-----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, MVgxEtke3uRsgmAAubZAPzv8hV4YHIMih6j+Dowf22j0/7umgybJAMaNtX7JtFce pcr8Mp5W0qGYwnLqlK2RDQ== 0000950130-99-003826.txt : 19990629 0000950130-99-003826.hdr.sgml : 19990629 ACCESSION NUMBER: 0000950130-99-003826 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19990628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NET2PHONE INC CENTRAL INDEX KEY: 0001086472 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 223559037 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-78713 FILM NUMBER: 99653141 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/A 1 AMENDMENT NO. 1 TO FORM S-1 As filed with the Securities and Exchange Commission on June 28, 1999 Registration No. 333-78713 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- AMENDMENT NO.1 TO 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) 907-5304 (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) 907-5304 (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 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 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
Title of Each Class of Securities Proposed Maximum Aggregate Amount of to be Registered Offering Price(1) Registration Fee(1)(2) - -------------------------------------------------------------------------------------- Common Stock, $.01 par value.... $66,240,000 $18,415 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. (2) $13,900 of this amount has been previously paid. 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 JUNE 28, 1999 PROSPECTUS 4,800,000 Shares Common Stock This is an initial public offering of common stock by Net2Phone, Inc. Net2Phone is selling 4,800,000 shares of common stock. The estimated initial public offering price is between $10.00 and $12.00 per share. -------- At the request of Net2Phone, the underwriters intend to reserve at the initial offering price up to 300,000 shares of common stock to be sold in this offering to National Broadcasting Company, Inc. We have applied for listing of Net2Phone's common stock 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 720,000 additional shares of our common stock. -------- Investing in the common stock involves a high degree of risk. See "Risk Factors" beginning on page 4. -------- 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 TABLE OF CONTENTS
Page ---- Prospectus Summary................................................... 1 Risk Factors......................................................... 4 Forward-Looking Statements........................................... 12 Use of Proceeds...................................................... 13 Dividend Policy...................................................... 13 Capitalization....................................................... 14 Dilution............................................................. 15 Selected Financial Data.............................................. 16 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17 Business............................................................. 26 Management........................................................... 43 Principal Stockholders............................................... 51 Certain Transactions................................................. 53 Description of Capital Stock......................................... 60 Shares Eligible for Future Sale...................................... 63 Underwriting......................................................... 65 Legal Matters........................................................ 68 Experts.............................................................. 68 Where You Can Find More Information.................................. 68 Index to Financial Statements ....................................... F-1
We maintain Web sites at www.Net2Phone.com and www.EZSurf.com. Information contained on our 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 services enabling users to make high quality, low-cost telephone calls over the Internet. These services are commonly referred to as Internet telephony. Our Internet telephony services enable our customers to call individuals and businesses worldwide using their personal computers or traditional telephones. According to Frost & Sullivan, a leading market research firm, we were the largest provider of Internet calls in the world in 1997 with a 30% market share. In August 1996, we introduced our first service, "PC2Phone." We believe that 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. Our customers often pay substantially less for long-distance calls they make using our services than they would for calls made over traditional long distance networks, such as those owned by AT&T, Sprint and MCI. We are leveraging our expertise in Internet telephony to integrate live voice capabilities into the Web. We have developed simple, easy to use PC2Phone software that operates on a 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. We promote our services through relationships with international resellers and leading Internet companies. For example, our PC2Phone software will be embedded on an exclusive basis into future versions of Netscape's Internet browser, including Netscape Navigator and Netscape Communicator, for the term of our agreement. 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. Our strategy for building on our leadership position in our market and making live voice communication a common feature on the Internet includes the following key elements: . marketing our services widely; . pursuing multiple sources of revenue; . enhancing brand recognition; . making our software readily available worldwide; and . expanding and enhancing our products and services. Upon completion of this offering, IDT will own approximately 58.2% 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 65.2% 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) 907-5304. 1 The Offering Common stock offered by Net2Phone............ 4,800,000 shares Capital stock to be outstanding after this offering.................................... 46,797,619 shares Common stock................................ 10,161,429 shares Class A stock............................... 36,636,190 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 Corporation. $1.5 million will be paid to NBC for the purchase of television advertising. We have not made any other specific allocations with respect to the proceeds. We expect to use the balance of the proceeds: 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. Nasdaq National Market symbol................ NTOP
-------------------- This information excludes: . 3,666,366 shares subject to options outstanding as of June 25, 1999 at a weighted average exercise price of $3.33 per share; and . 6,030,378 shares reserved for issuance under our 1999 Stock Incentive Plan, as of June 25, 1999, approximately 2,011,000 of which we expect to grant prior to the closing of this offering. Unless otherwise noted, the information in this prospectus: . reflects a 10,320-for-one stock split, which took place in April 1999; . reflects a three-for-one stock split on our common stock and Class A stock, which took place in June 1999; . assumes 4,683,129 shares of common stock outstanding in June 1999; . assumes 27,622,089 shares of Class A stock outstanding in June 1999; . assumes the exercise of warrants to purchase 272,400 shares of our common stock at a price of $3.33 per share prior to the closing of this offering; . gives effect to the conversion of 405,792 shares of Class A stock to common stock upon the transfer of these shares from IDT to Clifford M. Sobel, our Chairman and President, at the closing of this offering; and . gives effect to the conversion of all 3,140,000 outstanding shares of our Series A convertible preferred stock into 9,420,000 shares of Class A stock at the closing 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. Each share of Class A stock is convertible into one share of common stock, and automatically converts into common stock upon transfer. -------------------- 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. 2 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 Nine Months Ended January 2, 1996 July 31, April 30, (inception) to ------------------------ ----------------------- July 31, 1996 1997 1998 1998 1999 --------------- ----------- ----------- ---------- ----------- Statement of Operations: Revenue............... $ -- $ 2,652,303 $12,005,972 $7,954,374 $22,203,257 Loss from operations.. (507,758) (1,697,647) (3,544,689) (673,922) (2,905,966) Net loss.............. $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966) Net loss per share-- basic and diluted.... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09) Shares used in calculation of basic and diluted loss per share................ 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000
The pro forma balance sheet data summarized below gives effect to: . the sale of 3,140,000 shares of Series A convertible preferred stock, which are convertible into 9,420,000 shares of our Class A common stock, and warrants to purchase 180,000 shares of our common stock in May 1999 for net proceeds of $29.9 million; . the conversion of all outstanding shares of our Series A convertible preferred stock into shares of our Class A stock at the closing of this offering; . the issuance of warrants to purchase 92,400 shares of our common stock granted to the placement agent in May 1999 in connection with the sale of our Series A convertible preferred stock; . the repayment of $8.0 million of the amounts owed to IDT in May 1999; and . the exercise of options to purchase 1,345,219 shares of common stock in May 1999 in exchange 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 4,800,000 shares of common stock in this offering; . the application of $7.0 million of the estimated net proceeds from this offering to pay a portion of the amounts due to IDT; . the application of $1.5 million of the estimated net proceeds from this offering to pay NBC for television advertising time; and . the exercise of warrants to purchase 272,400 shares of common stock prior to the closing of this offering.
April 30, 1999 -------------------------------------- Pro Forma Actual Pro Forma As Adjusted ------------ ----------- ------------ Balance Sheet Data: Cash and cash equivalents.............. $ 1,782,194 $25,016,264 $65,237,356 Working capital........................ (17,255,452) 13,978,618 62,699,710 Total assets........................... 19,818,328 43,052,398 84,773,490 Due to IDT............................. 22,000,000 14,000,000 7,000,000 Total stockholders' (deficit) equity... (3,926,122) 27,307,948 76,029,040
3 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 FINANCIAL CONDITION AND BUSINESS MODEL OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT. 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 with which you may evaluate our business. You must consider the numerous risks and uncertainties an early stage company like ours faces in the new and rapidly evolving market for Internet-related services. These risks include our ability to: . increase awareness of our brand and continue to build user loyalty; . maintain our current, and develop new, strategic relationships; . respond effectively to competitive pressures; and . continue to develop and upgrade our network and technology. If we are unsuccessful in addressing these risks, our business, financial condition and results of operations will be materially and adversely affected. WE HAVE NEVER BEEN PROFITABLE AND EXPECT OUR LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE. We have never been profitable on an annual basis. We had an accumulated deficit of approximately $8.7 million as of April 30, 1999. We expect to continue to incur operating losses for the forseeable future. Our operating and marketing expenses have continuously increased since inception and we expect them to continue to increase significantly during the next several years. Accordingly, we will need to generate significant revenue to achieve profitability. We may not be able to do so. 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. Further, it is probable that we will have to recognize significant additional charges relating to non-cash compensation in connection with options that we granted in May 1999 and that we expect to grant prior to the closing of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WE INTEND TO PURSUE MULTIPLE STREAMS OF REVENUE, MANY OF WHICH ARE UNPROVEN. In the future, we intend to pursue revenue from new Web-based opportunities, such as banner and audio advertising, as well as from sponsorship opportunities on our user interface and our EZSurf.com Internet shopping directory. We also intend to explore the availability of revenue-sharing opportunities. We have not attempted to generate this type of revenue before. We intend to devote significant capital and resources to create these new revenue streams and we cannot ensure that these investments will be profitable. WE MAY HAVE DIFFICULTIES MANAGING OUR EXPANDING OPERATIONS, WHICH MAY REDUCE OUR CHANCES OF ACHIEVING PROFITABILITY. Our future performance will depend, in part, on our ability to manage our 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; 4 . improve coordination among our engineering, accounting, finance, marketing and operations personnel; . 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. IF WE FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS OUR ABILITY TO INCREASE OUR SALES WOULD SUFFER. We currently have strategic relationships with Netscape, Compaq, 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 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 DEPEND ON RESELLERS, WHOM WE DO NOT CONTROL, TO MARKET AND DISTRIBUTE OUR PRODUCTS AND SERVICES INTERNATIONALLY AND TO PROVIDE LOCAL CUSTOMER 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. If we lose a reseller in a key market, or if a current or future reseller fails to adequately provide customer support, our reputation and business could be materially adversely affected. COMPETITION COULD REDUCE OUR MARKET SHARE AND DECREASE OUR REVENUE. The market for our services has been extremely competitive. Many companies offer products and services like ours, and many of these companies have a substantial presence in this market. 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 Alcatel, Cisco, Lucent, Northern Telecom and Dialogic (which has entered into an agreement to be acquired by Intel), have announced that they intend to offer similar products. We expect these products to allow live 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 further steps by recently acquiring companies that produce devices that help Internet service providers carry voice over the Internet while maintaining traditional phone usage and infrastructure. Other competitors of ours, such as ICG Communications, IPVoice.com, ITXC, RSL Communications (through its Delta Three subsidiary) and VIP Calling, route voice traffic worldwide over the Internet. In addition, major long distance providers, such as AT&T, Deutsche Telekom, MCI WorldCom and Qwest Communications, as well as other major companies such as Motorola and Intel, have all entered or plan to enter the market for carrying voice over the Internet. These companies are larger than we are and have substantially greater financial, distribution and marketing resources than we do. We may not be able to compete successfully in this market. 5 PRICING PRESSURES MAY LESSEN OUR COMPETITIVE PRICING ADVANTAGE. Our success is based on our ability to provide discounted domestic and international long distance services by taking advantage of cost savings achieved by carrying voice traffic over the Internet, as compared to carrying calls over long distance networks, such as those owned by AT&T, Sprint and MCI. In recent years, the price of long distance calls has fallen. In response, we have lowered the price of our service offerings. The price of long distance calls may decline to a point where we no longer have a price advantage over these traditional long distance services. We would then have to rely on factors other than price to differentiate our product and service offerings, which we may not be able to do. WE MAY NOT BE ABLE TO HIRE AND RETAIN THE PERSONNEL WE NEED TO SUSTAIN OUR BUSINESS. We depend on the continued services of our executive officers and other key personnel. 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. If we are unable to attract and retain qualified technical and managerial personnel, our business, results of operations and financial condition would be materially adversely affected. IF OUR CUSTOMERS DO NOT PERCEIVE OUR SERVICE TO BE EFECTIVE OR OF HIGH QUALITY, OUR BRAND AND NAME RECOGNITION WOULD SUFFER. We believe that establishing and maintaining a brand and name recognition is critical for attracting and expanding our targeted client base. We also believe that the importance of reputation and name recognition will increase as competition in our 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. WE DEPEND ON OUR INTERNATIONAL OPERATIONS, WHICH SUBJECT US TO UNPREDICTABLE REGULATORY AND POLITICAL SITUATIONS. As of April 30, 1999, approximately 65% of our customers were based outside of the United States, generating approximately 58% of our revenues during the nine 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. ALL OF THE TELEPHONE CALLS MADE BY OUR CUSTOMERS ARE CONNECTED THROUGH LOCAL TELEPHONE COMPANIES AND, AT LEAST IN PART, THROUGH LEASED NETWORKS THAT MAY BECOME UNAVAILABLE. We are not a local telephone company or a registered local exchange carrier. Our network covers only portions of the United States. Accordingly, some domestic and all international calls made by our customers must be carried at least in part over leased transmission facilities. Further, because our network does not 6 extend to homes or businesses, all calls made by our customers must be routed through a local telephone company to reach our network and, ultimately, to reach their final destinations. 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 lease necessary transmission lines to us or, if applicable law requires national telephone companies to lease transmission facilities 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 telephone service are generally the incumbent local telephone companies, including the regional Bell operating companies. The permitted pricing of local transmission facilities that we lease in the United States is subject to uncertainties. The Federal Communications Commission has issued an order requiring incumbent local telephone companies 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 local transmission facilities provided to competitors. However, the incumbent local telephone companies 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 transmission 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. Additionally, 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 SUCCESS DEPENDS ON OUR ABILITY TO HANDLE A LARGE NUMBER OF SIMULTANEOUS CALLS, WHICH OUR SYSTEMS MAY NOT BE ABLE TO ACCOMMODATE. We expect the volume of simultaneous calls to increase significantly as we expand our operations. If this occurs, additional stress will be placed on our network hardware and software. If we are not able to maintain an appropriate level of operating performance, or if our service is disrupted, our reputation could be hurt and our business could suffer. BECAUSE WE ARE UNABLE TO PREDICT THE VOLUME OF USAGE AND OUR CAPACITY NEEDS, WE MAY BE FORCED TO ENTER INTO DISADVANTAGEOUS CONTRACTS THAT WOULD REDUCE OUR OPERATING MARGINS. In order to ensure that we are able to handle 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 a new high capacity network that 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 our call volume, we may be obligated to pay for more transmission capacity than we actually use, resulting in costs without corresponding revenue. Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity through more expensive means that may not be available. WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS. We intend to continue to grow our business. Due to our limited operating history and the nature of our industry, our future capital needs are difficult to predict. Therefore, we may require additional capital after this offering to fund any of the following: . unanticipated opportunities; . strategic alliances; 7 . potential acquisitions; . changing business conditions; and . unanticipated competitive pressures. Obtaining additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financings unattractive to us. If we are unable to raise additional capital, our growth could be impeded. ANY DAMAGE TO OR FAILURE OF OUR SYSTEMS OR OPERATIONS COULD RESULT IN REDUCTIONS IN, OR TERMINATIONS OF, OUR SERVICES. Our success depends on our ability to provide efficient and uninterrupted, high-quality services. 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. 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. 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." YEAR 2000 PROBLEMS MAY DISRUPT OUR OPERATIONS. 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. 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. 8 RISKS RELATED TO OUR RELATIONSHIP WITH IDT WE HAVE HISTORICALLY BEEN DEPENDENT ON IDT FOR VARIOUS SERVICES AND WORKING CAPITAL, AND FOR ITS TELECOMMUNICATIONS NETWORK. In May 1999, we entered into agreements with IDT under which IDT will continue to provide administrative and telecommunication services to us. When these agreements expire, we will need to extend them, 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. In addition, IDT has provided us in the past with working capital to fund our operations, and IDT is not under any obligation, under these agreements or otherwise, to do so in the future. WE MAY EXPERIENCE CONFLICTS OF INTEREST WITH IDT, WHICH MAY NOT BE RESOLVED IN OUR FAVOR. Two members of our board of directors are officers and directors of IDT. One of these directors, Howard S. Jonas, is the Chairman and Chief Executive Officer of IDT and IDT's controlling shareholder. Additionally, one of our directors, James R. Mellor, was a director of IDT until June 1999. Clifford M. 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 harm our business. THROUGH ITS OWNERSHIP OF OUR STOCK, IDT EFFECTIVELY CONTROLS OUR COMPANY AND MAY EXERT INFLUENCE CONTRARY TO THE INTERESTS OF OTHER STOCKHOLDERS. Immediately following this offering, IDT will own approximately 58.2% of our outstanding capital stock. Because IDT owns Class A stock, which entitles the holder to two votes per share, IDT will control 65.2% of our voting power. 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 our company or 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. IDT's ownership will increase further if Clifford M. Sobel exercises his option to transfer his shares of our stock to IDT in exchange for an option to purchase shares of IDT. See "Principal Stockholders." IDT HAS PLEDGED ITS SHARES OF OUR STOCK TO SECURE A CREDIT FACILITY, WHICH SHARES MAY BE TRANSFERRED TO A THIRD PARTY THAT WOULD EFFECTIVELY CONTROL US IF IDT DEFAULTS ON ITS OBLIGATIONS. The shares owned by IDT are pledged as collateral to secure an IDT credit facility. The lenders under the credit facility have agreed to permit IDT to transfer our shares free and clear of any liens as and when IDT seeks to transfer shares of our stock. Such transferability will cease if IDT's ownership of our capital stock drops below 50% of the number of shares which it owns 72 hours after the consummation of this offering. If IDT defaults in its obligations under the credit facility, then a third party could acquire the voting 9 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. Risks Related to Our Industry IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR VOICE COMMUNICATIONS, OUR BUSINESS WILL SUFFER. The technology that allows voice communications over the Internet is still in its early stages of development. Historically, the sound quality of Internet calls was poor. As the industry has grown, sound quality has improved, but the technology requires further refinement. Additionally, the Internet's capacity constraints may impede the acceptance of Internet telephony. Callers could experience delays, errors in transmissions or other interruptions in service. Making telephone calls over the Internet must also be accepted as an alternative to traditional telephone service. Because the Internet telephony market is new and evolving, predicting the size of this market and its growth rate is difficult. If our market fails to develop, then our business and our opportunity for profitability will be harmed. OUR BUSINESS WILL NOT GROW WITHOUT 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. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including: . concerns about security; . Internet congestion; . inconsistent 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 will suffer. GOVERNMENTAL REGULATIONS REGARDING THE INTERNET MAY BE PASSED, WHICH COULD IMPEDE OUR BUSINESS. To date, governmental regulations have not materially restricted use of the Internet in our market. However, the legal and regulatory environment that pertains to the Internet is uncertain and may change. 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. 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 that include: . sales and other taxes; . access charges; . user privacy; . pricing controls; . characteristics and quality of products and services; . consumer protection; . universal service contributions; . cross-border commerce; . copyright, trademark and patent infringement; and . other claims based on the nature and content of Internet materials. 10 In September 1998, two regional Bell operating companies advised Internet telephony providers that these companies would impose access charges on Internet telephony traffic. One of these operating companies also 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 Nebraska and Colorado for similar rulings concerning payment of access charges for intrastate Internet telephone calls. The outcome of these proceedings is uncertain. A finding that access charges may be levied against these service providers could affect other Internet telephony service providers in those states and suggests that other state utility commissions would make similar rulings. OUR RISK MANAGEMENT PRACTICES MAY NOT BE SUFFICIENT TO PROTECT US FROM UNAUTHORIZED TRANSACTIONS OR THEFTS OF SERVICES. 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 theft or fraud, though we may experience losses in the future. RISKS RELATED TO THIS OFFERING OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY. Following this offering, the 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 technical innovations, 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 stocks of many Internet-related companies have experienced significant fluctuations in trading price and volume. Often these fluctuations have been unrelated to operating performance. 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. IF OUR STOCK PRICE IS VOLATILE, WE MAY BECOME SUBJECT TO SECURITIES LITIGATION, WHICH IS EXPENSIVE AND COULD DIVERT OUR RESOURCES. In the past, following periods of market volatility in the price of a company's securities, security holders have instituted class action litigation. Many companies in our industry have been subject to this type of 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 our management's attention could be diverted, causing our business to suffer. 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 decline 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. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. 11 WE MAY USE THE PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH YOU MAY NOT AGREE. We have significant flexibility in applying the proceeds we receive in this offering. Other than the repayment of $7.0 million on an outstanding note to IDT and the payment of $1.5 million to NBC for television advertising, 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. If we do not apply the funds we receive effectively, our accumulated deficit will increase and we may lose significant business opportunities. See "Use of Proceeds" for a more detailed description of how we intend to apply the proceeds from this offering. 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, 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. 12 USE OF PROCEEDS Net2Phone will receive net proceeds of approximately $47.8 million from the sale of 4,800,000 shares of common stock (and an additional approximately $7.4 million from the sale of 720,000 shares if the underwriters over-allotment option is exercised in full) at an assumed initial public offering price of $11.00 per share after deducting underwriting commissions and discounts of $3.5 million (and an additional $554,000 if the underwriters' over-allotment option is exercised in full) and estimated expenses of $1.5 million. 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. Additionally, $1.5 million will be paid to NBC for television advertising. As of the date of this prospectus, we have not made any other specific allocations with respect to the proceeds. Therefore, we cannot specify with certainty the particular uses for the net proceeds to be received upon consummation of this offering. Accordingly, our management will have significant flexibility in applying the net proceeds from this offering. We expect to use the balance of the net proceeds of this offering for: . developing and maintaining strategic Internet relationships; . advertising and promotion; . research and development; . upgrading and expanding our network; and . general corporate purposes, including working capital. Pending any use, the net proceeds of this offering will be invested in short-term, 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. 13 CAPITALIZATION The following table sets forth: . our actual capitalization as of April 30, 1999; . our pro forma capitalization to give effect to: . the conversion of IDT's 27,864,000 shares of our common stock into 27,864,000 shares of Class A stock in May 1999, . the sale of 3,140,000 shares of Series A convertible preferred stock, which are convertible into 9,420,000 shares of our Class A common stock, and warrants to purchase 180,000 shares of our common stock in May 1999 for net proceeds of $29.9 million, . the conversion of all outstanding shares of our Series A convertible preferred stock into shares of our Class A stock at the closing of this offering, . the issuance of warrants to purchase 92,400 shares of our common stock granted to the placement agent in May 1999 in connection with the sale of our Series A convertible preferred stock, . the repayment of $8.0 million of the amounts owed to IDT in May 1999, . the conversion of 242,018 shares of Class A stock to common stock upon the transfer of these shares from IDT to Clifford M. Sobel in May 1999, . the exercise of stock options to purchase 1,375,219 shares of common stock in May 1999 in exchange for $3.1 million in promissory notes and $1.3 million in cash; and . the pro forma as adjusted balance sheet summarized below reflects: . the sale of 4,800,000 shares of common stock in this offering, . the application of $7.0 million of the estimated net proceeds from this offering to pay a portion of the amounts due to IDT, . the conversion of 405,792 shares of Class A stock to common stock upon the transfer of those shares from IDT to Clifford M. Sobel at the closing of this offering, and . exercise of warrants prior to the closing of this offering to purchase 272,400 shares of common stock. The information set forth in the table below excludes 3,666,366 shares of common stock issuable upon exercise of options to purchase our common stock at a weighted average exercise price of $3.33 per share. This information also excludes the effect of non-cash compensation in connection with options to purchase 5,040,000 shares of our common stock that were granted in May 1999 and options to purchase 2,011,000 shares of our common stock that are expected to be granted prior to the closing of this offering. See "Management--1999 Stock Incentive Plan" and "Certain Transactions--Relationship with Other Investors."
April 30, 1999 ------------------------------------- Pro Forma Actual Pro Forma As Adjusted ----------- ----------- ----------- Due to IDT.............................. $22,000,000 $14,000,000 $ 7,000,000 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; 200,000,000 shares authorized; 30,960,000 (actual) 4,683,237 (pro forma) and 10,161,429 (pro forma as adjusted) shares issued and outstanding............................ 309,600 46,832 101,614 Class A stock, $.01 par value; 37,042,089 shares authorized; none (actual) 37,041,982 (pro forma) and 36,636,190 (pro forma as adjusted) shares issued and outstanding.......... -- 370,420 366,362 Additional paid-in capital.............. 4,420,338 38,696,746 87,367,114 Loans to stockholders................... -- (3,149,990) (3,149,990) Accumulated deficit..................... (8,656,060) (8,656,060) (8,656,060) ----------- ----------- ----------- Total stockholders' (deficit) equity.... (3,926,122) 27,307,948 76,029,040 ----------- ----------- ----------- Total capitalization.................... $18,073,878 $41,307,948 $83,029,040 =========== =========== ===========
14 DILUTION The net tangible book value of Net2Phone common stock and Class A stock as of April 30, 1999, as adjusted to give effect to a private placement of 3,140,000 shares of Series A convertible preferred stock in May 1999 and the exercise of stock options to purchase 1,345,219 shares of common stock, was $22.3 million, or $0.53 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 and Class A stock outstanding. After giving effect to this offering and the receipt of an assumed $47.8 million of net proceeds from this offering (based on an assumed initial public offering price of $11.00 per share), the issuance of 3,140,000 shares of Series A convertible preferred stock in May 1999, the conversion of the Series A convertible preferred stock into 9,420,000 shares of Class A stock and the exercise of warrants to purchase 272,400 shares of common stock, the pro forma net tangible book value of the common stock and Class A stock as of April 30, 1999 would have been $71.0 million, or $1.49 per share. This amount represents an immediate increase in net tangible book value of $0.96 per share to the existing stockholders and an immediate dilution in net tangible book value of $9.51 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................. $11.00 Net tangible book value per share at April 30, 1999 .......... $0.53 Increase per share attributable to new investors.............. 0.96 ----- Pro forma net tangible book value per share after this offering........................................................ 1.49 ------ Dilution per share to new investors............................. $ 9.51 ======
The following table sets forth, as of April 30, 1999, on the pro forma basis described above, the number of shares of capital 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 89.7% $ 88,742,182 62.7% $ 2.11 New investors.......... 4,800,000 10.3% 52,800,000 37.3% 11.00 ---------- ----- ------------ ---- Total.............. 46,797,619 100.0% $141,542,182 100% ========== ===== ============ ====
15 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 (inception) to July 31, 1996, fiscal 1997 and fiscal 1998 and the balance sheet data as of July 31, 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 nine months ended April 30, 1998 and 1999 and the balance sheet data as of April 30, 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 Year Ended Nine Months Ended January 2, 1996 July 31, April 30, (inception) ------------------------ ------------------------- to July 31, 1996 1997 1998 1998 1999 ---------------- ----------- ----------- ------------ ----------- Statement of Operations Data: Revenue: PC2Phone.............. $ -- $ 2,170,442 $ 7,962,821 $ 5,085,176 $13,774,837 Phone2Phone........... -- 272 2,030,516 1,018,835 6,503,697 Other................. -- 481,589 2,012,635 1,850,363 1,924,723 ---------- ----------- ----------- ------------ ----------- Total revenue....... -- 2,652,303 12,005,972 7,954,374 22,203,257 ---------- ----------- ----------- ------------ ----------- Cost and expenses: Direct cost of revenue, excluding depreciation......... -- 1,553,443 6,848,759 3,589,301 11,848,089 Sales and marketing... 34,468 76,724 2,887,766 1,363,060 4,746,316 General and administrative....... 465,015 2,599,283 5,087,628 3,254,287 7,298,106 Depreciation.......... 8,275 120,500 726,508 421,648 1,216,712 ---------- ----------- ----------- ------------ ----------- Total costs and expenses........... 507,758 4,349,950 15,550,661 8,628,296 25,109,223 ---------- ----------- ----------- ------------ ----------- Loss from operations and net loss.......... $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966) ========== =========== =========== ============ =========== Net loss per share-- basic and diluted..... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09) ========== =========== =========== ============ =========== Shares used in calculation of basic and diluted net loss per share............. 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000 July 31, April 30, -------------------------------------- ----------- 1996 1997 1998 1999 ----------- ----------- ------------ ----------- Balance Sheet Data: Cash and cash equivalents............... $ -- $ -- $ 10,074 $ 1,782,194 Working capital......................... (681,532) (3,104,830) (11,149,553) (17,255,452) Total assets............................ 174,674 916,025 6,975,108 19,818,328 Due to IDT.............................. 681,532 2,960,329 11,814,988 22,000,000 Total stockholders' (deficit)........... (507,758) (2,205,305) (5,649,994) (3,926,122)
16 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 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 April 30, 1999, we had accumulated net losses of approximately $8.7 million. We will have to recognize a significant charge relating to non-cash executive compensation expense in the current fiscal quarter ending July 31, 1999, and on an ongoing basis due to accounting policies related to 5,040,000 options granted with an exercise price of $3.33 per share on May 17, 1999, including options granted to IDT employees for services rendered. These non- cash charges will be recognized over the vesting period of these options. These charges could total as high as approximately $41 million. If these charges are imposed, we would recognize a charge of $13 million in the current quarter, $10 million during fiscal 2000, $10 million during fiscal 2001 and $8 million during fiscal 2002. Sources of Revenue For the first nine months of fiscal 1999, approximately 62% of our revenue has been derived from per-minute charges we billed to our customers on a prepaid basis to use our PC2Phone service, and approximately 29% of our revenue has been derived from per-minute charges we billed to our customers and our international resellers on a prepaid basis to use our Phone2Phone service. The remainder of our revenue has been derived from the sale of Internet telephony equipment for Net2Phone Pro, a product that integrates our software into hardware for the personal computer, and for services we provide to IDT and other carriers. 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 through at least December 1999. Approximately 91% of our revenue is generated from per-minute charges we charge our customers on a prepaid basis to use our PC2Phone and Phone2Phone services. As of April 30, 1999, we served over 250,000 active customers who spent an average of approximately 60 minutes per month placing calls over the Internet. We recognize revenue as our customers utilize the balances in their prepaid accounts by placing calls. As such, we have deferred revenue for all unutilized balances in our customers' accounts. The remaining 9% of our revenue, which is derived from equipment sales and from services provided to IDT and other carriers, 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. 17 Direct Cost of Revenue Direct cost of revenue consists primarily of network costs associated with carrying and terminating our customers' traffic. These costs exclude depreciation and include: . amounts paid to other carriers to terminate traffic on a per-minute basis; . the cost of leased routers and access servers; . telecommunications costs, including the cost of local telephone lines to carry subscriber calls to our network; . the costs associated with leased lines connecting our network 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 capacity. 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 percentage of our traffic that we terminate with IDT will decline in the future as we expand our own network. Sales and Marketing. Sales and marketing includes the expenses associated with acquiring customers, including commissions paid to our sales personnel, advertising costs, referral fees and amounts paid to our strategic partners in connection with revenue-sharing arrangements. 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 Internet companies. We have strategic alliances with Netscape, Snap.com, 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 insurance, 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. We include 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 network equipment over its estimated five-year useful life using the straight-line method. We plan to acquire a domestic high capacity network to provide additional capacity to handle the expected increase in customer traffic as our business grows. In addition, we will be adding more network hardware as traffic volumes justify. We expect depreciation to increase in absolute terms as we expand our network to support new and acquired customers, but to decrease as a percentage of total revenue. We have also entered into a strategic agreement with Netscape, part of which includes the purchase of software and trademark licenses. We 18 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 working capital, its telecommunications network and for various 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 revenue for the periods indicated:
Percentage of Revenue ----------------------------------------------- Period from January 2, 1996 Year Ended Nine Months Ended (inception) July 31, April 30, to July 31, ------------- ------------------- 1996 1997 1998 1998 1999 ----------- ----- ----- -------- -------- Revenue: PC2Phone................. -- 81.8% 66.3% 63.9% 62.0% Phone2Phone.............. -- -- 16.9 12.8 29.3 Other.................... -- 18.2 16.8 23.3 8.7 ----- ----- ----- -------- -------- Total revenue........ -- 100.0 100.0 100.0 100.0 ----- ----- ----- -------- -------- Cost and expenses: Direct cost of revenue, excluding depreciation.. -- 58.6 57.0 45.1 53.4 Sales and marketing...... -- 2.9 24.1 17.1 21.4 General and administrative........... -- 98.0 42.4 40.9 32.8 Depreciation............. -- 4.5 6.1 5.3 5.5 ----- ----- ----- -------- -------- Total costs and expenses............ -- 164.0 129.6 108.4 113.1 ----- ----- ----- -------- -------- Loss from operations and net loss...................... -- (64.0)% (29.6)% (8.4)% (13.1)% ===== ===== ===== ======== ========
Comparison of Nine Months Ended April 30, 1998 and 1999 Revenue. Revenue increased approximately 178% from approximately $8.0 million for the nine months ended April 30, 1998 to approximately $22.2 million for the nine months ended April 30, 1999. Of total revenue for the nine months ended April 30, 1999, PC2Phone generated approximately $13.8 million and Phone2Phone generated approximately $6.5 million. The increase in revenue was primarily due to an increase in minutes of use resulting from additional marketing of our products and services. Specifically, revenue from PC2Phone services increased approximately 171% from approximately $5.1 million for the nine months ended April 30, 1998 to approximately $13.8 million in revenue for the corresponding nine-month period in fiscal 1999. Revenue from Phone2Phone increased approximately 550% from approximately $1.0 million for the nine months ended April 30, 1998 to approximately $6.5 million for the nine months ended April 30, 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. 19 In addition, we recognized revenue from certain amounts charged to IDT and other carriers and from equipment sales, as shown above in the category "Other." From these transactions, including monitoring IDT's network operations center for Internet customers, we recognized revenue of approximately $329,000 and $680,000 for the nine months ended April 30, 1998 and 1999, respectively. We also realized revenue from the sale of equipment, totaling approximately $1.5 million for the nine months ended April 30, 1998 as compared to equipment sales of approximately $446,000 for the nine months ended April 30, 1999. Equipment sales for the nine months ended April 30, 1999 were derived from our Net2Phone Pro product, while equipment sales for the nine months ended April 30, 1998 represented Internet telephony servers sold, on a one-time non-recurring basis, to an international Phone2Phone reseller for deployment abroad. Revenue from equipment sales, particularly revenue from sales of Internet telephony servers, reflect sales that we believe to be non-recurring and do not represent any trend. Direct Cost of Revenue, Excluding Depreciation. Total cost of revenue, excluding depreciation increased by 228% from $3.6 million for the nine months ended April 30, 1998 to approximately $11.8 million for the nine months ended April 30, 1999. As a percentage of total revenue, these costs increased from approximately 45.1% for the nine months ended April 30, 1998 to approximately 53.4% for the nine months ended April 30, 1999. This increase is primarily attributable to the fact that we sold approximately $1.5 million of equipment in the nine months ended April 30, 1998 as compared to approximately $446,000 in the nine months ended April 30, 1999. Such equipment sales have a low cost of sales associated with them. Over time, we expect direct cost of revenue to decline on a per-minute basis 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 expand our own network. As a percentage of revenue, we expect direct cost of revenue to increase as a result of a decline in per-minute charges to customers. 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 approximately 236% from approximately $1.4 million for the nine months ended April 30, 1998 to approximately $4.7 million for the nine months ended April 30, 1999. As a percentage of total revenue, these costs increased from approximately 17.1% for the nine months ended April 30, 1998 to approximately 21.4% for the nine months ended April 30, 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 approximately 121% from approximately $3.3 million for the nine months ended April 30, 1998 to approximately $7.3 million for the nine months ended April 30, 1999. As a percentage of total revenue, these costs decreased from approximately 40.9% for the nine months ended April 30, 1998 to approximately 32.8% for the nine months ended April 30, 1999. This decrease primarily reflects the efficiencies we have begun to realize from leveraging 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. However, these research and development expenses are not expected to significantly increase as a percentage of our total revenue. Depreciation. Depreciation increased from approximately $422,000 for the nine months ended April 30, 1998 to approximately $1.2 million for the nine months ended April 30, 1999. This increase is primarily attributable to the increase in capital expenditures for the deployment of network equipment both 20 domestically and internationally to manage increased call volumes. Depreciation will continue to increase as we build out our network and amortize intangibles such as our licenses and trademark rights acquired under agreements with strategic partners, including Netscape. Loss from Operations. Loss from operations was approximately $674,000 for the nine months ended April 30, 1998 as compared to loss from operations of approximately $2.9 million for the nine months ended April 30, 1999. This change is due to the substantial increase in both sales and marketing expenses as well as general and administrative expenses we incurred as we expanded our corporate infrastructure and human resources. We anticipate continued and increasing losses as we pursue our growth strategy. Comparison of Fiscal Years Ended July 31, 1997 and 1998 Revenue. Revenue increased approximately 344% from approximately $2.7 million for fiscal 1997 to approximately $12.0 million for fiscal 1998. The increase in revenue was primarily due to an increase in minutes of use 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 minutes of use due to the marketing of our Internet telephony products and services. Specifically, revenue from PC2Phone services increased approximately 264% from approximately $2.2 million in revenue for fiscal 1997 to approximately $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 approximately $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, Excluding Depreciation. Total cost of revenue, excluding depreciation increased by approximately 325% from approximately $1.6 million for fiscal 1997 to approximately $6.8 million for fiscal 1998. As a percentage of total revenue, these costs decreased from approximately 58.6% for fiscal 1997 to approximately 57.0% for fiscal 1998. This decrease is primarily attributable to the impact of the higher margin equipment sold in the first half of fiscal 1998. Since we do not expect to realize significant revenue from the sale of equipment in the future, our direct costs will reflect our ability to terminate our traffic worldwide cost-effectively 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 approximately $77,000 for fiscal 1997 to approximately $2.9 million for fiscal 1998. As a percentage of total revenue, these costs increased from approximately 2.9% for fiscal 1997 to approximately 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 approximately 96% from approximately $2.6 million for fiscal 1997 to approximately $5.1 million for fiscal 1998. As a percentage of total revenue, these costs decreased from approximately 98.0% for fiscal 1997 to approximately 42.4% for fiscal 1998. This decrease primarily reflects the efficiencies we have begun to realize from leveraging our sales and support infrastructure. We expect to continue to see further efficiencies 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. 21 Depreciation. Depreciation increased from approximately $121,000 for fiscal 1997 to approximately $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 from Operations. Loss from operations was approximately $1.7 million for fiscal 1997 as compared to approximately $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. Period from January 2, 1996 (inception) to July 31, 1996 During the period from January 2, 1996 (inception) to July 31, 1996, we did not generate any revenue. During this period, we incurred approximately $500,000 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 seven quarters ended April 30, 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, April 30, 1997 1998 1998 1998 1998 1999 1999 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Revenue: PC2Phone............... $1,371,598 $1,693,812 $ 2,019,766 $ 2,877,645 $ 3,776,777 $4,809,644 $5,188,416 Phone2Phone............ 70,939 148,572 799,324 1,011,681 1,287,415 2,280,366 2,935,916 Other.................. 825,000 905,000 120,363 162,272 599,227 412,456 913,040 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Total revenue........ 2,267,537 2,747,384 2,939,453 4,051,598 5,663,419 7,502,466 9,037,372 Cost and expenses: Direct cost of revenue, excluding depreciation.......... 602,389 1,070,051 1,916,861 3,259,458 3,353,247 3,970,504 4,524,338 Sales and marketing.... 133,963 316,141 912,956 1,524,706 1,299,903 1,691,810 1,754,603 General and administrative........ 730,893 1,073,165 1,450,229 1,833,341 1,900,234 2,286,770 3,111,102 Depreciation........... 68,169 123,844 229,635 304,860 338,469 400,584 477,659 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Total costs and expenses............ 1,535,414 2,583,201 4,509,681 6,922,365 6,891,853 8,349,668 9,867,702 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Income (loss) from operations and net income (loss).......... $ 732,123 $ 164,183 $(1,570,228) $(2,870,767) $(1,228,434) $ (847,202) $ (830,330) ========== ========== =========== =========== =========== ========== ========== As a Percentage of Revenue ----------------------------------------------------------------------------------------- Revenue: PC2Phone............... 60.5% 61.7% 68.7% 71.0% 66.7% 64.1% 57.4% Phone2Phone............ 3.1 5.4 27.2 25.0 22.7 30.4 32.5 Other.................. 36.4 32.9 4.1 4.0 10.6 5.5 10.1 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost and expenses: Direct cost of revenue, excluding depreciation.......... 26.6 38.9 65.2 80.4 59.2 52.9 50.1 Sales and marketing.... 5.9 11.5 31.1 37.6 23.0 22.6 19.4 General and administrative........ 32.2 39.1 49.3 45.2 33.6 30.5 34.4 Depreciation........... 3.0 4.5 7.8 7.5 6.0 5.3 5.3 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Total costs and expenses............ 67.7 94.0 153.4 170.7 121.8 111.3 109.2 ---------- ---------- ----------- ----------- ----------- ---------- ---------- Income (loss) from operations and net income (loss).......... 32.3% 6.0% (53.4)% (70.7)% (21.8)% (11.3)% (9.2)% ========== ========== =========== =========== =========== ========== ==========
22 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. We expect our revenue to grow over time as minutes of use increase. However, we may experience declines in average revenue per minute due to competitive pressures, promotions and marketing initiatives, increased commissions paid to our international resellers and increased amounts paid to our strategic partners under existing and future revenue-sharing arrangements. Since we derive revenue from more than one source, we have experienced volatility in our direct costs of revenue. Specifically, our direct cost of revenue in the first two quarters of fiscal 1998 were low as a percentage of total revenue due to sales of equipment in these quarters. 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 approximately 26% of total revenue in the latter half. We experienced start-up costs for Phone2Phone that increased our direct cost of revenue for those two quarters. However, we have been able to reduce direct cost of revenue for our Phone2Phone product as we expanded our network in the first three quarters of fiscal 1999, which resulted in lower direct cost of revenue. In the most recent quarter, direct cost of revenue as a percentage of revenue accounted for approximately 50% as compared to approximately 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 cost of revenue 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, capacity 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 advances from IDT. During the nine months ended April 30, 1999 we also received capital contributions from IDT of approximately $4.6 million. As of April 30, 1999, we had approximately $1.8 million in cash and cash equivalents. In May 1999 we raised net proceeds of approximately $29.9 million from the sale of Series A convertible preferred stock and warrants. Our operating activities generated negative cash flow of approximately $409,000 in the nine months ended April 30, 1998 compared to negative cash flow of approximately $4.0 million in the nine months ended April 30, 1999. Cash used in investing activities was approximately $4.2 million and approximately $9.0 million for the nine months ended April 30, 1998 and 1999, respectively. Our use of cash in investing activities was principally for the purchase of telecommunications and Internet equipment and for the purchase of a trademark in the 1999 period. In May 1999, we received $29.9 million in net proceeds from the sale of our Series A convertible preferred stock and warrants. We applied a portion of the net proceeds from this sale to repay $8.0 million of the $22.0 million of advances from IDT that were outstanding as of April 30, 1999. The remaining $14.0 million due to IDT was converted into a promissory note in May 1999. Our principal commitments following the closing of this offering are expected to consist of: . the repayment of $7.0 million with respect to the $14.0 million note due to IDT; . the payment of $1.5 million to NBC for television advertising time; 23 . the $7.0 million note described above, which is payable to IDT in 60 monthly installments of principal and interest at a rate of 9% per annum, commencing in June 1999; . the acquisition of a new network with expanded capacity from IDT in exchange for a $6.0 million note, payable in 60 monthly installments of principal and interest at a rate of 9% per annum; . other costs relating to network equipment and expansion; and . payments to Internet companies in connection with marketing our products and services, which as of April 30, 1999, were approximately $15 million. 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 or after 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. In connection with IDT's review of its own operations and the operations of its subsidiaries, we have conducted a comprehensive review of the computer hardware and software that we use in order 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 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. Our plan to ensure Year 2000 compliance consisted of the following phases: . conducting a comprehensive inventory of internal 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 systems used by us is unexpectedly affected by a previously unanticipated Year 2000 problem. We have substantially completed each of these phases, and believe that our internal systems are Year 2000 compliant. 24 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 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 or unforeseen Year 2000 problems. We believe that, in the event that one or more of our systems, or the systems of third parties with which we do business, 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. Most of our internal systems were developed after developers became aware of Year 2000 problems. To date, we have not incurred material expenses in connection with the remediation of Year 2000 related issues. We do not expect to incur significant costs in connection with Year 2000 related issues. However, our actual costs may be significant if we discover that any major portion of our internal systems requires unforeseen remediation. 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. 25 BUSINESS Overview Net2Phone is a leading provider of services enabling users to make high- quality, low-cost telephone calls over the Internet. This service is commonly referred to as Internet telephony. Our Internet telephony services enable our customers to call individuals and businesses worldwide 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 agreements to include our software with products sold by our strategic partners. In January 1999, Netscape agreed to embed our PC2Phone software on an exclusive basis 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, Excite, InfoSpace.com, Snap.com, Yahoo! and ZDNet. We have also entered into arrangements with leading computer equipment and software companies, such as IBM, Compaq, Packard Bell-NEC Europe and Creative Labs to include our software with their products. We promote our services through direct sales and marketing and through international 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 April 30, 1999, we served over 250,000 active customers who made an average of approximately 60 minutes of calls per month and handled over 20 million minutes of use per month. Our net loss increased from approximately $500,000 in fiscal 1996 and $1.7 million in fiscal 1997 to $3.5 million in fiscal 1998. Our total assets increased from $916,000 at July 31, 1997 to $7.0 million at July 31, 1998. 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 nine months ended April 30, 1999 was approximately $22.2 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. Instant text communication through online "chat" rooms is also gaining widespread acceptance. 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 billion of goods and services in 1998. International Data Corporation projects that commerce over the Internet will to grow to approximately $1.3 trillion in 2003. 26 Emergence of Internet Telephony TeleGeography, a market research firm, estimates that the international long distance market will grow to $79 billion in 2001, with consumers and businesses making an estimated 143 billion minutes of international long distance calls. Despite the large size of this market and the number of minutes of calls made, traditional international long distance calls 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. Internet telephony has emerged as a low cost alternative to traditional long distance calls. International Data Corporation projects that the Internet telephony market will grow rapidly to over $23.4 billion in 2003, from approximately $1.1 billion in 1998. Internet telephone calls are less expensive than traditional international long distance calls primarily because these calls are carried over the Internet or our network and therefore bypass a significant portion of international long distance tariffs. The technology by which Internet phone calls are made is also more cost-effective than the technology by which traditional long distance calls are made. We use a technology called "packet-switching" to break voice and fax calls into discrete data packets, route them over the Internet or our network and reassemble them into their original form for delivery to the recipient. Traditional international long distance calls, in contrast, are made using a technology called "circuit switching" which carries these calls over international voice telephone networks. These networks are typically owned by governments or carriers who charge a tariff for their use. Circuit switching requires a dedicated connection between the caller and the recipient that must remain open for the duration of the call. As a result, circuit-switching technology is inherently less efficient than packet-switching technology which allows data packets representing multiple conversations to be carried over the same line. 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 live voice capabilities 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 live, secure, low-cost or free voice 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 in order 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 opportunities to sell higher margin and additional products to these customers. Voice-enabling a commercial Web site may also give online retailers the ability to provide more responsive customer support and service. Integrating live voice capabilities into the Web would also enable Internet companies 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 companies 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 these Internet companies to attract advertisers and secure higher advertising rates, thereby increasing revenue. 27 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 network capacity limitations. However, recent improvements in packet-switching 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 network capacity constraints. Finally, the emergence of new, lower cost Internet access technologies, such as high-speed modems, are addressing local Internet access 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 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 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 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 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 from any 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, 28 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 design. This design allows us to expand our network and add capacity 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 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 customer billing software 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 readily available worldwide on the Internet and to develop and market online commerce and related products. Our strategy includes the following key elements: . Drive Usage through Resellers and Strategic Partners. 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 Web site. We also intend to explore the availability of revenue-sharing opportunities with online retailers. . 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 Readily Available Worldwide. 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 29 Internet browser and a Net2Phone icon will be prominently positioned next to AOL's Instant Messenger icon on the Netscape Navigator Personal Tool Bar. In addition, our software is included with IBM's Internet services and may be pre-loaded on computers sold by Compaq internationally. 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, . 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 and 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 . video conferencing 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. These relationships typically include arrangements under which we share with our strategic partners a portion of the revenue they bring to us. We believe that these relationships are important because they provide incentive to our partners and 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 PC2Phone software on an exclusive basis 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 online 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. 30 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 In 1998 we signed an agreement with Yahoo!, which was recently renewed through 2000. 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 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! Additionally, we have contracted with Yahoo! to integrate our PC2Phone service into Yahoo!'s Yellow Pages and White Pages online directories. Our Web-based Internet telephony software is also 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 Web site, 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: . Compaq. Our software is featured as a download from a special Compaq Web site accessible directly from the Compaq-branded keyboard, may be pre- installed on Compaq-branded computers distributed internationally and may be included with their other products. . Snap.com. Promotions for our services and a link to our Web site will be prominently displayed on the Snap.com Web site, and we are their preferred provider of PC-to-phone services. . 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. 31 Product/Service Description Benefits - -------------------------------------------------------------------------------- Basic Internet Telephony Services: . Enables customers to . International long . Phone2Phone make calls over distance rates are traditional telephones typically 50% to . Fax2Fax and fax machines routed 70% lower than the over the Internet. rate charged by . Net2Phone Pro Customers must dial traditional long a local or domestic distance carriers toll-free access for calls number to access originating in the the Net2Phone network. United States, and up to 95% lower for . Customers are charged calls originating for toll and long outside the United distance calls on a States. per-minute basis. There is no charge for . Users do not need calling United States to purchase and Canadian toll-free expensive hardware numbers. or software. . Available in the United . High voice quality. States and in many international locations. . Faxes are transmitted without . We market Phone2Phone delay and users under the brand receive immediate "Net2Phone Direct." delivery confirmations. - -------------------------------------------------------------------------------- Web-based Internet Telephony Services: . Enables customers to . Services are . PC2Phone make calls and send available to any faxes over the Internet Internet user with . Click2Talk using their personal a sound-equipped computers. Customers personal computer. must install our . PC2Fax 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 a 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. . Facilitates online commerce by providing live 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 . A Web-based shopping . Enables voice directory powered by communications with our Web-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. ------------------------------------------------------------------------------ 32 Sales, Marketing and Distribution We distribute our software through the Internet, strategic partnerships 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 IBM, Compaq, Packard Bell-NEC Europe and Creative Labs. Our software is included with our partners' products and services and distributed domestically and internationally. We expect to distribute over 25 million units of our software in 1999 as a result of these and other distribution arrangements. We promote our services through online and Internet-based advertising venues and traditional print advertising in domestic and international publications. We will also be advertising our services on the NBC television network. 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 goal to attract and retain customers, we offer free live customer support in multiple languages. We employ approximately 67 customer service representatives, who offer 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 customer billing software 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 Our PC2Phone software is simple to install and to use and has won various industry awards. The 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. Our software 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. Our PC2Phone software has gone through fourteen releases, each improving upon our Internet telephony capabilities. The software 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 release of our software can record and play sound files allowing us to deliver voice-mail services and can interface with third party PC mail software applications such as Eudora and Microsoft Outlook. 33 We also have developed a software development kit allowing other companies to quickly and easily integrate their products with our PC2Phone software. For example, our services have been successfully integrated with Quicknet's line of sound cards and telephone interface cards. This integration enables Internet telephony service to be deployed through inexpensive equipment currently used 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 online customer registration and customer registration through call centers and resellers. It also provides online credit card authorization and batch billing capabilities that streamline customer registration. A special remote access application program allows other people access to our database, enabling sophisticated partners to remotely service customers through our system, and to tie 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 simultaneous calls using the same account, pin code verification and call duration timers. We also generate reports on suspicious calling patterns to detect caller registration fraud. We routinely scan for fraudulent content before credit card purchases are allowed. . Network Security. Firewalls are employed to prevent attacks on our network. We use sophisticated techniques to safeguard sensitive database information. In addition, we encrypt call requests and portions of the call 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. 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. We are able to track potential problems such as too many short calls on a server or a low percentage of call completions. The system also provides remote management that allows partners to monitor and manage their own accounts. . Reliability. We maintain two separate network operations centers in Hackensack and Lakewood, New Jersey. These facilities house redundant equipment and have the ability to track calls simultaneously. 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 point at which the call enters and exits our network, the account owner, the calling party, the server/service phone number, the number of the called party, a running account balance, and rate and billing information, including surcharges. 34 The Net2Phone Network Through an agreement with IDT, we lease capacity on an Internet network comprised of leased high-speed fiber optic lines connecting eight major cities across the United States, and lease high-speed 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 hardware including Cisco Series 7000 routers and Nortel Passport switches. Our high-speed backbone connects traffic at four major public Internet exchange points and is also facilitated by a growing number of private peering or exchange points with other networks. 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 locations. Our Internet network also includes more than 700 additional network access locations 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 network access points in a number of states in order to consolidate our equipment into central "Super Point of Presence" locations. For example, one Super 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. [diagram illustrating the routing of traffic over the Net2Phone network] We seek to retain flexibility by utilizing dynamic call 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, our network employs an "Open Shortest Path First" protocol that promotes efficient routing of traffic. Additionally, we have placed redundant hardware for reliability in high traffic areas to minimize loss of data packets. Each network data exchange point employs hardware to direct network traffic and a minimum of two dedicated leased data lines to further increase reliability. We manage our network hardware remotely. It is compatible with a variety of local network systems around the world. We believe our Internet telephony network can currently support approximately 5,000 simultaneous calls. We believe our systems are scalable to 10 times their current capacity through the purchase and installation of certain additional hardware. To date, the highest number of simultaneous calls serviced by our network was approximately 1,660 simultaneous calls made on Father's Day in June 1999. 35 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. Their key objective is to provide quality service upon which customers can rely. Our monitoring group oversees a nationwide real-time network analysis map, which notifies our staff of network errors. They also use software we developed to monitor our hardware around the world. This group can dynamically turn on or turn off equipment and re-route Internet telephony traffic, as necessary. Customers We have a diverse, global customer base. As of April 30, 1999, approximately 65% of our customers are based outside of the United States. As of April 30, 1999, we served over 250,000 active customers who had used our services during the preceding three months. In addition, as of June 25, 1999, we had installed the Click2Talk service on approximately 150 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 route calls through Internet service providers, which allows us to bypass the international settlement process and realize substantial savings compared to traditional telephone service. Any change in the regulation of an Internet service provider could force us to increase prices and offer rates that are comparable to traditional telephone call 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 36 its Delta Three subsidiary) and VIP Calling provide a range of voice- over-the-Internet services. These companies offer PC-to-phone or phone- to-phone services that are similar to the services we offer. Some, such as AT&T Jens and OzEmail, offer these services within limited geographic areas. Additionally, a number of companies have recently introduced Web- based voice-mail services and voice-chat services to Internet users. . 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 rely on the public Internet for the transmission of traffic, which often results in reduced quality of communications. Representative companies include VocalTec and Netspeak. We believe VocalTec's software and hardware are unable to handle large numbers of simultaneous calls. Netspeak focuses on delivering solutions targeted at traditional call centers that require significant customization. . Telecommunications Companies. A number of telecommunications companies, including AT&T, Deutsche Telekom, MCI WorldCom and Qwest, 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 on the cable market and it is unclear if it will continue to pursue voice over the Web. Qwest has taken steps to enter the market by building a high capacity network in the United States. In addition, Qwest has also entered into a three-year strategic alliance with Netscape to provide one-stop access to Internet services including long distance calling, e-mail, 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, Lucent, Northern Telecom and Dialogic (which has entered into an agreement to be acquired by Intel) 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 hardware and software to market their systems to end users. Cisco currently manufactures Internet telephony equipment for low to medium scale networking, but does not manufacture high-end Internet telephony equipment for large networks. However, Cisco recently acquired two companies that produce devices to help Internet service providers transition voice and data traffic to packet networks while maintaining traditional phone usage and network equipment. Lucent has recently co-developed with VocalTec a set of industry standards that have been adopted by major competitors and is currently marketing Internet telephony hardware, including servers that allow the transmission of calls and faxes over the Internet. 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. 37 Research and Development Strategic Research and Development At our primary research and development center in Lakewood, New Jersey, we currently employ 12 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 customer billing software and call management system to increase the capacity of these systems, improvements to our Internet telephony hardware to increase capacity and modifications to our PC2Phone 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. We incurred $473,000 and $481,000 in product development expenses during fiscal 1997 and fiscal 1998, respectively. For the nine months ended April 30, 1999, we incurred product development expenses of $466,000. 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 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 Web site 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. 38 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 Nebraska and Colorado 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 these 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 39 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 standards 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 business and have applications pending to register several other service marks relating to our 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 that 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 litigation relating to intellectual property rights could materially adversely affect our business, results of operations and financial condition. In addition, one of our international resellers, 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 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 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 hardware 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. 40 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. We have been assigned the rights to patent applications claiming a number of the technologies underlying our products and services. Our two United States patent applications have 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 upon the proprietary rights of others or have licensed all such rights. We have not requested or obtained an opinion from our outside counsel as to whether our products and services infringe upon the intellectual property rights of any third parties. 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 31, 1999, we had approximately 171 full-time employees, including approximately 66 in technical support and customer service, 26 in sales and marketing, 20 in management and finance, 47 in operations, and 12 in research and development. Our employees are not represented by any union, and we consider our employee relations to be good. We have never experienced a work stoppage. 41 Properties Our primary facilities consist of approximately 15,445 square feet, which comprise our headquarters, executive offices and customer service and technical support centers, and are located in two buildings in Hackensack, New Jersey leased from corporations that are owned and controlled by Howard S. Jonas. Mr. Jonas is one of our directors, a director of IDT and the controlling stockholder 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 space for some of our computer equipment in Piscataway, New Jersey from IDT, which leases this space from a company also owned and controlled by Mr. Jonas. This lease runs for a three-year term, beginning in May 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. 42 MANAGEMENT Executive Officers, Directors and Key Employees The following persons are our executive officers, directors and director nominees:
Name Age Position ---- --- -------- Clifford M. Sobel......... 49 Chairman of the Board and President Howard S. Balter.......... 37 Chief Executive Officer and Vice Chairman of the Board David Greenblatt.......... 47 Chief Operating Officer Ilan M. Slasky............ 29 Chief Financial Officer H. Jeff Goldberg.......... 46 Chief Technology Officer Jonathan Reich............ 33 Executive Vice President- Marketing and Corporate Development Martin Rothberg........... 30 Executive Vice President- Strategic Sales Jonathan Rand............. 36 Executive Vice President- International Sales and Treasurer Howard S. Jonas........... 43 Director James A. Courter.......... 57 Director Gary E. Rieschel.......... 43 Director James R. Mellor........... 69 Director Stephen A. Oxman.......... 54 Director Nominee Raphael S. Grunfeld....... 52 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 and its subsidiary, 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 October 1997, our Chief Executive Officer since January 1999, and our Vice Chairman of the board of directors since May 1999. Mr. Balter also served as our Treasurer from October 1997 to January 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 1999. From 1985 to 1993, Mr. Balter operated his own real estate development firm. David Greenblatt has been our Chief Operating Officer since January 1999. Between January 1998 and January 1999, Mr. Greenblatt served as IDT's Vice President of Networks, during which time he was primarily responsible for the operations of Net2Phone. 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 has 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. 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 areas of finance, including risk management, fixed income trading and equity derivatives. 43 H. Jeff Goldberg has been our Chief Technology Officer since January 1999. From January 1996 to January 1999, 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, including service as Senior Vice President--International Sales and Senior Vice President--Finance. Additionally, Mr. Rand is a co-founder and director of the International Internet Association. 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. Howard S. Jonas was appointed a director in October 1997. Mr. Jonas founded IDT in August 1990 and has served as Chairman of the Board and Treasurer since its inception and as Chief Executive Officer since December 1991. Additionally, he served as President of IDT from December 1991 through September 1996. Mr. Jonas is also the founder and has been President of Jonas Publishing Corp., a publisher of trade directories, since its inception in 1979. 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. Gary E. Rieschel was appointed a director in June 1999. 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. James R. Mellor was appointed a director in June 1999. Mr. Mellor served as a director of IDT between August 1997 and June 1999. Since 1981, Mr. Mellor worked for General Dynamics Corporation, a developer of nuclear submarines, surface combatant ships and combat systems. From 1994 until 1997, Mr. Mellor served as Chairman and Chief Executive Officer of General Dynamics, and from 1993 to 1994, he served as President and Chief Operating Officer of General Dynamics. Before joining General Dynamics, Mr. Mellor served as President and Chief Operating Officer of AM International, Inc. now Multigraphics, Inc. Before 44 that time, Mr. Mellor spent 18 years with Litton Industries in a variety of engineering and management positions, including Executive Vice President in charge of Litton's Defense Group from 1973 to 1997. Stephen A. Oxman is expected to become a director after the closing of this offering. Mr. Oxman currently serves as a managing director in the mergers, acquisitions and corporate advisory group of Deutsche Bank Securities Inc., an affiliate of BT Alex. Brown Incorporated. He heads the group's telecommunications practice and also focuses on the firm's work in Europe. In 1995, Mr. Oxman became a partner in the investment banking firm of James D. Wolfensohn Incorporated, which merged in 1996 with Bankers Trust, which in turn merged with Deutsche Bank in 1999. From 1993 to 1994, Mr. Oxman served as Assistant Secretary of State for European and Canadian Affairs. From 1988 to 1993, Mr. Oxman was a managing director of Wasserstein Perella & Co. and Deputy Chairman of Wasserstein Perella International. From 1980 to 1988, he was a partner in the law firm of Shearman & Sterling. During the Carter administration, Mr. Oxman was Executive Assistant to the Deputy Secretary of State, and subsequently a consultant to the Secretary of State concerning the Iran hostage crisis. Raphael S. Grunfeld is expected to become a director after the closing of this offering. Mr. Grunfeld has served as a partner in the Corporate Department of Morrison & Forester LLP since May 1999. Since November 1995, Mr. Grunfeld has served as General Counsel and Secretary of Genesis Direct, Inc., a catalog and Internet direct marketer. He also served as Vice President of Genesis Direct from November 1995 until March 1999. From 1992 to 1995, Mr. Grunfeld was General Counsel and Secretary of First Capital Asset Management, Inc. and its operating subsidiaries, including newspaper, media, money management and broker dealer companies. From 1992 to 1994 he also served as Executive Vice President, General Counsel and Secretary to DSI Industries, Inc., a public holding company, and to its operating subsidiaries engaged in the businesses of medical diagnostic imagery, oil drilling equipment leasing and plant nurseries. In addition, we employ the following additional key employees: 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 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. Mr. Greenstein has testified as an expert in the U.S. securities laws in U.S. District Court. 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. 45 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. Two additional individuals have been nominated to serve as directors. We also anticipate that one additional director will be elected after the closing of this offering. 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. All of the officers identified above serve at the discretion of our board of directors. IDT and Clifford M. Sobel, our Chairman and President, have 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 either GE Capital Equity Investments or NBC, in each case for as long as either entity holds a majority of the shares of Series A convertible preferred stock originally purchased by them or the shares into which they are convertible. Gary E. Rieschel was nominated to our board by Softbank. Neither GE nor NBC has nominated a director. We have established an audit committee and a compensation committee, the initial member of each of which will be James R. Mellor. We expect to appoint one or more additional directors to each of these committees after the closing of this offering. The audit committee oversees 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 reviews and approves the compensation of our executive officers, including payment of salaries, bonuses and incentive compensation, determines our compensation policies and programs, and administers 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 corporate secretary at our principal executive offices. Executive Compensation The following table identifies our most highly compensated executive officers whose salaries and bonuses exceeded $100,000 during fiscal 1998 and who served as executive officers of Net2Phone during fiscal 1998. Our Chief Executive Officer, Howard S. Balter was employed as the Chief Operating Officer and Vice Chairman of IDT during fiscal 1998 and did not serve as an executive officer of Net2Phone during fiscal 1998. All of the named executive officers listed below were compensated by IDT during fiscal 1998. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ------------------ -------------- Securities Name and Principal Fiscal Underlying All Other Position Year Salary($) Bonus($) IDT Options(#) Compensation($) - ------------------ ------ --------- -------- -------------- --------------- Clifford M. Sobel(1).... 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
- --------------------- (1) Mr. Sobel served as our Chief Executive Officer from October 1997 to January 1999. 46 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 % of at Number of Total Assumed Annual Securities Options Rates of Stock Under- Granted Price lying IDT to Exercise Appreciation Options Employees of for Option Term 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
Value of IDT 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 Value of Unexercised Number of Underlying Unexercised in-the-Money Shares Options at Fiscal Year-End Options at Fiscal Year-End Acquired on --------------------------- ----------------------------- Names Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable (1) - ----- ----------- -------------- --------------------------- ----------------------------- Clifford M. Sobel(2).... 100,000 $1,701,500 100,000/875,000 $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 IDT's common stock on July 31, 1998, as reported on the Nasdaq National Market, was $24.25 per share. (2) Mr. Sobel has an option that may be exercised beginning in September 1999, to transfer his shares of Net2Phone to IDT in exchange for an option to acquire 875,000 shares of IDT common stock at a purchase price of $6.50 per share. Mr. Sobel will be prohibited by an agreement with the underwriters from exercising this option during the 180-day period following the date of this prospectus. 47 Value of Net2Phone Options at Year End The following table describes the value of Net2Phone options exercised in fiscal 1998 and the value of unexercised options held by Clifford M. Sobel, our Chairman and President, at July 31, 1998. None of the other individuals named in the Summary Compensation Table were granted options to purchase shares of Net2Phone prior to fiscal 1999.
Number of Securities Value of Unexercised Number of Underlying Unexercised in-the-Money Shares Options at Fiscal Year-End Options at Fiscal Year-End Acquired Value ---------------------------- ---------------------------- Names Exercise Realized(1) Exercisable/Unexercisable(2) Exercisable/Unexercisable(2) - ----- --------- ----------- ---------------------------- ---------------------------- Clifford M. Sobel....... 3,096,000 $ 0 0/347,865 0/--
- --------------------- (1) For purposes of this table, the per share value of each share of Net2Phone common stock in January 1998 is assumed to be $.03 per share, based upon a valuation report prepared by an independent appraiser. (2) Mr. Sobel 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. Mr. Sobel does not currently own any options to purchase shares of Net2Phone. 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, other than non- employee directors who serve as officers of IDT. 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% of our total outstanding capital stock 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 transferred to a trust for the benefit of his offspring. Mr. Sobel will be prohibited by an agreement with the underwriters from exercising this option during the 180-day period following the date of this prospectus. 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. Under the plan, our officers, directors, key employees and consultants, together with those of IDT and its subsidiaries, are eligible to 48 receive awards of stock options, stock appreciation rights, limited stock appreciation rights and 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 11,040,000 shares of common stock have been authorized to date for issuance under the plan, 5,040,000 of which were granted through June 21, 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. Additional options to purchase 6,996 shares were cancelled in connection with the termination of the employment of four grantees. We expect to grant options to purchase approximately 2,011,000 additional shares of our common stock upon the consummation of this offering. The 1999 Stock Option and Incentive Plan is administered by the compensation committee of our board. Subject to the provisions of the plan, the board of directors or the compensation committee 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 and kind of consideration payable with respect to awards. The board of directors or the compensation committee 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 may take into account the duties of the respective persons, their present and potential contribution to our success and other relevant factors. Stock Options. An option may be granted on the terms and conditions as the board of directors or the compensation committee 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 on the date of grant. Additional limitations will apply to incentive stock options granted to a grantee that beneficially holds 10% or more of our voting stock. The board of directors or compensation committee 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 the conditions determined by the board of directors or the compensation committee. To date, the options that have been granted to our executive officers will generally vest automatically in the event that there is a change of control of our company, if we are merged into another company or if any of these individuals are employed by a subsidiary of our company that is sold to another company. The 1999 Stock Option and Incentive Plan provides for automatic option grants to eligible non-employee directors. Options to purchase 10,000 shares of common stock will be granted to each eligible non-employee director upon consummation of this offering and options to purchase 10,000 shares of common stock will be granted to each new eligible non-employee director upon the director's initial election to the board. In addition, options to purchase 10,000 shares of common stock are granted annually to each eligible non- employee director on the anniversary date of his or her election to the board. Each of these 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; and . 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 to grant stock appreciation rights and/or limited stock appreciation rights with respect to all or any portion of the shares of 49 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. 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, 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. Limited stock appreciation rights may be exercised only during the 90 days following a change in control, or a merger or similar transaction, involving Net2Phone. Upon exercise of a limited stock appreciation right, a grantee will receive, for each share for which a limited stock appreciation rights is exercised, an amount in cash equal to the excess of the highest fair market value of a share of our common stock during the 90-day period ending on the date of the limited stock appreciation rights is exercised, or an amount equal to the highest price per share paid for shares of our common stock in connection with a merger or a change of control of Net2Phone, whichever is greater, over the exercise price per share of the option to which the limited stock appreciation rights 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. 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 a period of time determined by the compensation committee or the board of directors. The board or the compensation committee may also impose other conditions and restrictions on the shares as it deems appropriate, including the satisfaction of performance criteria. All restrictions affecting the awarded shares will lapse in the event of a merger or similar transaction involving Net2Phone. The board may amend or terminate the 1999 Stock Option and Incentive Plan. However, as required by any law, regulation or stock exchange rule, no change shall be effective without the 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. Compensation Committee Interlocks and Insider Participation. We did not have a compensation committee during fiscal 1998. Compensation decisions relating to our executive officers, key employees and other senior personnel were made primarily by IDT, which owned all of our outstanding capital stock at the beginning of fiscal 1998. During fiscal 1998, Howard S. Jonas, who was serving as our chairman, and Howard S. Balter, who was serving as our treasurer, also served as directors of IDT. 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) of the Internal Revenue Code. We intend that most of our employees will be eligible to participate in our 401(k) Savings and Retirement Plan upon adoption. 50 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership of our outstanding common stock as of June 25, 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 named executive officers, directors and director nominees as a group. Except as otherwise indicated, all of the shares indicated in the table are shares of common stock.
Percentage Number of Shares Beneficially Beneficially Owned Owned(1) --------------------- ----------------- Prior to After Prior to After Holders Offering Offering Offering Offering - -------------------------------------- ---------- ---------- -------- -------- IDT Corporation(2).................... 27,622,089 27,216,297 66.2% 58.2% 190 Main Street Hackensack, New Jersey 07601 Howard S. Jonas(3).................... 27,622,089 27,216,297 66.2% 58.2% c/o IDT Corporation 190 Main Street Hackensack, New Jersey 07601 James A. Courter(4)................... 27,658,089 27,252,297 66.2% 58.2% c/o IDT Corporation 190 Main Street Hackensack, New Jersey 07601 SOFTBANK Technology Ventures IV, L.P.(5).............................. 4,590,000 4,590,000 11.0% 9.8% 333 West San Carlos Street, Suite 1225 San Jose, California 95110 Gary E. Rieschel(6)(7)................ 4,590,000 4,600,000 11.0% 9.8% c/o SOFTBANK Technology Ventures IV, L.P. 333 West San Carlos Street, Suite 1225 San Jose, California 95110 Clifford M. Sobel(8).................. 3,337,911 3,743,703 8.0% 8.0% c/o Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 America Online, Inc.(9)............... 2,295,000 2,295,000 5.5% 4.9% 22000 AOL Way Dulles, Virginia 20166 General Electric Company Group(10).... 2,295,000 2,295,000 5.5% 4.9% 120 Long Ridge Road Stamford, Connecticut 06927 Howard S. Balter(7)(11)............... 714,978 782,028 1.7% 1.7% David Greenblatt(7)(12)............... 105,840 135,840 * * H. Jeff Goldberg(7)(13)............... 105,840 120,840 * * James R. Mellor(7).................... -- 10,000 * * Stephen A. Oxman(7)................... -- 10,000 * * Raphael S. Grunfeld................... -- -- * * Officers, Directors and Director Nominees as a Group (14 Persons)(14)..................... 36,583,128 36,778,178 87.7% 78.3%
51 - --------------------- * Less than one percent. (1) Percentage of beneficial ownership prior to this offering is based on 4,683,129 shares of common stock and 27,622,089 shares of Class A stock outstanding at June 25, 1999 plus 9,420,000 shares of Class A stock issuable upon conversion of the Series A convertible preferred stock at the same date and the exercise of 272,400 warrants to purchase our common stock. Percentage of beneficial ownership after this offering is based on 46,797,619 total shares outstanding, which includes all shares outstanding prior to this offering, plus 4,800,000 shares of common stock to be sold 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. (2) All of the shares held by IDT are Class A stock. IDT has pledged its shares 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 capital stock drops below 50% of the capital 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. In addition, in connection with the employment agreement between IDT, Mr. Sobel and Net2Phone, IDT will transfer to Mr. Sobel the number of shares of stock upon consummation of this offering that is necessary to maintain Mr. Sobel's percentage ownership of our outstanding stock, together with a trust for the benefit of his offspring, at 8%. (3) Howard S. 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. Mr. Jonas disclaims beneficial ownership of these shares. (4) James A. Courter, one of our directors, is the President, Vice Chairman and a director of IDT. As a result, in addition to the 36,000 shares of our common stock that he holds directly, he may be deemed to be the beneficial owner of the shares of Net2Phone capital stock owned by IDT. Mr. Courter disclaims beneficial ownership of these additional shares. (5) Includes 4,415,400 shares of Class A stock and 88,308 shares of common stock issuable upon conversion of shares of Series A convertible preferred stock and presently exercisable warrants, respectively, that have been issued to SOFTBANK Technology Ventures IV, L.P. Also includes 84,600 shares of Class A stock and 1,692 shares of common stock issuable upon conversion of shares of Series A preferred stock and presently exercisable warrants, respectively, that have been issued to SOFTBANK Technology Advisors Fund L.P. (6) Gary E. Rieschel is the Executive Managing Director of SOFTBANK Technology Ventures, and as a result, he may exercise the power to vote and to dispose of the shares held by SOFTBANK. (7) Shares owned after the offering include 10,000, 67,050, 30,000, 15,000, 10,000 and 10,000, shares of common stock that will be issuable upon the exercise of stock options that we expect to issue to Messrs. Rieschel, Balter, Greenblatt, Goldberg, Mellor and Oxman, respectively, upon the closing of this offering that will be immediately exercisable. (8) Clifford M. 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. In addition, in connection with the employment agreement between IDT, Mr. Sobel and Net2Phone, IDT will transfer to Mr. Sobel the number of shares of stock upon consummation of this offering that is necessary to maintain Mr. Sobel's percentage ownership of our outstanding stock, together with a trust for the benefit of his offspring, at 8%. (9) Includes 2,250,000 shares of Class A stock and 45,000 shares of common stock issuable upon conversion of shares of Series A convertible preferred stock and issuable upon exercise of presently exercisable warrants, respectively. (10) Includes 1,125,000 of Class A stock issuable upon conversion of shares of Series A convertible preferred stock that are held of record by GE Capital Equity Investments, Inc., which shares beneficial ownership with its parent General Electric Capital Corporation, which is a wholly-owned subsidiary of the General Electric Company. Also includes 1,125,000 shares of Class A stock issuable upon exercise of shares of Series A convertible preferred stock that are beneficially owned by NBC, a wholly-owned indirect subsidiary of the General Electric Company, of which 300,000 shares are issuable upon conversion of shares of Series A convertible preferred stock that are held of record by Snap! LLC, an Internet portal service of NBC and CNET, Inc. Includes 22,500, 16,500 and 6,000 shares of common stock issuable upon exercise of warrants held by GE Capital Equity Investments, NBC and Snap! LLC, respectively. (11) 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 183,840 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. (12) 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. (13) 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. (14) Includes the shares of Class A stock held by IDT and the shares of Class A stock and the shares of common stock issuable upon exercise of presently exercisable warrants held by SOFTBANK. Also includes 195,050 shares of common stock that will be granted to our directors and executive officers upon the closing of this offering. 52 CERTAIN TRANSACTIONS We believe that all of the transactions set forth below 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. Relationship with IDT Upon the closing of this offering, IDT will own approximately 58.2% of our capital stock. IDT owns Class A stock that has twice the voting power of our common stock. Therefore, upon the closing of this offering, IDT will control 65.2% of our vote. Since inception, we have received various services from IDT, including administration (accounting, human resources, legal), customer support, 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. 53 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 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 convertible 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 54 IDT's 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. 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 customer who incurs and pays $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 high-speed network. We have the right to terminate portions of the existing network to the extent that the existing network is replaced, the underlying leases expire or at anytime with IDT's consent. 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 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; 55 . for each dedicated-line Internet customer, the lesser of $100.00 or 20% of the fee IDT charges; 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. 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 Net2Phone. 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 controversial matters 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 may 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 56 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. Payable to IDT. Since inception, IDT has provided the funds to finance our operations in the form of advances (approximately $22.0 million as of April 30, 1999, of which we repaid $8.0 million in May 1998). 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 is payable in 60 monthly installments of principal and interest at a rate of 9% per annum. 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, 3,140,000 shares of Series A convertible preferred stock and warrants to purchase 180,000 shares of our common stock, which expire upon the closing of this offering, for a 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 convertible 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 the consummation of this offering. This demand registration right may be made by one or more holders of the Series A convertible preferred stock that own at least 50% of the shares of Class A stock into which the Series A convertible 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 Class A stock into which the Series A convertible 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. 57 Stockholders Agreement IDT and Clifford M. 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 or NBC, in each case for as long as either entity holds a majority of the shares of Series A convertible preferred stock originally purchased by them or the shares into which they are convertible. In addition, each Series A convertible 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. Agreements with NBC We signed an agreement with NBC on June 25, 1999 to purchase $1.5 million in television advertising time on the NBC television network. We also have the right to purchase additional spots to be telecast prior to June 30, 2000. Additionally, on May 18, 1999, we signed a non-binding letter of intent with NBC Multimedia, an affiliate of NBC. This letter of intent contemplates a one- year agreement whereby we will pay NBC Multi-Media $280,000 in exchange for the integration of our services into the NBC.com and NBC Interactive Neighborhood Web sites. Agreements with Netscape We signed a series of related agreements with Netscape on January 31, 1999, allowing us to embed our software and services in future versions of Netscape's Internet browsers. The two-year term of our exclusive arrangement with Netscape commences with the beta release of the next version of Netscape's Internet browser, which we believe will occur later this year. In addition, our services will be displayed on Netscape Netcenter and bundled with Netscape's suite of software and software updates. We also have a right to place advertisements on Netscape's Web site. In exchange, we will pay Netscape one-time licensing fees, a percentage of revenue generated by calls provided through our co-branded service and a percentage of advertising revenue generated by a co-branded Web page. Agreement with Snap We entered into an agreement with Snap on May 17, 1999. Snap will strategically display links to our Web site and services on its Snap.com Web site. In addition, we are their preferred provider of PC-to-phone services during the two-year term of this agreement. Snap also will deliver a preset minimum number of impressions on its site and agreed to give us the right to a certain amount of online advertising, subject to certain conditions. In exchange, we agreed to pay Snap a one-time fee, a percentage of revenue generated through their site and bonus payments for customers delivered by Snap after meeting certain quotas. 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 member of our board of directors and a director of IDT. Additionally, Mr. 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. 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 Mr. Jonas. The Piscataway sublease runs for a three-year term, beginning in May 1999, with monthly rent of $8,400. 58 Officer Loans In May 1999, Howard S. Balter, Ilan M. Slasky, David Greenblatt, Martin Rothberg, H. Jeff Goldberg, Jonathan Reich, and Jonathan Rand, each of whom is an executive officer, 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. As a condition to receiving these loans, these officers agreed to surrender their respective right to exercise 8,862, 2,160, 2,160, 2,160, 2,160, 600 and 270 immediately exercisable options, respectively. Relationship with Law Firm Ira A. Greenstein, our General Counsel and Secretary, and Raphael S. Grunfeld, a director nominee, are partners of the law firm Morrison & Foerster LLP, which has provided legal services to us and to IDT and its subsidiaries since December 1996, and in connection with this offering. 59 DESCRIPTION OF CAPITAL STOCK Authorized Capital Stock Our certificate of incorporation, as amended and restated, authorizes 247,042,089 shares of capital stock consisting of: . 6,850,000 shares of preferred stock, $0.01 par value; . 3,150,000 shares of Series A convertible preferred stock, $0.01 par value; . 37,042,089 shares of Class A stock, $0.01 par value; and . 200,000,000 shares of common stock, $0.01 par value. Of the shares of common stock, 4,800,000 shares of our common stock are being offered through this prospectus. Immediately following the closing of the offering, 10,161,429 shares of common stock and 36,636,190 shares of Class A stock will be outstanding. As of June 25, 1999, there were 17 holders of our Series A convertible preferred stock, one holder of our Class A stock and 33 holders of our common stock. 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 rights, conversion rights and restrictions on transferability. As of June 25, 1999, there were 4,683,129 shares of common stock outstanding and 27,622,089 shares of Class A stock outstanding. An additional 9,420,000 shares of Class A stock are issuable upon conversion of our outstanding Series A convertible preferred stock. 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 58.2% of our Class A stock upon consummation of this offering. Accordingly, IDT will retain effective control of us through holding approximately 65.2% 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 60 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. 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 3,140,000 shares of Series A convertible preferred stock pursuant to Series A Subscription Agreements. All shares of the Series A convertible preferred stock will automatically convert into 9,420,000 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. 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 that 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 61 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. 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. 62 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 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 10,161,429 shares of common stock and 36,636,190 shares of Class A stock to be outstanding on the closing of the offering (10,881,429 shares of common stock if the underwriters exercise their over-allotment option in full), the 4,800,000 shares of common stock sold in the offering (5,520,000 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 27,216,297 shares of Class A stock, which will constitute 58.2% of our outstanding capital stock (57.3% if the underwriters exercise their over-allotment option in full). 63 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. Upon closing of this offering, we intend to file a registration statement for the resale of 11,040,000 shares of common stock that are authorized for issuance under our stock option plan. We expect this registration statement to become effective immediately upon filing. Shares issued pursuant to our stock option plan after the effective date of this registration statement (other than shares issued to our affiliates) generally will be freely tradable without restriction or further registration under the Securities Act of 1933. 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 1,375,218 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 security-holders, our directors and executive officers, IDT and the Series A investors have 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. IDT's shares of our capital stock are pledged as collateral to secure a credit facility. If IDT defaults in its obligations under the pledge agreement, then a third party could acquire the pledged stock and would not be subject to these agreements. See "Underwriting." Upon closing of this offering, the holders of 9,420,000 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................................... 4,800,000 =========
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 $1.5 million. 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 720,000 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. 65 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. 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. All of our security-holders, including the Series A investors, IDT, and our executive officers and directors have agreed that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of capital stock, options or warrants to acquire shares of capital stock or securities exchangeable for or convertible into shares of capital 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 capital stock, options or warrants to acquire shares of capital stock or securities exchangeable for or convertible into shares of capital 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 at the initial public offering price the number of shares of common stock that may be purchased for $3.0 million for sale to NBC. Based upon the low end of the estimated range on the front cover of this prospectus, NBC may therefore purchase up to 300,000 shares of our common stock. NBC has expressed an interest in purchasing these shares, which will be subject to a lock-up agreement that it has entered into with the underwriters, under which it agreed not to sell shares for 180 days after the date of this prospectus. There can be no assurance that any of the reserved shares will be purchased. The number of shares available for sale to the general public in this offering will be reduced by the number of reserved shares sold. Any reserved shares not so purchased will be offered to the general public on the same basis as the other shares offered hereby. In addition, at our request, the underwriters have reserved up to 240,000 shares of common stock for sale at the initial public offering price to our directors, officers, employees, business associates and related persons. 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. 66 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. Hambrecht & Quist LLC and persons associated with Hambrecht & Quist LLC beneficially own 20,000 shares of Series A convertible preferred 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 a subsidiary of Hambrecht & Quist California, owns 80,000 shares of Series A convertible preferred stock. BT Alex. Brown Incorporated and persons associated with BT Alex. Brown Incorporated own 40,000 shares of Series A convertible preferred stock. Additionally, Stephen A. Oxman, one of our director nominees, and a managing director at Deutsche Bank Securities Inc., an affiliate of BT Alex. Brown Incorporated, will receive options to purchase 10,000 shares of common stock at the offering price upon the closing of this offering. 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 in May 2009. Addition- ally, Mr. Bovin will receive options to purchase 50,000 shares of common stock at the offering price upon the consummation of this offering. Prior to the closing of this offering, each of Hambrecht & Quist LLC and persons associated with it, BT Alex. Brown Incorporated and persons associated with it, Denis Bovin and Stephen A. Oxman will enter into written agreements with Net2Phone, whereby each of them will agree, for a period of one year from the date of this prospectus, not to sell or otherwise transfer any shares of capital stock, or options or warrants to purchase common stock, owned by them that are deemed to be underwriting compensation. 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. 67 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. Ira A. Greenstein, our General Counsel and Secretary, and Raphael S. Grunfeld, one of our director nominees, are partners of Morrison & Foerster LLP. 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. and, for the periods prior to its incorporation, the Net2Phone division of IDT Corporation, 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. WHERE YOU CAN FIND MORE 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. 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 Web site at www.sec.gov. 68 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Independent Auditors............................................ F-2 Balance Sheets as of July 31, 1997 and 1998 and April 30, 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 nine months ended April 30, 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 nine months ended April 30, 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 nine months ended April 30, 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. and, for the periods prior to its incorporation, the Net2Phone division of IDT Corporation (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. Ernst & Young LLP New York, New York May 11, 1999, except for Note 9, the date of which is June 25, 1999 F-2 Net2Phone, Inc. BALANCE SHEETS
July 31 April 30 ------------------------ ----------- 1997 1998 1999 ----------- ----------- ----------- (Unaudited) Assets Current assets: Cash and cash equivalents............. $ -- $ 10,074 $ 1,782,194 Trade accounts receivable, net........ 16,500 1,465,475 329,577 Due from IDT Corporation.............. -- -- 346,176 Prepaid contract deposits............. -- -- 4,000,000 Other current assets.................. -- -- 31,051 ----------- ----------- ----------- Total current assets................ 16,500 1,475,549 6,488,998 Property and equipment, net............. 899,525 5,409,061 8,228,218 Trademark, net.......................... -- -- 5,000,000 Other assets............................ -- 90,498 101,112 ----------- ----------- ----------- Total assets........................ $ 916,025 $ 6,975,108 $19,818,328 =========== =========== =========== Liabilities and stockholders' deficit Current liabilities: Accounts payable...................... $ -- $ -- $ 248,675 Deferred revenue...................... 161,001 810,114 1,495,775 Due to IDT Corporation................ 2,960,329 11,814,988 22,000,000 ----------- ----------- ----------- Total current liabilities........... 3,121,330 12,625,102 23,744,450 Commitments and contingencies Redeemable convertible preferred stock, Series A, $.01 par value; authorized shares-- 3,150,000; no shares issued and outstanding.......................... -- -- -- Stockholders' deficit: Preferred stock, $.01 par value; authorized shares--6,850,000; no shares issued and outstanding........ -- -- -- Common stock, $.01 par value; authorized shares-- 200,000,000; 30,960,000 shares issued and outstanding at July 31, 1998 and April 30, 1999 (27,864,000 shares at July 31, 1997)....................... 100 100,100 309,600 Class A stock, $.01 par value; authorized shares 37,042,089; no shares issued and outstanding........ -- -- -- Additional paid-in capital............ -- -- 4,420,338 Accumulated deficit................... (2,205,405) (5,750,094) (8,656,060) ----------- ----------- ----------- Total stockholders' deficit......... (2,205,305) (5,649,994) (3,926,122) ----------- ----------- ----------- Total liabilities and stockholders' deficit............................ $ 916,025 $ 6,975,108 $19,818,328 =========== =========== ===========
See accompanying notes. F-3 Net2Phone, Inc. STATEMENTS OF OPERATIONS
Period from January 2, 1996 (date of inception) Nine months ended April to July 31 Year ended July 31 30 ------------------- ------------------------- ------------------------- 1996 1997 1998 1998 1999 ------------------- ----------- ------------ ----------- ------------ (Unaudited) Revenues: Service revenue....... $ -- $ 2,652,303 $ 10,490,972 $ 6,439,374 $ 21,757,721 Product revenue....... -- -- 1,515,000 1,515,000 445,536 ---------- ----------- ------------ ----------- ------------ Total revenue....... -- 2,652,303 12,005,972 7,954,374 22,203,257 Costs and expenses: Direct cost of revenue: Service cost of revenue*............. -- 1,547,443 6,576,523 3,317,065 11,787,689 Product cost of revenue*............. -- 6,000 272,236 272,236 60,400 ---------- ----------- ------------ ----------- ------------ Total direct cost of revenue*........... -- 1,553,443 6,848,759 3,589,301 11,848,089 Selling and marketing............ 34,468 76,724 2,887,766 1,363,060 4,746,316 General and administrative....... 465,015 2,599,283 5,087,628 3,254,287 7,298,106 Depreciation.......... 8,275 120,500 726,508 421,648 1,216,712 ---------- ----------- ------------ ----------- ------------ Total costs and expenses........... 507,758 4,349,950 15,550,661 8,628,296 25,109,223 ---------- ----------- ------------ ----------- ------------ Loss from operations before provision for income taxes........... (507,758) (1,697,647) (3,544,689) (673,922) (2,905,966) Provision for income taxes.................. -- -- -- -- -- ---------- ----------- ------------ ----------- ------------ Net loss................ $ (507,758) $(1,697,647) $ (3,544,689) $ (673,922) $ (2,905,966) ========== =========== ============ =========== ============ Net loss per share-- basic and diluted...... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09) ========== =========== ============ =========== ============ Weighted average number of shares used in calculation of basic and diluted net loss per share.............. 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000 ========== =========== ============ =========== ============
- -------- * Excludes depreciation and amortization 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 nine months ended April 30, 1999 (unaudited with respect to the nine months ended April 30, 1999)
Common Stock Additional Total ------------------- Paid-In Accumulated Stockholders' Shares Amount Capital 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 Net loss for the year ended July 31, 1997.. -- -- -- (1,697,647) (1,697,647) ---------- -------- ---------- ----------- ----------- Balance at July 31, 1997................... 27,864,000 100 -- (2,205,405) (2,205,305) Sale of Common Stock to officer........... 3,096,000 100,000 -- -- 100,000 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) Capital contributions from IDT Corporation.......... -- 209,500 4,420,338 -- 4,629,838 Net loss for the nine months ended April 30, 1999............. -- -- -- (2,905,966) (2,905,966) ---------- -------- ---------- ----------- ----------- Balance at April 30, 1999................... 30,960,000 $309,600 $4,420,338 $(8,656,060) $(3,926,122) ========== ======== ========== =========== ===========
See accompanying notes. F-5 Net2Phone, Inc. STATEMENTS OF CASH FLOWS
Period from January 2, 1996 (date of Nine months ended inception) Year ended July 31 April 30 to July 31 ------------------------ ----------------------- 1996 1997 1998 1998 1999 --------------- ----------- ----------- ---------- ----------- (Unaudited) Operating activities Net loss................ $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation........... 8,275 120,500 726,508 421,648 1,216,712 Changes in assets and liabilities: Accounts receivable.. -- (16,500) (1,448,975) (555,000) 1,135,898 Due from IDT Corporation......... -- -- -- -- (346,176) Prepaid contract deposits............ -- -- -- -- (4,000,000) Other current assets.............. -- -- -- -- (31,051) Other assets......... -- -- (90,498) (73,323) (10,614) Accounts Payable..... -- -- -- -- 248,675 Deferred revenue..... -- 161,001 649,113 471,524 685,661 --------- ----------- ----------- ---------- ----------- Net cash (used in) operating activities... (499,483) (1,432,646) (3,708,541) (409,073) (4,006,861) Investing activities Purchase of trademark... -- -- -- -- (5,000,000) Purchases of property and equipment.......... (182,949) (845,351) (5,236,044) (4,230,909) (4,035,869) --------- ----------- ----------- ---------- ----------- Net cash used in investing activities... (182,949) (845,351) (5,236,044) (4,230,909) (9,035,869) Financing activities Proceeds from sale of Common Stock to IDT Corporation -- 100 -- -- -- Proceeds from sale of Common Stock to officer................ -- -- 100,000 -- -- Capital contributions from IDT Corporation... -- -- -- -- 4,629,838 Net advances from IDT Corporation............ 682,432 2,277,897 8,854,659 4,639,982 10,185,012 --------- ----------- ----------- ---------- ----------- Net cash provided by financing activities... 682,432 2,277,997 8,954,659 4,639,982 14,814,850 --------- ----------- ----------- ---------- ----------- Net increase in cash and cash equivalents....... -- -- 10,074 -- 1,772,120 Cash and cash equivalents at beginning of period.... -- -- -- -- 10,074 --------- ----------- ----------- ---------- ----------- Cash and cash equivalents at end of period................. $ -- $ -- $ 10,074 $ -- $ 1,782,194 ========= =========== =========== ========== =========== 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 nine months ended April 30, 1998 and 1999) 1. Description of Business and Basis of Presentation The accompanying financial statements reflect the historical financial information of Net2Phone, Inc. and, for the periods prior to its incorporation, the Net2Phone division of IDT Corporation (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 April 30, 1999 and for the nine months ended April 30, 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. Revenue derived from equipment sales and from services provided to IDT is recognized upon installation of the equipment and performance of the services, respectively. (See Note 4) Direct Cost of Revenue Direct cost of revenue consists primarily of telecommunication costs, connectivity costs, and the cost of equipment sold to customers. Direct cost of revenue excludes depreciation and amortization. Property and Equipment Equipment 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. Computer software is amortized using the straight-line method over the shorter of five years or the term of the related agreement. F-7 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 2. Summary of Significant Accounting Policies (continued) Advertising Costs The Company expenses the costs of advertising as incurred. For the years ended July 31, 1997 and 1998 and the nine months ended April 30, 1998 and 1999, advertising expense totaled approximately $6,000, $1,962,000, $888,000, and $3,165,000, respectively. There was no advertising expense for the period from January 2, 1996 (date of inception) to July 31, 1996. 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. Software development costs are the Company's only research and development expenditures. 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 nine months ended April 30, 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. The Company's policy prior to the adoption of the SOP was to capitalize substantially all internal use software costs. Therefore, the adoption of the SOP did not have a material effect on the Company's financial position or results of operations. At July 31, 1997 and 1998 and April 30, 1999, the Company has capitalized $493,000, $2,198,000 and $3,598,000, 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 two year term of the agreement. 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. Stock Based Compensation The Company applies the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for stock options using APB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Options issued to non-employees are accounted for in accordance with SFAS No. 123. F-8 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 2. Summary of Significant Accounting Policies (continued) 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. 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 April 30 --------------------- ---------- 1997 1998 1999 --------- ---------- ---------- Equipment............................... $ 348,625 $3,631,140 $6,094,189 Computer software....................... 679,484 2,595,572 4,118,590 Furniture and fixtures.................. 191 37,632 87,415 --------- ---------- ---------- 1,028,300 6,264,344 10,300,194 Accumulated depreciation................ (128,775) (855,283) (2,071,976) --------- ---------- ---------- Property and equipment, net............. $ 899,525 $5,409,061 $8,228,218 ========= ========== ==========
4. Related Party Transactions In May 1999, the Company and IDT entered into a separation agreement whereby the transactions and agreements necessary to govern the relationship between the two companies necessary to effect their separation were determined. In accordance with such agreement, it was determined that amounts paid by IDT in excess of $22 million would be deemed to be capital contributions. F-9 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 4. Related Party Transactions (continued) In May 1999, the Company and IDT entered into an Internet/telecommunications agreement whereby the Company has agreed to pay IDT up to $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, for a period of 20 years, to use a certain telecommunications network as it is completed and delivered for up to approximately $6.0 million. 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. 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 assigned all of its rights in certain trademarks, patents and proprietary products and information to the Company. These assets were contributed at IDT's historical cost which was $0. 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. The ratios used to allocate these costs were the Company's total payroll to IDT's total payroll and the Company's total revenue to IDT's total revenue, depending on the type of services provided. The allocated 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 nine months ended April 30, 1998 and 1999, all of the Company's operations were financed by IDT. For the years ended July 31, 1997 and 1998 and the nine months ended April 30, 1998 and 1999, the Company recognized revenue for services provided to IDT of $297,000, $453,000, $323,000, and $680,000, respectively. At July 31, 1997 and 1998 and April 30, 1999, the due to IDT balance represents the net amounts owed to IDT as a result of the aforementioned agreements and financing. No interest was charged on the Company's advances from IDT. The average balance owed to IDT during the period from January 2, 1996 (date of inception) to July 31, 1996, the years ended July 31, 1997 and 1998, and the nine months ended April 30, 1999 and 1998 were $341,000, $1,821,000, $7,388,000, $16,907,000 and $5,280,000, respectively. F-10 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 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 consolidated 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 consolidated Federal tax group. Significant components of the Company's deferred tax assets and liabilities consists of the following:
July 31 April 30 ------------------ --------- 1997 1998 1999 -------- --------- --------- Deferred tax assets: Net operating loss carryforwards.......... $ -- $ 314,000 $ 670,000 Deferred tax liabilities: Depreciation.............................. -- (300,000) (609,000) -------- --------- --------- Net deferred tax assets................... -- 14,000 61,000 Valuation allowance....................... -- (14,000) (61,000) -------- --------- --------- Total deferred tax assets................. $ -- $ -- $ -- ======== ========= =========
The net deferred tax assets have been fully offset by a valuation allowance due to the uncertainty of the realization of the assets. At April 30, 1999, the Company had net operating loss carryforwards for state income tax purposes of approximately $7.5 million expiring in years through 2006. These net operating loss carryforwards may be limited to future taxable earnings of the Company.
Period from Year Ended Nine Months January 2, 1996 July 31 Ended April 30 (date of inception) -------------------- ------------------ to July 31, 1996 1997 1998 1998 1999 ------------------- -------- ---------- -------- -------- Tax at effective rate... (173,000) (577,000) (1,205,000) (229,000) (988,000) Benefit used by IDT for which the Company received no compensation........... 173,000 577,000 1,205,000 229,000 988,000 -------- -------- ---------- -------- -------- Tax provision........... -- -- -- -- -- ======== ======== ========== ======== ========
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. F-11 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 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 $2.85 million through April 30, 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 link has been capitalized as computer software and $2.1 million attributable to advertising has been expensed. As of April 30, 1999, the Company is required to make an additional payment of $150,000 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 $495,000 through April 30, 1999 for the Company advertisements on such site. As of April 30, 1999, the Company is required to make additional payments of $213,000 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. Total advertising payments under the aforementioned agreements are amortized systematically over the terms of the agreements. On February 19, 1999, the Company entered into an agreement with an international computer company to build custom circuits to provide worldwide connectivity for Company users. The agreement is effective for 63 months upon completion of the circuits. Pursuant to such agreement, the Company has made payments of $1 million through April 30, 1999 for its worldwide build-out, which have been reflected on the consolidated balance sheets as prepaid contract deposits. As of April 30, 1999, the Company is required to make an additional payment of $1 million when the circuits are complete and pay future fees for additional sites, usage, and installation, as defined. 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 from the third party, 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. Through April 30, 1999, the Company has made payments of $8.0 million to such third party. The software is being amortized over the term of the agreement. 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. F-12 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Continued) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) Employment Agreement In May 1997, the Company entered into a three year employment agreement with 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 fiscal 1998. 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%, 63%, and 58% of total revenue during the years ended July 31, 1997 and 1998 and the nine months ended April 30, 1998 and 1999, respectively. During the year ended July 31, 1998 and the nine months ended April 30, 1998, revenues derived from equipment sales to a customer in Korea represented approximately 14% and 19%, 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 nine months ended April 30, 1999. No customer accounted for more than 10% of revenue during the year ended July 31, 1997 and the nine months ended April 30, 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 $14,000,000 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. On May 13, 1999, the Company designated 3,150,000 shares of its preferred stock as Series A ("Series A Stock") and sold 3,140,000 of such shares to unrelated third parties in a private placement transaction for aggregate gross proceeds of $31,400,000. The Series A Stock entitles its holders to a non-cumulative dividend of 8% per annum on the original issue price. The Series A Stock is convertible into three shares of Class A stock on a one to one basis at the option of the holder, subject to certain adjustments as, defined. Each shares of Series A stock also entitles its holders to vote on corporate matters on an as if converted basis. Holders of Series A Stock have priority over common stock and Class A stock with respect to the payment of dividends and in the event of the liquidation or dissolution of the Company. The liquidation preference of the Series A Stock is equivalent to the original issue price plus an amount equal to 8% of the original issue price compounded on an annual basis from the date of issuance plus any declared, but unpaid dividends. F-13 Net2Phone, Inc. NOTES TO FINANCIAL STATEMENTS--(Concluded) July 31, 1998 (unaudited with respect to the nine months ended April 30, 1998 and 1999) 9. Subsequent Events (continued) In connection with the sale of Series A Stock, the Company granted warrants to purchase 272,400 shares of common stock at an exercise price of $3.33 per share, subject to certain adjustments as defined, from the date of issuance through May 13, 2004 to the Series A Stock investors and placement agent. The warrants contain a provision whereby they are automatically terminated upon a merger or sale of the Company or an initial public offering of the Company's stock. As a result, the warrants are expected to be exercised prior to the proposed initial public offering of the Company's common stock. On June 25, 1999, the Company designated 15,000,000 shares of its capital stock as Class A stock and 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. In April 1999, the Company adopted a stock option and incentive plan (the "Plan"). Pursuant to the Plan, the Company's officers, employees and non- employee directors, as well as those of IDT, are eligible to receive awards of incentive and non-qualified stock options, stock appreciation rights, limited stock appreciation rights and restricted stock. In May 1999, a total of 5,040,000 shares of common stock were authorized for issuance under the plan to employees of the Company and to employees and consultants of IDT, all of which were granted with an exercise price of $3.33 per share and 1,345,219 of which were exercised through June 25, 1999. The options generally vest over four years and expire ten years from the date of grant. In connection with the exercise of such options, the Company extended $3,150,000 in loans to employees. In connection with such loans, 23,382 outstanding options were canceled. On June 25, 1999 the shares authorized for issuance under the plan was increased by 6,000,000 shares. F-14 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4,800,000 Shares [LOGO] Common Stock ---------------- PROSPECTUS ---------------- HAMBRECHT & QUIST BT ALEX. BROWN ---------------- 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........... $ 18,415 NASD filing fee............................................... 7,124 Nasdaq National Market listing fee............................ 5,000 Blue Sky filing fees and expenses............................. 20,000 Accounting fees and expenses.................................. 300,000 Legal fees and expenses....................................... 500,000 Transfer agent fees and expenses.............................. 3,500 Printing and engraving expenses............................... 400,000 Miscellaneous expenses........................................ 245,961 ---------- Total....................................................... $1,500,000 ==========
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 27,864,000 shares of 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 3,096,000 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 convertible preferred stock at $10.00 per share, which are convertible into 9,420,000 shares of our common stock, together with warrants to purchase 180,000 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. This transaction was exempt from registration under Section 4(2) of the Securities Act of 1933. We also issued a warrant to purchase 92,400 shares of our common stock to the placement agent as partial consideration for its 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 5,040,000 shares pursuant to our 1999 Stock Option and Incentive Plan, and issued approximately 1,345,219 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. 3.3 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. 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 Assignment . 10.6 Internet/Telecommunications 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 Amended and Restated 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. 10.20 Stockholders Agreement, dated as of May 13, 1999, by and among the Investors listed therein, IDT Corporation, Clifford M. Sobel, the trustee of the Scott Sobel Annual Gift Trust and the Registrant. 10.21 Letter agreement, dated as of May 12, 1999, by and among IDT Corporation, Clifford M. Sobel and the Registrant. 10.22 Letter agreement, dated as of May 17, 1999, by and among IDT Corporation, Clifford M. Sobel and the Registrant.
II-2
Exhibit Number Description of Exhibit ------- ---------------------- 10.23 Co-Location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between IDT Corporation and the Registrant. 10.24 Form of Loan Agreement between the Registrant and each of its executive officers. 10.25 Form of Stock Option Agreement for Executive Officers. 10.26# Letter agreement, dated as of June 25, 1999, by and between National Broadcasting Company, Inc. and the Registrant. 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, Raphael S. Grunfeld. 99.2 Consent of Director Nominee, Stephen A. Oxman.
- -------- *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. + Previously filed. 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 II-3 497(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- 4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hackensack, State of New Jersey, on June 28, 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 Ilan M. Slasky, 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 Amendment to the 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 June 28, 1999 ___________________________________________ of the Board Clifford M. Sobel* /s/ Howard S. Balter Chief Executive Officer June 28, 1999 ___________________________________________ and Director (Principal Howard S. Balter Executive Officer) /s/ Ilan M. Slasky Chief Financial Officer June 28, 1999 ___________________________________________ (Chief Accounting Ilan M. Slasky* Officer) /s/ James R. Mellor Director June 28, 1999 ___________________________________________ James R. Mellor
*Executed by attorney-in-fact: Howard S. Balter II-5
Name and Signatures Title Date ------------------- ----- ----
/s/ Howard S. Jonas Director June 28, 1999 ___________________________________________ Howard S. Jonas* Director June 28, 1999 ___________________________________________ Gary Reischel /s/ James A. Courter Director June 28, 1999 ___________________________________________ James A. Courter*
*Executed by attorney-in-fact: Howard S. Balter II-6 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. 3.3 Certificate of Amendment to the Restated Certificate of Incorporation. 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 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 Amended and Restated 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. 10.20 Stockholders Agreement, dated as of May 13, 1999, by and among the Investors listed therein, IDT Corporation, Clifford M. Sobel, the trustee of the Scott Sobel Annual Gift Trust and the Registrant. 10.21 Letter agreement, dated as of May 12, 1999, by and among IDT Corporation, Clifford M. Sobel and the Registrant. 10.22 Letter agreement, dated as of May 17, 1999, by and among IDT Corporation, Clifford M. Sobel and the Registrant.
Sequentially Exhibit Numbered Number Description of Exhibit Page ------- ---------------------- ------------ 10.23 Co-Location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between IDT Corporation and the Registrant. 10.24 Form of Loan Agreement between the Registrant and each of its executive officers. 10.25 Form of Stock Option Agreement for Executive Officers. 10.26# Letter agreement, dated as of June 25, 1999, by and between National Broadcasting Company, Inc. and the Registrant. 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, Raphael S. Grunfeld. 99.2 Consent of Director Nominee, Stephen A. Oxman.
- -------- *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. + Previously filed. 2 EX-3.3 2 CERTIFICATE OF AMENDMENT EXHIBIT 3.3 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION OF NET2PHONE, INC. (pursuant to Section 242 of the DGCL) NET2PHONE, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Net2Phone, Inc. (hereinafter the "Corporation"). 2. The Corporation's Certificate of Incorporation was initially filed with the Secretary of State of the State of Delaware on October 10, 1997 and was amended and restated on May 14, 1999. 3. The Certificate of Incorporation of the Corporation is hereby amended by deleting the Preamble of Article Fourth thereof and replacing it with the following: ARTICLE FOURTH: the aggregate number of shares of all classes of capital stock which the Corporation shall have the authority to issue is two hundred and forty-seven million, forty-two thousand and eighty-nine (247,042,089) shares, consisting of (a) 200,000,000 shares of common stock, par value $.01 per share ("Common Stock"), (b) 37,042,089 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"). Effective upon filing of this Certificate of Amendment, each share of the Corporation's Common Stock and each share of the Corporation's Class A Stock that is outstanding on the date of filing shall be subdivided into three (3) shares of Common Stock or Class A Stock, as applicable, and the par value of each post-split share of Common Stock and Class A Stock shall be restated to equal $.01 per share. [Signature Page follows] IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed on its behalf this 24th day of June, 1999. NET2PHONE, INC. By: /s/ Howard Balter ____________________________ Name: Howard Balter Title: Chief Executive Officer Attest: By: /s/ Joel Haims _______________ Name: Joel Haims EX-10.6 3 INTERNET/TELECOMMUNICATIONS AGREEMENT 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: 1. Internet Network. (a) Existing Network. IDT hereby grants and conveys to Net2Phone an ---------------- indefeasible right to use and enjoy, to the extent of IDT's rights therein, those equipment items, equipment leases and rights of use and/or access which are part of IDT's 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 with respect to any item described on Exhibit A hereto upon the first of the following to occur: --------- (i) 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; (ii) 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; or (iii) with respect to any part of the Existing Network not sooner terminated pursuant to clauses (i) or (ii) above, upon the mutual consent of IDT and Net2Phone. Net2Phone hereby agrees it shall perform all obligations reasonably required of it by IDT and shall do nothing whatsoever in violation of the agreements set forth on Exhibit A. It is expressly understood that IDT --------- remains the primary party with respect to all agreements set forth on Exhibit A --------- and retains all obligations to pay rent and/or usage fees in connection therewith. (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 grants and conveys to Net2Phone an indefeasible right to use and enjoy, to the extent of IDT's rights therein, 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 and delivered, on the date hereof and, with respect to any part of the Frontier Network which has not yet been completed and delivered, on the date such part of the Frontier Network is completed and delivered. 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; provided, -------- however, Net2Phone shall have the right to request an earlier termination of - ------- such grant and conveyance, in whole or in part, which request shall be granted by IDT solely in the event that Frontier agrees to amend the Frontier Agreement to permit a termination of IDT's corresponding obligations under the Frontier Agreement and that Net2Phone pays all costs and expenses incurred to secure Frontier's consent to such amendment. 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 remains the primary party with respect to the Frontier Agreement and retains all obligations to pay maintenance and/or usage fees in connection therewith. (c) Networking Infrastructure. IDT hereby grants and conveys to ------------------------- Net2Phone the right to use and enjoy, to the extent of IDT's rights therein, 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 remains the primary party with respect to all agreements set forth on Exhibit C and retains all obligations to pay rent and/or usage fees in --------- connection therewith. (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, for a period of one year commencing on the date hereof. In --------- accordance with current industry custom, such transit relationships shall be provided on a mutual and gratuitous basis. At the end of such initial term and of each year thereafter, such rights of access 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 such rights of access. Following such initial term, such rights of access may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. (e) Network Operations Center. IDT hereby grants and conveys to ------------------------- Net2Phone the right to use and enjoy, to the extent of IDT's rights therein, the equipment, equipment leases and rights of use and/or access and other facilities comprising its Network 2 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 remains the primary party with respect - - to all agreements set forth on Exhibit E and retains all obligations to pay rent --------- and/or usage fees in connection therewith. The IDT employees at the NOC Facilities who are 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. (f) Maintenance and Support. With respect to leases and other ----------------------- agreements described in the Exhibits hereto, IDT shall use commercially reasonable efforts 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. With respect to equipment listed on the exhibits hereto which is or becomes owned by IDT or which is leased by IDT pursuant to leases which obligate IDT to maintain such equipment, IDT shall maintain such equipment in accordance with industry practice and, upon notice from Net2Phone of any malfunctioning of such equipment, shall promptly repair or cause the repair of such equipment. Net2Phone shall reimburse IDT for all costs and expenses incurred by IDT for the maintenance and repair of such equipment to the extent that IDT is contractually obligated for such maintenance and repair. Net2Phone shall also reimburse IDT for all necessary upgrades to such equipment and, to the extent permitted by the respective leases (if any), Net2Phone shall own any upgrades so installed. (g) Equipment with Expiring Leases. To the extent that any equipment ------------------------------ described on the Exhibits hereto is subject to a lease which terminates during the term of Net2Phone's right to use such item of equipment, following the termination of such lease IDT shall be responsible for providing Net2Phone with an item of equipment of equivalent function and quality for the remainder of Net2Phone's right of use hereunder. (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 with respect to each such agreement and shall not amend, alter, supplement, terminate, cancel, assign, transfer or otherwise modify any such agreement without the prior written consent of Net2Phone; provided, however, -------- ------- that IDT's obligation with respect to any such agreement shall cease upon the expiration of the corresponding Net2Phone right of use granted herein. (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 effective with respect to such lease or other agreement until such consent has been received and IDT hereby agrees to use all commercially reasonable efforts to procure such consent. 3 (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 to facilitate such access for a period of five years commencing on the date hereof. At the end of such initial term and of each year thereafter, Net2Phone's obligation to facilitate IDT's Internet access 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 such facilitation of Internet access. Following such initial term, such facilitation of Internet access may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. 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. For a period of two years commencing on the ---------------- date hereof, Net2Phone hereby agrees (i) that IDT is hereby granted the right of first refusal to provide Net2Phone's carrier traffic, (ii) that any carrier traffic actually routed over IDT's direct routes (whether or not pursuant to the foregoing right of first refusal) shall be charged at the greater of (A) IDT's overall most favorite nation selling price less 5% and (B) IDT's cost plus 5%, and (iii) that any other carrier traffic actually routed over IDT's telecommunications network (whether or not pursuant to this right of first refusal) shall be charged at IDT's cost plus 10%. For a two year period commencing on the date hereof, each party hereby grants the other party an option to purchase bandwidth from such granting party at the granting party's cost plus 10% and Net2Phone hereby grants IDT an option to use Net2Phone's indirect telecommunications network (to the extent that Net2Phone has excess availability thereon) to route IDT's carrier traffic at Net2Phone's cost plus 10%. At the end of such initial terms and of each year thereafter, such agreements with respect to carrier traffic and bandwidth 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 such respective agreements. Following such initial term, such agreements with respect to carrier traffic or bandwidth may be terminated at any time at the option of either IDT or Net2Phone upon sixty (60) days' prior written notice. (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 network. 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. Notwithstanding the foregoing, in the event that either Net2Phone or IDT suffers a "brownout" from the equipment or rights of access referenced in this Section 1 for any reason, IDT or Net2Phone, as the case may be, shall use reasonable commercial efforts to obtain a rebate or other concession from any third party which may have responsibility for such unavailability. In case either party receives any such rebate or concession, such party shall share any such rebate 4 or concession with the other in a manner reflecting the relative loss of usage incurred by each of Net2Phone and IDT. (m) With respect to any equipment or rights of use and/or access to which IDT has granted Net2Phone a right of use herein, Net2Phone shall have the right to use such equipment and access to the exclusion of IDT for the duration of the right granted herein. 2. Payments. -------- (a) Existing Network. On May 1, 1999, and on the first day of each ---------------- month thereafter until such time as the grant and conveyance set forth in Section 1(a) hereof has terminated in its entirety, Net2Phone shall pay to IDT an Existing Network Fee (as defined below) as compensation for the grant and conveyance set forth in Section 1(a) hereof with respect to the Existing Network. As the Frontier Network is completed and delivered, 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. With respect to any termination requested by Net2Phone, the actual date such lease or other agreement is terminated shall hereinafter be referred to as the "Termination Date" with respect to such lease or other agreement. To the extent that IDT incurs any termination or cancellation charges as a result of any such lease or contract termination, Net2Phone shall reimburse IDT for such charges upon demand. The Existing Network Fee shall equal, on each date payable, the product of $60,000 multiplied by a fraction, the numerator of which is the total mileage of all circuits set forth on Exhibit A hereto except those circuits with --------- respect to which a Termination Date has occurred and the denominator of which is the total mileage of all circuits set forth on Exhibit A hereto. Ten (10) days --------- following the end of any month in which a Termination Date has occurred, IDT shall refund to Net2Phone upon the request of Net2Phone that portion of the Existing Network Fee for such month representing the per diem charge for each circuit deemed terminated during such month (based on mileage) for the number of days in such month following the Termination Date with respect to such circuit. (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 and delivered. Upon the completion and delivery of each circuit set forth on Exhibit B, Net2Phone shall --------- pay to IDT an amount equal to the non-recurring charge with respect to such circuit (as set forth on Exhibit B) plus 10%, such amount to be paid with --------- interest at 9% per annum in sixty (60) equal monthly installments commencing thirty (30) days following the completion and delivery of such circuit. Upon the completion and delivery of all of the circuits set forth on Exhibit B, the --------- amount payable by Net2Phone with respect to the non-recurring charges for the individual circuits shall be aggregated and the payments restructured so that such aggregate outstanding amount shall be paid, with interest at 9% per annum, in equal monthly payments during the Restructured Term (as defined below) commencing thirty (30) days following the completion and delivery of the final circuit of the Frontier Network. The 5 "Restructured Term" shall commence thirty (30) days following the completion and delivery of the final circuit of the Frontier Network and shall continue for that number of months equal the weighted average, rounded to the nearest whole number, of the number of months remaining in the original payment periods of the individual circuits. In addition, Net2Phone shall pay to IDT with respect to the completion and delivery of the Frontier Network an installation fee of $600,000 (the "Installation Fee"). Upon the completion and delivery of each circuit set forth on Exhibit B hereto, Net2Phone shall pay to IDT an amount equal to the product --------- of the Installation Fee multiplied by a fraction, the numerator of which is the non-recurring charge with respect to such circuit (as set forth on Exhibit B) --------- and the denominator of which is the sum of all non-recurring charges (as set forth on Exhibit B) with respect to all of the circuits of the Frontier Network --------- described on Exhibit B hereto. --------- In addition, beginning on the date hereof and continuing until the termination in 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 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). 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. (d) Internet Usage and Services. During the period set forth in --------------------------- Section 1(j) hereof (as extended pursuant to the terms thereof), 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. 3. Ownership of Equipment and Intellectual Property. ------------------------------------------------ Nothing herein is intended to, nor shall it, change the legal ownership of any equipment or intellectual property. 4. Termination. ----------- (a) This Agreement may only be terminated by the mutual agreement of the parties in writing, except as specifically set forth in this Agreement with respect to specific portions hereof. 6 (b) Sections 3 and 4 shall survive termination of this Agreement. 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. (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 7 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 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) 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 DAMAGES. (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, dated as of May 7, 1999, by and between IDT and Net2Phone, as if such Article VIII were set forth herein in its entirety. 8 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 9 EX-10.8 4 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 Exhibit 1 --------- Services to be Provided by IDT to Net2Phone General Accounting Services - --------------------------- Accounts payable and general ledger services, similar to those furnished by IDT to Net2Phone as of the date of this Agreement, will be provided by IDT to Net2Phone. Such Services will consist of, among other things, the following: (a) receipt and opening of all vendor mail; (b) maintenance of a vendor master file; (c) processing and forwarding payment of all vendor invoices; (d) invoice exception reporting and resolution; (e) monthly financial reporting; (f) vendor relations; and (g) processing credit card transactions. This category of Services may be cancelled, in whole or in part, by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- Payroll and Benefit Administration - ---------------------------------- IDT will administer Net2Phone's payroll. IDT will also continue to include Net2Phone's employees under IDT's group health insurance policies until Net2Phone has established its own benefit plan for its employees with respect to group health insurance or, if sooner, the termination of this Agreement. In addition to the cost of administration of such group health insurance, Net2Phone will reimburse IDT for the employer's monthly costs of health insurance attributable to each eligible Net2Phone employee participating in IDT's health insurance plan. Further, IDT will continue to permit Net2Phone's employees to participate in IDT's 401(k) Savings and Retirement Plan until the termination of this Agreement or such earlier time as Net2Phone establishes its own 401(k) for its employees which Net2Phone agrees to do on or prior to the date on which IDT ceases to own at least 80% of the stock of Net2Phone. In addition to the cost of administration of such 401(k) plan, Net2Phone will reimburse IDT for the employer's matching contribution and other direct costs attributable to each eligible Net2Phone employee participating in IDT's 401(k) plan. 1 This category of Services may be cancelled, in whole or in part, by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- administration of payroll and benefits plans, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above; ---------------- plus (c) Direct Costs: reimbursement of IDT's direct costs as set forth ------------- above. Customer Support - ---------------- IDT shall provide customer support for Net2Phone's Phone2Phone customers which shall include answering all customer inquiries (such as billing inquiries), payment processing, rate questions, accommodating dissatisfied customers, providing technical feedback to Network Operations Center about any quality or technical problems and offering e-mail support. Customer service support will be available 24 hours per day, seven days per week. Sales support will be available 16 hours per day, five days per week. This category of Services may be cancelled by either party on thirty (30) days' prior written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- LAN Services - ------------ IDT shall provide Local Area Network services to Net2Phone, including all maintenance, installation of new hardware and software (or upgrades thereto) and consultation on acquisition of new equipment. This category of Services may be cancelled by either party on thirty (30) days' prior 2 written notice. Amount to be paid by Net2Phone: ------------------------------ (a) Employee Cost: for each IDT employee assigned to render the ------------- foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system); plus (b) Overhead Factor: 20% of each product calculated in (a) above. ---------------- 3 EX-10.9 5 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 Exhibit 1 --------- Services to be Provided by Net2Phone to IDT Debit Card Platform Services - ---------------------------- Net2Phone shall support IDT's Debit Card Platform including: (1) providing technical support for the debit card platform; (2) ordering lines to handle calls (WorldCom, Piscataway, etc.); (3) managing database for the platform; and (4) monitoring network, 24 hours per day, seven days per week. IDT shall be responsible for the cost of any and all additional or replacement equipment needed for the Debit Card Platform and shall be responsible for the cost of maintaining and supporting all existing or new equipment required for the Debit Card Platform. IDT shall reimburse Net2Phone for any cost incurred by Net2Phone in the acquisition, maintenance or support of such equipment. This category of Services may be cancelled by either party on thirty (30) days' prior written notice and may be renewed by mutual agreement of the parties. Amount to be paid by IDT: ------------------------ (a) Direct Costs: reimbursement of Net2Phone's direct costs as set forth ------------ above; plus (b) On a monthly basis, the greater of: (i) (A) Employee Cost: for each Net2Phone employee assigned to ------------- render the foregoing services, such employee's salary for the month multiplied by the percentage of such employee's work month actually spent rendering such Services (such percentage to be calculated based upon time-cards or some other mutually agreed upon system) plus (B) Overhead Factor of 20% of each product calculated in the foregoing --------------- clause (A) or (ii) Usage of Debit Card Platform: $.0025 per minute of IDT use of ----------------------------- the Debit Card Platform during such month. 1 EX-10.12 6 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 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 EXHIBIT A --------- The provision of and developmental efforts related to Internet telephony services and voice enabling Web applications. EX-10.15 7 1999 STOCK OPTION AND INCENTIVE PLAN EXHIBIT 10.15 NET2PHONE, INC. 1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN 1. Purpose; Types of Awards; Construction. - -- -------------------------------------- The purpose of the Amended and Restated Net2Phone, Inc. 1999 Stock Option and Incentive Plan (the "Plan") is to provide incentives to executive officers, other key employees, directors and consultants of Net2Phone, Inc. (the "Company"), or any parent or subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as officers, employees, directors or consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Securities Exchange Act of 1934, as amended, and of Section 162(m) of the Internal Revenue Code of 1986, as amended, and shall be interpreted in a manner consistent with the requirements thereof. 2. Definitions. - -- ----------- As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Agreement" shall mean a written agreement entered into between the Company and a Grantee in connection with an award under the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Change in Control" means a change in ownership or control of the Company effected through either of the following: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (C) any corporation or other entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock, or (D) any person who, immediately prior to the Initial Public Offering, owned more than 25% of the combined voting power of the Company's then outstanding voting securities), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) during any period of not more than two consecutive years, not including any period prior to the initial adoption of this Plan by the Board, individuals who at the beginning of such period constitute the Board, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to a consent solicitation, relating to the election of directors of the Company) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Committee" shall mean the Compensation Committee of the Board or such other committee as the Board may designate from time to time to administer the Plan. (f) "Common Stock" shall mean shares of common stock, par value $.01 per share, of the Company. (g) "Company" shall mean Net2Phone Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation. (h) "Continuous Service" means that the provision of services to the Company or a Related Entity in any capacity of officer, employee, director or consultant is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers between locations of the Company or among the Company, any Related Entity or any successor in any capacity of officer, employee, director or consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of officer, employee, director or consultant (except as otherwise provided in the applicable Agreement). An approved leave of absence shall include sick leave, maternity leave, military leave or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days unless reemployment upon expiration of such leave is guaranteed by statute or contract. (i) "Corporate Transaction" means any of the following transactions: (i) a merger or consolidation of the Company with any other corporation or other entity, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 80% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined in the Exchange Act) acquired 25% or more of the combined voting power of the Company's then outstanding securities; or (ii) a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets (or any transaction having a similar effect). (j) "Disability" shall mean a Grantee's inability to perform his or her duties with the Company or any of its affiliates by reason of any medically determinable physical or mental impairment, as determined by a physician selected by the Grantee and acceptable to the Company. 2 (k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (l) "Fair Market Value" per share as of a particular date shall mean (i) the closing sale price per share of Common Stock on the national securities exchange on which the Common Stock is principally traded for such date or the last preceding date on which there was a sale of such Common Stock on such exchange, as the Committee shall determine, or (ii) if the shares of Common Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, or (iii) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine; provided, however, that the Fair Market Value per share on the date of the Initial Public Offering will equal the Initial Public Offering price per share or such other price that the Committee determines in its sole discretion. (m) "Grantee" shall mean a person who receives a grant of Options, Stock Appreciation Rights, Limited Rights or Restricted Stock under the Plan. (n) "IDT" shall mean IDT Corporation, a Delaware corporation, and any successor corporation thereto. (o) "Incentive Stock Option" shall mean any option intended to be, and designated as, an incentive stock option within the meaning of Section 422 of the Code. (p) "Initial Public Offering" shall mean the underwritten initial public offering of shares of Common Stock. (q) "Insider" shall mean a Grantee who is subject to the reporting requirements of Section 16(a) of the Exchange Act. (r) "Limited Right" shall mean a limited stock appreciation right granted pursuant to Section 10. (s) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any Related Entity. (t) "Nonqualified Stock Option" shall mean any option not designated as an Incentive Stock Option. (u) "Option" or "Options" shall mean a grant to a Grantee of an option or options to purchase shares of Common Stock. (v) "Option Agreement" shall have the meaning set forth in Section 6. (w) "Option Price" shall mean the exercise price of the shares of Common Stock covered by an Option. 3 (x) "Parent" shall mean any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an award under the Plan, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (y) "Plan" means this Net2Phone, Inc. 1999 Stock Option and Incentive Plan, as amended from time to time. (z) "Related Entity" means any Parent, Subsidiary or any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a controlling ownership interest, directly or indirectly. IDT and each of its Subsidiaries shall be deemed to be a Related Entity for so long as IDT, together with any of its Subsidiaries, shall be the beneficial owner of at least 20.0% of the outstanding aggregate amount of Common Stock and Class A Stock of the Corporation. (aa) "Restricted Period" shall have the meaning set forth in Section 11. (bb) "Restricted Stock" means shares of Common Stock issued under the Plan to a Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of refusal, repurchase provisions, forfeiture provisions and other terms and conditions as shall be determined by the Committee. (cc) "Retirement" shall mean a Grantee's retirement in accordance with the terms of any tax-qualified retirement plan maintained by the Company or any of its affiliates in which the Grantee participates. (dd) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect, promulgated under the Exchange Act, including any successor to such Rule. (ee) "Stock Appreciation Right" shall mean the right, granted to a Grantee under Section 9, to be paid an amount measured by the appreciation in the Fair Market Value of a share of Common Stock from the date of grant to the date of exercise of the right, with payment to be made in cash or Common Stock as specified in the award or determined by the Committee. (ff) "Subsidiary" shall mean any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an Option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (gg) "Tax Event" shall have the meaning set forth in Section 17. (hh) "Ten Percent Stockholder" shall mean a Grantee who, at the time an Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary. 4 3. Administration. - -- -------------- (a) The Plan shall be administered by the Committee, the members of which shall, except as may otherwise be determined by the Board, be "non- employee directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the Code. Prior to the formation of the Committee, the Board shall exercise all powers of the Committee set forth herein. (b) The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options, Stock Appreciation Rights, Limited Rights and Restricted Stock; to determine which options shall constitute Incentive Stock Options and which Options shall constitute Nonqualified Stock Options; to determine which Options (if any) shall be accompanied by Limited Rights; to determine the purchase price of the shares of Common Stock covered by each option; to determine the persons to whom, and the time or times at which awards shall be granted; to determine the number of shares to be covered by each award; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Agreements (which need not be identical) and to cancel or suspend awards, as necessary; and to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) All decisions, determinations and interpretations of the Committee shall be final and binding on all Grantees of any awards under this Plan. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any award granted hereunder. 4. Eligibility. - -- ----------- Awards may be granted to executive officers, other key employees, directors and consultants of the Company or of any Related Entity. In addition to any other awards granted to Non-Employee Directors hereunder, awards shall be granted to Non-Employee Directors pursuant to Section 14 hereof. In determining the persons to whom awards shall be granted and the number of shares to be covered by each award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock. - -- ----- (a) The maximum number of shares of Common Stock reserved for the grant of awards under the Plan shall be 11,040,000, subject to adjustment as provided in Section 12 hereof. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company. (b) If any outstanding award under the Plan should, for any reason expire, be canceled or be forfeited (other than in connection with the exercise of a Stock Appreciation 5 Right or a Limited Right), without having been exercised in full, the shares of Common Stock allocable to the unexercised, canceled or terminated portion of such award shall (unless the Plan shall have been terminated) become available for subsequent grants of awards under the Plan. (c) Except as the Committee may otherwise determine, in no event may a Grantee be granted during any calendar year Options to acquire more than 750,000 shares of Common Stock or more than 750,000 shares of Restricted Stock, in each case subject to adjustment as provided in Section 12 hereof. 6. Terms and Conditions of Options. - -- ------------------------------- (a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be evidenced by a written agreement between the Company and the Grantee (the "Option Agreement"), in such form and containing such terms and conditions as the Committee shall from time to time approve, which Option Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Option Agreement. For purposes of interpreting this Section 6, a director's service as a member of the Board shall be deemed to be employment with the Company. (b) NUMBER OF SHARES. Each Option Agreement shall state the number of shares of Common Stock to which the Option relates. (c) TYPE OF OPTION. Each Option Agreement shall specifically state that the Option constitutes an Incentive Stock Option or a Nonqualified Stock Option. In the absence of such designation, the Option will be deemed to be a Nonqualified Stock Option. (d) OPTION PRICE. Each Option Agreement shall state the Option Price, which, in the case of an Incentive Stock Option, shall not be less than one hundred percent (100%) of the Fair Market Value of the shares of Common Stock covered by the Option on the date of grant. The Option Price shall be subject to adjustment as provided in Section 12 hereof. (e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at the time of exercise, in cash or in shares of Common Stock (whether then owned by the Grantee or issuable upon exercise of the Option) having a Fair Market Value equal to such Option Price or in a combination of cash and Common Stock, including a cashless exercise procedure through a broker-dealer; provided, however, that in the case of an Incentive Stock Option, - -------- ------- the medium of payment shall be determined at the time of grant and set forth in the applicable Option Agreement. (f) TERM AND EXERCISABILITY OF OPTIONS. Each Option Agreement shall provide the exercise schedule for the Option as determined by the Committee, provided, that, the Committee shall have the authority to accelerate the - -------- ---- exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. The exercise period will be ten (10) years from the date of the grant of the option unless otherwise determined by the Committee; provided, however, that in the case of -------- ------- an Incentive Stock Option, such exercise period shall not exceed ten (10) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in 6 Sections 6(g) and 6(h) hereof. An Option may be exercised, as to any or all full shares of Common Stock as to which the Option has become exercisable, by written notice delivered in person or by mail to the Company's transfer agent or other administrator designated by the Company, specifying the number of shares of Common Stock with respect to which the Option is being exercised. (g) TERMINATION. Except as provided in this Section 6(g) and in Section 6(h) hereof, an Option may not be exercised unless the Grantee is then in the employ of or maintaining a director or consultant relationship with the Company or a Related Entity (or a company or a Parent or Subsidiary of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Grantee has remained continuously so employed or in the director or consultant relationship since the date of grant of the Option. This condition will not be satisfied if the Company's ownership of the voting stock of a Subsidiary (or a Parent's ownership of the Company) is reduced to less than 50% as a result of any sales or transfers of Securities by the Parent, the Company or such Subsidiary. In the event that the employment or consultant relationship of a Grantee shall terminate (other than by reason of death, Disability or Retirement), all Options of such Grantee that are exercisable at the time of Grantee's termination may, unless earlier terminated in accordance with their terms, be exercised within three (3) months after the date of such termination (or such different period as the Committee shall prescribe). (h) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. If a Grantee shall die while employed by, or maintaining a director or consultant relationship with, the Company or a Related Entity, or within thirty (30) days after the date of termination of such Grantee's employment, director or consultant relationship (or within such different period as the Committee may have provided pursuant to Section 6(g) hereof), or if the Grantee's employment, director or consultant relationship shall terminate by reason of Disability, all Options theretofore granted to such Grantee (to the extent otherwise exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Grantee or by the Grantee's estate or by a person who acquired the right to exercise such Options by bequest or inheritance or otherwise by result of death or Disability of the Grantee, at any time within 180 days after the death or Disability of the Grantee (or such different period as the Committee shall prescribe). In the event that an Option granted hereunder shall be exercised by the legal representatives of a deceased or former Grantee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative to exercise such Option. In the event that the employment or consultant relationship of a Grantee shall terminate on account of such Grantee's Retirement, all Options of such Grantee that are exercisable at the time of such Retirement may, unless earlier terminated in accordance with their terms, be exercised at any time within one hundred eighty (180) days after the date of such Retirement (or such different period as the Committee shall prescribe). Unless otherwise provided in the applicable Agreement, in the case of awards granted to consultants who do not provide services to the Company or to a Related Entity on an ongoing basis, for the purpose of determining the rights of such consultant under the Plan, the Committee shall determine the date, if any, upon which the consultant's relationship with the Company or the Related Entity shall have been terminated. 7 (i) OTHER PROVISIONS. The Option Agreements evidencing awards under the Plan shall contain such other terms and conditions not inconsistent with the Plan as the Committee may approve. 7. Nonqualified Stock Options. - -- -------------------------- Options granted pursuant to this Section 7 are intended to constitute Nonqualified Stock Options and shall be subject only to the general terms and conditions specified in Section 6 hereof. 8. Incentive Stock Options. - -- ----------------------- Options granted pursuant to this Section 8 are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 6 hereof: (a) LIMITATION ON VALUE OF SHARES. To the extent that the aggregate Fair Market Value of shares of Common Stock subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Subsidiary) exceeds $100,000, such excess Options, to the extent of the shares covered thereby in excess of the foregoing limitation, shall be treated as Nonqualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the shares of Common Stock shall be determined as of the date that the Option with respect to such shares was granted. (b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of the shares of Common Stock on the date of grant of such Incentive Stock Option, and (ii) the exercise period shall not exceed five (5) years from the date of grant of such Incentive Stock Option. 9. Stock Appreciation Rights. - -- ------------------------- The Committee shall have authority to grant a Stock Appreciation Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. A Stock Appreciation Right shall, except as provided in this Section 9 or as may be determined by the Committee, be subject to the same terms and conditions as the related Option. Each Stock Appreciation Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Stock Appreciation Right may be granted either at the time of grant of the related option, or at any time thereafter during the term of the Option; provided, however that Stock Appreciation Rights -------- ------- related to Incentive Stock Options may only be granted at the time of grant of the related Option. 8 (b) PAYMENT. A Stock Appreciation Right shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of an amount computed pursuant to Section 9(d). (c) EXERCISE. A Stock Appreciation Right shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related option may be transferable. A Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a share of Common Stock on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option. Unless otherwise approved by the Committee, no Grantee shall be permitted to exercise any Stock Appreciation Right (i) until six (6) months have elapsed from the date of grant or (ii) during the period beginning two weeks prior to the end of each of the Company's fiscal quarters and ending on the second business day following the day on which the Company releases to the public a summary of its fiscal results for such period. (d) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right, the Optionee shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right over the Option Price of the related Option, by (ii) the number of shares of Common Stock as to which such Stock Appreciation Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION RIGHTS UPON EXERCISE. Upon the exercise of a Stock Appreciation Right, the related Option shall be canceled to the extent of the number of shares of Common Stock as to which the Stock Appreciation Right is exercised. Upon the exercise or surrender of an option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be canceled to the extent of the number of shares of Common Stock as to which the Option is exercised or surrendered. (f) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered to the Company in accordance with procedures specified by the Company from time to time. Such notice shall state the number of shares of Common Stock with respect to which the Stock Appreciation Right is being exercised. A Grantee may also be required to deliver to the Company the underlying Agreement evidencing the Stock Appreciation Right being exercised and any related Option Agreement so that a notation of such exercise may be made thereon, and such Agreements shall then be returned to the Grantee. (g) FORM OF PAYMENT. Payment of the amount determined under Section 9(d) may be made solely in whole shares of Common Stock in a number based upon their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and shares of Common Stock as the Committee deems advisable. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. 9 10. Limited Stock Appreciation Rights. - --- --------------------------------- The Committee shall have authority to grant a Limited Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. Each Limited Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Limited Right granted in tandem with a Nonqualified Stock Option may be granted either at the time of grant of the related Option or any time thereafter during its term. A Limited Right granted in tandem with an Incentive Stock Option may only be granted at the time of grant of the related Option. (b) EXERCISE. A Limited Right may be exercised only (i) during the ninety-day period following the occurrence of a Change in Control or (ii) immediately prior to the effective date of a Corporate Transaction. Each Limited Right shall be exercisable only if, and to the extent that, the related Option is exercisable and, in the case of a Limited Right granted in tandem with an Incentive Stock Option, only when the Fair Market Value per share of Common Stock exceeds the Option Price per share. Notwithstanding the provisions of the two immediately preceding sentences (or unless otherwise approved by the Committee), a Limited Right granted to a Grantee who is an Insider must be (x) held by the Insider for at least six (6) months from the date of grant of the Limited Right before it becomes exercisable and (y) automatically paid out in cash to the Insider upon the occurrence of a Change in Control or a Corporate Transaction (provided such six (6) month holding period requirement has been met). (c) AMOUNT PAYABLE. Upon the exercise of a Limited Right, the Grantee thereof shall receive in cash whichever of the following amounts is applicable: (i) in the case of the realization of Limited Rights by reason of an acquisition of Common Stock described in clause (i) of the definition of "Change in Control" (Section 2(c) above), an amount equal to the Acquisition Spread as defined in Section 10(d)(ii) below; or (ii) in the case of the realization of Limited Rights by reason of stockholder approval of an agreement or plan described in clause (i) of the definition of "Corporate Transaction" (Section 2(j) above), an amount equal to the Merger Spread as defined in Section 10(d)(iv) below; or (iii) in the case of the realization of Limited Rights by reason of the change in composition of the Board described in clause (ii) of the definition of "Change in Control" or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the Spread as defined in Section 10(d)(v) below. Notwithstanding the foregoing provisions of this Section 10(c) (or unless otherwise approved by the Committee), in the case of a Limited Right granted in respect of an 10 Incentive Stock Option, the Grantee may not receive an amount in excess of the maximum amount that will enable such option to continue to qualify under the Code as an Incentive Stock Option. (d) DETERMINATION OF AMOUNTS PAYABLE. The amounts to be paid to a Grantee pursuant to Section 10(c) shall be determined as follows: (i) The term "Acquisition Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of an acquisition of Common Stock described in clause (i) of the definition of Change in Control, the greatest of (A) the highest price per share shown on the Statement on Schedule 13D or amendment thereto filed by the holder of 25% or more of the voting power of the Company that gives rise to the exercise of such Limited Right, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right, or (C) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date the Limited Right is exercised. (ii) The term "Acquisition Spread" as used herein shall mean an amount equal to the product computed by multiplying (A) the excess of (1) the Acquisition Price per Share over (2) the Option Price per share of Common Stock at which the related option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (iii) The term "Merger Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of stockholder approval of an agreement described in clause (i) of the definition of Corporate Transaction, the greatest of (A) the fixed or formula price for the acquisition of shares of Common Stock specified in such agreement, if such fixed or formula price is determinable on the date on which such Limited Right is exercised, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety- day period ending on the date of exercise of the Limited Right, (C) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date on which such Limited Right is exercised. (iv) The term "Merger Spread" as used herein shall mean an amount equal to the product computed by multiplying (A) the excess of (1) the Merger Price per Share over (2) the Option Price per share of Common Stock at which the related Option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (v) The term "Spread" as used herein shall mean, with respect to the exercise of any Limited Right by reason of a change in the composition of the Board described in clause (ii) of the definition of Change in Control or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the product computed by multiplying (i) the excess of (A) the greater of (1) the highest price paid in any tender or exchange offer which is in effect at any time 11 during the ninety-day period ending on the date of exercise of the Limited Right or (2) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date the Limited Right is exercised over (B) the Option Price per share of Common Stock at which the related Option is exercisable, by (ii) the number of shares of Common Stock with respect to which the Limited Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND LIMITED RIGHTS UPON EXERCISE. Upon the exercise of a Limited Right, the related Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Right is exercised but shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock available for the grant of further awards pursuant to this Plan. Upon the exercise or termination of a related Option, the Limited Right with respect to such related Option shall terminate to the extent of the shares of Common Stock with respect to which the related Option was exercised or terminated. (f) METHOD OF EXERCISE. To exercise a Limited Right, the Grantee shall (i) deliver written notice to the Company specifying the number of shares of Common Stock with respect to which the Limited Right is being exercised, and (ii) if requested by the Committee, deliver to the Company the Agreement evidencing the Limited Rights being exercised and, if applicable, the Option Agreement evidencing the related Option; the Company shall endorse thereon a notation of such exercise and return such Agreements to the Grantee. The date of exercise of a Limited Right that is validly exercised shall be deemed to be the date on which there shall have been delivered the instruments referred to in the first sentence of this paragraph (f). 11. Restricted Stock. - --- ---------------- The Committee may award shares of Restricted Stock to any eligible employee or consultant. Each award of Restricted Stock under the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) NUMBER OF SHARES. Each Agreement shall state the number of shares of Restricted Stock to be subject to an award. (b) RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such additional or alternative restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Such performance criteria may include sales, earnings before interest and taxes, return on investment, earnings per share, any combination of the foregoing or rate of growth of any of the foregoing, as determined by the Committee. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the 12 Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. (c) FORFEITURE. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment or consultant relationship with the Company or a Related Entity shall terminate for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions (after taking into account the provisions of Subsection (e) of this Section 11) shall thereupon be forfeited by the Grantee and transferred to, and retired by, the Company without cost to the Company or such Related Entity. (d) OWNERSHIP. During the Restricted Period the Grantee shall possess all incidents of ownership of such shares, subject to Subsection (b) of this Section 11, including the right to receive dividends with respect to such shares and to vote such shares. (e) ACCELERATED LAPSE OF RESTRICTIONS. Upon the occurrence of any of the events specified in Section 13 (and subject to the conditions set forth therein), all restrictions then outstanding on any shares of Restricted Stock awarded under the Plan shall lapse as of the applicable date set forth in Section 13. The Committee shall have the authority (and the Agreement may so provide) to cancel all or any portion of any outstanding restrictions prior to the expiration of the Restricted Period with respect to any or all of the shares of Restricted Stock awarded on such terms and conditions as the Committee shall deem appropriate. 12. Effect of Certain Changes. - --- ------------------------- (a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any extraordinary dividend, stock dividend (including a spin-off or split-off of a Subsidiary), recapitalization, merger, consolidation, stock split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, the Committee shall equitably adjust (i) the maximum number of Options or shares of Restricted Stock that may be awarded to a Grantee in any calendar year (as provided in Section 5 hereof), (ii) the number of shares of Common Stock available for awards under the Plan, (iii) the number of such shares covered by outstanding awards and/or (iv) the price per share of Options or the applicable market value of Stock Appreciation Rights or Limited Rights, in each such case so as to reflect such event and preserve the value of such awards; provided, however, that any fractional shares resulting from such -------- ------- adjustment shall be eliminated. (b) CHANGE IN COMMON STOCK. In the event of a change in the Common Stock of the Company as presently constituted that is limited to a change of all of its authorized shares of Common Stock into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. 13 13. Corporate Transaction. - --- --------------------- Unless otherwise provided in the applicable Agreement, in the event of a Corporate Transaction, each award which is at the time outstanding and unexercised under the Plan shall automatically terminate and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Corporate Transaction. However, all such awards shall not terminate if the awards are, in connection with the Corporate Transaction, assumed by the successor corporation or Parent thereof. 14. Non-Employee Director Options. - --- ----------------------------- The provisions of this Section 14 shall apply only to certain grants of Options to Non-Employee Directors, as provided below. Except as set forth in this Section 14, the other provisions of the Plan shall apply to grants of Options to Non-Employee Directors to the extent not inconsistent with this Section. For purposes of interpreting Section 6 of the Plan, a Non-Employee Director's service as a member of the Board shall be deemed to be employment with the Company. (a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock Options in accordance with this Section 14. The Option Price per share of Common Stock purchasable under Options granted to Non-Employee Directors shall be the Fair Market Value of a share on the date of grant. Options granted pursuant to this Section 14 shall be subject to the terms of such section and shall not be subject to discretionary acceleration of exercisability by the Committee. (b) INITIAL GRANTS. On the date of the Initial Public Offering, each Non-Employee Director will be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the offering price of the Common Stock in connection with the Initial Public Offering. (c) SUBSEQUENT GRANTS. Each person who, after the Initial Public Offering, becomes a Non-Employee Director for the first time, will, at the time such director is elected and duly qualified, be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the Fair Market Value of the Common Stock as of the date of grant. (d) ANNUAL GRANTS. On each anniversary date of a Non-Employee Director's initial election to the Board, such Non-Employee Director will be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the Fair Market Value of the Common Stock as of the date of grant. (e) VESTING. Each option granted under this Section 14 shall be fully exercisable on the date of grant. Sections 6(f), 6(g) and 6(h) hereof shall not apply to Options granted to Non-Employee Directors. 14 (f) DURATION. Each Option granted to a Non-Employee Director shall expire on the first to occur of (i) the tenth anniversary of the date of grant of the Option, (ii) the first anniversary of the Non-Employee Director's termination of service as a member of the Board other than for Cause or (iii) three months following the Non-Employee Director's removal from the Board for Cause. The Committee may not provide for an extended exercise period beyond the periods set forth in this Section 14. (g) DEFINITION OF "CAUSE." For purposes of this Section 14, "cause" shall mean the termination of service as a member of the Board by a Non-Employee Director due to any act of (i) fraud or intentional misrepresentation, (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary, or (iii) any other act deemed by the Board to be detrimental to the Company. 15. Period During which Awards May Be Granted. - --- ----------------------------------------- Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years from April 27, 1999, the date the Plan was initially adopted by the Board. 16. Transferability of Awards. - --- ------------------------- (a) Incentive Stock Options (and any Stock Appreciation Rights related thereto) may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by the laws of descent and distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee or his or her guardian or legal representative. (b) Nonqualified Stock Options (together with any Stock Appreciation Rights or Limited Rights related thereto) shall be transferable in the manner and to the extent acceptable to the Committee, as may be evidenced by a writing signed by the Company and the Grantee, or in such other matter as the Committee shall provide. Notwithstanding the transfer by a Grantee of a Nonqualified Stock Option, the Grantee will continue to remain subject to the withholding tax requirements set forth in Section 17 hereof. (c) The terms of any award granted under the Plan, including the transferability of any such award, shall be binding upon the executors, administrators, heirs and successors of the Grantee. 17. Agreement by Grantee regarding Withholding Taxes. - --- ------------------------------------------------ If the Committee shall so require, as a condition of exercise of an Option, Stock Appreciation Right or Limited Right or the expiration of a Restricted Period (each, a "Tax Event"), each Grantee shall agree that no later than the date of the Tax Event, the Grantee will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, the Committee may provide that a Grantee may elect, to the extent permitted or required by law, to have the Company deduct federal, state and local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due to the Grantee. The withholding obligation may be satisfied by the withholding or delivery of Common Stock. 15 18. Rights as a Stockholder. - --- ----------------------- Except as provided in Section 11(d) hereof, a Grantee or a transferee of an award shall have no rights as a stockholder with respect to any shares covered by the award until the date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 12(a) hereof. 19. No Rights to Employment. - --- ----------------------- Nothing in the Plan or in any award granted or Agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of, or in a consultant relationship with, the Company or any Related Entity or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such Related Entity to terminate such Grantee's employment. Awards granted under the Plan shall not be affected by any change in duties or position of a Grantee as long as such Grantee continues to be employed by, or in a consultant relationship with, the Company or any Related Entity. 20. Beneficiary. - --- ----------- A Grantee may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Grantee, the executor or administrator of the Grantee's estate shall be deemed to be the Grantee's beneficiary. 21. Stockholder Approval; Amendment and Termination of the Plan. - --- ------------------------------------------------------------ (a) STOCKHOLDER APPROVAL. The Plan initially became effective when adopted by the Board and stockholders of the Company on April 27, 1999 and shall terminate on the tenth anniversary of such date. This amendment and restatement of the Plan became effective upon its adoption by the Board on May 17, 1999. (b) AMENDMENT AND TERMINATION OF THE PLAN. The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; however, unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. Except as provided in Section 12(a) hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted, unless the written consent of the Grantee is obtained. 22. Governing Law. - --- ------------- The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. 16 EX-10.20 8 STOCKHOLDERS AGREEMENT Exhibit 10.20 STOCKHOLDERS AGREEMENT ---------------------- STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of May 13, 1999, --------- by and among IDT Corporation, a Delaware corporation ("IDT"), and Clifford M. Sobel ("Sobel") (together with IDT, the "Majority Stockholders"), Net2Phone, ----- --------------------- Inc., a Delaware corporation (the "Company"), and the additional investors listed on Schedule A hereto (the "Series A Investors"). ------------------ WHEREAS, each of the Series A Investors has executed and delivered a Series A Subscription Agreement, dated as of May 13, 1999 (collectively, the "Series A Subscription Agreement"), by and among the Company and each such ------------------------------- Series A Investor for the purchase of Series A Convertible Preferred Stock of the Company, par value $.01 per share (the "Series A Preferred"), and Warrants ------------------ (the "Warrants") to purchase Common Stock of the Company, par value $.01 per -------- share (the "Common Stock"). ------------ WHEREAS, Sobel holds shares individually and has donated shares to the Scott Sobel Annual Gift Trust (the "Sobel Trust"). ----------- WHEREAS, Sobel is entering into this Agreement with respect to the shares of Common Stock held by him and a trustee is entering into this Agreement on behalf of the Sobel Trust. WHEREAS, it is a condition to the Series A Investors entering into the Series A Subscription Agreements that the Majority Stockholders enter into this Agreement. NOW, THEREFORE, the Majority Stockholders and each of the Series A Investors hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined ------------- herein shall have the meanings given to them in the Series A Subscription Agreements. 2. Election of Directors. (a) The Majority Stockholders agree that at the next --------------------- meeting of stockholders of the Company following the date of this Agreement (the "Stockholders' Meeting"), and for so long as the Series A Investors who are --------------------- affiliates of Softbank (the "Softbank Investors") hold a majority of the shares ------------------ of Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the capital stock into which such shares of Series A Preferred are convertible, they will vote all of their respective shares of capital stock in the Company in favor of the election of, and take all other actions necessary to cause the election of, a director nominated by the Softbank Investors (the "Softbank Director"), and shall, upon the request of the Softbank ----------------- Investors, use their best efforts to cause such director to be appointed to the Company's audit committee or compensation committee. In the event that the Softbank Investors elect to terminate the appointment of the Softbank Director, or fail to nominate a 1 candidate, the Majority Stockholders will nominate and elect a director of their choosing in place of the Softbank Director. (b) The Majority Stockholders agree that at the Stockholders' Meeting, and for so long as GE Capital Equity Investments Inc., its affiliates or beneficial owners (collectively, the "GE Investors") hold a majority of the shares of ------------ Series A Preferred originally purchased pursuant to their respective Subscription Agreements or the capital stock into which such shares of Series A Preferred are convertible, they will vote all of their respective shares of capital stock in the Company in favor of the election of, and take all other actions necessary to cause the election of, a director nominated by the GE Investors (the "GE Director"), and shall, upon the request of the GE Investors, ----------- use their best efforts to cause such director to be appointed to whichever of the Company's audit committee or compensation committee to which the Softbank Director is not elected. 3. Transfer Restrictions. Except as otherwise set forth in this Section 3, --------------------- each Series A Investor agrees not to sell, transfer or otherwise dispose of, pledge, collateralize, hypothecate or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer or other disposition, pledge, collateralization, or hypothecation (any such event, a "Disposition") of its shares of Series A Preferred or Warrants, or Common Stock ----------- underlying such securities, for a period of 180 days following the date upon which a registration statement relating to an initial public offering of the Company which results in the conversion of the Series A Preferred pursuant to the Certificate of Designation is declared effective. No Series A Investor nor any Majority Stockholder may for a period of 36 months from the date of this Agreement, make any Dispositions to any Competitor of the Company. If, after 36 months from the date of this Agreement, a Series A Investor elects to make a Disposition to a Competitor of the Company, such Disposition shall be subject to a right of first refusal by the Company as set forth in Exhibit A hereto. For purposes of this Agreement, a "Competitor" shall mean any person or entity who derives a majority of its revenue from providing Internet telephony services. Notwithstanding anything contained herein, there shall be no restrictions on transfer between Series A Investors or from a Series A Investor to any of its affiliates or beneficial owners or to IDT or the Company, nor shall there be any restrictions on any Disposition (i) which have been consented to by the Company, (ii) pursuant to a third party tender offer, (iii) pursuant to a merger, consolidation or reorganization to which the Company is a party, (iv) in a bona fide public distribution or bona fide underwritten public offering, or (v) pursuant to Section 144 or Section 144A of the Securities Act (including distributions by a partnership to its partners or a limited liability company to its members); provided, however, that in the case of any such permitted transfer -------- ------- to an affiliate or beneficial owner of a Series A Investor or Majority Stockholder, this contract shall be binding on the affiliate or beneficial owner. 4. Representations, Warranties and Acknowledgments of IDT. IDT hereby ------------------------------------------------------ represents, warrants and acknowledges to Sobel and the Series A Investors as follows: (i) Organization and Qualification. IDT has been duly organized and is validly ------------------------------ existing and is in good standing under the laws of the State of Delaware, and has all requisite corporate power 2 and authority to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) Authorization. All corporate actions on the part of IDT necessary for ------------- the authorization, execution and delivery of this Agreement and the performance of all obligations of IDT hereunder have been taken. This Agreement has been duly executed and delivered by IDT and constitutes a valid and legally binding obligation of IDT, enforceable against IDT in accordance with its terms, subject to (a) the laws of bankruptcy and the laws affecting creditors' rights generally, and (b) the availability of equitable remedies. (iii) Ownership of Shares. IDT owns of record and beneficially owns the number ------------------- of shares of Common Stock set forth opposite its name on Schedule B attached hereto. (iv) No Proxy. IDT has not granted and is not a party to any proxy, voting -------- trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. 5. Representations, Warranties and Acknowledgment of Sobel. Sobel hereby ------------------------------------------------------- represents, warrants and acknowledges to IDT and the Series A Investors as follows: (i) This Agreement has been duly executed and delivered by Sobel individually and a trustee of the Sobel Trust and constitutes a legal, valid and binding agreement of Sobel and the Sobel Trust, enforceable against each of Sobel and the Sobel Trust in accordance with its terms, subject to (a) the laws of bankruptcy and the laws affecting creditors' rights generally, and (b) the availability of equitable remedies. (ii) Ownership of Shares. Sobel and the Sobel Trust own of record and ------------------- beneficially own the number of shares of Common Stock set forth opposite its name on Schedule C attached hereto. (iii) No Proxy. Neither Sobel nor the Sobel Trust has granted nor is either a -------- party to any proxy, voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. 6. Representations, Warranties and Acknowledgments of the Series A --------------------------------------------------------------- Investors. Each Series A Investor hereby represents, warrants and acknowledges - --------- to the Majority Stockholders as follows: Authorization. All action on the part of such Series A Investor ------------- necessary for the authorization, execution and delivery of this Agreement and the performance of all obligations of such Series A Investor hereunder has been taken. This Agreement has been duly executed and delivered by such Series A Investor and constitutes a valid and legally binding obligation of such Investor, enforceable in accordance with its terms, subject to (a) the laws of bankruptcy and the laws affecting creditors' rights generally and (b) the availability of equitable remedies. 3 7. Miscellaneous. ------------- 7.1. Legends. Each of the parties consents to the printing of a legend on the ------- certificates representing its shares of Common Stock or Series A Preferred that refer to the limitations on transfer set forth in this Agreement. 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 except for the last sentence thereof, if necessary, shall be removed from the certificates, 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 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. 7.2. Termination. This Agreement shall terminate with respect to a Series A ----------- Investor upon the earlier to occur of (i) the mutual consent of all of the Series A Investors and IDT or (ii) with respect to each provision of this Agreement, in accordance with its terms. 7.3. Specific Performance. The parties hereto agree that the remedy at law -------------------- for any breach of this Agreement will be inadequate and that any party by whom this Agreement is enforceable shall be entitled to specific performance in addition to any other appropriate relief or remedy. Such party may, in its sole discretion, apply to a court of competent jurisdiction for specific performance or injunctive or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief. 4 7.4. Successors and Assigns. This Agreement may not be assigned by any Series ---------------------- A Investor or the Majority Stockholders 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. 7.5. Additional Shares. In the event that subsequent to the date of this ----------------- Agreement any shares or other securities are issued on, or in exchange for, any of the securities of the Company owned by a Majority Stockholder by reason of any stock dividend, stock split, combination of shares, reclassification or the like, such shares or securities shall be subject to the terms of this Agreement to the same extent as Majority Stockholder Shares hereunder. 7.6. Addition of Series A Investors. Notwithstanding anything to the contrary ------------------------------ contained herein, if the Company shall issue additional shares of its Series A Preferred pursuant to a Series A Subscription Agreement, any purchaser of such shares of Series A Preferred may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed a "Series A Investor" hereunder. 7.7. Waiver. No waivers of any breach of this Agreement extended by any party ------ hereto to any other party shall be construed as a waiver of any rights or remedies of any other party hereto or with respect to any subsequent breach. 7.8. 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 giving effect to the conflict of laws provisions. Each of the Series A Investors and the Majority Stockholders 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 Majority Stockholders 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. 7.9. 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. 7.10. 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. 7.11. 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 one business day after 5 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: If to the Majority Stockholders: IDT Corporation 190 Main Street Hackensack, NJ 07601 Attn: Chief Financial Officer Fax: 201-928-2952 and: Clifford M. Sobel Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Fax: 201-907-5351 with a copy to: Morrison & Foerster LLP 1290 Avenue of the Americas New York, NY 10104 Attn: Ira A. Greenstein Fax: 212-468-7900 If to the Series A Investors: At the address specified in Schedule A with a copy to: Softbank Technology Ventures, IV 333 West San Carlos St., Suite 1225 San Jose, CA 95110 Attn: Gary Rieschel Fax: 408-271-2270 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 Los Angeles, CA 90071 Attn: Siobhan M. Burke Fax: 213-627-0705 6 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 7.12. Amendments. This Agreement may not be modified, amended, altered or ---------- supplemented, except upon the execution and delivery of a written agreement executed by the party or parties against which the same will be enforced. Notwithstanding the foregoing, the consent of a Majority Stockholder who, as of the date hereof, is an employee or director of, or consultant to, the Company to any amendment or waiver which diminishes such Majority Stockholder's rights shall not be required if such person is no longer serving as an employee or director of, or consultant to the Company. 7.13. Further Assurances. Each party hereto shall execute and deliver such ------------------ additional documents as may be necessary or desirable to consummate the transactions contemplated by this Agreement. 7.14. 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. 7.15. Entire Agreement. This Agreement together with Schedule(s) with the ---------------- Series A Subscription Agreement and the Additional Agreements contain the entire understanding of the parties hereto and thereto with respect to the subject matter contained herein and therein, and supersede and cancel 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 or to the Subscription Agreement or any of the Additional Agreements with respect to the respect contemplated hereby and thereby, other than those set forth herein or therein or made hereunder or thereunder. 7.16. No Fiduciary Duty of Investors. It is understood and accepted that each ------------------------------ of the Series A Investors and their respective affiliates (as defined in Rule 405 of the SEC under the Act) and beneficial owners have or may hereafter have interests in other business ventures that are or may be competitive with the activities of the Company and that, to the fullest extent permitted by law, nothing in this Agreement shall limit the current or future business activities of each of such Persons whether or not such activities are competitive with those of the Company or otherwise. Nothing in this Agreement shall limit in any manner the ability of the Investors to exercise their rights under this Agreement or as stockholders or other security holders of the Company and this 7 Agreement shall not create, or be deemed or interpreted to create, any fiduciary or similar duty of any party owing to any other party or the Company. 7.17. 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 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 7.17 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. 8 IN WITNESS WHEREOF, the parties, each by its duly authorized signatory (if not an individual), have executed this Agreement as of the date first above written. SERIES A INVESTOR: By:____________________________ Name: Title: Name:__________________________ Address:_______________________ Title:_________________________ Telephone No.__________________ Fax No.________________________ Date:__________________________ IDT Corporation Net2Phone, Inc. By: /s/ Joyce J. Mason By: /s/ Howard Balter ------------------------ ----------------------------------- Name: Joyce J. Mason Name: Howard Balter Title: General Counsel Title: Chief Executive Officer Scott Sobel Annual Gift Trust By: a Trustee /s/ Clifford M. Sobel /s/ Stephen Greenberg ------------------------ -------------------------------------- Clifford M. Sobel Name: Stephen M. Greenberg, Trustee SCHEDULE A ----------
Subscription Shares of Investor Amount Preferred A Warrants -------- ------------ ----------- -------- Softbank Technology Ventures IV, L.P. $14,718,000.00 1,471,800 29,436 Softbank Technology Advisors Fund L.P. $ 282,000.00 28,200 564 GE Capital Equity Investments, Inc. $ 7,500,000.00 750,000 15,000 America Online, Inc. $ 7,500,000.00 750,000 15,000 Hambrecht & Quist Individuals $ Timothy Baughman $ 20,000.00 2,000 0 Daniel Rimer $ 20,000.00 2,000 0 David Golden $ 15,000.00 1,500 0 Mark Zanoli $ 15,000.00 1,500 0 Daniel H. Case III $ 10,000.00 1,000 0 Norman Colbert $ 5,000.00 500 0 Hambrecht & Quist Entities Hambrecht & Quist California $ 78,750.00 7,875 0 Hambrecht & Quist Employee Venture Fund, L.P. II $ 37,500.00 3,750 0 Access Technology Partners, L.P. $ 790,000.00 79,000 0 Access Technology Partners Brokers Fund, L.P. $ 8,750.00 875 0 ABS Employee's Venture Fund Limited Partnership $ 400,000.00 40,000 0 -------------- --------- ------ TOTAL $31,400,000.00 3,140,000 60,000 ============== ========= ======
SCHEDULE B ---------- IDT Corporation 9,288,000 shares SCHEDULE C ---------- Clifford M. Sobel Scott Sobel Annual Gift Trust EXHIBIT A RIGHT OF FIRST REFUSAL ---------------------- 1. If any Series A Investor seeks to make a Disposition pursuant to this Agreement, such Series A Investor (the "Offering Holder") shall first make a written offer (the "Offer") to sell such shares of Series A Preferred or Warrants or Common Stock underlying such securities. The Offer shall set forth: (i) the name and address of any proposed transferee; (ii) the number of shares of Series A Preferred or Warrants or Common Stock underlying such securities to be transferred ("Offered Shares"); (iii) if the proposed transfer is a sale, the cash consideration per share to be received by the Offering Holder in connection with such Disposition and, if the consideration is other than cash or partly in cash and partly in the form of other consideration, a statement as to the nature of the other consideration (with a reasonably sufficient and accurate description thereof) and the fair and reasonable cash equivalent value (discounted at the prime commercial rate of interest most recently published by The Wall Street Journal (the "Prime Rate") to present value) of such other consideration; (iv) the address of the Offering Holder at which each Offeree may give any notice required herein; (v) an offer to sell and transfer the Offered Shares to the Company pursuant to the provisions of this Agreement; and (vi) all other terms and conditions of the proposed transfer. As used herein, the term "Offer Date" shall mean the date on which the Company actually receives an Offer unless, an independent investment banking firm is required to determine the fair market value of the Offered Shares, in which event the "Offer Date" shall be deemed to be the fifth day that is not a Saturday, Sunday or legal holiday in the State of New York (a "Business Day") after such investment banking firm shall have notified the Company of its determination of the value of the Offered Shares. The Company shall have the option and preferential right, but shall not be obligated, for 60 days following the Offer Date to purchase any or all of the Offered Shares. 2. If the Company elects to purchase less than all of the Offered Shares pursuant to this right of first refusal, the Offering Holder will have the right to make a Disposition of the balance Offered Shares to the proposed transferee pursuant to the terms of the Offer, and such proposed transferee shall execute and become a party to this Agreement and must hold the Offered Shares subject to all the terms and conditions of this Agreement. Notwithstanding the failure to execute a counterpart of this Agreement, any such proposed transferee shall take such Offered Shares subject to this Agreement and by acceptance of any certificate representing such Offered Shares shall be bound by this Agreement. If all of the Offered Shares are not transferred in accordance with the terms described in the Offer within a period of 45 days after the expiration of the option period provided in Paragraph (1) hereof, then no Disposition of any Offered Shares may be made unless a new Offer covering such Offered Shares is given and this Exhibit A is complied with again. EX-10.21 9 AGREEMENT DATED 05/12/99 EXHIBIT 10.21 [NET2PHONE LETTERHEAD] May 12, 1999 Clifford M. Sobel 40 Dorrison Drive Short Hills, New Jersey 07078 Dear Cliff: This letter is being entered into in connection with the amendment among Net2Phone, Inc. ("Net2Phone"), IDT Corporation ("IDT") and you, dated May 11, 1999 (the "Amendment"), to the original employment agreement between you and IDT, dated May 1, 1997 (the "Agreement"). While the Amendment made Net2Phone a party to the Agreement, we have asked for you and IDT to execute this letter agreement to clarify two points with respect to the Amendment and the Agreement. 1. It is the intention and desire of the parties to amend Section 8 and Section 12 of the Agreement to include Net2Phone within the purview of the nondisclosure and non-compete provisions contained therein. Therefore, Section 8 and Section 12 of the Agreement are hereby amended to include Net2Phone along with the Company (as defined in the Agreement) for purposes of your nondisclosure and non-compete obligations as set forth in Section 8 and Section 12 of the Agreement. 2. This letter shall also clarify that you executed the Amendment in your capacity as an individual and not as an officer of Net2Phone. Please acknowledge your acceptance to the terms of this letter by executing below. Very truly yours, Howard S. Balter Chief Executive Officer AGREED TO AND ACCEPTED: IDT CORPORATION /s/ Clifford M. Sobel By: /s/ Joyce Mason - -------------------------------- ------------------------------ Clifford M. Sobel Name: Joyce Mason Title: General Counsel EX-10.22 10 AGREEMENT DATED 05/17/99 EXHIBIT 10.22 Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 May 17, 1999 Clifford M. Sobel 40 Dorrison Drive Short Hills, New Jersey 07078 Dear Cliff: This letter agreement is being entered into in connection with your agreement to retain your common stock (the "Common Stock") of Net2Phone, Inc. ("Net2Phone"), in lieu of becoming a holder of Net2Phone class A common stock (the "Class A Stock"). In consideration of your agreement not to participate in the Net2Phone recapitalization pursuant to which IDT Corporation ("IDT") became a holder of Class A Stock, Net2Phone and IDT have agreed to provide you with certain piggyback registration rights relating to the shares of Common Stock you hold today and undertaking to ensure that you remain Chairman of Net2Phone for a period of three years, both as provided herein. 1. Net2Phone hereby grants you "piggy-back" registration rights relating to the shares of Common Stock you hold today under the same terms and conditions as those rights granted to Net2Phone's Series A Preferred stockholders as set forth in the Series A Preferred Shareholder Registration Rights Agreement, dated as of May 13, 1999, among Net2Phone and each of the investors listed on Schedule A thereto (the "Agreement"); provided, however, that you agree to be subject to the allocation provisions contained in Section 2.7 of the Agreement. 2. IDT agrees that upon a Qualifying Public Offering (as defined in the Agreement), IDT shall vote its Class A Stock or Common Stock, as the case may be, provided that you remain in compliance with the terms of your employment agreement, to elect you to that class of directors of Net2Phone's staggered board whose term expires three years from the date of election. 3. If no Qualifying Public Offering occurs, IDT agrees to vote its Class A Stock or Common Stock, as the case may be, to re-elect you Chairman of the firm at each of the next two annual stockholder meetings. 4. To clarify the rights and obligations of the parties, upon the occurrence of a Qualifying Public Offering, IDT shall be released from any obligations to pay to you any amount of salary or other benefits payable pursuant to your employment agreement, as amended, and Net2Phone shall be solely obligated as to such payments. Net2Phone, Inc. Clifford Sobel May 17, 1999 Page Two Please acknowledge your acceptance to the terms of this letter by executing below. Very truly yours, /s/ Howard Balter Howard S. Balter Chief Executive Officer AGREED TO AND ACCEPTED: /s/ Clifford M. Sobel - -------------------------------------- Clifford M. Sobel IDT CORPORATION By: /s/ Joyce Mason ----------------------------------- Name: Joyce Mason Title: General Counsel EX-10.23 11 CO-LOCATION AND FACILITIES AGREEMENT EXHIBIT 10.23 CO-LOCATION AND FACILITIES MANAGEMENT SERVICES AGREEMENT This Co-location and Facilities Management Services Agreement (this "Agreement") is made effective as of the 20th day of May, 1999 by and between IDT Corporation, a Delaware corporation having an office at 225 Old New Brunswick Road, Piscataway, NJ and Net2Phone, Inc., a Delaware corporation having an office at 171 Main Street, Hackensack, NJ. WHEREAS, IDT has entered into an agreement with 225 Old NB Road, Inc. ("Landlord") pursuant to which IDT uses and occupies approximately 22,000 square feet of space (the "Premises") located within that certain building located at 225 Old New Brunswick Road, Piscataway, New Jersey ("Building"); and, WHEREAS, IDT desires to license to Net2Phone, and Net2Phone desires to license from IDT, the right to use and occupy space within the Premises (the "Equipment Space") as shown on Exhibit B attached to and made a part hereof to locate certain internet telephony equipment (the "Equipment"); and WHEREAS, IDT has agreed to provide, and Net2Phone desires to receive, co- location and facilities management services based upon the terms and conditions set forth herein. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and in consideration of the foregoing recitals, each of which is incorporated in and made a part of this Agreement, the parties hereto, intending to be legally bound, hereby agree as follows: 1. PERMISSIBLE USE IDT hereby licenses the Equipment Space to Net2Phone, and Net2Phone hereby licenses the Equipment space from IDT upon and subject to the terms, covenants, rentals and conditions herein set forth for the purpose of locating internet telephony equipment therein. 2. UTILITIES AND TECHNICAL UNDERTAKINGS IDT shall at all times during the Term of this Agreement maintain or cause the maintenance of the back-up generator, electrical system and equipment and heating, ventilating and air-conditioning system and equipment (collectively, "Utility Systems") serving the Equipment Space in good condition and repair, adequate at all times to provide, without interruption, all of the Services described in this Agreement. IDT currently employs technical staff to maintain and manage technical facilities. Upon Net2Phone's request, IDT's technical staff shall perform necessary technical work related specifically to Net2Phone owned or leased equipment and/or provide technical services to Net2Phone's facilities on a "time and material" basis as set forth in Exhibit A. Such work and or services will be performed only at Net2Phone's written request (including via email) and under Net2Phone's direction. 3. ADDITIONAL TERMS GOVERNING THE USE OF THE EQUIPMENT SPACE; INSTALLATION OF EQUIPMENT a. Net2Phone shall not make any construction changes or material alterations to the interior or exterior portions of the Equipment Space or Premises, including building of walls or partitions, drop ceilings, lighting, hvac, plumbing or any electrical distribution or power supplies for equipment. IDT shall exclusively perform and manage any construction or material alterations within the Equipment Space and Premises at rates to be negotiated between the parties hereto, which rates shall not exceed the generally prevailing market rate that is then being charged to perform such services. b. Net2Phone's use of the Equipment Space, installation of Equipment, and access to the Premises shall at all times be subject to Net2Phone's adherence to generally accepted industry standards for facility security and rules of conduct provided, however, Net2Phone shall be permitted to use the Equipment Space and shall have access through the Premises to the Equipment Space, twenty-four (24) hours per day, three hundred sixty-five (365) days per year. c. Net2Phone shall not market, license or sell co-location services in the Equipment Space to any third party such that Net2Phone is using the Equipment Space to compete with IDT, except that Net2Phone is permitted, subject to IDT's prior written consent, to allow its vendors and customers to co-locate within the Equipment Space if such co- location is needed for purposes of permitting the vendor or customer to connect to Net2Phone's network. However, Net2Phone may not market, license or sell co-location services in the Equipment Space to other local, inter-exchange, long distance carriers, or Internet service providers, or other such service providers or carriers for the purpose of such carriers or service providers utilizing the Premises or the Building as a point of presence from which the service provider or carrier would provision interconnect services to other users within the Premises or the Building. If Net2Phone should provide or attempt to make available to any third party use of the Equipment Space without obtaining the prior written consent of IDT, Net2Phone shall be in breach of this Agreement and IDT may pursue any legal or equitable remedy it is entitled to pursue under Paragraph 9 of this Agreement. 4. PAYMENT a. Net2Phone shall pay IDT a monthly recurring fee for use and occupancy of the Equipment Space (the "Occupancy Fee") as set forth in the attached 2 Exhibit A. If Net2Phone requests that IDT provide services not delineated herein or in Exhibit A, Net2Phone agrees to pay IDT's then current standard charge for such service in effect at the time such service was rendered or such charge as the parties may mutually agree upon prior to the delivery of the service. b. Commencing on the Commencement Date, monthly installments of the Occupancy Fee shall be payable in advance on the first day of each calendar month. c. Both IDT and Net2Phone agree to reimburse the other for all reasonable repair or restoration costs associated with damage or destruction caused by their own personnel, agents, suppliers, contractors or visitors or as a consequence of any removal of Equipment or other property installed in the Equipment Space or the Premises. Such reimbursement shall be made within thirty (30) days of the damage or destruction. d. The monthly charges for all services used shall be payable in U.S. dollars within thirty (30) days from the date of IDT's invoice. Payment shall be remitted to IDT at the address set forth in Paragraph 13 and will not be deemed to have been made until the funds are received by IDT. e. Any payment (including monthly service charges due under this Paragraph or any other amount due hereunder) not made when due will be subject to a late charge or one and one-half percent (1.5%) per month. 5. HOURLY RATES FOR ADDITIONAL SERVICES When IDT technical support assistance is requested by Net2Phone for resolution or coordination of problems, Net2Phone agrees to pay IDT a per hour rate set forth in Exhibit A. IDT will inform Net2Phone in advance, if any services to be performed by IDT for Net2Phone are billable and IDT will provide Net2Phone with a reasonable estimate prior to performance of the services. For any services that it may require, Net2Phone shall contact IDT customer service as specified in Paragraph 13. 6. INTERCONNECT SERVICES a. IDT shall arrange for all interconnection facilities within the Premises. All interconnection facilities arranged by IDT shall be provisioned solely to the Net2Phone occupied Equipment Space within the Premises. All costs and arrangements for local interconnects will be Net2Phone's responsibility, unless otherwise agreed to by the parties in writing. When Net2Phone utilizes IDT's services under this Paragraph 6(a), Net2Phone's facilities management personnel must coordinate with IDT in the exchange of technical information relating to their requirements for local interconnect in order for IDT to provide the necessary support to Net2Phone with the provisioning and installation of the interconnect 3 facilities. In addition, for all services to be provided by IDT under this Paragraph 6(a), Net2Phone agrees to provide IDT notice at least ten (10) days prior to the commencement date of the services. Coordination regarding exchange of technical information relating to local interconnects shall be provided to IDT as specified in Paragraph 13. b. Upon Net2Phone's written request, IDT shall, on an as required basis, provide cross-connect services to Net2Phone to allow Net2Phone to interconnect with the various local exchange and competitive access providers that are located within the meet-me area of the Premises. In such event, IDT shall invoice and Net2Phone shall pay to IDT the Dispatch Labor Charges as specified in Exhibit A. c. Upon Net2Phone's written request, IDT shall, on an as required basis, act as Net2Phone's agent in the turning-up of local interconnects and to provide on-going loop maintenance between the Premises and any third-party facilities of Net2Phone's customers. In such event, IDT shall invoice and Net2Phone shall pay to IDT the Dispatch Labor Charges as specified in Exhibit A. d. All interconnects must be at the OC3, STM-1, DS3, or DS1 level utilizing up to 28 T1's per DS3, 24 ports per DS1. The interface point for IDT's service will be IDT's DSX "CROSS-CONNECT" panel. 7. FORCE MAJEURE Neither party shall be liable for any failure or delay in performance to the extent caused by causes beyond its reasonable control, including, without limitation, labor disputes, fires or other casualties, weather or natural disasters, damage to facilities, or the conduct of third parties ("Force Majeure"). 8. EMERGENCIES AND INTERRUPTIONS a. In case of an interruption or failure of any of the services furnished hereunder, including but not limited to power, back-up power, hvac, transmission and internet services (the "Services"), IDT shall use commercially reasonable efforts to restore service as soon as possible. If IDT elects, it may substitute a reasonably equivalent service. IDT's liability for all mistakes, errors, omissions, interruptions, delays or defects in Services occurring in the course of engineering, installation and operation of its system or the provision of Services shall in no event exceed the charges paid by Net2Phone for the Services during the two months preceding the outage. In no event shall IDT be liable for any special, consequential or incidental damages. b. In the event Net2Phone experiences an interruption of power services for any cause within IDT's control, which results in the loss of Net2Phone's 4 service for a period of twenty-four (24) hours or more in any single event or for more than ninety-six (96) hours in any consecutive six (6) month period, or if IDT fails to promptly commence or diligently pursue restoration of any interrupted power services, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. c. In the event Net2Phone experiences an interruption of back-up power which is the direct result of IDT's Landlord's negligence or willful misconduct, IDT shall pay to Net2Phone, it's proportionate share (based upon the ratio of the gross area of the Equipment Space to the gross area of the Premises) of any damages collected by IDT from its Landlord for such interruption of back-up power. d. IDT shall at all times during the term of this Agreement maintain a required operating temperature of 65-87 degrees Fahrenheit. In the event Net2Phone experiences an interruption of hvac services for any cause within IDT's control, which lasts for more than one (1) day, the Occupancy Fee shall be abated from the second day until the date on which such hvac services are restored, and if such hvac services are not restored within ten (10) days, or if IDT fails to promptly commence or diligently pursue restoration of the interrupted hvac services, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. e. In the event Net2Phone experiences an interruption of transmission services for reasons other than Force Majeure which results in the loss of Net2Phone's service for a period of seventy-two (72) hours or more in any single event or for more than one hundred sixty-eight (168) hours in any consecutive six (6) month period, Net2Phone shall have the right to terminate this Agreement upon ten (10) days notice to IDT. 9. DEFAULT. a. Either party shall be in default if it fails to timely perform its material obligations under this Agreement or becomes the subject of any voluntary proceedings under any bankruptcy or insolvency laws, or becomes the subject of any involuntary proceedings under any bankruptcy or involvency laws which are not dismissed or withdrawn within sixty (60) days after the filing thereof. Upon such default by a party (other than a service interruption as described in Paragraph 9 hereof), the other party shall provide written notice to the defaulting party within ten (10) days of such default, allowing thirty (30) days for the default to be cured. If the default is not cured within that thirty (30) days, the non-defaulting party may, upon ten (10) days notice to the other, terminate this Agreement, and pursue all other available remedies at law and in equity, all of which shall be cumulative. 5 b. If this Agreement or any addendum is terminated by IDT during the Term as a result of Net2Phone's material default or is terminated by Net2Phone in the absence of a material default hereunder by IDT (in either case, an "Net2Phone Termination"), Net2Phone shall be liable to IDT for liquidated damages (due to the difficulty in projecting and establishing actual damages) for the terminated Services, as provided for below: i. If a Net2Phone Termination occurs within twenty-four (24) months from the Commencement Date, then, Net2Phone shall pay to IDT forty (40%) percent of the monthly Occupancy and related Fees for the remainder of the Term. ii. If a Net2Phone Termination occurs after twenty-four (24) months but prior to forty-eight (48) months from the Commencement Date, then, Net2Phone shall pay to IDT twenty (20%) percent of the monthly Occupancy and related Fees for the remainder of the Term. iii. If a Net2Phone Termination occurs after forty-eight (48) months but prior to sixty (60) months from the Commencement Date, then Net2Phone shall pay to IDT ten (10%) percent of the monthly Occupancy and related Fees for the remainder of the Term. c. Only in the event of a Net2Phone default and subsequent to an IDT termination of the Services for cause, the parties shall agree upon the amount of any reconnect charges, increase in service rates and/or security deposit required hereunder, prior to any reinstatement of the Services by IDT; it being understood, however, that in the event of a termination by IDT for cause, IDT may sell the Services to others. d. Upon termination or expiration of the Term of this Agreement, Net2Phone agrees to remove the Equipment and other property which was installed by Net2Phone or Net2Phone's agents. Net2Phone shall promptly reimburse IDT for all costs associated with the repair and restoration of the Equipment Space, the Premises and the Building affected by the removal of such Equipment. In the event such Equipment or property has not been removed within fifteen (15) days following the effective termination or expiration date, IDT shall have the right to remove, relocate, or otherwise store such Equipment or property at Net2Phone's expense. 10. TERM OF THIS AGREEMENT The term (the "Term") of this Agreement shall be for a period of three (3) years commencing on the effective date of this Agreement (the "Commencement Date"). After the expiration of such three (3) year period, this Agreement shall remain in force on a month to month basis until terminated by either party upon thirty (30) days written notice. 6 11. APPROVALS Net2Phone shall be responsible to obtain and maintain all approvals and permits necessary for Net2Phone's use of the Equipment Space. 12. INDEMNIFICATION The parties shall indemnify each other against all losses, claims damages, expenses and liabilities (including reasonable attorneys' fees and court costs) to extent caused by a willful or negligent act or omission of such party. 13. NOTICES AND OTHER COMMUNICATIONS a. Documentation and coordination regarding exchange of technical information relating to local interconnects, and notification for assistance, resolution or coordination of service, and other notices under this Agreement shall be sent to: If to IDT: Kathy Timko IDT Corporation 225 Old New Brunswick Road Piscataway, New Jersey And if of a legal nature: Copy to: IDT Legal Department 190 Main Street Hackensack, New Jersey If to Net2Phone: Gary Lundner Net2Phone, Inc. 171 Main Street Hackensack, New Jersey And if of a legal nature: Copy to: Net2Phone Legal Department 171 Main Street Hackensack, New Jersey 7 14. INSURANCE a. Net2Phone agrees to maintain, at Net2Phone's expense, during the entire time this Agreement is in effect for the Premises (i) Comprehensive General Liability Insurance in an amount not less than one million dollars ($1,000,000.00) per occurrence for bodily injury or property damage, (ii) Employer's Liability in an amount not less than one million dollars ($1,000,000.00) per occurrence, (iii) Worker's Compensation in an amount not less than that prescribed by statutory limits, and (iv) adequate insurance coverage to protect Net2Phone owned Equipment and property installed within the Equipment Space. Under no circumstances shall IDT be obligated to provide insurance coverage for any Net2Phone owned Equipment or property installed within the IDT Premises. However, Net2Phone may satisfy the foregoing insurance obligations under the existing policies of insurance of IDT, at IDT's discretion, so long as Net2Phone qualifies as a subsidiary of IDT as defined in such policies of insurance; in which event, Net2Phone shall be responsible for the Net2Phone portion of the cost to IDT of such insurance. Net2Phone shall furnish IDT with certificates of insurance which evidence the minimum levels of insurance set forth herein and which, if not an IDT policy, name IDT as an additional insured upon request by IDT. b. IDT agrees to maintain, at IDT's expense, during the entire time this Agreement is in effect (i) Comprehensive General Liability Insurance in an amount not less than one million dollars ($1,000,000.00) per occurrence for bodily injury or property damage, (ii) Employer's Liability in an amount not less than Five Hundred Thousand Dollars ($500,000.00) per occurrence, and (iii) Worker's Compensation in an amount not less than that prescribed by statutory limits. IDT shall furnish Net2Phone with certificates of insurance which evidence the minimum levels of insurance set forth herein upon request. 15. MISCELLANEOUS a. This Agreement may not be assigned by either party in whole or in part without the prior written consent of the other party, which consent shall not be unreasonably withheld, except that Net2Phone and IDT shall have the right to assign this Agreement to an affiliate or division, provided that IDT or Net2Phone exercise management control over and/or own a controlling interest in or are under common control with such affiliate or division. Notwithstanding the foregoing restriction on the assignment of this Agreement, (i) any direct or indirect transfer of the share capital of IDT or Net2Phone shall not be considered an assignment of this Agreement, and (ii) both IDT and Net2Phone shall have the unrestricted right to assign its rights and obligations under this Agreement to any individual, corporation or other business entity which acquires all or substantially all of its shares or assets and upon such assignment, the 8 assigning party shall be released of all of its obligations under this Agreement arising from and after the date of such assignment. b. The terms and provisions of this Agreement may only be waived, modified or changed by an amendment in writing signed by both parties hereto. No failure by either party to insist upon the other's performance of any obligation hereunder shall constitute a waiver of the obligation unless in writing. c. If any provision of this Agreement shall be determined to be invalid or unenforceable, the remainder of the Agreement shall continue in full force and effect. d. This Agreement and the rights and obligations of the parties hereto shall be governed in all respects by the laws of the State of New Jersey (without regard to the principles of conflicts of laws). Each party shall comply with all applicable federal, state and local laws. The parties hereby solely subject themselves to the jurisdiction of the State of New Jersey, for the resolution of any dispute arising hereunder and agree that venue in any suit filed in those courts shall be proper. e. This Agreement may be executed in two or more counterparts, each of which shall be an original, and all of which, taken together, shall constitute one and the same Agreement. f. Both IDT and Net2Phone each represent and warrant to the other that the person executing this Agreement (or any amendments and changes) on its behalf is its duly authorized representative. g. Net2Phone covenants and represents that it has negotiated this Agreement directly with IDT, and has not acted by implication or otherwise to authorize or authorized any other broker, salesman, or finder to act for it in the negotiation and execution of this Agreement and agrees to defend, indemnify and hold harmless IDT from any and all claims by any such broker, salesman or finder for a commission or finder's fee as a result of Net2Phone having entered into this Agreement. h. This Agreement and any documents attached hereto constitute the entire Agreement between the parties and supersede all prior agreements, whether written or oral, with respect to the subject matter contained herein. In case of any conflict between this Agreement and the terms of any documents attached hereto, the terms of the documents attached shall control insofar as the services covered thereby are concerned. 9 IN WITNESS WHEREOF, the undersigned hereby acknowledges that they have read and fully understand the foregoing Agreement and, further, that they agree to each of the terms and conditions contained herein. Agreed and Accepted: Net2Phone, Inc. By: /s/ David Greenblatt Print: David Greenblatt ----------------------------- --------------------------------- Date: 5/20/99 Title: Chief Operating Officer --------------------------- --------------------------------- Agreed and Accepted: IDT Corporation By: /s/ Joyce Mason Print: Joyce Mason ----------------------------- --------------------------------- Date: 5/20/99 Title: Senior Vice Presdient & Secretary --------------------------- --------------------------------- 10 Exhibit A- RATES CO-LOCATION AND FACILITIES MANAGEMENT SERVICE AGREEMENT CLIENT: Net2Phone 1. Address of Co-location Center: 225 Old New Brunswick Road, Piscataway, NJ ----------------------------- 2. Initial Space Allocation: 14 racks. ------------------------ 3. Initial Term: Years (3) years. ------------- 4. Monthly Recurring Occupancy Fees: $600 per month, per rack --------------------------------- 5. Additional Occupancy Fees: Payable at the times and in the amounts as -------------------------- agreed by Net2Phone and IDT when additional services are requested by Net2Phone. 6. Dispatch Labor Charges: The following charges apply to work done on ----------------------- Net2Phone's behalf on Net2Phone equipment located in the Equipment space ("Dispatch Labor Charges"). a. Normal IDT business hours (Mon. - Fri. 8:00 a.m. to 5:00 p.m. except IDT holidays) will be billed to Net2Phone at the rate of $75.00 per hour with a one (1) hour minimum. b. Off-hour support shall be billed at a rate of $125.00 per hours with a two (2) hour minimum (All other times and IDT holidays). c. Dispatch Labor Charges apply only if Net2Phone's requests and authorizes dispatch of IDT personnel to perform work on Net2Phone's behalf. IDT reserves the right to accept or reject any such requests. IDT dispatch of personnel to work on Net2Phone's equipment is also premised on Net2Phone furnishing instruction to IDT prior to commencement of any work. 7. Additional space within the Premises: Additional space made available to ------------------------------------- Net2Phone by IDT will be provided to Net2Phone according to the terms, conditions and rates in force at the time of the Net2Phone request. 11 EX-10.24 12 FORM OF LOAN AGREEMENT EXHIBIT 10.24 Form of Loan Agreement Loan Agreement, dated as of May 17, 1999 (the "Agreement"), between Net2Phone, Inc., a Delaware corporation (the "Company"), and the borrower whose name appears on the signature page hereof ("Borrower"). Capitalized terms used herein without definition have the meanings assigned to such terms in the Stock Option Agreement, dated as of May 17, 1999, by and between the Company and Borrower (the "Option Agreement"). WHEREAS, Borrower intends to exercise the portion of his Options which are vested and exercisable as of the date hereof, pursuant to the terms of the Option Agreement; and WHEREAS, the Company wishes to loan to Borrower the amount necessary to pay the exercise price for such Options (the "Option Price"); NOW THEREFORE the parties hereto agree as follows: 1. Loan; Cancellation of Options. ----------------------------- a. The Company hereby agrees to make available to Borrower a loan in lawful money of the United States in the principal amount of $______ (the "Principal Amount") on the terms of this agreement (the "Loan"). b. As a condition to the making of the Loan, the Borrower agrees that ____ of the Options that are vested on the date hereof pursuant to the terms of the Option Agreement shall be deemed to be cancelled, and shall no longer be deemed to be outstanding. 2. Repayment of Principal. ---------------------- The entire Principal Amount, or if lesser, the then unpaid principal balance outstanding under this Agreement, shall be due and payable by Borrower on May 16, 2001 (the "Normal Repayment Date"), together with all unpaid accrued interest and other charges due hereunder, unless earlier due and payable by reason of the acceleration of the maturity of the Principal Amount due hereunder pursuant to the terms of this Agreement. 3. Interest. -------- Borrower agrees to pay interest on the unpaid principal outstanding under this Agreement, which interest payments shall be due and payable annually in arrears commencing December 31, 1999 and continuing on the last day of each and every December thereafter at a rate per annum equal to 7.0% compounded annually, the mid-term applicable Federal rate (compounded annually) as of the date hereof (the "Interest Rate"). If any payment which is to be made hereunder by Borrower is not paid when due, such payment shall, from and after the day that is five days following the applicable payment date, bear interest payable on demand at a rate per annum equal to the Interest Rate plus 2 percent (2%), but not to exceed the maximum amount permitted by law. If the payment date for the payment of principal or interest under this Agreement falls on a Saturday, Sunday or a day on which the offices of the Company are closed, then such payment date shall be extended to the next succeeding business day, and interest on such payment shall be payable at the Interest Rate during such extension. 4. Use of Funds. ------------ Borrower covenants and agrees that the funds advanced pursuant to this Agreement shall be used solely to finance Borrower's payment of the Option Price. As a consequence, Borrower hereby instructs the Company to disburse the Loan by transferring the Principal Amount back to the Company in payment of Borrower's Option Price. 5. Voluntary Prepayments. --------------------- The Loan may be prepaid in whole or in part at any time without premium or penalty, but with interest on the amount being prepaid through the date of prepayment, with written notice to the Company received two (2) business days prior to the date of such prepayment specifying the amount of prepayment. 6. Mandatory Prepayment in connection with Distribution of Deferral Account. ------------------------------------------------------------------------ Borrower shall prepay, within 90 days after the termination of Borrower's employment with the Company, the entire Principal Amount, together with all unpaid accrued interest and other charges properly incurred by the Company pursuant to Section 8 of this Agreement; provided however that no such prepayment shall be required ---------------- in the event that Borrower is employed by an affiliate of the Company immediately following his termination of employment with the Company. 7. Defaults. -------- If either of the following events shall occur: (a) a default by Borrower in the payment of any of the obligations or liabilities of Borrower to the Company hereunder which default is not cured within 10 days following delivery by the Company of notice thereof to Borrower or (b) Borrower shall admit in writing that he is unable to pay his debts as such debts become due, then, at the option of the Company, all obligations of Borrower under this Agreement shall become due and payable forthwith, upon delivery by the Company of notice to Borrower to that effect, anything contained herein or in any other document, instrument or agreement to the contrary notwithstanding. All obligations of Borrower under this Agreement shall become immediately and automatically due and payable, without presentment, demand, protest or notice of any kind, upon the commencement by or against Borrower of a case or proceeding under any bankruptcy, insolvency or other law relating to the relief of debtors, which case or proceeding is not discharged or bonded within 30 days. 8. Costs. ----- Borrower agrees to pay on demand all reasonable costs and expenses incurred by the Company incidental to or in any way relating to the Company's enforcement of the obligations of Borrower hereunder or the preservation or protection of the Company's rights in connection herewith, including, but not limited to, reasonable attorneys' fees and expenses. 9. Governing Law; Jurisdiction. --------------------------- The provisions of this Agreement shall be construed and interpreted and all rights and obligations hereunder shall be determined in accordance with the laws of the State of Delaware without reference to principles of conflicts or choice of law under which the law of any other jurisdiction would apply, and the courts located in that state shall have exclusive jurisdiction of all disputes rising hereunder. 10. Advice of Counsel. ----------------- Borrower acknowledges having had the opportunity to obtain the advice of counsel of his own choosing in entering into this Agreement and the transactions contemplated hereby. Borrower is fully aware of the contents of this Agreement and its legal effect and is entering into this Agreement without threat, coercion, fraud or duress of any kind. Borrower is not relying on any representation, statement, or warranty of any party regarding this Agreement or the transactions contemplated hereby. 11. Counter-Claims, Set-Off. ----------------------- Borrower waives the right to interpose any counter-claim and the right of set-off of any kind relating to the claims of the Company under this Agreement or the transactions contemplated hereby. 12. Assignment. ---------- The obligations or rights of the Company hereunder shall be assignable or transferable in full or in part by the Company without the consent of, but upon prior notice to, Borrower. No obligation or rights of Borrower hereunder can be assigned or transferred without the prior written consent of the Company. 13. No Waiver, Cumulative Remedies. ------------------------------ No failure on the part of the Company to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as waiver thereof, nor shall any single or partial exercise by the Company of any right, remedy or power hereunder preclude any other or future exercises of any other right, remedy or power. Each and every right, remedy and power hereby granted to the Company shall be cumulative and not exclusive of any other such right, remedy or power, and may be exercised by the Company from time to time. 14. Severability. ------------ Every provision of this Agreement, other than the set-off provisions hereof, is intended to be severable; if any term or provision of this Agreement shall be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired. 15. Notices. ------- Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by registered mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Attention: General Counsel If to Borrower, to him at the address set forth on the signature page hereof. 16. Headings. -------- The section headings in this Agreement are for convenience only and are not intended to affect the interpretation or construction of the provisions of this Agreement. 17. Amendments. ---------- This Agreement may not be altered, modified or amended except by a written instrument signed by each of the parties hereto. 18. Counterparts. ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and Borrower has hereunto set his hand as of the day and year first above written. NET2PHONE, INC. By:______________________________ Name: Title: BORROWER _________________________________ Name: Address: EX-10.25 13 FORM OF STOCK OPTION AGREEMENT EXHIBIT 10.25 Form of NET2PHONE, INC. STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT is entered into on May 17, 1999, by and between Net2Phone, Inc., a Delaware corporation (the "Company"), and _____________ (the "Employee"). WHEREAS, the Company has adopted the Net2Phone, Inc. 1999 Stock Option and Incentive Plan (the "Plan"); and WHEREAS, the company desires to grant to the Employee options under the Plan to acquire an aggregate of _________ shares of common stock of the Company, par value $.01 per share (the "Stock"), on the terms set forth herein and in the Plan. NOW, THEREFORE, the parties hereby agree as follows: 1. Definitions. Capitalized terms not otherwise defined herein shall ----------- have the meanings set forth in the Plan. 2. Grant of Options. The Employee is hereby granted [Incentive Stock ---------------- Options] [Nonqualified Stock Options] (the "Options") to purchase an aggregate of __________ shares of Stock, pursuant to the terms of this Agreement and the provisions of the Plan. 3. Term. The term of the Options (the "Option Term") shall be for ten ---- (10) years from the date of this Agreement. 4. Option Price. The initial exercise price per share of the Options ------------ shall be $_____, subject to adjustment as provided in the Plan. 5. Conditions to Exercisability. The Options shall become vested and ---------------------------- exercisable ____% immediately, ____% on the 1st anniversary, ____% on the 2nd anniversary and ____% on the third anniversary of the date of this Agreement if the Employee continues to be in the employ of, or maintains a director or consultant relationship with, the Company or any Related Entity. The terms and conditions set forth in the Plan, including, without limitation, the provisions relating to the termination of Employee's employment or other relationship with the Company or a Related Entity, are hereby incorporated by reference in this Agreement. 6. Withholding Taxes. No later than the date on any Tax Event, the ----------------- Employee will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, solely to the extent permitted or required by law, the Company may deduct the amount of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due to the Employee. The withholding obligation may be satisfied by the withholding or delivery of Common Stock. 7. Corporate Transaction; Change in Control; Related Entity Disposition. -------------------------------------------------------------------- (a) Corporate Transaction. In the event of a Corporate Transaction --------------------- occurring after the Company's Initial Public Offering, each of the Options covered by this Agreement shall automatically become fully vested and exercisable immediately prior to the specified effective date of such Corporate Transaction. Effective upon the consummation of the Corporate Transaction, all of the Options covered by this Agreement that have not been exercised shall terminate. However, all such awards shall not terminate if the Options are, in connection with the Corporate Transaction, assumed by the successor corporation or Parent thereof. (b) Change In Control. In the event of a Change in Control (other ----------------- than a Change in Control which is also a Corporate Transaction) occurring after the Company's Initial Public Offering, each of the Options covered by this Agreement which is at the time outstanding automatically shall become fully vested and exercisable, immediately prior to the specified effective date of such Change in Control. (c) Related Entity Disposition. The Continuous Service of the -------------------------- Employee (if the Employee is primarily engaged in service to a Related Entity at the time that the Company is involved in a Related Entity Disposition occurring after the Company's Initial Public Offering) shall terminate effective upon the consummation of such Related Entity Disposition, and each of the Options covered by this Agreement shall become fully vested and exercisable upon such Related Entity Disposition. The Continuous Service of the Employee shall not be deemed to terminate if an outstanding Option is assumed by the surviving corporation or its parent entity in connection with a Related Entity Disposition. For purposes of this paragraph, the term "Related Entity Disposition" means the sale, distribution or other disposition by the Company of all or substantially all of the Company's interest in any Related Entity effected by a sale, merger or consolidation or other transaction involving such Related Entity or the sale of all or substantially all of the assets of such Related Entity. 8. Entire Agreement. This Agreement and the Plan contain all of the ---------------- understandings between the parties hereto pertaining to the matters referred to herein, and supersedes all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Employee represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter of this Agreement or otherwise. 9. Amendment or Modification, Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Employee and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar of dissimilar condition or provision at the same time, any prior time or any subsequent time. 10. Notices. Each notice relating to this Agreement shall be in writing ------- and delivered in person or by certified mail to the proper address. All notices to the Company shall be addressed to it at: 2 Net2Phone, Inc. 171 Main Street Hackensack, New Jersey 07601 Attention: Options Administrator All notices to the Employee or other person or persons then entitled to exercise the Options shall be addressed to the Employee or such other person or persons at: ________________________________________ ________________________________________ ________________________________________ Anyone to whom a notice may be given under this Agreement may designate a new address by notice to such effect. 11. 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 and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 12. Governing Law. This Agreement shall be construed and governed in ------------- accordance with the laws of the state of Delaware, without regard to principles of conflicts of laws. 13. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 14. Construction. This Agreement is made under and subject to the ------------ provisions of the Plan, and all of the provisions of the Plan are hereby incorporated herein as provisions of this Agreement. If there is a conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Agreement shall govern. By signing this Agreement, the Employee confirms that he has received a copy of the Plan and has had an opportunity to review the contents thereof. 15. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed to be an original but both of which together shall constitute one and the same instrument. 3 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by an authorized officer and the Employee has hereunto set his hand all as of the date first above written. NET2PHONE, INC. By: ______________________________________ Name: Title: Employee: ______________________________ Name: _________________________________ Telephone: ______________________________ 4 EX-10.26 14 PURCHASE OF NBC TV ADVERTISING EXHIBIT 10.26 ****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 [LOGO FOR NBC TV NETWORK] June 25, 1999 Mr. Cliff Sobel Net2Phone, Inc. 171 Main Street Hackensack, NJ 07601 Purchase of NBC TV Advertising Inventory ---------------------------------------- Dear Cliff: This letter sets forth the agreement between National Broadcasting Company, Inc. ("NBC"), and Net2Phone, Inc. ("Advertiser") with respect to Advertiser's purchase of certain NBC Television Network ("NBC TV") advertising inventory. The terms and conditions shall be as follows: 1. Spots. NBC shall provide Advertiser with the use of thirty (30) second advertising spots or such other lengths or formats of advertising as NBC and Advertiser may mutually agree (collectively, the "Spots") to be telecast on NBC TV prior to June 30, 2000 on the Dates, Days and Times reasonably determined by NBC in accordance with schedules and strategies reasonably requested by Advertiser following consultations with NBC. NBC agrees to telecast Spots with a Total Spot Value (as defined below) of $1,500,000. All such Spots run by Advertiser shall be subject to NBC TV's standard terms and conditions for such advertising which are described in the "Participating Sponsorship Agreement" attached hereto as Exhibit A (the "Standard Terms") and which are made a part of this Letter Agreement in their entirety; provided, however, that in the case of a conflict between the terms of this Letter Agreement and the terms of the Standard Terms, the terms of this Letter Agreement shall govern. For purposes of the Standard Terms, Advertiser shall be both the "Advertiser" and the "Agency" as such terms are used therein. 2. Value of Spots. The value of each of Advertiser's Spots telecast by NBC TV pursuant to the terms hereof shall be $1,500,000 (the "Total Spot Value"), calculated, for each Spot, at ****% of the scatter market rate for the Date, Day and Time in which the Spot will be telecast and as charged by NBC at the time when such Spot is scheduled. Advertiser shall pay the Total Spot Value to NBC in cash immediately following the consummation of Advertiser's initial public offering. Advertiser agrees that NBC makes no guarantee regarding what the actual rating for any particular Program will be and, therefore, will not be obligated to provide any make-goods hereunder. The parties agree that no agency fees or other expenses may be deducted by Advertiser in any way from payment of the Total Spot Value to NBC. 3. Representations and Warranties. NBC and Advertiser each represent and warrant that this Letter Agreement has been duly authorized, executed and delivered by such party and that this Letter Agreement constitutes the legal, valid and binding obligations of such party, enforceable against it in accordance with its terms. [****] 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. Confidentiality. Neither party shall issue a press release or make any statement to the general public concerning this Letter Agreement, the Spots, or the existence thereof, without the express prior written consent of the other; provided, however, that NBC agrees that Advertiser may file this Letter Agreement with the Securities and Exchange Commission (the "SEC") and describe the terms of this transaction in any filing with the SEC if so required by the Securities Act of 1933 and Securities Exchange Act of 1934, in each case, as amended, the rules and regulations related thereto or any applicable state laws (the "Securities Laws") as long as Advertiser agrees to use its reasonable efforts to obtain confidential treatment of the economic and other material terms hereof under the Securities Laws and to consult with NBC during the process. 5. Miscellaneous. This Letter Agreement and the exhibits and schedules attached hereto constitute the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations, and understandings between the parties, both oral and written. No waiver or modification of any provision of this Letter Agreement shall be effective unless in writing and signed by both parties. Any waiver by either party of any provision of this Letter Agreement shall not be construed as a waiver of any other provision of this Letter Agreement, nor shall such waiver operate as or be construed as a waiver of such provision respecting any future event or circumstance. The terms of this Letter Agreement shall apply to parties hereto and any of their successors or assigns. This Letter Agreement may be executed in counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 6. Governing Law and Jurisdiction. This Letter Agreement shall be governed by and construed under the laws of the State of New York applicable to contracts fully performed in New York, without regard to New York conflicts law. The parties hereto irrevocably consent to and submit to the exclusive jurisdiction of the federal and state courts located in the County of New York. The parties hereto irrevocably waive any and all rights to trial by jury in any proceeding arising out of or relating to this Agreement. 7. Liability for Failure to Broadcast Spots. In the event that NBC does not telecast Spots equal to the Total Spot Value pursuant to the terms and conditions of this Agreement, then as liquidated damages and not a penalty, NBC shall promptly pay Advertiser in cash an amount equal to the difference between the Total Spot Value and the value of the Spots actually telecast, as calculated in accordance with Section 2 above. Except for damages arising out of the gross negligence of willful misconduct of either party hereto, no party shall be liable to the other party or its affiliates, officers, directors, successors or assigns for any incidental, consequential, special or punitive damages or lost profits arising out of this Letter Agreement, whether liability is asserted in contract or tort and irrespective of whether it has advised or been advised of the possibility of any such loss or damage. CONFIDENTIAL 3 If you are in agreement with the above terms and conditions, please indicate your acceptance by signing in the space provided below, and return one original to me. Very truly yours, NATIONAL BROADCASTING COMPANY, INC. By: /s/ [ILLEGIBLE] ----------------------------- Name: Title: ACCEPTED AND AGREED: NET2PHONE, INC. By: /s/ Clifford M. Sobel ------------------------------ Name: Clifford M. Sobel Title: President CONFIDENTIAL Exhibit A --------- Participating Sponsorship Agreement ----------------------------------- CONFIDENTIAL Participating Sponsorship Agreement - [NBC TELEVISION NETWORK LOGO HERE] Part II 1. DEFINITIONS "Advertiser" means advertiser named in Part I. "Agency" means the advertising agency named in Part I (see also paragraph 23). "NBC" means NBC Television Network, a Division of National Broadcasting Company, Inc. "paragraph" - all references to 'paragraphs' by numbers apply to this Part II. "participation" means a sponsorship unit which entitles Advertiser to 30 seconds of commercial time unless otherwise specified in Part I hereof. "Program" means the program(s) and/or event(s) described in Part I intended for telecast in which Advertiser is a sponsor. "Section" references to 'Sections' by numbers apply to Part I of which this Part II is a part (by attachment or by reference) and without which this Part II shall be invalid. "telecast" means the presentation and transmission of any of the programs described in Part I on one occasion to any or all stations. The four digit numerals within parentheses at the conclusion of certain paragraphs are internal NBC printing codes and are not a part of this agreement. Certain paragraphs are intentionally omitted for reasons of inapplicability. 2. STATIONS a. Stations Ordered. Stations ordered for Advertiser for the Program(s) shall be the interconnected affiliated stations identified in the NBC TV Station List and such other stations as NBC may elect to include in the Program's station lineup, including delays, if any. NBC shall endeavor to make available as many stations as possible. The status of availability of all ordered stations, whether available or not, shall be included in the NBC TV Station List which shall be furnished to Agency upon request. b. Station Lineup. Station lineup as used herein shall compromise all stations which are available or may become available for the Program(s) on a basis which is live or tape delayed. c. Addition of Ordered Stations. Stations which are initially reported unavailable but which become available for the telecast(s) on either a live or tape delayed basis shall become part of Advertiser's station lineup effective immediately. 4. PACKAGE PRICE The package price(s) indicated in Part I include all charges except the applicable Integrated Networking Charge and other charges for special commercial requirements. 5. INTEGRATED NETWORKING CHARGE The Integrated Networking Charge listed in the current NBC Television Network Commercial Integration Manual shall be applicable to each commercial insertion up to and including 60 seconds in length. Announcements in excess of 60 seconds will be billed at a proportionately higher charge. This production facilities charge includes the services, as required, for program origination, videotaped repeat network telecast(s), and satellite transmissions. Also included are the normal insertions of tape commercials when originated from network control points in New York and/or Burbank and the normal insertions of commercials into delayed broadcasting tapes. Additional production charges may be made for special commercial requirements in accordance with the NBC O&TS Rate Card. With respect to late delivery of commercial material, charges and other conditions will be in accordance with the NBC Television Network Commercial Integration Manual. 6. PROGRAM a. Supplier. The Program(s) set forth in Part I will be supplied by NBC and NBC will furnish for such Program(s) all the necessary creative elements, production facilities and services therefor and personnel and talent required for the appropriate television presentation of the Program(s). Each program will conform to NBC's programming and operating policies and technical standards. CONFIDENTIAL d. Production Facilities and Services. Production facilities and services charges applicable to the Program(s) are included in the package price. Agency will furnish all elements for and will bear all costs of the commercials. To the extent feasible, NBC will provide, if requested, production facilities and/or personnel for the production and presentation of commercials. Rates therefor will be charged to Agency in accordance with the O&TS Rate Card (or at rates quoted upon request where such Rate Card rates do not apply). Agency must deliver commercial material to NBC no later than 14 days prior to the scheduled telecast and NBC shall insert such material into the program(s) to be telecast. 7. AGENCY-FURNISHED MATERIAL a. Furnishing and Submission. All commercial announcements and talents and material therefor and billboards where applicable (except as may be furnished by NBC) and any other material furnished by Agency for the telecasts are hereinafter collectively and individually referred to as Agency material. Agency material must be furnished to NBC at least 14 days in advance of air date. Agency warrants that it has obtained all necessary rights for the performance and use of said agency material, including music performance. b. Compliance With Standards. Agency material must conform to the programming and operating policies of NBC, and the quality of recorded Agency material must comply with NBC's technical standards, and shall not contain copy or material which conflicts with product protection rights granted to others by NBC. NBC has the continuing right to require Agency and Advertiser to edit and modify any and all Agency material to the extent NBC deems necessary to conform to the public interest and to the programming and operating policies of NBC. NBC reserves the right to refuse to accept for telecasting or to refuse to telecast any Agency material which does not in its judgement conform to the public interest or to such policies and standards, or which in the reasonable opinion of NBC may violate the rights of others. c. Substitution by Agency. In the event of NBC's refusal to accept any Agency material, Agency will substitute other material therefor acceptable to NBC. The acceptance or rejection by NBC of any substitutes hereunder shall be made by NBC in accordance with the requirements of paragraph 7b. d. NBC Rights on Agency's Failure to Furnish. In the event Agency fails to furnish any Agency material as being provided, or in the event NBC disapproves any Agency material and Agency fails to furnish substitutes therefor satisfactory to NBC, NBC may, at its option, schedule promotional or public service type announcements in place of Agency's regularly scheduled commercial material without identification of Advertiser except as required by law or administrative regulation. No such action on the part of NBC under this paragraph shall relieve Agency of its obligation to make payments for all charges as provided for hereunder. 9. INCREASES AND PROTECTION NBC reserves the right to change production facilities and services charges, including the Integrated Networking Charge, effective on such date as announced by NBC to the trade. Any such change which results in an increase to Advertiser will not apply until three months after the date upon which such change is announced by NBC. 10. ADVERTISING AGENCY COMMISSION The package price(s) set forth in Part I and the Integrated Networking Charge include an advertising agency commission of 15%. 11. BILLING AND PAYMENT All charges hereunder will be billed to Agency on the second business day following the month of telecast(s) and shall be paid on or before the 15th day of the billing month (or such earlier date as set forth by any special payment terms or as designated in Part I), it being agreed that time of payment is of the essence. Notwithstanding disagreement between the parties as to particular items of charge or credit as of the due date, all charges not specifically and reasonably questioned by Agency shall be paid by such date. NBC's obligations under this agreement are also conditioned upon full payment by Agency of all obligations to NBC under preceding or concurrent agreements with NBC for the same advertiser. 12. DAY AND TIME PERIOD OF SPONSORSHIP Part I reflects the day, starting time, program length and program to be sponsored on a participating basis by Advertiser on the dates shown, expressed in New York City Time (NYCT). Time for the purpose of this paragraph is approximate. NBC reserves the right to advance or delay the starting time shown and the further right to expand or contract the program length indicated. The program(s) hereunder are distributed across the country in various configurations which utilize live and tape delay transmissions to stations. Specific information with respect to such transmissions is available on request. CONFIDENTIAL 14. COMMERCIAL ENTITLEMENT Each date listed in Part 1 represents a 30-second participation for commercial utilization in the program indicated, unless otherwise specified. 15. COMMERCIAL POSITIONS The placement and designation of commercial positions shall be determined by NBC. NBC reserves the right to revise any or all elements of the commercial format in each of the programs hereunder to include changing of commercial placement within programs. In certain program series, NBC retains the right to move within the same program a participation(s) from one day of the week to another day of the same week. NBC reserves the further rights to format the programs so as to accommodate any combination of commercial elements and to expand or contract any or all elements of the commercial format at any time to meet the competitive forces of the industry. 16. CAST COMMERCIALS Cast Commercials, including placement thereof, are subject to the review and approval of NBC Advertising Standards and Sales Services. 17. PRODUCTS TO BE ADVERTISED a. Protected Products. NBC will endeavor to avoid scheduling products competitive or antithetical to single-product commercials of at least 30 seconds duration within the commercial interruption (i.e. pod) in which such commercial is scheduled. Such competitive or antithetical avoidance is known as product protection. Product protection throughout this paragraph 17 applies only to other network advertisers obtained by the NBC Television Network. Product protection will not be granted to commercials which are multi- product 30-second commercials nor to any commercial of less than 30 seconds in length. Changes in designation of protected products may be made only upon receipt of NBC's approval. Requests for such changes in designation must be submitted to the NBC Television Network Sales Department not less than 14 days prior to the desired date of such change(s). b. Exclusive Basis Products. In certain programs, some products may be established as exclusive basis products which entitle such products to broader product protection than that which is indicated in subparagraph "a" above. The products (if any) granted such exclusivity and the extent of the product protection granted thereby is specified in Part 1. c. Non-Exclusive Basis Products. Advertiser's products other than protected products may be advertised hereunder on a non-exclusive basis providing NBC's approval has been obtained in advance in writing. The advertising of non-exclusive basis products is subject to discontinuance on 24 hours notice in the event the advertising of such non-exclusive basis products conflicts with product commitments made by NBC to others. d. Other Products. Products other than protected and NBC approved non-exclusive basis products may not be advertised on any program hereunder. Commercials for such other products may be removed or deleted by NBC without prior notice and Advertiser will not be relieved of its obligation for any of the charges hereunder by reason of such removal or deletion. e. Nature of Approvals. Approvals referred to above in this paragraph 17 must be obtained in writing from NBC. Approval of products or commercial material for compliance with NBC's Advertising Standards, while ultimately required under paragraph 7, does not constitute NBC's approval under this paragraph 17. 18. BILLBOARDS Certain programs provide billboards. The billboard is a brief announcement identifying the sponsor or partial sponsor of a program. It is not intended for use as a commercial announcement. If so indicated in Part 1, Advertiser shall be allowed a billboard of the type and duration specified therein. Such billboard will consist of visual and/or audio material acceptable to NBC. Placement of billboards shall be designated by NBC and may be scheduled adjacent to billboards and/or commercials of other sponsors in the program. 19. LEAD-INS Lead-in copy of a transitional nature may be used in certain types of programs. Such copy must be limited to five seconds in length and must be devoid of commercial sell and comparative references. The program host or other individual designated by NBC shall be made available for lead-ins. In no event may lead-ins be used separately from the commercial it was intended to be lead into, nor combined to form a longer lead-in. 20. AGENCY TERMINATION RIGHTS If so provided in Part 1, Agency shall have the right to terminate a portion of Advertiser's sponsorship, effective with the termination dates shown in Part 1, on prior written notice to NBC as provided therein. CONFIDENTIAL 21. PROGRAM SUBSTITUTION AND TRANSFER a. Program Substitution. Except as set forth in paragraphs 21c and 21d hereof, NBC may substitute another program for any program hereunder. In such event, Advertiser's participation(s) will be scheduled by NBC in a replacement program(s) provided such replacement program(s): i. is(are) of comparable quality with comparable demographics. ii. is(are) available to advertisers on a participation basis. iii. is(are) comparably priced, and iv. present(s) no product or scheduling conflicts c. Daytime Programs (Monday through Friday 9:00am-4:30pm NYCT). NBC has the right to change the time period and/or discontinue telecasting any or all of its Daytime Programs on reasonable prior notice. In the event of such discontinuance or time period change, Advertiser's participation(s) so affected will be transferred to a mutually agreeable substitute program(s) where available. d. Unique Programs. The provisions of this paragraph 21 are not applicable to unique programs such as major sporting events, major award presentation programs, and coverage of a special news event. 22. IMPOSSIBILITY OF AGENCY PERFORMANCE In the event Agency is unable or fails to supply agency material, NBC may, at its option, in addition to any other remedies which may be available to it, terminate this agreement forthwith, and upon such termination, Agency, Advertiser, and NBC will be relieved of further liability hereunder except with respect to obligations incurred or arising out of telecasts made prior to such termination. 24. PREEMPTION a. General. NBC reserves the right to preempt all or any portion of any telecast of any of the programs hereunder in order to telecast events or programs of public importance, news reports, political programs, sports events, special programs, or special events. NBC agrees that in the event of such preemption, as much advance notice as is practicable will be given to Agency. In the event of a preemption involving the elimination of Advertiser's participation(s), NBC will be relieved of its obligation to telecast Advertiser's participation(s) hereunder and Agency will be relieved from paying any charges hereunder for the participation(s) so eliminated unless Advertiser's participation(s) are resheduled as may be provided for elsewhere herein. b. Partial Political. NBC also reserves the right to preempt the last five minutes of any telecast preceding an election day generally observed throughout a majority of the United States. In the event of such five minutes preemption which does not affect Advertiser's participation(s), the affected program will be edited to the required length at NBC's expense and there shall not be any adjustment in any of the charges hereunder to Agency. 25. NETWORK FAILURE TO TELECAST In the event NBC fails to present over its network facilities any telecast hereunder because of unavailability of technical facilities, defect or breakdown of equipment or transmission facilities, labor dispute, government action, the unforeseen absence of a principal performer, or any cause beyond the control of NBC, whether of a similar or dissimilar nature. NBC's liability herefor shall be limited solely to cancellation of all charges to Agency hereunder for such affected telecast and such failure to telecast shall not constitute a breach of this agreement. 26. LOSS OF SPONSORSHIP/AUDIENCE DEFICIENCY For the purpose of determining loss, each participation shall be treated as a complete and separate sponsorship. Where split 60-second commercials, the contiguous announcements in a 60-second commercial, and 15-second commercials are utilized, each component shall be deemed a complete and separate sponsorship. If NBC fails to carry all or any part of Advertiser's commercial to the extent that the substance of the commercial announcement is lost on the entire station lineup, NBC will negotiate in good faith for a makegood. If NBC fails to achieve agreed upon audience delivery, NBC will negotiate in good faith and deliver a makegood no later than by the end of the calendar year following the end of a broadcast season. 27. INDEMNIFICATION AND DEFENSE a. NBC Obligation. NBC agrees to indemnify and hold harmless Advertiser, Agency and their respective directors, officers, agents and employees against and from any and all claims, liability, loss and damage, including reasonable attorney's fees, caused by or arising wholly or in part out of the telecasting of NBC material hereunder and to defend at its own expense any litigation instituted by others against any of them resulting therefrom. CONFIDENTIAL b. Agency Obligations. Agency agrees to indemnify and hold harmless NBC, the stations over which the sponsored telecasts are carried and their owners, the package producer of the program (if any involved) and the talent thereof and the other advertisers in the program and their agencies, and their respective directors, officers, agents and employees against and from any and all claims, liability, loss and damage, including reasonable attorneys' fees, caused by or arising wholly or in part out of the telecasting of Agency material hereunder and to defend at its own expense any litigation instituted by others against any of them resulting therefrom. c. Distinction. For the purposes of this paragraph 27 only, Agency material (see paragraph 7a) shall be deemed to include ad lib acts or utterances of personnel furnished by Agency or Advertiser, and NBC material shall be deemed to include material furnished by NBC as referred to in paragraph 6 and ad lib acts and utterances of personnel furnished by NBC and material furnished by other agencies or advertisers for the telecasts. NBC's acceptance or approval of Agency material will not affect Agency's obligation for defense and indemnification hereunder. d. Control of Litigation. The indemnitor hereunder shall have full control of the defense of such litigation and may settle, compromise or adjust the same, provided, however, that the indemnitee, upon relieving the indemnitor in writing of the obligations imposed hereunder for defense and indemnification, shall have the right, if it so elects, to conduct such litigation at its own expense by its own counsel. e. Notice and Duration. The following obligations for defense and indemnification shall be imposed only if (1) the indemnitee sends to the indemnitor timely written notice of first service of process upon the indemnitee and a timely written request to defend the litigation (such notice and request shall be deemed timely if given within a reasonable length of time after receipt of service by the indemnitee and a reasonable length of time prior to the date by which first response to such process is legally required, considering all the circumstances; and (2) while such litigation is pending, the indemnitee upon request, shall furnish to the indemnitor all relevant facts and documentary material in the former's possession or under its control, and shall make its employees or other persons under its control with knowledge of relevant facts available to the indemnitor for consultation and as witnesses at their customary places of business. The indemnity right and defense obligations hereunder shall survive the termination or expiration of this agreement and of Agency's status as advertising agency for Advertiser. 29. ABSENCE, INCAPACITY, OR DEATH The temporary or sudden absence for any reason, or death, of any regular principal performer including but not limited to newscasters and sportscasters on the program(s) hereunder will be accommodated for as NBC deems appropriate by substitutions of a performance of comparable stature or if practicable, by writing out of the character portrayed or by substitution of another comparable program. 30. USE OF NAME AND LIKENESS Except for programs which consist of motion picture films, NBC hereby authorizes Agency and Advertiser to use and license others to use during the term hereof the title of the Program(s) and the name, sobriquet, biography and likenesses of regular featured performers in the Program(s) for informative purposes and to advertise and publicize the network and the Program(s) through tune-in advertising either alone or in conjunction with the advertising of the protected products of Advertiser as designated hereunder. Names, sobriquets, biographies and likenesses of the regular featured performers will not be used without the prior written approval of NBC. No such use shall be for advertising (except as specifically above stated) or merchandising use nor for an express or implied endorsement of any product or service except upon the written permission of the person involved and NBC. No such use in connection with the Program(s) hereunder may continue beyond the termination of Advertiser's sponsorship in any such Program(s) or of the participation of such characters or persons in the Program(s), and Agency will take all reasonable steps to require discontinuance of utilization of any previously released display material involving any such use within 30 days after such termination. For a sports program, the reference to featured performers is to the announcers furnished by NBC and not to any participant in the sporting event. For programs which consist of motion picture films, the NBC authorization within this paragraph 30 shall be limited to the title of the program and shall not apply to the title of a specific motion picture nor to any of the featured performers of the motion picture film. 31. RIGHTS AND RESTRICTIONS ON USE OF TELECASTS NBC may use or license to be used all or any part of the programs hereunder by or for the Armed Services and for telecasting in connection with documentary programs. Neither Agency nor Advertiser will authorize anyone to telecast or to utilize for any commercial purposes, other than for telecasts hereunder, the actual telecasts made by NBC, or any part of such telecasts, including material supplied by Agency, whether such other use of the actual telecasts be by means of tape or film, except for recording of Agency material specifically authorized and released in accordance with applicable NBC policy. Nothing herein contained shall prevent Agency from making subsequent use of Agency material (as distinguished from telecasts by NBC of such material). CONFIDENTIAL 32. MATERIAL AND PROPERTY OF AGENCY OR ADVERTISER Material or property (other than recorded commercial material) furnished by Agency or Advertiser for use on or in connection with the telecasts hereunder must be removed from NBC areas at Agency's expense within six days after the date of program performance, and if not so removed, Agency will be billed and will pay storage charges effective commencing the day following the date of program performance. All recorded commercial material which has not been telecast for a period of 45 days will be destroyed. If Advertiser submits a written request to NBC to return such recorded commercial material prior to the expiration of the 45 day period, NBC will endeavor to comply at Agency's expense. Agency and Advertiser hereby release NBC from any liability arising out of damage to or loss of any material or property furnished by Agency or Advertiser for use on or in connection with telecasts hereunder except for damage or loss caused by the demonstrable negligence of NBC or its employees. In no event will NBC be reponsible for damages to or loss of any such material or property left with NBC for any extended period except such material or property so left pursuant to written agreement of the parties specifically identifying the same. Unless otherwise agreed to in writing, NBC retains title to all scenery, props, costumes and other material furnished by NBC. NBC will be under no liability with respect to the handling or forwarding of audience mail addressed to NBC or the stations listed in the Station List intended for use by or for the benefit of Agency or Advertiser. 33. PARTIES This agreement is entered into for Advertiser by Agency as Advertiser's agent. Agency represents and warrants that it is the duly authorized agent of Advertiser for the purposes of this agreement and the matters contemplated hereby and that its arrangements with Advertiser specifically contemplate the placement of the advertising herein provided and the servicing thereof and the allowance of agency commission as herein provided. It is understood that Agency functions as paying agent for Advertiser hereunder and in no sense as an agent or representative of NBC and that Advertiser will continue to be obligated for all payments due to NBC hereunder until the actual receipt thereof by NBC. If at any time during the term hereof Agency ceases to be the advertising agency for Advertiser, the then rights and duties of Agency herein shall, subject to the provisions of paragraph 27 hereof, insure to the benefit of and be binding on any other advertising agency, acceptable to NBC as to financial responsibility, designated by Advertiser in writing to NBC therefor. If this agreement is executed by Advertiser rather than its advertising agency, or if at any time during the term hereof, Agency ceases to be the advertising agency for Advertiser, and if NBC has not exercised its right of termination under paragraph 22, and Advertiser has not designated to NBC in writing another advertising agency similarly acceptable, the term "Agency" shall mean "Advertiser." 34. NOTICES Notices to Agency and NBC hereunder shall be given by personal delivery, postpaid mail, or overnight courier services to the Agency at its address and to the person if any, shown in Part I and to NBC at 30 Rockefeller Plaza, New York, New York 10112, attention of President, Sales, Television Network. The date of such personal delivery, mailing, or delivery to courier services shall be deemed the date of service. 35. GENERAL PROVISIONS This agreement is made subject to all Federal, State and Municipal laws and regulations now or hereafter in force and is not assignable in whole or in part, except as otherwise herein specifically provided, without the consent of NBC and shall be governed by the laws of the State of New York, excluding all principles of referral to the laws of other jurisdictions which might otherwise be applicable under doctrines of conflicts of laws. Agency and Advertiser represent and warrant that this agreement represents a sponsorship arrangement exclusively between NBC and Advertiser and that no subordination arrangement or other sale or exchange has taken place or will take place between Advertiser and any other person or entity. Waiver of rights resulting from breach of any provision hereof shall not be deemed to constitute a waiver of rights resulting from any previous or succeeding breach of the same or any other provision. Except as herein otherwise specifically provided, this agreement constitutes the entire Agreement between the parties relating to the subject matter hereof and may not be changed, modified, renewed, extended or discharged except by an agreement in writing, signed by the party against whom enforcement of the change, modification, renewal, extension or discharge is sought. EX-23.1 15 CONSENT OF ERNST & YOUNG LLP 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 June 22, 1999), in the Registration Statement (Form S-1 No. 333-78713) and related Prospectus of Net2Phone, Inc. for the registration of shares of its common stock. /s/ Ernst & Young LLP New York, New York June 25, 1999 EX-27.1 16 FINANCIAL DATA SCHEDULE
5 YEAR YEAR YEAR 9-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 APR-30-1999 0 0 10,074 1,782,194 0 0 0 0 0 16,500 1,465,475 329,577 0 0 0 0 0 0 0 0 0 16,500 1,475,549 6,488,998 182,950 1,028,300 6,264,345 10,300,194 8,275 128,775 855,284 2,071,976 174,674 916,025 6,975,108 19,818,328 681,532 3,121,330 12,625,102 23,744,450 0 0 0 0 0 0 0 0 0 0 0 0 0 100 100,100 309,600 (507,758) (2,205,305) (5,750,094) (4,235,722) 174,674 916,025 6,975,108 19,818,328 0 2,652,303 12,005,972 22,203,257 0 2,652,303 12,005,972 22,203,257 0 1,553,443 6,848,759 11,848,089 507,758 4,349,950 15,550,661 25,109,223 0 0 0 0 0 0 0 0 0 0 0 0 (507,758) (1,697,647) (3,544,689) (2,905,966) 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) (2,905,966) (0.02) (0.05) (0.11) (0.09) (0.02) (0.05) (0.11) (0.09)
EX-99.1 17 CONSENT OF DIRECTOR 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/ RAPHAEL S. GRUNFELD -------------------------------- Raphael S. Grunfeld Date: June 25, 1999 EX-99.2 18 CONSENT OF DIRECTOR NOMINEE 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/ Stephen A. Oxman -------------------------------- Stephen A. Oxman Date: June 27, 1999 -----END PRIVACY-ENHANCED MESSAGE-----