<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1999
REGISTRATION NO. 333-86503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTATHREE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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:
<TABLE>
<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(5) $23,344(5)
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(5) $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. 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 is registering an additional $26,471,147 aggregate offering
price of securities, and an additional fee of $8,958 is being paid herewith.
The Registrant has previously paid a $15,985 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>
Subject to Completion, dated October 19, 1999
PROSPECTUS
5,000,000 SHARES
[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.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FFIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
Facilitating Electronic Distribution
, 1999
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.
<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 INTENDS TO DISTRIBUTE WITH PRELIMINARY PROSPECTUSES CDS CONTAINING
THE
COMPANY'S PC-TO-PHONE SOFTWARE.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
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....................................... 33
Management..................................... 49
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders......................... 59
Related Party Transactions..................... 61
Description of Capital Stock................... 64
Shares Eligible for Future Sale................ 67
Important United States Federal Tax
Consequences of Our Common Stock to Non-U.S.
Holders...................................... 68
Underwriting................................... 71
Legal Matters.................................. 73
Experts........................................ 73
Where You Can Find Additional
Information.................................. 73
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.
ii
<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 leading provider of Internet Protocol (IP) telephony services and
other enhanced, Web-based communications services to individuals and businesses
worldwide. 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. Our privately-managed, global network, using IP technology, enables
our users to make phone calls from either a personal computer or a standard
telephone. Through our on-line interactive communications portal,
www.deltathree.com, our users can also retrieve and forward voice mail, e-mail
and faxes and send e-mail using one unified mailbox from anywhere in the world
at any time.
We were founded in 1996 to capitalize on the growth of the Internet as a
communications tool by commercially offering IP telephony services over a
privately-managed network. We are now using our expertise in IP telephony to
provide our users with a package of enhanced IP communications services that
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 from a standard telephone or fax machine, carried over our
privately-managed, global IP network
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 PC-to-phone, phone-to-phone and global roaming services at a
cost to users that is typically lower than that charged by traditional carriers
because we typically avoid local access charges, by-pass international
settlement rates by routing international long distance calls over our privately
managed network and minimize our network costs by using efficient
packet-switched technology.
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 operate a privately-managed, IP telephony network with 45 points of
presence in 29 countries. In order to maximize the use of available capacity on
our network, in addition to the enhanced IP communications services we provide
our users, we transmit and terminate voice and fax traffic for
telecommunications carriers, including RSL Communications, Ltd., our parent
company. This service for carriers is referred to as carrier transmission
services. Carrier transmission services provided to RSL COM accounted for 72.7%
of our total revenues in the first six months of 1999 and 69.1% of our total
revenues in 1998. Services provided to RSL COM include minutes carried by RSL
COM for other carriers. Carrier transmission services provided to non-affiliates
accounted for 11.5% of our total revenues in the first six months of 1999 and
5.6% of our total revenues in 1998.
1
<PAGE>
We market our services through relationships we have developed with
Internet companies to create "communications centers" on their Web sites.
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. For example, we currently have marketing relationships with
Yahoo!, CBS.com, Sony.com and Xoom.com. In addition, we have developed an
on-line agent program through which our agents market our services through their
own Web sites. To date, we have established relationships with more than 175
on-line agents that have generated revenues for us. We also have entered into
distribution and marketing arrangements with communications equipment and
software companies such as Ericsson.
OUR STRATEGY
Our goal is to be the leading provider of IP telephony and other enhanced,
Web-based communications 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 aggressive
marketing and advertising 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 97.1% of the combined voting power of all classes of our capital
stock and approximately 76.8% of the economic interest in our company. For more
information about our relationship with RSL COM and certain services they
provide to us, 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.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered ......................... 5,000,000 shares
Capital stock to be outstanding after
this offering:
Common stock................................ 5,961,399 shares
Class B common stock........................ 19,688,885 shares
Total capital stock...................... 25,650,284 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 advertising and marketing activities, to
pursue strategic alliances, to develop additional enhanced IP
communications services, 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 2.5-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 709,319 RSL COM restricted units that have vested
for 709,319 shares of our common stock and the exchange of 442,418 RSL
COM restricted units that have not vested for options to purchase 442,418
shares of our common stock
We have submitted trademark applications for the names
"deltathree.com(Trademark)," "V-Greetings(Trademark)," "D3 Box(Trademark),"
"Click IT(Trademark)," "D3 Fax(Trademark)," "Delta Three(Trademark)" and
"deltathree.com the Communications Portal(Trademark)." All other trademarks and
trade names appearing in this prospectus are the property of their respective
holders.
3
<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 SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 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 $ 2,171
Costs and operating expenses.............. 179 3,576 12,796 5,243
------- ------- ------- -------
Loss from operations...................... (178) (2,330) (7,158) (3,072)
Interest expense, net..................... -- (38) (186) 66
Minority interests........................ -- -- 223 --
------- ------- ------- -------
Net loss.................................. $ (178) $(2,368) $(7,121) $(3,006)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share--basic and
diluted................................. $ (0.03) $ (0.19) $ (0.37) $ (0.16)
Weighted average shares outstanding--
basic and diluted....................... 6,459 12,466 19,371 19,054
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999
-------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 4,243
Costs and operating expenses.............. 10,260
-------
Loss from operations...................... (6,017)
Interest expense, net..................... (757)
Minority interests........................ --
-------
Net loss.................................. $(6,774)
-------
-------
Net loss per share--basic and
diluted................................. $ (0.34)
Weighted average shares outstanding--
basic and diluted....................... 19,689
</TABLE>
The as adjusted balance sheet data gives effect to this offering of common
stock.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 1,396 $ 55,696
Working capital (deficiency)........................................................... (2,656) 51,644
Total assets........................................................................... 24,452 78,752
Long-term debt due to affiliates....................................................... 9,616 9,616
Total stockholders' equity............................................................. 7,723 62,023
</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 $6.8 million for the six months ended June 30, 1999
and a net loss of approximately $7.1 million in 1998. As of June 30, 1999, our
accumulated deficit was approximately $16.4 million. As a percentage of
revenues, our net loss for the six months ended June 30, 1999 was 159.7% 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 and capital
expenditures to increase significantly as we develop and expand our business. 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, as well as enable us to generate
additional advertising revenues. 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 telecommunication carriers. Carrier transmission
services generated 84.2% of our total revenues in the first six months of 1999
and 74.7% in 1998. Enhanced IP communications services generated 15.4% of our
total revenues in the first six months of 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. 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
o expansion of service offerings
o user traffic levels
5
<PAGE>
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
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 $10 to
$20 million in 2000 for advertising and marketing activities. Many potential end
users who have already invested substantial resources in traditional telephone
service may be reluctant or slow to adopt a new technology that makes their
existing equipment obsolete. 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 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
To maintain a leading position in our industry, we must strengthen the
brand awareness of the deltathree.com brand. If we fail to create and maintain
brand awareness, it could adversely affect our ability
6
<PAGE>
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. We are a "restricted subsidiary" under RSL COM's
indentures and will continue to be one after the completion of the offering. The
limitations under RSL COM's restrictive indenture covenants will prohibit us
from incurring any significant amount of additional debt unless RSL COM
completes an equity offering or generates significant positive cash flow from
operations. Those 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
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.
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WE DEPEND ON OUR SUPPLIERS FOR THE OPERATION OF OUR BUSINESS
We are dependent upon our suppliers of equipment and software to develop
and maintain our network and services. Should our suppliers cease to supply us
with the equipment and software necessary for the operation of our network or to
maintain our current network equpment, we may not be able to identify and
integrate alternative sources of supply in a timely fashion. Any transition to
alternate suppliers would likely result in delays, operational problems or
increased expenses and may limit our liability to provide services to our users
or expand our operations.
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,
while we were installing a new billing system, 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
test marketed. During the three days the system was down, users were unable to
send 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 plan to complete the final phase of testing prior to the end of October
1999. Until such testing is completed, we will not be able to completely
evaluate whether any of our systems will need to be repaired or replaced. We
cannot predict the extent to which the Year 2000 issue will affect our users,
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. If our assessment and implementation of Year 2000 compliance is completed
without identifying any material non-compliant systems operated by us or our
vendors, suppliers and service providers, 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 or trademarks, we have pending applications for
trademarks and patents in the United States and some foreign countries. We may
be unable to detect the unauthorized use of, or take appropriate steps to
enforce, our intellectual property rights. Effective trademark, 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. Although we believe that
we have valid defenses to this claim, the case is only in the very early stages,
and an unfavorable result may have a material adverse effect on our business,
financial condition and results of operation.
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 regulatory requirements 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 enhanced IP communications services and
carrier transmission services is becoming increasingly intense and is expected
to increase significantly in the future. We expect that competition from
companies both in the Internet and telecommunications industries will increase
in the future. Many of our existing competitors and potential competitors have
longer operating histories, broader portfolios of services, greater financial,
management and operational resources, greater brand-name recognition and
customer loyalty, larger subscriber bases and more experience than we have.
Our competitors include both start-up IP telephony service providers and
established traditional communications providers. 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, 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.
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 same report, Net2Phone and AT&T Jens are the only providers
with greater market shares than ours, together representing approximately 55% of
the market. AT&T Jens' services are aimed at international 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.
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. This pricing pressure has
begun to negatively impact our gross margin. Although the minutes of use we sell
are increasing, revenues are not increasing at the same rate, particularly with
respect to 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, 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.
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.
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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 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 as well as 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
our company 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.
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
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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.
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
72.7% of our revenues for the years ended December 31, 1997 and December 31,
1998 and for the six months ended June 30, 1999, respectively. RSL COM is not
contractually required to purchase services from us. 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 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 97.1% of the voting power of
our company, or approximately 96.7% 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, five of our seven directors 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
We are subject to covenants by reason of our status as a restricted
subsidiary of RSL COM under the indentures that govern a substantial amount of
RSL COM's debt. 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. 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 will prohibit us
from incurring any significant amount of additional debt unless RSL COM
completes an equity offering or generates significant positive cash flows from
operations. In addition, currently such restrictions 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 $9.6 million, as of June 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. Five of our seven directors 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. As a result, conflicts could be resolved
in a manner adverse to us which could harm our business.
RSL COM MAY COMPETE WITH OUR COMPANY
RSL COM is in the communications business. 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.
However, this non-competition provision terminates on September 3, 2001 and the
scope of such provision is subject to the following limitations:
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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 5,961,399 shares of common stock, or approximately 6,711,399
shares of common stock outstanding if the underwriters exercise their
over-allotment option in full, and 19,688,885 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--Registration Rights
Agreement."
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. We, RSL COM 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 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.
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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 $9.93 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 actual or anticipated variations in our 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
The factors beyond our control 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.
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
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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. We are under no duty
to update in this prospectus any of the forward-looking statements after the
date of this prospectus.
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 fund
advertising and marketing activities, to pursue strategic and marketing
alliances, to develop additional enhanced IP communications services, for
capital expenditures and for other general corporate purposes. Although, we
cannot specify with certainty the allocation of the net proceeds upon completion
of this offering, we currently expect in 2000 to spend $10 to $20 million on
marketing and advertising programs and approximately $9 million for capital
expenditures relating principally to the enhancement and expansion of our
network.
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 June 30, 1999. Our
capitalization is presented:
(1) on an actual basis
(2) on a pro forma basis to give effect to:
o the amendment of our certificate of incorporation to provide for two
classes of common stock (common stock and Class B common stock) and
preferred stock
o the conversion of each share of our existing common stock into one
share of Class B common stock
o the issuance of 252,080 shares of common stock to Yahoo! (including
126,040 shares issued upon the exercise of warrants at an exercise
price of $7.932), the charge to income for compensation expense of
approximately $1,026,000 related to the issuance of common stock to
Yahoo! at a discount from the fair market and the recording of a
note receivable in the amount of $1 million in a transaction
effected on October 18, 1999
o an increase in deferred compensation attributable to RSL COM
restricted units and options granted under our 1999 Stock Incentive
Plan, representing the difference between the exercise price of the
restricted units and options 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:
o the sale of 5,000,000 shares of common stock offered by us in this
offering at an assumed initial public offering price of $12.00 per
share after deducting the underwriting discount and estimated
expenses of this offering, but excluding 750,000 shares issuable
upon the underwriters' exercise of their option to purchase
additional shares
o 709,319 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $1.04 per
share
The table excludes:
o 1,083,332 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 $5.08 per share
o 175,000 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 442,418 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 $1.66 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
JUNE 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................................. $ 1,396 $ 2,396 $ 57,432
--------- --------- ---------
--------- --------- ---------
Long-term debt due to affiliates........................................... $ 9,616 $ 9,616 $ 9,616
--------- --------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value per share;
no shares authorized (actual) and 75,000,000 shares authorized (pro
forma and pro forma as adjusted); no shares issued and outstanding
(actual, pro forma and pro forma as adjusted)......................... -- -- --
Common stock, $0.001 par value per share;
20,000,000 shares authorized (actual) and 200,000,000 shares
authorized (pro forma and pro forma as adjusted); 19,688,885 shares
issued and outstanding (actual), 252,080 shares issued and outstanding
(pro forma) and 5,961,399 shares issued and outstanding (pro forma as
adjusted)............................................................. 8 -- 6
Class B common stock, $0.001 par value per share;
no shares authorized (actual) and 200,000,000 shares authorized (pro
forma and pro forma as adjusted); no shares issued and outstanding
(actual) and 19,688,885 shares issued and outstanding (pro forma and
pro forma as adjusted)................................................ -- 20 20
Additional paid-in capital................................................. 33,828 43,697 98,727
Note receivable............................................................ -- (1,000) (1,000)
Deferred compensation...................................................... (9,672) (17,527) (17,527)
Accumulated deficit........................................................ (16,441) (17,467) (17,467)
--------- --------- ---------
Total stockholders' equity............................................... 7,723 7,723 62,759
--------- --------- ---------
Total capitalization.................................................. $ 17,339 $ 17,339 $ 72,375
--------- --------- ---------
--------- --------- ---------
</TABLE>
19
<PAGE>
DILUTION
As of June 30, 1999, our pro forma consolidated net tangible book value was
$(3,249,830), or $(0.17) 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 the conversion of each share of our
existing common stock into one share of Class B 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 June 30, 1999 would have been
approximately $51.1 million, or $2.07 per share. This represents an immediate
increase in pro forma consolidated net tangible book value of $2.24 per share to
our existing shareholders and an immediate dilution of $9.93 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 June 30, 1999.......... $ (0.17)
Increase in pro forma consolidated net tangible book value per share attributable
to new investors................................................................ 2.24
---------
Pro forma consolidated net tangible book value per share after this offering......... 2.07
---------
Dilution per share to new investors.................................................. $ 9.93
---------
---------
</TABLE>
The following table summarizes, as of June 30, 1999, the differences
between the total consideration paid and the average price per share paid by RSL
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>
RSL COM........................................... 19,688,885 80% $19,675,714 25% $ 1.00
New investors..................................... 5,000,000 20 60,000,000 75 12.00
---------- --- ----------- ---
Total........................................... 24,688,885 100% $79,675,714 100%
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
The foregoing table excludes:
o the issuance of 252,080 shares of common stock to Yahoo! (including
126,040 shares issued upon the exercise of warrants at an exercise
price of $7.932) for a note receivable in the amount of $1 million
in a transaction effected on October 18, 1999
o 709,319 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $1.04 per
share
o 1,083,332 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 $5.08 per
share
o 175,000 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 442,418 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 $1.66 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.
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 six
months ended June 30, 1998 and 1999 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 six months ended June 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 SIX MONTHS ENDED
(INCEPTION) TO 31, JUNE 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 $ 1,210 $ 3,086
Non-affiliates................................... 1 778 1,742 961 1,157
--------- ------- ------- ------- -------
Total revenues................................. 1 1,246 5,638 2,171 4,243
Costs and operating expenses:
Cost of revenues................................. -- (1,065) (4,657) (1,738) (3,314)
Research and development expenses................ -- (294) (651) (549) (429)
Selling and marketing expenses................... -- (632) (2,431) (918) (1,461)
General and administrative expenses.............. (179) (1,388) (1,842) (596) (1,414)
Non-cash compensation expense.................... -- -- (743) (485) (2,126)
Amortization of goodwill......................... -- (197) (2,472) (957) (1,516)
--------- ------- ------- ------- -------
Total costs and operating expenses............. (179) (3,576) (12,796) (5,243) (10,260)
--------- ------- ------- ------- -------
Loss from operations............................... (178) (2,330) (7,158) (3,072) (6,017)
Interest income (expense), net..................... -- (38) (186) 66 (757)
Minority interests................................. -- -- 223 -- --
--------- ------- ------- ------- -------
Net loss........................................... $ (178) $(2,368) $(7,121) $(3,006) $(6,774)
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Net loss per share--basic and diluted.............. $ (0.03) $ (0.19) $ (0.37) $ (0.16) $ (0.34)
Weighted average shares outstanding--basic and
diluted.......................................... 6,459 12,466 19,371 19,054 19,689
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 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 $ 1,346 $ 1,396
Working capital (deficiency)............................... 70 2,763 (3,232) 427 (2,656)
Total assets............................................... 396 8,403 25,676 18,987 24,452
Long-term debt due to affiliates........................... 344 -- 5,107 -- 9,616
Total stockholder's equity (deficiency).................... (30) 6,272 12,370 16,227 7,723
</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 leading provider of IP telephony services and other enhanced,
Web-based communications services to individuals and businesses worldwide. We
were founded in June 1996 to capitalize on the growth of the Internet as a
communications tool. 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 to target individuals and businesses, we expect this revenue
mix to shift to our enhanced IP communications services, including PC-to-phone,
unified messaging, Click IT, phone-to-phone and global roaming, and thereby
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 72.7% of our total
revenues in the first six months of 1999 and 69.1% of our total revenues in
1998. Carrier transmission services to non-affilates accounted for 11.5% of our
total revenues in the first six months of 1999 and 5.6% of our total revenues in
1998. The provision of enhanced IP communications services accounted for 15.4%
of our total revenues in the first six months of 1999 and 20.5% in 1998.
22
<PAGE>
We have a diverse global user base for our enhanced IP communications
services. As of October 1, 1999, we had more than 875,000 users of our enhanced
IP communications services worldwide, approximately 75% of which were located
outside the United States.
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 enhanced
IP communications services and fixed costs associated with leased
transmission lines. The term of our contracts for leased transmission
lines is one year or less and either party can terminate on 30 days'
notice. We incurred extraordinary costs of approximately $1,595,000 in
1998 and $960,000 in the first six months of 1999 in integrating the
hardware and software purchased from Ericsson into our network, and
anticipate that we will incur additional costs of $445,000 through the
end of 1999. To compensate us for our costs, Ericsson agreed to provide
us at no cost with network telecommunications equipment with a fair
market value of $3 million, representing Ericsson's participation in such
research and development 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, 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. The acquisition of our company by RSL COM has been
accounted for in our consolidated 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. 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. As a result of these transactions, RSL COM "pushed
down" a total of approximately $15.2 million of goodwill to our financial
statements.
We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to June 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 a significant charge relating to non-cash
executive compensation expense in the third quarter ending September 30, 1999,
and on an ongoing basis due to accounting policies related to 1,083,332 options
granted with an exercise price of $5.08 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 and in the third
quarter with respect to the shares to be issued. 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 $2.9 million in
deferred compensation expenses previously amortized. Based on this assumption,
we will recognize $9.1 million in the third quarter and $2.1 million in the
fourth quarter of 1999, $4.7 million during the year ending December 31, 2000,
$1.5 million during the year ending December 31, 2001 and $200,000 during the
year ending December 31, 2002.
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 SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------- ----------------------------------
1997 1998 1998 1999
------ ------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Affiliates............................................................ 37.6% 69.1% 55.7% 72.7%
Non-affiliates........................................................ 62.4 30.9 44.3 27.3
------ ------ ------- -------
Total revenues..................................................... 100.0 100.0 100.0 100.0
Costs and operating expenses:
Cost of revenues...................................................... 85.5 82.6 80.0 78.1
Research and development expenses..................................... 23.6 11.5 25.3 10.1
Selling and marketing expenses........................................ 50.7 43.1 42.3 34.5
General and administrative expenses................................... 111.4 32.7 27.4 33.3
Non-cash compensation expense......................................... -- 13.2 22.4 50.1
Amortization of goodwill.............................................. 15.9 43.9 44.1 35.7
------ ------ ------- -------
Total costs and operating expenses................................. 287.1 227.0 241.5 241.8
------ ------ ------- -------
Loss from operations.................................................... (187.1) (127.0) (141.5) (141.8)
Interest income (expense), net.......................................... (3.0) (3.3) 3.0 (17.8)
Minority interests...................................................... -- 4.0 -- --
------ ------ ------- -------
Net loss................................................................ (190.1)% (126.3)% (138.5)% (159.6)%
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
Affiliates. Revenues from affiliates were $3.1 million for the six months
ended June 30, 1999 compared to $1.2 million for the six months ended June 30,
1998, an increase of $1.9 million, or 155.2%. 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 $1.2 million for the six
months ended June 30, 1999 compared to $961,212 for the six months ended
June 30, 1998, an increase of $195,627, or 20.4%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
$487,494 for the six months ended June 30, 1999 compared to $85,147 for the six
months ended June 30, 1998, an increase of $402,347, or 472.5%. The increase was
due primarily to an increased demand from a larger customer base. Revenues from
enhanced IP communications services were $652,581 for the six months ended June
30, 1999 compared to $528,405 for the six months ended June 30, 1998, an
increase of $124,176, or 23.5%. 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.
24
<PAGE>
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 84.2% and 59.6% of revenues for the
periods ended June 30, 1999 and June 30, 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 $3.3 million for the six months
ended June 30, 1999 compared to $1.7 million for the six months ended June 30,
1998. During the six months ended June 30, 1999, we recognized $299,136 as the
reimbursement of certain costs from Ericsson, our primary equipment vendor. Such
reimbursement reduced our cost of revenues during the six months ended June 30,
1999. Excluding this reimbursement, cost of revenues would have been $3.6
million, an increase of $1.9 million, or 107.9%. 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
$428,700 for the six months ended June 30, 1999 compared to $549,484 for the six
months ended June 30, 1998. During the six months ended June 30, 1999, we
recognized reimbursement from Ericsson for expenses we incurred in research and
development of $460,285. Excluding this reimbursement, research and development
costs would have been $888,985, an increase of $339,501, or 61.8%. 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
$1.5 million for the six months ended June 30, 1999 compared to $918,304 for the
six months ended June 30, 1998, an increase of $542,732, or 59.1%. The increase
in selling and marketing expenses was due to the expansion of our marketing and
promotional activities. Selling and marketing expenses for the six months ended
June 30, 1998 include expenses related to a promotional campaign we conducted
during this period.
General and administrative expenses. General and administrative expenses
were $1.4 million for the six months ended June 30, 1999 compared to $595,515
for the six months ended June 30, 1998, an increase of $817,985, or 137.4%. 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
$2.1 million for the six months ended June 30, 1999 compared to $485,508 for the
six months ended June 30, 1998, an increase of $1.6 million, or 338.0%. The
increase in non-cash compensation expenses was due to the recognition of
compensation expense for grants of employee stock options and units.
Amortization of goodwill. Amortization of goodwill was $1.5 million for
the six months ended June 30, 1999 compared to $956,564 for the six months ended
June 30, 1998, an increase of $559,193 or 58.5%. The increase in amortization of
goodwill was 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 $6.0 million for the six months ended June 30,
1999 compared to approximately $3.1 million for the six months ended June 30,
1998, an increase of $2.9 million,or 95.8%. 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. We expect to
continue to incur losses for the foreseeable future.
Interest Income (Expense), Net
Interest expense, net was $757,039 for the six months ended June 30, 1999
compared to interest income of $66,080 for the six months ended June 30, 1998,
an increase of $823,119. The increase in interest expense was due to increased
borrowings from RSL COM and Ericsson to finance our working capital and capital
expenditure requirements.
25
<PAGE>
Net Loss
Net loss was $6.8 million for the six months ended June 30, 1999 compared
to $3.0 million for the six months ended June 30, 1998, an increase of
$3.8 million, or 125.3%. 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 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 $694,250 as 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 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.
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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 and Ericsson to support our working capital and capital
expenditure requirements.
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.
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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.
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 June 30, 1999, we had an accumulated deficit of approximately
$16.3 million. We anticipate that we will continue to incur operating and net
losses as we implement our growth strategy.
From our inception through July 1997, 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
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 ofour 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 date will be
extended to the first anniversary of the completion of such offering. As of
June 30, 1999, we owed approximately $9.6 million (principal and accrued
interest) to RSL COM. On the first anniversary of the closing of this offering,
this debt will become payable on demand.
We are subject to financial restrictions by reason of our status as a
restricted subsidiary of RSL COM under indentures relating to outstanding
indebtedness of RSL COM. Such restrictions significantly limit and
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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. Prior to the closing of this offering, RSL COM will provide us with a
$10 million line of credit (exclusive of the existing $9.6 million), 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 loan
or line of credit.
In 1998 and the first half of 1999, we incurred approximately $6.0 million
and $900,000 in capital expenditures, including purchases of network components,
the expansion of our network and computer hardware and software costs. We expect
to incur approximately $9.0 million in capital expenditures through the end of
2000.
As of June 30, 1999, we had approximately $1.4 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 fiscal and quarterly period to
date.
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 $822,846 for the six months ended June 30, 1998 and $3.0 million
for the six months ended June 30, 1999. Net cash used in operating activities in
these periods consisted mostly of net operating losses and increases in accounts
receivable, partially offset by increases in trade payables and accrued
expenses.
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 $1.0 million for the six months ended June 30, 1998 and $917,037
for the six months ended June 30, 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 zero for the six months ended June 30, 1998 and
$4.0 million for the six months ended June 30, 1999. Cash provided by financing
activities in these periods 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.
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.
Consequently, we may need to rely upon RSL COM to provide any additional capital
to meet our working capital requirements, and we cannot assure you that RSL COM
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.
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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 second quarter ended June 30, 1999.
We have established reserves for bad debts in accordance with historical
levels of uncollectible receivables resulting 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.
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 are engaged in 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
consists 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 have completed the inventory phase of our assesment plan and the first
phase of testing which consisted of simulating the functioning of our entire
network during the change from December 31, 1999 to January 1, 2000. The tests
were repeated several times and on each occasion the network functioned without
any interruption. The final phase of testing, consisting of simulating the
functioning of each individual component during the change from December 31,
1999 to January 1, 2000, is expected to be completed by the end of October 1999.
We believe that the IT systems that we have developed internally to operate our
business are Year 2000 compliant based on the results of testing completed to
date and because all of the software code for the systems that we have
internally developed is written with four digits to define the
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applicable year. We expect, prior to December 31, 1999, to resolve any Year 2000
compliance issues relating to off-the-shelf commercial software used in our
business through upgrades of our software or, when necessary, through
replacement of existing software with Year 2000 compliant applications. In
addition, we are completing our assessment of our non-IT systems which we have
identified as containing embedded technology. At this point of our assessment,
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 principal third party vendors, suppliers and service providers, including
Ericsson, Cisco and Hewlett-Packard, 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.
We plan to complete our assessment and testing process prior to the end of
October 1999. Until such assessments and testing are fully completed, we will
not be able to completely evaluate whether any of our systems will need to be
repaired or replaced.
Costs to Address Our Year 2000 Issues
To date, we have spent $50,000 on Year 2000 compliance issues through
September 30, 1999. We expect to incur approximately $10,000 of additional costs
in the fourth quarter of 1999 addressing Year 2000 compliance issues. We expect
that our costs will 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. If our assessment and implementation of Year 2000
compliance is completed without identifying any material non-compliant systems
operated by us or our vendors, suppliers and service providers, 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.
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IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Substantially all of our revenues are in U.S. dollars and our costs are
paid in dollars and New Israeli Shekels, or NIS. As a result, inflation in
Israel will have a negative effect on our profitability, if achieved, unless
such inflation is offset by a devaluation of the NIS.
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS unless such expenses or payables are linked to the dollar. Such a
devaluation also has the effect of decreasing the dollar value of any asset
which consists of NIS or receivables payable in NIS unless such receivables are
linked to the dollar. Conversely, any increase in the value of the NIS in
relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses.
MARKET RISK
We currently do not invest in, or otherwise hold, for trading or other
purposes, any financial instruments subject to market risk. We pay interest on
our credit facility with RSL COM based on a fixed 14% interest rate. Our
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, and long term debt due to affiliates is a reasonable
approximation of their fair value. We expect that our exposure to market risk
from changes in interest rates to be minimal.
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 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 leading provider of IP telephony and other enhanced, Web-based
communications services to individuals and businesses worldwide. We use our
privately-managed, global IP network to enable our users to make phone calls
from either a personal computer or a standard telephone. We were founded in June
1996 to capitalize on the growth of the Internet as a communications tool. Our
network contains 45 POPs in 29 countries. By using our own network rather than
relying exclusively on the Internet, we are better able to manage and control
the quality of our 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 PC-to-phone, phone-to-phone and global roaming services at a
cost that is typically lower than that charged by traditional carriers, because
we typically avoid local access charges, by-pass international settlement rates
by routing international long distance calls over our privately managed network
and minimize our network costs by using efficient packet-switched technology.
We also provide carrier transmission services over our privately-managed IP
network for RSL COM and other telecommunications carriers. This has enabled us
to maximize the use of available capacity on our network as we continue to
expand our user base and increase revenues from enhanced IP communications
services.
Our user base for enhanced IP communications services is expanding. At
December 31, 1998, we had more than 250,000 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 and approximately 21.37% of these paid users have re-charged
their deltathree.com accounts.
Carrier transmission services generated 84.2% of our total revenues in the
first six months of 1999 and 74.7% in 1998. Enhanced IP communications services
generated 15.4% of our total revenues in the first six months of 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 98%
of all Internet users use e-mail and 53% of all Internet users 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.
Accordingly, service providers are beginning to migrate voice and fax
traffic from traditional networks known as the public switched telephone
network, or the PSTN, to packet-switched networks. 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 and revenues will grow to approximately 135.0 billion 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
o increased business and leisure travel
In addition, technological advancements have allowed for multiple modes of
communication, such as cellular, voice-mail, e-mail and fax. We believe that due
to the proliferation of modes of communication and the difficulty and expense of
managing these multiple modes of communication, consumers increasingly value the
convenience of a one-stop solution for communications services. Accordingly, 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.
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. However, these
traditional carriers have substantial investments in circuit-switched
technology, and to date few of these traditional carriers have launched global
IP services.
In addition, 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, provide limited services and lack advanced customer
service and billing capabilities required for enhanced, Web-based
communications. 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 are generally not 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 ensure 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 the
retailers' or businesses' Web sites. This provides e-commerce shoppers
with the opportunity to
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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 to over
200 countries.
o LOWER COSTS. We are able to charge lower rates than traditional long
distance carriers because we typically avoid local access charges,
by-pass international settlement rates by routing international long
distance calls over our privately-managed IP network and minimize our
network costs by using packet-switched technology.
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. Through
our comprehensive customer care and real-time billing center, which is
accessible directly on the Web, our users have 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 continue to be the leading provider of IP telephony and
other enhanced Web-based communications 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 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 on-line branding through marketing and advertising
relationships with Internet companies and Web portals with strong brand
names or high traffic volumes, our on-line agent program and partnerships
with major hardware manufacturers and software developers.
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
derived from usage charges on a per minute basis for carrier transmission
services as well as 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.
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.
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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 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 enables individuals and businesses to place
a Web 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.
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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.
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, Germany, 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.
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
</TABLE>
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<TABLE>
<S> <C>
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.
Since most user concerns can be addressed on-line, we only need a small,
focused customer support department that responds to user inquiries primarily
through e-mail with limited telephone support. 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 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 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. We have entered into marketing relationships with seven
Internet businesses, including the following four:
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 Internet telephony services. Yahoo! will also send e-mails
to certain Yahoo! international and domestic registered users with exclusive
offers for our PC-to-phone service. In addition, Yahoo! will create and place on
Yahoo! Broadcast.com audio advertisements for our Internet telephony services.
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 its entire user base. In addition, our
advertising banners will be placed on the CBSMarketWatch.com Web site.
o Sony.com. In August 1999, we entered into a marketing agreement with
Sony.com. Under this agreement, we are the preferred provider of enhanced IP
communications services on the Sony.com Web site, which includes sonymusic.com,
sonyspc.com, sony.com and infobeat.com. Preferred provider status entitles us
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to prominent positioning within these Web sites. As part of this agreement, a
co-branded area known as the "Communication Center" will be established and will
offer users our enhanced IP communications services.
o Xoom.com. In June 1999, we entered into a co-marketing agreement with
Xoom.com, Inc. Under this agreement, we are the preferred provider of enhanced
IP communications services on Xoom's Web site. Xoom 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)
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.
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 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. We currently have relationships with more than 175
on-line agents who market deltathree.com services on their Web sites and have
generated revenue for us.
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
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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.
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. For example,
under an agreement with Ericsson, Ericsson will prominently refer to us in all
of its marketing materials for its IP telephony gateways as well as market our
services to its potential IP telephony customers and assist us with customer
contacts.
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 and Frankfurt
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with some of the largest backbone providers,
enabling transmission efficiency
o a technologically-advanced network operations center
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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)
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 four 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.
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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 from
MCI WorldCom Inc., Teleglobe Inc., AT&T Corp. TMI U.S.A, Inc and Hutchison
Corporate Access (H.K.) Limited. We currently lease approximately two-thirds of
our bandwidth needs from these companies.
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 ARRANGEMENTS
Our network also connects with major Internet exchange points to provide
access to and from the Internet for our PC-to-phone service. We have entered
into peering arrangements with MCI WorldCom and AT&T, two of the largest
Internet backbone providers, as well as Inter Nap, 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 submitted trademark applications for the name "Delta
Three(Trademark)" for the following jurisdictions: Brazil, Colombia, Japan,
Mexico, the Russian Federation, the United States, 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.
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 as well as 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 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
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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 40% of our 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 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
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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.
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
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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.
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.
Internet and IP Telephony Providers. Many companies provide, or are
planning to provide, certain portions of the complete communications solution we
offer, including Net2Phone, AT&T Jens and JFAX.COM.
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.
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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. 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 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 1, 1999, we employed 75 full-time and 8 part-time employees,
of which 66 are located in Israel and 17 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 and monetary damages in an unspecified amount. We believe that we
have valid defenses to the claim and we intend to defend the lawsuit vigorously.
However, the case is only in the very early stages, and an unfavorable result
may have a material adverse effect on our business, financial condition and
results of operations.
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-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-Chairman of the Company
Mark J. Hirschhorn................................... 35 Vice President and Chief Financial Officer
Noam Bardin.......................................... 28 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
Itzhak Fisher........................................ 43 Director
Nir Tarlovsky........................................ 33 Director
Donald R. Shassian................................... 44 Director
Jacob Z. Schuster.................................... 50 Director
Avery S. Fischer..................................... 32 Director
</TABLE>
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 1996. 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 1991, 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 secretary from March 1995 to July 1998.
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.
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.
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 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.
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.
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.
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 25,000 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
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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 ($)
- ---------------------------------------------------------- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Elie Wurtman, president and chief executive officer(2).... 153,000 162,500 -- --
Jacob A. Davidson, chairman of the board (2).............. 81,250 81,250 -- --
Noam Bardin, chief technology officer..................... 120,000 10,000 -- --
</TABLE>
- ------------------
(1) The positions stated are those held by the named executive officers in 1998.
(2) Mr. Wurtman and Mr. Davidson were paid by RSL COM.
OPTION GRANTS IN LAST FISCAL YEAR
Neither we nor RSL COM granted options or stock appreciation rights to the
named executive officers in 1998.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no option exercises by our named executive officers in 1998. The
following table sets forth information for the named executive offices with
respect to restricted units held as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
RESTRICTED UNITS AT RESTRICTED UNITS AT
YEAR END (#) YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE ($) EXERCISABLE
NAME ON EXERCISE (#) REALIZABLE /UNEXERCISABLE(1) /UNEXERCISEABLE(2)
- ----------------------------------------------- --------------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C>
Elie Wurtman................................... -- -- --/-- --/--
Jacob A. Davidson.............................. -- -- --/-- --/--
Noam Bardin.................................... -- -- 250,000/0 516,500/0
</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 $5.175 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
141,666 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 1,083,332 shares of common stock at
an exercise price of $5.08 per share to Messrs. Sela, Wurtman, Davidson,
Hirschhorn, Bardin and Zimels, executive officers of our company. We also intend
to grant options to purchase 25,000 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
52
<PAGE>
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.
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. RSL COM granted an
aggregate of 1,151,737 restricted units to our employees. 857,500 restricted
units granted in 1997 and 1998 have an exercise price of $0.004; 197,750
restricted units granted in 1998 have an exercise price of $2.07; and 96,500
restricted units granted in April 1999 have an exercise price of $5.08. 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 had 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 and vesting schedules as the RSL COM
restricted units.
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
709,319 restricted shares of common stock and options to purchase 442,418 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 5,000,000 shares of our common stock for issuance upon exercise
of awards to be granted under the plan.
ADMINISTRATION. The plan will be administered by a committee that will be
made up of directors who are not employees of the Company and whose membership
on the committee (i) does not adversely impact the Company's 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 compensation 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
53
<PAGE>
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 compensation 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. The option
exercise price is payable by one of the following methods or a combination of
methods to the extent permitted by the compensation committee: (i) in cash or
its equivalent, or (ii) subject to the approval of the compensation committee,
in shares of common stock owned by the participant for at least six months prior
to the date of exercise. The compensation 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 compensation 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 compensation 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.
RESTRICTED STOCK AND RESTRICTED UNITS. The compensation 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 compensation committee deems appropriate. Unless otherwise
determined by the compensation 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
compensation 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 compensation 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 compensation committee. With regard to a
particular performance period, the compensation 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 compensation 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 compensation 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 compensation
committee and subject to such terms and conditions as the compensation 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 ("deferral
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 compensation committee, a participant may also receive
supplemental stock units for a percentage of the deferral 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
54
<PAGE>
rights until the shares have been issued. The compensation 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 compensation committee
provides otherwise, supplemental stock units and dividend equivalents with
respect to the supplemental stock 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 compensation 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. The plan will terminate not later than ten
years from the date of its adoption. The board of directors or the compensation
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 awards may be granted, or
(3) remove the administration of the plan from the compensation 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.
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 compensation
committee, after receipt of the proposed annual budget for the coming year from
management. Both the targets and proposed budget must be approved by the board
of directors. It is expected that the proposed targets, including revenues and
end users, and budget 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 compensation committee recommends to the board of directors whether
bonuses payable under the plan will be paid in cash, shares of common stock or
in any combination thereof. No more than shares common stock may be
issued under the plan.
ADMINISTRATION. The plan will be administered by a committee that will be
made up of directors who are not employees of the Company and whose membership
on the committee (i) does not adversely impact the Compay's 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
compensation 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 the
Company's 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.
To be eligible for any bonus, the company must meet or exceed its annual
targets. 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
compensation committee. In addition, the plan permits the compensation committee
to grant discretionary bonuses to participants, notwithstanding that a bonus
would not otherwise be payable under the plan, to recognize extraordinary
individual performance.
55
<PAGE>
ELIGIBILITY. Each executive officer of the company and each key employee
who is recommended by the chief executive officer and selected by the
compensation 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 $500,000. The compensation 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 compensation
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 compensation 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 compensation committee.
AMENDMENT AND TERMINATION. Any amendment or termination of the plan
requires stockholder approval.
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 thereby. We have reserved
1,282,514 shares of our common stock for issuance under the employee stock
purchase plan.
ADMINISTRATION. The employee stock purchase plan will be administered by
the compensation committee established by the board of directors comprised
solely of non-employee directors who are not eligible to participate in the
employee stock purchase plan. The compensation 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 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 subsidiary of the company will not be eligible to participate.
Designations of corporations participating in the employee stock purchase plan
may be made from time to time by the committee from among any subsidiary
corporations of the company, including corporations which become subsidiaries
after the adoption and approval of the employee stock purchase plan.
GRANTS. Pursuant to the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of common stock up to four times
per calendar year through regular payroll deductions and/or cash payments 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.
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.
OTHER TERMS. 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
56
<PAGE>
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.
A right to purchase shares of a series 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, and is exercisable, during the
participant's lifetime, only by the participant.
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 10-year 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, on the date of the
completion of this offering, each director who is not an employee of our company
will be granted options to acquire 25,000 shares of our common stock with an
exercise price per share equal to the initial public offering price. 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 .
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Sela and Hirschhorn
and expect to enter into employment agreements with each of Messrs. Wurtman,
Davidson, Bardin and Zimels, with the following principal terms:
o The agreement will be 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 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. 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.
57
<PAGE>
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) 166,667
of the Board of Directors
Amos Sela............................... Chief Executive Officer and President $ 220,000 275,000
Jacob A. Davidson....................... Co-Chairman of the Company $ 180,000(1) 116,667
Mark J. Hirschhorn...................... Vice President and Chief Financial $ 200,000 175,000
Officer
Noam Bardin............................. Vice President of Technology and $ 150,000 175,000
Operations and Chief Technology
Officer
Shimmy Zimels........................... Vice President of Operations $ 140,000 175,000
</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.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
RSL COM beneficially owns all of the shares of our Class B common stock
outstanding as of the date of this prospectus. Following the completion of this
offering, RSL COM will continue to beneficially own 100% of the Class B common
stock and, accordingly, will hold approximately 76.8% of the economic interest
in us, and 97.1% of the combined voting power of us.
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 18, 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, 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 18,
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
COMMON STOCK
BENEFICIALLY OWNED(1) SHARES OF RSL COM
-------------------------------------------------- COMMON 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............... 19,688,885 98.7% 76.8% 100% 97.1% -- -- --
Ronald S. Lauder
c/o RSL Communications, Ltd. (3)....... 19,688,885 98.7% 76.8% 100% 97.1% 16,447,636(9) 29.7% 57.6%
DIRECTORS AND EXECUTIVE OFFICERS:
Itzhak Fisher(4)......................... 0 0 (8) 0 * 3,310,481(10) 6.0% 11.4%
Nir Tarlovsky(4)......................... 0 0 (8) 0 * 791,058(11) 1.4% *
Donald R. Shassian(4).................... 0 0 (8) 0 * 18,000(12) * *
Jacob K. Schuster(4)..................... 0 0 (8) 0 * 1,689,404(13) 3.1% 6.0%
Avery S. Fischer(4)...................... 0 0 (8) 0 * 5,980(14) * *
Elie C. Wurtman(5)....................... 0 0 0 0 0 0 0 0
Jacob A. Davidson(5)..................... 0 0 0 0 0 0 0 0
Noam Bardin(6)........................... 0(6) 0(6) 1.0% 0 * 0 0 0
All Directors and Executive Officers as a
group (13 persons)..................... 0(7) 0(7) 1.9% 0 * 5,814,923 10.5 17.4
</TABLE>
* Less than 1%.
59
<PAGE>
- ------------------
(1) Before the offering our outstanding share capital consists of
(a) 19,688,885 shares of Class B common stock and (b) 252,080 shares of
common stock issued to Yahoo! on October 18, 1999 (including warrants to
purchase 126,040 shares of common stock at an exercise price of $7.932 per
share) and after the offering, unless otherwise indicated, our outstanding
share capital consists of (a) 19,688,885 shares of Class B common stock and
(b) 5,961,399 shares of common stock.
(2) RSL COM's outstanding share capital consists of 25,082,283 shares of
Class B common stock and 29,556,036 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 formed, including 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) The address for the director listed is c/o RSL Communications, Ltd.
(5) The address for director or executive officer listed is c/o us.
(6) Mr. Bardin holds 250,000 RSL COM restricted units that will be exchanged
for 250,000 shares of our common stock upon completion of this offering.
(7) Four of our 14 directors and executive officers collectively hold for
354,165 RSL COM restricted units that will be exchanged 354,165 shares of
our common stock upon completion of this offering.
(8) On completion of the offering we are issuing to each of our directors who
is not an employee of our company options to purchase 25,000 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.
(9) Consists of (a) 341,209 shares of Class A common stock of RSL COM,
(b) 16,106,427 shares of Class B common stock and (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. 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, (d) 3,428,363 shares owned directly by Mr. Lauder,
and (e) 459,900 shares issuable upon exercise of a warrant issued to Mr.
Lauder.
(10) Consists of (a) 177,839 shares of Class A common stock of RSL COM and
(b) 3,132,642 shares of Class B common shares 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.
(11) 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 option granted to Mr. Tarlovsky under
RSL COM's 1997 Stock Incentive Plan.
(12) Represents 18,000 shares of Class A common stock of RSL COM.
(13) 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.
(14) Represents 5,980 shares of Class A common stock of RSL COM.
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RELATED PARTY TRANSACTIONS
AMBIENT
In January 1998, we entered into a cooperation agreement with Ambient
Corporation, a public company founded by Elie Wurtman, our chairman, and Jacob
Davidson, our vice chairman. 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 rented approximately 150 square meters of
our facility in Jerusalem, Israel to Ambient and provided them with office
services for approximately $1,000 per month. The cooperation agreement was
terminated as of September 1, 1999. 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.
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 June 30, 1999, we owed approximately $9.6 million
(principal and accrued interest) to RSL COM. The inter-company loan is due on
demand after June 30, 2000. Upon completion of an initial public offering by us,
the maturity date will be extended to the first anniversary of the completion of
such offering. RSL COM will, upon completion of this offering, provide a
$10 million line of credit (in addition to the existing $9.6 million), bearing
interest at the rate of 14% per annum, due on demand after November 1, 2000, and
to be used by us for working capital purposes.
RSL COM currently owns all of our capital stock. Following the completion
of this offering, RSL COM will continue to be our controlling shareholder and
will own 100% of the outstanding Class B common stock, which will represent
approximately 97.1% of the combined voting power of all of our outstanding
capital stock and approximately 76.8% of the economic interest in our company
(or 96.7% and 74.6% 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, there currently are only limited restrictions
on RSL COM's ability to compete with us. 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."
CARRIER TRANSMISSION SERVICES
RSL COM purchases carrier transmission services from us. RSL COM accounted
for 37.6%, 69.1% and 72.7% of our revenues in the years 1997 and 1998 and for
the six months ended June 30, 1999, respectively. RSL COM is not contractually
obligated to purchase services from us. Rates are established based on market
rates. The balance of our revenues in these periods were derived from services
provided to non-affiliates.
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
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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. However, RSL COM may decline to provide us office and
equipment space in Latin America. 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 June 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. 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.
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
colocated. The fee for using RSL COM's prepaid calling card platform
is $0.01 per minute of traffic usage. In addition, RSL COM provides
us with additional customer-related services for our prepaid calling
services at a rate of $0.015 per minute of traffic usage, all
subject to certain minimum minutes per month per service.
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
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origination and termination points. These services are provided to RSL COM at
the then prevailing fair market 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
our 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. 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.
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 the
expenses RSL COM would pay for its counsel for such registration, 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.
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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 75,000,000 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 2.5 to one stock
split of our common and Class B common stock. Upon closing of the offering,
there will be 5,961,399 shares of our common stock and 19,688,885 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 5,961,399 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 6,711,399 shares of common stock outstanding. In addition, we will
have 19,688,885 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.
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 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.
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.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that future sales of shares of our
common stock or the availability of our shares for sale would have on the
prevailing market price of our common stock. Sales of a significant number of
shares of our common stock, or the perception that these sales could occur,
could adversely affect the prevailing market price of our common stock and could
impair our future ability to raise capital through an offering of equity
securities. See "Risk Factors--Futures Sales of Capital Stock May Adversely
Affect Our Stock Price."
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."
On October 18, 1999, we issued to Yahoo! 126,040 shares of our common stock
and warrants to purchase 126,040 shares of our common stock, at an exercise
price of $7.932 per share for $1 million. The warrants must be exercised by the
closing of this offering or they will lapse. 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.
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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
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, or exemption from, 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.
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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.
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
69
<PAGE>
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.
70
<PAGE>
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., 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.........................................................
U.S. Bancorp Piper Jaffray Inc..............................................
Lazard Freres & Co. LLC.....................................................
Fidelity Capital Markets,
a division of National 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:
the representations and warranties made by us to the underwriters are true;
there is no material change in the financial markets; and
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 we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
71
<PAGE>
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 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, among other things and in
addition to 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 and liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, 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.
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.
72
<PAGE>
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, the underwriters have reserved up to 500,000 shares of the
common stock, or 10% of the common stock offered by this prospectus, for sale to
persons designated by us at the initial offering price set forth on the cover
page of this prospectus. It is expected that approximately 90% of such shares
will be sold to officers, directors and employees (and their family members) of
us and RSL COM and its affiliates. The remainder of such shares will be sold to
others designated by 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 securities 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
for the period from June 1996 (inception) through December 31, 1996 and the
years ended December 31, 1997 and 1998 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
are not necessarily complete, and, in each instance where a copy of a document
is filed as an exhibit to the registration statement, 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 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.
73
<PAGE>
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.
74
<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 June 30, 1999 (unaudited)....... 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
six months ended June 30, 1998 and 1999 (unaudited)............................................ 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 six months ended June 30, 1999 (unaudited)......................................... 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
six months ended June 30, 1998 and 1999 (unaudited)............................................ F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDER 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 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. 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 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 in conformity with
generally accepted accounting principles.
Brightman Almagor & Co.
(a member firm of Deloitte Touche Tohmatsu)
Tel Aviv, Israel
May 17, 1999
F-2
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 3,196,082 $ 1,356,562 $ 1,396,057
Accounts receivable--net........................................... 825,200 543,335 484,234
Due from affiliates................................................ -- 2,191,903 1,670,130
Prepaid expenses and other current assets.......................... 166,287 620,676 603,838
------------ ------------ ------------
Total current assets.................................................. 4,187,569 4,712,476 4,154,259
------------ ------------ ------------
Investments........................................................... 105,000 90,000 90,000
------------ ------------ ------------
Property and equipment:
Telecommunications equipment....................................... 849,824 7,910,224 8,816,132
Furniture, fixtures and other...................................... 200,122 735,991 745,805
------------ ------------ ------------
1,049,946 8,646,215 9,561,937
Less accumulated depreciation...................................... (177,738) (376,792) (484,590)
------------ ------------ ------------
Property and equipment--net........................................ 872,208 8,269,423 9,077,347
------------ ------------ ------------
Goodwill--net......................................................... 3,183,875 12,488,125 10,972,368
Deposits.............................................................. 54,549 115,497 157,677
------------ ------------ ------------
Total assets.......................................................... $ 8,403,201 $25,675,521 $ 24,451,651
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................... $ 949,716 $ 4,301,763 $ 3,707,584
Due to affiliates.................................................. 120,487 1,403,163 710,749
Deferred revenues.................................................. 159,778 1,610,081 967,769
Other current liabilities.......................................... 194,295 629,096 1,424,489
------------ ------------ ------------
Total current liabilities............................................. 1,424,276 7,944,103 6,810,591
------------ ------------ ------------
Long-term liabilities:
Long-term debt due to affiliates................................... -- 5,106,602 9,615,709
Severance pay obligations.......................................... 26,775 233,247 302,813
------------ ------------ ------------
Total long-term liabilities........................................... 26,775 5,339,849 9,918,522
------------ ------------ ------------
Convertible notes payable to affiliates............................... 679,965 -- --
------------ ------------ ------------
Minority interests.................................................... -- 21,399 --
------------ ------------ ------------
Total liabilities..................................................... 2,131,016 13,305,351 16,729,113
------------ ------------ ------------
Commitments and contingencies
Stockholder's equity:
Class A Common stock --par value $0.001; 200,000,000 shares
authorized as of December 31, 1997 and 1998 and June 30, 1999; no
shares issued and outstanding
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 June 30, 1999, respectively; 19,053,822, 19,688,885 and
19,688,885 issued and outstanding at December 31, 1997 and 1998
and June 30, 1999, respectively.................................. 19,054 19,689 19,689
Preferred stock --par value $0.001; 75,000,000 shares authorized as
of December 31, 1997 and 1998 and June 30, 1999; no shares issued
and outstanding
Additional paid-in capital......................................... 8,799,315 23,083,518 33,816,040
Deferred compensation.............................................. -- (1,065,882) (9,672,117)
Accumulated deficit................................................ (2,546,184) (9,667,155) (16,441,074)
------------ ------------ ------------
Total stockholder's equity............................................ 6,272,185 12,370,170 7,722,538
------------ ------------ ------------
Total liabilities and stockholder's equity............................ $ 8,403,201 $25,675,521 $ 24,451,651
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
TO DECEMBER 31, ---------------------------- ----------------------------
1996 1997 1998 1998 1999
--------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Affiliates.................... $ -- $ 467,842 $ 3,896,106 $ 1,209,395 $ 3,085,893
Non-affiliates................ 933 777,799 1,741,941 961,212 1,156,839
--------- ------------ ------------ ------------ ------------
Total revenues.................. 933 1,245,641 5,638,047 2,170,607 4,242,732
Costs and operating expenses:
Cost of revenues.............. -- 1,064,940 4,657,373 1,737,772 3,314,332
Research and development
expenses................... -- 294,150 650,140 549,484 428,700
Selling and marketing
expenses................... -- 631,970 2,431,371 918,304 1,461,036
General and administrative
expenses................... 179,138 1,387,682 1,842,446 595,515 1,413,500
Non-cash compensation
expense.................... -- -- 742,780 485,508 2,126,287
Amortization of goodwill...... -- 197,249 2,472,214 956,564 1,515,757
--------- ------------ ------------ ------------ ------------
Total costs and operating
expenses...................... 179,138 3,575,991 12,796,324 5,243,147 10,259,612
--------- ------------ ------------ ------------ ------------
Loss from operations............ (178,205) (2,330,350) (7,158,277) (3,072,540) (6,016,880)
Interest income (expense), net.. (397) (37,232) (186,295) 66,080 (757,039)
Minority interests.............. -- -- 223,601 -- --
--------- ------------ ------------ ------------ ------------
Net loss........................ $(178,602) $ (2,367,582) $ (7,120,971) $ (3,006,460) $ (6,773,919)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Net loss per share--basic and
diluted....................... $ (0.03) $ (0.19) $ (0.37) $ (0.16) $ (0.34)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Weighted average shares
outstanding--basic and
diluted....................... 6,459,375 12,465,655 19,371,355 19,053,822 19,688,885
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DELTATHREE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
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................... 7,706,250 7,706 140,784 -- -- 148,490
Net loss.................................... (178,602) (178,602)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1996...................... 7,706,250 7,706 140,784 (178,602) -- (30,112)
Issuance of capital stock................... 11,347,572 11,348 5,319,907 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...................... 19,053,822 19,054 8,799,315 (2,546,184) -- 6,272,185
Conversion of debt and warrants to equity... 635,063 635 656,577 657,212
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...................... 19,688,885 19,689 23,083,518 (9,667,155) (1,065,882) 12,370,170
Deferred compensation expense (unaudited)... 10,732,522 (10,732,522) --
Amortization of deferred compensation
(unaudited)............................... 2,126,287 2,126,287
Net loss (unaudited)........................ (6,773,919) (6,773,919)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at June 30, 1999
(unaudited)............................... 19,688,885 $19,689 $33,816,040 $(16,441,074) $(9,672,117) $ 7,722,538
---------- ------- ----------- ------------ ------------ -----------
---------- ------- ----------- ------------ ------------ -----------
</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 research and
development
credits.......................................... $ -- $ -- $ 3,000,000
--------- ------------ ------------
--------- ------------ ------------
Recognition of pushdown of goodwill................ $ -- $ 3,338,624 $ 11,818,964
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (3,006,460) $ (6,773,919)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,126,342 1,623,555
Amortization of deferred compensation............ 485,508 2,126,287
Write-down of investment......................... -- --
Minority interests............................... -- (21,399)
Increase in liability for severance pay.......... 10,294 28,701
Provision for losses on accounts receivable...... -- 24,296
Changes in assets and liabilities:
Decrease (increase) in accounts receivable....... 360,673 34,805
Decrease (increase) in other current assets and
due from affiliates............................ (1,117,029) 538,611
Increase (decrease) in accounts payable.......... (6,857) (594,179)
Increase (decrease) in deferred revenues......... 78,015 (642,312)
Increase in current liabilities and due to
affiliates..................................... 1,246,668 609,411
------------ ------------
2,183,614 3,727,776
------------ ------------
Net cash used in operating activities................ (822,846) (3,046,143)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................. (1,026,513) (915,722)
Increase in deposits............................... (305) (1,315)
Equity investments................................. -- --
Other.............................................. -- --
------------ ------------
Net cash used in investing activities................ (1,026,818) (917,037)
------------ ------------
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....................................... -- 4,080,562
Proceeds from short-term borrowings................ -- --
Payment of other long-term debt.................... -- (77,887)
------------ ------------
Net cash provided by financing activities............ -- 4,002,675
------------ ------------
Increase (decrease) in cash and cash equivalents..... (1,849,664) 39,495
Cash and cash equivalents at beginning of period..... 3,196,082 1,356,562
------------ ------------
Cash and cash equivalents at end of period........... $ 1,346,418 $ 1,396,057
------------ ------------
------------ ------------
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.................................... $ -- $ --
------------ ------------
------------ ------------
Assets acquired with vendor research and
development
credits.......................................... $ -- $ --
------------ ------------
------------ ------------
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
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
1 -- BUSINESS DESCRIPTION
<TABLE>
<S> <C>
Description of business
Deltathree.com, Inc. (the "Company"), a Delaware corporation, is a leading provider of Internet
Protocol ("IP") telephony services and other enhanced, Web-based communications services to
individuals and businesses worldwide.
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 43 points of presence (POPs)
in 27 countries as of June 30, 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 products 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
</TABLE>
F-7
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
1 -- BUSINESS DESCRIPTION (CONTINUED)
<TABLE>
<S> <C>
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.
</TABLE>
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
<TABLE>
<S> <C>
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 fiscal 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. The useful life of telecommunications
network equipment purchased from Ericsson (see Note 11b) is 10 years. Improvements are
capitalized, while repair and maintenance costs are charged to operations as incurred.
Impairment of Assets--The Company's long-lived assets and identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the net carrying amount
may not be recoverable. When such events occur, the Company reviews for impairment by comparing
the carrying value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from the use of the assets and their eventual disposition. 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
</TABLE>
F-8
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C>
determined to be necessary, would be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset based on estimated future discounted cash flows. The
Company determined that, as of December 31, 1997 and 1998 and June 30, 1999 (unaudited), there
had been no impairment in the carrying value of long-lived assets.
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. The Company periodically
reviews the value of its goodwill to determine if an impairment has occurred. The Company
measures the potential impairment of recorded goodwill by comparing the carrying value of
goodwill to the estimated undiscounted value of expected future cash flows expected to result
from the goodwill. If the sum of the expected undiscounted future cash flows is less than the
carrying value of the goodwill, 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 value
of the goodwill exceeds the fair value of the goodwill based on estimated future discounted cash
flows. Based on its review, the Company does not believe that an impairment of its goodwill has
occurred as of December 31, 1997 and 1998 and for the six month period ended June 30, 1999
(unaudited).
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 six-month
period ended June 30, 1999 (unaudited), advertising expenses were approximately $0, $24,000,
$124,000 and $30,000, 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.
</TABLE>
F-9
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C>
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.
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 12B).
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 June 30, 1998 and 1999 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
periods presented.
</TABLE>
F-10
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<S> <C>
Reclassifications--Certain previously reported amounts have been reclassified to conform with
the current period presentation.
</TABLE>
3 -- ACCOUNTS RECEIVABLE-NET
<TABLE>
<S> <C>
Accounts receivable are stated net of an allowance for doubtful accounts of $100,000, $326,542
and $124,296 at December 31, 1997 and 1998 and June 30, 1999 (unaudited), respectively.
</TABLE>
4 -- DUE FROM/TO AFFILIATES
<TABLE>
<S> <C>
The balances due from and due to Affiliates are for services rendered and are non-interest
bearing.
</TABLE>
5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
<TABLE>
<S> <C>
Prepaid expenses and other current assets consist of the following:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Prepaid commissions...................................... $ -- $144,768 $ 32,550
Deposits with credit card companies...................... -- 199,401 213,767
Government of Israel (VAT refund and other).............. -- 59,763 54,950
Deposits with suppliers.................................. -- 86,799 67,043
Prepaid expenses......................................... 20,455 28,055 57,216
Loan to employee......................................... -- 31,917 --
Other.................................................... 145,832 69,973 178,312
-------- -------- ---------
Total prepaid expenses and other current assets.......... $166,287 $620,676 $ 603,838
-------- -------- ---------
-------- -------- ---------
</TABLE>
6 -- GOODWILL-NET
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1997 1998 1999
----------- ------------ -----------
(UNAUDITED)
<S> <C> <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) (4,185,220)
----------- ------------ -----------
Total goodwill--net.................................... $3,183,875 $12,488,125 $10,972,368
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
F-11
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accrued expenses....................................... $ -- $361,187 $ 726,535
Employees and related expenses......................... 64,750 144,013 673,673
Deposits from customers................................ -- 118,672 3,000
Other.................................................. 129,545 5,224 21,281
-------- -------- -----------
Total other current liabilities........................ $194,295 $629,096 $ 1,424,489
-------- -------- -----------
-------- -------- -----------
</TABLE>
8 -- LONG-TERM DEBT DUE TO AFFILIATES
<TABLE>
<S> <C>
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 June 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.
</TABLE>
9 -- SEVERANCE PAY OBLIGATIONS
<TABLE>
<S> <C>
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 and $28,701 for the years
ended December 31, 1997 and 1998 and for the six months ended June 30, 1999 (unaudited),
respectively. No expenses were incurred for the period from June 1996 (inception) to December 31,
1996 and for the six months ended June 30, 1998 (unaudited).
</TABLE>
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
F-12
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. Subsequent to June 30, 1999, this agreement
was amended. Consistent with the original services agreement,
the amendment also supports the continued provision of services
at fair market value.
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 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 six
months ended June 30, 1999 (unaudited), the Company recognized
$901,385 and $460,285, 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 revenue and will be
recorded as an offset to such costs as they are incurred.
The Company is dependent upon its suppliers of equipment,
hardware and software to develop and maintain its network and
services. If the Company's suppliers cease to supply the
Company with the equipment, hardware and software necessary for
the operation of its network or to maintain its current network
equipment, the Company may not be able to acquire and integrate
alternative sources of supply in a timely fashion. Any
transition to alternate suppliers would likely result in
delays, operational problems, or increased expenses and may
limit the Company's ability to provide services to its users or
expand its operations.
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 these agreements, the Company is obligated
to pay commissions based on revenues derived from such Web
links.
F-13
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
D. 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.
E. 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.
12 -- STOCKHOLDERS' EQUITY
A. Description of Class B common stock
As of December 31, 1997, the Company's authorized share capital
was 100,000,000 shares of common stock, par value $0.001, of
which 19,053,822 were issued and outstanding.
As of December 31, 1998 and June 30, 1999 (unaudited), the
Company's authorized share capital was 20,000,000 shares of
common stock, par value $0.001, of which 19,688,885 shares of
common stock were issued and outstanding at each date.
B. Restricted Units
As of December 31, 1998 and June 30, 1999 (unaudited), a total
of 1,055,250 and 1,151,737 restricted units, respectively, had
been granted to employees of the Company under the 1997 RSL COM
Stock Incentive Plan. Of these restricted units, 850,820 have a
nominal exercise price and 204,417 have an exercise price of
$2.07. In April 1999, an additional 96,500 restricted units
were granted to employees of the Company with an exercise price
of $5.08. 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 and receipt by RSL COM of the requisite consents to
amend its indentures, the Company will issue shares of the
Company's common stock in exchange for vested restricted units
upon payment of the related exercise price and will issue
options to purchase shares of the Company's common stock in
exchange for unvested restricted units, with the same exercise
prices 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.
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
F-14
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
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 $7,400,000 during
the six month period ended June 30, 1999 (unaudited),
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 $2.07 and $8.13
per unit as of December 31, 1999 and June 30, 1999 (unaudited),
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 $1,796,287 for
the year ended December 31, 1998 and the six months ended
June 30, 1999 (unaudited), respectively.
C. Stock Options
In April 1999, the Company agreed to grant options to purchase
an aggregate of 1,083,332 shares of the Company's common stock
at an exercise price of $5.08 to executive officers of the
Company, subject to completion of the Company's contemplated
initial public offering and receipt by RSL COM of the requisite
consents to amend its indentures. Such options vest over a
three year period from the date of grant and to be exercisable
for a period of seven years from the date of grant.
The Company recorded deferred compensation related to the
stock options of approximately $3,300,000 as of June 30, 1999
(unaudited), representing the difference between the exercise
price and the deemed fair market value of the Company at such
date ($160 million). 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 $330,000 for the six
months ended June 30, 1999 (unaudited).
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)
---------- ------------ ------------
---------- ------------ ------------
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net loss:
As reported $ (3,006,460) $ (6,773,919)
------------ ------------
------------ ------------
Pro forma $ (2,575,977) $ (4,968,181)
------------ ------------
------------ ------------
Net loss per share--
basic and diluted
As reported $ (0.16) $ (0.34)
------------ ------------
------------ ------------
Pro forma $ (0.14) $ (0.25)
------------ ------------
------------ ------------
</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-15
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
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>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Salaries and related expenses.............. $ 317,897 $ 689,085
Consulting and advisory fees............... -- --
Depreciation and amortization.............. 20,500 26,448
Travel..................................... 64,441 46,407
Other...................................... 146,646 127,045
------------ ------------
549,484 888,985
Less--reimbursement by Ericsson (see Note
11B)..................................... -- 460,285
------------ ------------
Total research and development expenses.... $ 549,484 $ 428,700
------------ ------------
------------ ------------
</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,
----------------------- JUNE 30,
1997 1998 1999
--------- ---------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Net operating losses carryforwards............... $900,000 $3,500,000 $ 4,200,000
Less valuation allowance......................... (900,000) (3,500,000) (4,200,000)
--------- ---------- -----------
Net deferred tax assets.......................... $ -- $ -- $ --
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
As of December 31, 1997 and 1998 and as of June 30, 1999
(unaudited), a valuation allowance of $900,000, $3,500,000 and
$4,200,000, respectively, is provided as the realization of the
deferred tax assets are not assured.
F-16
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------- ------------------------
1997 1998 1998 1999
---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues by geographical location:
United States $ 679,821 $4,922,073 $1,611,279 $3,033,170
Europe 37,339 528,157 322,519 532,156
Argentina 284,202 33,432 38,757 54,910
Hong Kong and China 149,232 -- 81,450 168,961
Other 95,047 154,385 116,602 453,535
---------- ---------- ---------- ----------
Total revenues $1,245,641 $5,638,047 $2,170,607 $4,242,732
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Revenues from principal customers:
Affiliates $ 467,842 $3,896,106 $1,209,395 $3,085,893
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Other principal customer $ 276,000 $ -- $ -- $ --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-lived assets:
United States $448,424 $4,375,898 $3,837,980
Israel 250,535 2,077,091 2,295,776
Other 173,249 1,816,434 2,943,591
-------- ---------- -----------
Total long-lived assets $872,208 $8,269,423 $9,077,347
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
16 -- SUBSEQUENT EVENTS (UNAUDITED)
A. Initial public offering.
The Board of Directors of the Company has decided to pursue
an initial public offering of its capital stock.
B. Restricted Units.
The Board of Directors of the Company has decided that, in
connection with the initial public offering, the Company will
issue restricted shares of its Class A common stock in
exchange for vested restricted units on a one-for-one basis
and options to purchase its common stock in exchange for
unvested restricted units on a one-for-one basis.
C. Yahoo! Inc. Transaction.
On October 18, 1999, the Company issued to Yahoo! Inc.
126,040 shares of common stock and warrants to purchase
126,040 shares of common stock at an exercise price of $7.932
per share for a note receivable of $1 million.
The note receivable will be recorded as a debit (contra) in
the stockholders' equity section of the balance sheet. 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. In consideration for such, the Company will
compensate Yahoo! Inc. $5,000,000 of which the first
$1,000,000 will be offset against the note receivable
F-17
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO PERIODS SUBSEQUENT
TO DECEMBER 31, 1998 IS UNAUDITED)
16 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
held by the Company. The $5,000,000 will be charged to expense
over the life of the contract.
D. Stock Split.
On October 18, 1999, the Company revised its capital
structure to effect a 2.5-for-one stock split for each
outstanding share of Class B common stock. All references to
per share amounts and the number of shares in these financial
statements have been restated to reflect the above stock
split.
Upon the conversion, 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 Company also created the Class A common stock which has a
par value of $0.001, 200,000,000 shares authorized of which
none were issued and outstanding. The holders of the Class A
common stock are entitled to one vote per share.
Additionally, in connection with the conversion, the Company
created preferred stock which has a par value of $0.001,
75,000,000 shares authorized of which none were issued and
outstanding.
F-18
<PAGE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------------------------------------------
PROSPECTUS
, 1999
------------------------------------------------------------
LEHMAN BROTHERS
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation Facilitating Electronic Distribution
<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........................................................................... 7,975
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............................................................................. 94,582
----------
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
II-1
<PAGE>
dissented at the time, may avoid liability by causing his or her dissent to such
actions be entered in the books 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 2.5 to 1 stock split prior to completion of the offering.
Share numbers set forth below are presented on a pre-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
3,032,500 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 23 people 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 25,000 $ 25,000
July 15, 1996................................................. 2 12,500 $ 12,500
July 16, 1996................................................. 6 38,500 $ 38,500
August 1, 1996................................................ 7 2,512,500 $ 16,265
August 15, 1996............................................... 3 51,000 $ 51,000
October 15, 1996.............................................. 1 10,000 $ 10,000
November 5, 1996.............................................. 3 383,000 $ 11,490
---------
Total....................................................... $ 164,755
---------
---------
</TABLE>
In the first half of 1997, Old Delta Three issued 50,000 shares of its
common stock to each of two private investors 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 10,000 shares were purchased for $0.01
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
II-2
<PAGE>
registration requirements of the Securities Act pursuant to
Section 4(2) thereof. There were twelve investors in the December placement,
each investing $25,000 for which each investor received one unit consisting of a
$25,000 convertible note (at a conversion price of $2.00 per share) and a
warrant permitting the purchase of up to 12,500 shares at an exercise price of
$2.00 per share. In addition, one investor made a short term loan to Old Delta
Three for $5,000 for which it received a warrant to purchase up to 5,000 shares
at an exercise price of $2.00 per share. An additional investor was paid a 10%
commission and 3% expense allowance, in the form of convertible notes and
warrants, for acting as a placement agent. 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. There were eleven accredited investors in the
April placement. A total of 16 units were issued. The price of each unit was
$32,500 and consisted of a $32,500 convertible note (at a conversion price of
$3.25 per share) and a warrant permitting the purchase of up to 10,000 shares at
an exercise price of $3.25 per share. No general solicitations were made in
connection with this transaction; Old Delta Three obtained representatiosns 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 198,000 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
$0.01 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 3,260,358 shares
of its common stock. An additional 941,376 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, 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 7,268,539 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. 50,416 shares of common stock and warrants
to purchase 50,416 shares of common stock with an exercise price of $19.83 per
share, for $1,000,000, in a transaction exempt from the registration
requirements of the Securities Act.
The Registrant changed its name to its current name, deltathree.com, Inc.,
on May 17, 1999.
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.
II-3
<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
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 (included on signature page to this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
II-4
<PAGE>
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York on the 19th day of October, 1999.
DELTATHREE.COM, INC.
By: /s/ Amos Sela
-----------------------
Amos Sela
Chief Executive 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>
/s/ Amos Sela Chief Executive Officer, President October 19, 1999
- ------------------------------------------ and Director (Principal Executive Officer)
Amos Sela
* Chief Financial Officer (Principal October 19, 1999
- ------------------------------------------ Accounting and Financial Officer)
Mark J. Hirschhorn
* Co-Chairman of the Company October 19, 1999
- ------------------------------------------ and Chairman of the Board of Directors
Elie C. Wurtman
* Co-Chairman of the Company October 19, 1999
- ------------------------------------------
Jacob A. Davidson
* Director October 19, 1999
- ------------------------------------------
Itzhak Fisher
* Director October 19, 1999
- ------------------------------------------
Nir Tarlovsky
* Director October 19, 1999
- ------------------------------------------
Donald R. Shassian
* Director October 19, 1999
- ------------------------------------------
Jacob Z. Schuster
* By:/s/ Amos Sela Attorney-In-Fact October 19, 1999
Amos Sela
</TABLE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Amos Sela AND Mark J. Hirschhorn his true and
lawful attorney-in-fact, each acting alone, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any and all additional registration
statements pursuant to Rule 462(b) relating to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact or his substitutes, each acting alone,
may lawfully do or cause to be done by virtue thereof.
<TABLE>
<S> <C> <C>
/s/ Avery S. Fischer Director October 19, 1999
- ------------------------------------------
Avery S. Fischer
</TABLE>
II-6
<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.
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 (included on signature page to this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 4.3
================================================================================
REGISTRATION RIGHTS AGREEMENT
BETWEEN
DELTATHREE.COM, INC.
AND
RSL COMMUNICATIONS, LTD.
Dated as of September 1, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions............................................................2
2. Demand Registrations...................................................4
2.1. Demand Rights....................................................4
2.2. Provisions Applicable to each Demand Registration................4
3. Piggyback Registrations................................................6
3.1. Participation in Other Registrations.............................6
3.2. Withdrawal of Piggyback Registrations............................6
3.3. Underwritten Registrations.......................................6
3.4. Participation by RSL COM.........................................6
4. Registration Procedures................................................6
5. Underwritten Registrations............................................10
5.1. Selection of Underwriters.......................................10
5.2. Priority in Underwritten Registrations..........................10
5.3. Underwriting, Agreement.........................................11
5.4. Holdback Agreements.............................................11
6. Indemnification.......................................................12
6.1. Indemnification by the Company..................................12
6.2. Indemnification by RSL COM......................................12
6.3. Notice of Claims, etc...........................................13
6.4. Other Indemnification...........................................13
6.5. Payment.........................................................13
6.6. Other Remedies..................................................13
7. Expenses..............................................................14
8. Rules 144 and 144A....................................................14
9. Amendments............................................................14
10. Notices...............................................................14
11. Remedies..............................................................15
12. No Inconsistent Agreements............................................15
13. Assignment............................................................15
14. Arbitration...........................................................16
15. Miscellaneous.........................................................17
<PAGE>
REGISTRATION RIGHTS AGREEMENT, dated as of September 1, 1999, between
DELTATHREE.COM, INC., a Delaware corporation (the "Company"), and RSL
COMMUNICATIONS, LTD., a Bermuda company ("RSL COM").
W I T N E S S E T H:
-------------------
WHEREAS, the Company and RSL COM wish to agree upon the manner in
which the Company shall provide registration rights to its Registrable Shares
(as defined below) after consummation of an initial public offering (the "IPO")
of shares of the Company's Class A common stock, par value $0.00l, per share
(the "Common Stock"), as the same may from time to time be constituted.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. As used in this Agreement, the following terms have
the following meanings:
Business Day: each day other than a Saturday, a Sunday or any other
day on which commercial banks in New York City are authorized or required
by law or executive order to close.
Class B Common Stock: shares of the Company's Class B common stock,
par value $0.00l, per share, as the same may from time to time be
constituted.
Commission: the Securities and Exchange Commission and any successor
federal agency having similar powers.
Common Stock: as defined in the WHEREAS clause of this Agreement.
Company: as defined in the introductory paragraph of this Agreement.
Deferral Period: as defined in Section 2.2(a).
Delay Notice: as defined in Section 2.2(a).
Demand Notice: as defined in Section 2.1.
Demand Registration: as defined in Section 2.1.
Exchange Act: The Securities Exchange Act of 1934, as amended or any
similar replacement federal statute, as at the time in effect, and any
reference to a particular section of such Act shall include a reference to
the comparable section, if any, of any such similar replacement federal
statute.
IPO: as defined in the WHEREAS clause of this Agreement.
NASD: National Association of Securities Dealers, Inc.
NASDAQ: the NASDAQ Stock Market, Inc.
2
<PAGE>
Person: an individual, partnership, joint venture, corporation,
trust, unincorporated organization or government or any department or
agency thereof.
Piggyback Notice: as defined in Section 3.1.
Piggyback Registration: a registration of Registrable Shares
effected pursuant to Section 3.1.
Prospectus: the prospectus included in any Registration Statement,
including all amendments (including, but not limited to, post-effective
amendments) and supplements to such prospectus and all material
incorporated by reference in such prospectus.
Registrable Shares: (a) shares of Common Stock held by RSL COM
issuable upon conversion of shares of Class B Common Stock held by RSL
COM, and (b) any securities issued or issuable with respect to any shares
of Common Stock referred to in the preceding clause (a) upon any
conversion or exchange thereof, by way of stock dividend or stock split,
in connection with a combination of shares, recapitalization,
reclassification, merger, consolidation or other reorganization or
otherwise. Any particular Registrable Shares shall cease to be Registrable
Shares when (x) a registration statement with respect to the sale of such
Registrable Shares shall have become effective under the Securities Act
and such Registrable Shares shall have been disposed of in accordance with
such registration statement, (y) such Registrable Shares shall have been
distributed to the public pursuant to Rule 144 (or any successor
provision) under the Securities Act or (z) such Registrable Shares shall
have ceased to be outstanding.
Registration Expenses: All expenses incident to the Company's
performance of or compliance with Section 2, including, but not limited
to, all (a) registration and filing fees, including NASD fees and fees and
expenses associated with filings required to be made with any national
securities exchange or national computerized market system (including, if
required, the fees and expenses of any "qualified independent underwriter"
and its counsel), (b) fees and expenses of complying with securities or
blue sky laws, including reasonable fees and disbursements of counsel
effecting blue sky qualifications, (c) word processing, duplicating and
printing expenses, messenger and delivery expenses, and (d) fees and
disbursements of counsel for the Company, of the Company's independent
public accountants (including the expenses of any special audits or
"comfort" letters required by or incident to such performance and
compliance), of underwriters and of any Person, including special experts,
retained by the Company in connection with such performance and
compliance; but not including any underwriting discounts or commissions
attributable to the sale of Registrable Shares.
Registration Notice: as defined in Section 3.1.
Registration Statement: a registration statement of the Company
covering Registrable Shares pursuant to this Agreement, including the
Prospectus, all amendments (including, but not limited to, post-effective
amendments) and supplements to such registration statement, all exhibits
to such registration statement and all material incorporated by reference
in such registration statement.
3
<PAGE>
Securities Act: The Securities Act of 1933, as amended or any
similar replacement federal statute, as at the time in effect, and any
reference to a particular section of such Act shall include a reference to
the comparable section, if any, of any such similar replacement federal
statute.
Underwritten Offering: an offering of securities of the Company, in
which offering securities are sold to an underwriter for reoffering to the
public.
Underwritten Registration: a registration of securities of the
Company in connection with an Underwritten Offering.
Withdrawal Notice: as defined in Section 2.2(c).
2. Demand Registrations.
2.1. Demand Rights. At any time after 180 days after the
consummation of the IPO, RSL COM may request that the Company effect the
registration under the Securities Act of all or a part of the Registrable Shares
by delivering to the Company a written notice requesting such registration and
specifying the number of Registrable Shares to be included in such registration
and the intended method of disposition thereof (a "Demand Notice"). Subject to
Section 2.2, RSL COM shall be entitled to have three separate registrations of
such Registrable Shares effected pursuant to this Section 2.1 (each such
registration, a "Demand Registration").
2.2. Provisions Applicable to each Demand Registration.
(a) Preparation of Registration. Within ten Business Days after
receipt of a Demand Notice, the Company shall commence in accordance with
Section 4 the registration of the Registrable Shares specified in such Demand
Notice, provided that the Company may delay filing the related Registration
Statement for a reasonable period of time, not to exceed 90 days from the date
of receipt of such Demand Notice (the "Deferral Period"), if the Company (i)
would be required to disclose in such Registration Statement the existence of
any fact relating to a proposed acquisition, financing or other material
corporate development, which disclosure (x) would not otherwise be required to
be made and (y) would be, in the good faith determination of the board of
directors of the Company, materially adverse to the Company, (ii) gives written
notice to RSL COM within such ten-Business Day period setting forth, in
reasonable detail, the reasons for such delay and certifying as to the
determination of the board of directors of the Company referred to in the
preceding clause (i) (a "Delay Notice"), and (iii) has not given a Delay Notice
within the 180-day period ending on the date of receipt of such Demand Notice.
(b) Limitation on Demand Rights. Notwithstanding anything to the
contrary in this Section 2, the Company shall not be required to effect a Demand
Registration:
(i) until a period of 180 days shall have elapsed from the
effective date of the Registration Statement in connection
with the most recent Demand Registration previously effected;
4
<PAGE>
(ii) if the aggregate value (as determined in good faith by the
board of directors of the Company) of the Registrable Shares
to be included in such Demand Registration is less than
$25,000,000, or
(iii) if the Company has previously effected three Demand
Registrations.
(c) Withdrawal of Demand Notice. RSL COM may withdraw a Demand
Notice in the following circumstances by giving the Company written notice of
such withdrawal (a "Withdrawal Notice") within the time provided and prior to
the effectiveness of the related Registration Statement: (i) the Company has
given a Delay Notice and the Withdrawal Notice is given within 30 days after
receipt of such Delay Notice; (ii) a Registration Statement has not become
effective within 120 days after the date of termination of a Deferral Period
with respect to which RSL COM elected not to give a Withdrawal Notice and the
Withdrawal Notice pursuant to this clause (ii) is given within three Business
Days after the end of such 120-day period; and (iii) a Registration Statement
with respect to which there has been no Deferral Period has not become effective
within 120 days after the date of receipt of the related Demand Notice and the
Withdrawal Notice is given within three Business Days after the end of such
120-day period.
(d) Effecting Demand Registration. For the purposes of Section
2.2(b)(iii) and the last sentence of Section 2.1, a Demand Registration shall
not be deemed to have been effected (i) if (x) a Withdrawal Notice has been
given with respect thereto pursuant to Section 2.2(c) and RSL COM does not
proceed with such registration, (y) the conditions to closing specified in any
purchase agreement or underwriting agreement entered into in connection with
such registration are not satisfied because of an act or omission of the Company
and RSL COM does not proceed with such registration, or (z) if more than
one-half of the Registrable Shares requested to be included in such registration
are not included in such registration pursuant to Section 5, and (ii) in all
other cases, unless a Registration Statement covering the Registrable Shares
requested to be registered in such registration, subject to reduction in number
pursuant to Section 5, has become effective and remained effective for a period
of at least 180 days (as such period may be extended pursuant to the last
sentence of Section 4) or, if earlier, until all the Registrable Shares covered
thereby have been sold.
(e) Registration Rights Exclusive. The Company will not register any
Demand Registration securities for sale for the account of any Person other than
RSL COM, except, subject to Section 5.2(a), (i) equity securities of the Company
to be sold for the account of the Company, and (ii) with the prior written
consent of RSL COM in such Demand Registration, securities of the Company to be
sold for the account of any other Person.
(f) Underwritten Registrations. If requested by RSL COM, the
offering of the Registrable Shares to be registered in a Demand Registration
shall be in the form of an Underwritten Offering and provisions of Section 5
will apply thereto.
3. Piggyback Registrations.
3.1. Participation in Other Registrations. After the consummation of
the IPO, any time the Company determines to register any of its equity
securities under the Securities Act
5
<PAGE>
(other than on Form S-8, Form S-4 or any successor forms thereto), it will give
prompt written notice to RSL COM of its intention to do so (a "Registration
Notice"). Upon receipt of a Registration Notice, RSL COM may request that the
Company include in the related registration all or part of the Registrable
Shares by delivering to the Company within 15 Business Days after receipt of
such Registration Notice a written notice specifying the number of Registrable
Shares requested to be included in such registration and the intended method of
disposition thereof (a "Piggyback Notice"). The Company will effect in
accordance with Section 4 the registration of all Registrable Shares with
respect to which the Company has received a Piggyback Notice pursuant to this
Section 3.1 so as to permit the disposition in accordance with the reasonable
methods specified in such Piggyback Notice.
3.2. Withdrawal of Piggyback Registrations.
(a) By the Company. At any time after giving a Registration Notice
and prior to the effective date of the related Registration Statement, if the
Company elects not to proceed with such registration, the Company may give
written notice of such election to RSL COM and shall have no obligation to
register any Registrable Shares in connection with such registration, provided
that, (i) if such Registration Notice was given in connection with a Demand
Registration, the Company may not elect to not proceed with such registration
without the prior written consent of RSL COM in such Demand Registration, and
(ii) in all other cases, such election to not proceed with such registration
shall be without prejudice to the rights of RSL COM to request that such
registration be effected as a Demand Registration.
(b) By RSL COM. RSL COM may withdraw a Piggyback Notice from the
related Piggyback Registration by giving written notice of such withdrawal to
the Company and the managing underwriter or underwriters, if any, on or before
the 30th day prior to the planned effective date of the related Registration
Statement.
3.3. Underwritten Registrations. If a Registration Notice is given
in connection with an Underwritten Registration, the provisions of Section 5
shall apply to any Piggyback Registration in connection with such registration.
3.4. Participation by RSL COM. The registration of Registrable
Shares pursuant to Section 3.1 shall not constitute a Demand Registration for
the purposes of Section 2.2(b)(iii) and the last sentence of Section 2.1.
4. Registration Procedures. If and whenever the Company is required
to effect the registration of any Registrable Shares under the Securities Act
pursuant to Section 2 or Section 3, the Company will promptly:
(a) prepare and file with the Commission as soon as practicable a
Registration Statement with respect to such Registrable Shares and use its
best efforts to cause such Registration Statement to become effective;
(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to keep such Registration
Statement effective and to comply with the
6
<PAGE>
Securities Act and the rules and regulations thereunder with respect to
the disposition of all Registrable Shares and other securities covered by
such Registration Statement until the earlier of (i) such time as all of
such - Registrable Shares have been disposed of by RSL COM in accordance
with the intended method of disposition set forth in such Registration
Statement and (ii) the expiration of 180 days after such Registration
Statement becomes effective; and will furnish to RSL COM prior to the
filing thereof a copy of any amendment or supplement to such Registration
Statement or Prospectus and shall not file any such amendment or
supplement to which RSL COM shall have reasonably objected on the grounds
that such amendment or supplement does not comply in all material respects
with the requirements of the Securities Act or of the rules or regulations
thereunder;
(c) furnish to RSL COM such number of conformed copies of such
Registration Statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the
Prospectus included in such Registration Statement (including each
preliminary prospectus and any summary prospectus) in conformity with the
requirements of the Securities Act, such documents, if any, incorporated
by reference in such Registration Statement or Prospectus, and such other
documents, as RSL COM may reasonably request;
(d) promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the
Prospectus (after initial filing of the Registration Statement), provide
copies of such document to counsel to RSL COM, make the Company's
representatives available for discussion of such document and make such
changes in such document prior to the filing thereof as counsel for RSL
COM may reasonably request within five days of receipt thereof;
(e) use its best efforts to register or qualify all Registrable
Shares and other securities covered by such Registration Statement under
such other securities or blue sky laws of such jurisdictions as RSL COM
shall reasonably request, to keep such registration or qualification in
effect for so long as such Registration Statement remains in effect, and
do any and all other acts and things which may be reasonably necessary to
enable RSL COM to consummate the disposition in such jurisdictions of the
Registrable Shares covered by such Registration Statement, except that the
Company shall not for any such purpose be required to qualify generally to
do business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this Section 4(e) be obligated to be so
qualified, or to subject itself to taxation in any such jurisdiction, or
to consent to general service of process in any such jurisdiction;
(f) cooperate with RSL COM to facilitate the timely preparation and
delivery of certificates representing Registrable Shares to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company or similar
depository institution, and enable such Registrable Shares to be
registered in such names as RSL COM may request at least two Business Days
prior to any sale of Registrable Shares;
7
<PAGE>
(g) use its best efforts to cause such Registrable Shares to be
registered with or approved by such other governmental agencies or
authorities as may be necessary to enable RSL COM to consummate the
disposition of such Registrable Shares;
(h) furnish to RSL COM a signed counterpart, addressed to RSL COM,
of (i) an opinion of counsel for the Company, dated the effective date
of such Registration Statement (and, if such registration includes an
underwritten offering, dated the date of the closing under the
underwriting agreement) and (ii) a "comfort" letter, dated the effective
date of such Registration Statement (and, if such registration includes an
Underwritten Offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants who
have certified the Company's financial statements included in such
Registration Statement, covering substantially the same matters with
respect to such Registration Statement (and the Prospectus included
therein) and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements, as are
customarily covered in opinions of issuer's counsel and in accountants'
letters delivered to underwriters in Underwritten Offerings of securities;
(i) immediately notify RSL COM and (if requested by RSL COM) confirm
such advice in writing, (i) when or if the Prospectus or any prospectus
supplement or post-effective amendment has been filed, and, with respect
to the Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus
or for additional information, (iii) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement
or the initiation of any proceedings for that purpose, (iv) of the receipt
by the Company of any notification with respect to the suspension of the
qualification of the Registrable Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose and (v)
of the existence of any fact which makes any statement made in the
Registration Statement, the Prospectus or any document incorporated
therein by reference untrue or which requires the making of any changes in
the Registration Statement, the Prospectus or any document incorporated
therein by reference in order to make the statements therein not
misleading;
(j) if any fact contemplated by clause (v) of Section 4(i) shall
exist, prepare a supplement or post-effective amendment to the
Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchaser of the Registrable Shares
the Prospectus will not contain an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein
not misleading;
(k) use reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible moment;
(l) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its
shareholders, as soon as reasonably practicable, an earnings statement
covering the period of at least 12 months,
8
<PAGE>
but not more than 18 months, beginning with the first month of the first
fiscal quarter after the effective date of such Registration Statement,
which earnings statement shall satisfy the provisions of Section 11(a) of
the Securities Act and Rule 158 under the Securities Act;
(m) provide and cause to be maintained transfer agents and
registrars for all Registrable Shares covered by such Registration
Statement from and after a date not later than the effective date of such
Registration Statement and obtain a CUSIP number for such Registrable
Shares;
(n) cause all Registrable Shares covered by such Registration
Statement to be listed on each securities exchange on which similar
securities issued by the Company are then listed or, if no such securities
are then listed, on a national exchange selected by the Company, if such
listing is then permitted under the rules of such exchange, or, if such
listing is not practicable, to cause all such Registrable Shares to be
designated as "national market system securities" within the meaning of
Rule 11(A)(a)2-1 under the Exchange Act or, failing that, to secure NASDAQ
authorization for such Registrable Shares and, without limiting the
foregoing, to arrange for at least two market makers to register as such
with respect to such securities within the NASD; and
(o) give RSL COM and its underwriters, if any, and its counsel and
its accountants, the opportunity to participate in the preparation of such
Registration Statement, each Prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and, upon
reasonable notice and at reasonable times, such access to its books and
records and such opportunities to discuss the business of the Company with
its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of RSL COM and
such underwriters or RSL COM's counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
RSL COM agrees to furnish the Company such information regarding RSL
COM and the distribution of the Registrable Shares being registered as the
Company may from time to time reasonably request in writing, and to notify the
Company of any material change therein, and the Company may exclude from
registration the Registrable Shares if it fails to furnish such information
within a reasonable time after it receives such request.
RSL COM agrees that, upon receipt of any notice from the Company of
the existence of any fact of the kind described in clause (v) of Section 4(i),
RSL COM will forthwith discontinue disposition of Registrable Shares pursuant to
the Registration Statement covering such Registrable Shares until RSL COM's
receipt of the copies of the supplemented or amended Prospectus contemplated by
Section 4(j), or until it is advised in writing (the "Advice") by the Company
that the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
Prospectus, and, if so directed by the Company, RSL COM will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in RSL COM's possession, of the Prospectus covering such Registrable Shares
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the time periods regarding the effectiveness of
Registration
9
<PAGE>
Statements set forth in Section 4(b) shall be extended by the number of days
during the period from and including the date of the giving of such notice
pursuant to clause (v) of Section 4(i) to and including the date when RSL COM
shall have received the copies of the supplemented or amended Prospectus
contemplated by Section 4(j) or the Advice.
5. Underwritten Registrations.
5.1. Selection of Underwriters. In the case of a Demand Registration
in connection with an Underwritten Offering pursuant to Section 2.2(f), the
managing underwriter or underwriters that will administer such Underwritten
Offering will be selected by RSL COM in such Demand Registration, subject to the
approval of the Company, such approval not to be unreasonably withheld. In the
case of a Piggyback Registration in connection with an Underwritten
Registration, (a) if such Piggyback Registration is in connection with a Demand
Registration, the preceding sentence shall apply, and (b) in all other cases,
the managing underwriter or underwriters that will administer the related
Underwritten Offering will be selected by the Company.
5.2. Priority in Underwritten Registrations.
(a) Demand Registrations. In the case of a Demand Registration in
connection with an Underwritten Offering, if the managing underwriter or
underwriters in such Underwritten Offering determines in good faith that the
total number of securities proposed to be included in such Underwritten Offering
exceeds the number which can be sold without adversely affecting the offering
price, the Company will include in such Demand Registration to the extent of the
number of securities which the Company is so advised can be sold in such
Underwritten Offering without such adverse effect:
first, the Registrable Shares proposed to be sold by RSL COM
in such Demand Registration, until all such Registrable Shares are
included;
second, any securities proposed to be sold by the Company for
its own account, until all such securities are included;
third, any securities proposed to be sold for the account of
any Person, the inclusion of which securities in the Demand
Registration has been consented to by RSL COM pursuant to Section
2.2(e)(ii).
(b) Piggyback Registrations. In the case of a Piggyback Registration
in connection with an Underwritten Registration, (a) if such Piggyback
Registration is in connection with a Demand Registration, Section 5.2(a) shall
apply, and (b) in all other cases, if the managing underwriter or underwriters
determine in good faith that the total number of securities proposed to be
included in such Underwritten Offering exceeds the number which can be sold
without adversely affecting the offering price, the Company will include in such
registration to the extent of the number of securities which the Company is so
advised can be sold in such Underwritten Offering without such adverse affect:
first, any securities proposed to be sold by the Company for
its own account, until all such securities are included;
10
<PAGE>
second, any Registrable Shares with respect to which the
Company has received from RSL COM a Piggyback Notice pursuant to
Section 3.1, until all such Registrable Shares are included; and
third, any securities of the Company proposed to be sold for
the account of any other Person pursuant to an agreement entered
into by the Company subsequent to the date hereof.
5.3. Underwriting, Agreement. If requested by the underwriters for
any Underwritten Offering of Registrable Shares in connection with a Demand
Registration or a Piggyback Registration, the Company will enter into an
underwriting agreement with such underwriters for such offering, such agreement
to contain such representations and warranties by the Company and such other
terms and provisions as are customarily contained in underwriting agreements
with respect to secondary distributions, including, but not limited to,
indemnities to the effect and to the extent provided in Section 6, provisions
for the delivery of officers' certificates, opinions of counsel and accountants'
"comfort" letters and hold-back arrangements. RSL COM shall be a party to any
such underwriting agreement and the representations and warranties by, and the
other agreements on the part of, the Company to and for the benefit of such
underwriters, shall also be made to and for the benefit of RSL COM and any or
all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement shall also be conditions precedent to the
obligations of RSL COM. RSL COM shall not be required by the Company to make any
representations or warranties to or agreements with the Company or the
underwriters other than reasonable and customary representations, warranties or
agreements regarding RSL COM, the Registrable Shares and RSL COM's intended
method or methods of disposition and any other representation required by law.
5.4. Holdback Agreements.
(a) By RSL COM. In the case of any Demand Registration or Piggyback
Registration in connection with an Underwritten Offering, RSL COM agrees, if so
required by the managing underwriter or underwriters in such Underwritten
Offering, not to effect any public sale or distribution of Registrable Shares
(other than as part of such Underwritten Offering) or other equity securities of
the Company during the seven days prior to the effective date of the related
Registration Statement or 180 days after the effective date of such Registration
Statement.
(b) By the Company. In the case of any Demand Registration or
Piggyback Registration in connection with an Underwritten Offering, the Company
agrees not to effect any public sale or distribution of its equity securities
during the seven days prior to the effective date of the related Registration
Statement or 180 days after the effective date of such Registration Statement,
except pursuant to registrations on Form S-8, Form S-4 or any successor forms
thereto.
6. Indemnification.
6.1. Indemnification by the Company. In the event of any
registration of any Registrable Shares under the Securities Act pursuant to
Section 2 or 3, the Company shall
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indemnify and hold harmless RSL COM, its officers, directors and employees and
each Person, if any, who controls RSL COM within the meaning of Section 15 of
the Securities Act, against all losses, claims, damages, liabilities (or
proceedings in respect thereof) and expenses (under the Securities Act or common
law or otherwise), joint or several, arising out of or based upon any untrue
statement or alleged untrue statement of a fact contained in any Registration
Statement or Prospectus (and as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or any preliminary
Prospectus or caused by any omission or alleged omission to state therein a fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities (or
proceedings in respect thereof) or expenses are caused by any untrue statement
or alleged untrue statement contained in or by any omission or alleged omission
from information furnished in writing to the Company by RSL COM expressly for
use therein. If the offering pursuant to any Registration Statement provided for
herein is made through underwriters, no action or failure to act on the part of
such underwriters (whether or not such underwriter is an affiliate of RSL COM)
shall affect the obligations of the Company to indemnify RSL COM or any other
Person pursuant to the preceding sentence. If the offering pursuant to any
Registration Statement provided for under this Agreement is made through
underwriters, the Company agrees to enter into an underwriting agreement in
customary form with such underwriters and the Company agrees to indemnify such
underwriters, their officers, directors and employees and each Person, if any,
who controls such underwriters within the meaning of Section 15 of the
Securities Act to the same extent as hereinbefore provided with respect to
indemnification of RSL COM.
6.2. Indemnification by RSL COM. In connection with any Registration
Statement in which RSL COM is participating, RSL COM agrees to indemnify and
hold harmless the Company, its officers and directors and each Person, if any,
who controls the Company within the meaning of Section 15 of the Securities Act,
against any losses, claims, damages, liabilities, (or proceedings in respect
thereof) and expenses (under the Securities Act or common law or otherwise),
joint or several, arising out of or based upon any untrue statement or alleged
untrue statement of a fact contained in any Registration Statement or Prospectus
(and as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary Prospectus or caused by
any omission or alleged omission to state therein a fact required to be stated
therein or necessary to make the statements therein not misleading, but only to
the extent that such untrue statement is contained in or such omission is from
information so furnished in writing by RSL COM expressly for use therein.
6.3. Notice of Claims, etc. Any Person entitled to indemnification
under the provisions of this Section 6 shall (a) give prompt notice to the
indemnifying party of any claim with respect to which it seeks indemnification
and (b) unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, permit such indemnifying party to assume the defense of such
claim, with counsel reasonably satisfactory to the indemnified party; and if
such defense is so assumed, such indemnifying party shall not enter into any
settlement without the consent of the indemnified party if such settlement
attributes liability to the indemnified party and such indemnifying party shall
not be subject to any liability for any settlement made without its consent
(which shall not be unreasonably withheld); and any underwriting agreement
entered into with respect to any Registration Statement provided for under this
Agreement shall so provide. In the event an indemnifying party shall not be
entitled, or elects not, to assume the
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defense of a claim, such indemnifying party shall not be obligated to pay the
fees and expenses of more than one counsel or firm of counsel for all parties
indemnified by such indemnifying party in respect of such claim, unless in the
reasonable judgment of any such indemnified party a conflict of interest may
exist between such indemnified party and any other of such indemnified parties
in respect of such claim. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of RSL COM, its officers,
directors or any Person, if any, who controls RSL COM as aforesaid, and shall
survive the transfer of such shares by RSL COM.
6.4. Other Indemnification. Indemnification similar to that
specified in the preceding subdivisions of this Section 6 (with appropriate
modifications) shall be given by the Company to RSL COM, on the one hand, and by
RSL COM to the Company, on the other hand, with respect to any required
registration or other qualification of such Registrable Shares under any federal
or state law or regulation of any governmental authority other than the
Securities Act.
6.5. Payment. The indemnification required by this Section 6 shall
be made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred. Any indemnified party receiving indemnification
payments will repay the same to the Company in the event it is ultimately
determined that such indemnification payments were not permitted by applicable
law.
6.6. Other Remedies. If for any reason the foregoing indemnity is
unavailable, or is insufficient to hold harmless an indemnified party, other
than by reason of the exceptions provided therein, then the indemnifying party
shall contribute to the amount paid or payable by the indemnified party as a
result of such losses, claims, damages, liabilities or expenses (a) in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other from
the offering of Registrable Shares (taking into account the portion of the
proceeds of the offering realized by each such party) or (b) if the allocation
provided by clause (a) above is not permitted by applicable law, or provides a
lesser sum to the indemnified party than the amount hereinafter calculated, in
such proportion as is appropriate to reflect not only the relative benefits
received by the indemnifying party on the one hand and the indemnified party on
the other but also the relative fault of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations.
7. Expenses. The Company will pay all Registration Expenses in
connection with registrations of Registrable Shares pursuant to Section 2 and
Section 3 whether or not such registration becomes effective.
8. Rules 144 and 144A. The Company will file the reports required to
be filed by it under the Securities Act and the rules and regulations adopted by
the Commission thereunder (or, if the Company is not required to file such
reports, will, upon the request of RSL COM, make publicly available other
information), and will take such further action as RSL COM may reasonably
request, all to the extent required from time to time to enable RSL COM to sell
Registrable Shares without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, (b) Rule 144A under the
Securities Act, as such Rule may be amended from
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time to time, or (c) any similar rule or regulation hereafter adopted by the
Commission. Upon the request of RSL COM, the Company will deliver to RSL COM a
written statement as to whether it has complied with such requirements.
9. Amendments. This Agreement may be amended only by the written
consent of the parties hereto.
10. Notices. All notices and other communications given pursuant to
this Agreement shall be in writing and shall be deemed to have been duly given
(a) on receipt, if delivered personally, (b) three Business Days after it has
been mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, (c) the next Business Day after it has been sent by
nationally recognized overnight courier (appropriately marked for overnight
delivery); or (d) upon transmission, if it is sent by telecopy (with request for
immediate confirmation of receipt in a manner customary for communications of
such type):
(i) if to the Company, to:
deltathree.com, Inc.
430 Park Avenue
New York, New York 10022
Fax: (212) 588-3674
Attention: Marc Tobin
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Fax: (212) 735-2000
Attention: David J. Goldschmidt
(ii) if to RSL COM, to:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue
New York, New York 10153
Fax: (212) 317-1940
Attention: Avery S. Fischer
with a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Fax: (212) 940-8776
Attention: Robert L. Kohl
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or, in each case, at such other address as may be specified in writing (in
accordance with the terms of this Section 10).
11. Remedies. RSL COM in addition to being entitled to exercise all
rights provided herein and granted by law, including recovery of damages, will
be entitled to specific performance of its rights under this Agreement. The
Company agrees that monetary damages would not be adequate compensation for any
loss incurred by reason of a breach by it of the provisions of this Agreement
and hereby agrees to waive the defense in any action for specific performance
that a remedy at law would be adequate.
12. No Inconsistent Agreements. The Company will not, on or after
the date of this Agreement enter into any agreement with respect to its
securities that is inconsistent with the rights granted to RSL COM in this
Agreement or otherwise conflicts with the provisions hereof. As of the date
hereof, (i) no Person has any right to require the Company to register under the
Securities Act securities of the Company except pursuant to this Agreement, and
(ii) the rights granted to RSL COM hereunder do not in any way conflict with and
are not inconsistent with any other agreements of the Company.
13. Assignment.
Neither this Agreement nor any other rights, interests or obligations hereunder
may be assigned by any of the parties hereto, except in the case of the Company,
by operation of law. Each permitted assignee pursuant to this Section 13 shall
be deemed to have agreed to be bound by the terms of this Agreement.
14. Arbitration. (a) All disputes and controversies related to this
Agreement shall be fully and finally resolved by binding and non-appealable
arbitration, before a single arbitrator selected by the procedure set forth
below, held in New York City.
(b) 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 disputing parties, or if the disputing parties are unable to
agree, by the following means:
(i) The disputing parties shall simultaneously exchange lists
each containing the names of five members of their choice of the
Panel who have indicated a willingness to serve.
(ii) If a single name appears on all lists, that individual
shall be appointed.
(iii) If more than one name appears on all lists, the
Arbitrator shall be selected from the common names by mutual
agreement of the disputing parties or by lot.
(iv) If the lists contain no names in common, four names shall
be stricken from each disputing party's list by the other disputing
parties and the
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Arbitrator shall be selected from the remaining names by mutual
agreement of the disputing parties or by lot.
(v) 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.
(c) The Arbitrator, after appropriate consultation with the
disputing 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.
(d) The Arbitrator shall assess the costs of the proceeding
(including the prevailing disputing party's reasonable attorney's fees) on any
unsuccessful disputing party to the extent the Arbitrator concludes that such
disputing party is unsuccessful, unless he or she concludes that matters of
equity or important considerations of fairness dictate otherwise.
(e) 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.
(f) All proceedings in connection with any arbitration, including
its existence, the content of the proceedings and any decision, shall be kept
confidential to the maximum extent possible consistent with the law.
15. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective of the Company and RSL COM.
This Agreement embodies the entire agreement and understanding between the
Company and RSL COM and supersedes all prior agreements and understandings
relating to the subject matter hereof. THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. In
the event that any one or more of the provisions contained herein, or the
application thereof in any circumstance, is held invalid, illegal or
unenforceable, the validity, legality and enforceability of any such provision
in every other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby. The headings in this Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof. This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
DELTATHREE.COM, INC.
By:
-------------------------------------
Name:
Title:
RSL COMMUNICATIONS, LTD.
By:
-------------------------------------
Name:
Title:
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Exhibit 10.1
Execution Copy
SERVICES AGREEMENT
Amended and restated as of September 3, 1999
AMENDED AND RESTATED SERVICES AGREEMENT, dated as of September 3, 1999
(this "Agreement"), between RSL COMMUNICATIONS, LTD., a Bermuda corporation
("RSL"), and DELTATHREE.COM, INC. (formerly known as Delta Three, Inc.), a
Delaware corporation ("Delta").
W I T N E S S E T H :
-------------------
WHEREAS, Delta is a subsidiary of RSL;
WHEREAS, RSL and Delta entered into the Services Agreement, dated July 23,
1997, in connection with the original purchase of shares of Delta by RSL and
desire to amend and restate the Services Agreement;
WHEREAS, Delta is a leading on-line provider of Internet Protocol (IP)
communications services and utilizes the Internet and networks based on IP to
provide telecommunications products and services (the "Delta Business"); and
WHEREAS, RSL (together with its direct and indirect subsidiaries,
hereinafter referred to as "RSL") has agreed to provide to Delta certain
services in connection with the Delta Business and Delta has agreed to provide
certain services to RSL.
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants hereinafter contained, the parties hereto hereby agree as
follows:
ARTICLE I
Term
Section 1.01. Term. The term of this Agreement shall commence on the date
of this Agreement and shall continue for a term of five years, unless terminated
earlier in accordance with the provisions of this Agreement (the "Term");
provided, however, that RSL may elect to terminate this Agreement, upon 30 days'
written notice, at any time from and after the time that collectively RSL and/or
its Affiliates holds less than fifty percent (50%) of Delta's common stock
outstanding. Upon termination of the initial Term, the Term shall be
automatically extended for additional one year periods unless either party
notifies the other of its intent not to extend the Term by giving written notice
at least 30 days prior to the end of the initial term or any extended term.
"Affiliate" as used in this Agreement shall mean any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such person.
<PAGE>
ARTICLE II
Office and Equipment Space
Section 2.01. Office Space. (a) If Delta requires office space for certain
of its employees to conduct the Delta Business in a location where, at such
time, RSL maintains an office, Delta shall give written notice to RSL specifying
the office location and the amount of space therein required by Delta. Upon
receipt of such written notice, RSL shall use its reasonable efforts to provide
the requested office space to Delta for such employees; provided, however, that
in no event shall RSL be obligated to provide Delta with office space for more
than that required by the full-time employment of two individuals. Any such
office space provided by RSL to Delta shall be shared in accordance with such
reasonable procedures for sharing such office space as they shall establish.
Delta Three shall pay RSL its proportionate share of all lease payments
associated with the office space it shares with RSL.
(b) Notwithstanding anything contained herein to the contrary, RSL
may, in its sole and absolute discretion, vacate all or any of its present or
acquired office space, whether or not Delta occupies a portion of such office
space at such time, and relocate to any other location without such action by
RSL being deemed a breach of this Agreement. In the event that RSL relocates any
of its operations to a new office space or obtains additional office space, it
shall notify Delta of the existence of the new location, and Delta shall have
the right to request a portion of such office space in accordance with the
provisions of paragraph (a) of this Section 2.01.
Section 2.02. Equipment Space. (a) RSL shall provide Delta with access to
each location in which RSL has use of international gateway switches, whether
owned or leased from, or, if such access does not violate any joint venture
agreement, operated in joint venture with, third parties (collectively, the
"Switches"), as soon as reasonably practicable after receiving a written request
therefor as to each location, in order to permit Delta to collocate the servers
used by Delta in connection with the Delta Business (the "Delta Servers") and
four of Delta's 19-inch standard telco racks with RSL's Switches; provided that
with respect to RSL's Switches located in New York and in RSL's main European
hub, RSL shall provide Delta with sufficient access to such locations in order
to permit Delta to maintain ten 19-inch standard telco racks for the Delta
Servers (collectively, the "Equipment Space"). Delta shall pay RSL its
proportionate share of all lease payments made by RSL associated with the
Equipment Space. All costs and expenses associated with Internet, frame relay
and dedicated line connectivity, as well as any other direct costs or expenses
incurred by RSL in connection with the Delta Business, shall be payable by
Delta. RSL and Delta shall share the Equipment Space in accordance with such
reasonable procedures for the sharing of such space as RSL and Delta shall
determine.
(b) Notwithstanding anything contained herein to the contrary, RSL
may, in its sole and absolute discretion, relocate its Switches, whether or not
Delta occupies Equipment Space at the original location of such Switches at the
time of such relocation, without such action by RSL being deemed a breach of
this Agreement, and Delta will, upon 30 days' notice, immediately remove its
equipment from the Equipment Space. In the event that RSL relocates
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any of its Switches to a new location or obtains additional Switches, it shall
notify Delta of the existence of the new location or the new Switches, and Delta
shall have the right to request access to such new location or to the location
of any such new Switch in accordance with the provisions of paragraph (a) of
this Section 2.02.
Section 2.03. Conflicts. Notwithstanding anything contained herein to the
contrary, RSL shall not be obligated to provide any office space, Equipment
Space or other services pursuant to this Article II if any of RSL's current or
future Strategic Partners (as defined below) objects, at any time or from time
to time, to RSL providing such office space, Equipment Space or other services
to Delta; provided that RSL shall use its reasonable efforts to encourage such
Strategic Partner to permit RSL to provide such office space, Equipment Space or
other services to Delta. The term "Strategic Partner" as used in this Agreement
shall mean any partner, shareholder or other investor in RSL or any of its
subsidiaries having greater than a 10% equity interest in RSL or any of its
subsidiaries, as the case may be.
ARTICLE III
Services Provided by RSL
Section 3.01. Connectivity. RSL shall make reasonable efforts to assist
Delta in obtaining Internet, frame relay and dedicated line connectivity from
third parties in each country where RSL Switches are collocated with Delta
Servers for the maintenance of the Delta Business; provided, however, that Delta
shall be solely responsible for any obligations incurred in connection with such
services, including the obligations incurred in obtaining such services. At
Delta's written request, RSL shall, when purchasing dedicated bandwidth
connectivity for its business, use its reasonable efforts to purchase dedicated
bandwidth connectivity on behalf of Delta from third party bandwidth suppliers
at the same price as RSL pays such third party supplier for its connectivity.
Section 3.02. Traffic Termination. (a) RSL shall provide to Delta
"Termination Service" (as hereinafter defined) for Delta's domestic inbound
telephone traffic in each country in which (i) RSL has contracted to receive
such services in the ordinary course of its business (the "Domestic Inbound
Termination Service") and (ii) Delta Servers are collocated with RSL Switches.
For the purposes of this Agreement, "Termination Services" shall mean the
termination of voice telephone traffic which originates from the global network
utilized by Delta in conducting the Delta Business (the "Delta Global Network").
The Domestic Inbound Termination Service shall be made available to Delta by RSL
at the then prevailing fair market rates.
(b) RSL shall provide to Delta Termination Services for Delta's
international outbound telephone traffic in each originating country that Delta
Servers are collocated with RSL Switches (the "International Outbound
Termination Service"). The International Outbound Termination Service shall be
made available to Delta by RSL at the then prevailing fair market rates.
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Section 3.03. Traffic Origination. Within a country where Delta Servers
are collocated with RSL Switches, RSL will use its best efforts to assist Delta
in obtaining services, including toll-free services, from local third parties
which shall provide Delta's customers with the ability to "access" the Delta
Servers at the same rates that are currently offered by such third parties to
RSL for the conduct of RSL's business; provided, however, that Delta shall be
solely responsible for any obligations incurred in connection with such
services, including the obligations incurred in obtaining such services.
Section 3.04. Use of RSL Switches and RSL Prepaid Calling Card Platforms.
(a) In each location where a Delta Server is collocated with an RSL Switch, RSL
shall, during the Term, provide Delta with the use of an RSL Switch to connect
to Delta's carrier customers at a charge of $.01 per minute; provided that Delta
shall be charged for the use of each switch port connection provided by RSL to
such carrier customers for a minimum of 100,000 minutes per month whether or not
such level of usage has been achieved. RSL shall, at Delta's written request,
provide such carrier customers with billing and other similar customer-related
services which are comparable to the services provided to RSL's customers in the
ordinary course of RSL's business (the "Fulfillment Services") at a charge of
$.01 per minute of carrier traffic usage.
(b) In each location in which a Delta Server is collocated with an
RSL Switch, RSL shall provide Delta with access to, and the use of, its prepaid
calling platforms, if any, for Delta's prepaid calling cards at a charge of $.01
per minute of traffic usage. RSL shall also provide Delta with such
customer-related services which are comparable to the prepaid calling services
provided by RSL to its prepaid calling card customers in the ordinary course of
conducting that business (the "Prepaid Services"), at a charge of $.015 per
minute of traffic usage. Delta shall be charged for the use of RSL's prepaid
calling platforms, if Delta elects to purchase such service, for a minimum of
100,000 minutes for each month after the date hereof, whether or not such level
of usage has been achieved.
Section 3.05. Procedures. The services to be provided by RSL in accordance
with this Article III shall be provided to Delta in accordance with reasonable
procedures for operation to be agreed upon between RSL's engineers and Delta
within sixty (60) days from the date hereof.
Section 3.06. Conflicts. Notwithstanding anything contained herein to the
contrary, RSL shall not be obligated to provide any services pursuant to this
Article III (i) which RSL no longer generally provides to its customers or (ii)
if any of RSL's current or future Strategic Partners objects, at any time or
from time to time, to RSL providing such services to Delta; provided that RSL
shall use its reasonable efforts to encourage such Strategic Partner to permit
RSL to provide such services to Delta.
ARTICLE IV
Services Provided by Delta
Section 4.01. Internet Telephony Services. Delta shall, at RSL's
direction, provide RSL with Internet telephony services and facilities necessary
to route RSL's international
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telecommunications traffic between all originations and destinations now or
hereafter serviced by Delta (each a "Route"); provided that such Internet
telephony services and facilities shall be provided to RSL in accordance with
reasonable procedures for operation and quality to be agreed upon between RSL's
engineers and Delta within sixty (60) days from the date hereof; and provided
further that Delta shall not be obligated to provide RSL with more than fifty
percent (50%) of the capacity on Delta's Global Network. With respect to each of
Delta's Routes, Delta shall make the Internet Telephony Services available to
RSL at then prevailing fair market rates.
ARTICLE V
Operating Procedures
Section 5.01. Establishing Operating Procedures. The parties hereto agree
to use their reasonable efforts to establish reasonable procedures within sixty
(60) days from the date of this Agreement for the provision of the services
provided hereunder. Such procedures shall specify, among other things, the
operation and quality of such services and the submission, and completion, of
service orders and shall materially comply with procedures that are customary in
the telecommunications industry and currently in use by RSL and Delta, as the
case may be.
ARTICLE VI
Noncompetition
Section 6.01. Noncompetition. From and after the date of this Agreement
until the two year anniversary of the date of this Agreement, RSL
Communications, Ltd. and its subsidiaries in which it has 50% or more of the
voting power, shall not (i) directly or indirectly engage in the provision of
Internet Telephony Services (as defined below), other than through Delta;
provided that Delta provides any requested Internet Telephony Services to RSL
promptly and with quality assurance, or (ii) become a stockholder, partner or
owner (a "Stockholder") of any entity that provides Internet Telephony Services:
provided, however, that RSL may acquire a passive interest of up to twenty
percent (20%) in any such entity. "Internet Telephony Service" in this Section
6.01 shall mean (1) the provision of "phone-to-phone" services marketed as
Internet Protocal (IP) to the general public, including both individuals and
businesses and (2) the following web-based enhanced voice communication services
described in Delta's S-1 Registration Statement, filed with the Securities and
Exchange Commission on September 3, 1999, marketed to the general public,
including both individuals and businesses: "PC-to-phone, D3 Box,, Click IT,
Global Roaming, IP-initiated conference calls, Phone-to-PC, D3 Fax, Information
services and White Boarding. Notwithstanding anything contained herein to the
contrary, (a) RSL shall be permitted to be a Stockholder in any entity that
provides Internet Telephony Services following the date of this Agreement so
long as, promptly following the date that RSL becomes a Stockholder, the
Internet Telephony Services are ancillary to the business of such entity and (b)
this Section 6.1 shall not be applicable to any of RSL's subsidiaries which is
or becomes a publicly traded corporation.
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ARTICLE VII
Joint Marketing
Section 7.01. Marketing and Promotion. Each of RSL and Delta agree to
place, in a prominent location, a link on its home page website to the other's
home page website. The parties agree to cross-sell each other's products and
services, including through promotional materials and customer service
representatives and undertake additional promotional efforts as the parties
shall agree from time to time; provided, however, that no party shall be
obligated to market or promote a product or service of the other party if such
product or service competes with the other party's product or service.
ARTICLE VII
Payments
Section 8.01. Service Charges. (a) As soon as practicable after the end of
each calendar month during the Term, RSL shall provide Delta with an invoice
detailing the amounts to be paid by Delta in connection with the services
provided to Delta hereunder.
(b) As soon as practicable after the end of each calendar month
during the Term, Delta shall provide RSL with an invoice detailing the amounts
to be paid by RSL in connection with the services provided to RSL hereunder.
Section 8.02. Payments Due; Late Payment Charges. Amounts due hereunder
shall be paid within thirty (30) days of receipt of the invoice therefor. Any
undisputed amount due hereunder not paid within thirty (30) days of receipt of
the invoice therefor shall accrue interest from the date such amount was due at
the rate of ten percent (10%) per annum, compounded daily.
Section 8.03. Disputed Payments. If a dispute arises in good faith with
respect to any amount due hereunder, the recipient of the services which are the
basis for such dispute shall pay when due the undisputed portion of such amount,
if any, and, if the dispute is resolved in the service provider's favor,
promptly pay the disputed portion (or applicable part thereof) when the dispute
is resolved without the applicable late payment charge otherwise incurred in
connection with Section 8.02.
Section 8.04. Currency. All invoices hereunder shall be rendered, and all
payments hereunder shall be made, in U.S. Dollars.
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<PAGE>
ARTICLE IX
Termination
Section 9.01. Termination for Cause. In the event that either RSL or Delta
materially breaches any of its duties or obligations hereunder, which breach
shall not be cured within ten (10) days after written notice is given to the
breaching party specifying the breach, then either RSL or Delta, as the case may
be, may, by giving written notice thereof to the other, terminate this Agreement
as of a date specified in such notice of termination, which date shall be no
earlier than ten (10) days after the date of such notice.
Section 9.02. Termination for Bankruptcy. In the event of the Bankruptcy
(as hereinafter defined) of either RSL or Delta, then the non-bankrupt party
may, by written notice thereof to the party in Bankruptcy, terminate this
Agreement as of a date specified in such notice of termination, which date shall
be no earlier than ten (10) days after the date of such notice. For the purposes
of this Agreement, "Bankruptcy" shall mean the happening of any of the
following: (i) the filing of an application for, or a consent to, the
appointment of a trustee for all or substantially all of the relevant party's
assets, (ii) the filing of a voluntary petition in bankruptcy, or the filing of
a pleading in any court of record admitting in writing the relevant party's
inability to pay its debts generally as they come due, (iii) the making of a
general assignment for the benefit of creditors, (iv) the entry of an order,
judgment or decree by any court of competent jurisdiction adjudicating the
relevant party a bankrupt, or appointing a trustee of all or substantially all
of such party's assets unless such order, judgment or decree is vacated or
stayed on appeal within thirty (30) days or (v) the filing of an involuntary
case or other proceeding against the relevant party seeking liquidation,
reorganization or other relief under any bankruptcy, insolvency or other similar
law, which case or proceeding shall not have been dismissed within sixty days
after filing.
Section 9.03. Effect of Termination. In the event of the termination of
this Agreement, all rights and obligations of RSL and Delta shall terminate as
of the effective date of such termination, except that (i) such termination
shall not constitute a waiver of any rights that either RSL or Delta may have by
reason of a breach of this Agreement, (ii) such termination shall not constitute
a waiver of any right to receive payments that are due and owing pursuant to
Article VII and (iii) the provisions of Article X shall continue in full force
and effect.
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ARTICLE VIII
Limited Warranty
Section 10.01. Disclaimer of General Warranty by RSL. RSL MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE SERVICES PROVIDED
HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE,
MERCHANTABILITY OR OTHERWISE. IN NO EVENT SHALL RSL BE LIABLE TO DELTA FOR ANY
SPECIAL, INCIDENTIAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION,
LOSS OF PROFITS, REVENUES OR DATA WHETHER BASED ON BREACH OF CONTRACT, TORT OR
OTHERWISE, WHETHER OR NOT DELTA HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE. THE LIABILITY OF RSL FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER
IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED,
DELTA'S DIRECT DAMAGES.
Section 10.02. Disclaimer of General Warranty by Delta. DELTA MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE SERVICES PROVIDED
HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE,
MERCHANTABILITY OR OTHERWISE. IN NO EVENT SHALL DELTA BE LIABLE TO RSL FOR ANY
SPECIAL, INCIDENTIAL OR CONSEQUENTIAL DAMAGES, INCLUDING, WITHOUT LIMITATION,
LOSS OF PROFITS, REVENUES OR DATA WHETHER BASED ON BREACH OF CONTRACT, TORT OR
OTHERWISE, WHETHER OR NOT RSL HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE. THE LIABILITY OF DELTA FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER, WHETHER
IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL NOT EXCEED,
RSL'S DIRECT DAMAGES.
ARTICLE IXI
Confidentiality
Section 11.01. Confidentiality. RSL and Delta each agree that for the
longest period permitted by law each shall hold in strictest confidence and,
without the prior written approval of the other party hereto, not to use for
their own benefit or the benefit of any party other than the other party hereto,
or disclose to any person, firm or corporation other than such party (other than
as required by law) any confidential proprietary information concerning the
business and affairs of the other party hereto; provided, however, that the
foregoing limitations and restrictions shall not apply to information that (i)
is or becomes generally available to the public other than as a result of a
disclosure by the directors, officers, shareholders, partners, affiliates,
employees, agents or advisors of RSL or Delta, as the case may be, or (ii) is or
becomes available to RSL or Delta on a non-confidential basis from a source
other than the other party hereto or any of its
8
<PAGE>
advisors, agents or affiliates, provided that such source is not known by RSL or
Delta, as the case may be, to be bound by a confidentiality agreement with or
other obligation of secrecy to the other party hereto. Each of RSL and Delta
recognize that the absence of a time limitation in this Section 10.01 is
reasonable and properly required for the protection of the other party hereto
and in the event that the absence of such limitation is deemed to be
unreasonable by a court of competent jurisdiction, RSL and Delta each agree and
submit to the imposition of such a limitation as said court shall deem
reasonable.
Section 11.02. Equitable Remedies RSL and Delta each specifically
recognize that any breach of Section 11.01 will cause irreparable injury to the
other party hereto and that actual damages may be difficult to ascertain, and in
any event, may be inadequate. Accordingly (and without limiting the availability
of legal or equitable, including injunctive, remedies under any other provisions
of this Agreement), each of RSL and Delta agrees that in the event of any such
breach, the other party hereto shall be entitled to injunctive relief in
addition to such other legal and equitable remedies that may be available. In
addition, RSL and Delta each agree that the provisions of Section 11.01 shall be
considered separate and apart from the remaining provisions of this Agreement
and shall be enforced as such.
ARTICLE X
Miscellaneous
Section 12.01. 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, during and after the Term in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes involving Delta and/or RSL.
Section 12.02. Survival of Representations. All statements,
certifications, indemnifications, representations and warranties made by the
parties to this Agreement in this Agreement or in any certificate or list
delivered pursuant hereto, and their respective obligations to be performed
pursuant to the terms hereof and thereof, shall survive the Term notwithstanding
(a) any examination or audit by or on behalf of any party hereto and (b) any
notice of a breach or of a failure to perform not waived in writing.
Section 12.03. 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:
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<PAGE>
If to Delta:
430 Park Avenue, 5th Floor
` New York, NY 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, NY 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.
Section 12.04. 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.
Section 12.05. 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.
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<PAGE>
Section 12.06. 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.
Section 12.07. Assignment. 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.
Section 12.08. 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.
Section 12.09. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof. For purposes of this
Agreement, each party hereby irrevocably submits to the nonexclusive
jurisdiction of the courts of the State of New York, sitting in New York County,
and the courts of the United States for the Southern District of New York. Each
party irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such suit,
action or proceeding brought in any such court, any claim that any such suit,
action or proceeding brought in such a court has been brought in an inconvenient
forum and the right to object, with respect to any such suit, action or
proceeding brought in any such court, that such court does not have jurisdiction
over such party. In any such suit, action or proceeding, each party waives, to
the fullest extent it may effectively do so, personal service of any summons,
complaint or other process and agrees that the service thereof may be made by
certified or registered mail, addressed to such party at its address set forth
in Section 11.03. Each party agrees that a final non-appealable judgment in any
such suit, action or proceeding brought in such a court shall be conclusive and
binding.
Section 12.10. 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.
Section 12.11. 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.
Section 12.12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
RSL COMMUNICATIONS, LTD.
By:
-------------------------------------
Name:
Title:
DELTATHREE.COM, INC.
By:
-------------------------------------
Name:
Title:
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<PAGE>
Exhibit 10.2
- --------------------------------------------------------------------------------
$10,000,000
CREDIT FACILITY
Dated as of September 1, 1999
Between
DELTATHREE.COM, INC.
and
RSL COMMUNICATIONS, LTD.
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
Page No.
--------
Article 1 CREDIT FACILITY.................................................. 1
Section 1.01. Commitment to Lend ...................................... 1
Section 1.02. Manner of Borrowing ..................................... 1
Section 1.03. Interest ................................................ 1
Section 1.04. Repayment ............................................... 2
Section 1.05. Prepayments ............................................. 2
Section 1.06. Computation of Interest ................................. 3
Section 1.07. Payments by the Borrower ................................ 3
Section 1.08. Evidence of Indebtedness ................................ 4
Article 2 CONDITIONS TO LOANS.............................................. 4
Section 2.01. Conditions to Initial Loan .............................. 4
Section 2.02. Conditions to Each Loan ................................. 4
Article 3 CERTAIN REPRESENTATIONS AND WARRANTIES........................... 5
Section 3.01. Organization; Power; Qualification ...................... 5
Section 3.02. Authorization; Enforceability; Required Consents;
Absence of Conflicts .................................... 6
Article 4 CERTAIN COVENANTS................................................ 7
Section 4.01. Preservation of Existence and Properties, Scope of
Business, Compliance with Law, Payment of
Taxes and Claims, Preservation of Enforceability......... 7
Section 4.02. Insurance ............................................... 8
Article 5 FINANCIAL STATEMENTS AND INFORMATION............................. 8
Section 5.01. Financial Statements and Information to Be Furnished .... 8
Section 5.02. Accuracy of Financial Statements and Information ........ 9
Section 5.03. Additional Covenants Relating to Disclosure ............. 10
Article 6 DEFAULT.......................................................... 11
Section 6.01. Events of Default ....................................... 11
Section 6.02. Remedies upon Event of Default .......................... 12
Article 7 MISCELLANEOUS.................................................... 13
Section 7.01. Notices and Deliveries .................................. 13
Section 7.02. Expenses; Indemnification ............................... 14
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Section 7.03. Rights Cumulative ....................................... 16
Section 7.04. Disclosures ............................................. 16
Section 7.05. Amendments; Waivers ..................................... 16
Section 7.06. Setoff; Retention of Funds .............................. 16
Section 7.07. Assignments and Participations .......................... 17
Section 7.08. Governing Law ........................................... 17
Section 7.09. Judicial Proceedings; Waiver of Jury Trial .............. 17
Section 7.10. Limitation of Liability ................................. 18
Section 7.11. Severability of Provisions .............................. 18
Section 7.12. Counterparts ............................................ 18
Section 7.13. Survival of Obligations ................................. 18
Section 7.14. Entire Agreement ........................................ 18
Section 7.15. Successors and Assigns .................................. 18
Article 8 INTERPRETATION................................................... 19
Section 8.01. Certain Definitional Provisions ......................... 19
Section 8.02. Accounting Matters ...................................... 19
Section 8.03. Representations and Warranties .......................... 20
Section 8.04. Captions ................................................ 20
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Schedules
Schedule 1.02 Notice of Borrowing
Schedule 1.05 Notice of Prepayment
Schedule 1.08 Grid Note
Schedule 2.01 Borrower's Certificate as to Resolutions, etc.
Annex A Resolutions of Board of Directors of Borrower
Schedule 5.01(b) Certificate as to Annual Financial Statements
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CREDIT FACILITY
Dated as of September 1, 1999
RSL Communications, Ltd. (the "Lender"), a Bermuda company, and
deltathree.com, Inc. (the "Borrower"), a Delaware corporation, agree, as
follows:
ARTICLE 1
CREDIT FACILITY
Section 1.01. Commitment to Lend. Upon the terms and subject to the conditions
of this Agreement, the Lender agrees to make, from time to time during the
period from the date hereof (the "Agreement Date") through the earlier of (i)
October 31, 2000 and (ii) the date on which the Lender shall give the Borrower
prior written notice (the "Notice Date") of the termination of this Agreement
(the "Termination Date"), one or more loans (each, a "Loan") to the Borrower in
an aggregate unpaid principal amount not exceeding at any time the Commitment
(hereinafter defined). This Agreement shall terminate on the Termination Date
and the Commitment shall terminate on the Notice Date or as provided in Section
6.02. The Notice Date shall be at least 90 days prior to the Termination Date.
The Lender agrees to commit to lend to the Borrower up to $10,000,000 (the
"Commitment").
Section 1.02. Manner of Borrowing. The Borrower shall give the Lender notice
(which shall be irrevocable) no later than 10:00 a.m. (New York time) on the
third Business Day (hereinafter defined) prior to the requested date for the
making of such Loan. Each such notice shall be in the form of Schedule 1.02 and
shall specify (a) the requested date for the making of the requested Loan and
(b) the amount of each such Loan, which amount shall be, in the case of each
such Loan, not less than $1,000,000 or the unused Commitment. Subject to the
terms of this Agreement, each Loan so requested shall be disbursed by the Lender
not later than 12:00 noon (New York time) on the requested date therefor in U.S.
Dollars in funds immediately available to the Borrower by credit to an account
of the Borrower as may have been specified in the applicable notice and as shall
be acceptable to the Lender. For purposes of this Agreement, "Business Day"
shall mean any day other than a Saturday, Sunday or other day on which banks in
New York City are authorized to close.
Section 1.03. Interest.
(a) Rates. Unless an Event of Default (as defined in Section 6.01)
is continuing, each Loan shall bear interest on the outstanding principal amount
thereof at a rate per annum equal to 14%. During an Event of Default (and
whether before or after judgment), each Loan (whether or not due) and, to the
maximum extent permitted by Applicable Law (hereinafter defined), each other
amount due and payable hereunder shall bear interest at a rate per annum equal
to 16% (the "Post-Default Rate"). For purposes of this Agreement, "Applicable
Law" shall mean, anything in Section 7.08 to the contrary notwithstanding, (i)
all applicable common law and principles of equity and (ii) all applicable
provisions of all (A) constitutions, statutes, rules, regulations and orders of
governmental bodies, (B) Governmental Approvals, and (C)
<PAGE>
orders, decisions, judgments and decrees of all courts (whether at law or in
equity or admiralty) and arbitrators. "Governmental Approval" shall mean any
authorization, consent, approval, license or exemption of, registration or
filing with, or report or notice to, any governmental unit.
(b) Payment. Interest shall be payable on each April 1, July 1,
October 1 and January 1 of each year and when such Loan shall be due (whether at
maturity, by reason of notice of prepayment or acceleration or otherwise).
Interest at the Post-Default Rate shall be payable on demand.
(c) Maximum Interest Rate. Nothing contained in this Agreement shall
require the Borrower at any time to pay interest at a rate exceeding the Maximum
Permissible Rate (hereinafter defined). If interest payable by the Borrower on
any date would exceed the maximum amount permitted by the Maximum Permissible
Rate, such interest payment shall automatically be reduced to such maximum
permitted amount, and interest for any subsequent period, to the extent less
than the maximum amount permitted for such period by the Maximum Permissible
Rate, shall be increased by the unpaid amount of such reduction. Any interest
actually received for any period in excess of such maximum allowable amount for
such period shall be deemed to have been applied as a prepayment of the Loans.
For purposes of this Agreement, "Maximum Permissible Rate" shall mean, with
respect to interest payable on any amount, the rate of interest on such amount
that, if exceeded, could, under Applicable Law, result in (i) civil or criminal
penalties being imposed on the payee or (ii) the payee's being unable to enforce
payment of (or, if collected, to retain) all or any part of such amount or the
interest payable thereon.
Section 1.04. Repayment. The Loans outstanding at 5:00 p.m. (New York time) on
November 1, 2000 shall become due and payable thereafter on demand by Lender,
together with interest accrued to the date of maturity.
Section 1.05. Prepayments. The Borrower may, at any time and from time to time,
prepay the Loans in whole or in part, without premium or penalty, except that
any partial prepayment shall be in an aggregate principal amount of at least
$1,000,000. The Borrower shall give the Lender notice of each prepayment no
later than 10:00 a.m. (New York time) on the third Business Day before the date
of such prepayment. Each notice of prepayment shall be in the form of Schedule
1.05 and shall specify (a) the date such prepayment is to be made and (b) the
amount of each Loan to be prepaid. Amounts to be prepaid shall irrevocably be
due and payable on the date specified in the applicable notice of prepayment,
together with interest thereon as provided in Section 1.03(b).
Section 1.06. Computation of Interest. Interest shall be computed on the basis
of a year of 360 days and paid for the actual number of days elapsed. Interest
for any period shall be calculated from and including the first day thereof to
but excluding the last day thereof.
Section 1.07. Payments by the Borrower.
(a) Time, Place and Manner. All payments due to the Lender hereunder
shall be made to the Lender, at the Lender's office (as set forth in Section
7.01(b)). A payment shall not
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<PAGE>
be deemed to have been made on any day unless such payment has been received by
the Lender, at the Lender's office, in U.S. Dollars in funds immediately
available to the Lender, no later than 12:00 noon (New York time) on such day.
(b) No Reductions. All payments due to the Lender hereunder, and all
other terms, conditions, covenants and agreements to be observed and performed
by the Borrower hereunder, shall be made, observed or performed by the Borrower
without any reduction or deduction whatsoever, including any reduction or
deduction for any set-off, recoupment, counterclaim (whether sounding in tort,
contract or otherwise) or federal, state or foreign tax, assessment or other
governmental charge or levy (including any withholding tax) upon a Person (as
defined in Section 8.01) or upon its assets, revenues, income or profits ("Tax")
except for any withholding or deduction for Taxes required to be withheld or
deducted under Applicable Law.
(c) Taxes. If any Tax is required to be withheld or deducted from,
or is otherwise payable by the Borrower in connection with, any payment due to
the Lender hereunder, the Borrower (i) shall, if required, withhold or deduct
the amount of such Tax from such payment and, in any case, pay such Tax to the
appropriate taxing authority in accordance with Applicable Law and (ii) shall
pay to the Lender (A) such additional amounts as may be necessary so that the
net amount received by the Lender with respect to such payment, after
withholding or deducting all Taxes required to be withheld or deducted, is equal
to the full amount payable hereunder and (B) an amount equal to all Taxes
payable by the Lender as a result of payments made by the Borrower (whether to a
taxing authority or to the Lender) pursuant to this Section 1.07(c). If any Tax
is withheld or deducted from, or is otherwise payable by the Borrower in
connection with, any payment due to the Lender hereunder, the Borrower shall,
within 30 days after the date of such payment, furnish to the Lender the
original or a certified copy of a receipt for such Tax from the applicable
taxing authority. If any payment due to the Lender hereunder is or is expected
to be made without withholding or deducting therefrom, or otherwise paying in
connection therewith, any Tax payable to any taxing authority, the Borrower
shall, within 30 days after any request from the Lender, furnish to the Lender a
certificate from such taxing authority, or an opinion of counsel acceptable to
the Lender, in either case stating that no Tax payable to such taxing authority
was or is, as the case may be, required to be withheld or deducted from, or
otherwise paid by the Borrower in connection with, such payment.
(d) Extension of Payment Dates. Whenever any payment to the Lender
hereunder shall be due (otherwise than by reason of acceleration) on a day that
is not a Business Day, the date of payment thereof shall be extended to the next
succeeding Business Day. If the date for any payment hereunder is extended
(whether by operation of this Agreement, Applicable Law or otherwise), such
payment shall bear interest for such extended time at the rate of interest
applicable hereunder.
Section 1.08. Evidence of Indebtedness. The Loans and the Borrower's obligation
to repay the Loans with interest in accordance with the terms of this Agreement
shall be evidenced by this Agreement and Schedule 1.08 and the Lender shall
record the date, amount, type and maturity of each Loan made by it and the date
and amount of each payment of principal made by the
3
<PAGE>
Borrower with respect thereto, and prior to any transfer of funds shall endorse
on such Schedule appropriate notations to evidence the foregoing information
with respect to the Loan then outstanding; provided that the failure of the
Lender to make any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder. The Lender is hereby irrevocably
authorized by the Borrower so to endorse such Schedule from time to time as
Loans are made from the Lender to the Borrower.
ARTICLE 2
CONDITIONS TO LOANS
Section 2.01. Conditions to Initial Loan. The obligation of the Lender to
make the initial Loan is subject to its receipt of, in form and substance
satisfactory to the Lender, a certificate of the Secretary or an Assistant
Secretary of the Borrower, dated the requested date for the making of such Loan,
substantially in the form of Schedule 2.01.
Section 2.02. Conditions to Each Loan. The obligation of the Lender to make
each Loan, including the initial Loan, is subject to the determination of the
Lender, in its sole and absolute discretion, that each of the following
conditions has been fulfilled:
(a) the Lender shall have received a notice of borrowing with
respect to such Loan complying with the requirements of Section 1.02;
(b) each representation and warranty of the Borrower made in this
Agreement shall be true and correct at and as of the time such Loan is to be
made, both with and without giving effect to such Loan and all other Loans to be
made at such time and to the application of the proceeds thereof;
(c) no condition or event that constitutes an Event of Default (as
defined in Section 6.01) or that with the giving of notice or lapse of time or
both would, unless cured or waived, become an Event of Default (each, a
"Default") shall have occurred and be continuing at the time such Loan is to be
made or would result from the making of such Loan and all other Loans to be made
at such time or from the application of the proceeds thereof;
(d) the Lender shall have received such materials as it may have
requested pursuant to Section 5.01(d);
(e) such Loan will not contravene any Applicable Law applicable to
the Lender; and
(f) all legal matters incident to such Loan and the other
transactions contemplated by this Agreement shall be satisfactory to counsel for
the Lender.
Each notice of borrowing shall constitute a representation and
warranty by the Borrower made as of the time of the making of the requested
Loans that the conditions specified in clauses (b), (c) and (e) have been
fulfilled as of such time.
4
<PAGE>
ARTICLE 3
CERTAIN REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to
make each Loan, the Borrower represents and warrants as follows:
Section 3.01. Organization; Power; Qualification. The Borrower and each
Subsidiary (hereinafter defined) are corporations duly organized, validly
existing and in good standing under the laws of their respective jurisdictions
of incorporation, have the corporate power and authority to own their respective
properties and to carry on their respective businesses as now being and
hereafter proposed to be conducted and are duly qualified and in good standing
as foreign corporations, and are authorized to do business, in all jurisdictions
in which the character of their respective properties or the nature of their
respective businesses requires such qualification or authorization, except for
qualifications and authorizations the lack of which, singly or in the aggregate,
has not had and will not have a Material Adverse Effect (hereinafter defined) on
the Borrower and the Consolidated Subsidiaries (hereinafter defined) taken as a
whole. For purposes of this Agreement, "Subsidiary" shall mean, with respect to
any Person, any other Person (i) securities of which having ordinary voting
power to elect a majority of the board of directors (or other persons having
similar functions) or (ii) other ownership interests of which ordinarily
constituting a majority voting interest, are at the time, directly or
indirectly, owned or controlled by such first Person, or by one or more of its
Subsidiaries, or by such first Person and one or more of its Subsidiaries;
unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower.
"Material Adverse Effect" shall mean, (i) with respect to any Person, any
material adverse effect on such Person's business, assets, liabilities,
financial condition, results of operations or business prospects, (ii) with
respect to a group of Persons "taken as a whole," any material adverse effect on
such Persons' business, assets, liabilities, financial conditions, results of
operations or business prospects taken as a whole on, where appropriate, a
consolidated basis in accordance with GAAP, and (iii) with respect to this
Agreement, any adverse effect, whether or not material, on the binding nature,
validity or enforceability thereof as obligations of the Borrower. "Consolidated
Subsidiaries" shall mean, with respect to any Person at any time, any Subsidiary
or other Person the accounts of which would be consolidated with those of such
first Person in its consolidated financial statements as of such time; unless
otherwise specified, "Consolidated Subsidiary" means a Consolidated Subsidiary
of the Borrower.
Section 3.02. Authorization; Enforceability; Required Consents; Absence of
Conflicts. The Borrower has the power, and has taken all necessary action to
authorize it, to execute, deliver and perform in accordance with their
respective terms this Agreement and to borrow hereunder in the unused amount of
the Commitment. This Agreement has been duly executed and delivered by the
Borrower and is a legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms. The execution,
delivery and performance in accordance with their respective terms by the
Borrower of this Agreement, and each borrowing hereunder, whether or not in the
amount of the unused Commitment, do not and will not (a) require any
Governmental Approval or any other consent or approval, including any
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consent or approval of any Subsidiary or any consent or approval of the
stockholders of the Borrower or any Subsidiary, other than Governmental
Approvals and other consents and approvals that have been obtained, are final
and not subject to review on appeal or to collateral attack, are in full force
and effect or (b) violate or conflict with, result in a breach of, constitute a
default under, or result in or require the creation of any Lien (hereinafter
defined) upon any assets of the Borrower or any Subsidiary under, (i) any
applicable indenture, agreement (other than this Agreement), other contractual
restriction, lease, instrument, certificate of incorporation or charter, or
by-law (each, a "Contract") to which the Borrower or any Subsidiary is a party
or by which any of them or any of their respective properties may be bound or
(ii) any Applicable Law. For purposes of this Agreement, "Lien" shall mean, with
respect to any property or asset (or any income or profits therefrom) of any
Person (in each case whether the same is consensual or nonconsensual or arises
by Contract, operation of law, legal process or otherwise) (i) any mortgage,
lien, pledge, attachment, levy, priority or other security interest or
encumbrance of any kind thereupon or respect thereof and (ii) any arrangement,
express or implied, under which the same is subordinated, transferred,
sequestered or otherwise identified so as to subject the same to, or make the
same available for, the payment or performance of any debt or liability in
priority to the payment of the ordinary, unsecured creditors of such Person.
ARTICLE 4
CERTAIN COVENANTS
From the Agreement Date and until the later of (i) the termination
of the Commitment (whether on the Notice Date or pursuant to Section 6.02) and
(ii) the payment in full of the Loans and all other amounts payable or accrued
hereunder (the "Repayment Date"), the Borrower shall and shall cause each
Subsidiary to:
Section 4.01. Preservation of Existence and Properties, Scope of Business,
Compliance with Law, Payment of Taxes and Claims, Preservation of
Enforceability. (a) Preserve and maintain its corporate existence and all of its
other franchises, licenses, rights and privileges, (b) preserve, protect and
obtain all Intellectual Property (hereinafter defined), and preserve and
maintain in good repair, working order and condition all other properties,
required for the conduct of its business, (c) engage only in businesses in
substantially the same fields as the businesses conducted on the Agreement Date,
(d) comply with Applicable Law, (e) pay or discharge when due all Taxes and all
debts and liabilities that might become a Lien on any of its properties, and (f)
take all action and obtain all consents and Governmental Approvals required so
that its obligations hereunder will at all times be legal, valid and binding and
enforceable in accordance with their respective terms, except that this Section
4.01 (other than clauses (a), insofar as it requires the Borrower to preserve
its corporate existence, (c) and (f)) shall not apply in any circumstance where
noncompliance together with all other noncompliances with this Section 4.01,
will not have a Material Adverse Effect on (x) the Borrower and the Consolidated
Subsidiaries taken as a whole or (y) this Agreement. For purposes of this
Agreement "Intellectual Property" shall mean (i) (A) patents and patent rights,
(B) trademarks, trademark rights, trade names, trade name rights, corporate
names, business names, trade styles, service marks, logos and general
intangibles of like nature, and (C) copyrights, in each case whether
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registered, unregistered or under pending registration and, in the case of any
such that are registered or under pending registration, whether registered or
under pending registration under the laws of the United States or any other
country, (ii) reissues, continuations, continuations-in-part and extensions of
any Intellectual Property referred to in clause (i), and (iii) rights relating
to any Intellectual Property referred to in clause (i) or (ii), including rights
under applications (whether pending under the laws of the United States or any
other country) or licenses relating thereto.
Section 4.02. Insurance. Maintain insurance with responsible insurance companies
against at least such risks and in at least such amounts as is customarily
maintained by similar businesses, or as may be required by Applicable Law or
reasonably requested by the Lender.
ARTICLE 5
FINANCIAL STATEMENTS AND INFORMATION
Section 5.01. Financial Statements and Information to Be Furnished. From the
Agreement Date and until the Repayment Date, the Borrower shall furnish to the
Lender:
(a) Quarterly Financial Statements. As soon as available and in any
event within 45 days after the close of each of the first three quarterly
accounting periods in each fiscal year of the Borrower consolidated and
consolidating balance sheets of the Borrower and the Consolidated Subsidiaries
as at the end of such quarterly period and the related consolidated and
consolidating statements of income, retained earnings and cash flows of the
Borrower and the Consolidated Subsidiaries for such quarterly period and for the
elapsed portion of the fiscal year ended with the last day of such quarterly
period, setting forth in each case in comparative form the figures for the
corresponding periods of the previous fiscal year.
(b) Year-End Financial Statements; Accountants' and Officer's
Certificates. As soon as available and in any event within 90 days after the end
of each fiscal year of the Borrower:
(ii) consolidated and consolidating balance sheets of the Borrower
and the Consolidated Subsidiaries as at the end of such fiscal year and
the related consolidated and consolidating statements of income, retained
earnings and cash flows of the Borrower and the Consolidated Subsidiaries
for such fiscal year, setting forth in comparative form the figures as at
the end of and for the previous fiscal year;
(iii) a report of Brightman, Almagor & Co. or other independent
certified public accountants of recognized standing satisfactory to the
Borrower, on such of the financial statements referred to in clause (i) as
are consolidated financial statements, which report shall be in scope and
substance satisfactory to the Lender;
(iv) a certificate of such accountants addressed to the Lender and
in form and substance satisfactory to the Lender (A) confirming that (1)
the Borrower is authorized to deliver their report referred to in clause
(iii) to the Lender pursuant to this
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Agreement and (2) it is their understanding that the Lender is relying on
such report and such certificate, (B) stating that they have caused this
Agreement to be reviewed and that, in making the examination necessary for
their report on such consolidated financial statements, nothing came to
their attention that caused them to believe that, as of the date of such
financial statements, any Default exists or, if such is not the case,
specifying such Default and its nature, when it occurred and whether it is
continuing; and
(v) a certificate of the president or chief financial officer of the
Borrower in the form of Schedule 5.01(b).
(c) Reports and Filings. (i) Promptly upon receipt thereof, copies
of all reports, if any, submitted to the Borrower or any Subsidiary, or the
board of directors of the Borrower or any Subsidiary, by its independent
certified public accountants, including any management letter; (ii) as soon as
practicable, copies of all such financial statements and reports as the Borrower
or any Subsidiary shall send to its stockholders and of all registration
statements and all regular or periodic reports that the Borrower or any
Subsidiary shall file, or may be required to file, with the Securities and
Exchange Commission or any successor commission.
(d) Requested Information. From time to time and promptly upon
request of the Lender, such Information (as defined in Section 5.02(b))
regarding this Agreement or the Loans and the business, assets, liabilities,
financial condition, results of operations or business prospects of the Borrower
and the Subsidiaries as the Lender may request, in each case in form and
substance and certified in a manner satisfactory to the Lender.
(e) Notice of Defaults, Material Adverse Changes and Other Matters.
Prompt notice of: (i) any Default, (ii) the commencement of, or the occurrence
or nonoccurrence of any change or event relating to, any action, suit,
proceeding or investigation that would cause the representations and warranties
contained in Article 3 to be incorrect if made at such time, and (iii) any
amendment of the certificate of incorporation or by-laws of the Borrower.
Section 5.02. Accuracy of Financial Statements and Information.
(a) Future Financial Statements. The financial statements delivered
pursuant to Section 5.01(a) or (b) shall be complete and correct and present
fairly, in accordance with GAAP, except for changes therein or therefrom that
are described in the certificate or report accompanying such statements and that
have been approved in writing by the Borrower's then current independent
certified public accountants, the consolidated and consolidating financial
position of the Borrower and the Consolidated Subsidiaries as at their
respective dates and the consolidated and consolidating results of operations,
retained earnings and cash flows of the Borrower and such Subsidiaries for the
respective periods to which such statements relate, and the furnishing of the
same to the Lender shall constitute a representation and warranty by the
Borrower made on the date the same are furnished to the Lender to that effect
and to the further effect that, except as disclosed or reflected in such
financial statements, as at the respective dates thereof, neither the Borrower
nor any Subsidiary had any liability, contingent or otherwise, nor any
unrealized or anticipated loss, that, singly or in the aggregate, has had or
might have a Material Adverse Effect on the Borrower and the Consolidated
Subsidiaries taken as a whole.
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(b) Future Information. All data, certificates, reports, statements
(including financial statements), opinions of counsel, documents and other
information ("Information") furnished to the Lender by or on behalf of the
Borrower on or after the Agreement Date in connection with or pursuant to this
Agreement or in connection with or pursuant to any amendment or modification of,
or waiver of rights under, this Agreement, shall, at the time the same is so
furnished, but in the case of Information dated as of a prior date, as of such
date, (i) in the case of any Information such prepared in the ordinary course of
business, be complete and correct in the light of the purpose prepared, and, in
the case of any Information required by the terms of this Agreement or the
preparation of which was requested by the Lender, be complete and correct to the
extent necessary to give the Lender true and accurate knowledge of the subject
matter thereof, (ii) not contain any untrue statement of a material fact, and
(iii) not omit to state a material fact necessary in order to make the
statements contained therein not misleading in the light of the circumstances
under which they were made, and the furnishing of the same to the Lender shall
constitute a representation and warranty by the Borrower made on the date the
same are so furnished to the effect specified in clauses (i), (ii) and (iii).
Section 5.03. Additional Covenants Relating to Disclosure. From the Agreement
Date and until the Repayment Date, the Borrower shall and shall cause each of
its Subsidiaries to:
(a) Accounting Methods and Financial Records. Maintain a system of
accounting, and keep such books, records and accounts (which shall be true and
complete), as may be required or necessary to permit (i) the preparation of
financial statements required to be delivered pursuant to Sections 5.01(a) and
(b) and (ii) the determination of the Borrower's compliance with the terms of
this Agreement.
(b) Visits and Inspections. Permit, or, in the case of properties,
books, records or Persons not within its immediate control, promptly take such
actions as are reasonably practicable in order to permit, representatives
(whether or not officers or employees) of the Lender, from time to time, as
often as may be reasonably requested, to (i) visit and inspect any properties of
the Borrower and each Subsidiary, (ii) inspect and make extracts from the books
and records of the Borrower and each Subsidiary, including management letters
prepared by their respective independent certified public accountants, and (iii)
discuss with any Person, including the principal officers and the independent
certified public accountants of the Borrower and each Subsidiary, the respective
businesses, assets, liabilities, financial conditions, results of operations and
business prospects of the Borrower and each Subsidiary.
ARTICLE 6
DEFAULT
Section 6.01. Events of Default. Each of the following shall constitute an Event
of Default, whatever the reason for such event and whether it shall be voluntary
or involuntary, or within or without the control of the Borrower or any
Subsidiary, or be effected by operation of law or pursuant to any judgment or
order of any court or any order, rule or regulation of any governmental or
nongovernmental body:
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(a) Any payment of principal of or interest on any of the Loans
shall not be made when and as due (whether at maturity, by reason of notice of
prepayment or acceleration or otherwise) and in accordance with the terms of
this Agreement;
(b) Any representation and warranty shall at any time prove to have
been incorrect or misleading in any material respect when made;
(c) The Borrower shall default in the performance or observance of
(i) any term, covenant, condition or agreement contained in Section
4.01(a) (insofar as such Section requires the preservation of the
corporate existence of the Borrower), 4.01(f), or 5.01(e)(i); or
(ii) any term, covenant, condition or agreement contained in this
Agreement (other than a term, covenant, condition or agreement a default
in the performance or observance of which is elsewhere in this Section
specifically dealt with) and, if capable of being remedied, such default
shall continue unremedied for a period of 30 days;
(d) (i) The Borrower or any Subsidiary shall fail to pay, in
accordance with its terms and when due and payable, the principal of or interest
on any debt (other than the Loans), (ii) the maturity of any such debt shall, in
whole or in part, have been accelerated, or any such debt shall, in whole or in
part, have been required to be prepaid prior to the stated maturity thereof, in
accordance with the provisions of any Contract evidencing, providing for the
creation of or concerning such debt, or (iii) (A) any event shall have occurred
and be continuing that permits (or, with the passage of time or the giving of
notice or both, would permit) any holder or holders of such debt, any trustee or
agent acting on behalf of such holder or holders or any other Person so to
accelerate such maturity or require any such prepayment and (B) if the Contract
evidencing, providing for the creation of or concerning such Debt provides for a
cure period for such event, such event shall not be cured prior to the end of
such cure period;
(e) A default shall be continuing under any Contract (other than a
Contract relating to debt to which clause (d) of this Section 6.01 is
applicable) binding upon the Borrower or any Subsidiary, except a default that,
together with all other such defaults, has not had and will not have a Material
Adverse Effect on (i) the Borrower and the Consolidated Subsidiaries taken as a
whole or (ii) the Agreement;
(f) (i) The Borrower or any Subsidiary shall (A) commence a
voluntary case under the Federal bankruptcy laws (as now or hereafter in
effect), (B) file a petition seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding
up or composition or adjustment of debts, (C) consent to or fail to contest in a
timely and appropriate manner any petition filed against it in an involuntary
case under such bankruptcy laws or other laws, (D) apply for, or consent to, or
fail to contest in a timely and appropriate manner, the appointment of, or the
taking of possession by, a receiver, custodian, trustee, liquidator or the like
of itself or of a substantial part of its assets, domestic or foreign, (E) admit
in writing its inability to pay, or generally not be paying, its debts (other
than
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those that are the subject of bona fide disputes) as they become due, (F) make a
general assignment for the benefit of creditors, or (G) take any corporate
action for the purpose of effecting any of the foregoing; or
(ii) (A) case or other proceeding shall be commenced against the
Borrower or any Subsidiary seeking (1) relief under the Federal bankruptcy laws
(as now or hereafter in effect) or under any other laws, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, winding up or composition or
adjustment of debts, or (2) the appointment of a trustee, receiver, custodian,
liquidator or the like of the Borrower or any Subsidiary, or of all or any
substantial part of the assets, domestic or foreign, of the Borrower or any
Subsidiary, and such case or proceeding shall continue undismissed or unstayed
for a period of 30 days, or (B) an order granting the relief requested in such
case or proceeding against the Borrower or any Subsidiary (including an order
for relief under such Federal bankruptcy laws) shall be entered; or
(g) A judgment or order for the payment of money shall be entered
against the Borrower or any Subsidiary by any court, and either (i) such
judgment or order shall continue undischarged and unstayed for a period of 10
days in which the aggregate amount of all such judgments and orders exceeds
$500,000 or (ii) enforcement proceedings shall have been commenced upon such
judgment or order.
Section 6.02. Remedies upon Event of Default. During the continuance of any
Event of Default (other than one specified in Section 6.01(f)) and in every such
event, the Lender, upon notice to the Borrower, may do either or both of the
following: (a) declare, in whole or, from time to time, in part, the principal
of and interest on the Loans and all other amounts owing under this Agreement to
be, and the Loans and all such other amounts shall thereupon and to that extent
become, due and payable and (b) terminate, in whole or, from time to time, in
part, the Commitment. Upon the occurrence of an Event of Default specified in
Section 6.01(f), automatically and without any notice to the Borrower, (a) the
principal of and interest on the Loans and all other amounts owing under this
Agreement shall be due and payable and (b) the Commitment shall terminate.
Presentment, demand, protest or notice of any kind (other than the notice
provided for in the first sentence of this Section 6.02) are hereby expressly
waived.
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ARTICLE 7
MISCELLANEOUS
Section 7.01. Notices and Deliveries.
(a) Manner of Delivery. All notices, communications and materials
(including all Information) to be given or delivered pursuant to this Agreement
shall, except in those cases where a telephone notice is expressly permitted, be
in writing. All written notices, communications and materials shall be sent by
registered or certified mail, postage prepaid, return receipt requested, by
telex or telecopier, or delivered by hand. Notices under Sections 1.02, 1.05,
and 6.02 may be by telephone, promptly, in the case of each notice other than
one under Section 6.02, confirmed in writing. In the event of a discrepancy
between any telephonic notice and any written confirmation thereof, such written
confirmation shall be deemed the effective notice except to the extent that the
Lender has acted in reliance on such telephonic notice.
(b) Addresses. All notices, communications and materials to be given
or delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) if to the Borrower, to it at:
deltathree.com, Inc.
430 Park Avenue, Suite 500
New York, New York 10022
Telecopier No.: (212)
Telephone No.: (212) 588-3600
Attention: General Counsel
(ii) if to the Lender, to it at:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue, Sutie 4300
New York, New York 10153
Telecopier No.: (212) 317-1940
Telephone No.: (212) 317-1800
Attention: General Counsel
or at such other address or telecopier or telephone number or to the attention
of such other individual or department as the party to which such information
pertains may hereafter specify for the purpose in a notice to the other
specifically captioned "Notice of Change of Address."
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(c) Effectiveness. Each notice and communication and any material to
be given or delivered pursuant to this Agreement shall be effective or deemed
delivered or furnished (i) if sent by mail, on the third Business Day after such
notice, communication or material is deposited in the mail, addressed as above
provided, (ii) if sent by telecopier, when such notice, communication or
material is transmitted to the appropriate number determined as above provided
in this Section 7.01 and the appropriate answer-back is received or receipt is
otherwise acknowledged, (iii) if sent by hand delivery, when left at the address
of the addressee addressed as above provided, and (iv) if given by telephone,
when communicated to the individual or any member of the department specified as
the individual or department to whose attention notices, communications and
materials are to be given or delivered, or, in the case of notice by the Lender
to the Borrower under Section 6.02 given by telephone as provided below, if any
individual or any member of the department to whose attention notices,
communications and materials are to be given or delivered is unavailable at the
time, to any other officer or employee of the Borrower, except that notices of a
change of address, telecopier or telephone number or individual or department to
whose attention notices, communications and materials are to be given or
delivered, and notices to the Lender under Sections 1.02 and 1.05, shall not be
effective, and materials to be furnished to the Lender pursuant to Article 5
shall not be deemed furnished, until received, and such notices to the Lender
shall not be deemed received until received by the officer of the Lender
responsible, at the time, for the administration of this Agreement.
(d) Reasonable Notice. Any requirement under Applicable Law of
reasonable notice by the Lender to the Borrower of any event in connection with,
or in any way related to, this Agreement or the exercise by the Lender of its
rights hereunder and thereunder shall be met if notice of such event is given to
the Borrower in the manner prescribed above at least 10 days before (i) the date
of such event or (ii) the date after which such event will occur.
Section 7.02. Expenses; Indemnification. (a) Whether or not any Loans are made
hereunder, the Borrower shall:
(i) pay or reimburse the Lender for all transfer, documentary,
stamp and similar taxes, and all recording and filing fees and taxes, payable in
connection with, arising out of, or in any way related to, the execution,
delivery and performance of this Agreement or the making of the Loans;
(ii) pay or reimburse the Lender for all costs and expenses
(including fees and disbursements of legal counsel and other experts employed or
retained by the Lender) incurred by the Lender in connection with, arising out
of, or in any way related to (A) the negotiation, preparation, execution and
delivery of (1) this Agreement and (2) whether or not executed, any waiver,
amendment or consent under or to this Agreement, (B) the administration of and
any operations under this Agreement, (C) consulting with respect to any matter
in any way arising out of, related to, or connected with, this Agreement,
including (1) the protection, preservation, exercise or enforcement by the
Lender of any of its rights under or related to this Agreement or (2) the
performance by the Lender of any of its obligations under or related to this
Agreement, or (D) protecting, preserving, exercising or enforcing any of its
rights under or related to this Agreement; and
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(iii) indemnify and hold each Indemnified Person (hereinafter
defined) harmless from and against all losses suffered, and pay or reimburse
each Indemnified Person for all costs and expenses (including fees and
disbursements of legal counsel and other experts employed or retained by such
Indemnified Person) incurred, by such Indemnified Person in connection with,
arising out of, or in any way related to (A) any Credit Agreement Related Claim
(hereinafter defined) (whether asserted by such Indemnified Person or the
Borrower or any other Person), including the prosecution or defense thereof and
any litigation or proceeding with respect thereto (whether or not, in the case
of any such litigation or proceeding, such Indemnified Person is a party
thereto), or (B) any investigation, governmental or otherwise, arising out of,
related to, or in any way connected with, this Agreement or the relationship
established hereunder, except that the foregoing indemnity shall not be
applicable to any loss suffered by any Indemnified Person to the extent such
loss is determined by a judgment of a court that is binding on the Borrower and
such Indemnified Person, final and not subject to review on appeal, to be the
result of acts or omissions on the part of such Indemnified Person constituting
(x) willful misconduct, (y) knowing violations of law, or (z) in the case of
claims by the Borrower against such Indemnified Person, such Indemnified
Person's failure to observe any other standard applicable to it under any of the
other provisions of this Agreement or, but only to the extent not waivable
thereunder, Applicable Law. For purposes of this Agreement, "Indemnified Person"
shall mean any Person that is, or at any time was, the Lender, an Affiliate
(hereinafter defined) of the Lender or a director, officer, employee or agent of
any such Person. "Credit Agreement Related Claim" shall mean any claim (whether
sounding in tort, contract or otherwise) in any way arising out of, related to,
or connected with, this Agreement or the relationship established hereunder or
thereunder, whether such claim arises or is asserted before or after the
Agreement Date or before or after the Repayment Date. "Affiliate" shall mean,
with respect to a Person, any other Person that, directly or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, such first Person; unless otherwise specified, "Affiliate" means
an Affiliate of the Borrower.
(b) All amounts payable by the Borrower under Section 7.02(a) shall
be immediately due upon request for the payment thereof.
Section 7.03. Rights Cumulative. Each of the Lender's rights and remedies under
this Agreement shall be in addition to all of its other rights and remedies
under this Agreement and Applicable Law, and nothing in this Agreement shall be
construed as limiting any such rights or remedies.
Section 7.04. Disclosures. The Lender may disclose to, and exchange and discuss
with, any other Person (the Lender and each such other Person being hereby
irrevocably authorized to do so) any information concerning the Borrower or any
Subsidiary (whether received by the Lender or such other Person in connection
with or pursuant to this Agreement or otherwise) for the purpose of (a)
complying with Applicable Law, (b) protecting, preserving, exercising or
enforcing any of its rights under or related to this Agreement, (c) performing
any of its obligations under or related to this Agreement, or (d) consulting
with respect to any of the foregoing matters.
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Section 7.05. Amendments; Waivers. Any term, covenant, agreement or condition of
this Agreement may be amended, and any right under this Agreement may be waived,
if, but only if, such amendment or waiver is in writing and is signed by the
Lender and, in the case of an amendment, by the Borrower. Unless otherwise
specified in such waiver, a waiver of any right under this Agreement shall be
effective only in the specific instance and for the specific purpose for which
given. No election not to exercise, failure to exercise or delay in exercising
any right, nor any course of dealing or performance, shall operate as a waiver
of any right of the Lender under this Agreement or Applicable Law, nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right of the Lender under this
Agreement or Applicable Law.
Section 7.06. Setoff; Retention of Funds. The Lender is hereby authorized by the
Borrower, at any time and from time to time, without notice, (a) during any
Event of Default, to set off against, and to appropriate and apply to the
payment of, the obligations and liabilities of the Borrower under this Agreement
(whether matured or unmatured, fixed or contingent or liquidated or
unliquidated) any and all amounts owing by the Lender or any of its Affiliates
to the Borrower (whether payable in U.S. Dollars or any other currency, whether
matured or unmatured and, in the case of deposits, whether general or special,
time or demand and however evidenced and whether maintained at a branch or
office located within or without the United States) and (b) during any Default,
to hold such amounts as collateral to secure such obligations and liabilities
and to return as unpaid for insufficient funds any and all checks and other
items drawn against any deposits so held as the Lender in its sole discretion
may elect.
Section 7.07. Assignments and Participations.
(a) Assignments. (i) The Borrower may not assign any of its rights
or obligations under this Agreement without the prior written consent of the
Lender, and no assignment of any such obligation shall release the Borrower
therefrom or constitute a novation unless the Lender shall have consented to
such release in a writing specifically referring to the obligation from which
the Borrower is to be released.
(ii) The Lender may from time to time assign any or all of its
rights and obligations under this Agreement to one or more Persons without the
consent of the Borrower. Any assignment of any such obligation that is to an
Eligible Assignee (hereinafter defined) or is consented to by the Borrower in
writing shall release the Lender therefrom and constitute a novation. For
purposes of this Agreement, "Eligible Assignee" shall mean (i) any commercial
bank, savings and loan institution or savings bank organized under the laws of
the United States, or any State thereof, and having combined capital and surplus
in excess of $100,000,000, (ii) any commercial bank organized under the laws of
any other country that is a member of the Organization for Economic Cooperation
and Development ("OECD"), or a political subdivision of any such country, and
having combined capital and surplus (or the equivalent thereof under the
accounting principles applicable thereto) in excess of $100,000,000, provided
that such bank is acting through a branch, agency or Affiliate located in the
country in which it is organized or another country that is also a member of the
OECD, (iii) the central bank of any country that is a
15
<PAGE>
member of the OECD, or (iv) any insurance company, pension fund, mutual fund or
other financial institution of recognized standing.
Section 7.08. Governing Law. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York, excluding those
applicable to choice of law but including those applicable to the Maximum
Permissible Rate.
Section 7.09. Judicial Proceedings; Waiver of Jury Trial. Any judicial
proceeding brought against the Borrower with respect to any Credit Agreement
Related Claim may be brought in any court of competent jurisdiction in the City
of New York, and, by execution and delivery of this Agreement, the Borrower (a)
accepts, generally and unconditionally, the nonexclusive jurisdiction of such
courts and any related appellate court and irrevocably agrees to be bound by any
judgment rendered thereby in connection with any Credit Agreement Related Claim
and (b) irrevocably waives any objection it may now or hereafter have as to the
venue of any such proceeding brought in such a court or that such a court is an
inconvenient forum. The Borrower hereby waives personal service of process and
consents that service of process upon it may be made by certified or registered
mail, return receipt requested, at its address specified or determined in
accordance with the provisions of Section 7.01(b), and service so made shall be
deemed completed on the third Business Day after such service is deposited in
the mail. Nothing herein shall affect the right of the Lender or any other
Indemnified Person to serve process in any other manner permitted by law or
shall limit the right of the Lender or any other Indemnified Person to bring
proceedings against the Borrower in the courts of any other jurisdiction. Any
judicial proceeding by the Borrower against the Lender involving any Credit
Agreement Related Claim shall be brought only in a court located in the City and
State of New York. THE BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY
JUDICIAL PROCEEDING TO WHICH THEY ARE BOTH PARTIES INVOLVING ANY CREDIT
AGREEMENT RELATED CLAIM.
Section 7.10. LIMITATION OF LIABILITY. NEITHER THE LENDER NOR ANY OTHER
INDEMNIFIED PERSON SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND THE BORROWER
HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR, ANY SPECIAL, INDIRECT OR
CONSEQUENTIAL DAMAGES SUFFERED BY THE BORROWER IN CONNECTION WITH ANY CREDIT
AGREEMENT RELATED CLAIM.
Section 7.11. Severability of Provisions. Any provision of this Agreement that
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. To the extent permitted by Applicable Law, the Borrower hereby
waives any provision of Applicable Law that renders any provision hereof
prohibited or unenforceable in any respect.
16
<PAGE>
Section 7.12. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto were upon the same instrument.
Section 7.13. Survival of Obligations. Except as otherwise expressly provided
herein, the rights and obligations of the Borrower, the Lender and the other
Indemnified Persons hereunder shall survive the Repayment Date.
Section 7.14. Entire Agreement. This Agreement embodies the entire agreement
between the Borrower and the Lender relating to the subject matter hereof and
supersede all prior agreements, representations and understandings, if any,
relating to the subject matter hereof.
Section 7.15. Successors and Assigns. All of the provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
ARTICLE 8
INTERPRETATION
Section 8.01. Certain Definitional Provisions. (i) Except as otherwise specified
herein, all references herein (A) to any Person shall be deemed to include such
Person's successors and assigns, (B) to any Applicable Law defined or referred
to herein shall be deemed references to such Applicable Law as the same may have
been or may be amended or supplemented from time to time, and (C) to this
Agreement or any Contract defined or referred to herein shall be deemed
references to this Agreement or such Contract as the terms thereof may have been
or may be amended, supplemented, waived or otherwise modified from time to time.
(ii) When used in this Agreement, the words "herein", "hereof"
and "hereunder" and words of similar import shall refer to this Agreement as a
whole and not to any provision of this Agreement, and the words "Article,"
"Section," "Schedule" and "Exhibit" shall refer to Articles and Sections of, and
Schedules and Exhibits to, this Agreement unless otherwise specified.
(iii) Whenever the context so requires, the neuter gender
includes the masculine or feminine, the masculine gender includes the feminine,
and the singular number includes the plural, and vice versa.
(iv) Any item or list of items set forth following the word
"including," "include" or "includes" is set forth only for the purpose of
indicating that, regardless of whatever other items are in the category in which
such item or items are "included," such item or items are in such category, and
shall not be construed as indicating that the types of items in the category in
which such item or items are "included" are limited to such items or to items
similar to such items.
17
<PAGE>
(v) When used in this Agreement, "Person" means any
individual, sole proprietorship, corporation, partnership, trust, unincorporated
organization, mutual company, joint stock company, estate, union, employee
organization, government or any agency or political subdivision thereof.
(vi) Except as otherwise specified therein, all terms defined
in this Agreement shall have the meanings herein ascribed to them when used in
any certificate, opinion or other document delivered pursuant hereto.
Section 8.02. Accounting Matters. Unless otherwise specified herein, all
accounting determinations hereunder shall be made, all accounting terms used
herein shall be interpreted, and all financial statements required to be
delivered hereunder shall be prepared, in accordance with Generally Accepted
Accounting Principles, except, in the case of such financial statements, for
departures from Generally Accepted Accounting Principles that may from time to
time be approved in writing by the independent certified public accountants who
are at the time, in accordance with Section 5.01(b), reporting on the Borrower's
financial statements.
Section 8.03. Representations and Warranties. All representations and warranties
shall be deemed made (a) in the case of any representation and warranty
contained in this Agreement at the time of its initial execution and delivery,
(b) in the case of any representation and warranty contained in this Agreement
or any other document at the time any Loan is made, at and as of such time, and
(c) in the case of any particular representation and warranty, wherever
contained, at such other time or times as such representation and warranty is
made or deemed made in accordance with the provisions of this Agreement or the
document pursuant to, under or in connection with which such representation and
warranty is made or deemed made.
Section 8.04. Captions. Captions to Articles, Sections and subsections of, and
Schedules and Exhibits to, this Agreement are included for convenience of
reference only and shall not constitute a part of this Agreement for any other
purpose or in any way affect the meaning or construction of any provision of
this Agreement.
18
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers all as of the Agreement Date.
DELTATHREE.COM, INC.
By:
-------------------------------------
Name:
Title:
RSL COMMUNICATIONS, LTD.
By:
-------------------------------------
Name:
Title:
19
<PAGE>
Schedule 1.02
FORM OF NOTICE OF BORROWING
RSL Communications, Ltd.
767 Fifth Avenue, Suite 4300
New York, New York 10153
Date:
Gentlemen:
Reference is made to the Credit Facility, dated as of _________,
1999 between deltathree.com, Inc. and RSL Communications, Ltd. (the "Credit
Facility"). The undersigned hereby gives notice pursuant to Section 1.02 of the
Credit Facility of its request to have the following Loans made to it on [insert
requested date and amount of borrowing]:
Amount Date of Borrowing
------ -----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The undersigned represents and warrants that the borrowing requested
hereby complies with the requirements of Section 1.02 of the Credit Facility.
DELTATHREE.COM, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
Schedule 1.05
FORM OF NOTICE OF PREPAYMENT
RSL Communications, Ltd.
767 Fifth Avenue, Suite 4300
New York, New York 10153
Date:
Gentlemen:
Reference is made to the Credit Facility, dated as of ___________,
1999 between deltathree.com, Inc. and RSL Communications, Ltd. (the "Credit
Facility"). The undersigned hereby gives notice pursuant to Section 1.05 of the
Credit Facility that it will prepay the Loans specified below on [insert date
and amount of prepayment]:
Date of
Prepayment Amount
---------- ------
- ------------------------------ ---------------------------
- ------------------------------ ---------------------------
- ------------------------------ ---------------------------
The undersigned represents and warrants that the prepayment
requested hereby complies with the requirements of Section 1.05 of the Credit
Facility.
DELTATHREE.COM, INC.
By:
------------------------------------
Name:
Title:
<PAGE>
Schedule 1.08
GRID
NOTE
- -------------------------------------------------------------------------------
Amount of
Loan Amount of Principal Paid or Unpaid Principal Notation
Date of Loan Prepaid Amount of Loan Made by
------- ---- ------- -------------- -------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Schedule 2.01
DELTATHREE.COM, INC.
FORM OF BORROWER'S CERTIFICATE AS TO RESOLUTIONS, ETC.
I, ____________, [Assistant] Secretary of deltathree.com, Inc., a
Delaware corporation (the "Borrower"), hereby certify, pursuant to Section 2.01
of the Credit Facility dated as of ____________, 1999 between the Borrower and
RSL Communications, Ltd., that:
1. The below-named persons have been duly elected (or appointed)
and have duly qualified as, and on this day are, officers of the
Borrower holding their respective offices below set opposite their
names, and the signatures below set opposite their names are their
genuine signatures:
Name Office Signature
---- ------ ---------
[Insert names and offices of persons
---------------------------
Authorized to sign the Credit Facility
---------------------------
And any related documents]
---------------------------
2. Attached as Annex A is a true and correct copy of resolutions
duly adopted by [unanimous written consent of] the board of
directors of the Borrower. Such resolutions have not been amended,
modified or revoked and are in full force and effect on the
Agreement Date.
3. The Credit Facility, in each case as executed and delivered on
behalf of the Borrower, are in the forms thereof approved by
[unanimous written consent of] the board of directors of the
Borrower.
IN WITNESS WHEREOF, I have signed this certificate this __day
of _________, 1999.
----------------------------------------
[Assistant] Secretary
<PAGE>
I, _____________________, [title] of the Borrower, DO HEREBY CERTIFY
that [name of the above [Assistant] Secretary] has been duly elected or
appointed and has been duly qualified as, and on this day is, [Assistant]
Secretary of the Borrower, and the signature in paragraph 1 above is his genuine
signature.
IN WITNESS WHEREOF, I have signed this certificate this day of
_______________, 1999.
----------------------------------------
[Title]
2
<PAGE>
Annex A
DELTATHREE.COM, INC.
FORM OF RESOLUTIONS OF BOARD OF DIRECTORS OF BORROWER
RESOLVED, that this Corporation is authorized to borrow from RSL
Communications, Ltd. (the "Lender") under and pursuant to the below-mentioned
Credit Facility, an aggregate principal amount not to exceed at any time
outstanding $10,000,000, to be repaid in accordance with the Credit Facility,
with interest on the unpaid principal amounts thereof from time to time
outstanding at the interest rates per annum provided for in the Credit Facility;
and be it further
RESOLVED, that the form, terms and provisions of the proposed Credit
Facility (the "Credit Facility"), in substantially the form of the draft of
___________, 1999 attached, between this Corporation and the Lender, providing,
among other things, (i) for the making by the Lender to this Corporation from
time to time of advances ("Loans") in an aggregate principal amount not to
exceed at any time outstanding $10,000,000 upon the terms and conditions therein
set forth, (ii) for the payment by this Corporation of the fees, costs and
expenses as therein provided and (iii) for the waiver by this Corporation of (A)
trial by jury and (B) claims for special, indirect and consequential damages,
all as therein provided; be, and the same hereby are, in all respects approved,
and that the Chairman of the board of directors of this Corporation, the
President, any Vice President or the Treasurer of this Corporation be, and each
of them hereby is, authorized, in the name and on behalf of this Corporation, to
execute and deliver the Credit Facility, each in the form, or substantially in
the form, thereof submitted to the board of directors of this Corporation, with
such changes, additions and modifications thereto as the officer of this
Corporation executing the same shall approve, such approval to be conclusively
evidenced by his execution and delivery thereof; and be it further
RESOLVED, that the draft of the Credit Facility referred to above be
filed by the Secretary of this Corporation among the minutes of the meeting of
the board of directors of this Corporation; and be it further
RESOLVED, that the proper officers of this Corporation be, and each
of them hereby is, authorized and empowered (any one of them acting alone) to do
or cause to be done all such acts or things and to sign and deliver, or cause to
be signed and delivered, all such documents, instruments and certificates
(including, without limitation, all notices and certificates required or
permitted to be given or made under the terms of the Credit Facility), in the
name and on behalf of this Corporation or otherwise, as such officer of this
Corporation may deem necessary, advisable or appropriate to effectuate or carry
out the purposes and intent of the foregoing resolutions and to perform the
obligations of this Corporation under the agreements and instruments referred to
therein.
<PAGE>
Schedule 5.01(b)
DELTATHREE.COM, INC.
FORM OF CERTIFICATE AS TO ANNUAL FINANCIAL STATEMENTS
I, ___________, [President, Chief Financial Officer] of
deltathree.com, Inc., a Delaware corporation (the "Borrower"), hereby certify,
pursuant to Section 5.01(b) of the Credit Facility dated as of ___________, 19__
between the Borrower and RSL Communications, Ltd., that:
1. (a) The accompanying consolidated and consolidating financial
statements of the Borrower and the Consolidated Subsidiaries as at ___________
and for the fiscal year ending December 31, ____, are complete and correct and
present fairly, in accordance with Generally Accepted Accounting Principles
(except for changes therein or therefrom described below, that have been
approved in writing by Brightman, Almagor & Co., the Borrower's current
independent certified public accountants), the consolidated and consolidating
financial position of the Borrower and the Consolidated Subsidiaries as at the
end of such fiscal year, and the consolidated and consolidating results of
operations and cash flows for such fiscal year, in each case on the basis
presented.
(b) Except as disclosed or reflected in such financial statements,
as at _________, neither the Borrower nor any Subsidiary had any liability,
contingent or otherwise, nor any unrealized or anticipated loss, that, singly or
in the aggregate, have had or might have a Material Adverse Effect on the
Borrower and the Consolidated Subsidiaries taken as a whole.
2. (a) The changes from Generally Accepted Accounting Principles are
as follows:
All such changes have been approved in writing by Brightman, Almagor
& Co.
3. Based on an examination sufficient to enable me to make an
informed statement, no Default exists, including, in particular, any such
arising under the provisions of Articles 4 or 5, except the following:
[If none such exist, insert "None"; if any do exist, specify the
same by Section, give the date the same occurred, whether it is
continuing, and the steps being taken by the Borrower or a
Subsidiary with respect thereto.]
Dated:
------------------------------
[President, Chief
Financial Officer]
<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 five
percent (5%) of the number of outstanding 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 one-eighth (1/8) of the number of 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
6
<PAGE>
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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<PAGE>
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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<PAGE>
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
one-eighth (1/8) of the number of 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
9
<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.
10
<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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<PAGE>
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
14
<PAGE>
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.
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
(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
18
<PAGE>
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.
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<PAGE>
Deltathree.com, Inc.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of
the Company and its Designated Subsidiaries with an opportunity to purchase
Common Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" under section 423 of the Code, as
amended. The provisions of the Plan shall, accordingly, be construed in a manner
consistent with the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the
Company.
(b) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(c) "Committee" shall mean any committee appointed by the
Board to administer the Plan and to perform the functions set forth herein.
(d) "Common Stock" shall mean the common stock, $0.001 par
value, of the Company.
(e) "Company" shall mean Deltathree.com, Inc., a Delaware
corpora tion, or any successor corporation.
(f) "Compensation" shall mean the fixed salary or wage paid by
the Employer to an Employee as reported to the United States government for
Federal income tax purposes, including an Employee's portion of salary deferral
contributions pursuant to section 401(k) of the Code and any amount excludable
pursuant to section 125 of the Code, but excluding payments for overtime, shift
premium, incentive compen sation, incentive payments, bonuses, commissions,
severance pay, foreign service pay, expense reimbursements, any credit or
benefit under any employee plan and any other compensation.
(g) "Continuous Status As An Employee" shall mean the absence
of any interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of a leave of
absence agreed to in writing by the Employer, provided that such leave is for a
period of not more than 90
<PAGE>
days or reemployment upon the expiration of such leave is guaranteed by contract
or statute.
(h) "Contributions" shall mean all payroll deductions credited
to the account of a Participant pursuant to the Plan.
(i) "Designated Subsidiaries" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(j) "Effective Date" shall mean the date on which the
Registration Statement shall have been declared effective.
(k) "Employee" shall mean any person who is customarily
employed for at least twenty (20) hours per week and more than five (5) months
in a calendar year by the Company or one of its Designated Subsidiaries and who
has been employed by the Company or one of its Designated Subsidiaries for at
least one year as of the Offering Date of a given Offering Period, except (i)
any such person who is prohibited by applica ble foreign law from participating
in this Plan and (ii) any employee who is "highly compensated" within the
meaning of section 414(q) of the Code.
(l) "Employer" shall mean, as to any particular Employee, the
corporation which employs such Employee, whether it is the Company or a
Designated Subsidiary of the Company.
(m) "Exercise Date" shall mean the last Trading Day of each
Purchase Period with respect to an Offering Period.
(n) "Fair Market Value" per Share as of a particular date
shall mean the closing price per Share on such date 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, for purposes of the Offering Date of the First
Offering Period under the Plan, the "Fair Market Value" per Share shall be the
price to public as set forth in final prospectus included within the
Registration Statement.
(o) "Hardship" shall mean any of the following which the
Committee (or its designee) determines is sufficient reason to approve a
Hardship withdrawal or sale of Shares pursuant to Section 10(c) hereof: (i)
expenses directly relating to the purchase
2
<PAGE>
of a Participant's principal residence (excluding mortgage payments); (ii)
prevention of eviction or foreclosure on a Participant's principal residence;
(iii) tuition and related educational expenses for the next twelve months for
post-secondary education for a Participant or a Participant's spouse or
dependents; or (iv) expenses incurred (prior to a Participant's requesting
approval for the relevant Hardship stock sale) by the Participant, the
Participant's spouse or the Participant's dependents for medical care for the
Participant, the Participant's spouse or the Participant's dependents.
(p) "Investment Account" shall mean a Plan account at a
brokerage firm, selected by the Company, that is established for each
Participant and in which all Shares purchased by the Participant pursuant to the
Plan are held until withdrawn, sold or delivered pursuant to Section 9 or 15
hereof. The Investment Account of the Participant shall be an integral part of
the Participant's account hereunder.
(q) "Offering Date" shall mean the first Trading Day of each
Offering Period of the Plan. The Offering Date of an Offering Period is the
grant date for the options offered in such Offering Period.
(r) "Offering Period" shall mean a period as described in
Section 4 hereof.
(s) "Parent" shall mean any corporation (other than the
Company) in an unbroken chain of corporations ending with the Company if, at the
time of granting an option, each of the corporations other than the Company owns
shares possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
(t) "Participant" shall mean an Employee who participates in
the Plan.
(u) "Plan" shall mean the Deltathree.com, Inc., Employee Stock
Purchase Plan, as amended from time to time.
(v) "Purchase Period" shall mean the approximately six month
period, within an Offering Period, commencing on the Trading Day next following
the last previous Exercise Date in such Offering Period and ending with the next
Exercise Date in such Offering Period, except that the first Purchase Period of
any Offering Period shall commence on the first Trading Day of such Offering
Period and end with the next Exercise Date.
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<PAGE>
(w) "Registration Statement" shall mean the registration
statement on Form S-1 filed with the Securities and Exchange Commission for the
initial public offering of the Common Stock.
(x) "Shares" shall mean shares of Common Stock.
(y) "Subsidiary" shall mean any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of granting an option, each of the corporations other than the last
corporation in the unbroken chain owns shares possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
(z) "Trading Day" shall mean a day on which national stock
exchanges and the NASDAQ/NMS are open for trading.
3. Eligibility.
(a) Each Employee shall be eligible to participate in each
Offering Period under the Plan, subject to the requirements of Section 5 and the
limitations imposed by section 423(b) of the Code.
(b) Notwithstanding any provision of the Plan to the contrary,
no Employee shall be granted an option under the Plan (i) if, immediately after
the grant, such Employee (or any other person whose shares would be attributed
to such Employee pursuant to section 424(d) of the Code) would own shares and/or
hold outstanding options to purchase shares possessing five percent (5%) or more
of the total combined voting power or value of all classes of shares of the
Company or of any Subsidiary or Parent of the Company, or (ii) which permits
such Employee's right to purchase shares under all employee stock purchase plans
(as described in section 423 of the Code) of the Company and any Subsidiary or
Parent of the Company to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) of Fair Market Value of such shares (determined at the time
such option is granted) for any calendar year in which such option would be
outstanding at any time. Any amounts received from an Employee which cannot be
used to purchase Shares as a result of this limitation will be returned as soon
as practicable to the Employee without interest.
4. Offering Periods. The Plan shall be implemented by a series of
Offering Periods. The first such Offering Period shall commence on the first
Trading Day on or after the Effective Date and end on the last Trading Day on or
prior to the second anniversary of such commencement date. Unless otherwise
determined by the Board,
4
<PAGE>
each subsequent Offering Period shall have a duration of one year, commencing on
the first Trading Day and ending on the last Trading Day of each calendar year
(commencing with calendar year 2001). The Plan shall continue until terminated
in accordance with Section 19 hereof. Subject to Section 19 hereof, the Board
shall have the power to change the duration and/or the frequency of Offering
Periods and/or Purchase Periods with respect to future offerings and shall use
its best efforts to notify Employees of any such change at least fifteen (15)
days prior to the scheduled beginning of the first Offering Period to be
affected. In no event shall any option granted hereunder be exercisable more
than twenty-seven (27) months from its date of grant.
5. Grant of Option; Participation
(a) On each Offering Date the Company shall commence an
offering by granting each Employee an option to purchase Shares on each Exercise
Date with respect to each Purchase Period of such Offering Period, subject to
the limitations set forth in Sections 3(b) and 12 hereof. Each option so granted
shall be exercisable for the number of Shares described in Section 8 hereof and
shall be exercisable only on the Exercise Date.
(b) An Employee may become a Participant in the Plan by
completing a subscription agreement on the form provided by the Employer
authorizing payroll deductions (as set forth in Section 6 hereof) and filing it
with the Company or the Employer in accordance with the form's instructions at
least ten (10) business days prior to the applicable Offering Date, unless a
later time for filing the subscription agreement is set by the Committee for all
Employees with respect to a given offering. Additionally, the Participant may
participate to a greater extent by directing (where indicated on the
subscription agreement form) that any cash dividends received on the Shares held
in the Participant's account should be reinvested in additional Shares. Unless
the Participant withdraws from the Plan as provided in Section 11 hereof, or
unless the Committee otherwise provides, such authorization will remain in
effect for subsequent Offering Periods, until modified by the Participant in
accordance with Section 6(b) hereof.
6. Payroll Deductions.
(a) Subject to Section 5(b) hereof, the Participant may, in
accordance with rules and procedures adopted by the Committee, authorize payroll
deductions on each payday during an Offering Period in an amount which is not
less than one percent (1%) and not more than ten percent (10%) of such
Participant's Compensation on each such payday. Payroll deductions shall
commence on the first payroll following the Offering Date and shall end on the
last payroll paid on or prior to the last Exercise Date
5
<PAGE>
of such Offering Period, unless sooner terminated by the Participant's
withdrawal from the Plan as provided in Section 10 hereof. All payroll
deductions made by a Participant shall be credited to his or her account under
the Plan. A Participant may not make any additional payments into such account,
but, at the Participant's directions given in accordance with Section 5(b)
hereof, any cash dividends on Shares held in the Participant's account may be
reinvested in Shares.
(b) A Participant may withdraw from the Plan as provided in
Section 10, which will terminate his or her Contributions for the Purchase
Period in which such withdrawal occurs. A Participant may increase or decrease
the rate of his or her Contri butions during an Offering Period by completing
and filing with the Employer a new subscription agreement authorizing a change
in payroll deduction rate. The Committee may, in its discretion, limit the
number of rate changes by a Participant during an Offering Period. A change in
rate shall be effective as of the next payroll period following the date of
filing of the new subscription agreement.
7. Option Price. The option price per Share subject to an
offering shall be the lower of: (i) 85% of the Fair Market Value of a Share on
the Offering Date; or (ii) 85% of the Fair Market Value of a Share on the
Exercise Date.
8. Exercise of Option. Unless a Participant withdraws from the
Plan as provided in Section 10 hereof, his or her option for the purchase of
Shares shall be exercised automatically on each Exercise Date during the
applicable Offering Period, and the maximum number of whole Shares subject to
such option shall be purchased for him or her at the applicable option price
with the accumulated Contributions in his or her account. No fractional shares
shall be purchased; any Contributions in a Participant's account which are not
sufficient to purchase a full Share shall be retained in the account for the
subsequent Purchase Period or Offering Period, subject to earlier withdrawal by
the Participant as provided in Section 10 hereof. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
Participant on the Exercise Date. During his or her lifetime, a Participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery of Shares; Withdrawal or Sale of Shares.
(a) As promptly as practicable after each Exercise
Date, the Company shall arrange the delivery of the whole and fractional Shares
purchased on such date by each Participant to the Participant's Investment
Account.
6
<PAGE>
(b) A Participant (or, in the event of the
Participant's death, the designated beneficiary, if any, or other appropriate
person in accordance with Section 14 hereof) may at any time submit a written
request to the Company for withdrawal of such Shares from the Investment
Account, or, in the alternative (with the consent of the brokerage firm at which
the Participant's Investment Account is located), the Participant (or another
person in accordance with Section 14 hereof) may direct the sale of such Shares
by such brokerage firm. As promptly as practicable after receipt by the Company
of such a written request, the Company shall arrange the delivery to the
Participant of a share certificate representing such Shares (any fractional
Share being paid in cash). Unless the Committee, in its sole discretion,
otherwise determines, withdrawals may be made by a Participant no more
frequently than once each Offering Period.
10. Withdrawal of Cash; Withdrawal from Plan; Termination of
Employment
(a) At any time during an Offering Period, a Participant may,
by giving written notice to the Employer, withdraw all, but not less than all,
of the Contribu tions credited to his or her account under the Plan and not
theretofore used to acquire Shares. Withdrawal of such Contributions shall be
deemed a withdrawal from the Plan. All of the Participant's Contributions then
credited to his or her account shall be paid to him or her promptly after
receipt of his or her notice of withdrawal, his or her option for the remainder
of the Offering Period shall be automatically terminated, and no further
Contributions for the purchase of Shares shall be made during such Offering
Period. The Participant may rejoin the Plan for any subsequent Offering Period
as to which the Participant is an Employee by complying with the procedures set
forth in Section 5 hereof.
(b) Upon termination (for any reason, including, without
limitation, retirement or death) of the Participant's Continuous Status as an
Employee during an Offering Period in which the Employee is a Participant, the
Contributions credited to his or her account and not theretofore used to acquire
Shares shall be returned to him or her or, in the case of his or her death, to
the person or persons entitled thereto under Section 14 hereof, and his or her
option for the remainder of such Offering Period shall be automatically
terminated. Such termination shall be deemed a withdrawal from the Plan.
(c) A Participant's withdrawal from an offering or the Plan
shall not have any effect upon his or her eligibility to participate in a
succeeding offering or in any similar plan which may hereafter be adopted by the
Employer.
11. Dividends, Share Splits and Interest. Cash dividends paid on Shares
held in a Participant's account shall be paid to the Participant as soon as
practicable, unless re-
7
<PAGE>
invested in Shares pursuant to the Participant's directions. Share splits of, or
dividends paid in Shares on, the Shares held in the Participant's account shall
be held in the Participant's account until withdrawn or sold in accordance with
Section 9 hereof. Dividends paid in property other than cash or Shares shall be
distributed to the Participant as soon as practicable. No interest shall accrue
on or be payable with respect to the Contributions of a Participant to the Plan
or any assets held in the Participant's Plan account.
12. Stock.
(a) The maximum number of Shares which shall be made available
for sale under the Plan shall be 5% of the number of outstanding Shares of
Common Stock, subject to adjustment upon changes in capitalization of the
Company as provided in Section 18 hereof. If the total number of Shares which
would otherwise be subject to options granted pursuant to Section 5(a) hereof on
the Offering Date exceeds the number of Shares then available under the Plan
(after deduction of all Shares for which options have been exercised or are then
outstanding), the Board (or the Committee, as applicable) shall make a pro rata
allocation of the Shares remaining available for option grant in as uniform a
manner as shall be practicable and as it shall determine to be equitable. In
such event, the Board (or the Committee, as applicable) shall give written
notice of such reduction of the number of Shares subject to the option to each
Employee affected thereby and shall similarly reduce the rate of Contributions,
if necessary. Any amounts remaining in an Employee's account which have not been
applied to the purchase of Shares pursuant to this Section 12 shall be refunded
on or promptly after the applicable Exercise Date.
(b) A Participant shall have no rights as a stockholder with
respect to Shares covered by his or her option until such option has been
exercised.
(c) Shares to be delivered to a Participant under the Plan
shall be registered in the name of the Participant or, if requested in writing
by the Participant, in the names of the Participant and his or her spouse as
joint tenants with rights of survivorship.
13. Administration. The Committee shall supervise and administer
the Plan and shall have full power to adopt, amend and rescind any rules deemed
desirable and appropriate for the administration of the Plan and not
inconsistent with the Plan, to construe and interpret the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan.
Any decision reduced to writing and signed by all members of the Committee shall
be fully effective as if it had been made at a
8
<PAGE>
meeting duly held. Except as otherwise provided by the Committee, each Employer
shall be charged with all expenses incurred in the administration of the Plan
with respect to such Employer's Employees. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan, and all members of the Committee shall be fully
indemnified by the Company with respect to any such action, determination or
interpretation. All decisions, determinations and interpretations of the
Committee shall be final and binding on all persons, including the Company, the
Employer, the Participant (or any person claiming any rights under the Plan from
or through any Participant) and any stockholder.
14. Designation of Beneficiary.
(a) A Participant may file a written designation of a
beneficiary who is to receive any Shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death.
(b) Such designation of beneficiary may be changed by the
Participant at any time by written notice. In the event of the death of a
Participant, if a beneficiary validly designated under the Plan is living at the
time of such Participant's death, the Company shall deliver such Shares and/or
cash to such beneficiary. If no such beneficiary is living at the time of such
Participant's death, the Company shall deliver such Shares and/or cash to the
executor or administrator of the estate of the Participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such Shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate in compliance with law.
15. Transferability. Neither Contributions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive Shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
Contributions in accordance with Section 10.
16. Use of Funds. All Contributions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such Contributions.
9
<PAGE>
17. Reports. Individual accounts shall be maintained for each
Participant in the Plan. Statements of account will be given to Participants
promptly following each Exercise Date, which statements will set forth the
amounts of Contributions, the per Share purchase price, the number of Shares
purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization. Subject to any
required action by the stockholders of the Company, the number of Shares covered
by each option which has not yet been exercised and the number of Shares which
have been authorized for issuance under the Plan but have not yet been placed
under option (collectively, the "Reserves"), as well as the price per Share
covered by each option under the Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration". Such adjustments shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company,
the Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, to shorten the Offering Period then in
progress by setting a new Exercise Date (the "New Exercise Date"). If the Board
shortens the Offering Period then in progress in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
each Participant in writing, at least ten (10) days prior to the New Exercise
Date, that the Exercise Date for his or her option has been changed to the New
Exercise Date and that his or her option will be exercised automatically on the
New Exercise Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this Section, an
option granted under the Plan shall be deemed to be assumed if, following the
sale of assets or merger, the option confers the right to purchase, for each
Share subject to the
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<PAGE>
option immediately prior to the sale of assets or merger, the consideration
(whether stock, cash or other securities or property) received in the sale of
assets or merger by holders of Common Stock for each share of Common Stock held
on the effective date of the transaction (and if such holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares of Common Stock); provided, however, that if
such consideration received in the sale of assets or merger was not solely
common stock of the successor corporation or its parent (as defined in section
424(e) of the Code), the Board may, with the consent of the successor
corporation and the Participant, provide for the consideration to be received
upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in fair market value to the per Share
consideration received by holders of Common Stock and the sale of assets or
merger.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
19. Amendment or Termination. The Board of Directors of the
Company may at any time terminate or amend the Plan. Except as provided in
Section 18, no such termination may affect options previously granted, nor may
an amendment make any change in any option theretofore granted which adversely
affects the rights of any Participant. In addition, to the extent necessary to
comply with section 423 of the Code (or any successor rule or provision or any
applicable law or regulation), the Company shall obtain stockholder approval in
such a manner and to such a degree as so required.
20. Notices. All notices or other communications by a
Participant to the Company or the Employer under or in connection with the Plan
shall be deemed to have been duly given when they are received in a timely
manner in the form and by the person or office specified by the Company (or the
Employer, as the case may be).
21. Term of Plan. The Plan shall become effective on the Effective
Date, subject to the approval of the Plan by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted. The Plan
shall continue in effect until December 31, 2009, unless sooner terminated under
Section 19.
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22. Regulations and Other Approvals; Governing Law.
(a) This Plan and the rights of all persons claiming hereunder
shall be construed and determined in accordance with the laws of the State of
Delaware, without giving effect to the choice of law principles thereof.
(b) The obligation of the Company to sell or deliver Shares
with respect to options granted under the Plan shall be subject to all
applicable laws, rules and regulations (domestic or foreign), including all
applicable federal and state securities laws, and the obtaining of all such
approvals by governmental agencies as may be deemed necessary or appropriate by
the Committee.
23. Withholding of Taxes. If the Participant makes a disposition,
within the meaning of section 424(c) of the Code and regulations promulgated
thereunder, of any Share or Shares issued to such Participant pursuant to such
Participant's exercise of an option, and such disposition occurs within the
two-year period commencing on the day after the date of grant of such option or
within the one-year period commencing on the day after the date of transfer of
the Share or Shares to the Participant pursuant to the exercise of such option,
such Participant shall, within ten (10) days of such disposition, notify the
Employer thereof and thereafter immediately deliver to the Employer any amount
of Federal, state or local income taxes and other amounts which the Employer
informs the Participant the Employer is required to withhold.
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<PAGE>
Deltathree.com, Inc.
1999 PERFORMANCE INCENTIVE PLAN
1. Purpose
The purposes of the Plan are to enable 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 the Company's performance.
2. Definitions
Unless the context requires otherwise, the following words as
used in the Plan shall have the meanings ascribed to each below, it being
understood that masculine, feminine and neuter pronouns are used interchangeably
and that each comprehends the others.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the Class A common shares, par value
$0.001 per share, of the Company.
"Committee" means the Compensation Committee of the Board (or
such other committee of the Board that the Board shall designate from time to
time) or any subcommittee thereof consisting of two or more directors each of
whom is a Disinterested Director.
"Company" means deltathree.com, Inc., a Delaware Corporation.
"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.
"Effective Date" shall mean the date on which the Registration
Statement shall have been declared effective.
"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
<PAGE>
quotation system on which the trading prices of the Share are traded or quoted
at the relevant time).
"Participant" means (i) each executive officer of the Company
and (ii) each other key employee of the Company or a Subsidiary recommended by
the Chief Executive Officer of the Company and selected by the Committee and
approved by the Board to be a participant under the Plan.
"Performance Period" means each calendar year or multi-year
cycle as determined by the Committee.
"Plan" means the deltathree.com, Inc. 1999 Performance
Incentive Plan, as set forth herein and as may be amended from time to time.
"Registration Statement" shall mean the registration statement
on Form S-1 filed with the Securities and Exchange Commission for the initial
public offering of the Common Stock.
"Section 162(m)" means section 162(m) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (including
any proposed regulations).
"Share" shall mean a share of Common Stock.
"Subsidiary" means 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.
3. Administration
The Committee shall administer and interpret the Plan. The Committee
shall establish the performance objectives for any calendar year in accordance
with Section 4 and certify whether such performance objectives have been
attained. Any determination made by the Committee under the Plan shall be final
and conclusive. The Committee may employ such legal counsel, consultants and
agents (including counsel or agents who are employees of the Company or a
Subsidiary) as it may deem desirable for the administration of the Plan and may
rely upon any opinion received from any such counsel or consultant or agent and
any computation received from such consultant or agent. All
2
<PAGE>
expenses incurred in the administration of the Plan, including, without
limitation, for the engagement of any counsel, consultant or agent, shall be
paid by the Company. No member or former member of the Board or the Committee
shall be liable for any act, omission, interpretation, construction or
determination made in connection with the Plan other than as a result of such
individual's willful misconduct.
4. Bonuses
(a) Performance Criteria. Within 90 days after each Performance Period
begins (or, in the case of the 1999 calendar year, as promptly as practicable
following the adoption of this Plan), the Committee shall establish the
performance objective or objectives that must be satisfied in order for a
Participant to receive a bonus for such Performance Period. Any such performance
objectives will be based upon the achievement of one or more of the following
criteria, which may be absolute, relative or comparative, with respect to the
Company, a Subsidiary or a division or business unit of the Company or a
Subsidiary, as determined by the Committee: (i) revenue; (ii) operating income;
(iii) gross profit margin; (iv) net income; (v) earnings per share; (vi) maximum
capital or marketing expenditures; and/or (vii) targeted levels of customers.
(b) Maximum Amount Payable . If the Committee certifies in writing that
the performance objectives established for the relevant Performance Period under
Section 4(a) have been satisfied, each Participant who is employed by the
Company or one of its Subsidiaries on the last day of the Performance Period for
which the bonus is payable shall be eligible to receive a maximum bonus
hereunder determined as follows:
(i) in the case of a Participant other than the
Company's Chief Executive Officer:
Less than 120% or more
80% of 80% of 100% of of Target
Target Target Target
- ---------------- --------------- ------------------ -----------------
0 25% of 100% of 200% of base
base base salary salary
salary
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<PAGE>
(ii) in the case of the chief executive officer of
the Company:
Less than 120% or more
80% of 80% of 100% of of Target
Target Target Target
- ---------------- ------------- ------------------ -----------------
0 25% of 150% of 250% of base
base base salary salary
salary
(iii) in the event of performance between 80% of
target and 100% of target, or between 100% of target and 120% of
target, the maximum bonus shall be pro rated between the applicable
bonus percentages set forth in the preceding clauses (i) and (ii)
above.
If a Participant's employment terminates for any reason (including, without
limitation, his death, disability or retirement under the terms of any
retirement plan maintained by the Company or a Subsidiary) prior to the last day
of the Performance Period for which the bonus is payable but after March 31 of
such Performance Period, the Committee shall determine whether a pro rated bonus
shall be paid, provided that the maximum bonus for which such Participant shall
be eligible shall be the amount applicable to such Participant under the
preceding clause (i) or (ii) (as adjusted by clause (iii)) multiplied by a
fraction, the numerator of which is the number of days that have elapsed during
the Performance Period in which the termination occurs prior to and including
the date of the Participant's termination of employment and the denominator of
which is the total number of days in the Performance Period.
(c) Nondiscretionary Bonus. Fifty percent (50%) of the maximum bonus
amount (if any) as determined pursuant to Section 4(b) above shall be payable to
the Participant.
(d) Discretionary Bonus. The Committee shall have the right, in its
absolute discretion, to award a bonus to any Participant equal to fifty percent
(50%), or such lesser percentage as the Committee shall determine, of the
maximum bonus amount as determined pursuant to Section 4(b), based on individual
performance or any other factors that the Committee, in its discretion, shall
deem appropriate.
(e) Affirmative Discretion. Notwithstanding any other provision in the
Plan to the contrary, but subject to Section 4(f) below, (i) the Committee shall
have the right, in its discretion, to pay to any Participant a bonus for the
year, based on individual
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performance or any other criteria that the Committee deems appropriate,
regardless of whether performance objectives are attained, and (ii) in
connection with the hiring of any person who is or becomes a Participant, the
Committee may provide for a minimum bonus amount in any Performance Period.
(f) Absolute Maximum Bonus. Notwithstanding any other provision in the
Plan to the contrary, the maximum bonus that may be paid to any Participant
under the Plan with respect to any year may not exceed $1,000,000.
5. Payment
Except as otherwise provided hereunder, payment of any bonus amount
determined under Section 4 shall be made to each Participant as soon as
practicable after the Committee certifies that one or more of the applicable
performance objectives have been attained (or, in the case of any bonus payable
under the provisions of Section 4(d) or 4(e), after the Committee determines the
amount of any such bonus).
6. Form of Payment
Subject to the last sentence of this Section 6, the Committee shall
determine whether any bonus payable under the Plan is payable in cash, in shares
of Common Stock or in any combination thereof, provided that not less than 50%
of such bonus shall be payable in cash. The Committee shall have the right to
impose whatever conditions it deems appropriate with respect to the award of
shares of Common Stock, including conditioning the vesting of such shares on the
performance of additional service. The Committee may permit a Participant to
elect to receive all or a portion of his of her bonus payable hereunder in
shares of Common Stock (based on the Fair Market Value of such shares at the
time of payment (without regard to any deferral under Section 7)). The maximum
number of shares available for issuance under the Plan shall be 400,000 Shares
of Common Stock; provided that the Committee shall adjust such number of Shares
as appropriate 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.
7. Deferral
Payment of a bonus hereunder on a deferred basis may be
permitted at the election of the Participant on terms and conditions established
by the Committee, which may include, without limitation, provisions for the
payment or crediting of reasonable
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interest on installment or deferred payments or the grant or crediting of
dividend equivalents or other amounts in respect of installment or deferred
payments denominated in Common Stock.
8. General Provisions
(a) Effectiveness; Approval of Stockholders. The Plan shall become
effective on the Effective Date, but its effectiveness shall be subject to the
approval of the Plan by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted. The Plan shall, subject to
the foregoing, be effective with respect to the calendar years 1999 through
2002, unless the term hereof is extended by action of the Board.
(b) Amendment and Termination. Notwithstanding Section 8(a), the Board
or the Committee may at any time amend, suspend, discontinue or terminate the
Plan; provided, however, that, unless otherwise determined by the Board, an
amendment that requires stockholder approval in order to comply with Section
162(m) of the Code or any other law, regulation or stock exchange requirement
shall not be effective unless approved by the requisite vote of the
stockholders.
(c) Designation of Beneficiary. Each Participant may designate a
beneficiary or beneficiaries (which beneficiary may be an entity other than a
natural person) to receive any payments which may be made following the
Participant's death. Such designation may be changed or canceled at any time
without the consent of any such beneficiary. Any such designation, change or
cancellation must be made in a form approved by the Committee and shall not be
effective until received by the Committee. If no beneficiary has been named, or
the designated beneficiary or beneficiaries shall have predeceased the
Participant, the beneficiary shall be the Participant's spouse or, if no spouse
survives the Participant, the Participant's estate. If a Participant designates
more than one beneficiary, the rights of such beneficiaries shall be payable in
equal shares, unless the Participant has designated otherwise.
(d) No Right of Continued Employment. Nothing in this Plan shall be
construed as conferring upon any Participant any right to continue in the
employment of the Company or any of its Subsidiaries.
(e) No Limitation on Corporate Actions. Nothing contained in the Plan
shall be construed to prevent the Company or any Subsidiary from taking any
corporate action which is deemed by it to be appropriate or in its best
interest, whether or not such action would have an adverse effect on any awards
made under the Plan. No employee,
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beneficiary or other person shall have any claim against the Company or any
Subsidiary as a result of any such action.
(f) Nonalienation of Benefits. Except as expressly provided herein, no
Participant or beneficiary shall have the power or right to transfer,
anticipate, or otherwise encumber the Participant's interest under the Plan. The
Company's obligations under this Plan are not assignable or transferable except
to (i) a corporation which acquires all or substantially all of the Company's
assets or (ii) any corporation into which the Company may be merged or
consolidated. The provisions of the Plan shall inure to the benefit of each
Participant and the Participant's beneficiaries, heirs, executors,
administrators or successors in interest.
(g) Withholding. Any amount payable to a Participant or a beneficiary
under this Plan shall be subject to any applicable Federal, state and local
income and employment taxes and any other amounts that the Company or a
Subsidiary is required at law to deduct and withhold from such payment.
(h) Severability. If any provision of this Plan is held unenforceable,
the remainder of the Plan shall continue in full force and effect without regard
to such unenforceable provision and shall be applied as though the unenforceable
provision were not contained in the Plan.
(i) Governing Law. The Plan shall be construed in accordance with and
governed by the laws of the State of New York.
(j) Headings. Headings are inserted in this Plan for convenience of
reference only and are to be ignored in a construction of the provisions of the
Plan.
(k) Compliance with Certain Laws. This Plan is intended to comply with
the requirements of Section 162(m) of the Code and shall be interpreted
accordingly.
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DELTATHREE.COM, INC.
1999 DIRECTORS COMPENSATION PLAN
1. Purposes
The purposes of this deltathree.com, Inc. 1999 Directors Compensation Plan (the
"Plan") are to enable the Company to attract, retain and motivate the best
qualified directors and to enhance a long-term mutuality of interest between the
directors and shareholders of the Company by granting them shares and options to
purchase the Company's shares.
2. Definitions
Unless the context requires otherwise, the following words as used in the Plan
shall have the meanings ascribed to each below, it being understood that
masculine, feminine and neuter pronouns are used interchangeably, and that each
encompasses the others.
"Award" shall mean any Option or Share awarded under the Plan.
"Board" shall mean the Board of Directors of the Company.
"Class A Common Stock" shall mean the Class A common shares of the
Company, par value $.001.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall mean deltathree.com, Inc., a Delaware corporation, and
any successor thereto.
"Eligible Director" shall mean the Chairman of the Board (so long as
such person receives no compensation for his services to the Company or any of
its subsidiaries other than as a non-executive Chairman) and any director of the
Company who is not an employee of the Company or any of its subsidiaries.
"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, "Fair Market
Value" on the date of the IPO shall be the
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price at which the Shares are sold to the public in the IPO.
"Initial Option Award" shall mean an Option to purchase Shares
with an exercise price per Share equal to the Fair Market Value of a Share on
the date of grant that is granted to each Eligible Director on the date of the
IPO, and thereafter, to an individual effective as of the date he or she first
becomes an Eligible Director.
"IPO" shall mean the initial pubic offering of the Shares.
"Option" shall mean the right to purchase Shares at a stated price for
a specified period of time. For purposes of the Plan, the Options are
nonstatutory stock options and are not intended to qualify under Section 422 of
the Code.
"Share" shall mean a share of Class A Common Stock.
"Term Option Award" shall mean an Option to purchase Shares
with an exercise price per Share equal to the Fair Market Value of a Share on
the date of grant that is granted to each Eligible Director on the first
business day after each annual meeting of shareholders of the Company occurring
during the term of the Plan.
3. Effective Date
The effective date of the Plan shall be the date of the closing of the IPO.
4. Administration
(a) Powers of the Board. This Plan shall be administered by the Board.
The Board may delegate its powers and functions hereunder to a duly appointed
committee of the Board. The Board shall have full authority to interpret this
Plan; to establish, amend and rescind rules for carrying out this Plan; to
administer this Plan; to incorporate in any option agreement such terms and
conditions, not inconsistent with this Plan, as it deems appropriate; to
construe the respective option agreements and this Plan; and to make all other
determinations and to take such steps in connection with this Plan as the Board,
in its discretion, deems necessary or desirable for administering this Plan. All
expenses incurred in the administration of the Plan, including, but not limited
to, for the engagement of any counsel, consultant or agent, shall be paid by the
Company.
(b) Disinterested Status. Notwithstanding the foregoing, neither the
Board, any committee thereof nor any person designated pursuant to (c) below
shall take any action that would cause any director who is a "Non-Employee
Director" for purposes of
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Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, as
then in effect or any successor provisions ("Rule 16b-3"), to cease to be a
"Non-Employee Director," with regard to this Plan or any other stock option or
other equity plan of the Company. In particular, neither the Board nor any
committee thereof shall have any discretion as to
(i) the selection of Eligible Directors as eligible to receive
awards pursuant to the Plan; or
(ii) the number of Shares subject to Options awarded pursuant
to Section 6.
(c) Delegation. The Board may designate the Secretary of the Company,
other officers or employees of the Company or competent professional advisors to
assist the Board in the administration of this Plan, and may grant authority to
such persons to execute agreements or other documents on its behalf.
(d) Agents and Indemnification. The Board may employ such legal
counsel, consultants and agents as it may deem desirable for the administration
of this Plan, and may rely upon any opinion received from any such counsel or
consultant and any computation received from any such consultant or agent. No
member or former member of the Board or any committee thereof or any person
designated pursuant to paragraph (c) above shall be liable for any action or
determination made in good faith with respect to this Plan. To the maximum
extent permitted by applicable law and the Company's Certificate of
Incorporation and Bylaws, each member or former member of the Board or any
committee thereof or any person designated pursuant to (c) above shall be
indemnified and held harmless by the Company against any cost or expense
(including counsel fees, which shall be paid by the Company when incurred) or
liability (including any sum paid in settlement of a claim with the approval of
the Company) arising out of any act or omission to act in connection with this
Plan, unless arising out of such person's own fraud or bad faith. Such
indemnification shall be in addition to any rights of indemnification the person
may have as a director, officer or employee or under the Certificate of
Incorporation of the Company or the Bylaws of the Company.
5. Shares; Adjustment upon Certain Events
(a) Shares Available. Shares to be issued under this Plan shall be made
available, at the discretion of the Board, either from authorized but unissued
Shares or from issued Shares reacquired by the Company. The aggregate number of
Shares that
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may be issued under this Plan shall not exceed Shares, except as
provided in this Section. Shares subject to any Option granted hereunder which
expires or is terminated or canceled prior to exercise will be available for
future grants under the Plan.
(b) No Limit on Corporate Action. The existence of this Plan and Shares
granted hereunder shall not affect in any way the right or power of the Board or
the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of bonds, debentures, preferred or prior preference shares ahead of or affecting
common shares, the dissolution or liquidation of the Company or any sale or
transfer of all or part of its assets or business, or any other corporate act or
proceeding.
(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 5(a) or subject to outstanding Options, the number of Shares underlying
any outstanding Option Awards or future Option Awards pursuant to Section 6 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 underlying any outstanding Option Awards or future Option Awards
pursuant to Section 6.
6. Option Awards
(a) Initial Option Awards. Upon the date of the closing of the IPO,
each Eligible Director shall automatically be granted an Initial Option Award.
Each individual who becomes an Eligible Director after the Effective Date shall
be automatically granted an Initial Option Award on the date such Eligible
Director joins the Board.
(b) Term Option Awards. On the first business day after each annual
meeting of shareholders of the Company occurring during the term of the Plan,
each Eligible
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Director shall automatically be granted a Term Option Award.
(c) Option Agreement. Options shall be evidenced by a written option
agreement embodying the terms of this Section 6.
(d) Option Term. If not previously exercised, each Option shall expire
on the earlier of (i) the seventh (7th) anniversary of the date of the grant
thereof and (ii) on the first anniversary of the termination of the Eligible
Director's status as a director of the Company.
(e) Exercisability. Each Initial Option Award granted under the Plan
shall be fully vested and immediately exercisable and each Term Option Award
granted under this Plan shall become fully vested and exercisable on the first
anniversary of the date of grant.
(f) Procedure for Exercise. An Eligible Director electing to exercise
one or more Options shall give written notice to the Secretary of the Company of
such election and of the number of Shares he has elected to purchase. Shares
purchased pursuant to the exercise of Options shall he paid for at the time of
exercise in cash or by delivery to the Company of unencumbered Shares owned by
the Eligible Director for at least six (6) months (or such longer period as is
required by applicable accounting standards to avoid a charge to earnings),
having a value equal to the aggregate exercise price of the Options based on the
closing price of the Shares on the date of exercise, or a combination thereof.
Upon receipt of payment, the Company shall deliver to the Eligible Director as
soon as practicable a certificate or certificates for the Shares then purchased.
(g) Termination of Director Status. If an Eligible Director ceases to
serve as a member of the Board for any reason, (resignation, failure to stand
for reelection or failure to be reelected), any Option granted to such Eligible
Director may be exercised, to the extent it was exercisable at such date of
termination, within one year following the Eligible Director's termination of
service or prior to the expiration date of the term of the Option, whichever
period is shorter.
7. Transferability of Awards
No Award shall be transferable by the Eligible Director otherwise than by will
or under the applicable laws of descent and distribution, unless such transfer
shall be (a) acceptable under Rule 16b-3 and is approved by the Board or its
authorized delegate or (b) if the Option agreement pursuant to which an Award is
made so provides, by gift or domestic relations order, to (i) the spouse,
children or grandchildren of such Eligible
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Director (collectively, "Family Members"), (ii) a trust or trusts for the
exclusive benefit of such Family Members, or (iii) a partnership or limited
liability company in which such Family Members and trusts for the exclusive
benefit of such Family Members are the 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.
8. Rights as a Shareholder
An Eligible Director (or a permitted transferee of an Option) shall have no
rights as a shareholder with respect to any Shares covered by his Option until
he shall have become the holder of record of such Share(s), and no adjustments
shall be made for dividends in cash or other property or distribution or other
rights in respect to any such Shares, except as otherwise specifically provided
for in this Plan.
9. Determinations
Each determination, interpretation or other action made or taken pursuant to the
provisions of this Plan by the Board shall be final and binding for all purposes
and upon all persons, including, without limitation, the Company, the directors,
officers and other employees of the Company, the Eligible Director and the
respective heirs, executors, administrators, personal representatives and other
successors in interest of such persons.
10. Termination, Amendment and Modification
(a) Termination and Amendment. This Plan shall terminate at the close
of business on December 31, 2009, unless sooner terminated by action of the
shareholders of the Company, and no Awards shall be granted under this Plan
thereafter. The Board at any time or from time to time may amend this Plan to
effect (i) amendments necessary or desirable in order that this Plan and the
Awards shall conform to all applicable laws and regulations and (ii) any other
amendments deemed appropriate. Notwithstanding the foregoing, (i) the provisions
of the Plan relating to (A) the number of Shares to be granted under the Plan or
subject to any Option Award granted to any Eligible Director, (B) the timing of
any Award and (C) the material terms of any such Option Award (including,
without limitation, the time of any such grant) may not be amended without the
approval of the Company's shareholders and (ii) the Board may not effect any
amendment that
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would require the approval of the shareholders of the Company under any
applicable laws or the listing requirements of NASDAQ/NMS (if applicable to the
Company at the time such amendment is adopted or will be effective) unless such
approval is obtained.
(b) No Effect on Existing Rights. Except as otherwise required by law,
no termination, amendment or modification of this Plan may, without the consent
of an Eligible Director or the permitted transferee of an Award, alter or impair
the rights and obligations arising under any then outstanding Award held by such
Eligible Director or the permitted transferee.
11. Non-Exclusivity
Neither the adoption of this Plan by the Board nor the submission of this Plan
to the shareholders of the Company for approval shall be construed as creating
any limitations on the power of the Board to adopt such other compensatory
arrangements as it may deem desirable, including, without limitation, payments
of cash amounts related to the tax liabilities arising directly or indirectly
from the issuance of Shares in respect of an Option Award granted to an Eligible
Director hereunder.
12. General Provisions
(a) No Right to Serve as a Director. This Plan shall not impose any
obligations on the Company to retain any Eligible Director as a director nor
shall it impose any obligation on the part of any Eligible Director to remain as
a director of the Company, provided that each Eligible Director by accepting
each Award shall represent to the Company that it is his good faith intention to
continue to serve as a director of the Company until the next annual meeting of
shareholders and that he agrees to do so unless a change in circumstances
arises.
(b) No Right to Particular Assets. Nothing contained in this Plan and
no action taken pursuant to this Plan shall create or be construed to create a
trust of any kind or any fiduciary relationship between the Company and any
Eligible Director, the executor, administrator or other personal representative
or designated beneficiary of such Eligible Director, or any other persons. Any
reserves that may be established by the Company in connection with this Plan
shall continue to be part of the general funds of the Company, and no individual
or entity other than the Company shall have any interest in such funds until
paid to an Eligible Director. To the extent that any Eligible Director or his
executor, administrator, or other personal representative, as the case may be,
acquires a right to receive any payment from the Company pursuant to this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company.
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(c) Beneficiary Designation. Each Eligible Director under the Plan may
from time to time name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
or by whom any right under the Plan is to be exercised in case of his death.
Each designation will revoke all prior designations by the same Eligible
Director, shall be in a form prescribed by the Company, and will be effective
only when filed by the Eligible Director in writing with the Company during his
lifetime. In the absence of any such designation, benefits remaining unpaid at
the Eligible Director's death shall be paid to or exercised by the Eligible
Director's surviving spouse, if any, or otherwise to or by his estate.
(d) Listing of Shares and Related Matters. 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. If at any time the Board shall determine in its discretion that
the listing, registration or qualification of the Shares covered by this Plan
upon any national securities exchange or under any United States or non-United
States federal, state or other law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the delivery of Shares under this Plan, no Shares will be
delivered unless and until such listing, registration, qualification, consent or
approval shall have been effected or obtained, or otherwise provided for, free
of any conditions not acceptable to the Board. The Company, in its discretion,
may require an Eligible Director to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Shares 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 Shares in
violation of any such laws, rules, or 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 any person with respect to any Award (or
Shares issuable thereunder) that shall lapse because of such postponement.
(e) Issuance of Stock Certificates; Legends. Upon any exercise of an
Option and payment of the exercise price thereof and upon the issuance of Shares
pursuant to this Plan, a certificate or certificates for the Shares shall be
issued by the Company in the name of the person or persons exercising such
Option or receiving such Shares and shall be delivered to or upon the order of
such person or persons. Certificates for Shares issued upon exercise of an
Option or otherwise hereunder shall bear such legend or legends as the Board, in
its discretion, determines to be necessary or appropriate to prevent a
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violation of, or to perfect an exemption from, the registration requirements of
the Securities Act of 1933, as amended, or to implement the provisions of any
agreements between the Company and the Eligible Director with respect to such
Shares.
(f) Withholding Taxes. The Company shall have the right to make such
provisions as it deems necessary or appropriate to satisfy any obligations it
may have to withhold federal, state or local income or other taxes incurred by
reason of the issuance of Shares under the Plan, including requiring an Eligible
Director to reimburse the Company for any taxes required to be withheld or
otherwise deducted and paid by the Company in respect of the issuance of Shares.
(g) Notices. Each Eligible Director shall be responsible for furnishing
the Board with the current and proper address for the mailing of notices and
delivery of agreements and Shares. Any notices required or permitted to be given
shall be deemed given if directed to the person to whom addressed at such
address and mailed by regular United States mail, first-class and prepaid. If
any item mailed to such address is returned as undeliverable to the addressee,
mailing will be suspended until the Eligible Director furnishes the proper
address.
(h) Severability of Provisions. If any provision of this Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and this Plan shall be construed and
enforced as if such provision had not been included.
(i) Incapacity. Any benefit payable to or for the benefit of a minor,
an incompetent person or other person incapable of receipting therefor shall be
deemed paid when paid to such person's guardian or to the party providing or
reasonably appearing to provide for the care of such person, and such payment
shall fully discharge the Board, the Company and other parties with respect
thereto.
(j) Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of
this Plan, and shall not be employed in the construction of this Plan.
(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.
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Exhibit 10.7
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of April 1, 1999, by and between
deltathree.com, Inc. (formerly Delta Three, Inc.), a Delaware corporation (the
"Company"), and Amos Sela ("Executive").
W I T N E S S E T H:
-------------------
WHEREAS, the Company desires to enter into an agreement, effective
as of April 1, 1999 (the "Commencement Date") to set out the terms and
conditions of Executive's employment by the Company from and after the
Commencement Date; and
WHEREAS, the Executive desires to continue in the employment of the
Company from and after the Commencement Date under those terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions of
this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term (the
"Term") commencing on the Commencement Date and ending on March 31, 2002, unless
extended by a written agreement signed by both parties. The period commencing on
the Commencement Date and ending on the earlier of (i) the expiration of the
Term, or (ii) the date of Executive's termination of employment pursuant to
Section 5(a) shall be referred to as the "Employment Period".
2. Position and Duties.
(a) In general. Executive shall be employed as Chief Executive Officer
(the "CEO") and shall perform such duties and services, consistent with such
position and his current duties and services for the Company, and as may be
assigned to him from time to time by the Company's Board of Directors. The
duties of the Executive shall include serving as an officer or director or
otherwise performing services for any "Affiliate" of the Company as requested by
the Company. An "Affiliate" of the Company means any entity that controls, is
controlled by or is
<PAGE>
under common control with the Company. Executive shall report to the Board of
Directors of the Company.
(b) Full-time employment. During the Employment Period, Executive shall
devote his full business time to the services required of him hereunder, except
for time devoted to services required by him to be performed for any "Affiliate"
of the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his reasonable best efforts,
judgement, skill and energy to perform such services in a manner consonant with
the duties of his position and to improve and advance the business and interests
of the Company. Executive shall not be engaged in any other business activity
which, in the reasonable judgment of a majority of the Board of Directors,
conflicts with the duties of the Executive under this Agreement. Executive may
serve on the Board of Directors of other corporations which do not compete with
the Company; provided, however, that, in such case, (i) Executive shall provide
the Company with 5 days' written notice of any scheduled meeting of the Board of
Directors of such company and (ii) Executive shall be charged with 1/2 vacation
day for every four hours spent at such Board of Directors meeting during
business hours. In such event, Executive shall receive five days' written notice
to disengage from such business activity. Executive shall travel to such
location or locations as may be requested by the Company, or which Executive
believes is necessary or advisable, in the performance by Executive of his
duties hereunder or to the extent appropriate to improve and advance the
interests of the Company and its Affiliates. There is no formal disciplinary
procedure, but Executive is expected at all times to behave in a manner
befitting his employment.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$230,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 2001, by an amount equal to the base salary then in
effect, multiplied by the percentage increase in the Cost of Living Index during
the preceding year. The "Cost of Living Index" means the consumer price index
for all urban consumers in the New York metropolitan area published by the
Department of Labor, or if such index is no longer available, such other
generally available index measuring changes in consumer purchasing power (in the
New York metropolitan area or nationally) designated by the Board of Directors.
Any delay in increase in Executive's annual base salary by reason of the
unavailability of any such index at the time any such increase shall otherwise
be due shall be made up by a lump sum payment promptly after the index becomes
available. Executive's salary, as adjusted for any increase in the Cost of
Living Index, may be further increased at the option and in the discretion of
the Board of Directors (such salary, as the same may be increased from time to
time, is referred to herein as the "Base Salary"). The Base Salary shall be
payable in such installments (but not less frequent than monthly) as the
salaries of other executives of the Company are paid.
(b) Performance Incentive Plan. During the Employment Period, Executive
shall be eligible to participate in the Company's 1999 Performance Incentive
Plan. The discretionary portion of the bonus shall be determined by the
Compensation Committee. If the Company shall
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amend or terminate the 1999 Performance Incentive Plan in a manner that would
reduce the opportunity of Executive to earn an incentive bonus as provided in
the 1999 Performance Incentive Plan, the Company shall provide a substitute
arrangement so that Executive's total bonus opportunity will not be materially
reduced.
(c) Stock Incentive Plan. The Company shall grant Executive an award of
stock options (the "Option") to purchase 110,000 shares of the Company's Class A
Common Stock (the "Common Stock") at an exercise price equal to US$12.70 per
share. The Option shall be governed by, and fall under, the Company's 1999 Stock
Incentive Plan upon approval of such plan by the Company's Board of Directors.
The Option grant date shall be the date the Option grant is approved by the
Board of Directors or the Compensation Committee of the Board of Directors. The
Option shall become exercisable as set forth below, provided that Executive is
employed by the Company on such date, and once exercisable shall, except as
otherwise provided below, remain exercisable until the expiration of seven years
from the date of grant. However, the Option shall be immediately terminated upon
a termination of Executive's employment by the Company for Cause (as hereinafter
defined):
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
First Anniversary of the Commencement Date 33-1/3%
Second Anniversary of the Commencement Date 66-2/3%
Third Anniversary of the Commencement Date 100%
The Option shall become immediately exercisable in full in the event
that Executive's employment with the Company is terminated: (i) by the Company
other than for Cause, (ii) by Executive for Good Reason or (iii) by reason of
the death or Disability of the Executive; provided, however, that if Executive's
employment is terminated for any reason prior to September 30, 2000, only the
exercisable portion of the Option, if any, shall remain exercisable and any
unvested portion of the Option shall not be exercisable. The Option shall expire
on the seventh anniversary of the Commencement Date.
Additionally, the Option shall become immediately exercisable in
full upon a Change in Control. The exercisable portion of the Option shall,
following any termination of Executive's employment (other than for Cause),
remain exercisable for the lesser of two years and the remaining term of the
Option.
[Notwithstanding anything contained herein to the contrary, if, for
any reason, prior to the first anniversary of the Commencement Date, RSL
Communications, Ltd. ("RSL COM") does not receive written consent from its
noteholders to issue the Company's common stock or grant options to the
Company's employees pursuant to its stock incentive plans, then the Company may,
in its sole and absolute discretion, in lieu of delivering Common Stock to the
Executive, exchange the Option, and Executive shall waive any rights Executive
has to the
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Options, for RSL COM stock unit awards on substantially the terms and conditions
set forth in the stock unit award agreement attached hereto as Exhibit A.]
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible to
participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or maintained by the Company, in
each case, whether now existing or established hereafter, on the same basis as
generally made available to other senior officers of the Company.
(b) Perquisites. During the Employment Period, Executive shall be entitled
to five weeks' paid vacation annually and shall also be entitled to receive such
perquisites as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.
Executive shall not be entitled to receive renumeration for unused vacation and
shall not be permitted to carry-over unused vacation to the following year,
unless Executive receives the written consent from the Board of Directors prior
to September 30th of such year.
(c) Business Expenses. During the Employment Period, the Company shall pay
or reimburse Executive for all reasonable expenses incurred or paid by Executive
in the performance of Executive's duties hereunder, upon presentation of expense
statements or vouchers and such other information as the Company may require and
in accordance with the generally applicable policies and procedures of the
Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or affiliates or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law and the Company's
Certificate of Incorporation and Bylaws in effect on the date hereof. If any
claim is asserted against Executive with respect to which Executive reasonably
believes in good faith he is entitled to indemnification, the Company shall
either defend Executive or, at its option, pay Executive's legal expenses (or
cause such expenses to be paid) on a quarterly basis, provided that Executive
shall reimburse the Company for such amounts, plus simple interest thereon at
the 90-day United States Treasury Bill rate as in effect from time to time,
compounded annually, if Executive shall be found by a court of competent
jurisdiction not to have been entitled to indemnification.
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5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall end
upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination by Executive for Good Reason, (vi) a Termination by Executive
other than for Good Reason, or (vii) the expiration of the Term. The Company or
the Executive may initiate a termination in any manner permitted hereunder by
giving the other party written notice thereof (the "Termination Notice"). The
effective date (the "Termination Date") of any termination shall be deemed to be
the later of (i) in the case of a Termination Notice from Executive, 45 days
after the receipt by the Company of the Termination Notice, (ii) the date on
which the Termination Notice is given, or (iii) the date specified in the
Termination Notice; provided, however, that in the case of the Executive's
death, the Termination Date shall be the date of death. Upon termination of his
employment for any reason, Executive will immediately resign from all positions
that he holds with the Company and its Affiliates.
(b) Payments Upon Certain Terminations.
(i) Termination Without Cause or Termination by Executive for Good
Reason. In the event that Executive's employment is terminated by the Company
Without Cause or by Executive for Good Reason, the Company shall pay Executive
his Earned Salary, Vested Benefits and a Severance Benefit (as such terms are
hereinafter defined). In addition, if Executive's employment terminates pursuant
to this subsection (i), the Company shall continue to provide to Executive the
welfare benefits (other than disability insurance) referred to in Section 4, or
substantially comparable benefits, until the earlier of (x) the date on which
Executive is eligible to obtain comparable benefits from other employment, (y)
the expiration of the Term or (z) one year.
(ii) Termination due to Death. In the event of the termination of
Executive's employment due to Executive's death, the Company shall pay
Executive's estate Executive's Earned Salary, Vested Benefits and a lump sum
payment equal to 12 months of Executive's Base Salary (at the rate in effect on
the date of his death).
(iii) Termination due to Disability or Retirement. In the event of
termination of Executive's employment by the Company due to Disability or a
Termination due to Retirement, the Company shall pay Executive his Earned Salary
and Vested Benefits, plus, in the event of termination due to Disability, to the
Executive or his estate his Base Salary at the Termination Date on a monthly
basis for 12 months following the month in which Executive's employment is
terminated. In the event that Executive's employment with the Company is
terminated due to Disability, Executive's benefits under this subsection (iii)
shall be reduced by the amount of any Company sponsored (and paid for)
disability benefits paid to Executive.
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(iv) Termination by Executive Other Than for Good Reason. In the
event of a Termination by Executive other than for Good Reason, the Company
shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump sum
as soon as practicable, but in no event later than the earlier of 60 days
following the end of the Employment Period or the day such Earned Salary would
have been payable under the Company's normal payroll practices. Vested Benefits
shall be payable in accordance with the terms of the plan, policy, practice,
program, contract or agreement under which such benefits have accrued except as
otherwise expressly modified by this Agreement. Fifty percent (50% ) of
Severance Benefits shall be paid within 30 days after the Termination Date and
the remaining 50% of the Severance Benefits shall be paid in equal monthly
installments during the eleven-month period following the first payment.
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon his termination for any reason deduct and retain
from any monies owed by it to Executive any sum properly paid by it or any
Affiliate to, on behalf or at the request of Executive or due to it from
Executive including, but not limited to, unauthorized expenses or excess
vacation.
(e) Definitions. The following capitalized terms have the following
meanings:
"Change in Control" means the occurrence of (i) a sale or other
disposition of stock of the Company, other than a spin-off or any other form of
distribution of the Company's shares owned by RSL COM to the shareholders of RSL
COM, or an issuance of stock of the Company as a result of which any "person"
(as such term is used in section 13(d) and 14(d) of the Exchange Act), other
than RSL COM or any of its subsidiaries, or Ronald S. Lauder ("Lauder"), or any
of his controlled entities, is or becomes the beneficial owner of more than 50%
of the total voting power of the Company and those persons who are members of
the Board of Directors of the Company immediately prior to the closing of such
transaction constitute less than one half of the membership of the Board of
Directors of the Company immediately following the closing of such transaction,
(ii) any merger, consolidation or reorganization following which those persons
who are members of the Board of Directors of the Company immediately prior to
the closing of such transaction constitute less than one half of the membership
of the board of directors of the surviving entity immediately following the
closing of such transaction, (iii) a transaction pursuant to which more than 50%
of the total value of the assets of the Company and its consolidated
subsidiaries are transferred and the transferee of such assets is not RSL COM or
any of its subsidiaries, or Lauder or a company controlled by him, or (iv) a
complete liquidation of the Company.
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"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month following
Executive attaining age 65.
"Severance Benefit" means an amount equal to Executive's annual Base
Salary as in effect immediately prior to the Termination Date.
"Termination due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable of substantially
fulfilling the positions, duties, responsibilities and obligations set forth in
this Agreement because of physical, mental or emotional incapacity resulting
from injury, sickness or disease for a period of (i) at least six consecutive
months or (ii) more than nine months in any twelve month period. Any question as
to the existence, extent or potentiality of Executive's disability upon which
Executive and the Company cannot agree shall be determined by a qualified,
independent physician selected by the Company and reasonably acceptable to
Executive. The determination of any such physician shall be final and conclusive
for all purposes of this Agreement. Executive or his legal representative or any
adult member of his immediate family shall have the right to present to such
physician such information and arguments as to Executive's disability as he, she
or they deem appropriate, including the opinion of Executive's personal
physician.
"Termination due to Retirement" means termination of employment by
Executive other than for Good Reason, or termination of Executive's employment
by the Company other than a Termination for Cause, on or after Executive's
Normal Retirement Age.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) Executive's conviction of a felony or the
entering by Executive of a plea of nolo contendere with respect to a charged
felony, (ii) Executive's gross negligence, recklessness, dishonesty, or fraud,
willful malfeasance or willful misconduct in the performance of the services
contained in this Agreement; (iii) a willful failure without reasonable
justification to comply with a reasonable written order of the Board of
Directors or the CEO; or (iv) a willful and material breach of Executive's
duties or obligations under this Agreement, including, without limitation,
Executive's failure to devote full business time to the Company in accordance
with Section 2(b) of this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Cause unless the Company
shall have delivered a written notice to Executive stating that it intends to
terminate his employment for Cause and specifying the factual basis for such
termination, and the event or events that form the basis for the notice, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
"Termination Without Cause" means any termination by the Company of
Executive's employment hereunder other than (i) a Termination due to Disability,
(ii) a Termination due to Retirement or (iii) a Termination for Cause.
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"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following (i) a reduction in Executive's
annual Base Salary or opportunity under the 1999 Performance Incentive Plan
below the levels contemplated by Sections 3(a) and (b), (ii) a material
reduction in Executive's positions, duties, responsibilities or reporting lines
from those described in Section 2 hereof; or (iii) a material breach of this
Agreement by the Company. Notwithstanding the foregoing, a termination shall not
be treated as a Termination for Good Reason (x) if Executive shall have
consented in writing to the occurrence of the event giving rise to the claim of
Termination for Good Reason or (y) unless Executive shall have delivered a
written notice to the Company within 30 days of his having actual knowledge of
the occurrence of one of the events specified in clause (i), (ii) or (iii) above
stating that he intends to terminate his employment for Good Reason and
specifying the factual basis for such termination, and such event, if capable of
being cured, shall not have been cured within 30 days of the receipt of such
notice or (z) if the opportunity under the Company's proposed 1999 Performance
Incentive Plan is reduced by action of the Board of Directors of the Company.
Following a "Change in Control," Executive shall not be deemed to have Good
Reason under clause (ii) above so long as he continues to have substantially the
responsibilities he had at the time of the Change in Control.
"Termination Without Good Reason" means any termination by Executive
of Executive's employment hereunder other than (i) a termination due to
Executive's death, (ii) a Termination due to Retirement, (iii) a Termination for
Good Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which Executive
is otherwise entitled to receive under the terms of or in accordance with any
plan, policy, practice or program of, or any contract or agreement with, the
Company, including the Option (to the extent provided in Section 3(c)), at or
subsequent to the date of his termination without regard to the performance by
Executive of further services or the resolution of a contingency and expenses
incurred prior to termination of employment that are reimbursable under Section
4(c).
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries or Affiliates, including, without limitation, RSL COM. Such amounts
shall constitute liquidated damages with respect to any and all such rights and
claims and, upon Executive's receipt of such amounts, the Company shall be
released and discharged from any and all liability to Executive in connection
with this Agreement or otherwise in connection with Executive's employment with
the Company and its subsidiaries and Affiliates, other than Executive's rights
to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of twelve months
thereafter (the "Applicable Period"), Executive shall not directly or indirectly
own, manage, operate, finance,
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join, control, advise, consult, render services to, have an interest or future
interest or participate in the ownership, management, operation, financing or
control of, or be employed by or connected in any manner with any Competing
Business (other than as a holder of common stock of the Company, and not in
excess of 1% of the outstanding voting shares of any other publicly traded
company). "Competing Business" means the business of internet telephony and web
communication services engaged in by the Company in any country where the
Company or an Affiliate conducts such business at any time during the Term. Any
opportunity directly or indirectly related to any business engaged in by the
Company, its subsidiaries and Affiliates of which Executive becomes aware during
the Term shall be deemed a corporate opportunity of the Company, and Executive
shall promptly make such opportunity available to the Company.
(b) If, during the period of twelve months after expiration of the
Employment Period, Executive proposes to engage directly or indirectly in what
may be a Competing Business, Executive shall so notify the Company in a writing
which shall fully set forth and describe in detail the nature of the activity
which may be a competitive Business, the names of the companies or other
entities with or for whom such activity is proposed to be engaged in by
Executive or by an Affiliate of Executive (the "Section 6 Notice"). If, within
30 days after receipt by the Company of a Section 6 Notice, the Company shall
fail to notify Executive that it deems the proposed activity to be a Competitive
Business, then Executive shall be free to engage in the activities described in
the Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the twelve month period following expiration of the Employment Period,
and (ii) the Company shall pay Executive, during such twelve month period, in
equal monthly installments, an amount equal to his highest Base Salary; provided
that the amount payable under this Section 6(b) shall be reduced by the amount
of Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall not
disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining to
the Company or an Affiliate, any of their businesses or the business or personal
affairs of Lauder or his family and how any of them conducts its or his business
or affairs. "Confidential Information" includes not only information disclosed
by the Company or an Affiliate to Executive, but non-public information
developed, created or learned by Executive during the course of or as a result
of Executive's employment with the Company. "Confidential Information"
specifically includes non-public information and documents concerning the
Company's and its Affiliates' methods of doing business; research,
telecommunications technology, its actual and potential clients, transactions
and suppliers (including the Company's
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or an Affiliate's terms, conditions and other business arrangements with them);
client or potential client or transaction lists and billing; advertising,
marketing and business plans and strategies (including prospective or pending
licensing applications or investments in license holders or applicants); profit
margins, goals, objectives and projections; compilations, analyses and
projections regarding the Company, its Affiliates or any of its clients or
potential clients or their businesses; trade secrets; salary, staffing,
management organization or employment information; information relating to
members of the Board of Directors and management of the Company or an Affiliate;
files, drawings or designs; information regarding product development, marketing
plans, sales plans or manufacturing plans; operating policies or manuals,
business plans, financial records or packaging design; or any other non-public
financial, commercial, business or technical information relating to the
Company, an Affiliate, Lauder or his family or non-public information designated
as confidential or proprietary that the Company, an Affiliate or Lauder may
receive belonging to others who do business with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall promptly (and at the latest
within five business days but not less than three days prior to the date
Executive is required to respond to the request) notify the Company of that
request and cooperate to the maximum extent authorized by law with the Company
in protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information. The Company will reimburse
Executive for reasonable out-of-pocket costs or expenses incurred by Executive
in connection with his cooperation with the Company and its Affiliates
hereunder.
8. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, or members of the
Board of Affiliates, except to the extent required by law, and then only after
consultation with the other party to the maximum extent possible in order to
maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks, computer
diskettes and tapes and anything else containing the Company's
Confidential Information (as defined above), and any other property
or Confidential Information of the Company or its Affiliates,
including all copies thereof in Executive's possession, custody or
control, and
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(ii) delete from any computer or other electronic storage medium owned by
Executive any of the proprietary or Confidential Information of the
Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a one-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity, and during the Employment Period and for a
six-month period thereafter, shall not directly or indirectly, either
individually or as owner, agent, employee, consultant or otherwise, employ or
offer employment to any person who is or was employed by the Company or any
Affiliate as an employee.
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, 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) The Company, on one hand, and Executive 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.
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(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 attorney's fees) on any unsuccessful party to the
extent the Arbitrator concludes that such party is unsuccessful, unless he or
she concludes that (i) matters of equity or important considerations of fairness
dictate otherwise or (ii) in the case of Executive, the Arbitrator determined
that Executive acted reasonably and in good faith in pursuing all of the claims
asserted by him in such arbitration.
(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(s) 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(s) have 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(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
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(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 United States (Federal)
Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement of the
award or any direction for specific performance rendered by the arbitrators 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 that 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(s),
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.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services and
capabilities that he will provide to the Company under this Agreement are of a
personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that because the internet telephony
and web communications industry is globally integrated and that its constituent
companies are dependent for their survival on protection of their confidential
information which is highly advanced and technical and on carefully developed
knowledge of customer systems and requirements, the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and obligations
of Executive with respect to noncompetition, nonsolicitation, confidentiality
and Company property relate to special, unique and extraordinary matters and
that a violation of any of the terms of such covenants and obligations will
cause the Company and its Affiliates irreparable injury for which
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adequate remedies are not available at law. Executive therefore agrees that the
Company shall be entitled to an order of specific performance, injunction,
restraining order or such other interim or permanent equitable relief (without
the requirement to post bond) restraining Executive from committing any
violation of the covenants and obligations contained in this Agreement.
Executive acknowledges and agrees that if any one or more of any part of such
restrictions shall be rendered or judged invalid or unenforceable, such
restriction or part shall be deemed to be severed from this Agreement and such
invalidity or unenforceability shall not in any way affect the validity of the
remaining provisions.
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
15. Automatic Amendment by Court Order and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of any
part or terms of this agreement, including, without limitation, the provisions
relating to noncompetition, nonsolicitation, confidentiality and Company
property, the Executive specifically agrees that he will comply fully with this
Agreement unless and until the entry of an arbitral award to the contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
160 West 66th Street
Apt. 56F
New York, NY 10032
if to the Company, to the Company at
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deltathree.com, Inc.
430 Park Avenue
5th Floor
New York , NY 10022
Attention: Corporate Counsel
With a copy to :
RSL Communications, Ltd.
767 Fifth Avenue
Suite 4300
New York, NY 10153
Attention: Corporate Counsel
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other agreements, promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive.
18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
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20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding upon,
the Company, its successors and assigns and upon the Executive and his heirs,
successors and assigns; provided, however, that, because this is an Agreement
for personal services, the Executive cannot assign any of his obligations under
this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each of
the two counterparts will be deemed to be an original and the final counterpart
shall be deemed to have been executed in New York, New York.
22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by Executive
and then by the Company in New York, New York, on the dates shown below, but
effective as of the date and year first above written.
Date:_____________ ________________________________________
Executive
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deltathree.com, Inc.
Date:_____________ BY:_____________________________________
Title:__________________________________
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Exhibit 10.8
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of April 1, 1999, by and between
deltathree.com, Inc. (formerly Delta Three, Inc.), a Delaware corporation (the
"Company"), and Mark Hirschhorn ("Executive").
W I T N E S S E T H:
-------------------
WHEREAS, the Company desires to enter into an agreement, effective
as of April 1, 1999 (the "Commencement Date") to set out the terms and
conditions of Executive's employment by the Company from and after the
Commencement Date; and
WHEREAS, the Executive desires to continue in the employment of the
Company from and after the Commencement Date under those terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions of
this Agreement, the Company hereby employs Executive, and Executive hereby
accepts continued employment by the Company.
(b) Term of Employment. The Company shall employ Executive for a term (the
"Term") commencing on the Commencement Date and ending on March 31, 2002, unless
extended by a written agreement signed by both parties. The period commencing on
the Commencement Date and ending on the earlier of (i) the expiration of the
Term, or (ii) the date of Executive's termination of employment pursuant to
Section 5(a) shall be referred to as the "Employment Period".
2. Position and Duties.
(a) In general. Executive shall be employed as Chief Financial Officer
(the "CFO") and shall perform such duties and services, consistent with such
position and his current duties and services for the Company, and as may be
assigned to him from time to time by the Company's Chief Executive Officer (the
"CEO"). The duties of the Executive shall include serving as an officer or
director or otherwise performing services for any "Affiliate" of the Company as
requested by the Company. An "Affiliate" of the Company means any entity that
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controls, is controlled by or is under common control with the Company.
Executive shall report to the CEO of the Company.
(b) Full-time employment. During the Employment Period, Executive shall
devote his full business time to the services required of him hereunder, except
for time devoted to services required by him to be performed for any "Affiliate"
of the Company, vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his reasonable best efforts,
judgement, skill and energy to perform such services in a manner consonant with
the duties of his position and to improve and advance the business and interests
of the Company. Executive shall not be engaged in any other business activity
which, in the reasonable judgment of the CEO, conflicts with the duties of the
Executive under this Agreement. Executive may serve on the Board of Directors of
other corporations which do not compete with the Company; provided, however,
that, in such case, (i) Executive shall provide the Company with 5 days' written
notice of any scheduled meeting of the Board of Directors of such company and
(ii) Executive shall be charged with 1/2 vacation day for every four hours spent
at such Board of Directors meeting during business hours. In such event,
Executive shall receive five days' written notice to disengage from such
business activity. Executive shall travel to such location or locations as may
be requested by the Company, or which Executive believes is necessary or
advisable, in the performance by Executive of his duties hereunder or to the
extent appropriate to improve and advance the interests of the Company and its
Affiliates. There is no formal disciplinary procedure, but Executive is expected
at all times to behave in a manner befitting his employment.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary at the annual rate of US$200,000; provided that,
Executive's annual base salary shall be increased as of January 1 of each year,
commencing January 1, 2001, by an amount equal to the base salary then in
effect, multiplied by the percentage increase in the Cost of Living Index during
the preceding year. The "Cost of Living Index" means the consumer price index
for all urban consumers in the New York metropolitan area published by the
Department of Labor, or if such index is no longer available, such other
generally available index measuring changes in consumer purchasing power (in the
New York metropolitan area or nationally) designated by the Board of Directors.
Any delay in increase in Executive's annual base salary by reason of the
unavailability of any such index at the time any such increase shall otherwise
be due shall be made up by a lump sum payment promptly after the index becomes
available. Executive's salary, as adjusted for any increase in the Cost of
Living Index, may be further increased at the option and in the discretion of
the Board of Directors (such salary, as the same may be increased from time to
time, is referred to herein as the "Base Salary"). The Base Salary shall be
payable in such installments (but not less frequent than monthly) as the
salaries of other executives of the Company are paid.
(b) Performance Incentive Plan. During the Employment Period, Executive
shall be eligible to participate in the Company's 1999 Performance Incentive
Plan. The discretionary portion of the bonus shall be determined by the
Compensation Committee. If the Company shall
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amend or terminate the 1999 Performance Incentive Plan in a manner that would
reduce the opportunity of Executive to earn an incentive bonus as provided in
the 1999 Performance Incentive Plan, the Company shall provide a substitute
arrangement so that Executive's total bonus opportunity will not be materially
reduced.
(c) Stock Incentive Plan. The Company shall grant Executive an award of
stock options (the "Option") to purchase 70,000 shares of the Company's Class A
Common Stock (the "Common Stock") at an exercise price equal to US$12.70 per
share. The Option shall be governed by, and fall under, the Company's 1999 Stock
Incentive Plan upon approval of such plan by the Company's Board of Directors.
The Option grant date shall be the date the Option grant is approved by the
Board of Directors or the Compensation Committee of the Board of Directors. The
Option shall become exercisable as set forth below, provided that Executive is
employed by the Company on such date, and once exercisable shall, except as
otherwise provided below, remain exercisable until the expiration of seven years
from the date of grant. However, the Option shall be immediately terminated upon
a termination of Executive's employment by the Company for Cause (as hereinafter
defined):
Date First Exercisable Percentage Exercisable
---------------------- ----------------------
First Anniversary of the Commencement Date 33-1/3%
Second Anniversary of the Commencement Date 66-2/3%
Third Anniversary of the Commencement Date 100%
The Option shall become immediately exercisable in full in the event
that Executive's employment with the Company is terminated: (i) by the Company
other than for Cause, (ii) by Executive for Good Reason or (iii) by reason of
the death or Disability of the Executive; provided, however, that if Executive's
employment is terminated for any reason prior to September 30, 2000, only the
exercisable portion of the Option, if any, shall remain exercisable and any
unvested portion of the Option shall not be exercisable. The Option shall expire
on the seventh anniversary of the Commencement Date.
Additionally, the Option shall become immediately exercisable in
full upon a Change in Control. The exercisable portion of the Option shall,
following any termination of Executive's employment (other than for Cause),
remain exercisable for the lesser of two years and the remaining term of the
Option.
[Notwithstanding anything contained herein to the contrary, if, for
any reason, prior to the first anniversary of the Commencement Date, RSL
Communications, Ltd. ("RSL COM") does not receive written consent from its
noteholders to issue the Company's common stock or grant options to the
Company's employees pursuant to its stock incentive plans, then the Company may,
in its sole and absolute discretion, in lieu of delivering Common Stock to the
Executive, exchange the Option, and Executive shall waive any rights Executive
has to the
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Options, for RSL COM stock unit awards on substantially the terms and conditions
set forth in the stock unit award agreement attached hereto as Exhibit A.]
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible to
participate in (i) each welfare benefit plan sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each pension, profit sharing, retirement,
deferred compensation or savings plan sponsored or maintained by the Company, in
each case, whether now existing or established hereafter, on the same basis as
generally made available to other senior officers of the Company.
(b) Perquisites. During the Employment Period, Executive shall be entitled
to five weeks' paid vacation annually and shall also be entitled to receive such
perquisites as are generally provided to other senior officers of the Company in
accordance with the then current policies and practices of the Company.
Executive shall not be entitled to receive renumeration for unused vacation and
shall not be permitted to carry-over unused vacation to the following year,
unless Executive receives the written consent from the CEO prior to September
30th of such year.
(c) Business Expenses. During the Employment Period, the Company shall pay
or reimburse Executive for all reasonable expenses incurred or paid by Executive
in the performance of Executive's duties hereunder, upon presentation of expense
statements or vouchers and such other information as the Company may require and
in accordance with the generally applicable policies and procedures of the
Company.
(d) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss or cause of action arising
from or out of Executive's performance as an officer, director or employee of
the Company or any of its subsidiaries or affiliates or in any other capacity,
including any fiduciary capacity, in which Executive serves at the request of
the Company to the maximum extent permitted by applicable law and the Company's
Certificate of Incorporation and Bylaws in effect on the date hereof. If any
claim is asserted against Executive with respect to which Executive reasonably
believes in good faith he is entitled to indemnification, the Company shall
either defend Executive or, at its option, pay Executive's legal expenses (or
cause such expenses to be paid) on a quarterly basis, provided that Executive
shall reimburse the Company for such amounts, plus simple interest thereon at
the 90-day United States Treasury Bill rate as in effect from time to time,
compounded annually, if Executive shall be found by a court of competent
jurisdiction not to have been entitled to indemnification.
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5. Termination of Employment.
(a) Termination of the Employment Period. The Employment Period shall end
upon the earliest to occur of (i) a termination of Executive's employment on
account of Executive's death, (ii) a Termination due to Disability or
Retirement, (iii) a Termination for Cause, (iv) a Termination Without Cause, (v)
a Termination by Executive for Good Reason, (vi) a Termination by Executive
other than for Good Reason, or (vii) the expiration of the Term. The Company or
the Executive may initiate a termination in any manner permitted hereunder by
giving the other party written notice thereof (the "Termination Notice"). The
effective date (the "Termination Date") of any termination shall be deemed to be
the later of (i) in the case of a Termination Notice from Executive, 45 days
after the receipt by the Company of the Termination Notice, (ii) the date on
which the Termination Notice is given, or (iii) the date specified in the
Termination Notice; provided, however, that in the case of the Executive's
death, the Termination Date shall be the date of death. Upon termination of his
employment for any reason, Executive will immediately resign from all positions
that he holds with the Company and its Affiliates.
(b) Payments Upon Certain Terminations.
(i) Termination Without Cause or Termination by Executive for Good
Reason. In the event that Executive's employment is terminated by the Company
Without Cause or by Executive for Good Reason, the Company shall pay Executive
his Earned Salary, Vested Benefits and a Severance Benefit (as such terms are
hereinafter defined). In addition, if Executive's employment terminates pursuant
to this subsection (i), the Company shall continue to provide to Executive the
welfare benefits (other than disability insurance) referred to in Section 4, or
substantially comparable benefits, until the earlier of (x) the date on which
Executive is eligible to obtain comparable benefits from other employment, (y)
the expiration of the Term or (z) one year.
(ii) Termination due to Death. In the event of the termination of
Executive's employment due to Executive's death, the Company shall pay
Executive's estate Executive's Earned Salary, Vested Benefits and a lump sum
payment equal to 12 months of Executive's Base Salary (at the rate in effect on
the date of his death).
(iii) Termination due to Disability or Retirement. In the event of
termination of Executive's employment by the Company due to Disability or a
Termination due to Retirement, the Company shall pay Executive his Earned Salary
and Vested Benefits, plus, in the event of termination due to Disability, to the
Executive or his estate his Base Salary at the Termination Date on a monthly
basis for 12 months following the month in which Executive's employment is
terminated. In the event that Executive's employment with the Company is
terminated due to Disability, Executive's benefits under this subsection (iii)
shall be reduced by the amount of any Company sponsored (and paid for)
disability benefits paid to Executive.
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(iv) Termination by Executive Other Than for Good Reason. In the
event of a Termination by Executive other than for Good Reason, the Company
shall pay Executive his Earned Salary and Vested Benefits.
(v) Termination for Cause. In the event of a termination of
Executive's employment by the Company for Cause, the Company shall pay Executive
his Earned Salary and Vested Benefits.
(c) Timing of Payments. Earned Salary shall be paid in a single lump sum
as soon as practicable, but in no event later than the earlier of 60 days
following the end of the Employment Period or the day such Earned Salary would
have been payable under the Company's normal payroll practices. Vested Benefits
shall be payable in accordance with the terms of the plan, policy, practice,
program, contract or agreement under which such benefits have accrued except as
otherwise expressly modified by this Agreement. Fifty percent (50% ) of
Severance Benefits shall be paid within 30 days after the Termination Date and
the remaining 50% of the Severance Benefits shall be paid in equal monthly
installments during the eleven-month period following the first payment.
(d) Retention of monies owed. The Company may at any time during
Executive's employment or upon his termination for any reason deduct and retain
from any monies owed by it to Executive any sum properly paid by it or any
Affiliate to, on behalf or at the request of Executive or due to it from
Executive including, but not limited to, unauthorized expenses or excess
vacation.
(e) Definitions. The following capitalized terms have the following
meanings:
"Change in Control" means the occurrence of (i) a sale or other
disposition of stock of the Company, other than a spin-off or any other form of
distribution of the Company's shares owned by RSL COM to the shareholders of RSL
COM, or an issuance of stock of the Company as a result of which any "person"
(as such term is used in section 13(d) and 14(d) of the Exchange Act), other
than RSL COM or any of its subsidiaries, or Ronald S. Lauder ("Lauder"), or any
of his controlled entities, is or becomes the beneficial owner of more than 50%
of the total voting power of the Company and those persons who are members of
the Board of Directors of the Company immediately prior to the closing of such
transaction constitute less than one half of the membership of the Board of
Directors of the Company immediately following the closing of such transaction,
(ii) any merger, consolidation or reorganization following which those persons
who are members of the Board of Directors of the Company immediately prior to
the closing of such transaction constitute less than one half of the membership
of the board of directors of the surviving entity immediately following the
closing of such transaction, (iii) a transaction pursuant to which more than 50%
of the total value of the assets of the Company and its consolidated
subsidiaries are transferred and the transferee of such assets is not RSL COM or
any of its subsidiaries, or Lauder or a company controlled by him, or (iv) a
complete liquidation of the Company.
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"Earned Salary" means any Base Salary earned, but unpaid, for
services rendered to the Company on or prior to the date on which the Employment
Period ends.
"Normal Retirement Age" means the first day of the month following
Executive attaining age 65.
"Severance Benefit" means an amount equal to Executive's annual Base
Salary as in effect immediately prior to the Termination Date.
"Termination due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable of substantially
fulfilling the positions, duties, responsibilities and obligations set forth in
this Agreement because of physical, mental or emotional incapacity resulting
from injury, sickness or disease for a period of (i) at least six consecutive
months or (ii) more than nine months in any twelve month period. Any question as
to the existence, extent or potentiality of Executive's disability upon which
Executive and the Company cannot agree shall be determined by a qualified,
independent physician selected by the Company and reasonably acceptable to
Executive. The determination of any such physician shall be final and conclusive
for all purposes of this Agreement. Executive or his legal representative or any
adult member of his immediate family shall have the right to present to such
physician such information and arguments as to Executive's disability as he, she
or they deem appropriate, including the opinion of Executive's personal
physician.
"Termination due to Retirement" means termination of employment by
Executive other than for Good Reason, or termination of Executive's employment
by the Company other than a Termination for Cause, on or after Executive's
Normal Retirement Age.
"Termination for Cause" means a termination of Executive's
employment by the Company due to (i) Executive's conviction of a felony or the
entering by Executive of a plea of nolo contendere with respect to a charged
felony, (ii) Executive's gross negligence, recklessness, dishonesty, or fraud,
willful malfeasance or willful misconduct in the performance of the services
contained in this Agreement; (iii) a willful failure without reasonable
justification to comply with a reasonable written order of the Board of
Directors or the CEO; or (iv) a willful and material breach of Executive's
duties or obligations under this Agreement, including, without limitation,
Executive's failure to devote full business time to the Company in accordance
with Section 2(b) of this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Cause unless the Company
shall have delivered a written notice to Executive stating that it intends to
terminate his employment for Cause and specifying the factual basis for such
termination, and the event or events that form the basis for the notice, if
capable of being cured, shall not have been cured within 30 days of the receipt
of such notice.
"Termination Without Cause" means any termination by the Company of
Executive's employment hereunder other than (i) a Termination due to Disability,
(ii) a Termination due to Retirement or (iii) a Termination for Cause.
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"Termination for Good Reason" means a termination of Executive's
employment by Executive within 90 days following (i) a reduction in Executive's
annual Base Salary or opportunity under the 1999 Performance Incentive Plan
below the levels contemplated by Sections 3(a) and (b), (ii) a material
reduction in Executive's positions, duties, responsibilities or reporting lines
from those described in Section 2 hereof; or (iii) a material breach of this
Agreement by the Company. Notwithstanding the foregoing, a termination shall not
be treated as a Termination for Good Reason (x) if Executive shall have
consented in writing to the occurrence of the event giving rise to the claim of
Termination for Good Reason or (y) unless Executive shall have delivered a
written notice to the Company within 30 days of his having actual knowledge of
the occurrence of one of the events specified in clause (i), (ii) or (iii) above
stating that he intends to terminate his employment for Good Reason and
specifying the factual basis for such termination, and such event, if capable of
being cured, shall not have been cured within 30 days of the receipt of such
notice or (z) if the opportunity under the Company's proposed 1999 Performance
Incentive Plan is reduced by action of the Board of Directors of the Company.
Following a "Change in Control," Executive shall not be deemed to have Good
Reason under clause (ii) above so long as he continues to have substantially the
responsibilities he had at the time of the Change in Control.
"Termination Without Good Reason" means any termination by Executive
of Executive's employment hereunder other than (i) a termination due to
Executive's death, (ii) a Termination due to Retirement, (iii) a Termination for
Good Reason, or (iv) a Termination due to Disability.
"Vested Benefits" means amounts which are vested or which Executive
is otherwise entitled to receive under the terms of or in accordance with any
plan, policy, practice or program of, or any contract or agreement with, the
Company, including the Option (to the extent provided in Section 3(c)), at or
subsequent to the date of his termination without regard to the performance by
Executive of further services or the resolution of a contingency and expenses
incurred prior to termination of employment that are reimbursable under Section
4(c).
(f) Full Discharge of Company Obligations. The amounts payable to
Executive pursuant to this Section 5 following termination of his employment
(including amounts payable with respect to Vested Benefits) shall be in full and
complete satisfaction of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the Company or any of its
subsidiaries or Affiliates, including, without limitation, RSL COM. Such amounts
shall constitute liquidated damages with respect to any and all such rights and
claims and, upon Executive's receipt of such amounts, the Company shall be
released and discharged from any and all liability to Executive in connection
with this Agreement or otherwise in connection with Executive's employment with
the Company and its subsidiaries and Affiliates, other than Executive's rights
to indemnification under Section 4(d).
6. Agreement Not to Compete With Company
(a) During the Employment Period and for a period of twelve months
thereafter (the "Applicable Period"), Executive shall not directly or indirectly
own, manage, operate, finance,
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join, control, advise, consult, render services to, have an interest or future
interest or participate in the ownership, management, operation, financing or
control of, or be employed by or connected in any manner with any Competing
Business (other than as a holder of common stock of the Company, and not in
excess of 1% of the outstanding voting shares of any other publicly traded
company). "Competing Business" means the business of internet telephony and web
communication services engaged in by the Company in any country where the
Company or an Affiliate conducts such business at any time during the Term. Any
opportunity directly or indirectly related to any business engaged in by the
Company, its subsidiaries and Affiliates of which Executive becomes aware during
the Term shall be deemed a corporate opportunity of the Company, and Executive
shall promptly make such opportunity available to the Company.
(b) If, during the period of twelve months after expiration of the
Employment Period, Executive proposes to engage directly or indirectly in what
may be a Competing Business, Executive shall so notify the Company in a writing
which shall fully set forth and describe in detail the nature of the activity
which may be a competitive Business, the names of the companies or other
entities with or for whom such activity is proposed to be engaged in by
Executive or by an Affiliate of Executive (the "Section 6 Notice"). If, within
30 days after receipt by the Company of a Section 6 Notice, the Company shall
fail to notify Executive that it deems the proposed activity to be a Competitive
Business, then Executive shall be free to engage in the activities described in
the Section 6 Notice without violation of Section 6(a). If, however, the Company
notifies Executive that the proposed activities constitute a Competitive
Business, then (i) Executive shall not engage in such Competitive Business
during the twelve month period following expiration of the Employment Period,
and (ii) the Company shall pay Executive, during such twelve month period, in
equal monthly installments, an amount equal to his highest Base Salary; provided
that the amount payable under this Section 6(b) shall be reduced by the amount
of Severance Benefit that Executive is receiving for such period.
7. Confidential Information
(a) Without the prior written consent of the Company, Executive shall not
disclose at any time during the Employment Period or any time thereafter any
Confidential Information (as defined below) to any third person other than in
the course of fulfilling Executive's responsibilities under this Agreement
unless such Confidential Information has been previously disclosed to the public
by the Company or an Affiliate or is in the public domain (other than by reason
of Executive's breach of the provisions of this paragraph).
(b) "Confidential Information" is any non-public information pertaining to
the Company or an Affiliate, any of their businesses or the business or personal
affairs of Lauder or his family and how any of them conducts its or his business
or affairs. "Confidential Information" includes not only information disclosed
by the Company or an Affiliate to Executive, but non-public information
developed, created or learned by Executive during the course of or as a result
of Executive's employment with the Company. "Confidential Information"
specifically includes non-public information and documents concerning the
Company's and its Affiliates' methods of doing business; research,
telecommunications technology, its actual and potential clients, transactions
and suppliers (including the Company's
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or an Affiliate's terms, conditions and other business arrangements with them);
client or potential client or transaction lists and billing; advertising,
marketing and business plans and strategies (including prospective or pending
licensing applications or investments in license holders or applicants); profit
margins, goals, objectives and projections; compilations, analyses and
projections regarding the Company, its Affiliates or any of its clients or
potential clients or their businesses; trade secrets; salary, staffing,
management organization or employment information; information relating to
members of the Board of Directors and management of the Company or an Affiliate;
files, drawings or designs; information regarding product development, marketing
plans, sales plans or manufacturing plans; operating policies or manuals,
business plans, financial records or packaging design; or any other non-public
financial, commercial, business or technical information relating to the
Company, an Affiliate, Lauder or his family or non-public information designated
as confidential or proprietary that the Company, an Affiliate or Lauder may
receive belonging to others who do business with any of them.
(c) Nothing herein shall prevent the disclosure by Executive of any
information required by an order of a court having competent jurisdiction or
under subpoena from a government agency, provided that, if Executive receives a
request for the disclosure of any Confidential Information pursuant to court
process or by a government agency, Executive shall promptly (and at the latest
within five business days but not less than three days prior to the date
Executive is required to respond to the request) notify the Company of that
request and cooperate to the maximum extent authorized by law with the Company
in protecting the Company's and it Affiliates' interest in maintaining the
confidentiality of any Confidential Information. The Company will reimburse
Executive for reasonable out-of-pocket costs or expenses incurred by Executive
in connection with his cooperation with the Company and its Affiliates
hereunder.
8. No Disparaging Comments
Each of the parties hereto agrees not to make disparaging or derogatory comments
about the other party, members of the Board or Affiliates, or members of the
Board of Affiliates, except to the extent required by law, and then only after
consultation with the other party to the maximum extent possible in order to
maintain goodwill for each of the parties.
9. Return of Company Property
Promptly (and at the latest within ten business days) following Executive's
termination of services, Executive shall:
(i) return to the Company all documents, records, notebooks, computer
diskettes and tapes and anything else containing the Company's
Confidential Information (as defined above), and any other property
or Confidential Information of the Company or its Affiliates,
including all copies thereof in Executive's possession, custody or
control, and
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(ii) delete from any computer or other electronic storage medium owned by
Executive any of the proprietary or Confidential Information of the
Company or its Affiliates.
10. No Soliciting or Hiring Company Employees
During the Employment Period and for a one-year period thereafter, Executive
shall not directly or indirectly induce any employee of the Company or any
Affiliate, other than Executive's secretary or personal assistant, to terminate
employment with such entity, and during the Employment Period and for a
six-month period thereafter, shall not directly or indirectly, either
individually or as owner, agent, employee, consultant or otherwise, employ or
offer employment to any person who is or was employed by the Company or any
Affiliate as an employee.
11. Continuing Obligations Following Termination
Executive agrees that his obligations and restrictions with respect to
noncompetition, confidentiality, Company property, nondisparagement and
nonsolicitation, and the Company obligations to indemnify Executive under
Section 4(d), will continue to apply following the termination of Executive's
relationship regardless of the manner in which his relationship with the Company
is terminated, whether voluntarily, for Cause, for Good Reason, without Cause or
otherwise.
12. Arbitration of All Disputes
(a) Any dispute, controversy or claim between the Executive and the
Company or any of its officers, directors, employees or shareholders (who are
expressly made third-party beneficiaries of this agreement) arising out of,
relating to or in connection with this agreement, or the breach, termination or
validity thereof, 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) The Company, on one hand, and Executive 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.
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(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 attorney's fees) on any unsuccessful party to the
extent the Arbitrator concludes that such party is unsuccessful, unless he or
she concludes that (i) matters of equity or important considerations of fairness
dictate otherwise or (ii) in the case of Executive, the Arbitrator determined
that Executive acted reasonably and in good faith in pursuing all of the claims
asserted by him in such arbitration.
(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(s) 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(s) have 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(s)
who shall thereafter have full power to continue, modify or vacate the terms of
any injunctive relief ordered by the court.
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(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 United States (Federal)
Arbitration Act, 9 U.S.C. ss.ss. 1-16, and judgment on or enforcement of the
award or any direction for specific performance rendered by the arbitrators 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 that 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(s),
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.
13. No Punitive or Emotional Damages
The parties hereto agree that neither the Executive nor the Company will be
entitled to seek or obtain punitive, exemplary or similar damages of any kind
from the other or, in the case of Executive, from the Company's officers,
directors, employees or shareholders, or to seek or obtain damages or
compensation for emotional distress, as a result of any dispute, controversy or
claim arising out of, relating to or in connection with this Agreement, or the
performance, breach, termination or validity thereof. Nothing herein shall
preclude an award of compensatory or punitive damages against any other third
party.
14. Injunctive Relief to Avoid Irreparable Injury
(a) Executive acknowledges and agrees that the individualized services and
capabilities that he will provide to the Company under this Agreement are of a
personal, special, unique, unusual, extraordinary and intellectual character.
(b) Executive acknowledges and agrees that because the internet telephony
and web communications industry is globally integrated and that its constituent
companies are dependent for their survival on protection of their confidential
information which is highly advanced and technical and on carefully developed
knowledge of customer systems and requirements, the restrictions in this
agreement are reasonable to protect the Company's rights under this Agreement
and to safeguard the Company's and it Affiliates' Confidential Information.
(c) Executive acknowledges and agrees that the covenants and obligations
of Executive with respect to noncompetition, nonsolicitation, confidentiality
and Company property relate to special, unique and extraordinary matters and
that a violation of any of the terms of such covenants and obligations will
cause the Company and its Affiliates irreparable injury for which
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adequate remedies are not available at law. Executive therefore agrees that the
Company shall be entitled to an order of specific performance, injunction,
restraining order or such other interim or permanent equitable relief (without
the requirement to post bond) restraining Executive from committing any
violation of the covenants and obligations contained in this Agreement.
Executive acknowledges and agrees that if any one or more of any part of such
restrictions shall be rendered or judged invalid or unenforceable, such
restriction or part shall be deemed to be severed from this Agreement and such
invalidity or unenforceability shall not in any way affect the validity of the
remaining provisions.
(d) These injunctive remedies are cumulative and are in addition to any
other rights and remedies the Company may have at law or in equity.
(e) Executive represents that his economic means and circumstances are
such that the provisions of this Agreement, including the noncompetition,
nonsolicitation, confidentiality and Company property provisions, will not
prevent him from providing for himself and his family on a basis satisfactory to
him and them.
15. Automatic Amendment by Court Order and Interim Enforcement
(a) If the Arbitrator(s) or a court determines that, but for the
provisions of this paragraph, any part of this agreement is illegal, void as
against public policy or otherwise unenforceable, the relevant part will
automatically be amended to the extent necessary to make it sufficiently narrow
in scope, time and geographic area to be legally enforceable. All other terms
will remain in full force and effect.
(b) If the Executive raises any question as to the enforceability of any
part or terms of this agreement, including, without limitation, the provisions
relating to noncompetition, nonsolicitation, confidentiality and Company
property, the Executive specifically agrees that he will comply fully with this
Agreement unless and until the entry of an arbitral award to the contrary.
16. Notices
All notices and other communications required or permitted hereunder shall be
sufficiently given if (a) delivered personally, (b) sent by facsimile
transmission (with confirmation received), (c) sent by a nationally-recognized
air courier assuring overnight delivery, or (d) mailed (by registered or
certified mail, return receipt requested and postage prepaid) as follows:
if to the Executive, to the Executive at:
8 Avon Road
Larchmont, NY 10538
if to the Company, to the Company at
deltathree.com, Inc.
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430 Park Avenue
5th Floor
New York , NY 10022
Attention: Corporate Counsel
With a copy to :
RSL Communications, Ltd.
767 Fifth Avenue
Suite 4300
New York, NY 10153
Attention: Corporate Counsel
or to such other address as shall be furnished by notice from time to time by
one party hereto to the other party. Any such communication shall be deemed to
have been given, (i) in the case of personal delivery, on the date of delivery,
(ii) in the case of delivery by air courier, on the first business day following
the day on which such communication was posted, and (iii) in the case of
mailing, on the third business day following the day on which such notice was
posted.
17. Sole and Entire Understanding; Amendments
The entire understanding and agreement between the Company and Executive have
been incorporated into this Agreement. There are no other agreements, promises,
representations, understandings or inducements by the Company to Executive or
Executive to the Company other than those specifically set forth in this
Agreement. This Agreement may not be altered, amended or added to except in a
single writing signed by the Company and the Executive.
18. Waiver of Breach
A waiver or breach of any provision of this Agreement shall not constitute or
operate as a waiver of any other breach of such provision or of any other
provision, and any failure to enforce any provision hereof shall not operate as
a waiver of such provision or of any other provision.
19. Headings
The headings of sections in this Agreement are for convenience only, are not a
part of this Agreement and shall not affect the construction of the provisions
of this Agreement.
20. Arm's Length
(a) This Agreement was entered into at arm's length, without duress or
coercion, and is to be interpreted as an agreement between parties of equal
bargaining strength. Both the Company and the Executive agree that this
Agreement is clear and unambiguous as to its terms, and that no parol or other
evidence will be used or admitted to alter or explain the terms of this
Agreement, but that it will be interpreted based on the language within its four
corners in accordance with the purposes for which it is entered into.
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(b) The parties hereto expressly agree that any rule or contractual
interpretation, as applied under California law or anywhere else, that would
allow parol or extrinsic evidence to attempt to show fraud in the inducement or
duress to contradict the plain, unambiguous terms of this Agreement shall not
apply to this Agreement and its performance and enforcement. This provision is a
material part of this Agreement and, should any party try to introduce evidence
contrary to this provision, any other party shall be entitle to consider it a
breach and to rescind this contract in full.
21. Successors and Assigns
(a) This Agreement will inure to the benefit of, and will be binding upon,
the Company, its successors and assigns and upon the Executive and his heirs,
successors and assigns; provided, however, that, because this is an Agreement
for personal services, the Executive cannot assign any of his obligations under
this Agreement to anyone else.
(b) This Agreement may be executed in counterparts, in which case each of
the two counterparts will be deemed to be an original and the final counterpart
shall be deemed to have been executed in New York, New York.
22. New York Law Governs
Any questions or other matters arising under this Agreement, whether of
validity, interpretation, performance or otherwise, will therefore be governed
by and construed in accordance with the laws of the State of New York applicable
to agreements made and to be wholly performed in New York, without reference to
principles of conflicts or choice of law under which the law of any other
jurisdiction would apply.
IN WITNESS WHEREOF, this Agreement has been executed by Executive
and then by the Company in New York, New York, on the dates shown below, but
effective as of the date and year first above written.
Date:
------------------------- ----------------------------------------
Executive
deltathree.com, Inc.
Date: BY:
------------------------- -------------------------------------
Title:
----------------------------------
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Exhibit 10.13
DELTATHREE.COM, INC.
INVESTOR RIGHTS AGREEMENT
September 29, 1999
<PAGE>
TABLE OF CONTENTS
Page
1. General..................................................................1
1.1 Certain Definitions....................................1
1.2 Demand Registration....................................3
1.3 Company Registration...................................4
1.4 Expenses of Registration...............................5
1.5 Registration Procedures................................6
1.6 Indemnification........................................7
1.7 Information by Holder.................................10
1.8 Rule 144 Reporting....................................10
1.9 Transfer of Registration Rights.......................11
1.10 Termination of Rights.................................11
1.11 "Market Stand-Off" Agreement; Agreement to
Furnish Information.....................................................11
2. Redemption..............................................................12
2.1 ......................................................12
2.2 ......................................................13
2.3 ......................................................13
2.4 ......................................................13
3. Affirmative Covenants of the Company....................................13
3.1 Financial Information.................................13
4. Drag Along Rights.......................................................14
4.1 ......................................................14
5. Miscellaneous...........................................................15
5.1 Governing Law.........................................15
5.2 Survival..............................................16
5.3 Transfer of Shares; Successors and Assigns............16
5.4 Entire Agreement......................................16
5.5 Amendment and Waiver..................................16
5.6 Notices, Etc..........................................17
5.7 Delays or Omissions...................................17
5.8 Counterparts..........................................17
5.9 Severability..........................................18
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DELTATHREE.COM, INC.
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (this "Agreement") is entered
into as of the 29th day of September, 1999, by and between deltathree.com, Inc.,
a Delaware corporation (the "Company") and Yahoo! Inc., a Delaware corporation
(the "Investor".)
RECITALS
Whereas, the Company proposes to sell and issue 50,416 shares
of its Class A Common Stock (the "Shares") pursuant to the Common Stock and
Warrant Purchase Agreement of even date herewith by and between the Company and
the Investor (the "Purchase Agreement");
Now, Therefore, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in this
Agreement, the parties hereto further agree as follows:
1. General
1.1 Certain Definitions
As used in this Agreement, the following terms shall have the
following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Common Stock" shall mean the Company's Class A Common Stock,
par value $.001 per share.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Holder" shall mean the Investor and any person holding
Registrable Securities to whom the rights under this Agreement have been
transferred in accordance with Section 1.09 hereof.
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"IPO" shall mean the first public offering of Common Stock by
the Company to the public pursuant to a registration statement filed with, and
declared effective by, the Commission under the Securities Act.
The terms "register", "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" means the Shares or other securities
issued or issuable with respect to the Shares upon any stock split, stock
dividend, recapitalization or similar event, or any Common Stock otherwise
issued or issuable with respect to the Shares; provided, however, that shares of
Common Stock or other securities shall only be treated as Registrable Securities
(A) if they are not eligible for resale under Rule 144(k) of the Securities Act,
or (B) if and so long as they have not been (i) sold to or through a broker or
dealer or underwriter in a public distribution or a public securities
transaction, or (ii) sold in a transaction exempt from the registration and
prospectus delivery requirements of the Securities Act under Section 4(1)
thereof so that all transfer restrictions and restrictive legends with respect
thereto are removed upon the consummation of such sale.
"Registration Expenses" shall mean all expenses incurred by
the Company in complying with Sections 1.2, 1.3 and 1.4 hereof, including,
without limitation, all registration, qualification and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company, blue
sky fees and expenses, and the expense of any special audits incident to or
required by any such registration (but excluding the compensation of regular
employees of the Company which shall be paid in any event by the Company).
"RSL COM" shall mean RSL Communications, Ltd., a Bermuda
corporation, and the principal shareholder of the Company.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and all fees and disbursements of counsel for the
Holders (as limited by Section 1.5).
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1.2 Demand Registration
(a) Subject to the conditions of this Section 1.2, if
the Company shall receive a written request from a Holder or Holders of a
majority of the Registrable Securities then outstanding (the "Initiating
Holders") that the Company file a registration statement under the Securities
Act covering the registration of at least 35% of the Registrable Securities
owned by such Holder or Holders, then the Company shall, within thirty (30) days
of the receipt thereof, give written notice of such request to all Holders of
Registrable Securities, and subject to the limitations of this Section 1.2, use
reasonable commercial efforts to effect, as soon as practicable, the
registration under the Securities Act of all Registrable Securities that the
Holders request to be registered. The Company may include any securities, for
its own account or for the account of a security holder or holders, in such
registration.
(b) No request by an Initiating Holder pursuant to
this Section 1.2 shall entitle the Holders to have Registrable Securities sold
pursuant to an underwritten offering, it being also understood that the Company
will not be required to include information in any registration statement beyond
that then required by the rules and regulations under the Securities Act.
(c) The Company shall not be required to effect a
registration pursuant to this Section 1.2:
(i) if the anticipated aggregate offering
price, net of underwriting discounts and commissions, would not exceed
$10,000,000;
(ii) prior to the earlier of (A) September
29, 2001 and (B) one hundred eighty (180) days following the date of the final
prospectus pertaining to the IPO;
(iii) after the Company has effected two (2)
registrations pursuant to this Agreement, and such registrations have been
declared or ordered effective;
(iv) during the period starting with the
date of filing of, and ending on the date one hundred eighty (180) days
following the effective date of the registration statement pertaining to a
public offering; provided that the Company makes reasonable good faith efforts
to cause such registration statement to become effective;
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(v) if within thirty (30) days of receipt of
a written request from Initiating Holders pursuant to Section 1.2(a), the
Company gives notice to the Holders of the Company's intention to make a public
offering within ninety (90) days; or
(vi) if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 1.2, a certificate
signed by the Chairman of the Board of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be effected at such time, in which event the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the Initiating Holders.
1.3 Company Registration
(a) Notice of Registration. If at any time or from
time to time the Company shall determine to register any of its securities,
either for its own account or the account of a security holder or holders, other
than (w) the IPO, (x) a registration relating solely to employee benefit plans,
(y) a registration relating solely to a Commission Rule 145 transaction, or a
registration on any registration form that does not permit secondary sales, or
(z) registration statement on Form S-4, the Company will:
(i) promptly give to each Holder written
notice thereof, and
(ii) include in such registration (and any
related qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all the Registrable Securities specified in a
written request or requests made within fifteen (15) days after receipt of such
written notice from the Company by any Holder.
(b) Underwriting. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holder as a part of the written
notice given pursuant to Section 1.3(a)(i). In such event, the right of any
Holder to registration pursuant to Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting, to the extent requested, to the extent provided
herein. The Holder shall (together with the Company and the other holders
distributing their securities through such underwriting (the "Other
Participating Holders")) enter into an underwriting agreement in customary
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form with the managing underwriter selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.3, if the
managing underwriter determines that factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting, on a
pro rata basis based on the total number of securities (including, without
limitation, Registrable Securities) requested to be registered pursuant to
registration rights granted to the Holder and the Other Participating Holders by
the Company; except for a registration relating to the Company's Initial Public
Offering from which all Registrable Securities may be excluded. To facilitate
the allocation of shares in accordance with the above provisions, the Company or
the underwriters may round the number of shares allocated to the Holder or the
Other Participating Holders to the nearest one hundred (100) shares. If the
Holder or any Other Participating Holder disapproves of the terms of any such
underwriting, it, he or she may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration, and shall not
be transferred in a public distribution prior to one hundred and eighty (180)
days after the effective date of the registration statement relating thereto.
(c) Right to Terminate Registration. The Company
shall have the right to terminate or withdraw any registration initiated by it
under this Section 1.3 prior to the effectiveness of such registration, whether
or not any Holder has elected to include securities in such registration.
1.4 Expenses of Registration
All Registration Expenses incurred in connection with any
registration pursuant to Section 1.2 and Section 1.3 excluding (1) legal
expenses of counsel to the Holder and (2) underwriting discount, selling
commissions or brokers fees relating to the sale of Shares by the Holder, shall
be borne by the Company. If a registration proceeding is begun upon the request
of the Holder pursuant to Section 1.2, but such request is subsequently
withdrawn other than pursuant to Section 1.2(c)(vi), then the Holder may either:
(i) bear all Registration Expenses of such proceeding, in which case the Company
shall be deemed not to have effected a registration pursuant to Section 1.2 of
this Agreement, or (ii) require the Company to bear all Registration Expenses of
such proceeding, in which case the Company shall be deemed to have effected a
registration pursuant to Section 1.2 of this Agreement. Unless otherwise stated,
all other Selling Expenses relating to securities registered on behalf of the
Holder shall be borne by the Holder.
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1.5 Registration Procedures
In the case of each registration, qualification or compliance
effected by the Company pursuant to this Section 1, the Company will:
(a) Prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become effective, and in the case of a
registration pursuant to Section 1.2, remain effective until the distribution
described in the registration statement has been completed, but in no event
longer than thirty (30) days.
(b) Prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act.
(c) Furnish to the Holders participating in such
registration and to the underwriters, if any, of the securities being registered
such reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
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(g) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange or other trading
market on which similar securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
1.6 Indemnification
(a) The Company will indemnify each Holder, each of
its officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, for whom registration,
qualification or compliance has been effected pursuant to this Section 1,
against all actual out-of-pocket expenses, claims, losses, damages or
liabilities (or actions in respect thereof), arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any registration statement, prospectus, preliminary prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, and the Company will reimburse each such
Holder, each of its officers and directors, and each person controlling such
Holder, each such underwriter and each person who controls any such underwriter,
for any legal and any other actual out-of-pocket expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, as such expenses are incurred; provided, however,
that the indemnity agreement contained in this Section 1.6(a) shall not apply
to amounts paid in settlement of any such matter if the settlement is effected
without the consent of the Company, which consent shall not be unreasonably
withheld; and provided further that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by such Holder, controlling person or
underwriter specifically for use therein and provided further that in connection
with a registration that is not an underwritten offering the foregoing indemnity
with respect to any preliminary prospectus shall not inure to the benefit of a
Holder with respect to any person who purchased shares of Registrable Securities
from such Holder that was sold pursuant to such registration statement if such
untrue statement or omission or alleged untrue statement or omission made in
such preliminary prospectus is eliminated or remedied in the related prospectus
(as
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<PAGE>
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) and a copy of the related prospectus (as so amended or
supplemented) shall have been furnished to such Holder at or prior to the sale
of the shares of Registrable Securities to be registered, and such prospectus
shall not have been delivered to such person (including, if applicable, delivery
pursuant to Rule 153 under the Securities Act).
(b) Each Holder will, if Registrable Securities held
by such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all actual out-of-pocket expenses, claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein, in light of the circumstances in which they were made, or
necessary to make the statements therein not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal and any other actual out-of-pocket expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, as such expenses are incurred, in each
case to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder specifically for use therein; provided, however, that the
indemnity agreement contained in this Section 1.6(b) shall not apply to amounts
paid in settlement of any matter if the settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld; and
provided, further, that the maximum liability of each selling Holder under this
Section 1.6(b) shall be equal to the net proceeds to such selling Holder as a
result of such registration and offering.
(c) Each party entitled to indemnification under this
Section 1.6 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such Indemni-
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<PAGE>
fied Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that an Indemnified Party
(together with all other Indemnified Parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses of such counsel to be paid by the
Indemnifying Party, if representation of such Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between such Indemnified Party and any other party
represented by such counsel in such proceeding. The failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying Party
of its obligations under this Section 1.6 unless the failure to give such notice
is materially prejudicial to an Indemnifying Party's ability to defend such
action. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party (not to be unreasonably
withheld), consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
(d) If the indemnification provided for in this
Section 1.6 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage, or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations; provided, however, that, in no event shall any contribution by a
Holder under this subsection 1.6(d) exceed the net proceeds from the offering
received by such Holder, except in the case of willful fraud by such Holder. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
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(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under
this Section 1.6 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.7 Information by Holder
The Holder or Holders of Registrable Securities included in
any registration shall furnish to the Company such information regarding such
Holder or Holders, the Registrable Securities held by them and the distribution
proposed by such Holder or Holders as the Company may request in writing and as
shall be required in connection with any registration, qualification or
compliance referred to in this Section 1.
1.8 Rule 144 Reporting
With a view to making available the benefits of certain rules
and regulations of the Commission which may at any time permit the sale of the
Shares to the public without registration, after such time as a public market
exists for the Common Stock of the Company, the Company agrees to use its best
efforts to:
(a) Make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times after the effective date that the Company becomes subject to the
reporting requirements of the Exchange Act and continues to be subject to such
reporting requirements.
(b) File with the Commission in a timely manner all
reports and other documents required of the Company under the Exchange Act (at
any time after it has become subject to such reporting requirements); and
(c) So long as the Holder owns any Registrable
Securities, to furnish to the Holder forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements under the
Exchange Act.
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1.9 Transfer of Registration Rights
The rights to cause the Company to register securities granted
to the Holder under Sections 1.2 and 1.3 may not be assigned to a transferee or
assignee in connection with any transfer or assignment of Registrable Securities
by the Holder (together with any affiliate); provided, however, that such rights
may be assigned to an affiliate of the Investor if (a) such transfer may
otherwise be effected in accordance with applicable securities laws and this
Agreement, (b) notice of such assignment is given to the Company, and (c) such
affiliate agrees to be bound by the terms and conditions of this Agreement.
1.10 Termination of Rights
The rights of any particular Holder to cause the Company to
register securities under Sections 1.2 and 1.3 shall terminate with respect to
such Holder on the earlier of (a) the second anniversary of the effective date
of the Company's IPO and (b) such time as Rule 144 under the Securities Act or
another similar exemption under the Securities Act is available for the sale of
all such Holders securities during a three (3)-month period without
registration; provided, however, that in no event shall such rights terminate
prior to the first anniversary of the effective date of the Company's IPO.
1.11 "Market Stand-Off" Agreement; Agreement to Furnish
Information
Each Holder hereby agrees that such Holder shall not sell,
transfer, make any short sale of, grant any option for the purchase of, enter
into any hedging or similar transaction with the same economic effect as a sale,
or otherwise dispose of, any Common Stock (or other securities) of the Company
held of record or beneficially owned by such Holder (other than those included
in the registration) for a period specified by the representative of the
underwriters of Common Stock (or other securities) of the Company not to exceed
one hundred eighty (180) days following the date of the final prospectus
contained in a registration statement of the Company filed under the Securities
Act; provided that:
(i) such agreement shall apply only to the
Company's IPO; and
(ii) all officers and directors of the
Company who hold capital stock of the Company and all holders of five percent or
more of the Company's capital stock enter into similar agreements.
Each Holder agrees to execute and deliver such other
agreements as may be reasonably requested by the Company or the representative
of the underwrit-
12
<PAGE>
ers which are consistent with the foregoing or which are necessary to give
further effect thereto. In addition, if requested by the Company or the
representative of the underwriters of Common Stock (or other securities) of the
Company, each Holder shall provide, within ten (10) days of such request, such
information as may be required by the Company or such representative in
connection with the completion of any public offering of the Company's
securities pursuant to a registration statement filed under the Securities Act.
The obligations described in this Section 1.11 shall not apply to a registration
relating solely to employee benefit plans on Form S-1 or Form S-8 or similar
forms that may be promulgated in the future, or a registration relating solely
to a Commission Rule 145 transaction on Form S-4 or similar forms that may be
promulgated in the future. The Company may impose stop-transfer instructions
with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of said one hundred eighty (180) day period.
2. Redemption
2.1 Subject to the provisions of this Section 2, the Holder
shall have the right (the "Redemption Right"), in such Holder's sole discretion,
to require the Company to redeem, on the date (the "Redemption Date") which is
the earlier of (i) one hundred eighty (180) days after the original issue date
of the Shares, or (ii) the receipt by the Holder of the Drag-Along Notice (as
defined below) from RSL COM pursuant to Section 4.1 of this Agreement, and any
date thereafter, all of the Shares held by such Holder; provided, however, that
the Redemption Right shall be null and void (i) if the Company's IPO closes
prior to the Redemption Date, or (ii) upon consummation of the transfer of
Common Stock, prior to exercise by Holder of such Redemption Right, by RSL COM
and each holder of Shares pursuant to Section 4.1 of this Agreement. The Holder
may exercise the Redemption Right by giving the Company a written notice of
exercise.
2.2 An exercise by the Holder of the Redemption Right shall
result in the expiration, 180 days following the date on which such right is
exercised, of the Holder's warrant (the "Warrant") to purchase shares of the
Company's common stock, in accordance with Section 8 of the Warrant.
2.3 The closing of the purchase and sale of the Shares which
the Company is required to repurchase pursuant to the Holder's exercise of the
Redemption Right shall occur at the offices of the Company on or before that
date which is thirty (30) days after the Company's receipt of the Holder's
notice of exercise of the Redemption Right. The Shares to be redeemed on the
Redemption Date shall be redeemed by the Company paying in cash, an amount equal
to $1,000,000 (the
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<PAGE>
"Redemption Price"), the aggregate original issuance price paid by the Holder
for the Shares.
2.4 Provided that Holder exercises the Redemption Right, from
and after the close of business on the Redemption Date, unless there shall have
been a default in the payment of the Redemption Price, all rights of the Holder
(except the right to receive the Redemption Price) shall cease with respect to
such Shares, and such Shares shall not thereafter be transferred on the books of
the Company or be deemed to be outstanding for any purpose whatsoever.
3. Affirmative Covenants of the Company
The Company hereby covenants and agrees as follows:
3.1 Financial Information
The Company will furnish the Holder with the following
reports:
(a) As soon as practicable after the end of each
fiscal year and in any event within ninety (90) days thereafter, audited
consolidated balance sheets and statements of stockholders' equity of the
Company and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such fiscal year, prepared in accordance with
generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail and audited by independent public accountants of national standing
selected by the Company.
(b) As soon as practicable after the end of each
quarter, and in any event within 45 days thereafter, unaudited balance sheets of
the Company and its subsidiaries, if any, as of the end of the most recent
quarter, and consolidated statements of income and cash flows of the Company and
its subsidiaries, if any, for such quarter and for the then current fiscal year
to the end of such quarter, all prepared in accordance with generally accepted
accounting principles, together with a comparison of such statement of the
Company's operating plan then in effect. The quarterly financials delivered
pursuant to this section will be prepared in accordance with the form of the
annual financials provided pursuant to Section 3.1(a).
(c) The covenant set forth in this Section 3.1 shall
terminate on, and be of no further force and effect after, the closing of the
Company's IPO.
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4. Drag Along Rights
4.1 If RSL COM proposes to sell, assign, mortgage, transfer,
pledge, hypothecate or otherwise dispose of (collectively, "Transfer") at least
75% of all shares of common stock of the company owned by RSL COM to a third
party, then RSL COM may, at its option, require each Holder of Shares
(collectively, the "Investor Group") to include in such Transfer to the third
party such number of shares of Common Stock owned by each of them as determined
in accordance with this Section 4.1.
RSL COM shall send written notice (the "Drag-Along Notice") of
the exercise of its rights pursuant to this Section 4.1 to each of the Holders
in the Investor Group, setting forth the consideration per share to be paid by
the third party and the other material terms and conditions of such transaction.
The Drag-Along Notice shall state that the members of the Investor Group shall
be required to participate in the proposed Transfer of shares to the Third Party
according to the terms and conditions of this section 4.1 and for the same type
of consideration and for an amount of consideration per share not less than that
offered to RSL COM by the third party. Within 15 days following the receipt of
the Drag-Along Notice, the Investor Group shall deliver to RSL COM certificates
representing all shares of common stock held by the Investor Group, duly
endorsed, together with all other documents required to be executed in
connection with such transaction. In the event that the Investor Group should
fail to deliver such certificates to RSL COM, the Company shall cause the books
and records of the Company to show that such shares are bound by the provisions
of this Section 4.1 and that such shares be transferred only to the third party.
Each member of the Investor Group shall be required to
participate in the proposed Transfer to the third party by transferring in
connection therewith shares of Common Stock equal to the product of (x) the
total number of shares to be acquired by the third party, times (y) a fraction,
the numerator of which shall be the total number of shares of Common Stock owned
by such member of the Investor Group, and the denominator of which shall be the
total number of shares of Common Stock owned by RSL COM plus (a) the total
number of shares of Common Stock owned by the Investor Group and (b) the total
number of share of Common Stock of any other investor in the Company subject to
similar drag-along requirements.
If, within 60 days after RSL COM gave the Drag-Along Notice,
RSL COM shall not have completed the Transfer of all the shares of Common Stock
of the Investor Group in accordance with this Section 4.1, RSL COM shall return
to the Investor Group all certificates representing shares of Common Stock that
the Investor
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Group delivered for Transfer pursuant hereto and that were not purchased
pursuant to this Section 4.1.
Promptly, but in no event later that 5 days, after the
consummation of the Transfer of Common Stock of RSL COM and the Investor Group
pursuant to this Section 4.1, RSL COM shall give notice thereof to the Investor
Group, shall remit to the Investor Group the total consideration in respect of
the shares of Common Stock of the Investor Group which were so transferred, and
shall furnish such other evidence of the completion and time of completion of
such Transfer and the terms thereof as may be reasonably requested by the
Investor Group.
5. Miscellaneous
5.1 Governing Law
This Agreement shall be governed in all respects by the laws
of the State of New York.
5.2 Survival
The representations, warranties, covenants and agreements made
herein shall survive any investigation made by any Investor and the closing of
the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.
5.3 Transfer of Shares; Successors and Assigns
Prior to the Company's IPO, the Investor may not transfer the
Shares other than to an entity that is an "affiliate" of the Investor as such
term is defined in Rule 144(a) under the Securities Act. Except as otherwise
expressly provided herein, the provisions hereof shall inure to the benefit of,
and be binding upon the successors, assigns, heirs, executors and administrators
of the parties hereto and shall inure to the benefit of and be enforceable by
each person who shall be a Holder of Shares from time to time: provided,
however, that prior to the receipt by the Company of adequate written notice of
the transfer of any Registrable Securities specifying the full name and address
of the transferee, the Company may deem and treat the person listed as the
Holder of such shares in its records as the absolute owner and holder of such
shares for all purposes, including the payment of dividends or any redemption
price.
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5.4 Entire Agreement
This Agreement and the other documents delivered pursuant
hereto constitute the full and entire understanding and agreement among the
parties with regard to the subjects hereof and thereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
5.5 Amendment and Waiver
Unless otherwise specified herein, this Agreement and any term
hereof may be amended, and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of (i) the Company, and (ii) the
Holders of a majority of the Registrable Securities then outstanding and not
sold to the public; provided, however, that in the event that such amendment or
waiver adversely affects the obligation and/or rights of any such Holders in a
different manner than the other Holders, such amendment or waiver shall also
require the written consent of a majority in the interest of such Holders
adversely affected. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Holder of any Registrable Securities, each
future Holder of all such Registrable Securities, and the Company.
5.6 Notices, Etc.
Any notice, demand, offer, request or other communication
required or permitted to be given by either the Company or a Holder pursuant to
the terms of this Agreement shall be in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) when delivered personally, (iii)
one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iv) one (1) business day after being deposited with
a courier service that guarantees "next business day" delivery or (v) four (4)
days after being deposited in the U.S. mail, First Class with postage prepaid,
and addressed to the parties at the addresses provided to the Company (which the
Company agrees to disclose to the other parties upon request) or such other
address as a party may request by notifying the other in writing.
5.7 Delays or Omissions
No delay or omission to exercise any right, power or remedy
accruing to any holder of any Shares upon any breach or default of the Company
under this Agreement shall impair any such right, power or remedy of such
holder, nor shall it
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be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing or as
provided in this Agreement.
5.8 Counterparts
This Agreement may be executed in any number of counterparts,
each of which shall be enforceable against the parties actually executing such
counter parts, and all of which together shall constitute one instrument.
5.9 Severability
In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this
Investor Rights Agreement as of the date set forth in the first paragraph
hereof.
DELTATHREE.COM, INC.
a Delaware corporation
-----------------------------------
Signature of Authorized Signatory
-----------------------------------
Print Name and Title
YAHOO! INC.
a Delaware corporation
-----------------------------------
Signature of Authorized Signatory
-----------------------------------
Print Name and Title
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<PAGE>
Exhibit 10.14
THE SECURITIES REPRESENTED BY THIS WARRANT 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 FOR THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
- --------------------------------------------------------------------------------
No.1 Number of Shares: 50,416
Date of Issuance: October 18, 1999 Subject To Adjustment in The Manner
Described Below
deltathree.com, Inc.
WARRANT
-------
deltathree.com, Inc., a Delaware corporation (the "Company"), for value
received, hereby certifies that Yahoo! Inc., a Delaware corporation, or its
registered assigns (the "Registered Holder") is entitled, subject to the terms
set forth below, to purchase from the Company, at any time on or after the date
hereof up until the earlier of (i) 5:00 p.m., New York City time, on September
29, 2001, or (ii) the closing of the initial public offering (the "Initial
Public Offering"), of the Company's Class A common stock ("Common Stock"), $.001
par value per share, having an aggregate offering price of at least twenty
million dollars ($20,000,000) (the "Exercise Period"), in whole 50,416 fully
paid and nonassessable shares of Common Stock at a price of $19.83 per share
(the "Exercise Price"). This warrant (the "Warrant") is being issued pursuant to
Section 2.1 of the Common Stock and Warrant Purchase Agreement, dated even date
hereof, between the Company and the Registered Holder (the "Purchase Agreement")
and attached hereto as Exhibit A. As used herein, the term "Warrant Stock" shall
mean the Common Stock issuable upon exercise of this Warrant.
1. Exercise.
(a) This Warrant may be exercised by the Registered Holder at
any time during the Exercise Period by surrendering this Warrant, with the
purchase form appended hereto as Exhibit B duly executed by such Registered
Holder or by
<PAGE>
such Registered Holder's duly authorized attorney, at the principal office of
the Company, or at such other office or agency as the Company may designate,
accompanied by payment in full by cash, check or wire transfer in the amount of
the Exercise Price multiplied by the number of shares of Warrant Stock for which
this Warrant is being exercised (the "Purchase Price"). The Company shall notify
the Registered Holder of the expected date of the expiration of the Exercise
Period in accordance with Section 8 of this Warrant.
(b) The exercise of this Warrant, if any, shall be deemed to
have been effected immediately prior to the close of business on the day on
which this Warrant shall have been surrendered to the Company as provided in
Section 1(a) above. At such time, the person or persons in whose name or names
any certificates for Warrant Stock shall be issuable upon such exercise as
provided in Section 1(d) below shall be deemed to have become the Registered
Holder or Registered Holders of record of the Warrant Stock represented by such
certificates.
(c) Net Issue Exercise.
(i) Notwithstanding the payment provisions set forth
above, in lieu of exercising this Warrant in the manner provided above in
Section 1(a), the Registered Holder may elect to receive shares of Warrant Stock
equal to the value of this Warrant by surrender of this Warrant at the principal
office of the Company, together with notice of such election, in which event the
Company shall issue to Registered Holder a number of shares of Warrant Stock
computed using the following formula:
X = Y (A - B)
--------
A
Where X = The number of shares of Warrant Stock to be issued to the Registered
Holder.
Y = The number of shares of Warrant Stock as to which the Warrant is
being exercised.
A = The Fair Market Value (as defined below) of one share of Warrant
Stock (at the date of such calculation).
B = The Exercise Price (as adjusted to the date of such calculation).
(ii) For purposes of this Section 1(c), the Fair
Market Value of the Warrant Stock shall be determined in good faith by written
resolution of
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<PAGE>
the Company's Board of Directors; provided, however, that if this Warrant is
exercised in connection with the Initial Public Offering, the fair market value
of the Warrant Stock shall be equal to the final price set for the Common Stock
in the Initial Public Offering.
(d) As soon as practicable after the exercise of this Warrant,
and in any event within 20 days thereafter, the Company at its expense will
cause to be issued in the name of, and delivered to, the Registered Holder, or
as such Registered Holder (upon payment by such Registered Holder of any
applicable transfer taxes) may direct, a certificate or certificates for the
number of shares of Warrant Stock to which such Registered Holder shall be
entitled.
(e) Automatic Conversion In the event that the Registered
Holder does not exercise this Warrant prior to the termination of the Exercise
Period, to the extent that this warrant is then exerciseable and such conversion
would result in the issuance of shares to the Registered Holder, this Warrant
shall be deemed automatically converted through a Net Issue Exercise as
described in Section 1(c) above immediately prior to the time at which it would
otherwise expire.
2. Adjustments.
(a) If outstanding shares of the Warrant Stock shall be
subdivided into a greater number of shares or a dividend in Warrant Stock shall
be paid in respect of Warrant Stock, the Exercise Price in effect immediately
prior to such subdivision or at the record date of such dividend shall
simultaneously with the effectiveness of such subdivision or immediately after
the record date of such dividend be proportionately reduced. If outstanding
shares of Warrant Stock shall be combined into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall,
simultaneously with the effectiveness of such combination, be proportionately
increased. When any adjustment is required to be made in the Exercise Price, the
number of shares of Warrant Stock purchasable upon the exercise of this Warrant
shall be changed to the number determined by dividing (i) an amount equal to the
number of shares issuable upon the exercise of this Warrant immediately prior to
such adjustment, multiplied by the Exercise Price in effect immediately prior to
such adjustment, by (ii) the Exercise Price in effect immediately after such
adjustment.
(b) In case of any reclassification or change of the
outstanding securities of the Company or of any reorganization of the Company
(or any other corporation the stock or securities of which are at the time
receivable upon the
3
<PAGE>
exercise of this Warrant) or any similar corporate reorganization on or after
the date hereof, then and in each such case the Registered Holder of this
Warrant, upon the exercise hereof at any time after the consummation of such
reclassification, change, reorganization, merger or conveyance, shall be
entitled to receive, in lieu of the stock or other securities and property
receivable upon the exercise hereof prior to such consummation, the stock or
other securities or property to which such Registered Holder would have been
entitled upon such consummation if such Registered Holder had exercised this
Warrant immediately prior thereto, all subject to further adjustment as provided
in paragraph (a); and in each such case, the terms of this Section 1 shall be
applicable to the shares of stock or other securities properly receivable upon
the exercise of this Warrant after such consummation.
(c) When any adjustment is required to be made in the Exercise
Price, the Company shall promptly mail to the Registered Holder a certificate
setting forth the Exercise Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment. Such certificate shall also
set forth the kind and amount of stock or other securities or property into
which this Warrant shall be exercisable following the occurrence of any of the
events specified in Section 2(a) or (b) above.
3. Termination Upon Reorganization. Simultaneous with the closing
of a merger, consolidation, acquisition of all or substantially all of the
assets or stock, of the Company by another entity (the "Surviving Entity") as a
result of which the stockholders of the Company will own less than 50% of the
voting capital stock of the surviving entity or the entity that controls such
surviving entity immediately after the transaction or, in the case of a sale of
assets, the Company will own after the transaction less than 50% of the assets
owned by the Company prior to the transaction (collectively, a "Reorganization")
prior to the expiration of the Exercise Period, as a result of which the
stockholders of the Company receive cash, stock or other property in respect of
their shares of Warrant Stock, this Warrant shall be canceled and all rights
granted hereunder shall terminate; provided, however, that (a) the Company shall
have delivered to the Registered Holder notice of the Reorganization no less
than thirty (30) business days before the date scheduled for closing of the
Reorganization, and (b) at the closing of such Reorganization this Warrant will
be exchanged for a warrant to purchase such kind and number of shares of capital
stock or other securities or property of the Company or the Surviving Entity to
which the Registered Holder would have been entitled if it had held the Warrant
Stock issuable upon the exercise hereof immediately prior to such
Reorganization, which warrant shall have the same terms and conditions hereof.
4
<PAGE>
4. Transfers. Neither this Warrant nor any securities purchased
upon exercise of this Warrant may be transferred unless (i) such transfer is
registered under the Securities Act and any applicable state securities or blue
sky laws, (ii) an opinion of counsel, satisfactory to the Company, to the effect
that the transfer is exempt from the prospectus delivery and registration
requirements of the Securities Act and any applicable state securities or blue
sky laws; provided, however, that no such opinion of counsel shall be necessary
for a transfer of Warrant Stock pursuant to Rule 144(k) promulgated under the
Securities Act or any successor rule thereto, or (iii) the Company otherwise
satisfies itself that such transfer is exempt from registration.
5. Legend. A legend setting forth or referring to the above
restrictions shall be placed on this Warrant, any replacement hereof and any
certificate representing a security issued pursuant to the exercise hereof, and
a stop transfer restriction or order shall be placed on the books of the Company
and with any transfer agent until such securities may be legally sold or
otherwise transferred; provided, however, that such legend shall not be required
and a stop transfer restriction order shall not be placed if (i) in the opinion
of counsel to the Registered Holder (reasonably concurred with by counsel to the
Company) registration of any future transfer is not required by the applicable
provisions of the Securities Act, (ii) the Company shall have waived the
requirements of such legends or (iii) the transfer of Warrant Stock shall be
made in compliance with the requirements of Rule 144(k).
6. Registered Holder its Owner. The Company may deem and
treat the Registered Holder of this Warrant as the absolute owner hereof for all
purposes regardless of any notice to the contrary.
7. No Impairment. The Company will not, by amendment of its
charter or through reorganization, consolidation, merger, dissolution, sale of
assets or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will (subject to Section 16
below) at all times in good faith assist in the carrying out of all such terms
and in the taking of all such action as may be necessary or appropriate in order
to protect the rights of the Registered Holder of this Warrant against
impairment.
8. Expiration. This Warrant (and the right to purchase securities
upon exercise hereof) shall be void and all rights represented thereby shall
cease (i) unless exercised during the Exercise Period or unless automatically
converted pursuant to Section 1(e), as such period may be adjusted pursuant to
Section 3 hereof, or (ii) if the Redemption Right (as such term is defined in
the Investors Rights Agreement, dated even date hereof, between the Company and
the Registered Holder attached
5
<PAGE>
hereto as Exhibit C) is exercised by the Registered Holder, 180 days following
the date on which such Redemption Right is exercised. All restrictions set forth
herein on the shares of capital stock issued upon exercise of any rights
hereunder shall survive such exercise and expiration of the rights granted
hereunder.
9. Notices of Certain Transactions. In case:
(a) the Company shall take a record of the holders of its
Warrant Stock (or other stock or securities at the time deliverable upon the
exercise of this Warrant) for the purpose of entitling or enabling them to
receive any dividend or other distribution other than as described in Section 2,
or to receive any right to subscribe for or purchase any shares of stock of any
class or any other securities, or to receive any other right, to subscribe for
or purchase any shares of stock of any class or any other securities, or to
receive any other right, or
(b) of the Initial Public Offering, or
(c) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company, any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving entity), or any transfer of all or substantially all of the
assets of the Company, or
(d) of the voluntary or involuntary dissolution, liquidation
or winding-up of the Company, or
(e) of any redemption of the Warrant Stock,
then, and in each such case, the Company will mail or cause to be mailed to the
Registered Holder of this Warrant a notice specifying, as the case may be, (i)
the date on which a record is to be taken for the purpose of such dividend,
distribution or right and stating the amount and character of such dividend
distribution or right, or (ii) the effective date on which such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock shall be entitled
to exchange their shares of Common Stock for the securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
transfer, dissolution, liquidation, winding-up, redemption or conversion, or
(iii) the anticipated date of effectiveness (the "Anticipated Effective Date")
of the registration statement for the Initial Public Offering. Such notice shall
6
<PAGE>
be mailed at least ten (10) days prior to the record date or effective date for
the event specified in such notice, except in the case of (iii) of this
subsection, such notice shall be mailed and faxed at least forty-eight hours
prior to the Anticipated Effective Date and upon actual effectiveness of the
Registration Statement, the Company will confirm to the Registered Holder in
writing (by fax) the date of the closing of the Initial Public Offering.
10. Reservation of Stock. The Company will at all times reserve
and keep available, solely for the issuance and delivery upon the exercise of
this Warrant, such shares of Warrant Stock and other stock, securities and
property, as from time to time shall be issuable upon the exercise of this
Warrant.
11. Exchange of Warrants. Upon the surrender by the Registered
Holder of any Warrant or Warrants, properly endorsed, to the Company at the
principal office of the Company, the Company will, subject to the provisions of
Section 4 hereof, issue and deliver to or upon the order of such Registered
Holder, at the Company's expense, a new Warrant or Warrants of like tenor, in
the name of such Registered Holder or as such Registered Holder (upon payment by
such Registered Holder of any applicable transfer taxes) may direct, calling in
the aggregate on the face or faces thereof for the number of shares of Warrant
Stock called for on the face or faces of the Warrant or Warrants so surrendered.
12. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and (in the case of loss, theft or destruction) upon delivery of an
indemnity agreement (with surety if reasonably required) in an amount reasonably
satisfactory to the Company, or (in the case of mutilation) upon surrender and
cancellation of this Warrant, the Company will issue, in lieu thereof, a new
Warrant of like tenor.
13. Mailing of Notices. Any notice required or permitted pursuant
to this Warrant shall be in writing and shall be deemed sufficient when
delivered personally or sent by telegram or fax or forty-eight (48) hours after
being deposited in the U.S. mail, as certified or registered mail, with postage
prepaid, addressed as follows:
If to the Registered Holder:
Yahoo! Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: Senior Vice President, Corporate Development
7
<PAGE>
with a copy to:
Yahoo!Inc.
3420 Central Expressway
Santa Clara, California 95051
Attention: General Counsel
Fax: (408) 731-3400
If to the Company:
deltathree.com, Inc.
430 Park Avenue
New York, NY 10022
Fax: (212) 588-3674
Attention: General Counsel
with a copy to:
David J. Goldschmidt, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue - 33rd Floor
New York, New York 10022-3897
Fax: (212) 735-2000
Each of the foregoing parties shall be entitled to specify a different
address by giving five days' advance written notice as aforesaid to the other
parties. All such notices and communications shall be deemed to have been
received (i) in the case of personal delivery, on the date of such delivery and
(ii) in the case of mailing, on the third business day following the date of
such mailing.
14. Warrant Holder Rights
(a) Rights in Connection with Warrant Stock. Upon exercise of
all or part of this Warrant, the Registered Holder of the Warrant Stock shall be
entitled to all rights with respect to such shares of Warrant Stock as set forth
in the Investor Rights Agreement and the Company's certificate of incorporation.
(b) No Rights as Stockholder. Until the exercise of this
Warrant, the Registered Holder of this Warrant shall not have or exercise any
rights by virtue hereof as a stockholder of the Company; and except as otherwise
provided herein, no
8
<PAGE>
dividend or interest shall be payable or shall accrue in respect of this Warrant
or the Warrant Stock purchasable hereunder unless, until and to the extent that
this Warrant shall be exercised.
15. No Fractional Shares. No fractional shares of Warrant Stock
will be issued in connection with any exercise hereunder. In lieu of any
fractional shares which would otherwise be issuable, the Company shall pay cash
equal to the product of such fraction multiplied by the fair market value of one
share of Warrant Stock on the date of exercise, as determined in good faith by
the Company's Board of Directors.
16. Amendment or Waiver. This Warrant or any provision thereof may
be changed, waived, discharged or terminated only by a statement in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
17. Headings. The headings in this Warrant are for purposes of
reference only and shall not limit or otherwise affect the meaning of any
provision of this Warrant.
18. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF
THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
19. Successors and Assigns. This Warrant shall be binding upon the
Company and inure to the benefit of Yahoo! Inc. and its successors and assigns.
20. Investment Intent. By accepting this Warrant, the Registered
Holder represents that it is acquiring this Warrant for investment and not with
a view to, or for sale in connection with, any distribution thereof.
9
<PAGE>
IN WITNESS WHEREOF, THE Company has executed this Warrant as
of the date first written above.
deltathree.com, Inc.
By:_______________________
10
<PAGE>
Exhibit A
PURCHASE AGREEMENT
------------------
11
<PAGE>
Exhibit B
FORM OF PURCHASE
----------------
[To be executed only upon exercise of Warrant]
To deltathree.com, Inc.:
The undersigned registered holder of the within Warrant hereby irrevocably
exercises such Warrant for, and purchases thereunder, ______ [_______] shares of
Warrant Stock of deltathree.com, Inc. and herewith makes payment of $__________
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to _____________________________________ , whose address
is ____________________________________________.
Dated: -----------------------------------------------
(Signature must conform in all respects to name
of holder as specified on the face of Warrant)
-----------------------------------
(Street Address)
-----------------------------------
(City)(State)(Zip Code)
12
<PAGE>
Exhibit C
INVESTOR RIGHTS AGREEMENT
-------------------------
13
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-86503 of deltathree.com, Inc. on Form S-1 of our report dated May 17, 1999,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the headings "Selected Consolidated
Financial Data" and "Experts" in such Prospectus.
/s/ Brightman Almagor & Co.
Brightman Almagor & Co.
(a member firm of Deloitte Touche Tohmatsu)
Tel Aviv, Israel
October 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,396,057
<SECURITIES> 0
<RECEIVABLES> 608,530
<ALLOWANCES> 124,296
<INVENTORY> 0
<CURRENT-ASSETS> 4,154,259
<PP&E> 9,561,937
<DEPRECIATION> 484,590
<TOTAL-ASSETS> 24,451,651
<CURRENT-LIABILITIES> 6,810,591
<BONDS> 0
0
0
<COMMON> 19,689
<OTHER-SE> 7,614,662
<TOTAL-LIABILITY-AND-EQUITY> 24,451,651
<SALES> 0
<TOTAL-REVENUES> 4,242,732
<CGS> 0
<TOTAL-COSTS> 3,314,332
<OTHER-EXPENSES> 7,147,526
<LOSS-PROVISION> (202,246)
<INTEREST-EXPENSE> 757,039
<INCOME-PRETAX> (6,773,919)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,773,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,773,919)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
