<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
NET2PHONE, INC.
--------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X]No fee required
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
2) Form, Schedule or Registration Statement no.:
3) Filing Party:
4) Date Filed:
<PAGE>
[LOGO OF NET2PHONE]
November 14, 2000
Dear Stockholder:
It is my pleasure to invite you to Net2Phone, Inc.'s 2000
Annual Meeting of Stockholders. The meeting will be held at our
new headquarters located at 520 Broad Street, Newark, New Jersey
on Friday, December 8, 2000.
The formal notice of the meeting follows on the next page.
Enclosed with this proxy statement are your proxy card and our
2000 Annual Report to Stockholders.
Your vote is important. To make it easier for you to vote your
shares, you have the choice of voting over the Internet, by
telephone or by completing and returning the enclosed proxy card.
The proxy card describes your voting options in more detail. If
you attend the meeting and prefer to vote in person, you may do
so.
On behalf of the Board of Directors and management of
Net2Phone, I would like to thank you for your continuing support
and we look forward to seeing you on December 8. Refreshments
will be served after the meeting.
Sincerely,
/s/ Clifford M. Sobel
Clifford M. Sobel
Chairman of the Board
520 Broad Street, Newark, New Jersey 07102
<PAGE>
[LOGO OF NET2PHONE]
NOTICE OF THE
2000 ANNUAL MEETING OF STOCKHOLDERS
----------------
To Our Stockholders:
The Annual Meeting of Stockholders of Net2Phone, Inc. will be held at our
headquarters located at 520 Broad Street, Newark, New Jersey 07102, on Friday,
December 8, 2000, beginning at 9:00 a.m. local time. At the meeting,
stockholders will act on the following matters:
. Election of three Class I directors for a term of three years;
. Approve an amendment to the Net2Phone, Inc. 1999 Amended and Restated
Stock Option and Incentive Plan to increase the number of shares
authorized for issuance under the plan by 2,000,000 shares;
. Ratification of appointment of Ernst & Young LLP as our independent
accountants; and
. Any other matters that properly come before the meeting.
Only stockholders of record at the close of business on November 1, 2000 are
entitled to receive notice of and to vote at the meeting or any postponement or
adjournment thereof. We have enclosed a copy of our 2000 Annual Report to
Stockholders, which includes certified financial statements, a proxy solicited
by our Board of Directors and our Proxy Statement.
Your vote is important. Whether you plan to attend the meeting or not, you
may vote your shares (1) via a toll-free telephone number, (2) via the
Internet or (3) you may sign, date and mail the enclosed proxy card in the
envelope provided. Instructions regarding all three methods of voting are
contained on the proxy card. If you attend the meeting and prefer to vote
in person, you may do so.
By Order of the Board of Directors,
/s/ Glenn J. Williams
Glenn J. Williams
Secretary and General Counsel
November 14, 2000
Newark, New Jersey
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THE MEETING......................................................... 1
What is the purpose of the annual meeting?................................ 1
What are the voting recommendations of the Board of Directors?............ 1
Who is entitled to vote at the meeting?................................... 1
Who can attend the meeting?............................................... 2
What constitutes a quorum?................................................ 2
How do I vote?............................................................ 2
What if I vote and then change my mind?................................... 2
What vote is required to approve each item?............................... 3
How are we soliciting this proxy?......................................... 3
BOARD OF DIRECTORS........................................................ 3
APPROVE AN AMENDMENT TO THE NET2PHONE, INC. 1999 AMENDED AND RESTATED
STOCK OPTION AND INCENTIVE PLAN.......................................... 9
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS.................... 13
EXECUTIVE COMPENSATION.................................................... 14
Summary Compensation Table................................................ 14
Option Grants During Fiscal 2000.......................................... 15
Aggregated Option Exercises In Last Fiscal Year and Fiscal Year-End Option
Values................................................................... 15
Employment, Severance and Change of Control Agreements.................... 15
Report of the Compensation Committee on Executive Compensation............ 17
STOCK PRICE PERFORMANCE GRAPH............................................. 20
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF OUR PRINCIPAL STOCKHOLDERS,
DIRECTORS AND MANAGEMENT................................................. 21
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................... 25
CERTAIN TRANSACTIONS AND RELATIONSHIPS.................................... 25
STOCKHOLDER PROPOSALS AND NOMINATIONS..................................... 34
OTHER MATTERS............................................................. 34
APPENDIX A--Net2Phone, Inc. 1999 Amended and Restated Stock Option and
Incentive Plan........................................................... A-1
</TABLE>
<PAGE>
NET2PHONE, INC.
520 Broad Street
Newark, New Jersey 07102
----------------
PROXY STATEMENT
----------------
This proxy statement contains information related to the 2000 Annual Meeting
of Stockholders to be held on December 8, 2000 at 9:00 a.m. local time, at our
headquarters located at 520 Broad Street, Newark, New Jersey 07102, or at such
other time and place to which the annual meeting may be adjourned or postponed.
The enclosed proxy is solicited by our Board of Directors. The proxy materials
relating to the annual meeting are first being mailed to stockholders entitled
to vote at the meeting on or about November 14, 2000.
ABOUT THE MEETING
What is the purpose of the annual meeting?
At the annual meeting, stockholders will act upon the matters outlined in
the accompanying notice of meeting, including the following:
. to elect three directors;
. to approve an amendment to our 1999 Amended and Restated Stock Option and
Incentive Plan; and
. to ratify the appointment of Ernst & Young LLP as our independent
accountants.
What are the voting recommendations of the Board of Directors?
The Board recommends that you vote your shares:
. FOR each of the directors (see page 4).
. FOR the amendment to the Net2Phone, Inc. 1999 Amended and Restated Stock
Option and Incentive Plan (see page 9).
. FOR ratification of the appointment of Ernst & Young LLP as Net2Phone's
independent accountants (see page 13).
Who is entitled to vote at the meeting?
Only stockholders of record at the close of business on the record date,
November 1, 2000, are entitled to receive notice of the annual meeting and to
vote the shares of capital stock that they held on that date at the meeting, or
any postponement or adjournment of the meeting. Except as otherwise required by
law:
. holders of our Class A Common Stock are entitled to two votes per share
and holders of our common stock are entitled to one vote per share on
each matter to be voted upon; and
. holders of our Class A Common Stock and holders of our common stock will
vote together as a single class on all matters to be voted upon at this
annual meeting.
As of the record date, we had 33,625,000 outstanding shares of our Class A
Common Stock and 27,830,668 outstanding shares of our common stock,
representing 71% and 29%, respectively, of our voting power.
<PAGE>
Who can attend the meeting?
All stockholders as of the record date, or their duly appointed proxies, may
attend the meeting. Registration and seating will begin at 8:00 a.m. Cameras,
recording devices and other electronic devices will not be permitted at the
meeting.
Please note that if you hold your shares in "street name" (that is, through
a broker or other nominee), you will need to bring a copy of your proxy card or
a brokerage statement reflecting your stock ownership as of the record date and
check in at the registration desk at the meeting.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a
majority of our voting power on the record date will constitute a quorum for
our meeting. Proxies received but marked as abstentions and broker non-votes
will be included in the calculation of the voting power considered to be
present at the meeting.
How do I vote?
You can vote on matters to come before the meeting in four ways:
. By Internet.
. By toll-free telephone.
. By completing, dating and signing the enclosed proxy card and returning
it in the enclosed postage-paid envelope.
. By written ballot at the meeting.
Please see your proxy card for specific instructions on the above methods of
voting. The Internet and telephone voting procedures are designed to verify
your vote through the use of a control number that is provided on each proxy
card. Stockholders whose shares are held in "street name" may vote by Internet
or telephone only if the holder of record offers those options.
Your shares will be voted as you indicate. If you return the proxy card but
you do not indicate your voting preferences, the individuals named on the proxy
card will vote your shares for each of the directors, the amendment to our
stock option and incentive plan, and the ratification of the appointment of
Ernst & Young LLP. We are not aware of any other matters to be presented at the
meeting; however, the individuals named in the proxy card will vote your shares
as recommended by the Board, or if no recommendation is given, in their own
discretion, with respect to any other matter that properly comes before the
meeting.
What if I vote and then change my mind?
You may revoke your proxy at any time before it is exercised by:
. filing with the Secretary of Net2Phone a notice of revocation;
. entering a new vote by Internet or telephone;
. sending in another duly executed proxy bearing a later date; or
. attending the meeting and casting your vote in person.
Your last vote will be the vote that is counted.
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<PAGE>
What vote is required to approve each item?
Election of Directors. The three nominees who receive the most votes will be
elected to the Board of Directors. A properly executed proxy marked "WITHHOLD
AUTHORITY" with respect to the election of one or more directors will not be
voted with respect to the director or directors indicated, although it will be
counted for purposes of determining whether there is a quorum. The withholding
of authority by a stockholder, including "broker non-votes" (discussed below),
will not be counted in computing a plurality and thus will have no effect on
the results of the election of such nominees.
Other Proposals. For each other proposal, the affirmative vote of the
holders of a majority of the voting interest of our stockholders represented in
person or by proxy and entitled to vote at the meeting will be required for
approval. A properly executed proxy marked "ABSTAIN" with respect to any such
proposal will not be voted, although it will be counted for purposes of
determining whether there is a quorum. Accordingly, an abstention will have the
effect of a negative vote.
Effect of Broker Non-Votes. If you do not provide your broker or other
nominee with instructions on how to vote your "street name" shares, your broker
or nominee may not be permitted to vote them. You should therefore be sure to
provide your broker or nominee with instructions on how to vote your shares.
If you do not give voting instructions to your broker or nominee, you will,
in effect, be voting against the amendment to our stock option and incentive
plan and the ratification of the appointment of Ernst & Young LLP, unless you
appear in person at the annual meeting and vote in favor of these proposals. As
discussed above, a "broker non-vote" will have no effect on the outcome of the
election of directors.
How are we soliciting this proxy?
We are soliciting this proxy on behalf of our Board of Directors by mail and
will pay all expenses associated therewith. Some of the officers and other
employees of Net2Phone also may, but without compensation other than their
regular compensation, solicit proxies by further mailing or personal
conversations, or by telephone, facsimile or other electronic means. We will
also, upon request, reimburse brokers and other persons holding stock in their
names, or in the names of nominees, for their reasonable out-of-pocket expenses
for forwarding proxy materials to the beneficial owners of the capital stock
and to obtain proxies.
BOARD OF DIRECTORS
This section gives biographical information about our directors and director
nominees and describes their membership on Board committees, their attendance
at meetings and their compensation. This section also sets forth the first
proposal on the agenda for the annual meeting.
What is the makeup of the Board of Directors?
Our Amended and Restated Certificate of Incorporation requires that we have
at least five directors but no more than thirteen. The number of directors is
set by the Board and is currently twelve. The directors are divided into three
classes, with each class serving for a three-year period. The stockholders
elect approximately one-third of the Board of Directors each year.
Are there any arrangements pursuant to which directors are to be selected?
Yes. Gary E. Rieschel and Martin Y. Yudkovitz were appointed to our Board in
connection with equity investments in Net2Phone by SOFTBANK Technology Ventures
IV and GE Capital Equity Investments. As a
3
<PAGE>
result of such investments, IDT Corporation and Clifford M. Sobel, our
Chairman, 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. Mr. Yudkovitz resigned from our Board effective October 31, 2000
and, as of the date of this proxy statement, neither GE nor NBC had nominated a
director to replace Mr. Yudkovitz.
John C. Petrillo and Richard R. Roscitt were appointed to our Board in
connection with the equity investment in Net2Phone by a subsidiary of AT&T
Corp. in August 2000. IDT Investments Inc., a wholly-owned subsidiary of IDT
Corporation, and ITelTech, LLC, a subsidiary of AT&T Corp., have agreed that
until August 1, 2003 or such earlier time as IDT Investments ceases to own two
million or more shares of our Class A Common Stock or common stock, IDT
Investments and ITelTech will vote or cause to be voted all of their shares in
favor of mutually-acceptable nominees to the Board. IDT Investments and
ITelTech have further agreed to vote or cause to be voted all of their shares
consistent with the result of having two designees from IDT Investments
reasonably acceptable to ITelTech on the Board and three designees from
ITelTech reasonably acceptable to IDT Investments on the Board (one of which
has not yet been appointed). In the event that IDT Investments and ITelTech are
unable to agree on acceptable nominees, they have agreed to abstain from voting
on such nominees as to which they are unable to agree. IDT Investments and
ITelTech also have agreed to use their reasonable best efforts to assure that
at least five members of the Board will be members not employed by, providing
material services for compensation to or otherwise affiliated with IDT, IDT
Investments, AT&T or ITelTech or any of their respective affiliates. This
obligation terminates at such time as IDT Investments or ITelTech, as the case
may be, becomes the beneficial owner of more than 85% or less than 15% of the
voting power of Net2Phone. IDT Investments currently has two nominees on our
Board, James A. Courter and Michael Fischberger.
Are there any directors who are not standing for re-election?
Yes. The following Class I directors are not standing for re-election at the
annual meeting:
. Jesse P. King. Mr. King is not standing for re-election allowing him time
to devote to his current job responsibilities with the Rockefeller
Foundation's Next Generation Leadership Program and the Philanthropy
Workshop.
. Martin Y. Yudkovitz. Mr. Yudkovitz resigned from the Board effective
October 31, 2000 allowing him time to devote to his current
responsibilities as President of NBC Interactive Media.
We are grateful for the services of Messrs. King and Yudkovitz during the
past fiscal year and wish them the best in their future endeavors.
Election of Directors (Item No. 1 on Proxy Card)
For Term Expiring at 2003 Annual Meeting
Class I
There are three Class I directors whose terms expire at the annual meeting.
Each nominee listed below will be elected to serve until the 2003 Annual
Meeting of Stockholders or until his successor shall have been duly elected and
qualified or his resignation or removal, whichever first occurs.
Each of the nominees has consented to serve a three-year term. If any of
them should decline or be unable to act as a director, the persons named in the
accompanying proxy card will vote for such substitute nominee or nominee(s) as
may be designated by the Board of Directors unless the Board reduces the number
of directors accordingly.
Nominees standing for election are:
4
<PAGE>
Stephen M. Greenberg, 56 New Director Nominee
Stephen M. Greenberg joined Net2Phone in August 2000 as Chairman of the
Office of the President. Prior to joining Net2Phone, Mr. Greenberg was a
founder and Senior Partner of Stern & Greenberg, a New Jersey law firm. From
1969 to 1971, Mr. Greenberg served as Executive Assistant to the United States
Attorney for the District of New Jersey. Mr. Greenberg has practiced law for
over 32 years and has received many honors including one for Outstanding
Personal Achievement from the New Jersey Bar Association. Mr. Greenberg is also
the Commissioner of the New Jersey Public Broadcasting Authority and a Member
of the New Jersey Israel Commission.
James R. Mellor, 70 Director since June 1999
James Mellor served as a director of IDT Corporation between August 1997 and
June 1999. From 1981 until 1997, 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 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.
Anthony G. Werner, 43 New Director Nominee
Anthony G. Werner became President and Chief Executive Officer of Aurora
Networks in November 2000. From March 1999 to October 2000, Mr. Werner was
Chief Technology Officer and Executive Vice President--Engineering and
Technical Operations for AT&T Broadband. From 1994 to 1999, Mr. Werner held
various positions at Tele-Communications, Inc., including Chief Technology
Officer and Executive Vice President. From 1981 to 1994, Mr. Werner held
various positions with Rogers Cablesystems, Ltd., in Toronto, Canada, including
Vice President of Engineering for Eastern Canada and Vice President of
Operations Engineering for the entire corporation. Mr. Werner currently serves
as Chairman of CableLab's Enhanced Services Deployment Working Group and
Chairman of CableLab's Cable Integrated Network Architecture Team. Mr. Werner
has been listed by CableFax since 1998 as one of Cable's 100 most influential
people and he was the year 2000 recipient of the National Cable Television
Association Vanguard Award for Science and Technology.
The Board of Directors unanimously recommends a vote FOR the election of
each of the director nominees.
Continuing Directors
For Term Expiring at 2001 Annual Meeting
Class II
Howard S. Balter, 39 Director since October 1997
Howard S. Balter has been 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 July 1999. Prior to his employment
with us, Mr. Balter was IDT Corporation's Chief Operating Officer from 1993 to
1998 and Chief Financial Officer from 1993 to 1995. Mr. Balter was a director
of IDT Corporation from December 1995 to January 1999 and Vice Chairman of IDT
Corporation's board of directors from 1996 to 1999. From 1985 to 1993, Mr.
Balter operated his own real estate development firm.
5
<PAGE>
Michael Fischberger, 31 Director since September 1999
Michael Fischberger has served as Senior Vice President of Domestic
Telecommunications and Internet services at IDT Corporation since 1993. In this
capacity, he helped build IDT Corporation's Internet business, guiding the
development of IDT Corporation's sales, technical support, customer service and
nationwide backbone. Mr. Fischberger currently supervises IDT Corporation's
domestic products and services, which includes domestic long distance services,
Internet access, calling cards and corporate services. Prior to July 1999, Mr.
Fischberger managed our Phone2Phone sales, customer service and anti-fraud
departments.
Harry C. McPherson, Jr., 71 Director since October 1999
Harry C. McPherson, Jr. has been a partner in the law firm of Verner,
Liipfert, Bernhard, McPherson and Hand, Chartered since 1969. Mr. McPherson has
been the President of the Economic Club of Washington since 1992. In 1993, Mr.
McPherson was a member of the Defense Base Closure and Realignment Commission.
From 1988 to 1992, Mr. McPherson was the Vice Chairman of the United States
International Cultural and Trade Center Commission. From 1983 to 1988, Mr.
McPherson was President of the Federal City Council, Washington, D.C. In 1979,
Mr. McPherson was a member of the President's Commission on the Accident at
Three Mile Island. From 1965 to 1969, Mr. McPherson was Counsel and then
Special Counsel to the President of the United States. From 1964 to 1965, Mr.
McPherson was Assistant Secretary of State for Educational and Cultural
Affairs. From 1963 to 1964, Mr. McPherson was Deputy Under Secretary of the
Army for International Affairs.
Richard R. Roscitt, 49 Director since August 2000
Richard R. Roscitt has been President and CEO of AT&T Solutions since 1994.
Mr. Roscitt has held numerous other positions since joining AT&T in 1972,
including Director-Data Network Services, Director- Marketing Strategy and
Product Management and Vice President-AT&T Business Long Distance. Mr. Roscitt
is also a member of the AT&T Operations Group, the company's governing
executive panel. Mr. Roscitt currently leads all of AT&T's units focused on the
business marketplace, including AT&T Solutions, Business Services Sales,
Business Services Operations, AT&T Data and Internet Services and AT&T Global
Network Services. Mr. Roscitt also is responsible for AT&T's entire local to
global business communication network requirements, including all voice, data,
Internet Protocol, outsourcing and managed network services. Mr. Roscitt
currently serves on the Board of Directors of Concert, PLC, the global joint
venture between AT&T and British Telecom.
Continuing Directors
For Term Expiring at 2002 Annual Meeting
Class III
James A. Courter, 59 Director since May 1999
James A. Courter has been President of IDT Corporation since October 1996
and a director of IDT Corporation 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 and Hand, Chartered 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.
John C. Petrillo, 51 Director since August 2000
John C. Petrillo has been Executive Vice President of Corporate Strategy and
Business Development for AT&T Corp. since 1995. From 1993 to 1995, Mr. Petrillo
was President of AT&T's Business Communications
6
<PAGE>
Services unit providing worldwide long distance network services for business
customers. Mr. Petrillo has held numerous other positions since joining AT&T in
1971, including Sales Vice President, Director of Personnel, Services Vice
President, Vice President-- Business Communications Services and Vice
President--Strategic Planning. Mr. Petrillo is a member of the Board of
Directors of Tele-Communications, Inc. and its subsidiaries, Silver Spur Land
and Cattle Co. and At Home Corporation. He also serves as a member of the Board
of Directors of the New Jersey Shakespeare Festival and a member of the Board
of Trustees for the Tallberg Foundation in Tallberg, Sweden.
Gary E. Rieschel, 44 Director since June 1999
Gary E. 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.
Clifford M. Sobel, 51 Director since May 1999
Clifford M. Sobel has served as our Chairman of the Board of Directors since
May 1999, our President from October 1997 to July 1999 and 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.
Daniel H. Schulman, 42 Director since September 1999
Daniel H. Schulman has been the President, Chief Operating Officer and a
director of priceline.com since July 1999. From December 1998 to July 1999, Mr.
Schulman was President of the AT&T Consumer Markets Division of AT&T Corp. and
was appointed to the AT&T Operations Group, the company's governing executive
panel. From March 1997 to November 1998, Mr. Schulman was President of AT&T
WorldNet Service. From December 1995 to February 1997, he was Vice President,
Business Services Marketing of the AT&T Business Markets Division, and from May
1994 to November 1995, Mr. Schulman was Small Business Marketing Vice President
of the AT&T Business Markets Division. Mr. Schulman also serves as director of
iVillage, Inc., the Global Internet Project and several charitable
organizations, including INROADS and Teach for America.
How are non-employee directors compensated?
Directors do not receive any fees for service on our Board, but are
reimbursed for reasonable travel expenses incurred in connection with
attendance at each Board and Board committee meeting and are eligible to
participate in our 1999 Amended and Restated Stock Option and Incentive Plan.
Each newly elected non-employee director receives an option to purchase 10,000
shares of our common stock at the time they join the Board. Further, each non-
employee director who continues to serve in such capacity is automatically
granted each year an option to purchase 10,000 shares of our common stock.
These options are granted at the fair market value of our common stock on the
date of grant and are immediately exercisable.
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<PAGE>
Are employees of Net2Phone paid additional compensation for service as a
director?
No. We do, however, reimburse them for travel and other related expenses.
See "Employment, Severance and Change of Control Agreements" below for a
description of the compensation arrangements with Clifford M. Sobel, our
Chairman, Howie S. Balter, our Chief Executive Officer and a director, and
Stephen M. Greenberg, our Chairman of the Office of the President and a new
director nominee.
How often did the Board meet during fiscal 2000?
The Board of Directors met eleven times during fiscal 2000. Each member of
the Board attended more than 75% of the aggregate of the total number of
meetings of the Board and the committees on which he was a member during the
portion of the fiscal year that he served as a director or committee member,
except for Martin Y. Yudkovitz (who is not standing for re-election at the
annual meeting).
What committees has the Board established?
The Board of Directors has standing Compensation and Audit Committees. We do
not maintain a standing nominating committee or other committee performing
similar functions. The function of nominating directors is carried out by the
entire Board of Directors. Our Bylaws, however, provide a procedure for you to
recommend candidates for director at an annual meeting. For more information,
see page 34 under "Stockholder Proposals and Nominations."
<TABLE>
<CAPTION>
Name Compensation Committee Audit Committee
------------------------------------------------------------------
<S> <C> <C>
Jesse P. King(1) x x
------------------------------------------------------------------
James R. Mellor x x
------------------------------------------------------------------
Gary E. Rieschel x
------------------------------------------------------------------
Daniel H. Schulman x
------------------------------------------------------------------
Harry C. McPherson, Jr. x
</TABLE>
(1) As discussed above, Mr. King is not standing for re-election as a director
at the annual meeting. The Board anticipates appointing a new member to
both the Compensation Committee and Audit Committee following the annual
meeting.
Compensation Committee
11 meetings in fiscal year 2000
. reviews and approves compensation of executive officers, including
payment of salaries, bonuses and incentive compensation;
. determines our compensation policies and programs; and
. administers our 1999 Amended and Restated Stock Option and Incentive
Plan.
Audit Committee 1 meeting in fiscal year 2000
. oversees the retention, performance and compensation of independent
accountants;
. oversees the audit and non-audit activities of both the independent
accountants and the internal audit staff of Net2Phone;
. meets separately and privately with the independent auditors to ensure
that the scope of their activities has not been restricted and that
adequate responses to their recommendations have been received; and
. receives and accepts the report of independent auditors.
8
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APPROVE AN AMENDMENT TO THE NET2PHONE, INC.
1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN
(Item No. 2 on Proxy Card)
Our Board has approved, subject to stockholder approval, an amendment to the
Net2Phone, Inc. 1999 Amended and Restated Stock Option and Incentive Plan to
increase the number of shares reserved for issuance thereunder by 2,000,000
shares to an aggregate of 16,940,000 shares, and has directed that this
amendment be submitted as a proposal for stockholder approval at this meeting.
The plan was originally adopted in April 1999 and was amended in July 2000.
What am I voting on?
A proposal to approve an amendment to the plan to increase the number of
shares reserved for issuance thereunder by 2,000,000 shares to an aggregate of
16,940,000 shares.
Before you decide how to vote, you should review the summary below and the
full text of the plan attached hereto as Appendix A with the proposed change
highlighted in Section 5(a) of the plan.
What is the plan and why is it important to me?
The plan allows our officers, directors, key employees and consultants, to
receive awards of stock options, stock appreciation rights, limited stock
appreciation rights and restricted stock in Net2Phone. The key provisions of
the plan are summarized below.
The plan is beneficial to us as a means of promoting the success and
enhancing the value of Net2Phone by linking the personal interests of the
participants to those of our stockholders and by providing participants with an
incentive for outstanding performance. These incentives also provide us
flexibility in our ability to attract and retain the services of directors,
officers, employees and others upon whose judgment, interest and special effort
the success of our business is largely dependent. Our Board of Directors
believes that the shares remaining available for issuance pursuant to the plan,
approximately 450,000 shares, are insufficient to provide us with the necessary
flexibility. Accordingly, we are requesting our stockholders to consider and
approve the amendment to the plan to increase the number of shares reserved for
issuance thereunder by 2,000,000 shares.
Who is eligible to participate in the plan?
The following persons are eligible to participate in the plan:
. officers, key employees and consultants of Net2Phone and any parent or
subsidiary (approximately 804 individuals); and
. directors of Net2Phone and any parent or subsidiary (approximately 25
individuals).
The selection of those participants who will receive awards under the plan
is entirely within the discretion of the Board or the compensation committee.
How is the plan administered?
The compensation committee of our Board, which currently consists of Messrs.
King, Mellor, Rieschel and Schulman, administer the plan. Subject to the
provisions of the plan, the compensation committee determines 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 compensation committee may interpret the plan and may at any time
adopt rules and regulations for the plan as it deems advisable.
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<PAGE>
What types of awards are provided for under the plan?
Stock Options. Options granted under the plan may be incentive stock options
or nonqualified stock options. An option may be granted on the terms and
conditions as 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 apply to
incentive stock options granted to a grantee that beneficially holds 10% or
more of our voting stock. The compensation committee may authorize loans to
individuals to finance their exercise of vested options. Options granted under
the plan become exercisable at those times and under the conditions determined
by the compensation committee.
Non-Employee Director Stock Options. The plan provides for automatic option
grants to eligible non-employee directors. Options to purchase 10,000 shares of
common stock have been granted to each eligible non-employee director 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. 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. 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 a stock appreciation
right is exercised, an amount in cash or common stock, as determined by 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, 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 right 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 the limited stock appreciation right 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 right relates. In no event, however, may the holder of a limited
stock appreciation right granted in connection with an incentive stock option
receive an amount in excess of the maximum amount that will enable the option
to continue to qualify as an incentive stock option.
Restricted Stock. The plan also 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. 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.
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Can the plan be amended or terminated?
The Board may amend or terminate the 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 plan after the tenth anniversary of its initial
adoption.
What are the new plan benefits?
The benefits or amounts that will be received by or allocated to:
. each of the executive officers named in the table on page 14,
. all current executive officers, as a group,
. all current directors who are not executive officers, as a group, and
. all employees, including all current officers who are not executive
officers, as a group,
are not presently determinable, except for (1) the automatic annual grants of
options to purchase 10,000 shares of our common stock granted to each non-
employee director and (2) the options to purchase 10,000 shares of our common
stock to be granted to the new non-employee director nominated for election to
our Board at this meeting. Grants or awards under the current plan are made at
the discretion of the Board or the compensation committee. If the plan, as
amended, had been in effect in fiscal 2000, the stock option grants received by
our executive officers and directors would have been the same as the stock
options received by such persons for fiscal 2000 under the plan. See "Options
Grants During Fiscal 2000" and "Employment, Severance and Change of Control
Agreements" below.
What are the federal income tax consequences related to stock options?
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to options granted under
the plan, and with respect to the sale of common stock acquired thereunder.
This summary does not address the effects of other federal taxes or taxes
imposed under state, local or foreign tax laws. Because of the complexities of
the tax laws, participants are encouraged to consult a tax advisor as to their
individual circumstances.
Incentive Stock Options. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option.
Instead, a participant will recognize taxable income with respect to an
incentive stock option only upon the sale of common stock acquired through the
exercise of the option ("ISO Stock"). The exercise of an incentive stock
option, however, may subject the participant to the alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least two
years from the date the option was granted and one year from the date the
option was exercised, then the participant will recognize long-term capital
gain in an amount equal to the excess of the sale price of the ISO Stock over
the exercise price.
If the participant sells ISO Stock for more than the exercise price prior to
having owned it for at least two years from the date the option was granted and
one year from the date the option was exercised, then all or a portion of the
gain recognized by the participant will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO Stock for more than
one year prior to the date of the sale.
If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Stock. This capital loss will be a long-
term capital loss if the participant has held the ISO Stock for more than one
year prior to the date of the sale.
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<PAGE>
Non-Qualified Options. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a non-qualified
option. However, a participant generally will recognize ordinary compensation
income upon the exercise of a non-qualified option in an amount equal to the
excess of the fair market value of the common stock acquired through the
exercise of the option (the "NQO Stock") on the date the option was exercised
over the exercise price.
A participant will have a tax basis for any NQO Stock equal to the exercise
price plus any income recognized upon the exercise of the option. Upon selling
NQO Stock, a participant generally will recognize capital gain or loss in an
amount equal to the difference between the sale price of the NQO Stock and the
participant's tax basis in the NQO Stock. This capital gain or loss will be a
long-term capital gain or loss if the participant has held the NQO Stock for
more than one year prior to the date of the sale.
Other Stock-Based Awards. The tax consequences associated with any other
stock-based award granted under the plan will vary depending on the specific
terms of such award. Among the relevant factors are whether or not the award
has a readily ascertainable fair market value, whether or not the award is
subject to forfeiture provisions or restrictions on transfer, the nature of the
property to be received by the participant under the award, the participant's
applicable holding period and the participant's tax basis.
Tax Consequences to Net2Phone. The grant of an award under the plan will
have no tax consequences to Net2Phone. Moreover, in general, neither the
exercise of an incentive stock option acquired under the plan nor the sale of
any common stock acquired under the plan, will have any tax consequences to
Net2Phone. However, we generally will be entitled to a business-expense
deduction with respect to any ordinary compensation income recognized by a
participant under the plan, including in connection with a restricted stock
award or as a result of the exercise of a non-qualified stock option. Any such
deduction will be subject to the limitations of Section 162(m) of the Internal
Revenue Code
What was the closing price of our common stock?
The closing price of our common stock reported on the Nasdaq National Market
for November 1, 2000, was $19.50 per share.
The Board of Directors unanimously recommends a vote FOR the amendment to
the Net2Phone, Inc. 1999 Amended and Restated Stock Option and Incentive
Plan.
12
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RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
(Item No. 3 on Proxy Card)
The Board of Directors, upon the recommendation of its Audit Committee, has
selected Ernst & Young LLP as Net2Phone's independent accountants for the
fiscal year ending July 31, 2001, and has further directed that management
submit the selection of independent accountants for ratification by the
stockholders at the annual meeting.
Stockholder ratification of the appointment of Ernst & Young LLP as
Net2Phone's independent accountants is not required by the our Bylaws or
otherwise. However, the Board is submitting the appointment of Ernst & Young
LLP to the stockholders for ratification as a matter of good corporate
practice. If the stockholders fail to ratify the appointment, the Audit
Committee and the Board of Directors will reconsider whether or not to retain
that firm. Even if the selection is ratified, the Audit Committee and the Board
of Directors in their discretion may direct the appointment of different
independent accountants at any time during the year if they determine that such
an appointment would be in the best interests of Net2Phone and its
stockholders.
The Board of Directors unanimously recommends a vote FOR the ratification of
the appointment of Ernst & Young LLP as Net2Phone's independent accountants
for fiscal year 2001.
13
<PAGE>
EXECUTIVE COMPENSATION
This section contains tables that show the amount of compensation earned by
our Chief Executive Officer and by our four other most highly paid executive
officers. It also contains the Report of the Compensation Committee explaining
the compensation philosophy for our most highly paid officers.
Summary Compensation Table
The following table sets forth information relating to the compensation paid
to our Chief Executive Officer and the four other executive officers who earned
the most cash compensation for services rendered on our behalf during fiscal
2000 (collectively, the "Named Executives").
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual ------------
Compensation(1) Securities
Fiscal --------------------- Underlying
Name and Principal Position Year Salary($) Bonus($) Options(#)
--------------------------- ------ --------- -------- ------------
<S> <C> <C> <C> <C>
Howard S. Balter...................... 2000 $258,521 -- --
Chief Executive Officer 1999 90,066(2) -- 1,874,499
Jonathan Fram(3)...................... 2000 $367,110(4) -- --
President 1999 -- -- 1,020,000
David Greenblatt(5)................... 2000 $266,336 -- --
Chief Operating Officer 1999 184,392 $25,000 460,000
1998 104,238 -- --
H. Jeff Goldberg(5)................... 2000 $231,406 $25,000 --
Chief Technology Officer 1999 206,169 -- 460,000
1998 209,447 -- --
Ilan S. Slasky........................ 2000 $207,408 -- --
Chief Financial Officer 1999 94,982(6) -- 360,000
</TABLE>
--------
(1) Compensation information in this table for Messrs. Greenblatt and Goldberg
includes amounts paid by IDT Corporation for services rendered to us during
fiscal 1999, in that these officers were compensated by IDT Corporation and
not by us directly until January 1999.
(2) Compensation information for fiscal 1999 only includes compensation earned
after Mr. Balter joined Net2Phone in January 1999.
(3) Mr. Fram's term as President ended effective August 25, 2000.
(4) Base salary for fiscal 2000 includes salary earned but not paid during the
period from July 20, 1999 (effective date of Mr. Fram's employment) to July
31, 1999 (end of our 1999 fiscal year).
(5) Effective September 15, 2000, Messrs. Greenblatt and Goldberg joined Adir
Technologies, Inc., our newly-formed subsidiary, as President/Chief
Operating Officer and Chief Technology Officer, respectively.
(6) Compensation information for fiscal 1999 only includes compensation earned
after Mr. Slasky joined Net2Phone in January 1999.
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<PAGE>
Options Grants During Fiscal 2000
No options to acquire shares of our common stock were granted to our Named
Executives during our fiscal year ended July 31, 2000. See "Employment,
Severance and Change of Control Agreements" below for a description of stock
options in which some of our Named Executives were granted on August 8, 2000
pursuant to the terms of their respective employment agreements.
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
The following table describes the value of options exercised in fiscal 2000
and the value of unexercised options held by the Named Executives at July 31,
2000.
<TABLE>
<CAPTION>
Number of Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ----------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Howard S. Balter........ 300,000 $ 7,676,000 190,974/ 843,525 $3,713,054/ $18,030,807
Jonathan Fram........... 253,333 $10,661,791 255,555/ 511,112 $4,839,700/ $ 9,679,441
David Greenblatt........ 60,030 $ 2,109,935 84,970/ 207,000 $2,000,193/ $ 4,972,780
H. Jeff Goldberg........ 8,000 $ 299,760 137,000/ 207,000 $2,968,240/ $ 4,055,880
Ilan S. Slasky.......... 30,030 $ 834,683 59,970/ 162,000 $1,411,693/ $ 3,813,480
</TABLE>
--------
(1) Options are considered "in-the-money," if the fair market value of the
underlying securities exceeds the exercise price of the options. The year-
end values represent the difference between the fair market value of the
common stock subject to the options (the closing price of Net2Phone's
common stock on July 31, 2000, as reported on the Nasdaq National Market,
was $26.87 per share) and the exercise price of the options.
Employment, Severance and Change of Control Agreements
Messrs. Balter, Greenberg, Greenblatt, Slasky and Sobel. Effective January
1, 2000, we entered into employment agreements with Messrs. Balter, Greenblatt
and Slasky. Effective July 31, 2000, we entered in an employment agreement with
Mr. Greenberg who joined Net2Phone as Chairman of the Office of the President.
Also effective July 31, 2000, we entered into a new employment agreement with
Mr. Sobel. His prior employment agreement was scheduled to expire in September
2000. All of these employment agreements are for a period of three years, but
may be renewed for successive one year terms.
In addition to information found elsewhere in this proxy statement, each
employment agreement provides for an annual base salary, an annual bonus, a
grant of stock options, participation in our benefits plans and certain other
fringe benefits. The following table shows the annual base salary, minimum
annual bonus, stock option grants and restricted stock awards for each of the
executives as set forth in their respective agreements.
<TABLE>
<CAPTION>
Base Minimum Stock Restricted
Executive Salary(1) Annual Bonus Option Grant(2) Stock Award
--------- --------- ------------------ --------------- -----------
<S> <C> <C> <C> <C>
Howard S. Balter...... $300,000 25% of Base Salary 500,000 --
Clifford M. Sobel..... $300,000 25% of Base Salary 500,000 --
Stephen M. Greenberg.. $300,000 25% of Base Salary 525,000 50,000
David Greenblatt...... $300,000 25% of Base Salary -- --
Ilan S. Slasky........ $225,000 25% of Base Salary 200,000 --
</TABLE>
--------
(1) Each executive's base salary is reviewed at least annually by the
compensation committee for consideration of appropriate merit-based
increases.
15
<PAGE>
(2) These options were granted on August 8, 2000 to each executive at an
exercise price equal to $25.00 (the closing price of Net2Phone's common
stock on August 8, 2000 as reported on the Nasdaq National Market). Each
executive's options vest as follows: one-third on the first anniversary of
the grant date and the remaining portion vests on a pro rata basis on the
last day of each month for the twenty-four months following the first
anniversary of the grant date.
The employment agreement for each of Messrs. Balter, Greenblatt, Sobel and
Slasky provide that if, during the period of the agreement, we terminate the
executive's employment without "cause," or the executive terminates his
employment for "good reason," which may include a change of control, the
executive is entitled to (1) a lump-sum cash payment equal to two times the sum
of the executive's then-current base salary and the executive's then-current
annual bonus, (2) a lump-sum cash payment equal to the sum of his unpaid base
salary through the date of termination, any earned but unpaid annual bonus for
any completed calendar year and any unreimbursed business expenses or other
amounts due executive, (3) a lump-sum cash payment equal to a pro rata portion
of the annual bonus for any partial calendar year of service through the date
of termination, (4) medical, dental, disability, life insurance and other
fringe benefits for the two-year period following the date of termination, and
(5) immediate vesting of 50%, with respect to Messrs. Balter, Greenblatt and
Slasky, and 66 2/3%, with respect to Mr. Sobel, of the executive's unvested
stock options and the right to exercise all vested options until the second
anniversary following the date of termination.
The employment agreement for Mr. Greenberg provides that if, during the
period of the agreement, we terminate Mr. Greenberg's employment without
"cause," or Mr. Greenberg terminates his employment for "good reason," which
may include a change of control, Mr. Greenberg is entitled to (1) receive for
two years following termination his then current base salary payable in
accordance with general payroll practices, (2) receive for two years following
termination his then current annual bonus payable in accordance with the plan
in place immediately prior to his termination, (3) a lump-sum cash payment
equal to the sum of his earned but unpaid base salary through the date of
termination, any earned but unpaid annual bonus for any completed calendar year
and any unreimbursed business expenses or other amounts due Mr. Greenberg, (4)
a lump-sum cash payment equal to a pro rata portion of his annual bonus for any
partial calendar year of service through the date of termination, (5) medical,
dental, disability, life insurance and other fringe benefits for the two-year
period following the date of termination, and (6) immediate vesting of all his
outstanding unvested stock options and the right to exercise all vested options
until the second anniversary following the date of termination.
Jonathan Fram. Net2Phone and Mr. Fram mutually agreed it was in their best
interest to bring their employment relationship to a conclusion effective
August 25, 2000. Pursuant to an understanding reached between Mr. Fram and
Net2Phone, Mr. Fram forfeited 165,000 unvested options to purchase our common
stock at $11.00 per share and agreed to certain volume limitations on the sale
of our common stock. Also pursuant to the understanding, any remaining unvested
options held by Mr. Fram immediately vested and became exercisable until the
one year anniversary following his termination. Because Mr. Fram became
employed shortly after leaving Net2Phone, he did not receive any cash payments
or other fringe benefits following his termination.
Change of Control Agreements. In connection with various stock option grants
(other than the option grants described above), pursuant to our 1999 Amended
and Restated Stock Option and Incentive Plan, we entered into agreements with
each of Messrs. Balter, Fram, Greenblatt, Goldberg and Slasky, which provided
that, following a "change in control" or a "related entity disposition," all
outstanding stock options currently held by the executive would automatically
vest and become exercisable. All such options held by Messrs. Balter, Fram,
Greenblatt, Goldberg and Slasky fully vested and became exercisable as a result
of the recent investment in us by ITelTech, LLC, a wholly-owned subsidiary of
AT&T Corp.
16
<PAGE>
Report of the Compensation Committee on Executive Compensation
The following Report of the Compensation Committee does not constitute
soliciting material and should not be deemed filed or incorporated by reference
into any other Net2Phone filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934, except to the extent we specifically
incorporate this Report.
The Compensation Committee of the Board of Directors, comprised of directors
who are not employees or former employees of Net2Phone, has furnished the
following report on executive compensation for fiscal 2000.
What is Net2Phone's philosophy of executive officer compensation?
Net2Phone's compensation program for executive officers consists of
three key elements:
. a base salary,
. a performance-based annual bonus, and
. long-term incentives in the form of stock option grants.
The Compensation Committee believes that this three-part approach best
serves the interests of Net2Phone and its stockholders. As described more
fully below, each element of Net2Phone's executive compensation program
has a somewhat different purpose.
The three-part approach enables Net2Phone to meet the requirements of
the competitive environment in which Net2Phone operates while ensuring
that executive officers are compensated in a way that advances both the
short- and long-term interests of the stockholders. Under this approach,
compensation for these officers was ultimately based upon:
. the Committee's assessment of the executive officers' performance,
. the continuing demand for superior executive talent,
. Net2Phone's overall performance, and
. Net2Phone's future objectives and challenges.
Net2Phone's philosophy is to pay base salaries to executives that reward
these executives for ongoing performance throughout the year and that
enable Net2Phone to attract, motivate and retain highly qualified
executives. The annual bonus program is designed to reward executives for
performance and is based primarily on Net2Phone's financial results. Stock
option grants give executives an opportunity to obtain equity in Net2Phone
and, because options result in rewards to executives if Net2Phone's stock
price appreciates, provide an incentive for outstanding performance in the
long-term. The Board believes that this mix of short- and long-term
compensation components provides a balanced approach that enables
Net2Phone to attract and retain experienced executives, rewards such
executives for their individual and collective contribution to the growth
of Net2Phone, and ensures that the incentives of Net2Phone's executives
are aligned with the best interest of its stockholders.
The Board's decisions concerning the specific fiscal 2000 compensation
elements for individual executive officers, including the Chief Executive
Officer, were made within this broad framework and in light of each
executive officer's level of responsibility, performance, current salary
and prior-year bonus and other compensation awards. As noted below, the
Board's specific decisions involving fiscal 2000 executive officer
compensation were ultimately based upon the Board's judgment regarding the
individual executive officer's performance, potential future
contributions, and whether each payment or award would provide an
appropriate reward and incentive for such officer to sustain and enhance
Net2Phone's long-term performance.
17
<PAGE>
How do we determine base salary?
The Board typically establishes each executive's base salary at a level
that is designed to reflect that executive's position and responsibility
within Net2Phone, to attract and retain highly qualified executives and to
be competitive with similarly situated executives at companies of similar
size and revenue levels. The Board also takes into account, among other
things, the individual executive's experience and performance during the
past year.
How are annual bonuses determined?
Bonuses typically are paid based upon the Board's judgment regarding the
significance of the individual executive officer's contributions during a
given year and the overall financial performance of Net2Phone. Net2Phone's
bonus plan generally makes such bonuses substantially contingent upon
Net2Phone's achievement of certain objective performance goals related to
revenue and net income, although the plan does not preclude discretionary
bonuses based upon other factors, such as individual achievement.
How is compensation used to focus management on long-term value creation?
In April 1999, Net2Phone adopted the Net2Phone, Inc. 1999 Stock Option
and Incentive Plan to provide key employees selected by the Board or
Compensation Committee an opportunity to obtain an equity stake in
Net2Phone. Stock options are primarily designed to provide such employees
with strong incentives for superior long-term performance. The
exercisability of options is therefore conditioned upon the employee's
continued employment by Net2Phone or its related entities for periods of
time specified by the Board or Compensation Committee when these options
are granted. Unexercised options are forfeited if the employee leaves
Net2Phone or its related entities prior to the time such options vest or,
if vested upon termination, if the employee fails to exercise them prior
to the end of a stated period following termination. In making option
awards, the Board or Compensation Committee reviews the level of awards
granted to executives at other comparable companies, the awards granted to
other employees within Net2Phone and the individual employee's specific
position at Net2Phone and role in helping Net2Phone to achieve its goals.
Do executives receive any other benefits?
Certain executives also participate in various other benefit plans,
including medical plans and a 401(k) plan, which are generally available
to all employees of Net2Phone.
How is Net2Phone's Chief Executive Officer compensated?
Howard S. Balter's compensation is determined within the broad framework
discussed above for executive officers in general. In fiscal 2000, Mr.
Balter earned total compensation of $258,521. Mr. Balter's base salary for
the year ended July 31, 2000, was established in part under the terms of
his new employment agreement. See "Employment, Severance and Change of
Control Agreements" above. Mr. Balter did not receive a bonus and was not
granted any options to purchase common stock in fiscal 2000; however, Mr.
Balter was, pursuant to the terms of his new employment agreement, granted
an option to purchase 500,000 shares of common stock on August 8, 2000 in
order to provide Mr. Balter with incentive for outstanding performance and
to encourage him to remain at Net2Phone.
How is Net2Phone addressing Internal Revenue Code limits on deductibility
of compensation?
Section 162(m) of the Internal Revenue Code, adopted as part of the
Revenue Reconciliation Act of 1993, generally limits to $1 million the
deduction that can be claimed by any publicly-held corporation
18
<PAGE>
for compensation paid to any "covered employee" in any taxable year
beginning after December 31, 1993. The term "covered employee" for this
purpose is defined generally as the chief executive officer and the four
other highest-paid employees of the corporation. In fiscal 2000, Net2Phone
did not pay compensation to any executive that was subject to Section
162(m).
Jesse King
James R. Mellor
Gary E. Rieschel
Daniel H. Schulman
As Members of the Compensation
Committee
19
<PAGE>
STOCK PRICE PERFORMANCE GRAPH
The following graph illustrates a comparison of the cumulative total
stockholder return (change in stock price plus reinvested dividends) of:
. our common stock,
. the Standard & Poor's Small Cap 600 Stock Index, and
. the Nasdaq Telecommunications Index,
from August 2, 1999 (the date of our initial public offering) through July 31,
2000 (the end of our fiscal year).
The graph assumes that $100 was invested on August 2, 2000 in our common
stock and in each of the comparison indices, and assumes that all dividends
paid were reinvested. The comparisons in the graph are required by the
Securities and Exchange Commission and are not intended to forecast or be
indicative of possible future performance of our common stock.
[LINE GRAPH]
<TABLE>
<CAPTION>
S&P Small Nasdaq
Net2Phone Cap 600 Telecommunications
--------- --------- ------------------
<S> <C> <C> <C>
August 2, 1999...................... $100.00 $100.00 $100.00
July 31, 2000....................... $114.00 $112.20 $126.60
</TABLE>
20
<PAGE>
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF OUR PRINCIPAL STOCKHOLDERS,
DIRECTORS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our outstanding capital stock as of October 1, 2000, by:
. each person who is the beneficial owner of more than 5% of our capital
stock;
. each of our directors;
. our chief executive officer and four other highest paid executive
officers; and
. our directors and executive officers as a group.
The following table also sets forth information with respect to the
beneficial ownership of the capital stock of Adir Technologies, Inc., our
subsidiary, as of October 1, 2000, by:
. each of our directors;
. our chief executive officer and four other highest paid executive
officers; and
. our directors and executive officers as a group.
Except as otherwise indicated, all of the shares indicated in the table are
shares of common stock.
<TABLE>
<CAPTION>
Net2Phone Percent of Capital Adir Shares
Shares Beneficially Stock of Beneficially Percent of Capital
Holders Owned Net2Phone(1) Owned(2) Stock of Adir(3)
------- ------------------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C>
AT&T Corp.(4)(5)........ 28,896,750 47% -- --
32 Avenue of the
Americas
New York, NY 10013-2412
John C. Petrillo(6)..... 28,906,750 47% -- --
c/o AT&T Corp.
32 Avenue of the
Americas
New York, NY 10013-2412
Richard R. Roscitt(7)... 28,906,750 47% -- --
c/o AT&T Corp.
32 Avenue of the
Americas
New York, NY 10013-2412
IDT Corporation(4)(8)... 28,896,750 47% -- --
520 Broad Street
Newark, New Jersey
07102
James A. Courter........ 28,923,150(9) 47% 4,000(10) 4.6%
c/o IDT Corporation
520 Broad Street
Hackensack, New Jersey
07102
SOFTBANK Technology 4,100,000 6.7% -- --
Ventures IV, L.P.(11)..
333 West San Carlos
Street, Suite 1225
San Jose, CA 95110
Gary E. Rieschel........ 4,110,000(12) 6.7% 1,750(13) 2.0%
c/o SOFTBANK Ventures
IV, L.P.
333 West San Carlos
Street, Suite 1225
San Jose, CA 95110
Yahoo! Inc.(4)(14)...... 3,390,778 5.5% -- --
3420 Central Expressway
Santa Clara, California
95051
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Net2Phone Percent of Capital Adir Shares
Shares Beneficially Stock of Beneficially Percent of Capital
Holders Owned Net2Phone(1) Owned(2) Stock of Adir(3)
------- ------------------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C>
America Online, 2,795,000 4.5% -- --
Inc.(4)(15)..............
22000 AOL Way
Dulles, VA 21066
General Electric Company 2,332,333 3.8% -- --
Group(16)(17)............
120 Long Ridge Road
Stamford, Connecticut
06927
Clifford M. Sobel......... 2,157,241(18) 3.5% 1,500(19) 1.7%
Howard S. Balter............ 1,773,557(20) 2.8% 937(19) 1.1%
FMR Corp(4)(21)........... 1,417,900 2.3% -- --
82 Davanshire Street
Boston, Massachusetts
82109
Janus Capital 672,155 1.1% -- --
Corporation(4)(22).......
672,155 100 Filmore
Street
Denver, Colorado 80206-
4923
Jonathan Fram............. 601,667(23) 1.0% 0 0%
H. Jeff Goldberg.......... 421,040(24) * 4,500(19) 5.1%
David Greenblatt.......... 396,040(25) * 3,000(19) 3.4%
Ilan S. Slasky............ 322,040(26) * 500(19) *
Stephen M. Greenberg...... 62,000(27) * 250(19) *
Michael Fischberger....... 55,680(28) * 0 0%
Harry C. McPherson, Jr. .. 20,000(29) * 0 0%
James R. Mellor........... 20,000(29) * 0 0%
Daniel H. Schulman........ 17,666(29) * 0 0%
Jesse P. King............. 24,200(29) * 0 0%
Martin J. Yudkovitz....... 10,000(17)(29) * 0 0%
Anthony G. Werner......... 0 0% 0 0%
Named Executive Officers
and Directors as a group
(18 persons)............. 38,934,281(30) 60.8% 16,437(19)(31) 18.8%
</TABLE>
--------
* Less than one percent.
(1) All percentage calculations assume that all shares of Class A Common Stock
have been converted into shares of common stock.
(2) All shares of Adir, except for the shares beneficially owned by Messrs.
Courter and Rieschel, are subject to vesting, forfeiture and other
restrictions on transferability. The shares vest as follows: twenty-five
percent on September 8, 2001 and the remaining portion vests on a pro rata
basis on the last day of each month for the thirty-six months following
September 8, 2001.
(3) All percentage calculations assume that all shares of Series A-1
Convertible Preferred Stock have been converted into shares of common stock
on a one-to-one basis.
(4) We have relied, without further investigation, on information filed by the
reporting person with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. We make no representation as to the
accuracy or completeness of the information reported.
22
<PAGE>
(5) Based on a Schedule 13D dated August 22, 2000, filed by AT&T Corp. and
ITelTech, LLC, a wholly-owned subsidiary of AT&T. AT&T does not directly
beneficially own any shares of Net2Phone and disclaims beneficial ownership
on all such shares it may be deemed to beneficially own. ITelTech has sole
voting power with respect to 18,900,000 shares of Class A Common Stock,
shared voting power with respect to 28,896,750 shares of Class A Common
Stock, sole dispositive power with respect to 18,900,000 shares of Class A
Common Stock and shared dispositive power with respect to 28,896,750.
Although ITelTech directly beneficially owns only 18,900,000 shares of
Class A Common Stock, ITelTech may be deemed to beneficially own an
additional 9,996,750 shares of Class A Common Stock beneficially owned by
IDT Investments, Inc. by virtue of a certain Voting Agreement, but as to
which ITelTech disclaims any beneficial interest.
(6) John C. Petrillo, one of our directors, is Executive Vice President of
Corporate Strategy and Business Development for AT&T. As a result, Mr.
Petrillo may be deemed to be the beneficial owner of the shares of our
capital stock beneficially owned by ITelTech, LLC, a wholly-owned
subsidiary of AT&T. Mr. Petrillo disclaims beneficial ownership of these
shares. Also includes 10,000 shares of common stock issuable upon exercise
of presently exercisable options granted to Mr. Petrillo over which AT&T
may have the power to direct the disposition.
(7) Richard R. Roscitt, one of our directors, is President of AT&T Business
Services and President and CEO of AT&T Solutions. As a result, Mr. Roscitt
may be deemed to be the beneficial owner of the shares of our capital stock
beneficially owned by ITelTech, LLC, a wholly-owned subsidiary of AT&T. Mr.
Roscitt disclaims beneficial ownership of these shares. Also includes
10,000 shares of common stock issuable upon exercise of presently
exercisable options granted to Mr. Roscitt over which AT&T may have the
power to direct the disposition.
(8) Based on a Schedule 13G dated August 21, 2000, filed by IDT Corporation,
IDT Investments, Inc. and Howard S. Jonas. IDT and Howard S. Jonas do not
directly beneficially own any shares of Net2Phone and disclaim beneficial
ownership on all such shares each may be deemed to beneficially own. IDT
Investments has sole voting power with respect to 9,996,750 shares of Class
A Common Stock, shared voting power with respect to 28,896,750 shares of
Class A Common Stock, sole dispositive power with respect to 9,996,750
shares of Class A Common Stock and shared dispositive power with respect to
28,896,750 shares of Class A Common Stock. Although IDT Investments
directly beneficially owns only 9,996,750 shares of Class A Common Stock,
IDT Investments may be deemed to beneficially own an additional 18,900,000
shares of Class A Common Stock beneficially owned by ITelTech, LLC by
virtue of a certain Voting Agreement, but as to which IDT Investments
disclaims any beneficial interest.
(9) James A. Courter, one of our directors, is the President, Vice Chairman and
a director of IDT. As a result, in addition to the 26,400 shares of our
common stock that he holds directly, he may be deemed to be the beneficial
owner of the shares of our capital stock owned by IDT. Mr. Courter
disclaims beneficial ownership of these additional shares.
(10) All of these shares are Series A-1 Convertible Preferred Stock. Mr.
Courter may be deemed to be the beneficial owner of the shares of Adir
capital stock beneficially owned by IDT Corporation and its subsidiaries.
Mr. Courter disclaims beneficial ownership of these shares.
(11) Includes 4,022,920 shares of Class A Common Stock held by SOFTBANK
Technology Ventures IV, L.P. and 77,080 shares of Class A Common Stock
held by SOFTBANK Technology Advisers Fund L.P.
(12) Gary E. Rieschel, one of our directors, 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. Includes
10,000 shares issuable upon exercise of presently exercisable stock
options.
(13) All of these shares are Series A-1 Convertible Preferred Stock. Mr.
Rieschel may be deemed to be the beneficial owner of the shares of Adir
capital stock beneficially owned by SOFTBANK Technology Ventures or its
affiliates. Mr. Rieschel disclaims beneficial ownership of these shares.
(14) Based on a Schedule 13G dated March 30, 2000, filed by Yahoo! Inc. Yahoo!
has sole voting and sole dispositive power with respect to all such
shares.
(15) Based on a Schedule 13G dated February 15, 2000, filed by AOL. 2,250,000
of these shares are shares of Class A Common Stock, 500,000 shares are
shares of common stock, and 45,000 of these shares are
23
<PAGE>
issuable upon exercise of presently exercisable warrants or warrants
exercisable within 60 days. AOL has sole voting and sole dispositive power
with respect to all such shares.
(16) Includes 1,989,000 shares of Class A Common Stock held by GE Capital
Equity Investments, Inc. ("GECEI"), as to which GECEI and NBC share
voting power, GECEI and NBC have sole dispositive power as to 1,147,653
shares and 841,347 shares, respectively. Also includes (i) 333,333 shares
of common stock held by GECEI and (ii) 10,000 shares of common stock
issuable upon exercise of presently vested options granted to Martin J.
Yudkovitz, over which NBC has the power to direct disposition pursuant to
a nominee agreement with Mr. Yudkovitz. GECEI and NBC share voting power
with respect to all such shares of common stock; GECEI and NBC have sole
dispositive power as to 138,180 shares and 205,153 shares, respectively.
GECEI and NBC are subsidiaries of General Electric Company.
(17) Represents 10,000 shares of common stock issuable upon exercise of
presently exercisable options held by Martin J. Yudkovitz, over which NBC
has the power to direct the disposition pursuant to a nominee agreement.
Mr. Yudkovitz disclaims beneficial ownership of these shares.
(18) Includes 200,000 shares owned by Jon Jul Investment Partnership, L.P. Mr.
Sobel is a general and limited partner of Jon Jul Investment Partnership,
L.P.
(19) Does not include any shares of Adir capital stock beneficially owned by
Net2Phone.
(20) Includes 337,920 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 120,500 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. Also includes
1,034,499 shares issuable upon exercise of presently exercisable stock
options.
(21) Based on a Schedule 13G/A dated September 10, 2000, filed by FMR Corp.
and certain affiliated persons. FMR has sole dispositive power with
respect to all such shares.
(22) Based on a Schedule 13G/A dated September 8, 2000, filed by Janus and
Thomas H. Bailey, Chairman, President and a stockholder of Janus. Each of
Janus and Mr. Bailey, as a result of his position, have sole voting power
and sole dispositive power with respect to all such shares. Mr. Bailey
disclaims beneficial ownership over all such shares that he or Janus may
be deemed to beneficially own.
(23) Includes 499,445 shares that may be acquired currently or within 60 days
through the exercise of stock options.
(24) Includes 41,500 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.
Also includes 344,000 shares issuable upon exercise of presently
exercisable stock options.
(25) Includes 41,500 shares held of record by a trust for the benefit of Mr.
Greenblatt's family members, of which Mr. Balter is the trustee. Also
includes 291,970 shares issuable upon exercise of presently exercisable
stock options.
(26) Includes 25,000 shares held of record by a trust for the benefit of Mr.
Slasky's family members, of which Mr. Balter serves as the trustee. Also
includes 221,970 shares issuable upon exercise of presently exercisable
stock options.
(27) Includes 10,000 shares that may be acquired currently or within 60 days
through the exercise of stock options.
(28) Includes 30,000 shares issuable upon exercise of presently exercisable
stock options.
(29) All of these shares are shares of common stock that may be acquired
currently or within 60 days through the exercise of stock options.
(30) Includes the shares of Class A Common Stock held by IDT, SOFTBANK and
AT&T. Also includes an aggregate of 2,553,750 shares issuable upon
exercise of presently exercisable stock options.
(31) Includes shares of Series A-1 Convertible Preferred Stock held by IDT and
SOFTBANK.
24
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than 10% of our common stock, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file. Based solely upon a review of the copies of such forms furnished to
us, or written representations that no Forms 5 were required, we believe that
during our preceding fiscal year all Section 16(a) filing requirements
applicable to our officers, directors and greater than 10% beneficial owners
were complied with except for (1) the failure to timely file Mr. McPherson's
Initial Report on Form 3, which has since been filed and (2) the failure by
each of Messrs. Balter, Greenblatt, Slasky and Sobel to report one transaction
on a timely basis, which have all since been reported.
CERTAIN TRANSACTIONS AND RELATIONSHIPS
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 our Board of Directors, including a majority of the disinterested
directors, and will continue to be on terms no less favorable to us than could
be obtained from unaffiliated third parties.
Relationship with IDT Corporation
Until May 1999, we were a wholly-owned subsidiary of IDT Corporation. IDT
currently owns approximately 16.3% of our outstanding capital stock, but
controls 21% of the aggregate voting power of our capital stock because it
holds Class A Common Stock with two votes per share. Since we were established
as a separate subsidiary of IDT in October 1997, we have received various
services from IDT, including administrative (accounting, human resources and
legal), customer support, telecommunications and joint marketing. IDT has also
provided us with the services of a number of its executives and employees.
Prior to the execution of the agreements with IDT described below, IDT
historically allocated a portion of its overhead costs related to those
services to us.
In May 1999, prior to our initial public offering, we entered into a number
of agreements with IDT, 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. During fiscal 2000, IDT billed us $34.7
million and we billed IDT $13.1 million pursuant to the agreements described
below. As of July 31, 2000, we had an outstanding balance with IDT of
approximately $4.9 million.
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 uses and will continue to use in
connection with its business.
IDT Services Agreement
In connection with this agreement, IDT continued to provide us during fiscal
2000 with various administrative services, including general accounting
services, payroll and benefits administration and customer support.
. General Accounting Services. IDT provided us with accounts payable
services and general ledger services. IDT charged us cost plus 20 percent
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.
25
<PAGE>
. Payroll and Benefits Administration. IDT administered our payroll. Until
we established our own benefit plan for our employees, our employees
continued to be covered under IDT's health insurance policies. We payed
IDT for administering our payroll and benefits plans at IDT's cost plus
20 percent. Additionally, we reimbursed 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 provided customer support services to our customers
on a cost-plus 20 percent 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. During fiscal 2000, we
transitioned the above referenced services to our own resources.
Net2Phone Services Agreement
In connection with this agreement, we support IDT's prepaid calling card
platform. Our services under this agreement include technical support for the
platform, ordering lines to handle calls, managing the debit card database and
monitoring the network, 24 hours per day, seven days per week. We provide
these services at the greater of cost-plus 20 percent and $.0025 per minute of
IDT usage of the prepaid calling card platform. In addition, IDT reimburses 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
prepaid calling 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 (which expired May 7, 2000), the Net2Phone services agreement may be
terminated at any time at either party's option upon 30-days prior written
notice. If 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, we share certain past tax liabilities
and benefits with IDT, 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.
26
<PAGE>
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 pays 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 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 (which expired May 7, 2000), 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 to us an indefeasible right to use portions of its high-
speed network. We have the right to terminate our right to use 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 its right
to use 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. In fiscal 2000, we paid IDT an
installation fee of $600,000 for this network. We also have agreed to 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 percent 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.
IDT also 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. We also entered into transit relationship
agreements with IDT 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 (which expired May 7, 2000), 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 five-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;
. for each dedicated-line Internet customer, the lesser of $100.00 or 20
percent of the fee IDT charges; and
. 25 percent of all fees charged by IDT for installation of dedicated
lines.
27
<PAGE>
Following the initial one year term (which expired May 7, 2000), 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 percent 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.
Promissory Note with IDT
On May 12, 1999, we converted a portion of our liability to IDT into a $14
million promissory note. The promissory note accrued interest at a rate of 9%
per annumn and was payable in 60 equal monthly installments of principal and
interest. We repaid the entire principal balance to IDT during fiscal 2000.
Relationship with AT&T Corp.
On August 11, 2000, we issued 4,000,000 newly-authorized shares of our Class
A Common Stock to a subsidiary of AT&T, for an aggregate purchase price of
$300,000,000. In addition, the AT&T subsidiary purchased from IDT 14.9 million
of the approximately 24.9 million shares of our Class A Common Stock that IDT
owned for an aggregate purchase price of approximately $1.1 billion. As a
result of these transactions, the
28
<PAGE>
AT&T subsidiary owns approximately 31 percent of our outstanding capital stock,
but controls approximately 40 percent of the aggregate voting power of our
capital stock because it holds Class A Common Stock with two votes per share.
In connection with the transaction, we agreed to cooperate in the development
of new Internet voice applications for cable telephony and the business
communications market. AT&T and IDT were also granted a license to deploy our
present and future technologies on terms, conditions and pricing no less
favorable than those granted to other licensees of Net2Phone.
In addition, we have agreed to support good faith negotiations to work
together with AT&T to enter into commercial arrangements to:
. develop and deploy new products and applications that integrate voice-
over-IP technology into PBX's and other communication products for the
business market;
. develop a series of commercial and voice-over-IP technology;
. develop and implement such technologies as are required for the
interoperability of each party's services with the other's;
. develop "on-net" advantages in the delivery of each other's services;
. develop and evolve the standards for voice-over-IP services and products;
and
. classify each other as "preferred supplier" with respect to all services
offered by the parties.
Also in connection with our agreement with AT&T, we entered into a license,
distribution, marketing and services agreement in April 2000, whereby AT&T
agreed to offer our services through AT&T's WorldNet Service.
Adir Technologies, Inc. and Investment by SOFTBANK and IDT
We created Adir Technologies, Inc. as a new subsidiary to develop and market
our network management software for voice-over-IP and other packet-based
multimedia networks. The new company plans to offer our industry-leading voice-
over-IP network management software to telecommunications, Internet, wireless,
next generation and broadband service providers and enterprises worldwide. The
software platform we contributed to Adir pursuant to an assignment and license
agreement was originally created in our research and development laboratory in
Lakewood, New Jersey in 1995 and it has been enhanced since then.
In September 2000, we announced that Cisco Systems, Inc. had purchased a
minority equity interest in Adir. In connection with Cisco's investment, the
companies agreed to a relationship in which Cisco will jointly market Adir's
network management platform to its voice-over-IP customers, offering
communications providers and enterprises compelling new choices in voice-over-
IP solutions.
Adir also received equity investments from IDT, which owns 16.3% of our
capital stock, and SOFTBANK, who owns 6.7% of our capital stock, in the amount
of $7,000,000 and $3,062,500, respectively. IDT and SOFTBANK purchased
convertible preferred stock and received registration rights and right of first
offer and co-sale rights. Unlike Cisco, neither IDT nor SOFTBANK were granted
pre-emptive rights and, therefore, their interest in Adir may be diluted upon
future issuances of Adir equity.
Agreements with America Online and Subsidiaries
Netscape
We signed a series of related agreements with Netscape, a subsidiary of
America Online, 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 commenced with the second beta
release of Netscape's Internet browser in April 2000. In addition, our services
are displayed on the Netscape Netcenter
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site 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 have paid or 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. For
fiscal 2000, we paid $3.5 million in fees to Netscape pursuant to this
agreement. Netscape's parent company, America Online, beneficially owns
approximately 4.5 percent of our capital stock.
ICQ/AIM
ICQ, a subsidiary of America Online, began offering our services exclusively
to their instant messaging users in September 1999. Our software has been fully
integrated into ICQ's 2000b Instant Messenger since September 2000, and we have
been marketing a co-branded pre-paid calling card with ICQ since September
1999, allowing users to place calls from any telephone within the United States
and 19 other countries to anywhere in the world. Additionally, we have been
marketing a co-branded pre-paid calling card with AOL Instant Messenger (AIM)
since January 2000. We also have an agreement with AOL to integrate our PC to
Phone services into their Instant Messenger.
In July 1999, we entered into an exclusive, four-year distribution and
marketing agreement with ICQ. ICQ provides software that enables Internet users
to contact other users on a real-time basis, and to determine whether other
individuals are online. ICQ's software also enables Internet users to chat,
send messages and files and to play Internet-based games with one another. We
believe that this agreement will enable us to attract a substantial number of
ICQ's users to utilize our services, which will enhance our revenue, customer
base and market share. Under this agreement, ICQ has agreed to:
. co-brand and promote our phone-to-phone Internet telephony services in
the United States and in 19 other countries;
. embed customized versions of our software on an exclusive basis to allow
ICQ customers to make PC-to-phone and PC-to-PC calls and to receive
phone-to-PC calls;
. share revenue from advertisements and sponsorships sold by ICQ on our
software that is embedded in ICQ's instant messaging software; and
. promote our services on some of ICQ's Web sites;
and we have agreed to:
. pay ICQ a fee of $7.5 million, $4.0 million of which was paid at signing,
and the remaining $3.5 million was paid in September 1999;
. pay ICQ a share of minutes-based revenue generated through the ICQ
service and award ICQ a performance bonus on the basis of the total
revenue derived under the agreement; and
. promote ICQ on our Web sites.
For fiscal 2000, we paid $3.5 million in fees to ICQ and ICQ did not pay any
amounts to us pursuant to this agreement.
ICQ has the right to terminate the exclusivity granted to us as to a
particular service under the agreement under certain circumstances, including
if:
. the price for the service or the scope of the service offered by us to
retail customers through any other distribution channel is more favorable
than the corresponding service offered by Net2Phone through the ICQ
service;
. mutually agreed upon third party reviewers determine that the service
offered by us is not competitive as to per minute rates and quality with
similar services offered by a competitor of Net2Phone; or
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. our service is not prepared for launch in a particular country by the
applicable cut-off date specified in the agreement.
In addition, ICQ has the right to terminate the entire agreement under
certain circumstances, including if:
. two or more of our services are not competitive with those of our
competitors in terms of price, and the scope and quality of service; or
. if more than one of our services is not fully prepared for launch by the
specified cut-off dates.
If at any time after July 14, 2001, ICQ or America Online enters into a
strategic relationship with any major national or international
telecommunications provider for the distribution of telecommunications
services using America Online and its affiliates, and if ICQ terminates the
agreement and the telecommunications provider does not agree to offer all of
our services that are offered under the agreement on terms comparable to those
in the agreement, then ICQ will be required to pay us a termination fee of up
to $60.0 million. The amount of the termination fee, if any, will depend on
whether the telecommunications provider offers any of our services and the
aggregate transaction revenues represented by our services that will not be
offered.
In connection with our distribution and marketing agreement with ICQ, we
issued a warrant to America Online to purchase up to 3 percent of our
outstanding capital stock on a fully-diluted basis. This warrant will vest in
1 percent increments upon the achievement of each of three incremental
thresholds of revenue generated under the agreement during the first four
years that the warrant is outstanding. The per share exercise price under the
warrant will be equal to the lesser of $12.00 per share or $450 million
divided by the number of our fully- diluted shares on the initial exercise
date. The warrant may be exercised for a period of five years from the date of
issuance.
The warrant grants to America Online demand registration rights enabling
America Online to cause us to effect two registrations and piggy-back
registration rights that can be used in connection with future registrations.
In addition, America Online will have the right to require us to file up to
two additional registration statements relating to the shares issuable upon
exercise of the warrant at such time as we shall become eligible to register
these shares on Form S-3 under the Securities Act of 1933.
Agreements with NBC and Snap
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 obtained the
right to purchase additional spots to be telecast prior to June 30, 2000. NBC
is a wholly-owned indirect subsidiary of the General Electric Company Group,
which beneficially owns approximately 3.8 percent of our capital stock.
On May 17, 1999, we entered into an agreement with Snap. Snap, an Internet
portal service of NBC and CNET, 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 has 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. NBC, a
wholly-owned indirect subsidiary of General Electric Company, together with
CNET, is the primary owner of Snap.
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Agreements with priceline.com
In November 1999, we entered into agreements with priceline.com, an Internet
commerce service that allows users to name their own price to purchase goods
and services over the Internet. Daniel H. Schulman, a director of Net2Phone, is
the President, Chief Operating Officer and a director of priceline.com.
Under the terms of the agreement, we offer our international and domestic
Phone-to-Phone services as a premier provider through priceline.com, enabling
priceline.com customers to name their own price to purchase blocks of phone-to-
phone minutes. Our phone-to-phone products are offered for sale through
priceline.com through several live services. The "Name Your Own Price for Long
Distance" service, launched in March 2000, allows customers to make calls from
their home phones without having to enter an account number, once they've
purchased a block of Phone-to-Phone minutes from priceline.com. Customers may
make offers for blocks of calling time in the following manner:
. domestic time blocks, where customers can name their own price for blocks
of domestic long distance Phone-to-Phone minutes;
. international time blocks, where customers can name their own price for
blocks of international long distance Phone-to-Phone minutes to a
specified country; and
. priceline.com's "Call Anywhere" program, where customers can name their
own price for blocks of Phone-to-Phone minutes that can be used to call
multiple designated locations; the actual amount of time purchased will
vary per location.
In May 2000, we launched a second service with priceline.com, called "Offer
by Phone." The Offer by Phone service enables customers to make offers to
purchase phone-to-phone services from us on a per-call basis. Net2Phone is the
exclusive provider of the Offer by Phone service.
In August 2000, we launched a third service with priceline.com that allows
University Students to name their own price for blocks of calling time. This
university service is different from the original "Name Your Own Price for Long
Distance" service because customers are able to make calls from behind a
college PBX so they can use the service from their dorm rooms.
Under the terms of the agreement, we expect to pay priceline.com the
aggregate sum of $17,000,000 in increasing installment payments over a three
year period. For fiscal 2000, we paid $2,450,000 in payments to priceline.com.
Under the terms of the agreement, we reserve the right to cancel the agreement
in the event that priceline.com does not generate $20 million in revenue for
Net2Phone within the first year. If priceline.com fails to generate this
minimum required amount we have an option to limit our payment to priceline to
only $4 million.
Future Net2Phone/ priceline.com services under separate agreements include
launching the "Name Your Own Price for Long Distance" service in various
European countries, beginning with the United Kingdom by December 2000.
Agreements with Yahoo! Inc.
On March 31, 2000, Yahoo! Inc. purchased an equity interest in us. Under the
terms of the agreement, we entered into a stock swap with Yahoo! with the
objective of securing our strategic relationship in accordance with which we
issued and sold Yahoo! approximately 2.8 million shares of our common stock in
exchange for approximately 806,000 shares of Yahoo! common stock.
In 1998, we signed an agreement with Yahoo!, which was recently renewed
through December 31, 2000, that integrated our Web-based Internet telephony
service into the Yahoo! People Search online telephone directory. As a result
of this integration, an Internet user who performs a search on Yahoo! People
Search can, after installing our software, 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
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performs a word or category search for "Internet Telephony" or related phrases
on Yahoo! Additionally, our PC-to-phone service is integrated into the Yahoo!
Yellow pages online directory. In fiscal 2000, we paid approximately $1,705,260
to Yahoo! pursuant to this agreement.
On July 24, 2000, we entered into a three-year exclusive services and
marketing agreement whereby Yahoo! has agreed to embed our Internet telephony
software into the future versions of its Yahoo! Messenger software client and
to use our network to carry traffic to and from its voice portal. Additionally,
in October 2000, we announced that we will provide our voice-optimized IP
network for voice transit through the Yahoo! network of properties. Under the
terms of the agreement, Yahoo! will use our voice-over-IP network for its
newest suite of voice services. Launched in October 2000, Yahoo! by Phone
provides telephone and voice access to popular Yahoo! content, voice-mail and
e-mail. Yahoo! has also agreed to do the following:
. market and promote the combined Net2Phone Yahoo! services pursuant to a
joint media plan;
. market and promote a co-branded Net2Phone calling card;
. allow us to market our products and services to users of Yahoo! voice
portal; and
. share advertising revenue with us from the voice portal.
Under the terms of this agreement, we are obligated to pay Yahoo! fees in
consideration for our exclusivity throughout the Yahoo! network of properties,
as well as commit to certain advertising media buys pursuant to the joint media
plan. No payments were made pursuant to this agreement during fiscal 2000.
Facility Leases
We have entered into leases for the use of our Newark, Hackensack and
Piscataway facilities with corporations that are owned and/or controlled by
Howard S. Jonas, a director and executive officer 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 percent 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 Newark sublease from IDT for 520 Broad Street expires on May
31, 2010, with a monthly rent of $255,417.25. The Hackensack lease for 294
State Street expires on February 28, 2002 with a monthly rent of $5,600. 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 expires in May of 2002, with monthly rent of $14,400.
Officer Loans
In May 1999, Howard S. Balter, Ilan M. Slasky, David Greenblatt, Martin
Rothberg, H. Jeff Goldberg and Jonathan Reich, each an executive officer or
director of Net2Phone during fiscal 2000, borrowed funds from us to purchase
shares of our common stock upon the exercise of stock options. As of July 31,
2000, Messrs. Balter, Slasky, Greenblatt, Rothberg, Goldberg and Reich owed us
$1,413,940, $300,503, $430,156, $256,896, $290,196, and $98,000, respectively.
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 surrendered their
right to exercise 8,862, 2,160, 2,160, 2,160, 2,160, 600 and 270 immediately
exercisable options, respectively.
In September 2000, Clifford M. Sobel, Howard S. Balter, David Greenblatt, H.
Jeff Goldberg, Martin Rothberg and Ilan S. Slasky, each an executive officer or
director of Net2Phone during fiscal 2000, each purchased shares of restricted
common stock of Adir Technologies, Inc., a majority-owned subsidiary of
Net2Phone, in consideration for a note payable to Adir in the amount of
$262,485, $163,966, $524,970, $787,455, $306,233 and $87,495, respectively.
Each note is partial recourse, secured with the shares of Adir common stock
purchased by each officer or director and bears an interest rate of 6.33% per
annum.
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Transactions with Directors
Net2Phone retained Courter, Korbert, Laufer & Cohen, Stern & Greenberg and
Verner, Liipfert, Bernhard, McPherson & Hand, law firms to which James A.
Courter, Stephen M. Greenberg and Harry C. McPherson are or were counsel, to
perform certain legal services during fiscal year 2000. None of the fees paid
from Net2Phone to each of these law firms for services were in excess of 5% of
each firm's gross revenues during 2000.
STOCKHOLDER PROPOSALS AND NOMINATIONS
Stockholder proposals for our 2001 Annual Meeting of Stockholders must be
received at our principal executive offices by July 17, 2001, to be considered
for inclusion in our proxy materials relating to such meeting.
Stockholders may nominate directors or bring other business before the
stockholders at the 2001 Annual Meeting of Stockholders by delivering written
notice to our Secretary no later than September 30, 2001. Please note that this
relates only to the matters you wish to bring before your fellow stockholders
at the annual meeting. This is separate from the Securities and Exchange
Commission's requirements to have your proposal included in our proxy
statement.
We reserve the right to reject, rule out of order, or take other appropriate
action with respect to any proposal or nomination that does not comply with
these and other applicable requirements.
OTHER MATTERS
As of the date of this proxy statement, the Board of Directors does not
intend to present at the annual meeting any matters other than those described
herein and does not presently know of any matters that will be presented by
other parties. If any other matter requiring a vote of the stockholders should
come before the meeting, it is the intention of the persons named in the proxy
to vote with respect to any such matter in accordance with the recommendation
of the Board or, in the absence of such a recommendation, in accordance with
the best judgment of the proxy holder.
NET2PHONE, INC.
/s/Glenn J. Williams
Glenn J. Williams
Secretary and General Counsel
November 14, 2000
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APPENDIX A
NET2PHONE, INC.
1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN
(AS AMENDED ON NOVEMBER 6, 2000)
(Proposed change indicated in italics)
--------------------------------------------------------------------------------
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 here
after 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.
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(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 physicians
elected by the Grantee and acceptable to the Company.
(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.
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(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.
(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.
(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.
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(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.
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 16,940,000, 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 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.
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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 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.
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,
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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.
(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
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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.
(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.
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,
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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 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
(ii) 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.
(iii) 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
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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.
(iv) 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.
(v) 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.
(vi) 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 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.
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(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
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 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
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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.
(g) 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.
(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.l
(l) 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.
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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.
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.
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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.
* * * * *
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