<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1999
REGISTRATION NO. 333-86503
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTATHREE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 4813 13-4006766
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
430 PARK AVENUE, SUITE 500
NEW YORK, NEW YORK 10022
(212) 588-3670
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
AMOS SELA
CHIEF EXECUTIVE OFFICER
DELTATHREE.COM, INC.
430 PARK AVENUE, SUITE 500
NEW YORK, NEW YORK 10022
(212) 588-3670
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
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<S> <C>
DAVID J. GOLDSCHMIDT, ESQ. DAVID S. LEFKOWITZ, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP WEIL, GOTSHAL & MANGES LLP
919 THIRD AVENUE 767 FIFTH AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10153
(212) 735-3000 (212) 310-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH CLASS MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(1)
<S> <C> <C>
Class A common stock, $0.001 par value(2)...................... $83,971,147 $23,344
Options to purchase Class A common stock(3).................... $5,751,434 $1,599
Class A common stock, $0.001 par value(4)...................... -- --
Total.......................................................... $89,722,581 $24,943(5)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes 709,319 shares not previously registered to be issued by the
Registrant upon surrender by the holders of restricted units of RSL
Communications, Ltd. ("RSL COM") that have vested.
(3) Consists of 442,418 options to purchase Class A common stock (the "Options")
to be granted by the Registrant upon surrender by the holders of restricted
units of RSL COM which have not vested. The aggregate offering price of the
Options has been determined pursuant to Rule 457(o) of the Securities Act.
(4) Consists of an indeterminate number of shares of Class A common stock
underlying the options being registered hereby.
(5) The Registrant has previously paid a $24,943 filing fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, dated November 12, 1999
PROSPECTUS
5,000,000 SHARES
deltathree.com logo
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
5,000,000 shares.
No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"DDDC". We anticipate the public offering price to be between
$11.00 and $13.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 5.
<TABLE>
<CAPTION>
Per Share Total
------------ -----------
<S> <C> <C>
Public Offering Price ......................................... $ $
Underwriting Discount ......................................... $ $
Proceeds to deltathree.com .................................... $ $
</TABLE>
We have granted the underwriters the right to purchase up to 750,000 additional
shares within 30 days to cover any over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 1999.
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LEHMAN BROTHERS
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
, 1999
<PAGE>
[DESCRIPTION OF INSIDE FRONT AND BACK COVER GRAPHIC:
GRAPHIC DEPICTS WORLD MAP SHOWING THE COMPANY'S PRIVATELY-MANAGED, GLOBAL IP
NETWORK, SCREEN SHOTS OF THE COMPANY'S COMMUNICATIONS PORTAL AND SCREEN SHOTS OF
CO-BRANDED COMMUNICATIONS CENTERS]
[THE COMPANY DISTRIBUTED WITH PRELIMINARY PROSPECTUSES CDS CONTAINING THE
COMPANY'S PC-TO-PHONE SOFTWARE.]
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................. 1
Risk Factors................................... 5
Forward-Looking Statements..................... 16
Use of Proceeds................................ 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 20
Selected Consolidated Financial Data........... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 34
Management..................................... 52
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PAGE
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Principal Stockholders......................... 62
Related Party Transactions..................... 64
Description of Capital Stock................... 68
Shares Eligible for Future Sale................ 71
Important United States Federal Tax
Consequences of Our Common Stock to Non-U.S.
Holders...................................... 72
Underwriting................................... 75
Legal Matters.................................. 77
Experts........................................ 77
Where You Can Find Additional
Information.................................. 77
Index to Consolidated Financial Statements..... F-1
</TABLE>
Investors may rely only on the information contained in this prospectus. We
and the underwriters have not authorized anyone to provide any different or
additional information. This prospectus is not an offer to sell or a
solicitation of an offer to buy common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
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[This page intentionally left blank]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. You should read the entire prospectus, including the section
entitled "Risk Factors" and our consolidated financial statements and related
notes, before deciding to invest in our common stock.
DELTATHREE.COM
We are a global provider of Internet Protocol (IP) telephony services,
which include the transmission of voice and data traffic for communications
carriers and the provision of enhanced Web-based and other communications
services to individuals and businesses. IP telephony is the real time
transmission of voice communications in the form of digitized "packets" of
information over the public Internet or a private network, similar to the way in
which e-mail and other data is transmitted. We were founded in 1996 to
capitalize on the growth of the Internet as a communications tool by
commercially offering IP telephony services. We have built a privately-managed,
global network using IP technology, and we have primarily been using this
network to transmit traffic for communications carriers, including RSL
Communications, Ltd., our parent company. This service is referred to as carrier
transmission services.
We are now using our expertise in IP telephony to provide our users with a
package of enhanced IP communications services. Our on-line interactive
communications portal, www.deltathree.com, enables users to make calls and send
e-mail, as well as retrieve and forward voice mail, e-mail and faxes using one
unified mailbox from anywhere in the world at any time. Our package of enhanced
IP communications services includes the following:
o PC-to-phone: a service allowing a user to place a call through a personal
computer and speak to a party who uses a standard telephone
o D3 Box: a unified messaging service permitting convenient single-source
retrieval of voice mail, e-mail and faxes through the Web or by phone
o Click IT: a Web-based e-commerce service allowing a party to
simultaneously view the Web site of a business and talk directly with
that business while continuing to view the Web site
o Phone-to-phone: a voice and fax service allowing a user to place a call
or send a fax over our privately-managed, global IP network from a
standard telephone or fax machine
o Global roaming: a service enabling businesses and individuals to use a
single account number to place phone-to-phone calls over our IP network
from locations throughout the world using country-specific, toll-free
access numbers
We provide our services at a cost to users that is generally lower than
that charged by traditional carriers because we minimize our network costs by
using efficient packet-switched technology and we generally avoid local access
charges and by-pass international settlement charges by routing international
long distance calls over our privately managed network.
We intend to introduce additional enhanced IP communications services that
meet the communications needs of individuals and businesses. These services are
expected to include D3 Fax, a Web-based, PC-to-fax service allowing users to
conveniently send faxes directly from their computer to a standard fax machine
anywhere in the world, and white boarding, a service allowing multiple users to
simultaneously edit a document while speaking with each other over their
computers.
We market our enhanced IP communications services through our own Web site.
In addition, we market these services through "communications centers" on the
Web sites of other Internet companies. Communications centers enable viewers of
those Web sites to directly access our services without leaving those Web sites.
We have sought to establish marketing relationships with Internet companies that
have strong brand names and high traffic volumes. To date, we have marketing
relationships with CBS.com, CNET, Sony.com, Xoom.com and Yahoo! and we are
continuing to pursue marketing relationships with other companies. We also have
entered into distribution and marketing arrangements with communications
equipment and software companies.
Carrier transmission services accounted for 74.7% of our total revenues in
1998 and 70.2% of our total revenues for the nine months ended September 30,
1999. As we expand our marketing and promotional efforts for our enhanced IP
communications services, we expect revenue from these services, over time, to
represent a majority of our total revenues.
Our privately-managed, IP telephony network consists of:
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o 45 points of presence (POPs) in 29 countries
o gateways, gatekeepers and routers at each POP
o hubs in New York, Los Angeles, London,
Frankfurt and Hong Kong
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with Internet backbone providers
o a network operations center
OUR STRATEGY
Our goal is to be the leading provider of IP telephony services and to make
our interactive communications portal the leading one-stop solution for
communications needs. To achieve our goal, we intend to:
o build strong recognition of the deltathree.com brand through marketing
and promotional programs
o expand and enhance our service offerings
o ensure a positive user experience
o establish additional sources of revenue
o pursue strategic acquisitions and alliances
OUR HISTORY AND PARENT COMPANY
We were founded in 1996. In July 1997, RSL COM, a global facilities-based
telecommunications company, acquired a controlling 51% interest in us. By April
1998, RSL COM had acquired the remaining 49% interest in us from existing
shareholders, and we became a wholly-owned subsidiary of RSL COM. After this
offering, RSL COM's shares of our Class B common stock will represent
approximately 96.5% of the combined voting power of all classes of our capital
stock and approximately 73.6% of the economic interest in our company. We
provide carrier transmission services to RSL COM. Such services accounted for
69.1% of our total revenues in 1998 and 63.4% of our total revenues for the nine
months ended September 30, 1999. For more information about our relationship
with RSL COM and certain services they provide to us, and we provide to them,
see the section of this prospectus entitled "Related Party Transactions--RSL
COM."
Our executive offices are located at 430 Park Avenue, Suite 500, New York,
New York 10022, where our telephone number is (212) 588-3670. Our Web site is
www.deltathree.com. The information contained on our Web site does not
constitute a part of this prospectus.
RISK FACTORS
You should read the section of this prospectus entitled "Risk Factors."
This section indicates among other things that:
o we have a history of losses; we reported a net loss of approximately
$17.5 million for the nine months ended September 30, 1999 and of
approximately $7.1 million in 1998
o we anticipate recording substantial losses for the foreseeable future
o we have a limited operating history
o we operate in a highly competitive market
2
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THE OFFERING
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Common stock offered ......................... 5,000,000 shares
Capital stock to be outstanding after
this offering:
Common stock................................ 7,001,469 shares
Class B common stock........................ 19,569,459 shares
Total capital stock...................... 26,570,928 shares
Over-allotment option......................... 750,000 shares of common stock
Use of proceeds............................... We estimate that the net proceeds from this offering will be
approximately $54.3 million. We expect to use the net proceeds
from the offering to fund marketing and promotional activities,
for capital expenditures and for general corporate purposes.
Voting rights:
Common stock................................ One vote per share.
Class B common stock........................ Ten votes per share. Upon completion of this offering, RSL COM
will be the only holder of our Class B common stock.
Conversion of Class B common stock............ Each share of Class B common stock is convertible into one share
of common stock at any time and automatically converts into common
stock upon transfer, other than to permitted transferees.
Other capital stock provisions................ The holders of common stock and Class B common stock have
identical rights except with respect to voting and transfer.
Proposed Nasdaq National Market symbol .... .. "DDDC"
</TABLE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, the information in this prospectus:
o reflects a 2.48-for-1 stock split which will be effected prior to this
offering
o assumes an initial public offering price of $12.00 per share, the
mid-point of the estimated price range
o assumes no exercise of the underwriters' over-allotment option
o assumes no exercise of outstanding options or options to be granted to
directors who are not our employees to purchase our common stock
o assumes the exchange of 748,288 RSL COM restricted units that have vested
for 748,288 shares of our common stock and the exchange of 372,976 RSL
COM restricted units that have not vested for options to purchase 372,976
shares of our common stock
We have a registered trademark in the United States for "Delta
Three(Registered)". We have submitted United States trademark applications for
the names "deltathree.com(Trademark)," "V-Greetings(Trademark)," "D3
Box(Trademark)," "Click IT(Trademark)," "D3 Fax(Trademark)" and
"deltathree.com(Trademark) the Communications Portal(Trademark)." All other
trademarks and trade names appearing in this prospectus are the property of
their respective holders.
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present summary consolidated financial data derived
from our consolidated financial statements. You should read this along with the
sections of this prospectus entitled "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ -------------------------
1996 1997 1998 1998
------------------- ------- ------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 1 $ 1,246 $ 5,638 $ 3,669
Costs and operating expenses.............. 179 3,576 12,796 8,111
------- ------- ------- -------
Loss from operations...................... (178) (2,330) (7,158) (4,442)
Interest expense, net..................... -- (38) (186) (146)
Minority interests........................ -- -- 223 --
------- ------- ------- -------
Net loss.................................. $ (178) $(2,368) $(7,121) $(4,588)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share--basic and
diluted................................. $ (0.03) $ (0.19) $ (0.37) $ (0.24)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding--
basic and diluted....................... 6,420 12,390 19,254 19,149
<CAPTION>
Nine Months Ended
September 30,
1999
------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 6,432
Costs and operating expenses.............. 22,975
---------
Loss from operations...................... (16,543)
Interest expense, net..................... (915)
Minority interests........................ --
---------
Net loss.................................. $ (17,458)
---------
---------
Net loss per share--basic and
diluted................................. $ (0.89)
---------
---------
Weighted average shares outstanding--
basic and diluted....................... 19,569
</TABLE>
The pro forma balance sheet data gives effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
approximately $11 million (excluding a warrant to purchase 466,028
shares of common stock)
o an increase in deferred compensation attributable to RSL COM
restricted units, representing the difference between the exercise
price of the restricted units and the deemed fair value of our
common stock, based on an assumed initial public offering price of
$12.00 per share
The pro forma as adjusted balance sheet data gives effect to the foregoing
and to:
o the sale of 5,000,000 shares of common stock offered by us in this
offering
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 1,293 $12,293 $ 66,825
Working capital (deficiency)............................................... (3,890) 7,110 61,642
Total assets............................................................... 24,587 35,587 90,119
Long-term debt due to affiliates........................................... 12,307 12,307 12,307
Total stockholders' equity................................................. 3,838 14,838 69,370
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock.
If we do not successfully address any of the risks described below, there
could be a material adverse effect on our business, financial condition or
results of operations, and the trading price of our common stock may decline and
you may lose all or part of your investment. We cannot assure you that we will
successfully address these risks.
RISKS RELATED TO OUR COMPANY
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE OUR LOSSES WILL CONTINUE
We have incurred significant losses since inception, and we expect to
continue to incur significant losses for the foreseeable future. We reported a
net loss of approximately $17.5 million for the nine months ended September 30,
1999 and a net loss of approximately $7.1 million in 1998. As of September 30,
1999, our accumulated deficit was approximately $27.1 million. As a percentage
of revenues, our net loss for the nine months ended September 30, 1999 was
271.4% and 126.3% in 1998. Our revenues may not continue to grow or even
continue at their current level. In addition, we expect our operating expenses
to increase significantly as we develop and expand our business. For example, we
intend to spend approximately $20 million on marketing and promotional programs
in 2000 compared to $3.1 million for the nine months ended September 30, 1999
and $2.4 million in 1998. As a result, we will need to increase our revenues
significantly to become profitable. In order to increase our revenues, we need
to attract users to increase the fees we collect for our services. If our
revenues do not increase as much as we expect or if our expenses increase at a
greater pace than revenues, we may never be profitable or, if we become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE US
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations in June 1996. You should
consider our prospects in light of the risks, expenses and difficulties we may
encounter as an early stage company in the new and rapidly evolving market for
IP communications services. These risks include our ability:
o to increase awareness of our brand, increase the number of users of our
IP telephony services and build user loyalty
o to increase revenues to cover the increased marketing expenditures we
have planned
o to compete effectively
o to develop new products and keep pace with developing technology
In addition, because we expect an increasing percentage of our revenues to
be derived from our enhanced IP communications services, our past operating
results may not be indicative of our future results.
WE MAY NOT BE ABLE TO EXPAND OUR REVENUE AND ACHIEVE PROFITABILITY
Our business strategy is to expand our revenue sources to enhanced IP
communications services and advertising on the Internet. We can neither assure
you that we will be able to do this or that this strategy will be profitable.
Currently our revenues are primarily generated from carrier transmission
services for RSL COM and other communications carriers. Carrier transmission
services generated 70.2% of our total revenues for the nine months ended
September 30, 1999 and 74.7% in 1998. Enhanced IP communications services
generated 18.7% of our total revenues for the nine months ended September 30,
1999 and 20.5% in 1998. The provision of carrier transmission services and
enhanced IP communications services have not been profitable to date.
In the future, we intend to generate increased revenues from multiple
sources, many of which are unproven, including the commercial sale of enhanced
IP communications services and advertising on the Internet. To date, we have
recorded no revenue from advertising. We expect that our revenues for the
foreseeable future will be dependent on, among other factors:
o sale of enhanced IP communications services
o acceptance and use of Internet communications
o continued rapid growth of the Internet consumer market
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o expansion of service offerings
o user traffic levels
o the effect of competition, regulatory environment, international long
distance rates and access and transmission costs on our prices
o sale of carrier transmission services
o continued improvement of our global network quality
o sale of Internet advertising
We may not be able to sustain our current revenues or successfully generate
additional revenues from the sale of carrier transmission services, enhanced IP
communications services and advertising on the Internet in the future.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR SERVICES WILL DEVELOP
We are uncertain whether a market will develop for our enhanced IP
communications services. Our market is new and rapidly evolving. Our ability to
sell our services to end users may be inhibited by, among other factors, the
reluctance of some end users to switch from traditional communications carriers
to IP communications carriers and by concerns with the quality of Internet and
IP telephony and adequacy of security in the exchange of information over the
Internet. End users in markets serviced by recently deregulated
telecommunications providers are not familiar with obtaining services from
competitors of these providers and may be reluctant to use new providers, such
as our company. Our ability to increase revenues from enhanced IP communications
services depends on the migration of traditional telephone network traffic to
our IP network. We will need to devote substantial resources to educate end
users about the benefits of IP communications solutions in general and our
services in particular, and as a result, we intend to spend approximately $20
million in 2000 for marketing and promotional activities. If end users do not
accept our enhanced IP communications services as a means of sending and
receiving communications we will not be able to increase our number of paid
users or successfully generate revenues in the future.
OUR FUTURE SUCCESS DEPENDS ON THE GROWTH IN THE USE OF THE INTERNET AS A MEANS
OF COMMUNICATIONS
If the market for IP communications, in general, and our services in
particular, does not grow at the rate we anticipate, we will not be able to
increase our number of users or generate revenues from our enhanced IP
communications services or from advertising on the Internet at the rate we
anticipate. We currently rely on revenues generated primarily from the sale of
carrier transmission services but expect in the future to increasingly rely on
revenues generated from enhanced IP communications services and from advertising
on the Internet. To be successful, IP communications requires validation as an
effective, quality means of communication and as a viable alternative to
traditional telephone service. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The Internet may not prove to be a
viable alternative to traditional telephone service for reasons including:
o inconsistent quality or speed of service
o traffic congestion on the Internet
o potentially inadequate development of the necessary infrastructure
o lack of acceptable security technologies
o lack of timely development and commercialization of performance
improvements
o unavailability of cost-effective, high-speed access to the Internet
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our
communications portal and our services, could be adversely affected.
IF WE DO NOT DEVELOP THE DELTATHREE.COM BRAND, WE MAY NOT BE ABLE TO MAINTAIN A
LEADING POSITION IN OUR INDUSTRY
We may not be able to become the leader in our industry. To become the
leader, we must strengthen the brand awareness of the deltathree.com brand. If
we fail to create and maintain brand awareness, it could
6
<PAGE>
adversely affect our ability to attract sufficient Web traffic and reduce our
attractiveness to advertisers. Brand recognition may become more important in
the future with the growing number of Internet sites and IP communications
providers.
IF WE FAIL TO ESTABLISH MARKETING RELATIONSHIPS THAT PROVIDE US VISIBILITY, WE
MAY NOT BE ABLE TO SUFFICIENTLY INCREASE OUR SALES
We believe that our success depends, in part, on our ability to develop and
maintain marketing and promotional relationships with Internet companies and
communications equipment and software companies that themselves have strong
brand names or high traffic volumes. If we are unable to establish and maintain
these relationships, we may not be able to increase sales of our services, and
we may lose users.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE AND MAY
HAVE TO REQUEST IT FROM RSL COM WHO HAS NO OBLIGATION TO PROVIDE IT
We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for service
quality, capacity and competitive pricing. Also, the introduction of our new
enhanced IP communications services will require significant marketing and
promotional expenses that we often incur before we begin to receive the related
revenue. If our cash flow from operations is not sufficient to meet our capital
expenditure and working capital requirements, we will need to raise additional
capital from other sources. Although we are neither the debtor nor the guarantor
under any of the indentures that govern a substantial amount of RSL COM's debt,
we are a "restricted subsidiary" under these indentures and will continue to be
one after the completion of the offering. The limitations under RSL COM's
restrictive indenture covenants prohibit RSL COM and its restricted
subsidiaries, including us, from incurring any significant amount of additional
debt. We have agreed with RSL COM not to take any action which would cause RSL
COM to default under its indentures and not to incur any debt, other than inter-
company debt, without its written consent so long as we are a restricted
subsidiary of RSL COM. These limitations may require us to resort to other
sources of funding, such as the issuance of equity. If we issue additional
equity, investors could experience dilution. If we are unable to raise
additional capital through the issuance of equity, we may need to rely upon RSL
COM to provide any additional capital to meet our working capital and capital
expenditure requirements and we cannot assure you that RSL COM or any other
third party will be willing or able to provide additional capital on favorable
terms. If we are unable to obtain additional capital, we may be required to
reduce the scope of our business or our anticipated growth, which would reduce
our revenues.
WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY
We have grown and expect to continue to grow rapidly. This growth has
placed, and is likely to continue to place, a significant strain on our
managerial, operational and financial resources. To manage our growth, we must
continue to implement and improve our operational and financial systems, as well
as our managerial controls and procedures. We cannot assure you that we have
made adequate allowances for the costs and risks associated with this expansion,
that our systems, procedures or controls will be adequate to support our
operations or that our management will be able to successfully offer and expand
our services. If we are unable to effectively manage our expanding operations,
our revenues may not increase, our cost of operations may rise and we may not be
profitable.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE IT DIFFICULT FOR
INVESTORS TO PREDICT OUR FUTURE PERFORMANCE
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control. The
factors generally within our control include:
o the rate at which we are able to attract users to purchase our enhanced
IP communications services
o the amount and timing of expenses to enhance marketing and promotion
efforts and to expand our infrastructure
o the timing of announcements or introductions of new or enhanced services
by us
The factors outside our control include:
o the timing of announcements or introductions of new or enhanced services
by our competitors
o technical difficulties or network interruptions in the Internet or our
privately managed network
o general economic and competitive conditions specific to our industry
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The foregoing factors also may create other risks affecting our long-term
success, as discussed in the other risk factors.
We believe that quarter-to-quarter comparisons of our historical operating
results may not be a good indication of our future performance, nor would our
operating results for any particular quarter be indicative of our future
operating results.
OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
WE FACE A RISK OF FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS USED IN OUR
BUSINESS
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems in five facilities in New York, Los
Angeles, London, Frankfurt and Jerusalem. Our systems and those that connect to
our network are subject to disruption from natural disasters or other sources of
power loss, communications failure, hardware or software malfunction, network
failures and other events both within and beyond our control. In December 1998,
we experienced a system disruption while we were installing a new billing system
and users were unable to access our Web site for six hours. In July 1999, we
experienced a system disruption with respect to our unified messaging service,
D3 Box, while the product was being market tested. For a period of three days
the system was down and users were unable to send or retrieve new messages. Any
system interruptions that cause our services to be unavailable, including
significant or lengthy telephone network failures or difficulties for users in
communicating through our network or portal, could damage our reputation and
result in a loss of users.
OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES
Our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches which could cause interruptions, delays or loss of services to
our users. We believe that the secure transmission of confidential information
over the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Although we have experienced no security breaches to date of which we are aware,
we cannot guarantee you that our security measures will prevent security
breaches.
YEAR 2000 COMPLICATIONS MAY HARM OUR BUSINESS
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for system failures encompasses all aspects of our business, including
our computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our Web site and a temporary
inability to engage in normal business activities.
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We completed testing of our systems in October 1999. This testing did not
identify any material non-compliant systems operated by us or our vendors,
suppliers and service providers. Therefore, the most reasonably likely worst
case Year 2000 scenario is a systemic failure beyond our control, such as a
prolonged disruption or failure of the Internet or the telecommunications
infrastructure. Any failures or disruptions could prevent us from operating our
network or prevent users from accessing our Web site and services, which could
result in loss of users, lost revenues, increased operating costs and material
disruptions in the operation of our business. We have not developed our own
contingency plan to deal with problems that result from Year 2000 issues and are
dependent on a contingency plan developed by RSL COM to deal with such problems.
THIRD PARTIES MIGHT INFRINGE UPON OUR PROPRIETARY TECHNOLOGY
We cannot assure you that the steps we have taken to protect our
intellectual property rights will prevent misappropriation of our proprietary
technology. To protect our rights to our intellectual property, we rely on a
combination of trademark and patent law, trade secret protection,
confidentiality agreements and other contractual arrangements with our
employees, affiliates, strategic partners and others. Although we do not
currently own any issued patents, we have pending applications for patents in
the United States and Israel. We may be unable to detect the unauthorized use
of, or take appropriate steps to enforce, our intellectual property rights.
Effective copyright and trade secret protection may not be available in every
country in which we offer or intend to offer our services. Failure to adequately
protect our intellectual property could harm our brand, devalue our proprietary
content and affect our ability to compete effectively. Further, defending our
intellectual property rights could result in the expenditure of significant
financial and managerial resources.
OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties may assert claims that we have violated a patent or infringed
a copyright, trademark or other proprietary right belonging to them. We
incorporate licensed third-party technology in some of our services. In these
license agreements, the licensors have agreed to indemnify us with respect to
any claim by a third party that the licensed software infringes any patent or
other proprietary right so long as we have not made changes to the licensed
software. We cannot assure you that these provisions will be adequate to protect
us from infringement claims. Any infringement claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
On October 8, 1999, we were named as a defendant in a lawsuit alleging that
we are infringing on a patent by making, using, selling and offering for sale
prepaid telephone card products in the United States. The plaintiffs are seeking
an injunction to stop us from using the technology covered by this patent,
monetary damages in an unspecified amount and reimbursement of attorneys' fees.
The litigation was only recently filed and we are presently evaluating these
claims. We believe that we have meritorious defenses to the claim and we intend
to defend the lawsuit vigorously. However, the outcome of the litigation is
inherently unpredictable and an unfavorable result may have a material adverse
effect on our business, financial condition and results of operations.
Regardless of the ultimate outcome, the litigation could result in substantial
expenses to us and significant diversion of efforts by our managerial and other
personnel.
OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS
We intend to continue to enter additional markets in Eastern Europe, Africa
and Asia and to expand our existing operations outside the United States.
International operations are subject to inherent risks, including:
o potentially weaker protection of intellectual property rights
o political instability
o unexpected changes in regulations and tariffs
o fluctuations in exchange rates
o varying tax consequences
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o uncertain market acceptance and difficulties in marketing efforts due to
language and cultural differences
WE HAVE EXPERIENCED LOSSES AS A RESULT OF FRAUD
We have experienced losses due to fraud. In 1998, we experienced losses
from fraud of approximately $240,000. Callers have obtained our services without
rendering payment by unlawfully using our access numbers and personal
identification numbers. Although we have implemented anti-fraud measures in
order to control losses relating to these practices, these measures may not be
sufficient to effectively limit all of our exposure in the future from fraud and
we continue to experience losses from fraud. Such losses in 1999 were less than
$2,000 a month on average. While we have established reserves for bad debts in
accordance with historical levels of uncollectible receivables resulting
primarily from these fraudulent practices, our losses may exceed our reserves
and could rise significantly above anticipated levels.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
Competition in the market for each of enhanced IP communications services
and carrier transmission services is becoming increasingly intense and is
expected to increase significantly in the future. The market for enhanced
internet and IP communications is new and rapidly evolving. We expect that
competition from companies both in the Internet and telecommunications
industries will increase in the future. Our competitors include both start-up IP
telephony service providers and established traditional communications
providers. Many of our existing competitors and potential competitors have
broader portfolios of services, greater financial, management and operational
resources, greater brand-name recognition, larger subscriber bases and more
experience than we have. In addition, many of our IP telephony competitors use
the Internet instead of a private network to transmit traffic. Operating and
capital costs of these providers may be less than ours, potentially giving them
a competitive advantage over us in terms of pricing.
We also compete in the growing market of discount telecommunications
services including calling cards, prepaid cards, call-back services, dial-around
or 10-10 calling and collect calling services. In addition, some Internet
service providers have begun to aggressively enhance their real time interactive
communications, focusing initially on instant messaging, although we expect them
to begin to provide PC-to-phone services.
For the carrier transmission services business, we compete with
telecommunications providers, long distance carriers and other long distance
resellers and providers of carrier services. Competition for carrier traffic is
primarily based on price. Decreasing telecommunications rates have resulted in
intense price competition and we expect that competition will continue to
increase significantly as telecommunications rates decrease. Increased
competition could force us to further reduce our prices and profit margins, and
may reduce our market share.
If we are unable to provide competitive service offerings, we may lose
existing users and be unable to attract additional users. In addition, many of
our competitors, especially traditional carriers, enjoy economies of scale that
result in a lower cost structure for transmission and related costs, which cause
significant pricing pressures within the industry. Although the minutes of use
we sell are increasing, revenues are not increasing at the same rate due
primarily to a decrease in revenue per minute for our carrier transmission
services. In order to remain competitive we intend to increase our efforts to
promote our services, and we cannot be sure that we will be successful in doing
this.
In addition to these competitive factors, recent and pending deregulation
in some of our markets may encourage new entrants. We cannot assure you that
additional competitors will not enter markets that we plan to serve or that we
will be able to compete effectively.
DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR COMPETITIVE
PRICING ADVANTAGE
Decreasing telecommunications rates may diminish or eliminate the
competitive pricing advantage of our enhanced IP communications services and
carrier transmission services. International and domestic telecommunications
rates have decreased significantly over the last few years in most of the
markets in which we operate, and we anticipate that rates will continue to be
reduced in all of the markets in which we do business or expect to do business.
Users who select our enhanced IP communications services to take
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advantage of the current pricing differential between traditional
telecommunications rates and our rates may switch to traditional
telecommunications carriers as such pricing differentials diminish or disappear,
and we will be unable to use such pricing differentials to attract new customers
in the future. In addition, our ability to market our carrier transmission
services to telecommunications carriers depends upon the existence of spreads
between the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and
wholesale rates charged by the carriers from which we obtain wholesale service.
Continued rate decreases will require us to lower our rates to remain
competitive and will reduce or possibly eliminate our gross profit from our
carrier transmission services. If telecommunications rates continue to decline,
we may lose users for our enhanced IP communications services and carrier
transmission services.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO IP TELEPHONY COULD
HARM OUR BUSINESS
Traditionally, voice communications services have been provided by
regulated telecommunications common carriers. We offer voice communications to
the public for international and domestic calls using IP telephony, and we do
not operate as a licensed telecommunications common carrier in any jurisdiction.
Based on specific regulatory classifications and recent regulatory decisions, we
believe we qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the growth of IP telephony has led
to close examination of its regulatory treatment in many jurisdictions making
the legal status of our services uncertain and subject to change as a result of
future regulatory action, judicial decisions or legislation in any of the
jurisdictions in which we operate.
Established regulated telecommunications carriers have sought and may
continue to seek regulatory actions to restrict the ability of companies such as
ours to provide services or to increase the cost of providing such services. In
addition, our services may be subject to regulation if regulators distinguish
phone-to-phone telephony service using IP technologies over privately-managed
networks such as our services from integrated PC-to-PC and PC-originated voice
services over the Internet. Some regulators may decide to treat the former as
regulated common carrier services and the latter as unregulated enhanced or
information services.
Application of new regulatory restrictions or requirements to us could
increase our costs of doing business and prevent us from delivering our services
by our current arrangements. In such event, we would consider a variety of
alternative arrangements for providing our services, including obtaining
appropriate regulatory authorizations for our local network partners or
ourselves, changing our service arrangements with RSL COM for a particular
country or limiting our service offerings. Such regulations could limit our
service offerings, raise our costs and restrict our pricing flexibility, and
potentially limit our ability to compete effectively. Further, regulations and
laws which affect the growth of the Internet could hinder our ability to provide
our services over the Internet. For a more detailed discussion of the regulation
of IP telephony, see "Business--Regulation of IP Telephony."
WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE
COMMUNICATIONS INDUSTRY
Our industry is subject to rapid technological change. We cannot predict
the effect of technological changes on our business. In addition, widely
accepted standards have not yet developed for the technologies we use. We expect
that new services and technologies will emerge in the market in which we
compete. These new services and technologies may be superior to the services and
technologies that we use, or these new services may render our services and
technologies obsolete.
To be successful, we must adapt to our rapidly changing market by
continually improving and expanding the scope of services we offer and by
developing new services and technologies to meet customer needs. Our success
will depend, in part, on our ability to license leading technologies and respond
to technological advances and emerging industry standards on a cost-effective
and timely basis. We will need to spend significant amounts of capital to
enhance and expand our services to keep pace with changing technologies.
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RISKS RELATED TO OUR RELATIONSHIP WITH RSL COM
WE DEPEND ON SALES TO RSL COM
We currently depend on sales to RSL COM, our controlling stockholder, for a
substantial majority of our revenues. RSL COM accounted for 37.6%, 69.1% and
63.4% of our revenues for the years ended December 31, 1997 and December 31,
1998 and for the nine months ended September 30, 1999, respectively. RSL COM is
not contractually required to purchase services from us, other than a minimum of
50 million minutes per year pursuant to the services agreement for two years
from the date of this offering. We cannot assure you that RSL COM will fulfill
its obligations under this agreement or that the contract will be renewed upon
its expiration. RSL COM resells a significant portion of the carrier
transmission services it purchases from us to third parties. Although we could
market our services directly to these third parties if RSL COM ceased purchasing
services from us, we cannot assure you that we would succeed in attracting these
customers or that these customers would purchase our services in the same volume
or on the same terms as from RSL COM.
WE DEPEND ON THE SERVICES RSL COM PROVIDES TO US
We are currently dependent upon RSL COM for leased line capacity, data
communications facilities, traffic termination services and physical space for
our equipment. Through our relationship with RSL COM, which owns or leases
substantial bandwidth for its own business, we have access to bandwidth. We are
able to take advantage of RSL COM's volume discounts and achieve cost
efficiencies that we could not achieve on our own. Although we have entered into
a services agreement with RSL COM for it to provide these services through 2004,
if RSL COM becomes unwilling or unable to provide its current level of services
to us during the term of such agreement or thereafter, we may not be able to
find replacement service providers on a timely basis. If we are required to
change providers, we would likely experience delays, operational difficulties
and increased expenses, and our ability to provide services to our users or
expand our operations may be impaired.
The inter-company agreements with RSL COM were made in the context of a
parent-subsidiary relationship and were not negotiated on an arms' length basis.
As a result, the terms of such agreement may be better or worse than the terms
that would have been negotiated by unaffiliated third parties for similar
arrangements.
RSL COM WILL CONTROL ALL MATTERS SUBMITTED TO A STOCKHOLDER VOTE
After completion of this offering, RSL COM will own all of our Class B
common stock and will therefore own approximately 96.5% of the voting power of
our company, or approximately 96.2% of the voting power if the underwriters'
over-allotment option is exercised in full.
As long as RSL COM continues to beneficially own shares of capital stock
representing more than 50% of the voting power of our outstanding capital stock,
RSL COM will be able to exercise a controlling influence over decisions
affecting our company, including:
o composition of our board of directors and, through it, the direction and
policies of our company, including the appointment and removal of
officers
o mergers or other business combinations involving our company
o acquisitions or dispositions of assets by our company
o future issuances of capital stock or other securities by our company
o incurrence of debt by our company
o amendments, waivers and modifications to any agreements between us and
RSL COM
o payment of dividends on our capital stock
o approval of our business plans and general business development
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In addition, six of our ten directors (or director nominees) are officers and/or
directors of RSL COM, or otherwise affiliated with RSL COM. As a result, the
ability of any of our other stockholders to influence the management of our
company is limited, which could have an adverse effect on the market price of
our stock.
WE ARE SUBJECT TO THE COVENANTS OF RSL COM'S INDENTURES WHICH RESTRICT OUR
ABILITY TO CONDUCT OUR BUSINESS
Although we are neither the debtor nor the guarantor under any of the
indentures that govern a substantial amount of RSL COM's debt, we are subject to
covenants by reason of our status as a restricted subsidiary of RSL COM under
such indentures. As of September 30, 1999, RSL COM had approximately
$1.2 billion of debt outstanding under these indentures. This debt is unsecured.
These restrictions significantly limit the ability of RSL COM and its restricted
subsidiaries, including our company, to incur additional indebtedness or create
liens on their assets. The limitations on indebtedness under the indentures
generally are based on the application of tests derived from RSL COM's
consolidated financial statements. Effectively, our ability to incur
indebtedness is limited by the amount of indebtedness that RSL COM and its
restricted subsidiaries, including our company, are permitted to incur under the
indentures. The limitations under RSL COM's restrictive indenture covenants
currently prohibit us from incurring any significant amount of additional debt.
We have also agreed with RSL COM not to take any action which would cause RSL
COM to default under its indentures and not to incur any debt, other than
inter-company debt, without its written consent so long as we are a restricted
subsidiary of RSL COM. In addition, currently the restrictions under the
RSL COM indentures effectively prohibit us from paying dividends and limit our
ability to make other distributions in respect of our capital stock, sell
assets, engage in mergers or acquisitions or make some types of investments.
Such restrictions also limit the ability of a third party to acquire a
controlling interest in our company. These restrictions may prohibit
transactions that would otherwise be beneficial to our company.
THE INTERESTS OF RSL COM MAY CONFLICT WITH OUR INTERESTS
The interests of RSL COM, our controlling stockholder and principal
customer, may conflict with our interests.
Services. We have entered into a services agreement with RSL COM for the
provision of traffic termination services, colocation rights and other network
support services. We provide carrier transmission services to RSL COM. Because
of these transactions and RSL COM's controlling position in our company,
conflicts of interest could arise relating to the nature, quality and pricing of
services or products provided by us to RSL COM or by RSL COM to us.
Financial Support. Historically, RSL COM has funded our working capital and
operating losses. As a result, we owe RSL COM $12.3 million, as of
September 30, 1999. Also, to the extent that we require additional working
capital we may need to turn to RSL COM. Because of RSL COM's control over us,
conflicts of interest could arise relating to the prepayment of borrowings, the
provision of additional funding and the terms of such funding and general issues
relating to the uses and sources of our funds.
Board Conflicts. Six of our ten directors (or director nominees) are
officers and/or directors of RSL COM, or otherwise affiliated with RSL COM. Our
directors who are also directors or officers of RSL COM will have fiduciary
duties, including duties of loyalty, to both companies and may have conflicts of
interest with respect to matters potentially involving or affecting us, such as
acquisitions, financings or other corporate opportunities that may be suitable
for both us and RSL COM. Some of these individuals and a number of our executive
officers own substantial amounts of RSL COM capital stock and/or options for
shares of RSL COM capital stock. Although we believe that these directors and
officers will be able to fulfill their fiduciary duties to our stockholders
despite their positions with RSL COM and their ownership of RSL COM capital
stock and options, there could be potential conflicts of interest when these
directors and officers are faced with decisions that could have different
implications for our company and RSL COM. There are no specific policies in
place with respect to any conflicts that may arise. We expect conflicts to be
resolved on a case-by-case basis, and in a manner consistent with applicable
law. For example, if a business opportunity were presented to both us and
RSL COM for consideration, directors affiliated with RSL COM would not
participate in our consideration of that opportunity. However, conflicts could
be resolved in a manner adverse to us which could harm our business.
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RSL COM MAY COMPETE WITH OUR COMPANY
RSL COM is in the communications business and may compete with us under
some circumstances. Under the services agreement between us and RSL COM, RSL COM
is prohibited from competing with us in providing Internet telephony services as
described in the services agreement, provided that we provide RSL COM with any
requested Internet telephony services promptly and with quality assurance.
However, this non-competition provision terminates on September 3, 2001 and the
scope of such provision is subject to the following limitations:
o RSL COM and its subsidiaries may acquire up to 20% in an entity providing
Internet telephony services
o RSL COM and its subsidiaries may be stockholders in entities providing
Internet telephony services, provided that Internet telephony services
are ancillary to the business of that entity
o the non-competition provision does not apply to RSL COM's subsidiaries
that become publicly traded companies
o Internet telephony services under the non-competition provision are
limited to (1) phone to phone services marketed as IP to the general
public, including both individuals and businesses and (2) the following
Web-based enhanced communication services: PC-to-phone, D3 box, Click IT,
Global Roaming, IP-initiated conference calls, Phone-to-PC, D3 Fax,
information services and white boarding
RSL COM'S CLASS B COMMON STOCK MAY BE TRANSFERRED TO A THIRD PARTY THAT WOULD
EFFECTIVELY CONTROL US
Although our Class B common stock generally converts to common stock
automatically upon transfer, RSL COM may transfer our Class B common stock to
permitted transferees, including entities controlled by RSL COM or its principal
stockholder, Ronald S. Lauder, and successors in interest of RSL COM. As a
result, a third party could acquire our Class B common stock and may become
party to our intercompany agreements. We cannot assume that a third party would
maintain good relations with us or maintain or renew our agreements with RSL
COM.
RISKS RELATED TO THIS OFFERING
FUTURE SALES OF CAPITAL STOCK MAY ADVERSELY AFFECT OUR STOCK PRICE
Future sales of capital stock in the market after this offering or the
perception that such sales could occur may adversely affect the market price of
our stock and make it difficult for us to raise additional capital through the
sale of equity at prices acceptable to us. Following this offering, we will have
approximately 7,001,469 shares of common stock, or approximately 7,751,469
shares of common stock outstanding if the underwriters exercise their
over-allotment option in full, and 19,569,459 shares of Class B common stock
outstanding. Of these shares, persons other than our affiliates (as this term is
defined under the Securities Act, and which includes RSL COM) may freely
transfer the shares of common stock sold in this offering without restriction or
further registration under the Securities Act. However, we have given RSL COM
both demand and piggyback registration rights with respect to common stock into
which Class B common stock will convert. For more information about these
registration rights, see "Related Party Transactions--RSL COM--Registration
Rights Agreement" and "Shares Eligible for Future Sale."
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo!, CNET and all of our officers and directors
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and holders of options to purchase our common stock on
the closing of this offering (other than
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those subject to the 180-day lock-up) will be prohibited from disposing shares
of common stock for a period of 90 days after the date of this prospectus.
Shares of capital stock subject to these lock-up agreements will become eligible
for sale in the public market upon expiration of these lock-up agreements,
subject to limitations imposed by Rule 144 under the Securities Act for holders
who are our affiliates.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER SHARE
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $12.00 per share, if you purchase our common stock in
this offering, you will incur immediate dilution of approximately $9.72 in the
net tangible book value per share of common stock from the price you pay for our
common stock in this offering.
A THIRD PARTY MAY BE DETERRED FROM ACQUIRING OUR COMPANY
The disproportionate voting rights of our Class B common stock relative to
our common stock could delay, deter or prevent a third party from attempting to
acquire control of us. This provision may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of our company, even though such a change in ownership would be economically
beneficial to our company and our stockholders.
WE CANNOT GUARANTEE THAT A TRADING MARKET WILL DEVELOP FOR OUR COMMON STOCK
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiation between the representative of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as:
o variations in our actual or anticipated quarterly operating results or
those of our competitors
o announcements by us or our competitors of technological innovations
o introduction of new products or services by us or our competitors
o changes in financial estimates by securities analysts
o conditions or trends in the Internet industry
o changes in the market valuations of other Internet companies
o announcements by us or our competitors of significant acquisitions
o our entry into strategic partnerships or joint ventures
o sales of our capital stock by RSL COM
All of these factors are, in whole or part, beyond our control and may
materially adversely affect the market price of our common stock regardless of
our performance.
Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. The trading prices of many Internet-related and technology companies'
stocks have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During the same
period, such companies' stocks have also been highly volatile and have recorded
lows well below such historical highs. We cannot assure you that our stock will
trade at the same levels of other Internet stocks or that Internet stocks in
general will sustain their current market prices.
15
<PAGE>
WE DO NOT INTEND TO PAY DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance our operations and to expand our
business and, therefore, do not expect to pay any cash dividends in the
foreseeable future. In addition, indentures governing outstanding indebtedness
of RSL COM restrict our ability to declare or pay cash dividends, and, for the
foreseeable future, effectively prohibit such payments or declarations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things: development of services; expansion strategy; use of proceeds;
projected capital expenditures; liquidity; development of additional revenue
sources; development and expansion of marketing relationships; market acceptance
of Internet telephony; technological advancement; ability to develop "brand"
awareness and global expansion. These statements may be found in the sections of
this prospectus entitled "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and in this prospectus generally. Our
actual results could differ materially from those anticipated in these
forward-looking statements as of result of various factors, including all the
risks discussed in "Risk Factors" and elsewhere in this prospectus.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
5,000,000 shares of common stock will be approximately $54.3 million
(approximately $62.7 million if the underwriters exercise their over-allotment
option in full) after deducting the underwriting discount and estimated expenses
of this offering.
We expect that we will use the net proceeds from this offering to be
allocated as follows:
o approximately $20 million to fund marketing and promotional activities
o approximately $10 million for capital expenditures
o the balance for general corporate purposes
The preceding allocations are only an estimate and the amounts that we
actually expend will depend upon several factors, including our available cash,
the success of our marketing and promotion activities and the availability of
new business opportunities.
Pending use of the net proceeds, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance our operations and to expand our business. In addition, indentures
governing outstanding indebtedness of RSL COM restrict our ability to declare or
pay cash dividends, and, for the foreseeable future, effectively prohibit such
payments or declarations. Any future determination to pay cash dividends will be
at the discretion of our board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that our board of directors considers appropriate.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
Our capitalization is presented:
(1) on an actual basis
(2) on a pro forma basis to give effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
approximately $11 million (excluding a warrant to purchase 466,028
shares of common stock)
o an increase in deferred compensation attributable to RSL COM
restricted units, representing the difference between the exercise
price of the restricted units and the deemed fair value of our
common stock, based on an assumed initial public offering price of
$12.00 per share
(3) on a pro forma as adjusted basis to give effect to the foregoing and
to:
o the sale of 5,000,000 shares of common stock offered by us in this
offering
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
The table excludes:
o 1,076,761 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 1999 under our 1999 Stock Incentive Plan
at a weighted average exercise price of $5.11 per share
o 173,939 shares issuable upon the exercise of options to be granted under
our 1999 Directors' Plan upon completion of this offering at an exercise
price equal to the initial offering price
o 372,976 shares issuable upon the exercise of options issued in exchange
for RSL COM restricted units that have not vested at a weighted average
exercise price of $1.80 per share
18
<PAGE>
Please read this table together with the sections of this prospectus
entitled "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................................. $ 1,293 $ 12,293 $ 66,825
--------- --------- ---------
--------- --------- ---------
Long-term debt due to affiliates........................................... $ 12,307 $ 12,307 $ 12,307
--------- --------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value per share;
25,000,000 shares authorized; no shares issued and outstanding........ -- -- --
Common stock, $0.001 par value per share;
200,000,000 shares authorized; no shares issued and outstanding
(actual), 1,253,181 shares issued and outstanding (pro forma) and
7,001,469 shares issued and outstanding (pro forma as adjusted)....... -- 1 7
Class B common stock, $0.001 par value per share;
200,000,000 shares authorized; 19,569,459 shares issued and
outstanding........................................................... 20 20 20
Additional paid-in capital................................................. 37,177 54,738 109,264
Receivable for capital stock............................................... -- (1,000) (1,000)
Deferred compensation...................................................... (6,234) (8,938) (8,938)
Accumulated deficit........................................................ (27,125) (29,983) (29,983)
--------- --------- ---------
Total stockholders' equity............................................... 3,838 14,838 69,370
--------- --------- ---------
Total capitalization.................................................. $ 16,145 $ 27,145 $ 81,677
--------- --------- ---------
--------- --------- ---------
</TABLE>
19
<PAGE>
DILUTION
As of September 30, 1999, our pro forma consolidated net tangible book
value was $4,623,909, or $0.22 per share of capital stock. "Pro forma
consolidated net tangible book value per share" represents the total amount of
our pro forma consolidated tangible assets reduced by the amount of our
consolidated liabilities and divided by the number of shares of capital stock
outstanding on a pro forma basis after giving effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
$11 million (excluding a warrant to purchase 466,028 shares of
common stock)
After giving effect to the sale of 5,000,000 shares of common stock in this
offering and receipt of the estimated net proceeds from this offering, after
deducting the underwriting discount and estimated expenses of this offering, our
pro forma consolidated net tangible book value at September 30, 1999 would have
been approximately $58.9 million, or $2.28 per share. This represents an
immediate increase in pro forma consolidated net tangible book value of $2.06
per share to our existing investors and an immediate dilution of $9.72 per share
to new investors.
"Dilution per share" represents the difference between the price per share
to be paid by new investors and the pro forma consolidated net tangible book
value per share immediately after this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................................... $ 12.00
Pro forma consolidated net tangible book value per share at September 30, 1999..... $ 0.22
Increase in pro forma consolidated net tangible book value per share attributable
to new investors................................................................ 2.06
---------
Pro forma consolidated net tangible book value per share after this offering......... 2.28
---------
Dilution per share to new investors.................................................. $ 9.72
---------
---------
</TABLE>
The following table summarizes, as of September 30, 1999, the differences
between the total consideration paid and the average price per share paid by
existing investors and new investors with respect to the number of shares of
common stock purchased from us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors................................ 20,822,640 81% $30,675,714 34% $ 1.47
New investors..................................... 5,000,000 19 60,000,000 66 12.00
---------- --- ----------- ---
Total........................................... 25,822,640 100% $90,675,714 100%
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
The foregoing table excludes:
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
o 1,076,761 shares of common stock issuable upon the exercise of
options outstanding as of June 30, 1999 under our 1999 Stock
Incentive Plan at a weighted average exercise price of $5.11 per
share
o 173,939 shares issuable upon the exercise of options to be granted
under our 1999 Directors' Plan upon completion of this offering at
an exercise price equal to the initial offering price
o 372,976 shares issuable upon the exercise of options issued in
exchange for RSL COM restricted units that have not vested at a
weighted average exercise price of $1.80 per share
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated financial data presented below from
our consolidated financial statements and related notes included in this
prospectus. You should read the selected consolidated financial data together
with our consolidated financial statements and related notes and the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, independent certified public accountants, audited our
historical financial statements for the period June 1996 (inception) through
December 31, 1996 and as of and for the years ended December 31, 1997 and 1998
and the nine months ended September 30, 1999. Their report appears elsewhere in
this prospectus. The selected balance sheet data as of December 31, 1996 is
derived from an audited financial statement not included in this prospectus.
Statement of operations data and balance sheet data as of and for the nine
months ended September 30, 1998 have been derived from our unaudited
consolidated financial statements that have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
these periods. Operating results for the nine months ended September 30, 1998
and 1999 are not necessarily indicative of the results that may be expected for
the full year.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 YEAR ENDED DECEMBER NINE MONTHS ENDED
(INCEPTION) TO 31, SEPTEMBER 30,
DECEMBER 31, ------------------- --------------------
1996 1997 1998 1998 1999
--------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Affiliates...................................... $ -- $ 468 $ 3,896 $ 2,485 $ 4,077
Non-affiliates.................................. 1 778 1,742 1,184 2,355
--------- ------- ------- ------- --------
Total revenues................................ 1 1,246 5,638 3,669 6,432
Costs and operating expenses:
Cost of revenues................................ -- (1,065) (4,657) (2,649) (5,811)
Research and development expenses............... -- (294) (651) (479) (797)
Selling and marketing expenses.................. -- (632) (2,431) (1,603) (3,087)
General and administrative expenses (exclusive
of non-cash compensation expense)............. (179) (1,388) (1,842) (1,026) (2,080)
Non-cash compensation expense................... -- -- (743) (640) (8,926)
Amortization of goodwill........................ -- (197) (2,472) (1,714) (2,274)
--------- ------- ------- ------- --------
Total costs and operating expenses............ (179) (3,576) (12,796) (8,111) (22,975)
--------- ------- ------- ------- --------
Loss from operations.............................. (178) (2,330) (7,158) (4,442) (16,543)
Interest expense, net............................. -- (38) (186) (146) (915)
Minority interests................................ -- -- 223 -- --
--------- ------- ------- ------- --------
Net loss.......................................... $ (178) $(2,368) $(7,121) $(4,588) $(17,458)
--------- ------- ------- ------- --------
--------- ------- ------- ------- --------
Net loss per share--basic and diluted............. $ (0.03) $ (0.19) $ (0.37) $ (0.24) $ (0.89)
--------- ------- ------- ------- --------
--------- ------- ------- ------- --------
Weighted average shares outstanding--basic and
diluted......................................... 6,420 12,390 19,254 19,149 19,569
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
---- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $130 $ 3,196 $ 1,357 $ 432 $ 1,293
Working capital (deficiency)............................. 70 2,763 (3,232) (2,274) (3,890)
Total assets............................................. 396 8,403 25,676 22,337 24,582
Long-term debt due to affiliates......................... 344 -- 5,107 2,031 12,307
Total stockholder's equity (deficiency).................. (30) 6,272 12,370 14,800 3,838
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this prospectus.
OVERVIEW
We are a global provider of IP telephony services, which include our
carrier transmission services and enhanced Web-based and other communications
services. We were founded in 1996 to capitalize on the growth of the Internet as
a communications tool by commercially offering IP telephony services. In July
1997, RSL COM acquired a majority interest in our company, and in April 1998, we
became a wholly-owned subsidiary of RSL COM after RSL COM acquired the remaining
outstanding shares of our capital stock from third parties.
Since our inception, our primary activities have included:
o developing our business model
o hiring management and other key personnel
o building our IP network
o offering PC-to-phone, phone-to-phone and carrier transmission services
o entering into marketing relationships to promote our enhanced IP
communication services
o developing new services
o developing our interactive communications portal and customer care center
Since RSL COM's investment in our company in July 1997, we have relied on
RSL COM almost exclusively for our financing needs. With the proceeds of this
offering, we will be less dependent upon RSL COM for our funding needs.
In addition, since RSL COM's investment in our company, we have provided
RSL COM with a majority of our network capacity which has enabled us to maximize
the use of our available network capacity. We currently generate revenues
primarily from carrier transmission services for RSL COM and other
telecommunications carriers. As we continue to expand our marketing and
promotional efforts for our enhanced IP communications services, we expect
revenue from these services, over time, to represent a majority of our total
revenues. This shift in revenue mix would minimize our reliance upon carrier
transmission services for our revenues. In order to increase the number of users
of these services we believe we will have to significantly increase our
marketing and advertising expenditures. For these reasons our historical
operating results may not necessarily be indicative of our future operating
performance.
Revenues
Revenues are derived from affiliates and non-affiliates. Revenues from
affiliates consist of revenues received from RSL COM for carrier transmission
services we provide to RSL COM. The majority of the services we provide to RSL
COM are resold by RSL COM to other communications companies, and the remainder
are used directly by RSL COM's customers. Revenues from non-affiliates consist
of revenues from carriers other than RSL COM for carrier transmission services
and revenues from users of our enhanced IP communications services, including
PC-to-phone and phone-to-phone. All revenues are recognized as the service is
performed. Revenues are currently derived from usage charges on a per minute
basis. We expect our minutes of use to increase over time. However, prices have
been decreasing due to significant competition. This pricing pressure has begun
to negatively impact our gross margins, particularly with respect to our carrier
transmission services.
Carrier transmission services to RSL COM accounted for 63.4% of our total
revenues for the nine months ended September 30, 1999 and 69.1% of our total
revenues in 1998. Carrier transmission services to non-affilates accounted for
15.5% of our total revenues for the nine months ended September 30, 1999 and
5.6% of our total revenues in 1998. The provision of enhanced IP communications
services accounted for 18.7% of our total revenues for the nine months ended
September 30, 1999 and 20.5% in 1998.
22
<PAGE>
Costs and Operating Expenses
Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expenses and amortization of goodwill.
o Cost of revenues consist primarily of access, termination and
transmission costs paid to carriers that we incur when providing services
and fixed costs associated with leased transmission lines. The term of
our contracts for leased transmission lines is generally one year and
either party can terminate with prior notice. We incurred extraordinary
costs of approximately $1,596,000 in 1998 and $1,060,000 for the nine
months ended September 30, 1999 in integrating the hardware and software
purchased from Ericsson into our network, and anticipate that we will
incur additional costs of approximately $344,000 through the end of 1999.
To compensate us for our costs, Ericsson agreed to offset our payable to
them for network telecommunications equipment that we previously
purchased from them with a fair market value of $3 million, representing
Ericsson's reimbursement of costs incurred by us. As a result we
classified this payable as deferred revenues and costs which we recognize
as an offset to cost of revenues and research and development expenses as
they are incurred.
o Research and development expenses consist primarily of costs associated
with establishing our network and the initial testing of our services and
compensation expenses of software developers involved in new product
development and software maintenance. In the future, these expenses may
fluctuate as a percentage of revenue depending on the project undertaken
during the reporting period. Since our inception, we have expensed all
research and development costs in each of the periods in which they were
incurred.
o Selling and marketing expenses consist primarily of advertising and
promotional expenses incurred to attract potential users and network
partners. We expect to substantially increase our selling and marketing
expenses as we increase our marketing efforts in order to grow our user
base and increase the frequency of use by our registered users and new
users of our services. We anticipate that as we add new paid users we
will be able to spread these costs over a larger revenue base and
accordingly improve our operating margins.
o General and administrative expenses consist primarily of compensation and
benefits for management, finance and administrative personnel, deferred
compensation expense, occupancy costs, depreciation of fixed assets and
legal and accounting fees. We expect to hire additional personnel and to
incur expenses associated with being a public company, including costs of
directors' and officers' insurance and increased legal and accounting
fees.
o Amortization of goodwill consists of amortization of the goodwill related
to the purchase by RSL COM of all of the outstanding shares of our
capital stock. In July 1997, we issued shares representing 51% of
outstanding share captital to RSL COM for $5 million. No goodwill was
recorded as a result of this issuance. However, as a result of acquiring
a controlling interest in us, RSL COM recorded goodwill in the amount of
$450,000, representing our net liabilities. RSL COM then proceeded to
offer to purchase from our stockholders all of our outstanding shares it
did not already own. By April 1998, RSL COM had paid approximately
$14.7 million in cash and securities for the remaining 49% of our shares
that it did not own and RSL COM recorded goodwill in the amount of $14.7
million. As a result of these transactions, RSL COM "pushed down" a total
of approximately $15.2 million of goodwill to our financial statements,
accounted for in our financial statements as an increase in both goodwill
and additional paid-in capital of approximately $15.2 million in the
aggregate. The goodwill is being amortized by us over a five-year period.
The amortization of this goodwill has been reflected as a charge to
operations beginning in 1997. We have recorded amortization expense of
approximately $4.9 million through September 30, 1999. The future
amortization of the unamortized goodwill balance will result in charges
of approximately $750,000 in the fourth quarter of 1999, $3.0 million in
2000, $3.0 million in 2001, $3.0 million in 2002 and $500,000 in 2003.
We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to September 30, 1999. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.
23
<PAGE>
Deferred Compensation Charge
We will have to recognize significant recurring charges relating to
non-cash compensation expense due to the options to purchase 1,076,761 shares of
our common stock granted with an exercise price of $5.11 per share on April 1,
1999. The Company will recognize additional compensation expense for the
issuance of shares of our common stock and options to purchase shares of our
common stock in exchange for restricted units granted by RSL COM to our
employees. These non-cash charges will be recognized over the vesting period of
the options to be issued in exchange for unvested restricted units and in the
fourth quarter of 1999 with respect to the shares of common stock to be issued
in exchange for vested restricted units. Assuming an initial offering price of
$12.00 per share, the mid-point of the estimated price range, these charges
would total approximately $17.5 million, excluding $9.7 million in deferred
compensation expenses previously amortized. Based on this assumption, we will
recognize $2.0 million in the fourth quarter of 1999, $4.7 million during the
year ending December 31, 2000, and $1.1 million over the period from January 1,
2001 through May 31, 2002.
In addition, we will record approximately $672,000 of deferred compensation
expense related to the sale to Yahoo! of 167,238 shares of our common stock
(including a warrant to purchase 41,963 shares of common stock). In lieu of
purchasing the shares and warrant for cash, Yahoo! agreed to offset an account
payable in the amount of $1 million that we owe to Yahoo! under a marketing and
promotional agreement as consideration for the shares and warrant. The deferred
compensation expense represents the difference between each of the purchase
price of the common stock and the exercise price of the warrant as compared to
the fair value of the common stock at the date of sale, assuming an initial
public offering price of $12.00 per share. We will amortize this deferred
compensation expense over the one year life of our marketing and promotion
agreement with Yahoo!.
We will also record approximately $2.0 million of deferred compensation
expense related to the sale to CNET of 1,085,943 shares of our common stock and
a warrant to purchase 466,028 shares of common stock for approximately
$11 million. We will amortize the deferred compensation expense over the two
year life of our promotion agreement with CNET.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data presented
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------- ----------------------------------
1997 1998 1998 1999
------ ------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Affiliates............................................................ 37.6% 69.1% 67.7% 63.4%
Non-affiliates........................................................ 62.4 30.9 32.3 36.6
------ ------ ------- -------
Total revenues..................................................... 100.0 100.0 100.0 100.0
Costs and operating expenses:
Cost of revenues...................................................... 85.5 82.6 72.2 90.3
Research and development expenses..................................... 23.6 11.5 13.1 12.4
Selling and marketing expenses........................................ 50.7 43.1 43.7 48.0
General and administrative expenses (exclusive of non-cash
compensation expense).............................................. 111.4 32.7 28.0 32.3
Non-cash compensation expense......................................... -- 13.2 17.4 138.8
Amortization of goodwill.............................................. 15.9 43.9 46.7 35.4
------ ------ ------- -------
Total costs and operating expenses................................. 287.1 227.0 221.1 357.2
------ ------ ------- -------
Loss from operations.................................................... (187.1) (127.0) (121.1) (257.2)
Interest expense, net................................................... (3.0) (3.3) (4.0) (14.2)
Minority interests...................................................... -- 4.0 -- --
------ ------ ------- -------
(190.1)% (126.3)% (125.1)% (271.4)%
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
24
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
Affiliates. Revenues from affiliates were $4.1 million for the nine months
ended September 30, 1999 compared to $2.5 million for the nine months ended
September 30, 1998, an increase of $1.6 million, or 64.1%. The increase in
revenues from affiliates was due to an increase in sales of our services to RSL
COM. The increase in sales to RSL COM was due to the growth in our network
resulting in our ability to provide additional capacity to RSL COM and an
increase in demand for our services from RSL COM offset by decreases in prices.
Non-affiliates. Revenues from non-affiliates were $2.4 million for the
nine months ended September 30, 1999 compared to $1.2 million for the nine
months ended September 30, 1998, an increase of $1.2 million or 98.9%. Revenues
from carrier transmission services for telecommunications carriers other than
RSL COM were $1.0 million for the nine months ended September 30, 1999 compared
to $90,848 for the nine months ended September 30, 1998, an increase of
$928,418, or 1,021.9%. The increase was due primarily to an increased demand
from a larger customer base. Revenues from enhanced IP communications services
were $1.2 million for the nine months ended September 30, 1999 compared to
$729,414 for the nine months ended September 30, 1998, an increase of $499,051,
or 68.4%. The increase in revenues from enhanced IP communications services was
due to a greater number of PC-to-phone and phone-to-phone calls being placed by
an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 70.2% and 79.2% of revenues for the
periods ended September 30, 1999 and 1998, respectively. Other than RSL COM, no
other customer accounted for greater than 5% of our revenues during these
periods. We expect that revenues from carrier transmission services to RSL COM
and other carriers will continue to account for a majority of our revenues
through at least the end of 2000.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $5.8 million for the nine months
ended September 30, 1999 compared to $2.6 million for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, we
recognized a reduction in our costs of revenues of $299,136 as compared to
$506,250 for the nine months ended September 30, 1998 as a result of the
reimbursement of certain costs from Ericsson, our primary equipment vendor.
Excluding this reimbursement, cost of revenues would have been $6.1 million for
the nine months ended September 30, 1999 compared to $3.2 million for the nine
months ended September 30, 1998, an increase of $2.9 million, or 93.7%. The
increase in cost of revenues (excluding the reimbursement) was due primarily to
the increased costs associated with the increase in carrier transmission
services.
Research and development expenses. Research and development expenses were
$797,273 for the nine months ended September 30, 1999 compared to $479,030 for
the nine months ended September 30, 1998. During the nine months ended
September 30, 1999, we recognized reimbursement from Ericsson for expenses we
incurred in research and development of $760,285 compared to $488,951 for the
nine months ended September 30, 1998. Excluding this reimbursement, research and
development costs would have been $1.6 million for the nine months ended
September 30, 1999 compared to $968,000 for the nine months ended September 30,
1998, an increase of $589,577, or 60.9%. The increase in research and
development expenses (excluding the reimbursement) was due to greater costs
incurred in hiring personnel to develop new services and enhancements to our
existing services.
Selling and marketing expenses. Selling and marketing expenses were
$3.1 million for the nine months ended September 30, 1999 compared to
$1.6 million for the nine months ended September 30, 1998, an increase of
$1.5 million, or 92.6%. The increase in selling and marketing expenses was due
to the expansion of our marketing and promotional activities.
General and administrative expenses. General and administrative expenses
(exclusive of non-cash compensation expenses) were $2.1 million for the nine
months ended September 30, 1999 compared to
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$1.0 million for the nine months ended September 30, 1998, an increase of
$1.1 million, or 102.7%. The increase in general and administrative expenses was
primarily due to additional personnel and increased occupancy costs. We expect
that general and administrative expenses will continue to increase as we pay
executive compensation previously paid by RSL COM.
Non-cash compensation expenses. Non-cash compensation expenses were
$8.9 million for the nine months ended September 30, 1999 compared to $640,165
for the nine months ended September 30, 1998, an increase of $8.3 million, or
1,294.4%. The increase in non-cash compensation expenses was due to the
recognition of compensation expense for grants of employee stock options and RSL
COM restricted units held by our employees that are to be converted into shares
of our common stock or options to purchase our common stock upon completion of
this offering.
Amortization of goodwill. Amortization of goodwill was $2.3 million for
the nine months ended September 30, 1999 compared to $1.7 million for the nine
months ended September 30, 1998, an increase of $559,300, or 32.6%. The increase
in amortization of goodwill was due to a significant increase in goodwill during
1998 that resulted from RSL COM's acquisition of the remaining outstanding
shares of our common stock that it did not already own.
Loss from Operations
Loss from operations was $16.5 million for the nine months ended
September 30, 1999 compared to $4.4 million for the nine months ended
September 30, 1998, an increase of $12.1 million, or 272.4%. The increase in
loss from operations was due primarily to the increase in costs and operating
expenses, including non-cash compensation expense, and a decrease in prices we
charged for carrier transmission services. We expect to continue to incur losses
for the foreseeable future.
Interest Expense, Net
Interest expense, net was $914,901 for the nine months ended September 30,
1999 compared to $145,910 for the nine months ended September 30, 1998, an
increase of $768,991 or 527.0%. The increase in interest expense was primarily
due to increased borrowings from RSL COM to finance our working capital and
capital expenditure requirements.
Net Loss
Net loss was $17.5 million for the nine months ended September 30, 1999
compared to $4.6 million for the nine months ended September 30, 1998, an
increase of $12.9 million, or 280.5%. The increase in net loss was due to the
foregoing factors.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Affiliates. Revenues from affiliates were $3.9 million for the year ended
December 31, 1998 compared to $467,842 for the year ended December 31, 1997, an
increase of $3.4 million, or 732.8%. The increase in revenues from affiliates
was due to an increase in sales of our services to RSL COM. The increase in
sales to RSL COM was attributable to the growth in our network resulting in our
ability to provide additional capacity to RSL COM and an increase in demand for
our services from RSL COM.
Non-affiliates. Revenues from non-affiliates were $1.7 million for the
year ended December 31, 1998 compared to $777,799 for the year ended
December 31, 1997, an increase of $964,142, or 124.0%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
$317,503 for the year ended December 31, 1998 compared to $56,882 for the year
ended December 31, 1997, an increase of $260,621, or 458.2%. Revenues from
enhanced IP communications services were $1.2 million for the year ended
December 31, 1998 compared to $202,643 for the year ended December 31, 1997, an
increase of $951,151, or 469.4%. The increase in revenues from carrier
transmission and enhanced IP communications services was due to an increase in
the destinations we could terminate traffic to as a result of the expansion
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of our network and an increasing user base. Revenues from equipment sales were
$270,644 for the year ended December 31, 1998 compared to $498,504 for the year
ended December 31, 1997, a decrease of $227,860, or 45.7%. The decrease was due
primarily to our decision to focus on enhanced IP communications services rather
than equipment sales. Equipment sales are not expected to constitute a material
portion of revenues in the future.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $4.7 million for the year ended
December 31, 1998 compared to $1.1 million for the year ended December 31, 1997.
For the year ended December 31, 1998, we recognized a reduction in cost of
revenues of $694,250 as a result of the reimbursement for certain costs from
Ericsson. Excluding this reimbursement, cost of revenues would have totalled
$5.4 million, an increase of $4.3 million, or 402.5%. The increase in cost of
revenues (excluding the reimbursement) was due primarily to the increased costs
associated with the significant increase in carrier transmission services.
Research and development expenses. Research and development expenses were
$650,140 for the year ended December 31, 1998 compared to $294,150 for the year
ended December 31, 1997. For the year ended December 31, 1998, we recognized
reimbursement from Ericsson for expenses we incurred in research and development
of $901,385. Excluding this reimbursement, research and development expenses
would have been $1.6 million, an increase of $1.3 million, or 427.5%. The
increase in research and development expenses (excluding the reimbursement) was
due to greater costs incurred in hiring personnel to develop new services and
enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses were
$2.4 million for the year ended December 31, 1998 compared to $631,970 for the
year ended December 31, 1997, an increase of $1.8 million, or 284.7%. The
increase in selling and marketing expenses was due to the expansion of our
marketing and promotional activities.
General and administrative expenses. General and administrative (exclusive
of non-cash compensation expense) expenses for the year ended December 31, 1998
were $1.8 million compared to $1.4 million for the year ended December 31, 1997,
an increase of $454,764, or 32.8%. The increase in general and administrative
expenses was primarily due to additional personnel and increased occupancy
costs.
Non-cash compensation expense. Non-cash compensation expenses were
$742,780 for the year ended December 31, 1998 compared to zero for the year
ended December 31, 1997. The increase in non-cash compensation expense was due
to the recognition of compensation expense for grants of employee stock units.
Amortization of goodwill. Amortization of goodwill was $2.5 million for
the year ended December 31, 1998 compared to $197,249 for the year ended
December 31, 1997, an increase of $2.3 million, or 1,153.3%. The increase in
amortization of goodwill is due to an increase in goodwill which grew
significantly during 1998 as a result of RSL COM acquiring the remaining
outstanding shares of our company.
Loss from Operations
Loss from operations was $7.2 million for the year ended December 31, 1998
compared to $2.3 million for the year ended December 31, 1997, an increase of
$4.9 million, or 207.2%. The increase in loss from operations was due primarily
to the increase in costs and operating expenses and to a decrease in prices we
charged for carrier transmission services.
Interest Expense, Net
Interest expense, net was $186,295 for the year ended December 31, 1998
compared to $37,232 for the year ended December 31, 1997, an increase of
$149,063, or 400.4%. The increase in interest expense was due to increased
borrowings from RSL COM to support our working capital and capital expenditure
requirements.
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Net Loss
Net loss was $7.1 million for the year ended December 31, 1998 compared to
$2.4 million for the year ended December 31, 1997, an increase of $4.7 million,
or 200.8%. The increase in net loss was due to the foregoing factors.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM JUNE 1996 (INCEPTION)
TO DECEMBER 31, 1996
Revenues
Affiliates. Revenues from affiliates were $467,842 for the year ended
December 31, 1997. Revenues from RSL COM commenced in August 1997 shortly
following RSL COM's investment in us, and, accordingly, we did not generate any
revenues from RSL COM in 1996.
Non-affiliates. Revenues from non-affiliates were $777,799 for the year
ended December 31, 1997 compared to $933 for the seven month period ended
December 31, 1996. We commenced sales activities during the fourth quarter of
1996 and did not realize any material sales during 1996. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM
commenced in 1997 and were $56,882 for the year. We did not commence the
commercial sale of enhanced IP communications services until the first quarter
of 1997. Revenues from enhanced IP communications services were $202,643 for the
year ended December 31, 1997. Revenues from equipment sales for the year ended
December 31, 1997 were $498,504.
Costs and Operating Expenses
Cost of revenues. Cost of revenues was $1.1 million for the year ended
December 31, 1997. No such costs were incurred during 1996 since sales and
services had not yet commenced.
Research and development expenses. Research and development expenses were
$294,150 for the year ended December 31, 1997. No such costs were incurred in
1996 since research and development activities had not yet commenced.
Selling and marketing expenses. Selling and marketing expenses were
$631,970 for the year ended December 31, 1997. No such costs were incurred in
1996 since marketing efforts had not yet commenced.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1997 were $1.4 million compared to $179,138 for
the seven month period ended December 31, 1996, an increase of $1.2 million, or
674.6%. The increase in general and administrative expenses was primarily due to
additional personnel and increased occupancy costs that we incurred in
connection with the commencement of our commercial activities, as well as fees
and expenses incurred in connection with a private placement during 1997.
Amortization of goodwill. Amortization of goodwill was $197,249 for the
year ended December 31, 1997. We did not have any intangible assets during 1996.
Loss from Operations
Loss from operations was $2.3 million for the year ended December 31, 1997
compared to $178,205 for the seven month period ended December 31, 1996. The
increase in loss from operations was due to the increased costs associated with
our commencing commercial operations and establishing our network
infrastructure.
Interest Expense, Net
Interest expense, net was $37,232 for the year ended December 31, 1997
compared to $397 for the seven month period ended December 31, 1996. The
increase in interest expense was primarily due to accrued interest on our
convertible notes issued in a private placement during 1996.
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Net Loss
Net loss was $2.4 million for the year ended December 31, 1997 compared to
$178,602 for the seven month period ended December 31, 1996. The increase in net
loss was a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in June 1996, we have incurred significant operating
and net losses due in large part to the start-up and development of our
operations. As of September 30, 1999, we had an accumulated deficit of
approximately $27.1 million. We anticipate that we will continue to incur
operating and net losses as we implement our growth strategy.
From our inception, we funded losses and capital expenditures from cash
provided from financing activities, primarily the net proceeds of the private
placement of:
o capital stock sold to RSL COM for an aggregate amount of approximately
$5.0 million in July 1997
o capital stock and units of convertible notes and warrants to purchase our
capital stock sold to unrelated third parties for an aggregate amount of
approximately $1.2 million from July 1997 to April 1998
o capital stock sold to CNET for an aggregate amount of approximately
$11.0 million in October 1999
In July 1997, RSL COM acquired a 51% interest in our company for
approximately $5.0 million. Between July 1997 and April 1998, RSL COM acquired
all of the remaining shares of our outstanding capital stock from our
shareholders for approximately $14.7 million. In April 1998, our company was
merged into a wholly-owned subsidiary of RSL COM. Since RSL COM's acquisition of
a controlling interest in us in July 1997, RSL COM has funded our cash
requirements, which we have accounted for as inter-company loans bearing
interest at the rate of 14% per annum, due on demand after June 30, 2000. Upon
completion of an initial public offering by us, the maturity dates will be
extended to the first anniversary of the completion of such offering. As of
September 30, 1999, we owed approximately $12.3 million (principal and accrued
interest) to RSL COM.
Prior to the closing of this offering, RSL COM will provide us with a
$10 million line of credit (exclusive of the existing $12.3 million owed to RSL
COM as of September 30, 1999), due on demand after November 1, 2000 and bearing
interest at the rate of 14% per annum, which will be available to fund our
operating expenses. We are not subject to any negative or financial covenants
under either the RSL COM inter-company loans or line of credit. Although we are
neither the debtor nor the guarantor under any of the indentures that govern a
substantial amount of RSL COM's debt, we are subject to financial restrictions
by reason of our status as a restricted subsidiary of RSL COM under such
indentures. Such restrictions significantly limit and could prohibit the ability
of RSL COM and its restricted subsidiaries, including our company, to incur
additional indebtedness or to create liens on their assets. The limitations on
indebtedness under the indentures generally are based on the application of
tests derived from RSL COM's consolidated financial statements. Effectively, our
ability to incur indebtedness is limited by the amount of indebtedness that RSL
COM and its restricted subsidiaries, including our company, are permitted to
incur under the indentures. The limitations under RSL COM's restrictive
indenture covenants currently prohibit us from incurring any significant amount
of additional debt. We have further agreed with RSL COM that we will not incur
any debt other than inter-company debt without its written consent so long as we
are a restricted subsidiary.
In 1998 and during the nine months ended September 30, 1999, we incurred
approximately $6.0 million and $2.0 million, respectively, in capital
expenditures, including purchases of network components, the expansion of our
network and computer hardware and software costs. We expect to incur
approximately $10.0 million in additional capital expenditures through the end
of 2000.
As of September 30, 1999, we had approximately $1.3 million in cash and
cash equivalents. Principal uses of cash have been to fund operating losses,
working capital requirements and capital expenditures. We have had significant
negative cash flows from operating activities for each annual and quarterly
period to date.
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Net cash used in operating activities was $186,247 for the period from June
1996 to December 31, 1996, $1.6 million for the year ended December 31, 1997 and
$3.8 million for the year ended December 31, 1998. Net cash used in operating
activities was $2.8 million for the nine months ended September 30, 1998 and
$4.7 million for the nine months ended September 30, 1999. Net cash used in
operating activities in these periods consisted mostly of net operating losses
partially offset by increases in trade payables and deferred revenues.
Net cash used in investing activities was $205,809 for the period from June
1996 to December 31, 1996, $949,137 for the year ended December 31, 1997 and
$3.1 million for the year ended December 31, 1998. Net cash used in investing
activities was $2.0 million for both of the nine month periods ended
September 30, 1998 and 1999. Net cash used in investing activities in these
periods consisted mostly of capital expenditures for the purchase of computer
software and network equipment.
Net cash provided by financing activities was $522,048 for the period from
June 1996 to December 31, 1996, $5.6 million for the year ended December 31,
1997, and $5.0 million for the year ended December 31, 1998. Net cash provided
by financing activities was $2.0 million for the nine months ended
September 30, 1998 and $6.6 million for the nine months ended September 30,
1999. Cash provided by financing activities from June 1996 to December 31, 1997,
consisted primarily of proceeds from sales of capital stock and the issuance of
convertible notes and warrants to purchase capital stock, which was partially
offset by repayment of shareholder loans, short-term bank loans and loans from
RSL COM. For the year ended December 31, 1998 and the nine month periods ended
September 30, 1999 and 1998, cash provided by financing activities consisted of
borrowings from RSL COM.
RSL COM has agreed to continue to fund us through the earlier of the
completion of this offering and December 31, 2000. We believe that the net
proceeds from this offering, together with our existing cash and cash
equivalents, will be sufficient to meet our working capital requirements,
including operating losses, and capital expenditure requirements for at least
the next 18 months, assuming our business plan is implemented successfully.
Thereafter, we will be required to raise additional funds. Additional financing
may not be available when needed or, if available, such financing may not be on
terms favorable to us. If additional funds are raised through the issuance of
equity securities, our existing stockholders may experience significant
dilution. In addition, the indentures governing outstanding indebtedness of RSL
COM restrict our ability to incur indebtedness. We also have agreed with
RSL COM not to incur any debt (other than inter-company debt) without its
written consent so long as we are a restricted subsidiary of RSL COM. Those
limitations may require us to resort to other sources of funding, such as the
issuance of equity, we may need to rely upon RSL COM to provide any additional
capital to meet our working capital and capital expenditure requirements, and we
cannot assure you that RSL COM or any other third party will be willing or able
to provide additional capital on favorable terms or at all.
FRAUD PREVENTION
With the recent substantial growth of Internet use and e-commerce, the
Internet business community has been subject to significant credit card fraud.
We have attempted to reduce our exposure to such fraud by introducing various
advanced procedures and proprietary fraud prevention systems that monitor and
identify patterns and sources of credit card fraud and prevent fraudulent
transactions. We employ a full-time staff dedicated to monitoring fraudulent
activities. Once a fraud pattern is detected, the fraud pattern is brought to
the attention of our data programmers who seek to take appropriate action to
counter the fraudulent activity. As a result, we have been able to reduce our
credit card fraud exposure, which reached a peak of 19% of gross revenues during
1998, to less than 1% of gross revenues for the nine months ended September 30,
1999.
We have established reserves for bad debts in accordance with historical
levels of uncollectible receivables resulting primarily from such fraudulent
practices, on the basis of specific accounts receivable. Nevertheless, our
actual losses may exceed such reserves and could rise significantly above
anticipated levels. We cannot assure you that we will continue to be successful
in reducing or maintaining our current level of credit card fraud exposure.
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YEAR 2000 COMPLIANCE
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for failures encompasses all aspects of our business, including our
computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our interactive communications
portal and a temporary inability to engage in normal business activities.
Our State of Readiness
We may be affected by the Year 2000 issue related to our information
technology (IT) systems and non-IT systems operated by us or third parties.
Our IT systems include:
o gateways and gatekeepers developed by Ericsson
o routers developed by Cisco Systems, Inc.
o Hewlett-Packard Company Open View software
o software developed in-house to manage our network and support our portal
Our non-IT systems include:
o internal telephone systems
o leased office spaces and facilities
o office equipment
We completed a comprehensive assessment of the Year 2000 readiness of our
and third parties' IT and non-IT systems to ensure that these systems are, or
prior to December 31, 1999 will be, Year 2000 compliant. Our assessment plan
consisted of:
o conducting a comprehensive inventory of our IT and non-IT systems to
assess Year 2000 compliance
o testing our internally developed software and the commercial hardware and
software that support our network, Web site and other systems
o contacting third party vendors, suppliers and service providers of
material hardware, software and services necessary for the delivery of
our services to our users
o remediating any Year 2000 issues by repairing or, if necessary, replacing
any non-compliant systems
We completed our assesment plan which consisted of simulating and testing
the functioning of our entire network during the change from December 31, 1999
to January 1, 2000. We also successfully simulated and tested the functioning of
each individual component of our network during the change from December 31,
1999 to January 1, 2000. The tests were repeated several times and on each
occasion the network and each individual component of it functioned without any
interruption. We believe that the IT systems that we have developed internally
to operate our business are Year 2000 compliant based on the results of such
testing and because all of the software code for the systems that we have
internally developed is written with four digits to define the applicable year.
We have completed our assessment of our non-IT systems which we have identified
as containing embedded technology and, as a result, we are not aware of any Year
2000 issues relating to our non-IT systems which would cause disruptions in our
operations or impede our ability to provide services to our users.
Because third parties have developed and currently support many of the
systems we use, in addition to assessing our internal systems, a significant
part of our efforts have been to ensure that our externally developed IT and
non-IT systems are Year 2000 compliant. We have obtained confirmation from all
of our principalthird\party vendors, suppliers and service providers, including
Ericsson, Cisco and Hewlett-Packard,
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either directly in writing or via their Web sites, that they believe they have
resolved the Year 2000 issues relating to the systems, services and products
supplied to us.
Costs to Address Our Year 2000 Issues
To date, we have spent $50,000 on Year 2000 compliance issues through
September 30, 1999. Our costs primarily relate to the operating costs associated
with time spent by employees in the evaluation process and Year 2000 compliance
matters generally.
Risks of Our Year 2000 Issues
We are not currently aware of any Year 2000 compliance issues relating to
our systems that would cause disruptions in our operations or impede our ability
to provide our services. We cannot predict the extent to which the Year 2000
issue will affect our vendors, suppliers or service providers, or the extent to
which we would be vulnerable if such parties fail to resolve any Year 2000
issues on a timely basis. Year 2000 assessment and testing did not identify any
material non-compliant systems operated by us or our vendors, suppliers and
service providers. Therefore, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond our control, such as a prolonged
disruption or failure of the Internet or the telecommunications infrastructure.
Any failures or disruptions could prevent us from operating our network or
prevent users from accessing our portal and services, which could result in loss
of users, lost revenues, increased operating costs and material disruptions in
the operation of our business.
Our Contingency Plan
We do not currently have our own contingency plan to handle the most
reasonably likely worst case Year 2000 scenario that may occur if systems we are
dependent upon are not Year 2000 compliant and fail to operate effectively after
December 31, 1999. However, our systems are included in RSL COM's contingency
plans.
The primary goal of RSL COM's contingency plan is to identify, analyze and
correct any potential network or service interruptions related to Year 2000
problems that arise during the weekend of December 31, 1999 through Monday,
January 3, 2000. To achieve this goal, RSL COM intends to fully staff its
network operations centers, including ours, during the date change weekend to
monitor systems, and to take actions to ensure calls are completed, including
through the use of alternative quality back-ups to re-route traffic if
necessary. We expect that our network operations center will be in constant
communication with RSL COM's other network communications centers.
CURRENCY FLUCTUATIONS
We believe our exposure to foreign currency risk is immaterial. We have no
financial instruments denominated in any currency other than U.S. dollars and
are not party to any transactions that are sensitive to foreign currency
exchange rates. All of our revenues are in U.S. dollars and substantially all of
our costs are incurred in dollars, other than the salaries of our employees
located in Israel which are incurred in New Israeli Shekels, or NIS. Therefore,
we believe any appreciation of the NIS would have an immaterial effect on our
results of operations.
MARKET RISK
We believe our exposure to market risk is immaterial. We currently do not
invest in, or otherwise hold, for trading or other purposes, any financial
instruments subject to market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP No. 98-1). This statement is applicable to our 1999
financial statements and requires us to capitalize certain payroll and payroll
related costs and other costs that are
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directly related to the development of certain of our systems. We amortize these
costs over the anticipated life of the systems. The adoption of SOP No. 98-1 did
not have a material impact on our financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. We have expensed
these costs historically and therefore the adoption of this standard had no
impact on our results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," (SFAS No. 133) which establishes accounting and reporting standards
for derivative instruments and hedging activities. Generally, it requires that
an entity recognize all derivatives as either an asset or liability and measure
those instruments at fair value, as well as identify the conditions for which a
derivative may be specifically designed as a hedge. SFAS No. 133 is effective
for all fiscal years beginning after June 15, 2000. We do not currently engage
or plan to engage in derivative or hedging activities and therefore there will
be no material impact to our results of operations, financial position or cash
flows upon the adoption of this standard.
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BUSINESS
OVERVIEW
We are a global provider of IP telephony services, which include our
carrier transmission services and enhanced Web-based and other communications
services. We have built a privately-managed, global network using IP technology,
and we have primarily been using this network to transmit traffic for
communications carriers, including RSL Communication, Ltd., our parent company.
We are now using our expertise in IP telephony to provide our users with a
package of enhanced IP communications services. Our interactive communications
portal, www.deltathree.com, is a single on-line source for the communications
needs of our users anywhere in the world. By combining user-friendly, Web-based
access with the advanced functionality of our privately-managed, global IP
telephony network, we offer our users a comprehensive solution for IP
communications services.
We currently offer the following services:
o PC-to-phone service, which enables our users to make calls directly from
their personal computers to a telephone
o D3 Box, our unified messaging service, which permits our users to
conveniently retrieve through a single-source all voice mails, e-mails
and faxes through the Web or by phone
o Click IT, which allows a party to simultaneously view a Web site and talk
directly with the business sponsoring the Web site
o Phone-to-phone service, which enables our users to make calls and send
faxes using a traditional telephone and fax machine at less-expensive
rates than available through traditional carriers
o Global roaming service, which enables businesses and individuals to use a
single account number to access our network from locations throughout the
world using country-specific, toll-free access numbers
We provide our services at a cost that is generally lower than that charged
by traditional carriers, because we minimize our network costs by using
efficient packet-switched technology and because we generally avoid local access
charges and by-pass international settlement charges by routing international
long distance calls over our privately managed network.
Our user base for enhanced IP communications services is expanding. At
December 31, 1998, we had more than 185,000 users of our enhanced IP
communications services, and as of October 1, 1999, we had more than 875,000
users, which include users of both our prepaid and promotional services. We
offer some of our services on a prepaid basis while we offer other services
without charge to attract and retain users. Over 55,000 of our users have paid
for our services.
Carrier transmission services generated 70.2% of our total revenues for the
nine months ended September 30, 1999 and 74.7% in 1998. Enhanced IP
communications services generated 18.7% of our total revenues for the nine
months ended September 30, 1999 and 20.5% in 1998. Historically, substantially
all of our revenues from enhanced IP communications services have been generated
from PC-to-phone and phone-to-phone, as our other services were only recently
introduced.
OUR OPPORTUNITY
GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has emerged as a significant global communications and
commercial medium, enabling millions of people worldwide to communicate and
providing businesses with an attractive means of marketing and selling their
products and services. International Data Corporation (IDC), a market research
firm, estimates that there were approximately 142 million Internet users
worldwide at the end of 1998, and that the
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number of users worldwide will increase to approximately 500 million at the end
of 2003. Internet users are increasingly using the Web as a way to communicate.
Jupiter Communications, a market research firm, estimates that approximately
92.3% of all Internet users regularly use e-mail and 20.6% of all Internet users
regularly participate in on-line "chat" rooms. Further, Jupiter estimates that
an additional approximate 5.2% of all Internet users occasionally use e-mail and
an additional 32.4% of all Internet users occasionally participate in on-line
"chat" rooms. In addition, a recent study by E-Marketer, a market research firm,
estimates that 9.4 billion e-mail messages are delivered daily. Internet users
are also increasingly using the Web to purchase goods and services. IDC
estimates that Internet users worldwide purchased more than $50.0 billion of
goods and services in 1998, and that commerce over the Internet will grow to
approximately $1.3 trillion of goods and services in 2003.
THE INCREASING SIGNIFICANCE OF IP COMMUNICATIONS
Historically, the communications services industry has transmitted voice
and data over separate networks using different technologies. Traditional
carriers have typically built telephone networks based on circuit switching
technology, which establishes and maintains a dedicated path for each telephone
call until the call is terminated. Although a circuit-switched system reliably
transmits voice communications, circuit switching does not efficiently use
transmission capacity. When a telephone call is placed, a circuit is
established, and the circuit remains dedicated for transmission of the call and
unavailable to transmit any other call.
Data networks have typically been built utilizing packet switching
technology, such as IP, which divides signals into packets that are
simultaneously routed over different channels to a final destination where they
are reassembled in the original order in which they were transmitted. Packet
switching provides for more efficient use of the capacity in the network because
the network does not establish dedicated circuits and does not require a fixed
amount of bandwidth to be reserved for each transmission. As a result,
substantially greater traffic can be transmitted over a packet-switched network,
such as the Internet, than a circuit-switched network.
Traditional telecommunications carriers have historically avoided the use
of packet switching for transmitting voice calls due to poor sound quality
attributable to delays and lost packets which prevent real-time transmission.
However, recent improvements in packet switching, compression and broadband
access technologies, improved hardware and the use of privately-managed networks
(such as our network) have significantly improved the quality of packet-switched
voice calls, allowing for real-time transmission. Service providers that use
privately managed networks are able to reduce packet loss and latency, or delay,
because they are able to control the amount, timing and route of data
transmitted.
As a result, packet switching technology is now allowing service providers
to converge their traditional voice and data networks and more efficiently
utilize their networks by carrying voice, fax and data traffic over the same
network. These improved efficiencies of packet-switching technology create
network cost savings that can be passed on to the consumer in the form of lower
long distance rates. In addition, international telephone calls carried over the
Internet or private IP networks are less expensive than similar calls carried
over circuit-switched networks primarily because they bypass the international
settlement process, which represents a significant portion of international long
distance tariffs.
IDC estimates that in 1999, approximately 2.7 billion minutes will be
carried over IP networks, generating approximately $0.6 billion in revenues. IDC
also estimates that by 2004, IP minutes (retail and wholesale) and revenues will
grow to approximately 135.0 billion minutes and approximately $20.7 billion,
representing estimated compound annual growth rates of 119% and 103%,
respectively.
Beyond cost savings, we believe that advanced IP communications
technologies will further the potential for the Internet to become the preferred
medium of communications and commerce. For example, the integration of voice
communications into the Web could serve to enhance existing text-based modes of
Internet communications, such as e-mail and online chat, by adding a live,
low-cost means to communicate. In addition, the advanced functionality of IP
communications will provide e-commerce shoppers with the ability to speak
directly with customer service representatives of on-line retailers providing
the on-line retailer with the ability to offer responsive, real-time customer
support and service.
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INCREASE IN MODES OF COMMUNICATION
The global communications services industry, encompassing voice, fax and
data transmission, is experiencing significant growth. We believe the growth in
global communications services is being driven by:
o globalization of the world's economies and the worldwide trend toward
communications deregulation and liberalization
o the growth of data and Internet traffic
o declining prices and a wider choice of products and services
o technological advances and greater investment in communications
infrastructure
In addition, technological advancements have allowed for multiple modes of
communication, such as cellular, voice-mail, e-mail and fax. We expect rapid
growth in demand for services that unify and simplify the communications needs
of users. For example, IDC expects that the market for unified messaging
services will be more than $3.0 billion in 2002 from virtually nothing in 1997
and 1998.
LIMITATIONS OF EXISTING IP COMMUNICATIONS SOLUTIONS
Although the growth of IP telephony historically has been limited by poor
sound quality attributable to delays and packet loss, recent technological
advancements have significantly improved the quality of packet-switched
telephone calls. As a result, several large long distance carriers, including
AT&T and Sprint, have announced IP telephony service offerings.
In addition, most smaller service providers have begun to offer low-cost
Internet telephony services from PCs to telephones and from telephones to
telephones. Many of these service providers, however, offer their services only
in certain geographic areas and provide limited services. In addition, many of
these service providers use the Internet for transmission, rather than a
privately-managed IP network. In using the Internet, rather than a
privately-managed IP network, for transmission, these service providers have
less control over the network management and monitoring functions that are
necessary to ensure quality of service. Most of these service providers have not
had the benefit of a well-capitalized parent company to help finance a global,
privately-managed network.
OUR SOLUTION
To capitalize on the above trends, we offer a comprehensive communications
solution that combines the power of the Internet's communications and e-commerce
capabilities with the advanced functionality of a privately-managed IP network.
Key advantages we offer our users include:
o A SINGLE SOURCE FOR ACCESSING EVERYDAY MODES OF COMMUNICATION. Our
interactive communications portal is a one-stop source which allows our
users to manage and access everyday modes of communication, including
voice, fax and e-mail.
o USER-FRIENDLY, WEB-BASED ACCESS. Simply by clicking on our interactive
communications portal, our users can make PC-to-phone calls directly from
their computers and access their D3 Box to send e-mail and retrieve and
forward voice mail, e-mail and faxes from anywhere in the world at any
time. We believe that this offers users a more convenient and efficient
communications experience than that of traditional methods.
o A PRIVATELY-MANAGED IP NETWORK PROVIDING HIGH-QUALITY SERVICE. Our
privately-managed IP network enables us to achieve quality of service
levels that may not be available by utilizing the often congested
Internet, where voice calls are mixed with unpredictable traffic from the
Web. Our network operations center allows us to monitor all aspects of
our network 24 hours a day, 7 days a week, to provide uninterrupted and
continuous service to our users.
o VOICE INTEGRATED ON-LINE RETAILING. Our Click IT service allows
e-commerce shoppers to place a call to customer service representatives
of on-line retailers and other Web-based businesses while viewing
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the retailers' or businesses' Web sites. This provides e-commerce
shoppers with the opportunity to receive live customer service and the
ability to provide credit card information directly to a customer service
representative, thereby increasing the likelihood of consummating an
on-line transaction.
o GLOBAL REACH. We operate a privately-managed, IP telephony network, with
45 POPs in 29 countries. We are able to offer services to our users by
providing local access to our network as well as global access to our
services through the Web. In addition, through our POPs and the call
termination services provided to us by RSL COM, we are able to
cost-effectively terminate IP voice and fax communications worldwide.
o LOWER COSTS. We are able to charge lower rates than traditional long
distance carriers because we minimize our network costs by using
packet-switched technology, and because we generally avoid local access
charges and by-pass international settlement charges by routing
international long distance calls over our privately-managed IP network.
o COMPREHENSIVE USER SUPPORT THROUGH OUR ON-LINE INTERACTIVE CUSTOMER CARE
CENTER. Through our interactive communications portal, we have moved and
consolidated traditional customer care functions onto the Web. Our
comprehensive customer care and real-time billing center, which is
accessible directly on the Web, provides our users with the ability to
access their deltathree.com account to check billing and usage
information, increase their prepaid accounts and electronically
communicate with a deltathree.com customer service representative.
OUR STRATEGY
Our goal is to be the leading provider of IP telephony services and to make
our interactive communications portal the leading one-stop solution for the
communications needs of individuals and businesses. To achieve our goal, we plan
to:
o BUILD STRONG BRAND RECOGNITION. To date, we have used both on-line and
traditional marketing programs to create what we believe to be one of the
leading brand names in enhanced IP communications. We believe that
aggressive brand-building is important to obtain and sustain our
leadership position and to continue to attract users to our interactive
communications portal. We intend to continue to invest in branding
through traditional, direct media advertising. We also intend to increase
significantly our investment in branding through marketing and
advertising relationships with Internet companies and Web portals with
strong brand names or high traffic volumes and through our on-line agent
program.
o EXPAND AND ENHANCE OUR SERVICE OFFERINGS. We believe that expanding our
services will be critical to establishing ourselves as the leading
communications portal. We intend to capitalize upon our experience in
providing IP telephony services by introducing additional enhanced IP
communications services that appeal to the communications needs of
individuals and businesses. We also seek opportunities to bring
e-commerce and other enhanced IP communications tools to individuals and
businesses who want to fully utilize the multimedia capabilities of their
existing Web sites. For example, we intend to introduce new services,
including D3 Fax, IP-initiated conference calls, phone-to-PC, information
services and white boarding, to further complement our current services.
o ENSURE A POSITIVE USER EXPERIENCE. We believe that user satisfaction and
loyalty are heavily influenced by a user's experience with our
interactive communications portal. In order to enhance our appeal to
users, we intend to continue developing our interactive communications
portal by adding new features and technology to make it more user
friendly and efficient.
o ESTABLISH ADDITIONAL SOURCES OF REVENUE. Currently our revenues are
principally derived from carrier transmission services and, in part, from
our enhanced IP communications services. We intend to establish
additional sources of revenues from advertising sources, including the
sale of banner advertisements on our interactive communications portal to
leading retailers and marketers, and from monthly charges combined with
usage charges for services.
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o PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to bolster our
number of users and our services through strategic acquisitions,
including the acquisition of new technologies, and alliances that offer
opportunities to acquire users or accelerate our entry into offering
additional enhanced IP communications services.
OUR INTERACTIVE COMMUNICATIONS PORTAL
Our interactive communications portal, www.deltathree.com, acts as a
single-source, on-line solution for our users and on-line marketing agents.
Through our interactive communications portal, our users can:
o view a description of all of our services, including pricing information
o sign up for any of our services, including PC-to-phone, unified
messaging and phone-to-phone
o download our software
o recharge their account, either by entering their credit card information
or authorizing automatic recharging
o send a PC-to-phone call
o retrieve and forward their voice mail, e-mail and faxes through their D3
Box
o check real-time billing and usage information
o communicate by e-mail with a deltathree.com customer service
representative
o view answers to frequently-asked questions
Through our interactive communications portal, our on-line marketing agents
can:
o view a description of our on-line agent program
o sign up to serve as an on-line agent
o receive marketing tools to put on their own Web sites
o monitor their daily results
o view trends
o view commissions by promotions
OUR SERVICES
We provide a comprehensive package of enhanced IP communications services.
We provide some of our services on a prepaid or a per usage basis, while we
offer other services for free to attract and retain users.
CURRENT SERVICES
We currently provide the following services:
PC-to-phone. Our PC-to-phone service enables a user to conveniently and
inexpensively place a call to a standard telephone anywhere in the world
directly from a personal computer while remaining on-line. In order to use this
service, a user need only download our software for free from our Web site and
have access to the Internet. Once the software is downloaded, the user is able
to place a call from the user's PC and, while browsing the Web, speak to a party
who uses a standard telephone.
We are able to provide our PC-to-phone service at rates generally lower
than those charged for traditional circuit switched calls. We are able to charge
lower rates because our service utilizes packet-switched technology and because
it routes calls directly from the Internet onto our privately-managed IP network
and to the called destination, thus avoiding access and settlement rates
associated with traditional
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international and domestic long distance telecommunications services. Our
PC-to-phone service allows ease of use by enabling a user to make a call
directly from a personal computer.
D3 Box. Our unified messaging service enables a user to conveniently
retrieve e-mail, voice mail and faxes, as well as send e-mail, from a single
source. We offer a user the flexibility of retrieving messages by either logging
on to www.deltathree.com or by placing a call using a standard telephone. A user
retrieving messages through a computer can conveniently access and forward all
e-mail, voice mail and faxes, while a user retrieving messages through a
standard telephone can hear voice mail and have e-mail read by a
computer-simulated voice.
Click IT. Our Click IT service is a Web-based e-commerce service enabling
individuals and businesses to place a link on their Web sites which, when
clicked on by a user viewing the site, automatically initiates a telephone call
from the user's computer to a designated telephone number specified by the owner
of the Web site. In addition, a pop-up screen appears which advertises the
host's products and services. This service allows e-commerce and business Web
pages to support real-time voice calls from on-line customers. Our Click IT
service can also be used to enable a user to place a call from his or her PC to
any telephone number without having to download PC-to-phone software. We call
this service Click IT phone booth.
Phone-to-phone. Our phone-to-phone service enables a user to inexpensively
place a call or send a fax from a standard telephone or a fax machine to
anywhere in the world. Phone-to-phone calls originate and terminate on the PSTN,
but travel primarily over our privately-managed IP network. Through our
privately-managed IP network, we are able to carry phone-to-phone voice
communications traffic. Similar to our PC-to-phone service, our phone-to-phone
service is generally less expensive than traditional carriers' services. Users
can access this service by dialing a local or toll-free access number and
providing a pin number. Users are charged for toll and long distance calls on a
per-minute basis. We receive payment for these calls by debiting pre-paid user
accounts opened on-line and through the sale of pre-paid calling cards.
Global roaming. Our global roaming service enables businesses and
individuals to use a single account number to place phone-to-phone calls over
our network from locations throughout the world using country-specific,
toll-free access numbers, thereby bypassing local access charges. We currently
offer toll-free access numbers in Austria, Canada, Finland, France, Germany,
Hong Kong, Italy, Sweden, Switzerland, the United Kingdom and the United States.
Carrier transmission services. To maximize use of our available network
capacity, we offer carrier transmission services over our privately-managed IP
network to telecommunications carriers. RSL COM is currently our largest carrier
customer. RSL COM utilizes our network primarily to resell our transmission
services to other communications carriers, as well as for the traffic RSL COM
carries for its own retail customers.
FUTURE SERVICES
We intend to leverage our network to provide, and utilize our technological
expertise to develop, additional enhanced IP communications services. These
services will be accessible through our interactive communications portal.
We currently expect our future services will include the following:
<TABLE>
<CAPTION>
ENHANCED SERVICE SUMMARY DESCRIPTION
<S> <C>
IP-initiated conference calls............. Enables a user to set up a conference call through our interactive
communications portal either by sending a notice of the planned call
to all of the participants and having each participant dial a
toll-free number or by arranging for each of the participants to be
called by the automated system at the designated call time. This
service eliminates the need for a conference operator, thereby saving
time and money.
</TABLE>
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<TABLE>
<CAPTION>
ENHANCED SERVICE SUMMARY DESCRIPTION
<S> <C>
Phone-to-PC............................... Enables a user to receive phone calls directly through the user's PC
while remaining on-line. For example, a user on the Internet will
receive a pop-up screen stating that someone is calling. The user can
then choose to forward the call to voice mail or to answer the call
from the computer without logging off the Internet. We believe this
service will be attractive to users with a single telephone line, who
would otherwise miss incoming calls while on-line or would need to
install additional phone lines.
D3 Fax.................................... Enables users to conveniently send faxes directly from their computer
to a standard fax machine anywhere in the world over the Internet. To
use this service, a user only need download our software, set up a
deltathree.com account and be connected to the Web when they wish to
send a fax.
Information services...................... Enables a user to have easy access to communications information,
such as phone and e-mail directory services, with a single click on
our interactive communications portal. We believe this service will
further the use of our interactive communications portal as a single
source for users' communications needs.
White boarding............................ Enables multiple users to view and edit the same document on their
computers while speaking with each other through their PCs. We
believe this service will be an efficient and cost-effective tool for
businesses.
PC-to-PC.................................. A voice enabled IP phone and chat service that enables users to place
calls directly from their PC to other PCs while remaining on-line.
Like PC-to-phone, in order to use this product a user will need only
to download our software for free from our Web site and have access
to the Internet.
</TABLE>
CUSTOMER CARE
Our services are supported by our on-line interactive customer care and
billing center, which enables a user to set up a deltathree.com account, receive
an account number and a personal identification number, pay by credit card for
services, find answers to frequently asked questions and contact our customer
service representatives. Once a user has established an account, the user can
prepay for additional usage by credit card as well as access real-time detailed
information which includes call logs and transaction records. Through our
on-line billing system, a user can personalize the billing information to select
the data most relevant to the user.
Most user concerns can be addressed on-line. Users can find answers to many
of their questions by referring to the "frequently asked questions" information
section of our Web site. Other questions can be addressed by our customer
support department that responds to user inquiries primarily through e-mails. We
seek to respond to e-mail inquiries within 24 hours. We strive to continually
improve our customer care center on our interactive communications portal to
meet the evolving needs of our users.
OUR MARKETING, ADVERTISING AND PROMOTIONAL PROGRAMS
We have developed and will continue to develop diversified marketing,
advertising and promotional programs to stimulate demand for our services by
increasing brand awareness. In the past, we have allocated limited resources to
marketing, advertising and promoting our services, relying primarily on RSL COM
to generate demand for our services. We intend to increase our independent
marketing efforts substantially in
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order to increase our user base and to increase the frequency of use of our
services by our registered users and new users. We will also seek to form new
relationships with Internet businesses which we believe can promote our services
to a wide range of potential users and generate demand for our services.
Our marketing, advertising and promotional programs include:
ON-LINE MARKETING RELATIONSHIPS. We encourage other companies to link
their Web sites to us either by creating "communications centers" on their Web
sites or by placing a deltathree.com banner on their Web sites and directing
their customers to us for their communications needs. We pay fees for the
placement of these banners and, in addition, we offer these companies a
percentage of the revenue generated by users that click-through their Web site
to use our services. To date, we have entered into marketing relationships with
five Internet companies, as described below, and we are continuing to pursue
marketing relationships with other companies.
o Yahoo! In October 1999, we entered into a marketing and promotion
agreement with Yahoo! Under this agreement, Yahoo! has agreed to include banners
and other promotions on various Yahoo! domestic and international Web sites that
will link to areas of our Web site dedicated to our PC-to-phone service and
certain of our other enhanced IP communications services. Yahoo! will also send
e-mails to certain international and domestic registered users of Yahoo! e-mail
with exclusive offers for our PC-to-phone service. In addition, Yahoo! will
create and place on Yahoo! Broadcast.com audio advertisements for our enhanced
IP communications services. The initial term of this contract is one year. We
have committed to pay Yahoo! $850,000 per quarter for the services provided.
o CNET. In October 1999, we entered into a marketing and promotion
agreement with CNET. Under this agreement merchants on CNET's shopping sites
will be able to integrate our PC-to-phone software to enable users to make a
PC-to-phone call directly to such merchant from the CNET shopping site using our
Click IT service. In addition, CNET has agreed to display banners and other
promotions on its Web sites that will link to our Web site. The initial term of
the contract is two years. We have agreed to pay CNET $1,062,500 per quarter for
the services provided. We have committed to pay an additional $1,250,000 in each
year of the contract, a portion of which was allocated to the third quarter of
1999.
o CBS.com. In August 1999, we entered into a marketing agreement with
CBS.com. Under this agreement, we are the exclusive provider of enhanced IP
communications services, including PC-to-phone, phone-to-phone, unified
messaging and Click It services, on the CBS.com Web site. CBS will provide links
from its Web pages to our Web site and promote our services through co-branded
areas on its Web site, known as the "DeltaThree/CBS Communication Center," and
through a dedicated monthly e-mail to e-mail addresses contained in its
database. In addition, our advertising banners will be placed on the
CBSMarketWatch.com Web site. The term of this agreement is two years. We have
agreed to pay CBS $424,998 per quarter for the services provided.
o Sony.com. In August 1999, we entered into a marketing agreement with
Sony.com. Under this agreement, a co-branded area known as the "Communication
Center" will be established and will offer users links to our enhanced IP
communications services. Sony has agreed to include fixed links to the
Communication Center on the Sony.com Web site, which includes sonymusic.com,
sony.spe.com, station.sony.com and infobeat.com. The initial term of this
agreement is two years. We have agreed to pay Sony $180,000 per quarter for the
services provided.
o Xoom.com. In June 1999, we entered into a co-marketing agreement with
Xoom.com, Inc. Xoom will provides links to our interactive communications portal
and promotes our services through co-branded areas on its Web site and through
periodic e-mails to its customers. Xoom has established an IP "Communications
Hub" on its home page. In addition, under this agreement, Xoom will:
o integrate our services with the Xoom chat network of 250,000 chat
rooms
o offer our services with Xoom greeting cards
o integrate our services with Xoom's directory services (White Pages &
Yellow Pages)
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The initial term of this agreement is two years. We have agreed to pay Xoom
$240,000 per quarter for the services provided.
We continue to seek to identify additional Internet businesses and Web
portals with strong brand names or high traffic volumes with which we can
establish marketing relationships similar to those described above. We will
expense costs under these agreements as they are incurred. As we have only
recently entered into the marketing relationships described above, to date we
have not generated material revenue from them.
PRIVATE LABELING. We have entered into agreements with three service
providers to distribute our services under their own private labels. Instead of
sending customers to the deltathree.com interactive communications portal, a
service provider markets our services under its own brand name, while
contracting with us to provide the services under their private label. In our
agreements with these providers, we often stipulate that the provider's Web site
will say "powered by deltathree.com." Our private label customers include both
on-line and off-line providers who market our services to their customer base.
We believe service providers are attracted to our private label services because
it allows them to capitalize on their name recognition in their home market
while providing our high-quality, low-cost services.
Our agreement with MediaRing Pte Ltd was our first private labeling
agreement and served as our prototype for this promotional effort and serves as
a continuing source of revenues. Under this agreement, we integrate our
PC-to-phone service into MediaRing's PC-to-PC service, thereby providing
MediaRing's customers with a bundled package of communications services. Our
services are provided under MediaRing's brand name; however, MediaRing's Web
site states that it is "powered by deltathree.com." In addition, we also provide
the back-office and billing support for MediaRing.
ON-LINE AGENT COMMISSION PROGRAM. We have developed a Web-based agent
program that allows for rapid agent enrollment and agent account maintenance.
Through our on-line agent interactive center, any individual with their own Web
site can:
o take a tour of our on-line agent program
o complete an application to be an on-line agent
o be approved within 24-48 hours after completing the application
o if approved, execute our on-line agent agreement through a secured site
o receive an agent identification number and instructions on how to
proceed as an agent
o download deltathree.com banners to post on their Web site
o track the number of people who have clicked through to
www.deltathree.com and signed up for our services
o track the commissions that are due to them
Agents may devise their own marketing programs, including Web-links, direct
mail campaigns or co-branding of our services in select markets. Agents receive
as commissions a percentage of revenue generated from end users who sign up for
our services through the agent's Web site. We believe that providing our agents
with easy, on-line access to these marketing tools helps us to maximize the
number of agents selling our services while significantly reducing the resources
needed to recruit agents.
OFF-LINE AGENT COMMISSION PROGRAM. Our off-line agent commission program
allows non-Web agents to design their own marketing programs to solicit sales of
our services. Off-line agents market and advertise through traditional channels
such as newspaper and magazine advertisements, direct mail campaigns and
telemarketing campaigns. Off-line agents receive a percentage of revenue
generated from users who sign up for our services through the agent's programs.
We currently have relationships with more than 30 off-line agents that have
generated revenue for us.
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RESELLER PROGRAM. We offer individuals and businesses the opportunity to
become resellers of our services through our reseller program. Resellers are
able to purchase bulk deltathree.com account numbers at wholesale rates that
they are then able to resell to private individuals as either phone-to-phone
calling cards or PC-to-phone accounts.
DIRECT SALES. We have a direct sales force that is targeting organizations
that are currently not optimizing the marketing potential of their Web sites. As
with other on-line agents, we offer these on-line agents the opportunity to
market our services and products through their Web pages to generate revenue
from services we deliver as a result of links from their Web sites.
TRADITIONAL AND ON-LINE ADVERTISING. We intend to continue to advertise in
both traditional advertising mediums, such as direct mail, newspapers and
magazines, and through emerging on-line formats, such as banners.
INNOVATIVE MARKETING TOOLS. We intend to continue to develop innovative
marketing products and promotions to increase our user base. For example, in
December 1998, we introduced innovative voice-enabled electronic greeting cards
on a promotional basis. Sent over the Web, V-Greetings enable the recipient to
click on a link in the greeting card, automatically downloading our PC-to-phone
software allowing the recipient to place a free PC-to-phone call to the card
sender's standard telephone. V-Greeting cards are available on-line and are
designed to promote different holidays, such as Christmas, Chanukah, Valentine's
Day, Mother's Day and Chinese New Year and other special occasions. To date,
more than 700,000 V-Greeting cards have been sent. Of those V-Greeting cards
that have been sent, approximately 135,000 of the recipients have downloaded our
PC-to-phone software and made a free PC-to-phone call. We believe that V-
Greeting cards is an effective marketing tool to introduce our services to
potential users.
OUR NETWORK
In order to provide high-quality, low-cost service, we operate a
privately-managed, IP telephony network. By managing our network, we have the
ability to regulate traffic volumes for the communications traffic we carry and
directly control the quality of our services from our originating POP to the
termination point. In addition, our network allows us to avoid the significant
transmission delays associated with the highly congested Internet, which may
impede delivery of high-quality, reliable services to our users. As of October
1, 1999, our network consisted of:
o 45 POPs in 29 countries
o gateways, gatekeepers and routers at each POP
o hubs in New York, Los Angeles, London, Frankfurt and Hong Kong
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with Internet backbone providers, enabling
transmission efficiency
o a technologically-advanced network operations center
POPS
We intend to further develop our network to increase our number of POPs. We
currently have 45 POPs in the following locations:
Austria (Vienna)
Bangladesh (Dhaka)
Belgium (Brussels)
Brazil (Rio de Janeiro)
Brazil (Sao Paulo)
Brazil (Sao Paulo 2)
China (Beijing)
China (Beijing 2)
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China (Beijing 3)
China (Shanghai)
Colombia (Bogota)
Colombia (Cali)
Czech Republic (Prague)
Ecuador (Quayaquil)
Finland (Helsinki)
France (Paris)
Germany (Frankfurt)
Greece (Athens)
Greece (Heraklion)
Greece (Rhodes)
Greece (Saloniki)
Holland (Rotterdam)
Hong Kong
Hungary (Budapest)
Iceland (Reykjavik)
India (Bombay)
Israel (Jerusalem)
Israel (Rosh Ha'ayin)
Israel (Tel Aviv)
Japan (Tokyo)
Korea (Seoul1)
Korea (Seoul2)
Malaysia (Kuala Lumpur)
Norway (Oslo)
Russia (Moscow)
Russia (Nijnei)
Russia (Samara)
Russia (St. Petersburg)
Singapore
Spain (Madrid)
Sweden (Stockholm)
Turkey (Istanbul)
United Kingdom (London)
United States (Los Angeles)
United States (New York)
GATEWAYS, GATEKEEPERS AND ROUTERS
The gateway acts as an entrance into and exit from our network for
communications traffic. At the origination POP, the gateway accepts the
communications traffic from the public switched telephone network (PSTN) and
compresses this traffic into IP packets for transmission over our network. The
gatekeeper determines the most cost-effective route for each packet of
communications traffic and the routers then direct the packets to their
destination. Upon termination, the gateway decompresses and reconverts the
packets into a circuit-switched signal, thereby enabling the traffic to exit our
network on to the PSTN. We use gateways and gatekeepers developed by Ericsson
and routers developed by Cisco.
HUBS
Our network has five hubs located in New York, Los Angeles, London,
Frankfurt and Hong Kong which serve as backbone points for our network and which
allow our network to directly interconnect with the PSTN and the Internet. In
addition, at each of our five hubs, we co-locate our gateways with the Ericsson
international gateway switches on RSL COM's network. Our multiple hub structure
provides us with the ability to handle high volumes of traffic transmitted over
our network. By establishing multiple hubs, we have greater flexibility to
choose from multiple bandwidth suppliers, allowing us to optimize quality and
cost savings. In addition, our multiple hub structure enables us to more
efficiently direct the routing of traffic. For example, communications traffic
between Belgium and France does not need to be routed to our New York hub but
can be sent through our London hub. This enables better use of allocated
bandwidth and reduces delay between originating and terminating sites.
LEASED BANDWIDTH
We connect our hubs and POPs through a network of dedicated leased
bandwidth. By leasing bandwidth, we can avoid using the Internet as our primary
means for the transmission of communications traffic. We can therefore avoid the
significant transmission delays associated with the highly-congested Internet,
which may impede delivery of high-quality, reliable services to our users.
Through our relationship with RSL COM, which owns or leases substantial
bandwidth for its own business, we have access to bandwidth. We are able to take
advantage of RSL COM's volume discounts and achieve cost efficiencies that we
could not achieve on our own. In addition, we also lease bandwidth directly or
indirectly from several other telecommunications carriers.
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INTERCONNECTIONS WITH RSL COM NETWORK
RSL COM interconnects its network with our network in addition to supplying
us with low-cost bandwidth. The interconnections with RSL COM provide us with
access to major PSTNs throughout the world, the ability to terminate
communications traffic virtually anywhere in the world and the ability to
terminate traffic over RSL COM's network in the event of a network failure.
PEERING
Our network also connects with Internet exchange points to provide access
to and from the Internet. We have direct and indirect peering arrangements with
Internet backbone providers in order to support IP services to and from the
Internet. These arrangements allow us to access the Internet directly,
minimizing the amount of time our users' communications traffic has to travel
over the Internet.
NETWORK OPERATIONS CENTER
To service our network effectively, we have established a network
operations center (NOC) which monitors and manages our network from a central
location, 7 days a week, 24 hours a day. The NOC monitors all aspects of our
network, including the routers, databases, switches, leased lines, Internet
connections, gatekeepers and gateways, to ensure that they are functioning at
optimal levels. In the event of a failure of any of these network components,
NOC personnel are provided with a real-time, systems-generated notification via
an instant messaging system consisting of pagers, cellular phones, screen
pop-ups and e-mail, which identifies the malfunction so that proper measures can
be taken to restore service in a timely fashion. Our NOC utilizes a combination
of proprietary and leading industry technologies based upon Hewlett-Packard Open
View software. By utilizing technologically-advanced, real-time management and
monitoring systems, we seek to reduce system downtime and ensure that our users
will not experience any noticeable interruption in their service.
ADVANTAGES OF OUR NETWORK
Our network is engineered to provide the following advantages:
o scalability. The software and hardware that we use in our network is
scalable, allowing for new POPs to be easily integrated into our network
with minimal incremental investment.
o flexibility. Our multiple hub structure and our interconnections with
RSL COM and other carriers provide us with numerous routing options and
greater flexibility to handle changing traffic patterns.
o rapid integration of services. We can introduce new services and
duplicate existing services without having to deploy additional equipment
at each POP on our network.
o manageability. Our privately-managed network allows us to directly
control the quality of our services over our network from one central
location.
o accessibility. Our privately-managed network allows users to gain access
to our enhanced services from any country in which a POP has been
established.
o global reach. By using our network, we are able to cost-effectively
terminate communications traffic to over 200 countries.
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PROPRIETARY RIGHTS
We rely or expect to be able to rely on patent, trademark and trade secret
laws, confidentiality agreements and other contractual arrangements with our
employees, strategic partners and others to protect our proprietary rights.
We have a registered trademark for "Delta Three(Registered)" in the United
States. We have submitted trademark applications for the name "Delta
Three(Trademark)" for the following jurisdictions: Brazil, Colombia, Japan,
Mexico, the Russian Federation, Venezuela and the European Community under EC
trademark regulation. In addition, we have submitted trademark applications in
the United States for the names "V-Greetings(Trademark)," "Click IT(Trademark),"
"D3 Fax(Trademark)," "deltathree.com(Trademark)," "D3 Box(Trademark)" and
"deltathree.com the Communications Portal(Trademark)." We do not currently own
any registered copyrights. In addition, we have filed one patent application in
each of the United States and Israel for a remote telephone configuration in
connection with our V-Greeting product. These applications may not result in any
patents or trademarks being issued and, if issued, these patents or trademarks
may not provide adequate protection against competitive technology and may not
be held valid and enforceable if challenged. In addition, other parties may
assert rights as inventors of the underlying technologies, which could limit our
ability to fully exploit the rights conferred by any patents that we receive.
Our competitors may be able to design around any of the patents that we receive,
and other parties may obtain patents that we would need to license or circumvent
in order to exploit our patents.
To further safeguard our intellectual property, we have a policy that
requires our employees to execute confidentiality and technology ownership
agreements when they begin their relationships with us.
For a discussion of recent litigation, see "--Legal Proceedings."
REGULATORY ENVIRONMENT
REGULATION OF IP TELEPHONY
The use of the Internet and private IP networks to provide telephone
service is a recent market development. While we believe that the provision of
voice communications services over the Internet and private IP networks is
currently permitted under United States law, some foreign countries have laws or
regulations that may prohibit voice communications over the Internet.
United States. We believe that, under United States law, based on specific
regulatory classifications and recent regulatory decisions, the enhanced IP
communications services that we provide constitute information services (as
opposed to regulated telecommunications services). As such, our services are not
currently regulated by the Federal Communications Commission (FCC) or any state
agencies charged with regulating telecommunications carriers. Nevertheless,
aspects of our operations may be subject to state or federal regulation,
including regulation governing universal service funding, disclosure of
confidential communications, copyright and excise tax issues. However, we cannot
assure you that our services will not be regulated in the future. Several
efforts have been made in the United States to enact federal legislation that
would either regulate or exempt from regulation communications services provided
over the Internet. Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations. Such regulation may
negatively impact the cost of doing business over the Internet and materially
adversely affect our business, operating results, financial condition and future
prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon some providers of Internet and IP
telephony, primarily those which provide Internet and IP telephony services to
end users located within the United States. Although the FCC decided that
information service providers, including Internet and IP telephony providers,
are not telecommunications carriers, various companies have challenged that
decision. Congressional dissatisfaction with the FCC's conclusions could result
in requirements that the FCC impose greater or lesser regulation, which in turn
could materially adversely affect our business, financial condition, operating
results and future prospects. On April 10, 1998, the FCC issued a report to
Congress discussing its implementation of universal service provisions contained
in the 1996 amendments to the Communications Act of 1934. In the report, the FCC
indicated that it would examine the question of whether certain forms of
phone-to-phone IP telephony are information services or
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telecommunications services. The two are treated differently in several
respects, with certain information services being more lightly regulated and not
subject to universal service contribution obligations. The FCC noted that it did
not have, as of the date of the report, an adequate record on which to make a
definitive ruling, but that the record suggested that certain forms of
phone-to-phone IP telephony appear to have the same functionality as non-IP
telecommunications services and lack the characteristics that would render them
information services. In September 1998, two regional Bell operating companies
advised Internet and IP telephony providers that they would impose access
charges on Internet and IP telephony traffic. It is uncertain at this time
whether these companies will actually impose access charges or when such charges
will become effective. In addition, one of these regional Bell operating
companies has recently filed a petition with the FCC seeking the imposition of
access charges on phone-to-phone Internet and IP telephony services. If the FCC
were to determine that certain services are subject to FCC regulations as
telecommunications services, the FCC may require providers of Internet and IP
telephony services to be subject to traditional common carrier regulation, make
universal service contributions, and/or pay access charges. It is also possible
that the FCC may adopt a regulatory framework other than traditional common
carrier regulation which would apply to Internet and IP telephony providers. Any
such determinations could materially adversely affect our business, financial
condition, operating results and future prospects to the extent that they
negatively affect the cost of doing business over the Internet or otherwise slow
the growth of the Internet.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet and IP telephony services. Several state
regulatory authorities have initiated proceedings to examine the regulation of
such services. Others could initiate proceedings to do so.
Based on information users provide to us when they sign up to use our
services, we estimate that approximately 30% of our enhanced IP communications
services are provided to users in the United States.
International. The regulatory treatment of Internet and IP telephony
outside of the United States varies widely from country to country. A number of
countries that currently prohibit competition in the provision of voice
telephony may also prohibit Internet and IP telephony. Other countries permit
but regulate Internet and IP telephony. Some countries will evaluate proposed
Internet and IP telephony service on a case-by-case basis and determine whether
it should be regulated as a voice service or as another telecommunications
service. Finally, in many countries, Internet and IP telephony has not yet been
addressed by legislation or regulatory action. Increased regulation of the
Internet and/or Internet and IP telephony providers or the prohibition of
Internet and IP telephony in one or more countries could materially adversely
affect our business, financial condition, operating results and future
prospects.
For example, we believe that our services fall outside the classification
of regulated voice telephony services in the European Union. The European Union
regulatory regime distinguishes between voice telephony services and other
telecommunications services. In Services Directive 90/388/EEC, issued in 1990,
the European Commission required Member States to allow competition for all
telecommunications services except voice telephony and certain other services.
The Services Directive was amended in 1996 by Commission Directive 96/19/EC,
which required the liberalization of all telecommunications services, including
voice telephony, by January 1, 1998, except in certain member states that were
granted extended compliance periods. In addition, Directive 96/19/EC requires
that services other than voice telephony be subjected to no more than a general
authorization or declaration procedure. For purposes of these Directives, "voice
telephony" is defined as the commercial provision for the public of the direct
transport and switching of speech in real time between public switch network
termination points.
On January 10, 1998, the Commission issued a Notice addressing whether IP
telephony was voice telephony and thus subject to regulation as voice telephony
by the Member States. As noted by the Commission, a determination that IP
telephony constitutes "voice telephony" may trigger significant regulatory
consequences with respect to, among other things, licensing requirements and
contributions to universal service funding. Consistent with its earlier
directives, the Commission stated that Internet telephony could properly be
considered voice telephony only if all elements of its "voice telephony"
definition were met. In this January 1998 Notice, the Commission concluded that
no form of IP telephony currently meets the definition of "voice telephony"
subject to Member States' regulation. The Commission noted, however, that its
conclusion that IP telephony cannot be considered voice telephony may not apply
to particular forms
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of service provisions where, for example, an IP telephony service is marketed as
an alternative form of voice telephony service, users can dial out to any
telephone number, and the provider guarantees the quality of the IP voice
service by bandwidth reservation and claims that the quality of the IP voice
service is the same as traditional voice telephony service. Accordingly, the
Commission concluded that while voice over the Internet services cannot "for the
time being" be generally classified as "voice telephony," the situation must be
kept under review in light of technological and market developments. The
Commission intends to review its Notice periodically, and its next review is
scheduled to occur before January 1, 2000.
In light of this conclusion, providers of IP telephony should be subjected
to no more than a general authorization or declaration requirement by the
European Union Member States. The Member States of the European Union are:
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom.
However, we cannot assure you that more stringent regulatory requirements will
not be imposed by individual Member States, since the Commission's Notice is not
binding on the Member States. The Member States therefore are not obligated to
reach the same conclusions as the Commission on this subject so long as they
adhere to the definition of "voice telephony" in the Services Directive. In
fact, France is currently conducting an investigation into how IP telephony
should be regulated. We cannot assure you that the services provided over our
network will not be deemed voice telephony subject to heightened regulation by
one or more EU Member States. Moreover, we cannot assure you that our failure or
the failure of any of our partners to obtain any necessary authorizations will
not have a material adverse effect on our business, financial condition,
operating results and future prospects.
As we make our services available in foreign countries, and as we
facilitate sales by our partners to end users located in foreign countries, such
countries may claim that we are required to qualify to do business in the
particular foreign country. Such countries may also claim that we are subject to
regulation, including requirements to obtain authorization for the provision of
voice telephony or other telecommunications services, or for the operation of
telecommunications networks. It is also possible that such countries may claim
that we are prohibited in all cases from providing our services or conducting
our business as conducted in those countries. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could materially adversely affect our
business, financial condition, operating results and future prospects, including
by subjecting us to taxes and penalties and/or by precluding us from, or
limiting us in, enforcing contracts in such jurisdictions.
Our partners may also currently be, or in the future may become, subject to
requirements to qualify to do business in a particular foreign country, comply
with regulations, including requirements to obtain authorizations for the
provision of voice telephony or other telecommunications services or for the
operation of telecommunications networks, or to cease providing services or
conducting their business as conducted in that country. We cannot be certain
that our partners either are currently in compliance with any such requirements,
will be able to comply with any such requirements, and/or will continue in
compliance with any such requirements. The failure of our partners to comply
with such requirements could materially adversely affect our business, financial
condition, operating results and future prospects.
OTHER REGULATION AFFECTING THE INTERNET
United States. Congress has recently adopted legislation that regulates
certain aspects of the Internet, including on-line content, user privacy and
taxation. For example, the Internet Tax Freedom Act prohibits certain taxes on
Internet uses through October 21, 2001. We cannot predict whether substantial
new taxes will be imposed on our services after that date. In addition, Congress
and other federal entities are considering other legislative and regulatory
proposals that would further regulate the Internet. Congress is, for example,
currently considering legislation on a wide range of issues including Internet
spamming, database privacy, gambling, pornography and child protection, Internet
fraud, privacy and digital signatures. Various states have adopted and are
considering Internet-related legislation. Increased United States regulation of
the Internet may slow its growth, particularly if other governments follow suit,
which may negatively impact the cost of doing business over the Internet and
materially adversely affect our business, financial condition, results of
operations and future prospects.
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International. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive on data protection that imposes restrictions on the processing of
personal data which are more restrictive than current United States privacy
standards. Under the directive, personal data may not be collected, processed or
transferred outside the European Union unless certain specified conditions are
met. In addition, persons whose personal data is processed within the European
Union are guaranteed a number of rights, including the right to access and
obtain information about their data, the right to have inaccurate data
rectified, the right to object to the processing of their data for direct
marketing purposes and in certain other circumstances, and rights of legal
recourse in the event of unlawful processing. The Directive will affect all
companies that process personal data in, or receive personal data processed in,
the European Union, and may affect companies that collect or transmit
information over the Internet from individuals in the European Union Member
States. In particular, companies with establishments in the European Union may
not be permitted to transfer personal data to countries that do not maintain
adequate levels of data protection.
In addition, the European Union has adopted a separate, complementary
directive which pertains to privacy and the processing of personal data in the
telecommunications sector. This directive establishes certain requirements with
respect to, among other things, the processing and retention of subscriber
traffic and billing data, subscriber rights to non-itemized bills, and the
presentation and restriction of calling and connected line identification. In
addition, a number of European countries outside the European Union have
adopted, or are in the process of adopting, rules similar to those set forth in
the European Union directives. Although we do not engage in the collection of
data for purposes other than routing calls and billing for our services, the
data protection directives are quite broad and the European Union privacy
standards are stringent. Accordingly, the potential effect of these data
protection rules on the development of our business is uncertain.
COMPETITION
We compete in both the market for enhanced IP communications services and
the market for carrier transmission services. Each of these markets on a
stand-alone basis is highly competitive and has numerous service providers.
According to International Data Corporation (IDC), a market research firm,
by mid-1999 there were an estimated 300 IP telephony service providers
worldwide. In an August 1999 report on IP telephony services, IDC indicated that
based on 1998 IP telephony minutes carried, we accounted for 9.8% of the market.
According to this report, Net2Phone and Jens Corporation are the only providers
with greater market shares than ours, representing approximately 39.4% and 16.4%
of the market, respectively, in 1998. Jens Corporation's services are directed
primarily to callers based in Japan. IDC further indicated that while most IP
telephony traffic is carried by start-up service providers, traditional carriers
such as Singapore Telecom, Korea Telecom, Telia and Bell Atlantic are
establishing market presence.
ENHANCED IP COMMUNICATIONS SERVICES
The market for enhanced Internet and IP communications services is new and
rapidly evolving. We believe that the primary competitive factors determining
success in the Internet and IP communications market are:
o quality of service
o the ability to meet and anticipate customer needs through multiple
service offerings
o responsive customer care services
o price
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. These industries include major
companies who have greater resources and larger subscriber bases than we have,
and have been in operation for many years. We also compete in the growing market
of discount telecommunications services including calling cards, prepaid cards,
call-back services, dial-around or 10-10 calling and collect calling services.
In addition, some Internet service providers have begun to
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aggressively enhance their real time interactive communications, focusing
initially on instant messaging, although we expect them to begin to provide
PC-to-phone services.
Internet and IP Telephony Providers. Many companies provide, or are
planning to provide, certain portions of the complete communications solution we
offer, including Net2Phone, Jens Corporation, JFAX.COM, GlocalNet and Poptel.
Traditional Telecommunications Carriers. Several traditional
telecommunications companies, including industry leaders such as AT&T, Sprint,
Deutsche Telekom, MCI WorldCom and Qwest Communications International, have
recently announced their intention to offer enhanced Internet and IP
communications services in both the United States and internationally. All of
these competitors are significantly larger than we are and have:
o substantially greater financial, technical and marketing resources
o larger networks
o a broader portfolio of services
o stronger name recognition and customer loyalty
o well-established relationships with many of our target customers
o an existing user base to which they can cross-sell their services
These and other competitors may be able to bundle services and products
that are not offered by us together with enhanced Internet and IP communications
services, which could place us at a significant competitive disadvantage. Many
of our competitors enjoy economies of scale that can result in lower cost
structure for transmission and related costs, which could cause significant
pricing pressures within the industry.
CARRIER TRANSMISSION SERVICES
We compete with telecommunications providers, long distance carriers and
other long distance resellers and providers of carrier services for our carrier
transmission services. Our primary competitors in providing carrier transmission
services include:
o long distance carriers, including AT&T, MCI WorldCom and Sprint
Corporation
o foreign carriers, including British Telecom, Deutsche Telekom and Nippon
Telegraph and Telephone Corporation
o global telecommunications alliances, including Global One and BT/AT&T
o emerging carriers providing transmission services over the Internet,
including ITXC Corp., iBasis and AT&T Global Clearinghouse
o wholesale carrier providers, including STAR Telecommunications, Inc.,
GRIC Communications and Pacific Gateway Exchange
Competition for carrier traffic is primarily based on price. Decreasing
telecommunications rates have resulted in intense price competition and we
expect that competition will continue to increase significantly as
telecommunications rates decrease. Increased competition could force us to
further reduce our prices and profit margins, and may reduce our market share.
PROPERTIES
We maintain our executive offices at 430 Park Avenue, New York, New York,
occupying approximately 3,000 square feet, which we sub-lease from RSL COM. This
sub-lease extends until June 29, 2001. We pay RSL COM annual rent of $96,000 for
this space.
We lease a 1,184 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem, Israel. The
term of this lease extends until January 31, 2003, with an
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option to extend the lease for an additional five year period. We pay annual
rent of approximately $240,000 plus Israeli value-added tax. We sublease a
portion of our facility to third parties.
Under a services agreement with RSL COM, we share space for employees and
equipment at eight locations with RSL COM. One of these locations is 60 Hudson
Street, New York, New York. This space houses our international gateway and
domestic switches. RSL COM provides these facilities to us at no direct cost.
The services agreement expires September 3, 2004 with automatic extensions for
additional one-year terms unless terminated by one of the parties upon 30 days
notice prior to the end of the term.
EMPLOYEES
As of October 31, 1999, we employed 80 full-time and 10 part-time
employees, of which 74 are located in Israel and 16 are located in New York. We
consider our relationship with our employees to be good. None of our employees
is covered by collective bargaining agreements.
Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are, unless exempt, obligated to perform up to 31 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of the our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business if conditions should change, and no prediction can
be made as to the effect on us of any expansion of such obligations.
LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a suit
against us, RSL COM and an RSL COM subsidiary in the United States District
Court for the Southern District of New York. Aerotel alleges that we are
infringing on a patent issued to Aerotel in November 1987 by making, using,
selling and offering for sale prepaid telephone card products in the United
States. Aerotel seeks an injunction to stop us from using the technology covered
by this patent, monetary damages in an unspecified amount and reimbursement of
attorneys' fees. This litigation was only recently filed and we are presently
evaluating these claims. We believe that we have meritorious defenses to the
claim and we intend to defend the lawsuit vigorously. However, the outcome of
the litigation is inherently unpredictable and an unfavorable result may have a
material adverse effect on our business, financial condition and results of
operations. Regardless of the ultimate outcome, the litigation could result in
substantial expenses to us and significant diversion of efforts by our
managerial and other personnel.
We are not a party to any other material litigation and are not aware of
any other pending or threatened litigation that could have a material adverse
effect on us or our business taken as a whole.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Elie C. Wurtman...................................... 30 Co-founder, Co-Chairman of the Company and Chairman
of the Board of Directors
Amos Sela............................................ 56 Chief Executive Officer, President and Director
Jacob A. Davidson.................................... 30 Co-founder and Co-Chairman of the Company
Mark J. Hirschhorn................................... 35 Vice President and Chief Financial Officer
Noam Bardin.......................................... 28 Co-founder, Vice President of Technology and Chief
Technology Officer
Shimmy Zimels........................................ 34 Vice President of Operations
Dr. Baruch D. Sterman................................ 38 Vice President of Research and Development and
Product Integration
Marc M. Tobin........................................ 33 General Counsel
Avery S. Fischer..................................... 32 Director
Itzhak Fisher........................................ 43 Director
Robert R. Grusky..................................... 42 Nominee Director*
Yadin Kaufmann....................................... 40 Nominee Director*
Jacob Z. Schuster.................................... 50 Director
Donald R. Shassian................................... 44 Director
Nir Tarlovsky........................................ 33 Director
Oakleigh Thorne...................................... 42 Nominee Director*
</TABLE>
- ------------------
* The nominees shall become directors upon closing of this offering.
ELIE C. WURTMAN co-founded our company and has been a co-chairman of our
company since October 1999 and the chairman of our board of directors since
April 1999. Mr. Wurtman was president and chief executive officer of our company
from November 1996 until March 1999 and acting vice president of sales and
marketing for our company from August 1998 to March 1999. Mr. Wurtman has served
as vice president of emerging technologies for RSL COM from April 1998 to May
1999. In November 1995, Mr. Wurtman co-founded Ambient Corporation, Inc., a
company which develops smartcard technology, and was a director of Ambient until
September 1999. Mr. Wurtman co-founded Pioneer Management Corporation, a holding
company involved in several high-tech ventures, and was a director from January
1992 to June 1996.
AMOS SELA has been chief executive officer and a director of our company
since April 1999 and president since October 1999. Prior to joining our company,
Mr. Sela was the director and deputy managing director of ISIS Information
Systems, a leading South African information technology systems integrator,
since September 1991. From 1991 to 1996, Mr. Sela served as vice president of
DCL Technologies Ltd, a company specializing in the growth and management of
high technology start-up companies. From 1983 to 1990, Mr. Sela served as
general manager of Gold Net Ltd., a value-added service provider of information
services. Mr. Sela received a masters in physics and mathematics from Hebrew
University in Jerusalem.
JACOB A. DAVIDSON co-founded our company and has been a co-chairman of our
company since October 1999. Mr. Davidson is not a director of our company. From
April 1999 to October 1999, Mr. Davidson acted as our president. From May 1996
to March 1999, Mr. Davidson served as chairman of the board of our company.
Mr. Davidson co-founded Ambient Corporation and served as its chief executive
officer and its chairman from June 1996 until September 1999. Mr. Davidson
co-founded Pioneer Management Corporation and was the managing director from
January 1992 to June 1996.
MARK J. HIRSCHHORN has been our vice president and chief financial officer
since April 1999. Prior to joining our company, Mr. Hirschhorn served in various
positions at RSL COM, including vice president-finance from August 1997 to May
1999, global controller from January 1996 to May 1999 and assistant secretary
from September 1996 to May 1999. From October 1987 to December 1995,
Mr. Hirschhorn was employed at Deloitte & Touche LLP, most recently as senior
manager.
NOAM BARDIN co-founded our company and has been vice president of
technology and chief technology officer since June 1997. Prior to serving as
vice president, Mr. Bardin served as our global network director from November
1996 to May 1997. From November 1995 to October 1996, Mr. Bardin served as
director of operations for Ambient Corporation. From January 1995 to October
1995, Mr. Bardin worked for several
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Israeli high-tech companies in helping to secure government grants and
assistance. Prior to 1995, Mr. Bardin attended Hebrew University.
SHIMMY ZIMELS has been our vice president of operations since July 1997.
Prior to joining our company, Mr. Zimels was the controller and vice president
of finance of Net Media Ltd., a leading Israeli-based Internet service provider,
from June 1995 to June 1997. From April 1991 to May 1995, Mr. Zimels was a
senior tax auditor for the Income Tax Bureau of the State of Israel.
DR. BARUCH D. STERMAN has been our vice president of research and
development and product integration since May 1998. Prior to joining our
company, Dr. Sterman worked as a consultant for Israeli businesses in database
design, billing systems, and automated data flow from August 1996 to May 1998.
After receiving a doctorate in Physics in June 1993, Dr. Sterman founded a
start-up company, Gal-Or Lasers, that developed a compact laser (of his own
design) for industrial and medical use.
MARC M. TOBIN has been our general counsel since August 1998 and our
corporate secretary since September 1999. Prior to joining our company, Mr.
Tobin served as corporate counsel to Slim Fast Foods Company from October 1991
to July 1998 and assistant corporate secretary from March 1995 to July 1998.
AVERY S. FISCHER has been a director of our company since September 1999
and was the secretary of our company from July 1997 until September 1999.
Mr. Fischer has served as vice president of legal affairs and general counsel of
RSL COM since January 1999 and legal counsel of RSL COM since January 1997. From
1994 to 1997, he was an associate with the law firm of Rosenman & Colin LLP, New
York, New York with a practice concentrating in mergers and acquisitions,
securities and general corporate counseling. From 1993 to 1994, Mr. Fischer was
an associate with the law firm of Shea & Gould, New York, New York, with a
practice concentrating in commercial and securities litigation.
ITZHAK FISHER has been a director of our company since July 1997.
Mr. Fisher was a co-founder of RSL COM and has been a director, president and
chief executive officer of RSL COM since its inception in 1994. From 1992 to
1994, Mr. Fisher served as general manager of Clalcom Inc., a telecommunications
company. From 1990 to 1992, Mr. Fisher served as the special consultant to the
president of BEZEQ, the Israel Telecommunication Corp., Israel's national
telecommunications company. Mr. Fisher co-founded, and was a director, president
and chief executive officer of Medic Media, Inc., a company engaged in the
business of renting telephone and television systems in hospitals throughout
Israel.
ROBERT R. GRUSKY has been appointed a director of our company effective
upon closing of this offering. Mr. Grusky has been President of RSL Investments
Corporation since April 1998 and Senior Advisor to Ronald S. Lauder since April
1997. From 1985 to 1997, Mr. Grusky was at Goldman, Sachs & Co. as a member of
its mergers and acquisitions department and later in its principal investment
area. In 1990, Mr. Grusky took a one-year leave of absence during which he was
appointed a White House Fellow by President Bush and served as Assistant to the
then Secretary of Defense Dick Cheney. He is a director of Central European
Media Enterprises, Ltd., ITI Holdings, S.A. and an advisory director of Tinicum
Capital Partners, L.P. He is also a member of the Board of Trustees of the
Hackley School and The Multiple Myeloma Foundation.
YADIN KAUFMANN has been appointed director of our company effective upon
the closing of this offering. Mr. Kaufmann is a co-founder of MainXchange Ltd.
and has served as its chairman from February 1997 until the present and as its
chief executive officer from February 1997 until January 1999. In 1990,
Mr. Kaufmann co-founded Veritas Venture Capital Management Ltd., a venture fund
that invests primarily in early-stage technology companies in Israel, and has
since 1990 been its co-managing director. From 1987 until 1995, he was involved
in the management of Athena Venture Partners, and from 1986 until 1987 he was an
associate at the law firm Herzog, Fox & Ne'eman. Mr. Kaufmann currently serves
on the Board of Directors of Carmel Biosensors Ltd.
JACOB Z. SCHUSTER has been a director of our company since May 1999. He has
been a director, executive vice president and assistant secretary of RSL COM
since 1994. Mr. Schuster served as treasurer of RSL COM from 1994 through 1998,
and was chief financial officer from February 1997 until December 1998.
Mr. Schuster has been president and treasurer of RSL Management Corporation
since November 1995 and executive vice president of RSL Investments Corporation
since March 1994. From 1986 to 1992, Mr. Schuster was a general partner and
treasurer of Goldman Sachs and has been a limited partner since 1992.
DONALD R. SHASSIAN has been a director of our company since May 1999. Mr.
Shassian has served as chief operating officer of RSL COM since August 1999, and
he has served as executive vice president, chief financial officer and treasurer
of RSL COM since January 1999. From 1993 through 1998, Mr. Shassian served as
senior vice
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president and chief financial officer of Southern New England
Telecommunications. From 1988 through 1993, Mr. Shassian served as a partner of
Arthur Andersen LLP, providing audit and business advisory services to companies
in the telecommunications industry. In 1992, Mr. Shassian was named the
partner-in-charge of Arthur Andersen's telecommunications industry practice
group for North America.
NIR TARLOVSKY has been a director of our company since July 1997.
Mr. Tarlovsky has served as the vice president of business development of RSL
COM since April 1995, and was a director of RSL COM from April 1995 until March
1997. Mr. Tarlovsky is also vice president of RSL COM North America, Inc., a
subsidiary of RSL COM. From 1992 to March 1995, Mr. Tarlovsky served as senior
economist of Clalcom. While at Clalcom, he was responsible for the development
of new international telecommunications ventures. Mr. Tarlovsky is also a
director of Telegate, a German operator services company.
OAKLEIGH THORNE has been appointed director of our company effective upon
closing of this offering. Since October 1996, Mr. Thorne has served as the
chairman and chief executive officer of TBG Information Investors, LLC, a
private equity partnership, and as the co-president of Blumenstein/Thorne
Information Partners I, L.P., a private equity partnership. He was president and
chief executive officer of Commerce Clearing House, a provider of tax and
business law information, software and services from April 1995 to August 1996,
and the executive vice president of Commerce Clearing House from January 1991 to
April 1995. Since March 1998, Mr. Thorne has been a director of Medscape, a
web-based healthcare company. He also serves as the chairman of the board of SCP
Communications.
DIRECTOR COMPENSATION
We do not pay our directors cash compensation. Directors are reimbursed for
the expenses they incur in attending meetings of the board or board committees.
Each director who is not our employee will be eligible to receive options to
purchase 24,848 shares of common stock upon completion of this offering, with an
exercise price equal to the initial public offering price. Under our 1999
Directors Plan, each non-employee director will be eligible to receive on an
annual basis options to purchase 10,000 shares of common stock with an exercise
price equal to the fair market value on the date of grant. See "1999 Directors'
Plan."
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to or upon the completion of this offering, our board of directors
will create an executive committee, a compensation committee and an audit
committee.
We expect that our executive committee will be composed of at least three
directors. The executive committee will have such powers and duties as shall be
determined by the board of directors.
We expect that our compensation committee will be composed of three
directors, including at least two independent directors, to be appointed prior
to or soon after completion of this offering. The compensation committee will
have the authority to evaluate our compensation policies, determine our
executive compensation policies and guidelines and administer our stock option
and compensation plans.
We expect that our audit committee will be composed of three directors to
be appointed prior to or soon after completion of this offering. The audit
committee will be charged with the following responsibilities:
o recommending the engagement of independent accountants to audit our
financial statements
o discussing the scope and results of the audit with our independent
accountants
o reviewing the functions our management and our independent accountants
pertaining to our financial statements
o performing such other related duties and functions as are deemed
appropriate by the audit committee and the board of directors
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation decisions in 1998 were made by RSL COM's
compensation committee, in the case of Mr. Wurtman and Mr. Davidson, and by
Mr. Wurtman and Mr. Davidson, with our board's approval, in the case of
Mr. Bardin. Following the closing of this offering, our compensation committee
will make all compensation decisions regarding our executive officers. In 1998
no interlocking relationship existed between our board of directors and the
board of directors or compensation committee of any other company, except that
Messrs. Wurtman and Davidson were directors of Ambient, the board of which makes
all compensation decisions for Ambient. Mr. Davidson was also Ambient's chief
executive officer. See "Related Party Transactions--Ambient."
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EXECUTIVE COMPENSATION
In 1998, RSL COM paid the compensation of our executive officers listed
below other than Mr. Bardin. In addition, during 1998, RSL COM employed
Mr. Hirschhorn, our current chief financial officer, as vice president of
finance of RSL COM, and in that position, Mr. Hirschhorn provided financial
services to us.
The following table sets forth information concerning the compensation
during the year ended December 31, 1998 for our then chief executive officer and
the other most highly compensated executive officers of the Company whose total
salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1998 ANNUAL
COMPENSATION ($)
----------------------- LONG-TERM ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY ($) BONUS ($) COMPENSATION COMPENSATION ($)
------------------------------ ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Elie Wurtman, president and chief executive officer(2).... 153,000 162,500 -- --
Jacob Davidson, chairman of the board (2)................. 81,250 81,250 -- --
Noam Bardin, chief technology officer..................... 120,000 10,000 -- --
</TABLE>
- ------------------
(1) The positions stated are those held by the named executive officers in 1998.
(2) Mr. Wurtman and Mr. Davidson were paid by RSL COM.
OPTION GRANTS IN LAST FISCAL YEAR
Neither we nor RSL COM granted options or stock appreciation rights to the
named executive officers in 1998.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no option exercises by our named executive officers in 1998. The
following table sets forth information for the named executive offices with
respect to restricted units held as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
RESTRICTED UNITS AT RESTRICTED UNITS AT
YEAR END (#) YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE ($) EXERCISABLE
NAME ON EXERCISE (#) REALIZABLE /UNEXERCISABLE(1) /UNEXERCISEABLE(2)
---- --------------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C>
Elie Wurtman................................... -- -- --/-- --/--
Jacob Davidson................................. -- -- --/-- --/--
Noam Bardin.................................... -- -- 248,483/0 514,360/0
</TABLE>
- ------------------
(1) The number of securities was calculated based on our decision to exchange
the vested restricted units on a one-for-one basis for shares of our common
stock effective upon closing of this offering.
(2) Value was calculated using a $2.08 per unit value based on the price paid by
RSL COM to acquire 30% of our outstanding share capital in 1998 and a
nominal exercise price.
STOCK OWNERSHIP OF OUR DIRECTORS AND EXECUTIVE OFFICERS
None of our executive officers or directors currently own any of our
capital stock. However, four of our executive officers hold an aggregate of
385,148 restricted units granted under the RSL COM 1997 stock incentive plan
described below with an exercise price of $0.004. In addition, in April 1999 we
granted options to purchase an aggregate of 1,076,761 shares of common stock at
an exercise price of $5.11 per share to Messrs. Sela, Wurtman, Davidson,
Hirschhorn, Bardin and Zimels, executive officers of our company. We
55
<PAGE>
also intend to grant options to purchase 24,848 shares of our common stock to
each of our directors who are not our employees under our proposed 1999
Directors' Plan. In addition, we expect that our executive officers, directors
and employees and RSL COM employees will be offered the opportunity to purchase
shares of our common stock at the initial public offering price in this offering
from the shares reserved for employees and directors of our company and RSL COM.
The following table sets forth information for our directors and executive
officers with respect to the options or restricted units they hold.
<TABLE>
<CAPTION>
VALUE OF
SHARES TO BE UNEXERCISED
PURCHASED PURSUANT TO IN-THE-MONEY
OPTIONS/RESTRICTED EXERCISE OPTIONS/RESTRICTED
DIRECTOR/OFFICER UNITS PRICE UNITS*
- ---------------- --------------------- ---------- ------------------
<S> <C> <C> <C>
Elie Wurtman............................................... 165,656 $ 5.11 $1,141,370
Amos Sela.................................................. 273,332 5.11 1,883,257
Jacob Davidson............................................. 115,959 5.11 798,958
Mark Hirschhorn............................................ 173,938 5.11 1,198,432
Noam Bardin................................................ 173,938/248,483 5.11/.004 4,179,234
Shimmy Zimels.............................................. 173,938/86,969 5.11/.004 2,241,712
Baruch Sterman............................................. 24,848 .004 298,077
Marc Tobin................................................. 24,848 .004 298,077
Itzhak Fisher.............................................. 24,848 12.00* --
Nir Tarlovsky.............................................. 24,848 12.00* --
Donald Shassian............................................ 24,848 12.00* --
Jacob Schuster............................................. 24,848 12.00* --
Yadin Kaufmann............................................. 24,848 12.00* --
Robert Grusky.............................................. 24,848 12.00* --
Avery Fischer.............................................. 24,848 12.00* --
Oakleigh Thorne............................................ 24,848 12.00* --
</TABLE>
- ------------------
* Based on an initial public offering price of $12.00 per share, the mid-point
of the estimated price range.
We have adopted a policy to encourage all of our executive officers and
directors not to sell in excess of 50% of their holdings in us while they are
our employees or directors, except for personal estate planning or tax purposes.
STOCK OPTION INFORMATION; RSL COM 1997 STOCK INCENTIVE PLAN
Historically, we have not had a stock option plan. As of September 30, 1999
1,121,324 RSL COM restricted units granted to our employees were outstanding. Of
these, 836,147 restricted units granted in 1997 and 1998 have an exercise price
of $0.004; 189,262 restricted units granted in 1998 have an exercise price of
$2.08; and 95,915 restricted units granted in April 1999 have an exercise price
of $5.11. These restricted units were originally redeemable for shares of RSL
COM or cash (at RSL COM's discretion) based on the value of RSL COM attributable
to us. The restricted units generally vest over three-year periods and must be
redeemed by the employee before the seventh anniversary of their date of grant.
In connection with the offering, as of September 30, 1999, we committed to
exchange shares of our common stock or options to purchase shares of our common
stock for restricted units held, as follows:
(1) To holders of restricted units that have vested, we will issue
restricted shares of our common stock on a one-for-one basis, to be issued
under our 1999 Stock Incentive Plan upon payment of the related exercise
price; these restricted shares will fully vest 180 days after completion of
this offering.
(2) To holders of restricted units that have not yet vested, we will
issue options to purchase our common stock on a one-for-one basis; these
options will also be issued under our 1999 Stock Incentive Plan and will
have the same exercise price (adjusted for our 2.48-for-one stock split)
and vesting schedules as the RSL COM restricted units.
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<PAGE>
If all holders of restricted units exchange their restricted units for
shares of common stock or options to purchase common stock, then we will issue
748,288 restricted shares of common stock and options to purchase 372,976 shares
of common stock, in connection with this exchange.
1999 STOCK INCENTIVE PLAN
We expect to adopt a stock incentive plan prior to the completion of this
offering. The purpose of the plan is to foster and promote the long-term
financial success of our company and materially increase shareholder value by
(a) motivating superior performance by means of performance-related incentives,
(b) encouraging and providing for the acquisition of an ownership interest in
our company by executive officers, other employees and consultants and
(c) enabling us to attract and retain the services of an outstanding management
team upon whose judgment, interest and effort the successful conduct of our
operations is largely dependent.
GENERAL. The plan provides for the grant of (i) incentive stock options
and non-incentive stock options to purchase our common stock; (ii) stock
appreciation rights, which may be granted in tandem with or independently of
stock options; (iii) restricted stock and restricted units; (iv) incentive stock
and incentive units; (v) deferred stock units; and (vi) stock in lieu of cash.
We have reserved 4,000,000 shares of our common stock for issuance upon exercise
of awards to be granted under the plan.
ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors. This
committee will be made up of at least two directors who are not our employees
and whose membership on the committee (i) does not adversely impact our ability
to deduct compensation payments made under the plan and (ii) will permit
recipients of awards to avail themselves of exemptions under federal securities
laws.
ELIGIBILITY AND EXTENT OF PARTICIPATION. The plan provides for
discretionary grants of awards to officers of the company within the meaning of
Rule 16a-1(f) of the Exchange Act and to other employees and consultants of the
company. Directors who are non-employees are prohibited from participating in
the plan. The maximum number of shares for which options or stock appreciation
rights may be granted to any one participant in a calendar year is 600,000 of
the shares of common stock available under the plan.
STOCK OPTIONS. Under the plan, the committee may grant both incentive and
non-incentive stock options for common stock of the company. The options
generally will have a term of seven years and will become exercisable in three
equal installments commencing on the first anniversary of the date of grant. The
purchase price per share payable upon exercise of an option will be established
by the committee; provided, however, that such option exercise price may be no
less than the fair market value of a share of our common stock on the date of
grant (or 110% of the fair market value, in the case of incentive stock option
grants to persons holding more than 10% of voting power of all classes of our
capital stock). The option exercise price is payable by one of the following
methods or a combination of methods to the extent permitted by the committee:
(i) in cash or its equivalent, or (ii) subject to the approval of the committee,
in shares of common stock owned by the participant for at least six months prior
to the date of exercise. The committee may provide that a participant who
delivers shares of common stock to exercise an option when the market value of
the common stock exceeds the exercise price of the option will be automatically
granted reload options for the number of shares delivered to exercise the
option. Reload options will be subject to the same terms and conditions as the
related option except that the exercise price will be the fair market value on
the date the reload option is granted and such reload option will not be
exercisable for six months.
STOCK APPRECIATION RIGHTS. The committee may grant stock appreciation
rights in tandem with or independently of a stock option. Stock appreciation
rights entitle the participant to receive the excess of the fair market value of
a stated number of shares of common stock on the date of exercise over the base
price of the stock appreciation right. The base price may not be less than 100%
of the fair market value of the common stock on the date the stock appreciation
right is granted. The committee will determine when a stock appreciation right
is exercisable, the method of exercise, and whether settlement of the stock
appreciation right is to be made in cash, shares of common stock or a
combination of cash and shares.
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RESTRICTED STOCK AND RESTRICTED UNITS. The committee may grant awards in
the form of restricted stock and restricted units. For purposes of the plan,
restricted stock is an award of common stock and a restricted unit is a
contractual right to receive common stock (or cash based on the fair market
value of common stock). Such awards are subject to such terms and conditions, if
any, as the committee deems appropriate. Unless otherwise determined by the
committee, participants are entitled to receive either currently or at a future
date, dividends or other distributions paid with respect to restricted stock
and, if and to the extent determined by the committee, either to be credited
with or receive currently an amount equal to dividends paid with respect to the
corresponding number of shares covered by restricted units. Restricted stock and
restricted units become vested and nonforfeitable and the restricted period
shall lapse upon the third anniversary of the date of grant unless the committee
determines otherwise.
INCENTIVE STOCK AND INCENTIVE UNITS. The plan allows for the grant of
awards in the form of incentive stock and incentive units. For purposes of the
plan, incentive stock is an award of common stock and an incentive unit is a
contractual right to receive common stock. Such awards will be contingent upon
the attainment, in whole or in part, of certain performance objectives over a
period to be determined by the committee. With regard to a particular
performance period, the committee has the discretion, subject to the plan's
terms, to determine the terms and conditions of such awards, including the
performance objectives to be achieved during such period and the determination
of whether and to what degree such objectives have been attained. Unless
otherwise determined by the committee, participants are entitled to receive,
either currently or at a future date, all dividends and other distributions paid
with respect to the incentive stock and, if and to the extent determined by the
committee, either to be credited with or receive currently an amount equal to
dividends paid with respect to the corresponding number of shares covered by the
incentive units.
ELECTIVE UNITS. On such date or dates established by the committee and
subject to such terms and conditions as the committee will determine, a
participant may be permitted to defer receipt of all or a portion of his annual
compensation and/or annual incentive bonus ("deferred annual amount") and
receive the equivalent amount in elective stock units based on the fair market
value of the common stock on the date of grant. To the extent determined by the
committee, a participant may also receive supplemental stock units for a
percentage of the deferred annual amount. On the date of a participant's
termination of employment, the participant will receive a number of shares of
common stock equal to the number of elective units and supplemental units held
on that date. Elective units carry no voting rights until the shares have been
issued. The committee will determine whether any dividend equivalents
attributable to elective units are paid currently or credited to the
participant's account and deemed reinvested in common stock. Elective units and
dividend equivalents with respect to the elective units are fully vested at all
times. Unless the committee provides otherwise, supplemental units and dividend
equivalents with respect to the supplemental units will become fully vested on
the third anniversary of the date the corresponding deferred amount would have
been paid.
STOCK IN LIEU OF CASH. The plan authorizes the committee to grant awards
of common stock to executive officers in lieu of all or a portion of an award
otherwise payable in cash pursuant to any bonus or incentive compensation plan
of the company, based on the fair market value of the common stock.
AMENDMENT AND TERMINATION. No awards may be granted under the plan after
the expiration of ten years from the date of the plan's adoption. The board of
directors or the committee may amend, suspend or terminate the plan or any
portion of it at any time. However, no amendment may be made to the plan without
shareholder approval if such amendment would (1) increase the number of shares
of common stock subject to the plan, (2) change the price at which options may
be granted, or (3) remove the administration of the plan from the committee.
1999 PERFORMANCE INCENTIVE PLAN
We expect to adopt a performance incentive plan prior to the completion of
this offering. The purpose of the plan is to assist the company and its
subsidiaries to attract, retain, motivate and reward the best qualified
executive officers and key employees by providing them with the opportunity to
earn competitive compensation directly linked to our performance.
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<PAGE>
GENERAL. Under the plan, bonuses are payable if we meet any one or more of
several performance criteria, which are to be set annually by the committee,
after receipt of the proposed annual budget for the coming year from management.
It is expected that proposed performance criteria for the coming year will be
presented by management in the fourth quarter of the current year and approved
not later than March 31 of the next year. It is expected that the period over
which performance is to be measured will be one year.
The committee shall determine whether bonuses payable under the plan will
be paid in cash, shares of common stock or in any combination thereof, provided
that not less than 50% of any bonus shall be in cash. No more than 400,000
shares common stock may be issued under the plan.
ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors. This
committee will be made up of directors who are not our employees and whose
membership on the committee (i) does not adversely impact our ability to deduct
compensation payments made under the plan and (ii) will permit recipients of
awards to avail themselves of exemptions under federal securities laws. The
committee will establish the performance targets and certify whether such
performance targets have been achieved.
BONUS. Bonus amounts are determined as follows: if 100% of the
pre-established targets are achieved, participants will generally be eligible to
receive a bonus equal to their base salary for such year. If 120% of such
targets are achieved, the bonus potentially payable to participants will
generally equal twice their base salary for such year and, if 80% of such
targets are achieved, the bonus potentially payable to participants will
generally equal 25% of their base salary for such year. To the extent our
results exceed 80% of the targets but is less than 120% of the targets, the
amount of the bonus payable to participants will be adjusted proportionately
based on where such results fall within the ranges set forth above.
Once eligibility has been determined, a bonus, if applicable, will consist
of two components. Fifty percent of the amount determined pursuant to the
formula described above will be payable if the targets are achieved. Up to an
additional 50% of such amount will be payable in the discretion of the
committee. In addition, the plan permits the committee to grant discretionary
bonuses to participants, notwithstanding that a bonus would not otherwise be
payable under the plan, to recognize extraordinary individual performance.
ELIGIBILITY. Each executive officer of the company and each key employee
who is recommended by the chief executive officer and selected by the committee
and approved by the board of directors is eligible to receive a bonus under the
plan.
OTHER TERMS. No plan participant may receive a bonus with respect to any
plan year in excess of $1,000,000. The committee may impose conditions with
respect to an award of common stock, including conditioning the vesting of
shares on the performance of additional service. The committee may permit a
participant to receive all or a portion of his bonus payable in common stock. If
a participant's employment terminates prior to the completion of performance
period, the committee shall determine whether a prorated bonus may be paid to
such a participant. In addition, the plan permits a participant to elect to
defer payment of his or her bonus on terms and conditions established by the
committee.
AMENDMENT AND TERMINATION. Either the board of directors or the committee
may amend, suspend, discontinue or terminate the plan, provided that, unless the
board determines otherwise, any amendment or termination of the plan that
requires stockholder approval will not be effective until stockholder approval
is obtained.
1999 EMPLOYEE STOCK PURCHASE PLAN
We expect to adopt an employee stock purchase plan prior to the completion
of this offering. The purpose of the employee stock purchase plan is to align
employee and shareholder long-term interests by facilitating the purchase of
common stock by employees and to enable employees to develop and maintain
significant ownership of common stock.
GENERAL. The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code, and to assure the
participants of the tax advantages provided
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<PAGE>
thereby. The number of shares of our common stock available for issuance under
the employee stock purchase plan is limited to 1,350,000 shares of common stock.
ADMINISTRATION. The employee stock purchase plan will be administered by a
committee established by the board of directors. The committee may make such
rules and regulations and establish such procedures for the administration of
the employee stock purchase plan as it deems appropriate.
ELIGIBILITY. All employees of the company and its designated subsidiaries
who have at least one year of service and work more than 20 hours per week and
five months in a calendar year will be eligible to participate in the employee
stock purchase plan, except that employees who are "highly compensated" within
the meaning of Section 414(q) of the Code and employees who are five percent or
more stockholders of the company or any parent or subsidiary of the company will
not be eligible to participate.
GRANTS. Pursuant to the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of common stock up to two times
per calendar year through regular payroll deductions in an aggregate amount
equal to 1% to 10% of the employee's base pay, as elected by the employee, for
each payroll period. Under the employee stock purchase plan, a participant's
right to purchase shares of common stock may not accrue at a rate that exceeds
$25,000 of fair market value of common stock during any calendar year.
OFFERING PERIOD; PURCHASE PERIOD. The initial offering period will
commence on the first trading day on or after the effective date of the employee
stock purchase plan and end on the last trading day on or prior to the second
anniversary of the commencement date. Each subsequent offering period will have
a duration of approximately one year, commencing on the first trading day and
ending on the last trading day of each calendar year (commencing with calendar
year 2001). Each "purchase period" will have a duration of approximately six
months.
EXERCISE PRICE. As of the last day of each "purchase period" ending within
an "offering period," participating employees will be able to purchase shares of
common stock with payroll deductions for a purchase price equal to the lesser
of:
o 85% of the fair market value of common stock on the date the offering
period begins and
o 85% of the fair market value of common stock on the last day of the
purchase period.
A right to purchase shares which is granted to a participant under the
employee stock purchase plan is not transferable otherwise than by will or the
laws of descent and distribution.
1999 DIRECTORS' PLAN
We expect to adopt a directors' stock compensation plan prior to the
completion of this offering. The purposes of the directors' plan are to enable
us to attract, maintain and motivate qualified directors and to enhance a
long-term mutuality of interest between our directors and shareholders of our
common stock by granting our directors options to purchase our shares.
Under the directors' plan, on the first business day following each annual
meeting of our shareholders during the term of the directors' plan, each
director who is not an employee of our company will be granted options to
acquire 10,000 shares of our common stock with an exercise price per share equal
to the fair market value of a share of our common stock on the date of grant.
These options will have a seven-year term and will become exercisable on the
first anniversary of the date of grant. In addition, each director who is not an
employee of our company on the date of the completion of this offering will be
granted options to acquire 24,848 shares of our common stock with an exercise
price per share equal to the initial public offering price. Each individual who
becomes a director and is not an employee of our company following completion of
this offering will be granted options to acquire 24,848 shares of common stock
with an exercise price per share equal to the fair market value on the date of
grant. These options will have a seven-year term and will be immediately
exercisable, but if exercised, subject to the 180-day lock-up to be imposed on
our officers and directors. The maximum number of shares that may be issued
under the directors' plan is 600,000. The plan will terminate December 31, 2009,
unless sooner terminated by our stockholders.
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EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Sela, Hirschhorn,
Wurtman, Davidson, Bardin and Zimels, each with the following principal terms:
o The agreement is effective as of April 1, 1999 and will end on March 31,
2002.
o The employee is entitled to receive a base salary as stated below,
increased on each January 1, commencing January 1, 2001, by an amount
equal to his base salary then in effect, multiplied by the applicable
cost of living index during the prior year. The employee's base salary,
as adjusted for cost of living increases, may be further increased at the
option and in the discretion of the board of directors.
o The employee shall be granted options to purchase shares of our common
stock as set forth below, under our proposed 1999 Stock Incentive Plan,
at an exercise price of $5.08 per share. The employee's options are
exercisable in installments, as long as the employee is employed by us on
the applicable
o vesting date, and after an option is exercisable, that option remains
exercisable until the expiration of seven years from the date of the
agreement. If the employee is terminated for any reason prior to
September 30, 2000, following such date, any unvested options will
expire. If the employee is terminated for cause, following such date, all
options will expire. In the case of Messrs. Sela, Hirschhorn, Bardin and
Zimels, the options are exercisable in three equal installments on each
of April 1, 2000, 2001 and 2002. In the case of Messrs. Wurtman and
Davidson, 50% of the options are exercisable on April 1, 2000 and the
remaining options are exercisable in two equal installments on each of
April 1, 2001 and April 1, 2002.
o The employee's options are immediately exercisable in full upon a change
of control. The employee's options, following any termination of the
employee's employment, other than for cause, remain exercisable for the
lesser of two years and the remaining term of his options.
o If the employee's employment is terminated by us without cause or by the
employee for good reason, the employee is entitled to receive previously
earned but unpaid salary, vested benefits and a payment equal to his base
salary as in effect immediately prior to the termination date.
o If the employee dies or is unable to perform his duties, he or his
representative or estate or beneficiary will be paid, in addition to any
previously earned but unpaid salary and vested benefits, 12 months' total
base salary reduced, in the case of disability, by any disability
benefits he receives.
The following table sets forth the position, base salary and number of
shares of common stock represented by the options granted for each of Messrs.
Wurtman, Sela, Davidson, Hirschhorn, Bardin and Zimels, pursuant to their
respective employment agreements:
<TABLE>
<CAPTION>
OPTIONS TO
PURCHASE
SHARES OF
POSITION BASE SALARY COMMON STOCK
-------- ----------- ------------
<S> <C> <C> <C>
Elie C. Wurtman......................... Co-Chairman of the Company and Chairman $ 180,000(1) 165,656
of the Board of Directors
Amos Sela............................... Chief Executive Officer and President $ 230,000 273,332
Jacob A. Davidson....................... Co-Chairman of the Company $ 180,000(1) 115,959
Mark J. Hirschhorn...................... Vice President and Chief Financial $ 200,000 173,938
Officer
Noam Bardin............................. Vice President of Technology and Chief $ 170,000 173,938
Technology Officer
Shimmy Zimels........................... Vice President of Operations $ 170,000 173,938
</TABLE>
- ------------------
(1) Messrs. Wurtman and Davidson will devote 50% of their time to us beginning
on April 1, 2000 and their base salaries will at that time be reduced to
$90,000 each.
Following RSL COM's purchase of Mr. Davidson's and Mr. Wurtman's interests
in us in July 1997, they entered into employment agreements with RSL COM dated
July 1997. These agreements terminated at the end of March 1999. They entered
into new employment agreements with us as of April 1, 1999.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of our Class B common stock and common stock as of
October 20, 1999 and as adjusted to reflect the sale of the shares of common
stock offered under this prospectus, including shares offered in exchange for
RSL COM restricted units, and the beneficial ownership of shares of the capital
stock of RSL COM as of October 20, 1999 by:
o each person who we know owns beneficially more than 5% of our common
stock
o each of our directors individually
o each of our named executive officers individually
o all of our executive officers and directors as a group
The information in the table assumes the underwriters do not exercise their
option to purchase additional shares.
Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their shares of common stock.
Each person listed below disclaims beneficial ownership of their shares, except
to the extent of their pecuniary interests therein. Shares of common stock that
an individual or group has the right to acquire within 60 days of October 20,
1999 pursuant to the exercise of options are deemed to be outstanding for the
purpose of computing the percentage ownership of such person or group, but are
not deemed outstanding for the purpose of calculating the percentage owned by an
other person listed.
<TABLE>
<CAPTION>
SHARES OF DELTATHREE.COM
CAPITAL STOCK
BENEFICIALLY OWNED(1) SHARES OF RSL COM
------------------------------------------------ CAPITAL STOCK
PERCENTAGE VOTING POWER BENEFICIALLY OWNED(2)
------------------ ------------------ ----------------------------------
BEFORE AFTER BEFORE AFTER VOTING
NUMBER OFFERING OFFERING OFFERING OFFERING NUMBER PERCENTAGE POWER
---------- -------- -------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
RSL Communications, Ltd.
767 Fifth Avenue
Suite 4300,
New York, New York 10153............... 19,569,459 94.0% 73.6% 99.4% 96.5% -- --% --%
Ronald S. Lauder
c/o RSL Communications, Ltd. (3)....... 19,569,459 94.0 73.6 99.4 96.5 16,447,636(11) 29.7 57.6
CNET Investments, Inc.
150 Chestnut Street
San Francisco, California 94111........ 1,551,971(4) 7.3 5.7 * * -- -- --
DIRECTORS AND EXECUTIVE OFFICERS:
Itzhak Fisher(5)......................... -- -- (10) -- * 3,310,481(12) 6.0 11.5
Nir Tarlovsky(5)......................... -- -- (10) -- * 791,058(13) 1.4 *
Donald R. Shassian(5).................... -- -- (10) -- * 18,000(14) * *
Jacob Z. Schuster(5)..................... -- -- (10) -- * 1,689,404(15) 3.1 6.0
Yadin Kaufmann(6)........................ -- -- (10) -- * 1,000(16) * *
Robert R. Grusky(6)...................... -- -- (10) -- * 4,500(17) * *
Avery S. Fischer(5)...................... -- -- (10) -- * 5,980(18) * *
Oakleigh Thorne(6)....................... -- -- (10) -- * -- -- --
Elie C. Wurtman(7)....................... -- -- -- -- -- -- -- --
Jacob A. Davidson(7)..................... -- -- -- -- -- -- -- --
Noam Bardin(7)(8)........................ -- -- * * * 10,000(19) * *
All Directors and Executive Officers as a
group (fifteen persons)(9)(10)......... -- -- 2.1 * * 5,830,423 10.6 17.9
</TABLE>
- ------------------
* Less than 1%.
(1) Before this offering our outstanding share capital consists of
(a) 19,569,459 shares of Class B common stock, (b) 167,238 shares of common
stock issued to Yahoo! (including a warrant to purchase 41,963 shares of
common stock, assuming a cashless exercise) and (c) 1,085,943 shares of
common stock issued to CNET (excluding a warrant to purchase 466,028 shares
of common stock), and after this offering, unless otherwise indicated, our
outstanding share capital consists of (a) 19,569,459 shares of Class B
common stock and
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
(b) 7,001,469 shares of common stock (which includes shares of common stock
issued to Yahoo! and CNET, 41,963 shares of common stock issued to Yahoo!
upon a cash-less exercise of a warrant and 748,288 shares issued in
exchange for RSL restricted units that had vested).
(2) RSL COM's outstanding share capital consists of 24,267,283 shares of
Class B common stock and 30,591,975 shares of Class A common stock. Shares
of Class B common stock of RSL COM are convertible at any time into shares
of Class A common stock of RSL COM for no additional consideration on a
share-for-share basis. Shares of Class A common stock of RSL COM are
entitled to one vote for each share and shares of Class B common stock of
RSL COM are entitled to 10 votes for each share.
(3) Ronald S. Lauder, together with a number of entities, including entities
formed for the benefit of charities and members of his family, own shares
of RSL COM's capital stock that enable him to vote more than 50% of RSL
COM's capital stock. As a result, he may be deemed to be the beneficial
owner of our capital stock owned by RSL COM. Mr. Lauder disclaims
beneficial ownership of these shares.
(4) Includes a warrant to purchase 466,028 shares of common stock.
(5) The address for the director listed is c/o RSL Communications, Ltd.
(6) Each of these is a nominee director, who will become directors upon closing
of this offering. The address for Mr. Grusky is c/o RSL Management
Corporation, 767 Fifth Avenue, New York, NY 10153. The address for
Mr. Kaufmann is 91 Medinat Hayehudim St., Herzlia Pituach 46120, Israel.
The address for Mr. Thorne is P.O. Box 871, Lake Forest, IL 60045.
(7) The address for director or executive officer listed is c/o us.
(8) Mr. Bardin holds 248,483 RSL COM restricted units that will be exchanged
for 248,483 shares of our common stock upon completion of this offering.
(9) Four of our sixteen directors and executive officers collectively hold
385,148 RSL COM restricted units that will be exchanged for 385,148 shares
of our common stock upon completion of this offering.
(10) On completion of this offering, we will issue to each of our seven
directors who is not an employee of our company options to purchase 24,848
shares of our common stock at an exercise price equal to the initial public
offering price. If exercised, the shares issued would represent less than
1% of our outstanding share capital.
(11) Consists of (a) 502,336 shares of Class A common stock of RSL COM,
(b) 15,481,527 shares of Class B common stock, (c) 3,873 shares of Class A
common stock issuable upon exercise of an equal number of currently
exercisable options granted to Mr. Lauder under RSL COM's 1997 Directors'
Compensation Plan and (d) 459,900 shares issuable upon exercise of a
warrant issued to Mr. Lauder. The shares of Class B common stock consist
of: (a) 9,496,295 shares owned by RSL Investments Corporation, a
corporation wholly owned by Mr. Lauder, (b) 1,814,579 shares owned by
EL/RSLG Media, of which The 1995 Estee Lauder RSL Trust, of which Mr.
Lauder is a trustee and the beneficiary is a 50% shareholder, (c) 907,290
shares owned by RAJ Family Partners, of which Mr. Lauder is a limited
partner and a shareholder of the general partner, and (d) 3,428,363 shares
owned directly by Mr. Lauder.
(12) Consists of (a) 177,839 shares of Class A common stock of RSL COM and
(b) 3,132,642 shares of Class B common stock of RSL COM owned by Fisher
Investment Partners, L.P., of which Mr. Fisher is the sole general partner
and the Fisher 1997 Family Trust is the sole limited partner. Mr. Fisher
disclaims beneficial ownership of these shares.
(13) Consists of (a) 718,915 shares of Class A common stock of RSL COM owned by
Tarlovsky Investment Partners, of which Mr. Tarlovsky is the sole general
partner and the Tarlovsky 1997 Family Trust is the sole limited partner and
(b) 72,143 shares of Class A common stock issuable upon exercise of an
equal number of currently exercisable options granted to Mr. Tarlovsky
under RSL COM's 1997 Stock Incentive Plan.
(14) Represents 18,000 shares of Class A common stock of RSL COM.
(15) Consists of (a) 1,189 shares of Class A common stock owned directly by Mr.
Schuster, (b) 41,656 shares of Class A common stock owned by Schuster
Family Partners, of which Mr. Schuster is the sole general partner and the
limited partners are some of his children, and (c) 1,646,559 shares of
Class B common stock owned by Schuster Family Partners. Mr. Schuster
disclaims beneficial ownership of the shares owned by Schuster Family
Partners.
(16) Represents 1,000 shares of Class A common stock of RSL COM.
(17) Represents 4,500 shares of Class A common stock of RSL COM.
(18) Represents 5,980 shares of Class A common stock of RSL COM.
(19) Represents 10,000 shares of Class A common stock of RSL COM.
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<PAGE>
RELATED PARTY TRANSACTIONS
AMBIENT
In January 1998, we entered into a cooperation agreement with Ambient
Corporation, a public company founded by Elie Wurtman, a co-chairman of our
company and chairman of the board and Jacob Davidson, a co-chairman of our
company. Mr. Wurtman was a director of Ambient until September 1999.
Mr. Davidson was chief executive officer and chairman of Ambient from June 1996
until September 1999. Mr. Davidson owns a 7% interest in Ambient. Under the
cooperation agreement, we provided them with office services for approximately
$1,000 per month. We also rented approximately 150 square meters of our facility
in Jerusalem, Israel to Ambient. In addition, Ambient rented approximately 675
square feet of office space to us before we moved into our new facilities in
Jerusalem for a total of approximately $13,500. The cooperation agreement and
the sub-lease to Ambient were terminated as of September 1, 1999.
RSL COM
On July 23, 1997, RSL COM acquired 51% of our outstanding share capital.
From that date through March 31, 1998, RSL COM continued to purchase additional
shares from our other stockholders. On March 31, 1998, we entered into a merger
agreement with RSL COM and our remaining minority stockholders. Pursuant to the
agreement, we merged with and into a newly formed wholly-owned subsidiary of RSL
COM. Since RSL COM's acquisition of a controlling interest in us, RSL COM has
funded our cash requirements through inter-company loans bearing interest at the
rate of 14% per annum. As of September 30, 1999, we owed approximately
$12.3 million (principal and accrued interest) to RSL COM. The inter-company
loans is due on demand after September 30, 2000. Upon completion of an initial
public offering by us, the maturity dates will be extended to the first
anniversary of the completion of such offering. RSL COM will, upon completion of
this offering, provide us a $10 million line of credit (in addition to the
existing $12.3 million), bearing interest at the rate of 14% per annum, due on
demand after November 1, 2000. We have agreed with RSL COM that we will not
incur any debt other than inter-company debt without its written consent so long
as we are a restricted subsidiary.
RSL COM currently owns all of our capital stock. Following the completion
of this offering, RSL COM will continue to be our controlling stockholder and
will own 100% of the outstanding Class B common stock, which will represent
approximately 96.5% of the combined voting power of all of our outstanding
capital stock and approximately 73.6% of the economic interest in our company
(or 96.2% and 71.6% if the underwriters' over-allotment option is exercised in
full).
For so long as RSL COM continues to beneficially own shares of capital
stock representing more than 50% of the combined voting power of our outstanding
capital stock, it will be able to approve any matter submitted to a vote of our
stockholders, including, among other things, the election of all members of the
board of directors. In addition, our non-competition provision in the services
agreement with RSL COM terminates on September 3, 2001. See "--Services
Agreement." Therefore, various conflicts of interest could arise between
ourselves and RSL COM.
RSL COM has advised us that it currently has no plans to dispose of the
shares of Class B common stock owned by it. However, RSL COM has no contractual
obligation to retain its shares of our Class B common stock, except RSL COM has
agreed, subject to specified exceptions, not to sell or otherwise dispose of any
shares of our Class B common stock for a period of 180 days from the date of
this prospectus without the prior written consent of Lehman Brothers Inc. This
lock-up agreement does not restrict RSL COM from selling shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. As a result, there can be no assurance
concerning the period of time during which RSL COM will retain its ownership of
our Class B common stock owned by it following the offering. See "--Registration
Rights Agreement."
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<PAGE>
INTERCOMPANY COMPLIANCE AGREEMENT
We have entered into an agreement with RSL COM under which we have agreed
not to take any action which would cause RSL COM to default under its
indentures. In order to help RSL COM comply with its indentures, we have also
agreed to obtain RSL COM's written consent before incurring any debt and to
provide RSL COM with information that it requires for its reporting obligation
under its indentures and under the securities laws.
SERVICES AGREEMENT
We entered into a services agreement with RSL COM on July 23, 1997, which
was subsequently amended and restated as of September 3, 1999. As amended and
restated, the agreement extends to September 2, 2004, and is automatically
extended for additional one-year terms unless terminated by RSL COM or us. The
services agreement may be terminated by us or RSL COM for cause, by the
non-bankrupt party in the event of bankruptcy of the other party or by RSL COM
should RSL COM and/or its affiliates hold less than 50% of the voting control of
our outstanding common stock.
Services and Facilities
Under the agreement, if we require equipment space or limited office space
at any location where RSL COM maintains an office or equipment, RSL COM is
required to use its reasonable best efforts to provide us such space. However,
RSL COM is not obligated to provide us with office space for more than that
required by two full-time employees, and RSL COM is entitled to vacate space
without it being deemed a breach of the agreement. We are required to pay
RSL COM our proportionate share of all lease payments associated with such
office or equipment space. In addition, RSL COM is required to make reasonable
efforts to assist us in obtaining Internet, frame relay and dedicated lines from
third parties in countries where RSL COM has communication switches colocated
with our network servers at the same price that RSL COM pays such third parties.
As of September 30, 1999, we colocated offices in five locations and equipment
in five locations. RSL COM is also required to use its reasonable efforts to
purchase dedicated bandwidth connectivity on our behalf from third party
bandwidth suppliers at the same price as RSL COM pays such third party
suppliers. As a result, we realize certain bulk pricing benefits received by RSL
COM.
Under the services agreement, RSL COM is also required to provide us with
the following services:
o domestic inbound traffic termination--RSL COM is required to
terminate our domestic inbound traffic through RSL COM's switches in
countries where our servers and RSL COM's switches are co-located.
This termination service is provided to us at the then prevailing
fair market rates for such service.
o international outbound termination--RSL COM is required to terminate
our international outbound telephone traffic in each country where
our servers and RSL COM's switches are co-located and RSL COM has
contracted to receive such services in the ordinary course. This
termination service is provided to us at the then prevailing fair
market rates for such service.
o traffic origination--RSL COM is required to use its best efforts to
assist us in obtaining services, including toll-free services, from
local third parties which will provide our users with the ability to
access our network at the same rates offered by such third parties
to RSL COM in countries where our servers and RSL COM's switches are
colocated.
o use of RSL COM switches--RSL COM is required to provide us with use
of RSL's switches to connect our carrier customers in each location
where our servers and RSL COM's switches are colocated. The
termination rate is $0.01 per minute. We are charged for a minimum
usage of 100,000 minutes per month per switch per connection,
whether or not such minutes are used. In addition, RSL COM provides
our carrier customers billing and other similar customer-related
services at a charge of $0.01 per minute of carrier traffic usage.
Based on switches currently used, RSL COM charges us a minimum of
$7,000 per month.
65
<PAGE>
o use of prepaid calling platform--RSL COM is required to provide us
with access to, and use of, RSL COM's prepaid calling platform in
each location where our servers and RSL COM's switches are
co-located. If we elect to use RSL COM's prepaid calling platform,
we will be charged for a minimum of 100,000 minutes per month. The
fee for using RSL COM's prepaid calling platform is $0.01 per minute
of traffic usage. In addition, RSL COM is required to provide us
with additional customer-related services for our prepaid calling
services at a rate of $0.015 per minute of traffic usage. To date,
we have not elected to purchase such services.
In the event any of RSL COM's current or future strategic partner objects to RSL
COM providing us with any of the foregoing services, RSL COM can cease providing
the service to us. A strategic partner is a minority shareholder in RSL COM or
any RSL COM subsidiary owning more than 10% of the common stock of such entity.
However, RSL COM is required to use reasonable efforts to encourage its
strategic partners not to object. To date, no strategic partner has objected to
RSL COM providing us with these services.
Under the services agreement, we are required to provide Internet telephony
services and facilities to RSL COM necessary to route RSL COM's international
telecommunications traffic between all originations and destinations we service.
The agreement provides that we are required to use, at RSL COM's request, up to
50% of our network capacity to route RSL COM's international telecommunications
traffic between our origination and termination points. For a period two years
from the date of the closing of this offering, provided this offering occurs
prior to June 30, 2000, RSL COM has committed to purchase a minimum of
50 million minutes per annum of voice and fax transmission services from us. If
RSL COM fails in this commitment RSL COM will be required to pay us a shortfall
charge of 10% of the average daily weighted coverage price per minute charged by
us to RSL COM in the last three months of each annual period. If we are no
longer a subsidiary of RSL COM, RSL COM's minimum purchase obligation will
cease. These services are provided to RSL COM at the then prevailing fair market
rates. However, the services agreement does not specify procedures for
establishing such rates.
Marketing
Under the services agreement, we and RSL COM will engage in joint
marketing. Each of us is required to place, in a prominent location, a link on
its home page Web site to the other's home page Web site. We will also
cross-sell each other's products and services, including through promotional
materials and customer service representatives and other additional promotional
efforts. However, neither we nor RSL COM are required to market or promote a
product or service of the other if such product or service competes with the
other party's product or service.
Non-Competition
Under the services agreement between us and RSL COM, RSL COM is prohibited
from competing with us in providing Internet telephony services as described in
the services agreement, provided that we provide RSL COM with any requested
Internet telephony services promptly and with quality assurance. However, this
non-competition provision terminates on September 3, 2001 and the scope of such
provision is subject to the following limitations:
o RSL COM and its subsidiaries may acquire up to 20% in an entity providing
Internet telephony services;
o RSL COM and its subsidiaries may be stockholders in entities providing
Internet telephony services, provided that Internet telephony services
are ancillary to the business of that entity;
o the non-competition provision does not apply to RSL COM's subsidiaries
that become publicly traded companies; and
o Internet telephony services under the non-competition provision are
limited to (1) phone to phone services marketed as IP to the general
public, including both individuals and businesses and (2) the following
Web-based enhanced communication services: PC-to-phone, D3 box, Click IT,
Global Roaming, IP-initiated conference calls, Phone-to-PC, D3 Fax,
information services and white boarding.
66
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CARRIER TRANSMISSION SERVICES
RSL COM purchases carrier transmission services from us. RSL COM accounted
for 37.6%, 69.1% and 63.4% of our revenues in the years 1997 and 1998 and for
the nine months ended September 30, 1999, respectively. Rates are established
based on market rates. The balance of our revenues in these periods were derived
from services provided to non-affiliates.
REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with RSL COM under which we have given
RSL COM the right to require us on three occasions to register for sale the
shares of common stock they hold. RSL COM will not be allowed to exercise these
registration rights during the 180-day lock-up period. RSL COM also has an
unlimited number of "piggyback" registration rights. This means that any time we
register our common stock for sale, RSL COM will have the right to include their
common stock in that offering and sale.
We have agreed to pay all expenses that result from registration of
RSL COM's common stock under the registration rights agreement (other than
underwriting commissions for the common stock it sells and RSL COM's taxes). We
have also agreed to indemnify RSL COM against liabilities that may result from
their sale of common stock they hold, including Securities Act liabilities.
MANAGEMENT AGREEMENT
We have entered into an agreement with RSL COM pursuant to which RSL COM
has agreed from the time we complete this offering until such time as we are no
longer a subsidiary of RSL COM, RSL COM will provide to us the following
services:
o international legal services
o financial services, including assistance in accounting, financial
reporting, budgeting, business controls, tax and treasury related
matters
o corporate finance and mergers and acquisition advisory services
o assistance with network planning
o product development
o assistance with strategic planning
o availability of RSL COM management.
We have agreed to pay to RSL COM $20,000 per month for these services, subject
to adjustments for inflation.
RSL COM PRIMECALL CO-BRANDING AND SERVICES AGREEMENT
We have entered into an agreement with RSL COM PrimeCall, a subsidiary of
RSL COM, to develop a prepaid IP calling card product. PrimeCall will arrange
for the production of the calling card, as well as assisting us with sales,
marketing and distribution. We will record all revenues from the sales of the
calling cards. In exchange for the services PrimeCall provides to us, we will
agree to establish and administer a Web site for PrimeCall to help enable
PrimeCall to market and sell its calling cards over the Web and place 500,000
RSL COM PrimeCall's banners on our site per month. We will oversee for PrimeCall
all billing, collections and fullfillment for on-line orders.
RELEASE AND INDEMNIFICATION AGREEMENT
We intend to enter into an agreement with RSL COM, pursuant to which we
will agree to release each other from any claims existing or arising from acts
or events occurring or failing to occur prior to the date of the agreement,
other than those arising from this agreement, the service agreement, the
registration rights agreement, the management agreement, the intercompany credit
agreement, the compliance agreement and other commercial transactions between us
and RSL COM. Further, we will agree to indemnify each other for breaches of the
existing agreements described above. We expect this agreement to be effective
upon completion of this offering.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of our capital
stock. This summary does not purport to be complete. For a more detailed
description, see our amended and restated certificate of incorporation and
by-laws, copies of which we have filed as exhibits to the registration
statement.
Our authorized capital stock consists of 200,000,000 shares of Class A
common stock (which we refer to as common stock in this prospectus), 200,000,000
shares of Class B common stock and 25,000,000 shares of preferred stock, par
value $0.001 per share. Immediately prior to the closing of this offering, we
will restate our certificate of incorporation to reflect a 2.48 to one stock
split of our common and Class B common stock. Upon closing of the offering,
there will be 7,001,469 shares of our common stock and 19,569,459 shares of our
Class B common stock outstanding.
COMMON STOCK AND CLASS B COMMON STOCK
General
The rights of holders of common stock are subject to the rights of holders
of any preferred stock which may be issued in the future. All outstanding shares
of common stock are, and the shares of common stock to be sold by us in this
offering when issued will be, duly authorized, validly issued, fully paid and
nonassessable. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to share ratably in all net assets
available for distribution to stockholders after payment to creditors. The
holders of common stock and Class B common stock have identical rights except
with respect to voting, conversion and transfer. The common stock is not
redeemable and has no preemptive or conversion rights.
Voting Rights
Holders of our common stock are entitled to one vote per share on all
matters submitted for stockholder vote, except matters submitted to the vote of
another class or series of shares, while holders of Class B common stock are
entitled to ten votes per share. Holders of common stock and Class B common
stock are not entitled to cumulative voting rights. Cumulative voting for the
election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
Dividends
Holders of common stock and Class B common stock are entitled to receive
dividends out of assets legally available for this purpose at the times and in
the amounts as the board of directors may from time to time determine. Holders
of our common stock and Class B common stock will share equally on a per share
basis in any dividend declared by the board of directors, subject to any
preferential rights of any outstanding preferred stock. Dividends consisting of
shares of common stock and Class B common stock may be paid only as follows:
(1) shares of common stock may be paid only to holders of common stock, and
shares of Class B common stock may be paid only to holders of Class B common
stock; and (2) the number of shares so paid will be equal on a per share basis
with respect to each outstanding share of common stock and Class B common stock.
We have not paid any dividends on our common stock and do not anticipate paying
any cash dividends on such stock in the foreseeable future. See the section of
this prospectus entitled "Dividend Policy" for more information.
Merger or Consolidation
In the event of a merger or consolidation, the holders of common stock and
Class B common stock will be entitled to receive the same per share
consideration, if any, except that if the consideration includes voting
securities (or the right to acquire voting securities, or securities
exchangeable for, or convertible into, voting securities), we are required,
unless the holders of Class B common stock agree, to provide for the holders of
Class B common stock to receive consideration entitling them to ten times the
number of votes per share as the consideration being received by holders of the
common stock.
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Conversion of Class B Common Stock
Our Class B common stock will be convertible into common stock on a
share-for-share basis at the option of the holder at any time, or automatically
upon transfer to a person or entity which is not a permitted transferee.
Permitted transferees will include RSL COM, its direct and indirect
majority-owned subsidiaries, successors of RSL COM following a merger,
consolidation or reorganization if RSL COM is not the surviving entity, or
Ronald S. Lauder or members of his family, a trust established by him for his
family members or entities controlled by him. Ronald S. Lauder is the
controlling shareholder of RSL COM. In the event a permitted transferee receives
Class B common stock and after that time ceases to qualify as a permitted
transferee, all Class B common stock held by that permitted transferee will
automatically convert into shares of our common stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and the board of directors may fix the number of shares of each series
and the designation, powers, privileges, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The specific matters that our board of directors may determine include the
following:
o the designation of each series
o the number of shares of each series
o the rate of any dividends
o whether any dividends shall be cumulative or non-cumulative
o the terms of any redemption
o the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of affairs of our company
o rights and terms of any conversion or exchange
o restrictions on the issuance of shares of the same series or any other
series
o any voting rights
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our by-laws provide that directors and officers shall be indemnified by our
company to the fullest extent authorized by Delaware law, as it now exists or
may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with services for or on behalf of us. The by-laws also
authorize us to enter into one or more agreements with any person that provide
for indemnification greater or different from that provided in the by-laws. To
the extent that indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of our company,
we have been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LIMITATION OF LIABILITY OF DIRECTORS
Our amended and restated certificate of incorporation provides, as
authorized by Section 102(b)(7) of the Delaware General Corporation Law (DGCL),
that our directors will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability imposed by law, as in effect from time to time, for the following:
o any breach of the director's duty of loyalty to our company or our
stockholders
o any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law
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o unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL
o any transaction from which the director derived an improper personal
benefit
The inclusion of this provision in our amended and restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
our company and our stockholders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
Our amended and restated certificate of incorporation provides that we have
opted-out of the provisions of Section 203 of the Delaware General Corporation
Law. Section 203 prohibits a publicly held Delaware corporation from engaging in
a "business combination" with "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless:
o prior to such date, the board of directors of the corporation
approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder;
o upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock,
excluding shares held by directors, officers and certain employee
stock plans; or
o on or after the consummation date the business combination is
approved by the board of directors and by the affirmative vote at an
annual or special meeting of stockholders of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is
generally a person who, together with affiliates and associates of such person:
o owns 15% or more of the corporation's voting stock; or
o is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the corporation at
any time within the prior three years.
LISTING
We have applied to have our common stock quoted on The Nasdaq National
Market under the symbol "DDDC."
TRANSFER AGENT
Our transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. Its address is 40 Wall Street, New York, New York
10005, and its telephone number at this location is (212) 936-5100.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 7,001,469 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 7,751,469 shares of common stock outstanding. In addition, we will
have 19,569,459 shares of Class B common stock outstanding, all of which will be
owned by RSL COM. All of the common stock sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except for shares acquired by our directors and executive officers and our
affiliates. The shares of Class B common stock to be retained by RSL COM are not
being acquired under this offering and will have restrictions on resale.
LOCK-UP
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo!, CNET and all of our officers and directors
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and employees holding options to purchase our common
stock on the closing of this offering (other than those subject to the 180-day
lock-up) will be prohibited from disposing shares of common stock for a period
of 90 days after the date of this prospectus. We can give no assurance as to how
long RSL COM or any of the other parties subject to the lock-up agreements will
continue to hold its common stock after this offering.
RULE 144
The shares of Class B common stock held by RSL COM and the shares of common
stock acquired by any of our affiliates will be subject to the resale
limitations of Rule 144 of the Securities Act. Rule 144 defines an affiliate as
a person that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, the issuer.
In general, a stockholder subject to Rule 144 who has beneficially owned
shares of common stock of an issuer for at least one year may, within any
three-month period, sell up to the greater of:
o 1% of the total number of shares of common stock then outstanding or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the stockholder's required filing of notice of
sale
Rule 144 requires stockholders to aggregate their sales with other
stockholders with which it is affiliated for purposes of complying with this
volume limitation. A stockholder who has owned common stock for at least two
years, and who has not been an affiliate of the issuer for at least 90 days, may
sell common stock free from the volume limitation and notice requirements of
Rule 144.
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because these sales will depend on market prices and
other factors.
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REGISTRATION RIGHTS
After the closing of this offering, RSL COM or its transferees will be
entitled to request that we register their shares under the Securities Act. See
"Related Party Transactions--RSL COM--Registration Rights Agreement."
On October 18, 1999 in exchange for the offset of an account payable to
Yahoo! of $1 million, we issued to Yahoo! 125,275 shares of our common stock and
a warrant to purchase 41,963 shares of our common stock, assuming a cashless
exercise of a warrant to purchase 125,275 shares of our common stock at an
exercise price of $7.98 per share. The warrant will be automatically exercised
upon completion of this offering unless earlier exercised. The shares issued to
Yahoo! are subject to restrictions on resale. However, Yahoo! will be entitled
to request that we register their shares under the Securities Act beginning 180
days after completion of this offering and to include their shares and our
future registered equity offerings.
On October 20, 1999, we issued to CNET Investments, Inc. for approximately
$11 million 1,085,943 shares of our common stock and warrants to purchase
466,028 shares of our common stock at an exercise price of $10.13 per share
exercisable for the term of our promotion agreement with CNET, Inc. CNET
Investments will be entitled to request that we register their shares under the
Securities Act beginning 180 days after completion of this offering and to
include their shares in our future registered equity offerings.
If RSL COM sells 75% or more of its equity interest in us, it has the right
to require Yahoo! and CNET to sell their holdings in us as well.
IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
OF OUR COMMON STOCK TO NON-U.S. HOLDERS
This is a general discussion of certain U.S. federal tax consequences of
the acquisition, ownership, and disposition of our common stock issued pursuant
to this offering by a holder that, for U.S. federal income tax purposes, is not
a "U.S. person" as we define that term below (a "Non-U.S. Holder"). We assume in
this discussion that you will hold our common stock as a capital asset
(generally, property held for investment). We do not discuss all aspects of U.S.
federal taxation that may be important to you in light of your individual
investment circumstances, such as special tax rules that apply to you, for
example, if you are a dealer in securities, financial institution, bank,
insurance company, tax-exempt organization, partnership or owner of more than 5%
of our common stock. Our discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended, Treasury Regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service, or the IRS,
and other applicable authorities, all as in effect on the date of this
prospectus and all of which are subject to differing interpretations or change,
possibly with retroactive effect. We have not sought, and will not seek, any
ruling from the IRS with respect to the tax consequences discussed in this
prospectus, and there can be no assurance that the IRS will not take a position
contrary to the tax consequences discussed below or that any position taken by
the IRS would not be sustained. We urge you to consult your tax advisor about
the U.S. federal tax consequences of acquiring, holding, and disposing of our
common stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
For purposes of this discussion, a "U.S. person" means any one of the
following:
o a citizen or resident of the U.S.
o a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
o an estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source
o a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
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DIVIDENDS
Dividends paid to a Non-U.S. Holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30%. If, however, the
dividend is effectively connected with the conduct of a trade or business in the
U.S. by the Non-U.S. Holder, the dividend will be subject to U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax. Non-U.S. Holders should consult any applicable income tax treaties
that may provide for a reduction of withholding taxes. For purposes of
determining whether tax is to be withheld at a reduced rate as specified by a
treaty, we generally will presume that dividends we pay on or before
December 31, 2000, to an address in a foreign country are paid to a resident of
that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a Non-U.S. Holder generally will be required to
provide certification as to that Non-U.S. Holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay to a Non-U.S. Holder that
is an entity should be treated as paid to holders of interests in that entity.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to U.S. federal income tax,
including by way of withholding, on gain recognized on a sale or other
disposition of our common stock unless any one of the following is true:
o the gain is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder
o the Non-U.S. Holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
o the Non-U.S. Holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
o we are or have been during certain periods a "U.S. real property holding
corporation" for U.S. federal income tax purposes
If we are or have been a U.S. real property holding corporation, a Non-U.S.
Holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
o the Non-U.S. Holder does not hold (and has not held during certain
periods), directly or indirectly, more than 5% of our outstanding common
stock and
o our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes
We believe that our common stock will be traded on an established
securities market for this purpose in any quarter during which it is quoted on
Nasdaq.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a Non-U.S. Holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax (generally
at a rate of 10% of the proceeds). Any amount withheld pursuant to a withholding
tax will be creditable against a Non-U.S. Holder's U.S. federal income tax
liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders and under certain circumstances, the
branch profits tax, but will generally not be subject to withholding. Non-U.S.
Holders should consult any applicable income tax treaties that may provide for
different rules.
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UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S. (as specially defined for U.S. federal
estate tax purposes) on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the Non-U.S. Holder resides.
Under current U.S. Treasury Regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a Non-U.S. Holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its Non-U.S. Holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S., unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Holder and
certain other conditions are
met or the holder otherwise established an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
Non-U.S. Holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, U.S. Bancorp Piper Jaffray Inc., Lazard Freres & Co. LLC and
Fidelity Capital Markets, a division of National Financial Services Corporation,
are acting as representatives, has agreed to purchase from us the respective
number of shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- ------------ ----------------
<S> <C>
Lehman Brothers Inc.........................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........................
U.S. Bancorp Piper Jaffray Inc..............................................
Lazard Freres & Co. LLC.....................................................
Fidelity Capital Markets,
a division of National Financial Services Corporation.....................
----------
Total..................................................................... 5,000,000
----------
----------
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include that:
o the representations and warranties made by us to the underwriters are
true
o there is no material change in the financial markets
o we deliver customary closing documents to the underwriters
The representatives had advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and
the selected dealers may reallow, a concession not in excess of $ per
share to brokers and dealers. After the offering, the underwriters may change
the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions
we will pay. The underwriting discounts and commissions are equal to the public
offer price per share less the amount paid to us per share. The underwriting
discounts and commissions will equal 7% of the public offer price.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions to be
paid by us................................................ $ $ $
</TABLE>
We estimate that the total expenses of the offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses but excluding underwriting discounts and commissions, will be
approximately $1.5 million.
We have granted to the underwriters an option to purchase up to an
aggregate of 750,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time, and from time
to time, until 30 days after the date of the underwriting agreement. To the
extent the underwriters exercise this option, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to that underwriter's initial commitment as indicated in the
preceding table, and
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we will be obligated, under the over-allotment option, to sell the shares of
common stock to the underwriters.
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo! and CNET and all of our officers and
directors have agreed under lock-up agreements that, without the prior written
consent of Lehman Brothers Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of capital stock or any securities which
may be converted into or exchanged for any shares of capital stock for a period
of 180 days from the date of this prospectus, except that RSL COM may sell
shares of Class B common stock to a purchaser or purchasers of the shares who
agree to be bound by the same restrictions that bind RSL COM. Individuals
participating in the directed share program and employees holding options to
purchase our common stock on the closing of this offering (other than those
subject to the 180-day lock-up) will be prohibited from disposing shares of
common stock for a period of 90 days after the date of this prospectus. See
"Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider prevailing market conditions,
our historical performance and capital structure, estimates of our business
potential and earning prospects, an overall assessment of our management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
Intranet and other proprietary electronic technology.
We have agreed to indemnify the underwriters against liabilities relating
to the offering, including liabilities under the Securities Act, liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and liabilities incurred in connection with the directed
share program referred to below, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares of
common stock than are set forth on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option described in this prospectus.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
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Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in such transactions or that any such transaction, once commenced,
will not be discontinued without notice.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, Lehman Brothers Inc. has reserved up to 500,000 shares of
the common stock, or 10% of the common stock offered by this prospectus, for
sale pursuant to a directed share program to officers, directors and employees
(and their family members) of RSL COM and its affiliates (including us) and
friends of management of RSL COM and us. All of the persons purchasing the
reserved shares must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares.
Lehman Brothers Inc. has served as co-manager for two security offerings
for RSL COM in the past and has received customary compensation for these
services. Lehman Brothers Inc. has also served as the solicitation agent in
connection with RSL COM's recent solicitation of consents from certain of its
noteholders and received $750,000 as compensation for this service.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
September 30, 1999 and for the period from June 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998 and the nine
month period ended September 30, 1999 included in this prospectus and in the
registration statement have been audited by Brightman Almagor & Co., a member
firm of Deloitte Touche Tohmatsu, independent auditors, as stated in their
report appearing in this prospectus, and are included in reliance upon the
report of that firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
filed as exhibits are not necessarily complete, and reference is made to the
copy so filed, each such statement being qualified in all respects by such
reference. You can inspect and copy the registration statement and the reports
and other information we file with the Commission under the Exchange Act at the
public reference room maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain
information on the operation of the public reference room by calling the
Commission at 1-800-SEC-0330. The same information will be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of this material from the public reference room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site which
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provides on-line access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You can inspect and copy these reports and other information of our
company at the locations set forth above or download these reports from the
Commission's Web site.
We will apply to have our common stock quoted on The Nasdaq National
Market. Reports, proxy statements and other information concerning us can be
inspected at the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
RSL COM's Class A common stock is traded on Nasdaq under the symbol RSLC.
RSL COM is subject to the reporting requirements of the Exchange Act.
78
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DELTATHREE.COM, INC.
<TABLE>
<S> <C>
Independent Auditors' Report..................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999.............. F-3
Consolidated Statements of Operations for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 (unaudited) and 1999...................................... F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficiency) for the period from
June 1996 (inception) to December 31, 1996 and for the years ended December 31, 1997 and 1998
and for the nine months ended September 30, 1999............................................... F-5
Consolidated Statements of Cash Flows for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 (unaudited) and 1999...................................... F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon completion of
the stock split described in Note 12A to the consolidated financial statements,
assuming that from October 27, 1999 to the date of such completion, no other
material events have occurred that would affect the accompanying consolidated
financial statements or required disclosure therein. If the stock split ratio
changes, all references to numbers of shares, per share amounts and stock option
data included within the consolidated financial statements will also change.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
November 1, 1999
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF
DELTATHREE.COM, INC.
We have audited the accompanying consolidated balance sheets of
deltathree.com, Inc. (the "Company") as of December 31, 1997 and 1998 and
September 30, 1999 and the related consolidated statements of operations,
changes in stockholder's equity (deficiency) and cash flows for the period from
June 1996 (inception) to December 31, 1996 and each of the two years in the
period ended December 31, 1998 and for the nine months ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1998 and September 30, 1999, and the consolidated results
of its operations and cash flows for the period from June 1996 (inception) to
December 31, 1996 and each of the two years in the period ended December 31,
1998 and for the nine months ended September 30, 1999 in conformity with
generally accepted accounting principles.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
October 27, 1999, except for Note 12A as to which the date is , 1999
F-2
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 3,196,082 $ 1,356,562 $ 1,292,887
Accounts receivable--net.......................................... 825,200 543,335 862,266
Due from affiliates............................................... -- 2,191,903 920,036
Prepaid expenses and other current assets......................... 166,287 620,676 1,151,652
------------ ------------ -------------
Total current assets................................................. 4,187,569 4,712,476 4,226,841
------------ ------------ -------------
Investments.......................................................... 105,000 90,000 90,000
------------ ------------ -------------
Property and equipment:
Telecommunications equipment...................................... 849,824 7,910,224 9,947,932
Furniture, fixtures and other..................................... 200,122 735,991 686,502
------------ ------------ -------------
1,049,946 8,646,215 10,634,434
Less accumulated depreciation..................................... (177,738) (376,792) (745,092)
------------ ------------ -------------
Property and equipment--net....................................... 872,208 8,269,423 9,889,342
------------ ------------ -------------
Goodwill--net........................................................ 3,183,875 12,488,125 10,214,490
Deposits............................................................. 54,549 115,497 161,374
------------ ------------ -------------
Total assets......................................................... $ 8,403,201 $25,675,521 $ 24,582,047
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................. $ 949,716 $ 4,301,763 $ 4,148,126
Due to affiliates................................................. 120,487 1,403,163 722,835
Deferred revenues and costs....................................... 159,778 1,610,081 734,465
Other current liabilities......................................... 194,295 629,096 2,511,002
------------ ------------ -------------
Total current liabilities............................................ 1,424,276 7,944,103 8,116,428
------------ ------------ -------------
Long-term liabilities:
Long-term debt due to affiliates.................................. -- 5,106,602 12,306,880
Severance pay obligations......................................... 26,775 233,247 320,340
------------ ------------ -------------
Total long-term liabilities.......................................... 26,775 5,339,849 12,627,220
------------ ------------ -------------
Convertible notes payable to affiliates.............................. 679,965 -- --
------------ ------------ -------------
Minority interests................................................... -- 21,399 --
------------ ------------ -------------
Total liabilities.................................................... 2,131,016 13,305,351 20,743,648
------------ ------------ -------------
Commitments and contingencies
Stockholder's equity:
Class A Common stock, authorized in September 1999--par value
$0.001; 200,000,000 shares authorized as of September 30, 1999;
no shares issued and outstanding at December 31, 1997 and 1998
and September 30, 1999.......................................... -- -- --
Class B Common stock --par value $0.001; 100,000,000, 20,000,000
and 20,000,000 shares authorized at December 31, 1997 and 1998
and September 30, 1999, respectively; 18,938,249, 19,569,460 and
19,569,460 issued and outstanding at December 31, 1997 and 1998
and September 30, 1999, respectively............................ 18,938 19,569 19,569
Preferred stock, authorized in September 1999--par value $0.001;
25,000,000 shares authorized as of September 30, 1999; no shares
issued and outstanding at December 31, 1997 and 1998 and
September 30, 1999.............................................. -- -- --
Additional paid-in capital........................................ 8,799,431 23,083,638 37,178,351
Deferred compensation............................................. -- (1,065,882) (6,234,375)
Accumulated deficit............................................... (2,546,184) (9,667,155) (27,125,146)
------------ ------------ -------------
Total stockholder's equity........................................... 6,272,185 12,370,170 3,838,399
------------ ------------ -------------
Total liabilities and stockholder's equity........................... $ 8,403,201 $25,675,521 $ 24,582,047
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
TO DECEMBER 31, ---------------------------- -----------------------------
1996 1997 1998 1998 1999
--------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Affiliates................... $ -- $ 467,842 $ 3,896,106 $ 2,484,541 $ 4,077,278
Non-affiliates............... 933 777,799 1,741,941 1,184,324 2,355,076
--------- ------------ ------------ ------------ ------------
Total revenues................. 933 1,245,641 5,638,047 3,668,865 6,432,354
Costs and operating expenses:
Cost of revenues............. -- 1,064,940 4,657,373 2,648,748 5,811,171
Research and development
expenses.................. -- 294,150 650,140 479,030 797,273
Selling and marketing
expenses.................. -- 631,970 2,431,371 1,603,221 3,087,336
General and administrative
expenses--(exclusive of
non-cash compensation
expense shown below)...... 179,138 1,387,682 1,842,446 1,025,861 2,079,809
Non-cash compensation
expense................... -- -- 742,780 640,165 8,926,220
Amortization of goodwill..... -- 197,249 2,472,214 1,714,335 2,273,635
--------- ------------ ------------ ------------ ------------
Total costs and operating
expenses..................... 179,138 3,575,991 12,796,324 8,111,360 22,975,444
--------- ------------ ------------ ------------ ------------
Loss from operations........... (178,205) (2,330,350) (7,158,277) (4,442,495) (16,543,090)
Interest expense, net.......... (397) (37,232) (186,295) (145,910) (914,901)
Minority interests............. -- -- 223,601 -- --
--------- ------------ ------------ ------------ ------------
Net loss....................... $(178,602) $ (2,367,582) $ (7,120,971) $ (4,588,405) $(17,457,991)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Net loss per share--basic and
diluted...................... $ (0.03) $ (0.19) $ (0.37) $ (0.24) $ (0.89)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Weighted average shares
outstanding--basic and
diluted...................... 6,420,194 12,390,043 19,253,855 19,148,652 19,569,459
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DELTATHREE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CLASS B TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDER'S
--------------------- PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIENCY)
---------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
at June 1996 (Inception).................. -- $ -- $ -- $ -- $ -- $ --
Issuance of capital stock................... 7,659,507 7,659 140,831 -- -- 148,490
Net loss.................................... (178,602) (178,602)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1996...................... 7,659,507 7,659 140,831 (178,602) -- (30,112)
Issuance of capital stock................... 11,278,742 11,279 5,319,976 5,331,255
Recognition of pushdown of goodwill......... 3,338,624 3,338,624
Net loss.................................... (2,367,582) (2,367,582)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1997...................... 18,938,249 18,938 8,799,431 (2,546,184) -- 6,272,185
Conversion of debt and warrants to equity... 631,210 631 656,581 657,212
Deferred compensation expense............... 1,808,662 (1,808,662) --
Amortization of deferred compensation
expense................................... 742,780 742,780
Recognition of pushdown of goodwill......... 11,818,964 11,818,964
Net loss.................................... (7,120,971) (7,120,971)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1998...................... 19,569,459 19,569 23,083,638 (9,667,155) (1,065,882) 12,370,170
Deferred compensation expense............... 14,094,713 (14,094,713) --
Amortization of deferred compensation
expense................................... 8,926,220 8,926,220
Net loss.................................... (17,457,991) (17,457,991)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at September 30, 1999..................... 19,569,459 $19,569 $37,178,351 $(27,125,146) $(6,234,375) $ 3,838,399
---------- ------- ----------- ------------ ------------ -----------
---------- ------- ----------- ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ---------------------------------------------------
1996 1997 1998
--------------- ------------------------ ------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(178,602) $ (2,367,582) $ (7,120,971)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 5,371 369,616 2,671,268
Amortization of deferred compensation........... -- -- 742,780
Write-down of investment........................ -- -- 25,000
Minority interests.............................. -- -- (223,601)
Increase in liability for severance pay......... -- 26,775 147,628
Provision for losses on accounts receivable..... -- 100,000 226,542
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...... (22,173) (925,200) 78,216
Decrease (increase) in other current assets and
due from affiliates........................... (42,900) (198,263) (2,269,872)
Increase (decrease) in accounts payable......... 23,547 926,169 1,733,912
Increase (decrease) in deferred revenues........ -- -- (1,595,635)
Increase in current liabilities and due to
affiliates.................................... 28,510 446,050 1,826,832
--------- ------------ ------------
(7,645) 745,147 3,363,070
--------- ------------ ------------
Net cash used in operating activities............... (186,247) (1,622,435) (3,757,901)
--------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................ (160,809) (889,137) (3,003,004)
Increase in deposits.............................. -- -- (60,948)
Equity investments................................ (45,000) (60,000) (25,000)
Other............................................. -- -- 15,000
--------- ------------ ------------
Net cash used in investing activities............... (205,809) (949,137) (3,073,952)
--------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock........... 148,490 5,331,255 --
Proceeds from issuance of convertible notes....... 343,558 520,000 --
Retirement of convertible notes................... -- (208,298) --
Proceeds (repayment) of long-term debt from
affiliates...................................... 30,000 (30,000) 5,000,000
Proceeds from short-term borrowings............... -- 24,705 --
Payment of other long-term debt................... -- -- (7,667)
--------- ------------ ------------
Net cash provided by financing activities........... 522,048 5,637,662 4,992,333
--------- ------------ ------------
Increase (decrease) in cash and cash equivalents.... 129,992 3,066,090 (1,839,520)
Cash and cash equivalents at beginning of period.... -- 129,992 3,196,082
--------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 129,992 $ 3,196,082 $ 1,356,562
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ -- $ -- $ --
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock................................... $ -- $ -- $ 657,212
--------- ------------ ------------
--------- ------------ ------------
Assets acquired with vendor credits............... $ -- $ -- $ 3,000,000
--------- ------------ ------------
--------- ------------ ------------
Recognition of pushdown of goodwill............... $ -- $ 3,338,624 $ 11,818,964
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------
1998 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (4,588,405) $(17,457,991)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 1,815,277 2,641,765
Amortization of deferred compensation........... 640,164 8,926,220
Write-down of investment........................ -- --
Minority interests.............................. -- (21,399)
Increase in liability for severance pay......... 8,578 39,679
Provision for losses on accounts receivable..... -- (294,074)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...... 432,883 (24,857)
Decrease (increase) in other current assets and
due from affiliates........................... (2,204,181) 742,428
Increase (decrease) in accounts payable......... 675,879 (153,637)
Increase (decrease) in deferred revenues........ (804,993) (875,616)
Increase in current liabilities and due to
affiliates.................................... 1,212,146 1,772,397
------------ ------------
1,775,753 12,752,906
------------ ------------
Net cash used in operating activities............... (2,812,652) (4,705,085)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................ (1,941,092) (1,988,048)
Increase in deposits.............................. -- --
Equity investments................................ -- --
Other............................................. (25,000) --
------------ ------------
Net cash used in investing activities............... (1,966,092) (1,988,048)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock........... -- --
Proceeds from issuance of convertible notes....... -- --
Retirement of convertible notes................... -- --
Proceeds (repayment) of long-term debt from
affiliates...................................... 2,014,314 6,629,458
Proceeds from short-term borrowings............... -- --
Payment of other long-term debt................... -- --
------------ ------------
Net cash provided by financing activities........... 2,014,314 6,629,458
------------ ------------
Increase (decrease) in cash and cash equivalents.... (2,764,430) (63,675)
Cash and cash equivalents at beginning of period.... 3,196,082 1,356,562
------------ ------------
Cash and cash equivalents at end of period.......... $ 431,652 $ 1,292,887
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ -- $ --
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock................................... $ 657,212 $ --
------------ ------------
------------ ------------
Assets acquired with vendor credits............... $ 3,000,000 $ --
------------ ------------
------------ ------------
Recognition of pushdown of goodwill............... $ 11,818,964 $ --
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- BUSINESS DESCRIPTION
Description of business
Deltathree.com, Inc. (the "Company"), a Delaware corporation, is
a global provider of Internet Protocol ("IP") telephony
services, which include the transmission of voice and data
traffic fo communications carriers and the provision of enhanced
Web-based and other communications services to individuals and
businesses.
The Company was founded in 1996 to capitalize on the growth of
the Internet as a communications tool. The Company commercially
provides IP telephony services over a privately-managed IP
network. The Company operates a privately-managed IP network
with 45 points of presence (POPs) in 29 countries as of October
27, 1999.
The Company has a limited operating history and its prospects
are subject to the risks, expenses and uncertainties frequently
encountered by companies in the new and rapidly evolving markets
for Internet and telecommunications services. In addition, the
Company is financially dependent on RSL Communications Ltd.
("RSL COM") (see below).
The Company's research and development activities are conducted
in Israel by its wholly owned subsidiary, Delta Three Israel
Ltd. ("Delta Ltd.").
In 1997, the Company established a 95%-owned subsidiary,
Internet Technologies Colombia SA ("SA"), to provide the
Company's network services in Colombia. In 1998, the Company
established a 51%-owned subsidiary, Eltel Services Company Ltd.
("Eltel"), to provide the Company's network services in the
Philippines. Eltel ceased operations in 1998 and the Company's
investment in Eltel was written-off. In 1998, the Company also
established a 51%-owned subsidiary, Delta Three Direct LLC
("Direct"), to provide direct marketing for the Company. The
Company is in the process of dissolving Direct. As of June 30,
1999, the Company also had a 5% interest in the share capital of
Internet Telecom, Ltd., an Israeli corporation engaged in
research and development of Internet telephony.
Acquisition of the Company by RSL COM
The Company is a wholly owned subsidiary of RSL COM, a publicly
traded multinational telecommunications company. RSL COM and its
subsidiaries and affiliates (excluding the Company) are
collectively referred to herein as "RSL COM" or "Affiliates."
Approximately 69% of the Company's revenues for the year ended
December 31, 1998 were derived from transactions with RSL COM.
(RSL COM has also provided the Company with substantially all of
the Company's working capital since July 1997.)
In July 1997, the Company issued 8,150,895 shares of capital
stock to RSL COM pursuant to a stock purchase agreement with RSL
COM (representing 51% of the Company's outstanding capital stock
at that time) for aggregate gross consideration of $5,000,000.
In addition, at the time of the closing under the stock purchase
agreement, the Company issued 2,353,440 shares of capital stock
into escrow, which were released to RSL COM in 1997 for no
additional consideration under the anti-dilution provisions of
the stock purchase agreement relating to the July 1997 issuance.
During the remainder of 1997, RSL COM acquired additional shares
of capital stock from the Company's existing stockholders for
aggregate consideration of $2,856,750. As of December 31, 1997,
RSL COM held approximately 75% of the Company's outstanding
capital stock.
By April 1998, RSL COM acquired the remaining outstanding
capital stock of the Company held by the Company's remaining
stockholders for total consideration of $11,818,964 and
F-7
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- BUSINESS DESCRIPTION (CONTINUED)
merged the Company with a newly formed, wholly owned subsidiary
of RSL COM, with the Company remaining as the surviving
corporation.
The acquisition of the Company by RSL COM has been "pushed-down"
into the Company's financial statements as of July 1997, with an
increase to both goodwill and additional paid-in capital in the
amount of $15,157,588. The goodwill is being amortized by the
Company over a five-year period.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The
consolidated financial statements include the accounts of
deltathree.com, Inc. and its subsidiaries. The results of
subsidiaries acquired or disposed of during the year are
included from the date of acquisition to the date of disposal,
if applicable. All significant intercompany accounts and
transactions have been eliminated in consolidation. Each of the
Company's subsidiaries has a December 31 year end.
Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions, primarily
for allowances for doubtful accounts receivable and the useful
lives of fixed assets and intangible assets, that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents--The Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Allowance for Doubtful Accounts--The Company estimates the
allowance for doubtful accounts by reviewing the status of
significant past due receivables and analyzing historical bad
debt trends and the Company then reduces accounts receivables by
such allowance for doubtful accounts to expected net realizable
value.
Investments--Investments in less than 20% of the share capital
of other companies are presented at cost. In the event that
management identifies a decline of an other than temporary
nature in the estimated fair value of an investment to an amount
below cost, such investment is written down to fair market
value.
Property and Equipment and Related Depreciation--Property and
equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the
depreciable assets, which range from two to ten years.
Improvements are capitalized, while repair and maintenance costs
are charged to operations as incurred. The useful life of
telecommunications network equipment purchased from Ericsson
(see Note 11B) is 10 years. During 1998, $3.0 million of the
Company's equipment purchases from Ericsson was initially
recorded in the Company's consolidated balance sheets as a
credit to property and equipment and an offsetting debit to
accounts payable. After the Company reached agreement with
Ericsson relating to difficulties encountered by the Company in
integrating hardware and software purchased from Ericsson (see
Note 11B), the Company reclassified the $3.0 million accounts
payable to deferred revenues and costs.
Goodwill and Related Amortization--Goodwill represents the
excess of cost over the fair value of the Company's net assets,
pushed down as a result of RSL COM's acquisition of the Company,
and is being amortized using the straight-line method over five
years.
F-8
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-lived Assets and Goodwill--The Company's
long-lived assets and goodwill are reviewed for impairment on a
quarterly basis and whenever events or changes in circumstances
occur indicating that the net carrying amount may not be
recoverable. The Company reviews for impairment by comparing the
carrying value of the long-lived asset or goodwill to the
estimated undiscounted future cash flows expected to result from
the use of the long-lived assets (and their eventual
disposition) or the goodwill. If the sum of the expected
undiscounted future cash flows is less than the carrying amount
of assets, the Company would recognize an impairment loss. The
impairment loss, if determined to be necessary, would be
measured as the amount by which the carrying amount of the
long-lived asset or goodwill exceeds the fair value of the
long-lived asset or goodwill based on estimated future
discounted cash flows. The Company determined that, as of
December 31, 1997 and 1998 and September 30, 1999, there had
been no impairment in the carrying value of long-lived assets or
goodwill.
Revenue Recognition and Deferred Revenue--The Company records
revenue based on minutes (or fractions thereof) of customer
usage. The Company records payments received in advance for
prepaid services and services to be supplied under contractual
agreements as deferred revenue until such related services are
provided.
Cost of Revenues--Cost of revenues is comprised primarily of
access, transmission and termination costs based on actual
minutes in addition to monthly circuit lease costs and is net of
reimbursements from vendors.
Research and Development Expenses--Research and development
expenses, net of reimbursements from vendors, are expensed as
incurred.
Advertising Expenses--Advertising expenses are expensed as
incurred. For the period from June 30, 1996 to December 31,
1996, the years ended December 31, 1997 and 1998 and the
nine-month period ended September 30, 1999, advertising expenses
were approximately $0, $24,000, $124,000 and $52,000,
respectively.
Income Taxes--The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109
establishes financial accounting and reporting standards for the
effect of income taxes that result from activities during the
current and preceding years. SFAS No. 109 requires an asset and
liability approach for financial reporting for income taxes. The
Company's foreign subsidiaries file separate income tax returns
in the jurisdiction of their operations.
Net Loss per Share--In accordance with the Company's adoption of
SFAS No. 128, "Earnings Per Share", the net loss per share is
calculated by dividing the net loss attributable to capital
stock by the weighted average number of shares outstanding.
Outstanding common stock options are not included in the net
loss per share calculation as their effect is anti-dilutive. The
adoption of SFAS No. 128 did not materially affect the Company's
presentation of net loss per share.
Concentration of Credit Risk--The Company is subject to
concentrations of credit risk which consist principally of trade
accounts receivable and cash and cash equivalents.
The Company maintains its cash with various financial
institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions.
F-9
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of the Company's noncarrier customers prepay for
their services. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information.
Fair Value of Financial Instruments--The carrying amounts of
cash and cash equivalents, accounts and other receivables and
accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of
outstanding borrowings approximate fair value due to their
short-term interest rate.
Effects of Recently Issued Accounting Standards--In June 1997,
the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes new rules for the reporting and display of
comprehensive income and its components. The Company has no
elements of comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. Generally, it requires that
an entity recognize all derivatives as either an asset or
liability and measure those instruments at fair value, as well
as identify the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. The Company does not
currently engage or plan to engage in any derivative or hedging
activities. The adoption of SFAS No. 133 is not expected to have
a material impact on the Company.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP
No. 98-1"). The Company amortizes these costs over the
anticipated life of the systems. The adoption of SOP No. 98-1
did not have a material impact on the Company's financial
statements.
Stock-based Compensation--The Company has adopted the disclosure
provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," and elected to continue the accounting set forth
in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has
provided the necessary pro forma disclosures as if the fair
value method had been applied (See Note 12F).
Segment Reporting--Effective January 1, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes
standards for the way business enterprises report information
about operating segments, as well as enterprise-wide disclosures
about products and services, geographic areas and major
customers. See Note 15 for enterprise-wide disclosures required
by SFAS No. 131.
Unaudited Financial Statements--The unaudited interim September
30, 1998 financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in
management's opinion, necessary for a fair presentation of the
results for the interim period presented.
Reclassifications--Certain previously reported amounts have been
reclassified to conform with the current period presentation.
3 -- ACCOUNTS RECEIVABLE-NET
Accounts receivable are stated net of an allowance for doubtful
accounts of $100,000, $326,542 and $32,468 at December 31, 1997
and 1998 and September 30, 1999, respectively.
F-10
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 -- DUE FROM/TO AFFILIATES
The balances due from and due to Affiliates are for services
rendered and are non-interest bearing.
5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Prepaid commissions................................... $ -- $144,768 $ --
Deposits with credit card companies................... -- 199,401 150,000
Government of Israel (VAT refund and other)........... -- 59,763 106,161
Deposits with suppliers............................... -- 86,799 75,499
Prepaid expenses...................................... 20,455 28,055 669,121
Loan to employee...................................... -- 31,917 --
Other................................................. 145,832 69,973 150,871
-------- -------- -----------
Total prepaid expenses and other current
assets............................................ $166,287 $620,676 $ 1,151,652
-------- -------- -----------
-------- -------- -----------
</TABLE>
6 -- GOODWILL-NET
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Goodwill from acquisition of the Company by RSL COM
(see Note 1)...................................... $3,338,624 $15,157,588 $15,157,588
Deferred financing costs............................ 42,500 -- --
Less -- accumulated amortization.................... (197,249) (2,669,463) (4,943,098)
----------- ------------ -----------
Total goodwill--net................................. $3,183,875 $12,488,125 $10,214,490
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Accrued expenses..................................... $ -- $361,187 $ 1,314,983
Employees and related expenses....................... 64,750 144,013 1,106,281
Deposits from customers.............................. -- 118,672 14,957
Other................................................ 129,545 5,224 74,781
-------- -------- -----------
Total other current liabilities...................... $194,295 $629,096 $ 2,511,002
-------- -------- -----------
-------- -------- -----------
</TABLE>
F-11
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 -- LONG-TERM DEBT DUE TO AFFILIATES
The long-term debt issued in 1998 to RSL COM bears interest at a
fixed annual rate of 14% and is due on demand after September
30, 2000. Upon completion of an initial public offering by the
Company, the maturity date will be extended to the first
anniversary of the completion of such offering.
9 -- SEVERANCE PAY OBLIGATIONS
Delta Ltd., the Company's Israeli subsidiary, is subject to
certain Israeli law and labor agreements that determine the
obligations of Delta Ltd. to make severance payments to
dismissed employees and to employees leaving employment under
certain other circumstances. The obligation for severance pay
benefits, as determined by Israeli law, is based upon length of
service and the employee's most recent salary. This obligation
is partially funded through regular deposits made by Delta Ltd.
into unaffiliated severance pay funds and by the purchase from
unaffiliated insurance companies of managers' insurance
policies. Amounts funded are controlled by the fund trustees and
insurance companies and are not under the control and management
of Delta Ltd.
Expenses relating to employee termination benefits were $26,775,
$147,628, $8,578 and $39,679 for the years ended December 31,
1997 and 1998 and for the nine months ended September 30, 1998
(unaudited) and 1999, respectively. No expenses were incurred
for the period from June 1996 (inception) to December 31, 1996.
10 -- CONVERTIBLE NOTES PAYABLE TO AFFILIATES
During 1996 and 1997, RSL COM purchased from third parties
convertible notes issued by the Company. The notes were
convertible into capital stock at conversion rates of $0.80 and
$1.30, respectively. In connection with the issuance of the
notes, warrants were issued to purchase capital stock with
exercise prices of $0.80 and $1.30 per share. During 1998, all
of the notes were converted into, and warrants were exercised
for, shares of capital stock, in each case under their original
terms.
11 -- COMMITMENTS AND CONTINGENCIES
A. Services agreement with RSL COM
In July 1997, the Company entered into a three-year services
agreement with RSL COM. Pursuant to the services agreement with
RSL COM, RSL COM is required to use its reasonable best efforts
to provide the Company with certain office and equipment space
and to assist the Company in obtaining Internet, frame-relay and
dedicated lines from third parties. In addition, RSL COM is
required under the agreement to provide the Company with various
communications services at rates set forth in the agreement. The
agreement also provides that the Company is required, at RSL
COM's request, to use up to 50% of its network capacity to route
RSL COM's international telecommunications traffic at rates set
forth in the agreement.
Based on a cost analysis performed by the Company, management
believes that the amounts reflected in the financial statements
pursuant to the above services agreement do not materially
differ from amounts which the Company would have recognized or
incurred in providing or obtaining equivalent services on an
arms-length basis. During September 1999, this agreement was
amended. Consistent with the original services agreement, the
amendment also supports the continued provision of services at
fair market value.
F-12
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
B. Technology and marketing agreement with Ericsson
In October 1997, the Company entered into a technology and
marketing alliance with Ericsson for the development and
deployment of advanced IP telephony gateways and communications
software. Under the alliance agreement, the Company is entitled
to purchase hardware and software on preferential terms.
During 1998, due to difficulties in integrating the hardware and
software purchased from Ericsson into the Company's network, the
Company incurred significant costs and anticipates that it will
incur additional costs in 1999. To compensate the Company for
its costs, Ericsson agreed to offset amounts owed by the Company
to Ericsson for network telecommunications equipment previously
purchased from Ericsson with a fair value of $3 million. This
offset represents Ericsson's reimbursement of the costs
previously incurred and expected to be incurred by the Company.
For the year ended December 31, 1998 and the nine months ended
September 30, 1999, the Company recognized $901,385 and
$760,285, respectively, as an offset to research and development
expenses, and $694,250 and $299,136, respectively, as an offset
to cost of revenues incurred in respect of the network
telecommunications equipment. The remaining balance is reflected
as deferred revenues and costs and will be recorded as an offset
to such costs as they are incurred.
C. Other marketing and cooperation agreements
The Company has entered into marketing and cooperation
agreements with various other companies that maintain sites on
the Web. Pursuant to certain of these agreements, the Company is
obligated to pay commissions based on revenues derived from such
Web links.
D. Indentures governing debt of RSL COM
The Company is subject to covenants by reason of its status as a
restricted subsidiary of RSL COM under the indentures governing
a substantial amount of RSL COM's debt. These restrictions
significantly limit the ability of the Company to incur
additional indebtedness or create liens on its assets. The
Company's ability to incur indebtedness is limited by the amount
of indebtedness that RSL COM and the Company are permitted to
incur under the indentures. Such restrictions also limit the
Company's ability to pay dividends or make other distributions
in respect of the Company's capital stock, sell assets, engage
in mergers or acquisitions or make some types of investments.
These restrictions also limit the ability of a third party to
acquire a controlling interest in the Company. These
restrictions may prohibit transactions that would otherwise be
beneficial to the Company.
E. Lease commitments
The Company leases office space from RSL COM in New York at an
annual cost of $96,000. The lease term extends until June 2001.
In addition, the Company leases offices in Israel at an annual
cost of $240,000. The lease term extends until February 2003,
with an option to extend the lease for an additional five years.
F-13
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
F. Legal Proceedings.
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a
suit against the Company, RSL COM and an RSL COM subsidiary in
the United States District Court for the Southern District of
New York. Aerotel alleges that the Company is infringing on a
patent issued to Aerotel in November 1987 by making, using,
selling and offering for sale prepaid telephone card products in
the United States. Aerotel seeks an injunction to stop us from
using the technology covered by this patent, monetary damages in
an unspecified amount and reimbursement of attorneys' fees. This
litigation was only recently filed and the Company is presently
evaluating these claims. The Company believes that it has
meritorious defenses to the claim and it intends to defend the
lawsuit vigorously. However, the outcome of the litigation is
inherently unpredictable and an unfavorable result may have a
material adverse effect on the Company's business, financial
condition and results of operations. Regardless of the ultimate
outcome, the litigation could result in substantial expenses to
the Company and significant diversion of efforts by the
Company's managerial and other personnel.
12 -- STOCKHOLDERS' EQUITY
A. Stock Split.
The Company expects to revise its capital structure in
connection with its initial public offering to effect a
2.48-for-one stock split for each outstanding share of its
capital common stock. All references to per share amounts and
the number of shares in these financial statements have been
restated to reflect this expected stock split.
B. Description of capital stock
As of December 31, 1997, the Company's authorized share capital
was 100,000,000 shares of Class B common stock, par value
$0.001, of which 18,938,249 shares were issued and outstanding.
As of December 31, 1998, the Company's authorized share capital
was 20,000,000 shares of Class B common stock, par value $0.001,
of which 19,569,459 shares were issued and outstanding.
In September 1999, the Company authorized two additional classes
of capital stock, the Class A common stock, par value $0.001,
and preferred stock, par value $0.001. As of September 30, 1999,
the Company's authorized share capital was 200,000,000 shares of
Class A common stock, of which none were issued and outstanding,
20,000,000 shares of Class B common stock, of which 19,569,459
shares were issued and outstanding, and 25,000,000 shares of
preferred stock,of which none were issued and outstanding.
Effective upon the authorization of the Class A common stock,
each share of Class B common stock is convertible into one share
of Class A common stock at any time. The holders of the Class B
common stock are entitled to ten votes per share. The holders of
the Class A common stock are entitled to one vote per share.
C. Yahoo! Inc. Transaction.
On October 18, 1999, the Company issued to Yahoo! Inc. in
exchange for an offset to an account payable owed by the Company
to Yahoo! in the amount of $1 million 125,275 shares of Class A
common stock and a warrant to purchase 41,963 shares of Class A
common stock, assuming a cashless exercise of a warrant to
purchase 125,275 shares of Class A common stock at an exercise
price of $7.98 per share. The Company will record approximately
$672,000 of deferred compensation expense related to the
issuance of the shares (including shares issued
F-14
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
upon exercise of the warrant) representing the difference
between each of the purchase price of the Class A common stock
as compared to the initial public offering price of the Class A
common stock. The Company will amortize this deferred
compensation expense over the one year life of the Yahoo!
advertising and promotion agreement referred to below.
In addition, on October 18, 1999, the Company entered into an
advertising and promotion agreement whereby Yahoo! Inc. will
provide 226,038,600 page views to the Company over a one year
period commencing in December 1999. In consideration for such,
the Company will compensate Yahoo! Inc. $5,000,000 of which the
first $1,000,000 will be offset against receivables for the
shares issued to Yahoo!, as described above. The $5,000,000 will
be charged to expense using the straight line basis over the one
year life of the contract.
D. CNET Transaction.
On October 20, 1999, the Company issued to CNET Investments,
Inc. 1,085,943 shares of common stock and a warrant to purchase
466,028 shares of Class A common stock at an exercise price of
$19.31 per share, or approximately $11.0 million in the
aggregate. The Company will record approximately $2.0 million of
deferred compensation expense related to the issuance of the
shares representing the difference between each of the purchase
price of the Class A common stock as compared to the initial
public offering price of the Class A common stock. The Company
will amortize this deferred compensation expense over the two
year life of the CNET promotion agreement referred to below.
In addition, the Company entered into a development and
promotion agreement with CNET, Inc., effective as of September
22, 1999, whereby CNET, Inc. will provide various promotions to
the Company to assist the Company in promoting its pc-to-phone
product and related services. In consideration for this
promotion, the Company will compensate CNET, Inc. a total of
$11,000,000 over a two year period. The Company will expense the
$11.0 million of payments under the development promotion
agreement using the straight line method over the two year
period of the agreement.
E. Restricted Units
As of December 31, 1998 and September 30, 1999, a total of
1,048,851 and 1,121,324 restricted units, respectively, had been
granted to employees of the Company under the 1997 RSL COM Stock
Incentive Plan. The restricted units were convertible to shares
of RSL COM Class A common stock or cash (at RSL COM's
discretion) based on the value of the Company on December 31 of
each year, as determined with reference to the value of RSL COM.
Of these restricted units, 836,147 have an exercise price of
$.0004 and were granted in 1997 and 1998 and 189,262 have an
exercise price of $2.08 and were granted in 1998. In April 1999,
an additional 95,915 restricted units were granted to employees
of the Company with an exercise price of $5.11. The majority of
the restricted units vest over a three-year period from the date
of grant and are exercisable for a period of seven years from
the date of grant. Upon completion of the Company's contemplated
initial public offering, the Company will issue shares of the
Company's Class A common stock in exchange for vested restricted
units on a one-for-one basis upon payment of the related
exercise price and will issue options to purchase shares of the
Company's Class A common stock in exchange for unvested
restricted units on a one-for-one basis, with the same exercise
prices (adjusted for the stock split referred to in Note 12A)
and vesting schedules as the corresponding restricted units. For
purposes of these financial statements, the Company has assumed
that the restricted units will convert into shares of common
stock on a one-for-one basis.
F-15
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to generally accepted accounting principles, the
restricted units are considered variable grants. Consequently,
changes in the fair value of the underlying shares at each
balance sheet date affect the aggregate amount of deferred
compensation recorded by the Company. The Company recorded
deferred compensation in connection with the restricted unit
grants of approximately $1,800,000 through December 31, 1998 and
an additional $6,600,000 during the nine months ended September
30, 1999, representing the difference between the exercise price
and the deemed fair value of the Company's common stock at such
date, based on a fair value of restricted units of $2.08 and
$8.18 per unit as of December 31, 1998 and September 30, 1999,
respectively. Such amount is included as a reduction of
stockholder's equity and is being amortized by charges to
operations over the vesting period. Amortization of the deferred
compensation amounted to $742,780 and $6,635,574 for the year
ended December 31, 1998 and the nine months ended September 30,
1999, respectively.
Upon completion of the Company's contemplated initial public
offering, the Company will record an additional $4.5 million of
deferred compensation expense for the difference between the
fair value of the restricted units and the deemed fair value of
the Company's Class A common stock, based on an assumed initial
public offering price of $12.00 per share.
F. Stock Options
In April 1999, the Company agreed to grant options to purchase
an aggregate of 1,076,761 shares of the Company's Class A common
stock at an exercise price of $5.11 to executive officers of the
Company, subject to completion of the Company's contemplated
initial public offering. Such options vest over a three year
period from the date of grant and are exercisable for a period
of seven years from the date of grant.
The Company recorded deferred compensation related to the stock
options of approximately $7,500,000 as of September 30, 1999,
representing the difference between the exercise price and the
deemed fair market value of the Company's Class A common stock
at such date. Such amount is included as a reduction of
stockholder's equity and is being amortized by charges to
operations over the three year vesting period. Amortization of
the deferred compensation amounted to $2,290,646 for the nine
months ended September 30, 1999.
Had compensation cost for the Company's stock options and
restricted units been determined based on fair value at the
grant date in accordance with SFAS No. 123, the Company's pro
forma net loss and pro forma diluted net loss per share would
have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported....................................... $ (178,602) $(2,367,582) $ (7,120,971)
---------- ------------ ------------
---------- ------------ ------------
Pro forma......................................... $ (178,602) $(2,367,582) $ (6,475,211)
---------- ------------ ------------
---------- ------------ ------------
Net loss per share--basic and diluted:
As reported....................................... $ (0.03) $ (0.19) $ (0.37)
---------- ------------ ------------
---------- ------------ ------------
Pro forma......................................... $ (0.03) $ (0.19) $ (0.34)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
For the purpose of presenting pro forma information required
under SFAS 123, the fair value of the restricted units and
option grants has been estimated on the date of grant using the
Black-
F-16
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
Scholes option pricing model with a risk-free interest rate of
6%, a 3-year expected life, zero expected volatility and no
dividends.
13 -- RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses (which commenced in 1997)
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Salaries and related expenses........... $ 91,318 $ 947,943
Consulting and advisory fees............ -- 196,981
Depreciation and amortization........... 83,057 41,214
Travel.................................. -- 146,432
Other................................... 119,775 218,955
------------ ------------
294,150 1,551,525
Less--reimbursement by Ericsson (see
Note 11B)............................. -- (901,385)
------------ ------------
Total research and development
expenses.............................. $ 294,150 $ 650,140
------------ ------------
------------ ------------
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Salaries and related expenses........... $ 605,735 $ 1,137,619
Consulting and advisory fees............ -- --
Depreciation and amortization........... 46,295 85,451
Travel.................................. 121,609 94,551
Other................................... 194,342 239,937
------------ ------------
967,981 1,557,558
Less--reimbursement by Ericsson (see
Note 11B)............................. (488,951) (760,285)
------------ ------------
Total research and development
expenses.............................. $ 479,030 $ 797,273
------------ ------------
------------ ------------
</TABLE>
14 -- INCOME TAXES
A. Tax loss carryforwards
As of December 31, 1998, the Company had net operating loss
carryforwards generated in the U.S. and Israel of approximately
$3,000,000 and $3,300,000, respectively. The Company's U.S. net
operating loss carryforwards will expire at various dates
beginning in 2011 if not utilized. In addition, a portion of
those net operating loss carryforwards could be subject to
limitation due to RSL COM's acquisition of the Company. The
Company's net operating losses generated in Israel may be
carried forward indefinitely.
B. In accordance with SFAS No. 109, the components of deferred
income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
--------- ---------- -------------
<S> <C> <C> <C>
Net operating losses carryforwards................. $900,000 $3,500,000 $ 9,800,000
Less valuation allowance........................... (900,000) (3,500,000) (9,800,000)
--------- ---------- -----------
Net deferred tax assets............................ $ -- $ -- $ --
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
As of December 31, 1997 and 1998 and as of September 30, 1999, a
valuation allowance of $900,000, $3,500,000 and $9,800,000,
respectively, is provided as the realization of the deferred tax
assets are not assured.
F-17
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 -- SEGMENT REPORTING, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment, IP
communications services, and makes business decisions and
allocates resources accordingly.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1998 1999
---------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues by geographical location:
United States......................................... $ 679,821 $4,922,073 $3,060,431 $4,088,235
Europe................................................ 37,339 528,157 364,501 870,573
Argentina............................................. 284,202 33,432 40,092 113,309
Hong Kong and China................................... 149,232 -- 87,011 688,586
Other................................................. 95,047 154,385 116,830 671,651
---------- ---------- ----------- ----------
Total revenues...................................... $1,245,641 $5,638,047 $3,668,865 $6,432,354
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Revenues from principal customers:
Affiliates............................................ $ 467,842 $3,896,106 $2,484,541 $4,077,278
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Other principal customer.............................. $ 276,000 $ -- $ -- $ --
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
<S> <C> <C> <C> <C>
Long-lived assets:
United States........................................... $448,424 $4,375,898 $ 1,722,038
Israel.................................................. 250,535 2,077,091 4,385,126
Other................................................... 173,249 1,816,434 3,782,178
-------- ---------- -----------
Total long-lived assets................................. $872,208 $8,269,423 $ 9,889,342
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
F-18
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
5,000,000 SHARES
[deltathree.com logo]
Common Stock
------------------------------
PROSPECTUS
, 1999
------------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of common stock being registered, all of which will
be paid by the Registrant*:
<TABLE>
<S> <C>
SEC registration fee...................................................................... $ 24,943
NASD filing fee........................................................................... 9,473
Nasdaq National Market listing fee........................................................ 80,000
Transfer agent and registrar fees......................................................... 7,500
Printing and engraving fees............................................................... 250,000
Legal fees and expenses................................................................... 650,000
Blue sky fees and expenses................................................................ 10,000
Accounting fees and expenses.............................................................. 375,000
Miscellaneous............................................................................. 93,084
----------
Total................................................................................... $1,500,000
----------
----------
</TABLE>
- ------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL"), as amended,
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that the Company may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the Company) by reason of the fact that the
person is or was a director, officer, agent or employee of the Company or is or
was serving at the Company's request as a director, officer, agent or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the Company as well
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgement or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to the Company, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
dissented at the time, may avoid liability by causing his or her dissent to such
actions be entered in the books
II-1
<PAGE>
containing the minutes of the meetings of the board of directors at the time
such action occurred or immediately after such absent director receives notice
of the unlawful acts.
Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to deltathree.com, Inc.
or its stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under section 174 of the DGCL regarding unlawful dividends and stock
purchases; or
for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our Amended and Restated By-laws provide that:
o we must indemnify our directors and officers to the fullest extent
permitted by Delaware law;
o we may indemnify our other employees and agents to the same extent that
we indemnified our officers and directors, unless otherwise determined by
our Board of Directors; and
o we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.
The indemnification provisions contained in the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-laws are not
exclusive of any other rights to which a person may be entitled by law,
agreement, vote of stockholders or disinterested directors or otherwise. In
addition, the Company maintains insurance on behalf of its directors and
executive directors or officers insuring them against any liability asserted
against them in their capacities as directors or officers or arising out of such
status.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in June 1996, the Company has issued and sold
unregistered securities in the transactions described below. The registrant
intends to effect a 2.48 to 1 stock split prior to completion of the offering.
Share numbers set forth below are presented on a post-split basis.
A predecessor company to the Registrant, Delta Three, Inc., was formed in
June 1996 ("Old Delta Three"). During 1996, Old Delta Three issued a total of
7,535,277 (post-split) shares of its common stock to private investors to
generate initial start-up capital in transactions exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act")
pursuant to Section 4(2) of the Securities Act. Shares for a total consideration
of $164,755 were issued to 22 investors over a five-month period in privately
negotiated transactions with no general solicitations being made. The purchasers
delivered representations as to their investment intents and all securities
issued were legended to indicate the restricted nature of the securities. These
shares were issued as follows:
<TABLE>
<CAPTION>
DATE NO. OF INVESTORS NO. OF SHARES TOTAL CONSIDERATION
- ---- ---------------- ------------- -------------------
<S> <C> <C> <C>
July 2, 1996.................................................. 1(1) 62,121 $ 25,000
July 15, 1996................................................. 2(2) 31,060 $ 12,500
July 16, 1996................................................. 6(3) 95,666 $ 38,500
August 1, 1996................................................ 6(4) 6,243,160 $ 16,265
August 15, 1996............................................... 3(5) 126,726 $ 51,000
October 15, 1996.............................................. 1(6) 24,848 $ 10,000
November 5, 1996.............................................. 3(7) 951,693 $ 11,490
---------
Total....................................................... $ 164,755
---------
---------
</TABLE>
(Footnotes continued on next page)
II-2
<PAGE>
(Footnotes continued from previous page)
- ------------------
(1) Elliot Schwartz
(2) Arlene & Elliot Schwartz and Schwartz Family Trust Fund B
(3) Michael Ettinger, Schwartz Family Trust Fund C, Ida & Michael Ettinger,
Walter Wolak, Rosalyn Schneller & Elliot Schwartz and Elliot Schwartz, as
custodian for Alex Weller
(4) Jacob Davidson, Pioneer Management Corporation, Inc., Fred Sager, Noam
Bardin, Lee Kaplan, and Micha Avni
(5) Modern Technology Corp., Charolotte Horowitz and Shelly Weller & Elliot
Schwartz
(6) Kerry Kassovar
(7) Joseph H. Popolow, Stephen J. Perone and Jane F. Moysak
In the first half of 1997, Old Delta Three issued 124,242 shares of its
common stock to each of Israel Securities Center Corp. and Michael Selesny in
exchange for investment banking services related to identifying private
investors in Old Delta Three in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. These
24,848 shares were purchased for $0.004 per share.
On December 23, 1996, Old Delta Three conducted a $300,000 private
placement of units consisting of convertible notes and warrants to individual
accredited investor subscribers in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. There were
twelve investors in the December placement, Eva D. Glass, Bert Amador, Albert
Resnick, John M. Walsh, Andrew S. Edson & Marilyn Edson, Larry Alpert, H. Manes,
Mark Katzman, Neil Katzman, Edmond O'Donnell, Dr. Debabrata Chakrabarty and
Smithfield Corp., each investing $25,000 for which each investor received one
unit consisting of a $25,000 convertible note (at a conversion price of $0.80
per share and a warrant permitting the purchase of up to 31,060 shares at an
exercise price of $0.8 per share. In addition, one investor, Thomas Mann, made a
short term loan to Old Delta Three for $5,000 for which it received a warrant to
purchase up to 12,424 shares at an exercise price of $0.8 per share. An
additional investor, Northeast Securities, Inc., was paid a 10% commission and
3% expense allowance, in the form of convertible notes and warrants, for acting
as a placement agent which such services were valued at $50,000. No general
solicitations were made in connection with this transaction; Old Delta Three
obtained representations from the investors as to their accredited investor
status and the securities were legended to indicate the restricted nature of
them.
Old Delta Three conducted a similar private placement of units in April
1997 consisting of convertible notes and warrants for an aggregate of $520,000
in transactions exempt from the registration requirements of the Securities Act
in reliance on Rule 505 thereof. A total of 16 units were issued to the
following investors: Surety Bank & Trust Co. Ltd., Bert Amador, Harvey R. Manes,
M.D., Steven A. Portnoy, Kantibhai S. Patel IRA, The Gross Investment Company,
L.P., M.A.S. Hallaba IRA and Northeast Securities, Inc. The price of each unit
was $32,500 and consisted of a $32,500 convertible note (at a conversion price
of $1.30 per share) and a warrant permitting the purchase of up to 24,848 shares
at an exercise price of $1.30 per share. No general solicitations were made in
connection with this transaction; Old Delta Three obtained representations from
the investors as to their accredited investor status and the securities were
legended to indicate the restricted nature of them.
In June 1997, under a restricted stock agreement for employees and
directors of Old Delta Three, Old Deta Three granted shares to certain employees
of Old Delta Three totaling 491,999 shares of common stock of Old Delta Three,
pursuant to transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Rule 701 thereunder. These
grants were to have vested over a two year period. Upon the merger described
below, these grants were converted to restricted units with an exercise price of
$0.004 per share granted by RSL Communications, Ltd. ("RSL COM"), the
Registrant's parent company, under RSL COM's 1997 Stock Incentive Plan, pursuant
to RSL COM's registration statement on Form S-8 related to such plan.
Pursuant to a stock purchase agreement among RSL COM, Old Delta Three and
shareholders of Old Delta Three representing a controlling interest in Old Delta
Three, dated July 23, 1997, Old Delta Three issued to RSL COM 8,101,467 shares
of its common stock. An additional 2,339,168 shares of common stock were issued
into escrow. The shares were issued in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. The escrowed shares were released from escrow to RSL COM prior to
completion of the merger described below. The total consideration for all the
shares issued, including the escrowed shares, was $5 million. At or about the
same time as the July 23, 1997 transaction,
II-3
<PAGE>
RSL COM purchased shares from most of the then existing shareholders of Old
Delta Three as well as the units sold in December 1996 and April 1997 from the
then existing unitholders.
Pursuant to an Agreement and Plan of Merger dated March 31, 1998, Old Delta
Three was merged into RSL Acquisition Corp., a wholly-owned subsidiary of RSL
COM, the name of which new entity was changed to Delta Three, Inc. Old Delta
Three ceased to exist upon consummation of the merger. Shareholders of Old Delta
Three, other than RSL COM, received cash and shares of RSL COM in exchange for
their shares of Old Delta Three. As of the consummation of the merger, RSL COM
was the only shareholder of the Registrant and was issued 18,061,156 shares of
common stock. Subsequent to the merger, RSL COM exercised all the warrants and
convertible notes held by it in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. As of the
date of this registration statement, there are no security holders of the
Registrant other than RSL COM.
Pursuant to a stock and warrant purchase agreement, on October 18, 1999,
the Registrant issued to Yahoo! Inc. 125,275 shares of common stock and a
warrant to purchase 125,275 shares of common stock with an exercise price of
$7.932 per share, for $1,000,000, in a transaction exempt from the registration
requirements of the Securities Act, pursuant to Section 4(2) thereof.
Pursuant to a stock and warrant purchase agreement, on October 20, 1999,
the Registrant issued to CNET Investments, Inc. 1,085,943 shares of common stock
and warrants to purchase 466,028 (post-split) shares of common stock at an
exercise price of $19.31 per share for $10,999,994.76, in a transaction exempt
from the registration requirements of the Securities Act, pursuant to
Section 4(2) thereof.
In connection with this offering, shares of common stock outstanding prior
to the offering were converted into shares of Class B common stock. This
conversion was effected without registration under the Securities Act in
reliance on Section 3(a)(9) of the Securities Act on a one-for-one basis.
The Registrant changed its name to its current name, deltathree.com, Inc.,
on May 17, 1999.
II-4
<PAGE>
ITEM 16. EXHIBITS.
A. EXHIBITS
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.+
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.+
4.1 Specimen Certificate of Common Stock.
4.2 Specimen Certificate of Class B Common Stock.
4.3 Registration Rights Agreement dated September 1, 1999, between RSL Communications, Ltd.
and deltathree.com, Inc.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.+
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated September 3, 1999.+
10.2 Credit Facility dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.+
10.3 Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4 Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.+
10.5 Form of deltathree.com, Inc. 1999 Performance Incentive Plan.+
10.6 Form of deltathree.com, Inc. 1999 Directors' Plan.+
10.7 Employment Agreement effective as of April 1, 1999, between Amos Sela and deltathree.com,
Inc.+
10.8 Employment Agreement effective as of April 1, 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.+
10.9 Employment Agreement effective as of April 1, 1999, between Noam Bardin and
deltathree.com, Inc.+
10.10 Employment Agreement effective as of April 1, 1999, between Shimmy Zimels and
deltathree.com, Inc.+
10.11 Employment Agreement effective as of April 1, 1999, between Elie C. Wurtman and
deltathree.com, Inc.+
10.12 Employment Agreement effective as of April 1, 1999, between Jacob A. Davidson and
deltathree.com, Inc.+
10.13 Investor Rights Agreement dated as of September 29, 1999 between Yahoo! Inc. and
deltathree.com, Inc.+
10.14 Form of warrant issued to Yahoo! Inc on October 18, 1999.+
10.15 Management Agreement dated as of November 1, 1999 between deltathree.com, Inc. and RSL
Communications, Ltd.
10.16 Amendment to Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated November 1, 1999.+
10.17 Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.+
10.18 Form of warrant issued to CNET Investments, Inc. on October 20, 1999.+
10.19 Co-Branding and Services Agreement effective as of October 1, 1999, between RSL COM
PrimeCall, Inc. and deltathree.com, Inc.+
10.20 Intercompany Compliance Agreement dated as of November 1, 1999, between RSL
Communications, Ltd., RSL Communications PLC and deltathree.com, Inc.+
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C> <C>
10.21 Development and Promotion Agreement effective as of September 22, 1999 between CNET, Inc.
and deltathree.com, Inc.
10.22 Form of Proposed Release and Indemnification Agreement between RSL Communications, Ltd.
and deltathree.com, Inc.
21.1 Subsidiaries of Registrant.+
23.1 Consent of Brightman Almagor & Co.*
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).+
24.1 Power of Attorney+
27.1 Financial Data Schedule.+
99.1 Consent of Nominee Director--Robert R. Grusky
99.2 Consent of Nominee Director--Yadin Kaufmann
99.3 Consent of Nominee Director--Oakleigh Thorne
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) It will provide to the underwriters at the closing specified in
the underwriting agreements certificates in such denominations and
registered in such amount as required by the underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, New York on the 12th day of November, 1999.
DELTATHREE.COM, INC.
By: /s/ Mark J. Hirschhorn
-----------------------------------
Mark J. Hirschhorn
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer, President November 12, 1999
- ------------------------------------------ and Director (Principal Executive Officer)
Amos Sela
/s/ Mark J. Hirschhorn Chief Financial Officer (Principal November 12, 1999
- ------------------------------------------ Accounting and Financial Officer)
Mark J. Hirschhorn
* Co-Chairman of the Company November 12, 1999
- ------------------------------------------ and Chairman of the Board of Directors
Elie C. Wurtman
* Co-Chairman of the Company November 12, 1999
- ------------------------------------------
Jacob A. Davidson
* Director November 12, 1999
- ------------------------------------------
Itzhak Fisher
* Director November 12, 1999
- ------------------------------------------
Nir Tarlovsky
* Director November 12, 1999
- ------------------------------------------
Donald R. Shassian
* Director November 12, 1999
- ------------------------------------------
Jacob Z. Schuster
* Director November 12, 1999
- ------------------------------------------
Avery S. Fischer
* By: /s/ Mark J. Hirschhorn Attorney-In-Fact November 12, 1999
------------------------------------
Mark J. Hirschhorn
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.+
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.+
4.1 Specimen Certificate of Common Stock.
4.2 Specimen Certificate of Class B Common Stock.
4.3 Registration Rights Agreement dated September 1, 1999, between RSL Communications, Ltd.
and deltathree.com, Inc.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.+
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated September 3, 1999.+
10.2 Credit Facility dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.+
10.3 Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4 Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.+
10.5 Form of deltathree.com, Inc. 1999 Performance Incentive Plan.+
10.6 Form of deltathree.com, Inc. 1999 Directors' Plan.+
10.7 Employment Agreement effective as of April 1, 1999, between Amos Sela and deltathree.com,
Inc.+
10.8 Employment Agreement effective as of April 1, 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.+
10.9 Employment Agreement effective as of April 1, 1999, between Noam Bardin and
deltathree.com, Inc.+
10.10 Employment Agreement effective as of April 1, 1999, between Shimmy Zimels and
deltathree.com, Inc.+
10.11 Employment Agreement effective as of April 1, 1999, between Elie C. Wurtman and
deltathree.com, Inc.+
10.12 Employment Agreement effective as of April 1, 1999, between Jacob A. Davidson and
deltathree.com, Inc.+
10.13 Investor Rights Agreement dated as of September 29, 1999 between Yahoo! Inc. and
deltathree.com, Inc.+
10.14 Form of warrant issued to Yahoo! Inc on October 18, 1999.+
10.15 Management Agreement dated as of November 1, 1999 between deltathree.com, Inc. and RSL
Communications, Ltd.
10.16 Amendment to Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated November 1, 1999.+
10.17 Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.+
10.18 Form of warrant issued to CNET Investments, Inc. on October 20, 1999.+
10.19 Co-Branding and Services Agreement effective as of October 1, 1999, between RSL COM
PrimeCall, Inc. and deltathree.com, Inc.+
10.20 Intercompany Compliance Agreement dated as of November 1, 1999, between RSL
Communications, Ltd., RSL Communications PLC and deltathree.com, Inc.+
10.21 Development and Promotion Agreement effective as of September 22, 1999 between CNET, Inc.
and deltathree.com, Inc.
10.22 Form of Proposed Release and Indemnification Agreement between RSL Communications, Ltd.
and deltathree.com, Inc.
21.1 Subsidiaries of Registrant.+
23.1 Consent of Brightman Almagor & Co.*
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1).+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
24.1 Power of Attorney+
27.1 Financial Data Schedule.+
99.1 Consent of Nominee Director-Robert R. Grusky
99.2 Consent of Nominee Director-Yadin Kaufmann
99.3 Consent of Nominee Director-Oakleigh Thorne
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
DRAFT
5,000,000 Shares
DELTATHREE.COM, INC.
Class A Common Stock, par value $0.001 per share
UNDERWRITING AGREEMENT
_____ __, 1999
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION,
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Deltathree.com, Inc., a Delaware corporation (the "Company"),
proposes to sell 5,000,000 shares (the "Firm Stock") of the Company's Class A
Common Stock, par value $0.001 per share (the "Common Stock"). In addition, the
Company proposes to grant to the Underwriters named in Schedule 1 hereto (the
"Underwriters") an option to purchase up to an additional 750,000 shares of the
Common Stock on the terms and for the purposes set forth in Section 3 (the
"Option Stock"). The Firm Stock and the Option Stock, if purchased, are
hereinafter collectively called the "Stock." This is to confirm the agreement
concerning the purchase of the Stock from the Company by the Underwriters.
It is understood that 500,000 shares of the Firm Stock will
initially be reserved by Lehman Brothers Inc. for offer and sale upon the terms
and conditions set forth in the Prospectus and in accordance with the rules and
regulations of the National Association of Securities Dealers, Inc. to officers,
directors, employees (including their family members) of the Company and RSL
Communications Ltd. ("RSL COM") and its affiliates and friends of management of
RSL COM and the Company (collectively, "Participants") as set forth in the
Prospectus under the caption "Underwriting" (the "Directed Share Program") who
have heretofore delivered to Lehman Brothers Inc. offers or indications of
interest to purchase shares of Firm Stock in form satisfactory to Lehman
Brothers Inc. The Firm Stock to be sold by Lehman Brothers Inc. pursuant to the
Directed Share Program (the "Directed Shares") will be sold by Lehman Brothers
Inc. pursuant to this Agreement at the public offering price. Any Directed
Shares not orally confirmed for purchase by any Participants by the end of the
business
<PAGE>
day on which this Agreement is executed will be offered to the public by Lehman
Brothers Inc. as set forth in the Prospectus.
1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 with respect
to the Stock has (i) been prepared by the Company in
conformity with the requirements of the United States
Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the
United States Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement have
been delivered by the Company to you as the representatives
(the "Representatives") of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent
post-effective amendment thereto, if any, was declared
effective by the Commission; "Effective Date" means the date
of the Effective Time; "Preliminary Prospectus" means each
prospectus included in such registration statement, or
amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by
the Company with the consent of the Representatives pursuant
to Rule 424(a) of the Rules and Regulations; "Registration
Statement" means such registration statement, as amended at
the Effective Time, including all information contained in the
final prospectus filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations in accordance with Section
5(a) hereof and deemed to be a part of the registration
statement as of the Effective Time pursuant to paragraph (b)
of Rule 430A of the Rules and Regulations; and "Prospectus"
means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of
the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they
become effective or are filed with the Commission, as the case
may be, conform in all respects to the requirements of the
Securities Act and the Rules and Regulations and do not and
will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of
the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement
of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading;
provided that no representation or warranty is made as to
information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity
with written information
2
<PAGE>
furnished to the Company through the Representatives by or on
behalf of any Underwriter specifically for inclusion therein,
it being understood that the only information so furnished is
specified in Section 8(e).
(c) The Company and each of its subsidiaries (as
defined in Section 15) have been duly incorporated and are
validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as
foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of
their respective businesses requires such qualification,
except where failure to be so qualified and in good standing
could not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the consolidated
financial position, stockholders' equity, results of
operations, business or prospects of the Company and its
subsidiaries take as a whole (a "Material Adverse Effect");
the Company and each of its subsidiaries have all power and
authority necessary to own or hold their respective properties
and to conduct the businesses in which they are engaged as
described in the Prospectus; and none of the subsidiaries of
the Company is a "significant subsidiary," as such term is
defined in Rule 405 of the Rules and Regulations.
(d) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of
capital stock of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable
and (except as described in the Prospectus) are owned directly
or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims.
(e) The shares of the Stock to be issued and sold by
the Company to the Underwriters hereunder have been duly and
validly authorized and, when issued and delivered against
payment therefor as provided herein, will be duly and validly
issued, fully paid and non-assessable and the Stock will
conform to the description thereof in the Prospectus
(f) This Agreement has been duly authorized, executed
and delivered by the Company and (assuming the due
authorization, execution and delivery thereof by the other
parties thereto) constitutes the legal, valid and binding
obligation of the Company, enforceable against it in
accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles
(whether considered in a proceeding in equity or at law) or an
implied covenant of good faith and fair dealing, except that
any rights or indemnification or contribution under this
Agreement may be limited by the laws of the State of New York,
the federal laws of the United States or public policy
relating thereto.
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(g) The execution, delivery and performance of this
Agreement by the Company and the consummation of the
transactions contemplated hereby and the amendment of the
Company's certificate of incorporation to provide for the
2.48483594491554-for-1 stock split described in the Prospectus
under the captions "Capitalization" and "Description of
Capital Stock" (such stock split is herein called the
"Recapitalization") did not and will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor did or will such
actions result in any violation of the provisions of the
charter or by-laws of the Company or any of its subsidiaries
or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties
or assets; and except for the registration of the Stock under
the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as have been
obtained or made under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and applicable state or foreign
securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the
transactions contemplated hereby.
(h) There are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company (i) to include
with the securities registered pursuant to the Registration
Statement any securities of the Company owned or to be owned
by such person or (ii) to file a registration statement under
the Securities Act with respect to such securities or to
include such securities in any securities being registered
pursuant to any other registration statement (other than the
Registration Statement) filed by the Company under the
Securities Act, except, in the case of clause (ii), pursuant
to the Investor Rights Agreement, dated September 29, 1999,
between the Company and Yahoo! Inc. ("Yahoo"), the Investor
Rights Agreement, dated October 20, 1999, between the Company
and CNET Investments, Inc. ("CNET") and the Registration
Rights Agreement, dated September 1, 1999, between the Company
and RSL Communications, Ltd. (collectively, the "Registration
Rights Agreements"). The holders of outstanding shares of the
Company's capital stock are not entitled to preemptive or
other rights to subscribe for the Stock. Except for (i) the
warrants acquired by Yahoo pursuant to the Common Stock and
Warrant Purchase Agreement, dated September 29, 1999, between
the Company and Yahoo and the warrants acquired by CNET
pursuant to the Common Stock and Warrant Purchase Agreement,
dated October 20, 1999, between the Company and CNET
(collectively, the "Stock and Warrant Agreements"), (ii) the
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options to purchase 1,076,761 shares of Common Stock in the
aggregate (after giving effect to the Recapitalization)
granted to executive officers of the Company pursuant to their
employment agreements, (iii) the options to purchase 198,784
shares of Common Stock in the aggregate (after giving effect
to the Recapitalization) to be granted to the non-employee
directors of the Company immediately after the Closing Date,
(iv) the 748,288 RSL COM restricted units vested on the date
hereof to be exchanged for Common Stock on a one-for-one basis
and (v) the 372,976 RSL COM restricted units that are unvested
on the date hereof to be exchanged for options to purchase
Common Stock on a one-for-one basis, no options, warrants or
other rights to purchase, agreements or other obligations to
issue, or rights to convert any obligations into or exchange
any securities for, shares of capital stock of or ownership
interests in the Company are outstanding.
(i) Except pursuant to the Stock and Warrant
Agreements, the Company has not sold or issued any shares of
its capital stock during the six-month period preceding the
date of the Prospectus, including any sales pursuant to Rule
144A under, or Regulations D or S of, the Securities Act
(other than as described in the Prospectus under the captions
"Capitalization" and "Description of Capital Stock").
(j) Neither the Company nor any of its subsidiaries
has sustained, since the date of the latest audited financial
statements included in the Prospectus, any material loss or
interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or
decree, otherwise than as set forth in the Prospectus; and,
since such date, there has not been any change in the capital
stock of the Company (other than as described in the
Prospectus under the captions "Capitalization" and
"Description of Capital Stock") or long-term debt of the
Company or, otherwise than as set forth in the Prospectus, any
material adverse change, or any development involving a
prospective material adverse change, in or affecting the
general affairs, management, financial position, stockholders'
equity or results of operations of the Company and its
subsidiaries.
(k) The financial statements (including the related
notes and supporting schedules) filed as part of the
Registration Statement or included in the Prospectus comply as
to form in all material respects with the requirements of
Regulation S-X under the Securities Act applicable to
registration statements on Form S-1 under the Securities Act
and present fairly, in all material respects, the consolidated
financial position and results of operations of the Company,
at the dates and for the periods indicated, and have been
prepared in conformity with generally accepted accounting
principles in the United States applied on a consistent basis
throughout the periods involved.
(l) Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, who have certified the financial
statements of the Company filed as
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part of the Registration Statement, whose report appears in
the Prospectus and who have delivered the initial letter
referred to in Section 6(f) hereof, are independent public
accountants as required by the Securities Act and the Rules
and Regulations.
(m) Neither the Company nor any of its subsidiaries
owns any real property; the Company and each of its
subsidiaries have good and marketable title to all personal
property owned by them, free and clear of all liens,
encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of
such property and do not materially interfere with the use
made and proposed to be made of such property by the Company
and its subsidiaries; and all real property and buildings held
under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry,
or are covered by, insurance in such amounts and covering such
risks as is adequate for the conduct of their respective
businesses and the value of their respective properties and as
is customary for companies engaged in similar businesses in
similar industries.
(o) The Company and its subsidiaries own, possess,
license or have other rights to use, on reasonable terms, all
material patents, patent applications, trademarks, service
marks, trademark and service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, technology,
know-how and other intellectual property (collectively, the
"Intellectual Property") necessary for the conduct of their
respective businesses as now conducted or as proposed to be
conducted as described in the Prospectus. To the Company's
best knowledge, there are no rights of third parties to any
such Intellectual Property and there is no material
infringement by third parties of any of the Intellectual
Property. (i) Except as set forth in the Prospectus under the
caption "Business--Legal Proceedings," there is no pending or,
to the Company's best knowledge, threatened action, suit,
proceeding or claim by others challenging the Company's rights
in or to any of the Intellectual Property, (ii) the Company is
not aware (without any independent verification) of any facts
which would form a reasonable basis (in the Company's opinion)
for any such claim by others challenging the Company's rights
in and to any of the Intellectual Property, (iii) except as
set forth in the Prospectus under the caption "Business--Legal
Proceedings," there is no pending or, to the Company's best
knowledge, threatened action, suit, proceeding or claim by
others that the Company infringes or otherwise violates any
patent, trademark, copyright, trade secret or other
proprietary rights of others, and (iv) the Company is not
aware (without any independent verification) of any facts
which would form a reasonable basis (in the Company's opinion)
for any such claim by others that the Company infringes
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<PAGE>
or otherwise violates any patent, trademark, copyright, trade
secret or other property rights of others.
(p) There are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or of which any property or assets of the Company or any
of its subsidiaries is the subject which, if adversely
determined to the Company or any of its subsidiaries, could
reasonably be expected to have a material adverse effect on
the performance of this Agreement or the consummation of any
of the transactions contemplated hereby; except as described
in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property or assets of
the Company or any of its subsidiaries is the subject which,
if adversely determined to the Company or any of its
subsidiaries, could reasonably be expected to, individually or
in the aggregate, have a Material Adverse; and, except as
described in the Prospectus, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others.
(q) There are no contracts or other documents which
are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act
or by the Rules and Regulations which have not been described
in the Prospectus or filed as exhibits to the Registration
Statement.
(r) No relationship, direct or indirect, exists
between or among the Company on the one hand, and the
directors, officers, employees, stockholders, customers or
suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the
Company exists or, to the Company's best knowledge, is
imminent which could reasonably be expected to, individually
or in the aggregate, have a Material Adverse Effect.
(t) The Company is in compliance in all material
respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension
plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would
cause the loss of such qualification.
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(u) The Company has filed all federal, state and
local income and franchise tax returns required to be filed
through the date hereof and has paid all taxes due thereon,
and no tax deficiency has been determined adversely to the
Company or any of its subsidiaries which has had (nor does the
Company have any knowledge of any tax deficiency which, if
determined adversely to the Company or any of its
subsidiaries, could reasonably be expected to have),
individually or in the aggregate, a Material Adverse Effect.
(v) Since the date as of which information is given
in the Prospectus, except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any material liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any material transaction not in
the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(w) The Company (i) makes and keeps accurate books
and records and (ii) maintains internal accounting controls
which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B)
transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for
its assets, (C) access to its assets is permitted only in
accordance with management's authorization and (D) the
reported accountability for its assets is compared with
existing assets at reasonable intervals.
(x) Neither the Company nor any of its subsidiaries
(i) is in violation of its charter or by-laws, (ii) is in
default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any
term, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it
is bound or to which any of its properties or assets is
subject, except where such default could not reasonably be
expected to have, individually or in the aggregate, a Material
Adverse Effect, or (iii) is in violation in any material
respect of any law, ordinance, governmental rule, regulation
or court decree to which it or its property or assets may be
subject, except where such violation could not reasonably be
expected to have, individually or in the aggregate, a Material
Adverse Effect.
(y) Neither the Company nor any of its subsidiaries,
nor any director, officer, agent, employee or other person
associated with or acting on behalf of the Company or any of
its subsidiaries, has used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; violated
or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or
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<PAGE>
made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(z) Neither the Company nor any subsidiary is an
"investment company" within the meaning of such term under the
Investment Company Act of 1940 and the rules and regulations
of the Commission thereunder.
(aa) The Company and its subsidiaries have all
necessary certificates, orders, permits, licenses,
authorizations, consents and approvals ("Governmental
Approvals") of and from, and has made all declarations and
filings with all applicable governmental authorities
("Governmental Authorities") to own, lease, license and use
its properties and assets and to conduct its business in the
manner described in the Prospectus, except where the failure
to have such Governmental Approvals, or to make such
declaration or filing with Governmental Authorities would not
result in a Material Adverse Effect, and neither the Company
nor any such subsidiary has received any notice of proceedings
relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations,
consents or approvals.
(bb) The Company has reviewed its operations and that
of its subsidiaries to evaluate the extent to which the
business or operations of the Company and its subsidiaries
will be effected by the occurrence of calender year 2000, as
described in the Prospectus. The Company has obtained
confirmation from all its principal third party vendors,
suppliers and service providers that they believe that the
systems, services and products they supply to the Company are
Year 2000 Compliant. The occurrence of calendar year 2000 is
not expected to have a Material Adverse Effect on the Company.
For purposes of this subsection, "Date Data" means any data of
any kind that includes date information or which is otherwise
derived from, dependent on or related to date information;
"Date-Sensitive System" means any software, microcode or
hardware system or component, including any electronic or
electronically controlled system or component that processes
any Date Data and that is installed, in development or on
order, for internal or external use, or the provision or
operation of which provides a benefit to customers, vendors,
suppliers or any other party; and "Year 2000 Compliant" means
(i) with respect to Date Data, that such data is in proper
format and accurate for all dates in the twentieth and
twenty-first centuries, and (ii) with respect to
Date-Sensitive Systems, that each such system accurately
processes all Date Data, including for the twentieth and
twenty-first centuries, without loss of any functionality or
performance, including, without limitation, calculating,
comparing, sequencing, storing and displaying such Date Data
(including all leap year considerations), when used as a
stand-alone system or in combination with other software or
hardware.
(cc) There are no transfer taxes or other similar
fees or charges under Federal law or the laws of any state or
foreign jurisdiction, or any political subdivision thereof,
required to be paid in connection with the execution and
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delivery of this Agreement or the issuance by the Company or
sale by the Company of the Stock (including Directed Shares in
any foreign jurisdiction).
(dd) The Company has not taken, directly or
indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under
the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Stock.
2. Purchase of the Stock by the Underwriters. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell the Firm Stock to the
several Underwriters and each of the Underwriters, severally and not jointly,
agrees to purchase the number of shares of the Firm Stock set opposite that
Underwriter's name in Schedule 1 hereto. The respective purchase obligations of
the Underwriters with respect to the Firm Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
In addition, the Company grants to the Underwriters an option
to purchase up to 750,000 shares of Option Stock. Such option is granted for the
purpose of covering over-allotments in the sale of Firm Stock and is exercisable
as provided in Section 4 hereof. Shares of Option Stock shall be purchased
severally for the account of the Underwriters in proportion to the number of
shares of Firm Stock set opposite the name of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Stock shall be adjusted by the Representatives so that no Underwriter
shall be obligated to purchase Option Stock other than in 100 share amounts. The
price of both the Firm Stock and any Option Stock shall be $_____ per share.
The Company shall not be obligated to deliver any of the Stock
to be delivered on any Delivery Date (as hereinafter defined), as the case may
be, except upon payment for all the Stock to be purchased on such Delivery Date
as provided herein.
3. Offering of Stock by the Underwriters. Upon authorization
by the Representatives of the release of the Firm Stock, the several
Underwriters propose to offer the Firm Stock for sale upon the terms and
conditions set forth in the Prospectus.
It is understood that the Directed Shares initially reserved
by the Underwriters for offer and sale in connection with the Directed Share
Program shall be allocated among such persons in accordance with timely
directions received by Lehman Brothers Inc. from the Company.
4. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the office of Weil, Gotshal & Manges
LLP, 767 Fifth Avenue, New York, New York 10153 at 10:00 A.M., New York City
time, on the third full business day following the date of this Agreement (or
the fourth business day if this Agreement is executed after 4:00 p.m. New York
time) or at such other date or place as shall be determined by agreement between
the Representatives and the Company. This date and time are sometimes referred
to as the "First
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Delivery Date." On the First Delivery Date, the Company shall deliver or cause
to be delivered certificates representing the Firm Stock to the Representatives
for the account of each Underwriter against payment to or upon the order of the
Company of the purchase price by wire transfer in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such
names and in such denominations as the Representatives shall request in writing
not less than two full business days prior to the First Delivery Date. For the
purpose of expediting the checking and packaging of the certificates for the
Stock, the Company shall make the certificates representing the Firm Stock
available for inspection by the Representatives in New York, New York, not later
than 2:00 P.M., New York City time, on the business day prior to the First
Delivery Date.
The option granted in Section 2 will expire 30 days after the
date of this Agreement and may be exercised in whole or in part from time to
time by written notice being given to the Company by the Representatives. Such
notice shall set forth the aggregate number of shares of Option Stock as to
which the option is being exercised, the names in which the shares of Option
Stock are to be registered, the denominations in which the shares of Option
Stock are to be issued and the date and time, as determined by the
Representatives, when the shares of Option Stock are to be delivered; provided,
however, that this date and time shall not be earlier than the First Delivery
Date nor earlier than the second business day after the date on which the option
shall have been exercised nor later than the fifth business day after the date
on which the option shall have been exercised. The date and time the shares of
Option Stock are delivered are sometimes referred to as a "Second Delivery Date"
and the First Delivery Date and any Second Delivery Date are sometimes each
referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at
the place specified in the first sentence of the first paragraph of this Section
4 (or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by wire transfer in immediately
available funds. Time shall be of the essence, and delivery at the time and
place specified pursuant to this Agreement is a further condition of the
obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall
be registered in such names and in such denominations as the Representatives
shall request in the aforesaid written notice. For the purpose of expediting the
checking and packaging of the certificates for the Option Stock, the Company
shall make the certificates representing the Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
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5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by
the Representatives and to file such Prospectus pursuant to
Rule 424(b) under the Securities Act not later than the
Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule
430A(a)(3) under the Securities Act; to make no further
amendment or any supplement to the Registration Statement or
to the Prospectus except as permitted herein; to advise the
Representatives, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has
been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to
furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of
the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any
jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the
Registration Statement or the Prospectus or for additional
information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any
such qualification, to use promptly its best efforts to obtain
its withdrawal;
(b) To furnish promptly to counsel for the
Underwriters one signed copy of the Registration Statement as
originally filed with the Commission, and each amendment
thereto filed with the Commission, including all consents and
exhibits filed therewith;
(c) To deliver promptly to the Representatives such
number of the following documents as the Representatives shall
reasonably request: (i) conformed copies of the Registration
Statement as originally filed with the Commission and each
amendment thereto (in each case including exhibits other than
this Agreement) and (ii) each Preliminary Prospectus, the
Prospectus and any amended or supplemented Prospectus; and, if
the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the
Stock or any other securities relating thereto and if at such
time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading,
or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the
Securities Act, to notify the Representatives and, upon their
request, to prepare and furnish without charge to each
Underwriter and to any dealer in securities as many copies
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as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any
amendment to the Registration Statement or the Prospectus or
any supplement to the Prospectus that may, in the reasonable
judgment of the Company or the Representatives, be required by
the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment
to the Registration Statement or supplement to the Prospectus
or any Prospectus pursuant to Rule 424 of the Rules and
Regulations, to furnish a copy thereof to the Representatives
and counsel for the Underwriters and obtain the consent of the
Representatives to the filing, which consent shall not be
unreasonably withheld;
(f) As soon as practicable after the Effective Date
(but in no event later than 45 days after the first
anniversary of the end of the fiscal quarter following the
effective date of the Registration Statement, or 90 days if
such period is a fiscal year), to make generally available to
the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with
Section 11(a) of the Securities Act and the Rules and
Regulations (including, at the option of the Company, Rule
158);
(g) For a period of three years following the
Effective Date, to furnish to the Representatives copies of
all materials furnished by the Company to its shareholders
(other than materials furnished solely to RSL COM) and all
reports or other documents publicly filed or furnished by the
Company to the principal exchange upon which the Common Stock
may be listed pursuant to requirements of or agreements with
such exchange or to the Commission pursuant to the Exchange
Act or any rule or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as
the Representatives may reasonably request to qualify the
Stock for offering and sale under the securities laws of such
jurisdictions as the Representatives may request (including
such jurisdictions as may be required for the offering and
sale of the Directed Shares) and to comply with such laws so
as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete
the distribution of the Stock; provided that in connection
therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of
process in any jurisdiction;
(i) (A) For a period of 180 days from the date of the
Prospectus, not to, directly or indirectly, (1) offer for
sale, sell, pledge or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be
expected
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to, result in the disposition by any person at any time in the
future of) any shares of Common Stock or Class B Common Stock
(collectively, the "Capital Stock") or securities convertible
into or exchangeable for Capital Stock (other than the Stock
and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation
plans existing on the date hereof or pursuant to currently
outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of
Capital Stock or securities convertible into or exchangeable
for Capital Stock (other than the grant of options pursuant to
option plans existing on the date hereof), or (2) enter into
any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Capital Stock, whether
any such transaction described in clause (1) or (2) above is
to be settled by delivery of Capital Stock or other
securities, in cash or otherwise, or (3) publicly disclose an
intention to make any such offer, sale, pledge, hedge, swap or
other transaction, in each case without the prior written
consent of Lehman Brothers Inc., except for any issuance of
Common Stock or securities convertible into Common Stock in
consideration of an acquisition, merger or consolidation or
other business combination by or involving the Company or any
wholly owned subsidiary of the Company, provided that the
recipients of such Common Stock or securities convertible into
Common Stock agrees to be bound by the restrictions in this
paragraph; and (B) to cause RSL COM, Yahoo, CNET, each officer
and director of the Company and each Participant in the
Directed Share Program to furnish to the Representatives,
prior to the First Delivery Date, a letter or letters, in form
and substance satisfactory to counsel for the Underwriters,
pursuant to which each such person shall agree not to,
directly or indirectly, (1) offer for sale, sell, pledge or
otherwise dispose of (or enter into any transaction or device
which is designed to, or could be expected to, result in the
disposition by any person at any time in the future of) any
shares of Capital Stock or securities convertible into or
exchangeable for Capital Stock or (2) enter into any swap or
other derivatives transaction that transfers to another, in
whole or in part, any of the economic benefits or risks of
ownership of such shares of Capital Stock, whether any such
transaction described in clause (1) or (2) above is to be
settled by delivery of Capital Stock or other securities, in
cash or otherwise, in each case for a period of 180 days (or
90 days with respect to Participants in the Directed Share
Program and employees of the Company holding Common Stock or
options to purchase Common Stock, except for those otherwise
subject to the 180-day lock-up) from the date of the
Prospectus, without the prior written consent of Lehman
Brothers Inc.;
(j) Prior to the First Delivery Date, to use its best
efforts to complete that listing of the Stock in the National
Market System of The Nasdaq Stock Market, subject only to
official notice of issuance;
(k) To apply the net proceeds from the sale of the
Stock as set forth in the Prospectus under the caption "Use of
Proceeds";
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(l) To take such steps as shall be necessary to
ensure that neither the Company nor any subsidiary shall
become an "investment company" within the meaning of such term
under the Investment Company Act of 1940 and the rules and
regulations of the Commission thereunder;
(m) To comply with the Securities Act and the Rules
and Regulations and the Exchange Act (including the rules and
regulations thereunder) so as to permit the completion of the
distributions of the Stock as contemplated in this Agreement
and the Prospectus;
(n) Not to take, directly or indirectly, any action
designed to cause or result in, or that constitutes or might
reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock;
(o) In connection with the Directed Share Program, to
ensure in accordance with the Conduct Rules of the National
Association of Securities Dealers ("NASD") that the Directed
Shares are not sold, transferred, assigned, pledged or
hypothecated for a period of 90 days following the Effective
Date and to direct the transfer agent that transfer
restrictions be placed on the stock certificates of the
Participants in the Directed Share Program identified by
Lehman Brothers Inc. as needing to be so restricted;
(p) To comply with all applicable securities and
other applicable laws, rules and regulations in each foreign
jurisdiction in which the Directed Shares are offered in
connection with the Directed Share Program.
6. Expenses. The Company agrees to pay (a) the costs incident
to the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the Stock; (e) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of sale of the Stock; (f) any applicable listing or other
fees; (g) the costs incident to the issuance of the Directed Shares(including
the reasonable fees and expenses of counsel for the Underwriters in connection
therewith); (h) the fees and expenses of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 5(h)
(including filing fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such registration and qualification) and of preparing,
printing and distributing any materials in connection therewith and (i) all
other costs and expenses incident to the performance of the obligations of the
Company under this Agreement; provided that, except as provided in this Section
6 and in Section 11, the Underwriters shall pay their own costs and expenses,
including the costs and expenses of their counsel.
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7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with
the Commission in accordance with Section 5(a); no stop order
suspending the effectiveness of the Registration Statement or
any part thereof shall have been issued and no proceeding for
that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the
Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and
disclosed to the Company on or prior to such Delivery Date
that the Registration Statement or the Prospectus or any
amendment or supplement thereto contains an untrue statement
of a fact which, in the opinion of Weil, Gotshal & Manges LLP,
counsel for the Underwriters, is material or omits to state a
fact which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the
statements therein not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this
Agreement, the Stock, the Registration Statement and the
Prospectus, and all other material legal matters relating to
this Agreement and the transactions contemplated hereby shall
be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company shall have furnished to
such counsel all material documents and information that they
may reasonably request to enable them to pass upon such
matters.
(d) Skadden, Arps, Slate, Meagher & Flom LLP shall
have furnished to the Representatives its written opinion, as
counsel to the Company, addressed to the Underwriters and
dated such Delivery Date, in form and substance reasonably
satisfactory to the Representatives, to the effect set forth
in Exhibit 7(d) to this Agreement.
(e) Seidel, Gonda, Lavorgna & Monaco, P.C. shall have
furnished to the Representatives its written opinion, as
intellectual property counsel to the Company, addressed to the
Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to
the effect that the Intellectual Property does not infringe
upon the patent issued to Areotel U.S.A. referred to in the
Prospectus under the caption "Business--Legal Proceedings".
(f) Debevoise & Plimpton shall have furnished to the
Representatives its written opinion, as special counsel to the
Company, addressed to the
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<PAGE>
Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to
the effect that the issue and sale of the shares of Stock
being delivered on such Delivery Date by the Company and the
compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions
contemplated hereby will not violate any of the terms of any
of the indentures governing the outstanding debt of RSL COM.
(g) The Representatives shall have received from
Weil, Gotshal & Manges LLP, counsel for the Underwriters, such
opinion or opinions, dated such Delivery Date, with respect to
the issuance and sale of the Stock, the Registration
Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company shall
have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass
upon such matters.
(h) At the time of execution of this Agreement, the
Representatives shall have received from Brightman Almagor &
Co. a letter, in form and substance satisfactory to the
Representatives, addressed to the Underwriters and dated the
date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are
in compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, and (ii) stating, as of the date hereof
(or, with respect to matters involving changes or developments
since the respective dates as of which specified financial
information is given in the Prospectus, as of a date not more
than five days prior to the date hereof), the conclusions and
findings of such firm with respect to the financial
information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection
with registered public offerings.
(i) With respect to the letter of Brightman Almagor &
Co. referred to in the preceding paragraph and delivered to
the Representatives concurrently with the execution of this
Agreement (the "initial letter"), the Company shall have
furnished to the Representatives a letter (the "bring-down
letter") of such accountants, addressed to the Underwriters
and dated such Delivery Date (i) confirming that they are
independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants
under Rule 2-01 of Regulation S-X of the Commission, (ii)
stating, as of the date of the bring-down letter (or, with
respect to matters involving changes or developments since the
respective dates as of which specified financial information
is given in the Prospectus, as of a date not more than five
days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the
financial information and other matters covered by the initial
letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
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<PAGE>
(j) The Company shall have furnished to the
Representatives a certificate, dated such Delivery Date, of
its Chairman of the Board, its President or a Vice President
and its chief financial officer stating that:
(i) The representations, warranties and
agreements of the Company in Section 1 are true and
correct as of such Delivery Date; the Company has
complied with all its agreements contained herein;
and the conditions set forth in Sections 7(a) and
7(k) have been fulfilled; and
(ii) They have carefully examined the
Registration Statement and the Prospectus and, in
their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include
any untrue statement of a material fact and did not
omit to state a material fact required to be stated
therein or necessary to make the statements therein
(in the case of the Prospectus, in light of the
circumstances under which they were made) not
misleading, and (B) since the Effective Date no event
has occurred which should have been set forth in a
supplement or amendment to the Registration Statement
or the Prospectus which has not been so set forth.
(k) (i) Neither the Company nor the Subsidiary shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or
decree, otherwise than as set forth in the Prospectus, and
(ii) since such date, there shall not have been any change in
the capital stock (other than the Recapitalization) or
long-term debt of the Company or any of its subsidiaries or
any change, or any development involving a prospective change,
in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth in
or contemplated by the Prospectus, the effect of which, in any
such case described in clause (i) or (ii), is, in the
reasonable judgment of the Representatives, so material and
adverse as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Stock being
delivered on such Delivery Date on the terms and in the manner
contemplated in the Prospectus.
(l) Subsequent to the execution and delivery of this
Agreement there shall not have occurred any of the following:
(i) trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or in the
over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market,
shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body
or governmental authority having jurisdiction, (ii) a banking
moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged
18
<PAGE>
in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have
been a declaration of a national emergency or war by the
United States or (iv) there shall have occurred such a
material adverse change in general economic, political or
financial conditions (or the effect of international
conditions on the financial markets in the United States shall
be such) as to make it, in the reasonable judgment of a
majority in interest of the several Underwriters,
impracticable or inadvisable to proceed with the public
offering or delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in
the Prospectus.
(m) The Company shall have furnished to the
Representatives a certificate, dated such Delivery Date, of
its chief financial officer in the form set forth in Exhibit
7(m) to this Agreement.
(n) The Nasdaq Stock Market shall have approved the
Stock for inclusion in the National Market System, subject
only to official notice of issuance.
(o) Prior to the execution and delivery of this
Agreement, the Company shall have furnished to the
Representatives a letter addressed to the Representatives
substantially in the form set forth in Section 5(i) from RSL
COM, Yahoo, CNET and each officer and director of the Company.
(p) The Company shall have effected the
Recapitalization.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless
each Underwriter, its officers and employees and each person,
if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock),
to which that Underwriter, officer, employee or controlling
person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any application, filing or other material
filed, registered, distributed or otherwise furnished by the
Company or with the consent of the Company in connection the
securities laws of any state or political subdivision thereof
or any material prepared by or with the consent of the Company
for distribution in foreign jurisdictions in connection with
the Directed Share Program (collectively, the "Other Offering
Materials"),
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<PAGE>
(ii) the omission or alleged omission to state in any
Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any amendment or supplement thereto, or in
any Other Offering Materials, any material fact required to be
stated therein or necessary to make the statements therein (in
the case of the Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Other Offering
Materials, in light of the circumstances under which they were
made) not misleading, (iii) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or
(ii) above, (iv) the failure of any Participant to pay for and
accept delivery of the Stock which immediately following the
Effective Time were subject to a properly confirmed agreement
to purchase, (v) the Directed Share Program (provided that the
Company shall not be liable under clauses (iii) and (v) to the
extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful
misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon
demand for any legal or other expenses reasonably incurred by
that Underwriter, officer, employee or controlling person in
connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that
the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged
untrue statement or omission or alleged omission made in any
Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in
reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of any Underwriter
specifically for inclusion therein which information consists
solely of the information specified in Section 8(e). The
indemnification agreement set forth in this Section 8(a) with
respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses
purchased the Stock which is the subject thereof (or to the
benefit of any officer or employee of, or person, if any, who
controls, any such Underwriter within the meaning of the
Securities Act) if at or prior to the written confirmation of
the sale of such Stock a copy of the Prospectus (or the
Prospectus as supplemented) was not sent or delivered to such
person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the
Prospectus (or in the Prospectus as supplemented) in any case
where such delivery is required by the Securities Act, unless
the Company failed to provide to the Underwriters with the
corrected Prospectus (or the Prospectus as supplemented). The
foregoing indemnity agreement is in addition to any liability
which the Company may otherwise have
20
<PAGE>
to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
(b) Each Underwriter, severally and not jointly,
shall indemnify and hold harmless the Company, its officers
and employees, each of its directors (including any person
who, with his or her consent, is named in the Registration
Statement as a nominee director), and each person, if any, who
controls the Company within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint
or several, or any action in respect thereof, to which the
Company or any such director, officer or controlling person
may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in
any Preliminary Prospectus, the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or (B)
in any Other Offering Materials or (ii) the omission or
alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment
or supplement thereto, or in any Other Offering Materials, any
material fact required to be stated therein or necessary to
make the statements therein (in the case of the Preliminary
Prospectus, the Prospectus or any amendment or supplement
thereto or any Other Offering Materials, in light of the
circumstances under which they were made) not misleading, but
in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written
information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of that
Underwriter specifically for inclusion therein, which
information consists solely of the information specified in
Section 8(e), and shall reimburse the Company and any such
director, officer or controlling person for any legal or other
expenses reasonably incurred by the Company or any such
director, officer or controlling person in connection with
investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses
are incurred. The foregoing indemnity agreement is in addition
to any liability which any Underwriter may otherwise have to
the Company or any such director, officer, employee or
controlling person.
(c) Promptly after receipt by an indemnified party
under this Section 8 of notice of any claim or the
commencement of any action, the indemnified party shall, if a
claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the
indemnifying party in writing of the claim or the commencement
of that action; provided, however, that the failure to notify
the indemnifying party shall not relieve it from any liability
which it may have under this Section 8 except to the extent it
has been materially prejudiced by such failure and, provided
further, that the failure to notify the indemnifying party
shall not relieve it from any liability which it may have to
an indemnified party otherwise than under this Section 8. If
any such claim or
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<PAGE>
action shall be brought against an indemnified party, and it
shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the
extent that it wishes, jointly with any other similarly
notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to the indemnified
party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the
indemnified party under this Section 8 for any legal or other
expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the
Representatives shall have the right to employ counsel to
represent jointly the Representatives and those other
Underwriters and their respective officers, employees and
controlling persons who may be subject to liability arising
out of any claim in respect of which indemnity may be sought
by the Underwriters against the Company under this Section 8
if the Representatives have been advised by their counsel that
either (i) there is an actual or potential conflict between
the position of the Company and the Underwriters, (ii) there
may be defenses available to it or them that are different
from or additional to those available to the Company (in any
of which events the Company shall not have the right to direct
the defense of such action on behalf of the Representative or
Representatives with respect to such different defenses) or
(iii) the Company has failed to assume the defense of such
action and employ counsel reasonably satisfactory to the
Representatives, and in that event the fees and expenses of
such separate counsel shall be paid by the Company, it being
understood that the Company shall not, in connection with any
one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the
reasonable expenses of more than one separate firm of
attorneys at any time for all such indemnified parties. No
indemnifying party shall (i) without the prior written consent
of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the
entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such
settlement, compromise or consent includes an unconditional
release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding, or (ii) be
liable for any settlement of any such action effected without
its prior written consent (which consent shall not be
unreasonably withheld), but if settled with the consent of the
indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to
indemnify and hold harmless any indemnified party from and
against any loss or liability by reason of such settlement or
judgment.
(d) If the indemnification provided for in this
Section 8 shall for any reason be unavailable to or
insufficient to hold harmless an indemnified party under
Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability,
22
<PAGE>
or any action in respect thereof, referred to therein, then
each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by
such indemnified party as a result of such loss, claim, damage
or liability, or action in respect thereof, (i) in such
proportion as shall be appropriate to reflect the relative
benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Stock or
(ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the
Company on the one hand and the Underwriters on the other with
respect to the statements or omissions which resulted in such
loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other with respect
to the offering of the Stock shall be deemed to be in the same
proportion as the total net proceeds from the offering of the
Stock purchased under this Agreement (before deducting
expenses) received by the Company on the one hand, and the
total underwriting discounts and commissions received by the
Underwriters with respect to the shares of the Stock purchased
under this Agreement, on the other hand, bear to the total
gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall
be determined by reference to whether the untrue or alleged
untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information
supplied by the Company or the Underwriters, the intent of the
parties and their relative knowledge, access to information
and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this
Section 8(d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to
herein. The amount paid or payable by an indemnified party as
a result of the loss, claim, damage or liability, or action in
respect thereof, referred to above in this Section 8(d) shall
be deemed to include, for purposes of this Section 8(d), any
legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no Underwriter shall be
required to contribute any amount in excess of the amount by
which the total price at which the Stock underwritten by it
and distributed to the public was offered to the public
exceeds the amount of any damages which such Underwriter has
otherwise paid or become liable to pay by reason of any untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in
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<PAGE>
this Section 8(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the
Company acknowledges that the statements with respect to the
offering of the Stock by the Underwriters set forth in the
last paragraph on the cover page of, and the names of the
Underwriters in the table and the third, ninth, eleventh,
twelfth, thirteenth, fourteenth and last paragraphs appearing
under the caption "Underwriting" in, the Prospectus constitute
the only information concerning such Underwriters furnished in
writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and
the Prospectus.
9. Defaulting Underwriters.
If, on any Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
forth opposite the name of each remaining non-defaulting Underwriter in Schedule
1 hereto bears to the total number of shares of the Firm Stock set forth
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 hereto; provided, however, that the remaining non-defaulting Underwriters
shall not be obligated to purchase any of the Stock on such Delivery Date if the
total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of shares of the Stock to be purchased on such Delivery Date, and
any remaining non-defaulting Underwriter shall not be obligated to purchase more
than 110% of the number of shares of the Stock which it agreed to purchase on
such Delivery Date pursuant to Section 3. If the foregoing maximums are
exceeded, the remaining non-defaulting Underwriters, or those other underwriters
satisfactory to the Representatives who so agree, shall have the right, but
shall not be obligated, to purchase, in such proportion as may be agreed upon
among them, all the Stock to be purchased on such Delivery Date. If the
remaining Underwriters or other underwriters satisfactory to the Representatives
do not elect to purchase the shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such Delivery Date, this Agreement
(or, with respect to the Second Delivery Date, the obligation of the
Underwriters to purchase, and of the Company to sell, the Option Stock) shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company, except that the Company will continue to be liable for the payment of
expenses to the extent set forth in Sections 6 and 11. As used in this
Agreement, the term "Underwriter" includes, for all purposes of this Agreement
unless the context requires otherwise, any party not listed in Schedule 1 hereto
who, pursuant to this Section 9, purchases Stock which a defaulting Underwriter
agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company for damages caused by
its default. If other underwriters are obligated or agree to purchase the Stock
of a defaulting or withdrawing Underwriter, either the Representatives or the
Company may postpone the Delivery Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Company or
counsel for
24
<PAGE>
the Underwriters may be necessary in the Registration Statement, the Prospectus
or in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 7(l) or 7(m), shall have occurred
or if the Underwriters shall decline to purchase the Stock for any reason
permitted under this Agreement.
11. Reimbursement of Underwriters' Expenses. If the Company
shall fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the Company is
not fulfilled, the Company will reimburse the Underwriters for all reasonable
out-of-pocket expenses (including fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock, and upon demand the Company shall pay the full amount thereof to the
Representatives. If this Agreement is terminated pursuant to Section 9 by reason
of the default of one or more Underwriters, the Company shall not be obligated
to reimburse any defaulting Underwriter on account of those expenses.
12. Notices, etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or
sent by mail, telex or facsimile transmission to Lehman
Brothers Inc., Three World Financial Center, New York, New
York 10285, Attention: Syndicate Department (Fax:
212-526-6588), with a copy, in the case of any notice pursuant
to Section 8(c), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., 3 World Financial
Center, 10th Floor, New York, NY 10285;
(b) if to the Company, shall be delivered or sent by
mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention:
Mr. Amos Sela, Chief Executive Officer and President (Fax:
212-588-3674), with a copy to Skadden, Arps, Slate, Meagher &
Flom LLP, 313 Third Avenue, New York, New York 10022,
Attention: David Goldschmidt (Fax: 212-735-2000);
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc. on behalf of the
Representatives.
25
<PAGE>
13. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
and their respective successors. This Agreement and the terms and provisions
hereof are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 15 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company and the Underwriters contained in this
Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Stock and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary".
For purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
16. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
17. Counterparts. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
26
<PAGE>
If the foregoing correctly sets forth the agreement between
the Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
DELTATHREE.COM, INC.
By:
----------------------------------
Name:
Title:
Accepted:
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION, For themselves and as
Representatives of the several Underwriters named in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By:
---------------------------------
Name:
Authorized Representative
27
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ --------------
<S> <C>
Lehman Brothers Inc. ...........................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated .............................
U.S. Bancorp Piper Jaffray Inc. ................................................
Lazard Freres & Co. LLC ........................................................
Fidelity Capity Markets, a division of National Financial
Sevices Corporation ............................................................
Total ..........................................................................
</TABLE>
<PAGE>
LOCK-UP LETTER AGREEMENT
LEHMAN BROTHERS INC.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS,
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION,
As Representatives of the
several underwriters
c/o LEHMAN BROTHERS INC.
Three World Financial Center
New York, NY 10285
Dear Sirs:
The undersigned understands that you and certain other firms
propose to enter into an Underwriting Agreement (the "Underwriting Agreement")
providing for the purchase by you and such other firms (the "Underwriters") of
shares (the "Shares") of Class A Common Stock, par value $0.001 per share (the
"Common Stock"), of deltathree.com, Inc. (the "Company") and that the
Underwriters propose to reoffer the Shares to the public (the "Offering").
In consideration of the execution of the Underwriting
Agreement by the Underwriters, and for other good and valuable consideration,
the undersigned hereby irrevocably agrees that, without the prior written
consent of Lehman Brothers Inc., the undersigned will not, directly or
indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or enter
into any transaction or device that is designed to, or could be expected to,
result in the disposition by any person at any time in the future of) any shares
of Common Stock (including, without limitation, shares of Common Stock that may
be deemed to be beneficially owned by the undersigned in accordance with the
rules and regulations of the Securities and Exchange Commission and shares of
Common Stock that may be issued upon exercise of any option or warrant) or
securities convertible into or exchangeable for Common Stock owned by the
undersigned on the date of execution of this Lock-Up Letter Agreement or at any
time hereafter (including, without limitation, any Common Stock acquired in the
Offering), or (2) enter into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic benefits or risks
of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, for a period of 180 days after
the date of the final Prospectus relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer
Agent are hereby authorized to decline to make any transfer of securities if
such transfer would constitute a violation or breach of this Lock-Up Letter
Agreement.
<PAGE>
It is understood that, if the Company notifies you that it
does not intend to proceed with the Offering, if the Underwriting Agreement does
not become effective, or if the Underwriting Agreement (other than the
provisions thereof which survive termination) shall terminate or be terminated
prior to payment for and delivery of the Shares, we will be released from our
obligations under this Lock-Up Letter Agreement. In any event, if the
transactions contemplated by the Underwriting Agreement are not completed by
March 31, 2000, then this Lock-Up Letter Agreement shall be of no force and
effect.
The undersigned understands that the Company, the Underwriters
and the stockholders selling shares in the Offering will proceed with the
Offering in reliance on this Lock-Up Letter Agreement.
The undersigned hereby represents and warrants that the
undersigned has full power and authority to enter into this Lock-Up Letter
Agreement and that, upon request, the undersigned will execute any additional
documents necessary in connection with the enforcement hereof. Any obligations
of the undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
Very truly yours,
[Stockholder]
By:
------------------------------
Name:
Title:
Dated:
--------------
<PAGE>
NUMBER SHARES
- ------ ------
DC [LOGO]
- ------ ------
deltathree.com SEE REVERSE FOR
CLASS A COMMON STOCK DELTATHREE.COM, INC. CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 24783N 10 2
THIS IS TO CERTIFY THAT
is the owner of
fully paid and non-assessable shares of CLASS A COMMON STOCK of the par value of
$0.001 each of deltathree.com, Inc.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate and the shares
represented hereby are issued and shall be held subject to all of the provisions
of the Certificate of Incorporation of the Corporation to all of which the
holder by acceptance hereof assents.
This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ [illegible] [SEAL] /s/ [illegible]
CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
BY TRANSFER AGENT AND REGISTRAR
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215) 657-3480
SALES: J. NAPOLITANO: 212-593-5700
NEW LIVE JOBS HOME 11/DELTATHREE H64048
PRODUCTION COORDINATOR: LISA MARTIN: 215-830-2155
PROOF OF NOVEMBER 8, 1999
DELTATHREE.COM, INC.
H 64048 tc
OPERATOR: lr/mt/eg
Rev 2
<PAGE>
The powers, designations, preferences, and relative participating,
optional, or other special rights, and the qualifications, limitations, or
restrictions of such preferences and/or rights of each class of stock or series
of any class are set forth in the Certificate of Incorporation. The corporation
will furnish a copy of the Certificate of Incorporation to the holder of this
certificate without charge upon request.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right
of survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ___________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Date
------------------
--------------------------------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed:
- --------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCK
BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PALCE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215) 657-3480
SALES: J. NAPOLITANO: 212-593-5700
NEW LIVE JOBS HOME 11/DELTATHREE H64048
PRODUCTION COORDINATOR: LISA MARTIN: 215-830-2155
PROOF OF NOVEMBER 4, 1999
DELTATHREE.COM, INC.
H 64048 bk
OPERATOR: lr/mt
Rev 1
<PAGE>
NUMBER SHARES
DCB [LOGO]
deltathree.com
CLASS B COMMON STOCK DELTATHREE.COM, INC. SEE REVERSE FOR
INCORPORATED UNDER THE LAWS CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 24783N 20 1
THIS IS TO CERTIFY THAT
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
is the owner of
fully paid and non-assessable shares of CLASS B COMMON STOCK
of the par value of $0.001 each of deltathree.com, Inc.
(hereinafter called the "Corporation"), transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney,
upon surrender of this certificate properly endorsed. This certificate and
the shares represented hereby are issued and shall be held subject to all
of the provisions of the Certificate of Incorporation of the Corporation to
all of which the holder by acceptance hereof assents.
This certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT AND REGISTRAR
BY
/s/ AUTHORIZED SIGNATURE
Dated:
/s/ Mark J. Hirschhorn /s/ Amos Sela
CHIEF FINANCIAL OFFICER CHIEF EXECUTIVE OFFICER
deltathree.com, Inc.
Corporate
SEAL
1999
DELAWARE
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS
ON TRANSFER INCLUDING A 180-DAY LOCKUP IN CONNECTION WITH AN INITIAL PUBLIC
OFFERING AS SET FORTH IN THE REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY
AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE COMPANY. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST
REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
The powers, designations, preferences, and relative participating,
optional, or other special rights, and the qualifications, limitations, or
restrictions of such preferences and/or rights of each class of stock or series
of any class are set forth in the Certificate of Incorporation. The corporation
will furnish a copy of the Certificate of Incorporation to the holder of this
certificate without charge upon request.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT - as tenants by the ------- -------
entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors
right of survivorship Act
and not as tenants in --------------------------
common (State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------
--------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
- -------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,STOCK-
BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE>
Deltathree.com, Inc.
1999 STOCK INCENTIVE PLAN
1. Purpose
The purpose of the Plan is to foster and promote the long-term financial success
of the Company and its Subsidiaries and materially increase shareholder value by
(a) motivating superior performance by means of performance-related
incentives;
(b) encouraging and providing for the acquisition of an ownership
interest in the Company by Eligible Employees; and
(c) enabling the Company to attract and retain the services of
outstanding management team and other qualified and dedicated employees upon
whose judgment, interest and special effort the successful conduct of its
operations is largely dependent.
2. Definitions
"Award" shall mean any grant or award under the Plan, as evidenced in a
written document delivered to a Participant as provided in Section 11(b).
"Board" shall mean the Board of Directors of the Company.
"Cause" shall mean (i) the willful failure by the Participant to
perform substantially the Participant's duties (other than due to physical or
mental illness) after reasonable notice to the Participant of such failure, (ii)
the Participant's engaging in serious misconduct that is injurious to the
Company or any Subsidiary, (iii) the Participant's having been convicted of, or
entered a plea of nolo contendere to, a crime that constitutes a felony, or (iv)
the breach by the Participant of any written covenant or agreement not to
compete, in each case with respect to the Company or any Subsidiary, regarding
confidentiality of information of the Company or any Subsidiary or
nonsolicitation or hiring of employees of the Company or any Subsidiary.
1
<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Committee" shall mean the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan.
"Common Stock" shall mean the Class A common shares, par value $0.001
per share, of the Company.
"Company" shall mean Deltathree.com, Inc., a Delaware corporation, and
any successor thereto.
"Deferred Annual Amount" shall mean, with respect to any year, the
amount of compensation that a Participant elects to defer in exchange for an
award of Elective Units as determined pursuant to Section 9 hereof.
"Disability" shall mean long-term disability as defined under the terms
of the Company's applicable long-term disability plans or policies.
"Disinterested Director" shall mean a director of the Company who is
both a "Non-Employee Director" within the meaning of Rule 16b-3 under the
Exchange Act and an "outside director" within the meaning of Section 162(m) of
the Code.
"Dividend Equivalent" shall mean a right granted to a Participant to
receive cash or Common Stock equal in value to dividends paid with respect to
Common Stock.
"Early Retirement" shall mean retirement at or after the earliest age
at which the Participant may retire and receive an immediate, but actuarially
reduced, retirement benefit under any defined benefit pension plan maintained
by the Company or any of its Subsidiaries in which such Participant
participates, or, in the absence of any such applicable plan, as determined by
the Committee.
"Effective Date" shall mean the date on which the Plan is approved by
the shareholders of the Company.
"Elective Units" shall mean a contractual right to receive a share of
Common Stock at the time and subject to the conditions set forth in Section 9
hereof, in respect of a Participant's Deferred Annual Amount.
2
<PAGE>
"Eligible Employee" shall mean each Executive Officer and each other
employee or consultant of the Company or its Subsidiaries, but shall not include
Directors who are not employees of any such entity.
"Employment" shall mean, for purposes of Sections 5(e), 7(b) and 8(b),
continuous and regular salaried employment with the Company or a Subsidiary,
which shall include (unless the Committee shall otherwise determine) any period
of vacation, any approved leave of absence or any salary continuation or
severance pay period and, at the discretion of the Committee, may include
service with any former Subsidiary of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Executive Officer" shall mean those persons who are officers of the
Company within the meaning of Rule 16a-1(f) of the Exchange Act.
"Fair Market Value" shall mean, on any date, the closing price of a
Share as reported on the National Association of Securities Dealers Automated
Quotation/National Market System ("NASDAQ/NMS") (or on such other recognized
market or quotation system on which the trading prices of the Share are traded
or quoted at the relevant time). Notwithstanding the foregoing, (i) in the case
of any Award made on the date of the initial public offering of the Company's
Common Stock, "Fair Market Value" on such date shall be the price at which the
Company's Common Stock is sold to the public in such initial public offering and
(ii) in the case of any Award made prior to the date of the initial public
offering of the Company's Common Stock, "Fair Market Value" on such date shall
be as determined in good faith by the Board.
"Incentive Stock" shall mean any Award of Common Stock granted under
Section 8 which becomes vested and nonforfeitable upon the attainment, in whole
or in part, of performance objectives determined by the Committee.
"Incentive Stock Option" shall mean an Option which is intended to meet
the requirements of Section 422 of the Code.
"Incentive Unit" shall mean any Award of a contractual right granted
under Section 8 to receive Common Stock (or, at the discretion of the Committee,
cash based on the Fair Market Value of the Common Stock) which becomes vested
and
3
<PAGE>
nonforfeitable upon the attainment, in whole or in part, of performance
objectives determined by the Committee.
"Nonstatutory Stock Option" shall mean an Option which is not intended
to be an Incentive Stock Option.
"Normal Retirement" shall mean retirement at or after the earliest age
at which the Participant may retire and receive a retirement benefit without an
actuarial reduction for early commencement of benefits under any defined benefit
pension plan maintained by the Company or any of its Subsidiaries in which such
Participant participates, or, in the absence of any such applicable plan, as
determined by the Committee.
"Option" shall mean the right to purchase the number of shares of
Common Stock specified by the Committee, at a price and for the term fixed by
the Committee in accordance with the Plan and subject to any other limitations
and restrictions as this Plan and the Committee shall impose.
"Participant" shall mean an Eligible Employee who is selected by the
Committee to receive an Award under the Plan.
"Plan" shall mean the Deltathree.com, Inc., 1999 Stock Incentive Plan,
described herein, and as may be amended from time to time.
"Reload Option" shall have the meaning ascribed thereto in Section
5(f).
"Restricted Period" shall mean the period during which a grant of
Incentive Stock, Restricted Stock, Incentive Units or Restricted Units is
subject to forfeiture.
"Restricted Stock" shall mean any Award of Common Stock granted under
Section 7 which becomes vested and nonforfeitable, in whole or in part, upon the
completion of such period of service as shall be determined by the Committee.
"Restricted Unit" shall mean any Award of a contractual right granted
under Section 7 to receive Common Stock (or, at the discretion of the Committee,
cash based on the Fair Market Value of the Common Stock) which becomes vested
and nonforfeitable, in whole or in part, upon the completion of such period of
service as shall be determined by the Committee.
4
<PAGE>
"Share" shall mean a share of Common Stock.
"Stock Appreciation Right" shall mean a contractual right granted under
Section 6 to receive cash, Common Stock or a combination thereof.
"Subsidiary" shall mean any corporation of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power of all classes of stock of such corporation and any other business
organization, regardless of form, in which the Company possesses directly or
indirectly fifty percent (50%) or more of the total combined equity interests in
such organization.
"Supplemental Units" shall mean an award made pursuant to Section 9
with respect to a number of shares of Common Stock in excess of the number of
shares of Common Stock corresponding to the Participant's Elective Units.
3. Administration
The Plan shall be administered by the Committee which shall consist of
at least two Directors of the Company chosen by the Board each of whom is a
Disinterested Director. The Committee shall have the responsibility of
construing and interpreting the Plan and of establishing and amending such rules
and regulations as it deems necessary or desirable for the proper administration
of the Plan. Any decision or action taken or to be taken by the Committee,
arising out of or in connection with the construction, administration,
interpretation and effect of the Plan and of its rules and regulations, shall,
to the maximum extent permitted by applicable law, be within its absolute
discretion (except as otherwise specifically provided herein) and shall be
conclusive and binding upon all Participants and any person claiming under or
through any Participant. No member of the Board or the 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. Maximum Amount of Shares Available for Awards
(a) Maximum Number of Shares. The maximum number of shares of Common
Stock in respect of which Awards may be made under the Plan shall be 4,000,000
shares of Common Stock of the Company. Without limiting the generality of the
foregoing, whenever shares are received by the Company in connection with the
exercise of or payment for any Award
5
<PAGE>
granted under the Plan only the net number of shares actually issued shall be
counted against the foregoing limit.
(b) Shares Available for Issuance. Shares of Common Stock may be made
available from the authorized but unissued shares of the Company or from Shares
held in the Company's treasury and not reserved for some other purpose. In
addition, if any Award in respect of Shares is canceled or forfeited for any
reason without delivery of shares of Common Stock, the shares subject to such
Award shall thereafter again be available for award pursuant to the Plan.
(c) Adjustments Upon Certain Events. In the event of any Share dividend
or Share split, recapitalization (including, without limitation, the payment of
an extraordinary dividend), merger, consolidation, combination, spin-off,
distribution of assets to shareholders, exchange of shares, or other similar
corporate change, the aggregate number of Shares available for Options under
Section 4(a) or subject to outstanding Options and the respective prices
applicable to outstanding Options shall be appropriately adjusted.
(d) No Adjustment If Value Received. Except as hereinbefore expressly
provided, the issuance by the Company of shares of stock of any class or
securities convertible into shares of stock of any class, for cash, property,
labor or services, upon direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or other securities, and in any
case whether or not for fair value, shall not affect, and no adjustment by
reason thereof shall be made with respect to the number of Shares subject to
Options to be awarded to an Eligible Employee pursuant to Section 5.
5. Stock Options
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have the authority to grant Options to Eligible Employees and to determine (i)
the number of shares to be covered by each Option, (ii) the exercise price
therefor and (iii) the conditions and limitations applicable to the exercise of
the Option. Notwithstanding the foregoing, in no event shall the Committee
grant any Participant Options in any single calendar year with respect to more
than 600,000 shares of Common Stock authorized for issuance under the Plan, as
such number may be adjusted pursuant to Section 4(c). The Committee shall have
the authority to grant Incentive Stock Options or Nonstatutory Stock Options. In
the case
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of Incentive Stock Options, the terms and conditions of such grants shall be
subject to and comply with Section 422 of the Code and the regulations
thereunder.
(b) Option Price. The Committee shall establish the exercise price at
the time each Option is granted. Notwithstanding the foregoing, (i) the exercise
price at the time an Option is granted shall not be less than the Fair Market
Value of the Common Stock at the date of grant and (ii) in the case of an
Incentive Stock Option issued to a Participant who owns stock in the Company
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, the exercise price at the time such Incentive Stock Option
is granted to such individual shall equal at least 110% of the Fair Market Value
of the Common Stock at the date of grant.
(c) Option Term. If not previously exercised each Option shall expire
upon the seventh (7th) anniversary of the date of the grant thereof or, upon the
earlier termination of the Participant's Employment (or, if applicable, on the
day following the last day on which such Option is exercisable under Section
5(e) below), provided that (i) the Committee may establish a shorter term for an
Option at the time of the grant of such Option and (ii) in the case of an
Incentive Stock Option issued to a Participant who owns stock in the Company
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, such Incentive Stock Option shall expire on the fifth
(5th) anniversary of the date of grant.
(d) Exercise. Each Option shall be exercised at such times and subject
to such terms and conditions as the Committee may specify in the applicable
Award or thereafter; provided, however, that if the Committee does not establish
a different exercise schedule at or after the date of grant of an Option, such
Option shall become exercisable on a cumulative basis in three equal annual
installments commencing on the first anniversary of the date the Option is
granted. The Committee may impose such conditions with respect to the exercise
of Options as it shall deem appropriate, including without limitation, any
conditions relating to the application of federal or state securities laws. No
Shares shall be delivered pursuant to any exercise of an Option unless
arrangements satisfactory to the Committee have been made to assure full payment
of the option price therefor and of applicable taxes as provided in Section
11(a) below. Without limiting the generality of the foregoing, payment of the
option price may be made in cash or its equivalent or, if and to the extent
permitted by the Committee, by exchanging shares of Common Stock owned by the
optionee for at least six (6) months (or such longer period as is required by
applicable accounting standards to avoid a charge to earnings) and that are not
the subject of any pledge or other security interest, or by a combination of the
foregoing, provided
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that the combined value of all cash and cash equivalents and the Fair Market
Value of any such Common Stock so tendered to the Company, valued as of the date
of such tender, is at least equal to such option price.
(e) Termination of Employment. Unless the Committee shall otherwise
determine at or after grant, an Option shall be exercisable following the
termination of a Participant's Employment only to the extent provided in this
Section 5(e). If a Participant's Employment terminates due to the Participant's
(i) death, (ii) Disability, (iii) Early Retirement with the consent of the
Committee or (iv) Normal Retirement, the Participant (or, in the event of the
Participant's death or Disability during Employment or during the period during
which an Option is exercisable under this sentence, the Participant's
beneficiary or legal representative) may exercise any Option held by the
Participant at the time of such termination, regardless of whether then
exercisable, for a period of three years (or such greater or lesser period as
the Committee shall determine at or after grant), but in no event after the date
the Option otherwise expires. If a Participant's Employment is terminated for
Cause (or, if after the Participant's termination of Employment, the Committee
determines that the Participant's Employment could have been terminated for
Cause had the Participant still been employed or has otherwise engaged in
conduct that is detrimental to the interests of the Company, as determined by
the Committee in its sole discretion), all Options held by the Participant shall
immediately terminate, regardless of whether then exercisable. In the event of a
Participant's termination of Employment for any reason not described in the
preceding two sentences, the Participant (or, in the event of the Participant's
death or Disability during the period during which an Option is exercisable
under this sentence, the Participant's beneficiary or legal representative) may
exercise any Option which was exercisable at the time of such termination for 90
days (or such greater or lesser period as the Committee shall specify at or
after the grant of such Option) following the date of such termination, but in
no event after the date the Option otherwise expires.
(f) Reload Options. The Committee may provide that a Participant (or,
if applicable, his permitted transferee) who delivers shares of Common Stock
that have been owned by such Participant (or permitted transferee) for any
minimum period of time specified by the Committee to exercise an Option (when
the fair market value of Common Stock exceeds the exercise price of such Option)
will automatically be granted new Options ("Reload Options") for a number of
shares of Common Stock equal to the number of shares so delivered. Unless the
Committee determines otherwise, such Reload Options will be subject to the same
terms and conditions (including the same expiration date) as the related Option
except (i) that the exercise
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price shall initially be equal to the Fair Market Value of a share of Common
Stock on the date such Reload Option is granted and (ii) such Reload Option
shall not be exercisable prior to the six month anniversary of the date of grant
and, thereafter, shall be exercisable in full.
6. Stock Appreciation Rights
(a) Grant of SARs. The Committee shall have the authority to grant
Stock Appreciation Rights in tandem with an Option, in addition to an Option, or
freestanding and unrelated to an Option. Notwithstanding the foregoing, in no
event shall the Committee grant any Participant SARs with respect to more than
600,000 shares of Common Stock authorized for issuance under the Plan, as such
number may be adjusted pursuant to Section 4(c). Stock Appreciation Rights
granted in tandem or in addition to an Option may be granted either at the same
time as the Option or at a later time. Stock Appreciation Rights shall not be
exercisable after the expiration of ten years from the date of grant and shall
have a base price determined in the same manner as, and subject to the same
conditions as apply with respect to, a Nonstatutory Stock Option under Section
5(b).
(b) Exercise of SARs. A Stock Appreciation Right shall entitle the
Participant to receive from the Company an amount equal to the excess of the
Fair Market Value of a share of Common Stock on the date of exercise of the
Stock Appreciation Right over the base price thereof. The Committee shall
determine the time or times at which or the event or events (including, without
limitation, a change of control) upon which a Stock Appreciation Right may be
exercised in whole or in part, the method of exercise and whether such Stock
Appreciation Right shall be settled in cash, shares of Common Stock or a
combination of cash and shares of Common Stock; provided, however, that unless
otherwise specified by the Committee at or after grant, a Stock Appreciation
Right granted in tandem with an Option shall be exercisable only at the same
time or times as the related Option is exercisable.
7. Restricted Stock and Restricted Units
(a) Grant of Restricted Stock or Restricted Units. The Committee may
grant Awards of Restricted Stock or Restricted Units to Participants at such
times and in such amounts, and subject to such other terms and conditions not
inconsistent with the Plan, as it shall determine. Each grant of Restricted
Stock or Restricted Units shall be evidenced by an Award Agreement. Unless the
Committee provides
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<PAGE>
otherwise at or after the date of grant, stock certificates evidencing any
shares of Restricted Stock so granted shall be held in the custody of the
Secretary of the Company until the Restricted Period lapses, and, as a condition
to the grant of any Award of shares of Restricted Stock, the Participant shall
have delivered to the Secretary of the Company a certificate, endorsed in blank,
relating to the shares of Common Stock covered by such Award.
(b) Termination of Employment. Unless the Committee otherwise
determines at or after grant, the rights of a Participant with respect to an
award of Restricted Stock or Restricted Units outstanding at the time of the
Participant's termination of Employment shall be determined under this Section
7(b). In the event that a Participant's Employment terminates due to the
Participant's (i) death, (ii) Disability, (iii) Early Retirement with the
consent of the Committee or (iv) Normal Retirement, any award of Restricted
Stock or Restricted Units shall become vested and nonforfeitable as to that
number of shares which is equal to the number of shares of Common Stock subject
to such Award times a fraction, the numerator of which is the number of days
actually worked during the Restricted Period (or, in the case of an Award which
has previously vested in part (an "Installment Award"), the number of days
worked since the last vesting date) and the denominator of which is the total
number of days during the Restricted Period (or, in the case of an Installment
Award, the number of days between the last vesting date and the end of the
Restricted Period). Unless the Committee otherwise determines, any portion of
any Restricted Stock or Restricted Unit Award that has not become nonforfeitable
at the date of a Participant's termination of Employment shall be forfeited as
of such date.
(c) Delivery of Shares. Upon the expiration or termination of the
Restricted Period and the satisfaction (as determined by the Committee) of any
other conditions determined by the Committee, the restrictions applicable to the
Restricted Stock or Restricted Units shall lapse and a stock certificate for the
number of shares of Common Stock with respect to which the restrictions have
lapsed shall be delivered, free of all such restrictions, except any that may
be imposed by law, to the Participant or the Participant's beneficiary or
estate, as the case may be. No payment will be required to be made by the
Participant upon the delivery of such shares of Common Stock and/or cash, except
as otherwise provided in Section 11(a) of the Plan. At or after the date of
grant, the Committee may accelerate the vesting of any award of Restricted Stock
or Restricted Units or waive any conditions to the vesting of any such award.
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<PAGE>
(d) Restricted Period; Restrictions on Transferability during
Restricted Period. Unless otherwise determined by the Committee at or after the
date of grant, the Restricted Period applicable to any award of Restricted Stock
or Restricted Units shall lapse, and the shares related to such award shall
become freely transferable, on the third anniversary of the date of grant.
Restricted Stock or Restricted Units may not be sold, assigned, pledged or
otherwise encumbered, except as herein provided, during the Restricted Period.
Any certificates issued in respect of Restricted Stock shall be registered in
the name of the Participant and deposited by such Participant, together with a
stock power endorsed in blank, with the Company. At the expiration of the
Restricted Period with respect to any award of Restricted Stock, unless
otherwise forfeited, the Company shall deliver such certificates to the
Participant or to the Participant's legal representative. Payment for Restricted
Stock Units shall be made by the Company in shares of Common Stock, cash or in
any combination thereof, as determined by the Committee.
(e) Rights as a Stockholder; Dividend Equivalents. Unless otherwise
determined by the Committee at or after the date of grant, Participants granted
shares of Restricted Stock shall be entitled to receive, either currently or at
a future date, as specified by the Committee, all dividends and other
distributions paid with respect to those shares, provided that if any such
dividends or distributions are paid in shares of Common Stock or other property
(other than cash), such shares and other property shall be subject to the same
forfeiture restrictions and restrictions on transferability as apply to the
shares of Restricted Stock with respect to which they were paid. The Committee
will determine whether and to what extent to credit Dividend Equivalents to the
account of, or to pay dividends currently to, each recipient of Restricted
Units. To the extent provided by the Committee at or after the date of grant,
any Dividend Equivalents credited to a Participant's account shall be deemed to
have been invested in shares of Common Stock on the record date established for
the related dividend and, accordingly, a number of additional Restricted Units
shall be credited to such Participant's account equal to the greatest whole
number which may be obtained by dividing (x) the value of such Dividend
Equivalent on the record date by (y) the Fair Market Value of a share of Common
Stock on such date.
8. Incentive Awards
(a) Incentive Stock and Incentive Units. Subject to the provisions of
the Plan, the Committee shall have the authority to grant Incentive Stock or
Incentive Units to any Eligible Employee and to determine (i) the number of
shares of Incentive Stock and the number of Incentive Units to be granted to
each Participant and
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<PAGE>
(ii) the other terms and conditions of such Awards; provided that, to the extent
necessary to comply with applicable law, Incentive Stock shall only be awarded
to an Eligible Employee who has been employed for such minimum period of time as
shall be determined by the Committee. The Restricted Period related to Incentive
Stock or Incentive Units shall lapse upon the determination by the Committee
that the performance objectives established by the Committee have been attained,
in whole or in part. Such performance objectives may be related to the
performance of (i) the Company, (ii) a Subsidiary, (iii) a division or unit of
the Company or any Subsidiary, (v) the Participant or (vi) any combination of
the foregoing, over a measurement period or periods established by the
Committee. Unless the Committee otherwise determines at the time of grant of
Incentive Stock or Incentive Units, the perfor mance objectives with respect to
such Award shall be related to at least one of the following criteria, which may
be determined solely by reference to the performance of the Company or a
Subsidiary or a division or unit of the Company or a Subsidiary or based on
comparative performance relative to other companies: (i) consolidated earnings
before income taxes, depreciation and amortization; (ii) revenues; (iii)
earnings per share; (iv) net income; (v) gross profit margin; (vi) maximum
capital expenditures; (vii) return on equity; and/or (viii) return on total
capital. Except to the extent otherwise expressly provided herein, the Committee
may, at any time and from time to time, change the performance objectives
applicable with respect to any Incentive Stock or Incentive Units to reflect
such factors, including, without limitation, changes in a Participant's duties
or responsibilities or changes in business objectives (e.g., from corporate to
Subsidiary or business unit performance or vice versa), as the Committee shall
deem necessary or appropriate. In making any such adjustment, the Committee
shall adjust the number of Incentive Stock or Incentive Units or take other
appropriate actions to prevent any enlargement or diminution of the
Participant's rights related to service rendered and performance attained prior
to the effective date of such adjustment.
(b) Termination of Employment. Unless the Committee otherwise
determines at or after grant, the rights of a Participant with respect to an
award of Incentive Stock or Incentive Units outstanding at the time of the
Participant's termination of Employment shall be determined under this Section
8(b). In the event that a Participant's Employment terminates due to the
Participant's (i) death, (ii) Disability, (iii) Early Retirement with the
consent of the Committee or (iv) Normal Retirement, any award of Incentive Stock
or Incentive Units shall become vested and nonforfeitable at the end of the
measurement period as to that number of shares which is equal to that
percentage, if any, of such award that would have been earned based on the
attainment or partial attainment of such performance objectives times a
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<PAGE>
fraction, the numerator of which is the number of days employed during the
Restricted Period (or, in the case of an Award which has previously vested in
part (an "Installment Award"), the number of days employed since the last
vesting date) and the denominator of which is the total number of days during
the Restricted Period (or, in the case of an Installment Award, the number of
days between the last vesting date and the end of the Restricted Period);
provided that, any portion of any Incentive Stock or Incentive Unit award that
does not become vested as of the times set forth in this sentence shall be
forfeited at such times. In all other cases, any portion of any award of
Incentive Stock or Incentive Units that has not become nonforfeitable at the
date of a Participant's termination of Employment shall be forfeited as of such
date.
(c) Awards Nontransferable. Incentive Stock or Incentive Units may not
be sold, assigned, pledged or otherwise encumbered, except as herein provided,
during the Restricted Period. Any certificates issued in respect of Incentive
Stock shall be registered in the name of the Participant and deposited by such
Participant, together with a stock power endorsed in blank, with the Company. At
the expiration of the Restricted Period with respect to any award of Incentive
Stock, unless otherwise forfeited, the Company shall deliver such certificates
to the Participant or to the Participant's legal representative. Payment for
Incentive Stock Units shall be made by the Company in shares of Common Stock,
cash or in any combination thereof, as determined by the Committee.
(d) Rights as a Stockholder; Dividend Equivalents. Unless otherwise
determined by the Committee at or after the date of grant, Participants granted
shares of Incentive Stock shall be entitled to receive, either currently or at a
future date, as specified by the Committee, all dividends and other
distributions paid with respect to those shares, provided that if any such
dividends or distributions are paid in shares of Common Stock or other property
(other than cash), such shares and other property shall be subject to the same
forfeiture restrictions and restrictions on transferability as apply to the
shares of Incentive Stock with respect to which they were paid. The Committee
will determine whether and to what extent to credit Dividend Equivalents to the
account of, or to pay dividends currently to, each recipient of Incentive Units
during the period of deferral. To the extent provided by the Committee at or
after the date of grant, any Dividend Equivalents credited to a Participant's
account shall be deemed to have been invested in shares of Common Stock on the
record date established for the related dividend and, accordingly, a number of
additional Incentive Units shall be credited to such Participant's account
equal to the greatest whole number which may be obtained by dividing (x) the
value of such Dividend Equiva-
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lent on the record date by (y) the Fair Market Value of a share of
Common Stock on such date.
(e) Interpretation. Notwithstanding anything else contained in this
Section 8 to the contrary, if any award of Incentive Stock or Incentive Units is
intended, at the time of grant, to be other performance-based compensation
within the meaning of Section 162(m)(4)(C) of the Code, to the extent required
to so qualify any Award hereunder, the Committee shall not be entitled to
exercise any discretion otherwise authorized under this Section 8 with respect
to such award if the ability to exercise such discretion (as opposed to the
exercise of such discretion) would cause such award to fail to qualify as other
performance-based compensation.
9. Elective and Supplemental Units
(a) Elective Units; Supplemental Units. On such date or dates as shall
be established by the Committee and subject to such terms and conditions as the
Committee shall determine, a Participant may be permitted to elect to defer
receipt of all or a portion of his annual compensation and/or annual incentive
bonus ("Deferred Annual Amount") payable by the Company or a Subsidiary and
receive in lieu thereof a number of Elective Units equal to the greatest whole
number which may be obtained by dividing (x) the amount of the Deferred Annual
Amount by (y) the Fair Market Value of a share of Common Stock on the date of
grant. No shares of Common Stock will be issued upon the issuance of Elective
Units; the Company will establish a separate account for the Participant and
will record in such account the number of Elective Units issued to the
Participant. To the extent the Committee so determines, a Participant who elects
to receive Elective Units shall also receive that number of Supplemental Units
equal to the greatest whole number which may be obtained by dividing (x) such
percentage of the Deferred Annual Amount as is determined by the Committee at
the date of grant by (y) the Fair Market Value of a share of Common Stock on the
date of grant.
(b) Rights as a Stockholder; Dividend Equivalents. A Participant shall
not have any right in respect of Elective Units issued pursuant to the Plan to
vote on any matter submitted to the Company's stockholders until such time as
the shares of Common Stock attributable to such Elective Units have been issued
to such Participant or his beneficiary. The Committee will determine whether
and to what extent to credit Dividend Equivalents to the account of, or to pay
dividends currently to, each recipient of Elective Units. Dividend Equivalents
credited to a Participant's account shall be deemed to have been invested in
shares of Common Stock on the record date
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established for the related dividend and, accordingly, a number of
Elective Units shall be credited to such Participant's account equal to the
greatest whole number which may be obtained by dividing (x) the value of such
Dividend Equivalent on the record date by (y) the Fair Market Value of a share
of Common Stock on such date.
(c) Vesting of Elective Units and Supplemental Units. The Elective
Units credited to a Participant, together with any Dividend Equivalents credited
in respect of such Elective Units, shall be fully vested at all times. Unless
the Committee provides otherwise at or after the date of grant, the
Supplemental Units credited to a Participant, together with any Dividend
Equivalents credited in respect of Supplemental Units, shall become vested in
full on the third anniversary of the date the corresponding Deferred Annual
Amount would have been paid absent the Participant's election to defer provided
the Participant remains in the continuous employ of the Company or a Subsidiary
through such date. Notwithstanding the foregoing, the Committee may accelerate
the vesting of any Supplemental Units at or after the date of grant.
(d) Settlement of Elective Units and Supplemental Units. Unless the
Committee determines otherwise at or after the date of grant, a Participant
shall receive one share of Common Stock for each Elective Unit (and related
Dividend Equivalents) as of the date of such Participant's termination of
employment (or such later date as may be elected by the Participant in
accordance with the rules and procedures of the Committee). Unless the Committee
determines otherwise at or after the date of grant, a Participant shall receive
one share of Common Stock for each Supplemental Unit (and related Dividend
Equivalents) that shall have become vested on or prior to the date of such
Participant's termination of employment with the Company and the Subsidiaries,
other than any such termination for Cause, on the date of such termination of
employment (or on such earlier date as the Committee shall permit or such later
date as may be elected by the Participant in accordance with the rules and
procedures of the Committee). In the event of the termination of a Participant's
employment with the Company and the Subsidiaries for Cause, the Participant
shall immediately forfeit all rights with respect to any Supplemental Units (and
related Dividend Equivalents) credited to his account. The Committee may provide
in the Award Agreement applicable to Elective Units that, in lieu of issuing
shares of Common Stock in settlement of the vested Supplemental Units (and
related Dividend Equivalents), the Committee may direct the Company to pay to
the Participant the cash value thereof.
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10. Stock in Lieu of Cash
The Committee may grant Awards or shares of Common Stock in lieu of all
or a portion of an award otherwise payable in cash to an Executive Officer
pursuant to any bonus or incentive compensation plan of the Company (subject to
any applicable limitations in such bonus or incentive compensation plan). If
shares are issued in lieu of cash, the number of shares of Common Stock to be
issued shall be the greatest number of whole shares which has an aggregate Fair
Market Value on the date the cash would otherwise have been payable pursuant to
the terms of such other plan equal to or less than the amount of such cash.
11. General Provisions
(a) Withholding. The Company shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of any Award satisfied in the form of Common Stock, no shares shall be
issued unless and until arrangements satisfactory to the Committee shall have
been made to satisfy any withholding tax obligations applicable with respect to
such Award. Without limiting the generality of the foregoing and subject to such
terms and conditions as the Committee may impose, the Company shall have the
right to retain, or the Committee may, subject to such terms and conditions as
it may establish from time to time, permit Participants to elect to tender,
Common Stock (including Common Stock issuable in respect of an Award) to
satisfy, in whole or in part, the amount required to be withheld.
(b) Awards. Each Award hereunder shall be evidenced in writing. The
written agreement shall be delivered to the Participant and shall incorporate
the terms of the Plan by reference and specify the terms and conditions thereof
and any rules applicable thereto (each, an "Award Agreement").
(c) Non-transferability. No Award shall be transferable by a
Participant otherwise than by will or under the applicable laws of descent and
distribution, unless such transfer shall be (i) permitted by the Committee (on
such terms as it shall establish) or (ii) if the Option agreement pursuant to
which an Award is made so provides, to (A) the spouse, children or grandchildren
of such Participant (collectively, "Family Members"), (B) a trust or trusts for
the exclusive benefit of such Family Members, or (C) a partnership or limited
liability company in which such Family Members and trusts for the exclusive
benefit of such Family Members are the
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only partners or members, as the case may be. In addition, no Award shall be
assigned, negotiated, pledged or hypothecated in any way (whether by operation
of law or otherwise) and no Award shall be subject to execution, attachment or
similar process. Upon any attempt to transfer, assign, negotiate, pledge or
hypothecate any Award, or in the event of any levy upon any Award by reason of
any attachment or similar process, in either case contrary to the provisions
hereof, such Award shall immediately become null and void.
(d) Legend. To the extent any stock certificate is issued to a
Participant in respect of shares of Restricted Stock or Incentive Stock awarded
under the Plan prior to the expiration of the applicable Restricted Period, such
certificate shall be registered in the name of the Participant and shall bear
the following (or similar) legend:
"The shares of stock represented by this certificate are
subject to the terms and conditions contained in the Deltathree.com,
Inc. 1999 Stock Incentive Plan and the Award Agreement, dated as of
_____, between the Company and the Participant, and may not be sold,
pledged, transferred, assigned, hypothecated or otherwise encumbered in
any manner (except as provided in Section 11(c) of the Plan or in such
Award Agreement) until _________________ ."
Upon the lapse of the Restricted Period with respect to any such shares of
Restricted Stock or Incentive Stock, the Company shall issue or have issued new
share certifi cates without the legend described herein in exchange for those
previously issued.
(e) No Right to Employment. No person shall have any claim or right to
be granted an Award, and the grant of an Award shall not be construed as giving
a Participant the right to be retained in the employ of the Company or any
Subsidiary. Further, the Company and each Subsidiary expressly reserves the
right at any time to dismiss a Participant free from any liability, or any claim
under the Plan, except as provided herein or in any agreement entered into with
respect to an Award.
(f) No Rights to Awards, No Shareholder Rights. No Participant or
Eligible Employee shall have any claim to be granted any Award under the Plan,
and there is no obligation of uniformity of treatment of Participants and
Eligible Employ ees. Subject to the provisions of the Plan and the applicable
Award, no person shall have any rights as a shareholder with respect to any
shares of Common Stock to be issued under the Plan prior to the issuance
thereof.
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(g) Effective Date. The Plan shall become effective on the Effective
Date. No Awards may be granted under the Plan after the expiration of ten years
from the date this Plan is adopted.
(h) Amendment of Plan. The Board or the Committee may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no
amendment shall be made without shareholder approval if such amendment would
(1) increase the number of shares of Common Stock subject to the Plan,
except pursuant to Section 4(c);
(2) change the price at which Options may be granted; or
(3) remove the administration of the Plan from the Committee.
Without the written consent of an affected Participant, no termination,
suspension or modification of the Plan shall adversely affect any right of such
Participant under the terms of an Award granted before the date of such
termination, suspension or modification.
(i) Application of Proceeds. The proceeds received by the Company from
the sale of its shares under the Plan will be used for general corporate
purposes.
(j) Compliance with Legal and Exchange Requirements. The Plan, the
granting and exercising of Awards thereunder, and the other obligations of the
Company under the Plan, shall be subject to all applicable federal and state
laws, rules, and regulations, and to such approvals by any regulatory or
governmental agency as may be required. The Company, in its discretion, may
postpone the granting and exercising of Awards, the issuance or delivery of
Common Stock under any Award or any other action permitted under the Plan to
permit the Company, with reasonable diligence, to complete such stock exchange
or similar listing or registration or qualification of such Common Stock or
other required action under any federal or state law, rule, or regulation and
may require any Participant to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Common Stock in compliance with applicable laws, rules, and
regulations. The Company shall not be obligated by virtue of any provision of
the Plan to recognize the exercise of any Award or to otherwise sell or issue
Common Stock in violation of any such laws, rules, or
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regulations; and any postponement of the exercise or settlement of any Award
under this provision shall not extend the term of such Awards, and neither the
Company nor its directors or officers shall have any obligation or liability to
the Participant with respect to any Award (or Stock issuable thereunder) that
shall lapse because of such postponement.
(k) Gender and Number. Except when otherwise indicated by the context,
words in the masculine gender used in the Plan shall include the feminine
gender, the singular shall include the plural, and the plural shall include the
singular.
(l) Governing Law. This Plan shall be construed and enforced according
to the laws of the state of New York.
19
<PAGE>
MANAGEMENT AGREEMEENT
This Management Agreement (this "Agreement"), dated as of November 1,
1999, by and between RSL Communications, Ltd., a Bermuda company ("RSL COM") and
deltathree.com, Inc., a Delaware corporation (the "Company"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
assigned to them in clause 1.1 hereof.
WHEREAS, the Company is a wholly-owned Subsidiary of RSL COM and will
continue to be a Subsidiary immediately following the proposed Initial Public
Offering;
WHEREAS, RSL COM has incurred and will continue to incur, directly and
through other members of the RSL Group, overhead expenses in relation to
services provided to the Company Group;
WHEREAS, the Company Group benefits from the services RSL COM provides to,
and expenses incurred by RSL COM on behalf of, the Company Group;
WHEREAS, the Company has agreed to make payment to RSL COM in
consideration of these services, on the terms set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be legally bound, agree
as follows:
1 Definitions and interpretation
1.1 Definitions
For purposes of this Agreement, the following terms shall have the
following meanings:
Affiliate of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of
such entity, whether through ownership of voting securities or other
interests, by contract or otherwise;
Business Day means a day on which banks are open for business in New
York, New York, excluding a Saturday, Sunday or public holiday;
Commencement Date means the date the Initial Public Offering is
consummated;
Company Group means the Company and its Subsidiaries from time to
time;
CPI means the Consumer Price Index for all Urban Consumers as
published by the Bureau of Labor Statistics of the United States
Department of Labor for the New York Northeastern New Jersey Area,
all items (1967-100);
Initial Public Offering means an underwritten initial public
offering of common stock of the Company pursuant to an effective
registration statement under the Securities Act of 1933, as amended;
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Insolvency Event in relation to a party means the happening of one
or more of these events:
(a) an application is made to a court for an order that it be
wound up, declared bankrupt or that a provisional liquidator
or receiver or receiver and manager be appointed, unless the
application is withdrawn, struck out or dismissed within 7
Business Days of it being made;
(b) a receiver, administrator, manager, receiver and manager or
agent is appointed to administer it or any part of its
undertaking or property, or any encumbrancer is validly
entitled to exercise any power of sale over any part of its
undertaking or property;
(c) a liquidator or provisional liquidator is appointed;
(d) it is insolvent, as disclosed in its accounts or otherwise,
states that it is insolvent or it is presumed to be insolvent
under any applicable law;
(e) it states that it is unable to pay its debts or is unable to
pay its debts as and when they fall due; or
(f) anything having a substantially similar effect to any of the
events specified above happens to it under the law of any
jurisdiction;
Management Fee means the monthly fee payable by the Company to RSL
COM pursuant to clause 5;
Management Services means the services set out in Schedule 1
attached hereto;
Review Date means December 31, 2000 and December 31 of each
subsequent year;
RSL Group means RSL COM and its Affiliates from time to time, not
including the Company Group;
Services Agreement means the Amended and Restated Services Agreement
between RSL COM and the Company, dated September 3, 1999, relating
to, among other things, the supply of leased line capacity, data
communications facilities, traffic termination services and physical
space; and
Subsidiary means, in relation to a Person, any Person of which at
least a majority of the securities or interests having by the terms
thereof voting power to elect at least a majority of the board of
directors or others performing similar functions with respect to
such Person is directly or indirectly owned or controlled by such
Person or by any one or more of its Subsidiaries; provided, however,
that no Person shall be deemed to be a Subsidiary of such other
Person unless such other Person controls, or has the right, power or
ability to control, that Person.
1.2 Interpretation
In this Agreement, headings and boldings are for convenience only
and do not affect the interpretation of this Agreement and, unless
the context otherwise requires:
(a) words importing the singular include the plural and vice
versa;
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(b) words importing a gender include any gender;
(c) other parts of speech and grammatical forms of a word or
phrase defined in this Agreement have a corresponding meaning;
(d) an expression importing a natural person includes any company,
partnership, joint venture, association, corporation or other
Person;
(e) a reference to a clause, party, or schedule is a reference to
a clause of, and a party and schedule to, this Agreement and a
reference to this Agreement includes any schedule;
(f) a reference to a document includes all amendments or
supplements to, or replacements or novations of, that
document;
(g) a reference to a party to a document includes that party's
successors and permitted assigns;
(h) a reference to $ or dollars is to US dollars; and
(i) the expressions:
(1) comply with includes observe and perform;
(2) permit includes suffer or cause, including by way of
omission; and
(3) including and similar words are not words of limitation.
1.3 Business Day
Where the day on or by which any thing is to be done is not a
Business Day, that thing must be done on or by the next Business
Day.
2 Conditions precedent
2.1 Conditions
The obligations and liabilities of the parties under this Agreement
are conditional on the Company consummating the Initial Public
Offering.
2.2 Cut-off date
If the condition precedent in clause 2.1 is not satisfied on or
before March 31, 2000, or such later date as the parties agree in
writing, this Agreement will terminate and will have no further
effect, and neither party will be liable to the other.
3 Commencement and term
This Agreement will commence on the Commencement Date and will
continue until terminated in accordance with clause 7.
4 Provision of Management Services
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(a) The Company acknowledges that the Company and the other
members of the Company Group have received, and will continue
to receive during the term of this Agreement, the benefit of
the Management Services.
(b) RSL COM will provide, or procure the provision of, the
Management Services in a manner consistent with:
(1) the provision of the Management Services to the Company
Group prior to the commencement of this Agreement; and
(2) the provision of similar services by RSL COM to the
various telecommunications operating companies
throughout the world that form part of the RSL Group.
5 Fees and payment
5.1 Amount of Management Fee
(a) The amount of the Management Fee payable in respect of each
month up to and including December 2000 is $20,000 per month.
(b) The Management Fee will be adjusted as from each Review Date
in accordance with clause 5.2.
5.2 Adjustment of Management Fee - CPI
(a) Subject to clause 5.2(c), the Management Fee will be adjusted
from each Review Date in accordance with the following
formula:
A = B x C divided by D
A = the Management Fee payable from the relevant Review
Date;
B = the Management Fee immediately before the relevant
Review Date;
C = the CPI in respect of the quarter immediately before
the relevant Review Date; and
D = the CPI in respect of the quarter immediately before
the previous Review Date or (in the case of the first
Review Date) the commencement date of this Agreement.
(b) If the Bureau of Labor Statistics of the United States
Department of Labor or equivalent authority ceases to issue
the CPI then the published index which most closely resembles
it must be used for the purpose of clause 5.2(a).
(c) Clause 5.2(a) will not apply if the parties agree in writing
before any Review Date that an alternative Management Fee is
to apply after that date.
5.3 Payment of Management Fee
(a) On the first Business Day of each month, the Company must pay
to RSL COM
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<PAGE>
the Management Fee in respect of the preceding month.
(b) Any amount which is not paid as required by clause 5.3(a) will
accrue interest from the date such amount was due at the rate
of RSL COM's "weighted average cost of capital" ("WACC") as
calculated by RSL COM and/or its advisers from time to time.
As of the date of this Agreement, RSL COM's WACC is 14.66%.
Promptly upon calculation of a new WACC, RSL COM shall notify
the Company of such new rate and immediately upon such
notification, the new WACC shall be effective under the terms
of this Agreement and shall remain in effect until RSL COM's
next calculation thereof.
5.4 Set off
The Company may set off any amount which is payable by RSL COM to
the Company by crediting that amount towards the amount payable by
the Company under this Agreement.
5.5 Currency
All payments to RSL COM shall be made in U.S. Dollars.
6 Liability
6.1 Liability
(a) Neither RSL COM, any other member of the RSL Group, nor any of
their respective directors, officers and employees will have
any liability whatsoever to the Company Group for any loss or
damage incurred by the Company Group arising out of or in
connection with the provision of the Management Services,
except to the extent that such loss or damage is caused by the
willful misconduct of RSL COM.
(b) The parties acknowledge that RSL COM enters into clause 6.1(a)
on its own account and as agent for:
(1) its directors, officers and employees; and
(2) the other members of the RSL Group and their respective
directors, officers and employees,
and that RSL COM holds the benefit of that clause in trust for
itself and for such other persons.
6.2 Indemnity
The Company agrees to indemnify RSL COM in respect of any claim,
action, damage, loss, liability, cost, charge, expense, outgoing or
payment (including without limitation legal fees) which RSL COM
pays, suffers, incurs or is liable for, by reason of any action or
claim brought against RSL COM in respect of the provision of the
Management Services, except to the extent caused by to the
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5
<PAGE>
willful misconduct of RSL COM.
7 Termination
7.1 Change of control
Either party may terminate this Agreement upon three months' written
notice to the other at any time after the Company is no longer a
Subsidiary of the RSL Group.
7.2 Events of default
Either party (the "non-defaulting party") may terminate this
Agreement immediately by notice to the other (the "defaulting
party") if:
(a) the defaulting party commits a material breach of this
Agreement and that failure or breach is incapable of remedy
or, if capable of remedy, continues for 20 Business Days after
the defaulting party is given a notice by the non-defaulting
party requiring the breach to be remedied;
(b) the defaulting party is repeatedly or persistently in breach
of or default under any of the provisions of this Agreement;
(c) the defaulting party ceases to carry on its business or a
material part of its business;
(d) the defaulting party ceases to hold any material license,
approval, authorization or consent required to enable it to
comply with its obligations under this Agreement; or
(e) an Insolvency Event occurs in relation to the defaulting
party.
7.3 Effect of termination
Upon termination of this Agreement, each party is released (as of
the effective date of such termination) from any further obligation
under this Agreement except that:
(a) such termination will not affect any rights that either party
may have by reason of a breach of this Agreement occurring
prior to termination; and
(b) such termination will not affect any party's right to receive
payments that are due and owing to it under this Agreement at
the date of termination.
8 Dispute resolution
8.1 Submission to arbitration
(a) The parties agree to submit any disputes arising out of,
relating to, or in connection with, the interpretation,
execution or performance of this Agreement to final and
binding arbitration in New York, New York.
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<PAGE>
(b) The parties consent to the jurisdiction of the Supreme Court
of the State of New York, and of the United States District
Court for the Southern District of New York, for all purposes
in connection with arbitration, including the entry of
judgment on any award; and consent that any process, notice of
motion or other application to either of those courts, and any
papers in connection with arbitration, may be served by
registered or certified mail, return receipt requested, by
personal service, or in such other manner as may be
permissible under the rules of the applicable court or
arbitration tribunal, provided a reasonable time for
appearance is allowed.
8.2 Arbitration rules
(a) The rules of the American Arbitration Association (AAA) will
apply to any arbitration except to the extent modified by this
clause 8.
(b) The arbitration will be conducted in English before three
arbitrators. Each party may appoint one arbitrator, and the
arbitrators so appointed shall choose another arbitrator. If
the arbitrators chosen by the parties cannot agree on the
choice of the other arbitrator within a period of 30 days
after their appointment, then the other arbitrator shall be
appointed by the AAA.
(c) The arbitrators must state the reasons upon which the award is
based. The award of the arbitrators will be final and binding
upon the parties and will not be subject to appeal to any
court or other authority, except to the extent required by
applicable law. Judgment upon the award may be entered in any
court having jurisdiction, and application may be made to any
such court for a judicial acceptance of the award and an order
for enforcement.
8.3 Costs
Each party must bear its own costs and expenses in connection with
any arbitration, but must share equally in the expenses and fees
assessed by the AAA.
9 Miscellaneous
9.1 Waivers
(a) Waiver of any right arising from a breach of this Agreement or
of any right, power, authority, discretion or remedy arising
upon default under this Agreement must be in writing and
signed by the party granting the waiver.
(b) A failure or delay in exercise, or partial exercise, of:
(1) a right arising from a breach of this Agreement; or
(2) a right, power, authority, discretion or remedy created
or arising upon default under this Agreement,
does not result in a waiver of that right, power, authority,
discretion or remedy.
(c) A party is not entitled to rely on a delay in the exercise or
non-exercise of a right,
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<PAGE>
power, authority, discretion or remedy arising from a breach
of this Agreement or on a default under this Agreement as
constituting a waiver of that right, power, authority,
discretion or remedy.
(d) A party may not rely on any conduct of another party as a
defense to exercise of a right, power, authority, discretion
or remedy by that other party.
(e) This clause may not itself be waived except by writing.
9.2 Variation
A variation of any term of this Agreement must be in writing and
signed by the parties.
9.3 Assignment
(a) Subject to clause 9.3(b), rights arising out of or under this
Agreement are not assignable by one party without the prior
written consent of the other party (which consent must not be
unreasonably withheld).
(b) RSL COM may at any time assign its rights under this Agreement
to an Affiliate.
(c) A breach of clause 9.3((a)) by one party entitles the other
party to immediately terminate this Agreement.
(d) Clause 9.3((c)) does not affect the construction of any other
part of this Agreement.
9.4 Further assurances
Each party must do all things and execute all further documents
necessary to give full effect to this Agreement.
9.5 Governing law and jurisdiction
This Agreement is governed by, and must be construed in accordance
with, the laws of New York, without regard to the conflict of laws
provisions thereof, other than as to its laws of arbitration which
shall be governed under the United States Arbitration Act or other
applicable federal law.
9.6 Relationship
Nothing in this Agreement or in any other instrument, agreement or
other document delivered pursuant to or in connection with it will
deem either party the partner, joint venture, agent or employee of
the other.
9.7 Prohibition and enforceability
(a) Any provision of, or the application of any provision of, this
Agreement or any right, power, authority, discretion or remedy
which is prohibited in any jurisdiction is, in that
jurisdiction, ineffective only to the extent of that
prohibition.
(b) Any provision of, or the application of any provision of, this
Agreement which is
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<PAGE>
void, illegal or unenforceable in any jurisdiction does not
affect the validity, legality or enforceability of that
provision in any other jurisdiction or of the remaining
provisions in that or any other jurisdiction.
9.8 Costs and expenses
Each party must pay its own legal costs and expenses in respect of
the negotiation, preparation, completion and execution of this
Agreement.
9.9 Notices
(a) Any notice or other communication including, but not limited
to, any request, demand, consent or approval, to or by a party
to this Agreement must be delivered personally or sent by
prepaid airmail post or facsimile and:
(1) must be in legible writing and in English addressed as
shown below:
(A) if to RSL COM:
Address: Clarendon House
Church Street
Hamilton HM CX, Bermuda
Attention: President
Facsimile: (441) 292-4720
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<PAGE>
With a copy to:
RSL Communications, N. America, Inc.
767 Fifth Avenue, Suite 4300
New York, New York 10153 USA
Attention: General Counsel
Facsimile: 212-317-1940
and
(B) if to the Company:
Address: 430 Park Avenue, Suite 500
New York, New York 10022
Attention: General Counsel
Facsimile: (212) 588-3674
or as specified to the sender by any party by notice;
(2) where the sender is a company, must be signed by an
officer of the sender;
(3) is regarded as being given by the sender and received by
the addressee:
(A) if by delivery in person or by internationally
recognized overnight courier, when delivered to
the addressee;
(B) if by post, seven Business Days from and including
the date of postage; or
(C) if by facsimile transmission, when legibly
received by the addressee,
but if the delivery or receipt is on a day which is not
a Business Day or is after 4:00 p.m. (addressee's time)
it is regarded as received at 9:00 a.m. on the following
Business Day; and
(4) can be relied upon by the addressee and the addressee is
not liable to any other person for any consequences of
that reliance if the addressee believes it to be
genuine, correct and authorized by the sender.
(b) A facsimile transmission is regarded as legible unless the
addressee telephones the sender within two hours after
transmission is received or regarded as received under clause
9.9(a)(3) and informs the sender that it is not legible.
(c) In this clause 9.9, a reference to an addressee includes a
reference to an addressee's officers, agents or employees.
9.10 No third party beneficiaries
Save where expressly provided to the contrary, nothing in this
Agreement will confer any rights upon any person which is not a
party to this Agreement.
9.11 Entire agreement
This Agreement supersedes all previous agreements in respect of the
Management
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<PAGE>
Services and embodies the entire agreement between the parties. The
Services Agreement shall remain in full force and effect and shall
be in no way modified by the terms and conditions of this Agreement.
9.12 Counterparts
(a) This Agreement may be executed in any number of counterparts.
(b) All counterparts, taken together, constitute one instrument.
(c) A party may execute this Agreement by signing any counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Management
Agreement to be executed as of the date first written above.
RSL Communications, Ltd.
By:
Name:
Title:
deltathree.com, Inc.
By:
Name:
Title:
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<PAGE>
Schedule 1 - Management Services
All management services provided by the RSL Group for the benefit of the Company
Group, including:
1. International legal counsel
2. Financial services, including, assistance in accounting, financial
reporting, budgeting, business controls, tax and treasury related matters
3. Corporate finance and mergers and acqusitions advisory services
4. Assistance with network planning
5. Product development
6. Assistance with strategic planning
7. Availability of RSL COM management
The Management Services do not include any services provided by the RSL Group
under the Services Agreement.
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<PAGE>
CNET PROMOTION AGREEMENT
DELTATHREE.COM, INC.
This Development and Promotion Agreement (the "Agreement") is dated
effective as of September 22, 1999 (the "Effective Date") between CNET, Inc.,
with its principal place of business located at 150 Chestnut Street, San
Francisco, California 94111 ("CNET"), and deltathree.com, Inc., with its
principal place of business located at 430 Park Avenue, New York, NY 10022
("Delta Three"). Pursuant to this Agreement, Delta Three will provide its
PC-to-telephone connection product and related services to CNET users, and CNET
will provide various promotions to Delta Three to assist Delta Three in
promoting its PC-to-telephone product and related services. Accordingly, the
parties hereby agree as follows:
1. Definitions.
"CNET Shopping Sites" means the CNET Sites located at the URLs
http://www.shopper.com and http://www.computers.com, along with any
other CNET sites mutually agreed by the parties.
"CNET Sites" means the Internet sites operated by CNET.
"Delta Three Marks" means any trademarks, trade names, service marks
and logos that may be delivered by Delta Three to CNET expressly for
inclusion in the Promotions.
"Delta Three Products" means any product or service sold on Delta Three
Site (and any successors and enhancements thereto), including but not
limited to PC-to-Phone.
"Delta Three Site" means the Internet site operated by Delta Three in
the United States of America at http://www.deltathree.com, together
with any mirror sites, co-branded sites, and successors to the
foregoing.
"Impression" means the display of a Promotion on the CNET Sites.
"Merchant" means any merchant on any CNET Shopping Site.
"PC-to-Phone" means Delta Three product known as PC-to-Phone or Click
IT(TM) (and any successors and enhancements thereto) through which a
User can place a call from a personal computer to a traditional
telephone.
"PC Telephone Product" means any product by which a User can place a
call from a computer, whether through the Internet, by traditional
telephone, or by other means.
"PC Telephone Product Area" means a designated area on the CNET Sites
where a User can view information about various PC Telephone Products.
"Premier Status" means that no third-party PC Telephone Product will
receive equal or more prominent positioning within a page on which
PC-to-Phone appears, excluding standard banner advertising.
<PAGE>
"Promotions" means banners, buttons, text links, windows, television
ads, event sponsorships and other promotions that are offered by CNET
(whether online or offline) now or in the future.
"Telephone Hyperlink" means a Merchant phone number that is hyperlinked
in a manner that allows a User to click on the number and place a call
to the respective Merchant through a PC Telephone Product, as further
described in Section 3.1.1.
"Term" means the term described in Section 6.
"User" means a user of a CNET Site.
2. 2.1 Promotions. During the Term of this Agreement, CNET will use commercially
reasonable means to deliver for Delta Three the Promotions as set forth on
Exhibit A. Delta Three may request any reasonable reallocation of the location
and type of the Promotions described in subparagraph (b) of Exhibit A, subject
to CNET's then-current inventory availability. CNET shall not charge Delta Three
any extra fees for such requested reallocations of Promotions if they are
equivalent in value to those that would otherwise be provided by CNET hereunder.
If Delta Three's requested reallocations of Promotions are more expensive than
the location and type normally provided hereunder by CNET, then Delta Three
shall pay the difference of such cost based on a thirty percent (30%) discount
off of CNET's net standard advertising rate card (the net standard advertising
rate card shall equal the standard rate card minus a 15% standard agency
commission) at the time of request. CNET will use commercially reasonable
efforts to implement Delta Three's requests made in accordance with the
preceding sentence within thirty (30) days after receipt of each request. Delta
Three will design any graphics and other materials required for the Promotions,
and CNET will provide reasonable assistance to Delta Three in connection with
the design and creation of such materials. Delta Three will be responsible for
ensuring that each URL provided to CNET for use in a Promotion takes the User to
the appropriate area within Delta Three Site and that such site functions with
reasonable reliability and in a commercially reasonable manner throughout the
Term. In particular, DeltaThree agrees that the DeltaThree Site will comply with
the performance standards set forth on Exhibit D throughout the Term. In the
event that any guarantee of minimum monthly number of Promotions to be delivered
by CNET as set forth on Exhibit A is not reached in any month, CNET will agree
to deliver such undelivered Promotions no later than within 60 days following
that month or CNET and Delta Three will mutually agree on alternative placements
to make up for any underdelivery.
2.2 CNET will ensure that the CNET Sites will be available to Users at
least 99% of the time during any 30 day period.
3. CNET Shopping Sites; PC Telephone Product Area.
3.1 Merchant Telephone Numbers.
3.1.1 Telephone Hyperlink. Except as described in Section
3.1.3, below, within 45 days following the Effective
Date (the "Launch Date"), each Merchant telephone
number listed on the CNET Shopping Sites will be
hyperlinked in a manner that allows a User to click
on the number and place a call to the respective
Merchant through a PC Telephone Product. During the
first year following the Launch Date, PC-to-Phone
will be the exclusive PC Telephone Product through
which a User may call a Merchant through a Telephone
Hyperlink. Thereafter, PC-to-Phone will receive
2
<PAGE>
Premier Status within the PC Telephone Product Area.
Upon mutual agreement of the parties, the period of
exclusivity described above may be extended.
3.1.2 PC-to-Phone. CNET and Delta Three will work together
in good faith to allow Delta Three to reasonably
implement technology that causes a User's computer to
determine whether PC-to-Phone is installed on the
computer each time a User clicks on a Telephone
Hyperlink. If PC-to-Phone is determined to be on the
User's computer, the User will be automatically
connected to the Merchant through PC-to-Phone.
Further, during the first year following the Launch
Date, if PC-to-Phone is determined not to be on the
User's computer, the User will automatically be taken
to a Delta Three specific co-branded download page
through which the User may download PC to Phone. PC
to Phone will be the exclusive PC Telephone Product
offered on such download page. Notwithstanding the
foregoing, Users will be under no obligation to
download PC-to-Phone. After the first year following
the Launch Date, if PC-to-Phone is determined not to
be on the User's computer, the User will
automatically be taken to the PC Telephone Product
Area and be able to download PC-to-Phone. Following
the first year of the Term, PC-to-Phone will receive
Premier Status within the PC Telephone Product Area
unless the period of exclusivity is extended by the
mutual agreement of the parties as set forth in
3.1.1.
3.1.3 Delta Three acknowledges that CNET receives
compensation from Merchants, and that such
compensation might be adversely affected by the
Telephone Hyperlinks. If CNET reasonably and in good
faith determines that a Telephone Hyperlink is
adversely affecting the compensation paid by a
Merchant, then CNET, following notification to Delta
Three, may remove the Telephone Hyperlink from such
Merchant's listings. Further, CNET may remove the
Telephone Hyperlink from a Merchant's listings upon
such Merchant's request. In the event that CNET
removes a Telephone Hyperlink as described herein,
then CNET will use commercially reasonable efforts to
notify Delta Three of such removal, and CNET will
insure that no other Telephone Hyperlink from a third
party competing with Delta Three is attached to such
Merchant.
3.1.4 Delta Three agrees that it will not charge Merchants
any fees or require any other payment or
consideration in order for Merchants to receive
unlimited, uninterrupted telephone calls through
PC-to-Phone other than normal fees incurred by the
Merchants in connection with the operation and
maintenance of a toll-free number.
3.2 PC Telephone Product Area.
3.2.1 Delta Three Services. CNET will include PC-to-Phone
within the PC Telephone Product Area which shall be
accessible from the CNET Sites as determined by CNET.
CNET will create the product description for
PC-to-Phone, taking into consideration the reasonable
input of Delta Three. Delta Three agrees to provide
CNET with updated information in as necessary to
maintain its accuracy. Each PC-to-Phone listing will
be accompanied by a hyperlink that allows a User to
download the PC-to-Phone file.
3
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3.2.2 Prominence. Notwithstanding anything written above in
Section 3.1.1 with respect to exclusivity, during the
Term of this Agreement, PC-to-Phone will receive
Premier Status within the PC Telephone Product Area.
Notwithstanding the foregoing, Delta Three
acknowledges that CNET produces co-branded editions
of the CNET Sites for various resellers, distributors
and other licensees (collectively the
"Distributors"). In some cases, such Distributors are
entitled to replace CNET's default content with other
content within their own co-branded editions of the
CNET Sites. Notwithstanding the other provisions of
this Agreement, if any such Distributor has exercised
its right to remove Delta Three's PC-to-Phone
product, then CNET will use commercially reasonable
efforts to notify Delta Three within a reasonable
time and will not be required to feature PC-to-Phone
within such Distributor's co-branded edition of the
CNET Sites. Additionally, CNET will insure that no
other Telephone Hyperlink from a third party
competing with Delta Three is available to be
downloaded from the CNET Sites or any co-branded CNET
web sites.
4. Delta Three Product Maintenance and Support.
4.1 Maintenance. Delta Three will maintain the Delta Three
Products throughout the Term, and will ensure that they
operate according to the specifications attached hereto as
Exhibit B, as may be reasonably changed from time to time upon
notice to CNET. Delta Three will use commercially reasonable
efforts to notify CNET of any updates, upgrades or bug fixes,
and will promptly provide copies of such to CNET.
4.2 Support. Delta Three will provide Users with customer support
for the Delta Three Products 24 hours per day, 7 days per
week, 365 days per year. Delta Three will also provide a
dedicated point-of-contact for CNET that can address any
product performance issues.
4.3 Third-Party Costs and Fees. As between CNET and Delta Three,
Delta Three is responsible for paying all third-party costs
and fees associated with Delta Three Products, including but
not limited to licensing fees and royalties, servicing costs,
and operations costs and, except as otherwise provided herein,
CNET is responsible for paying all third-party costs and fees
associated with the CNET Sites.
4.4 Advertising Restrictions. If Delta Three permits any
advertising to be included within PC-to-Phone, Delta Three
will not include (or allow any third party to include)
advertising within PC-to-Phone downloaded from the CNET web
site for any competitor of CNET listed on Exhibit C, as
reasonably amended by CNET from time to time. Further, without
limiting the foregoing, each time a user clicks on a Telephone
Hyperlink and is taken to a Delta Three Product from the CNET
web site, Delta Three will block advertising within such
Product for any competitor of CNET listed on Exhibit C.
5. Payments.
5.1 Promotions. During the Term, Delta Three will pay CNET a total
of $11,000,000 for the Promotions as set forth in Exhibit A.
4
<PAGE>
5.2 Payment Terms. All amounts due to CNET shall be paid by Delta
Three on a monthly basis within fifteen (15) business days
following the receipt of the billing statement by Delta Three
for the Promotions for the month in question. Payments under
this Section 5 will be made by check or wire transfer of
immediately available funds as reasonably directed by CNET.
6. Term and Termination.
6.1 Term. This Agreement shall begin on the Effective Date and end
on the second anniversary (the "Term").
6.2 Termination for Breach. If either party commits a material
breach of its obligations hereunder that is not cured within
30 days after notice thereof from the non-breaching party, the
non-breaching party may terminate this Agreement at any time
by giving written notice of termination to the breaching
party.
6.3 Termination by CNET. CNET may terminate this Agreement at any
time upon 30 days written notice, if CNET reasonably
determines that PC-to-Phone:
(a) contains any virus, worm, "trojan horse", time
bomb or similar contaminating or destructive feature;
(b) contains a material "bug" that is not adequately
remedied to CNET's satisfaction within;
(c) is not performing substantially in the manner
described in the written specifications provided to
CNET and attached as Exhibit B ; or
(d) after the first year of the Term, is not among
the top three PC Telephone Products on the market as
determined by independent industry source ratings and
market share.
Notwithstanding anything written above, the Agreement shall
not be terminated if Delta Three is able to cure the condition
in question at any time during the 30 day notice period.
6.4 Survival. The provisions of Sections 1, 10, 11 and 12 and any
payment obligations arising prior to termination will survive
any termination of this Agreement.
7. Reporting.
7.1 CNET Promotion Report. Within 30 days after the end of each
month during the Term, CNET will provide to Delta Three
standard advertising reports, as generally offered by CNET,
with respect to the Promotions.
7.2 Delta Three Report. Within 30 days after the end of each month
during the Term, Delta Three will provide to CNET a report
that includes the following information for such month: (a)
the aggregate number of referrals from the CNET Sites to Delta
Three Site; (b) the total value of Delta Three Products
purchased by Users on Delta Three Site, (c) other information
mutually agreed by the parties. Delta Three will obtain the
foregoing data by tagging each User using a cookie or other
similar technology, as agreed upon by the parties. Further,
Delta Three will provide CNET with a monthly report describing
the number of calls made
5
<PAGE>
through Telephone Hyperlinks, broken down by Merchant (the
"Telephone Report"). Delta Three acknowledges and agrees that
CNET may make such Telephone Report available to the Merchants
at CNET's discretion provided that Delta Three is informed
prior to of distribution of the Telephone Report to any third
party and has the right to prevent distribution to any
competitors of Delta Three listed on Exhibit C, as reasonably
amended by Delta Three from time to time. Further, at CNET's
request, Delta Three will make the Telephone Report available
to CNET in a manner that allows the Merchants to access such
Telephone Report on a real-time basis provided that any
reasonable technical costs associated with providing such
access shall be borne by CNET.
8. User Data.
8.1 Collected Through Sites. Delta Three will be the sole owner of
any information that Delta Three collects from Users through
Delta Three Site, and CNET will be the sole owner of any
information that CNET collects from Users through the CNET
Sites. Subject to Section 12.7, each party will have the
unrestricted right and license to use any information provided
by the other party pursuant to Section 7. Further, unless
otherwise disclosed to Users on the respective site, all data
collected from Users through Delta Three Site will be kept
confidential and not disclosed to third parties in accordance
with the published privacy policy of CNET.
8.2 Collected Through PC-to-Phone. Delta Three will own all
information gathered through PC-to-Phone, provided that (a)
Delta Three may use such information only for the purpose of
notifying Users of updates, upgrades and bug-fixes related to
PC-to-Phone, and (b) all such registration and transaction
data shall be provided to CNET within 30 days after the end of
each month, and CNET will be granted an unrestricted license
to use such information as CNET deems appropriate.
9. Trademark License. Delta Three hereby grants to CNET a non-exclusive,
royalty-free license, effective throughout the Term, to use, display
and publish Delta Three Marks solely within the Promotions. Any use of
Delta Three Marks by CNET must comply with any reasonable usage
guidelines communicated by Delta Three to CNET from time to time.
Nothing contained in this Agreement will give CNET any right, title or
interest in or to Delta Three Marks or the goodwill associated
therewith, except for the limited usage rights expressly provided
above. CNET acknowledges and agrees that, as between Delta Three and
CNET, Delta Three is the sole owner of all rights in and to Delta Three
Marks. CNET hereby grants to Delta Three a non-exclusive, royalty-free
license, effective throughout the Term, to use, display and publish
CNET Marks solely within the Delta Three web site. Any use of CNET
Marks by Delta Three must comply with any reasonable usage guidelines
communicated by CNET to Delta Three from time to time. Nothing
contained in this Agreement will give Delta Three any right, title or
interest in or to CNET Marks or the goodwill associated therewith,
except for the limited usage rights expressly provided above. Delta
Three acknowledges and agrees that, as between Delta Three and CNET,
CNET is the sole owner of all rights in and to CNET Marks.
10. Responsibility for Delta Three Products. Delta Three acknowledges and
agrees that, as between Delta Three and CNET, Delta Three will be
solely responsible for any claims or other losses associated with or
resulting from the marketing or operation of Delta Three Site or the
offer or sale of any Delta Three Products by Delta Three or through
Delta Three Site. CNET is not authorized
6
<PAGE>
to make, and agrees not to make, any representations or warranties
concerning Delta Three Products, except to the extent (if any)
contained within Promotions delivered to CNET by Delta Three.
11. Mutual Indemnification.
11.1 Indemnification by CNET. CNET shall indemnify and hold Delta
Three harmless from and against any costs, losses, liabilities
and expenses, including all court costs, reasonable expenses
and reasonable attorney's fees (collectively, "Losses") that
Delta Three may suffer, incur or be subjected to by reason of
any legal action, proceeding, arbitration or other claim by a
third party, whether commenced or threatened, arising out of
or as a result of (a) the use of the CNET Marks by Delta Three
in accordance with this Agreement; or (b) the operation of any
CNET site (except in cases where Delta Three is required to
indemnify CNET under the following paragraph), including
claims of infringement or misappropriation of intellectual
property rights.
11.2 Indemnification by Delta Three. Delta Three shall indemnify
and hold CNET harmless from and against any Losses that CNET
may suffer, incur or be subjected to by reason of any legal
action, proceeding, arbitration or other claim by a third
party, whether commenced or threatened, arising out of or as a
result of (a) the use of Delta Three Marks by CNET in
accordance with this Agreement; (b) the use or distribution of
PC-to-Phone, including without limitation any claim that
PC-to-Phone infringes any third party intellectual property
rights (including patent, copyright and trade secret rights);
(c) the operation of Delta Three Site; or (d) the offer or
sale of Delta Three Products by Delta Three or through Delta
Three Site.
11.3 Indemnification Procedures. If any party entitled to
indemnification under this Section (an "Indemnified Party")
makes an indemnification request to the other, the Indemnified
Party shall permit the other party (the "Indemnifying Party")
to control the defense, disposition or settlement of the
matter at its own expense; provided that the Indemnifying
Party shall not, without the consent of the Indemnified Party
enter into any settlement or agree to any disposition that
imposes an obligation on the Indemnified Party that is not
wholly discharged or dischargeable by the Indemnifying Party,
or imposes any conditions or obligations on the Indemnified
Party other than the payment of monies that are readily
measurable for purposes of determining the monetary
indemnification or reimbursement obligations of Indemnifying
Party. The Indemnified Party shall notify Indemnifying Party
promptly of any claim for which Indemnifying Party is
responsible and shall cooperate with Indemnifying Party in
every commercially reasonable way to facilitate defense of any
such claim; provided that the Indemnified Party's failure to
notify Indemnifying Party shall not diminish Indemnifying
Party's obligations under this Section except to the extent
that Indemnifying Party is materially prejudiced as a result
of such failure. An Indemnified Party shall at all times have
the option to participate in any matter or litigation through
counsel of its own selection and at its own expense.
7
<PAGE>
12. Miscellaneous.
12.1 LIMITATION OF DAMAGES. NEITHER PARTY WILL BE LIABLE FOR ANY
SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING
OUT OF OR RELATED TO THIS AGREEMENT, HOWEVER CAUSED AND ON ANY
THEORY OF LIABILITY (INCLUDING NEGLIGENCE), AND EVEN IF SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
FURTHER, EXCEPT FOR ANY CLAIM FOR INDEMNIFICATION ARISING
UNDER SECTION 11, ABOVE, OR A CLAIM ARISING UNDER A BREACH OF
CONFIDENTIALITY UNDER SECTION 12.7 BELOW, IN NO EVENT SHALL
EITHER PARTY BE LIABLE FOR DAMAGES IN EXCESS OF THE TOTAL
PAYMENTSMADE BY SUCH PARTY UNDER THIS AGREEMENT.
12.2 Assignment. Neither party may assign this Agreement, except
(a) upon the transfer of substantially all of the business
operations of such party (whether by asset sale, stock sale,
merger or otherwise); (b) to an affiliate of such party; or
(c) with the written permission of the other party.
Notwithstanding the foregoing, if either party's acquirer is
recognized as a direct competitor of the other non-acquired,
then the non-acquired party may terminate this Agreement upon
10 days written notice to the acquiror.
12.3 Relationship of Parties. This Agreement will not be construed
to create a joint venture, partnership or the relationship of
principal and agent between the parties hereto, nor to impose
upon either party any obligations for any losses, debts or
other obligations incurred by the other party except as
expressly set forth herein.
12.4 Severability of Agreement. If a court of an arbitrator or
competent jurisdiction holds any provision of this Agreement
to be illegal, unenforceable, or invalid in whole or in part
for any reason, the validity and enforceability of the
remaining provisions, or portions thereof, will not be
affected.
12.5 Audit Rights. Delta Three will have the right to engage an
independent third party to audit the books and records of CNET
relevant to the quantification of the Promotions, upon
reasonable notice and during normal business hours, and CNET
will provide reasonable cooperation in connection with any
such audit. Delta Three will pay all expenses of the auditor
unless the audit reveals an underpayment or underdelivery by
CNET of more than 10%, in which case CNET will reimburse all
reasonable expenses of the auditor.
12.6 Applicable Law. This Agreement will be construed in accordance
with and governed by the laws of the State of New York,
without regard to principles of conflicts of law.
12.7 Arbitration. Any dispute arising out of or relating to this
Agreement shall be resolved by private arbitration in New York
City by an arbitrator mutually selected by the parties. If the
parties are unable to agree on an arbitrator or upon the rules
governing the arbitration, the arbitration will be governed by
the rules of the American Arbitration Association. Judgment
upon the award rendered may be entered in any federal or state
court in New York City and the parties hereby submit
themselves to the jurisdiction of such courts for that
purpose. All fees and costs concerning the arbitration,
including, without limitation, the arbitrator's fees and
expenses, shall be borne by the parties in the proportion
determined by
8
<PAGE>
the arbitrator, provided, however, that each party shall bear its own
attorneys' fees and witness' fees.
12.8 Confidentiality. In connection with the activities
contemplated by this Agreement, each party may have access to
confidential or proprietary technical or business information
of the other party, including without limitation (a)
proposals, ideas or research related to possible new products
or services; (b) financial statements and other financial
information; (c) any reporting information herein; and (d) the
material terms of the relationship between the parties;
provided, however, that such information will be considered
confidential only if it is conspicuously designated as
"Confidential," or if provided orally, identified at the time
of disclosure and confirmed in writing within 30 days of
disclosure (collectively, "Confidential Information"). Each
party will take reasonable precautions to protect the
confidentiality of the other party's Confidential Information,
which precautions will be at least equivalent to those taken
by such party to protect its own Confidential Information.
Except as required by law or as necessary to perform under
this Agreement, neither party will knowingly disclose the
Confidential Information of the other party or use such
Confidential Information for the benefit of any third party.
Each party's obligations in this Section with respect to any
portion of the other party's disclosed Confidential
Information shall terminate when the party seeking to avoid
its obligation under such Paragraph can document that such
disclosed Confidential Information: (i) was in the public
domain at or subsequent to the time it was communicated to the
receiving party ("Recipient") by the disclosing party
("Discloser") through no fault of Recipient; (ii) was
rightfully in Recipient's possession free of any obligation of
confidence at or subsequent to the time it was communicated to
Recipient by Discloser; (iii) was developed by employees or
agents of Recipient independently of and without reference to
any information communicated to Recipient by Discloser; (iv)
was communicated by the Discloser to an unaffiliated third
party free of any obligation of confidence; or (v) was in
response to a valid order by a court or other governmental
body, was otherwise required by law, including the United
States securities law and the rules promulgated thereunder, or
was necessary to establish the rights of either party under
this Agreement; provided, however, that both parties will
stipulate to any orders necessary to protect said information
from public disclosure.
12.9 Press Release. Within sixty (60) days of the execution of this
Agreement, the parties will issue a joint press release
publicizing the agreement. As part of such joint press
release, each party will provide an appropriate quote from one
of its senior executive officers for use in such press
release. Each party will have a reasonable opportunity to
review and comment on such press release prior to publication.
12.10 Illustrations. All Illustrations attached to the Exhibits are
for illustrative purposes only and shall not be deemed to
bind, obligate or restrict either party from making reasonable
changes in such party's discretion.
12.11 Dispute Resolution. In the event that any dispute arises
hereunder, the parties agree that prior to commencing
litigation, arbitration, or any other legal proceeding, each
party shall send an officer of such party to negotiate a
resolution of the dispute in good faith at a time and place as
may be mutually agreed. Each officer shall have the power to
bind its respective party in all material respects related to
the dispute. If the parties cannot agree on a time or place,
upon written notice from either party to the other, the
negotiations shall be held at the San Francisco offices of
Skadden, Arps, Slate, Meagher & Flom LLP twenty one
9
<PAGE>
(21) days following such notice (or on the next succeeding
business day, if the twenty first day is a weekend or
holiday). In the event that after such negotiations the
parties fail to resolve any dispute hereunder, the matter
shall be referred to arbitration under section 12.7
12.12 Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be deemed
given or delivered (i) when delivered personally, by messenger
or by private courier; (ii) when actually delivered by
registered or certified United States mail, return receipt
requested and postage prepaid; or (iii) when sent by telecopy
(provided, that, it is simultaneously electronically
confirmed), addressed as follows:
<TABLE>
<S> <C>
in the case of CNET: in the case of Delta Three:
Attention: Chief Executive Officer Attention: Chief Executive Officer
150 Chestnut Street 430 Park Avenue
San Francisco, California 94111 New York, NY 10022
Fax: (415) 274-3750 Fax: (212) 588-3674
With a copy to: General Counsel With a copy to: General Counsel
150 Chestnut Street 430 Park Avenue
San Francisco, California 94111 New York, NY 10022
Fax: (415) 274-3750 Fax: (212) 588-3674
</TABLE>
or to such other address as such party may indicate by a
notice delivered to the other party hereto pursuant to the
terms hereof.
12.13 No Waiver. No waiver of breach, failure of any condition, or
any right or remedy contained in or granted by the provisions
of this Agreement will be effective unless it is in writing
and signed by the party waiving the breach, failure, right or
remedy. No waiver of any other breach, failure, right or
remedy will be deemed a waiver of any other breach, failure,
right or remedy, whether or not similar, nor shall any waiver
constitute a continuing waiver unless the writing so
specifies.
12.14 Remedies Not Exclusive. Any specific right or remedy provided
in this Agreement shall not be exclusive but shall be
cumulative upon all other rights and remedies set forth herein
and allowed or allowable under applicable law.
12.15 Article Headings. The captions and headings of the various
articles of this Agreement are inserted merely for the purpose
of convenience and do not expressly or by implication limit,
define or extend and specific terms or text of the article so
designated and shall not in any way alter the meaning or
interpretation of this Agreement.
12.16 No Warranties. Neither Party warrants that its web site or
services are completely error free or will operate without
packet loss or interruption nor does it warrant any connection
to or any transmission over the Internet. Each party
acknowledges and agrees that the other has not made any
representations, warranties or agreements of any kind, except
as expressly set
10
<PAGE>
forth herein. Notwithstanding the foregoing, nothing herein
shall prevent CNET from exercising its termination rights
pursuant to Section 6.3.
12.17 Entire Agreement. This Agreement constitutes and contains the
entire agreement between the parties with respect to the
subject matter hereof and supersedes any prior oral or written
agreements. This Agreement may not be amended except in
writing signed by both parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
CNET, INC. DELTATHREE.COM, INC.
By: /s/ Douglas J. Woodrum By: /s/ Mark Hirschhorn
----------------------------- ----------------------------------
Name: Douglas J. Woodrum Name: Mark Hirschhorn
-------------------------- ----------------------------
Title: CFO Title: V.P. & CFO
------------------------- ---------------------------
11
<PAGE>
Exhibit A
Promotions
During the Term, Delta Three will pay CNET a total of $11,000,000 (net of all
discounts) for the Promotions. All Promotions will be provided by CNET at a
thirty percent (30%) discount off of CNET's net standard advertising rate card
(the net standard advertising rate card shall equal the standard rate card minus
a 15% standard agency commission). Such payment and Promotions will be allocated
as follows:
I. CNET shall invoice Delta Three $330,000 for Promotions placed
on the CNET Web Site from the Effective Date through September
30, 1999. Notwithstanding anything to the contrary herein,
Delta Three shall pay CNET the $330,000 within 90 days of
receipt of the invoice for such amount.
II. Delta Three will pay CNET $354,166.66 per month during the
initial Term in accordance with the terms set forth in Section
5.2 of this Agreement for Promotions, to be delivered as
described below (or as otherwise mutually agreed by the
parties pursuant to Section 2 of the Agreement).
III. Delta Three shall pay CNET $920,000 for the first year of the
initial Term and $1,250,000 for the second year of the initial
Term for additional advertising opportunities that CNET will
present to Delta Three during each of the first two years of
this Agreement. Such additional advertising opportunities
shall include, but are not limited to, additional Promotions,
radio and television advertising opportunities and event
sponsorships as selected by DeltaThree's at its descretion.
Delta Three's participation in such additional advertising
opportunities shall be paid in accordance with CNET's net
standard advertising rate card (the net standard advertising
rate card shall equal the standard rate card minus a 15%
standard agency commission).
12
<PAGE>
Year 1
<TABLE>
<CAPTION>
Net 30% Monthly Monthly Yearly
Site CPM Disc CPM Impressions Cost Cost
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CNET Network
- ------------
DOWNLOAD.COM
Internet Category - Banners $28.33 $19.83 750,000 $ 14,873 $ 178,479
Home and Personal - Buttons $10.63 $ 7.44 750,000 $ 5,581 $ 66,969
Home and Personal - Banners $28.33 $19.83 250,000 $ 4,958 $ 59,493
Home and Personal - Window $42.50 $29.75 400,000 $ 11,900 $ 142,800
ROS Banners $21.25 $14.88 550,000 $ 8,181 $ 98,175
ROS Windows $28.33 $19.83 1,120,000 $ 22,211 $ 266,529
ROS Buttons $ 7.50 $ 5.25 1,000,000 $ 5,250 $ 63,000
COMMERCE SERVICES
Merchant Listings Pages $17.00 $11.90 7,500,000 $ 89,250 $1,071,000
NEWS.COM
Communications - Banners $68.00 $47.60 575,000 $ 27,370 $ 328,440
Communications - Buttons $12.75 $ 8.93 1,200,000 $ 10,710 $ 128,520
CNET.COM
Software Section - Banners $63.75 $44.63 250,000 $ 11,156 $ 133,875
Internet Section - Banners $63.75 $44.63 250,000 $ 11,156 $ 133,875
ROS Banners $56.67 $39.67 350,000 $ 13,884 $ 166,610
SEARCH.COM
ROS Banners $13.60 $10.88 2,500,000 $ 27,200 $ 326,400
GAMECENTER.COM
ROS Banners $21.25 $17.00 1,250,000 $ 21,250 $ 255,000
Television Sponsorships
- -----------------------
CNET News.com
3 spots 30 seconds
Founding Sponsor Billboard 10 seconds
(beg. and end of show)
CNET News.com Online Explore Board
CNET News.com $ -- $ -- -- $ 64,000 $ 832,000
1 spot 30 seconds
Founding Sponsor Billboard 10 seconds
(beg. and end of show)
CNET TV.com Online Explore Board
- ---------------------------------------------------------------------------------------------------------
Totals 18,695,000 $348,930 $4,251,164
CPM $ 18.66
- ---------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Year 2
<TABLE>
<CAPTION>
Net 30% Monthly Monthly Yearly
Site CPM Disc CPM Impressions Cost Cost
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CNET Network
- ------------
DOWNLOAD.COM
Internet Category - Banners $28.33 $19.83 750,000 $ 14,873 $ 178,479
Home and Personal - Buttons $10.63 $ 7.44 750,000 $ 5,581 $ 66,969
Home and Personal - Banners $28.33 $19.83 250,000 $ 4,958 $ 59,493
Home and Personal - Window $42.50 $29.75 400,000 $ 11,900 $ 142,800
ROS Banners $21.25 $14.88 550,000 $ 8,181 $ 98,175
ROS Windows $28.33 $19.83 1,120,000 $ 22,211 $ 266,529
ROS Buttons $ 7.50 $ 5.25 1,000,000 $ 5,250 $ 63,000
COMMERCE SERVICES
Merchant Listings Pages $17.00 $11.90 7,500,000 $ 89,250 $1,071,000
NEWS.COM
Communications - Banners $68.00 $47.60 575,000 $ 27,370 $ 328,440
Communications - Buttons $12.75 $ 8.93 1,200,000 $ 10,710 $ 128,520
CNET.COM
Software Section - Banners $63.75 $44.63 250,000 $ 11,156 $ 133,875
Internet Section - Banners $63.75 $44.63 250,000 $ 11,156 $ 133,875
ROS Banners $56.67 $39.67 350,000 $ 13,884 $ 166,610
SEARCH.COM
ROS Banners $13.60 $10.88 2,500,000 $ 27,200 $ 326,400
GAMECENTER.COM
ROS Banners $21.25 $17.00 1,250,000 $ 21,250 $ 255,000
Television Sponsorships
- -----------------------
CNET News.com
3 spots 30 seconds
Founding Sponsor Billboard 10 seconds
(beg. and end of show)
CNET News.com Online Explore Board
CNET News.com $ -- $ -- -- $ 64,000 $ 832,000
1 spot 30 seconds
Founding Sponsor Billboard 10 seconds
(beg. and end of show)
CNET TV.com Online Explore Board
- ---------------------------------------------------------------------------------------------------------
Totals 18,695,000 $348,930 $4,251,164
CPM $ 18.66
- ---------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Exhibit B
Delta Three PC-to-Phone Specifications
15
<PAGE>
Exhibit C
CNET Competitors
----------------
Ziff Davis
CMP
IDG
Wired
Mecklermedia
Andover News Network
FileZ.com
Developer.com
EarthWeb
MacCentral
Tucows
Dave Central
Gamelan
Softseek
Tipworld
Tom's Hardware
Amazon Auctions and Amazon Shop the Web (but not including sites operated by
Amazon.com in other categories, including books, CDs, videos, etc.)
eBay
Onsale
Bidder's Edge
Boxlot
uBid
BottomDollar
MySimon
Price Watch
CompareNet
PriceScan
Delta Three Competitors
-----------------------
Net2Phone
PhoneFree
VocalTec
Efax
Jfax
Mail.com
DotCom Technologies
Escort Telecom
Biztrans
Iscom Inc.
My Operator
WebKall
ZeroPlus
16
<PAGE>
Exhibit D
Performance Standards and Technical Specifications
The Delta Three Site and Delta Three's related operations must comply with the
following performance standards throughout the Term:
1. Delta Three shall use commercially reasonable efforts to ensure that
the Delta Three Site will be operational and fully functional in all
material respects (i.e. capable of displaying information and
conducting transactions as contemplated in the ordinary course of
business) at least 99% of the time during any 30 day period.
2. The average time required to start downloading the HTML on a page of
the Delta Three Site after a link from the CNET Sites shall not exceed
a daily average of three seconds. For measurements required in this
Paragraph, Delta Three may assume standard T1 connectivity to the
Internet.
3. Without limiting the effect of Paragraphs 1 and 2 above, Delta Three
shall provide to Users coming to the Delta Three Site from the CNET
Sites at least the same level of service as is offered to users coming
directly to the Delta Three Site.
4. The Delta Three Site shall not: (a) contain defamatory or libelous
material or material which discloses private or personal matters
concerning any person, without such person's consent; (b) permit to
appear or be uploaded any messages, data, images or programs which are
illegal, contain nudity or sexually explicit content or are, by law,
obscene, profane or pornographic; or (c) permit to appear or be
uploaded any messages, data, images or programs that would knowingly or
intentionally (which includes imputed intent) violate the property
rights of others, including unauthorized copyrighted text, images or
programs, trade secrets or other confidential proprietary information,
or trademarks or service marks used in an infringing fashion.
5. If any of the performance standards set forth above are not met by
Delta Three, CNET may immediately remove any or all links to the Delta
Three Site and Delta Three Products, at CNET's sole discretion. If the
Delta Three Site fails to operate fully and functionally in any
material respect for any period of four or more consecutive hours, even
if otherwise in compliance with the performance standards, CNET may
immediately remove any or all links to the Delta Three Site, at CNET's
sole discretion, until such time as Delta Three notifies CNET that the
Delta Three Site has resumed acceptable operation. These remedies are
for CNET's editorial purposes and in no way limit CNET's ability to
terminate this contract.
17
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DRAFT 11/11/99
RELEASE AND INDEMNIFICATION AGREEMENT
THIS RELEASE AND INDEMNIFICATION AGREEMENT, dated as of November __,
1999, is by and between RSL Communications, Ltd., a Bermuda company ("RSL"), and
deltathree.com, Inc., a Delaware corporation ("Delta").
WHEREAS, Delta is a majority-owned subsidiary of RSL;
WHEREAS, Delta is contemplating an initial public offering ("IPO") of
its Class A Common Stock;
WHEREAS, RSL and Delta have entered into several agreements relating to
the relationship between them after the IPO and they desire to set forth certain
additional agreements.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be legally bound, agree
as follows:
Article I
DEFINITIONS
For the purpose of this Agreement the following terms shall have the
following meanings:
1.1 "Action" means any demand, action, suit, countersuit, arbitration,
inquiry, proceeding or investigation by or before any federal, state, local,
foreign or international Governmental Authority or any arbitration or mediation
tribunal.
1.2 "Affiliate" of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
1.3 "Agreement" means this Release and Indemnification Agreement.
1.4 "Arbitration Act" means the United States Arbitration Act, 9 U.S.C.
1- 14, as the same may be amended from time to time.
1.5 "Arbitrator" shall have the meaning set forth in Section 3.1.
1.6 "CPR" has the meaning set forth in Section 3.1.
<PAGE>
1.7 "Credit Facility" means that certain Credit Facility between RSL
and Delta, dated __________ __, 1999.
1.8 "Delta Group" means Delta, each Subsidiary of Delta and each other
Person that is either controlled directly or indirectly by Delta on the date
hereof.
1.9 "Delta Indemnitees" has the meaning set forth in Section 2.3.
1.10 "Existing Agreements" mean this Agreement, the Services Agreement,
the Credit Facility, the Registration Rights Agreement, the Management Agreement
and the Intercompany Compliance Agreement.
1.11 "Governmental Authority" means any federal, state, local, foreign
or international court, government, department, commission, board, bureau,
agency, official or other regulatory, administrative or governmental authority.
1.12 "Group" means the Delta Group or the RSL Group.
1.13 "Indemnifying Party" has the meaning set forth in Section 2.4(a).
1.14 "Indemnitee" has the meaning set forth in Section 2.4(a).
1.15 "Indemnity Payment" has the meaning set forth in Section 2.4(a).
1.16 "Intercompany Compliance Agreement" means that certain
Intercompany Compliance Agreement between RSL and Delta, dated _____________ __,
1999.
1.17 "Insurance Proceeds" means those monies:
(a) received by an insured from an insurance carrier; or
(b) paid by an insurance carrier on behalf of the insured; in any
such case net of any applicable premium adjustments (including reserves and
retrospectively rated premium adjustments) and net of any costs or expenses
incurred in the collection thereof.
1.18 "Liabilities" means any and all losses, claims, charges, debts,
demands, actions, causes of action, suits, damages, obligations, payments, costs
and expenses, sums of money, accounts, reckonings, bonds, specialties,
indemnities and similar obligations, exonerations, covenants, contracts,
controversies, agreements, promises, doings, omissions, variances, guarantees,
make whole agreements and similar obligations, and other liabilities, including
all contractual obligations, whether absolute or contingent, matured or
unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown,
whenever arising, and including those arising under any law, rule, regulation,
Action, threatened or contemplated Action (including the costs and expenses of
demands, assessments, judgments, settlements and compromises relating thereto
and attorneys' fees and any and all costs and expenses (including allocated
costs of in-house counsel and other personnel), whatsoever reasonably incurred
in investigating, preparing or defending
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against any such Actions or threatened or contemplated Actions), order or
consent decree of any Governmental Authority or any award of any arbitrator or
mediator of any kind, and those arising under any contract, commitment or
undertaking, except those arising under this Agreement or the other Existing
Agreements, in each case, whether or not recorded or reflected or required to be
recorded or reflected on the books and records or financial statements of any
Person.
1.19 "Management Agreement" means that certain Management Agreement
between RSL and Delta, dated _____________ __, 1999.
1.20 "Panel" has the meaning set forth in Section 3.1.
1.21 "Person" means an individual, a general or limited partnership, a
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity, any other entity and any Governmental Authority.
1.22 "Registration Rights Agreement" means that certain Registration
Rights Agreement between RSL and Delta, dated ____________ __, 1999.
1.23 "RSL Group" means RSL and each Person (other than any member of
the Delta Group) that is an Affiliate of RSL on the date hereof.
1.24 RSL "Indemnitees" has the meaning set forth in Section 2.2.
1.25 "Services Agreement" means that certain Services Agreement, as
amended, between RSL and Delta, dated September 3, 1999.
1.26 "Subsidiary" means any corporation or other organization whether
incorporated or unincorporated of which at least a majority of the securities or
interests having by the terms thereof ordinary voting power to elect at least a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such Person or by any one or more of its Subsidiaries, or
by such Person and one or more of its Subsidiaries; provided, however, that no
Person shall be deemed to be a Subsidiary of such other Person unless such other
Person controls, or has the right, power or ability to control, that Person.
1.27 "Third Party Claim" has the meaning set forth in Section 2.5(a).
Article II
RELEASE AND INDEMNIFICATION
2.1 Release of Existing Claims.
(a) Except as provided in Section 2.1(c), effective as of the date
hereof, Delta does
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hereby, for itself, its Affiliates (other than any member of the RSL Group),
successors and assigns, and all Persons who at any time prior to the date hereof
have been shareholders, directors, officers, agents or employees of any member
of the Delta Group (in each case, in their respective capacities as such and not
in their personal capacities), remise, release and forever discharge each of
RSL, its Affiliates (other than any member of the Delta Group), successors and
assigns, and all prior, current or future shareholders, directors, officers,
agents or employees of RSL (in each case, in their respective capacities as
such), and their respective heirs, executors, administrators, successors and
assigns, from any and all Liabilities whatsoever, whether at law or in equity
(including any right of contribution), whether arising under any contract or
agreement, by operation of law or otherwise, existing or arising from all acts
and events occurring or failing to occur or alleged to have occurred or to have
failed to occur and all conditions existing or alleged to have existed on or
before the date hereof between Delta and RSL (including any contractual
arrangements or arrangements existing or alleged to exist between them on or
before the date hereof, except those arising under this Agreement or the other
Existing Agreements).
(b) Except as provided in Section 2.1(c), effective as of the date
hereof, RSL does hereby, for itself and its Affiliates (other than any member of
the Delta Group), successors and assigns, and all Persons who at any time prior
to the date hereof have been shareholders, directors, officers, agents or
employees of any member of the RSL Group (in each case, in their respective
capacities as such and not in their personal capacities), remise, release and
forever discharge Delta, the respective members of the Delta Group, their
respective Affiliates (other than any member of the RSL Group), successors and
assigns, and all prior, current or future shareholders, directors, officers,
agents or employees of any member of the Delta Group (in each case, in their
respective capacities as such), and their respective heirs, executors,
administrators, successors and assigns, from any and all Liabilities whatsoever,
whether at law or in equity (including any right of contribution), whether
arising under any contract or agreement, by operation of law or otherwise,
existing or arising from all acts and events occurring or failing to occur or
alleged to have occurred or to have failed to occur and all conditions existing
or alleged to have existed on or before the date hereof between Delta and RSL
(including any contractual arrangements or arrangements existing or alleged to
exist between them on or before the date hereof, except those arising under this
Agreement or the other Existing Agreements).
(c) Nothing contained in Section 2.1(a) or (b) shall impair any
right of any Person to enforce any of the Existing Agreements. Nothing contained
in Section 2.1(a) or (b) shall release any Person from:
(i) any Liability for the sale, lease, construction or receipt
of goods, property or services purchased, obtained or used in the
ordinary course of business by a member of one Group from a member
of the other Group prior to the date hereof;
(ii) any Liability for unpaid amounts for products or services
or refunds owing on products or services by a member of one Group
at the request or on behalf of a member of the other Group;
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<PAGE>
(iii) any Liability that the parties may have with respect to
indemnification or contribution pursuant to this Agreement for
claims brought against the parties by third Persons, which
Liability shall be governed by the provisions of this Article II
and, if applicable, the appropriate provisions of the Existing
Agreements;
(iv) in the case of Delta, the outstanding balance as of the
date hereof of funds advanced by the RSL Group (in the approximate
amount of $10,000,000) to Delta for working capital and capital
improvement purposes; or
(v) any Liability the release of which would result in the
release of any Person other than a Person released pursuant to
this Section 2.1; provided, that, the parties agree not to bring
suit or permit any of their Subsidiaries to bring suit against any
Person with respect to any Liability to the extent that such
Person would be released with respect to such Liability by this
Section 2.1 but for the provisions of this clause (v).
(d) Delta shall not make, and shall not permit any member of the
Delta Group to make, any claim or demand, or commence any Action asserting any
claim or demand, including any claim of contribution or any indemnification,
against RSL or any member of the RSL Group or any other Person released pursuant
to Section 2.1(a), with respect to any Liabilities released pursuant to Section
2.1(a). RSL shall not, and shall not permit any member of the RSL Group, to make
any claim or demand, or commence any Action asserting any claim or demand,
including any claim of contribution or any indemnification, against Delta or any
member of the Delta Group, or any other Person released pursuant to Section
2.1(b), with respect to any Liabilities released pursuant to Section 2.1(b).
(e) It is the intent of each of RSL and Delta by virtue of the
provisions of this Section 2.1 to provide for a full and complete release and
discharge of all Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
date hereof, between or among Delta or any member of the Delta Group, on the one
hand, and RSL or any member of the RSL Group, on the other hand (including any
contractual agreements or arrangements existing or alleged to exist between or
among any such members on or before the date hereof), except as expressly set
forth in Section 2.1(c). At any time, at the request of any other party, each
party shall cause each member of its respective Group to execute and deliver
releases reflecting the provisions hereof.
2.2 Indemnification by Delta. Except as provided in Section 2.4, Delta
shall indemnify, defend and hold harmless RSL, each member of the RSL Group and
each of their respective directors, officers and employees (in each case, in
their respective capacities as such), and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "RSL
Indemnitees"), from and against any and all Liabilities of the RSL Indemnitees
relating to, arising out of or resulting from any of the following items
(without duplication):
(a) the failure of Delta or any other member of the Delta Group or
any other Person to
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<PAGE>
pay, perform or otherwise promptly discharge any Liabilities of Delta in
accordance with their respective terms, whether prior to or after the date
hereof; and
(b) any breach by Delta or any member of the Delta Group of this
Agreement or the other Existing Agreements; provided, however, that Delta shall
not be financially responsible hereunder for any special, incidental,
consequential or other similar type of damage to the extent that such damages
are specifically excluded in such agreement.
2.3 Indemnification by RSL. Except as otherwise provided in Section
2.4, RSL shall indemnify, defend and hold harmless Delta, each member of the
Delta Group and each of their respective directors, officers and employees (in
each case, in their respective capacities as such), and each of the heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"Delta Indemnitees"), from and against any and all Liabilities of the Delta
Indemnitees relating to, arising out of or resulting from any of the following
items (without duplication):
(a) the failure of RSL or any other member of the RSL Group or any
other Person to pay, perform or otherwise promptly discharge any Liabilities of
the RSL Group, whether prior to or after the date hereof; and
(b) any breach by RSL or any member of the RSL Group of this
Agreement or the other Existing Agreements; provided, however, that RSL shall
not be financially responsible hereunder for any special, incidental,
consequential or other similar type of damage to the extent that such damages
are specifically excluded in such agreement.
2.4 Indemnification Obligations Net of Insurance Proceeds and Other
Amounts.
(a) The parties intend that any Liability subject to
indemnification or reimbursement pursuant to this Article II will be net of
Insurance Proceeds that actually reduce the amount of the Liability.
Accordingly, the amount which any party (an "Indemnifying Party") is required to
pay to any Person entitled to indemnification hereunder (an "Indemnitee") will
be reduced by any Insurance Proceeds theretofore actually recovered by or on
behalf of the Indemnitee in reduction of the related Liability. If an Indemnitee
receives a payment (an "Indemnity Payment") required by this Agreement from an
Indemnifying Party in respect of any Liability and subsequently receives
Insurance Proceeds, then the Indemnitee will pay to the Indemnifying Party an
amount equal to the excess of the Indemnity Payment received over the amount of
the Indemnity Payment that would have been due if the Insurance Proceeds had
been received, realized or recovered before the Indemnity Payment was made.
(b) An insurer who would otherwise be obligated to pay any claim
shall not be relieved of the responsibility with respect thereto or, solely by
virtue of the indemnification provisions hereof, have any subrogation rights
with respect thereto, it being expressly understood and agreed that no insurer
or any other third party shall be entitled to a "winfall" (i.e., a benefit they
would not be entitled to receive in the absence of the indemnification
provisions) by virtue of the indemnification provisions hereof. Nothing
contained in this Agreement shall obligate any member of any Group to seek to
collect or recover any Insurance Proceeds.
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<PAGE>
2.5 Procedures for Indemnification of Third Party Claims.
(a) If an Indemnitee shall receive notice or otherwise learn of
the assertion by a Person (including any Governmental Authority) who is not a
member of the RSL Group or the Delta Group of any claim or of the commencement
by any such Person of any Action (collectively, a "Third Party Claim") with
respect to which an Indemnifying Party may be obligated to provide
indemnification to such Indemnitee pursuant to Section 2.2 or 2.3, or any other
Section of this Agreement, such Indemnitee shall give such Indemnifying Party
written notice thereof within 20 days after becoming aware of such Third Party
Claim. Any such notice shall describe the Third Party Claim in reasonable
detail. Notwithstanding the foregoing, the failure of any Indemnitee or other
Person to give notice as provided in this Section 2.5(a) shall not relieve the
related Indemnifying Party of its obligations under this Article II, except to
the extent that such Indemnifying Party is actually prejudiced by such failure
to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 2.5(a) (or
sooner, if the nature of such Third Party Claim so requires), the Indemnifying
Party shall notify the Indemnitee of its election whether the Indemnifying Party
will assume responsibility for defending such Third Party Claim, which election
shall specify any reservations or exceptions. After notice from an Indemnifying
Party to an Indemnitee of its election to assume the defense of a Third Party
Claim, such Indemnitee shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise, or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
Indemnitee except as set forth in the next sentence. In the event that the
Indemnifying Party has elected to assume the defense of the Third Party Claim
but has specified, and continues to assert, any material reservations or
exceptions in such notice, then, in any such case, the reasonable fees and
expenses of one separate counsel for all Indemnitees shall be borne by the
Indemnifying Party.
(c) If an Indemnifying Party elects not to assume responsibility
for defending a Third Party Claim, or fails to notify an Indemnitee of its
election as provided in Section 2.5(b), such Indemnitee may defend such Third
Party Claim at the cost and expense of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the defense
of the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent of
the Indemnifying Party, which consent shall not be unreasonably withheld.
(e) No Indemnifying Party shall consent to entry of any judgment
or enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be
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entered, directly or indirectly, against any Indemnitee.
2.6 Additional Matters.
(a) Any claim on account of a Liability which does not result from
a Third Party Claim shall be asserted by written notice given by the Indemnitee
to the related Indemnifying Party. Such Indemnifying Party shall have a period
of 30 days after the receipt of such notice within which to respond thereto. If
such Indemnifying Party does not respond within such 30-day period, such
Indemnifying Party shall be deemed to have refused to accept responsibility to
make payment. If such Indemnifying Party does not respond within such 30-day
period or rejects such claim in whole or in part, such Indemnitee shall be free
to pursue such remedies as may be available to such party as contemplated by
this Agreement.
(b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have any right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if the Indemnifying Party shall so request, the parties
shall endeavor to substitute the Indemnifying Party for the named defendant if
at all practicable. If such substitution or addition cannot be achieved for any
reason or is not requested, the named defendant shall allow the Indemnifying
Party to manage the Action as set forth in this Section and the Indemnifying
Party shall fully indemnify the named defendant against all costs of defending
the Action (including court costs, sanctions imposed by a court, attorneys'
fees, experts' fees and all other external expenses), the costs of any judgment
or settlement, and the cost of any interest or penalties relating to any
judgment or settlement.
2.7 Remedies Cumulative. The remedies provided in this Article II shall
be cumulative and, subject to the provisions of Article III, shall not preclude
assertion by any Indemnitee of any other rights or the seeking of any and all
other remedies against any Indemnifying Party.
Article III
ARBITRATION
3.1 Arbitration of All Disputes.
(a) Any dispute, controversy or claim between the parties hereto
arising out of, relating to or in connection with this Agreement, or the breach,
termination or validity thereof,
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shall be finally resolved by binding and non-appealable arbitration, before a
single arbitrator selected by the procedure set forth below, conducted in New
York, New York.
(b) Either party may commence an arbitration proceeding by giving
written notice to the other party of its desire to arbitrate.
(c) The single arbitrator (the "Arbitrator") shall be selected
from among the New York City members of the New York Regional Panel of
Distinguished Neutrals (the "Panel") of the Center for Public Resources ("CPR")
by mutual agreement of the parties, or if the parties are unable to agree, by
the following means:
(A) RSL, on one hand, and Delta on the other hand, shall
simultaneously exchange lists each containing the names of five
members of their choice of the Panel who have indicated a
willingness to serve.
(B) If a single name appears on both lists, that individual
shall be appointed.
(C) If more than one name appears on both parties' lists, the
Arbitrator shall be selected from the common names by mutual
agreement of the parties or by the toss of a coin.
(D) If the lists contain no names in common, each party shall
strike four names from the other party's list and the Arbitrator
shall be selected from the remaining two names by mutual agreement
of the parties or by the toss of a coin.
(E) If the CPR ceases to have a Panel or it is otherwise
impossible to select the Arbitrator from the Panel as contemplated
by this Agreement, the Arbitrator shall be selected by the
President of the CPR in the manner that the President deems
closest to satisfying the purposes of this Section, or, if such
person is unable to do so, by the President of the Association of
the Bar of the City of New York.
(d) The Arbitrator, after appropriate consultation with the
parties, shall (i) determine, in his or her sole discretion, the rules governing
the arbitration proceeding, including whether and to what extent the parties
shall have any right to pre-hearing discovery or other forms of disclosure, the
manner of presentation of arguments and/or evidence before or at any hearing,
whether and to what extent formal rules of evidence shall govern the proceeding
and the parties' rights following the proceeding, and (ii) be governed in
exercising such discretion by the goal of reaching a fair and reasonable
decision in an expeditious and efficient manner while endeavoring to streamline
the process and avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding
(including the prevailing party's reasonable attorneys' fees) on any
unsuccessful party to the extent the Arbitrator concludes that such party is
unsuccessful, unless he or she concludes that matters of equity or
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important considerations of fairness dictate otherwise.
(f) The Arbitrator shall be required to state his or her decision
in writing and may, but shall not be required to, elaborate on the reasons for
such decision.
(g) The Arbitrator shall have the authority upon application by a
party to direct specific performance, including preliminary or interim specific
performance pending the final resolution of the arbitration, of any portion of
this Agreement. The parties expressly consent to the jurisdiction and power of
any federal or state court in New York to enforce the terms of such a direction
upon application by a party. If the Arbitrator has not yet been appointed, the
parties may obtain injunctive or other appropriate relief from a court to
enforce the terms of this Agreement pending the appointment of the Arbitrator
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
(h) Notwithstanding the terms of this Agreement that provide that
New York law shall govern, the arbitration and the provisions in this Agreement
dealing with arbitration shall be governed exclusively by the Arbitration Act,
and judgment on or enforcement of the award or any direction for specific
performance rendered by the Arbitrator may be entered by any court having
jurisdiction thereof or having jurisdiction over the relevant party or assets of
such party.
(i) IF, NOTWITHSTANDING THE PARTIES' AGREEMENT TO ARBITRATE, ANY
ISSUE IS PRESENTED TO A COURT FOR DECISION, THE PARTIES HEREBY WAIVE ANY RIGHT
TO TRIAL BY JURY.
(j) The parties agree that any dispute between the parties and the
arbitration itself shall be kept confidential and the existence of the
arbitration and any element of it (including but not limited to any pleading,
brief or other document submitted or exchanged, any testimony or other oral
submission, and any award) shall not be disclosed except to the Arbitrator, the
CPR Institute for Dispute Resolution, the parties, their counsel and any person
necessary to the conduct of the proceeding, except as may be lawfully required
in judicial proceedings relating to the arbitration or otherwise.
3.2 Continuity of Service and Performance. Unless otherwise agreed in
writing, the parties will continue to provide service and honor all other
commitments under this Agreement and the Services Agreement during the course of
dispute resolution pursuant to the provisions of this Article III with respect
to all matters not subject to such dispute, controversy or claim.
3.3 Law Governing Arbitration Procedures. The interpretation of the
provisions of this Article III, only insofar as they relate to the agreement to
arbitrate and any procedures pursuant thereto, shall be governed by the
Arbitration Act and other applicable federal law. In all other respects, the
interpretation of this Agreement shall be governed as set forth in Section 4.3.
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Article IV
MISCELLANEOUS
4.1 Further Assurances. Each party will, at any time and from time to
time after the date hereof, upon the request of the other, do, execute,
acknowledge and deliver, or shall cause to be done, executed, acknowledged and
delivered, all such other instruments as may be reasonably required in
connection with the performance of this Agreement and each shall take all such
further actions as may be reasonably required to carry out or further effect the
transactions contemplated by this Agreement. Upon request, Delta and RSL will
cooperate, and will use their respective best efforts to have their respective
officers, directors and other employees cooperate at the requesting parties'
expense in furnishing information, evidence, testimony and other assistance in
connection with any actions, proceedings, arrangements or disputes involving
Delta and/or RSL.
4.2 Corporate Power.
(a) RSL represents on behalf of itself and each other member of
the RSL Group and Delta represents on behalf of itself and each other member of
the Delta Group as follows:
(i) each such Person has the requisite corporate or other
power and authority and has taken all corporate or other action
necessary in order to execute, deliver and perform each of this
Agreement and to consummate the transactions contemplated hereby
and thereby; and
(ii) this Agreement has been duly executed and delivered by it
and constitutes a valid and binding agreement of it enforceable in
accordance with the terms thereof subject to (a) the laws of
bankruptcy and laws effecting creditors' rights generally and (b)
the availability of equitable remedies.
4.3 Governing Law. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of New York (other than
as to its laws of arbitration which shall be governed under the Arbitration Act
or other applicable federal law pursuant to Section 3.1), irrespective of the
choice of laws principles of the State of New York, as to all matters, including
matters of validity, construction, effect, enforceability, performance and
remedies.
4.4 Assignability. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and permitted
assigns. This Agreement may not be assigned by Delta without the prior written
consent of RSL. RSL may assign this Agreement to any affiliate of RSL or in
connection with a merger or consolidation of RSL or a sale of all or
substantially all of RSL's business. Except as provided in the preceding
sentence, this Agreement may not be assigned by RSL without the prior written
consent of Delta.
4.5 Third-Party Beneficiaries. Except for the indemnification rights
under this Agreement of any RSL Indemnitee or Delta Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement are solely
for the benefit of the parties and are not intended to confer upon any Person
except the parties any rights or remedies hereunder, and (b) there are no
third-party
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beneficiaries of this Agreement and this Agreement shall not provide any third
person with any remedy, claim, liability, reimbursement, claim of action or
other right in excess of those existing without reference to this Agreement. No
party hereto shall have any right, remedy or claim with respect to any provision
of this Agreement to the extent such provision relates solely to the other two
parties hereto or the members of such other two parties' respective Groups.
4.6 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed given or delivered (i) when
delivered personally or by private courier, (ii) when actually delivered by
registered or certified United States mail, return receipt requested and postage
prepaid or (iii) when sent by telecopy (provided; that, it is simultaneously
electronically confirmed), addressed as follows:
If to Delta:
430 Park Avenue, 5th Floor
New York, New York 10022
Fax No.:
Attention: Marc M. Tobin, Esq.
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Fax No.: (212) 735-2000
Attention: David Goldschmidt, Esq.
If to RSL:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue, Suite 4300
New York, New York 10153
Fax No.: (212) 317-1940
Attention: Avery S. Fischer, Esq.
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022-2585
Fax No.: (212) 940-8776
Attention: Robert L. Kohl, Esq.
or to such other address as such party may indicate by a notice delivered to the
other party hereto pursuant to the terms hereof.
4.7 Severability. If any provision of this Agreement or the application
of any provision hereof to any Person or circumstances is held invalid, the
remainder of this Agreement and the application of such provision to other
Persons or circumstances shall not be affected unless the provision held invalid
shall substantially impair the benefits of the remaining portions of this
Agreement.
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<PAGE>
4.8 Force Majeure. No party shall be deemed in default of this
Agreement to the extent that any delay or failure in the performance of its
obligations under this Agreement results from any cause beyond its reasonable
control and without its fault or negligence, such as acts of God, acts of civil
or military authority, embargoes, epidemics, war, riots, insurrections, fires,
explosions, earthquakes, floods, unusually severe weather conditions, labor
problems or unavailability of parts, or, in the case of computer systems, any
failure in electrical or air conditioning equipment. In the event of any such
excused delay, the time for performance shall be extended for a period equal to
the time lost by reason of the delay.
4.9 Publicity; Announcements. Except to the extent required by law, all
publicity related to the transactions contemplated hereby shall be subject to
the mutual approval of the parties hereto and, except as otherwise may be
required by law, no public announcement of any of the transactions contemplated
hereby will be made by either party hereto without the prior written consent of
the other party hereto, which consent shall not be unreasonably withheld.
4.10 Captions. The captions appearing in this Agreement are inserted
only as a matter of convenience and for reference and in no way define, limit or
describe the scope and intent of this Agreement or any of the provisions hereof.
4.11 Waivers of Default. Waiver by any party of any default by the
other party of any provision of this Agreement shall not be deemed a waiver by
the waiving party of any subsequent or other default, nor shall it prejudice the
rights of the other party.
4.12 Specific Performance. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right to specific performance and injunctive or other equitable relief
of its rights under this Agreement, in addition to any and all other rights and
remedies at law or in equity, and all such rights and remedies shall be
cumulative. The parties agree that the remedies at law for any breach or
threatened breach, including monetary damages, are inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived. Any requirements for the securing or
posting of any bond with such remedy are waived.
4.13 No Modification Except in Writing. This Agreement shall not be
changed, modified, or amended except by a writing signed by the party to be
charged and this Agreement may not be discharged except by performance in
accordance with its terms or by a writing signed by the party to be charged.
4.14 Interpretation. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine, neuter, singular, or plural as the
identity of the person or persons referred to may require.
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<PAGE>
4.15 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
4.16 Entire Agreement. This Agreement and all other documents to be
delivered in connection herewith set forth the entire agreement and
understanding between the parties as to the subject matter hereof and merges and
supersedes all prior discussions, agreements and understandings of every kind
and nature between them.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Release and
Indemnification to be executed by their duly authorized representatives as of
the date first above written.
RSL COMMUNICATIONS, LTD.
By
Name:
Title:
DELTATHREE.COM, INC.
By
Name:
Title:
[SIGNATURE PAGE TO RELEASE AND INDEMNIFICATION AGREEMENT]
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<PAGE>
EXHIBIT 99.1
CONSENT OF NOMINEE DIRECTOR
Pursuant to Rule 438, promulgated under the Securities Act of 1933, I,
Robert R. Grusky, hereby consent to the use of my name and any references to me
as a nominee director of deltathree.com, Inc. (the "Company") in the
registration statement on Form S-1 of the Company, filed with the Securities and
Exchange Commission, and all amendments thereto.
/s/ Robert R. Grusky
--------------------
Robert R. Grusky
Dated: November , 1999
<PAGE>
EXHIBIT 99.2
CONSENT OF NOMINEE DIRECTOR
Pursuant to Rule 438, promulgated under the Securities Act of 1933, I,
Yadin Kaufmann, hereby consent to the use of my name and any references to me as
a nominee director of deltathree.com, Inc. (the "Company") in the registration
state ment on Form S-1 of the Company, filed with the Securities and Exchange
Commis sion, and all amendments thereto.
/s/ Yadin Kaufmann
------------------
Yadin Kaufmann
Dated: November , 1999
<PAGE>
EXHIBIT 99.3
CONSENT OF NOMINEE DIRECTOR
Pursuant to Rule 438, promulgated under the Securities Act of 1933, I,
Oakleigh Thorne, hereby consent to the use of my name and any references to me
as a nominee director of deltathree.com, Inc. (the "Company") in the
registration statement on Form S-1 of the Company, filed with the Securities and
Exchange Commission, and all amendments thereto.
/s/ Oakleigh Thorne
-------------------
Oakleigh Thorne
Dated: November , 1999
