectus, as well as the underwriters' discount as provided in the underwriting agreement. See "Underwriting." Except as expressly set forth in the agreements between us and IDT, whether or not this offering is consummated, each party shall bear its own respective third- party fees, costs and expenses paid or incurred in connection with this offering. 57 Payable To IDT. Since inception, IDT has provided the funds to finance our operations in the form of advances (approximately $14.0 million as of January 31, 1999). These advances have been converted into a note that is payable in 60 monthly installments of principal and interest. $7.0 million of the proceeds of this offering will be used to prepay a portion of the note. The balance of the note accrues interest at the rate of 9% per annum and matures on May 30, 2004. Relationship with Other Investors Series A Subscription Agreements Pursuant to Series A Subscription Agreements, dated as of May 13, SOFTBANK Technology Ventures IV, GE Capital Equity Investments, America Online, Access Technology Partners, Hambrecht & Quist and its affiliates and BT Alex. Brown and its affiliates, purchased from us, in the aggregate, 9,420,000 shares of Series A preferred stock and warrants to purchase 180,000 shares of our common stock, which expire upon the closing of this offering, for net aggregate purchase price of $29.9 million. Additionally, a warrant to purchase 92,400 shares of our common stock was issued to Hambrecht & Quist as part of its fee as placement agent with respect to the sale of our Series A preferred stock. This warrant expires upon the closing of this offering. In connection with the subscription agreements, we also entered into a registration rights agreement, and a stockholders agreement, each of which is described below. Registration Rights Agreement The Series A investors acquired the following registration rights: . one demand for registration at any time on or after the earlier to occur of the second anniversary of the Series A offering or 180 days following this offering. This demand registration right may be made by one or more holders of the Series A preferred stock that own at least 50% of the shares of common stock into which the Series A preferred stock converts. If our board of directors determines in good faith that the demand registration would be materially detrimental to us, we are entitled to postpone the filing of the registration statement otherwise required to be prepared and filed by us for a reasonable period of time, not to exceed 90 days; . piggyback registration rights if we propose to register any securities under the Securities Act in connection with any offering of our securities other than a registration statement on Form S-8 or Form S-4, subject to quantity limitations determined by underwriters if the offering involves an underwriting; and . two demand registrations at any time after we become eligible to register our securities on Form S-3 (or any successor form). Holders that beneficially own at least 20% of the shares of common stock into which the Series A preferred stock converts may make these demands. We agreed to pay all reasonable expenses incurred in connection with any registration, filing or qualification pursuant to the Registration Rights Agreement. We also agreed, to the extent permitted by law, to indemnify the Series A investors against some liabilities in connection with the offering of the shares, including liabilities arising under the Securities Act. Stockholders Agreement IDT and Mr. Sobel, our Chairman and President, agreed to vote all of their shares in favor of the election of a director nominated by SOFTBANK Technology Ventures IV and a director nominated by GE Capital Equity Investments, in each case for as long as either entity holds a majority of the shares of Series A preferred stock originally purchased by them or the shares into which they are convertible. In addition, each Series A investor agreed to a lock up with respect to their shares for a period of 180 days following this offering. The Series A investors, IDT and Mr. Sobel also agreed not to transfer any of their shares to any of our competitors for a period of 36 months, and thereafter only subject to our right of first refusal. However, the stockholders agreement does permit transfers between Series A investors. 58 Facility Leases We have entered into leases for the use of our Hackensack facilities with corporations that are owned and controlled by Howard S. Jonas, a director of IDT. The two Hackensack leases run for three-year terms, beginning on March 1, 1999 with monthly rent of $5,600 for 294-298 State Street and $9,912 for 171- 173 Main Street. We have also entered into a sublease with IDT for our Piscataway facility, which is leased by IDT from a corporation owned and controlled by Howard Jonas, a director of IDT. The Piscataway sublease runs for a three-year term, beginning in April 1999, with monthly rent of $8,400. Officer Loans In May 1999, Messrs. Howard S. Balter, Ilan M. Slasky, David Greenblatt, Martin Rothberg, H. Jeffrey Goldberg, Jonathan Reich, and Jonathan Rand, all executive officers of Net2Phone, borrowed $1,447,240, $352,800, $352,800, $352,800, $352,800, $98,000 and $44,100, respectively, from us. All of the proceeds of these loans were used to purchase shares of Net2Phone common stock upon the exercise of stock options. The loans bear interest at the rate of 7.0% per annum, and will mature in May 2001. We believe that all of the transactions set forth above were made on an arms-length basis. All future transactions between us and our officers, directors, principal stockholders and affiliates will be approved by a majority of the board of directors, including a majority of the outside directors, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. 59 DESCRIPTION OF CAPITAL STOCK Authorized Capital Stock Our certificate of incorporation, as amended and restated, authorizes 120,000,000 shares of capital stock consisting of: . 6,850,000 shares of preferred stock, $0.01 par value, . 3,150,000 shares of Series A preferred stock, $0.01 par value, . 15,000,000 shares of Class A stock, $0.01 par value, and . 95,000,000 shares of common stock, $0.01 par value. Of the shares of common stock, shares of our common stock are being offered through this prospectus. Immediately following the closing of the offering, shares of common stock and shares of Class A stock will be outstanding. Common Stock and Class A Stock General. The rights of holders of common stock and holders of Class A stock are identical, except for voting, conversion rights and restrictions on transferability. As of May 17, 1999, there were 4,683,129 shares of common stock outstanding and 37,042,090 shares of Class A stock outstanding. Voting Rights. The holders of Class A stock are entitled to two votes per share and the holders of common stock are entitled to one vote per share. Except as otherwise required by law or as described below, holders of Class A stock and common stock will vote together as a single class on all matters presented to the stockholders for their vote or approval, including the election of directors. Stockholders are not entitled to vote cumulatively for the election of directors, and no class of outstanding capital stock acting alone is entitled to elect any directors. IDT will hold % of our Class A stock upon consummation of this offering. Accordingly, IDT will retain effective control of us through holding approximately % of the combined voting power of our outstanding capital stock. Therefore, IDT has the ability to elect all of our directors and to effect or prevent certain corporate transactions which require majority approval of the combined classes, including mergers and other business combinations. Transfer Restrictions. Class A stock is subject to certain limitations on transferability that do not apply to the common stock. Our certificate of incorporation provides that shares of Class A stock automatically convert into an equal number of shares of common stock if there is a transfer of shares of Class A stock to a person other than a permitted transferee. Thereafter, such shares of common stock may be freely transferred, subject to restrictions imposed under applicable securities laws. Shares of Class A stock acquired by us will be canceled and may not be reissued. Dividends and Liquidation. Holders of Class A stock and holders of common stock have an equal right to receive dividends when and if declared by the board of directors out of legally available funds. In the event of a liquidation, dissolution, or winding up, holders of the shares of Class A stock and common stock are entitled to share equally, share-for-share, in the assets available for distribution after payment of all creditors and the liquidation preferences of our preferred stock. Optional Conversion Rights. Each share of Class A stock may, at any time and at the option of the holder, be converted into one fully paid and non- assessable share of common stock. Upon conversion, such shares of common stock would not be subject to restrictions on transfer that applied to the shares of Class A stock prior to conversion except to the extent such restrictions are imposed under applicable securities laws. The shares of common stock are not convertible into or exchangeable for shares of Class A stock or any other shares or securities. 60 Other Provisions. Holders of Class A stock and common stock have no preemptive rights to subscribe to any additional securities of any class which we may issue and there are no redemption provisions or sinking fund provisions applicable to either such class, nor is the Class A stock or the common stock subject to calls or assessments by us. The rights, preferences, and privileges of the holders of common stock and Class A stock are subject to and may be adversely affected by, the rights of the holders of any series of preferred stock. Preferred Stock Our certificate of incorporation provides that we may issue up to 10,000,000 shares of preferred stock in one or more series as may be determined by our board of directors who may establish the number of shares to be included in each such series, fix the designation, powers, preferences and relative rights of the shares of each such series and any qualifications, limitations, or restrictions thereof, and increase or decrease the number of shares of any such series without any further vote or action by the stockholders. The board of directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights that could adversely affect the voting power and other rights of holders of common stock or Class A stock. Preferred stock could be issued quickly with terms designated to delay or prevent a change in our control or to make the removal of management more difficult. This could have the effect of decreasing the market price of the common stock. In May 1999, we sold 9,420,000 shares of the 9,450,000 authorized shares of Series A preferred stock pursuant to Series A Subscription Agreements. All shares of the Series A preferred stock will automatically convert to shares of our Class A stock at the closing of this offering. We believe that the ability of the board to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. The authorized shares of preferred stock, as well as shares of common stock, will be available for issuance without further action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although the board has no intention at the present time of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The board will make any determination to issue such shares based on its judgment as to our best interests and the best interests of our stockholders. The board could issue preferred stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition of the board, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of such stock. Certain Anti-Takeover Effects. Certain provisions of the certificate of incorporation and bylaws, summarized in the following paragraphs, may be considered to have an anti-takeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. The certificate of incorporation and bylaws provide for the board of directors to be divided into three classes of directors serving staggered three-year terms upon the consummation of this offering. As a result, approximately one-third of the board of directors will be elected each year. Classification of the board of directors expands the time required to change the composition of a majority of directors and may tend to discourage a proxy contest or other takeover bid for us. Moreover, under the Delaware General Corporation Law, in the case of a corporation having a classified board of directors, the stockholders may remove a director only for cause. 61 The certificate of incorporation provides that a special meeting of stockholders may be called by any of the following: . the chairman of our board; . our president; . any of our vice presidents; or . our secretary. In addition, a special meeting of stockholders may be called by any such officer at the written request of a majority of the board of directors or at the written request of stockholders owning a majority of our capital stock issued and outstanding and entitled to vote. Section 203 of the Delaware General Corporation Law provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combinations, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the date that such stockholder becomes an interested stockholder unless: . prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; . upon consummation of the transaction that resulted in the stockholder becoming an "interested stockholder," the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares); or . on or subsequent to such date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66.67% of the outstanding voting stock that is not owned by the interested stockholder. Except as otherwise specified in Section 203 of the Delaware General Corporation Law, an interested stockholder is defined to include (x) any person that owns (or, within the prior three years, did own) 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and (y) the affiliates and associates of any such person. Under certain circumstances, Section 203 of the Delaware General Corporation Law makes it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203 of the Delaware General Corporation Law. However, IDT and its affiliates are excluded from the definition of "interested stockholder" pursuant to the terms of Section 203 of the Delaware General Corporation Law. The provisions of Section 203 of the Delaware General Corporation Law may encourage persons interested in acquiring us to negotiate in advance with the board, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves either the business combination or the transaction which results in any such person becoming an interested stockholder. Such provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions that our stockholders may otherwise deem to be in their best interests. Liability of Directors; Indemnification The certificate of incorporation contains a provision that is designed to limit directors' liability to the extent permitted by the Delaware General Corporation Law. Specifically, directors will not be held liable 62 to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability as a result of: . any breach of the duty of loyalty to us or our stockholders; . actions or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . payment of an improper dividend or improper repurchase of our stock under Section 174 of the Delaware General Corporation Law; or . actions or omissions pursuant to which the director received an improper personal benefit. The principal effect of the limitation of liability provision is that a stockholder is unable to prosecute an action for monetary damages against a director of ours unless the stockholder can demonstrate one of the specified bases for liability. The provision, however, does not eliminate or limit director liability arising in connection with causes of action brought under the federal securities laws. The certificate of incorporation does not eliminate a director's duty of care. The inclusion of this provision in the certificate of incorporation may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefited us and our stockholders. This provision should not affect the availability of equitable remedies such as injunction or rescission based upon a director's breach of the duty of care. The bylaws also provide that we will indemnify our directors and officers, and may indemnify any of our employees and agents, to the fullest extent permitted by Delaware law. We are generally required to indemnify our directors and officers for all judgments, fines, penalties, settlements, legal fees and other expenses incurred in connection with pending, threatened or completed legal proceedings because of the director's or officer's position with us or another entity that the director or officer serves at our request, subject to certain conditions, and to advance funds to its directors and officers to enable them to defend against such proceedings. At present, there is no pending or threatened litigation or proceeding involving any director or officer, employee or agent of ours where such indemnification will be required or permitted. Transfer Agent and Registrar American Stock Transfer & Trust Company will be the transfer agent and registrar for the common stock. SHARES ELIGIBLE FOR FUTURE SALE Of the shares of common stock and shares of Class A stock to be outstanding on the closing of the offering ( shares of common stock if the underwriters exercise their over-allotment option in full), the shares of common stock sold in the offering ( shares if the underwriters exercise their over-allotment option in full) will be freely tradable without restriction under the Securities Act of 1933, except for any such shares which may be acquired by an affiliate of ours, as that term is defined in Rule 144 promulgated under the Securities Act of 1933. On the closing of the offering, IDT will own shares of Class A stock, which will constitute % of our outstanding capital stock ( % if the underwriters exercise their over- allotment option in full). Persons who are affiliates of ours will be permitted to sell the shares of common stock that are issued in the offering only pursuant to an effective registration statement under the Securities Act of 1933 or an exemption from the registration requirements of the Securities Act of 1933, including exemptions provided by Rule 144 of the Securities Act of 1933. 63 Upon consummation of this offering, we intend to file a registration statement to file for resale the shares of common stock reserved for issuance under our stock option plan. We expect such registration to become effective immediately upon filing. As of the date of this prospectus, options to purchase 5,040,000 shares of common stock under our stock option plan have been granted of which 1,345,219 have been exercised. See "Management--1999 Stock Incentive Plan" for a more complete description of our employee benefit plans. The shares of capital stock held by IDT are deemed "restricted securities" as defined in Rule 144 of the Securities Act of 1933, and may not be sold other than through registration under the Securities Act of 1933 or pursuant to an exemption from the regulations thereunder, including exceptions provided by Rule 144 of the Securities Act of 1933. Subject to applicable law and to the contractual restriction with the underwriters described below, IDT may sell any and all of the shares of capital stock it owns after completion of the offering. We, along with each of our directors and executive officers and, IDT and the Series A investors have each agreed, for a period of 180 days after the date of this prospectus, not to offer or sell any shares of Class A stock or common stock, subject to limited exceptions, without the prior written consent of Hambrecht & Quist LLC on behalf of the underwriters. See "Underwriting." We may grant options to purchase shares of common stock to employees, non- employee directors and independent contractors of ours pursuant to the 1999 Stock Option and Incentive Plan. See "Management--Stock Options." We currently expect to file promptly following the closing date of this offering date a registration statement under the Securities Act of 1933 to register shares reserved for issuance under the 1999 Stock Option and Incentive Plan. Shares issued pursuant to the 1999 Stock Option and Incentive Plan after the effective date of such registration statement (other than shares issued to affiliates of ours) generally will be freely tradable without restriction or further registration under the Securities Act of 1933. Upon consummation of this offering, the holders of shares of our Class A stock, or their transferees, will be entitled to request that we register their shares under the Securities Act. See "Certain Transactions--Relationship with Other Investors--Registration Rights Agreement." 64 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement the underwriters named below, through their representatives, Hambrecht & Quist LLC, BT Alex.Brown Incorporated and Bear, Stearns & Co. Inc., have severally agreed to purchase from Net2Phone the following respective number of shares of common stock:
Number of Name Shares ---- --------- Hambrecht & Quist LLC................... BT Alex. Brown Incorporated............. Bear, Stearns & Co. Inc................. ---- Total................................... ====
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt of certain certificates, opinions and letters from us, our counsel and the independent auditors. The underwriters are committed to purchase all of the shares of common stock offered by us if they purchase any shares. The following table shows the per share and total underwriting discounts and commissions we will pay to the underwriters. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase additional shares. Underwriting Discounts and Commissions
With Without Over-Allotment Over-Allotment Exercise Exercise -------------- -------------- Per Share................................... $ $ Total....................................... $ $
We estimate that the total expenses of this offering, excluding underwriting discounts and commissions, will be approximately $ . The underwriters propose to offer the shares of common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. We have granted to the underwriters an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to additional shares of common stock at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of common stock to be purchased by it shown in the above table bears to the total number of shares of common stock offered hereby. We will be obligated, pursuant to the option, to sell shares to the underwriters to the extent the option is exercised. The underwriters may exercise this option only to cover over-allotments made in connection with the sale of shares of common stock offered by us. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. 65 We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect of these liabilities. Certain of our stockholders, including the Series A investors, IDT, and our executive officers and directors, who will own in the aggregate shares of Class A stock and shares of common stock after this offering, have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Class A stock, common stock, options or warrants to acquire shares of Class A stock or common stock or securities exchangeable for or convertible into shares of Class A stock or common stock owned by them for a period of 180 days following the date of this prospectus. We have agreed that we will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of Class A stock, common stock, options or warrants to acquire shares of Class A stock or common stock or securities exchangeable for or convertible into shares of Class A stock or common stock for a period of 180 days following the date of this prospectus, except that we may issue shares upon the exercise of options and warrants granted prior to the date hereof, and may grant additional options under our stock option plans. Without the prior written consent of Hambrecht & Quist LLC, any additional options granted shall not be exercisable during this 180-day period. Certain persons participating in this offering may over-allot or effect transactions which stabilize, maintain or otherwise affect the market price of the common stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the common stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of common stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the- counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. Prior to this offering, there has been no public market for our common stock. The initial public offering price for the common stock will be determined by negotiations among us and the representatives. Among the factors to be considered in determining the initial public offering price will be prevailing market and economic conditions, our revenue and earnings, market valuations of other companies engaged in activities similar to our business operations and our management. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions or other factors. At our request, the underwriters have reserved up to shares of common stock for sale at the initial public offering price to directors, officers, employees, business associates and related persons of ours, including purchasers of the preferred stock. The number of shares of common stock available for sale to the general public will be reduced if such persons purchase the reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. In connection with this offering, certain underwriters and selling group members (if any) who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in our common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. 66 Hambrecht & Quist LLC and persons associated with Hambrecht & Quist LLC own 63,000 shares of Series A stock and warrants to purchase 92,400 shares of common stock at an exercise price of $3.33 per share, which warrants expire upon the closing of this offering. Additionally, Access Technology Partners, L.P., a fund of outside investors that is managed by Hambrecht & Quist California, owns 237,000 shares of Series A stock. BT Alex. Brown Incorporated and persons associated with BT Alex. Brown Incorporated own 120,000 shares of Series A stock. Denis Bovin, Vice Chairman-Investment Banking of Bear, Stearns & Co. Inc., owns options to purchase 75,000 shares of common stock at an exercise price of $3.33 per share, which expire 10 years from the date of grant. Additionally, Mr. Bovin will receive options to purchase 50,000 shares of common stock at the offering price upon the consummation of this offering. Hambrecht & Quist LLC and BT Alex. Brown Incorporated have provided financial advisory services to Net2Phone and IDT in the past and have received compensation at market rates for these services. LEGAL MATTERS Certain legal matters with respect to the validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, New York, New York. Certain legal matters relating to this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York. EXPERTS The financial statements of Net2Phone, Inc. at July 31, 1997 and July 31, 1998 and for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act of 1933 with respect to the common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement, certain portions of which are omitted as permitted by the rules and regulations of the Securities and Exchange Commission. For further information pertaining to us and the common stock to be sold in this offering, reference is made to the registration statement, including the exhibits thereto and the financial statements, notes and schedules filed as a part thereof. Statements contained in this prospectus regarding the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement or such other document, each such statement being qualified in all respects by such reference. On the closing of the offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and will file reports, proxy statements and other information with the Securities and Exchange Commission. Such reports, proxy statements and other information, as well as the registration statement and the exhibits and schedules thereto, may be inspected, without charge, at the public reference facility maintained by the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the Securities and Exchange Commission's regional offices located at Seven World Trade Center, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661- 2511. Copies of such material may also be obtained from the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be inspected on the Securities and Exchange Commission's site on the Internet at http://www.sec.gov. 67 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors............................................ F-2 Balance Sheets as of July 31, 1997 and 1998 and January 31, 1999 (Unaudited).............................................................. F-3 Statements of Operations for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999 (Unaudited)........... F-4 Statements of Stockholders' Deficit for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998 and the six months ended January 31, 1999 (Unaudited)........... F-5 Statements of Cash Flows for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999 (Unaudited)........... F-6 Notes to Financial Statements............................................. F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Net2Phone, Inc. We have audited the accompanying balance sheets of Net2Phone, Inc. (the "Company") as of July 31, 1997 and 1998, and the related statements of operations, stockholders' deficit and cash flows for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at July 31, 1997 and 1998 and the results of its operations and its cash flows for the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998, in conformity with generally accepted accounting principles. New York, New York May 11, 1999, except for Note 9, the date of which is , 1999 - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 9 to the financial statements. /s/ Ernst & Young LLP New York, New York May 17, 1999 F-2 Net2Phone, Inc. BALANCE SHEETS
July 31 January 31 ------------------------ ----------- 1997 1998 1999 ----------- ----------- ----------- (Unaudited) Assets Current assets: Cash and cash equivalents............. $ -- $ 10,074 $ 10,074 Trade accounts receivable, net........ 16,500 1,465,475 184,551 Other current assets.................. -- -- 7,800 ----------- ----------- ----------- Total current assets................ 16,500 1,475,549 202,425 Property and equipment, net............. 899,525 5,409,061 7,146,030 Trademark, net.......................... -- -- 5,000,000 Other assets............................ -- 90,498 97,816 ----------- ----------- ----------- Total assets........................ $ 916,025 $ 6,975,108 $12,446,271 =========== =========== =========== Liabilities and stockholders' deficit Current liabilities: Payable for trademark................. $ -- $ -- $ 5,000,000 Deferred revenue...................... 161,001 810,114 1,309,067 Due to IDT Corporation................ 2,860,329 11,814,988 13,862,833 ----------- ----------- ----------- Total current liabilities........... 3,021,330 12,625,102 20,171,900 Commitments and contingencies Stockholders' deficit: Preferred stock, $.01 par value; authorized shares--10,000,000; no shares issued and outstanding........ -- -- -- Common stock, $.01 par value; authorized shares-- 100,000,000; 30,960,000 shares issued and outstanding.......................... 100,100 100,100 100,100 Accumulated deficit................... (2,205,405) (5,750,094) (7,825,729) ----------- ----------- ----------- Total stockholders' deficit......... (2,105,305) (5,649,994) (7,725,629) ----------- ----------- ----------- Total liabilities and stockholders' deficit............................ $ 916,025 $ 6,975,108 $12,446,271 =========== =========== ===========
See accompanying notes. F-3 Net2Phone, Inc. STATEMENTS OF OPERATIONS
Period from January 2, 1996 Six months ended (date of inception) Year ended July 31 January 31 to July 31 ------------------------ ---------------------- 1996 1997 1998 1998 1999 ------------------- ----------- ----------- ---------- ----------- (Unaudited) Revenue................. $ -- $ 2,652,303 $12,005,972 $5,014,922 $13,165,886 Costs and expenses: Direct cost of revenue.............. -- 1,553,443 6,848,759 1,672,440 7,323,751 Selling and marketing............ 34,468 76,724 2,887,766 450,105 2,991,713 General and administrative....... 465,015 2,599,283 5,087,628 1,804,058 4,187,024 Depreciation.......... 8,275 120,500 726,508 192,013 739,033 ---------- ----------- ----------- ---------- ----------- Total costs and expenses........... 507,758 4,349,950 15,550,661 4,118,616 15,241,521 ---------- ----------- ----------- ---------- ----------- (Loss) income from operations before provision for income taxes.................. (507,758) (1,697,647) (3,544,689) 896,306 (2,075,635) Provision for income taxes.................. -- -- -- -- -- ---------- ----------- ----------- ---------- ----------- Net (loss) income....... $ (507,758) $(1,697,647) $(3,544,689) $ 896,306 $(2,075,635) ========== =========== =========== ========== =========== Net (loss) income per share--basic and diluted................ $ (0.02) $ (0.05) $ (0.11) $ 0.03 $ (0.07) ========== =========== =========== ========== =========== Weighted average number of shares used in calculation of basic and diluted net (loss) income per share....... 30,960,000 30,960,000 30,960,000 30,960,000 30,960,000 ========== =========== =========== ========== ===========
See accompanying notes. F-4 Net2Phone, Inc. STATEMENTS OF STOCKHOLDERS' DEFICIT Period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998 and the six months ended January 31, 1999 (unaudited with respect to the six months ended January 31, 1999)
Common Stock Total ------------------- Accumulated Stockholders' Shares Amount Deficit Deficit ---------- -------- ----------- ------------- Net loss for the period January 2, 1996 (date of inception) to July 31, 1996.. -- $ -- $ (507,758) $ (507,758) ---------- -------- ----------- ----------- Balance at July 31, 1996 ....... -- -- (507,758) (507,758) Sale of Common Stock to IDT Corporation.................. 27,864,000 100 -- 100 Sale of Common Stock to officer...................... 3,096,000 100,000 -- 100,000 Net loss for the year ended July 31, 1997................ -- -- (1,697,647) (1,697,647) ---------- -------- ----------- ----------- Balance at July 31, 1997........ 30,960,000 100,100 (2,205,405) (2,105,305) Net loss for the year ended July 31, 1998................ -- -- (3,544,689) (3,544,689) ---------- -------- ----------- ----------- Balance at July 31, 1998........ 30,960,000 100,100 (5,750,094) (5,649,994) Net loss for the six months ended January 31, 1999....... -- -- (2,075,635) (2,075,635) ---------- -------- ----------- ----------- Balance at January 31, 1999..... 30,960,000 $100,100 $(7,825,729) $(7,725,629) ========== ======== =========== ===========
See accompanying notes. F-5 Net2Phone, Inc. STATEMENTS OF CASH FLOWS
Period from January 2, 1996 (date of Six months ended inception) Year ended July 31 January 31 to July 31 ------------------------ ----------------------- 1996 1997 1998 1998 1999 --------------- ----------- ----------- ---------- ----------- (Unaudited) Operating activities Net (loss) income....... $(507,758) $(1,697,647) $(3,544,689) $ 896,306 $(2,075,635) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation........... 8,275 120,500 726,508 192,013 739,033 Changes in assets and liabilities: Accounts receivable.. -- (16,500) (1,448,975) (996,000) 1,280,924 Other current assets.............. -- -- -- -- (7,800) Other assets......... -- -- (90,498) (10,000) (7,318) Deferred revenue..... -- 161,001 649,113 270,400 498,953 --------- ----------- ----------- ---------- ----------- Net cash (used in) provided by operating activities............. (499,483) (1,432,646) (3,708,541) 352,719 428,157 Investing activities Purchases of property and equipment.......... (182,949) (845,351) (5,236,044) (1,552,803) (2,476,002) --------- ----------- ----------- ---------- ----------- Net cash used in investing activities... (182,949) (845,351) (5,236,044) (1,552,803) (2,476,002) Financing activities Proceeds from sale of Common Stock to IDT Corporation -- 100 -- -- -- Proceeds from sale of Common Stock to officer................ -- 100,000 -- -- -- Net advances from IDT Corporation............ 682,432 2,177,897 8,954,659 1,208,731 2,047,845 --------- ----------- ----------- ---------- ----------- Net cash provided by financing activities... 682,432 2,277,997 8,954,659 1,208,731 2,047,845 --------- ----------- ----------- ---------- ----------- Net increase in cash and cash equivalents....... -- -- 10,074 8,647 -- Cash and cash equivalents at beginning of period.... -- -- -- -- 10,074 --------- ----------- ----------- ---------- ----------- Cash and cash equivalents at end of period................. $ -- $ -- $ 10,074 $ 8,647 $ 10,074 ========= =========== =========== ========== =========== Supplemental disclosure of cash flow information: Cash payments made for interest............... $ -- $ -- $ -- $ -- $ -- ========= =========== =========== ========== =========== Cash payments made for income taxes........... $ -- $ -- $ -- $ -- $ -- ========= =========== =========== ========== ===========
See accompanying notes. F-6 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) 1. Description of Business and Basis of Presentation The accompanying financial statements reflect the historical financial information of Net2Phone, Inc. (the "Company") a majority owned subsidiary of IDT Corporation ("IDT"), incorporated in October 1997, to operate and develop its Internet telephony business. Prior to such time, the Company's business was conducted as a division of IDT. The Company is a leading provider of voice- enhanced Internet communication services to individuals and businesses. The Company's statements of operations include allocations of certain costs and expenses from IDT (Note 4). Although such allocations are not necessarily indicative of the costs that would have been incurred if the Company operated as an unaffiliated entity, management believes that the allocation methods are reasonable. 2. Summary of Significant Accounting Policies 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 amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Interim Financial Information The unaudited interim information as of January 31, 1999 and for the six months ended January 31, 1998 and 1999 has been prepared on the same basis as the annual financial statements and, in the opinion of the Company's management, contains all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. Operating results for any interim period are not necessarily indicative of results to be expected for the entire year. Revenue Recognition Internet telephony service revenue is recognized as service is provided. Equipment sales are recognized when installation is completed. Deferred revenue results from advance billings for services. Direct Cost of Revenue Direct cost of revenue consists primarily of telecommunication costs, connectivity costs, and the cost of equipment sold to customers. Property and Equipment Equipment, computer software, and furniture and fixtures are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets of five years. Advertising Costs The Company expenses the costs of advertising as incurred. For the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999, advertising expense totaled approximately $6,250, $1,962,465, $200,743, and $2,059,421, respectively. There was no advertising expense for the period from January 2, 1996 (date of inception) to July 31, 1996. F-7 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) 2. Summary of Significant Accounting Policies (continued) Software Development Costs Costs for the internal development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. To date, the Company has essentially completed its software development concurrently with the establishment of technological feasibility and, accordingly, no such costs have been capitalized to date. For the period from January 2, 1996 (date of inception) to July 31, 1996, software development costs of $340,000 were expensed. No software development costs were expensed for the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999. Capitalized Internal Use Software Costs In March 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which has been adopted by the Company requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. At July 31, 1997 and 1998 and January 31, 1999, the Company has capitalized $493,000, $2,198,000 and $3,117,000, respectively, of internal use software costs as computer software. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents are carried at cost which approximates market value. Trademark Costs associated with obtaining the right to use trademarks owned by third parties are capitalized and amortized on a straight-line basis over the term of the trademark. Income Taxes The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. Earnings (Loss) Per Share Earnings (loss) per share is calculated in accordance with FASB Statement No. 128, Earnings per Share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common shares by the weighted average of common shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the periods in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. F-8 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) 2. Summary of Significant Accounting Policies (continued) Current Vulnerability Due to Certain Concentrations Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, and trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Management regularly monitors the creditworthiness of its domestic and international customers and believes that it has adequately provided for any exposure to potential credit losses. Recently Issued Financial Accounting Standards SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, was issued in June 1997. The Company will be required to adopt the new statement for the year ending July 31, 1999. This statement requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company intends to adopt this statement in fiscal 1999 and does not anticipate that the adoption of the statement will have significant impact on its financial statements. 3. Property and Equipment Property and equipment consists of the following:
July 31 --------------------- January 31, 1997 1998 1999 --------- ---------- ----------- Equipment.............................. $ 348,625 $3,631,140 $5,145,617 Computer software...................... 679,484 2,595,572 3,530,414 Furniture and fixtures................. 191 37,632 64,315 --------- ---------- ---------- 1,028,300 6,264,344 8,740,346 Accumulated depreciation............... (128,775) (855,283) (1,594,316) --------- ---------- ---------- Property and equipment, net............ $ 899,525 $5,409,061 $7,146,030 ========= ========== ==========
4. Related Party Transactions In May 1999, the Company and IDT entered into an Internet/telecommunications agreement whereby the Company has agreed to pay IDT $110,000 per month for connectivity, the use of certain computer software and equipment owned or leased by IDT and to provide a platform for IDT's Internet services for a monthly per customer charge. In connection with such agreement, IDT has also granted the Company an indefeasible right to use a certain telecommunications network as it is completed and delivered for up to approximately $6.0 million. The agreement is effective for a period of two years. In May 1999, the Company and IDT entered into two one-year services agreements whereby the Company agreed to pay IDT for certain administrative, customer support and other services that IDT provides to it at the cost of such services plus 20%. Also, in conjunction with such agreements, the Company has agreed to provide IDT with certain support services for the cost of such services plus 20%. The agreement is effective for a period of two years. F-9 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) 4. Related Party Transactions (continued) In May 1999, the Company and IDT entered into a joint marketing agreement whereby the companies have agreed to jointly advertise and market their products. The agreement continues for a term of one year and is automatically renewable for an additional one year unless terminated by either party. In conjunction with such agreement, a commission will be earned by each company for new customers generated by the other company as a result of such programs. In May 1999, the Company and IDT entered into an assignment agreement whereby IDT has agreed to assign all of its rights in certain trademarks, patents and proprietary products and information to the Company. The accompanying financial statements for periods prior to the signing of the aforementioned agreements include charges by IDT to the Company for the aforementioned services. Such charges were based principally upon the Company's allocable portion of IDT's costs for such services. Such costs approximate the amounts that would have been charged under the inter-company agreements if they had been in effect during such periods. For the period from January 2, 1996 (date of inception) to July 31, 1996 and the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999, all of the Company's operations were financed by IDT. For the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999, the Company recognized revenue for services provided to IDT of $297,000, $453,000, $209,000, and $333,000, respectively. At July 31, 1997 and 1998 and January 31, 1999, the due to IDT balance represents the net amounts owed to IDT as a result of the aforementioned agreements and financing. 5. Income Taxes The Company files a consolidated Federal income tax return with IDT and has entered into a tax sharing agreement with IDT. Pursuant to such tax sharing agreement, the Company would, while included in the IDT tax return, be reimbursed for the use of its tax losses to the extent IDT realizes a tax reduction from the use of such tax losses. When IDT's ownership interest in the Company falls below 80%, the Company will no longer be a part of the IDT U.S. consolidated tax group. Significant components of the Company's deferred tax assets and liabilities consists of the following:
January July 31 31 ------------------ --------- 1997 1998 1999 -------- --------- --------- Deferred tax assets: Net operating loss carryforwards.......... $ -- $ 314,000 $ 541,000 Deferred tax liabilities: Depreciation.............................. -- (300,000) (482,000) -------- --------- --------- Net deferred tax assets................... -- 14,000 59,000 Valuation allowance....................... -- (14,000) (59,000) -------- --------- --------- Total deferred tax assets................. $ -- $ -- $ -- ======== ========= =========
F-10 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) 5. Income Taxes (continued) The net deferred tax assets have been fully offset by a valuation allowance due to the uncertainty of the realization of the assets. At January 31, 1999, the Company had net operating loss carryforwards for state income tax purposes of approximately $6.0 million expiring in years through 2006. These net operating loss carryforwards may be limited to future taxable earnings of the Company. 6. Stockholders' Deficit In April 1999, the Company amended and restated its Certificate of Incorporation (the "Amendment"). As a result of the Amendment, the Company increased its authorized shares of capital stock from 1,500 to 110,000,000, of which 100,000,000 shares are designated as common stock and 10,000,000 shares are designated as preferred stock. Subject to any voting rights which may be provided to future holders of preferred stock, the holders of common stock have exclusive voting rights on all matters requiring a vote of the Company and are entitled to one vote per share of common stock held. In conjunction with the Amendment, the Company effectuated a 10,320 for one stock split. The accompanying financial statements give retroactive effect to the stock split. 7. Commitments Advertising and Promotion Agreements On February 8, 1998, the Company entered into an agreement with an Internet company to develop a link between its Internet site and that of the Company and advertise Company products on such site. The agreement is effective for fifteen months upon the completion of the link and automatically extends for an additional one year unless terminated by either party. Pursuant to such agreement, the Company has made payments of $2.4 million through January 31, 1999 for the design, development, installation and implementation of the link as well as the placement of Company advertisements on the Internet company's site, of which $750,000 attributable to the development of such software has been capitalized as computer software and $1.65 million attributable to advertising has been expensed as incurred. As of January 31, 1999, the Company is required to make additional payments of $600,000 in fiscal 1999 and pay certain future commissions, as defined, based upon revenue earned and usage of the link. On August 4, 1998, the Company entered into an agreement with an Internet company to advertise Company products on its Internet site. The agreement is effective as of October 1, 1998, the launch date of the link, and extends indefinitely until the Internet company fully provides all advertising impressions guaranteed under the agreement. Pursuant to such agreement, the Company has made payments of $433,000 through January 31, 1999 for the Company advertisements on such site. As of January 31, 1999, the Company is required to make additional payments of $425,000 in fiscal 1999, $975,000 in fiscal 2000, and $167,000 in fiscal 2001 and pay certain future commissions, as defined, based upon revenue earned and usage of the link. F-11 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) License Fees and Trademark On January 31, 1999, the Company entered into a series of agreements with a third party to effectuate the licensing of Internet software, the use of the third party's trademark for $5.0 million and the bundling of the Company's Internet telephony products with those of the third party for a period of two years. Pursuant to such agreements, the Company has agreed to buy $8.0 million of software and other products through January 31, 2000 and pay commissions to such third party for each new customer it obtains through the bundling of products. Distribution Agreements The Company has distribution agreements under which it has agreed to pay its agents commissions for obtaining new Internet telephony customers. The agreements require commissions upon activation of the customers. Employment Agreement In May 1997, the Company entered into a three year employment agreement with its one of its officers. Under the terms of such agreement, which was amended in May 1999, the Company agreed to, among other things, provide such officer with an annual salary of $100,000 and the right to purchase a 10% interest in the Company for $100,000, which was the fair market value of the Company at that time. Such right, which includes an anti-dilutive provision mandating that the officer's ownership interest cannot be diluted below 8% of the total outstanding shares upon consummation of an initial public offering of the Company's common stock, was exercised during 1997. The agreement is automatically renewable on an annual basis after its initial three year term unless terminated by either party. 8. Customer and Geographical Area Revenue from customers outside the United States represented approximately 44%, 72%, 82%, and 58% of total revenue during the years ended July 31, 1997 and 1998 and the six months ended January 31, 1998 and 1999, respectively. During the year ended July 31, 1998 and the six months ended January 31, 1998, revenues derived from equipment sales to a customer in Korea represented approximately 14% and 32%, respectively, of total revenue. No single geographic area accounted for more than 10% of total revenue during the year ended July 31, 1997 and the six months ended January 31, 1999. No customer accounted for more than 10% of revenue during the year ended July 31, 1997 and the six months ended January 31, 1999. 9. Subsequent Events In March 1999, the Company entered into two lease agreements with companies which are owned by the Chairman, Chief Executive Officer and Treasurer of IDT. Pursuant to such lease agreements, the Company is required to make equal monthly rental payments aggregating $558,000 to such companies through February 2002. On May 12, 1999, the Company converted a portion of its liability to IDT into a $14 million promissory note. Such promissory note accrues interest at a rate of 9% per annum and is payable in 60 equal monthly installments of principal and interest. Notwithstanding the foregoing, $7,000,000 in principal will be repaid within 10 days of the consummation of a proposed initial public offering of the Company's common stock. F-12 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the six months ended January 31, 1998 and 1999) On May , 1999, the Company designated 3,150,000 shares of its preferred stock as Series A and sold 3,140,000 of such shares for aggregate net proceeds of $29,900,000. On May , 1999, the Company designated 15,000,000 shares of its capital stock as Class A stock and on May , 1999 the Company effectuated a three-for- one stock split. The accompanying financial statements give retroactive effect to the stock split. The holders of Class A stock are identical to those of common stock except for voting and conversion rights and restrictions or transferability. The Class A stock is entitled to two votes per share. F-13 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Shares [LOGO] Common Stock ---------------- PROSPECTUS ---------------- HAMBRECHT & QUIST BT ALEX. BROWN INCORPORATED ---------------- BEAR, STEARNS & CO. INC. ---------------- , 1999 ---------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus applicable to that jurisdiction. Until , 1999, all dealers that buy, sell or trade in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Other expenses in connection with the issuance and distribution of the securities to be registered hereunder, all of which will be paid by us, will be substantially as follows (all amounts are estimated except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers filing fee and the Nasdaq National Market listing fee):
Item Amount ---- ------- Securities and Exchange Commission registration fee.............. $13,900 NASD filing fee.................................................. Nasdaq National Market listing fee............................... Blue Sky filing fees............................................. Accounting fees and expenses..................................... Legal fees and expenses.......................................... Transfer agent fees and expenses................................. Printing and Engraving expenses.................................. Miscellaneous expenses........................................... ------- Total.......................................................... $ =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Reference is made to Section 145 of the Delaware General Corporation Law, which provides for indemnification of directors, officers and other employees in certain circumstances, and to Section 102(b)(7)of the Delaware General Corporation Law, which provides for the elimination or limitation of the personal liability for monetary damages of directors under certain circumstances. Article Sixth of our certificate of incorporation, as amended and restated, eliminates the personal liability for monetary damages of directors under certain circumstances. Our bylaws provide indemnification to our directors and officers to the fullest extent permitted by the Delaware General Corporation Law for, among other things, liabilities for judgments in and settlements of lawsuits and other proceedings and for the advance and payment of fees and expenses reasonably incurred by the director or officer in defense of any such lawsuit or proceeding. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In October 1997, in connection with our initial organization, IDT Corporation purchased 900 shares of the our common stock for nominal consideration. In January 1998, pursuant to the terms of his employment agreement with IDT Corporation, Mr. Clifford M. Sobel purchased 100 shares of our common stock for the purchase price of $100,000. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. In May 1999, we issued and sold an aggregate of 3,140,000 shares of Series A preferred stock at $10.00 per share together with warrants to purchase 60,000 shares of our class A stock to several investors for an aggregate of $31,400,000, pursuant to Series A Subscription Agreements, dated as of May 13, 1999. We also issued a warrant to purchase 30,800 shares of our common stock to the placement agent as partial consideration for their services. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933. In May 1999, we issued options to purchase 1,680,000 shares pursuant to our 1999 Stock Option and Incentive Plan, and issued approximately 448,406 shares of common stock upon exercise of these options. These transactions were exempt from registration under Section 4(2) of the Securities Act of 1933. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibits:
Exhibit Number Description of Exhibit ------- ---------------------- 1.1* Form of Underwriting Agreement. 3.1 Certificate of incorporation, as amended. 3.2 Bylaws. 4.1* Specimen Common Stock Certificate of the Registrant. 5.1* Form of Opinion of Morrison & Foerster LLP. 10.1 Employment Agreement, dated May 1, 1997, by and between Clifford M. Sobel and IDT Corporation. 10.2 Amendment to Employment Agreement between IDT Corporation and Clifford M. Sobel, dated as of May 11, 1999, by and between Clifford M. Sobel, IDT Corporation and the Registrant. 10.3# Bundling and Distribution Services Agreement, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.4 General License Terms & Conditions, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.5# Trademark License Agreement, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.6 Internet/Telecommunications Assignment Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.7 Joint Marketing Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.8 IDT Services Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.9 Net2Phone Services Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.10 Assignment Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.11 Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.12 Separation Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.13 Lease Agreement, dated as of March 1, 1999, by and between 171-173 Main Street Corporation and the Registrant. 10.14 Lease Agreement, dated as of March 1, 1999, by and between 294-298 State Street Corporation and the Registrant. 10.15* The Registrant's 1999 Stock Option and Incentive Plan. 10.16 Series A Subscription Agreement, dated as of May 13, 1999, by and between the Investors listed therein and the Registrant. 10.17 Series A Preferred Shareholder Registration Rights Agreement, dated as of May 13, 1999, by and between the Investors listed therein and the Registrant. 10.18 Form of Warrant to Purchase Common Stock. 10.19 Promissory Note of Registrant to IDT Corporation, dated as of May 12, 1999. 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Morrison & Foerster LLP (incorporated by reference into Exhibit 5.1). 24.1 Power of Attorney (set forth on the signature page to this registration statement). 27.1 Financial Data Schedule. 99.1 Consent of Director Nominee of Gary Reischel, dated May 17, 1999. 99.2 Consent of Director Nominee of David Greenblatt, dated May 17, 1999.
II-2
Exhibit Number Description of Exhibit ------- ---------------------- 99.3 Consent of Director Nominee of Ilan Slasky, dated May 17, 1999. 99.4 Consent of Director Nominee of Michael Fischberger, dated May 17, 1999.
- -------- * To be filed by amendment. # Confidential treatment has been requested with respect to certain portions of the Exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. Financial Statements and Schedule: Financial Statements: Financial Statements filed as a part of this registration statement are listed in the Index to Financial Statements of page F-1. Financial Statement Schedules: None. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing of the offering specified in the Underwriting Purchase Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 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 Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hackensack, State of New Jersey, on May 18, 1999. Net2Phone, Inc. /s/ Howard S. Balter By: _________________________________ Howard S. Balter Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints and hereby authorizes Howard S. Balter and Joyce M. Mason, severally, such person's true and lawful attorneys-in-fact, with full power of substitution or resubstitution, for such person and in such person's name, place and stead, in any and all capacities, to sign on such person's behalf, individually and in each capacity stated below, any and all amendments, including post-effective amendments to this registration statement and to sign any and all additional registration statements relating to the same offering of securities as this registration statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name and Signatures Title Date ------------------- ----- ---- /s/ Clifford M. Sobel President and Chairman May 18, 1999 ___________________________________________ of the Board Clifford M. Sobel /s/ Howard S. Balter Chief Executive Officer May 18, 1999 ___________________________________________ and Director Howard S. Balter /s/ Ilan M. Slasky Chief Financial Officer May 18, 1999 ___________________________________________ and Chief Accounting Ilan M. Slasky Officer /s/ Joyce J. Mason Director May 18, 1999 ___________________________________________ Joyce J. Mason /s/ Howard S. Jonas Director May 18, 1999 ___________________________________________ Howard S. Jonas /s/ Hal Brecher Director May 18, 1999 ___________________________________________ Hal Brecher /s/ James A. Courter Director May 18, 1999 ___________________________________________ James A. Courter
INDEX OF EXHIBITS
Sequentially Exhibit Numbered Number Description of Exhibit Page ------- ---------------------- ------------ 1.1* Form of Underwriting Agreement. 3.1 Certificate of incorporation, as amended. 3.2 Bylaws. 4.1* Specimen Common Stock Certificate of the Registrant. 5.1* Form of Opinion of Morrison & Foerster LLP. 10.1 Employment Agreement, dated May 1, 1997, by and between Clifford M. Sobel and IDT Corporation. 10.2 Amendment to Employment Agreement between IDT Corporation and Clifford M. Sobel, dated as of May 11, 1999, by and between Clifford M. Sobel, IDT Corporation and the Registrant. 10.3# Bundling and Distribution Services Agreement, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.4 General License Terms & Conditions, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.5# Trademark License Agreement, dated as of January 31, 1999, by and between Netscape Communications Corporation and the Registrant. 10.6 Internet/Telecommunications Assignment Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.7 Joint Marketing Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.8 IDT Services Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.9 Net2Phone Services Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.10 Assignment Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.11 Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.12 Separation Agreement, dated as of May 7, 1999, by and between IDT Corporation and the Registrant. 10.13 Lease Agreement, dated as of March 1, 1999, by and between 171-173 Main Street Corporation and the Registrant. 10.14 Lease Agreement, dated as of March 1, 1999, by and between 294-298 State Street Corporation and the Registrant. 10.15* The Registrant's 1999 Stock Option and Incentive Plan. 10.16 Series A Subscription Agreement, dated as of May 13, 1999, by and between the Investors listed therein and the Registrant. 10.17 Series A Preferred Shareholder Registration Rights Agreement, dated as of May 13, 1999, by and between the Investors listed therein and the Registrant. 10.18 Form of Warrant to Purchase Common Stock. 10.19 Promissory Note of Registrant to IDT Corporation, dated as of May 12, 1999. 23.1 Consent of Ernst & Young LLP. 23.2* Consent of Morrison & Foerster LLP (incorporated by reference into Exhibit 5.1). 24.1 Power of Attorney (set forth on the signature page to this registration statement). 27.1 Financial Data Schedule. 99.1 Consent of Director Nominee of Gary Reischel, dated May 17, 1999. 99.2 Consent of Director Nominee of David Greenblatt, dated May 17, 1999.
Sequentially Exhibit Numbered Number Description of Exhibit Page ------- ---------------------- ------------ 99.3 Consent of Director Nominee of Ilan Slasky, dated May 17, 1999. 99.4 Consent of Director Nominee of Michael Fischberger, dated May 17, 1999.
- -------- * To be filed by amendment. # Confidential treatment has been requested with respect to certain portions of the Exhibit. Omitted portions will be filed separately with the Securities and Exchange Commission. 2 EX-3.1 2 OUR CERTIFICATE OF INCORPORATION, AS AMENDED EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NET2PHONE, INC. NET2PHONE, INC., a Delaware corporation, the original Certificate of Incorporation of which was filed with the Secretary of State of Delaware on October 10, 1997, HEREBY CERTIFIES that this Amended and Restated Certificate of Incorporation, restating, integrating and amending its Certificate of Incorporation and reclassifying its capital stock as described in Article FOURTH below, was duly adopted in accordance with Paragraphs 228, 242 and 245 of the General Corporation Law of the State of Delaware. ARTICLE FIRST: The name of the Corporation is Net2Phone, Inc. (the "Corporation"). ARTICLE SECOND: The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Corporation. ARTICLE THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware (the "GCL"). ARTICLE FOURTH: The aggregate number of shares of all classes of capital stock which the Corporation shall have the authority to issue is one hundred and twenty million (120,000,000) shares, consisting of (a) 95,000,000 shares of common stock, par value $.01 per share ("Common Stock"), (b) 15,000,000 shares of Class A common stock, par value $.01 per share (the "Class A Stock" and, together with the Common Stock, the "Common Shares"), and (c) 10,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). 1. Designation of Series and Number of Authorized Shares ----------------------------------------------------- Preferred Stock. 3,150,000 of the authorized shares of Preferred Stock are - --------------- hereby designated "Series A Preferred Stock" (the "Series A Preferred"). The rights, preferences, restrictions and other matters relating to the Series A Preferred are as follows: (a) Ranking. The Series A Preferred shall, with respect to ------- dividends and rights upon liquidation, dissolution or winding up, whether voluntary or involuntary, have priority over the Common Shares of the Corporation. (b) Dividends. --------- (1) The holders of outstanding shares of Series A Preferred shall be entitled to receive a non-cumulative cash dividend at an annual rate equal to 8% of the Original Series A Issue Price (as defined in Paragraph (e)(2)), if, as and when declared by the Board of Directors out of the assets of the Corporation legally available therefor. Dividends on the Series A Preferred, if any, shall be payable to holders of record as they appear on the stock register of the Corporation on such record dates as are fixed by the Corporation. In the event that the Corporation declares or pays any dividends upon the Common Shares (whether payable in cash, securities or other property) other than dividends payable solely in shares of Common Shares, the Corporation shall also declare and pay to the holders of the Series A Preferred at the same time that it declares and pays such dividends to the holders of Common Shares, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series A Preferred had all of the outstanding Series A Preferred been converted immediately prior to the record date of such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. Any dividends paid with respect to shares of Series A Preferred pursuant to this Paragraph (b)(1) shall be paid pro rata to the holders entitled thereto. Notwithstanding the foregoing, no dividends on Common Shares shall be paid until such time as all accrued dividends on the Series A Preferred are paid in full. (2) So long as any Series A Preferred remains outstanding, without the prior written consent of holders owning in the aggregate 66-2/3% or more of the outstanding shares of Series A Preferred, the Corporation shall not directly or indirectly redeem, purchase or otherwise acquire any other stock of the Corporation that ranks junior or pari passu with the Series A Preferred ("Junior Stock"), nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Stock. The provisions of this Paragraph (b)(2) shall not, however, apply to (i) the acquisition of shares of any Junior Stock solely in exchange for shares of any other Junior Stock, (ii) the payment of cash dividends on the Common Shares to the extent that dividends are paid on the Series A Preferred as provided above and equivalent dividends are paid on the Series A Preferred at the same time (determined on an as-if-converted basis), or (iii) any repurchase at cost of any shares of the Corporation's capital stock from former employees, directors or consultants in connection with termination of employment or service as a director or consultant pursuant to contractual repurchase rights or that is otherwise approved by the Corporation's Board of Directors, so long as the total amount applied to such repurchases does not exceed $100,000 during any twelve- month period. (c) Liquidation Preference. ---------------------- (1) Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, the holders of Series A Preferred shall be entitled to be paid out of the assets of the Corporation with respect to each share of Series A Preferred an amount equal to the sum of (i) the Original Series A Issue Price plus (ii) an amount equal to 8% of the Original Series A Issue Price (compounded on an annual basis from date of issuance of the Series A Preferred) plus (iii) any declared but unpaid dividends thereon (such sum, the "Series A Liquidation Value"). If, upon any liquidation, dissolution or winding up, the assets of the Corporation shall be insufficient to make payment in full to all holders of Series A Preferred of the Series A Liquidation Value, then such assets shall be distributed among the holders of Series A Preferred at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. 2 (2) After payment in full of the Series A Liquidation Value, the remaining assets of the Corporation legally available for distribution, if any, shall be distributed to the holders of any Junior Stock entitled to a preference over the Common Shares and, thereafter, to the holders of Common Shares. The holders of Series A Preferred shall be entitled to participate in distributions to holders of the Common Shares such that, giving effect to all distributions pursuant to Paragraph (c)(1) and all exercises of options and conversions of any Convertible Securities (as defined in Paragraph (e)(3)(ii)) effected on or prior to the date on which distributions are made to holders of Common Stock, the holders of Series A Preferred receive aggregate distributions equal to the greater of the Series A Liquidation Value or the amounts that such holders would have received if the Series A Preferred had been converted into Common Stock immediately prior to such liquidation, dissolution or winding up of the Corporation. (3) The following events shall be considered a liquidation for purposes of Paragraph (c)(1): (i) any merger, consolidation, business combination, reorganization or recapitalization of the Corporation in which the stockholders of the Corporation immediately prior to such transaction own capital stock representing less than fifty percent (50%) of the Corporation's voting power immediately after such transaction (an "Acquisition"); (ii) a sale of all or substantially all of the assets of the Corporation (an "Asset Transfer"); or (iii) in any of such events in subsection (i) or (ii), if the consideration received by the Corporation is other than cash, its value will be deemed its fair market value as determined in good faith by the Board of Directors. Any securities shall be valued as follows: (A) Securities not subject to investment letter of other similar restrictions on free marketability covered by (B) below: (1) If traded on a securities exchange or through the Nasdaq National Market, the value shall be deemed to be the average of the closing prices of the securities on such quotation system over the thirty (30) day period ending three (3) days prior to the closing; (2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the closing; and (3) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Board of Directors and the holders of at least a majority of the voting power of all then outstanding shares of Series A Preferred. 3 (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a shareholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in Paragraphs (A)(1), (2) or (3) to reflect the approximate fair market value thereof, as mutually determined by the Board of Directors and the holders of at least a majority of the voting power of all then outstanding shares of such Series A Preferred. (4) Notwithstanding and in lieu of the foregoing, in the event of any liquidation event in which the aggregate Transaction Value is greater than $240 Million, the holders of shares of Series A Preferred shall be entitled to receive their pro rata share of the assets or proceeds, as the case may be, as if they had converted their shares of Series A Preferred into Common Stock immediately prior to such transaction. For the purposes of this liquidation preference, "Transaction Value" shall be deemed to be the amount of consideration actually received (i) by the shareholders of the Corporation with respect to such transaction, it being understood that such aggregate consideration shall not be deemed to include amounts received by the holders of options, warrants and Convertible Securities to the extent such options, warrants and Convertible Securities are not exercisable at the time of or upon consummation of any such transaction, the principal amount of any indebtedness for borrowed money set forth on the consolidated balance sheet of the Corporation and its subsidiaries as of the last fiscal quarter prior to the consummation of such transaction, or any amounts due as a results of an "earn out" or (ii) by the Corporation with respect to such transaction. (d) Voting Rights. ------------- (1) Except as otherwise provided herein under "Protective Provisions" and "Board Representation," or as provided by law, the holders of the shares of the Series A Preferred shall vote with the Common Shares of the Corporation (and not as a separate class) at any annual or special meeting of stockholders of the Corporation, and may act by written consent in the same manner as the Common Shares, in either case upon the following basis: each holder of shares of Series A Preferred shall be entitled to such number of votes as shall be equal to the whole number of shares of Class A Stock into which such holder's aggregate number of shares of Series A Preferred are convertible pursuant to Paragraph (e) below as of the close of business on the record date fixed for such meeting or the effective date of such written consent. (2) Notwithstanding any other provision of this Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least 66-2/3 percent of the outstanding shares of Common Shares of the Corporation, voting as a single class, entitled to vote shall be required to approve: (1) any sale, lease or exchange of all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises; (2) any action taken to dissolve the Corporation; (3) any merger or consolidation of the Corporation with any other corporation, joint-stock or other association, trust or enterprise in which the holders of the Corporation's equity securities immediately prior to the closing of such transaction become the beneficial owners of 50% or less of the voting equity securities of the surviving entity; (4) any change in authorized capital; (5) the removal of a director other than for 4 cause; or (6) the amendment, change, elimination or repeal of Article Twelfth of this Certificate of Incorporation. (e) Conversion Rights. ----------------- (1) Optional Conversion. Subject to and in compliance ------------------- with the provisions of this Paragraph (e), any shares of Series A Preferred may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Class A Stock. The number of shares of Class A Stock to which a holder of Series A Preferred shall be entitled upon conversion shall be the product obtained by multiplying the applicable "Conversion Rate" then in effect (determined as provided in Paragraph (e)(2)) by the number of shares of Series A Preferred being converted. (2) Conversion Rate. The conversion rate in effect at --------------- any time for conversion of the Series A Preferred (the "Conversion Rate") shall be the quotient obtained by dividing the Original Series A Issue Price by the "Conversion Price" calculated as provided in Paragraph (e)(3). The "Original Series A Issue Price" shall be $10.00, as appropriately adjusted for any future stock splits, stock combinations, stock dividends or similar transactions affecting the Series A Preferred. (3) Conversion Price. The conversion price for the ---------------- Series A Preferred (the "Series A Conversion Price") shall initially be the Original Series A Issue Price. Such initial Series A Conversion Price shall be adjusted from time to time in accordance with this Paragraph (e). All references to the Series A Conversion Price herein shall mean the Series A Conversion Price as so adjusted. If and whenever on or after the first date of issuance of Series A Preferred (the "Original Issue Date") the Corporation makes, or fixes a record date, or in accordance with this Paragraph (e)(3) is deemed to have issued or sold, any shares of its Common Stock (other than pursuant to a Permitted Issuance) for a consideration per share less than the applicable Conversion Price, then in each such event the Series A Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Series A Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Shares Deemed Outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is the total number of shares of Common Shares Deemed Outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Conversion Price shall be adjusted pursuant to this Paragraph (e)(3) to reflect the actual payment of such dividend or distribution. For purposes of determining any adjusted Conversion Price, the following shall be applicable: (i) Issuance of Rights or Options. If the ----------------------------- Corporation in any manner grants or sells any options and the price per share for which Common Shares are issuable upon the exercise of such Options, or upon conversion or exchange of any 5 Convertible Securities issuable upon exercise of such Options, is less than the applicable Conversion Price in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of Common Shares are issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share, without regard to whether the option was exercisable at the time of the grant. For purposes of this paragraph, the "price per share for which Common Shares are issuable" shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the applicable Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Shares are actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the ---------------------------------- Corporation in any manner issues or sells any other series of convertible preferred stock, warrants or stock or other securities convertible into or exchangeable for Common Stock (the "Convertible Securities") and the price per share for which Common Shares are issuable upon conversion or exchange thereof is less than the applicable Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Shares are issuable" shall be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (B) the total maximum number of Common Shares are issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the applicable Conversion Price shall be made when Common Shares are actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of such Conversion Price had been or are to be made pursuant to other provisions of this Paragraph (e), no further adjustment of such Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Price. ------------------------------------------ If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or the rate at which any 6 Convertible Securities are convertible into or exchangeable for Common Shares changes at any time, each Conversion Price in effect at the time of such change shall be immediately adjusted to the applicable Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. (iv) Treatment of Expired Options and Unexercised -------------------------------------------- Convertible Securities. Upon the expiration of any Option or the termination of - ---------------------- any right to convert or exchange any Convertible Security without the exercise of any such Option or right, each Conversion Price then in effect hereunder shall be adjusted immediately to the applicable Conversion Price which would have been in effect at the time such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. (v) Calculation of Consideration Received. If any ------------------------------------ Common Shares, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor (net of discounts, commissions and related expenses). If any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration. If any Common Shares, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Shares, Option or Convertible Security, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Series A Preferred. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Series A Preferred. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) Treasury Shares. The number of shares of --------------- Common Shares outstanding at any given time shall not include shares owned or held by or for the account of the Corporation or any of its subsidiaries, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Shares. (4) Adjustment for Stock Splits and Combinations. -------------------------------------------- If the Corporation shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Shares (i.e., a stock split), the Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding Common Shares into a smaller number of shares (i.e., a reverse split), the 7 Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Paragraph (e)(4) shall become effective at the close of business on the date the subdivision or combination becomes effective. (5) Adjustment for Common Stock Dividends and ----------------------------------------- Distributions. If the Corporation at any time or from time to time after the - ------------- Original Issue Date makes, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable in additional Common Shares, in each such event the Conversion Prices then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (1) the numerator of which is the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which is the total number of Common Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, -------- ------- that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Prices shall be adjusted pursuant to this Paragraph (e)(5) to reflect the actual payment of such dividend or distribution. (6) Adjustments for Other Dividends and Distributions. ------------------------------------------------- If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Shares entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Series A Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation which they would have received had their Series A Preferred been converted into Class A Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period subject to all other adjustments called for during such period under this Paragraph (e) with respect to the rights of the holders of the Series A Preferred or with respect to such other securities by their terms. (7) Adjustment for Reclassification, Exchange and --------------------------------------------- Substitution. If at any time or from time to time after the Original Issue Date, - ------------ the Class A Stock issuable upon the conversion of the Series A Preferred is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend or a reorganization, merger or consolidation provided for elsewhere in this Paragraph (e)), in any such event each holder of Series A Preferred shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable in connection with such recapitalization, reclassification or other change with respect to the maximum number of shares of Class A Stock into which such shares of Series A Preferred could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further 8 adjustments as provided herein or with respect to such other securities or property by the terms thereof. (8) Reorganization, Mergers or Consolidations. If at any ----------------------------------------- time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Shares or a merger or consolidation of the Corporation affecting the Common Shares (other than a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for in Paragraph 3(c)(3) or elsewhere in this Paragraph (e)), as a part of such capital reorganization, merger or consolidation, provision shall be made so that the holders of the Series A Preferred shall thereafter be entitled to receive upon conversion thereof the number of shares of stock or other securities or property of the Corporation to which a holder of the maximum number of Common Shares deliverable upon conversion would have been entitled in connection with such capital reorganization, merger or consolidation, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Paragraph (e) with respect to the rights of the holders of Series A Preferred after the capital reorganization to the end that the provisions of this Paragraph (e) (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of the Series A Preferred) shall be applicable after that event and be as nearly equivalent as practicable. (9) Certificate of Adjustment. In each case of an ------------------------- adjustment or readjustment of the Conversion Price or the number of Common Shares or other securities issuable upon conversion of the Series A Preferred, the Corporation, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series A Preferred at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (1) the consideration received or deemed to be received by the Corporation for any additional Common Shares issued or sold or deemed to have been issued or sold, (2) the applicable Conversion Prices in effect before and after such adjustment, (3) the number of additional Common Shares issued or sold or deemed to have been issued or sold, and (4) the type and amount, if any, of other property which at the time would be received upon conversion of the Series A Preferred. (10) Notices of Record Date. Upon (i) any taking by the ----------------------- Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition (as defined in Paragraph (c)(3)) or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other corporation, any Asset Transfer (as defined in Paragraph (c)(3)), or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred at least twenty (20) days prior to the record date specified therein a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, 9 liquidation or winding up is expected to become effective, and (3) the date, if any, that is to be fixed for determining the holders of record of Common Shares (or other securities) that shall be entitled to exchange their Common Shares (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, asset transfer, dissolution, liquidation or winding up. (11) Automatic Conversion. Each share of Series A -------------------- Preferred shall automatically be converted into shares of Class A Stock, based on the then-effective applicable Conversion Price, immediately upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Class A Stock for the account of the Corporation (an "IPO") in which (i) the valuation of the Corporation on a fully-diluted basis including options reserved under option plans at the time of such IPO, calculated based on the per share offering price of the IPO (excluding proceeds from the IPO), is equal to or greater than $150,000,000, and (ii) the gross cash proceeds to the Corporation (before underwriting discounts, commissions and fees) from such IPO are at least $30,000,000 (a "Qualifying Public Offering"). Upon such automatic conversion, all declared but unpaid dividends, if any, shall be paid in accordance with Paragraph (e)(12). (12) Mechanics of Conversion. ----------------------- (i) Optional Conversion. Each holder of Series A ------------------- Preferred who desires to convert the same into shares of Class A Stock pursuant to this Paragraph (e) shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series A Preferred, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series A Preferred being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Class A Stock to which such holder is entitled and shall promptly pay in cash or, to the extent sufficient funds are not then legally available therefor, in Class A Stock (at the Class A Stock's fair market value determined by the Board of Directors as of the date of such conversion) or a combination of cash and Class A Stock, any declared but unpaid dividends on the shares of Series A Preferred being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificate representing the shares of Series A Preferred to be converted, and the person entitled to receive the shares of Class A Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Class A Stock on such date. (ii) Automatic Conversion. Upon the occurrence of -------------------- the event specified in Paragraph (e)(11) above, the outstanding shares of Series A Preferred shall be converted into Class A Stock automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, -------- ------- that the Corporation shall not be obligated to issue certificates evidencing the shares of Class A Stock issuable upon such conversion unless the certificates evidencing such shares of Series A Preferred are either delivered to the Corporation or its transfer agent as provided 10 below, or the holder certifies to the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon surrender by any holder of the certificates formerly representing shares of Series A Preferred at the office of the Corporation or any transfer agent for the Series A Preferred, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Class A Stock into which the shares of Series A Preferred surrendered were Series A on the date on which such automatic conversion occurred, and the Corporation shall promptly pay in cash or, to the extent sufficient funds are not legally available therefor, in Class A Stock (at the Class A Stock's fair market value determined by the Board as of the date of such conversion) or a combination of cash and Class A Stock, all declared but unpaid dividends on the shares of Series A Preferred being converted. Until surrendered as provided above, each certificate formerly representing shares of Series A Preferred shall be deemed for all corporate purposes to represent the number of shares of Class A Stock resulting from such automatic conversion. (iii) Fractional Shares. No fractional shares of ----------------- Class A Stock shall be issued upon conversion of Series A Preferred. All shares of Class A Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred by a holder thereof shall be aggregated for purposes of determination whether the conversion would result in the issuance of any fractional shares. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Class A Stock's fair market value (as determined by the Board) on the date of conversion. (13) Exempt Transactions. Notwithstanding the foregoing, ------------------- no adjustment to the Conversion Price pursuant to this Paragraph (e) shall be made in the event that the Corporation issues additional shares of Common Stock or options, warrants, Convertible Securities or other rights to acquire shares of Common Stock (i) an amount of shares of Common Stock not exceeding the Employee Stock issued to employees, officers or directors of, and consultants or vendors to, the Corporation, to the extent approved by the Board of Directors (including the Series A representatives) (ii) any Warrant issued to any Series A Investor, including any Warrants issued to the placement agent in connection with the investment by the Series A Investors (collectively, the "Investor Warrants") and shares of Common Stock issued upon exercise or exchange of the Investor Warrants, (iii) shares of Common Stock issued or issuable upon conversion of the Series A Preferred, or (iv) shares of Common Stock issued in a Qualifying Public Offering. (14) Reservation of Stock Issuable Upon Conversion. The --------------------------------------------- Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Class A Stock, solely for the purpose of effecting the conversion of the shares of Series A Preferred, such number of its shares of Class A Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred; and if at any time the number of authorized but unissued shares of Class A Stock shall not be sufficient to effect the 11 conversion of all then outstanding shares of the Series A Preferred, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Class A Stock to such number of shares as shall be sufficient for such purpose. (15) Notices. Any notice required or permitted by this ------- Paragraph (e) or any other provision herein to be given to a holder of Series A Preferred or to the Corporation shall be in writing and be deemed given upon the earlier of actual receipt or three (3) days after the same has been deposited in the United States mail, by certified or registered mail, return receipt requested, postage prepaid, and addressed (i) to each holder of record at the address of such holder appearing on the books of the Corporation, or (ii) to the Corporation at 171 Main Street, Hackensack, New Jersey 07601; Attn.: Chief Financial Officer; (iii) to the Corporation or any holder, at any other address for the giving of notice specified in a written notice given to the other. (16) Payment of Taxes. The Corporation will pay all ---------------- taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of Common Shares upon conversion of shares of Series A Preferred, including without limitation any tax or other charge imposed in connection with any transfer involved in the issue and delivery of Common Shares in a name other than that in which the shares of Series A Preferred so converted were registered. (17) Certain Definitions. ------------------- "Common Stock Deemed Outstanding" means, at any given time, the sum of the ------------------------------- number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock issuable pursuant to Options and Convertible Securities outstanding on the date of issuance of the Series A Preferred to the extent that such Options and/or Convertible Securities remain outstanding as of the date of determination, plus, without duplication, the number of shares of Common Stock deemed to have been issued pursuant to subparagraphs (e)(3)(i) and (e)(3)(ii) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Employee Stock" means up to 1,680,000 shares of Common Stock issuable to -------------- employees, directors or consultants of the Corporation and its subsidiaries as determined by the Corporation's Board of Directors with vesting and buy-back restrictions approved by the Board, pursuant to the Corporation's 1999 Stock Option and Incentive Plan, adopted April 27, 1999. "Options" means any rights, warrants or options to subscribe for or ------- purchase Common Stock or Convertible Securities. (f) Redemption. The Corporation shall be obligated to redeem ---------- the Series A Preferred as follows: (1) The holders of at least a majority of the then outstanding shares of Series A Preferred, voting together as a separate class, may require the Corporation, to the extent it may lawfully do so, to redeem the Series A Preferred in annual installments beginning on the seventh anniversary of the Original Issue Date, and ending on the date three (3) 12 years from such first redemption date (each a "Redemption Date"). The holders of at least a majority of the outstanding shares of Series A Preferred shall notify the Corporation of their election by delivering to the Corporation written notice of such election at least 30 days prior to the applicable Redemption Date. The Corporation shall effect such redemptions on the applicable Redemption Date by paying in cash in exchange for the shares of Series A Preferred to be redeemed a sum equal to the Original Series A Issue Price per share of Series A Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) plus declared and unpaid dividends with respect to such shares. The total amount to be paid for the Series A Preferred is hereinafter referred to as the "Redemption Price." The number of shares of Series A Preferred that the Corporation shall be required to redeem on any one Redemption Date shall be equal to the amount determined by dividing (A) the aggregate number of shares of Series A Preferred outstanding immediately prior to the Redemption Date by (B) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). Shares subject to redemption pursuant to this Paragraph (e)(a) shall be redeemed from each holder of Series A Preferred on a pro rata basis. (2) At least thirty (30) days but no more than sixty (60) days prior to the first Redemption Date, the Corporation shall send a notice (a "Redemption Notice") to all holders of Series A Preferred to be redeemed setting forth (A) the Redemption Price for the shares to be redeemed; and (B) the place at which such holders may obtain payment of the Redemption Price upon surrender of their share certificates. If the Corporation does not have sufficient funds legally available to redeem all shares to be redeemed at the Redemption Date (including, if applicable, those to be redeemed at the option of the Corporation), then it shall redeem such shares pro rata (based on the portion of the aggregate Redemption Price payable to them) to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. (3) On or prior to the Redemption Date, the Corporation shall deposit the Redemption Price of all shares to be redeemed with a bank or trust company having aggregate capital and surplus in excess of $100,000,000, as a trust fund, with irrevocable instructions and authority to the bank or trust company to pay, on and after such Redemption Date, the Redemption Price of the shares to their respective holders upon the surrender of their share certificates. Any moneys deposited by the Corporation pursuant to this Paragraph (f) for the redemption of shares thereafter converted into shares of Common Stock pursuant to Paragraph (e) hereof no later than the fifth (5th) day preceding the Redemption Date shall be returned to the Corporation forthwith upon such conversion. The balance of any funds deposited by the Corporation pursuant to this Paragraph (f) remaining unclaimed at the expiration of one (1) year following such Redemption Date shall be returned to the Corporation promptly upon its written request, and the Corporation shall have no obligation to pay such amounts to any holder of any shares of Series A Preferred. (4) On or after such Redemption Date, each holder of shares of Series A Preferred to be redeemed shall surrender such holder's certificates representing such shares to the Corporation in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certified shall be canceled. In the event less than all the shares represented by such certificates 13 are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such Redemption Date, unless there shall have been a default in payment of the Redemption Price or the Corporation is unable to pay the Redemption Price due to not having sufficient legally available funds, all rights of the holder of such shares as holder of Series A Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificates), shall cease and terminate with respect to such shares; provided -------- that in the event that shares of Series A Preferred are not redeemed due to a default in payment by the Corporation or because the Corporation does not have sufficient legally available funds, such shares of Series A Preferred shall remain outstanding and shall be entitled to all of the rights and preferences provided herein. (5) In the event of a call for redemption of any shares of Series A Preferred, the Conversion Rights (as defined in Paragraph (e)) for such Series A Preferred shall terminate as to the shares designated for redemption at the close of business on the fifth (5th) day preceding the Redemption Date, unless default is made in payment of the Redemption Price. (6) No share or shares of Series A Preferred acquired by the Corporation by reason of redemption, repurchase, conversion or otherwise shall be reissued, and in addition, the Corporation's Certificate of Incorporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized stock. (g) Protective Provisions. --------------------- So long as any shares of the Series A Preferred are outstanding, in addition to any other vote or consent required herein or by law, the affirmative vote or consent of holders representing 66-2/3% or more of the Series A Preferred, voting as a separate class, shall be required for any action which (i) alters or changes the rights, preferences or privileges of the Series A Preferred, (ii) increases or decreases the authorized number of shares of Series A Preferred or (iii) creates any new class of equity security having rights and preference senior to or on parity with the Series A Preferred with respect to voting, dividends, liquidation preference or other rights, or senior to the Common Shares with respect to liquidation preference, or (iv) results in a liquidation, including any Acquisition or Asset Transfer (each as defined in Paragraph (c)(3)), or any other consolidation or merger involving the Corporation, or any reclassification or other change of any stock, or other recapitalization, or any dissolution or winding up of the Corporation, or any agreement by the Corporation or its stockholders regarding any of the foregoing. The foregoing provisions shall not restrict the issuance of shares of Series A Preferred up to the maximum amount specified in Paragraph 1 above. (h) Board Representation with Respect to Series A Preferred. ------------------------------------------------------- (1) Board Composition. Following issuance of the Series ----------------- A Preferred, the Board shall consist of between five and eleven members, two of which shall be elected by the Series A Preferred Stock voting as a separate class (the "Series A Directors"). At least one director, if the number of directors is five or less, and at least two directors, if the number of directors is greater than six, shall be an outside director mutually acceptable to the other Board members. 14 (2) Board Meetings. Board of Directors meetings shall be -------------- held quarterly until such time as the Board determines that quarterly meetings are not required or until a majority of the Series A Preferred originally issued is no longer outstanding. The Corporation will reimburse the Series A Directors for the customary and reasonable expenses in attending Board meetings. (3) Committees. The Board of Directors will establish a ---------- Compensation Committee to recommend management compensation, the Corporation benefit plan, and general options plans for approval by the Board of Directors. The Board of Directors will also establish an Audit Committee. One Series A Director may be a member of the Compensation Committee and one Series A Director may be a member of the Audit Committee. (4) Right to Elect Directors. ------------------------ (i) For so long as the Investors who are affiliates of Softbank Technology Ventures IV, L.P. (the "Softbank Investors") hold ------------------ a majority of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, the Softbank Investors will be entitled to nominate, and the Corporation and the directors of the Corporation shall use their best efforts to secure the election of, a person to serve as a Series A Director (the "Softbank -------- Director"). The directors of the Corporation will assign the Softbank -------- Director to a particular class in the Corporation's classified board and the Softbank Director's term will expire in accordance with such class. The Softbank Investors, as appropriate, will have the right to nominate a successor director upon the expiration of the term. The Softbank Director shall have the right to serve on the Corporation's Compensation Committee or Audit Committee. Once the Softbank Investors no longer hold any of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements, they shall use their best efforts to secure the immediate resignation of the Softbank Director. At any time from the Closing until three business days before such time as the Company prints a preliminary prospectus or "red herring" in connection with a Qualifying Public Offering, the Softbank Investors may in lieu of electing such Softbank Director select a second representative of the Softbank Investors to attend all meetings of the Company's board in a nonvoting observer capacity pursuant to Section (h)(5) hereof. Such right of the Softbank Investors shall be without prejudice to the right of the Softbank Investors to nominate such Softbank Director at any time thereafter pursuant to this Section. (ii) For so long GE Capital Equity Investments Inc. ("GE Capital"), or its affiliates or beneficial owners (collectively, ---------- the "GE Investors") hold a majority of the Series A Preferred originally ------------ purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, the GE Investors will be entitled to nominate, and the Corporation and the directors of the Corporation shall use their best efforts to secure the election of, a person to serve as a Series A Director (the "GE Director"). The directors of the Corporation will ------------ assign the GE Director to a particular class in the Corporation's classified board and the GE Director's term will expire in accordance with such class. The GE Investors, as appropriate, will have the right to nominate a successor director 15 upon the expiration of the term. The GE Director shall have the right to serve on either the Corporation's Compensation Committee or Audit Committee; provided, however, that such right shall only apply to the -------- ------- committee upon which the Softbank Director shall choose not to serve. Once the GE Investors no longer hold any of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements, they shall use their best efforts to secure the immediate resignation of the GE Director. At any time from the Closing until three business days before such time as the Company prints a preliminary prospectus or "red herring" in connection with a Qualifying Public Offering, the GE Investors may in lieu of electing such GE Director select a second representative of the GE Investors to attend all meetings of the Company's board in a nonvoting observer capacity pursuant to Section (h)(5) hereof. Such right of the GE Investors shall be without prejudice to the right of the GE Investors to nominate such GE Director at any time thereafter pursuant to this Section. (5) Right to Observer. In addition to the Softbank ----------------- Investors' and GE Investors' representation on the Corporation's board of directors, from the Closing until the later to occur of (i) such time as the Softbank Investors, GE Investors or the AOL Investors, as the case may be, no longer hold a majority of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, or (ii) the consummation of a Qualifying Public Offering, a representative of the Softbank Investors, the GE Investors and the AOL Investors may attend all meetings of the Corporation's board of directors in a nonvoting observer capacity and the Corporation shall notify such observer of the date, place, and time of such meetings; provided, -------- however, the Softbank Investors or GE Investors may each elect to have a second - ------- observer pursuant to this Section (h)(5) in lieu of their respective directors as provided in Section (h)(4) hereof. (6) Expenses. The Corporation shall reimburse each -------- director of the Corporation, and such persons who attend board meetings pursuant to Paragraph (h)(5) for such director's or person's customary and reasonable expenses in attending board meetings. 2. Preferred Stock - Other Classes Subject to the other provisions of this Amended and Restated Certificate of Incorporation, including but not limited to the provisions of Section (g) of Article Fourth, The Board of Directors is hereby expressly authorized, by resolution or resolutions, to provide, out of the unissued and undesignated shares of Preferred Stock, for one or more series of Preferred Stock, in addition to the Series A Preferred. Before any shares of any such series are issued, the Board of Directors shall fix, and hereby is expressly empowered to fix, by resolution or resolutions, the following provisions of the shares thereof: (a) the designation of such series, the number of shares to constitute such series, and the stated value thereof if different from the par value thereof; (b) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; 16 (c) the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of this class; (d) whether the shares of such series shall be subject to redemption by the Corporation, and, if so, the terms and conditions of such redemption, including the manner of selecting shares for redemption if less than all shares of such series are to be redeemed, the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (e) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation, and whether such rights shall be in preference to, or in another relation to, the comparable rights of any other class or classes or series of stock; (f) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; (g) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other series of this class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (h) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payments of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Shares or shares of stock of any other class or any other series of this class; (i) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of this class or of any other class; and (j) any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations of restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall accrue and/or be cumulative. 17 3. Common Stock and Class A Stock ------------------------------ (a) General. Except as hereinafter expressly set forth in ------- Paragraph(b), and subject to the rights and preferences of the holders of Preferred Stock at any time outstanding, the Class A Stock and the Common Stock, both of which are classes of common stock, shall have the same rights and privileges and shall rank equally, share ratably and be identical in respects as to all matters, including rights in liquidation. (b) Voting Rights. Except as otherwise expressly provided by ------------- law, and subject to any voting rights provided to holders of Preferred Stock at any time outstanding, the Common Shares have exclusive voting rights on all matters requiring a vote of the Corporation. The holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the stockholders of the Corporation. The holders of Class A Stock shall be entitled to two votes per share on all matters to be voted on by the stockholders of the Corporation. Except as otherwise provided in this Amended and Restated Certificate of Incorporation or as required by law, and subject to any voting rights provided to holders of Preferred Stock at any time outstanding, the holders of shares of Class A Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Dividends and Distributions. Subject to the rights of the --------------------------- holders of Preferred Stock, and subject to any other provisions of this Amended and Restated Certificate of Incorporation, as it may be amended from time to time, holders of Class A Stock and holders of Common Stock shall be entitled to receive such dividends and other distributions in cash, in property or in shares of the Corporation as may be declared thereon by the Board of Directors from time to time out of assets or funds of the Corporation legally available therefor; provided, however, that no cash, property or share dividend or -------- ------- distribution may be declared or paid on the outstanding shares of either the Class A Stock or the Common Stock unless an identical per share dividend or distribution is simultaneously declared and paid on the outstanding shares of the other such class of common stock; provided, further, however, that a -------- ------- dividend of shares may be declared and paid in Class A Stock to holders of Class A Stock and in Common Stock to holders of Common Stock if the number of shares paid per share to holders of Class A Stock and to holders of Common Stock shall be the same. If the Corporation shall in any manner subdivide, combine or reclassify the outstanding shares of Class A Stock or Common Stock, the outstanding shares of the other such class of common stock shall be subdivided, combined or reclassified proportionally in the same manner and on the same basis as the outstanding shares of Class A Stock or Common Stock, as the case may be, have been subdivided, combined or reclassified. (d) Optional Conversion. ------------------- The shares of Common Stock are not convertible into or exchangeable for shares of Class A Stock or any other shares or securities of the Corporation. 18 Each share of Class A Stock may be converted, at any time and at the option of the holder thereof, into one fully paid and nonassessable share of Common Stock. (e) Mandatory Conversion. -------------------- (1) Upon a Transfer by a Holder, other than to a "Permitted Transferee" of such Holder, shares of Class A Stock so transferred shall, effective on the date of such Transfer, be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock, and the stock certificates formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock. (2) For purposes of this Paragraph (e)(2), a "Permitted Transferee" of a Holder may mean, any of the following: (i) In the case of any Holder, the Corporation or any one or more of its directly or indirectly wholly owned subsidiaries, or one or more of its affiliates or beneficial owners, or to any other Holder; (ii) In the case of a Holder who is a natural person: (A) The spouse of such Holder (the "Spouse"), any lineal ancestor of such Holder or of the Spouse, and any person who is a lineal descendant of a grandparent of such Holder or of the Spouse, or a spouse of any such lineal descendant or such lineal ancestor (collectively, the "Family Members"); (B) A trust (including a voting trust) exclusively for the benefit of one or more of (x) such Holder, (y) one or more of his or her Family Members or (z) an organization to which contributions are deductible under 501(c)(3) of the Internal Revenue Code of 1986, as amended, or any successor provision (the "Internal Revenue Code") or for estate or gift tax purpose (a "Charitable Organization"); provided that such trust may include a -------- general or special power of appointment for such Holder or Family Members (a "Trust"); provided, further, that if by reason of any change in the -------- ------- beneficiaries of such Trust, such Trust would not have qualified, at the time of the transfer of Class A Stock to such Trust (for purposes of this sub-paragraph (B), the "Transfer Date"), as a Permitted Transferee, all shares of Class A Stock so transferred to such Trust shall, effective on the date of such change of beneficiary, be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock, and the stock certificates formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; (C) A Charitable Organization established solely by one or more of such Holder or a Family Member; (D) An Individual Retirement Account, as defined in Paragraph 408(a) of the Internal Revenue Code, of which such Holder is a participant or beneficiary, provided that such Holder has the power to direct the investment of funds 19 deposited into such Individual Retirement Account and to control the voting of securities held by such Individual Retirement Account (an "IRA"); (E) A pension, profit sharing, stock bonus or other type of plan or trust of which such Holder is a participant or beneficiary and which satisfies the requirements for qualification under Paragraph 401(k) of the Internal Revenue Code, provided that such Holder has the power to direct the investment of funds deposited into such plan or trust and to control the voting of securities held by such plan or trust (a "Plan"); (F) Any corporation or partnership directly or indirectly controlled, individually or as a group, only by such Holder and/or any of his Permitted Transferees as determined under this clause (ii); provided -------- that if by reason of any change in the direct or indirect control of such corporation or partnership, such corporation or partnership would not have qualified, at the time of the Transfer of Class A Stock to such corporation or partnership, as a Permitted Transferee of such Holder, all shares of Class A Stock so transferred to such corporation or partnership shall, effective on the date of such direct or indirect change in control, be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock, and the stock certificates formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; and (G) The estate, executor, executrix or other personal representative, custodian, administrator or guardian of such Holder. (iii) In the case of a Holder holding the shares of Class A Stock in question as trustee of an IRA, a Plan or a Trust, "Permitted Transferee" means (x) the person who transferred Class A Stock to such IRA, such Plan or such Trust, (y) any Permitted Transferee of any such person determined pursuant to this Paragraph 2(e) and (z) any successor trustee or trustees in such capacity of such IRA, such Plan or such Trust; (iv) In the case of a Holder which is a partnership, "Permitted Transferee" means any other person, directly or indirectly controlling, controlled by or under direct or indirect common control with such partnership, provided that, if by reason of any change in the -------- direct or indirect control of such person, such person would not have qualified, at the time of the Transfer of the Class A Stock to such person, as a Permitted Transferee of such partnership, all shares of Class A Stock so transferred to such person shall, effective on the date of such direct or indirect change in control, be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock, and the stock certificates formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; (v) In the case of a Holder which is a corporation (other than a Charitable Organization) "Permitted Transferee" means any other person directly or indirectly controlling, controlled by or under direct or indirect common control with such corporation; provided that -------- if by reason of any change in the direct or indirect control 20 of such person, such person would not have qualified, at the time of the Transfer of the Class A Stock to such person, as a Permitted Transferee of such corporation, all shares of Class A Stock so transferred to such person shall, effective on the date of such direct or indirect change in control be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock, and the stock certificates formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; and (vi) In the case of a Holder which is the estate of a deceased Holder or who is the executor, executrix or other personal representative, custodian or administrator of such Holder, or guardian of a disabled or adjudicated incompetent Holder or which is the estate of a bankrupt or insolvent Holder, which owns the shares of Class A Stock in question, "Permitted Transferee" means a Permitted Transferee of such deceased, or adjudicated incompetent, disabled, bankrupt or insolvent Holder as otherwise determined pursuant to this Paragraph (e)(2). As used in this Paragraph (e)(2), the term "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the controlled person or entity. As used in this Paragraph (e)(2), the term "Holder" means any holder of Class A Stock or of the proxy to vote shares of Class A Stock. As used in this Paragraph (e)(2), the term "person" shall mean both natural persons and legal entities, unless otherwise specified. The relationship of any person that is derived by or through legal adoption shall be considered a natural relationship. Each joint owner of shares or owner of a community property interest in shares of Class A Stock shall be considered a "Holder" of such shares. A minor for whom shares of Class A Stock are held pursuant to a Uniform Transfer to Minors Act or similar law shall be considered a Holder of such shares. As used in this Paragraph (e)(2), a "Transfer" shall mean any type of transfer of shares of Class A Stock, whether by sale, exchange, gift, operation of law, pledge, or otherwise, and shares of Class A Stock shall refer to either (i) such shares of Class A Stock so transferred, (ii) the power to vote such shares so transferred or (iii) shares of Class A Stock for which the power to vote was so transferred, as the case may be. (3) Notwithstanding anything to the contrary set forth herein, any Holder may pledge the shares of Class A Stock belonging to such Holder to a pledgee pursuant to a bona fide pledge of such shares as collateral security for indebtedness due to the pledgee, provided that such pledgee does not have the power to vote such shares and such shares remain subject to the provisions of this Paragraph. In the event of foreclosure or other similar action by the pledgee, such shares, at midnight on the thirtieth day after delivery of notice by the Corporation to the pledgor of such foreclosure or other similar action (for purposes of this paragraph (3) the "Conversion Time"), shall be automatically converted, without further act on anyone's part, into an equal number of shares of Common Stock and the stock certificates 21 formerly representing such shares of Class A Stock shall thereupon and thereafter be deemed to represent the like number of shares of Common Stock; provided, however, that such automatic conversion of such shares of Class A - -------- ------- Stock shall not occur if, prior to the Conversion Time, (x) such pledged shares of Class A Stock are transferred to a Permitted Transferee of the pledgor or (y) such foreclosure or other similar action is cancelled or annulled so that the pledgor retains the right to vote such shares. (4) A good faith determination by the Board of Directors of the Corporation (x) that a transferee of shares of Class A Stock is or is not a Permitted Transferee of the transferor of such shares to such transferee on the date of Transfer, or (y) that, by reason of any change in the direct or indirect control of such transferee subsequent to such Transfer, such person would have or have not qualified at the time of the Transfer of the Class A Stock to such person as a Permitted Transferee shall be conclusive and binding upon all the stockholders of the Corporation. (5) The Corporation may, as a condition to the transfer or the registration of transfer of shares of Class A Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. Each certificate representing shares of Class A Stock shall be endorsed with a legend that states that shares of Class A Stock are not transferable other than to certain transferees and are subject to certain restrictions as set forth in the Amended and Restated Certificate of Incorporation of the Corporation filed with the Secretary of the State of Delaware. (6) This Paragraph (e) may not be amended without the affirmative vote of holders of the majority of the shares of Class A Stock and the affirmative vote of the holders of the majority of the shares of Common Stock, each voting separately as a class. (f) Conversion Procedures. --------------------- (1) Each conversion of shares pursuant to Paragraph (d) hereto will be effected by the surrender of the certificate or certificates, duly endorsed, representing the shares to be converted at the principal office of the transfer agent of the Class A Stock at any time during normal business hours, together with a written notice by the holder stating the number of shares that such holder desires to convert and the names or name in which he wishes the certificate or certificates for the Common Stock to be issued. Such conversion shall be deemed to have been effected as of the close of business on the date on which such certificate or certificates have been surrendered, and at such time, the rights of any such holder with respect to the converted shares of such holder will cease and the person or persons in whose name or names the certificate or certificates for shares are to be issued upon such conversion will be deemed to have become the holder or holders of record of such shares represented thereby. Promptly after such surrender, the Corporation will issue and deliver in accordance with the surrendering holder's instructions the certificate or certificates for the Common Stock issuable upon such conversion and a certificate representing any Class A Stock which was 22 represented by the certificate or certificates delivered to the Corporation in connection with such conversion, but which was not converted. (2) The issuance of certificates upon conversion of shares pursuant to Paragraph (d) hereto will be made without change to the holder or holders of such shares for any issuance tax (except stock transfer tax) in respect thereof or other costs incurred by the Corporation in connection therewith. (3) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock or its treasury shares, solely for the purpose of issuance upon the conversion of the Class A Stock, such number of shares of Common Stock as may be issued upon conversion of all outstanding Class A Stock. (4) Shares of the Class A Stock surrendered for conversion as above provided or otherwise acquired by the Corporation shall be cancelled according to law and shall not be reissued. (5) All shares of Common Stock which may be issued upon conversion of shares of Class A Stock will, upon issue, be fully paid and nonassessable. ARTICLE FIFTH: Subject and in addition to the provisions of Article Fourth, Paragraph 1(h), the business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than five (5) and not more than eleven (11) directors, the exact number of which shall be fixed from time to time by the Board of Directors. Immediately upon the closing of a Qualifying Public Offering, the directors shall be divided into three classes, designated Class I, Class II and Class III. Each class of directors shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial term of office of directors of Class I shall expire at the annual meeting of stockholders in 2000; the initial term of office of directors of Class II shall expire at the annual meeting of stockholders in 2001; and the initial term of office of directors of Class III shall expire at the annual meeting of stockholders in 2002. At each annual meeting of stockholders, beginning with the annual meeting in 2000, successors to the class of directors whose term expires at such annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the amount of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting of stockholders for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death or incapacity, resignation, retirement, disqualification or removal from office. The directors of the Corporation as of the date upon which the Qualifying Public Offering closed may designate the respective class of directors to which each such director shall belong. The directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Restated Certificate of Incorporation, and any By-Laws hereafter adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall 23 invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted at the time of such act. Subject to the terms of any one or more classes or series of Preferred Stock, newly created directorships resulting from any increase in the number of directors and any vacancies in the Board of Directors resulting from death or incapacity, resignation, retirement, disqualification or removal from office may be filled only by the affirmative vote of a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and directors so elected shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires and until their successors are duly elected and qualified, or until their earlier death or incapacity, resignation, retirement, disqualification or removal from office. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the Corporation's then outstanding capital stock entitled to vote generally in the election of directors. ARTICLE SIXTH: No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for breach of the 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) pursuant to Paragraph 174 of the GCL or (iv) for any transaction from which the director derived an improper personal benefit. If the GCL 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 GCL as so amended. Any alteration, amendment or repeal of this Article SIXTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such alteration, amendment or repeal with respect to acts or omissions occurring prior to such alteration, amendment or repeal. ARTICLE SEVENTH: The Corporation shall have perpetual existence. ARTICLE EIGHTH: The By-Laws of the Corporation may be altered, amended or repealed in whole or in part, or new By-Laws may be adopted, by the stockholders or by the affirmative vote of a majority of the entire Board of Directors of the Corporation. As used in this Amended and Restated Certificate of Incorporation, the term "entire Board of Directors" means the total number of directors which the Corporation shall have at the time that any matter is submitted to the Board of Directors. ARTICLE NINTH: Special meetings of stockholders may be called by any of (i) the Chairman of the Board of Directors, (ii) the President, (iii) any Vice President, (iv) the Secretary, or (v) any Assistant Secretary, and shall be called by any such officer at the request in writing of a majority of the entire Board of Directors or at the request in writing of stockholders owning a majority of the capital stock of the Corporation issued and outstanding and entitled to vote. 24 ARTICLE TENTH: The Corporation elects not to be governed by Paragraph 203 of the GCL. ARTICLE ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, and all rights conferred upon stockholders hereby are granted subject to this reservation. 25 IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be executed on its behalf this 14th day of May, 1999. Net2Phone, Inc. By: /s/ Howard Balter ----------------------- Howard S. Balter Chief Executive Officer Attest: By: ----------------------- Name: EX-3.2 3 BYLAWS EXHIBIT 3.2 BY-LAWS OF Net2Phone, Inc. (hereinafter called the "Corporation") ARTICLE I. OFFICES ------- Section 1. Registered Office. The registered office of the Corporation shall ----------------- be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such ------------- other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II. ----------- MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of the stockholders for the election ----------------- of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be --------------- held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Written notice of the Annual Meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 3. Special Meetings. Unless otherwise prescribed by law or by the ---------------- Certificate of Incorporation, Special Meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, or (ii) the President, (iii) any Vice President, if there be one, (iv) the Secretary or (v) any Assistant Secretary, if there be one, and shall be called by any such officer at the request in writing of a majority of the Board of Directors or at the request in writing of stockholders owning a majority of the capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Written notice of a Special Meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. Section 4. Quorum. Except as otherwise provided by law or by the Certificate ------ of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present, in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Section 5. Voting. Unless otherwise required by law, the Certificate of ------ Incorporation or these By-Laws, any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. Each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 6. Consent of Stockholders in Lieu of Meeting. Unless otherwise ------------------------------------------ provided in the Certificate of Incorporation, 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 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 notes 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. Section 7. List of Stockholders Entitled to Vote. The officer of the ------------------------------------- Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 8. Stock Ledger. The stock ledger of the Corporation shall be the ------------ only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. ARTICLE III. DIRECTORS --------- Section 1. Number of Election of Directors. The Board of Directors shall ------------------------------- consist of not less than five nor more than eleven members, the exact number of which shall initially be fixed by the Incorporator and thereafter from time to time by the Board of Directors. Except as provided in Section 2 of this Article, directors shall be elected by a plurality of the votes cast at Annual Meetings of Stockholders, and each director so elected shall hold office until the next Annual Meeting, unless otherwise provided by the Certificate of Incorporation, and until his successor is duly elected and qualified, or until his earlier resignation or removal. Any director may resign at any time upon notice to the Corporation. Directors need not be stockholders. Section 2. Vacancies. Vacancies and newly created directorships resulting --------- from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier resignation or removal. Section 3. Duties and Powers. The business of the Corporation shall be ----------------- managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 4. Meetings. The Board of Directors of the Corporation may hold -------- meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be hold without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the President, or any directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 5. Quorum. Except as may be otherwise specifically provided by Law, ------ the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, a majority of the entire Board of Directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 6. Actions of Board. Unless otherwise provided by the Certificate of ---------------- Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 7. Meetings by Means of Conference Telephone. Unless otherwise ----------------------------------------- provided by the Certificate of Incorporation or the By-Laws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting. Section 8. Committees. The Board of Directors may, by resolution passed by a ---------- majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 9. Compensation. The directors may be paid their expenses, if any, ------------ of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 10. Interested Directors. No contract or transaction between the -------------------- Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV. OFFICERS -------- Section 1. General. The officers of the Corporation shall be chosen by the ------- Board of Directors and shall be a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, may also choose a Chairman of the Board of Directors (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-Laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation. Section 2. Election. The Board of Directors at its first meeting held after -------- each Annual Meeting of Stockholders (or at such other times as it shall deem appropriate) shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of attorney, ------------------------------------------ proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 4. Chairman of the Board of Directors. The Chairman of the Board of ---------------------------------- Directors, if there by one, shall preside at all meetings of the stockholders and of the Board of Directors. He shall be the Chief Executive Officer of the Corporation (unless another individual is selected by the Board of Directors to serve as Chief Executive Officer), and except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 5. President. The President shall, subject to the control of the --------- Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there by none, the President shall preside at all meetings of the stockholders and the Board of Directors. If there be no Chairman of the Board of Directors, and if no other individual is so appointed, the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 6. Vice Presidents. At the request of the President or in his --------------- absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 7. Secretary. The Secretary shall attend all meetings of the Board --------- of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 8. Treasurer. The Treasurer shall have the custody of the corporate --------- funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 9. Assistant Secretaries. Except as may be otherwise provided in --------------------- these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 10. Assistant Treasures. Assistant Treasurers, if there be any, ------------------- shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 11. Other Officers. Such other officers as the Board of Directors -------------- may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE V. STOCK ----- Section 1. Form of Certificates. Every holder of stock in the Corporation -------------------- shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Signatures. Any or all of the signatures on a certificate may be ---------- a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new ----------------- certificate to be issued in place of any certificate theretofore issued by the corporation alleged to, have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Stock of the Corporation shall be transferable in the --------- manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. Section 5. Record Date. In order that the Corporation may determine the ----------- stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. Beneficial Owners. The Corporation shall be entitled to recognize ----------------- the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VI. NOTICES ------- Section 1. Notices. Whenever written notice is required by law, the ------- Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex or cable. Section 2. Waivers of Notice. Whenever any notice is required by law, the ----------------- Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII. ------------ GENERAL PROVISIONS ------------------ Section 1. Dividends. Dividends upon the capital stock of the Corporation, --------- subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All checks or demands for money and notes of the ------------- Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by ----------- resolution of the Board of Directors. Section 4. Corporate Seal. The corporate seal shall have inscribed thereon -------------- the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII. INDEMNIFICATION --------------- Section 1. Power to Indemnify in Actions, Suits or Proceedings other Than -------------------------------------------------------------- Those by or in the Right of the Corporation. Subject to Section 3 of this - ------------------------------------------- Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by 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. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which 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 reasonable cause to believe that his conduct was unlawful. Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the ---------------------------------------------------------------- Right of the Corporation. Subject to Section 3 of this Article VIII, the - ------------------------ Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit 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; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. Authorization of Indemnification. Any indemnification under this -------------------------------- Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. Section 4. Good Faith Defined. For purposes of any determination under ------------------ Section 3 of this Article VIII, a person shall be deemed to have acted in faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Section 5. Indemnification by the Court. Notwithstanding any contrary ---------------------------- determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in Sections 1 or 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. Section 6. Expenses Payable in Advance. Expenses incurred by a director or --------------------------- officer in defending or investigating a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. ------------------------------------------------------------- The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Section 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Sections 1 or 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. Section 8. Insurance. The Corporation may purchase and maintain insurance on --------- behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VIII. Section 9. Certain Definitions. For purposes of this Article VIII, ------------------- references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII . Section 10. Survival of Indemnification and Advancement of Expenses. The ------------------------------------------------------- indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 11. Limitation on Indemnification. Notwithstanding anything ----------------------------- contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 hereof), the Corporation shall not be obligated to indemnify any director or officer in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation. Section 12. Broadest Lawful Indemnification. In addition to the foregoing, ------------------------------- the Corporation shall, to the broadest and maximum extent permitted by Delaware law, as the same exists from time to time (but, in case of any amendment to or change in Delaware law, only to the extent that such amendment or change permits the Corporation to provide broader rights of indemnification than is permitted to the Corporation prior to such amendment or change), indemnify each 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 by reason of the fact that he is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust 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. In addition, the Corporation shall, to the broadest and maximum extent permitted by Delaware law, as the same may exist from time to time (but, in case of any amendment to or change in Delaware law, only to the extent that such amendment or change permits the Corporation to provide broader rights of payment of expenses incurred in advance of the final disposition of an action, suit or proceeding than is permitted to the Corporation prior to such amendment or change), pay to such person any and all expenses (including attorneys' fees) incurred in defending or settling any such action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer, to repay such amount if it shall ultimately be determined by a final judgment or other final adjudication that he is not entitled to be indemnified by the Corporation as authorized in this Section 12. The first sentence of this Section 12 to the contrary notwithstanding, the Corporation shall not indemnify any such person with respect to any of the following matters: (i) remuneration paid to such person if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; or (ii) any accounting of profits made from the purchase or sale by such person of the Corporation's securities within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (iii) actions brought about or contributed to by the dishonesty of such person, if a final judgment or other final adjudication adverse to such person establishes that acts of active and deliberate dishonesty were committed or attempted by such person with actual dishonest purpose and intent and were material to the adjudication; or (iv) actions based on or attributable to such person having gained any personal profit or advantage to which he was not entitled, in the event that a final judgment or other final adjudication adverse to such person establishes that such person in fact gained such personal profit or other advantage to which he was not entitled; or (v) any matter in respect of which a final decision by a court with competent jurisdiction shall determine that indemnification is unlawful; provided, however, that the Corporation shall perform its obligations under the second sentence of this Section 12 on behalf of such person until such time as it shall be ultimately determined by a final judgment or other final adjudication that he is not entitled to be indemnified by the Corporation as authorized by the first sentence of this Section 12 by virtue of any of the preceding clauses (i), (ii), (iii), (iv) or (v). Section 13. Severability. If any part of this Article VIII shall be found, ------------ in any action, suit or proceeding or appeal therefrom or in any other circumstances or as to any particular officer, director, employee or agent to be unenforceable, ineffective or invalid for any reason, the enforceability, effect and validity of the remaining parts or of such parts in other circumstances shall not be affected, except as otherwise required by applicable law. Section 14. Indemnification of Employees and Agents. The Corporation may, to --------------------------------------- the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation. Section 15. Amendments. The foregoing provisions of this Article VIII shall ---------- be deemed to constitute an agreement between the Corporation and each of the persons entitled to indemnification hereunder, for as long as such provisions remain in effect. Any amendment to the foregoing provisions of this Article VIII which limits or otherwise adversely affects the scope of indemnification or rights of any such persons hereunder shall, as to such persons, apply only to claims arising, or causes of action based on actions or events occurring, after such amendment and delivery of notice of such amendment is given to the person or persons so affected. Until notice of such amendment is given to the person or persons whose rights hereunder are adversely affected, such amendment shall have no effect on such rights of such persons hereunder. Any person entitled to indemnification under the foregoing provisions of this Article VIII shall, as to any act or omission occurring prior to the date of receipt of such notice, be entitled to indemnification to the same extent as had such provisions continued as By-Laws of the Corporation without such amendment. ARTICLE IX. ----------- AMENDMENTS ---------- Section 1. Amendments. These By-Laws may be altered, amended or repealed, in ---------- whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws be contained in the notice of such meeting of stockholders or Board of Directors as the case may be. All such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office. Section 2. Entire Board of Directors. As used in this Article IX and in ------------------------- these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. EX-10.1 4 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 1, 1997 by and between IDT Corporation, a Delaware corporation (the "Company"), and Clifford M. Sobel (the "Executive"). WHEREAS, in recognition of the Executive's experience and abilities, the Company desires to assure itself of the employment of the Executive in accordance with the terms and conditions provided herein; and WHEREAS, the Executive wishes to perform services for the Company in accordance with the terms and conditions provided herein; and WHEREAS, Net2Phone is a division of the Company engaged in technology consisting of both hardware and software which is utilized to transmit voice in packet switched format over the Internet, known in the industry as Internet telephony and/or voice over the Internet. NOW, THEREFORE, in consideration of the promises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Employment. The Company hereby agrees to employ the Executive, and the ---------- Executive hereby agrees to perform services for the Company, on the terms and conditions set forth herein. 2. Term. This Agreement is for the three-year period (the "Term") commencing ---- on September 15, 1997, and terminating on the third anniversary of such date, or upon the Executive's earlier death or other termination of employment pursuant to Section 7 hereof; provided, however, that commencing on September 15, 2000 -------- ------- and each anniversary thereafter, the Term shall automatically be extended for one additional year beyond its otherwise expiration unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as the President and -------- Chief Executive Officer of the Net2Phone Division or its corporate successor. 4. Duties and Reporting Relationship. During the Term, Executive shall, on a --------------------------------- full time basis, use his skills and render services to the best of his abilities, subject to the conditions set forth in paragraph 14 of this Agreement. The executive shall report directly to the President of the Company. At such time that the new company is incorporated as set forth in paragraph 6(b), the Executive shall report directly to the Board of Directors of the new company, as defined in 6(b) below. (a) The Board of Directors of the new company, as defined in 6(b) below, will be selected based upon the mutual agreement among the Executive and the President and Chief Executive Officer of the Company. 1 5. Place of Performance. The Executive shall perform his duties and conduct -------------------- his business at the offices of the Company, located in Hackensack, Now Jersey, except for required travel on the Company's business. 6. Compensation and Related Matters. -------------------------------- (a) The Company shall pay to the Executive an annual base salary (the "Base Salary")at a rate not less than one hundred thousand dollars ($100,000.00) per year such salary to be paid in conformity with the Company's payroll policies relating to its senior executive officers, but in any event not less than monthly. The Base Salary may, from time to time, be increased, however, if the Executive's Base Salary is increased, it shall not thereafter be decreased during the Term. (b) As soon as it is practical, but no later than three (3) months following the date of this Agreement, the Company shall cause the Net2Phone Division of IDT to become incorporated under the laws of Delaware. Once the Net2Phone Division of IDT becomes incorporated under the laws of the State of Delaware, and as soon as it is practical and reasonable thereafter, Executive shall use his best efforts to have an initial public offering of the new company's stock. At the time of incorporation, (hereinafter "new company") and for a period of three (3) years after the date of incorporation so long as the Executive remains employed with the new company, the Executive may purchase ten percent (10%) of the new company at a purchase price of one-hundred thousand dollars ($100,000). If and when the new company becomes a public company, Executive shall receive stock in the new company which shall be equal to ten (10%) percent of the value of the new company at the time of the initial public offering. (i) In the event that the Executive first exercises his right to purchase ten percent (10%) of the new company, he may, upon the Executive's completion of the second year of the Term, exercise the option to purchase one million 1,000,000 shares of IDT Corporation registered and marketable stock at the purchase price of $6.50 per share, adjusted for stock splits and any and all interest acquired by him or value granted to him in the new company. This option is only exercisable for a period commencing on September 5, 1999 through September 5, 2000 and shall immediately thereafter terminate. In the event the Company abandons its effort to establish or sustain the Net2Phone Division or the new company, or the Company sells its interest in the new company, or there is a substantial change in control of the new company, then the exercise period will commence immediately upon the occurrence of such event and continue for a period of one year thereafter. (c) Executive shall also have the right to purchase an additional one percent (1%) of the new company upon the Executive's completion of the second year of the Term, at the same price and under the same conditions as forth in paragraph (b) above. If and when the new company becomes a public company, Executive shall receive stock in the new company which shall be equal to one percent (1%) of the value of the new company at the time of the initial public offering. (d) The Company agrees that an additional nine (9%) percent of the value of the Net2Phone 2 Division shall be conveyed to the other senior executives of the Net2Phone Division of the purpose of performance incentive, the terms and conditions of which are to be set forth in separate agreement. (e) The Company hereby grants to the Executive two hundred thousand (200,000) options which have an exercisable price of $6.50. The options are transferable, however, Executive shall maintain direct or indirect beneficial ownership of same. (f) Compensation During Disability. During any period that the ----------------------------- Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness, the Company shall pay to the Executive the difference between the Executive's regular wage and the benefits received from the New Jersey Statement Department of Labor as well as other applicable employee benefits provided to other senior executives of the Company, until his employment is terminated in accordance with applicable law, including, but not limited to the Family and Medical Leave Act, and the Americans with Disabilities Act. Upon such termination the Company shall pay the Executive (i) all unpaid amounts, if any, to which the Executive was entitled as of the Date of Termination under paragraph 6(a) hereof and (ii) all unpaid amounts to which the Executive was then entitled under the Benefit Plans, the Pension Plans and any other unpaid employee benefits, perquisites or other reimbursements (the amounts set forth in clauses (i) and (ii) above being hereinafter referred to as the "Accrued Obligation"). 7. Termination. The Executive's employment hereunder may be terminated without ----------- breach of this Agreement only under the following circumstances. (a) Death. The Executive's employment hereunder shall terminate upon ----- his death. (b) Cause. The Company may terminate the Executive's employment ----- hereunder for "Cause." For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment hereunder (i) upon the Executive's conviction for the commission of an act or acts constituting a felony under the laws of the United States or any state thereof, (ii) upon the Executive's willful and continued failure to substantially perform his duties hereunder (other than any such resulting from the Executive's incapacity due to physical or mental illness), after written notice has been delivered to the Executive by the Company, which notice specifically identifies the manner in which the Executive has not substantially performed his duties, and the Executive's failure to substantially perform his duties is not cured within fifteen (15) business days after notice of such failure has been given to the Executive, or in the event that the alleged failure to substantially perform cannot be completely cured within fifteen (15) days, that the Executive has taken all actions that were reasonably available to him within that period, or (iii) if Executive fails to devote all his business time and energy in furtherance of the Company's business subject to the conditions set forth in paragraph 14 herein. For purposes of this Section 7(b), no act, or failure to act, on the Executive's part shall be deemed "willful," unless done, or omitted to be done by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company. (c) Termination by the Executive. The Executive may terminate his ---------------------------- employment hereunder for "Good Reason." "Good Reason" for termination by the Executive of 3 the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts by the Company, or failure by the Company to act: (i) a material breach of this Agreement by the Company; (ii) any purported termination of the Executive's employment with is not effected pursuant to a Notice of Termination satisfying the requirement of paragraph (d) below; for purposes of this Agreement, no such purported termination shall be effective; or (iii) the Executive's job responsibilities are caused to be substantially diminished by the Company or new company. (d) Notice of Termination. Any termination of the Executive's --------------------- employment by the Company or by the Executive (other than termination under Section 7(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 16 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause issuing from the Company is required to include a copy of a resolution duty adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in the definition of Cause herein, and specifying the particulars thereof. (e) Date of Termination. "Date of Termination" shall mean if the ------------------- Executive's employment is terminated by his death, the date of his death. If the Executive's employment is terminated pursuant to paragraph (b)(i) above, the Date of Termination shall be the date of the Executive's conviction as described therein. If the Executive's employment is terminated pursuant to paragraph (b)(ii) or (c) above, the Date of Termination shall be the date which the fifteen (15) day period specified in the Notice of Termination, as required by paragraph (d) above, shall expire. 8. During the Term and thereafter, the parties agree that Executive will not, except as necessary within the scope of employment with the Company (a) use any Confidential Information, however acquired; (b) himself duplicate or replicate or cause or permit others to duplicate or replicate any document or other material in any medium embodying any Confidential Information except as necessary in connection with the Scope of this Employment; or (c) disclose or permit the disclosure of any Confidential Information to any person, without the prior written consent of Company. (a) "Confidential Information" means technical and business information about the Company, its subsidiaries and affiliates, and their respective clients and customers that is not otherwise generally known or available to persons unaffiliated with the Company and is learned by Executive in the course of his employment with the Company (including, without limitation, all periods of employment with Company prior to the Effective Date) including, without limitation, any and all proprietary Inventions, customer and potential customer names, 4 product plans and designs, licenses and other agreements, marketing and business plans, various other financial and businesses information of Company. Executive acknowledges that such Confidential Information is specialized, unique in nature and of great value to Company, and that such information gives Company a competitive advantage. 9. Executive acknowledges that Company owns all right, title and interest in and to the Confidential Information. Executive acquires hereunder no right, title or interest in any Confidential Information. 10. Executive hereby represents and warrants that (i) Executive's performance of the terms of this Agreement and as an employee of the Company will not breach any confidentiality or other agreement which Executive entered into with former Companies, and (ii) Executive is not bound by any agreement either oral or written which conflicts with this Agreement. 11. Upon the termination or expiration of the Employment, Executive will return to Company all tangible materials and all copies thereof, in whatever media, then in Executive's possession or control, containing or employing any Confidential Information, together with a written certification with the foregoing. 12. Covenant Not to Compete. Executive hereby agrees that he shall not, either ----------------------- as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director or in any other individual or representative capacity, engage or participate, directly invest in any publicly traded company over the amount of five hundred thousand dollars ($500,000) or become employed by any business that is in competition in any manner whatsoever with the business of the Company in any of the United States during the Term and for a period of one year immediately following the termination of his employment with Company, except upon express written consent of Company. 13. Executive agrees that, during the Term and for a period of two (2) years thereafter, Executive shall not, directly or indirectly: (a) influence or attempt to influence customers or suppliers of Company, or any of its subsidiaries or affiliates, to divert their business to any competitor of Company, and (b) solicit or recruit any employee of Company for the purpose of being employed by him or by a competitor of Company and that he will not convey any confidential information about other employees of Company to any other person. 14. Nothing in this Agreement shall be interpreted to limit the Executive from continuing to engage in political activities and/or to participate as an advisor to Bon-Art International, Inc., or to manage any and all investments contained within his personal investment portfolio. 15. Executive hereby agrees that, during the Term of employment and for one (1) year thereafter, Executive will not directly or indirectly disparage the Company or disseminate, or cause or permit to be negative regarding Company or any other employee, officer director or agent of Company. Notwithstanding the foregoing, Executive is not hereby barred or restricted 5 from exercising any right of speech or expression protected by applicable federal, state or local law from restriction by Company. 16. Successors; Binding Agreement. ----------------------------- (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance reasonably satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as he would be entitled to hereunder if he terminated his employment for Good Reason, except for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that executes and delivers the agreement provided for in this paragraph 16 or that otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes, devises and legatees. In the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatees, or other designee or, if there be no such designee, to the Executive's estate (any of which is referred to herein as a "Beneficiary'). 17. Notices. For the purposes of this Agreement, notices, demands and all ------- other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: IDT Corporation 294 State Street Hackensack, NJ 07601 Attn: General Counsel If to the Executive: Clifford M. Sobel c/o Stern & Greenberg 75 Livingston Avenue Roseland, NJ 07068 6 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 18. Miscellaneous. No provision of this Agreement may be modified, waived or ------------- discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and such officer of the Company as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the state of New Jersey without regard to its conflicts of law principles. 19. Validity. The invalidity or unenforceability of any provision or -------- provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 20. Counterparts. This Agreement may be executed in one or more counterparts, ------------ each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Entire Agreement. This Agreement sets forth the entire agreement of the ---------------- parties hereto in respect of the subject matter contained herein and supersedes any and all other prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereof; and any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled. 22. Remedies of the Company. Executive agrees that in the event of a breach by ----------------------- Executive of this Agreement, the Company shall be entitled, if it so elects, to institute and prosecute proceedings, at law or in equity, to obtain damages with respect to such breach or to seek the specific performance of this Agreement by Executive, or, to enjoin Executive form engaging in any activity in violation thereof. (a) In the event of the Executive's employment ceases due to the Executive's voluntarily termination of his employment without Good Reason, the Executive forfeits the options as provided in paragraphs 6(b), 6(b)(i) and/or 6(c), based upon a pro-rated portion of the options to purchase or the stock calculated to the nearest month completed of his first two years of employment. (Example: after 12 months of employment = 1/2 of value set forth in 6(b), 6(b)(i) and/or 6(c).) (b) In the event of the Executive's employment cases as the result of his death during the first two years of the Term and whether or not the Executive has exercised his options under paragraph 6(b), the Executive's estate shall receive a pro-rated share of the value set forth in paragraph 6(b) in accordance with the formula set forth in paragraph 22(a) above. The 7 Executive's estate will remit payment to the Company of any payment made to him in excess of that as calculated. (c) In the event of the Executive's employment ceases prior to the first two years of the Term, under the conditions set forth in paragraph 7(b), the Executive will forfeit the value set forth in paragraph 6(b). Further, in the event the Executive's termination is determined to have been without cause by a Court of Law, the Company will pay to the Executive any and all attorney's fees as a result of the necessity of his bringing the action plus an additional amount equal to 100% of any damages assessed by a Court of Law. 23. Representations. Executive has been advised to obtain independent counsel --------------- to evaluate the terms, conditions and covenants herein set forth and he has been afforded ample opportunity to obtain such independent advice and evaluation. Executive warrants to the Company that he has relied upon such independent counsel and not upon any representation (legal or otherwise), statement or advice said or offered by the Company or the Company's counsel in connection herewith. 24. Executive's Status Under Agreement. The parties agree and acknowledge that ---------------------------------- the Executive shall at all times act in the capacity of an employee under this Agreement, and nothing in this Agreement shall be construed to create the relationship of an independent contractor, partner, joint venturer, or any other relationship or status other than that of an employee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. IDT CORPORATION By:/s/ Jim Courter Dated as of: May 1, 1997 _______________________ Jim Courter, President EXECUTIVE /s/ Clifford Sobel Dated as of: May 1, 1997 _______________________ Clifford M. Sobel 8 EX-10.2 5 AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.2 AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN IDT CORPORATION AND CLIFFORD M. SOBEL This Amendment dated May 11, 1999 between IDT Corporation (the "Company"), Net2Phone Inc. ("Net2Phone") and Clifford M. Sorbel (the "Executive"), is intended to and does restate and amend certain sections of the Employment Agreement (the "Agreement") entered into between the Company and the Executive as of May 1, 1997. WHEREAS, the parties desire to restate and amend certain sections of the Agreement of May 1, 1997; WHEREAS, the parties acknowledge that certain of the Executive's compensation provisions set forth in the Agreement were intended to and, in fact were, based upon the assets of Net2Phone at the time the parties entered into the Agreement as of May 1, 1997 and such assets have changed since that time; WHEREAS, the parties recognize that the change in Net2Phone's assets may result in the creation of issues regarding the Executive's compensation based on said assets; WHEREAS, the parties acknowledge that subsequent to the execution of the Agreement by the parties, Net2Phone includes significantly more assets than contemplated or intended as of May 1, 1997, and thus, the parties have agreed to amend the grant of stock to Executive as set forth in Paragraph 6, sub- paragraphs (b) and (c) of the Agreement; WHEREAS, the parties desire to avoid future disputes regarding the Executive's Net2Phone ownership potential by amending the Agreement; WHEREAS, the parties desire to add Net2Phone as a party to the Agreement and to make the Agreement binding on Net2Phone. NOW, THEREFORE, in consideration of the promises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Paragraph 2 of the Agreement is hereby amended and restated to read as follows: Term. This Agreement is for the three-year period (the "Term") commencing ---- on September 15, 1997, and terminating on the third anniversary of such date, or upon the Executive's earlier death or other termination of employment pursuant to Section 7 hereof; provided however, that commencing on September 15, 2000 and each anniversary thereafter, the Term shall automatically be extended for one additional year beyond its otherwise expiration unless, not later than 90 days prior to any such anniversary, 1 Net2phone or Executive shall have notified the other party hereto in writing that such extension shall not take effect. 2. The Executive hereby acknowledges that he shall serve as Chairman and President of Net2Phone and shall not be Chief Executive Officer of Net2Phone as originally contemplated in paragraph 3 of the Agreement. 3. Paragraph 4(a) of the Agreement is hereby amended and restated to read as follows: The initial Board of Directors of Net2Phone will be selected based upon the mutual agreement among the Executive and the Chief Executive Officer of the Company. Thereafter, the Board of Directors shall be elected by the stockholders of Net2Phone pursuant to the applicable provisions of Delaware general corporate law. 4. Net2Phone Ownership Potential: The parties hereby acknowledge that ----------------------------- paragraph 6, sub-paragraphs (b) and (c) of the Agreement provided the Executive with stock in the new company, as defined in the Agreement, equal to a total of 11% of the value of the new company at the time of the initial public offering. A copy of the Agreement is attached herewith as Attachment 1. The parties agree that paragraph 6, sub-paragraphs (b) and (c) of the Agreement are hereby amended to provide the Executive with stock in the new company equal to a total of eight (8)% of the value of the new company which percentage may be maintained by the Executive through the time of Net2Phone's initial public offering by transfer of the Company's shares in Net2Phone; it being understood, that any express or implied anti-dilution rights granted by the Company hereunder shall not apply, nor shall the Executive's percentage in Net2Phone be guaranteed, in connection with any transactions affecting Net2Phone's capitalization after its initial public offering. 5. Paragraph 6(b)(i) of the Agreement is hereby amended and restated to read as follows: Upon the Executive's completion of the second year of the Term and for a period of one year thereafter, Executive will have the option to do one of the following two things: (1) transfer to the Company all of the stock representing his 7% interest in Net2Phone (calculated by subtracting from the 8% he received pursuant to this Agreement, the 1% interest he previously transferred to irrevocable trusts for the benefit of his children), in exchange for an option from the Company exercisable from September 15, 1999 through September 15, 2000 to purchase 875,000 registered and marketable shares of the Company's common stock, adjusted for stock splits, at a purchase price of $6.50 per share; or (2) keep his 7% interest in Net2Phone and forfeit the option set forth in the preceding subparagraphs 6(b)(i)(1). Notwithstanding the foregoing, once Executive no longer owns and holds in his own name each and every share of stock representing the above referenced 7% interest he received pursuant to this Agreement, he will forfeit the option set forth in the preceding subparagraph 6(b)(i)(1). 2 6. Paragraph 17 of the Agreement is hereby amended and restated to read as follows: Notices: For the purposes of the Agreement, notices, demands and all other ------- communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or (unless otherwise specified) mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: ----------------- IDT Corporation 190 Main Street Hackensack, NJ 07601 With a copy to: Ira Greenstein, Esq. Morrison & Foerster, LLP 1290 Avenue of the Americas New York, NY 10104 If to the Executive: ------------------- Clifford M. Sobel c/o Net2Phone 171 Main Street Hackensack, NJ 07601 With a copy to: Steven Greenberg, Esq. Stern & Greenberg 75 Livingston Avenue Roseland, NJ 07068 If to Net2Phone: --------------- Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 7. Release: The Executive hereby releases and forever discharges the ------- Company and Net2Phone from any and all actions, claims and/or damages and agrees 3 that he has not filed and will not file any action or proceeding in Federal, State or other court, or before any Administrative Agency, under any statute, law, ordinance, regulation or constitution arising out of or in connection with the re-negotiation of the Net2Phone or IDT Ownership or stock option provisions set forth in Paragraphs 4 and 5 of this Amendment. 8. Severability: If any part or provision of this Amendment is ------------ determined to be invalid, unenforceable or contrary to public policy under an applicable statute or rule of law, the parties agree to ratify the Restatement with the affected part or provision (and only that part or provision) considered to be omitted from the Amendment. 9. Representations: Executive has been advised to obtain independent --------------- counsel to evaluate the terms, conditions and covenants herein set forth and he has been afforded ample opportunity to obtain such independent advice and evaluation. Executive warrants to the Company that he has relied upon such independent counsel and not upon any representation (legal or otherwise), statement or advice said or offered by the Company of the Company's counsel in connection herewith. 10. Modification: This Amendment may not be amended except upon mutual ------------ agreement in writing signed by the Company and the Executive and no amendments or modifications are contemplated at this time. 11. Superseding Provisions: This Amendment is intended to and does ---------------------- supersede certain sections of the Agreement executed as of May 1, 1997 between the Company and the Executive. In all other respects, the Agreement executed as of May 1, 1997 remains in full force and effect. The parties further acknowledge that all references in paragraph 22 of the Agreement making references to paragraphs or sections amended or deleted by this Amendment are hereby updated or deleted, as the case may be. 12. Controlling Law: This Amendment will be governed by the laws of the --------------- State of New Jersey and both parties agree to submit to the jurisdiction of the courts of the State of New Jersey, both state and federal. 13. Breach: The parties agree that in the event of a breach of any term of ------ this Amendment, the non-breaching party may commence an action at law or in equity to enjoin or recover any loss, cost, damage or expense incurred by the breach, including without limitation, any attorney's fees incurred. 4 It is so Agreed this 11 day of May, 1999 Signed in the Presence of WITNESS /s/ Heather Valpone /s/ Clifford M. Sobel - --------------------------- ------------------------------------ Clifford M. Sobel, President Net2Phone, Inc. WITNESS /s/ Heather Valpone /s/ Jim Courter - --------------------------- ------------------------------------ James Courter, President, IDT Corporation WITNESS /s/ Heather Valpone /s/ Howard Balter - --------------------------- ------------------------------------ Howard Balter, CEO, Net2Phone, Inc. 5 EX-10.3 6 BUNDLING AND DISTRIBUTION **** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED. EXHIBIT 10.3 Netscape Agreement #005440 -------------------------- BUNDLING AND DISTRIBUTION SERVICES AGREEMENT This Bundling and Distribution Services Agreement, including the exhibits and attachments hereto (the "Agreement"), is effective as of the date of the last signature as indicated in the signature block below (the "Effective Date"), between Net2Phone, Inc., a New Jersey corporation located at 171 Main Street, Hackensack, NJ 07601 ("Participant"), and Netscape Communications Corporation, a Delaware corporation located at 501 East Middlefield Road, Mountain View, CA 94043 and its wholly-owned subsidiaries (collectively "Netscape"). RECITALS A. Netscape markets and distributes computer software to link people and information over enterprise networks and the Internet. B. Participant markets and distributes computer software that provides for the connection and transmission of telecommunications from personal computers to standard telephone media over enterprise networks and/or the Internet. C. Netscape and Participant believe that it would be useful to end users of Netscape products for such end users to have access to certain of Participant's software. NOW, THEREFORE, the parties agree as follows: AGREEMENT 1. DEFINITIONS "Bundling Candidate" means a version of the Co-branded Net2Phone Product that Participant reasonably believes, after having conducted the tests required under Exhibit A of this Agreement, meets the requirements contained in this Agreement for acceptance by Netscape. "Co-brand or Co-branded" means such joint branding, marking and promotion of products, services and materials, and other related joint marketing efforts as the parties shall mutually agree, taking into account Netscape's trademark guidelines and affording Participant with sufficient prominence, in terms of size, placement, appearance and the like, for Participant's name, logo, trademarks, and other similar brand features, which in any event shall be no less favorable than what is afforded to other similarly situated partners of Netscape. "Co-branded Net2Phone Product" means the Co-branded version of the Net2Phone Product together with any other changes to the Net2Phone Product required to make such co-branded version under this Agreement or as otherwise mutually agreed. "Co-branded Service" means the Participant Service to be provided by Participant for inclusion in the specified communications oriented areas of Netcenter, any Co-branded pages 1 CONFIDENTIAL accessible from or related to the Co-branded Net2Phone Product, and as the parties otherwise mutually agree. "Distribution" means, collectively, Electronic Distribution and Non- Electronic Distribution. "Electronic Distribution" means placing information and/or products in files on servers which permit downloading of such information and/or products. "Initial Bundling Period" means the period from the Effective Date until the date two (2) years after the later of (i) the date that the Beta 2 release of the Netscape Communicator 5.0 (the "Beta 2 Release") that contains the Co- branded Net2Phone Product is first posted to the Netscape U.S. Website for download by the general public, or (ii) if the Beta 2 Release does not contain the Co-branded Net2Phone Product, the date that the next succeeding release after the Beta 2 Release containing the Co-branded Net2Phone Product is posted to the Netscape U.S. Website for download by the general public, or, (iii) if the Beta 2 Release containing the Co-branded Net2Phone Product is released in less than 14 days after the Beta 1 Release, the date that the next succeeding release after the Beta 2 Release is first posted to the Netscape U.S. Website for download by the general public , provided that in any event the Initial Bundling Period shall start no later than the First Commercial Ship date of the Netscape Communicator 5.0(such date in (i), (ii) or (iii) being the "Release Date"). The Initial Bundling Period will end on the earlier to occur of (i) the end of the 2 year period after the Release Date or (ii) the termination of this Agreement, whichever comes first. Netscape shall provide Participant with written notice of the Release Date within thirty (30) days of when such date is fixed and determinable. "Inline Plug-in Pages" means that area of Netscape's US Web Site marketed as the Inline Plug-in Pages. "Integrated Offering" means a product, inclusive of any beta releases of the product, produced or offered by Netscape, which combines the Co-branded Net2Phone Product and/or third party product(s) with Netscape product(s), to produce a single offering for users of enterprise networks and/or the Internet; provided that the Integrated Offering must contain significant functionality in addition to that provided by the Co-branded Net2Phone Product alone. Without limiting the foregoing, an Integrated Offering includes a Netscape Software Bundle product that is downloadable from a Netscape web site and that provides as part of its default installation procedures for the Co-branded Net2Phone Product to be included in the download and installation. "Localized Versions" means those international versions of the Co-branded Net2Phone Product specifically listed in Section 3.1 (b) and other international versions of the Co-branded Net2Phone Product that are included pursuant to Section 3.1(b), all of which will meet all the specific requirements of Section 3.1 (b), Exhibit A and Attachment A-1 to Exhibit A. --------- --------- "Major Release" means a release of software for which there is a change to the right of the decimal point in the tenths, or a change to the left of the decimal point (e.g. 4.0 to 4.1 or 4.0 to 5.0). 2 CONFIDENTIAL "Minor Release" means a release of software for which there is a change to the right of the decimal point in the hundredths (e.g. 4.01 to 4.02). "Netcenter" means that area of Netscape's US Web Site that offers online services and shopping opportunities to end users. "Netscape Software Bundle" means the Co-branded Net2Phone Product bundled with and part of the default installation of every release of the object code form of the Netscape product offerings identified in Exhibit D as "Products --------- Covered Under Section 3.1(a)" after the Effective Date which operate on the platforms and in the languages listed in Exhibit D attached hereto (excluding --------- specific, custom software projects developed in accordance with customer requirements that necessitate an exclusion of such Co-branded Net2Phone Product, provided that Netscape has not encouragedsuch exclusion). "Netscape's US Web Site" means the collection of U.S. English language HTML documents targeted at end users in the United States and currently accessible by the public via the Internet at the URL http://home.netscape.com and/or at such other URL or locations as Netscape may designate. For purposes of this Agreement, Netscape's US Web Site does not include any future technologies or future uses of existing technologies which might embody a collection of documents (other than HTML documents) on the Internet. "Net2Phone Product" means the object code form of the product described under the "Description" section of Attachment A-1 of Exhibit A and Attachment A- -------------------------- 2 of Exhibit A, related documentation, and any Upgrades (as defined below) - -------------- provided to Netscape during the term of this Agreement. "Non-Electronic Distribution" means distribution by any means other than Electronic Distribution, including any method of distribution now available or hereafter developed. "Participant Collateral Materials" means all materials, information and other content (including without limitation product descriptions and logos, FAQs and product demos) supplied by, managed by or under the control of Participant, relating to promotion and distribution of the Co-branded Net2Phone Product hereunder or to promotion of any other products or services of Participant that are a subject of this Agreement. "Participant Service" means any Net2Phone related services and any associated Participant web pages accessible through the Net2Phone Product. "Products" means products produced or offered by Netscape for use with enterprise networks and the Internet, including without limitation Netscape Navigator and Netscape Communicator client software. "SmartUpdate Program" means that portion of Netcenter known as SmartUpdate, which area provides end users with access to an Internet service that makes available, free of charge, certain client software products, as further described in Exhibit E. --------- "Upgrades" means any updates, upgrades or enhancements of the Co-branded Net2Phone Product, including without limitation any releases of the Co-branded Net2Phone 3 CONFIDENTIAL Product that include bug fixes, as well as the Localized Versions provided hereunder and versions provided for those platforms in Exhibit D. --------- 2. GRANT OF RIGHTS 2.1 License. Participant hereby grants Netscape a non-exclusive, world-wide, royalty-free license to: (a) distribute Co-branded Net2Phone Product through Netscape's channels of distribution by including Co-branded Net2Phone Product in one or more Integrated Offerings which Netscape distributes via any form of Distribution; (b) distribute Co-branded Net2Phone Product in standalone form through Electronic Distribution from any Netscape branded web site in the world (including Netscape branded web sites that may be operated by Affiliates (as defined below)); (c) use, reproduce, translate, market, create derivative works and subsets of and distribute via any form of Distribution the user documentation for the Co-branded Net2Phone Product provided by Participant and any derivative works or subsets thereof prepared by or for Netscape, for use with Co-branded Net2Phone Product, provided Netscape meets the provisions defined in Section 7.6 of this Agreement; and (d) use, reproduce, translate, market, create derivative works and subsets of and distribute via any form of Distribution the Participant Collateral Materials and any derivative works or subsets thereof prepared by or for Netscape provided Netscape meets the provisions defined in Section 7.6 of this Agreement. Netscape agrees that it shall not reverse engineer, reverse assemble, decompile, disassemble or otherwise attempt to derive the source code from the Co-branded Net2Phone Product. Netscape agrees that, notwithstanding the licenses granted in subsection (c) and (d) above, Netscape shall not translate, modify or otherwise create derivative works of the user documentation or Participant Collateral Materials (and any derivative works or subsets thereof) referred to in such subsections (c) and (d) above (excluding minor formatting or stylistic modifications and minor grammatical corrections) without Participant's consent, which consent shall not to be unreasonably withheld. With respect to the Co-branded Net2Phone Product, Participant shall grant the same rights to Netscape as those set forth above for all platforms and localized versions not already granted by the terms of this Agreement; however, such grant shall in no way impose any additional obligations under this Agreement upon Netscape to bundle or distribute such products. 2.2 Discretion. Except as specifically provided for in Section 3 of this Agreement, Netscape may, in its discretion, determine which of the above forms of Distribution is appropriate for Co-branded Net2Phone Product. The broad grant of distribution rights in Section 2.1 to Netscape for the Co-branded Net2Phone Product, shall not obligate or be construed to obligate Netscape to bundle or distribute the Co-branded Net2Phone Product beyond the obligations of this Agreement. 4 CONFIDENTIAL 2.3 Reproduction. Netscape and its channels of distribution may reproduce or have reproduced Co-branded Net2Phone Product as necessary for Distribution authorized under Section 2.1. 2.4 Trademark and Logo License. Netscape and its channels of distribution may use Participant's trademarks and logos applicable to Co-branded Net2Phone Product in connection with Distribution and related marketing and promotion, subject to Participant's approval which shall not be unreasonably withheld. Netscape will use Participant's trademarks and logos as part of the promotional programs set forth in Exhibit E. On Participant's request, Netscape will furnish --------- Participant with a sample of such trademark usage. Netscape agrees not to remove any of Participant' s trademarks or logos from the Co-branded Net2Phone Product without Participant's prior approval. 2.4.1 Netscape grants Participant a non-exclusive, nontransferable, license to use the Netscape N and Design Horizon Logo ("the Logo") solely in connection with the Cobranded Service and Cobranded Net2Phone Product to promote, market, sell and deliver such Co-branded Service and Co-branded Net2Phone Product in accordance with the terms of this Agreement. No right is granted to sublicense, transfer, or assign any rights to use the Logo. Participant may only use the Logo as a collective whole and shall not separately use any element or elements of the Logo or modify the Logo in any manner. 2.4.2 Netscape hereby reserves any and all rights not expressly and explicitly granted in this Agreement, including Netscape's right to authorize or license use of the Logo to any third party for use in connection with any goods and services. Without limiting the rights reserved in the first sentence, Netscape hereby reserves any and all rights to use, authorize use or license use of the Logo in any geographic territory and in any language. Participant shall have no obligation to use the Logo as contemplated under this Agreement. 2.4.3 Participant hereby acknowledges that Netscape is the owner of the Logo, and any applications and/or registrations thereto, agrees that it will not do anything inconsistent with Netscape's intellectual property rights in the Logo. Participant agrees that nothing in this Agreement shall give Participant any right, title or interest in the Logo other than the right to use the Logo in accordance with this Agreement. Participant agrees not to register or attempt to register the Logo with any domestic or foreign governmental or quasi- governmental authority. Participant may not register the Logo. The provisions of this paragraph shall survive the expiration or termination of this Agreement. 2.4.4 Participant agrees that all use of the Logo shall only occur in connection with the Co-branded Service and Co-branded Net2Phone Product, and that such use shall conform with Netscape's trademark guidelines set forth at hft://home.netscape.com/misc/tradeLogos.html#tradeLogos which may be reasonably - ------------------------------------------------------- updated from time to time by Netscape. Participant may not use the Logo in connection with, or for the benefit of, any third party's products or services. Participant further agrees not to use the Logo on or in connection with any products or services that are or could reasonably be deemed to be obscene, pornographic, or disparaging of Netscape or its products or services, or otherwise in poor taste, or that are themselves unlawful or whose purpose is to encourage unlawful activities by others (provided, however, that this clause shall not be applicable to the content of any 5 CONFIDENTIAL communications sent through the use of the Cobranded Service or Co-branded Net2Phone Product that is not created by Participant). ). 2.4.5 Participant agrees it shall only use the Logo on the Co-branded Service and Co-branded Net2Phone Product that comply with the Quality Assurance provisions of Section 4.6 and in accordance with this Agreement. Participant further agrees to use commercially reasonable efforts to maintain a level of quality of the Cobranded Service and Co-branded Net2Phone Product in connection with its use of the Logo that is consistent with general industry standards. Failure to comply with this Section may be a basis for suspension of the use of the Logo, the bundling services and promotional services obligations under Section 3.5. 2.4.6 Upon reasonable request by Netscape, no more often than quarterly Participant shall provide Netscape with representative samples of each such use prior to the time the Logo is used on the Cobranded Service and Co-branded Net2Phone Product. If Netscape determines in good faith that Participant's use does not comply with this Agreement, Netscape shall notify Participant, and Participant shall use reasonable efforts to remedy the improper use within ten (10) business days following receipt of such notice from Netscape. 2.4.7 Participant shall include with any online publication or publication in print of the Logo a legend indicating that the Logo is that of Netscape, used under license, and a disclaimer that Participant and not Netscape has produced Participant's Cobranded Services and Co-branded Net2Phone Product and the Licensee Cobranded Product. 2.4.8 If the Cobranded Service or the Cobranded Net2Phone Product contains or presents any material that constitutes an infringement of the Logo or Netscape's trademarks, patents, copyrights or trade secrets (except with respect to any such material provided or included by Netscape or at the request of Netscape), Participant's right to use the Logo shall be subject to suspension under Section 3.5. Failure to correct such defects may constitute material breach which shall be treated in accordance with Section 11. 2.5 Affiliate Sublicenses. Netscape may grant, and will use reasonable efforts, as appropriate to grant, its Affiliates (as defined herein) a sublicense to the Co-branded Net2Phone Product equal in scope to, and subject to the same limitations as, the license granted hereunder by Participant to Netscape pursuant to this Section 2 only with respect to Netscape branded Integrated Offerings and standalone Electronic Distribution (only SmartUpdate and future similar Netscape updating program(s) that check the installed product) from Netscape branded Netscape web sites or as Participant otherwise approves in writing. "Affiliates" means any corporation, partnership, joint venture or other entity or person controlled, controlling or under common control with Netscape. For purposes of this definition, the term "control" shall mean the direct or indirect beneficial ownership of fifty percent (50%) or more of the voting interests (representing the right to vote for the election of directors or other managing authority) in an entity as of the date Netscape grants such entity a sublicense to the Co-branded Net2Phone Product. 6 CONFIDENTIAL 3. MISCELLANEOUS OBLIGATIONS 3.1 Bundling Requirements. During the Initial Bundling Period, subject to the terms and conditions herein, Netscape agrees to the following: (a) Netscape shall bundle the Co-branded Net2Phone Product with, and make such Co-branded Net2Phone Product a part of the default installation of, the Netscape Software Bundle, regardless of the means or agent of Distribution, starting with inclusion in the beta versions of the Netscape 5.0 Communicator Complete and Netscape 5.0 Client Customization Kit ("CCK") default installs. Except as provided below, the Co-branded Net2Phone Product shall be installed without user intervention upon the installation of the Netscape Software Bundle. Participant acknowledges that the person(s) installing Netscape Software Bundle may perform a custom installation of the Netscape Software Bundle or may de- select installation of the Co-branded Net2Phone Product which may result in Co- branded Net2Phone Product not being installed with the Netscape Software Bundle. Participant further acknowledges that certain Netscape Software Bundle products allow third parties to customize the installation and operation of other Netscape Software Bundle products and that such capability may result in the distribution, by such third parties to end users, of Netscape Software Bundle products that do not include the Co-branded Net2Phone Product or do not include it as a component that is installed by default. Netscape will make good faith efforts to work with Participant to develop ways to encourage distributors of CCK versions not to remove the Co-branded Net2Phone Product from the Netscape Software Bundle. In order to assist Netscape in any such efforts, Participant acknowledges that it may be necessary for Participant to provide appropriate incentives for such CCK distributors. (b) Netscape will bundle the localized versions of the Co-branded Net2Phone Product specified below and will use commercially reasonable efforts to bundle other localized versions of the Co-branded Net2Phone Product in the corresponding localized versions of the Netscape Communicator Complete installs defined above (i) to the extent that Netscape releases a specific localized product for such territories and (ii) provided the gold master of the localized versions and localized Co-branded Service pages meet Netscape's localized universal registration and branding requirements, and (iii) provided such localized version and Co-branded Service pages are made available at least eight (8) weeks prior to the initial Beta Release (or if such release does not have a beta release, eight (8) weeks prior to Release To Manufacturer ("RTM")) of any such Localized Version(s) and (iv) provided passage of Netscape's acceptance test as defined in Exhibit A. Bundling of Localized Versions will commence upon --------- the first release of localized versions of Netscape 5.0 Communicator Complete and Netscape 5.0 CCK default installs. Netscape will provide Participant with reasonable notice of release schedules so as to facilitate Participant's ability to meet the deadlines set forth above. As soon as practicable following the Effective Date of this Agreement, Participant agrees to provide Netscape with the following localized binaries: French, German, Spanish, Dutch, Portuguese, Chinese, Japanese, Korean, Canadian, Great Britain, Australian and Italian (c) Netscape agrees to include a preloaded button in the U.S. English versions of the Netscape Navigator (excluding specific, custom software projects developed in accordance with customer requirements that necessitate an exclusion of such Co-branded Net2Phone Product, provided that Netscape has not encouraged such exclusion) personal toolbar from 7 CONFIDENTIAL Netscape, or an equivalent position to that of the personal toolbar in the Communicator 4.5 release (and in equivalent positions of subsequent releases), for the Co-branded Net2Phone Product ("Button"). Inclusion of the Button in the personal toolbar will commence when Netscape releases the initial Netscape Software Bundle subject to the golden master of the Co-branded Net2Phone Product for the respective platform. Netscape also agrees to include a button in the versions of the localized language Netscape Navigator (excluding specific, custom software projects developed in accordance with customer requirements that necessitate an exclusion of such Co-branded Net2Phone Product, provided that Netscape has not encouraged such exclusion).personal toolbar from Netscape, or an equivalent position to that of the personal toolbar in the Communicator 4.5 release (and in equivalent positions of subsequent releases) to the extent that a Localized Version of the Co-branded Net2Phone Product has been delivered to Netscape. Inclusion of such button in the personal toolbar will commence when Netscape releases the Netscape Software Bundle that corresponds with the delivered Localized Version. The position of the Button is to be such that it is the second button from the left-most button on the personal toolbar and visible on a 640x480 pixel screen size. Netscape cannot guarantee that the Button will remain part of the personal toolbar for CCK releases based on the customizable nature of the CCK products. The name, design, look and feel of the Button shall be determined in Netscape's reasonable discretion, subject to Participant's approval, not to be unreasonably withheld but in any event will properly convey the functionality of the Co-branded Net2Phone Product. In addition, and provided that personal toolbar icons are supported for the corresponding version of the Netscape Navigator Product, Netscape will include an icon that conveys the functionality of the Co-branded Net2Phone Product on the Button with the text described in the succeeding sentence. The text on the Button will say "Net2Phone," unless otherwise mutually agreed upon by the parties. The Button will either (i) launch the Co-branded Net2Phone Product, if installed, or (ii) otherwise link to a Co-branded Net2Phone Product sell page. (d) Subject to Netscape's obligations under Section 3.3, for each Netscape Software Bundle and each Netscape Navigator release which includes the Button, Participant will provide the Co-branded Net2Phone Product for all Primary Platforms described in Exhibit D in accordance with the applicable --------- specifications and test procedures expressly provided for under this Agreement, including those set forth in Exhibits A and G. Without limiting ---------------- Participant's obligations pursuant to Exhibits A and G, in the event that a ---------------- given Netscape Software Bundle release can reasonably incorporate a previously accepted Co-branded Net2Phone Product without requiring any changes, Netscape shall include such existing Co-branded Net2Phone Product in the Netscape Software Bundle release in accordance with Sections 3.1(a) and (b). (e) If Netscape provides a localized version of SmartUpdate for an international version of Netscape's US Web Site, Netscape will include the Co- branded Net2Phone Product pursuant to the SmartUpdate program terms and will use commercially reasonable efforts to promote Participant in ways similar to those set forth in Section 3.2, if applicable to the particular international website. Netscape agrees to use commercially reasonable efforts to include the Co-branded Net2Phone Product and Co-branded Service in international versions of Netscape's US Web Site and, if so included, Netscape will use commercially reasonable efforts to promote Participant in ways similar to those set forth in Section 3.2, if applicable to the particular international website. 8 CONFIDENTIAL Notwithstanding anything contained herein to the contrary, Netscape shall have no obligation to bundle the Co-branded Net2Phone Product with any version of the Netscape Software Bundle to the extent that: (i) Participant has not delivered the applicable Co-branded Net2Phone Product for each of the primary platforms described in Exhibit D for the --------- applicable Netscape Software Bundle release; (ii) Co-branded Net2Phone Product does not meet any of the material requirements set forth above and in Exhibit G; or --------- (iii) Co-branded Net2Phone Product does not pass Netscape's acceptance test as described in Exhibit A. --------- Furthermore, notwithstanding anything contained herein to the contrary, Netscape shall have no obligation to bundle the Co-branded Net2Phone Product with any version of the Netscape Software Bundle to the extent that Netscape discontinues general commercial distribution of such version of Netscape Software Bundle, for any reason, provided that Netscape does not discontinue distribution for the purpose of avoiding its obligations hereunder by promoting an alternative Product that does not meet the definition of Netscape Software Bundle or otherwise. In the event Netscape discontinues general commercial distribution of all versions of the Netscape Software Bundle, but distributes a Product similar to, but not meeting the definition of, the Netscape Software Bundle, Netscape shall use its best efforts to bundle the Co-branded Net2Phone Product in such alternative Product in accordance with this Agreement. In addition, if Netscape alone, or in conjunction with an Affiliate, distributes or makes generally available a Product similar to, but not meeting the definition of, a Netscape Software Bundle with the goal or effect of replacing or phasing out over time the Netscape Software Bundle, Netscape shall use its best efforts to bundle the Co-branded Net2Phone Product in such alternative Products in accordance with this Agreement. 3.2 Netscape's Promotional Programs. During the Initial Bundling Period and in accordance with the commencement dates set forth in Exhibit E, or as --------- otherwise mutually agreed by the parties, Netscape shall provide the services set forth in Exhibit E to promote the Co-branded Net2Phone Product, with such --------- changes to the manner of promotion as may be reasonably necessary given changes that may occur in the various promotional programs over time; provided that the level of promotion of the Co-branded Net2Phone Product (including the manner in which an end user is encouraged to download Co-branded Net2Phone Product) will remain substantially the same as is described in Exhibit E. Netscape shall use --------- good faith efforts not to alter or replace Netcenter, Netscape's US Web Site or the portions or areas thereof which are a subject of this Agreement (the "Netscape Sites") with the purpose or effect of significantly avoiding its obligations under this Section 3.2. In the event Netscape, alters, replaces, discontinues or otherwise phases out the operation of the Netscape Sites in a manner that significantly avoids its obligations under this Section 3.2, but operates an alternative site(s) similar to the Netscape Sites alone or in conjunction with an Affiliate, Netscape shall comply with its obligations to provide services in accordance with this Section 3.2 on such alternative site(s). 9 CONFIDENTIAL Notwithstanding anything contained in this Section 3.2, Netscape shall have no obligation to provide such services with respect to Co-branded Net2Phone Product until thirty (30) days following Netscape's (i) acceptance of the applicable Co-branded Net2Phone Product in JAR format in accordance with Exhibits A and E and (ii) receipt of mutually acceptable Participant Collateral - ---------------- Materials. However, within thirty (30) days following receipt of the above, Netscape shall provide the above services with respect to the Co-branded Net2Phone Product. 3.3 Technical Communication. During the Initial Bundling Period, the parties will designate certain internal technical contacts for each other as set forth in Exhibit F and will conduct certain technical communication activities as --------- described in Exhibit F. Netscape will use commercially reasonable efforts to --------- provide technical and marketing assistance, including sufficient availability of applicable contacts and maintenance of regular communication channels between relevant personnel, for the purpose of assisting both parties to abide by their obligations under this Agreement. 3.4 General Conditions to Netscape Bundling and Promotional Obligations. Notwithstanding anything contained in this Section 3, Netscape shall have no obligation under this Section 3 with respect to a particular version of Co- branded Net2Phone Product or the Button to the extent that: (i) Netscape has received notice (written or verbal) of, and reasonably believes, that the reproduction, use or distribution of any version of the Co-branded Net2Phone Product in accordance with this Agreement infringes or misappropriates the intellectual property rights of any third party; or (ii) this Agreement is terminated by Participant or Netscape as set forth in this Agreement; or (iii) an aspect of such Co-branded Net2Phone Product exists, other than an acknowledged security risk that a corporation/ user accepts by opening up holes in its firewall to enable use of the Co-branded Net2Phone Product, that could be exploited in a manner that Netscape reasonably believes (a) would expose Netscape's users to potential efforts to invade their privacy or damage or modify data, software or hardware in an unauthorized manner or (b) would otherwise result in meaningful and serious claims that the Co-branded Net2Phone Product presents a security risk to its users; or (iv) in the case of a previously accepted Co-branded Net2Phone Product, the Co-branded Net2Phone Product contains a Priority level 1 or 2 Error, as defined in Exhibit C. --------- 3.5 Procedures Related to Suspension of Bundling or Promotional Services. Prior to suspending any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 or suspending use of the Logo as provided for in Section 2.4(other than in conjunction with termination of this Agreement which shall be treated in accordance with Section 11) in accordance with the above occurring events or the events described in Section 2.4 or in accordance with any other provision of this Agreement (other than termination of this Agreement), Netscape will give Participant notice and an opportunity to cure, as provided below, 10 CONFIDENTIAL unless, in its reasonable discretion, Netscape will be materially and adversely affected in a substantial manner by failing to act immediately or at some subsequent time prior to the completion of the notice and cure period. The notice will be in writing and contain a reasonably detailed explanation for Netscape's intention to suspend a given bundling or promotional activity or use of the Logo. Upon receipt of such notice, Participant will have at least seven (7) business days to cure the applicable error or deficiency to Netscape's reasonable satisfaction and, if cured, Netscape shall not suspend the given bundling or promotional services or Logo usage. Netscape will make good faith efforts to facilitate Participant's cure efforts and to extend the cure period as appropriate, so long as Netscape, in its reasonable discretion, is not materially prejudiced thereby. In the event Netscape suspends any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 or use of the Logo provided for in Section 2.4 (other than for termination of this Agreement) in accordance with this Agreement, including the provisions above, Netscape will notify Participant in writing within twenty-four hours of this decision setting forth in reasonable detail the explanation for such decision. Participant will then have the opportunity to cure the applicable error or deficiency. When such cure is demonstrated to Netscape's reasonable satisfaction, which satisfaction shall not be unreasonably withheld, Netscape shall resume the applicable bundling or promotional services or Logo usage as soon as commercially practical, which may be in the next release of the Netscape Software Bundle. If, in Participant's reasonable and good faith opinion, Netscape has improperly suspended any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 or Logo usage as provided for in Section 2.4 in a manner that was not in accordance with this Agreement, Participant shall provide Netscape with written notice of this contention. The parties will then attempt to determine in good faith whether or not such contention is true. If the parties both determine that Netscape improperly suspended any bundling or promotional services or Logo usage in a manner that was not in accordance with this Agreement, the InitialBundling Period will be extended by the length of time of such suspension. If the parties cannot reach agreement on Participant's contention within thirty (30) days of the notice, the Initial Bundling Period will be extended by a period of time equal to one-half the length of time of the suspension at issue; provided, however, that the total aggregate amount of time the Initial Bundling Period may be extended in this manner (i.e., where the parties cannot agree on the truth of the contention) cannot exceed sixty (60) days. Prior to suspending any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 (other than in conjunction with termination of this Agreement which shall be treated in accordance with Section 11) in accordance with the above occurring events or in accordance with any other provision of this Agreement (other than termination of this Agreement), Netscape will give Participant notice and an opportunity to cure, as provided below, unless, in its reasonable discretion, Netscape will be materially and adversely affected in a substantial manner by failing to act immediately or at some subsequent time prior to the completion of the notice and cure period. The notice will be in writing and contain a reasonably detailed explanation for Netscape's intention to suspend a given bundling or promotional activity. Upon receipt of such notice, Participant will have at least seven (7) business days to cure the applicable error or deficiency to Netscape's reasonable satisfaction and, if cured, Netscape shall not suspend the given bundling or promotional services. Netscape will make good faith efforts to facilitate Participant's cure efforts and to extend the cure period as appropriate, so long as Netscape, in its reasonable discretion, is not materially prejudiced thereby. 11 CONFIDENTIAL In the event Netscape suspends any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 (other than for termination of this Agreement) in accordance with this Agreement, including the provisions above, Netscape will notify Participant in writing within twenty-four hours of this decision setting forth in reasonable detail the explanation for such decision. Participant will then have the opportunity to cure the applicable error or deficiency. When such cure is demonstrated to Netscape's reasonable satisfaction, which satisfaction shall not be unreasonably withheld, Netscape shall resume the applicable bundling or promotional services as soon as commercially practical, which may be in the next release of the Netscape Software Bundle. If, in Participant's reasonable and good faith opinion, Netscape has improperly suspended any bundling or promotional services obligations provided for in Sections 3.1 or 3.2 in a manner that was not in accordance with this Agreement, Participant shall provide Netscape with written notice of this contention. The parties will then attempt to determine in good faith whether or not such contention is true. If the parties both determine that Netscape improperly suspended any bundling or promotional services in a manner that was not in accordance with this Agreement, the Initial Bundling Period will be extended by the length of time of such suspension. If the parties cannot reach agreement on Participant's contention within thirty (30) days of the notice, the Initial Bundling Period will be extended by a period of time equal to one-half the length of time of the suspension at issue; provided, however, that the total aggregate amount of time the Initial Bundling Period may be extended in this manner (i.e., where the parties cannot agree on the truth of the contention) cannot exceed sixty (60) days. 3.6 Provision of Unavailable Localized Versions. If Netscape desires a localized version of the Co-branded Net2Phone Product in addition to the Localized Versions, then Netscape shall notify Participant in writing within 5 months of the expected release date of the localized version. If Participant notifies Netscape that it has or will have the localized version available 8 weeks prior to the expected release date, then there shall be no fees owed to Participant and the localized version shall be provided to Netscape at least 8 weeks prior to the release date. Except with respect to Localized Versions, if Participant does not plan to develop or acquire the localized version as requested by Netscape prior to the 8 week deadline, then Netscape may elect to order such localized version from Participant for a fee equal to the Participant's reasonable costs of localization plus **** percent (to be quoted and agreed upon by Netscape in writing prior to the localization). Participant must respond within 10 working days after receiving Netscape's order for the localized version if Participant wishes to accept such order. If Participant accepts Netscape's order to develop the localized version, then both parties shall mutually agree upon a reasonable schedule for development of the localized version which must be completed at least 8 weeks prior to the expected release date such that Netscape has the ability to perform the agreed upon acceptance tests outlined in Exhibit A. Except as set forth specifically in this --------- Section 3.6 (i.e., Netscape orders and agrees to pay for a localized version to be developed at Netscape's request), there shall be no fees owed to Participant for Localized Versions. 3.7 Competitive Products. For the term of this Agreement, Netscape agrees not to bundle a directly competitive product to the Net2Phone Product that provides for PC to telephone calls in the Netscape Products described in Exhibit ------- D. - - [****] REPRESENTS MATERIAL, WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 12 CONFIDENTIAL 3.8 Reporting. Netscape agrees to make reasonable efforts to provide Participant with reporting information regarding aggregate numbers of downloads or other distributions of Netscape Communicator Complete and CCK, based on availability, from the Netscape download site and such other information as Participant shall reasonably request and that Netscape can reasonably provide. 4. CO-BRANDED SERVICE OBLIGATIONS 4.1 Co-branded Service Pages. The pages of the Co-branded Service will be produced, managed and hosted by Netscape or Participant as indicated in the site map attached hereto as Exhibit I or as otherwise mutually agreed from time to ------------------------------------------------------ time. Any Co-branded Service pages hosted by Participant on Participant's - ---- servers shall be designed by Netscape subject to Participant's approval which shall not be unreasonably withheld. With no less than 10 days prior written notice to Participant and except as limited by technical requirements, Netscape may produce, manage and host all such Co-branded Service pages. All Co-branded Service pages will have a "Netscape.com" domain name (or such other domain name as Netscape may determine) or as otherwise agreed between the parties. All access to the Co-branded Service shall be deemed to be via Netscape's Web Site, and therefore shall be Netscape traffic, provided, however, that all traffic from the Participant billing history, account summary, call details and substantially similar pages linked directly to the Co-branded Net2Phone Product, shall be deemed Participant traffic. Except as set forth in the previous sentence, Participant agrees that for the purpose of third party industry measurement metrics (such as Media Metrix and Relevant Knowledge), all traffic (by any industry unit of measurement) within such areas should be exclusively attributable to Netscape so long as such industry measurement metric companies do not attribute traffic to more than one entity. Participant shall contact such industry metrics companies and initiate this process, and Netscape and Participant will use commercially reasonable efforts and will sign appropriate documentation to obtain the consent of third party industry measurement firms to attribute traffic credit to both Participant and Netscape for such pages. The pages of the Co-branded Service designated for Co-branding shall be Co-branded by Netscape and Participant and such Co-branding shall appear above the fold. All use of Participant's name, logos, trademarks and service marks shall be subject to Participant's approval. Every Co-branded Service page within Netcenter shall include a header as specified at the following URL: http:/ / proto.mcom.com:888/nc20/html with User ID = **** and Password = **** or a replacement URL specified by Netscape from time to time. The overall look and feel of the header shall be determined by Netscape and be consistent with the look and feel of the other navigational elements within Netcenter. Netscape will be responsible for the design and look and feel of the Co-branded Service, subject to Participant's reasonable approval, not to be unreasonably withheld. Participant will be notified of any change to such design and look and feel and, subject to Participant's reasonable approval, given 30 days to implement such changes. All Co-branded Service pages will follow Netscape re-circulation, design and template specifications. The Co-branded Service pages may have mutually agreed upon links to the Participant Service or Participant's website, however, none of the Co-branded Service pages will link to a Netscape direct competitor. 4.2 Production, Technology and Content Programming. Subject to Participant's approval, not to be unreasonably withheld, Netscape shall be responsible for creating the graphic user interface for the Co-branded Service with commercially reasonable assistance from [****] REPRESENTS MATERIAL, WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 13 CONFIDENTIAL Participant, upon Netscape's request. The Co-branded Service shall use substantially the same technology and advantages as Participant uses in the Participant Service unless otherwise agreed to by the parties. The Co-branded Service shall not be disadvantaged or suffer from inferior production, programming or performance relative to the Participant Service, or any substantially similar service which Participant might make available to, or operate on behalf of, third parties. Participant shall consider, whenever reasonably possible, employing in the Co-branded Service and for Participant's enterprise, Netscape's technology, if available, provided that such use of Netscape's technology does not unduly burden the performance or production of the Co-branded Service. 4.3 Sale of Advertising. The parties shall allocate the sale and resulting revenue from Co-branded pages of the Co-branded Service as follows: (a) Netcenter Pages. As further described in Exhibit I, Netscape --------- shall be responsible for selling and serving advertising and any other promotions within the sell pages that are linked from the Netcenter "Contact" and "Voice Services" or equivalent nomenclature pages and Participant shall be responsible for selling and serving advertising and any other promotions within the download pages that are linked to the sell pages described above and any pages thereafter linked to Participant's download pages. Each party shall retain all advertising revenues realized from the sale of advertising pursuant to this Section 4.3 (a). (b) Pages Accessed from the Co-branded Net2Phone Product. Participant shall be responsible for selling and serving advertising and any other promotions within the Co-branded pages linked directly and indirectly (except for those pages described in subsections (a) and (c) of this Section) to the Co- branded Net2Phone Product and will share revenues from such sales in accordance with Section 13. (c) Netcenter Pages Accessed from Clicking on the Personal Tool Bar and the Contact Address Book. Netscape shall be responsible for selling and serving advertising and any other promotions within the pages accessed by clicking on the personal toolbar or clicking on the web-based address book accessible from Contact ("Contact Address Book") hosted by Netscape as indicated in Exhibit I. Participant shall be responsible for selling and serving --------- advertising and any other promotions within the pages hosted by Participant as indicated in Exhibit I. Each party shall retain all advertising revenues --------- realized from the sale of advertising pursuant to this Section 4.3 (c). 4.4 Technical Support by Participant. During the Term, Participant shall provide technical support services for the Co-branded Service to Netscape on a timely basis, appoint a technical contact to whom Netscape may address all technical questions relating to the Co-branded Service, and use reasonable commercial efforts to promptly remedy any material malfunctioning of the Co- branded Service, except to the extent such support services or material malfunctioning is attributable to any Products or to hardware or software under Netscape's or the end user's responsibility or control (other than the Co- branded Net2Phone Product itself or related portions of the Co-branded Service). Except as provided at the end of the previous sentence, Participant shall be solely responsible for end user satisfaction with respect to the Co-branded Service and maintenance and support requirements in connection with the Co- branded Service. Except for those portions of the Co-branded Service for which Netscape is 14 CONFIDENTIAL responsible pursuant to the terms of this Agreement, Participant shall be solely responsible for the purchase, implementation, maintenance and support of all software and hardware required to maintain portions of the Co-branded Service for which Participant is responsible and fulfill its obligations under the Agreement. Technical support obligations for the Co-branded Net2Phone Product are outlined in Section 8.1. 4.5 Netscape Technical Support. During the Term, Netscape shall provide technical support services to Participant for interaction between the Co-branded Service and other areas of Netcenter on a timely basis, appoint a technical contact to whom Participant may address all technical questions relating to the technical interface between such areas and use its commercially reasonable efforts to promptly remedy any material malfunctioning of areas of Netcenter that interact with the Co-branded Service. Netscape shall be solely responsible for end user satisfaction with respect to the Netcenter Service and maintenance and support requirements in connection with the Netcenter Service. Netscape shall be solely responsible for the purchase, implementation, maintenance and support of all software and hardware required to maintain the portions of the Co-branded Service for which Netscape is responsible and fulfill its obligations under the Agreement. 4.6 Quality Assurance. All of Participant's service offerings within the Co- branded Service and Co-branded Net2Phone Product must be "Best of Breed", meaning competitive with comparable market leading products and services, excluding price, containing substantially all of the features and functionality of, and being of the same or superior quality to such other available comparable market leading products and services. In the event Netscape notifies Participant that any portion of the Co-branded Service does not meet Best of Breed criteria, Participant shall have 10 business days within which to submit a mutually agreed upon action plan to cure such quality issue. 5. END USER REGISTRATION AND CUSTOMER SUPPORT 5.1 User Registration. End users who wish to engage in any activities in the Co-branded Service including use of the Co-branded Net2Phone Product which requires User Registration will have to register with the Co-Branded Service in accordance with the terms described in Exhibit H, as such Exhibit may be revised --------- by Netscape from time to time. Any and all information regarding end users that is obtained by Participant through, or in connection with, the Service will be subject to the terms and conditions of Exhibit H. --------- 5.2 Netcenter Customer Support Programs. Participant shall provide the following customer support features in the Co-branded Service: (i) 72 hour response to customer inquiries; (ii) 24 hour notification of order confirmation and estimated delivery time; and (iii) a secure transaction environment (supporting at least SSL 3.0, or the then current industry standard). Netscape may develop additional Netcenter features and programs to help promote sales and customer loyalty, and Participant shall implement such services and features when they are developed, provided such implementation is reasonable and is standard for participants in Netcenter. 15 CONFIDENTIAL 6. PROPRIETARY RIGHTS. Participant shall have no ownership interest in any of Netscape's products, including the Products, nor in any of Netscape's trademarks, and Netscape and its licensors shall retain ownership in such products and trademarks. Participant and its suppliers shall retain ownership in, and Netscape shall have no ownership interest in, all copyrights, patents, trade secrets, trademarks and trade name rights and all other right, title and interest in and to the Participant Marks, the Net2Phone Products, Co-branded Net2Phone Products (except for any Netscape trademarks and/or trade names therein), the Participant Service, the Participant Collateral Materials, international versions of the foregoing, any enhancements and improvements thereto, and derivative works thereof, delivered by Participant hereunder, and all proprietary rights therein, including all packaging designs, logos, slogans, advertising materials, promotional materials, and all other materials delivered by Participant pursuant hereto, except for the limited license rights expressly granted to Netscape as set forth in this Agreement. Netscape will not delete or in any manner alter the copyright, trademark, and other proprietary rights notices appearing on the Co- branded Net2Phone Product, the Net2Phone Product or any of the items licensed to Netscape under Section 2, and will reproduce such notices on all copies it makes of such products or items. 7. BUSINESS PRACTICES 7.1 End User Fees. Participant acknowledges that Netscape may charge for the Products and/or Integrated Offerings, provided that Netscape will not charge a fee for a stand-alone version of the Co-branded Net2Phone Product. 7.2 Identity as Separate Product. All Distributions will distinguish Co- branded Net2Phone Product as separate and distinct from the Products. The license grant to the end user for Co-branded Net2phone Product will be granted by Participant and not Netscape. Participant shall be responsible for all its obligations with respect to Co-branded Net2Phone Product pursuant to such license grant to end users. Netscape may utilize whatever reasonable method(s) Netscape deems appropriate to convey the separate nature of Participant Product to end users. 7.3 End User License Agreement. Co-branded Net2Phone Product will be licensed under an end user license agreement between Participant and the end user which is built into the Co-branded Net2Phone Product and which is substantially similar to the form attached hereto as Exhibit B ("License Form"). --------- Participant acknowledges that Netscape's installation procedure for the Integrated Offering may not provide a mechanism for the potential end user to review the end user license agreement prior to installation 7.4 Integration. Netscape will, with consultation of Participant, determine installation requirements and other technical requirements applicable to inclusion of Co-branded Net2Phone Product in the Integrated Offering. At Netscape's request, Participant will promptly assist Netscape in making the integration of Co-branded Net2Phone Product into the Integrated Offering as seamless as reasonably possible. 7.5 Unauthorized Distribution. Participant acknowledges that Electronic Distribution of the Co-branded Net2Phone Product may result in an increased number of persons obtaining 16 CONFIDENTIAL copies through improper channels (e.g., redistribution over the Internet, "mirror sites," unauthorized posting to newsgroups, etc.). Participant agrees that Netscape will not bear the risk of unauthorized distribution or redistribution by third parties, both during and after the term of this Agreement, and that Netscape shall have no liability to Participant or its suppliers for any such unauthorized distribution. 7.6 User Documentation Changes. Netscape agrees that if it (a) makes any major modifications (for distribution) to the Co-branded Net2Phone Product user documentation and Participant Collateral Materials other than formatting and non-substantive style ("User Doc Modifications"), the Participant shall have the right to approve such User Doc Modifications as follows. Netscape shall provide any such User Doc Modifications to Participant for review and approval, and Participant shall not unreasonably withhold or delay any such approval. If Participant does not respond to Netscape with approval or specified reasons for rejection of User Doc Modifications within five (5) business days after submission by Netscape, then such User Doc Modifications shall be deemed approved by Participant. At the time of entering into this Agreement, Netscape does not anticipate making any User Doc Modifications. Participant shall own such User Doc Modifications (except for any Netscape trademarks/logos contained therein), and Netscape hereby transfers and assigns all of its rights therein to Participant, subject to the following: (1) all User Doc Modifications are provided to Participant "AS IS"; and (2) except for any Participant trademarks/logos contained therein, Netscape shall retain a nonexclusive, perpetual, irrevocable, worldwide license to use, distribute, reproduce, publish and modify the User Doc Modifications (not the Co-branded Net2Phone Product user documentation, only the changes thereto), with rights to sublicense such rights. 8. PARTICIPANT OBLIGATIONS 8.1 Support. Netscape will not provide any support for Co-branded Net2Phone Product. Netscape may notify end users that it does not provide any such support and that end users must contact Participant directly for support options. Participant will take reasonable commercial steps to make end users aware that all support requests for Co-branded Net2Phone Product should be directed to Participant. Participant will make available to end users of the Co-branded Net2Phone Product support that, at a minimum, conforms to the requirements of Exhibit C relating to end user support. Participant also agrees to provide HTML - --------- based user support through the browser. A minimum of 80% of user support should be located on the server. 8.2 Upgrades. Participant will include Netscape in its alpha and beta programs for any Upgrades released during the term of this Agreement, and will provide Netscape with the production version of such Upgrades simultaneously with its earliest release of such Upgrades to other customers. Participant shall also provide Netscape during the term hereof with any error corrections, bug fixes and enhancements to the Co-branded Net2Phone Product (other than corrections, bug fixes and enhancements specifically for custom or specialized versions or projects) simultaneously with its earliest release of such error corrections, bug fixes or enhancements to other customers. Netscape will use reasonable and good faith efforts to incorporate any such Upgrade, error correction, bug fix or enhancement in an the applicable Integrated Offering or Distribution in a commercially reasonable period of time. 17 CONFIDENTIAL 8.3 Complete Listing. Participant will provide Netscape with a complete list of all files, libraries, etc. that are required for installation and use of Co- branded Net2Phone Product within five (5) days of Netscape's request. 8.4 No Viruses. Participant will use commercially reasonable efforts to ensure that the Co-branded Net2Phone Product (i) does not contain any computer virus or (ii) will not otherwise introduce any harmful or destructive code into the end user's computer. 8.5 Participant Collateral Material. Participant will provide Netscape the Participant Collateral Materials as specified in Exhibit A and such additional --------- or modified Participant Collateral Materials as Netscape may reasonably request from time to time for Netscape's use in accordance with this Agreement. If Netscape determines that any Participant Collateral Material, or any material that is located one click away from any Participant Collateral Materials, contains anything that Netscape reasonably deems likely to cause Netscape material harm, Netscape will inform Participant and may exclude Participant Collateral Materials from Netscape's website, marketing materials and products until corrected. Netscape reserves the right not to include in its website, marketing materials and products, any Participant Collateral Materials that do not substantially conform to the terms set forth in this Agreement. 8.6 Netscape Now. Participant agrees during the Initial Bundle Period to promote Netscape Navigator as a "recommended browser" for using with Co-branded Net2Phone Products, and in a manner no less favorably than any other browser, whenever and wherever Participant promotes the use of any browser. Participant agrees to place the Netscape Now button(s) on Participant's web site located at URL www.net2phone.com in accordance with the then current Netscape Now guidelines provided by Netscape, and which are currently available at http://home.netscape.com/comprod/mirror/netscape/now/guidelines.html. - -------------------------------------------------------------------- 8.7 Payments. Participant agrees to make the payments set forth in Section 13. 8.8 Marketing Promotions. Participant shall provide mutually agreed upon marketing promotions or product/service bundles for the Co-branded Net2Phone Product, including all localized versions. 9. WARRANTIES AND INDEMNIFICATION 9.1 Title. Participant warrants to the best of its knowledge that (i) it has the right to grant the licenses as set forth in this Agreement, (ii) such licenses do not infringe on any third parties' proprietary rights, (iii) it owns or possesses all rights to the Co-branded Net2Phone Product and to the Participant Collateral Materials necessary to grant the licenses hereunder, (iv) Netscape shall not be obligated to pay any fees or royalties for use of the Co- branded Net2Phone Product or the Participant Collateral Materials, and (v) there are no pending or threatened lawsuits concerning any aspect of the Co-branded Net2Phone Product or any Participant Collateral Materials that would have a materially adverse impact on Netscape and its ability to exercise the licenses granted hereunder. If Participant becomes aware of any pending or threatened lawsuit concerning any aspect of the Co-branded Net2Phone Product or the Participant Collateral Materials that, in its reasonable opinion, could likely have a materially 18 CONFIDENTIAL adverse impact on Netscape and its ability to exercise the licenses granted hereunder, Participant shall notify Netscape and provide Netscape with information reasonably related thereto. 9.2 Export. Participant shall be responsible for obtaining any and all necessary approvals, registrations or certifications for the international sale or export of the Co-branded Net2Phone Product. Participant shall inform Netscape and keep Netscape apprised of the export approval status of the Co-branded Net2Phone Product and must promptly inform Netscape of any cryptographic technologies used or embedded within the Co-branded Net2Phone Product, and of any associated international restrictions. Notwithstanding the foregoing, both parties shall adhere to all applicable laws, regulations and rules relating to the export of technical data and shall not export or re-export any technical data, any products received from the other party or the direct product of such technical data to any proscribed country listed in such applicable laws, regulations and rules unless properly authorized. 9.3 Non-Infringement. Without limiting Netscape's rights under Section 9.8, should the Co-branded Net2Phone Product become, or in Participant's opinion be likely to become, the subject of any infringement claim or suit, Participant shall, at its option: (i) procure for Netscape the right to continue distributing the Co-branded Net2Phone Product, as well as the right for Netscape and its customers to continue use of the Co-branded Net2Phone Product, while maintaining substantially similar functionality, (ii) modify the Co-branded Net2Phone Product such that it no longer infringes the proprietary rights of any third party, while maintaining substantially similar functionality, look and feel of the Co-branded Net2Phone Products, or (iii) if (i) and (ii) are not commercially practicable and Participant determines in good faith (and is confirmed by an opinion of its counsel, if reasonably requested by Netscape) that continued distribution by Netscape (and its other similarly situated distributors) will likely increase the likelihood of liability to Participant and Participant ceases distribution of Co-branded Net2Phone Product by its other similarly situated distributors, Participant may terminate this Agreement. 9.4 Performance. Participant warrants that (i) for a period of 90 days from the applicable delivery date that the media on which the Co-branded Net2Phone Product is delivered will be free of defects in material and workmanship, (ii) the Co-branded Net2Phone Product will function substantially in accordance with the specifications for the Co-branded Net2Phone Product in applicable documentation, and (iii) the Co-branded Net2Phone Product documentation shall be accurate in all material respects. In the case of a breach of the warranties in this Section 9.4, Participant shall use commercially reasonable efforts to repair or replace non-conforming, unsuitable or inaccurate Co-branded Net2Phone Product software or documentation within a reasonable period of time of notice of such condition. 9.5 Year 2000. Participant warrants that the Co-branded Net2Phone Product is Year 2000 Compliant. "Year 2000 Compliant" shall mean the Co-branded Net2Phone Product complies with the following: (a) General Integrity: No value for the current date will interrupt ----------------- normal operation: the Co-branded Net2Phone Product returns the correct date accurate to century in response to a request for current date, the Co-branded Net2Phone Product correctly provides date output and performs calculations on dates or portions of dates, and the Co-branded Net2Phone Product is not adversely affected by any value returned; 19 CONFIDENTIAL (b) Date Integrity: Correct results are returned in the operation of -------------- all legal, arithmetic, logical and calendar operations of dates that span century marks; (c) Explicit Century: The Co-branded Net2Phone Product's internal ---------------- date storage format explicitly includes the century and reporting formats allow date representations in four digit format; (d) Implicit Century: On encountering data that does not include the ---------------- century either from transaction input or from an external data source, the century value is unambiguously inferred by the Co-branded Net2Phone Product. In the case of a breach of the warranty described in this Section 9.5, Participant shall use commercially reasonable efforts to modify the Co-branded Net2Phone Product such that the Co-branded Net2Phone Product is Year 2000 Compliant. Netscape may suspend the distribution of Co-branded Net2Phone Product if Participant is in breach of the warranty in this Section 9.5 in accordance with the procedures set forth in Section 3.5 of this Agreement.. 9.6 General Warranty. Each party represents and warrants to the other party that: (i) it has the full corporate right, power and authority to enter into this Agreement, and to perform the acts required of it hereunder; and (ii) the execution of this Agreement by it, and the performance by it of its obligations and duties hereunder, do not and shall not violate any agreement to which it is a party or by which it is otherwise bound. 9.7 Disclaimer. THE WARRANTIES PROVIDED BY EACH PARTY HEREIN ARE EXCLUSIVE AND THE ONLY WARRANTIES PROVIDED BY EACH PARTY WITH RESPECT TO THE PARTICIPANT'S PRODUCTS AND SERVICES AND THIS AGREEMENT. SUCH WARRANTIES ARE IN LIEU OF, AND BOTH PARTIES AND THEIR SUPPLIERS DISCLAIM ALL OTHER WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, SATISFACTORY QUALITY OR, EXCEPT AS EXPRESSLY PROVIDED HEREIN, NONINFRINGEMENT. 9.8 Participant Indemnity. Participant agrees to defend any action or claim brought against Netscape to the extent that such action or claim is based upon, third party claims alleging (i) Participant does not have the right to grant the licenses as set forth in this Agreement, such licenses do infringe on any third parties' proprietary rights, Participant does not own or possess all rights to the Co-branded Net2Phone Product and to the Participant Collateral Materials and to the portions of the Co-branded Service provided by Participant necessary to grant the licenses and rights hereunder, and/or Netscape shall be obligated to pay fees or royalties for use of the Co-branded Net2Phone Product or the Participant Collateral Materials or the portions of the Co-branded Service provided by Participant, and/or (ii) that Netscape's exercise of its rights to the Co-branded Net2Phone Product and/or Participant Collateral Materials and/or portions of the Co-branded Service provided by Participant granted by Participant hereunder infringes any trademark patent, copyright, trade secret or other proprietary right of any third party (in each such case, a "Netscape Claim"). Participant will pay any costs, damages and expenses (including settlement costs and reasonable attorneys' fees) attributable to such Netscape Claim that are awarded in a final judgment against Netscape, provided that Netscape (i) promptly notifies 20 CONFIDENTIAL Participant in writing of any such claim and grants Participant sole control of the defense and all related settlement negotiations, and (ii) cooperates with Participant, at Participant's expense, in defending or settling such claim; provided that if any settlement results in any ongoing liability to, or prejudices or detrimentally impacts Netscape, and such obligation, liability, prejudice or impact can reasonably be expected to be material, then such settlement shall require Netscape's written consent. In connection with any such claim, Netscape may have its own counsel in attendance at all public interactions and substantive negotiations at its own cost and expense. Exclusions. Notwithstanding the above, Participant will have no liability for any Netscape Claim to the extent (i) it relates to any Products, any portions of the Netscape Software Bundle or Integrated Offering or the Co- branded Service that are not provided to Netscape by Participant or any other product or service not provided, in whole or in part, by Participant or (ii) it results from (a) modifications to the Co-branded Net2Phone Product or Participant Collateral Materials or portions of the Co-branded Service provided by Participant made other than by Participant or at Participant's direction or without Participant's approval; (b) failure of Netscape to use updated or modified versions of the Co-branded Net2Phone Product or Participant Collateral Materials when such versions have been timely supplied to Netscape by Participant to be included in the next relevant Netscape Software Bundle, or portions of the Co-branded Service; (c) the use of the Net2Phone Product or Participant Collateral Materials or portions of the Co-branded Service provided by Participant in combination with software or hardware not provided by Participant if such infringement would have been avoided but for such combination. 9.9 Netscape Indemnity to Participant. Netscape agrees to defend any action or claim brought against Participant to the extent that such action or claim is based upon third party claims alleging that any portion of the Co-branded Service provided by Netscape or any portion of the Netscape Software Bundle or Integrated Offering provided by Netscape infringes any trademark, patent, copyright or trade secret or other proprietary right of any third party (in each such case a "Participant Claim"). Netscape will pay any costs, damages and expenses (including settlement costs and reasonable attorneys' fees) attributable to such Participant Claim that are awarded in a final judgment against Participant, provided that Participant (i) promptly notifies Netscape in writing of any such claim and grants Netscape sole control of the defense and all related settlement negotiations, and (ii) cooperates with Netscape, at Netscape's expense, in defending or settling such claim; provided that if any settlement results in any ongoing liability to, or prejudices or detrimentally impacts Participant, and such obligation, liability, prejudice or impact can reasonably be expected to be material, then such settlement shall require Participant's written consent. In connection with any such claim, Participant may have its own counsel in attendance at all public interactions and substantive negotiations at its own cost and expense. Exclusions. Notwithstanding the above, Netscape will have no liability for any Participant Claim to the extent (i) it relates to the Net2Phone Product, any portions of the Netscape Software Bundle or Integrated Offering or the Co- branded Net2Phone Product or the Co-branded Service that are not provided by Netscape, or any other product or service not provided, in whole or in part, by Netscape or (ii) it results from (a) modifications to the portions of the Netscape Software Bundle or Integrated Offering or Co-branded Net2Phone Product or Co-branded Service provided by Netscape made other than by Netscape or at Netscape's direction or without Netscape's approval; (b) failure of Participant to use updated or modified versions of the portions of the Co-branded Service or Co-branded Net2Phone Product provided 21 CONFIDENTIAL by Netscape to Participant provided that Netscape supplies such version to Participant in a timely manner; (c) the use of the portions of the Co-branded Service or Co-branded Net2Phone Product provided by Netscape in combination with software or hardware not provided by Netscape if such infringement would have been avoided but for such combination. 10. LIMITATION OF LIABILITY. EXCEPT FOR PARTICIPANT'S OBLIGATIONS AND LIABILITY UNDER SECTION 9.8 AND 12 AND NETSCAPE'S OBLIGATIONS AND LIABILITY UNDER SECTIONS 9.9 AND 12, IN NO EVENT WILL EITHER PARTY OR THEIR SUPPLIERS BE LIABLE FOR ANY LOST PROFITS OR ANY FORM OF INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER FROM ANY CAUSES OF ACTION OF ANY KIND WITH RESPECT TO THIS AGREEMENT OR THE PARTICIPANT'S PRODUCTS OR SERVICES LICENSED HEREUNDER, WHETHER ARISING IN TORT (INCLUDING NEGLIGENCE), CONTRACT, OR OTHERWISE, EVEN IF IT HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES. WITHOUT LIMITING THE FOREGOING, EXCEPT FOR PARTICIPANT'S OBLIGATIONS AND LIABILITIES UNDER SECTIONS 9.8 AND 12 AND NETSCAPE'S OBLIGATIONS AND LIABILITIES UNDER SECTIONS 9.9 AND 12, IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY ARISING OUT OF OR RELATING TO THIS AGREEMENT EXCEED THE GREATER OF (i) THE SUM OF THE PAYMENTS MADE BY PARTICIPANT TO NETSCAPE UNDER THIS AGREEMENT DURING THE 6 MONTH PERIOD PRIOR TO THE CLAIM GIVING RISE TO SUCH LIABILITY OR (ii) TWO HUNDRED AND FIFTY THOUSAND DOLLARS (US$250,000). 11. TERMINATION 11.1 Term after Initial Bundling Period. The term of this Agreement shall continue up until the end of the Initial Bundling period, unless terminated earlier as set forth herein. This Agreement shall automatically terminate upon the end of the Initial Bundling Period unless the parties agree in writing to extend or renew the term of this Agreement. Notwithstanding the foregoing, Netscape agrees to use commercially reasonable efforts to negotiate in good faith with Participant mutually satisfactory terms for an additional one (1) year period. Participant shall provide Netscape with ninety (90) days prior notice of its desire to renew for a third year. 11.2 Termination for Cause. Either party shall have the right to terminate this Agreement upon a material default by the other party of any of its material obligations under this Agreement, in accordance with the following procedures: (i) the party claiming breach shall provide the breaching party with written notice setting forth in reasonable detail the material default; (ii) upon receipt of such notice, the breaching party shall have thirty (30) days to either remedy such default or provide the other party with a written plan to remedy such default in no more than sixty (60) days from the date such plan is provided to the other party; and (iii) upon the failure of the breaching party to cure such default within the thirty (30) or sixty (60) day period, as applicable, the party claiming breach may terminate this Agreement effective immediately upon written notice thereof. 22 CONFIDENTIAL 11.3 Termination. Either Party shall have the right to terminate this Agreement upon written notice to the other party in the event either party is dissolved and no successor assumes such dissolved party's obligations under this Agreement. In the event a governmental authority with applicable jurisdiction determines that the calling service provided under the Co-branded Net2Phone Product is contrary to existing laws, rules or regulations, Participant may terminate this Agreement upon written notice to Netscape. 11.4 Rights Upon Termination. Upon termination of this Agreement, Netscape shall have the right at its option, to continue producing versions of the Integrated Offering(s) including the Co-branded Net2Phone Product for the longer ("End Date") of (i) Netscape's production of the next major commercial release (indicated by a change in version number to the left of the decimal point of an Integrated Offering(s)) of the Integrated Offering(s), or (ii) twelve (12) months from date of expiration or termination. Following any termination or expiration of this Agreement, Netscape and its distribution channels shall be entitled to continue to exercise the rights granted hereunder indefinitely with respect to any version(s) of the Integrated Offerings already released prior to the End Date and with respect to any versions of Co-branded Net2Phone Product offered through the SmartUpdate Program. Upon termination for cause of this Agreement by Participant or in the event that Netscape is dissolved and no successor assumes Netscape's obligations under this Agreement, Participant shall not be obligated to make any additional payments to Netscape as provided for in Section 13, however, Participant shall be obligated to pay any amounts due and payable prior to such termination for cause. 11.5 Survival after Termination. 11.5.1 Sublicenses. All sublicenses to the Co-branded Net2Phone Product which are properly granted shall survive any termination or expiration of this Agreement. 11.5.2 Provisions of Agreement. The provisions of Sections 6, 7.5, 8.1, 9.8, 9.9, 10,11.4, 11.5, 12, 13 and 14 will survive any termination or expiration of this Agreement; provided that the survival of Section 8.1 will not exceed twelve (12) months following the termination or expiration of this Agreement. Provisions of other Sections which, by their nature, must remain in effect beyond the termination or expiration of this Agreement shall also survive. 12. CONFIDENTIALITY 12.1 Confidential Information. Except as provided for Exhibit H, each party --------- (the "Receiving Party") understands that the other party (the "Disclosing Party") has disclosed or may disclose information of a confidential nature including, without limitation, computer programs, code, algorithms, names and expertise of employees and consultants, know-how, formulas, processes, ideas, inventions (whether patentable or not), schematics and other technical, business, financial and product development plans, forecasts, strategies and information ("Proprietary Information"). All Proprietary Information disclosed in tangible form by the Disclosing Party shall be marked "confidential" or "proprietary" and all Proprietary Information disclosed orally or otherwise in intangible form by the Disclosing Party shall be designated as confidential or proprietary at the time of disclosure. 23 CONFIDENTIAL 12.2 Disclosure and Use. The Receiving Party agrees (i) to hold the Disclosing Party's Proprietary Information in confidence and to take all necessary precautions to protect such Proprietary Information (including, without limitation, all precautions the Receiving Party employs with respect to its own confidential materials), (ii) not to divulge any such Proprietary Information or any information derived therefrom to any third person, except independent contractors under an obligation of confidentiality and with a need to know for purposes authorized under this Agreement, (iii) not to make any use whatsoever at any time of such Proprietary Information except as authorized under this Agreement, and (iv) not to remove or export any such Proprietary Information from the country of the Receiving Party except as may be allowed by applicable export laws. The Receiving Party shall limit the use of and access to the Disclosing Party's Proprietary Information to the Receiving Party's employees, attorneys and independent contractors under an obligation of confidentiality and restricted use who need to know such Proprietary Information for the purposes authorized under this Agreement. The Receiving Party shall treat the Proprietary Information with at least the same degree of care and protection as it would use with respect to its own proprietary information. The foregoing obligations shall survive for a period of three (3) years from the date of disclosure of the Proprietary Information. Without granting any right or license, the Disclosing Party agrees that the foregoing shall not apply with respect to information that the Receiving Party can establish (i) is in the public domain and is available at the time of disclosure or which thereafter enters the public domain and is available, through no improper action or inaction by the Receiving Party or any affiliate, agent or employee, or (ii) was in its possession or known by it prior to receipt from the Disclosing Party, or (iii) was rightfully disclosed to it by another person without restriction, or (iv) is independently developed by the Receiving Party without access to such Proprietary Information, or (v) is required to be disclosed pursuant to any statutory or regulatory authority, provided the Disclosing Party is given prompt notice of such requirement and the scope of such disclosure is limited to the extent possible, or (vi) is required to be disclosed by a court order, provided the Disclosing Party is given prompt notice of such order and provided the opportunity to contest it. 12.3 Independent Development. The terms of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Proprietary Information. Further, Proprietary Information as defined in Section 10.1 above shall not include the Residuals resulting from access to such Proprietary Information. The term "Residuals" means information in intangible form which may be retained in the unaided memories of Receiving Party's employees or independent contractors who have had access to the information. An employee's or contractor's memory will be considered to be unaided if the employee has not intentionally memorized the Proprietary Information for the purpose of retaining and subsequently using or disclosing it. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of Residuals. However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. 12.4 Return of Proprietary Information. Upon any termination or expiration of this Agreement each party upon the reasonable request of the disclosing party, will destroy, or return to the other party, all tangible copies of the other party's Proprietary Information. 24 CONFIDENTIAL 12.5 Confidentiality of Agreement. Each party agrees that the terms of this Agreement shall be deemed Proprietary Information of the other party, provided that in addition to the permitted disclosures under section 10.2, either party may disclose the terms of this Agreement (i) if required to do so by law or generally accepted accounting principles, (ii) as required to assert its rights hereunder, and (iii) to its own directors, employees, attorneys, accountants, and other advisors on a "need to know" basis and under an obligation of confidentiality no less stringent than set forth herein. Each party agrees that the Disclosing Party will be given prompt notice of any disclosure made pursuant to clause (i) or (ii) above, and that any such disclosure shall be limited to the extent possible. In addition, either party may disclose the terms of this Agreement or matters relating thereto to its Affiliates. 12.6 Use of End-User Information. Any information provided to Participant by Netscape, or collected by Participant (other than information obtained by Participant independently from end users who provide their information directly to Participant and not from a Netscape web site) from Netcenter members or Inbox Direct subscribers, shall be subject to Netcenter's privacy policy and terms of use, as in effect from time to time, the current version of which is located at http://www.netscape.com/netcenter/privacy.html. - ---------------------------------------------- 13. PAYMENT. 13.1 Percentage of Net Revenues from Participant Service. During the Initial Bundling Period, (i) Participant shall pay Netscape **** of the Net Revenue, as defined below, attributable to the initial purchase of the calling service provided through the Co-branded Net2Phone Product/Co-branded Service by first time users of the Co-branded Net2Phone Product/Co-branded Service, and (ii) Participant shall pay Netscape **** of the Net Revenue attributable to recharge fees for the calling service provided through the Co-branded Net2Phone Product/Co-branded Service generated by users throughout the Initial Bundling Period who first registered during the Initial Bundling Period ("Initial Users"). For a period of two (2) years after the Initial Bundling Period, Participant shall pay Netscape **** of the Net Revenue attributable to recharge fees for the calling service provided through the Co-branded Net2Phone Product/ Co-branded Service generated by Initial Users throughout such two (2) year period. During the Initial Bundling Period and for a period of six (6) months thereafter, Participant shall pay Netscape **** of Net Revenue attributable to amounts paid by Initial Users for Participant products and services other than the Co-branded Net2Phone Product. "Net Revenue" shall mean gross revenues that have been invoiced and received by Participant and are attributable to accounts registered through the Co-branded Net2Phone Product and Co-branded Service net of any taxes, surcharges, refunds, charge-backs and fraudulent usage. 13.2 Advertising Revenue Share. All revenue realized according to section 4.3 (b) shall be shared **** between the parties. 13.3 Reports. For purposes of tracking payments hereunder, Participant agrees to provide to Netscape the following data within forty-five (45) days after the end of each calendar quarter: the quantities of users who registered for the Co-branded Net2Phone Product in that quarter and made an initial purchase; the Net Revenue from sales made broken down by category as provided in Section 13.1 (i.e. initial purchases, recharge fees and upsells) ; advertising revenue generated from pages linked to the Co-branded Net2Phone Product, number of downloads from [****] REPRESENTS MATERIAL, WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 25 CONFIDENTIAL Participant's servers, and such other information as Netscape shall reasonably request that Participant can reasonably provide. With such report, Participant shall also report the fees for the quarter that accrued hereunder and provide payment to Netscape of any fees then due. 13.4 Records and Audit Rights. Participant shall maintain accurate records relating to the tracking of Co-branded Net2Phone Product Upgrade Sales and names generated from distribution of Co-branded Net2Phone Product by Netscape hereunder, sufficient to track and verify the fees payable to Netscape hereunder. Netscape may through an independent nationally recognized CPA conduct up to one audit of Participant per year to verify compliance with this Agreement upon at least twenty (20) business days prior notice, which audit shall be conducted at Netscape's expense, unless the results establish that inaccuracies have resulted in underpayment to Netscape of more than five percent (5%) of the amount actually due, in which case Participant shall pay all amounts due and bear the expense of the audit. The information obtained during any audit of Participant shall, subject to the terms of Section 10, be Proprietary Information of Participant and shall not be disclosed by Netscape except as may be reasonably necessary in order to enforce this Agreement. 13.5 Payments. All amounts payable to Netscape are nonrefundable, are stated and to be paid in U.S. Dollars and must be paid in accordance with the terms set forth herein. All payments shall be made by wire transfer or check. 13.6 Taxes. All payment amounts in this Agreement are in US dollars and are exclusive of any applicable taxes and shall be made free and clear of, without reduction for, (and Participant shall be responsible for and shall indemnify Netscape against) any applicable U.S. and foreign, state and local taxes, value added or sales taxes, withholding taxes, duties or levies and assessments, howsoever designated or computed, pertaining to the payments under this Agreement (excluding taxes based upon the net income of Netscape). Participant shall promptly furnish Netscape with tax receipts evidencing the payment of any taxes referred to in the preceding sentence. Netscape and Participant shall cooperate with each other in minimizing any applicable tax and in obtaining any exemption from or reduced rate of tax available under any applicable law or tax treaty. 14. GENERAL 14.1 Governing Law. This Agreement shall be subject to and governed in all respects by the statutes and laws of the State of Delaware without regard to the conflicts of laws principles thereof. In the event Participant brings suit against Netscape, the Superior Court of Santa Clara County and/or the United States District Court for the Northern District of California shall have exclusive jurisdiction and venue over all controversies in connection herewith, and each party hereby consents to such exclusive and personal jurisdiction and venue. In the event Netscape brings suit against Participant, an appropriate Superior Court and/or United States District Court for either the State of New Jersey or the State of New York shall have exclusive jurisdiction and venue over all controversies in connection herewith, and each party hereby consents to such exclusive and personal jurisdiction and venue. 14.2 Entire Agreement. This Agreement, including the exhibits and attachments referenced on the signature page hereto, constitutes the entire Agreement and understanding 26 CONFIDENTIAL between the parties and integrates all prior discussions between them related to its subject matter. No modification of any of the terms of this Agreement shall be valid unless in writing and signed by an authorized representative of each party. 14.3 Assignment. Except as set forth below, neither party may assign any of its rights or (except in the normal course of its business) delegate any of its duties under this Agreement, or otherwise assign or transfer this Agreement without the prior written consent of the other party. Either party may assign this Agreement in connection with any merger, acquisition, reorganization, sale of substantially all the assets or stock of that party or any similar event ("Change of Control Event") without the prior written consent of the other party. In the event of a Change of Control Event in which Netscape is not to be a surviving entity, Netscape will use commercially reasonable efforts to ensure this Agreement is assigned to the successor entity. Netscape shall have the right to terminate this Agreement upon thirty (30) days prior written notice if Participant assigns or transfers this Agreement as permitted to a direct competitor of Netscape in the web client or web portal business without Netscape's consent. Any attempted assignment, delegation or transfer in derogation of the foregoing shall be null and void. This Agreement shall apply to and bind any permitted successors or assigns of the parties hereto and any reference to the applicable parties herein shall refer to the applicable successors or assigns. 14.4 Notices. All notices required or permitted hereunder shall be given in writing addressed to the respective parties as set forth below and shall either be (i) personally delivered, (ii) transmitted by postage prepaid certified mail, return receipt requested, or (iii) transmitted by nationally- recognized private express courier, and shall be deemed to have been given on the date of receipt if delivered personally, or two (2) days after deposit in mail or express courier. Either party may change its address for purposes hereof by written notice to the other in accordance with the provisions of this Subsection. The addresses for the parties are as follows: Participant: Netscape: - --------------------------------------- -------------------------------------- Net2Phone, Inc. Netscape Communications Corporation 171 Main Street 501 East Middlefield Road Hackensack, NJ 07601 Mountain View, CA 94043 Fax: 201-928-2970 Fax: (415) 528-4123 Attn: General Counsel Attn: General Counsel With a copy to: With a copy to: - --------------------------------------- -------------------------------------- Jonathan Reich Eric Alexander Senior VP of Marketing and Business Senior Business Development Manager Development 14.5 Force Majeure. Neither party will be responsible for any failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including but not limited to acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods, or accidents. 27 CONFIDENTIAL 14.6 Waiver. The waiver, express or implied, by either party of any breach of this Agreement by the other party will not waive any subsequent breach by such party of the same or a different kind. 14.7 Headings. The headings to the Sections and Subsections of this Agreement are included merely for convenience of reference and shall not affect the meaning of the language included therein. 14.8 Independent Contractors. The parties acknowledge and agree that they are dealing with each other hereunder as independent contractors. Nothing contained in this Agreement shall be interpreted as constituting either party the joint venturer, employee or partner of the other party or as conferring upon either party the power of authority to bind the other party in any transaction with third parties. 14.9 Severability. In the event any provision of this Agreement is held by a court or other tribunal of competent jurisdiction to be unenforceable, the other provisions of this Agreement will remain in full force and effect. 14.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. For purposes hereof, a facsimile copy of this Agreement, including the signature pages hereto shall be deemed to be an original. Notwithstanding the foregoing, the parties shall deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof. 28 CONFIDENTIAL 14.11 Publicity. The parties agree to issue a mutually agreeable joint press release announcing their relationship and the purpose of this Agreement Such initial press release will include quotes from both Marc Andreessen endorsing the Net2Phone technology and Jim Barksdale endorsing the strategic partnership between Net2Phone and Netscape and the potential of the business opportunity. The parties shall cooperate with each other with respect to the timing and content of the joint press release, and with respect to any other press releases either may issue that directly relate to this Agreement or the relationship hereunder (neither party shall issue a press release on its own relating to this Agreement or the relationship hereunder prior to the joint press release). Except as the parties otherwise agree, no press release from either party shall contain any information regarding the financial or compensatory provisions of this Agreement. Further, any press release shall comply with the provisions of Section 10. 29 CONFIDENTIAL
PARTICIPANT NETSCAPE NET2PHONE, INC. NETSCAPE COMMUNICATIONS CORPORATION By: /s/ Jonathan Reich By: /s/ Noreen G. Bergin --------------------------------------- ---------------------------------- Print Name: JONATHAN REICH Print Name: Noreen G. Bergin Title: Senior Vice President Marketing & Title: Senior Vice President, Finance & Bus. Dev. Corporate Controller Date: January 31, 1999 Date: 01/31/99 --------------------------------------- ---------------------------------- REVIEWED BY NETSCAPE LEGAL Initial AM 1/31/99
30 EX-10.4 7 AGREEMENT, DATED AS OF JANUARY 31, 1998 EXHIBIT 10.4 CORPORATE END USER SOFTWARE ORDER FORM (With Terms and Conditions) No. 005355 Net2Phone, Inc. - -------------------------------------------------------------------------------- Full Legal Name of Entity Signing This Order Form ("Licensee") 171 Main Street - -------------------------------------------------------------------------------- Address of Principal Place of Business Hackensack, NJ 07601 - ----------------------------------------------------------------------------------------------------- City State/Province Postal Code/Country Contact Person: Jonathan Reich Telephone: 201-928-4438 Fax: 201-928-2970 ---------------------------------- --------------- ------------------ Licensee is incorporated in the state/country of: New Jersey ---------------------------------------------------
IMPORTANT NOTICE: UPON EXECUTION OF THIS ORDER FORM BY THE PARTIES, LICENSEE WILL HAVE CERTAIN RIGHTS AND OBLIGATIONS WITH RESPECT TO THE SOFTWARE PRODUCTS LISTED IN THE ATTACHED PRODUCT SCHEDULE (THE "PRODUCTS") AND THE RELATED DOCUMENTATION, AS SET FORTH IN THE ATTACHED LICENSE TERMS AND CONDITIONS. BY SIGNING THIS ORDER FORM, LICENSEE AGREES TO ALL THE TERMS AND CONDITIONS ATTACHED HERETO. THIS ORDER FORM, THE PRODUCT SCHEDULE AND THE LICENSE TERMS AND CONDITIONS ARE REFERRED TO HEREIN COLLECTIVELY AS THE "AGREEMENT." At Licensee's request, Licensor will provide the Products through a Netscape authorized reseller selected by Licensee ("Reseller") provided Licensee independently (i) seeks out the Reseller and (ii) negotiates pricing with the Reseller.
LICENSOR LICENSEE By: /s/ Noreen G. Bergin By: /s/ Jonathan Reich ------------------------------------------------------------- ---------------------------------------------------- Print Name: Noreen G. Bergin Print Name: JONATHAN REICH ---------------------------------------------------- -------------------------------------------- Title: Senior Vice President, Finance & Corporate Controller Title: Senior Vice President of Marketing & Bus. Dev. --------------------------------------------------------- ------------------------------------------------- Date: 01/31/99 Date: January 31, 1999 ---------------------------------------------------------- --------------------------------------------------
AGREEMENT CONSISTS OF: - ---------------------- 1. Corporate End User Software Order Form 2. Product Schedule 3. General License Terms and Conditions 4. Product Specific License Terms and Conditions REVIEWED BY NETSCAPE LEGAL Initial --------------------- GENERAL LICENSE TERMS & CONDITIONS REDISTRIBUTION OR RENTAL NOT PERMITTED These General Terms apply to all Netscape products BY CLICKING THE ACCEPTANCE BUTTON OR INSTALLING OR USING THE SOFTWARE PRODUCTS LISTED ON THE PRODUCT SCHEDULE, QUOTATION AND OFFER FORM, OR INVOICE (THE "PRODUCTS"), THE INDIVIDUAL OR ENTITY LICENSING THE PRODUCT(S) ("LICENSEE") IS CONSENTING TO BE BOUND BY AND IS BECOMING A PARTY TO THIS AGREEMENT. IF LICENSEE DOES NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, THE BUTTON INDICATING NON- ACCEPTANCE MUST BE SELECTED, AND LICENSEE MUST NOT INSTALL OR USE THE SOFTWARE. (Depending on the method of acquisition the licensed Products will be listed on a Product Schedule, Quotation and Offer form, or invoice. The term "Product Schedule" shall be used herein to refer to whichever of these documents is applicable.). 1. Agreement. The "Agreement" governing Licensee's use of the Product(s) consists of these General License Terms and Conditions ("General Terms"), each set of product specific license terms and conditions which follow ("Product Terms"), and, if provided, the (i) Corporate End User Order Form and product Schedule or (ii) Quotation and Offer form, as applicable. If more than one license agreement was provided for this Product, and the terms vary, the order of precedence of those license agreements is as follows: a signed agreement, a license agreement available for review on the Netscape website, a printed or electronic agreement that states clearly that it supersedes other agreements, a printed agreement provided with a Product, an electronic agreement provided with a Product. The General Terms apply to all Products on the Product Schedule, and each set of Product Terms applies only to the individual Products identified in the Product Terms sheet. All Products are licensed independently of one another. As used in this Agreement, for residents of Europe, the Middle East or Africa, "Netscape" shall mean Netscape Communications Ireland Limited; for residents of Japan, "Netscape" shall mean Netscape Communications (Japan), Ltd.; for residents of all other countries, "Netscape" shall mean Netscape Communications corporation. In this Agreement "Licensor" shall mean Netscape except: (i) if Licensee acquired the Product as a bundled component of a third party product or service, then such third party shall be Licensor; or (ii) if any third party software is included with a Product without any license agreement in any form (no license in the installer, as an electronic file or in the box in printed form), then the use of such third party software shall be governed by this Agreement, and the term "Licensor," with respect to such third party software, shall mean the copyright holder of that software and not Netscape. If a third party license agreement is provided, then the use of the third party software product shall be governed by such third party license agreement and not by this Agreement. Any third party software provided together with a Product is included for use at Licensee's option. 2. Term and Termination. This Agreement shall remain in effect until terminated in accordance with this Section or as otherwise provided in this Agreement. Licensee may terminate this Agreement at any time by written notice to Licensor. Licensor may terminate this Agreement immediately in the event of (i) any breach of Section 6 or 8 by Licensee or (ii) a material breach by Licensee which is not cured within 30 days of written notice by Licensor. Upon termination, Licensee shall discontinue use and certify as destroyed, or return to Licensor, all copies of the Product(s). Licensee's obligation to pay accrued charges and fees shall survive any termination of this Agreement. Within 30 calendar days after termination of the Agreement, Licensee shall pay to Licensor all sums then due and owing. 3. Fees and Taxes. The license fees due hereunder are exclusive of any applicable taxes. Netscape shall be responsible for and shall reimburse Licensee for, and promptly pay, all applicable national, state and local taxes, value added or sales taxes, and other taxes pertaining to payments except taxes based on Licensee's income. If Netscape in good faith contests any tax that is so payable or reimbursable by Netscape, Licensee shall cooperate in good faith in the contest at Netscape's expense. Licensee shall pass on to Netscape any tax refund and interest related thereto, received by Licensee with respect to Licensee's previous payment or reimbursement of applicable taxes and interest related thereto hereunder, if any. 4. Reports; Records; Audit. Licensee shall provide Licensor with quarterly reports containing the number and type of Product copied for license pursuant to this Agreement. Licensee shall maintain accurate records as necessary to verify compliance with this Agreement. Licensor may conduct one or more audits to verify such compliance. Audits will be conducted during normal business hours. All audits shall be conducted at Licensor's expense unless the results establish that Licensee has underpaid Licensor by more than 5% of the amount actually due, in which case Licensee shall pay all amounts due and bear the expense of the audit. Licensee acknowledges that Licensor is required by its suppliers of the relational database product provided with certain Products to disclose, and Licensee agrees that Licensor may disclose, the make/model, operating system and number of CPUs of the Designated System(s), as defined in the Product Schedule. 5. Proprietary Rights. Title, ownership rights, and intellectual property rights in the Product(s) shall remain in Netscape and/or its suppliers. Licensee acknowledges such ownership and intellectual property rights and will not take any action to jeopardize, limit or interfere in any manner with Netscape's or its suppliers' ownership of or rights with respect to Product(s). The Product(s) are protected by copyright and other intellectual property laws and by international treaties. Title and related rights in the content accessed through the Products(s) are the property of the applicable content owner and are protected by applicable law. The license granted under this Agreement gives Licensee no rights to such content. 6. Restrictions. Except as otherwise expressly permitted in this Agreement, Licensee may not: (i) modify or create any derivative works of any Product or documentation, including translation or localization (Licensee's code written to published APIs (application programming interfaces) for the Product(s) shall not be deemed derivative works); (ii) decompile, disassemble, reverse engineer, or otherwise attempt to derive the source code for any Product (except to the extent applicable laws specifically prohibit such restriction); (iii) redistribute, encumber, sell, rent, lease, sublicense, use the Products in a timesharing or service bureau arrangement, or otherwise transfer rights to any Product; (iv) copy any Product (except for an archival copy which must be stored on media other than a computer hard drive) or documentation (copies shall contain all the notices regarding proprietary rights that were contained in the Product(s) originally delivered by Licensor); (v) remove or alter any trademark; logo, copyright or other proprietary notices, legends, symbols or labels in the Product(s); (vi) modify any header files or class libraries in any Product; (vii) create or alter tables or reports relating to the database portion of the Product (except as necessary for operating the Product); (viii) publish any results of benchmark tests run on any Product to a third party without Netscape's prior written consent; (ix) use the database provided for use with any Product except in conjunction with the relevant Product; or (x) use any Product on a system with more CPUs than the number licensed, by more Users than have been licensed, on more computers than the number licensed, or by more developers than the number licensed, as applicable. 7. Limited Warranty. Provided Licensee has paid the applicable license fees for the Product(s), for 90 days after the date of shipment to Licensee (date of shipment meaning either the date Licensor shipped the Product on media or the date on which Licensee downloaded the Product from an authorized Netscape download site) of each Product (the "Warranty Period"), Licensor warrants that (i) the media on which the Product is delivered will be free of defects in material and workmanship under normal use; and (ii) the unmodified Product, when properly installed and used, will substantially achieve the functionality described in the applicable documentation. THE EXPRESS WARRANTY SET FORTH HEREIN CONSTITUTES THE ONLY WARRANTY WITH RESPECT TO THE PRODUCT(S). LICENSOR AND ITS SUPPLIERS DO NOT MAKE, AND HEREBY EXCLUDE, ALL OTHER REPRESENTATIONS OR WARRANTIES OF ANY KIND WHETHER EXPRESS OR IMPLIED (EITHER IN FACT OR BY OPERATION OF LAW) WITH RESPECT TO ANY PRODUCT OR TEST DATA INCLUDED IN ANY PRODUCT. LICENSOR AND ITS SUPPLIERS EXPRESSLY DISCLAIM ALL WARRANTIES OF TITLE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NONINFRINGEMENT OF THIRD PARTIES' RIGHTS. LICENSOR AND ITS SUPPLIERS DO NOT WARRANT THAT THE PRODUCT(S) WILL MEET LICENSEE'S REQUIREMENTS OR WILL OPERATE IN THE COMBINATIONS WHICH MAY BE SELECTED BY LICENSEE OR THAT THE OPERATION OF THE PRODUCT(S) WILL BE SECURE, ERROR-FREE OR UNINTERRUPTED AND LICENSOR HEREBY DISCLAIMS ANY AND ALL LIABILITY ON ACCOUNT THEREOF. THE SECURITY MECHANISMS IMPLEMENTED BY THE PRODUCT(S) HAVE INHERENT LIMITATIONS, AND LICENSEE MUST DETERMINE THAT THE PRODUCT(S) SUFFICIENTLY MEET LICENSEE'S REQUIREMENTS. LICENSOR AND ITS SUPPLIERS SHALL HAVE NO OBLIGATIONS UNDER THE WARRANTY PROVISIONS SET FORTH HEREIN IF LICENSEE SUBJECTS THE MEDIA TO ACCIDENT OR ABUSE; ALTERS, MODIFIES OR MISUSES THE PRODUCT(S); USES THE PRODUCT(S) INCORPORATED, ATTACHED OR IN COMBINATION WITH NON-NETSCAPE SOFTWARE OR ON ANY COMPUTER SYSTEM OTHER THAN THAT FOR WHICH THE PRODUCT IS INTENDED; OR LICENSEE VIOLATES THE TERMS OF THIS AGREEMENT. THE EXTENT OF LICENSOR'S DUTY UNDER THIS LIMITED WARRANTY SHALL BE THE CORRECTION OR REPLACEMENT ANY PRODUCT WHICH FAILS TO MEET THIS WARRANTY. IN THE EVENT OF A BREACH OF THIS WARRANTY, AND IF LICENSEE PROVIDES LICENSOR WITH A WRITTEN REPORT DURING THE WARRANTY PERIOD, LICENSOR WILL USE REASONABLE EFFORTS TO CORRECT OR REPLACE PROMPTLY, AT NO CHARGE TO LICENSEE, THE ERRORS OR FAILURES. THIS IS LICENSEE'S SOLE AND EXCLUSIVE REMEDY FOR BREACH OF ANY EXPRESS OR IMPLIED WARRANTIES HEREUNDER. NOTWITHSTANDING THE FOREGOING, SOME JURISDICTIONS DO NO ALLOW THE EXCLUSION OF CERTAIN IMPLIED WARRANTIES; HOWEVER, THE EXCLUSIONS OF LICENSOR'S WARRANTY IN THIS LIMITED WARRANTY SECTION SHALL APPLY TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW. THIS AGREEMENT DOES NOT EXCLUDE ANY WARRANTIES THAT MAY NOT BE EXCLUDED BY LAW AND ANY LIABILITY ARISING HEREUNDER SHALL BE LIMITED TO THE CORRECTION OR REPLACEMENT OF THE APPLICABLE PRODUCT, AT LICENSOR'S OPTION. 8. Confidentiality. "Confidential Information" shall mean this Agreement, if the terms have been negotiated, pricing information, and all information a party discloses to the other which has been either (i) characterized in writing as confidential at the time of its disclosure or (ii) orally characterized as confidential at the time of disclosure, except for information which the receiving party can demonstrate: (a) is previously rightfully known to the receiving party without restriction on disclosure; (b) is or becomes, from no act or failure to act on the part of the receiving party, generally known in the relevant industry or public domain; (c) is disclosed to the receiving party by a third party as a matter of right and without restriction on disclosure; or (d) is independently developed by the receiving party without access to the Confidential Information. Each receiving party shall at all times, both during the term hereof and for a period of at least 3 years after termination, keep in confidence all such Confidential Information using a standard of care such party uses with its own information of this nature, but in no event less than reasonable care. The receiving party shall not use any Confidential Information other than in the course of its permitted activities hereunder. Without the prior written consent of the disclosing party, the receiving party shall not disclose any Confidential Information except on a "need to know" basis to an employee or contractor under binding obligations or confidentiality substantially similar to those set forth herein. If a receiving party is legally compelled to disclose any of the disclosing party's Confidential Information, then, prior to such disclosure, the receiving party will (i) assert the privileged and confidential nature of the Confidential Information and (ii) cooperate fully with the disclosing party in protecting against any such disclosure and/or obtaining a protective order narrowing the scope of such disclosure and/or use of the Confidential Information. In the event such protection is not obtained, the receiving party shall disclose the Confidential Information only to the extent necessary to comply with the applicable legal requirements. 9. Limitation of Liability. EXPECT FOR LICENSOR'S OBLIGATIONS AND LIABILITY UNDER SECTION 18 OF THIS AGREEMENT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT WILL LICENSOR OR ITS SUPPLIERS OR RESELLERS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (OR ANY DIRECT DAMAGES WITH RESPECT SOLELY TO ANY DATABASE PRODUCT PROVIDED WITH THE PRODUCT) ARISING OUT OF THE USE OF OR INABILITY TO USE THE PRODUCT, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OR GOODWILL, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTION, OR ANY AND ALL OTHER COMMERCIAL DAMAGES OR LOSSES, EVEN IF ADVISED OF THE POSSIBILITY THEREOF, AND REGARDLESS OF THE LEGAL OR EQUITABLE THEORY (CONTRACT, TORT OR OTHERWISE) UPON WHICH THE CLAIM IS BASED. IN ANY CASE, LICENSOR'S ENTIRE LIABILITY UNDER ANY PROVISION OF THIS AGREEMENT SHALL NOT EXCEED IN THE AGGREGATE THE SUM OF THE LICENSE FEES LICENSEE PAID TO LICENSOR FOR THE PRODUCT GIVING RISE TO SUCH DAMAGES, NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY, WITH THE EXCEPTION OF DEATH OR PERSONAL INJURY CAUSED BY THE NEGLIGENCE OF LICENSOR TO THE EXTENT APPLICABLE LAW PROHIBITS THE LIMITATION OF DAMAGES IN SUCH CASES. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS EXCLUSION AND LIMITATION MAY NOT BE APPLICABLE. LICENSOR IS NOT RESPONSIBLE FOR ANY LIABILITY ARISING OUT OF CONTENT PROVIDED BY LICENSEE OR A THIRD PARTY THAT IS ACCESSED THROUGH THE PRODUCT AND/OR ANY MATERIAL LINKED THROUGH SUCH CONTENT. ANY DATA INCLUDED IN A PRODUCT UPON SHIPMENT FROM LICENSOR IS FOR TESTING USE ONLY AND LICENSOR HEREBY DISCLAIMS ANY AND ALL LIABILITY ARISING THEREFROM. THE EXTENT OF LICENSOR'S LIABILITY FOR THE LIMITED WARRANTY SECTION SHALL BE AS SET FORTH THEREIN. 10. Encryption. If Licensee wishes to use the cryptographic features of any Product, then Licensee may need to obtain and install a signed digital certificate from a certificate authority or a certificate server in order to utilize the cryptographic features. Licensee may be charged additional fees for certification services. Licensee is responsible for maintaining the security of the environment in which the Product is used and the integrity of the private key file used with the Product. In addition, the use of digital certificates is subject to the terms specified by the certificate provider, and there are inherent limitations in the capabilities of digital certificates. If Licensee is sending or receiving digital certificates, Licensee is responsible for familiarizing itself with and evaluating such terms and limitations. If the Product is a version with FORTEZZE, Licensee will need to obtain PC Card Readers and FORTEZZA Crypto Cards from another vendor to enable the FORTEZZE features. 11. Export Control. Licensee agrees to comply with all export laws and restrictions and regulations of any United States or foreign agency or authority, and not to export or re-export any Product or any direct product thereof in violation of any such restrictions, laws or regulations, or without all necessary approvals. As applicable, each party shall obtain and bear all expenses relating to any necessary licenses and/or exemptions with respect to its own export of the Product from the U.S. Licensee acknowledges that neither the Product nor the underlying information or technology may be downloaded or otherwise exported or re-exported (i) into Cuba, Iran, Iraq, Libya, North Korea, Sudan, Syria or any other country subject to U.S. trade sanctions covering the Product, to individuals or entities controlled by such countries, or to nationals or residents of such countries other than nationals who are lawfully admitted permanent residents of countries not subject to such sanctions; or (ii) to anyone on the U.S. Treasury Department's list of Specially Designated Nationals and Blocked Persons or the U.S. Commerce Department's Table of Denial Orders. By downloading or using the Product, Licensee represents and warrants that it complies with these conditions. If the Product(s) are identified as being not-for-export (for example, on the box, media or in the installation process), then, unless Licensee has an exemption from the United States government, the following applies: EXCEPT FOR EXPORT TO CANADA FOR USE IN CANADA BY CANADIAN CITIZENS, THE PRODUCT(S) AND ANY UNDERLYING ENCRYPTION TECHNOLOGY MAY NOT BE EXPORTED OUTSIDE THE UNITED STATES OR TO ANY FOREIGN ENTITY OR "FOREIGN PERSON" AS DEFINED BY U.S. GOVERNMENT REGULATIONS, INCLUDING WITHOUT LIMITATION, ANYONE WHO IS NOT A CITIZEN, NATIONAL OR LAWFUL PERMANENT RESIDENT OF THE UNITED STATES. BY DOWNLOADING OR USING THE SOFTWARE, LICENSEE AGREES TO THE FOREGOING AND WARRANTS THAT IT IS NOT A "FOREIGN PERSON" OR UNDER THE CONTROL OF A "FOREIGN PERSON." 12. High Risk Activities. The Product(s) are not fault-tolerant and are not designed, manufactured or intended for use or resale as on-line control equipment in hazardous environments requiring fail-safe performance, such as in the operation of nuclear facilities, aircraft navigation or communication systems, air traffic control, direct life support machines, or weapon systems, in which the failure of any Product could lead directly to death, personal injury, or severe physical or environmental damage ("High Risk Activities"). Accordingly, Licensor and its suppliers specifically disclaim any express or implied warranty of fitness for High Risk Activities. Licensee agrees that Licensor and its suppliers will not be liable for any claims or damages arising from the use of any Product in such applications. 13. U.S. Government End Users. The Product is a "commercial item," as that term is defined in 48 C.F.R. 2.101 (Oct. 1995), consisting of "commercial computer software" and "commercial computer software documentation," as such terms are used in 48 C.F.R. 12.212 (Sept. 1995). Consistent with 48 C.F.R. 12.212 and 48 C.F.R. 227.7202-1 through 227.7202-4 (June 1995), all U.S. Government End Users acquire the Product with only those rights set forth herein. 14. Purchase Orders. Licensee shall place written purchase orders for additional unit licenses. If Licensee is purchasing such licenses from Licensor, the purchase orders shall include the following information: (i) reference to the Agreement number on the Order Form, if applicable; (ii) description of each Product ordered, quantity and price; (iii) shipping instructions and destination; (iv) requested delivery date; (v) bill to address; and (vi) restatement of the payment terms on the Product Schedule, if applicable. 15. Notices. Any notice required or permitted hereunder shall be in English, in writing and shall be deemed to be properly given upon the earlier of (i) actual receipt by the addressee (including facsimile or e-mail) or (ii) 5 business days after deposit in the mail, postage prepaid, when mailed by registered or certified airmail, return receipt requested, or (iii) 2 business days after being sent via private industry courier to the respective parties at the addresses set forth in the Order Form or to such other person or address as the parties may designate in a writing. Notices to Licensor shall be to the attention of the Legal Department, at Netscape Communications Corporation, 501 East Middlefield Road, Mountain View, CA 94043, USA. 16. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements and communications, whether oral or written, between the parties relating to the subject matter hereof, and all past courses of dealing or industry custom. The terms and conditions hereof shall prevail exclusively over any written instrument submitted by Licensee, including purchase order, and Licensee hereby disclaims any terms therein, except for terms therein relating to product description, quantity thereof, pricing therefor, shipment and delivery. (b) This Agreement may be amended only by a writing signed by an executive vice president of Netscape and a duly authorized representative of Licensee. (c) Except to the extent applicable law, if any, provides otherwise, this Agreement shall be governed by the laws of the State of California, U.S.A., excluding its conflict of law provisions. (d) Any dispute hereunder will be negotiated between the parties commencing upon written notice from one party to the other. Settlement discussions and materials will be confidential and inadmissible in any subsequent proceeding without both parties' written consent. If the dispute is not resolved by negotiation within 45 days following such notice, the parties will refer the dispute to non-binding mediation conducted by JAMS Endispute in Santa Clara County, California (the "Venue"). The parties will share the costs of mediation. If the dispute is not resolved after 45 days of mediation, the parties will refer the dispute to binding arbitration by JAMS Endispute in the Venue. The results of any arbitration will be final and non-appealable, except that either party may petition any court of competent jurisdiction in the Venue to review any decision relating to intellectual property matters (including the scope of license rights) vacating or modifying erroneous conclusions of law or findings of fact not supported by substantial evidence. The arbitrator may fashion any legal or equitable remedy except punitive or exemplary damages, which both parties hereby waive. The arbitrator will render a written decision, which may be entered in and enforced by any court of competent jurisdiction, but which will have no preclusive effect in other matters involving third parties. The losing party will pay the costs of the arbitration and the reasonable legal fees and expenses of the prevailing party, as determined by the arbitrator. The parties will jointly pay arbitration costs pending a final allocation by the arbitrator. At any point in the dispute resolution process, either party may seek injunctive relief preserving the status quo pending the outcome of that process. Except as noted, the parties hereby waive any right to judicial process. The U.S. Arbitration Act and JAMS Endispute rules will govern the arbitration process. Absent fraudulent concealment, neither party may raise a claim more than 3 years after it arises or any shorter period provided by applicable statutes of limitations. Notwithstanding the foregoing, Licensor reserves the right to invoke the jurisdiction of any competent court to remedy or prevent violation of any provision in the Agreement relating to payment, Netscape Confidential Information or Netscape intellectual property. (e) If any dispute arises under this Agreement, the prevailing party shall be reimbursed by the other party for any and all legal fees and costs associated therewith. (f) This Agreement shall not be governed by the United Nations Convention on Contracts for the International Sale of Goods. (g) If any provision in this Agreement should be held illegal or unenforceable by a court having jurisdiction, such provision shall be modified to the extent necessary to render it enforceable without losing its intent, or severed from this Agreement if no such modification is possible, and other provisions of this Agreement shall remain in full force and effect. (h) The controlling language of this Agreement is English. If Licensee has received a translation into another language, it has been provided for Licensee's convenience only. (i) A waiver by either party of any term or condition of this Agreement or any breach thereof, in any one instance, shall not waive such term or condition or any subsequent breach thereof. (j) The provisions of this Agreement which require or contemplate performance after the expiration or termination of this Agreement shall be enforceable notwithstanding said expiration or termination. (k) Licensee may not assign or otherwise transfer by operation of law or otherwise this Agreement or any rights or obligations herein without the prior express written consent of Licensor, which will not be unreasonably withheld. (l) This Agreement shall be binding upon and shall inure to the benefit of the parties, their successors and permitted assigns. (m) If applicable, this Agreement may be executed in counterparts or by facsimile, each of which shall be deemed an original, and all of which together shall constitute one and the same agreement. (n) Neither party shall be in default or be liable for any delay, failure in performance (excepting the obligation to pay) or interruption of service resulting directly or indirectly from any cause beyond its reasonable control. (o) The relationship between Licensor and Licensee is that of independent contractors and neither Licensee nor its agents shall have any authority to bind Licensor in any way. (p) Netscape and its suppliers are direct and intended third party beneficiaries of this Agreement. (q) If any Netscape professional services are being provided, then such professional services are provided pursuant to the terms of a separate Professional Services Agreement between Netscape and Licensee. The parties acknowledge that such services are acquired independently of the Products licensed hereunder, and that provision of such services is not essential to the functionality of such Products. (r) The headings of the sections of this Agreement are used for convenience only and shall have no substantive meaning. (s) Licensor may use Licensee's name in any customer reference list or in any press release issued by Licensor regarding the licensing of the Product and/or provide Licensee's name and the names of the Products licensed by Licensee to third parties. 17. Licensee Outside the U.S. If Licensee is located outside the U.S., then the provisions of this Section shall apply. (i) If Licensee is purchasing licenses directly from Netscape and if Netscape and Licensee are not located in the same country, then, if any applicable law requires Licensee to withhold amounts from any payments to Netscape hereunder Licensee shall effect such withholding, remit such amounts to the appropriate taxing authorities and promptly furnish Netscape with tax receipts evidencing the payments of such amounts, and the sum payable by Licensee upon which the deduction or withholding is based shall be increased to the extent necessary to ensure that, after such deduction or withholding, Netscape receives and retains, free from liability for such deduction or withholding, a net amount equal to the amount Netscape would have received and retained absent such required deduction or withholding. (ii) Les parties aux presentes confirment leur volonte que cette convention de meme que tous les documents y compris tout avis qui s'v rattache, soient rediges en langue anglaise. (translation: "The parties confirm that this Agreement and all related documentation is and will be in the English language.") (iii) Licensee is responsible for complying with any local laws in its jurisdiction which might impact its right to import, export or use the Product(s), and Licensee represents that it has complied with any regulations or registration procedures required by applicable law to make this license enforceable. 18. Indemnity. (a) Netscape shall defend or settle, at its option, any action brought against Licensee to the extent it is based on a claim that use or reproduction by Licensee of the Netscape-owned portion of the Product hereunder directly infringes any valid patent, copyright or trade secret. Netscape will pay resulting costs, damages and legal fees finally awarded against Licensee in such action which are attributable to such claim provided that: (i) Licensee promptly notifies Netscape in writing of any such claim; (ii) Netscape has sole control of the defense and all related settlement negotiations; and (iii) Licensee cooperates with Netscape, at Netscape's expense, in defending or settling such claim. Should a Product become, or be likely to become in Netscape's opinion, the subject of infringement of such copyright or trade secret, Netscape may (I) procure for Licensee the right to continue using the same or (II) replace or modify it to make it non-infringing. Netscape shall have no obligation or liability for, and Licensee shall defend, indemnify and hold Netscape harmless from and against, any claim based upon: (A) use of other than then-current, unaltered version of the product, unless the infringing portion is also in the then-current, unaltered release; (B) use, operation or combination of the Product with non-Netscape programs, data, equipment or documentation if such infringement would have been avoided but for such use, operation or combination; (C) Licensee's or its agent's activities after Netscape has notified Licensee that Netscape believes such activities may result in such infringement; (D) compliance with Licensee's designs, specifications or instructions for the Product; (E) any modifications or marking of the Product not specifically authorized in writing by Netscape; (F) any authorized use of any Netscape intellectual property; (G) any content provided by Licensee and/or any material to which users can link through such content; or (H) third party software. The foregoing states the entire liability of Netscape and the exclusive remedy of Licensee with respect to infringement of any intellectual property right, whether under theory of warranty, indemnity or otherwise. NETSCAPE SERVER PRODUCT TERMS AND CONDITIONS These Terms apply to SuiteSpot, Calendar Express, Calendar Server, Certificate Server, Collabra Server, Compass Server, Content Management Server (part of PublishingXpert), Delegated Administrator, Directory Server, Enterprise Server, FastTrack Server, Messenger Express, Messaging Server, Process Manager & Proxy Server. These terms do not apply to Hosting Edition products. For Hosting Edition products see the Hosting Edition Terms and Conditions. 1. Agreement. The Agreement governing Licensee's use of the Product(s) identified above ("Server Products") consists of these Netscape Server Product Terms and Conditions, the General Terms, and, if provided, the (i) Corporate End User Order Form and Product Schedule or (ii) Quotation and Offer form, as applicable. 2. License Grant. Subject to payment of applicable license fees, Licensor grants Licensee a non-exclusive and non-transferable license to use the executable code version of the Server Product(s) and accompanying documentation in the territory of use allowed under the license fee paid by Licensee (the "Territory"), according to the terms and conditions of this Agreement. Licensee is only entitled to a refund if one is offered by Licensee's place of purchase. Licensee may: A. For Packaged Products: a. Allow access to the functionality and/or services provided by the Server Products(s) by a maximum of fifty Users, unless (i) Licensee has paid fees for access by additional Users as reflected in the Product Schedule, (ii) the information in the User Table (defined below) indicates access by more or fewer Users is allowed for a specific Server Product, (iii) the Server Product is Netscape FastTrack Server which is licensed on a per copy unlimited User basis, or (iv) Licensee is using the PM Builder component of Netscape Process Manager, which is licensed on a per developer basis. "Users" is defined for each Server Product in the User Definitions table found at the following URL: http://home,netscape.com/servers/pricing/license.html (the "User Table"). License fees must be paid for all Users who have access to the Server Product's services, not just the number who may access those services concurrently. Additional fees are required prior to providing access to additional Users (with the exceptions noted above). It is recommended that Licensee print out a copy of the User Table page on the date of purchase confirmation of the information provided therein. b. Install the Server Product(s) on only one computer on a single platform unless Licensee has paid fees for use by additional Users. In that case, for Server Products that are licensed on aper-User basis, Licensee may install one additional copy for every 50 additional licensed Users, except that if the User Table provides different information, Licensee may make the number of copies indicated in the User Table. If a relational database product is provided with a Server Product, Licensee may only install one copy of such relational database, even if additional Users have been licensed. See the Relational Database Rights and Limitations section below for more information on database use. If Licensee has purchased a license for SuiteSpot software, Licensee may install each included Server Product on a different computer and/or platform. Licensee also may switch its installation from one platform to another. It is recommended that Licensee print out a copy of the User Table page on the date of purchase as confirmation, along with the Product Schedule, of the number of copies that may be installed. B. For Charters Program Licenses (or a successor volume licensing program): a. Allow access to the functionality and/or services provided by the Server Product(s) by the number of Users from whom Licensee has paid license fees, as identified on Licensee's Certificate of Authenticity, unless (i) Licensee has purchased a license at special pricing exclusively for extranet Users, in which case Licensee may permit access to the specified functionality and services only by Users who are not employees or full-time independent contractors, and only by the number of Users specified on the Product Schedule, (ii) Licensee has purchased a Search and Browse only, per CPU license for Netscape Compass Server (available only for internet and extranet use), in which case Compass Server may not be installed on a computer system with more CPUs than the number licensed, no use of My Compass is allowed, and unlimited user access may be granted for searching and browsing, (iii) Licensee has purchased an unlimited User license for a Server Product for which such licenses are available or (iv) Licensee is using the PM Builder component of Netscape Process Manager, which is licensed on a per developer basis. When licensing SuiteSpot, the number of Users for whom license fees must be paid is the largest number of Users who will have access to any of the included Server Products. Additional fees are required prior to providing access to additional Users (with the exceptions noted above). Extranet-only licenses are not available for the provision of hosting services, such as ISP services. b. If the Server Product is SuiteSpot, reproduce, without change, the number of copies of the Server Products in SuiteSpot necessary to support the number of Users on Licensee's Certificate of Authenticity. For individual Server Product(s) that are licensed on a per-User basis, one copy may be installed for every 50 licensed Users, except that if the User Table provides different information, Licensee may make the number of copies indicated in the User Table. However, if a relational database product is provided with a Server Product, Licensee may only make one copy of such relational database, even if additional Users have been licensed. See the Relational Database Rights and Limitations section below for more information on database use. c. Make, without change, the number of copies of the documentation provided with the Server Product(s) necessary to support the Server Product(s) copied. d. Sublicense the right to use and reproduce the Server Product(s) and related documentation under this Agreement to subsidiaries of Licensee provided Licensee is responsible for each such entity complying with the terms of this Agreement. C. For Both A and B: a. Use the "Powered by Netscape SuiteSpot" logo (the "Logo") on its website (internal or external) provided (i) the site operates on or utilizes any Server Product or combination of Server Products and (ii) Licensee agrees to the applicable terms and conditions of use described in the Logo usage guidelines found at: http://home.netscape.com/comprod/mirror/powered_suitespot_guidelines.html. This license does not grant Licensee any rights to use the Logo on products or services. It also does not grant Licensee any rights to use other Netscape trademarks or logos. b. If the Server Product(s) contain header files, copy and use the header files solely to create and distribute programs to interface with the server APIs. c. If the Server Product(s) contain Java classes other than classes which are part of the Server Product's programming interfact ("Sample Java Classes"), copy and use the Sample Java Classes solely to create and distribute programs to interface with Netscape products. d. If applicable, run multiple instances of the Netscape Resource Description Server and Netscape Compass Server software for content robotting on multiple computers. e. If applicable, install and run multiple instances of the Netscape Mission Control Console client on multiple computers and platforms for remote and distributed administration of servers and applications. f. If applicable, run the server-side JavaScript compiler on an unlimited number of computers. g. If the Server Product is or includes Netscape Messenger Express 3.5 ("ME 3.5"), modify ME 3.5 to meet Licensee's needs. The modified version may only be used by Licensee. Any modified code will not be supported or warranted by Licensor. ME 3.5, including any modified versions created by Licensee, may only be used in conjunction with Netscape Messaging Server any may not be used with any third party server product. Licensee may allow use of ME 3.5 by the same number of Users licensed for use of Messaging Server. If Licensee wishes to submit modifications to ME 3.5 to Netscape for possible inclusion in a future version of ME 3.5, Licensee must to the following URL for submission information, and must agree to the license terms posted there. The ME submission site is found at http://home.netscape.com/messaging/v3.5/custmod.html. h. If the Server Product is or includes Netscape Calendar Express, use Netscape Calendar Express only in conjunction with Netscape Calendar Server. Netscape Calendar Express may not be used with any other server product. Licensee may allow use of Netscape Calendar Express by the same number of Users licensed for use of Calendar Server. i. Use the Netscape Directory Server or Netscape Enterprise Server software bundled or embedded with a Server Product, if any, only in conjunction with that Server Product, and not with other software products or on a stand- alone basis. In addition, in the case of Netscape Process Manager, the only information that may be loaded into the embedded Netscape Directory Server software is (i) the automatically generated process definitions, (ii) user data provided by Netscape with Netscape Process Manager for testing and evaluation purposes and (iii) user information to be used to resolve groups and roles by Process Manager. All other Netscape Process Manager user information must be stored in a separate LDAP directory product. Licensee may use Netscape Directory Server copies that are provided as the embedded directory service component of a third party software product or application only for such embedded directory services and not to provide directory services for other software products or to provide stand-alone directory services (unless the license provided with the third party product containing an embedded Netscape Directory Server explicitly grants additional rights). j. Use any Netscape communicator software provided with a Server Product in accordance with the Netscape Client Product Terms and Conditions. k. Use the Informix database in Netscape Certificate Server only on a single computer upon which Certificate Server is installed, and only as a repository for Certificate Server's data. The Informix database may be accessed only by tools intended for use with Certificate Server. If the Server Product is SuiteSpot with an Informix database, Licensee may use the Informix database for additional purposes as further described below in the Relational Database rights and Limitations section. l. If the Server Product(s) contain a Visigenic VisiBroker development component, use the Visigenic VisiBroker development component on no more than one computer by no more than one developer. The single allowed developer may use both VisiBroker for C++ and VisiBroker for Java. m. If the Server Product(s) contain a Visigenic runtime component, use the Visigenic runtime component to invoke object implementations, provided that the invoking application (i) is one or more components of the Server Product or (ii) interoperates with and runs on the same computer as the Server Product. D. Relational Database Rights and Limitations. If the Server Product is SuiteSpot with an included database product, then the following rights and limitations govern Licensee's use of the included database: a. Informix Database. If the SuiteSpot software includes an Informix database, the Informix database may be used only (i) for the purpose of developing Netscape web server applications ("Web Server Applications"); and (ii) to reproduce and distribute a single copy of the runtime version of the Informix database for use solely as a component of a Web Server application and only on a single computer for up to 32 connections (the "Deployment System"). A "Connection" means a computer process generated by the designated computer to service on-line users of the Web Server Applications. A single connection may support a multitude of users, the exact number of which depends on the particular circumstances. Multiple Web Server Applications may reside on the Deployment System, provided that all such applications access only the single copy of the Informix database and all Web Server Applications together use no more than 32 connections. Licensee may use the Informix database to develop any number of Web Server applications, but once Licensee has distributed a single runtime version of the Informix database in any one Web Server Application, Licensee may not distribute the Informix database in another copy of that Web Server Application or as part of any subsequent Web Server Application. In order to provide a database product as part of Licensee's Web Server Application either Licensee must purchase a separate database product license for each recipient, or each recipient to whom Licensee distributes a Web Server Application must license its own copy of a database product. Licensee may not establish direct connections with the Informix database other than through Enterprise Server software of use the Informix database for any purpose other than developing and executing Web Server Applications. b. Oracle Database. If the SuiteSpot software includes an Oracle database, Licensee is licensed to run the Oracle database only on a single processor on the same computer upon which Enterprise Server software is installed for internal business purposes, and only permitting access by up to ten named users. The Oracle database may be used only for the purpose of developing Web Server Applications, and for no other purpose. Licensee may not distribute the Oracle database with Web Server Applications. In order to provide a database product as part of Licensee's Web Server Application either Licensee must purchase a separate database product license for the each recipient, or each recipient to whom Licensee distributes a Web Server Application must license its own copy of a database product. Licensee may not establish direct connections with the Oracle database other than through Enterprise Server software. c. Fees. License fees for most Server Products are based on the number of Users accessing certain functionally and/or services of the Server Product. User-based licensing applies to these server products. Detailed information regarding user-based and other types of licensing and license fees can be found at the User Table page. It is recommended that Licensee print out a copy of the User Table page on the date of purchase as confirmation of the information therein. EX-10.5 8 TRADEMARK LICENSE AGREEMENT, JANUARY 31, 1998 EXHIBIT 10.5 ****CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED Netscape Agreement # 005439 TRADEMARK LICENSE AGREEMENT This Trademark License Agreement ("Agreement") is effective as of the 31st day of January, 1999 ("the Effective Date") and is entered into by and between Netscape Communications Corporation ("Netscape"), a Delaware corporation located at 501 East Middlefield Road, Mountain View California 94043, and Net2Phone, Inc., ("Licensee"), a New Jersey corporation located at 171 Main Street, Hackensack, NJ 07601. RECITALS A. Netscape owns and uses the trademark NETSCAPE (the "Mark"), in connection with its Internet-related software products, services and technology; B. Licensee, among other things, produces certain client software products that operate in conjunction with Netscape client software products or are accessible from and promoted on Netscape's Internet web sites ("Co-branded Products"). C. Licensee desires to use the Mark in connection with the promotion, marketing and delivery of Licensee's Co-branded Products over the Internet, enterprise networks or similar networks through web pages in the languages and geographic territories set forth in Exhibit A; and --------- D. Netscape is willing to permit such use of the Mark under the terms and conditions set forth in this Agreement. NOW THEREFORE, the parties agree as follows: 1. Grant of License. 1.1. Grant of License. Netscape hereby grants to Licensee a non-exclusive, nontransferable, license to use the Mark in connection with the Co-branded Products solely to promote, market, sell and deliver Co-branded Products to end users in the languages and geographic territories mutually agreed upon in writing by the parties, including those set forth in Exhibit A. Licensee may ------------ only use the Mark as a collective whole and shall not separately use any element or elements of the Mark. 1.2. Reservation of Rights. Netscape hereby reserves any and all rights not expressly and explicitly granted in this Agreement, including Netscape's right to authorize or license use of the Mark or any other trademarks or names containing NETSCAPE, to any third party for use in connection with any goods and services, including, but not limited to, Co-branded Products. Without limiting the rights reserved in the first sentence, Netscape hereby reserves any and all rights to use, authorize use or license use of the Mark or any other trademarks or names containing the Marks in any geographic territory and in any language, except as otherwise agreed CONFIDENTIAL to in writing. Licensee shall have no obligation to use the Mark as contemplated under this Agreement. 2. License Fee. For the rights granted to Licensee herein, Licensee shall pay Netscape, by wire transfer, a one-time non-refundable license fee of **** at the time of the execution of this Agreement. The license fee due hereunder is exclusive of any applicable taxes. Netscape shall be responsible for and shall reimburse Licensee for, and promptly pay, all applicable national, state and local taxes, value added or sales taxes, and other taxes pertaining to payments except taxes based on Licensee's income. If Netscape in good faith contests any tax that is so payable or reimbursable by Netscape, Licensee shall cooperate in good faith in the contest at Netscape's expense. Licensee shall pass on to Netscape any tax refund and interest related thereto, received by Licensee with respect to Licensee's previous payment or reimbursement of applicable taxes and interest related thereto hereunder, if any 3. Ownership of Mark. Licensee hereby acknowledges that Netscape is the owner of the Mark, and any trademark applications and/or registrations thereto, agrees that it will do nothing inconsistent with Netscape's intellectual property rights in the Mark and agrees that all use of the Mark by Licensee shall inure to the benefit of Netscape. Licensee agrees that nothing in this Agreement shall give Licensee any right, title or interest in the Mark other than the right to use the Mark in accordance with this Agreement. Licensee agrees not to register or attempt to register the Marks as a trademark, service mark, Internet domain name, trade name, with any domestic or foreign governmental or quasi- governmental authority and agrees it will not violate any of Netscape's intellectual property rights in the Mark. Licensee may not register or use either the Mark, or an abbreviation of the Mark, as part of an Internet domain name. The provisions of this paragraph shall survive the expiration or termination of this Agreement. 4. Use of the Mark; Protection of the Mark. 4.1. Proper Use. Licensee agrees that all use of the Mark under this Agreement shall only occur in connection with The Co-branded Products and shall be in compliance with the terms of this Agreement. Licensee may use the Mark as set forth in Section 1.1 as well as in connection with the promotion of The Co- branded Products. Licensee shall use the Mark in conformance with Netscape's trademark guidelines ("Trademark Guidelines"), set forth in Exhibit B, which may --------- reasonably be revised by Netscape from time to time. Licensee agrees not to use any other trademark or service mark in combination with the Mark other than as described in Section 1.1. Except as provided in Section 8.3, Licensee has no right to sublicense, transfer or assign the use of the Mark or use the Mark for any other purpose other than the purpose described herein. Licensee may not use the Mark in connection with or for the benefit of, any third party's products or services. Licensee further agrees not to use the Mark on or in connection with any products or services that are or could reasonably be deemed to be obscene, pornographic, disparaging of Netscape or its products or services, or that are themselves unlawful or whose purpose is to encourage unlawful activities by others (provided however that this clause shall not be applicable to the content sent through the use of the Co-branded Products except if such content is originated by Licensee). The parties acknowledge that nothing in the Agreement prevents the other from using the Mark in a non-denominative, non-trademark fashion that is otherwise allowed by law. [****] REPRESENTS MATERIAL, WHICH HAS BEEN REDACTED AND FILED SEPARATELY WITH THE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED. CONFIDENTIAL 4.2. Quality Standards. If Licensee uses the Mark in connection with the Co- branded Products, Licensee agrees to maintain a consistent level of quality of the Co-branded Products made available thereunder, substantially equal to that found in Licensee's existing products and Web site services. Licensee further agrees to maintain a level of quality of the Co-branded Products in connection with its use of the Mark that is consistent with general industry standards. 4.3. Monitoring by Netscape. Licensee acknowledges that Netscape has no further obligations under this Agreement but that Netscape does have the right to periodically monitor, no more than quarterly, Licensee's use of the Mark in conjunction with the Co-branded Products. Upon reasonable request by Netscape, no more often than quarterly, Licensee shall provide Netscape with representative samples of each such use prior to the time the Mark is published on the Internet or in press materials or marketing or advertising materials. If Netscape determines in good faith that Licensee is using the Mark improperly, and/or in connection with Products, or products, which do not meet the standards set forth in Section 4.1 or Section 4.2, Netscape shall notify Licensee, and Licensee shall use reasonable efforts to remedy the improper use within ten (10) business days following receipt of such notice from Netscape. Use of the Mark on goods or services other than in connection with the Co-branded Products, in a manner inconsistent with the Trademark Guidelines, or in connection with an infringement of Netscape's or a third party's rights, including but not limited to rights under trademark, patent, trade secret or copyright, laws may constitute material breach of this Agreement which shall be treated in accordance with Section 7.1.. 4.4. Legend; Disclaimer. Licensee shall include with any online publication or publication in print of the Mark a trademark legend indicating that the Mark is that of Netscape, used under license, and a disclaimer that Licensee and not Netscape has produced The Co-branded Products. 4.5. Licensee's Co-branded Products. If the Co-branded Products contain or present any material that constitutes an infringement of Netscape's trademark, patents, copyrights or trade secrets (except with respect to any such material provided or included by Netscape or at the request of Netscape), Licensee's right to use the Mark pursuant to the grant described in Section 1.1 shall, upon written notice from Netscape and following an opportunity to cure in at least ten (10) business days from receipt of such notice, be suspended until Licensee has revised, removed or removed links to such material to Netscape's reasonable satisfaction. If such revision or removal of, or removal of links to, such material to Netscape's reasonable satisfaction has not occurred within thirty (30) days of the notice from Netscape described in the preceding sentence, Netscape may terminate this Agreement in accordance with Section 7.1. If the Co-branded Products contain or present any material that constitute an infringement of a third party's copyright, trademark, patents or trade secrets, (except for any such material provided or included by Netscape or at the request of Netscape), Netscape may terminate this Agreement in accordance with Section 7.1. CONFIDENTIAL 5. Confidential Information and Disclosure. Unless required by law, and except to assert its rights hereunder or for disclosures to its own employees, consultants, accountants, agents, representatives and attorneys on a "need to know" basis, each party agrees not to disclose the terms of this Agreement or matters relating thereto without the prior written consent of the other. 6. Indemnification 6.1. By Netscape. Netscape agrees to indemnify Licensee and to hold Licensee harmless from any and all liability, loss, damages, claims or causes of action, including reasonable legal fees and expenses that may be incurred by Licensee, arising out of claims by a third party that Licensee's use of the Marks in accordance with this Agreement infringes such third party's rights in the Marks. Licensee shall provide Netscape with prompt written notice of any claim for which indemnification is sought, and shall cooperate fully with and allow Netscape to control the defense and settlement of such claim. Netscape may not settle any such claim without Licensee's prior written consent, which consent shall not be unreasonably withheld. Licensee shall have the right, at its own expense, to participate in the defense of any such claim. 7. Termination Term and Termination. This Agreement and the term of the license granted herein shall be perpetual unless terminated as provided in Section 4.3, Section 4.5 or this Section 7.1. Netscape shall have the right to terminate this Agreement upon the occurrence of one or more of the following: (a) any material breach by Licensee of its obligations under this Agreement, including without limitation, those indicated in Section 4.3 and 4.5 of this Agreement, which remains uncured for (i) thirty (30) days or more following written notice of such breach from Netscape, or (ii) in the event Licensee provides Netscape, within such thirty (30) day period, a written plan to remedy such breach, sixty (60) days of more from the date such plan is provided to Netscape (b) Licensee decides not to develop and launch a Co-branded Products that uses the Mark, or (c) The Co- branded Products are discontinued for a continuous period of four (4) months and not restarted within thirty (30) days of written notice from Netscape of such fact; provided, however, that Netscape shall not be entitled to terminate the Agreement under subsections (b) or (c)of the foregoing provision prior to the date two (2) years following the Effective Date. Licensee may terminate this Agreement at any time for any reason, or for no reason, by written notice thereof. Notwithstanding the above, if in its reasonable discretion Netscape determines that as a result of a breach of this Agreement it will be materially and adversely affected in a substantial manner by failing to immediately suspend the licenses granted herein, Netscape may suspend the licenses granted in Section 1 until such breach is cured. 7.2. Effect of Termination. Upon termination of the Agreement, Licensee agrees it shall immediately cease any and all use of the Mark. CONFIDENTIAL 8. General 8.1. Governing Law. This Agreement shall be subject to and governed in all respects by the statutes and laws of the State of Delaware without regard to the conflicts of laws or principles thereof. 8.2. Entire Agreement. This Agreement, including Exhibit A and Exhibit B --------- --------- attached hereto, constitute the entire Agreement and understanding between the parties and integrates all prior discussions between them related to its subject matter. No amendment or modification of any of the terms of this Agreement shall be valid unless in writing and signed by an authorized representative of each party. 8.3. Assignment. Except as set forth below, neither party may assign any of its rights or (except in the normal course of its business) delegate any of its duties under this Agreement, or otherwise assign or transfer this Agreement without the prior written consent of the other party. Either party may assign this Agreement in connection with any merger, acquisition, reorganization, sale of substantially all the assets or stock of that party or any similar event ("Change of Control Event") without the prior written consent of the other party. In the event of a Change of Control Event in which Netscape is not to be a surviving entity, Netscape will use commercially reasonable efforts to ensure this Agreement is assigned to the successor entity. Netscape shall have the right to terminate this Agreement upon thirty (30) days prior written notice if Participant assigns or transfers this Agreement as permitted to a direct competitor of Netscape in the web client or web portal business without Netscape's consent. Any attempted assignment, delegation or transfer in derogation of the foregoing shall be null and void. This Agreement shall apply to and bind any permitted successors or assigns of the parties hereto and any reference to the applicable parties herein shall refer to the applicable successors or assigns. 8.4. Notices. All notices required or permitted hereunder shall be given in writing addressed to the respective parties as set forth below and shall either be (a) personally delivered or (b)transmitted by nationally-recognized private express courier, and shall be deemed to have been given on the date of receipt if delivered personally, or 2 days after deposit with such express courier. Either party may change its address for purposes hereof by written notice to the other in accordance with the provisions of this Subsection. The addresses for the parties are as follows: Licensee: Netscape: Net2Phone, Inc. Netscape Communications Corporation 171 Main Street 501 East Middlefield Road, MV-002 Hackensack, NJ 07601 Mountain View, CA 94043 Fax: _____________ Fax: (650) 528-4123 Attn: General Counsel Attn: General Counsel 8.5. Force Majeure. Neither party will be responsible for any failure to perform its obligations under this Agreement due to causes beyond its reasonable control, including but not CONFIDENTIAL limited to acts of God, war, riot, embargoes, acts of civil or military authorities, fire, floods or accidents. 8.6. Waiver. Any waiver, either expressed or implied, by either party of any default by the other in the observance and performance of any of the conditions, covenants of duties set forth herein shall not constitute or be construed as a waiver of any subsequent or other default. 8.7. Headings. The headings to the Sections and Subsections of this Agreement are included merely for convenience of reference and shall not affect the meaning of the language included therein. 8.8. Independent Contractors. The parties acknowledge and agree that they are dealing with each other hereunder as independent contractors. Nothing contained in the Agreement shall be interpreted as constituting either party the joint venture or partner of the other party or as conferring upon either party the power of authority to bind the other party in any transaction with third parties. 8.9. Survival. The provisions of Section 1.2 (Reservation of Rights), 3 (Ownership of Mark), 4.4 (Legend; Disclaimer), 5 (Confidential Information and Disclosure), 6 (Indemnification by Netscape), 7.2 (Effect of Termination) and 8 (General) will survive any termination of this Agreement. 8.10. Equitable Relief. Licensee recognizes and acknowledges that a breach by Licensee of this Agreement may cause Netscape irreparable damage which cannot be readily remedied in monetary damages in an action at law, and may, in addition thereto, constitute an infringement of the Mark. In the event of any default or breach by Licensee that could result in irreparable harm to Netscape or cause some loss or dilution of Netscape's goodwill, reputation, or rights in the Mark, Netscape shall be entitled to seek immediate injunctive relief to prevent such irreparable harm, loss, or dilution in addition to any other remedies available. 8.11. Severability. Except as otherwise set forth in this Agreement, the provisions of this Agreement are severable, and if any one or more such provisions shall be determined to be invalid, illegal or unenforceable, in whole or in part, the validity, legality and enforceability of any of the remaining provisions or portions thereof shall not in any way be affected thereby and shall nevertheless be binding between the parties hereto. CONFIDENTIAL IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date. NET2PHONE, INC. NETSCAPE COMMUNICATIONS CORPORATION By: /s/ Jonathan Reich By: /s/ Noreen G. Bergin Name: JONATHAN REICH Name: Noreen G. Bergin Title: SENIOR VICE PRESIDENT MARKET Title: Senior Vice President Finance & BUS. DEV. & Corporate Controller Date: JANUARY 31, 1999 Date: 01-31-99 Exhibit A: Marks; Target Language and Geographic Combinations - --------- Exhibit B: Trademark Guidelines - --------- APPROVED REVENUE ACCTG. REVIEWED BY NETSCAPE LEGAL Initial /s/ AM 1/31/99/ EX-10.6 9 INTERNET/TELECOMMUNICATIONS ASSIGNMENT EXHIBIT 10.6 INTERNET/TELECOMMUNICATIONS AGREEMENT INTERNET/TELECOMMUNICATIONS AGREEMENT, dated May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, IDT currently maintains a telecommunication switching infrastructure and network which provides Internet access and Internet telephony services for the customers of IDT and Net2Phone; WHEREAS, parties intend that Net2Phone be given an indefeasible right to use parts of IDT's Internet network. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Internet Network. ---------------- (a) Existing Network. IDT hereby grants and conveys to Net2Phone an indefeasible right to use and enjoy those equipment items, equipment leases and rights of use and/or access which are part of its existing DS3 network and are described on Exhibit A hereto (the "Existing Network"), such --------- grant and conveyance to be effective as of the date hereof. The foregoing grant and conveyance shall terminate as follows: (i) with respect to any part of the Existing Network which will be replaced by the Frontier Network (as defined below), upon Net2Phone exercising its rights set forth in Section 2(a) hereof with respect to such part of the Existing Network; (ii) with respect to any part of the Existing Network, upon the expiration of the respective lease or other agreement set forth in Exhibit A relating to such part of the Existing Network; --------- (iii) with respect to any part of the Existing Network not sooner terminated pursuant to clauses (i) or (ii) above,...[consider a date certain with renewals; consider whether either party should have the unilateral right to terminate]. Net2Phone hereby agrees it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the leases and other agreements set forth on Exhibit A. It is expressly understood that --------- IDT retains all obligations to pay rent and/or usage fees in connection with all agreements set forth on Exhibit A. --------- (b) Frontier Network. Pursuant to a Telecommunications ---------------- Services Agreement, dated September 24, 1998 (the "Frontier Agreement"), by and between IDT and Frontier Communications of the West, Inc. ("Frontier"), IDT has an indefeasible right to use a certain telecommunication network as it is completed and delivered pursuant to the terms and conditions set forth in the Frontier Agreement. IDT hereby 1 grants and conveys to Net2Phone an indefeasible right to use and enjoy those parts of such telecommunication network which are described on Exhibit B hereto --------- (the "Frontier Network"), such grant and conveyance to be effective, with respect to those parts of the Frontier Network which have already been completed, delivered and installed, on the date hereof and, with respect to any part of the Frontier Network which has not yet been completed, delivered and installed, on the date such part of the Frontier Network is completed, delivered and installed. The foregoing grant and conveyance with respect to the Frontier Network shall terminate upon the expiration of the Frontier Agreement, in accordance with its terms. Net2Phone hereby agrees it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the Frontier Agreement. It is expressly understood that IDT retains all obligations to pay rent and/or usage fees in connection with the Frontier Agreement. (c) Networking Infrastructure. IDT hereby grants and conveys ------------------------- to Net2Phone the right to use and enjoy the equipment, equipment leases, co- location agreements and rights of use and/or access primarily located at the backbone points of presence on its Internet network and comprising its networking infrastructure, as more particularly described on Exhibit C --------- hereto (the "Networking Infrastructure Equipment"), for a period of two years commencing on the date hereof. Net2Phone hereby agrees that it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the leases and other agreements set forth on Exhibit C. It is expressly understood that --------- IDT retains all obligations to pay rent and/or usage fees in connection with all agreements set forth on Exhibit C. --------- (d) Transit Relationship Agreements. IDT hereby agrees to ------------------------------- enter into transit relationship agreements with Net2Phone to provide Net2Phone with rights of access substantially identical with those of IDT at the locations set forth on Exhibit D hereto. --------- (e) Network Operations Center. IDT hereby grants and conveys ------------------------- to Net2Phone the right to use and enjoy the equipment, equipment leases and rights of use and/or access and other facilities comprising its Network Operations Center, as more particularly described on Exhibit E hereto (the "NOC --------- Facilities"), for a period of two years commencing on date hereof. Net2Phone hereby agrees that upon such grant and conveyance it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the leases and other agreements set forth on Exhibit ------- E. It is expressly understood that IDT retains all obligations to pay rent - - and/or usage fees in connection with all agreements set forth on Exhibit E. All --------- IDT employees at the NOC Facilities (listed on Exhibit F hereto) shall be --------- transferred to, and become employees of, Net2Phone on the date hereof or as promptly thereafter as is feasible so as to permit an orderly transition. 2 (f) Maintenance and Support. With respect to leases and ----------------------- other agreements described in the Exhibits hereto, IDT shall be responsible to cause the other parties to such leases and other agreements to fulfill their respective contractual obligations, including those (if any) relating to the maintenance of equipment or network access, and shall use commercially reasonable efforts to do so. With respect to equipment leased by IDT to which Net2Phone has been given the right of use pursuant to this Agreement, Net2Phone shall reimburse IDT for all costs and expenses incurred by IDT for the maintenance of such equipment to the extent that IDT is contractually obligated for such maintenance. Net2Phone shall also reimburse IDT for all necessary upgrades to such equipment and, to the extent permitted by the respective leases, Net2Phone shall own any upgrades so installed. (g) Equipment Transfers. To the extent that any equipment ------------------- described on the Exhibits hereto is subject to a lease containing a purchase option which may be exercised during the term of Net2Phone's right to use such item of equipment hereunder, IDT shall exercise such option only upon the direction of, and at the expense of, Net2Phone. Any purchase options which are so exercised shall be exercised exclusively for the account of Net2Phone and IDT shall instruct any lessor to transfer title directly to Net2Phone. In the event that a lessor cannot or will not transfer title directly to Net2Phone upon the exercise of a purchase options, IDT shall take title in its own name and as soon as practicable thereafter transfer title to Net2Phone of any such equipment so acquired for no additional consideration. (h) No Modifications to Third Party Contracts. With respect ----------------------------------------- to the Frontier Agreement and all the leases and other agreements described on the Exhibits hereto from which IDT derives the rights necessary for Net2Phone to exercise the rights of use granted herein, IDT shall fulfill all of its obligations under such agreements and shall not amend, alter, supplement, terminate, cancel, assign, transfer or otherwise modify any such agreement without the prior written consent of Net2Phone. (i) No Assignment. This Agreement shall not be construed as ------------- an assignment or as an attempted assignment of any of the leases or other agreements set forth on the Exhibits hereto. To the extent that any transaction contemplated by the provisions of this Agreement requires the consent of a party to the leases or other agreements set forth on the Exhibits hereto (other than IDT), such transaction shall not be effectiveness with respect to such lease or other agreement until such consent has been received. (j) Hosting Service. It is understood that IDT retains --------------- primary control over the Internet equipment listed on the Exhibits hereto. Notwithstanding the foregoing, to the extent that IDT requires Net2Phone's assistance in gaining Internet access as a result of Net2Phone exercising the rights to use the equipment and/or access granted to Net2Phone herein, Net2Phone hereby agrees facilitate such access for a period of two years commencing on the date hereof. Following such two year period, Net2Phone's obligation to facilitate IDT's Internet access shall automatically renew for one year periods unless either party has given the other written notice terminating such facilitation 60 days prior to the end of the original two year period or any one year period thereafter. 3 As compensation to Net2Phone for facilitating such access, IDT agrees to pay for such usage and services as provided in Section 2(d) hereof. (k) Transfer Pricing. IDT and Net2Phone agree to route one ---------------- another's telecommunications traffic at the providing party's cost plus 10%, for a period of two years commencing on the date hereof. Following such two year period, such obligation shall automatically renew for one year periods unless either party has given the other written notice terminating such obligation 60 days prior to the end of the original two year period or any one year period thereafter. (l) Network Unavailability. Each of the parties acknowledges ---------------------- that the Internet network or any of the networks or equipment referred to herein may be unavailable periodically for the purposes of maintenance and/or upgrades. Each of the parties further acknowledges that periodic service outages, known as "brownouts," may occur in connection with the server. Each of the parties shall use all reasonable efforts to minimize any such interruptions and brownouts with respect to equipment or other aspects of the network and network infrastructure which it controls. Each party agrees to hold the other party harmless of any and all losses arising to such party and/or any third parties as a result of "brownouts," service interruptions and server unavailability. Each of the parties acknowledges that data stored on the Internet Network may be lost due to accidents or unforeseen circumstances. Each of the parties agrees to make daily backup copies of its own data stored on the Internet Network. Section 2. Payments. - ------------- -------- (a) Existing Network. Beginning on the date hereof and ---------------- continuing until the termination in its entirety of the grant and conveyance with respect to the Existing Network, Net2Phone shall reimburse IDT an amount equal to the costs and fees IDT incurs subsequent to the date hereof pursuant to such leases and other agreements, such reimbursement shall be due and payable upon payment by IDT of such costs and fees. As the Frontier Network is completed, delivered and installed, Net2Phone shall have the right to require IDT to terminate, in whole or in part, any or all of the leases and other agreements set forth in Exhibit A, to the extent permitted by such --------- instruments. To the extent that IDT incurs any termination or cancellation charges as a result of any such lease or contract terminations, Net2Phone shall reimburse IDT for such charges upon demand. (b) Frontier Network. Pursuant to the Frontier Agreement, ---------------- IDT must pay Frontier certain non-recurring charges for the installation of the Frontier network, some of which IDT has already paid Frontier and the remainder of which IDT will pay Frontier as the network is completed, delivered and installed. Net2Phone shall reimburse IDT for those non-recurring charges incurred (or to be incurred) by IDT with respect to those parts of the Frontier Agreement set forth on Exhibit B hereto, with interest at 9% per annum, in 60 --------- equal monthly payments commencing on _________ __, 1999. In addition, beginning on the date hereof and continuing until the termination in 4 its entirety of the grant and conveyance with respect to the Frontier Network, Net2Phone shall reimburse IDT an amount equal to the costs and fees IDT incurs subsequent to the date hereof with respect to the Frontier Network pursuant to the Frontier Agreement (other than the non-recurring charges), such reimbursement shall be due and payable upon payment by IDT of such costs and fees. (c) Networking Infrastructure, Transit Relationships and ---------------------------------------------------- Network Operations Center. For 24 months commencing on April 1, 1999, - ------------------------- Net2Phone shall pay to IDT $50,000 per month as compensation for the rights of usage and enjoyment with respect to the Networking Infrastructure Equipment (as set forth in Section 1(c) hereof) and the NOC Facilities (as set forth in Section 1(e) hereof) and for the Transit Relationship Agreements (as described in Section 1(d) hereof). Upon the expiration of Net2Phone's rights to use and enjoy the Networking Infrastructure Equipment and NOC Facilities pursuant to Sections 1(c) and (e) hereof, IDT hereby grants to Net2Phone the right to purchase from IDT at fair market value any such items of equipment then owned by IDT (excluding any items temporarily in the name of IDT pursuant to Section 1(g) hereof). (d) Internet Usage and Services. During the period set forth --------------------------- in Section 1(j) hereof, IDT shall pay on the first day of each month (i) for each of IDT's dial-up Internet customers, $1.00 and (ii) for each of IDT's dedicated-line Internet customers, the lesser of $100.00 or 20% of the fee that IDT charges such customer. Additionally, in the case of IDT's dedicated-line customers, IDT shall pay Net2Phone 25% of all installation fees charged such customers by IDT. Section 3. Ownership of Equipment and Intellectual Property. ------------------------------------------------ [to be provided following the Company's completion of Exhibit A and B] Section 4. Termination. ----------- (a) Except as specifically set forth in this Agreement, this Agreement may not be terminated except by the mutual agreement of the parties in writing. (b) Sections 3 and 4 shall survive termination of this Agreement. Section 5. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. 5 (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 5(d) constitute notice for service of process. (e) This Agreement contains the entire understanding of the parties hereto with respect to its subject matter. This Agreement supersedes all prior agreements and understandings, oral or written, with respect to its subject matter. (f) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 6 (g) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (h) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement, dated as of May 7, 1999, by and between IDT and Net2Phone, as if such Article VIII were set forth herein in its entirety. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher ----------------------------------------- Name: Hal Brecher Title: COO NET2PHONE, INC. By: /s/Howard Balter ----------------------------------------- Name: Howard S. Balter Title: CEO 8 EX-10.7 10 JOINT MARKETING AGREEMENT EXHIBIT 10.7 JOINT MARKETING AGREEMENT JOINT MARKETING AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; WHEREAS, IDT and Net2Phone have undertaken certain joint advertising and marketing efforts relating to their respective businesses; and WHEREAS, Net2Phone and IDT desire to continue such joint advertising and marketing efforts in accordance with the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Joint Advertising and Marketing Efforts. --------------------------------------- Each of Net2Phone and IDT shall (a) continue to offer their respective users links to the other party's website, (b) cross-sell one another's products including through their promotional materials and customer service representatives and (c) undertake such additional promotions as the parties shall agree from time to time. IDT and Net2Phone specifically agree that the form, content and design of any and all advertisements or promotional materials featuring the other party shall continue to be developed by or on behalf of such party and shall be subject to such party's final approval. Section 2. Compensation. ------------ In addition, IDT shall pay to Net2Phone a fee of $8.00 for each customer of Net2Phone who becomes a new customer of IDT as a result of Net2Phone's referral and Net2Phone shall pay to IDT a fee of $8.00 for each customer of IDT who becomes a new customer of Net2Phone as a result of IDT's referral; provided, -------- however, that no such fee shall be due and payable with respect to any such new - ------- customer until such new customer incurs and pays $50.00 in charges to the party responsible for paying the fee hereunder. The parties agree to pay all customer fees due hereunder to the other party as billed. Section 3. Term. ---- 1 The term of this Agreement shall commence on the date hereof and shall continue for a period of two (2) years (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party sixty (60) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated by either party upon sixty (60) days' prior written notice. Section 4. Mutual Covenant as to Advertisements. ------------------------------------ Each of IDT and Net2Phone hereby covenants and agrees that their respective marketing and advertising efforts provided for herein shall at all times comply with all applicable laws, rules and regulations and will not contain any material which is obscene, threatening, fraudulent, harassing, libelous, infringing of third party intellectual property rights, otherwise illegal or, in the reasonable judgment of the party required to display the advertisement, offensive. Section 5. Cross-Licensing Provisions. -------------------------- Each Party acknowledges that nothing contained in this Agreement transfers to the other Party any right, title or proprietary interest (including without limitation any intellectual property rights), in any part of the marketing or promotional efforts which are the subject matter hereof, or any proprietary information (including without limitation any trademarks, service marks, trade names, or logos ("Marks"), trade secrets, knowhow, inventions, patents (including any applications, extensions, continuations, renewals and re-issues thereof), copyrights, designs and industrial designs). Each Party hereby grants to the other Party a non-exclusive, limited, worldwide, non-transferable license to use its Marks solely for the purpose of carrying out such other Party's obligations under this Agreement, including without limitation the marketing and promotional activities contemplated by this Agreement. Except as provided herein, no licenses of either Party's Marks are granted or implied under this Agreement. Section 6. Liability. --------- Neither party shall have any liability to the other party for any error, act or omission in connection with the marketing activities to be undertaken pursuant to this Agreement unless any such error, act or omission derives from willful misconduct or gross negligence. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF EITHER PARTY FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, THE OTHER PARTY'S DIRECT 2 DAMAGES. Section 7. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile 3 notice is deemed received. In no event shall the provision of notice pursuant to this Section 7(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement (defined below) specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (g) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (h) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement, dated as of May 7, 1999, by and between IDT and Net2Phone, as if such Article VIII were set forth herein in its entirety. 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 5 EX-10.8 11 IDT SERVICES AGREEMENT EXHIBIT 10.8 IDT SERVICES AGREEMENT IDT SERVICES AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT and obtains administrative, customer support and other services from IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; and WHEREAS, Net2Phone desires to continue to obtain administrative, customer support and other services from IDT pursuant to the terms hereof and IDT desires to continue to provide such services pursuant to the terms hereof. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Services. -------- (a) IDT shall render to Net2Phone general accounting services, payroll and benefits administration services, customer support and other services all as more particularly described in Exhibit 1 hereto (collectively, the "Services"). --------- The Services shall be rendered by IDT in conformity with good commercial practice, the terms and conditions of this Agreement and the reasonable instructions of Net2Phone as set forth in this Agreement. (b) Net2Phone shall provide to IDT when required all funds necessary to perform the Services, including, without limitation, all amounts required to pay payroll expenses of employees of Net2Phone and all amounts necessary to pay accounts payable of Net2Phone. (c) IDT shall have no authority pursuant to this Agreement to commit Net2Phone to any obligation in any manner whatsoever with respect to third parties, to use Net2Phone's name in any way or to enter into any contracts on behalf of Net2Phone. (d) In the event that Net2Phone requests services in addition to the Services provided for herein, and if IDT agrees to provide such services, IDT and Net2Phone shall negotiate in good faith a fee for such services, which compensation shall be covered by the final sentence of Section 2(a) hereof; provided, however, that the fee payable by - -------- ------- 1 Net2Phone for such services shall be no less favorable to Net2Phone than the charges for comparable services from unaffiliated third parties. In the event that the parties agree to additional services, the scope and duration of such services, and any termination provisions with respect thereto, shall be described in an addendum to Exhibit 1 and thereafter such services shall be --------- considered Services hereunder. If and to the extent the parties agree to cancel or terminate any of the Services, such services shall be deemed deleted from Exhibit 1, with the remaining services thereafter constituting the Services - --------- hereunder. Section 2. Compensation. ------------ (a) Net2Phone shall pay to IDT a fee for each of the Services equal to the amount set forth in Exhibit 1 corresponding to such service. In the event --------- Net2Phone terminates any Service in accordance with the final sentence of Section 3 hereof, the fee for such Service shall no longer be payable for any period subsequent to the effective date of such termination. In the event the parties agree to additional services, such fee shall be payable as provided herein. (b) Within 15 days following the end of each calendar month, IDT shall submit to Net2Phone for payment a billing invoice setting forth the amount of fees payable by Net2Phone to IDT for Services rendered during such calendar month. Net2Phone shall pay the invoiced amount to IDT within thirty (30) days following receipt of such invoice by Net2Phone. Section 3. Term. ---- The term of this Agreement shall commence on the date hereof and shall continue for a period of one (1) year (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party thirty (30) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated at any time at the option of either IDT or Net2Phone upon thirty (30) days' prior written notice. Specific categories of Services may be cancelled as set forth in Exhibit 1. --------- Section 4. Records and Accounts. -------------------- IDT shall maintain accurate records and accounts of all transactions relating to the Services performed by it pursuant to this Agreement. Such records and accounts shall be maintained separately from IDT's own records and accounts and shall reflect such information as would normally be examined by an independent accountant in performing a complete audit pursuant to United States generally accepted auditing standards for the purpose of certifying financial statements, and to permit verification thereof by 2 governmental agencies. Net2Phone shall have the right to inspect and copy, upon reasonable notice and at reasonable intervals during IDT's regular office hours, the separate records and accounts maintained by IDT relating to the Services. Section 5. Directors and Officers of Net2Phone and IDT. ------------------------------------------- (a) Nothing contained in this Agreement shall be deemed to relieve the officers and directors of Net2Phone from the performance of their duties or limit the exercise of their powers in accordance with Net2Phone's Certificate of Incorporation or the laws of the State of Delaware. The services of IDT's officers and employees which are rendered to Net2Phone under this Agreement shall at all times be in accordance with the reasonable instructions of Net2Phone's officers and in accordance with IDT's historical business practice. (b) Nothing in this Agreement shall limit or restrict the right of any of IDT's directors, officers or employees to engage in any other business or devote their time and attention in part to the management or other aspects of any other business, whether of a similar nature, or to limit or restrict the right of IDT to engage in any other business or to render services of any kind to any corporation, firm, individual, trust or association; provided, however, -------- ------- that the foregoing shall in no way modify or limit IDT's agreement not to compete with Net2Phone as set forth in Section 6.3 of the Separation Agreement between IDT and Net2Phone, dated the date hereof (the "Separation Agreement"), and IDT hereby confirms its agreement to be bound by the terms thereof.. Section 6. Liability; Indemnification. -------------------------- (a) IDT shall have no liability whatsoever to Net2Phone for any error, act or omission in connection with the services to be rendered by IDT to Net2Phone hereunder unless any such error, act or omission derives from willful misconduct or gross negligence. The parties acknowledge that Article VIII of the Separation Agreement provides for indemnification obligations relating to this Agreement and confirm their agreement to be bound by the terms thereof. IN NO EVENT SHALL IDT BE LIABLE TO NET2PHONE FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT IDT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF IDT FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, NET2PHONE'S DIRECT DAMAGES. (b) IDT is an independent contractor and when its employees act under the terms of this Agreement, they shall be deemed at all times to be under the supervision and responsibility of IDT; and, notwithstanding any reimbursement of labor costs as provided 3 herein or otherwise, no person employed by IDT and acting under the terms of this Agreement shall be deemed to be acting as agent or employee of Net2Phone or any customer of Net2Phone for any purpose whatsoever. Section 7. Other Agreements. ---------------- From time to time, Net2Phone may find it necessary or desirable either to enter into agreements covering services of the type contemplated by this Agreement to be provided by parties other than IDT or to enter into other agreements covering functions to be performed by IDT hereunder. Nothing in this Agreement shall be deemed to limit in any way the right of Net2Phone to acquire such services from others or to enter into such other agreements; provided that -------- in no such event shall the compensation to be paid to IDT pursuant to Section 2 hereof be reduced on account thereof unless and until this Agreement is terminated, or the applicable category of Services set forth in Exhibit 1, is --------- cancelled in accordance with Section 3 hereof and Exhibit 1 hereto. --------- Section 8. Confidentiality. --------------- IDT agrees to hold in strict confidence, and to use reasonable efforts to cause its employees and representatives to hold in strict confidence, all confidential information concerning Net2Phone furnished to or obtained by IDT in the course of providing the Services (except to the extent that such information has been (a) in the public domain through no fault of IDT or (b) lawfully acquired by IDT from sources other than Net2Phone); and IDT shall not disclose or release any such confidential information to any person, except its employees, representatives and agents who have a need to know such information in connection with IDT's performance under this Agreement, unless (i) such disclosure or release is compelled by the judicial or administrative process, or (ii) in the opinion of counsel to IDT, such disclosure or release is necessary pursuant to requirements of law or the requirements of any governmental entity including, without limitation, disclosure requirements under the Securities Act of 1933 or the Securities Exchange Act of 1934, in each case as amended. Section 9. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. 4 (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 9(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) The provisions of Sections 6 and 8 hereof shall survive any termination of this Agreement. (g) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a 5 view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (h) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (i) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation Agreement as if such Article VIII were set forth herein in its entirety. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 7 EX-10.9 12 NET2PHONE SERVICES AGREEMENT EXHIBIT 10.9 NET2PHONE SERVICES AGREEMENT NET2PHONE SERVICES AGREEMENT, dated as of May 7, 1999 (this "Agreement"), by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). WHEREAS, Net2Phone is currently a subsidiary of IDT and provides certain services to IDT; WHEREAS, Net2Phone and IDT expect that equity interests in Net2Phone may be sold to additional investors; and WHEREAS, IDT desires to continue to obtain services from Net2Phone pursuant to the terms hereof and Net2Phone desires to continue to provide such services pursuant to the terms hereof. NOW, THEREFORE, in consideration of the premises and mutual promises and representations contained herein, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto do mutually covenant, stipulate and agree as follows: Section 1. Services. -------- (a) Net2Phone shall render to IDT the services described in Exhibit 1 --------- hereto (collectively, the "Services"). The Services shall be rendered by Net2Phone in conformity with good commercial practice, the terms and conditions of this Agreement and the reasonable instructions of IDT as set forth in this Agreement. (b) IDT shall provide to Net2Phone when required all funds, if any, necessary to perform the Services. (c) Net2Phone shall have no authority pursuant to this Agreement to commit IDT to any obligation in any manner whatsoever with respect to third parties, to use IDT's name in any way or to enter into any contracts on behalf of IDT. (d) In the event that IDT requests services in addition to the Services provided for herein, and if Net2Phone agrees to provide such services, IDT and Net2Phone shall negotiate in good faith a fee for such services, which compensation shall be covered by the final sentence of Section 2(a) hereof; provided, however, that the fee payable by IDT for such services shall be no - -------- ------- less favorable to IDT than the charges for comparable services from unaffiliated third parties. In the event that the parties agree to additional services, the scope and duration of such services, and any termination provisions with 1 respect thereto, shall be described in an addendum to Exhibit 1 and thereafter --------- such services shall be considered Services hereunder. If and to the extent the parties agree to cancel or terminate any of the Services, such services shall be deemed deleted from Exhibit 1, with the remaining services thereafter --------- constituting the Services hereunder. Section 2. Compensation. ------------ (a) IDT shall pay to Net2Phone a fee for each of the Services equal to the amount set forth in Exhibit 1 corresponding to such service. In the event --------- IDT terminates any Service in accordance with the final sentence of Section 3 hereof, the fee for such Service shall no longer be payable for any period subsequent to the effective date of such termination. In the event the parties agree to additional services, such fee shall be payable as provided herein. (b) Within 15 days following the end of each calendar month, Net2Phone shall submit to IDT for payment a billing invoice setting forth the amount of fees payable by IDT to Net2Phone for Services rendered during such calendar month. IDT shall pay the invoiced amount to Net2Phone within thirty (30) days following receipt of such invoice by IDT. Section 3. Term. ---- The term of this Agreement shall commence on the date hereof and shall continue for a period of one (1) year (the "Initial Term") and, at the end of the Initial Term and of each year thereafter, shall automatically renew for an additional one (1) year period unless one party has given the other party thirty (30) days' prior written notice terminating this Agreement. Following the Initial Term, this Agreement may be terminated at any time at the option of either IDT or Net2Phone upon thirty (30) days' prior written notice. Specific categories of Services may be cancelled as set forth in Exhibit 1. --------- Section 4. Records and Accounts. -------------------- Net2Phone shall maintain accurate records and accounts of all transactions relating to the Services performed by it pursuant to this Agreement. Such records and accounts shall be maintained separately from Net2Phone's own records and accounts and shall reflect such information as would normally be examined by an independent accountant in performing a complete audit pursuant to United States generally accepted auditing standards for the purpose of certifying financial statements, and to permit verification thereof by governmental agencies. IDT shall have the right to inspect and copy, upon reasonable notice and at reasonable intervals during Net2Phone's regular office hours, the separate records and accounts maintained by Net2Phone relating to the Services. Section 5. Directors and Officers of Net2Phone and IDT. ------------------------------------------- 2 (a) Nothing contained in this Agreement shall be deemed to relieve the officers and directors of IDT from the performance of their duties or limit the exercise of their powers in accordance with IDT's Certificate of Incorporation or the laws of the State of Delaware. The services of Net2Phone's officers and employees which are rendered to IDT under this Agreement shall at all times be in accordance with the reasonable instructions of IDT's officers and in accordance with Net2Phone's historical business practice. (b) Nothing in this Agreement shall limit or restrict the right of any of Net2Phone's directors, officers or employees to engage in any other business or devote their time and attention in part to the management or other aspects of any other business, whether of a similar nature, or to limit or restrict the right of Net2Phone to engage in any other business or to render services of any kind to any corporation, firm, individual, trust or association. Section 6. Liability; Indemnification. -------------------------- (a) Net2Phone shall have no liability whatsoever to IDT for any error, act or omission in connection with the services to be rendered by Net2Phone to IDT hereunder unless any such error, act or omission derives from willful misconduct or gross negligence. The parties acknowledge that Article VIII of the Separation Agreement between the parties hereto, dated the date hereof (the "Separation Agreement") provides for indemnification obligations relating to this Agreement and confirm their agreement to be bound by the terms thereof. IN NO EVENT SHALL NET2PHONE BE LIABLE TO IDT FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, REVENUES OR DATA), WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT NET2PHONE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF NET2PHONE FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED, IDT'S DIRECT DAMAGES. (b) Net2Phone is an independent contractor and when its employees act under the terms of this Agreement, they shall be deemed at all times to be under the supervision and responsibility of Net2Phone; and, notwithstanding any reimbursement of labor costs as provided herein or otherwise, no person employed by Net2Phone and acting under the terms of this Agreement shall be deemed to be acting as agent or employee of IDT or any customer of IDT for any purpose whatsoever. Section 7. Other Agreements. ---------------- From time to time, IDT may find it necessary or desirable either to enter into agreements covering services of the type contemplated by this Agreement to be provided by parties other than Net2Phone or to enter into other agreements covering functions to be performed by Net2Phone hereunder. Nothing in this Agreement shall be deemed to 3 limit in any way the right of IDT to acquire such services from others or to enter into such other agreements; provided that in no such event shall the -------- compensation to be paid to Net2Phone pursuant to Section 2 hereof be reduced on account thereof unless and until this Agreement is terminated, or the applicable category of Services set forth in Exhibit 1, is cancelled in accordance with --------- Section 3 and Exhibit 1 hereto. --------- Section 8. Confidentiality. --------------- Net2Phone agrees to hold in strict confidence, and to use reasonable efforts to cause its employees and representatives to hold in strict confidence, all confidential information concerning IDT furnished to or obtained by Net2Phone in the course of providing the Services (except to the extent that such information has been (a) in the public domain through no fault of Net2Phone or (b) lawfully acquired by Net2Phone from sources other than IDT); and Net2Phone shall not disclose or release any such confidential information to any person, except its employees, representatives and agents who have a need to know such information in connection with Net2Phone's performance under this Agreement, unless (i) such disclosure or release is compelled by the judicial or administrative process, or (ii) in the opinion of counsel to Net2Phone, such disclosure or release is necessary pursuant to requirements of law or the requirements of any governmental entity including, without limitation, disclosure requirements under the Securities Act of 1933 or the Securities Exchange Act of 1934, in each case as amended. Section 9. Miscellaneous. ------------- (a) This Agreement may not be transferred or assigned by either party, whether voluntarily or by operation of law, without the prior written consent of the other which consent may be withheld in such party's sole discretion. This Agreement shall inure to the benefit of and be binding upon all permitted successors and assigns. (b) This Agreement shall be governed by the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law) as to all matters, including, but not limited to, matters of validity, construction, effect, performance and remedies. (c) This Agreement may be executed in counterparts, each of which shall constitute an original and both of which together shall be deemed to be one and the same instrument. (d) All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 4 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 9(d) constitute notice for service of process. (e) This Agreement and those provisions of the Separation Agreement specifically referred to herein contain the entire understanding of the parties hereto with respect to the subject matter of this Agreement. This Agreement and such referenced provisions of the Separation Agreement supersede all prior agreements and understandings, oral or written, with respect to the subject matter of this Agreement. (f) The provisions of Sections 6 and 8 hereof shall survive any termination of this Agreement. (g) In the event that any one or more of the provisions contained herein is held invalid or unenforceable in any respect, the parties shall negotiate in good faith with a view toward substituting therefor a suitable and equitable solution in order to carry out the intent and purpose of such invalid provision; provided, however, that the validity and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. (h) The Section headings contained in this Agreement are for reference only and shall not affect the meaning or interpretation of this Agreement. (i) Any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be settled in accordance with the procedures set forth in Article VIII of the Separation 5 Agreement as if such Article VIII were set forth herein in its entirety. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth above. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 7 EX-10.10 13 ASSIGNMENT AGREEMENT EXHIBIT 10.10 ASSIGNMENT AGREEMENT This Assignment Agreement (this "Agreement") is made as of May 7, 1999 (the "Effective Date"), by and between IDT Corporation, a Delaware corporation with its principal place of business at 190 Main Street, Hackensack, New Jersey 07601 ("Assignor"), and Net2Phone, Inc., a Delaware corporation with its principal place of business at 171 Main Street, Hackensack, New Jersey 07601 ("Assignee") (hereinafter referred to collectively as the "Parties" and individually as a "Party"). RECITALS WHEREAS, Assignor has heretofore irrevocably transferred and assigned to Assignee all of its rights, title and interest, on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain proprietary products, patent applications and proprietary information set forth herein (excluding any trademark rights) as part of its initial and original capital contribution in Assignee, and the Parties wish to memorialize such transfer and assignment in this Agreement; WHEREAS, Assignor desires and agrees to irrevocably assign to Assignee as of the Effective Date all of its rights, title and interest, on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain proprietary products, patent applications and proprietary information, as set forth herein, that otherwise have not been transferred and assigned to Assignee prior to the Effective Date, as well as certain trademark rights as set forth herein; WHEREAS, except for any ownership interest already held by Assignee, Assignor is the sole owner of all rights, title and interest, including, without limitation, all intellectual property rights, in and to such proprietary products, patents, trademarks, proprietary information and proprietary business information; and, with respect to the trademarks, Assignee is a successor to a portion of the business of the Assignor to which these trademarks pertain; WHEREAS, Assignor has agreed to irrevocably assign to Assignee all of its rights, title and interest on a worldwide basis, including, without limitation, all intellectual property rights and moral rights, in and to certain non- proprietary products set forth herein to the full extent that Assignor has a license for such rights and subject to and contingent upon Assignor having the right and necessary consents to assign such license; WHEREAS, Assignor is a licensee of certain rights in and to such non- proprietary products; WHEREAS, Assignor has agreed to license to Assignee certain rights in and to certain proprietary business information relating to the business operations of Assignee and the combined business operations of Assignor and Assignee; and WHEREAS, to enable Assignor to continue its current use of certain proprietary products, Assignee is willing to grant to Assignor a license back to certain rights in such proprietary products as set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: 1 AGREEMENT 1. DEFINITIONS For the purposes of this Agreement, the following terms will have the meanings ascribed to them as follows: 1.1 "Assigned Property" means the Proprietary Products, Proprietary Information, Third Party Products, Trademarks and Patents. 1.2 "Patents" means the patent applications set forth in Exhibit C. 1.3 "Price" means a one-time payment of one dollar (US$1). 1.4 "Proprietary Business Information" means any confidential or proprietary information, know-how, or trade secret described or comprised in or relating to the general business operations of Assignee, excluding Proprietary Information (but including, without limitation, access to the carrier minutes report manager, call costing and payments settlement system and similar databases to the extent related to and appropriate for the operation of Assignee's business), that exists as of the Effective Date or that is subsequently provided by Assignor to Assignee at its sole discretion, and that is not in the public domain or regularly disclosed by Assignor to third parties without confidentiality restrictions. 1.5 "Proprietary Information" means any confidential or proprietary information, know-how, or trade secret described or comprised in or relating to the Assigned Property that is not in the public domain or regularly disclosed by Assignee to third parties without confidentiality restrictions. 1.6 "Proprietary Products" means the products set forth in Exhibit A, including, without limitation, all user manuals, reference manuals and other documentation and materials relating thereto; and any derivative works, foreign language versions, fixes, upgrades, updates, enhancements, new versions or previous versions thereof. 1.7 "Trademarks" means the product marks and logos set forth in Exhibit D and all rights and goodwill associated therewith. 1.8 "Third Party Products" means a mutually agreed upon subset of products selected by the Parties from among the products set forth in Exhibit B (and such additional similar products as the Parties may mutually agree), including, without limitation, any software and firmware relating thereto; all user manuals, reference manuals and other documentation and materials relating thereto; and any derivative works, foreign language versions, fixes, upgrades, updates, enhancements, new versions or previous versions thereof provided by the third-party licensor of such products to Assignor. 2. ASSIGNMENT Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee the following rights (collectively, the "Rights"): 2.1 Proprietary Products. Subject to the terms and conditions of this -------------------- Agreement, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant 2 and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world in and to the Proprietary Products to the full extent of its ownership or interest therein; including, without limitation, all federal, state, foreign, statutory and common law and other rights in patents, copyrights, moral rights, trademarks, trade secrets, know- how, design rights and all other intellectual property and proprietary rights therein; all domestic and foreign intellectual property applications and registrations therefor (and all divisions, continuations, continuations-in-part, reexaminations, substitutions, reissues, extensions, and renewals of such applications and registrations, and the right to apply for any of the foregoing); all goodwill associated therewith; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Proprietary Products. Upon Assignee's reasonable request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Proprietary Products. 2.2 Proprietary Information. Subject to the terms and conditions of this ----------------------- Agreement, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Proprietary Information to the full extent of its ownership or interest therein; including, without limitation, all intellectual property and proprietary rights therein, all goodwill associated therewith, all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing), and any and all other rights and interests arising out of, in connection with or in relation to the Proprietary Information. 2.3 Third Party Products. Subject to the terms and conditions of this -------------------- Agreement, and subject to and contingent upon Assignor obtaining any necessary and applicable third party consents, Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Third Party Products and any license agreements related thereto to the full extent of Assignor's rights or interest therein (if any). Upon Assignee's request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Third Party Products and any license agreements related thereto. 2.4 Patents. Subject to the terms and conditions of this Agreement, ------- Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Patents to the full extent of its ownership or interest therein; including, without limitation, all domestic and foreign patent applications and registrations therefor (and all patents that issue therefrom and all divisions, continuations, continuations-in-part, reexaminations, substitutions, reissues, extensions, and renewals of such applications, registrations and patents, and the right to apply for any of the foregoing); all goodwill associated therewith; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, 3 misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Patents. Upon Assignee's request, Assignor will promptly take such actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Patents. 2.5 Trademarks. Subject to the terms and conditions of this Agreement, ---------- Assignor hereby irrevocably assigns, conveys, sells, grants and transfers and agrees to assign, convey, sell, grant and transfer to Assignee, its successors and assigns all of its rights, title and interest of every kind and character throughout the world, including moral rights, in and to the Trademarks to the full extent of its ownership or interest therein; including, without limitation, all federal, state, foreign, statutory and common law and other rights; all domestic and foreign trademark applications and registrations therefor (and all extensions and renewals of such applications and registrations, and the right to apply for any of the foregoing); all goodwill associated therewith symbolized by the Trademarks and the portion of the business of the Assignor to which the Trademarks pertain; all rights to causes of action and remedies related thereto (including, without limitation, the right to sue for past, present or future infringement, misappropriation or violation of rights related to the foregoing); and any and all other rights and interests arising out of, in connection with or in relation to the Trademarks. The Parties agree to have executed and file the confirmatory assignment with respect to the Trademarks attached hereto as Exhibit F. Upon Assignee's request, Assignor will promptly take such other actions, including, without limitation, the prompt execution and delivery of documents in recordable form, as may be reasonably necessary to vest, secure, perfect, protect or enforce the rights and interests of Assignee in and to the Trademarks. 2.6 Further Assurances For Third Party Products. Assignor and Assignee ------------------------------------------- will use their respective reasonable best efforts to obtain any consent, approval or amendment required to novate and/or assign the Third Party Products; provided, however, that, except for filing and -------- ------- other administrative charges, Assignee shall not be obligated to pay any consideration therefor to the third party from whom such consents, approvals and amendments are requested. In the event and to the extent that Assignee and Assignor are unable to obtain any such required consent, approval or amendment, or if any attempted assignment would be ineffective or would adversely affect the rights of Assignor with respect to any Third Party Product so that Assignee would not in fact receive all the rights with respect to such Third Party Product, Assignor and Assignee will cooperate (to the extent permitted by law or the terms of any applicable agreement) in a mutually agreeable arrangement under which Assignee would, to the extent possible and permissible under any applicable agreement, obtain the benefits and assume the obligations with respect to such Third Party Product, in accordance with this Agreement, including sub-contracting, sub- licensing, or sub-leasing to Assignee, or under which Assignor would enforce for the benefit of Assignee, with Assignee assuming Assignor's obligations, any and all rights of Assignor against a third party thereto. Assignor shall, without further consideration therefor, pay and remit to Assignee promptly all monies, rights and other considerations received in respect to Assignee's performance of such obligations and Assignee shall remit to Assignor (or pay directly) all amounts due with respect to such Third Party Products to such third parties. If and when any such consent shall be obtained or such Third Party Product shall otherwise become assignable or able to be novated, Assignor shall promptly assign and novate all of its rights and obligations thereunder to Assignee without payment of further consideration and Assignee shall, without the payment of any further consideration therefor, assume such rights and obligations and Assignor shall be relieved of any and all liability hereunder. 4 3. LICENSE 3.1 Subject to the terms and conditions of this Agreement, Assignor hereby grants and agrees to grant to Assignee a worldwide, royalty- free, fully paid up, perpetual, irrevocable, nonexclusive, transferable right and license (with the right to sublicense) to copy and use Proprietary Business Information for the purposes of conducting Assignee's business; provided, however, Assignee takes such steps as are reasonably necessary to protect Assignor's rights in the Proprietary Business Information, including by providing the same protection that Assignor affords to Proprietary Business Information and by treating Proprietary Business Information as confidential information, if appropriate. 3.2 Subject to the terms and conditions of this Agreement, Assignee hereby grants and agrees to grant to Assignor a worldwide, royalty- free, fully paid up, perpetual, irrevocable, non-exclusive license to use the products identified in Exhibit E only for internal use by and for Assignor. Assignor will not assign, sublicense, resell, rent, distribute or provide service-bureau timesharing or related services with respect to the products identified in Exhibit E or the license granted in this Section 3.2 . 4. PAYMENT As payment for the assignment of Rights and the license granted pursuant to Sections 2 and 3, Assignee will pay to Assignor the Price, the receipt and full satisfaction of which is hereby acknowledged by the Parties. 5. REPRESENTATIONS AND WARRANTIES UNLESS EXPLICITLY STATED OTHERWISE IN THIS AGREEMENT, THE ASSIGNED PROPERTY, PRODUCTS IN EXHIBIT E, AND PROPRIETARY BUSINESS INFORMATION ARE PROVIDED "AS IS" AND THE PARTIES HEREBY DISCLAIM ALL WARRANTIES OF ANY KIND WITH RESPECT TO ANY OF THE ASSIGNED PROPERTY, PRODUCTS IN EXHIBIT E OR PROPRIETARY BUSINESS INFORMATION, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 6. LIMITATION OF LIABILITY IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, EXEMPLARY OR PUNITIVE DAMAGES, OR DAMAGES FOR ANY LOSS OF PROFITS, REVENUE OR BUSINESS, EVEN IF SUCH PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The Parties acknowledge that the limitation of liability in this Section 6 and the allocation of risk that it implements is an essential element of the bargain agreed to by the Parties, without which the Parties would not have entered into this Agreement. 7. GENERAL 7.1 This Agreement, and all disputes, claims or controversies arising under or relating to this Agreement or the breach, termination or validity hereof, or any transaction contemplated hereby shall be governed by and settled in accordance with the procedures terms and conditions set forth in the applicable dispute resolution provisions of the Separation Agreement to be signed between the Parties in May or June of 1999. 5 7.2 If either Party commences any action or proceeding against the other Party to enforce this Agreement or any of such Party's rights hereunder, the prevailing Party will be entitled to its reasonable expenses related to such action or proceeding, including reasonable attorneys' and expert fees. 7.3 No delay, failure or waiver by either Party to exercise any right or remedy under this Agreement, and no partial or single exercise, will operate to limit, preclude, cancel, waive or otherwise affect such right or remedy, nor will any single or partial exercise limit, preclude, impair or waive any further exercise of such right or remedy or the exercise of any other right or remedy. 7.4 If any provision of this Agreement is determined to be invalid or unenforceable, the validity or enforceability of the other provisions or of this Agreement as a whole will not be affected; and, in such event, such provision will be changed and interpreted so as best to accomplish the objectives of such provision within the limits of applicable law or applicable court decision. 7.5 Except as provided in Section 7.1, this Agreement, including any exhibit(s) hereto which are incorporated herein by this reference, serves to document formally the entire understanding between the Parties relating to the subject matter hereof, and supersedes and replaces any prior or contemporaneous agreements, negotiations or understandings (whether oral or written), relating generally to the same subject matter. No amendment or modification of any provision of this Agreement will be effective unless in writing and signed by a duly authorized signatory of the Party against which enforcement of the amendment or modification is sought. 6 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. IDT CORPORATION NET2PHONE, INC. - ---------------------------------- ---------------------------------- By: /s/ Steve Brown By: /s/ Ilan Slasky ------------------------------ ------------------------------ Name (Print): Steve Brown Name (Print): Ilan Slansky -------------------- -------------------- Title: Chief Financial Officer Title: Chief Financial Officer --------------------------- --------------------------- EX-10.11 14 TAX SHARING AND INDEMNIFICATION EXHIBIT 10.11 TAX SHARING AND INDEMNIFICATION AGREEMENT THIS TAX SHARING AND INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into as of May 7, 1999, by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). --- --------- RECITALS A. IDT is the common parent corporation of an affiliated group of corporations (the "IDT Consolidated Group") within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The IDT Consolidated Group includes Net2Phone. The IDT Consolidated Group have heretofore joined in the filing of consolidated federal income tax returns. B. IDT expects that as a result of sales of shares of Net2Phone, including through a public offering, Net2Phone will cease to be a member of the IDT Consolidated Group, although Net2Phone may continue to be included in Combined Tax returns (as defined herein). C. IDT and Net2Phone desire to provide for the payment of Income Taxes (as defined herein) and entitlement to refunds thereof, allocate responsibility and provide for cooperation in connection with the filing of returns in respect of Income Taxes, and provide for certain other matters relating to Income Taxes. NOW, THEREFORE, in consideration of the agreements contained herein and intending to be legally bound hereby, IDT and Net2Phone agree as follows: ARTICLE 1. DEFINITIONS 1.1 Definitions. For purposes of this Agreement, the terms set forth below shall have the following meanings, in addition to the terms defined elsewhere in this Agreement: (a) "Actually Realized" or "Actually Realizes" shall mean, for purposes of determining the timing of the occurrence of any Income Tax Benefit, the time at which the amount of Income Taxes paid by such person is reduced below the amount of Income Taxes that such person would have been required to pay but for the occurrence of such Income Tax Benefit. In the case of an Income Tax Benefit in the form of a Refund, "Actually Realized" or "Actually Realizes" means the date such Refund is received. (b) "Carryback" shall mean the carryback of a Tax Asset (including, without limitation, a net operating loss, a net capital loss or a tax credit) by Net2Phone from a Post-Deconsolidation Taxable Period to a Pre-Deconsolidation Taxable Period. 1 (c) "Combined Tax" shall mean, with respect to each foreign, state or local taxing jurisdiction, any Income Tax payable to such foreign, state or local taxing jurisdiction in which a member of the Net2Phone Group files tax returns with a member of the IDT Sub-Group, on a consolidated, combined, or unitary basis for purposes of such Income Tax. (d) "Deconsolidation" shall mean any event pursuant to which Net2Phone ceases to be a member of the IDT Consolidated Group. (e) "Deconsolidation Date" means the day on which Net2Phone ceases to be a member of the IDT Consolidated Group, as determined under Treas. Reg. (S)1.1502- 76(b). (f) "Federal Tax" shall mean any tax imposed under Subtitle A of the Code. (g) "Final Determination" shall mean (i) with respect to Federal Taxes, a "determination" as defined in Section 1313(a) of the Code or execution of an Internal Revenue Service Form 870AD and, with respect to taxes other than Federal Taxes, any final determination of liability in respect of a tax that, under applicable law, is not subject to further appeal, review, or modification through proceedings or otherwise, (ii) any final disposition of a tax issue by reason of the expiration of a statute of limitations, or (iii) the payment of tax by IDT with respect to any item disallowed or adjusted by any taxing authority where IDT determines in good faith that no action should be taken to recoup such payment. (h) "IDT Consolidated Group" shall mean, at any time, IDT and each direct and indirect corporate subsidiary eligible to join with IDT in the filing of a consolidated Federal Tax return. (i) "IDT Sub-Group" shall mean, at any time, IDT and each of its direct and indirect corporate subsidiaries other than those subsidiaries that are members of the Net2Phone Group. (j) "IDT Sub-Group Separate Return" shall mean an Income Tax return of IDT or a member of the IDT Sub-Group for a Post-Deconsolidation Tax Period other than a Combined Tax return. (k) "Income Tax" (i) shall mean (A) any foreign or any United States federal, state or local tax, charge, fee, impost, levy or other assessment which is based upon, measured by, or calculated with respect to (1) net income or profits (including, but not limited to, any capital gains, gross receipts, or minimum tax, and any tax on items of tax preference, but not including sales, use, value added, real property gains, real or personal property, transfer or similar taxes), or (2) multiple bases (including, but not limited to, corporate franchise, doing business or occupation taxes), if one or more of the bases upon which tax may be based, by which it may be measured, or with respect to which it may be calculated, is described in clause (i)(A)(1) of this definition, together with (B) any interest, penalties, fines, additions to tax or additional amounts imposed by any taxing jurisdiction with respect thereto, 2 and (ii) shall include any transferee liability in respect of an amount described in clause (i) of this definition. (l) "Income Tax Benefit" shall mean, in respect of a person or group of persons for any taxable period, the excess of (A) the hypothetical Income Tax liability of such person or group of persons for such taxable period, calculated as if the use of a Tax Asset had not occurred but with all other facts unchanged, over (B) the actual Income Tax liability of such person or group of persons for such taxable period, calculated taking into account the use of such Tax Asset (and treating a Refund as a negative Income Tax liability, and taking into account credits (if any), for purposes of such calculation). (m) "Net2Phone Combined Tax Liability" shall mean, with respect to any jurisdiction and any taxable year or part thereof for which Combined Tax is due, an amount of Combined Tax determined in accordance with the principles set forth in the definition of Net2Phone Federal Tax Liability; provided, however, that the total amount of the Net2Phone Combined Tax Liability shall also include, to the extent not included after application of the principles set forth in the definition of Net2Phone Federal Tax Liability, any actual Income Tax liability owed in a jurisdiction in which a member of the Net2Phone Group files or is included in a Combined Tax return, to the extent the Income Tax liability shown on such return exceeds the amount of such liability that would have been owed had no member of the Net2Phone Group been included in such return. (n) "Net2Phone Federal Tax Liability" shall mean, with respect to any taxable year or portion thereof during which Net2Phone is a member of the IDT Consolidated Group, the sum of the Net2Phone Group's Federal Income Tax liability, computed as if the Net2Phone Group were not and never were part of the IDT Consolidated Group, but rather were a separate affiliated group of corporations filing a consolidated federal income tax return pursuant to Section 1501 of the Code; provided, however, that transactions with members of the IDT Sub-Group shall be reflected according to the provisions of the consolidated return regulations promulgated under the Code governing intercompany transactions, and that Deconsolidation will trigger any deferred amounts, excess loss accounts, or similar items. Such computation shall be made (A) without regard to the income, deductions (including net operating loss and capital loss deductions), and credits in any year of any member of the IDT Group that is not a member of the Net2Phone Group, (B) by taking account of all Tax Assets of the Net2Phone Group other than any Tax Asset which produces an Income Tax Benefit to IDT in accordance with Section 2.1(c)(iii), (C) as though the highest rate of tax specified in subsection (b) of Section 11 of the Code (for any other similar rates applicable to specific types of income) were the only rate set forth in that subsection, and with other similar adjustments as described in Section 1561 of the Code, (D) reflecting the positions, elections, and accounting methods used by IDT in preparing the consolidated Federal Tax return for the IDT Group, and (E) by not permitting the Net2Phone Group any compensation deductions arising in respect of the issuance by IDT of IDT stock to any employee of the Net2Phone Group. 3 (o) "Net2Phone Group" shall mean, at any time, Net2Phone and any direct or indirect corporate subsidiaries of Net2Phone that would be eligible to join with Net2Phone, with respect to Federal Taxes, in the filing of a consolidated federal income tax return and, with respect to Combined Taxes, in the filing of a consolidated, combined, or unitary Income Tax return if Net2Phone were not consolidated, combined, or filing on a unitary basis with any member of the IDT Sub-Group. (p) "Net2Phone Group Separate Return" shall mean an Income Tax return of Net2Phone or a member of the Net2Phone Group for a Post-Deconsolidation Tax Period other than a Combined Tax return. (q) "Post-Deconsolidation Tax Period" means (i) any tax period, or portion thereof, beginning and ending after the date of Deconsolidation, and (ii) with respect to a tax period that begins before and ends after the date of Deconsolidation, such portion of the tax period that commences on the day immediately after the date of Deconsolidation. (r) "Pre-Deconsolidation Tax Period" means (i) any tax period, or portion thereof, beginning and ending before or on the date of Deconsolidation, and (ii) with respect to a period that begins before and ends after the date of Deconsolidation, such portion of the tax period ending on and including the date of Deconsolidation. (s) "Refund" shall mean any refund of Income Taxes, including any reduction in Income Tax liabilities by means of a credit, offset or otherwise. (t) "Tax Asset" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction, or any other deduction, credit, or tax attribute which could reduce Income Tax (including, without limitation, deductions and credits related to alternative minimum taxes). 1.2 Internal References. Unless the context indicates otherwise, references to Articles, Sections, and paragraphs shall refer to the corresponding articles, sections, and paragraphs in this Agreement and references to the parties shall mean the parties to this Agreement. ARTICLE 2. TAX SHARING 2.1 Tax Sharing. (a) General. For each taxable year of the IDT Consolidated Group during which income, loss, or credit against tax of the Net2Phone Group is includible in the consolidated Federal Tax return of the IDT Group, Net2Phone shall pay to 4 IDT an amount equal to the Net2Phone Federal Tax Liability, and for each taxable period during which income, loss, or credit against tax of any member of the Net2Phone Group is includible in a return relating to a Combined Tax, Net2Phone shall pay to IDT an amount equal to the Net2Phone Combined Tax Liability for such taxable period, each as shown on the Pro Forma Returns (as defined in paragraph (c) below). Subject to receipt of the payments described in the first two sentences of this Section 2.1(a), and subject to the provisions of Section 2.1(d), IDT shall be liable for and shall indemnify the Net2Phone Group against all Income Taxes due with respect of all consolidated Federal Tax returns of the IDT Group, and all returns relating to a Combined Tax. (b) Estimated Payments. For each taxable period as to which Section 2.1(a) applies, IDT may determine the amount of the estimated tax installment of the Net2Phone Federal Tax Liability (corresponding to IDT's estimated Federal Tax installment), as determined under the principles of Section 2.1(a). If IDT makes such a determination, Net2Phone shall pay to IDT, within ten (10) business days (i) of the statutorily mandated payment date or (ii), if later, of the date of delivery of a written request for such payment under this Section 2.1(b), the amount so determined. In addition for each taxable period as to which Section 2.1(a) applies, IDT may determine under provisions of applicable law the amount of the estimated tax installment of the Net2Phone Combined Tax Liability (corresponding to the relevant estimated Combined Tax installment), as determined under the principles of Section 2.1(a). If IDT makes such a determination, Net2Phone shall pay to IDT, within ten (10) business days (i) of the statutorily mandated payment date or (ii), if later, of the date of delivery of a written request for such payment under this Section 2.1(b), the amount so determined. (c) Payment of Taxes at Year-End. (i) Within thirty (30) days after the date the IDT Consolidated Group's Federal Tax return is filed, IDT shall make available to Net2Phone a pro forma Federal Tax return (a "Pro Forma Federal Return") of the Net2Phone Group reflecting the Net2Phone Federal Tax Liability. Within thirty (30) days after the date the last Combined Tax return is filed for the fiscal year to which such returns relate, IDT shall make available to Net2Phone the relevant pro forma Combined Tax returns (each a "Pro Forma Combined Tax Return" and together with the Pro Forma Federal Returns, the "Pro Forma Returns") of the Net2Phone Group reflecting the relevant Net2Phone Combined Tax Liability. The Pro Forma Returns shall be prepared in good faith in a manner generally consistent with past practice. (ii) Within ten (10) days of the receipt by Net2Phone of a Pro Forma Federal Return, Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as appropriate, an amount equal to the difference, if any, between the Net2Phone Federal Tax Liability reflected on the Pro Forma Federal Return for such year and the aggregate amount of the estimated installments of the Net2Phone Federal Tax Liability for such year made pursuant to Section 2.1(b). Within ten (10) days of the receipt of the Pro Form Combined Tax Returns, Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as appropriate, an amount equal to the difference, if any, between the 5 Net2Phone Combined Tax Liability reflected on the relevant Pro Forma Combined Tax Returns and the aggregate amount of the estimated installments paid with respect to the corresponding Net2Phone Combined Tax Liability pursuant to Section 2.1(b). (iii) If, under applicable law and consistent with this Agreement, the IDT Sub-Group avails itself of a Tax Asset of the Net2Phone Group, IDT shall pay to Net2Phone an amount equal to the Income Tax Benefit attributable to such Tax Asset, if and when Actually Realized by IDT. The parties agree that all net operating losses and net capital losses of the IDT Group shall be taken into account by IDT in the order in which such net operating losses and net capital losses have arisen; all other Tax Assets of the Net2Phone Group shall be taken into account by IDT in the above- described manner, subject, however, to the ordering rules then in effect under the Code. (iv) In the event that IDT makes a cash deposit with a taxing authority in order to stop the running of interest or makes a payment of tax and correspondingly takes action to recoup such payment (such as suing for a refund), Net2Phone shall pay to IDT, within ten (10) days (i) of the date such cash deposit is made by IDT or (ii) if later, of the date of delivery of a written request for such payment under this Section 2.1(c)(iv), an amount equal to Net2Phone's share of the amount so deposited or paid (calculated in a manner consistent with the determinations provided in this Article 2). Upon receipt by IDT of a refund of any amounts paid by it in respect of which Net2Phone shall have advanced an amount hereunder, IDT shall pay to Net2Phone the amount of such refund, together with any interest received by it on such refund, within ten (10) days of the receipt of such refund. If and to the extent that any claim for refund or contest based thereupon shall be unsuccessful, the payment by Net2Phone under this Section 2.1(c)(iv) may be credited by IDT toward any of Net2Phone's obligations under this Section 2.1. (d) Treatment of Adjustments. If any adjustment is made in a Federal Tax return of the IDT Group or in a return relating to a Combined Tax of the IDT Group, after the filing thereof, in which income or loss of the Net2Phone Group (or any member thereof) is included, then at the time of a Final Determination of the adjustment Net2Phone shall pay to IDT, or IDT shall pay to Net2Phone, as the case may be, the difference between all payments actually made under Section 2.1 with respect to the taxable year or period covered by such tax return and all payments that would have been made under Section 2.1 taking such adjustment into account together with any penalties actually paid and interest for each day until the date of Final Determination calculated at the rate determined, in the case of a payment by Net2Phone, under Section 6621(a)(2) of the Code and, in the case of a payment by IDT, under Section 6621(a)(1) of the Code. (e) Preparation of Consolidated and Combined Returns. For all taxable periods ending on or before the Deconsolidation Date, so long as the IDT Group 6 elects to file (i) consolidated Federal Tax returns as permitted by Section 1501 of the Code or (ii) any Combined Tax return as permitted by applicable state law, Net2Phone shall consent to the filing of such returns by IDT. IDT shall prepare and file such returns and any other returns, documents, or statements required to be filed with the Internal Revenue Service with respect to the determination of the Federal Tax liability of the IDT Group and with the appropriate taxing authorities with respect to the determination of a Combined Tax liability. With respect to such return preparation, IDT shall act in good faith with regard to all members included in an applicable return. IDT shall have the right with respect to any consolidated Federal Tax return or return relating to a Combined Tax that it has filed or will file to determine in good faith (i) the manner in which such returns, documents or statements shall be prepared and filed, including, without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported, (ii) whether any extensions should be requested, and (iii) the elections that will be made by any member of the IDT Group. (f) Contest of Consolidated and Combined Returns. IDT shall have the right, in good faith, to (i) contest, compromise, or settle any adjustment or deficiency proposed, or as a result of any audit of any Federal Tax return or return relating to a Combined Tax, (ii) file, prosecute, compromise or settle any claim for refund, and (iii) determine whether any refunds shall be received by way of refund or credited against tax liabilities. In addition, IDT shall prepare and file ruling requests, and take all other actions on behalf of any member of the IDT Group that it deems appropriate in providing tax services to the members of the IDT Group. IDT shall, to the extent such information is available, advise Net2Phone of any significant Net2Phone tax issue being audited or contested by the federal, state, local or other relevant taxing authorities, shall keep Net2Phone informed with respect to any audit, contest, compromise or settlement thereof, and shall provide to Net2Phone copies (subject to deletion of nonrelevant information) of all material correspondence relating to such contest. (g) Net2Phone Consent. Notwithstanding anything to the contrary in Section 2.1(e) or Section 2.1(f), except as IDT shall determine, in good faith, is required by law, without the express written consent of Net2Phone, which consent shall not be unreasonably withheld or delayed, IDT shall not file any amended Federal Tax return or Combined Tax return, settle any tax claim or assessment, file any ruling request, make any Tax election, or surrender any right to claim a Refund, if a principal effect of such action is to increase a Net2Phone Federal Tax Liability or a Net2Phone Combined Tax Liability. (h) Separate Returns. Net2Phone shall prepare, or cause to be prepared, and file, or cause to be filed, all Net2Phone Group Separate Returns, and shall pay, or cause to be paid, all Income Tax due with respect to such returns. IDT shall prepare, or cause to be prepared, and file, or cause to be filed, all IDT Sub-Group Separate Returns, and shall pay, or cause to be paid, all Income Tax due with respect to such returns. 7 2.2 Reimbursement for Certain Services. IDT shall provide services in connection with this Agreement, including, but not limited to, (i) those services relating to the preparation of returns (including Pro Forma Returns) described in paragraph 2.1(b) above, and (ii) services relating to the other activities described in paragraph 2.1(e) above. As compensation for these services, Net2Phone shall pay IDT a fee calculated on a basis such that IDT is reimbursed for all reasonable direct and indirect costs and expenses incurred with respect to Net2Phone's share of the overall costs and expenses incurred by IDT with respect to tax-related services. IDT shall calculate and invoice Net2Phone for the fee payable, and Net2Phone will pay the invoiced amount in a manner consistent with the invoice and payment procedures provided for in that certain Services Agreement, between IDT, certain members of the IDT Sub-Group, and Net2Phone, dated of even date herewith. ARTICLE 3. POST-DECONSOLIDATION 3.1 Additional Rights and Liabilities Post-Deconsolidation. (a) Apportionment of Tax Attributes. If the IDT Consolidated Group has a Tax Asset, the portion, if any, of such Tax Asset that shall be apportioned to the Net2Phone Group and treated as a carryover to the first Post-Deconsolidation taxable period of the Net2Phone Group shall be determined in accordance with Treasury Regulations (S)(S)1.1502-79 and 1.1502-79A; provided, however, that the portion, if any, of any consolidated unused foreign tax credit which shall be apportioned to the Net2Phone Group shall be determined separately with respect to each of the items of income listed in Code section 904(d). No consolidated Federal Income Tax Asset of the IDT Consolidated Group, other than those described in the first sentence hereof, and no Combined Tax Asset of the IDT Group, shall be apportioned to the Net2Phone Group, except as IDT determines is otherwise required under the provisions of applicable law. IDT shall determine the portion, if any, of any Tax Asset which must (absent a Final Determination to the contrary) be apportioned to the Net2Phone Group in accordance with this Section 3.1(a) and applicable law, and shall provide written notice of the calculation thereof to Net2Phone as soon as practicable after the information necessary to make such calculation becomes available to IDT. (b) Apportionment of Consolidated Section 382 Limitation. In the event that, after the date of this Agreement and prior to Deconsolidation, the IDT Group suffers an ownership change resulting in a consolidated Section 382 limitation (within the meaning of Treasury Regulations (S)1.1502-95T), then, upon Deconsolidation, IDT shall equitably apportion the consolidated Section 382 limitation between the IDT Sub-Group and the Net2Phone Group as permitted by Treasury Regulations (S)1.1502-95T(c) and shall prepare and file the election to apportion the consolidated Section 382 limitation in accordance with the provisions of Treasury Regulations 8 (S)1.1502-95T(e). Net2Phone agrees to cooperate in the preparation, execution and filing of such election. (c) Net2Phone Group Separate Returns. Net2Phone shall prepare, or cause to be prepared all Net2Phone Group Separate Returns. Net2Phone covenants that on or after a Deconsolidation it will not, nor will it cause or permit any member of the Net2Phone Group to make or change any tax election, change any accounting method, amend any tax return or take any tax position on any tax return, take any other action, omit to take any action, or enter into any transaction that results in any increase in the tax liability or reduction of any Tax Asset of the IDT Group in respect of any Pre-Deconsolidation Tax Period, without first obtaining the written consent of an authorized representative of IDT. (d) Carrybacks. Except to the extent otherwise consented to by IDT or prohibited by applicable law, Net2Phone (on its own behalf and on behalf of the Net2Phone Group) shall elect to relinquish, waive or otherwise forego all Carrybacks. In the event that Net2Phone is prohibited by applicable law to relinquish, waive or otherwise forego a Carryback (or IDT consents thereto), (i) IDT shall cooperate with Net2Phone, at Net2Phone's expense, in seeking from the appropriate taxing jurisdiction such Refund as reasonably would result from such Carryback, and (ii) Net2Phone shall be entitled to any Income Tax Benefit Actually Realized by a member of the IDT Group (including any interest thereon received from such taxing jurisdiction), to the extent that such Income Tax Benefit is directly attributable to such Carryback, within 10 days after such Income Tax Benefit is Actually Realized; provided, however, that Net2Phone shall indemnify and hold the members of the IDT Group harmless from and against any and all collateral tax consequences resulting from or caused by any such Carryback, including (but not limited to) the loss or postponement of benefit from the use of tax attributes generated by a member of the IDT Group (x) that expire unutilized, but would have been utilized but for such Carryback, or (y) the use of which is postponed to a later taxable period than the taxable period in which such tax attributes otherwise would have been utilized but for such Carryback. Nothing in this Agreement shall require IDT to file a claim for refund of Federal Taxes or Combined Taxes which IDT, in its sole discretion, determines lacks substantial authority, as defined in the Code and the Treasury Regulations thereunder. If there is a Final Determination that results in any change to or adjustment of an Income Tax Benefit Actually Realized by a member of the IDT Group that is directly attributable to a Carryback, then IDT (or its designee) shall make a payment to Net2Phone, or Net2Phone shall make a payment to IDT (or its designee), as may be necessary to adjust the payments between Net2Phone and IDT (or its designee) to reflect the payments that would have been made under this Section 3.1(d) had the adjusted amount of such Income Tax Benefit been taken into account in computing the payments due under this Section 3.1(d). (e) Refunds. Except to the extent provided in Section 3.1(d) hereof, IDT shall be entitled to all Refunds (and any interest thereon received from the applicable taxing jurisdiction) in respect of Income Taxes for all Pre- 9 Deconsolidation Tax Periods. Except to the extent provided in Section 3.1(d), Net2Phone shall be entitled to all Refunds (and any interest thereon received from the applicable taxing jurisdiction) in respect of Income Taxes paid by Net2Phone with respect to Net2Phone Group Separate Returns and attributable to Post-Deconsolidation Tax Periods included in Combined Tax returns. A party receiving a Refund to which another party is entitled pursuant to this Section 3.1(e) shall pay the amount to which such other party is entitled within ten days after such Refund is Actually Realized. IDT shall be permitted to file, and Net2Phone shall fully cooperate with IDT in connection with, any claim for Refund in respect of an Income Tax for which IDT is responsible pursuant to Section 2.1 (a) hereof. ARTICLE 4. MISCELLANEOUS 4.1 Limitation of Liability. Neither IDT nor Net2Phone shall be liable to the other for any special, indirect, incidental, or consequential damages of the other arising in connection with this Agreement. 4.2 Subsidiaries. (a) Performance. IDT agrees and acknowledges that IDT shall be responsible for the performance of the obligations of each member of the IDT Sub-Group hereunder applicable to such subsidiary. Net2Phone agrees and acknowledges that Net2Phone shall be responsible for the performance by each member of the Net2Phone Group of the obligations hereunder applicable to such member. (b) Application to Present and Future Subsidiaries. This Agreement is being entered into by IDT and Net2Phone on behalf of themselves and each member of the IDT Sub-Group and the Net2Phone Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the IDT Sub-Group or the Net2Phone Group in the future. IDT shall cause each member of the IDT Group, and Net2Phone shall cause each member of the Net2Phone Group, to comply fully with the terms of this Agreement. Each party shall, upon the written request of the other, cause any of their respective group members to execute and deliver a counterpart of this Agreement. 4.3 Cooperation. (a) Net2Phone, on behalf of itself and each member of the Net2Phone Group, agrees to provide IDT (or its designee) with such cooperation or information as IDT (or its designee) reasonably shall request in connection with the determination of any other calculations described in this Agreement, the preparation or filing of any Income Tax return or claim for Refund, or the conduct of any proceeding relating to Income Tax. Such cooperation and information shall include, 10 without limitation, upon reasonable notice (i) promptly forwarding copies of appropriate notices and forms or other communications (including, without limitation, information document requests, revenue agent's reports and similar reports, notices of proposed adjustments and notices of deficiency) received from or sent to any taxing jurisdiction or any other administrative, judicial or governmental authority, (ii) providing copies of all relevant Income Tax returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, and such other records concerning the ownership and tax basis of property, or other relevant information that Net2Phone or any member of the Net2Phone Group may possess, (iii) the provision of such additional information and explanations of documents and information provided under this Agreement (including statements, certificates and schedules delivered by either party) as shall be reasonably requested by IDT (or its designee), (iv) the execution of any document that may be necessary or reasonably helpful in connection with the filing of an Income Tax return, a claim for a Refund, or in connection with any proceeding, including such waivers, consents or powers of attorney as may be necessary for IDT to exercise its rights under this Agreement, and (v) the use of Net2Phone's reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or reasonably helpful in connection with any of the foregoing. Upon reasonable notice, Net2Phone shall make its, or shall cause each member of the Net2Phone Group to make its, employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. Any information obtained under this Section 4.3(a) shall be kept confidential, except as otherwise reasonably may be necessary in connection with the filing of Income Tax returns or claims for Refund or in conducting any proceeding. It is expressly the intention of the parties to this Agreement to take all actions that shall be necessary to establish IDT as the sole agent for Income Tax purposes with respect to all IDT consolidated Federal Returns and Combined Tax returns. (b) IDT, on behalf of itself and each member of the IDT Sub-Group, agrees to provide Net2Phone (or its designee) with such cooperation or information as Net2Phone (or its designee) reasonably shall request in connection with the determination of any other calculations described in this Agreement, the preparation or filing of any Income Tax return or claim for Refund, or the conduct of any proceeding relating to Income Tax. Such cooperation and information shall include, without limitation, upon reasonable notice (i) promptly forwarding copies of appropriate notices and forms or other communications (including, without limitation, information document requests, revenue agent's reports and similar reports, notices of proposed adjustments and notices of deficiency) received from or sent to any taxing jurisdiction or any other administrative, judicial or governmental authority, (ii) providing copies of all relevant Income Tax returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, and such other records concerning the ownership and tax basis of property, or other relevant information that IDT or any member of the IDT Sub-Group may possess, (iii) the provision of such additional information and explanations of documents and information provided under this 11 Agreement (including statements, certificates and schedules delivered by either party) as shall be reasonably requested by Net2Phone (or its designee), (iv) the execution of any document that may be necessary or reasonably helpful in connection with the filing of an Income Tax return, a claim for a Refund, or in connection with any proceeding, including such waivers, consents or powers of attorney as may be necessary for Net2Phone to exercise its rights under this Agreement, and (v) the use of IDT's reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or reasonably helpful in connection with any of the foregoing. Upon reasonable notice, IDT shall make its, or shall cause each member of the IDT Sub-Group to make its, employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. Any information obtained under this Section 4.3(b) shall be kept confidential, except as otherwise reasonably may be necessary in connection with the filing of Income Tax returns or claims for Refund or in conducting any proceeding. Notwithstanding any other provision of this Agreement, neither Net2Phone, nor any of member of the Net2Phone Group shall have any right to receive or obtain any information relating to Income Taxes of IDT or the IDT Group other than (i) information relating solely to Net2Phone or a member of the Net2Phone Group, and (ii) information required to be provided pursuant to Section 2.1(f) hereof. 4.4 Retention of Records. Net2Phone agrees to retain all Income Tax returns, related schedules and workpapers, and all material records and other documents as required under Code Section 6001 and the Treasury Regulations promulgated thereunder (and any similar provision of state, local, or foreign Income Tax law) existing on the date hereof or created in respect of (i) any taxable period that ends on or before or includes the Deconsolidation Date or (ii) any taxable period that may be subject to a claim hereunder, until the later of (x) the expiration of the statute of limitations (including extensions) for the taxable periods to which such Income Tax returns and other documents relate and (y) the Final Determination of any payments that may be required in respect of such taxable periods under this Agreement. IDT shall notify Net2Phone whenever the applicable statute of limitations for any taxable period, including extensions, expires or, if sooner or later, as the case may be, whenever a Final Determination has occurred with respect to such taxable period. From and after the end of the period described in the first sentence of this Section 4.4, if Net2Phone wishes to dispose of any such records and documents, then Net2Phone shall provide written notice thereof to IDT and shall provide IDT the opportunity to take possession of any such records and documents within 90 days after such notice is delivered, at IDT's sole cost and expense; provided, however, that if IDT does not, within such 90-day period, confirm its intention to take possession of such records and documents, Net2Phone may destroy or otherwise dispose of such records and documents. 12 4.5 Agent. Each member of the Net2Phone Group hereby irrevocably appoints IDT as its agent and limited attorney-in-fact to take any action as IDT may deem necessary or appropriate to effect Section 2.1 including, without limitation, those actions specified in Treasury Regulation (S)1.1502-77(a). 4.6 Amendments. This Agreement may not be amended or terminated orally, but only by a writing duly executed by or on behalf of the parties hereto. Any such amendment shall be validly and sufficiently authorized for purposes of this Agreement if it is signed on behalf of IDT and Net2Phone by any of their respective presidents or vice presidents. 4.7 Resolution of Disputes. Any disputes between the parties concerning the calculation of amounts, allocation, or attribution of costs, or any Tax Asset or Income Tax Benefit, or similar accounting matters shall be resolved in accordance with IDT's interpretation of this Agreement, unless Net2Phone shall provide IDT with an opinion of a nationally recognized public accounting firm to the effect that such interpretation is unreasonable. If such opinion takes the position that IDT's interpretation of this Agreement is unreasonable, and the parties, conferring in good faith, cannot thereafter successfully resolve such dispute in a timely manner, then either party may submit the matter to binding arbitration in accordance with the Rules of Commercial Arbitration of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Such arbitration shall occur in New York City pursuant to Article VIII of the Separation Agreement entered into between the parties as of the date hereof , unless the otherwise agreed by the parties. The arbitrator(s) may, in such proceeding, award attorney's fees and costs to the prevailing party. 4.8 Severability. If any provision of this Agreement or the application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid, illegal, or unenforceable to any extent, the remainder of this Agreement or such provision or the application of such provision to such party or circumstances, other than those to which it is so determined to be invalid, illegal, or unenforceable, shall remain in full force and effect to the fullest extent permitted by law and shall not be affected thereby, unless such a construction would be unreasonable. 13 4.9 Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be deemed duly given upon actual receipt, and shall be delivered (a) in person, (b) by registered or certified mail, postage prepaid, return receipt requested, or (c) by facsimile or other generally accepted means of electronic transmission (provided that a copy of any notice delivered pursuant to this clause (c) shall also be sent pursuant to clause (a) or (b)), addressed as follows: (1) If to IDT to: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer (2) If to Net2Phone, to: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer 4.10 Expenses. Unless otherwise expressly provided in this Agreement, each party shall bear any and all expenses that arise from its respective obligations under this Agreement. 4.11 Further Assurances. IDT and Net2Phone shall execute, acknowledge, and deliver, or cause to be executed, acknowledged, and delivered, such instruments and take such other actions as may be necessary or advisable to carry out their obligations under this Agreement and under any exhibit, document, or other instrument delivered pursuant hereto. 4.12 Entire Agreement. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof. 4.13 Successors. This Agreement shall be binding upon and inure to the benefit of any successor, by merger, acquisition of assets, or otherwise, to any of the parties hereto (including but not limited to any successor of IDT and Net2Phone succeeding to the 14 tax attributes of such party under Section 381 of the Code), to the same extent as if such successor had been an original party hereto. 4.14 Authorization, etc. Each of the parties hereto hereby represents and warrants that it has the power and authority to execute, deliver, and perform this Agreement, that this Agreement has been duly authorized by all necessary corporate action on the part of such party, that this Agreement constitutes a legal, valid and binding obligation of each such party, and that the execution, delivery and performance of this Agreement by such party does not contravene or conflict with any provision of law or of its charter or bylaws or any agreement instrument or order binding on such party. 4.15 Titles and Headings. Titles and headings to sections herein are for convenience and reference only and are not intended to be a part, or to affect the meaning or interpretation, of this Agreement. 4.16 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4.17 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 15 IN WITNESS WHEREOF, each of the parties hereto has caused this agreement to be executed by a duly authorized officer as of the date first above written. IDT CORPORATION NET2PHONE, INC. By /s/ Steve Brown By /s/ Howard Balter -------------------------------- ---------------------------------- Title: Chief Financial Officer Title: Chief Executive Officer 16 EX-10.12 15 SEPARATION AGREEMENT EXHIBIT 10.12 SEPARATION AGREEMENT -------------------- THIS SEPARATION AGREEMENT, dated as of May 7, 1999, is by and between IDT Corporation, a Delaware corporation ("IDT"), and Net2Phone, Inc., a Delaware corporation ("Net2Phone"). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I hereof. WHEREAS, Net2Phone is currently a subsidiary of IDT; WHEREAS, the Board of Directors of IDT has determined that it is appropriate and desirable to cause Net2Phone to offer and sell for its own account equity interests in Net2Phone to additional investors; WHEREAS, IDT has historically provided various services to Net2Phone on an informal basis and, in connection with the separation of IDT and Net2Phone, the parties desire to formalize certain relationships which will continue as described herein; and WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the separation, and certain other agreements that will govern certain matters relating to the relationship of IDT and Net2Phone following the sale of equity to additional investors. NOW, THEREFORE, for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS For the purpose of this Agreement the following terms shall have the following meanings: 1.1. "Action" means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal. 1.2. "Affiliate" of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. 1.3. "Agreement" means this Separation Agreement, including all of the Schedules hereto. 1.4. "Ancillary Agreements" means (a) the IDT Services Agreement, dated as of the date hereof, by and between IDT and Net2Phone, (b) the Net2Phone Services Agreement, dated the date hereof, by and between IDT and Net2Phone, (c) the Internet/Telecommunications Agreement, dated the date hereof, by and between IDT and Net2Phone, (d) the Joint Marketing Agreement, dated the date hereof, by and between IDT and Net2Phone, (e) the Assignment Agreement, dated as of the date hereof, by and between IDT and Net2Phone, (f) the Tax Sharing and Indemnification Agreement, dated as of the date hereof, by and between IDT and Net2Phone, and (g) the Assignment and Assumption Agreement, dated as of the date hereof, by and between IDT and Net2Phone. 1.5. "Applicable Deadline" has the meaning set forth in Section 8.3(b). 1.6. "Arbitration Act" means the United States Arbitration Act, 9 U.S.C. 1- 14, as the same may be amended from time to time. 1.7. "Arbitration Demand Date" has the meaning set forth in Section 8.3(a). 1.8. "Arbitration Demand Notice" has the meaning set forth in Section 8.3(a). 1.9. "Code" means the Internal Revenue Code of 1986, as amended. 1.10. "Commission" means the United States Securities and Exchange Commission. 1.11. "Consents" means any consent, waiver or approval from, or notification requirements to, any third party. 1.12. "CPR" means the Center for Public Resources. 1.13. "Environmental Law" means any federal, state, local, foreign or international statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, common law (including tort and environmental nuisance law), legal doctrine, order, judgment, decree, injunction, requirement or agreement with any Governmental Authority, now or hereafter in effect relating to health, safety, pollution or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or to emissions, discharges, releases or threatened releases of any substance currently or at any time hereafter listed, defined, designated or classified as hazardous, toxic waste, radioactive or dangerous, or otherwise regulated, under any of the foregoing, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any such substances, including the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act and the Resource Conservation and Recovery Act and comparable provisions in state, local, foreign or international law. 1.14. "Environmental Liabilities" means all Liabilities relating to, arising out of or resulting from any Environmental Law or contract or agreement relating to environmental, health or safety matters (including all removal, remediation or cleanup costs, investigatory costs, governmental response costs, natural resources damages, 2 property damages, personal injury damages, costs of compliance with any settlement, judgment or other determination of Liability and indemnity, contribution or similar obligations) and all costs and expenses (including allocated costs of in-house counsel and other personnel), interest, fines, penalties or other monetary sanctions in connection therewith. 1.15. "Escalation Notice" has the meaning set forth in Section 8.2. 1.16. "Exchange Act" means the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. 1.17. "Governmental Approval" means any notice, report or other filing to be made, or any consent, registration, approval, permit or authorization to be obtained from, any Governmental Authority. 1.18. "Governmental Authority" means any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. 1.19. "IDT Group" means IDT and each Person (other than any member of the Net2Phone Group) that is an Affiliate of IDT on the date hereof. 1.20. "IDT Indemnitees" has the meaning set forth in Section 5.2 1.21. "Indemnifying Party" has the meaning set forth in Section 5.4(a). 1.22. "Indemnitee" has the meaning set forth in Section 5.4(a). 1.23. "Indemnity Payment" has the meaning set forth in Section 5.4(a). 1.24. "Information" means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical, financial, employee or business information or data. 1.25. "Insurance Policies" means the insurance policies written by insurance carriers unaffiliated with IDT pursuant to which members of the Net2Phone Group (or their respective officers or directors) will be insured parties after the date hereof. 1.26. "Insurance Proceeds" means those monies: (a) received by an insured from an insurance carrier; or 3 (b) paid by an insurance carrier on behalf of the insured; in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses incurred in the collection thereof. 1.27. "Liabilities" means any and all losses, claims, charges, debts, demands, actions, causes of action, suits, damages, obligations, payments, costs and expenses, sums of money, accounts, reckonings, bonds, specialties, indemnities and similar obligations, exonerations, covenants, contracts, controversies, agreements, promises, doings, omissions, variances, guarantees, make whole agreements and similar obligations, and other liabilities, including all contractual obligations, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and including those arising under any law, rule, regulation, Action, threatened or contemplated Action (including the costs and expenses of demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all costs and expenses (including allocated costs of in-house counsel and other personnel), whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened or contemplated Actions), order or consent decree of any Governmental Authority or any award of any arbitrator or mediator of any kind, and those arising under any contract, commitment or undertaking, including those arising under this Agreement or any Ancillary Agreement, in each case, whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of any Person. 1.28. "Net2Phone Business" means the business of Net2Phone as presently conducted and as more fully described on Exhibit A hereto. --------- 1.29. "Net2Phone Common Stock" means the common stock, $.01 par value per share, of Net2Phone. 1.30. "Net2Phone Group" means Net2Phone, each Subsidiary of Net2Phone and each other Person that is either controlled directly or indirectly by Net2Phone on the date hereof. 1.31. "Net2Phone Indemnitees" has the meaning set forth in Section 5.3(a). 1.32. "Person" means an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority. 1.33. "Prime Rate" means the rate which Chase Manhattan Bank (or any successor thereto or other major money center commercial bank agreed to by the parties hereto) announces from time to time as its prime lending rate, as in effect from time to time. 1.34. "Securities Act" means the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. 4 1.35. "Security Interest" means any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. 1.36. "Subsidiary of any Person" means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person shall be deemed to be a Subsidiary of such - -------- ------- other Person unless such other Person controls, or has the right, power or ability to control, that Person. 1.37. "Tax Agreement" means the Tax Sharing and Indemnification Agreement, dated as of the date hereof, by and between IDT and Net2Phone. 1.38. "Taxes" has the meaning set forth in the Tax Agreement. 1.39. "Third Party Claim" has the meaning set forth in Section 5.5(a). ARTICLE II ANCILLARY AGREEMENTS AND TAX AGREEMENT 2.1. ANCILLARY AGREEMENTS. Prior to the date hereof, IDT has provided Net2Phone with administration (accounting, human resources, legal), customer service, Internet/telecom, and marketing services and Net2Phone has provided IDT with marketing and certain technical support services. Net2Phone and IDT will enter into the Ancillary Agreements pursuant to which IDT will provide certain of such services to Net2Phone for those periods of time set forth in the respective Ancillary Agreements and Net2Phone will provide certain of such services to IDT for those periods of time set forth in the respective Ancillary Agreements. Effective as of the date hereof, each of IDT and Net2Phone will execute and deliver all of the Ancillary Agreements and the Tax Agreement. ARTICLE III INTER-COMPANY LICENSES 3.1 The parties may desire to provide each other from time to time, at their sole and absolute discretion, certain software, know-how, or other technology for which they have the rights to grant licenses to third parties ("Shared Technology") for use in the other party's business. To provide Shared Technology, the party granting rights (the "Granting Party") to such Shared Technology will identify the specific Shared Technology to be provided to the other party (the "Receiving Party") in a written notice (the "License Notice"), signed by a duly authorized representative of the Granting Party, 5 which references this Agreement and states that a license to such Shared Technology is being granted to the Receiving Party pursuant to the terms of this Agreement. The specific Shared Technology licensed pursuant to a given License Notice will be licensed under the following terms and conditions unless stated otherwise in such License Notice (provided that any changed or additional terms therein shall be subject to signed approval by both the Granting Party and the Receiving Party): (a) LICENSE GRANT. Granting Party will grant to Receiving Party a non- exclusive, non-transferable, royalty-free, revocable license to use, make, copy and practice the Shared Technology designated in the License Notice solely for internal business purposes. The term of the license granted herein shall be indefinite, provided, however, that Granting Party may revoke such license upon thirty (30) days prior written notice at any time and for any reason, or for no reason. (b) LIMITATIONS ON RIGHTS. Receiving Party will not modify, create derivative works based upon, translate, decompile, disassemble or otherwise reverse engineer, distribute, transfer, time-share, service bureau or otherwise provide any third parties access to, the Shared Technology licensed to it pursuant to an applicable License Notice, or permit any third party to do any of the foregoing.. (c) PROPRIETARY RIGHTS. Granting Party will retain all right, title and interest in and to the Shared Technology, and no right, title or interest will be deemed to be granted or transferred to Receiving Party, except as expressly provided for above or in the applicable License Notice. Receiving Party agrees to retain or reproduce any proprietary rights notices on all copies of the Shared Technology that it possesses or makes. (d) NO WARRANTY. EXCEPT AS OTHERWISE PROVIDED IN AN APPLICABLE LICENSE NOTICE, THE SHARED TECHNOLOGY IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND AND THE PARTIES HEREBY DISCLAIM ALL WARRANTIES OF ANY KIND WITH RESPECT TO ANY OF THE SHARED TECHNOLOGY, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. (e) LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE PROVIDED IN AN APPLICABLE LICENSE NOTICE, NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, INDIRECT, EXEMPLARY OR PUNITIVE DAMAGES OF ANY KIND WITH RESPECT TO THE SHARED TECHNOLOGY, EVEN IF SUCH PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. 6 ARTICLE IV OFFICE FURNITURE AND OFFICE EQUIPMENT 4.1 All office furniture and office equipment used by Net2Phone and located in its premises on the date hereof shall continue in the possession of Net2Phone. To the extent that any such office furniture or office equipment is, or becomes, legally owned by IDT, IDT hereby transfers all its right, title and interest therein to Net2Phone effective, with respect to such furniture and equipment currently owned by IDT, on the date hereof and effective, with respect to any such furniture and equipment which becomes owned by IDT at a future, on such date To the extent that any such office furniture or office equipment is leased by IDT, IDT hereby affirms its intent that such furniture and equipment is part of IDT's capital contribution to Net2Phone and indemnifies Net2Phone from any and all claims whenever raised by any lessor of such furniture and equipment. ARTICLE V INDEMNIFICATION 5.1. RELEASE OF EXISTING CLAIMS. (a) Except as provided in Section 5.1(c), effective as of the date hereof, Net2Phone does hereby, for itself, its respective Affiliates (other than any member of the IDT Group), successors and assigns, and all Persons who at any time prior to the date hereof have been stockholders, directors, officers, agents or employees of any member of the Net2Phone Group (in each case, in their respective capacities as such), remise, release and forever discharge each of IDT, its respective Affiliates (other than any member of the Net2Phone Group), successors and assigns, and all prior, current or future stockholders, directors, officers, agents or employees of IDT (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof between Net2Phone and IDT (including any contractual arrangements or arrangements existing or alleged to exist between them on or before the date hereof). (b) Except as provided in Section 5.1(c), effective as of the date hereof, IDT does hereby, for itself and its Affiliates (other than any member of the Net2Phone Group), successors and assigns, and all Persons who at any time prior to the date hereof have been stockholders, directors, officers, agents or employees of any member of the IDT Group (in each case, in their respective capacities as such), remise, release and forever discharge Net2Phone, the respective members of the Net2Phone Group, their respective Affiliates (other than any member of the IDT Group), successors and assigns, and all prior, current or future stockholders, directors, officers, agents or employees of any member of the Net2Phone Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of 7 contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof between Net2Phone and IDT (including any contractual arrangements or arrangements existing or alleged to exist between them on or before the date hereof). (c) Nothing contained in Section 5.1(a) or (b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement, or the Tax Agreement. Nothing contained in Section 5.1(a) or (b) shall release any Person from: (i) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement, any Ancillary Agreement or the Tax Agreement; (ii) any Liability for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by a member of one Group from a member of any other Group prior to the date hereof; (iii) any Liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by a member of one Group at the request or on behalf of a member of another Group; (iv) any Liability that the parties may have with respect to indemnification or contribution pursuant to this Agreement for claims brought against the parties by third Persons, which Liability shall be governed by the provisions of this Article V and Article VI and, if applicable, the appropriate provisions of the Ancillary Agreements; or (v) in the case of Net2Phone, outstanding unpaid amounts as of the date hereof advanced to Net2Phone for working capital and fixed asset purchases and to reimburse IDT for bank finance charges incurred not to exceed $14 million, $7 million of which will be repaid with proceeds from Net2Phone's sale of equity in connection with its proposed initial public offering, with the remaining $7 million being repaid in full not later than 60 months following the date hereof, self amortizing at the interest rate of 9% per annum in equal monthly payments. (vi) in the case of Net2Phone, $7 million which was advanced by IDT to Netscape and $1 million which was advanced to IBM all of which will be repaid by Net2Phone to IDT out of the proceeds of the private offering. (vii) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 5.1; provided that the parties agree not to bring suit or permit any of their Subsidiaries to bring suit against any Person with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 5.1 but for the provisions of this clause (vi). (viii) in the case if IDT, any Liability to Clifford Sobel pursuant to his 8 employment agreement (including option and stock conversion rights thereunder) or to any Net2Phone employee as a result of rights of such employee any employee benefit plan, including any stock option plan. (d) Net2Phone shall not make, and shall not permit any member of the Net2Phone Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against IDT or any member of the IDT Group or any other Person released pursuant to Section 5.1(a), with respect to any Liabilities released pursuant to Section 5.1(a). IDT shall not, and shall not permit any member of the IDT Group, to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Net2Phone or any member of the Net2Phone Group, or any other Person released pursuant to Section 5.1(b), with respect to any Liabilities released pursuant to Section 5.1(b). (e) It is the intent of each of IDT and Net2Phone by virtue of the provisions of this Section 5.1 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date hereof, between or among Net2Phone or any member of the Net2Phone Group, on the one hand, and IDT or any member of the IDT Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such members on or before the date hereof), except as expressly set forth in Section 5.1(c). At any time, at the request of any other party, each party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions hereof. 5.2. INDEMNIFICATION BY NET2PHONE. Except as provided in Section 5.4, Net2Phone shall indemnify, defend and hold harmless IDT, each member of the IDT Group and each of their respective directors, officers and employees (in each case, in their respective capacities as such), and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "IDT Indemnitees"), from and against any and all Liabilities of the IDT Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) the failure of Net2Phone or any other member of the Net2Phone Group or any other Person to pay, perform or otherwise promptly discharge any liabilities of Net2Phone in accordance with their respective terms, whether prior to or after the date hereof; and (b) any breach by Net2Phone or any member of the Net2Phone Group of this Agreement, any of the Ancillary Agreements or the Tax Agreement; provided, --------- however, that Net2Phone shall not be financially responsible hereunder for any - -------- special, incidental, consequential or other similar type of damage to the extent that such damages are specifically excluded in such agreement. 5.3. INDEMNIFICATION BY IDT. Except as otherwise provided in Section 9 5.4, IDT shall indemnify, defend and hold harmless Net2Phone, each member of the Net2Phone Group and each of their respective directors, officers and employees (in each case, in their respective capacities as such), and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "Net2Phone Indemnitees"), from and against any and all Liabilities of the Net2Phone Indemnitees relating to, arising out of or resulting from any of the following items (without duplication): (a) the failure of IDT or any other member of the IDT Group or any other Person to pay, perform or otherwise promptly discharge any Liabilities of the IDT Group, whether prior to or after the date hereof; and (b) any breach by IDT or any member of the IDT Group of this Agreement, any of the Ancillary Agreements or the Tax Agreement; provided, however, that IDT ------------------ shall not be financially responsible hereunder for any special, incidental, consequential or other similar type of damage to the extent that such damages are specifically excluded in such agreement. 5.4. INDEMNIFICATION OBLIGATIONS NET OF INSURANCE PROCEEDS AND OTHER AMOUNTS. (a) The parties intend that any Liability subject to indemnification or reimbursement pursuant to this Article V or Article VI will be net of Insurance Proceeds that actually reduce the amount of the Liability. Accordingly, the amount which any party (an "Indemnifying Party") is required to pay to any Person entitled to indemnification hereunder (an "Indemnitee") will be reduced by any Insurance Proceeds theretofore actually recovered by or on behalf of the Indemnitee in reduction of the related Liability. If an Indemnitee receives a payment (an "Indemnity Payment") required by this Agreement from an Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds had been received, realized or recovered before the Indemnity Payment was made. (b) An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. Nothing contained in this Agreement, any Ancillary Agreement or the Tax Agreement shall obligate any member of any Group to seek to collect or recover any Insurance Proceeds. 5.5. PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS. (a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the IDT Group or the Net2Phone Group of any claim or of the commencement by any such Person of any Action (collectively, a "Third Party Claim") with respect to which an Indemnifying 10 Party may be obligated to provide indemnification to such Indemnitee pursuant to Section 5.2 or 5.3, or any other Section of this Agreement, any Ancillary Agreement or the Tax Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof within 20 days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 5.5(a) shall not relieve the related Indemnifying Party of its obligations under this Article V, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. (b) An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after the receipt of notice from an Indemnitee in accordance with Section 5.5(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise, or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in the next sentence. In the event that the Indemnifying Party has elected to assume the defense of the Third Party Claim but has specified, and continues to assert, any reservations or exceptions in such notice, then, in any such case, the reasonable fees and expenses of one separate counsel for all Indemnitees shall be borne by the Indemnifying Party. (c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in Section 5.5(b), such Indemnitee may defend such Third Party Claim at the cost and expense of the Indemnifying Party. (d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld. (e) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of the Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against any Indemnitee. (f) The provisions of Section 5.5 and Section 5.6 shall not apply to Taxes (which are covered by the Tax Agreement). 5.6. ADDITIONAL MATTERS. (a) Any claim on account of a Liability which 11 does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement, the Ancillary Agreements and the Tax Agreement. (b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense (including allocated costs of in-house counsel and other personnel) of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. (c) In the event of an Action in which the Indemnifying Party is not a named defendant, if the Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys' fees, experts' fees and all other external expenses), the costs of any judgment or settlement, and the cost of any interest or penalties relating to any judgment or settlement. 5.7. REMEDIES CUMULATIVE. The remedies provided in this Article V shall be cumulative and, subject to the provisions of Article VIII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. 5.8. SURVIVAL OF INDEMNITIES. The rights and obligations of each of IDT and Net2Phone and their respective Indemnitees under this Article V shall survive the sale or other transfer by any party of any Assets or businesses or the assignment by it of any Liabilities. 5.9 UNAVAILABILITY OF INDEMNITY. If the indemnification provided for in this Article V is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any Liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, agrees to contribute to the amount paid or payable by such indemnified party as a result of such Liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on one 12 hand and of the indemnified party on the other in connection with the event that resulted in such Liability, as well as any other relevant equitable considerations. ARTICLE VI OPERATIONS AND CERTAIN OTHER MATTERS 6.1. INSURANCE MATTERS. (a) Net2Phone and IDT contemplate that Net2Phone shall obtain its own Directors and Officers Insurance Policy in a timely manner following the sale of equity to new investors. Each of Net2Phone and IDT agree that Net2Phone may remain on IDT's insurance policies relating to property, errors and omissions, professional liability, automobile and general liability until the earlier of such time as Net2Phone no longer qualifies for coverage on the respective IDT Insurance Policy or, upon thirty (30) days' prior written notice to IDT, Net2Phone elects to be removed from the IDT Insurance Policy or Policies. For so long as Net2Phone is covered by IDT's Insurance Policies, Net2Phone will pay to IDT each month (prorated on a daily basis for any partial month) in respect of the period from the date hereof until the termination of Net2Phone's coverage on all of IDT's Insurance Policies the amount calculated as set forth on Exhibit B hereto, such amount to be payable in arrears by the 10th --------- day of the next succeeding month, in respect of Insurance Policies under which Net2Phone will continue to have coverage following the date hereof. IDT and Net2Phone agree to cooperate in good faith to provide for the treatment of any Insurance Policies that will remain in effect following the date hereof on a mutually agreeable basis. IDT shall provide Net2Phone with prompt notice in the event that any Insurance Policy shall be terminated or otherwise cease to be in effect for any reason. In no event shall IDT, any other member of the IDT Group or any IDT Indemnitee have liability or obligation whatsoever to any member of the Net2Phone Group in the event (i) that any Insurance Policy or other contract or policy of insurance shall be terminated or otherwise cease to be in effect for any reason, shall be unavailable or inadequate to cover any Liability of any member of the Net2Phone Group for any reason whatsoever or shall not be renewed or extended beyond the current expiration date. or (ii) notwithstanding the provisions of the immediately preceding sentence, that IDT fails to provide Net2Phone with notice of any such event. (b) (i) Except as otherwise provided in any Ancillary Agreement, the parties intend by this Agreement that Net2Phone and each other member of the Net2Phone Group be successors-in-interest to all rights that any member of the Net2Phone Group may have as of the date hereof as a subsidiary, affiliate, division or department of IDT prior to the date hereof under any policy of insurance issued to IDT by any insurance carrier unaffiliated with IDT or under any agreements related to such policies executed and delivered prior to the date hereof, including any rights such member of the Net2Phone Group may have, as an insured or additional named insured, subsidiary, affiliate, division or department, to avail itself of any such policy of insurance or any such agreements related to such policies as in effect prior to the date hereof. At the request of Net2Phone, IDT shall take all reasonable steps, including the execution and delivery of any instruments, to effect the foregoing; provided, however that IDT shall not be required to pay any amounts, waive any rights or incur any Liabilities in connection therewith. 13 (ii) Except as otherwise contemplated by any Ancillary Agreement, after the date hereof, none of IDT or Net2Phone or any member of their respective Groups shall, without the consent of the other, provide any such insurance carrier with a release, or amend, modify or waive any rights under any such policy or agreement, if such release, amendment, modification or waiver would adversely affect any rights or potential rights of any member of the other Group thereunder; provided however that the foregoing shall not (A) preclude any member of any Group from presenting any claim or from exhausting any policy limit, (B) require any member of any Group to pay any premium or other amount or to incur any Liability, or (C) require any member of any Group to renew, extend or continue any policy in force. Each of Net2Phone and IDT will share such information as is reasonably necessary in order to permit the other to manage and conduct its insurance matters in an orderly fashion. (c) This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the IDT Group in respect of any Insurance Policy or any other contract or policy of insurance. (d) Net2Phone does hereby, for itself and each other member of the Net2Phone Group, agree that no member of the IDT Group or any IDT Indemnitee shall have any Liability whatsoever as a result of the insurance policies and practices of IDT and its Affiliates as in effect at any time prior to the date hereof, including as a result of the level or scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy, the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise. (e) Nothing in this Agreement shall be deemed to restrict any member of the Net2Phone Group from acquiring at its own expense any other insurance policy in respect of any Liabilities or covering any period. 6.2. CERTAIN BUSINESS MATTERS. (a) Except as may be expressly set forth in Section 6.3 below or in any Ancillary Agreement, no member of any Group shall have any duty to refrain from (i) engaging in the same or similar activities or lines of business as any member of any other Group, (ii) doing business with any potential or actual supplier or customer of any member of any other Group, or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of any member of any other Group. (b) Each of IDT and Net2Phone is aware that from time to time certain business opportunities may arise which more than one Group may be financially able to undertake, and which are, from their nature, in the line of more than one Group's business and are of practical advantage to more than one Group. In connection therewith, the parties agree that if, following the date hereof, any of IDT or Net2Phone acquires knowledge of an opportunity that meets the foregoing standard with respect to more than one Group, none of the IDT Group or the Net2Phone Group shall have any duty to communicate or offer such opportunity to any of the others and may pursue or acquire such opportunity for itself, or direct such opportunity to any other Person. 14 6.3. NON-COMPETITION. (a) IDT acknowledges that as the Parent of Net2Phone it and its Affiliates have become privy to certain confidential information and trade secrets of Net2Phone and further acknowledges that it will derive substantial benefits from the separation of IDT and Net2Phone and that purchasers of equity of Net2Phone will be making substantial investments in reliance upon the agreement contained in this Section 6.3 that the knowledge and expertise developed by Net2Phone and available to IDT will be preserved and will not be used in competition with Net2Phone. IDT hereby agrees that it is reasonable and necessary for the protection of Net2Phone that it agree, and accordingly IDT hereby does agree that, for a period of 36 months from the date hereof (the "Noncompetition Period"), neither IDT nor any member of the IDT Group will directly or indirectly, alone or in association with any other person, corporation, firm or business, engage in the Net2Phone Business any where in the world or become a stockholder, partner or owner of any other person, corporation, firm or business that is primarily engaged in the Net2Phone Business any where in the world; provided, however, that subject to Net2Phone's prior approval which shall not be - ----------------- unreasonably withheld, IDT or a member of the IDT Group may acquire a passive investment of up to 20% of another entity so long as IDT or such member of the IDT Group does not assist that entity in developing an Internet telephony business or otherwise engaging in the Net2Phone Business. (b) For a period of 36 months from the date hereof, neither IDT nor Net2Phone, nor any member of either such party's affiliated group, shall, whether for its own account or for the account of any other person, corporation, firm or business (other than Net2Phone or its Affiliates), solicit or endeavor to entice away from the other party, or otherwise interfere with the relationship of such other party with, any person who or which is employed on the date hereof by, or otherwise engaged to perform services for, the other party (including, but not limited to, any independent contractors or organizations), except to the extent that such other party agrees to release such employee or other service provider to the other party or such other party's affiliated group. General advertising for employment positions or general employment searches through a third party recruiter are not covered by this Section 6.3(b). (c) IDT expressly agrees that the covenants contained in Section 6.3(a) and Section 6.3(b) are reasonable and necessary for the protection of Net2Phone. The provisions of such Section 6.3(a) and Section 6.3(b) are separate and distinct commitments independent of each of the other provisions of such Sections. The invalidity or non-enforceability of this Section 6.3 in any respect shall not affect the validity or enforceability of this Section 6.3 in any other respect or of any other provisions of this Agreement. In the event that any provision of this Section 6.3 shall be held invalid or unenforceable by a court of competent jurisdiction by reason of the geographic or business scope or the duration thereof, such invalidity or unenforceability shall attach only to the scope or duration of such provision and shall not affect or render invalid or unenforceable any other provision of this Agreement, and, to the fullest extent permitted by law, this Agreement shall be construed as if the geographic or business scope or the duration of such provision had been more narrowly drafted so as not to be 15 invalid or unenforceable. (d) IDT acknowledges that Net2Phone would suffer irreparable harm if IDT were to breach the provisions of this Section 6.3 and that Net2Phone's remedy at law for any such breach is and will be insufficient and inadequate and that Net2Phone shall be entitled to equitable relief, including by way of temporary and permanent injunction, in addition to any remedies Net2Phone may have at law. 6.4. LATE PAYMENTS. Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, any amount not paid when due pursuant to this Agreement, any Ancillary Agreement or the Tax Agreement shall accrue interest at a rate per annum equal to the Prime Rate plus 2% commencing upon the later of the (a) due date of such amount and (b) thirtieth day following such amount being invoiced or otherwise demanded in writing. ARTICLE VII EXCHANGE OF INFORMATION; CONFIDENTIALITY 7.1. AGREEMENT FOR EXCHANGE OF INFORMATION; ARCHIVES. (a) Each of IDT and Net2Phone, on behalf of its respective Group, agrees to provide, or cause to be provided, to the other Group, as soon as reasonably practicable after written request therefor, any Information in the possession or under the control of such Group which the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities or tax laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative, tax or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation, tax or other similar requirements, or (iii) to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that in the event that any party determines that any such provision of Information could be commercially detrimental, violate any law or agreement, or waive any attorney client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. (b) Net2Phone shall have access during regular business hours (as in effect from time to time) to the documents and objects of historic significance that relate to the business of Net2Phone that are located in the IDT Records to the extent such documents or objects have been specifically identified and requested by Net2Phone in advance or, if specific documents or objects have not been identified, to the extent Net2Phone has provided IDT with proper advance notice to request such access and the Net2Phone representative designated to receive such access is accompanied by an IDT representative. Net2Phone may obtain copies (but not originals) of documents for bona fide business purposes and may obtain objects for exhibition purposes for commercially reasonable periods of time if required for bona fide business purposes, provided that Net2Phone shall cause any such objects to be returned promptly in the same condition in which they were delivered to Net2Phone and Net2Phone shall comply with any rules, 16 procedures or other requirements, and shall be subject to any restrictions (including prohibitions on removal of specified objects), that are then applicable to IDT. Nothing herein shall be deemed to restrict the access of any member of the IDT Group to any such documents or objects or to impose any liability on any member of the IDT Group if any such documents or objects are not maintained or preserved by IDT. (c) After the date hereof, (i) Net2Phone shall maintain in effect at its own cost and expense adequate systems and controls to the extent necessary to enable the members of the IDT Group to satisfy their respective reporting, accounting, audit and other obligations, and (ii) Net2Phone shall in a timely manner provide, or cause to be provided, to IDT in such form as IDT shall request, at no charge to IDT, all financial and other data and information as IDT determines necessary or advisable in order to prepare IDT financial statements and reports or filings with any Governmental Authority. 7.2. OWNERSHIP OF INFORMATION. Any Information owned by one Group that is provided to a requesting party pursuant to Section 7.1 shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information. 7.3. COMPENSATION FOR PROVIDING INFORMATION. The party requesting such Information agrees to reimburse the other party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any other agreement between the parties, such costs shall be computed in accordance with the providing party's standard methodology and procedures. 7.4. RECORD RETENTION. To facilitate the possible exchange of Information pursuant to this Article VII and other provisions of this Agreement after the date hereof, the parties agree to use their reasonable best efforts to retain all Information in their respective possession or control on the date hereof in accordance with the policies of IDT as in effect on the date hereof. No party will destroy, or permit any of its Subsidiaries to destroy, any Information which the other party may have the right to obtain pursuant to this Agreement prior to the third anniversary of the date hereof without first using its reasonable best efforts to notify the other party of the proposed destruction and giving the other party the opportunity to take possession of such information prior to such destruction; provided, however, that in the case of any Information relating to Taxes or to Environmental Liabilities, such period shall be extended to the expiration of the applicable statute of limitations (giving effect to any extensions thereof). 7.5. LIMITATION OF LIABILITY. No party shall have any liability to any other party in the event that any Information exchanged or provided pursuant to this Agreement which is an estimate or forecast, or which is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the party providing such Information. No party shall have any liability to any other party if any Information is destroyed after reasonable best efforts by such party to comply with the provisions of 17 Section 7.4. 7.6. OTHER AGREEMENTS PROVIDING FOR EXCHANGE OF INFORMATION. The rights and obligations granted under this Article VII are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in any Ancillary Agreement. 7.7. PRODUCTION OF WITNESSES; RECORDS; COOPERATION. (a) After the date hereof, except in the case of an adversarial Action by one party against another party, each party hereto shall use its reasonable best efforts to make available to each other party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with any Action in which the requesting party may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting party shall bear all costs and expenses in connection therewith. (b) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the other parties shall make available to such Indemnifying Party or such other party, as the case may be, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be. (c) Without limiting the foregoing, the parties shall cooperate and consult to the extent reasonably necessary with respect to any Actions. (d) Without limiting any provision of this Section, each of the parties agrees to cooperate, and to cause each member of its respective Group to cooperate, with each other in the defense of any infringement or similar claim with respect to any intellectual property and shall not claim to acknowledge, or permit any member of its respective Group to claim to acknowledge, the validity or infringing use of any intellectual property of a third Person in a manner that would hamper or undermine the defense of such infringement or similar claim. (e) The obligation of the parties to provide witnesses pursuant to this Section 7.7 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses inventors and other officers without regard 18 to whether the witness or the employer of the witness could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 7.7(a)). (f) In connection with any matter contemplated by this Section 7.7, the parties will enter into a mutually acceptable joint defense agreement so as to maintain to the extent practicable any applicable attorney-client privilege or work product immunity of any member of any Group. 7.8. CONFIDENTIALITY. (a) Subject to Section 7.9, each of IDT and Net2Phone, on behalf of itself and each member of its respective Group, agrees to hold, and to cause its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives to hold, in strict confidence, with at least the same degree of care that applies to IDT's confidential and proprietary information pursuant to policies in effect as of the date hereof, all Information concerning each such other Group that is either in its possession (including Information in its possession prior to either of the date hereof) or furnished by any such other Group or its respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives at any time pursuant to this Agreement, any Ancillary Agreement, the Tax Agreement or otherwise, and shall not use any such Information other than for such purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the extent that such Information has been (i) in the public domain through no fault of such party or any member of such Group or any of their respective directors, officers, employees, agents, accountants, counsel and other advisors and representatives, (ii) later lawfully acquired from other sources by such party (or any member of such party's Group) which sources are not themselves bound by a confidentiality obligation), or (iii) independently generated without reference to any proprietary or confidential Information of the other party. (b) Each party agrees not to release or disclose, or permit to be released or disclosed, any such Information to any other Person, except its directors, officers, employees, agents, accountants, counsel and other advisors and representatives who need to know such Information (who shall be advised of their obligations hereunder with respect to such Information), except in compliance with Section 7.9. Without limiting the foregoing, when any Information is no longer needed for the purposes contemplated by this Agreement, any Ancillary Agreement, or the Tax Agreement, each party will promptly after request of the other party either return to the other party all Information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or certify to the other party that it has destroyed such Information (and such copies thereof and such notes, extracts or summaries based thereon). 7.9. PROTECTIVE ARRANGEMENTS. In the event that any party or any member of its Group either determines on the advice of its counsel that it is required to disclose any Information pursuant to applicable law or receives any demand under lawful process or from any Governmental Authority to disclose or provide Information of any other party (or any member of any other party's Group) that is subject to the confidentiality provisions hereof, such party shall notify the other party prior to disclosing or providing such Information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such 19 other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide Information to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority. ARTICLE VIII ARBITRATION; DISPUTE RESOLUTION 8.1. AGREEMENT TO ARBITRATE. Except as otherwise specifically provided in any Ancillary Agreement, the procedures for discussion, negotiation and arbitration set forth in this Article VIII shall apply to all disputes, controversies or claims (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with this Agreement or any Ancillary Agreement, or the transactions contemplated hereby or thereby (including all actions taken in furtherance of the transactions contemplated hereby or thereby on or prior to the date hereof), or the commercial or economic relationship of the parties relating hereto or thereto, between or among any member of the IDT Group and the Net2Phone Group. Each party agrees on behalf of itself and each member of its respective Group that the procedures set forth in this Article VIII shall be the sole and exclusive remedy in connection with any dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Sections 8.7(b) and 8.8 and except to the extent provided under the Arbitration Act in the case of judicial review of arbitration results or awards. Each party on behalf of itself and each member of its respective Group irrevocably waives any right to any trial by jury with respect to any claim, controversy or dispute set forth in the first sentence of this Section 8.1. 8.2. ESCALATION. (a) It is the intent of the parties to use their respective reasonable best efforts to resolve expeditiously any dispute, controversy or claim between or among them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any party involved in a dispute, controversy or claim shall deliver a notice (an "Escalation Notice") demanding an in-person meeting involving representatives of the parties at a senior level of management of the parties (or if the parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the Chief Financial Officer, or like officer or official, of each party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedure for such discussions or negotiations between the parties may be established by the parties from time to time; provided, however, that the parties shall use their reasonable best efforts to meet within 30 days of the Escalation Notice. (b) The parties may, by mutual consent, retain a mediator to aid the parties in their discussions and negotiations by informally providing advice to the parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the parties, nor shall any opinion expressed by the mediator be admissible in any arbitration proceedings. The mediator may be chosen from a list of mediators previously selected by the parties or by other agreement of the parties. Costs of the mediation shall 20 be borne equally by the parties involved in the matter, except that each party shall be responsible for its own expenses. Mediation is not a prerequisite to a demand for arbitration under Section 8.3. 8.3. DEMAND FOR ARBITRATION. (a) At any time after the first to occur of (i) the date of the meeting actually held pursuant to the applicable Escalation Notice or (ii) 45 days after the delivery of an Escalation Notice (as applicable, the "Arbitration Demand Date"), any party involved in the dispute, controversy or claim (regardless of whether such party delivered the Escalation Notice) may, unless the Applicable Deadline has occurred, make a written demand (the "Arbitration Demand Notice") that the dispute be resolved by binding arbitration, which Arbitration Demand Notice shall be given to the parties to the dispute, controversy or claim in the manner set forth in Section 10.5. In the event that any party shall deliver an Arbitration Demand Notice to another party, such other party may itself deliver an Arbitration Demand Notice to such first party with respect to any related dispute, controversy or claim with respect to which the Applicable Deadline has not passed without the requirement of delivering an Escalation Notice. No party may assert that the failure to resolve any matter during any discussions or negotiations, the course of conduct during the discussions or negotiations or the failure to agree on a mutually acceptable time, agenda, location or procedures for the meeting, in each case, as contemplated by Section 8.2, is a prerequisite to a demand for arbitration under Section 8.3. (b) Except as may be expressly provided in any Ancillary Agreement, any Arbitration Demand Notice may be given until one year and 45 days after the later of the occurrence of the act or event giving rise to the underlying claim or the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the party asserting the claim (as applicable and as it may in a particular case be specifically extended by the parties in writing, the "Applicable Deadline"). Any discussions, negotiations or mediations between the parties pursuant to this Agreement or otherwise will not toll the Applicable Deadline unless expressly agreed in writing by the parties. Each of the parties agrees on behalf of itself and each member of its Group that if an Arbitration Demand Notice with respect to a dispute, controversy or claim is not given prior to the expiration of the Applicable Deadline, as between or among the parties and the members of their Groups, such dispute, controversy or claim will be barred. Subject to Sections 8.7(b) and 8.8, upon delivery of an Arbitration Demand Notice pursuant to Section 8.3(a) prior to the Applicable Deadline, the dispute, controversy or claim shall be decided by a sole arbitrator in accordance with the rules set forth in this Article VIII. 8.4. ARBITRATORS. (a) Within 15 days after a valid Arbitration Demand Notice is given, the parties involved in the dispute, controversy or claim referenced therein shall attempt to select a sole arbitrator satisfactory to all such parties. (b) In the event that such parties are not able jointly to select a sole arbitrator within such 15-day period, such parties shall each appoint an arbitrator within 30 days after delivery of the Arbitration Demand Notice. If one party appoints an arbitrator within such time period and the other party or parties fail to appoint an arbitrator within such time period, the arbitrator appointed by the one party shall be the sole arbitrator of the 21 matter. (c) In the event that a sole arbitrator is not selected pursuant to paragraph (a) or (b) above and, instead, two or more arbitrators are selected pursuant to paragraph (b) above, the two or more arbitrators will, within 30 days after the appointment of the later of them to be appointed, select an additional arbitrator who shall act as the sole arbitrator of the dispute. After selection of such sole arbitrator, the initial arbitrators shall have no further role with respect to the dispute. In the event that the arbitrators so appointed do not, within 30 days after the appointment of the later of them to be appointed, agree on the selection of the sole arbitrator, any party involved in such dispute may apply to CPR, New York, New York to select the sole arbitrator, which selection shall be made by such organization within 30 days after such application. Any arbitrator selected pursuant to this paragraph (c) shall be disinterested with respect to any of the parties and the matter and shall be reasonably competent in the applicable subject matter. (d) The sole arbitrator selected pursuant to paragraph (a), (b) or (c) above will set a time for the hearing of the matter which will commence no later than 90 days after the date of appointment of the sole arbitrator pursuant to paragraph (a), (b) or (c) above and which hearing will be no longer than 30 days (unless in the judgment of the arbitrator the matter is unusually complex and sophisticated and thereby requires a longer time, in which event such hearing shall be no longer than 90 days). The final decision of such arbitrator will be rendered in writing to the parties not later than 60 days after the last hearing date, unless otherwise agreed by the parties in writing. (e) The place of any arbitration hereunder will be New York, New York, unless otherwise agreed by the parties. 8.5. HEARINGS. Within the time period specified in Section 8.4(d), the matter shall be presented to the arbitrator at a hearing by means of written submissions of memoranda and verified witness statements, filed simultaneously, and responses, if necessary in the judgment of the arbitrator or both the parties. If the arbitrator deems it to be essential to a fair resolution of the dispute, live cross-examination or direct examination may be permitted, but is not generally contemplated to be necessary. The arbitrator shall actively manage the arbitration with a view to achieving a just, speedy and cost-effective resolution of the dispute, claim or controversy. The arbitrator may, in his or her discretion, set time and other limits on the presentation of each party's case, its memoranda or other submissions, and refuse to receive any proffered evidence, which the arbitrator, in his or her discretion, finds to be cumulative, unnecessary, irrelevant or of low probative nature. Except as otherwise set forth herein, any arbitration hereunder will be conducted in accordance with the CPR Rules for Non-Administered Arbitration of Business Disputes then prevailing (except that the arbitration will not be conducted under the auspices of the CPR and the fee schedule of the CPR will not apply). Except as expressly set forth in Section 8.8(b), the decision of the arbitrator will be final and binding on the parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the parties. Arbitration awards will bear interest at an annual rate of the Prime Rate plus 2% per annum. To the extent that the provisions of this Agreement and the prevailing rules of the CPR conflict, the provisions of this Agreement 22 shall govern. 8.6. DISCOVERY AND CERTAIN OTHER MATTERS. (a) Any party involved in the applicable dispute may request limited document production from the other party or parties of specific and expressly relevant documents, with the reasonable expenses of the producing party incurred in such production paid by the requesting party. Any such discovery (which rights to documents shall be substantially less than document discovery rights prevailing under the Federal Rules of Civil Procedure) shall be conducted expeditiously and shall not cause the hearing provided for in Section 8.5 to be adjourned except upon consent of all parties involved in the applicable dispute or upon an extraordinary showing of cause demonstrating that such adjournment is necessary to permit discovery essential to a party to the proceeding. Depositions, interrogatories or other forms of discovery (other than the document production set forth above) shall not occur except by consent of the parties involved in the applicable dispute. Disputes concerning the scope of document production and enforcement of the document production requests will be determined by written agreement of the parties involved in the applicable dispute or, failing such agreement, will be referred to the arbitrator for resolution. All discovery requests will be subject to the proprietary rights and rights of privilege of the parties, and the arbitrator will adopt procedures to protect such rights and to maintain the confidential treatment of the arbitration proceedings (except as may be required by law). Subject to the foregoing, the arbitrator shall have the power to issue subpoenas to compel the production of documents relevant to the dispute, controversy or claim. (b) The arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement or any Ancillary Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or any Ancillary Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement or any Ancillary Agreement, and to fashion appropriate remedies for breaches of this Agreement (including interim or permanent injunctive relief); provided that the arbitrator shall not have (i) any authority in excess of the authority a court having jurisdiction over the parties and the controversy or dispute would have absent these arbitration provisions or (ii) any right or power to award punitive or treble damages. It is the intention of the parties that in rendering a decision the arbitrator give effect to the applicable provisions of this Agreement and the Ancillary Agreements and follow applicable law (it being understood and agreed that this sentence shall not give rise to a right of judicial review of the arbitrator's award). (c) If a party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing party. (d) Arbitration costs will be borne equally by each party involved in the matter, except that each party will be responsible for its own attorney's fees and other costs and expenses, including the costs of witnesses selected by such party. 23 8.7. CERTAIN ADDITIONAL MATTERS. (a) Any arbitration award shall be a bare award limited to a holding for or against a party and shall be without findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall be without a statement of the reasoning on which the award rests, but must be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. (b) Prior to the time at which an arbitrator is appointed pursuant to Section 8.4, any party may seek one or more temporary restraining orders or preliminary injunctions in a court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, or grant or denial of, any such temporary restraining order or preliminary injunction shall be deemed a waiver of the obligation to arbitrate as set forth herein and the arbitrator may dissolve, continue or modify any such order. Any such temporary restraining order or preliminary injunction shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof by the arbitrator. (c) Except as required by law, the parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of Article VIII and except as may be required in order to enforce any award. Each of the parties shall request that any mediator or arbitrator comply with such confidentiality requirement. (d) In the event that at any time the sole arbitrator shall fail to serve as an arbitrator for any reason, the parties shall select a new arbitrator who shall be disinterested as to the parties and the matter in accordance with the procedures set forth herein for the selection of the initial arbitrator. The extent, if any, to which testimony previously given shall be repeated or as to which the replacement arbitrator elects to rely on the stenographic record (if there is one) of such testimony shall be determined by the replacement arbitrator. 8.8. LIMITED COURT ACTIONS. (a) Notwithstanding anything herein to the contrary, in the event that any party reasonably determines the amount in controversy in any dispute, controversy or claim (or any series of related disputes, controversies or claims) under this Agreement or any Ancillary Agreement is, or is reasonably likely to be, in excess of $5 million and if such party desires to commence an Action in lieu of complying with the arbitration provisions of this Article, such party shall so state in its Arbitration Demand Notice. If the other parties to the arbitration do not agree that the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is, or is reasonably likely to be, in excess of $5 million, the arbitrator selected pursuant to Section 8.4 hereof shall decide whether the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is, or is reasonably likely to be, in excess of $5 million. The arbitrator shall set a date that is no later than ten days after the date of his or her appointment for submissions by the parties with respect to such issue. There shall not be 24 any discovery in connection with such issue. The arbitrator shall render his or her decision on such issue within five days of such date so set by the arbitrator. In the event that the arbitrator determines that the amount in controversy in such dispute, controversy or claim (or such series of related disputes, controversies or claims) is or is reasonably likely to be in excess of $5 million, the provisions of Sections 8.4(d) and (e), 8.5, 8.6, 8.7 and 8.10 hereof shall not apply and on or before (but, except as expressly set forth in Section 8.8(b), not after) the tenth business day after the date of such decision, any party to the arbitration may elect, in lieu of arbitration, to commence an Action with respect to such dispute, controversy or claim (or such series of related disputes, controversies or claims) in any court of competent jurisdiction. If the arbitrator does not so determine, the provisions of this Article (including with respect to time periods) shall apply as if no determinations were sought or made pursuant to this Section 8.8(a). (b) In the event that an arbitration award in excess of $5 million is issued in any arbitration proceeding commenced hereunder, any party may, within 60 days after the date of such award, submit the dispute, controversy or claim (or series of related disputes, controversies or claims) giving rise thereto to a court of competent jurisdiction, regardless of whether such party or any other party sought to commence an Action in lieu of proceeding with arbitration in accordance with Section 8.8(a). In such event, the applicable court may elect to rely on the record developed in the arbitration or, if it determines that it would be advisable in connection with the matter, allow the parties to seek additional discovery or to present additional evidence. Each party shall be entitled to present arguments to the court with respect to whether any such additional discovery or evidence shall be permitted and with respect to all other matters relating to the applicable dispute, controversy or claim (or series of related disputes, controversies or claims). 8.9. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement and each Ancillary Agreement during the course of dispute resolution pursuant to the provisions of this Article VIII with respect to all matters not subject to such dispute, controversy or claim. 8.10. LAW GOVERNING ARBITRATION PROCEDURES. The interpretation of the provisions of this Article VIII, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 10.2. ARTICLE IX FURTHER ASSURANCES AND ADDITIONAL COVENANTS 9.1. FURTHER ASSURANCES. (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use its reasonable best effort to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions 25 contemplated by this Agreement, the Ancillary Agreements and the Tax Agreement. (b) Without limiting the foregoing, each party hereto shall cooperate with the other parties, and without any further consideration, but at the expense of the requesting party, to execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument and to take all such other actions as such party may reasonably be requested to take by any other party hereto from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the other transactions contemplated hereby and thereby. Without limiting the foregoing, to the extent necessary to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the other transactions contemplated hereby and thereby each party will, at the reasonable request, cost and expense of any other party, take such other actions as may be reasonably necessary to vest in such other party good and marketable title, free and clear of any Security Interest, if and to the extent it is practicable to do so. (c) IDT and Net2Phone, and each of the members of their respective Groups, waive (and agree not to assert against any of the others) any claim or demand that any of them may have against any of the others for any Liabilities or other claims relating to or arising out of: (i) the failure of Net2Phone or any member of the Net2Phone Group, on the one hand, or of IDT or any member of the IDT Group, on the other hand, to provide any notification or disclosure required under any state Environmental Law in connection with the transactions contemplated by this Agreement, or (ii) any inadequate, incorrect or incomplete notification or disclosure under any such state Environmental Law by the applicable transferor. (d) Following the date hereof, if one or more of the parties identifies any commercial or other service that is needed to assure a smooth and orderly transition of the businesses in connection with the consummation of the transactions contemplated hereby, and that is not otherwise governed by the provisions of this Agreement or any Ancillary Agreement, the parties will cooperate in determining whether there is a mutually acceptable arm's-length basis on which one or more of the other parties will provide such service. ARTICLE X MISCELLANEOUS 10.1. COUNTERPARTS; ENTIRE AGREEMENT; CORPORATE POWER. (a) This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 26 (b) This Agreement, and the Exhibits, Schedules and Appendices hereto, contain the entire agreement between the parties with respect to the subject matter hereof, supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter and there are no agreements or understandings between the parties other than those set forth or referred to herein or therein. (c) IDT represents on behalf of itself and each other member of the IDT Group and Net2Phone represents on behalf of itself and each other member of the Net2Phone Group as follows: (i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform each of this Agreement, each of the Ancillary Agreements and the Tax Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and (ii) this Agreement, each Ancillary Agreement and the Tax Agreement to which it is a party has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof subject to (a) the laws of bankruptcy and laws effecting creditors' rights generally and (b) the availability of equitable remedies. 10.2. GOVERNING LAW. Except as set forth in Section 8.10, this Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York (other than as to its laws of arbitration which shall be governed under the Arbitration Act or other applicable federal law pursuant to Section 8.10), irrespective of the choice of laws principles of the State of New York, as to all matters, including matters of validity, construction, effect, enforceability, performance and remedies. 10.3. ASSIGNABILITY. Except as set forth in any Ancillary Agreement or the Tax Agreement, this Agreement (including without limitation the provisions of Section 6.3 hereof), each Ancillary Agreement and the Tax Agreement shall be binding upon and inure to the benefit of the parties hereto and thereto, respectively, and their respective successors and assigns (whether by merger, operation of law or otherwise); provided, however, that no party hereto or thereto may assign its respective rights or delegate its respective obligations under this Agreement, any Ancillary Agreement or the Tax Agreement without the express prior written consent of the other parties hereto or thereto. 10.4. THIRD PARTY BENEFICIARIES. Except for the indemnification rights under this Agreement of any IDT Indemnitee or Net2Phone Indemnitee in their respective capacities as such, (a) the provisions of this Agreement, each Ancillary Agreement and the Tax Agreement are solely for the benefit of the parties and are not intended to confer upon any Person except the parties any rights or remedies hereunder, and (b) there are no third party beneficiaries of this Agreement, any Ancillary Agreement or the Tax Agreement and none of this Agreement, any Ancillary Agreement or the Tax Agreement shall provide any third person with any remedy, claim, liability, 27 reimbursement, claim of action or other right in excess of those existing without reference to this Agreement, any Ancillary Agreement or the Tax Agreement. No party hereto shall have any right, remedy or claim with respect to any provision of this Agreement, any Ancillary Agreement or the Tax Agreement to the extent such provision relates solely to the other two parties hereto or the members of such other two parties' respective Groups. 10.5. NOTICES. All notices requests, demands, waivers and other communications under this Agreement, any Ancillary Agreement or the Tax Agreement shall be in writing and shall be deemed to have been duly given if delivered personally or by facsimile transmission or mailed (certified or registered mail, postage prepaid, return receipt requested): If to IDT, to: IDT Corporation 190 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5165 If to Net2Phone: Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Chief Financial Officer Fax No.: (201) 907-5351 or to such other person or address as any party shall specify by notice in writing to the other party. All such notices, requests, demands, waivers and communications shall be deemed to have been received on the date on which hand delivered, upon transmission of the facsimile transmission by the sender and issuance by the transmitting machine of a confirmation slip confirming that the number of pages constituting the notice have been transmitted without error, or on the third business day following the date on which so mailed, except for a notice of change of address, which shall be effective only upon receipt thereof. In the case of a notice sent by facsimile transmission, the sender shall contemporaneously mail a copy of the notice to the addressee at the address provided for above. However, such mailing shall in no way alter the time at which the facsimile notice is deemed received. In no event shall the provision of notice pursuant to this Section 10.5 constitute notice for service of process. 10.6. SEVERABILITY. If any provision of this Agreement, any Ancillary Agreement or the Tax Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby or thereby, as the case may be, is not affected in any manner adverse to any party. Upon such determination, the parties shall 28 negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the parties. 10.7. FORCE MAJEURE. No party shall be deemed in default of this Agreement, any Ancillary Agreement or the Tax Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement, any Ancillary Agreement or the Tax Agreement results from any cause beyond its reasonable control and without its fault or negligence, such as acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any failure in electrical or air conditioning equipment. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. 10.8. PUBLICITY. Each of Net2Phone and IDT shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to the other transactions contemplated hereby and prior to making any filings with any Governmental Authority with respect thereto. 10.9. HEADINGS. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements and the Tax Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement, any Ancillary Agreement or the Tax Agreement. 10.10. SURVIVAL OF COVENANTS. Except as expressly set forth in any Ancillary Agreement and the Tax Agreement, the covenants, representations and warranties contained in this Agreement, each Ancillary Agreement and the Tax Agreement, and liability for the breach of any obligations contained herein, shall survive the delivery hereof. 10.11. WAIVERS OF DEFAULT. Waiver by any party of any default by the other party of any provision of this Agreement, any Ancillary Agreement or the Tax Agreement shall not be deemed a waiver by the waiving party of any subsequent or other default, nor shall it prejudice the rights of the other party. 10.12. SPECIFIC PERFORMANCE. In the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement, any Ancillary Agreement or the Tax Agreement, the party or parties who are or are to be thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief of its rights under this Agreement, such Ancillary Agreement or the Tax Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived. 29 10.13. AMENDMENTS. No provisions of this Agreement, any Ancillary Agreement or the Tax Agreement shall be deemed waived, amended, supplemented or modified by any party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the party against whom it is sought to enforce such waiver, amendment, supplement or modification. 10.14. INTERPRETATION. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) as a whole (including all of the Schedules, Exhibits and Appendices hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement or the Tax Agreement). Article, Section, Exhibit, Schedule and Appendix references are to the Articles, Sections, Exhibits, Schedules and Appendices to this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) unless otherwise specified. The word "including" and words of similar import when used in this Agreement (or the applicable Ancillary Agreement or the Tax Agreement) shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified. 30 IN WITNESS WHEREOF, the parties have caused this Separation Agreement to be executed by their duly authorized representatives as of the date first above written. IDT CORPORATION By: /s/ Hal Brecher -------------------------------- Name: Hal Brecher Title: Chief Operating Officer NET2PHONE, INC. By: /s/ Howard Balter -------------------------------- Name: Howard Balter Title: Chief Executive Officer 31 EX-10.13 16 LEASE AGREEMENT, DATED AS OF MARCH 1, 1999 Exhibit 10.13 LEASE AGREEMENT --------------- THIS LEASE, dated the first (1st) day of March 1, 1999, between 171-173 MAIN STREET CORPORATION having an office at 190 Main Street, Hackensack, New Jersey 07601, hereinafter referred to as LANDLORD. AND NET2PHONE, INC. having an office at 171 Main Street, Hackensack, New Jersey 07601, herein referred to as TENANT. WITNESSETH that the Landlord hereby leases to the Tenant and the Tenant hereby rents from the Landlord for the term and upon the rate specified, the leased premises described as follows, 171-173 Main Street, situated in the City of Hackensack, County of Bergen and State of New Jersey, and known and designated as 9,845 rentable square feet of the entire premises. 1. This lease shall commence on March 1, 1999 and end on February 28, 2002. 2. Tenant agrees to pay to the Landlord as a base rent for and during the term hereof, a monthly rate of $9,912.00. The Tenant shall pay when due all the rents or charges for water, utilities, taxes, inspection fees, public area insurance, contracts & services, which are or may be assessed or imposed upon the leased premises and common areas and which may be charged to the Landlord by the suppliers thereof during the term hereof. If not paid, such rents or charges shall be added to and become payable as additional rent with installment of rent next due or within 30 days of demand therefor, whichever occurs sooner. The Tenant shall be responsible for general maintenance of the leases premises, including general garbage removal. 3. The base rent payable by Tenant has been calculated on the basis of the portion of the leases premises to be occupied by Tenant during each applicable period during the term of the lease. In the event that Tenant takes occupancy of any additional portion of the leased premises, the Tenant shall be responsible to pay the Landlord an increased monthly rent directly proportional to the additional space rented. 4. Payment of rent is due on the first day of each month. Payable to 171-173 Main Street Corporation and mailed to: Attention: Marc Knoller, 190 Main Street, Hackensack, New Jersey 07601 or as may be otherwise directed by the Landlord in writing. Tenant shall pay a late charge of 5% of the monthly rent for each payment received by the Landlord after the 5th day of each month. Tenant shall pay a late charge of 10% of the monthly rent for each rent payment that is received by the landlord after the 10th of each month. The late charge shall be due with the current late rent payment. 5. The Landlord covenants and agrees that the Tenant, on paying the said rental and performing covenants and conditions in this lease contained, shall and may peaceably and quietly have, hold and enjoy the demised premises for the term aforesaid. 6. The tenant covenants and agrees to use the demised premises for any purpose as permissible under local zoning ordinances. Sublease of any portion of the demised premises is only permissible with written consent of the Landlord. 7. The Tenant will comply with all the laws, statutes, ordinances, orders, regulations, rules and requirements of every kind and nature relating to the premises, or hereafter in effect, of the federal, state, county, municipal, or other governmental authorities whether they be usual or usual ordinary or extraordinary. The Tenant agrees at his cost and expense to comply with all said requirements that pertain to the Tenant and/or his use of the said demised premises. The Landlord will be held harmless from all expenses and/or damages by reason of any notices, orders, violations, or penalties filed against or imposed upon the premises or against the Landlord because of the Tenant's non-compliance with said requirements. 8. The Tenant from and after the date of the commencement of the term of this lease will hold the Landlord harmless against any and all claims, suits, damages, or causes of action for damages arising after the commencement of the term of this lease, and against any orders or decrees of judgments which may be entered therein, brought for damages or alleged damages resulting from any injury to person and/or property or loss of life sustained in the demised premises, during the term hereof. 9. The Tenant shall during the demised term maintain a general liability policy insuring the Tenant and naming the Landlord as additional insured in an amount to be agreed upon by the parts but in no event less than $500,000/$1,000,000. Tenant shall cause the Landlord to be provided with certificates of insurance showing the issuance of the insurance policies provided for in this and shall further provide the Landlord with proof of payment of the premiums in connection with said property. 10. All erections, alterations, additions and improvements, whether temporary or permanent in character, which may be made upon the premises either by the Landlord or the Tenant, except furniture or movable trade fixtures installed at the expense of the Tenant shall be the property of the Landlord and shall remain upon and be surrendered with the premises as a part hereof at the termination of this lease without compensation to the Tenant. The Tenant further agrees to keep said premises and all parts thereof in a clean and sanitary condition and free from trash, inflammable material and other objectionable material. 11. The Tenant shall not make any alterations, additions, or improvements to said premises without the prior written consent of the Landlord. The Tenant shall at its own expense modify the leased premises. All Tenant work shall be in accordance with accepted professional and government regulatory standards'. All work shall have been reviewed and approved by the Landlord, whose approval shall not be unreasonably withheld or delayed. The Tenant has applied for and received the required Hacksensack Township permits. The Tenants shall take good care of the premises and shall at the Tenant's own cost and expense, make all repairs and shall maintain the premises in good condition and state of repair, and at the end or other expiration of the term hereof, shall deliver up the rented premises in good order and condition, wear and tear from reasonable use thereof 2 accepted. Tenant shall neither encumber nor obstruct the sidewalks, driveway yards, entrances, hallways and stairs. 12. In the event that any mechanics' lien is filed against the premises as a result of alterations, additions, or improvements made by the Tenant, the Landlord at its option, after 90 days notice to the Tenant, may terminate this lease and may pay the said lien without inquiring into the validity thereof, and the Tenant shall forthwith reimburse the Landlord the total expense incurred by the Landlord in discharging the said lien as additional rent hereunder. 13. If the Tenant does not exercise the option to renew as per the conditions in Paragraph 19 of this Lease, then one (1) month prior to the expiration of the demised term, the Landlord or its agent shall have the right to place a suitable "For Lease" sign on the premises. Also, during this time the Landlord or its agent with reasonable notice shall have the right to examine the premises and/or exhibit the suite to perspective tenants. In the event Landlord enters into a contract of sale of the leased premises, Landlord, may in its sole discretion, terminate this Lease Agreement, whereby Landlord agrees to provide Tenant with ninety (90) written notice prior to such termination. 14. The Tenant agrees that in case of a fire or other casualty resulting in damage to the premises it will give immediate notice thereof to the Landlord, who shall thereupon, with expedition and in good and workmanlike manner, after said damage, enter upon and undertake said repair and rehabilitation, as is necessary to restore said premises to its original condition before such damage, provided that such damage, with reasonable dispatch, can be repaired within ninety (90) days from the fire or casualty. The Landlord will make every effort to place the Tenant into available space within the building during the repairs not to exceed the 90 day period. In the event that the said demised premises shall at any time during the demised term be totally destroyed by fire or other casualty, or should be rendered party untenable, and the repair and rehabilitation of said demised premises shall be of an extent requiring more than (90) days from the fire or casualty for this completion, then this lease, at the option of either the Landlord or Tenant may be terminated and the obligation to make rental payments thereupon shall cease as of the date of such damage or destruction. Tenant shall not be obligated to make rental payments in the event that Landlord is unable to place the Tenant into available space in close proximity to the Building. 15. It is further agreed that if the rent herein provided for as well as additional sums deemed rent and to be paid by the Tenant shall at any time be in arrears and unpaid for more than ten (10) days after the demand, Landlord, at his option may void this lease and enter into possession of the demised premises and sue for and recover all rent due as herein provided for the entire lease term. Tenant in any such proceedings hereby waives the right of trial by jury. In the event Landlord shall enter into possession of the demised premises after default as above provided, Landlord may rent the premises for the unexpired term on behalf of the Tenant reserving the right to rent the premises for a longer period of time than fixed in the original lease without releasing the original Tenant form any liability, applying any monies collected first to the expense of resuming or obtaining possession, second to restoring premises to a rentable condition and then to the 3 payment of the rent and all other charges due and to grow due to the Landlord, any surplus to be paid to the Tenant who shall remain liable for any deficiency, as measured by the term of this lease. 16. This lease is subject and is hereby subordinated to all present and future mortgages, deeds of trust and other encumbrances affecting the demised premises or the property of which said premises are a part. The tenant agrees to execute, at no expense to the Landlord, any instrument which may be deemed necessary or desirable by the Landlord to further affect the subordination of this lease to any such mortgage, deed or trust or encumbrance. Tenant may not in any manner or form encumber this lease and the leasehold hereby created. Regardless of the terms of this Paragraph, Landlord will seek to obtain from any mortgage the right to quiet enjoyment of the Tenant as long as the Tenant attorns to said mortgagee. 17. If the property or any substantial part hereof wherein the demised premises are located shall be taken by public or quasi-public authority under any power or eminent domain or commendation, this lease at the option of the landlord shall forthwith terminate and the Tenant shall have no claim or interest in or to any award or damages from the Landlord for such taking. The Tenant is not precluded from the maintaining its own action against the condemning authority if said Tenant's rights are legislatively protected. 18. The Tenant has this day deposited with the Landlord the sum of $9,912.00 (Nine thousand nine hundred and twelve dollars) as security for the full and faithful performance by the Tenant of all the terms, covenants and conditions of this lease upon the Tenant's part to be performed, which said sum shall be returned to the Tenant after the time fixed as the expiration of the term herein or any renewal option thereof, provided the Tenant has fully and faithfully carried out all of said terms, covenants and conditions on Tenant's part to be performed. In the event of a bona fide sale, subject to this lease, the Landlord shall have the right to transfer the security to the purchaser for the benefit of the Tenant and the Landlord shall be considered released by the Tenant from all liability for the return of the said security; and the Tenant agrees to look to the new Landlord solely for the return of the said security, and it is agreed that this shall apply to every transfer or assignment made of the security of a new Landlord. 19. Provided that the tenant is not in default under this lease, Tenant shall have the option to renew this lease for an additional three year term by notifying the Landlord in writing, by certified or overnight mail, notice of its election to do so at least one (1) month prior to the date of the expiration of the then current term. The new rent to be payable during the renewal term shall be the current annual rental amount plus the Consumer Price Index (CPI) which shall begin to accrue as of the _______ of this lease. All other terms and conditions of the original lease shall remain in effect in full force and effect. 20. The Tenant accepts the premises in "AS IS" condition. 21. No sign, advertisement or notice shall be affixed to or placed upon any part of the demised premises by the Tenant, except in such manner and of such size, design and color as shall be approved in advance in writing by the Landlord, such approval not to be unreasonably withheld. 4 22. The rules and regulations regarding the demised premises which are part of this lease, shall be observed by the Tenant and by the Tenant's employees, agents and customers. 23. Landlord represents and warrants that Landlord and his agents know of nothing concerning the Premises which are subject matter of this leasehold agreement that would prohibit use of the premises by the Tenant for the uses and purposes intended and further that all of the mechanical equipment and structure in question, at time of the delivery of the premises to the Tenant, is sound and in good working order. Moreover, the electrical lines and plumbing likes contained within the building are in proper working order as of the time of the initial occupancy herein specified. 24. All of the terms, covenants and conditions of this lease shall insure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of the parties hereto. IN WITNESS WHEREOF, the said parties have hereunto set their hands and seals the days and year first above written. WITNESS: 171-173 MAIN STREET CORPORATION Landlord By /s/ Howard Jonas -------------------------------------- Howard Jonas, President ATTEST: NET2PHONE INC. Tenant By /s/ Howard Balter -------------------------------------- Howard Balter, Chief Executive Officer 5 EX-10.14 17 LEASE AGREEMENT DATED AS OF MARCH 1, 1999 Exhibit 10.14 LEASE AGREEMENT --------------- THIS LEASE, dated the first (1st) day of March 1, 1999, between 294-298 STATE STREET CORPORATION having an office at 190 Main Street, Hackensack, New Jersey 07601, hereinafter referred to as LANDLORD. AND NET2PHONE, INC. having an office at 171 Main Street, Hackensack, New Jersey 07601, herein referred to as TENANT. WITNESSTH that the Landlord hereby leases to the Tenant and the Tenant hereby rents from the Landlord for the term and upon the rate specified, the leased premises described as follows, 294-298 State Street, situated in the City of Hackensack, County of Bergen and State of New Jersey, and known and designated as 5,600 rentable square feet of the entire premises. 1. The term of this lease is for a three (3) year period, commencing on March 1, 1999 and ending on February 28, 2002. 2. Tenant agrees to pay to the Landlord as a base rent for and during the term hereof, a monthly rate of $5,600.00, excluding utilities. The Tenant shall pay when due all the rents or charges for water, utilities, taxes, inspection fees, public area insurance, contracts & services, which are or may be assessed or imposed upon the leased premises and common areas and which may be charged to the Landlord by the suppliers thereof during the term hereof. If not paid, such rents or charges shall be added to and become payable as additional rent with installment of rent next due or within 30 days of demand therefor, whichever occurs sooner. The Tenant shall be responsible for general maintenance of the leased premises, including general garbage removal. 3. The base rent payable by Tenant has been calculated on the basis of the portion of the leased premises to be occupied by Tenant during each applicable period during the term of the lease. In the event that Tenant takes occupancy of any additional portion of the leased premises, the Tenant shall be responsible to pay the Landlord an increased monthly rent directly proportional to the additional space rented. 4. Payment of rent is due on the first day of each month. Payable to 294-298 State Street Corporation and mailed to: Attention: mare Knoller, 190 Main Street, Hackensack, New Jersey 07601 or as may be otherwise directed by the Landlord in writing. Tenant shall pay a late charge of 5% of the monthly rent for each payment received by the Landlord after the 5th day of each month. Tenant shall pay a late charge of 10% of the monthly rent for each rent payment that is received by the landlord after the 10th of each month. The late charge shall be due with the current late rent payment. 5. The Landlord covenants and agrees that the Tenant, on paying the said rental and performing covenants and conditions in this lease contained, shall and may peaceably and quietly have, hold and enjoy the demised premises for the term aforesaid. 6. The tenant covenants and agrees to use the demised premises for any purpose as permissible under local zoning ordinances. Sublease of any portion of the demised premises is only permissible with written consent of the Landlord. 7. The Tenant will comply with all the laws, statutes, ordinances, orders, regulations, rules and requirements of every kind and nature relating to the premises, or hereafter in effect, of the federal, state, county, municipal, or other governmental authorities whether they be usual or usual ordinary or extraordinary. The Tenant agrees at his cost and expense to comply with all said requirements that pertain to the Tenant and/or his use of the said demised premises. The Landlord will be held harmless from all expenses and/or damages by reason of any notices, orders, violations, or penalties filed against or imposed upon the premises or against the Landlord because of the Tenant's non-compliance with said requirements. 8. The Tenant from and after the date of the commencement of the term of this lease will hold the Landlord harmless against any and all claims, suits, damages, or causes of action for damages arising after the commencement of the term of this lease, and against any orders or decrees of judgments which may be entered therein, brought for damages or alleged damages resulting from any injury to person and/or property or loss of life sustained in the demised premises, during the term hereof. 9. The Tenant shall during the demised term maintain a general liability policy insuring the Tenant and naming the Landlord as additional insured in an amount to be agreed upon by the parts but in no event less than $500,000/$1,000,000. Tenant shall cause the Landlord to be provided with certificates of insurance showing the issuance of the insurance policies provided for in this and shall further provide the Landlord with proof of payment of the premiums in connection with said property. 10. All erections, alterations, additions and improvements, whether temporary or permanent in character, which may be made upon the premises either by the Landlord or the Tenant, except furniture or movable trade fixtures installed at the expense of the Tenant shall be the property of the Landlord and shall remain upon and be surrendered with the premises as a part hereof at the termination of this lease without compensation to the Tenant. The Tenant further agrees to keep said premises and all parts thereof in a clean and sanitary condition and free from trash, inflammable material and other objectionable material. 11. The Tenant shall not make any alterations, additions, or improvements to said premises without the prior written consent of the Landlord. The Tenant shall at its own expense modify the leased premises. All Tenant work shall be in accordance with accepted professional and government regulatory standards. All work shall have been reviewed and approved by the Landlord, whose approval shall not be unreasonably withheld or delayed. The Tenant has applied for and received the required Hackensack Township permits. The Tenants shall take good care of the premise and shall at the Tenant's own cost and expense, make all repairs and shall maintain the premises in good condition and state of repair, and at the end or other expiration of the term hereof, shall deliver up the rented premises in good order and condition, wear and tear from reasonable use thereof accepted. Tenant shall neither encumber nor obstruct the sidewalks, driveways yards, entrances, hallways and stairs. 12. In the event that any mechanics' lien is filed against the premises as a result of alterations, additions, or improvements made by the Tenant, the Landlord at its option, after 90 days notice to the Tenant, may terminate this lease and may pay the said lien without inquiring into the validity thereof, and the Tenant shall forthwith reimburse the Landlord the total expense incurred by the Landlord in discharging the said lien as additional rent hereunder. 13. If the Tenant does not exercise the option to renew as per the conditions in Paragraph 19 of this Lease, then one (1) month prior to the expiration of the demised term, the Landlord or its agent shall have the right to place a suitable "For Lease" sign on the premises. Also, during this time the Landlord or its agent with reasonable notice shall have the right to examine the premises and/or exhibit the suite to perspective tenants. In the event Landlord enters into a contract of sale of the leased premises, Landlord, may in its sole discretion, terminate this Lease Agreement, whereby Landlord agrees to provide Tenant with ninety (90) written notice prior to such termination. 14. The Tenant agrees that in case of a fire or other casualty resulting in damage to the premises it will give immediate notice thereof to the Landlord, who shall thereupon, with expedition and in good and workmanlike manner, after said damage, enter upon and undertake said repair and rehabilitation, as is necessary to restore said premises to its original condition before such damage, provided that such damage, with reasonable dispatch, can be repaired within ninety (90) days from the fire or casualty. The Landlord will make every effort to place the Tenant into available space within the building during the repairs not to exceed the 90 day period. In the event that the said demised premises shall at any time during the demised term be totally destroyed by fire or other casualty, or should be rendered party untenable, and the repair and rehabilitation of said demised premises shall be of an extent require more than (90) days from the fire or casualty for this completion, then this lease, at the option of either the Landlord or Tenant may be terminated and the obligation to make rental payments thereupon shall cease as of the date of such damage or destruction. Tenant shall not be obligated to make rental payments in the event that Landlord is unable to place the Tenant into available space in or in close proximity to the Building. 15. It is further agreed that if the rent herein provided for as well as additional sums deemed rent and to be paid by the Tenant shall at any time be in arrears and unpaid for more than ten (10) days after the demand, Landlord, at his option may void this lease and enter into possession of the demised premises and sue for and recover all rent due as herein provided for the entire lease term. Tenant in any such proceedings hereby waives the right of trial by jury. In the event Landlord shall enter into possession of the demised premises after default as above provided, Landlord may rent the premises for the unexpired term on behalf of the Tenant reserving the right to rent the premises for a longer period of time than fixed in the original lease without releasing the original Tenant from any liability, applying any monies collected first to the expense of resuming or obtaining possession, second to restoring premises to a rentable condition and then to the payment of the rent and all other charges due and to grow due to the landlord, any surplus to be paid to the Tenant who shall remain liable for any deficiency, as measured by the term of this lease. 16. This lease is subject and is hereby subordinated to all present and future mortgages, deeds of trust and other encumbrances affecting the demised premises or the property of which said premises are a part. The tenant agrees to execute, at no expense to the Landlord, any instrument which may be deemed necessary or desirable by the Landlord to further effect the subordination of this lease to any such mortgage, deed or trust or encumbrance. Tenant may not in any manner or form encumber this lease and the leasehold hereby created. Regardless of the terms of this Paragraph, Landlord will seek to obtain from any mortgage the right to quiet enjoyment of the Tenant as long a the Tenant attorns to said mortgagee. 17. If the property or any substantial part hereof within the demised premises are located shall be taken by public or quasi-public authority under any power or eminent domain or commendation, this lease at the option of the landlord shall forthwith terminate and the Tenant shall have no claim or interest in or to any award or damages from the Landlord for such taking. The Tenant is not precluded from the maintaining its own action against the condemning authority if said Tenant's rights are legislatively protected. 18. The Tenant has this day deposited with the Landlord the sum of $5,600.00 (Five thousand sic hundred dollars) as security for the full and faithful performance by the Tenant of all the terms, covenants and conditions of this lease upon the Tenant's part to be performed, which said sum shall be returned to the Tenant after the time fixed as the expiration of the term herein or any renewal option thereof, provided the Tenant has fully and faithfully carried out all of said terms, covenants and conditions on Tenant's part to be performed. In the event of a bona fide sale, subject to this lease, the Landlord shall have the right to transfer the security to the purchaser for the benefit of the Tenant and the Landlord shall be considered released by the Tenant from all liability for the return of the said security; and the Tenant agrees to look to the new Landlord solely for the return of the said security, and it is agreed that this shall apply to every transfer or assignment made of the security of a new Landlord. 19. Provided that the Tenant is not in default under this Lease, Tenant shall have the option to renew this lease for an additional three year term by notifying the Landlord in writing, by certified or overnight mail, notice of its election to do so at least one (1) month prior to the date of the expiration of the then current term. The new rent to be payable during the renewal term shall be the current annual rental amount plus the Consumer Price Index (CPI) which shall begin to accrue as of the effective date of this lease. All other terms and conditions of the original lease shall remain in effect in full force and effect. 20. The Tenant accepts the premises in "AS IS" condition. 21. No sign, advertisement or notice shall be affixed to or placed upon any part of the demised premises by the Tenant, except in such manner and of such size, design and color as shall be approved in advance in writing by the Landlord, such approval not to be unreasonably withheld. 22. The rules and regulations regarding the demised premises which are part of this lease, shall be observed by the Tenant and by the Tenant's employees, agents and customers. 23. Landlord represents and warrants that landlord and his agents knows of nothing concerning the premises which are subject matter of this leasehold agreement that would prohibit use of the premises by the Tenant for the uses and purposes intended and further that all of the mechanical equipment and structure in question, at time of the delivery of the premises to the Tenant, is sound and in good working order. Moreover, the electrical lines and plumbing likes contained within the building are in proper working order as of the time of the initial occupancy herein specified. 24. All of the terms, covenants and conditions of this lease shall inure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns of the parties hereto. IN WITNESS WHEREOF, the said parties have hereunto set their hands and seals the days and year first above written. 294-298 STATE STREET CORPORATION Landlord By /s/ Howard Jonas --------------------------------- Howard Jonas, President NET2PHONE INC. Tenant By /s/ Howard Balter --------------------------------- Howard Balter, Chief Executive Officer EX-10.16 18 SERIES A SUBSCRIPTION AGREEMENT EXHIBIT 10.16 SERIES A SUBSCRIPTION AGREEMENT ------------------------------- SUBSCRIPTION Agreement (this "Agreement"), dated as of May 13, 1999, --------- between Net2Phone, Inc., a Delaware corporation (the "Company"), and those ------- investors listed on Schedule A hereto (each an "Investor" and jointly the -------- "Investors"). - ---------- WHEREAS, the Company seeks to raise up to $31.4 million through the issuance and sale of Series A Preferred and Warrants (each as defined below) (the "Private Placement"); ----------------- WHEREAS, the Investors desire to participate in the Private Placement; WHEREAS, the Company is a subsidiary of IDT Corporation, a Delaware corporation ("IDT"); --- WHEREAS, the transactions contemplated by IDT's tender offer (the "Tender Offer") to repurchase its 8.75% Senior Notes due 2006 (the "Notes"), - ------------- ----- which Tender Offer included a consent solicitation (a "Consent Solicitation") -------------------- with respect to IDT's indenture pertaining to the Notes (the "Indenture"), have --------- been consummated, including the Refinancing (as defined in the Tender Offer); WHEREAS, certain of the Investors operate as "venture capital operating companies" as defined in the Department of Labor Regulations, Section 2510.3-101(d) (the "VCOC Investors") and must, in order to maintain such status, -------------- have direct contractual rights to participate substantially in, or substantially influence the conduct of the management of, the Company; and WHEREAS, upon the terms and subject to the conditions of this Agreement, the Investors desire to purchase shares of Series A Convertible Preferred Stock of the Company, par value $.01 per share (the "Series A -------- Preferred"), and Warrants (the "Warrants") to purchase shares of Common Stock of - --------- -------- the Company, par value $.01 per share (the "Common Stock"), and the Company ------------ desires to sell shares of Series A Preferred and Warrants to the Investors. NOW, THEREFORE, the Company and the Investors hereby agree as follows: 1.1. Subscription for Series A Preferred. Upon the terms and subject to the - ---- ----------------------------------- conditions of this Agreement, the Company hereby agrees to issue and sell and each of the Investors hereby agrees to purchase from the Company (i) the total number of shares of Series A Preferred (the "Investor Shares"), at a price of --------------- $10 per share of Series A Preferred and (ii) the total number of Warrants (the "Investor Warrants"), each as specified opposite such Investor's name on - ------------------ Schedule A hereto. The Company and the Investors hereby acknowledge and agree that for United States federal, state and local income tax purposes the purchase price of each of the Warrants and the Series A Preferred shall be the amount as mutually agreed to by the Company and the Investors within sixty (60) days of the Closing. The Company and the Investors agree to use the foregoing purchase price for all income tax purposes with respect to this transaction. 1.2. Issuance of Series A Preferred Shares and Warrants; Execution of ---------------------------------------------------------------- Additional Agreements. At the Closing (as hereinafter defined): - --------------------- (a) Each Investor will pay or tender to the Company cash in immediately available funds in the amount representing the aggregate purchase price for the number of Investor Shares and Investor Warrants purchased by such Investor (the "Purchase Price"). -------------- (b) The Company shall issue and deliver to each Investor a share certificate or certificates representing the Investor Shares acquired hereunder by such Investor, which certificate or certificates shall be registered in such Investor's name or such name as such Investor designates and shall be in the form to be agreed by the parties. (c) The Company and the Investors shall execute and deliver the Registration Rights Agreement relating to the shares of Common Stock underlying the Investor Shares and the Investor Warrants substantially in the form attached as Exhibit A hereto (the "Registration Rights --------- ------------------- Agreement"). --------- (d) The Company and the Investors shall execute and deliver the Co-Sale Agreement relating to the potential sales of Common Stock, Investor Shares and Investor Warrants substantially in the form attached as Exhibit B --------- hereto (the "Co-Sale Agreement"). ----------------- (e) The Company shall issue and deliver to each Investor a warrant certificate representing the Investor Warrants issuable to such Investor, which certificate shall be registered in the Investor's name or in such name as such Investor designates and shall be substantially in the form attached as Exhibit C hereto (each, a "Warrant Certificate" and --------- ------------------- collectively, the "Warrant Certificates"). -------------------- (f) The Company, IDT, Clifford Sobel, the Investor and each of the other Investors which have simultaneously entered into Series A Subscription Agreements with the Company shall execute and deliver a Stockholders Agreement (the "Stockholders Agreement") substantially in the form attached ---------------------- as Exhibit D hereto. --------- (g) The Company shall have authorized the Investor Shares, which Investor Shares shall have the rights, preferences and terms set forth in the Amended and Restated Certificate of Incorporation attached as Exhibit E --------- hereto (the "Amended and Restated Certificate of Incorporation" and, ------------------------------------------------- together with the Registration Rights Agreement, the Co-Sale Agreement, the Warrant Certificate, the Stockholders Agreement, the Separation Agreement by and between IDT and the Company, the Assignment Agreement by and between IDT and the Company, the IDT Services Agreement by and between the Company and IDT, the Net2Phone Services Agreement by and between the Company and IDT, the Internet/Telecommunications Agreement by and between the Company and IDT, the Joint Marketing Agreement by and between the Company and IDT, the Tax Sharing and Indemnification Agreement by and between the Company and IDT, the Assignment and Assumption Agreement by and between the Company and IDT, the Company's 1999 Stock Option and Incentive Plan and Clifford M. Sobel's employment agreement with the Company, as amended (the "Sobel Agreement") are hereinafter collectively referred to as the "Additional ---------- Agreements").; ---------- 1.3. Closing. The issuance and delivery of the Investor Shares and Investor Warrants by the Company to the Investors and the delivery of the Purchase Price to the Company (the "Closing"), will take place at the offices of ------- Morrison & Foerster LLP, 1290 Avenue of the Americas, New York, New York, at 10:00 A.M. on May 13, 1999, or at such other time and place as the Company and the Investors may agree orally or in writing. 2. Representations, Warranties and Acknowledgments of the Investors. ---------------------------------------------------------------- Each Investor hereby represents, warrants and acknowledges to the Company, severally and not jointly, as follows: 2.1. Receipt of Agreements; Access to Information. The Investor has received and reviewed this Agreement, the Additional Agreements and the Confidential Executive Summary, dated February 2, 1999 (as updated, the "Memorandum") prepared and distributed by Hambrecht & Quist, LLC (the "Placement - ----------- --------- Agent"). The Company has provided the Investor with the opportunity to ask - ----- questions of and to receive answers from representatives of the Company concerning the Company and an investment in the Investor Shares and the Investor Warrants. 2.2. No Registration of Shares. The Investor is aware that the Investor ------------------------- Shares, the Investor Warrants and, when and if issued, the Common Shares underlying the Investor Shares and the Investor Warrants (the Investor Shares, the Investor Warrants and underlying Common Shares are collectively referred to herein as the "Securities"), have not been registered under the Securities Act ---------- of 1933, as amended (the "Act"), that such offer and sale are intended to be --- exempt from registration under the Act and the rules promulgated thereunder by the Securities and Exchange Commission (the "SEC"), and that the Securities --- cannot be sold, assigned, transferred, or otherwise disposed of unless they are subsequently registered under the Act or an exemption from such registration is available. The Investor is also aware that sales or transfers of the Securities are further restricted by state securities laws and the provisions of this Agreement and that the certificates for the Securities will bear appropriate legends restricting their transfer pursuant to applicable laws, this Agreement and the Additional Agreements. 2.3. Suitability of Investment. ------------------------- (a) The Investor understands that there is no established market for the Securities; (b) The Investor is acquiring the Securities for its own account, or for the account of another "accredited investor" who is an affiliate of the Investor and who can make all of the representations contained herein, for investment purposes only and not with a view to the resale or distribution thereof; (c) The Investor has not and will not, directly or indirectly, offer, sell, transfer, assign, exchange or otherwise dispose of all or any part of the Securities, except in accordance with applicable federal and state securities laws and the provisions of this Agreement or the Additional Agreements as long as such documents remain in effect; (d) The Investor has such knowledge and experience in financial, business and tax matters that the Investor is capable of evaluating the merits and risks relating to the Investor's investment in the Securities and making an investment decision with respect to the Company; (e) To the full satisfaction of the Investor, the Investor has been given the opportunity to obtain information and documents relating to the Company and to ask questions of and receive answers from representatives of the Company concerning the Company and the investment in the Securities; (f) Neither the Investor nor any of its affiliates has engaged in any activity that would be deemed a "general solicitation" under the provisions of Regulation D. (g) The Investor has such knowledge and experience in financial or business matters that it can, and it has, adequately analyzed the risks of an investment in the Securities and it has determined the Securities are a suitable investment for the Investor and that the Investor is able at this time, and in the foreseeable future, to bear the economic risk of a total loss of its investment in the Company; (h) The Investor is aware that there are substantial risks incident to an investment in the Securities, including, without limitation, those summarized under "Risk Factors" in the Memorandum; and (i) The Investor is an "accredited investor" within the meaning of Rule 501 of Regulation D of the Act as presently in effect and is either purchasing for its own account or for the account of another "accredited investor", and any accounts for which the Investor is acting are each able to bear the economic risks of this investment. For each Investor subject to ERISA (as defined below), if the Investor is acquiring the Securities as a fiduciary or agent for another investor's account, the Investor has sole investment and voting discretion with respect to such account and has full power to make the acknowledgments, representations and agreements contained herein on behalf of such account. 2.4. Authorization. All action on the part of the Investor necessary for ------------- the authorization, execution and delivery of this Agreement and the Shareholders Agreement and the Registration Rights Agreement and for the performance of all obligations of the Investor hereunder and thereunder has been taken. This Agreement has been, and the Shareholders Agreement and the Registration Rights Agreement will be, duly executed and delivered by the Investor and will constitute valid and legally binding obligations of the Investor, enforceable in accordance with their respective terms, subject to (i) the laws of bankruptcy and the laws affecting creditors' rights generally, and (ii) the availability of equitable remedies, and (iii) the fact that such Investor's indemnification obligations under this Agreement and the Registration Rights Agreement may be unenforceable on the grounds of public policy. 3. Representations, Warranties and Acknowledgments of the Company. -------------------------------------------------------------- The Company hereby represents, warrants and acknowledges to the Investors as follows: 3.1. Organization, Good Standing and Qualification. The Company is a --------------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its assets and properties, to carry on its Internet telephony business and such other businesses as presently conducted or as currently proposed to be conducted by the Company (the "Business"), to execute and deliver this Agreement and the Additional Agreements and to issue and sell the Securities pursuant to this Agreement. The Company possesses all governmental and other permits, licenses and other authorizations to own its properties as now owned and to conduct its Business, except where the failure to possess such governmental and other permits, licenses and other authorizations would not have a material adverse effect on the business, assets, financial condition, results of operations or properties of the Company (a "Material Adverse Effect"). The ----------------------- Company is duly qualified to transact business and is in good standing in each jurisdiction wherein the properties owned or leased or the business transacted by the Company makes such qualification to do business as a foreign corporation necessary, except for such jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. The Company has no subsidiaries or affiliated company (other than IDT and its subsidiaries) and does not presently own or control, directly or indirectly, any interest in any corporation, association or other business entity. 3.2. Capitalization. The authorized capital of the Company consists of: -------------- (a) Capital Stock. 120,000,000 shares of capital stock, including ------------- 95,000,000 shares of Common Stock, 1,032,000 shares of which are issued and outstanding prior to the Closing, 3,200,000 shares of which are reserved for issuance upon conversion of the Investor Shares and Investor Warrants, 60,000 shares of which are reserved for issuance to Hambrecht & Quist LLC pursuant to the terms of an engagement letter and 1,680,000 shares of which are reserved for issuance upon the exercise of options that have been or may be granted under the Company's stock option and incentive plans, and 15,000,000 shares of Class A Stock, par value $.01 per share, 3,140,000 shares of which are reserved for issuance upon conversion of the Investor Shares, 9,288,000 shares of which are issued and outstanding prior to the Closing. (b) Preferred Stock. 10,000,000 shares of preferred stock, 3,150,000 of --------------- which have been designated as Series A Preferred, par value $.01 per share, none of which is issued or outstanding prior to the Closing. There are no other shares of preferred stock authorized, issued or outstanding. (c) Rights. Except for (i) up to 1,680,000 shares of Common Stock which ------ may be issued upon the exercise of options that have been or may be granted under the Company's stock option and incentive plans, (ii) shares that may be issuable to Clifford Sobel pursuant to the Sobel Agreement and (iii) the Investor Shares and Investor Warrants to be issued hereunder, there are not outstanding any options, warrants, subscriptions, rights (including conversion or preemptive rights or first refusal rights) or agreements for the purchase or acquisition from the Company of any shares of the Company's capital stock or securities convertible into its capital stock. Except as set forth on Schedule 3.2(c) hereof, no stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities or rights to purchase equity securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of any merger, consolidated sale of stock or assets, change in control or any other transaction(s) by the Company. The pro forma, post Series A Preferred and Warrant Capitalization Table attached hereto as Exhibit H is complete and correct as of the date of this Agreement. (d) Treasury Stock. The Company does not hold any shares of its capital -------------- stock in its treasury. 3.3. Subsidiaries. The Company does not own or control any equity security ------------ or other interest of any other corporation, limited partnership or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 3.4. Authorization. All corporate action on the part of the Company and its ------------- officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement and the Additional Agreements and transactions contemplated hereby and thereby, the performance of all obligations of the Company hereunder and thereunder and the authorization, issuance and delivery of the Series A Preferred and the Warrants being sold hereunder, and the authorization of the Common Stock issuable upon exercise or exchange of the Warrants (the "Warrant Shares") and the Class A Stock issuable upon conversion -------------- of the Series A Preferred (the "Conversion Shares"), have been taken or will be ----------------- taken prior to the Closing, and this Agreement and the Additional Agreements will be duly executed by the Company, and will constitute valid and legally binding obligations of the Company, enforceable in accordance with its and their terms, subject to (i) the laws of bankruptcy and the laws affecting creditors' rights generally, (ii) the availability of equitable remedies and (iii) the fact that the Company's indemnification obligations under the Registration Rights Agreement may be unenforceable on the grounds of public policy. 3.5. Valid Issuance of Series A Preferred and Common Stock, Warrants and ------------------------------------------------------------------- Warrant Shares. (a) The Series A Preferred and Warrants, when issued, sold and - -------------- delivered in accordance with the terms hereof for the consideration herein, and the Warrant Shares, when issued and paid for in accordance with the terms of the Warrants, will be duly and validly issued, fully paid and nonassessable and free of any liens or encumbrances, except such as may be created or suffered by the Investor, will be in compliance with all applicable state and federal securities laws and will have the rights, preferences and privileges described in the Amended and Restated Certificate of Incorporation attached as Exhibit E. (b) The outstanding shares of Common Stock have been duly and validly authorized and issued and are fully paid and nonassessable, were not issued in contravention of any preemptive right or right of first refusal, and have been issued, sold and delivered by the Company in compliance with the applicable federal and state securities laws. The Conversion Shares and Warrant Shares have been duly and validly reserved and, when issued and paid for in compliance with the provisions of this Agreement, the Amended and Restated Certificate of Incorporation and the Warrants will be validly issued, fully paid and nonassessable. (c) Subject to the accuracy of the Investors' representations in Section 2 hereof and the compliance of the Investors with all applicable restrictions on transferability, the offer, sale and issuance of the Series A Preferred and the Warrants by the Company in conformity with the terms of this Agreement, the Warrant Shares to be issued in accordance with the terms of the Warrants and the issuance of the Conversion Shares, constitute transactions exempt from the registration requirements of Section 5 of the Act. (d) Except for shares that may be issuable pursuant to the Sobel Agreement, neither the offer nor the issuance or sale of the Warrant Shares or the Conversion Shares constitutes or will constitute an event, under any capital stock or convertible security or any anti-dilution or similar provision of any agreement or instrument to which the Company is a party or by which it is bound or affected, which shall either increase the number of shares or units of capital stock issuable upon conversion of any securities or upon exercise of any warrant or right to subscribe to or purchase any stock or similar security, or decrease the consideration per share or unit of capital stock to be received by the Company upon such conversion or exercise. (e) The options granted under the Company's stock option and incentive plans have been duly authorized and validly issued and were issued in compliance with the applicable federal and state securities laws. The sole stock option and incentive plan of the Company is the 1999 Stock Option Plan. (f) The Conversion Shares and the Warrants have been duly authorized and reserved for issuance upon the conversion of the Series A Preferred or exercise of the Warrants, as the case may be. 3.6. Consents. -------- (a) No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, regional, state or local governmental authority or any third party on the part of the Company is required in connection with the execution and delivery of this Agreement and the Additional Agreements, and the consummation of the transactions contemplated hereby, except for filings, if any, required pursuant to applicable state securities or Blue Sky laws, which filings will be made within the required statutory or regulatory periods, and any filing pursuant to Regulation D of the SEC, which filing, if made, will be effected within 15 days of the Closing. (b) The Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its Business or the ownership of its properties which violation would have a Material Adverse Effect. To the best of the Company's knowledge, IDT is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof affecting the Business, which violation would have a Material Adverse Effect. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its Business, the lack of which would not have a Material Adverse Effect. 3.7. Litigation. Except as set forth on Schedule 3.7, there is no action, ---------- suit, claim, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or the Business, nor is the Company aware of any event or circumstances that it expects to form the basis for such an action, suit, claim, proceeding or investigation. The foregoing includes, without limitation, actions pending or threatened (or any basis therefor known to the Company) involving the prior employment of any of the Company's, or to the Company's knowledge IDT's, employees, their use in connection with the Business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality that would have a Material Adverse Effect. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.8. Non-Disclosure and Non-Competition Agreements. Each key employee and --------------------------------------------- officer of the Company has executed a Non-Disclosure and Non-Competition Agreement with the Company or with IDT which was subsequently assigned to the Company in the form of Exhibit F attached hereto. No such key employee or officer of the Company has excluded works or inventions made prior to his employment with the Company pursuant to such employee's or officer's Non- Disclosure and Non-Competition Agreement. 3.9. Intellectual Property. --------------------- (a) The Company hereby refers the Investors to Schedule 3.9(a), as well as all information included in the risk factors of the draft Registration Statement, on Form S-1, dated as of May 4, 1999 (as the same may be amended, the "Registration Statement"), which Schedule and risk factors modify all representations made in this Section 3.9. A copy of the risk factors is annexed hereto as Exhibit J. Except as set forth on Schedule 3.9(a), the Company has no knowledge of any infringement by it or IDT of any third-party patents, trademarks, service marks, trade names, copyrights, trade secrets, information and other proprietary rights and processes necessary for the Business (collectively, the "Intellectual Property Rights"). Except as set forth on Schedule 3.9(a), the Company is not aware of any obligation to make any payments by way of royalties, fees or otherwise to any owner or licensor of, or other claimant to, any patent, trademark, service mark, trade name, copyright, trade secret, information or other proprietary right, with respect to the use thereof, or in connectio n with the conduct of the Business or otherwise other than royalties, fees or other payments (i) that would not have a Material Adverse Effect, (ii) arising from the purchase of "off the shelf" or standard products, or (iii) that are paid or payable in connection with strategic relationships, partnering agreements, bundling agreements, web linking agreements, agency agreements, affiliation agreements or other similar business arrangements in the ordinary course of the Business (excluding any such arrangements or agreements that involve licenses or rights to technology used in the Company's generally available product and service offerings). Except as set forth on Schedule 3.9(a), the Company is not aware of any third party that is infringing upon or violating any of the Company's Intellectual Property Rights. The Company does not believe it is necessary to utilize any patented inventions or trade secrets of any of its employees made prior to their employment by the Company, except for patented inventions or trade secrets that have been assigned to the Company. Since the Company's organization, the Company and IDT, taken together, have taken reasonable security measures to protect the secrecy, confidentiality and value of the Company's trade secrets (except where the failure to do so would not have a Material Adverse Effect). (b) The Company has registered the URL addresses of the "net2phone.com" and "EZSurf.com" web sites (the "Web Sites") with the appropriate organizations. The Company has not received any written communication from any person that any Web Site is in violation of any law, rule or regulation or in conflict with any patent, trademark, service mark, trade name, copyright, trade secret, trade dress, license or other proprietary right with respect thereto. 3.10. Compliance with Other Instruments. The Company is not in violation --------------------------------- of any provision of its Certificate of Incorporation or Bylaws, each as amended to date, or, to the Company's knowledge, in violation or default of any provision of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound or any provision of federal or state statute, rule or regulation applicable to the Company, which violation or default would have a Material Adverse Effect. The execution, delivery, and performance of and compliance with this Agreement, and the Additional Agreements, and the issuance and sale of the Series A Preferred and the Warrants pursuant hereto and of the Conversion Shares pursuant to the Certificate of Incorporation and the Warrant Shares, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.11. Disclosure. The Company has provided each Investor with true and ---------- complete copies of all documents and information requested by such Investor in its due diligence review of the Company. Neither this Agreement, the Schedules and Exhibits attached hereto, the Additional Agreements nor any certificate or other document to be delivered by the Company at or prior to the Closing contains or will contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading as of the date hereof and thereof. Notwithstanding the foregoing, the Registration Statement provided to each of the Investors was prepared by the management of the Company in a good faith effort to describe the Company's presently proposed business and products and the markets therefor. The assumptions applied in preparing the Registration Statement appeared reasonable to management as of the date thereof and as of the date hereof. No representations have been made to the Investors as to the timing of the filing of the Registration Statement. There are no facts which (individually or in the aggregate) would have a Material Adverse Effect that have not been set forth in this Agreement, the Schedules and Exhibits attached hereto, the Additional Agreements or in other documents delivered to the Investors or their attorneys or agents in connection herewith. 3.12. Agreements; Actions. ------------------- (a) The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) made any material loans or advances to any person, other than in the ordinary course of business, (iii) sold, exchanged or otherwise disposed of any material assets, or rights, other than in the ordinary course of business, or (iv) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to indebtedness and other obligations incurred in the ordinary course of business or as disclosed in the Financial Statements (as defined below)) individually in excess of $50,000 or in the aggregate in excess of $100,000. (b) There are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or to its knowledge by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $25,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), (ii) the license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), (iii) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services, or (iv) indemnification by the Company with respect to infringements of proprietary rights (other than indemnification obligations arising from agreements entered into in the ordinary course of business). (c) The Company has not engaged in the past three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, dissolution or winding up of the Company. (d) The Company and IDT have entered into each of the agreements between such entities as described in Section 1.2(g) (the "Intercompany Agreements"). 3.13. Title to Property and Assets. The Company has good and marketable ---------------------------- title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible liens and encumbrances which do not in any case materially detract from the value of the properties subject thereof or which would have a Materially Adverse Effect. All facilities, machinery, equipment, fixtures and other properties owned, leased or used by the Company are in good operating condition and repair, are reasonably fit and useable for the purposes for which they are being used and are adequate and sufficient for the Business. 3.14. Financial Statements. The Company has delivered to each Investor its -------------------- audited consolidated financial statements (balance sheet, statement of operations, statement of stockholders' deficit and statement of cash flows) for the fiscal years ended July 31, 1997 and July 31, 1998 (the "Balance Sheet ------------- Date"), its unaudited balance sheet as at January 31, 1999 and unaudited statements of income, cash flow and stockholders' equity for the six-month period ending on January 31, 1999 (the "Statement Date") (together, the -------------- "Financial Statements"). The Financial Statements are complete and correct in - --------------------- all material respects and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated. The balance sheets included in the Financial Statements accurately set forth and fairly present the financial condition and operating results of the Company as of the dates thereof and reflect all material liabilities, contingent or otherwise, of the Company as of such dates, and the statements of operations included in the Financial Statements accurately present the operating results of the Company during the periods indicated therein. Since the Balance Sheet Date, there has been no event which could have a Material Adverse Effect. 3.15. Labor Agreements and Actions; Employees. The Company is not bound by --------------------------------------- or subject to any agreement with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees of the Company. There is no strike or other labor dispute involving the Company or the Business pending or, to the Company's knowledge, threatened, that would have a Material Adverse Effect. The Company is not aware of any labor organization activity involving the employees of the Company or otherwise affecting the Business. To the Company's knowledge, no employee, officer or consultant of the Company is in violation of any term of employment contract, patent disclosure agreement or any other contract or agreement, or any judgment, decree or order of any court or administrative agency, relating to the relationship of any such employee, officer or consultant with the Company or any other party because of the nature of the Business; nor, to the Company's knowledge, has any such employee, officer, or consultant received notice or communication of such a violation. The Company is not aware that any officer or Key Employee (as defined below), or that any group of Key Employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees or other applicable laws, the employment of each officer and employee of the Company is terminable at the will of the Company. The carrying on of the Business by the employees of the Company will not, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employees are now obligated. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. For purposes of this Agreement, "Key Employee" shall mean each of Clifford M. Sobel, Howard ------------ S. Balter, Ilan Slasky, David Greenblatt and H. Jeff Goldberg. 3.16. Insurance. The Company carries, or is covered by, insurance with --------- companies the Company reasonably believes to be responsible and in such amounts and covering such risks as the Company reasonably believes to be adequate for the conduct of its Business and the value of its properties. 3.17. Employee Benefit Plans. Except as set forth in Schedule 3.17, the ---------------------- Company does not have any Employee Benefit Plan as defined in the Employee Retirement Income Security Act of 1974, as amended to date ("ERISA"). The ----- Company has no material liability with respect to any Employee Benefit Plan (including, without limitation, any unfunded liability or any accumulated funding deficiency) or any material liability to the Pension Benefit Guaranty Corporation or under Title IV of ERISA with respect to a multi-employer pension benefit plan, nor would the Company have any such liability if any such plan were terminated or if the Company withdrew, in whole or in part, from any multi- employer plan. 3.18. Investment Company. The Company is not, and, after giving effect to ------------------ the same and issuance of the Securities, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. 3.19. Solvency. After giving effect to the transactions contemplated by -------- this Agreement, (i) the fair market value of the Company's assets will be in excess of the total amount of its liabilities (including, without limitation, contingent liabilities); (ii) the present fair saleable value of the Company's assets is greater than its probable liability on its existing debts as such debts become absolute and matured; and (iii) the Company will be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature. 3.20. Obligations of Management. Each Key Employee of the Company is ------------------------- currently devoting one hundred percent (100%) of his or her business time to the conduct of the Business. The Company is not aware that any Key Employee of the Company is planning to work less than full time at the Company in the future. No officer or key employee is currently working, or, to the Company's knowledge, plans to work for a competitive enterprise, whether or not such officer or key employee is or will be compensated by such enterprise. 3.21. Interested Party Transactions: Obligations to Related Parties. -------------------------------------------------------------- Except as disclosed on Schedule 3.21 hereto, no officer, director or shareholder of the Company or any Affiliate (as this term is defined in Rule 405 of the SEC under the Act) of any such Person or the Company has or has had, either directly or indirectly, (i) an interest in any Person which (1) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company or (2) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficial interest in any transaction, contract or agreement to which the Company is a party or by which it may be bound or affected. There are no obligations of the Company to officers, directors, stockholders, or employees of the Company other than for indemnification, payment of salary for services rendered, reimbursement for reasonable expenses incurred on behalf of the Company and for other standard employee benefits made generally available to all employees. Except as may be disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other Person. 3.22. Tax Returns and Payments. The Company has timely filed all tax ------------------------ returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing have been paid or will be paid prior to the time they become delinquent. The Company has not been advised (i) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (ii) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. The Company has not executed any waiver of any statute of limitations on the assessment or calculation of any tax or governmental charge. The Company has withheld or collected from each payment made to each of its employees the amount of all taxes required to be withheld or collected therefrom. 3.23. Registration Rights. The Company is presently not under any ------------------- obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. 3.24. Changes. Since the Balance Sheet Date, there has not been: ------- (a) Any change in the assets, liabilities, financial condition or operations of the Company from that reflected in the Financial Statements, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is reasonably expected to have a Material Adverse Effect; (b) Any resignation or termination of any Key Employee, and the Company does not know of the impending resignation or termination of employment of any such Key Employee; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any cancellation, compromise or waiver by the Company of a valuable right or of a material debt owed to it; (e) Any direct or indirect loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (f) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder other than the Sobel Agreement; (g) Any declaration or payment of any dividend or other distribution of the assets of the Company or any purchase or redemption of any of its outstanding capital stock; (h) Any sale, transfer or lease of the assets of the Company, except in the ordinary course of business and as provided in the Intercompany Agreements; (i) Any physical damage, destruction or loss (whether or not covered by insurance) which individually or in the aggregate has had or is reasonably expected to have a Material Adverse Effect; (j) Any issuance or sale of any shares of the c apital stock or other securities of the Company or grant of any options with respect thereto, or any modification of any of the capital stock of the Company other than pursuant to the transactions contemplated hereby, the engagement letter with the Placement Agreement and the Sobel Agreement; (k) Any mortgage, pledge or lien incurred with respect to any of the assets of the Company; (l) Any other event or condition of any character that, either individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect. 3.25. Computer System. --------------- (a) To the Company's knowledge, each of the computer software programs developed by the Company that are listed on Schedule 3.25 hereto (the "Fully Operational Software") is operational in all material respects -------------------------- and functions substantially in accordance with its specifications, if any, or, if no written specifications exist, in the manner for which such software was designed in order to support the Company's business operations and product and service offerings; and both source code and object code versions thereof are in the Company's possession and control. (b) To the Company's knowledge, the computer systems and software owned or licensed by the Company (including without limitation the Fully Operational Software) are able to accurately process date data, including but not limited to calculating, comparing and sequencing from, into and between the twentieth century (through year 1999), the year 2000 and the twenty-first century, including leap year calculations. Notwithstanding the foregoing, the Company is conducting a review of its systems and the Fully Operational Software in connection with year 2000 compliance as described in the Registration Statement, which summary has been reviewed, and is understood, by the Investors. 3.26. Minute Books. The minute books of the Company provided to the ------------ Investors contain a summary of all material, scheduled meetings of directors and stockholders since the time of incorporation, and fairly and accurately reflect, in all material respects, all matters and transactions referred to in such minute books. 3.27. Real Property Holding Corporation. The Company is not a real --------------------------------- property holding corporation within the meaning of Section 8979(c)(2) of the Code and any regulations promulgated thereunder. 3.28. Health and Safety Laws. To its knowledge, the Company is not in ---------------------- violation of any applicable statute, law or regulation relating to occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. 3.29. Environmental Matters. --------------------- (a) No hazardous material, hazardous substance or toxic substance as defined in applicable environmental laws, rules and regulations ("Hazardous --------- Materials") (i) has been released, stored, generated, used, treated, deposited - --------- or disposed of on or under or is located on or under any real property currently or previously owned or leased by the Company, (ii) is presently maintained, used, generated, or permitted to remain in place by the Company in violation of any applicable law, (iii) is required by applicable law to be removed, treated or mitigated by the Company, given the nature of its present condition, location, nature, material or maintenance, or (iv) is of a type, location, material, nature or condition which requires special notification to third parties by the Company under applicable law. (b) To the Company's knowledge, the Company and IDT have maintained their properties and assets and conducted their Business in accordance with all federal, state and local statutes, laws, rules and regulations pertaining to conversation and protection of the environment and the release, treatment, discharge, use, handling, storage, production and disposal of Hazardous Materials. (c) No written notice, citation, summons or order has been received by the Company or IDT and no written notice has been received by the Company or IDT of any pending or threatened investigation or review by any governmental or other entity, with respect to (i) any alleged violation by the Company or IDT of any environmental statute, ordinance, rule, regulation or order of any governmental entity, or (ii) any alleged failure by the Company or IDT to have any environmental permit, certificate, license, approval, registration or authorization required in connection with its business, or (iii) any use, possession, generation, treatment, storage, recycling, transportation, release or disposal by or on behalf of the Company or IDT of any Hazardous Material. 3.30. D&O Insurance. The Company shall obtain directors' and officers' ------------- liability insurance and such other policies of insurance approved from time to time by the Board of Directors, issued by insurers of recognized standing and responsibility, with such coverage and in such amounts as are customary in the case of companies of established reputation engaged in the same or similar business and similarly situated. 3.31. Material Agreements. ------------------- (a) Set forth on Schedule 3.31(a) is a complete list of all agreements, contracts, leases, licenses, instruments and commitments (oral or written) to which the Company is a party or is bound that, individually or in the aggregate, are material to the business, assets, financial condition, results of operation or properties of the Company ("Material Agreements"). ------------------- (b) The Company, and to the best of the Company's knowledge IDT, have not materially breached, nor does the Company have any knowledge of any claim or threat that the Company, or to the best of the Company's knowledge IDT, have breached, any term or condition of (i) any Material Agreement, or (ii) any other agreement, contract, lease, license, instrument or commitment that, individually or in the aggregate, would have a Material Adverse Effect. Each Material Agreement is in full force and effect, and, to the Company's knowledge, no other party to such Material Agreement is in default thereunder. Except as set forth on Schedule 3.31(b), the Company is not a party to any agreement that materially restricts its ability to market or sell any of its products (whether by territorial restriction or otherwise). 4. Covenants of the Company. The Company hereby covenants and agrees as ------------------------ follows: (a) Basic Financial Information. So long as any Investor holds shares --------------------------- of Series A Preferred, the Company will furnish such Investor with (i) an annual budget at least 45 days prior to the beginning of each fiscal year (which budget may be revised at the discretion of the Board of Directors), (ii) quarterly financial statements (including balance sheet, statement of operations, statement of stockholders' deficit and statement of cash flows) within 45 days of the end of each quarter, all in a form which shall be reasonably acceptable to the Investors, and (iii) within 90 days following each fiscal year end, financial statements audited by an accounting firm of national recognition selected by the Board of Directors. In addition, beginning with the first calendar month following the six month anniversary of the Closing, the Company will provide the Investors with monthly budget forecasts. The Investor hereby agrees to keep such information confidential, will not disclose it to any third parties except to its affiliates, beneficial owners and its and their respective advisors and will disclose it to its employees only on a need-to-know basis, except as necessary for such Investor to enforce its rights under this Agreement or any of the Additional Agreements, or pursuant to a subpoena or otherwise pursuant to any legal process or as otherwise required by law. (b) Inspection Rights. So long as any Investor holds at least twenty ----------------- percent (20%) of the then outstanding shares of Series A Preferred, the Company shall permit such Investor, its representatives and advisors inspection rights during normal business hours upon prior written request to the Company. Such inspection rights shall not apply to information the Company reasonably determines to be confidential. The term "inspection rights," as used in this Section shall include, but be limited to the right of the Investor and its representatives and advisors to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such times as may be reasonably requested. (c) Termination of Information Rights. The Investors' rights pursuant --------------------------------- to paragraphs (a) and (b) of this Section shall terminate upon the consummation of a Qualifying Public Offering, as defined in the Amended and Restated Certificate of Incorporation. All other rights of the Investors pursuant to this Section 4 shall survive the consummation of a Qualifying Public Offering. (d) Right to Elect Directors. ------------------------ (i) For so long as the Investors who are affiliates of Softbank (the "Softbank Investors") hold a majority of the Series A Preferred originally ------------------ purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, the Softbank Investors will be entitled to nominate, and the Company and the directors of the Company shall use their best efforts to secure the election of, a person to serve as a director of the Company (the "Softbank Director"). The Softbank ----------------- Director shall have the right to serve on the Company's Compensation Committee or Audit Committee. Once the Softbank Investors no longer hold any of the shares of Series A Preferred originally purchased pursuant to their respective Subscription Agreements, they shall use their best efforts to secure the immediate resignation of the Softbank Director. At any time from the Closing until three business days before such time as the Company prints a preliminary prospectus or "red herring" in connection with a Qualifying Public Offering, the Softbank Investors may in lieu of electing such Softbank Director select a second representative of the Softbank Investors to attend all meetings of the Company's board in a nonvoting observer capacity pursuant to Section 4(i) hereof. Such right of the Softbank Investors shall be without prejudice to the right of the Softbank Investors to nominate such Softbank Director at any time thereafter pursuant to this Section 4(d). (ii) For so long as GE Capital Equity Investments Inc., its affiliates or beneficial owners (collectively, the "GE Investors") hold a ------------ majority of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, the GE Investors will be entitled to nominate, and the Company and the directors of the Company shall use their best efforts to secure the election of, a person to serve as a director of the Company (the "GE Director"). The GE Director shall have the right to serve on ----------- either the Company's Compensation Committee or Audit Committee; provided, however, that such right shall only apply to the committee upon which the Softbank Director shall choose not to serve. Once the GE Investors no longer hold any of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements, they shall use their best efforts to secure the immediate resignation of the GE Director. At any time from the Closing until three business days before such time as the Company prints a preliminary prospectus or "red herring" in connection with a Qualifying Public Offering, the GE Investors may in lieu of electing such GE Director select a second representative of the GE Investors to attend all meetings of the Company's board in a nonvoting observer capacity pursuant to Section 4(i) hereof. Such right of the GE Investors shall be without prejudice to the right of the GE Investors to nominate such GE Director at any time thereafter pursuant to this Section 4(d). (e) Board Composition. Following the Closing, the Board shall consist of ----------------- between five and eleven members, two of which shall be elected by the Series A Preferred Stock voting as a separate class (the "Series A Directors"), which Series A Directors shall be the Softbank Director and GE Director. At least one director, if the number of directors is five or less, and at least two directors, if the number of directors is greater than six, shall be an outside director mutually acceptable to the other Board members. (f) Board Meetings. Board of Directors meetings shall be held quarterly -------------- until such time as the Board determines that quarterly meetings are not required or until the Series A Preferred is no longer outstanding. The Company will reimburse the Series A Directors for the customary and reasonable expenses in attending Board meetings. (g) Committees. The Board of Directors will establish a Compensation ---------- Committee to recommend management compensation, the Company benefit plan, and general options plans for approval by the Board of Directors. The Board of Directors will also establish an Audit Committee. (h) Technical Advisory Committee. Within 45 days from the date hereof, the ---------------------------- Board of Directors will establish a Technical Advisory Committee to advise the board and make recommendations with respect to various technical aspects of the Company's current and proposed products and service offerings. For so long as America Online, Inc., its affiliates or beneficial owners (collectively, the "AOL Investors") hold any of the Series A Preferred originally purchased pursuant to this Agreement, a representative of the AOL Investors will be entitled to serve as a non-Director member of the Technical Advisory Committee; provided, however, that the AOL Investor's representative must treat as strictly - -------- ------ confidential any and all nonpublic information relating to the Company obtained as a result of serving as a member of this committee. (i) Right to Observer. In addition to the Softbank Investors' and GE ----------------- Investors' representation on the Company's board of directors, from the Closing until the later to occur of (i) such time as the Softbank Investors, GE Investors or AOL Investors, as the case may be, no longer hold a majority of the Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the shares of Class A Stock into which such Series A Preferred are convertible, or (ii) the consummation of a Qualifying Public Offering, as defined in the Amended and Restated Certificate of Incorporation, a representative of the Softbank Investors, the GE Investors and AOL Investors may attend all meetings of the Company's board of directors in a nonvoting observer capacity and the Company shall notify such observer of the date, place, and time of such meetings; provided, however, the Softbank Investors or GE Investors may -------- ------- each elect to have a second observer pursuant to this Section 4(i) in lieu of their respective directors as provided in Section 4(d) hereof. (j) VCOC Investors. -------------- (i) A representative of the VCOC Investors shall be entitled to consult with and advise the management of the Company on significant business issues, including management's proposed annual and quarterly operation plans, and the Company hereby agrees to meet with such representative of the VCOC Investors within thirty days after the end of each fiscal quarter at the Company's headquarters at a mutually agreeable time for such consultation and advice and to review the Company's progress in achieving said plans. (ii) A representative of the VCOC Investors may examine the books and records of the Company and inspect its facilities and request information at reasonable times and intervals concerning the general status of the Company's financial condition and operations; provided that access to confidential -------- proprietary information and facilities need not be provided except to the extent such confidential information is provided to all other Investors . (k) Confidential Information. Any and all directors, observers and VCOC ------------------------ Investors or representatives obtaining information from the Company pursuant to their respective rights under paragraphs (d), (e) or (f) of this Section 4 hereby agree to keep confidential all information they obtain related to the Company deemed sensitive or confidential by the Company in its reasonable discretion, and shall execute and be bound by a confidentiality and non- disclosure agreement relating to all information to which they have access as a result of serving in such capacity. (l) Legal Fees and Expenses. The Company shall pay or reimburse Investors for the reasonable fees and expenses of their counsel incurred in connection with the review and negotiation of this Agreement and the Additional Agreements, and all other documentation necessary to consummate the transactions contemplated hereby, and all reasonable fees and expenses of such counsel incurred in connection with its legal due diligence investigation of the Company and its business prospects, whether or not the transactions contemplated hereby are consummated; provided, however, that such reimbursement amount shall not --------- ------- exceed $20,000 for Cooley Godward LLP, counsel for Softbank and H&Q, and shall not exceed $10,000 for Paul, Hastings, Janofsky & Walker LLP, counsel for the GE Investors. (m) Use of Proceeds. The Company shall use the proceeds from the sale of --------------- the Series A Preferred and Warrants for the general working capital needs of the Company. The Company will not use the proceeds from the sale of the Series A Preferred and Warrants to pay any principal outstanding on the note between the Company and IDT, a copy of which is attached hereto as Exhibit I. Notwithstanding the foregoing, the Company will pay to IDT the sum of $8 million out of the proceeds of the offering to repay IDT for payments made by IDT on behalf of the Company to Netscape in the amount of $7 million and to IBM in the amount of $1 million. (n) The Netscape Agreement. The Company will in good faith renegotiate ---------------------- with Netscape Communications Corporation ("Netscape") certain limited portions of the agreement entered into by and between the Company and Netscape, dated February __, 1999 (the "Netscape Agreement"), in order to provide Netscape with (i) access to and greater control over those customers of the Company who became customers of the Company as a result of the transactions contemplated by the Netscape Agreement and (ii) greater economic opportunity to cross-sell Netscape or AOL products and services to those customers of the Company who became customers of the Company as a result of the transactions contemplated by the Netscape Agreement. 5. Rights of First Refusal ----------------------- 5.1. Subsequent Offerings. Each Investor shall have a right of first -------------------- refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 5.6 hereof. Each Investor's pro rata share is equal to the ratio of (i) the number of shares of the Company's Common Stock (including all Conversion Shares and Warrant Shares) which such Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (ii) the total number of shares of the Company's outstanding Common Stock (including all Conversion Shares and Warrant Shares) immediately prior to the issuance of the Equity Securities. As used in this Section 5, the term "Equity Securities" shall mean (1) any Common Stock, Preferred Stock or other security of the Company, (2) any security carrying any warrant convertible, with or without consideration, into any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible security), (3) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security or (4) any such warrant or right. 5.2. Exercise of Rights. If the Company proposes to issue any Equity ------------------ Securities, it shall give each Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Investor shall have fifteen (15) days after receipt of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. 5.3. Issuance of Equity Securities to Other Person. If not all of the --------------------------------------------- Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Investors who do so elect and shall offer such Investors the right to acquire such unsubscribed shares. The Investors shall have five (5) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. If the Investors fail to exercise in full the rights of first refusal, the Company shall have ninety (90) days thereafter to sell the Equity Securities in respect of which the Investor's rights were not exercised, at a price and upon general terms and conditions materially no more favorable to the purchasers thereof than specified in the Company's notice to the Investors pursuant to Section 5.2 hereof. If the Company has not sold such Equity Securities within ninety (90) days of the notice provided pursuant to Section 5.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the Investors in the manner provided above. 5.4. Termination and Waiver of Rights of First Refusal. The rights of ------------------------------------------------- first refusal established by this Section 5 shall not apply to, and shall terminate upon the earlier of (i) a Qualifying Public Offering, as defined in the Amended and Restated Certificate of Incorporation or (ii) an Acquisition or Asset transfer as defined in the Amended and Restated Certificate of Incorporation. The rights of first refusal established by this Section 5 may be amended, or any provision waived with the written consent of the Investors holding a majority of the Registrable Securities, as defined in the Registration Rights Agreement, held by all Investors, or as permitted by Section 5.6; provided, however, that no amendment or waiver shall be -------- ------- effective without the affirmative vote or written consent of holders owning in the aggregate 66-2/3% or more of the Series A Preferred then outstanding. 5.5. Transfer of Rights of First Refusal. The rights of first refusal of ----------------------------------- each Investor under this Section 5 may be transferred to the permitted transferees as governed by the Registration Rights Agreement, subject to the same restrictions, as any transfer of registration rights pursuant to the Registration Rights Agreement. 5.6. Excluded Securities. The rights of first refusal established by this ------------------- Section 5 shall have no application to any of the following Equity Securities: (a) up to an aggregate amount of 1,680,000 shares of Common Stock and an additional 10-15% of the Company that will be set aside for the issuance of employee stock options at the Qualified Public Offering (and/or options, warrants or other Common Stock purchase rights issued pursuant to such options, warrants or other rights) issued or to be issued after the Original Issue Date (as defined in the Company's Amended and Restated Certificate of Incorporation) to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary, pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors including the representatives designated by the holders of the Series A Preferred. (b) stock issued pursuant to any rights or agreements outstanding as of the date of this Agreement; options and warrants outstanding as of the date of this Agreement; and stock issued after the date of this Agreement pursuant to any such rights or agreements outstanding as of the date of this Agreement; provided that the rights of first refusal established by this Section 5 shall not be applied with respect to the initial sale or grant by the Company of such rights or agreements. (c) any Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board of Directors including the representatives designated by the holders of the Series A Preferred; (d) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; (e) shares of Common Stock issued upon conversion of the Series A Preferred or exercise of the Warrants; (f) any Equity Securities issued pursuant to any equipment leasing or loan arrangement, or debt financing from a bank or similar financial or lending institution approved by the Board of Directors including the representatives designated by the holders of the Series A Preferred; (g) any Equity Securities that are issued by the Company pursuant to a registration statement file under the Securities Act, including in a Qualifying Public Offering, as defined in the Amended and Restated Certificate of Incorporation; and (h) the sale of the balance of the authorized Series A Preferred and Warrants pursuant to Section 1.4. 6. Conditions of the Investor's Obligations at Closing. The obligations of the --------------------------------------------------- Investor to pay the Purchase Price for the Investor Shares and the Investor Warrants to the Company is absolute, subject to the fulfillment or waiver at or before the Closing of each of the following conditions by the Company, any or all of which may be waived by the Investor: (a) Representations and Warranties. The representations and warranties ------------------------------ of the Company contained in Section 3 hereof shall be true and correct at and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. (b) Performance. The Company shall have performed and complied with ----------- all agreements, obligations, covenants and conditions contained in this Agreement and the Additional Agreements that are required to be performed or complied with by the Company at or before the Closing. (c) Delivery of the Memorandum. The Placement Agent shall have -------------------------- delivered to the Investor a copy of the Memorandum. (d) Resolutions. The Company shall have delivered to the Investor a ----------- certified copy of the resolutions of the Board of Directors of the Company authorizing the transactions contemplated hereby. (e) Certificate. The Investor shall have received a certificate, dated ----------- as of the Closing, executed by an executive of the Company and stating that the conditions set forth in clauses (a) and (b) above have been satisfied. (f) Amended and Restated Certificate of Incorporation. The Company ------------------------------------------------- shall have adopted resolutions setting forth the terms of the Investor Shares as set forth in the Amended and Restated Certificate of Incorporation and shall have filed the Amended and Restated Certificate of Incorporation with the Delaware Secretary of State. (g) Opinion of Morrison & Foerster LLP. Morrison & Foerster LLP, ---------------------------------- counsel to the Company, shall deliver an opinion addressed to the Investors, dated the date of the Closing, substantially in the form attached as Exhibit G. (h) Other Agreements. The Additional Agreements shall have been ---------------- executed and delivered by the parties thereto. (i) Force Majeure. Subsequent to the execution and delivery of this ------------- Agreement, there shall not have occurred any of the following: (i) a suspension of trading in securities generally on the Nasdaq National Market by the SEC, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a declaration of a banking moratorium by federal or state authorities of the United States or (iii) an escalation of a national emergency or war by the United States which, in any such case, would have a Material Adverse Effect. (j) Consents, Permits and Waivers. The Company shall have obtained any ----------------------------- and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by the Agreement and the Additional Agreements. (k) Indemnification. The bylaws of the Company provide for the --------------- indemnification of directors to the fullest extent permitted by Delaware law. (l) Minimum Purchase. All of the Series A Preferred and all of the ---------------- Warrants shall be purchased on the Closing Date. 7. Conditions of the Company's Obligations at Closing. The obligations of the -------------------------------------------------- Company are subject to the fulfillment or waiver at or before the Closing of each of the following conditions: (a) Representations and Warranties. The representations and warranties ------------------------------ of the Investor contained in Section 2 hereof shall be true and correct at and as of the Closing with the same effect as though such representations and warranties had been made at and as of the date of the Closing. (b) Performance. The Investor shall have performed and complied with ----------- all agreements, obligations and conditions in this Agreement that are required to be performed or complied with by such Investor at or before the Closing. (c) Other Agreements. The Registration Rights Agreement and the ---------------- Shareholders Agreement have been executed and delivered by the parties thereto. 8. Transfer Limitations: 1933 Act Legend. ------------------------------------- (a) Unless sold pursuant to an effective registration statement, each certificate representing Securities shall bear a legend substantially in the following form: "The shares represented by this certificate have not been registered under the United States Securities Act of 1933, as amended (the "Act"), and may not be offered, sold or otherwise transferred, pledged or hypothecated unless and until such shares are registered under the Act or, except as otherwise permitted pursuant to Rule 144 under the Act or another exemption from registration under the Act or an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that such registration is not required and are subject to transfer restrictions as set forth in a Subscription Agreement, dated May __, 1999, and the operative agreements entered into in connection therewith, copies of which may be obtained from the Company." The foregoing legend, if necessary, shall be removed from the certificates representing any Series A Preferred, Warrant, Warrant Shares and Conversion Shares, at the request of the holder thereof, at such time as (i) they are sold pursuant to an effective registration statement, (ii) they become eligible for resale pursuant to Rule 144(k) under the Act or another provision of Rule 144 of the Act pursuant to which all or a portion of such underlying Common Shares could be sold in a single transaction, or (iii) an opinion of counsel reasonably satisfactory to the Company is obtained to the effect that the proposed transfer is exempt from the Act. The transfer agent for the Securities will issue new Securities without the legend upon receipt of a certificate from the Investor stating that the Securities have been registered or transferred pursuant to an effective registration statement under the Act or can be sold in reliance upon Rule 144 or the Company has received an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer is exempt from the Act. 9. Indemnification. --------------- 9.1. Company Indemnification. The Company covenants and agrees to defend, ----------------------- indemnify and save and hold harmless each Investor, together with its officers, directors, partners, shareholders, employees, trustees, affiliates (within the meaning of Rule 405 of the SEC under the Act), beneficial owners, attorneys and representatives, from and against any and all losses, costs, expenses, liabilities, claims or legal damages (including, without limitation, reasonable fees and disbursements of counsel and accountants and other costs and expenses incident to any actual or threatened claim, suit, action or proceeding, whether incurred in connection with a claim against the Company or a third party claim) (collectively, "Investor Losses") up to the amount of such Investor's original --------------- investment in the Private Placement (as set forth on Schedule A hereto) arising out of or resulting from: (i) any inaccuracy in or breach of any representation, warranty, covenant or agreement made by the Company in this Agreement, any Additional Agreement or in any writing delivered pursuant to this Agreement or at the Closing; (ii) the failure of the Company to perform or observe fully any covenant, agreement or provision to be performed or observed by it pursuant to this Agreement or any Additional Agreement; or (iii) any actual or threatened claim, suit, action or proceeding arising out of or resulting from the conduct by the Company of its Business or operations, or the Company's occupancy or use of its properties or assets, on or prior to the Closing Date; other than, with respect to an Investor. Investor Losses resulting directly from the gross negligence or willful misconduct of such Investor or any of its respective officers, directors, employees, or any affiliate within the meaning of Rule 405 of the SEC under the Act are not covered under this Section 9.1; provided, however, that, if and to the extent -------- ------- that such indemnification is unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. 9.2. Investor Indemnification. Each Investor covenants and agrees, severally ------------------------ and not jointly, to defend, indemnify and save and hold harmless the Company, together with its officers, directors, partners, shareholders, employees, trustees, affiliates (within the meaning of Rule 405 of the SEC under the Act), attorneys and representatives, from and against any and all losses, costs, expenses, liabilities, claims or legal damages (including, without limitation, reasonable fees and disbursements of counsel and accountants and other costs and expenses incident to any actual or threatened claim, suit, action or proceeding, whether incurred in connection with a claim against any such Investor or a third party claim) (collectively, "Company Losses"), up to the amount of such -------------- Investor's original investment in the Private Placement (as set forth in Schedule A hereto) arising out of or resulting from: (i) any inaccuracy in or breach of any representation, warranty, covenant or agreement made by the Investor in this Agreement, any Additional Agreement or in any writing delivered pursuant to this Agreement or at the Closing; or (ii) the failure of the Investor to perform or observe fully any covenant, agreement or provision to be performed or observed by it pursuant to this Agreement or any Additional Agreement. Company Losses resulting directly from the gross negligence or willful misconduct of the Company or any of its respective officers, directors, employees, or any affiliate within the meaning of Rule 405 of the SEC under the Act are not covered under this Section 9.2; provided, however, that, if and to -------- ------- the extent that such indemnification is unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. 9.3. Procedure. Each party entitled to be indemnified pursuant to Section 9.1 --------- and 9.2 (each, an "Indemnified Party") shall notify the other party in writing ----------------- of any action against such Indemnified Party in respect of which the other party is or may be obligated to provide indemnification on account of Section 9.1 or 9.2, promptly after the receipt of notice or knowledge of the commencement thereof. The omission of any Indemnified Party so to notify the other party of any such action shall not relieve such other party from any liability which it may have to such Indemnified Party except to the extent the other party shall have been materially prejudiced by the omission of such Indemnified Party so to notify it, pursuant to this Section 9.3. In case any such action shall be brought against any Indemnified Party and it shall notify the other party of the commencement thereof, the other party shall be entitled to participate therein and, to the extent that such other party may wish, to assume the defense thereof, with counsel reasonably satisfactory to such Indemnified Party, and after notice from it to such Indemnified Party of its election so to assume the defense thereof, the other party will not be liable to such Indemnified Party under Section 9.1 or 9.2 for any legal or other expense subsequently incurred by such Indemnified Party in connection with the defense thereof nor for any settlement thereof entered into without the consent of the other party; provided, however, that (i) if the other party shall elect not to assume the - -------- ------- defense of such claim or action or (ii) if the Indemnified Party reasonably determines (x) that there may be a conflict between the positions of the other party and of the Indemnified Party in defending such claim or action or (y) that there may be legal defenses available to such Indemnified Party different from or in addition to those available to the other party, then separate counsel for the Indemnified Party shall be entitled to participate in and conduct the defense, in the case of (i) and (ii)(x), or such different defenses, in the case of (ii)(y), and the other party shall be liable for any reasonable legal or other expenses incurred by the Indemnified Party in connection with the defense. 9.4. Indemnification Non-Exclusive. The foregoing indemnification ----------------------------- provisions are in addition to, and not in derogation of, any statutory, equitable or common-law remedy any party may have for breach of representation, warranty, covenant or agreement. 10. Miscellaneous. ------------- 10.1. Survival of Warranties. The representations and warranties set ---------------------- forth in Sections 2 and 3 hereof and the covenants contained in Section 4 hereof shall survive indefinitely. 10.2. Successors and Assigns. This Agreement may not be assigned by any ---------------------- Investor or the Company without the prior written consent of the other party hereto; provided, however, that this Agreement may be transferred by any -------- ------- Investor to one or more of its affiliates or beneficial owners, or to any other Investor. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and permitted assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 10.3. Governing Law; Submission to Jurisdiction. This Agreement shall be ----------------------------------------- governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law provisions. Each of the Company and the Investor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement and the transactions contemplated hereby. Each of the Company and the Investor irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 10.4. Counterparts. This Agreement may be executed in counterparts, each ------------ of which shall be deemed an original, and all of which together shall be deemed to constitute one and the same instrument. 10.5. Captions and Headings. The captions and headings used in this --------------------- Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement. 10.6. Notices. Unless otherwise provided, any notice or other ------- communication required or permitted to be given or effected under this Agreement shall be in writing and shall be deemed effective upon personal or facsimile delivery to the party to be notified or three business days after deposit with an internationally recognized courier service, delivery fees prepaid, and addressed to the party to be notified at the following respective addresses, or at such other addresses as may be designated by written notice; provided that any notice of change of address shall be deemed effective only upon receipt: If to the Company: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attn: Ilan Slasky Fax: 201-907-5351 with a copy to: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: Joyce Mason Fax: 201-928-2952 and a copy to: Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Ira Greenstein Fax: (212) 468-7900 If to the Investors: Notice shall be sent to the person and address indicated on signature page hereof. with a copy to: Cooley Godward LLP Five Palo Alto Square 3000 El Camino Road Palo Alto, CA 94306-2155 Attn: Eric Jensen Fax: 650-857-0663 and a copy to: Paul, Hastings, Janofsky & Walker LLP 555 S. Flower Street Los Angeles, CA 90071-2371 Attn: Siobhan M. Burke Fax: (213) 627-0705 and a copy to: NBC Multimedia, Inc. c/o National Broadcasting Company 30 Rockefeller Plaza New York, New York 10012 Attn: Vice President, Law, Corporate Transactions Group Fax: (212) 977-7165 10.7. Finder's Fee. Each of the Company, on the one hand, and the Investor, ------------ on the other hand, severally represents and warrants to the other party hereto that neither it nor any of its officers, directors, general partners, agents, employees or affiliates, has engaged or authorized any broker or finder, other than the Placement Agent (the costs and expenses of which shall be paid by the Company), to act, directly or indirectly, on its behalf, in connection with the transactions contemplated by this Agreement, or has consented to or acquiesced in anyone so acting, and it knows of no claim by any person for compensation from it for so acting or of any basis for such a claim. The provisions of this Section 10.7 shall survive any termination of this Agreement. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 10.7 being untrue. 10.8. Amendments and Waivers. Except as provided in Section 10.13, any ---------------------- term of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of each of the Company and Investors holding at least a majority of the Series A Preferred; provided, however, that no amendment or waiver shall be effective without the - -------- ------- affirmative vote or written consent of holders owning in the aggregate 66-2/3% or more of the Series A Preferred then outstanding. Any amendment or waiver effected in accordance with this Section 10.8 shall be binding upon each holder of any Securities purchased under this Agreement at the time outstanding, each future holder of all such Securities, and the other parties to this Agreement. 10.9. Severability. If one or more provisions of this Agreement are held ------------ to be unenforceable under applicable law, such provisions shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 10.10. Entire Agreement. This Agreement (and the Exhibits hereto) and the ---------------- Additional Agreements constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements, understandings and discussions between them, and all documents delivered by or on behalf of the Company to the Investor and its agents and representatives, with respect to such subject matter. 10.11. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 10.12. Publicity. None of the Company, IDT or any Investor shall issue, --------- publish or disseminate or cause to be issued, published or disseminated any press release or public communication relating to this Agreement or any Additional Agreement or any of the transactions contemplated herein or therein using the name or any trade mark, logo, tradename, trade dress or other intellectual property or otherwise referring to any Investor or any affiliate or beneficial owner of an Investor, the Company or IDT, as the case may be, without the prior written consent of such other party. 10.13. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE ADDITIONAL AGREEMENTS, THE SERIES A PREFERRED, THE WARRANTS, THE CONVERSION SHARES OR THE WARRANT SHARES, OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION 10.13 HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS SHALL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS OF) THIS AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT. IN WITNESS WHEREOF, the Investor has executed this Agreement on the day and year first above written. NET2PHONE, INC. INVESTOR: By: /s/ Howard Balter By: _____________________ ______________________ Name: Howard Balter Name: Title: Chief Executive Officer Title: Name:_____________________ IDT CORPORATION Address:__________________ Title:____________________ By: /s/ Joyce Mason Telephone No._____________ _____________________ Fax No.___________________ Name: Joyce Mason Date:_____________________ Title: Director SCHEDULE A
Subscription Shares of Investor Amount Preferred A Warrants -------- ------------- ----------- -------- Softbank Technology Ventures IV, L.P. $14,718,000 1,471,800 29,436 Softbank Technology Advisors Fund L.P. $ 282,000 28,200 564 GE Capital Equity Investments, Inc. $ 7,500,000 750,000 15,000 American Online, Inc. $ 7,500,000 750,000 15,000 Hambrecht & Quist Individuals Timothy Baughman $ 20,000 2,000 0 Daniel Rimer $ 20,000 2,000 0 David Golden $ 15,000 1,500 0 Mark Zanoli $ 15,000 1,500 0 Daniel H. Case III $ 10,000 1,000 0 Norman Colbert $ 5,000 500 0 Hambrecht & Quist Entities Hambrecht & Quist California $ 78,750 7,875 0 Hambrecht & Quist Employee $ 37,500 3,750 0 Venture Fund, L.P. II Access Technology Partners, L.P. $ 790,000 79,000 0 Access Technology Partners Brokers $ 8,750 875 0 Fund, L.P. ABS Employee's Venture Fund Limited $ 400,000 40,000 0 Partnership
EX-10.17 19 SERIES A PREFERRED SHAREHOLDER REG. RIGHTS AGMT. Exhibit 10.17 SERIES A PREFERRED SHAREHOLDER REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of May 13, --------- 1999, by and between NET2PHONE, INC., a Delaware corporation (the "Company"), ------- and each of the investors listed on Schedule A hereto (the "Series A -------- Investors"). WHEREAS, the Company will issue and sell to the Series A Investors shares of Series A Convertible Preferred Stock of the Company, par value $.01 per share (the "Series A Preferred"), and Warrants (the `Warrants") to purchase ------------------ -------- shares of Common Stock of the Company, par value $.01 per share (the "Common ------ Stock"), pursuant to various Series A Preferred Subscription Agreements, each - ----- dated as of May 13, 1999, between the Company and one of the Series A Investors (together, the "Series A Subscription Agreements"); and -------------------------------- WHEREAS, it is a condition to the Series A Investors' execution of the Series A Subscription Agreements that the Company grant the registration rights set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Definitions. For the purposes of this Agreement: ----------- (a) The term "Affiliate" means, with respect to any person or entity, any other --------- person or entity directly or indirectly controlling, controlled by or under common control with the first such person or entity. (b) The term "Closing Date" means the date of the Closing, as such term is ------------ defined in the Series A Subscription Agreement. (c) The term "current market value" means the average closing sale price per -------------------- share of Common Stock on the Nasdaq National Market (or such other market upon which the Common Stock is listed) over the 10 trading days prior to the date of determination. (d) The term "Holder" means a holder of Registrable Securities or, unless the ------ context otherwise requires, securities convertible into or exercisable for Registrable Securities. (e) The term "Qualifying Public Offering" shall have the meaning assigned to it -------------------------- in the Company's Amended and Restated Certificate of Incorporation. (f) The terms "register," "registered" and "registration" refer to a --------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Act"), and the --- declaration or ordering of effectiveness of such registration statement. (g) The term "Lock-Up Termination Date" means that date that is 180 days ------------------------ following the date upon which the registration statement relating to the Company's initial public offering is declared effective. (h) The term "Registrable Securities" means the shares of Common Stock issuable ---------------------- or issued conversion of the Series A Preferred and upon exercise of the Warrants by an Holder (collectively, the "Securities") as the same may exist, from time to time; provided, however, that such Securities shall cease to be -------- ------- Registrable Securities when and to the extent that (i) such Securities have been sold pursuant to an effective registration statement under the Act, (ii) such Securities have become eligible for resale pursuant to Rule 144(k) of the Act (or any similar provision then in force) or another provision of Rule 144 of the Act pursuant to which all of such Series A Investor's Securities are immediately eligible for resale or (iii) such Securities have ceased to be outstanding. (i) The term "Stockholders Agreement" means that Stockholders Agreement entered ---------------------- into as of May 13, 1999, by and among IDT Corporation, a Delaware corporation ("IDT"), Clifford M. Sobel and the Series A Investors. --- 2. Registration Rights. ------------------- 2.1. (a) Registration Upon Demand. (i) At any time on or after the earlier ------------------------ to occur of (x) the second anniversary of the Closing Date or (y) the Lock-up Termination Date, one or more Holders that in the aggregate beneficially own at least 50% of the Registrable Securities issued or issuable upon the conversion of Series A Preferred or exercise of Warrants may make a demand that the Company effect the registration of all or part of such Holders' Registrable Securities (a "Demand Registration"). Upon receipt of a valid request for a Demand ------------------- Registration, the Company shall promptly, and in any event no later than 15 days after such receipt, notify all other Holders of the making of such demand and shall use its best efforts to register under the Act as expeditiously as may be practicable the Registrable Securities that Holders have requested the Company to register in accordance with this Section 2.1. Notwithstanding the foregoing, the Company shall not be required to effect any registration if the Registrable Securities that the Company shall have been requested to register shall, in the aggregate, have a current market value of less than $5,000,000. The Holders shall have the right to one Demand Registration pursuant to this Section 2.1(a)(i). Notwithstanding Section 2.1(a)(ii), if any registration demand is made by Holders beneficially owning 50% or more of the Registrable Securities, and no Demand Registration has been made prior to such time, then such registration demand shall be treated for purposes of this Agreement as a Demand Registration, regardless of the registration form used (including Form S-3). (ii) Notwithstanding Section 2.1(a)(i) hereof, and in addition to the rights granted under Section 2.1(a)(i) hereof, at any time after the Company becomes eligible to register its securities on Form S-3 (or any successor form), one or more holders that in the aggregate beneficially own at least 20% of the Registrable Securities may make a demand that the Company effect the registration of all or part of such Holders' Registrable Securities (an "S-3 --- Demand Registration"). Upon receipt of a valid request for an S-3 Demand - ------ ------------ Registration, the Company 2 shall promptly, in and any event no later than 15 days after such receipt, notify all other Holders of the making of such demand and shall use its best efforts to register under the Act as expeditiously as may be practicable the Registrable Securities which Holders have requested the Company to register in accordance with this Section 2.1. Notwithstanding the foregoing, the Company shall not be required to effect any registration if the Registrable Securities that the Company shall have been requested to register shall, in the aggregate, have a current market value of less than $1,000,000. The Holders shall have the right to two S-3 Demand Registrations pursuant to this Section 2.1(a)(ii). (b) Effective Registration Statement. A registration requested pursuant to -------------------------------- Section 2.1(a) hereof shall not be deemed to have been effected (i) if a registration statement with respect thereto has not been declared effective by the Securities and Exchange Commission ("SEC"), (ii) if after it has become --- effective, such registration is materially interfered with by any stop order, injunction or similar order or requirement of the SEC or other governmental agency or court for any reason not attributable to any of the Holders and has not thereafter become effective, or (iii) the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such registration are not satisfied or waived, other than by reason of a failure on the part of a Holder. 2.2. "Piggy-Back" Registration. (a) If the Company proposes to register any ------------------------ securities under the Act in connection with any offering of its securities (other than a registration statement on Form S-8 or Form S-4, or their successors, or any other form for a similar limited purpose, or any registration statement covering only securities proposed to be issued in exchange for securities or assets of another corporation), whether or not for its own account, the Company shall furnish promptly, and in any event not less than 15 days in advance, written notice to the Holders of its intention to effect such registration and the intended method of distribution in connection therewith. Upon the written request of a Holder made to the Company within 15 days after the receipt of such notice by the Company, the Company shall include in such registration the requested number of the Holder's Registrable Securities (a "Piggy-Back Registration"). If a Holder decides not to include all of its ----------------------- Registrable Securities in any registration statement thereafter filed by the Company, the Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its Common Stock and any other securities, all upon the terms and conditions set forth herein. (b) Nothing in this Section 2.2 shall create any liability on the part of the Company or any other person to the Holders if the Company, for any reason, decides not to file a registration statement proposed to be filed pursuant to Section 2.2(a) or to withdraw such registration statement subsequent to its filing (except for the Company's obligation to pay the expenses in connection therewith as provided in Section 2.6), regardless of any action whatsoever that a Holder may have taken, whether as a result of the issuance by the Company of any notice under Section 2.2(a) or otherwise. 3 (c) Notwithstanding anything to the contrary contained herein, the registration rights set forth in this Section 2.2 shall not apply to the registration statement on Form S-1 filed by the Company in connection with the Qualifying Public Offering. 2.3. Blackout Periods for Holders. If the board of directors of the Company ---------------------------- determines in good faith that the registration and distribution of Registrable Securities (or the use of a registration statement or related prospectus) would be materially detrimental to the Company or its shareholders and therefore the board of directors determines that it is in the Company's best interest to defer the filing, and promptly gives the Holders written notice of such determination in the form of a certificate signed by an executive officer of the Company following their request to register any Registrable Securities pursuant to Section 2.1, the Company shall be entitled to postpone the filing of the registration statement otherwise required to be prepared and filed by the Company pursuant to Section 2.1 hereof for a reasonable period of time, but not to exceed 90 days (a "Demand Blackout Period") after the date of such request. ---------------------- The Company shall promptly notify each holder of the expiration or earlier termination of any Demand Blackout Period. 2.4. Obligations of the Company. Whenever the Company is required to effect -------------------------- the registration of any Registrable Securities under this Section 2, the Company shall, at its expense and as expeditiously as may be practicable: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, use reasonable efforts to keep such registration statement effective for ninety (90) days. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of applicable law with respect to the disposition of all of the Registrable Securities covered by such registration statement. (c) Furnish to the Holders of Registrable Securities registering such securities such numbers of copies of a prospectus, including a preliminary prospectus (in the event of an underwritten offering), in conformity with the requirements of applicable law, and such other documents as each such Holder may reasonably request in order to facilitate the disposition of Registrable Securities owned by it. (d) Use best efforts to register and qualify the securities covered by such registration statement under state blue sky laws in any U.S. jurisdictions in which such registration and qualification is reasonably requested by any Holder; provided, that the Company shall not be required in connection therewith or as a - -------- condition thereto to qualify to do business or to file a general consent to service of process in any such jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form and substance as agreed to by the Company and the managing underwriter of such offering. 4 (f) Promptly notify the Holders in writing: (i) when the registration statement, the prospectus or any prospectus supplement related thereto or post- effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (ii) of any request by the SEC for amendments or supplements to the registration statement or related prospectus or any written request by the SEC for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or prospectus or any amendment or supplement thereto or the initiation of any proceedings by any person for that purpose, and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued; and (iv) of the receipt by the Company of any written notification with respect to the suspension of the qualification of any Registrable Securities for sale in any jurisdiction or the initiation or overt threat of any proceeding for such purpose. (g) Notify the Holders in writing on a timely basis, at any time when a prospectus relating to such Registrable Securities is required to be delivered under applicable law, of the happening of 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 a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and at the request of any such Holder promptly prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the offerees 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 then existing. (h) Furnish, at the request of any Holder participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as if customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders participating in the registration, addressed to the underwriters, if any, and to the Holders participating in the registration of Registrable Securities and (ii) a "Cold Comfort" letter dated as ---- ------- of such date, from the independent certified public accountants to the underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders participating in the registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders participating in the registration of Registrable Securities. (i) Use best efforts to cause the transfer agent to remove restrictive legends on certificates representing the securities covered by such registration statement, as the Company determines to be appropriate, upon advice of counsel. (j) Use best efforts to list such Registrable Securities on any national securities exchange on which any shares of the Common Stock are listed or, if the Common Stock is not listed on a 5 national securities exchange, use its best efforts to qualify such Registrable Securities for inclusion on the automated quotation system of the National Association of Securities Dealers, Inc. ("NASD"). ---- (k) Prepare and file with the SEC, promptly upon the request of any such Holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such Holders, is required under the Act or the rules and regulations thereunder in connection with the distribution of the Registrable Securities by such Holders. (l) Make available for inspection by any Holder of such Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter (collectively, the "Inspectors"), all pertinent financial ---------- and other records, pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably necessary to enable them ------- to exercise their due diligence responsibility, and cause the Company's officers, directors and employees to supply all information (together with the Records, the "Information") reasonably requested by any such Inspector in ----------- connection with such registration statement. Any of the Information that the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, shall not be disclosed by the Inspectors unless (i) the release of such Information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (ii) such Information has been made generally available to the public or (iii) as necessary to enforce a Holder's rights under this Agreement. The Holder of Registrable Securities, agrees that it will, upon learning that disclosure of such Information is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Information deemed confidential and the Inspectors shall not disclose such Information until such action is determined. (m) Provide a transfer agent and registrar (which may be the same entity and which may be the Company) for such Registrable Securities. (n) Use its best efforts to take all other steps necessary to effect the registration of such Registrable Securities pursuant to the terms contemplated hereby. 2.5. Furnish Information. ------------------- (a) It shall be a condition precedent to the obligation of the Company to include any Registrable Securities of any Holder in a registration statement pursuant to this Section 2 that the Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, any other securities of the Company held by it, and the intended method of disposition of such Registrable Securities as shall be required to effect the registration of the Registrable Securities held by such Holder. Any such information shall be provided to the Company within any reasonable time period requested by the Company. (b) Each Holder shall notify the Company, at any time when a prospectus is required to be delivered under applicable law, of the happening of any event as a result of which the prospectus 6 included in the applicable registration statement, as then in effect, in each case only with respect to information provided by such Holder, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. Such Holder shall immediately upon the happening of any such event cease using such prospectus. Any other Holders shall cease using such prospectus immediately upon receipt of notice from the Company to that effect. If so requested by the Company, each Holder shall promptly return to the Company any copies of any prospectus in its possession (other than one permanent file copy) that contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. 2.6. Expenses of Registration. The Company shall bear and pay all reasonable ------------------------ expenses incurred in connection with any registration, filing or qualification of Registrable Securities pursuant to Section 2.1 or Section 2.2 including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, but excluding underwriting discounts and commissions relating to the Registrable Securities. The Company also shall be required to pay and bear the legal fees of one counsel for the Holders in an amount not to exceed $25,000 in connection with any registration. 2.7. Underwriting Requirements. In connection with any underwritten offering ------------------------- of a Holder's Registrable Securities, the Company shall not be required under Section 2.4 to register any of such Registrable Securities in connection with such underwritten offering unless the Holder accepts the underwriters selected by the Company and then only in such quantity as the lead managing underwriter determines, in its good faith discretion, will not jeopardize the success of the offering by the Company. To the extent that the lead managing underwriter will not permit the registration of all of the Registrable Securities sought to be registered, in the case of a registration pursuant to Section 2.1 or 2.2, the Registrable Securities to be included shall be apportioned among the Holders on a pro rata basis (based on the number of shares of Common Stock proposed to be registered by each), first among the Holders of Registrable Securities to be registered pursuant to Section 2.1, and thereafter among the Holders of Registrable Securities to be registered pursuant to Section 2.2; provided, -------- however, that the right of the underwriters to exclude Registrable Securities - ------- from the registration and underwriting as described above shall be restricted such that all shares that are not Registrable Securities and all shares that are held by persons who are employees or directors of the Company (or any subsidiary of the Company) shall first be excluded from such registration and underwriting before any Registrable Securities are so excluded. Notwithstanding the foregoing, the Holders' Registrable Securities shall in no event be reduced to less than one-third of the total number of shares of Common Stock to be registered in connection with a Piggyback Registration. Those Registrable Securities and other securities that are excluded from the underwriting by reason of the managing underwriter's marketing limitation and all other Registrable Securities not originally requested to be so included shall not be included in such registration and shall be withheld from the market by the Holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines necessary to effect the underwritten public offering. No Holder of Registrable Securities shall be entitled to participate in an underwritten offering unless such Holder enters 7 into, and performs its obligations under, one or more underwriting agreements and any related agreements and documents (including an escrow agreement and/or a power of attorney with respect to the disposition of the Registrable Securities), in the form that such Holder shall agree to with the lead managing underwriter of the transaction. If any Holder disapproves of the terms of any underwriting, it may elect, prior to the execution of any underwriting agreement, to withdraw therefrom by written notice to the Company and the lead managing underwriter. Any Registrable Securities so withdrawn from an underwriting by such Holder shall be withdrawn from such registration and shall not be transferred in a public distribution prior to 180 days following the effective date of the registration statement relating thereto. 2.8. Delay of Registration. No Holder shall have any right to obtain or seek --------------------- an injunction restraining or otherwise delaying any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. 2.9. Indemnification. In the event any Registrable Securities are included in --------------- a registration statement under this Section 2: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder and each person, if any, who controls such Holder within the meaning of the Act and the Securities Exchange Act of 1934, as amended (the "1934 Act"), and their respective directors, officers, partners, employees, -------- legal counsel and affiliates (each, an "Indemnified Person"), against any ------------------ losses, claims, damages, or liabilities joint or several) to which they may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (collectively, a "Violation") (i) any untrue statement or alleged untrue statement of a material --------- fact contained in such registration statement, including any final prospectus contained therein or any amendments or supplements thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) any violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities law in connection with the offering covered by any registration statement; and the Company will pay to each Indemnified Person any reasonable legal or other expenses incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the -------- indemnity agreement contained in this Section 2.9(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in strict conformity with written information furnished by a Holder expressly for use in connection with such registration or is caused by any failure by the Holder to deliver a prospectus or preliminary prospectus (or amendment or supplement thereto) as and when required under the Act after such prospectus has been timely furnished by the Company. (b) To the extent permitted by law, each Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, and 8 each person, if any, who controls the Company within the meaning of the Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, ------------------ damages or liabilities (joint or several) to which any of the foregoing persons may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation is caused by (x) any untrue statement or alleged untrue statement contained in, or by any omission or alleged omission from, information furnished in writing to the Company by the Holder specifically and expressly for use in any such registration statement or prospectus but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by such Holder specifically for use in the preparation thereof or (y) any failure by the Holder to deliver a prospectus or preliminary prospectus (or amendment or supplement thereto) as and when required under the Securities Act after such prospectus has been timely filed by the Company. Such Holder will pay any reasonable legal or other expenses incurred by any Indemnified Person pursuant to this Section 2.9(b) in connection with investigating or defending any such loss, claim, damage, liability or action; provided that the indemnity -------- agreement contained in this Section 2.9(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, further, that in no event shall any -------- ------- indemnity under this Section 2.9(b) exceed the net proceeds from the offering received by such Holder upon its sale of Registrable Securities included in the registration statement. (c) Promptly after receipt by an Indemnified Person under this Section 2.9 of notice of the commencement of any action (including any governmental action), such Indemnified Person will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.9, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the indemnifying parties; provided that an Indemnified Person -------- (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such Indemnified Person by the counsel retained by the indemnifying party would be inappropriate (in the opinion of the Indemnified Person) due to actual or potential differing interests between such Indemnified Person and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the Indemnified Person under this Section 2.9, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any Indemnified Person otherwise than under this Section 2.9; provided, that in no event shall any indemnity under this Section 2.9(b) exceed the net proceeds from the offering received by such Holder upon its sale of Registrable Securities included in the registration statement. 9 (d) If the indemnification provided for in this Section 2.9 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such Indemnified Person thereunder, agrees to contribute to the amount paid or payable by such Indemnified Person as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the Indemnified Person on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the Indemnified Person shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the Indemnified Person and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person found guilty of fraudulent misrepresentation (within the meaning of the Section 11(f) of the Act) shall be entitled to contribution hereunder from any person who was not guilty of such fraudulent misrepresentation. (e) The obligations of the Company and the Holders under this Section 2.9 shall survive the completion of any offering of Registrable Securities under a registration statement pursuant to this Section 2. 2.10. Assignment of Registration Rights. The rights to cause the Company to --------------------------------- register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a permitted transferee or assignee of Registrable Securities which (a) is a subsidiary, parent, general partner, limited partner, retired partner, affiliate, beneficial owner, member or retired member of a Holder, or (b) is a Holder's family member or trust for the benefit of an individual Holder; provided, however, (i) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 2.11. Limitation on Subsequent Registration Rights. After the date of this -------------------------------------------- Agreement, the Company shall not, without the prior written consent of Holders owning in the aggregate sixty-six and two-thirds percent (66-2/3%) of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder registration rights senior to those granted to the Holders hereunder. 2.12. Rule 144 Reporting: With a view to making available to the Holders the ------------------ benefits of certain rules and regulations of the SEC that permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; 10 (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the 1934 Act; and (c) So long as a Holder owns any Registrable Securities, furnish such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Act, and of the 1934 Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 3. Miscellaneous. ------------- 3.1. Successors and Assigns. The provisions of this Agreement shall inure to ---------------------- the benefit of and be binding upon the respective successors and permitted assigns of the parties hereto, except that the Company may not assign any of its obligations hereunder without the consent of Holders owning in the aggregate 66- 2/3% of the outstanding Registrable Securities. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. Nothing contained herein shall be construed as permitting any transfer of any securities of the Company in violation of any applicable law or agreement. 3.2. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of New York without giving effect to the conflict of laws provisions thereof. Each of the Series A Investors and the Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement and the transactions contemplated hereby. Each of the Series A Investors and the Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 3.3. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, and all of which together shall constitute one and the same instrument. 3.4. Captions and Headings. The captions and headings used in this Agreement --------------------- are used for convenience only and are not to be considered in construing or interpreting this Agreement. 3.5. Notices. Unless otherwise provided, any notice or other communication ------- required or permitted to be given or effected under this Agreement shall be in writing and shall be deemed effective upon (i) personal or facsimile delivery to the party to be notified, (ii) one business day after deposit with an internationally recognized courier service, delivery fees prepaid, or (iii) three business days after deposit with the U.S. mail, return-receipt requested, postage prepaid, and in each case, addressed to the party to be notified at the following respective 11 addresses, or at such other addresses as may be designated by written notice; provided that any notice of change of address shall be deemed effective only - -------- upon receipt. If to the Company: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attn: Ilan Slasky Fax: 201-907-5351 with a copy to: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer Fax: 201-928-2952 and a copy to: Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Ira Greenstein Fax: (212) 468-7900 If to the Series A Investors: Notice shall be sent to the person and address indicated on signature page hereof. with a copy to: Cooley Godward LLP Five Palo Alto Square 3000 El Camino Road Palo Alto, CA 94306-2155 Attn: Eric Jensen Fax: 650-857-0663 and a copy to: Paul, Hastings, Janofsky & Walker, LLP 555 South Flower Street, 23rd Floor Los Angeles, CA 90071 Attn: Siobhan McBreen Burke Fax: 213-627-0705 and a copy to: NBC Multimedia, Inc. c/o National Broadcasting Company 30 Rockefeller Plaza New York, New York 10012 Attn: Vice President, Law, Corporate Transactions Group Fax: (212) 977-7165 12 3.6. Amendments and Waivers. The provisions of this Agreement, including the ---------------------- provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained written consent of Holders owning in the aggregate 66-2/3% of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure; provided, however, -------- ------- that no amendment, modification, supplement, waiver or consent to the departure with respect to the provisions of Section 2 hereof shall be effective as against any person unless consented to in writing by such person. 3.7. Severability. If one or more provisions of this Agreement are held to be ------------ unenforceable under applicable law, such provisions shall be excluded from this Agreement and the balance of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 3.8. Entire Agreement. This Agreement (including the Schedule attached hereto) ---------------- contains the entire understanding of the parties hereto with respect to the subject matter contained herein, and supersedes and cancels all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter. There are no restrictions, promises, representations, warranties, agreements or undertakings of any party hereto with respect to the matters contemplated hereby, other than those set forth herein or made hereunder. 3.9. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES ITS RIGHTS TO A -------------------- JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE SERIES A PREFERRED, THE WARRANTS OR THE SUBJECT MATTER HEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION 3.9 HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS SHALL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS OF) THIS AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT. 13 IN WITNESS WHEREOF, the Series A Investor has executed this Agreement on the day and year first above written. NET2PHONE, INC. SERIES A INVESTOR: By: /s/ Howard Balter By: ___________________________ ___________________________________ Name: Howard Balter Name: Title: Chief Executive Officer Title: Name: _____________________________ Address:___________________________ Title:_____________________________ Telephone No.______________________ Fax No.____________________________ Date:______________________________ SCHEDULE A
Subscription Shares of Investor Amount Preferred A Warrants -------- ------------- ----------- -------- Softbank Technology Ventures IV, L.P. $14,718,000 1,471,800 29,436 Softbank Technology Advisors Fund L.P. $ 282,000 28,200 564 GE Capital Equity Investments, Inc. $ 7,500,000 750,000 15,000 American Online, Inc. $ 7,500,000 750,000 15,000 Hambrecht & Quist Individuals Timothy Baughman $ 20,000 2,000 0 Daniel Rimer $ 20,000 2,000 0 David Golden $ 15,000 1,500 0 Mark Zanoli $ 15,000 1,500 0 Daniel H. Case III $ 10,000 1,000 0 Norman Colbert $ 5,000 500 0 Hambrecht & Quist Entities Hambrecht & Quist California $ 78,750 7,875 0 Hambrecht & Quist Employee $ 37,500 3,750 0 Venture Fund, L.P. II Access Technology Partners, L.P. $ 790,000 79,000 0 Access Technology Partners Brokers $ 8,750 875 0 Fund, L.P. ABS Employee's Venture Fund Limited $ 400,000 40,000 0 Partnership
EX-10.18 20 WARRANT TO PURCHASE COMMON STOCK EXHIBIT 10.18 THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND THE RULES AND REGULATIONS THEREUNDER. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE REPRESENTS THAT IT IS ACQUIRING THE WARRANT FOR INVESTMENT AND AGREES TO COMPLY IN ALL RESPECTS WITH PARAGRAPH (e) OF THIS WARRANT. WARRANT TO PURCHASE COMMON STOCK OF NET2PHONE, INC. VOID AFTER THE FIFTH ANNIVERSARY OF THE DATE OF ISSUANCE HEREOF. RIGHT TO PURCHASE ____ SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT). This is to Certify that, FOR VALUE RECEIVED, _________, or its registered assigns ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from NET2PHONE, INC., a Delaware corporation (the "Company"), ___________ fully paid, validly issued and nonassessable shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") at a price of $10.00 per share of Common Stock at any time or from time to time during the period from the date of issuance through May 13, 2004, but not later than 5:00 p.m. New York City Time, on May 13, 2004; provided, however, that this Warrant terminates upon a merger or sale of the Company or the closing of the Company's initial public offering. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Warrant has been issued pursuant to a Series A Subscription Agreement dated as of the date hereof between the Company and Holder (the "Subscription Agreement"). (a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part at any time or from time to time on or after ______________ and until ___________ (the "Exercise Period"), provided, however, that (i) if either such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of -1- substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, prior to May 13, 2004, the Holder shall have the right to exercise this Warrant commencing at such time and continuing for thirty days thereafter into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant would have been exercisable immediately prior thereto, all subject to adjustment as provided in paragraph (g). Notwithstanding the foregoing, this Warrant terminates upon a merger or sale of the Company or the closing of the Company's initial public offering. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by the payment of an amount of money in same day funds equal to the Exercise Price times the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of the Warrants, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant of the same tenor evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (b) CASHLESS EXERCISE. Notwithstanding any provisions herein to the contrary, in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed subscription form (in the form annexed hereto) and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A Where X = the number of shares of Preferred Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) A = the current market value of one share of the Company's Common Stock (at the date of such calculation) -2- B = existing Exercise Price (as adjusted to the date of such calculation) Current market value shall have the meaning set forth in Section (d) below, except that for purposes hereof, the date of exercise, as used in such Section (d), shall mean the date of the exercise under this Section. As soon as practicable after each the exercise of the Warrant under this Section, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant together with the cashless exercise subscription form at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (c) RESERVATION OF SHARES. The Company covenants and agrees that all shares of Common Stock that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed. (d) FRACTIONAL SHARES. No fractional shares or script representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (1) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market, the current market value shall be the average of the last reported sale price of the Common Stock on such exchange or market for the last 5 trading days ending on the last business day prior to the date of exercise of this Warrant or if no -3- such sale is made on such day, the average closing bid and asked prices for such day on such exchange or market; or (2) If the Common Stock is not so listed or admitted to unlisted trading privileges, but is traded on the Nasdaq SmallCap Market, the current Market Value shall be the average of the closing bid and asked prices for such day on such market and if the Common Stock is not so traded, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (3) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, determined in such good faith reasonable manner as may be prescribed by the Board of Directors of the Company. (4) The current market value of a share shall be determined on a going concern basis, without any discount for lack of liquidity or based upon the sale of a minority interest. (e) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. (1) Restrictions on Transfer. Neither this Warrant, the Warrant ------------------------ Shares issuable upon the exercise hereof nor any interest herein or therein shall be transferable except upon the conditions specified in this paragraph (e), which conditions are intended to ensure compliance with the provisions of the Securities Act of 1933, as amended (the "Act"), in respect of any such transfer. The holder hereof will cause any transferee of this Warrant, the Warrant Shares or any interest herein or therein held by him to agree to take and hold the Warrant, the Warrant Shares or an interest herein or therein subject to the provisions and upon the conditions specified in this paragraph (e). 2. Restrictive Legend. This Warrant and each Warrant Share shall ------------------ (unless otherwise permitted by the provisions of subparagraph (e)(3)) include a legend in substantially the following form: Warrant Legend: THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND -4- NEITHER THIS WARRANT NOR ANY INTEREST HEREIN MAY BE SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND THE RULES AND REGULATIONS THEREUNDER. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE REPRESENTS THAT IT IS ACQUIRING THIS WARRANT FOR INVESTMENT AND AGREES TO COMPLY IN ALL RESPECTS WITH PARAGRAPH (E) OF THIS WARRANT. Warrant Share Legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SHARES ARE REGISTERED UNDER THE ACT OR, EXCEPT AS OTHERWISE PERMITTED PURSUANT TO RULE 144 UNDER THE ACT OR ANOTHER EXEMPTION FROM REGISTRATION UNDER THE ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED AND ARE SUBJECT TO TRANSFER RESTRICTIONS AS SET FORTH IN A SUBSCRIPTION AGREEMENT, DATED MAY __, 1999, AND THE OTHER OPERATIVE AGREEMENTS ENTERED INTO IN CONNECTION THEREWITH, COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY. (3) Notice of Proposed Transfers. The holder of this Warrant or ---------------------------- any Warrant Shares by acceptance hereof or thereof agrees to comply in all respect with the provisions of this paragraph (e). Prior to any proposed transfer of this Warrant or any Warrant Shares that transfer is not made pursuant to an effective registration statement, the holder hereof or thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstance of the proposed transfer in reasonable detail, and shall be accompanied by (a) a written opinion of counsel reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer may be effected without registration under the Act or (b) written assurance from the staff of the Securities and Exchange Commission (the "Commission") that it will not recommend -5- that any action be taken by the Commission in the event such transfer is effected without registration under the Act. Such proposed transfer may be effected only if the Company shall have received such notice and such opinion of counsel or written assurance, whereupon the holder of this Warrant or the Warrant Shares shall be entitled to transfer this Warrant or the Warrant Shares in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing this Warrant or the Warrant Shares transferred as above provided shall bear the appropriate legend set forth in subparagraph (e)(2), except that such certificate shall not bear such legend if the opinion of counsel or written assurance referred to above is to the further effect that neither such legend nor the restriction on transfer in this Article are required to ensure compliance with the Act. The foregoing restrictions shall not be applicable to any transfer by any Holder to any affiliate or beneficial owner of such Holder. (4) Termination of Conditions and Obligations. The conditions ----------------------------------------- precedent imposed by this paragraph (e) upon the transferability of the Warrant Shares shall terminate as to any particular Warrant Shares when such Warrant Shares shall have been effectively registered under the Act and sold or otherwise disposed of in accordance with the intended method of disposition by the seller or sellers thereof set forth in the registration statement covering such Warrant Shares or at such time as an opinion of counsel as specified in subparagraph (3) shall have been rendered to the effect set forth in the last sentence of subparagraph (3). (5) Loss or Mutilation. Upon receipt by the Company of evidence ------------------ satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and in the case of loss, theft or destruction of reasonably satisfactory indemnification, and in the case of mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. (f) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. -6- (g) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the following shall occur: (a) the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action; and (b) the number of Warrant Shares shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. Such adjustment shall be made successively whenever any event listed above shall occur. (2) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0.01) in such price; provided, however, that any adjustments which by reason of this Subsection (2) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (g) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section (g) to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section (g), as it shall reasonably determine to be advisable in order than any dividend or distribution in shares of Common Stock or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants). (4) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted Exercise Price and adjusted number of Shares issuable upon exercise of each Warrant, and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holders at their last addresses appearing in the Warrant Register, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. -7- (5) In the event that at any time, as a result of an adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in this Section (g) above. (6) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Agreement. (7) The Company will not, by amendment of its certificate of incorporation or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against dilution or other impairment. Without limiting the generality of the foregoing, the Company will not increase the par value of any share of stock receivable upon the exercise of the Warrant above the amount payable therefor upon such exercise. (h) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder or any holder of a Warrant executed and delivered pursuant to Section (a) and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder. (i) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock, (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights, or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is -8- to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (j) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company, or in the case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock or a change of more than 25% of the voting power of the Common Stock) or in the case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (j) shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (g) hereof. (k) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. If the Company, at any time while this Warrant is outstanding, shall issue any Additional Shares of Common Stock (other than as provided in the foregoing Sections (g) and (j)), at a price per share less than the Exercise Price then in effect or less than the current market value of the Common Stock then in effect or without consideration, then the Exercise Price upon each such issuance shall be adjusted to that price (rounded to the nearest cent) determined by multiplying the Exercise Price then in effect by a fraction: (1) the numerator of which shall be equal to the sum of (A) the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares of Common Stock plus (B) the number of shares of Common Stock ---- (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the greater of the current market value then in effect and the Exercise Price then in effect, and -9- (2) the denominator of which shall be equal to the number of shares of Common Stock outstanding immediately after the issuance of such Additional Shares of Common Stock. For purposes of this Warrant, "Additional Shares of Common Stock" means all --------------------------------- shares of Common Stock issued by the Company after the date hereof except (i) the shares of Common Stock issuable upon the exercise of this Warrant or any of the other Investor Warrants, and (ii) any shares of Common Stock issuable upon conversion of the Series A Preferred outstanding on the date hereof pursuant to the Certificate of Designation. Each of the terms "Investor Warrants," "Series A Preferred" and "Certificate of Designation" shall have the meanings assigned to them in the Subscription Agreement. (l) PAYMENT OF TAXES. All shares of Common Stock delivered upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company shall pay all taxes and other governmental charges that may be imposed in respect of the issue or delivery thereof. (m) NOTICES. Unless otherwise provided, any notice or other communication required or permitted to be given or effected under this Warrant shall be in writing and shall be deemed effective upon personal or facsimile delivery to the party to be notified or three business days after deposit with an internationally recognized courier service, delivery fees prepaid, and addressed to the party to be notified at the following respective addresses, or at such other addresses as may be designated by written notice; provided that any notice of change of address shall be deemed effective only upon receipt: If to the Company: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attn: Ilan Slasky Fax: 201-907-5351 with a copy to: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: [Joyce Mason] Fax: 201-928-2952 and a copy to: Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Ira Greenstein Fax: (212) 468-7900 -10- If to the Holder: Notice shall be sent to the person and address indicated on signature page hereof. with a copy to: Cooley Godward LLP Five Palo Alto Square 3000 El Camino Road Palo Alto, CA 94306-2153 Attn: Eric Jensen Fax: 650-857-0663 and a copy to: Paul, Hastings, Janofsky & Walker LLP 555 S. Flower Street, 23rd Floor Los Angeles, CA 90071-2371 Attn: Siobhan M. Burke Fax: (213) 627-0705 (l) CAPTIONS AND HEADINGS. The captions and headings used in this Warrant are for convenience only and are not to be considered in construing or interpreting this Warrant. (m) GOVERNING LAW; SUBMISSION TO JURISDICTION. This Warrant shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law provisions. Each of the Company and the Holder hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Warrant and the transactions contemplated hereby. Each of the Company and the Holder irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. -11- Net2Phone, Inc. By: ----------------------------- Title: [SEAL] Dated As Of: May __, 1999 Attest: - ----------------------------------- Secretary PURCHASE FORM ------------- Dated __________, 19___ The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing ____ shares of Common Stock and hereby makes payment of ______ in payment of the actual price thereof. _____________________ INSTRUCTIONS FOR REGISTRATION OF STOCK -------------------------------------- Name ___________________________ (Please typewrite or print in block letters) Address: _________________________ Signature _________________________ ASSIGNMENT FORM --------------- FOR VALUE RECEIVED, ______________ hereby sells, assigns and transfers unto Name ________________________ (Please typewrite or print in block letters) Address _______________________ the right to purchase Common Stock represented by this Warrant to the extent of _____ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ________ as attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Date __________, 19___ Signature _______________________________ CASHLESS EXERCISE SUBSCRIPTION FORM ----------------------------------- The undersigned ________________ pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe to that number of shares of stock of Net2Phone, Inc. as are issuable in accordance with the formula set forth in Section (b) of the Warrant, and makes payment therefore in full by cancellation of _____________ Warrants. (If this is a partial exercise of the Warrant, a new Warrant for the remaining number of unexercised Warrants shall be issued by the Company.) Dated:___________________ Signature: _________________________________ Name: _________________________________ Address: _________________________________ _________________________________ EX-10.19 21 PROMISSORY NOTE EXHIBIT 10.19 $14,000,000.00 Due May 30, 2004 PROMISSORY NOTE --------------- FOR VALUE RECEIVED, Net2Phone, Inc., a Delaware corporation ("Maker"), hereby promises to pay to the order of IDT Corporation ("Payee") in 60 equal monthly installments, the principal amount of Fourteen Million Dollars ($14,000,000.00) with interest self amortizing on the outstanding principal amount from May 30, 1999 at a rate of 9% per annum. Notwithstanding the foregoing, Seven Million Dollars ($7,000,000.00) of principal will be paid by Maker within ten (10) days of the consummation of Maker's proposed initial public offering. All payments hereunder shall be made by delivery to Payee of checks payable to the order of Payee or by wire transfer. Maker may, at its option, prepay this Note in whole or in part, together with accrued interest on the principal amount being prepaid, at any time or from time to time without penalty or premium. If any one or more of the following events (hereinafter an "Event of Default") shall occur, for any reason whatsoever: (a) default in any payment of principal of this Note when due and the continuance of such default for a period of ten days; (b) default in any payment of interest on this Note when due and continuance of such default for a period of ten days; and (c) financial difficulties of Maker as evidenced by the occurrence of any of the following events under the laws of the United States or any state, territory or possession thereof: (i) the failure, or acknowledgement in writing of its inability, to pay its debts as they become due; (ii) the commencement of a voluntary case in bankruptcy or any other action or proceeding for any other relief under any law affecting creditors' rights generally or the seeking of an appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any substantial part of its properties; (iii) consent by answer or otherwise to an order for relief against it in an involuntary case in bankruptcy or to the commencement of any other such action or proceeding or to any such appointment; (iv) the entry against it of an order for relief in an involuntary case in bankruptcy; (v) the commencement against it in an involuntary case in bankruptcy or any other such action or proceeding, if such case or other action or proceeding shall not be dismissed or stayed within thirty days following the commencement thereof or if any such dismissal or stay shall fail to remain in effect; or (vi) the appointment of a trustee, receiver, liquidator, custodian or other similar official for it or any substantial portion of its properties; then, and in each and every case, the Payee, during the continuance of such Event of Default, may, upon giving written notice to the Maker, declare the then outstanding principal amount of this Note and accrued interest thereon to be, and whereupon they shall become, immediately due and payable. Interest shall accrue hereunder during the continuance of an Event of Default. If an Event of Default should occur, Maker agrees to pay to the Payee all expenses, including reasonable attorneys' fees, incurred by the Payee in enforcing and collecting this Note (whether pursuant to acceleration or otherwise), whether before or after maturity. No delay or failure on the part of the Payee of this Note in exercising any option, power, right or remedy shall operate as a waiver thereof; nor shall any single or partial exercise of any option, power, right or remedy preclude other or further exercise thereof or exercise of any other option, or remedy shall be a waiver of any default. No waiver by the Payee of any right hereunder or of any default by Maker shall be binding upon the Payee unless in writing, and no failure by the Payee in exercising any right hereunder, and no waiver of any default of the Payee shall operate as a waiver of any other or further exercise of such right or of any further default. Maker waives demand, notice and protest in any defense by reason of extension of time for payment or other indulgence granted by the holder hereof. This Note shall be binding upon the successors and assigns of Maker and shall inure to the benefit of Payee and its successors and assigns. This Note shall be governed by the internal laws of the State of New York without giving effect the principles of conflicts of law. IN WITNESS WHEREOF, the undersigned has executed this Note as of the 12th day of May, 1999. NET2PHONE, INC. By: /s/ Howard S. Balter ------------------------ Howard S. Balter Chief Executive Officer EX-23.1 22 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated May 14, 1999 (except for Note 9, as to which the date is May, 1999), in the Registration Statement (Form S-1 No. 333- ) and related Prospectus of Net2Phone, Inc. for the registration of shares of its common stock. Ernst & Young LLP New York, New York May 1999 The foregoing consent is in the form that will be signed upon the completion of the restatement of capital accounts described in Note 9 to the financial statements. /s/ Ernst & Young LLP New York, New York May 17, 1999 EX-27.1 23 FINANCIAL DATA SCHEDULE
5 YEAR YEAR YEAR 6-MOS JUL-31-1996 JUL-31-1997 JUL-31-1998 JUL-31-1999 AUG-01-1995 AUG-01-1996 AUG-01-1997 AUG-01-1998 JUL-31-1996 JUL-31-1997 JUL-31-1998 JAN-31-1999 0 0 10,074 10,074 0 0 0 0 0 16,500 1,465,475 184,551 0 0 0 0 0 0 0 0 0 16,500 1,475,549 202,425 182,950 1,028,300 6,264,345 8,740,346 8,275 128,775 855,284 1,594,316 174,674 916,025 6,975,108 12,446,271 681,532 3,021,330 12,625,102 20,171,900 0 0 0 0 0 0 0 0 0 0 0 0 0 100,100 100,100 100,100 (507,758) (1,697,647) (3,544,689) (2,075,635) 174,674 916,025 6,975,108 12,446,271 0 2,652,303 12,005,972 13,165,886 0 2,652,303 12,005,972 13,165,886 0 1,553,443 6,848,759 7,323,751 507,758 4,349,950 15,550,661 15,241,521 0 0 0 0 0 0 0 0 0 0 0 0 (507,758) (1,697,647) (3,544,689) (2,075,635) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (507,758) (1,697,647) (3,544,689) (2,075,635) (0.02) (0.05) (0.11) (0.07) (0.02) (0.05) (0.11) (0.07)
EX-99.1 24 CONSENT OF GARY REISCHEL EXHIBIT 99.1 CONSENT OF DIRECTOR NOMINEE The undersigned, pursuant to Rule 438 under the Securities Act, consents to the use of his name in the Registration Statement on Form S-1 of Net2Phone, Inc. as a person who is a Director Nominee of Net2Phone, Inc. /s/ Gary Reischel -------------------------------- Gary Reischel Date: May 17, 1999 EX-99.2 25 CONSENT OF DAVID GREENBLATT EXHIBIT 99.2 CONSENT OF DIRECTOR NOMINEE The undersigned, pursuant to Rule 438 under the Securities Act, consents to the use of his name in the Registration Statement on Form S-1 of Net2Phone, Inc. as a person who is a Director Nominee of Net2Phone, Inc. /s/ David Greenblatt -------------------------------- David Greenblatt Date: May 17, 1999 EX-99.3 26 CONSENT OF ILAN SLASKY EXHIBIT 99.3 CONSENT OF DIRECTOR NOMINEE The undersigned, pursuant to Rule 438 under the Securities Act, consents to the use of his name in the Registration Statement on Form S-1 of Net2Phone, Inc. as a person who is a Director Nominee of Net2Phone, Inc. /s/ Ilan Slasky -------------------------------- Ilan Slasky Date: May 17, 1999 EX-99.4 27 CONSENT OF MICHAEL FISCHBERGER EXHIBIT 99.4 CONSENT OF DIRECTOR NOMINEE The undersigned, pursuant to Rule 438 under the Securities Act, consents to the use of his name in the Registration Statement on Form S-1 of Net2Phone, Inc. as a person who is a Director Nominee of Net2Phone, Inc. /s/ Michael Fischberger -------------------------------- Michael Fischberger Date: May 17, 1999 -----END PRIVACY-ENHANCED MESSAGE-----