<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1999
REGISTRATION NO. 333-86503
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 $23,344
Options to purchase Class A common stock(3).................... $5,751,434 $1,599
Class A common stock, $0.001 par value(4)...................... -- --
Total.......................................................... $89,722,581 $24,943(5)
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes 709,319 shares not previously registered to be issued by the
Registrant upon surrender by the holders of restricted units of RSL
Communications, Ltd. ("RSL COM") that have vested.
(3) Consists of 442,418 options to purchase Class A common stock (the "Options")
to be granted by the Registrant upon surrender by the holders of restricted
units of RSL COM which have not vested. The aggregate offering price of the
Options has been determined pursuant to Rule 457(o) of the Securities Act.
(4) Consists of an indeterminate number of shares of Class A common stock
underlying the options being registered hereby.
(5) The Registrant has previously paid a $24,943 filing fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT SPECIFICALLY STATING THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Subject to Completion, dated November 2, 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.
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
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
<PAGE>
, 1999
<PAGE>
[DESCRIPTION OF INSIDE FRONT AND BACK COVER GRAPHIC:
GRAPHIC DEPICTS WORLD MAP SHOWING THE COMPANY'S PRIVATELY-MANAGED, GLOBAL IP
NETWORK, SCREEN SHOTS OF THE COMPANY'S COMMUNICATIONS PORTAL AND SCREEN SHOTS OF
CO-BRANDED COMMUNICATIONS CENTERS]
[THE COMPANY 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....................................... 34
Management..................................... 52
<CAPTION>
PAGE
----
<S> <C>
Principal Stockholders......................... 62
Related Party Transactions..................... 64
Description of Capital Stock................... 68
Shares Eligible for Future Sale................ 71
Important United States Federal Tax
Consequences of Our Common Stock to Non-U.S.
Holders...................................... 72
Underwriting................................... 75
Legal Matters.................................. 77
Experts........................................ 77
Where You Can Find Additional
Information.................................. 77
Index to Consolidated Financial Statements..... F-1
</TABLE>
Investors may rely only on the information contained in this prospectus. We
and the underwriters have not authorized anyone to provide any different or
additional information. This prospectus is not an offer to sell or a
solicitation of an offer to buy common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
Until , 1999, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
i
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this
prospectus. You should read the entire prospectus, including the section
entitled "Risk Factors" and our consolidated financial statements and related
notes, before deciding to invest in our common stock.
DELTATHREE.COM
We are a global provider of Internet Protocol (IP) telephony services,
which include the transmission of voice and data traffic for communications
carriers and the provision of enhanced Web-based and other communications
services to individuals and businesses. IP telephony is the real time
transmission of voice communications in the form of digitized "packets" of
information over the public Internet or a private network, similar to the way in
which e-mail and other data is transmitted. We were founded in 1996 to
capitalize on the growth of the Internet as a communications tool by
commercially offering IP telephony services. We have built a privately-managed,
global network using IP technology, and we have primarily been using this
network to transmit traffic for communications carriers, including RSL
Communications, Ltd., our parent company. This service is referred to as carrier
transmission services.
We are now using our expertise in IP telephony to provide our users with a
package of enhanced IP communications services. Our on-line interactive
communications portal, www.deltathree.com, enables users to make calls and send
e-mail, as well as retrieve and forward voice mail, e-mail and faxes using one
unified mailbox from anywhere in the world at any time. Our package of enhanced
IP communications services includes the following:
o PC-to-phone: a service allowing a user to place a call through a personal
computer and speak to a party who uses a standard telephone
o D3 Box: a unified messaging service permitting convenient single-source
retrieval of voice mail, e-mail and faxes through the Web or by phone
o Click IT: a Web-based e-commerce service allowing a party to
simultaneously view the Web site of a business and talk directly with
that business while continuing to view the Web site
o Phone-to-phone: a voice and fax service allowing a user to place a call
or send a fax over our privately-managed, global IP network from a
standard telephone or fax machine
o Global roaming: a service enabling businesses and individuals to use a
single account number to place phone-to-phone calls over our IP network
from locations throughout the world using country-specific, toll-free
access numbers
We provide our services at a cost to users that is generally lower than
that charged by traditional carriers because we minimize our network costs by
using efficient packet-switched technology and we generally avoid local access
charges and by-pass international settlement charges by routing international
long distance calls over our privately managed network.
We intend to introduce additional enhanced IP communications services that
meet the communications needs of individuals and businesses. These services are
expected to include D3 Fax, a Web-based, PC-to-fax service allowing users to
conveniently send faxes directly from their computer to a standard fax machine
anywhere in the world, and white boarding, a service allowing multiple users to
simultaneously edit a document while speaking with each other over their
computers.
We market our enhanced IP communications services through our own Web site.
In addition, we market these services through "communications centers" on the
Web sites of other Internet companies. Communications centers enable viewers of
those Web sites to directly access our services without leaving those Web sites.
We have sought to establish marketing relationships with Internet companies that
have strong brand names and high traffic volumes. We recently entered into
marketing relationships with CBS.com, CNET, Sony.com, Xoom.com and Yahoo! We
also have developed an on-line agent program through which our agents market our
enhanced IP communications services through their own Web sites. Further, we
have entered into distribution and marketing arrangements with communications
equipment and software companies.
1
<PAGE>
Carrier transmission services accounted for 74.7% of our total revenues in
1998 and 70.2% of our total revenues for the nine months ended September 30,
1999. As we expand our marketing and promotional efforts for our enhanced IP
communications services, we expect revenue from these services, over time, to
represent a majority of our total revenues.
Our privately-managed, IP telephony network consists of:
o 45 points of presence (POPs) in 29 countries
o gateways, gatekeepers and routers at each POP
o hubs in New York, Los Angeles, London,
Frankfurt and Hong Kong
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with Internet backbone providers
o a network operations center
OUR STRATEGY
Our goal is to be the leading provider of IP telephony services and to make
our interactive communications portal the leading one-stop solution for
communications needs. To achieve our goal, we intend to:
o build strong recognition of the deltathree.com brand through marketing
and promotional programs
o expand and enhance our service offerings
o ensure a positive user experience
o establish additional sources of revenue
o pursue strategic acquisitions and alliances
OUR HISTORY AND PARENT COMPANY
We were founded in 1996. In July 1997, RSL COM, a global facilities-based
telecommunications company, acquired a controlling 51% interest in us. By April
1998, RSL COM had acquired the remaining 49% interest in us from existing
shareholders, and we became a wholly-owned subsidiary of RSL COM. After this
offering, RSL COM's shares of our Class B common stock will represent
approximately 96.5% of the combined voting power of all classes of our capital
stock and approximately 73.6% of the economic interest in our company. We
provide carrier transmission services to RSL COM. Such services accounted for
69.1% of our total revenues in 1998 and 63.4% of our total revenues for the nine
months ended September 30, 1999. For more information about our relationship
with RSL COM and certain services they provide to us, and we provide to them,
see the section of this prospectus entitled "Related Party Transactions--RSL
COM."
Our executive offices are located at 430 Park Avenue, Suite 500, New York,
New York 10022, where our telephone number is (212) 588-3670. Our Web site is
www.deltathree.com. The information contained on our Web site does not
constitute a part of this prospectus.
RISK FACTORS
You should read the section of this prospectus entitled "Risk Factors."
This section indicates among other things that:
o we have a history of losses; we reported a net loss of approximately
$17.5 million for the nine months ended September 30, 1999 and of
approximately $7.1 million in 1998
o we anticipate recording substantial losses for the foreseeable future
o we have a limited operating history
o we operate in a highly competitive market
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered ......................... 5,000,000 shares
Capital stock to be outstanding after
this offering:
Common stock................................ 7,001,469 shares
Class B common stock........................ 19,569,459 shares
Total capital stock...................... 26,570,928 shares
Over-allotment option......................... 750,000 shares of common stock
Use of proceeds............................... We estimate that the net proceeds from this offering will be
approximately $54.3 million. We expect to use the net proceeds
from the offering to fund marketing and promotional activities,
for capital expenditures and for general corporate purposes.
Voting rights:
Common stock................................ One vote per share.
Class B common stock........................ Ten votes per share. Upon completion of this offering, RSL COM
will be the only holder of our Class B common stock.
Conversion of Class B common stock............ Each share of Class B common stock is convertible into one share
of common stock at any time and automatically converts into common
stock upon transfer, other than to permitted transferees.
Other capital stock provisions................ The holders of common stock and Class B common stock have
identical rights except with respect to voting and transfer.
Proposed Nasdaq National Market symbol .... .. "DDDC"
</TABLE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, the information in this prospectus:
o reflects a 2.48-for-1 stock split which will be effected prior to this
offering
o assumes an initial public offering price of $12.00 per share, the
mid-point of the estimated price range
o assumes no exercise of the underwriters' over-allotment option
o assumes no exercise of outstanding options or options to be granted to
directors who are not our employees to purchase our common stock
o assumes the exchange of 748,288 RSL COM restricted units that have vested
for 748,288 shares of our common stock and the exchange of 372,976 RSL
COM restricted units that have not vested for options to purchase 372,976
shares of our common stock
We have a registered trademark in the United States for "Delta
Three(Registered)". We have submitted United States trademark applications for
the names "deltathree.com(Trademark)," "V-Greetings(Trademark)," "D3
Box(Trademark)," "Click IT(Trademark)," "D3 Fax(Trademark)" and
"deltathree.com(Trademark) the Communications Portal(Trademark)." All other
trademarks and trade names appearing in this prospectus are the property of
their respective holders.
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 NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ -------------------------
1996 1997 1998 1998
------------------- ------- ------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 1 $ 1,246 $ 5,638 $ 3,669
Costs and operating expenses.............. 179 3,576 12,796 8,111
------- ------- ------- -------
Loss from operations...................... (178) (2,330) (7,158) (4,442)
Interest expense, net..................... -- (38) (186) (146)
Minority interests........................ -- -- 223 --
------- ------- ------- -------
Net loss.................................. $ (178) $(2,368) $(7,121) $(4,588)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share--basic and
diluted................................. $ (0.03) $ (0.19) $ (0.37) $ (0.24)
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares outstanding--
basic and diluted....................... 6,420 12,390 19,254 19,149
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999
-----------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 6,432
Costs and operating expenses.............. 22,975
---------
Loss from operations...................... (16,543)
Interest expense, net..................... (915)
Minority interests........................ --
---------
Net loss.................................. $ (17,458)
---------
---------
Net loss per share--basic and
diluted................................. $ (0.89)
---------
---------
Weighted average shares outstanding--
basic and diluted....................... 19,569
</TABLE>
The pro forma balance sheet data gives effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
approximately $11 million (excluding a warrant to purchase 466,028
shares of common stock)
o an increase in deferred compensation attributable to RSL COM
restricted units, representing the difference between the exercise
price of the restricted units and the deemed fair value of our
common stock, based on an assumed initial public offering price of
$12.00 per share
The pro forma as adjusted balance sheet data gives effect to the foregoing
and to:
o the sale of 5,000,000 shares of common stock offered by us in this
offering
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,1999
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 1,293 $12,293 $ 66,825
Working capital (deficiency)............................................... (3,890) 7,110 61,642
Total assets............................................................... 24,587 35,587 90,119
Long-term debt due to affiliates........................................... 12,307 12,307 12,307
Total stockholders' equity................................................. 3,838 14,838 69,370
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before deciding
whether to invest in shares of our common stock.
If we do not successfully address any of the risks described below, there
could be a material adverse effect on our business, financial condition or
results of operations, and the trading price of our common stock may decline and
you may lose all or part of your investment. We cannot assure you that we will
successfully address these risks.
RISKS RELATED TO OUR COMPANY
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE OUR LOSSES WILL CONTINUE
We have incurred significant losses since inception, and we expect to
continue to incur significant losses for the foreseeable future. We reported a
net loss of approximately $17.5 million for the nine months ended September 30,
1999 and a net loss of approximately $7.1 million in 1998. As of September 30,
1999, our accumulated deficit was approximately $27.1 million. As a percentage
of revenues, our net loss for the nine months ended September 30, 1999 was
271.4% and 126.3% in 1998. Our revenues may not continue to grow or even
continue at their current level. In addition, we expect our operating expenses
to increase significantly as we develop and expand our business. For example, we
intend to spend approximately $20 million on marketing and promotional programs
in 2000 compared to $3.1 million for the nine months ended September 30, 1999
and $2.4 million in 1998. As a result, we will need to increase our revenues
significantly to become profitable. In order to increase our revenues, we need
to attract users to increase the fees we collect for our services. If our
revenues do not increase as much as we expect or if our expenses increase at a
greater pace than revenues, we may never be profitable or, if we become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE US
We have only a limited operating history upon which you can evaluate our
business and prospects. We commenced operations in June 1996. You should
consider our prospects in light of the risks, expenses and difficulties we may
encounter as an early stage company in the new and rapidly evolving market for
IP communications services. These risks include our ability:
o to increase awareness of our brand, increase the number of users of our
IP telephony services and build user loyalty
o to increase revenues to cover the increased marketing expenditures we
have planned
o to compete effectively
o to develop new products and keep pace with developing technology
In addition, because we expect an increasing percentage of our revenues to
be derived from our enhanced IP communications services, our past operating
results may not be indicative of our future results.
WE MAY NOT BE ABLE TO EXPAND OUR REVENUE AND ACHIEVE PROFITABILITY
Our business strategy is to expand our revenue sources to enhanced IP
communications services and advertising on the Internet. We can neither assure
you that we will be able to do this or that this strategy will be profitable.
Currently our revenues are primarily generated from carrier transmission
services for RSL COM and other communications carriers. Carrier transmission
services generated 70.2% of our total revenues for the nine months ended
September 30, 1999 and 74.7% in 1998. Enhanced IP communications services
generated 18.7% of our total revenues for the nine months ended September 30,
1999 and 20.5% in 1998. The provision of carrier transmission services and
enhanced IP communications services have not been profitable to date.
In the future, we intend to generate increased revenues from multiple
sources, many of which are unproven, including the commercial sale of enhanced
IP communications services and advertising on the Internet. To date, we have
recorded no revenue from advertising. We expect that our revenues for the
foreseeable future will be dependent on, among other factors:
o sale of enhanced IP communications services
o acceptance and use of Internet communications
o continued rapid growth of the Internet consumer market
5
<PAGE>
o expansion of service offerings
o user traffic levels
o the effect of competition, regulatory environment, international long
distance rates and access and transmission costs on our prices
o sale of carrier transmission services
o continued improvement of our global network quality
o sale of Internet advertising
We may not be able to sustain our current revenues or successfully generate
additional revenues from the sale of carrier transmission services, enhanced IP
communications services and advertising on the Internet in the future.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR SERVICES WILL DEVELOP
We are uncertain whether a market will develop for our enhanced IP
communications services. Our market is new and rapidly evolving. Our ability to
sell our services to end users may be inhibited by, among other factors, the
reluctance of some end users to switch from traditional communications carriers
to IP communications carriers and by concerns with the quality of Internet and
IP telephony and adequacy of security in the exchange of information over the
Internet. End users in markets serviced by recently deregulated
telecommunications providers are not familiar with obtaining services from
competitors of these providers and may be reluctant to use new providers, such
as our company. Our ability to increase revenues from enhanced IP communications
services depends on the migration of traditional telephone network traffic to
our IP network. We will need to devote substantial resources to educate end
users about the benefits of IP communications solutions in general and our
services in particular, and as a result, we intend to spend approximately $20
million in 2000 for marketing and promotional activities. If end users do not
accept our enhanced IP communications services as a means of sending and
receiving communications we will not be able to increase our number of paid
users or successfully generate revenues in the future.
OUR FUTURE SUCCESS DEPENDS ON THE GROWTH IN THE USE OF THE INTERNET AS A MEANS
OF COMMUNICATIONS
If the market for IP communications, in general, and our services in
particular, does not grow at the rate we anticipate, we will not be able to
increase our number of users or generate revenues from our enhanced IP
communications services or from advertising on the Internet at the rate we
anticipate. We currently rely on revenues generated primarily from the sale of
carrier transmission services but expect in the future to increasingly rely on
revenues generated from enhanced IP communications services and from advertising
on the Internet. To be successful, IP communications requires validation as an
effective, quality means of communication and as a viable alternative to
traditional telephone service. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The Internet may not prove to be a
viable alternative to traditional telephone service for reasons including:
o inconsistent quality or speed of service
o traffic congestion on the Internet
o potentially inadequate development of the necessary infrastructure
o lack of acceptable security technologies
o lack of timely development and commercialization of performance
improvements
o unavailability of cost-effective, high-speed access to the Internet
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, or its performance or
reliability may decline. In addition, Web sites may from time to time experience
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Internet usage, as well as usage of our
communications portal and our services, could be adversely affected.
IF WE DO NOT DEVELOP THE DELTATHREE.COM BRAND, WE MAY NOT BE ABLE TO MAINTAIN A
LEADING POSITION IN OUR INDUSTRY
We may not be able to become the leader in our industry. To become the
leader, we must strengthen the brand awareness of the deltathree.com brand. If
we fail to create and maintain brand awareness, it could
6
<PAGE>
adversely affect our ability to attract sufficient Web traffic and reduce our
attractiveness to advertisers. Brand recognition may become more important in
the future with the growing number of Internet sites and IP communications
providers.
IF WE FAIL TO ESTABLISH MARKETING RELATIONSHIPS THAT PROVIDE US VISIBILITY, WE
MAY NOT BE ABLE TO SUFFICIENTLY INCREASE OUR SALES
We believe that our success depends, in part, on our ability to develop and
maintain marketing and promotional relationships with Internet companies and
communications equipment and software companies that themselves have strong
brand names or high traffic volumes. If we are unable to establish and maintain
these relationships, we may not be able to increase sales of our services, and
we may lose users.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE AND MAY
HAVE TO REQUEST IT FROM RSL COM WHO HAS NO OBLIGATION TO PROVIDE IT
We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for service
quality, capacity and competitive pricing. Also, the introduction of our new
enhanced IP communications services will require significant marketing and
promotional expenses that we often incur before we begin to receive the related
revenue. If our cash flow from operations is not sufficient to meet our capital
expenditure and working capital requirements, we will need to raise additional
capital from other sources. 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 prohibit RSL COM and
its restricted subsidiaries, including us, from incurring any significant amount
of additional debt. We have also agreed with RSL COM not to take any action
which would cause RSL COM to default under its indentures and not to incur any
debt, other than inter-company debt, without its written consent so long as we
are a restricted subsidiary of RSL COM. 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
The foregoing factors also may create other risks affecting our long-term
success, as discussed in the other risk factors.
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We believe that quarter-to-quarter comparisons of our historical operating
results may not be a good indication of our future performance, nor would our
operating results for any particular quarter be indicative of our future
operating results.
OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS
We expect the volume of traffic we carry over our network to increase
significantly as we expand our operations and service offerings. Our network may
not be able to accommodate this additional volume. In order to ensure that we
are able to handle additional traffic, we may have to enter into long-term
agreements for leased capacity. To the extent that we overestimate our capacity
needs, we may be obligated to pay for more transmission capacity than we
actually use, resulting in costs without corresponding revenues. Conversely, if
we underestimate our capacity needs, we may be required to obtain additional
transmission capacity from more expensive sources. If we are unable to maintain
sufficient capacity to meet the needs of our users, our reputation could be
damaged and we could lose users.
WE FACE A RISK OF FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS USED IN OUR
BUSINESS
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems in five facilities in New York, Los
Angeles, London, Frankfurt and Jerusalem. Our systems and those that connect to
our network are subject to disruption from natural disasters or other sources of
power loss, communications failure, hardware or software malfunction, network
failures and other events both within and beyond our control. In December 1998,
we experienced a system disruption while we were installing a new billing system
and users were unable to access our Web site for six hours. In July 1999, we
experienced a system disruption with respect to our unified messaging service,
D3 Box, while the product was being market tested. For a period of three days
the system was down and users were unable to send or retrieve new messages. Any
system interruptions that cause our services to be unavailable, including
significant or lengthy telephone network failures or difficulties for users in
communicating through our network or portal, could damage our reputation and
result in a loss of users.
OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES
Our computer infrastructure is potentially vulnerable to physical or
electronic computer viruses, break-ins and similar disruptive problems and
security breaches which could cause interruptions, delays or loss of services to
our users. We believe that the secure transmission of confidential information
over the Internet, such as credit card numbers, is essential in maintaining user
confidence in our services. We rely on licensed encryption and authentication
technology to effect secure transmission of confidential information, including
credit card numbers. It is possible that advances in computer capabilities, new
technologies or other developments could result in a compromise or breach of the
technology we use to protect user transaction data. A party that is able to
circumvent our security systems could misappropriate proprietary information or
cause interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Although we have experienced no security breaches to date of which we are aware,
we cannot guarantee you that our security measures will prevent security
breaches.
YEAR 2000 COMPLICATIONS MAY HARM OUR BUSINESS
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for system failures encompasses all aspects of our business, including
our computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our Web site and a temporary
inability to engage in normal business activities.
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We completed testing of our systems in October 1999. This testing did not
identify any material non-compliant systems operated by us or our vendors,
suppliers and service providers. Therefore, the most reasonably likely worst
case Year 2000 scenario is a systemic failure beyond our control, such as a
prolonged disruption or failure of the Internet or the telecommunications
infrastructure. Any failures or disruptions could prevent us from operating our
network or prevent users from accessing our Web site and services, which could
result in loss of users, lost revenues, increased operating costs and material
disruptions in the operation of our business. We have not developed our own
contingency plan to deal with problems that result from Year 2000 issues and are
dependent on a contingency plan developed by RSL COM to deal with such problems.
THIRD PARTIES MIGHT INFRINGE UPON OUR PROPRIETARY TECHNOLOGY
We cannot assure you that the steps we have taken to protect our
intellectual property rights will prevent misappropriation of our proprietary
technology. To protect our rights to our intellectual property, we rely on a
combination of trademark and patent law, trade secret protection,
confidentiality agreements and other contractual arrangements with our
employees, affiliates, strategic partners and others. Although we do not
currently own any issued patents, we have pending applications for patents in
the United States and Israel. We may be unable to detect the unauthorized use
of, or take appropriate steps to enforce, our intellectual property rights.
Effective copyright and trade secret protection may not be available in every
country in which we offer or intend to offer our services. Failure to adequately
protect our intellectual property could harm our brand, devalue our proprietary
content and affect our ability to compete effectively. Further, defending our
intellectual property rights could result in the expenditure of significant
financial and managerial resources.
OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
Third parties may assert claims that we have violated a patent or infringed
a copyright, trademark or other proprietary right belonging to them. We
incorporate licensed third-party technology in some of our services. In these
license agreements, the licensors have agreed to indemnify us with respect to
any claim by a third party that the licensed software infringes any patent or
other proprietary right so long as we have not made changes to the licensed
software. We cannot assure you that these provisions will be adequate to protect
us from infringement claims. Any infringement claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources.
On October 8, 1999, we were named as a defendant in a lawsuit alleging that
we are infringing on a patent by making, using, selling and offering for sale
prepaid telephone card products in the United States. The plaintiffs are seeking
an injunction to stop us from using the technology covered by this patent,
monetary damages in an unspecified amount and reimbursement of attorneys' fees.
The litigation was only recently filed and we are presently evaluating these
claims. We believe that we have meritorious defenses to the claim and we intend
to defend the lawsuit vigorously. However, the outcome of the litigation is
inherently unpredictable and an unfavorable result may have a material adverse
effect on our business, financial condition and results of operations.
Regardless of the ultimate outcome, the litigation could result in substantial
expenses to us and significant diversion of efforts by our managerial and other
personnel.
OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS
We intend to continue to enter additional markets in Eastern Europe, Africa
and Asia and to expand our existing operations outside the United States.
International operations are subject to inherent risks, including:
o potentially weaker protection of intellectual property rights
o political instability
o unexpected changes in regulations and tariffs
o fluctuations in exchange rates
o varying tax consequences
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o uncertain market acceptance and difficulties in marketing efforts due to
language and cultural differences
WE HAVE EXPERIENCED LOSSES AS A RESULT OF FRAUD
We have experienced losses due to fraud. In 1998, we experienced losses
from fraud of approximately $240,000. Callers have obtained our services without
rendering payment by unlawfully using our access numbers and personal
identification numbers. Although we have implemented anti-fraud measures in
order to control losses relating to these practices, these measures may not be
sufficient to effectively limit all of our exposure in the future from fraud and
we continue to experience losses from fraud. Such losses in 1999 were less than
$2,000 a month on average. While we have established reserves for bad debts in
accordance with historical levels of uncollectible receivables resulting
primarily from these fraudulent practices, our losses may exceed our reserves
and could rise significantly above anticipated levels.
INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
Competition in the market for each of enhanced IP communications services
and carrier transmission services is becoming increasingly intense and is
expected to increase significantly in the future. The market for enhanced
internet and IP communications is new and rapidly evolving. We expect that
competition from companies both in the Internet and telecommunications
industries will increase in the future. Our competitors include both start-up IP
telephony service providers and established traditional communications
providers. Many of our existing competitors and potential competitors have
broader portfolios of services, greater financial, management and operational
resources, greater brand-name recognition, larger subscriber bases and more
experience than we have. In addition, many of our IP telephony competitors use
the Internet instead of a private network to transmit traffic. Operating and
capital costs of these providers may be less than ours, potentially giving them
a competitive advantage over us in terms of pricing.
We also compete in the growing market of discount telecommunications
services including calling cards, prepaid cards, call-back services, dial-around
or 10-10 calling and collect calling services. In addition, some Internet
service providers have begun to aggressively enhance their real time interactive
communications, focusing initially on instant messaging, although we expect them
to begin to provide PC-to-phone services.
For the carrier transmission services business, we compete with
telecommunications providers, long distance carriers and other long distance
resellers and providers of carrier services. Competition for carrier traffic is
primarily based on price. Decreasing telecommunications rates have resulted in
intense price competition and we expect that competition will continue to
increase significantly as telecommunications rates decrease. Increased
competition could force us to further reduce our prices and profit margins, and
may reduce our market share.
If we are unable to provide competitive service offerings, we may lose
existing users and be unable to attract additional users. In addition, many of
our competitors, especially traditional carriers, enjoy economies of scale that
result in a lower cost structure for transmission and related costs, which cause
significant pricing pressures within the industry. Although the minutes of use
we sell are increasing, revenues are not increasing at the same rate due
primarily to a decrease in revenue per minute for our carrier transmission
services. In order to remain competitive we intend to increase our efforts to
promote our services, and we cannot be sure that we will be successful in doing
this.
In addition to these competitive factors, recent and pending deregulation
in some of our markets may encourage new entrants. We cannot assure you that
additional competitors will not enter markets that we plan to serve or that we
will be able to compete effectively.
DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR COMPETITIVE
PRICING ADVANTAGE
Decreasing telecommunications rates may diminish or eliminate the
competitive pricing advantage of our enhanced IP communications services and
carrier transmission services. International and domestic telecommunications
rates have decreased significantly over the last few years in most of the
markets in which we operate, and we anticipate that rates will continue to be
reduced in all of the markets in which we do business or expect to do business.
Users who select our enhanced IP communications services to take
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advantage of the current pricing differential between traditional
telecommunications rates and our rates may switch to traditional
telecommunications carriers as such pricing differentials diminish or disappear,
and we will be unable to use such pricing differentials to attract new customers
in the future. In addition, our ability to market our carrier transmission
services to telecommunications carriers depends upon the existence of spreads
between the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and
wholesale rates charged by the carriers from which we obtain wholesale service.
Continued rate decreases will require us to lower our rates to remain
competitive and will reduce or possibly eliminate our gross profit from our
carrier transmission services. If telecommunications rates continue to decline,
we may lose users for our enhanced IP communications services and carrier
transmission services.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES RELATING TO IP TELEPHONY COULD
HARM OUR BUSINESS
Traditionally, voice communications services have been provided by
regulated telecommunications common carriers. We offer voice communications to
the public for international and domestic calls using IP telephony, and we do
not operate as a licensed telecommunications common carrier in any jurisdiction.
Based on specific regulatory classifications and recent regulatory decisions, we
believe we qualify for certain exemptions from telecommunications common carrier
regulation in many of our markets. However, the growth of IP telephony has led
to close examination of its regulatory treatment in many jurisdictions making
the legal status of our services uncertain and subject to change as a result of
future regulatory action, judicial decisions or legislation in any of the
jurisdictions in which we operate.
Established regulated telecommunications carriers have sought and may
continue to seek regulatory actions to restrict the ability of companies such as
ours to provide services or to increase the cost of providing such services. In
addition, our services may be subject to regulation if regulators distinguish
phone-to-phone telephony service using IP technologies over privately-managed
networks such as our services from integrated PC-to-PC and PC-originated voice
services over the Internet. Some regulators may decide to treat the former as
regulated common carrier services and the latter as unregulated enhanced or
information services.
Application of new regulatory restrictions or requirements to us could
increase our costs of doing business and prevent us from delivering our services
by our current arrangements. In such event, we would consider a variety of
alternative arrangements for providing our services, including obtaining
appropriate regulatory authorizations for our local network partners or
ourselves, changing our service arrangements with RSL COM for a particular
country or limiting our service offerings. Such regulations could limit our
service offerings, raise our costs and restrict our pricing flexibility, and
potentially limit our ability to compete effectively. Further, regulations and
laws which affect the growth of the Internet could hinder our ability to provide
our services over the Internet. For a more detailed discussion of the regulation
of IP telephony, see "Business--Regulation of IP Telephony."
WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE
COMMUNICATIONS INDUSTRY
Our industry is subject to rapid technological change. We cannot predict
the effect of technological changes on our business. In addition, widely
accepted standards have not yet developed for the technologies we use. We expect
that new services and technologies will emerge in the market in which we
compete. These new services and technologies may be superior to the services and
technologies that we use, or these new services may render our services and
technologies obsolete.
To be successful, we must adapt to our rapidly changing market by
continually improving and expanding the scope of services we offer and by
developing new services and technologies to meet customer needs. Our success
will depend, in part, on our ability to license leading technologies and respond
to technological advances and emerging industry standards on a cost-effective
and timely basis. We will need to spend significant amounts of capital to
enhance and expand our services to keep pace with changing technologies.
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RISKS RELATED TO OUR RELATIONSHIP WITH RSL COM
WE DEPEND ON SALES TO RSL COM
We currently depend on sales to RSL COM, our controlling stockholder, for a
substantial majority of our revenues. RSL COM accounted for 37.6%, 69.1% and
63.4% of our revenues for the years ended December 31, 1997 and December 31,
1998 and for the nine months ended September 30, 1999, respectively. RSL COM is
not contractually required to purchase services from us, other than a minimum of
50 million minutes per year pursuant to the services agreement for two years
from the date of this offering. We cannot assure you that RSL COM will fulfill
its obligations under this agreement or that the contract will be renewed upon
its expiration. RSL COM resells a significant portion of the carrier
transmission services it purchases from us to third parties. Although we could
market our services directly to these third parties if RSL COM ceased purchasing
services from us, we cannot assure you that we would succeed in attracting these
customers or that these customers would purchase our services in the same volume
or on the same terms as from RSL COM.
WE DEPEND ON THE SERVICES RSL COM PROVIDES TO US
We are currently dependent upon RSL COM for leased line capacity, data
communications facilities, traffic termination services and physical space for
our equipment. Through our relationship with RSL COM, which owns or leases
substantial bandwidth for its own business, we have access to bandwidth. We are
able to take advantage of RSL COM's volume discounts and achieve cost
efficiencies that we could not achieve on our own. Although we have entered into
a services agreement with RSL COM for it to provide these services through 2004,
if RSL COM becomes unwilling or unable to provide its current level of services
to us during the term of such agreement or thereafter, we may not be able to
find replacement service providers on a timely basis. If we are required to
change providers, we would likely experience delays, operational difficulties
and increased expenses, and our ability to provide services to our users or
expand our operations may be impaired.
The inter-company agreements with RSL COM were made in the context of a
parent-subsidiary relationship and were not negotiated on an arms' length basis.
As a result, the terms of such agreement may be better or worse than the terms
that would have been negotiated by unaffiliated third parties for similar
arrangements.
RSL COM WILL CONTROL ALL MATTERS SUBMITTED TO A STOCKHOLDER VOTE
After completion of this offering, RSL COM will own all of our Class B
common stock and will therefore own approximately 96.5% of the voting power of
our company, or approximately 96.2% of the voting power if the underwriters'
over-allotment option is exercised in full.
As long as RSL COM continues to beneficially own shares of capital stock
representing more than 50% of the voting power of our outstanding capital stock,
RSL COM will be able to exercise a controlling influence over decisions
affecting our company, including:
o composition of our board of directors and, through it, the direction and
policies of our company, including the appointment and removal of
officers
o mergers or other business combinations involving our company
o acquisitions or dispositions of assets by our company
o future issuances of capital stock or other securities by our company
o incurrence of debt by our company
o amendments, waivers and modifications to any agreements between us and
RSL COM
o payment of dividends on our capital stock
o approval of our business plans and general business development
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In addition, six of our nine 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 currently prohibit
us from incurring any significant amount of additional debt. We have also agreed
with RSL COM not to take any action which would cause RSL COM to default under
its indentures and not to incur any debt, other than inter-company debt, without
its written consent so long as we are a restricted subsidiary of RSL COM. In
addition, currently the restrictions under the RSL COM indentures effectively
prohibit us from paying dividends and limit our ability to make other
distributions in respect of our capital stock, sell assets, engage in mergers or
acquisitions or make some types of investments. Such restrictions also limit the
ability of a third party to acquire a controlling interest in our company. These
restrictions may prohibit transactions that would otherwise be beneficial to our
company.
THE INTERESTS OF RSL COM MAY CONFLICT WITH OUR INTERESTS
The interests of RSL COM, our controlling stockholder and principal
customer, may conflict with our interests.
Services. We have entered into a services agreement with RSL COM for the
provision of traffic termination services, colocation rights and other network
support services. We provide carrier transmission services to RSL COM. Because
of these transactions and RSL COM's controlling position in our company,
conflicts of interest could arise relating to the nature, quality and pricing of
services or products provided by us to RSL COM or by RSL COM to us.
Financial Support. Historically, RSL COM has funded our working capital and
operating losses. As a result, we owe RSL COM $12.3 million, as of
September 30, 1999. Also, to the extent that we require additional working
capital we may need to turn to RSL COM. Because of RSL COM's control over us,
conflicts of interest could arise relating to the prepayment of borrowings, the
provision of additional funding and the terms of such funding and general issues
relating to the uses and sources of our funds.
Board Conflicts. Six of our nine 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. For example, if a business opportunity
were presented to both us and RSL COM for consideration, directors affiliated
with RSL COM would not participate in our consideration of that opportunity.
However, conflicts could be resolved in a manner adverse to us which could harm
our business.
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RSL COM MAY COMPETE WITH OUR COMPANY
RSL COM is in the communications business and may compete with us under
some circumstances. Under the services agreement between us and RSL COM, RSL COM
is prohibited from competing with us in providing Internet telephony services as
described in the services agreement, provided that we provide RSL COM with any
requested Internet telephony services promptly and with quality assurance.
However, this non-competition provision terminates on September 3, 2001 and the
scope of such provision is subject to the following limitations:
o RSL COM and its subsidiaries may acquire up to 20% in an entity providing
Internet telephony services
o RSL COM and its subsidiaries may be stockholders in entities providing
Internet telephony services, provided that Internet telephony services
are ancillary to the business of that entity
o the non-competition provision does not apply to RSL COM's subsidiaries
that become publicly traded companies
o Internet telephony services under the non-competition provision are
limited to (1) phone to phone services marketed as IP to the general
public, including both individuals and businesses and (2) the following
Web-based enhanced communication services: PC-to-phone, D3 box, Click IT,
Global Roaming, IP-initiated conference calls, Phone-to-PC, D3 Fax,
information services and white boarding
RSL COM'S CLASS B COMMON STOCK MAY BE TRANSFERRED TO A THIRD PARTY THAT WOULD
EFFECTIVELY CONTROL US
Although our Class B common stock generally converts to common stock
automatically upon transfer, RSL COM may transfer our Class B common stock to
permitted transferees, including entities controlled by RSL COM or its principal
stockholder, Ronald S. Lauder, and successors in interest of RSL COM. As a
result, a third party could acquire our Class B common stock and may become
party to our intercompany agreements. We cannot assume that a third party would
maintain good relations with us or maintain or renew our agreements with RSL
COM.
RISKS RELATED TO THIS OFFERING
FUTURE SALES OF CAPITAL STOCK MAY ADVERSELY AFFECT OUR STOCK PRICE
Future sales of capital stock in the market after this offering or the
perception that such sales could occur may adversely affect the market price of
our stock and make it difficult for us to raise additional capital through the
sale of equity at prices acceptable to us. Following this offering, we will have
approximately 7,001,469 shares of common stock, or approximately 7,751,469
shares of common stock outstanding if the underwriters exercise their
over-allotment option in full, and 19,569,459 shares of Class B common stock
outstanding. Of these shares, persons other than our affiliates (as this term is
defined under the Securities Act, and which includes RSL COM) may freely
transfer the shares of common stock sold in this offering without restriction or
further registration under the Securities Act. However, we have given RSL COM
both demand and piggyback registration rights with respect to common stock into
which Class B common stock will convert. For more information about these
registration rights, see "Related Party Transactions--RSL COM--Registration
Rights Agreement" and "Shares Eligible for Future Sale."
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo!, CNET and all of our officers and directors
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and holders of options to purchase our common stock on
the closing of this offering (other than
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those subject to the 180-day lock-up) will be prohibited from disposing shares
of common stock for a period of 90 days after the date of this prospectus.
Shares of capital stock subject to these lock-up agreements will become eligible
for sale in the public market upon expiration of these lock-up agreements,
subject to limitations imposed by Rule 144 under the Securities Act for holders
who are our affiliates.
YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION OF BOOK VALUE PER SHARE
The initial public offering price of our common stock will be substantially
higher than the net tangible book value per share of the outstanding common
stock immediately after this offering. Therefore, based upon an assumed initial
public offering price of $12.00 per share, if you purchase our common stock in
this offering, you will incur immediate dilution of approximately $9.72 in the
net tangible book value per share of common stock from the price you pay for our
common stock in this offering.
A THIRD PARTY MAY BE DETERRED FROM ACQUIRING OUR COMPANY
The disproportionate voting rights of our Class B common stock relative to
our common stock could delay, deter or prevent a third party from attempting to
acquire control of us. This provision may have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of our company, even though such a change in ownership would be economically
beneficial to our company and our stockholders.
WE CANNOT GUARANTEE THAT A TRADING MARKET WILL DEVELOP FOR OUR COMMON STOCK
There has not been a public market for our common stock. We cannot predict
the extent to which a trading market will develop or how liquid that market
might become. The initial public offering price will be determined by
negotiation between the representative of the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS
The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as:
o variations in our actual or anticipated quarterly operating results or
those of our competitors
o announcements by us or our competitors of technological innovations
o introduction of new products or services by us or our competitors
o changes in financial estimates by securities analysts
o conditions or trends in the Internet industry
o changes in the market valuations of other Internet companies
o announcements by us or our competitors of significant acquisitions
o our entry into strategic partnerships or joint ventures
o sales of our capital stock by RSL COM
All of these factors are, in whole or part, beyond our control and may
materially adversely affect the market price of our common stock regardless of
our performance.
Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. The trading prices of many Internet-related and technology companies'
stocks have reached historical highs within the last 52 weeks and have reflected
relative valuations substantially above historical levels. During the same
period, such companies' stocks have also been highly volatile and have recorded
lows well below such historical highs. We cannot assure you that our stock will
trade at the same levels of other Internet stocks or that Internet stocks in
general will sustain their current market prices.
15
<PAGE>
WE DO NOT INTEND TO PAY DIVIDENDS
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance our operations and to expand our
business and, therefore, do not expect to pay any cash dividends in the
foreseeable future. In addition, indentures governing outstanding indebtedness
of RSL COM restrict our ability to declare or pay cash dividends, and, for the
foreseeable future, effectively prohibit such payments or declarations.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that address, among
other things: development of services; expansion strategy; use of proceeds;
projected capital expenditures; liquidity; development of additional revenue
sources; development and expansion of marketing relationships; market acceptance
of Internet telephony; technological advancement; ability to develop "brand"
awareness and global expansion. These statements may be found in the sections of
this prospectus entitled "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and in this prospectus generally. Our
actual results could differ materially from those anticipated in these
forward-looking statements as of result of various factors, including all the
risks discussed in "Risk Factors" and elsewhere in this prospectus.
We urge you to consider that statements which use the terms "believe," "do
not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and are subject to risks and uncertainties.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
5,000,000 shares of common stock will be approximately $54.3 million
(approximately $62.7 million if the underwriters exercise their over-allotment
option in full) after deducting the underwriting discount and estimated expenses
of this offering.
We expect that we will use the net proceeds from this offering to be
allocated as follows:
o approximately $20 million to fund marketing and promotional activities
o approximately $10 million for capital expenditures
o the balance for general corporate purposes
The preceding allocations are only an estimate and the amounts that we
actually expend will depend upon several factors, including our available cash,
the success of our marketing and promotion activities and the availability of
new business opportunities.
Pending use of the net proceeds, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance our operations and to expand our business. In addition, indentures
governing outstanding indebtedness of RSL COM restrict our ability to declare or
pay cash dividends, and, for the foreseeable future, effectively prohibit such
payments or declarations. Any future determination to pay cash dividends will be
at the discretion of our board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that our board of directors considers appropriate.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999.
Our capitalization is presented:
(1) on an actual basis
(2) on a pro forma basis to give effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
approximately $11 million (excluding a warrant to purchase 466,028
shares of common stock)
o an increase in deferred compensation attributable to RSL COM
restricted units, representing the difference between the exercise
price of the restricted units and the deemed fair value of our
common stock, based on an assumed initial public offering price of
$12.00 per share
(3) on a pro forma as adjusted basis to give effect to the foregoing and
to:
o the sale of 5,000,000 shares of common stock offered by us in this
offering
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
The table excludes:
o 1,076,761 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 1999 under our 1999 Stock Incentive Plan
at a weighted average exercise price of $5.11 per share
o 173,939 shares issuable upon the exercise of options to be granted under
our 1999 Directors' Plan upon completion of this offering at an exercise
price equal to the initial offering price
o 372,976 shares issuable upon the exercise of options issued in exchange
for RSL COM restricted units that have not vested at a weighted average
exercise price of $1.80 per share
18
<PAGE>
Please read this table together with the sections of this prospectus
entitled "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................................. $ 1,293 $ 12,293 $ 66,825
--------- --------- ---------
--------- --------- ---------
Long-term debt due to affiliates........................................... $ 12,307 $ 12,307 $ 12,307
--------- --------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value per share;
25,000,000 shares authorized; no shares issued and outstanding........ -- -- --
Common stock, $0.001 par value per share;
200,000,000 shares authorized; no shares issued and outstanding
(actual), 1,253,181 shares issued and outstanding (pro forma) and
7,001,469 shares issued and outstanding (pro forma as adjusted)....... -- 1 7
Class B common stock, $0.001 par value per share;
200,000,000 shares authorized; 19,569,459 shares issued and
outstanding........................................................... 20 20 20
Additional paid-in capital................................................. 37,177 54,738 109,264
Receivable for capital stock............................................... -- (1,000) (1,000)
Deferred compensation...................................................... (6,234) (8,938) (8,938)
Accumulated deficit........................................................ (27,125) (29,983) (29,983)
--------- --------- ---------
Total stockholders' equity............................................... 3,838 14,838 69,370
--------- --------- ---------
Total capitalization.................................................. $ 16,145 $ 27,145 $ 81,677
--------- --------- ---------
--------- --------- ---------
</TABLE>
19
<PAGE>
DILUTION
As of September 30, 1999, our pro forma consolidated net tangible book
value was $4,623,909, or $0.22 per share of capital stock. "Pro forma
consolidated net tangible book value per share" represents the total amount of
our pro forma consolidated tangible assets reduced by the amount of our
consolidated liabilities and divided by the number of shares of capital stock
outstanding on a pro forma basis after giving effect to:
o the issuance of 167,238 shares of common stock to Yahoo! (including
41,963 shares issued upon the exercise of a warrant at an exercise
price of $7.98 per share, assuming a cashless exercise) in exchange
for the offset of an account payable to Yahoo! in the amount of
$1 million
o the issuance of 1,085,943 shares of common stock to CNET for
$11 million (excluding a warrant to purchase 466,028 shares of
common stock)
After giving effect to the sale of 5,000,000 shares of common stock in this
offering and receipt of the estimated net proceeds from this offering, after
deducting the underwriting discount and estimated expenses of this offering, our
pro forma consolidated net tangible book value at September 30, 1999 would have
been approximately $58.9 million, or $2.28 per share. This represents an
immediate increase in pro forma consolidated net tangible book value of $2.06
per share to our existing investors and an immediate dilution of $9.72 per share
to new investors.
"Dilution per share" represents the difference between the price per share
to be paid by new investors and the pro forma consolidated net tangible book
value per share immediately after this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................................... $ 12.00
Pro forma consolidated net tangible book value per share at September 30, 1999..... $ 0.22
Increase in pro forma consolidated net tangible book value per share attributable
to new investors................................................................ 2.06
---------
Pro forma consolidated net tangible book value per share after this offering......... 2.28
---------
Dilution per share to new investors.................................................. $ 9.72
---------
---------
</TABLE>
The following table summarizes, as of September 30, 1999, the differences
between the total consideration paid and the average price per share paid by
existing investors and new investors with respect to the number of shares of
common stock purchased from us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing investors................................ 20,822,640 81% $30,675,714 34% $ 1.47
New investors..................................... 5,000,000 19 60,000,000 66 12.00
---------- --- ----------- ---
Total........................................... 25,822,640 100% $90,675,714 100%
---------- --- ----------- ---
---------- --- ----------- ---
</TABLE>
The foregoing table excludes:
o 748,288 shares issuable upon exchange of RSL COM restricted units
that have vested at a weighted average exercise price of $0.31 per
share
o 1,076,761 shares of common stock issuable upon the exercise of
options outstanding as of June 30, 1999 under our 1999 Stock
Incentive Plan at a weighted average exercise price of $5.11 per
share
o 173,939 shares issuable upon the exercise of options to be granted
under our 1999 Directors' Plan upon completion of this offering at
an exercise price equal to the initial offering price
o 372,976 shares issuable upon the exercise of options issued in
exchange for RSL COM restricted units that have not vested at a
weighted average exercise price of $1.80 per share
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the selected consolidated financial data presented below from
our consolidated financial statements and related notes included in this
prospectus. You should read the selected consolidated financial data together
with our consolidated financial statements and related notes and the section of
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Brightman Almagor & Co., a member firm of
Deloitte Touche Tohmatsu, independent certified public accountants, audited our
historical financial statements for the period June 1996 (inception) through
December 31, 1996 and as of and for the years ended December 31, 1997 and 1998
and the nine months ended September 30, 1999. Their report appears elsewhere in
this prospectus. The selected balance sheet data as of December 31, 1996 is
derived from an audited financial statement not included in this prospectus.
Statement of operations data and balance sheet data as of and for the nine
months ended September 30, 1998 have been derived from our unaudited
consolidated financial statements that have been prepared on the same basis as
the audited financial statements and, in the opinion of management, include all
adjustments, which consist only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
these periods. Operating results for the nine months ended September 30, 1998
and 1999 are not necessarily indicative of the results that may be expected for
the full year.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 YEAR ENDED DECEMBER NINE MONTHS ENDED
(INCEPTION) TO 31, SEPTEMBER 30,
DECEMBER 31, ------------------- --------------------
1996 1997 1998 1998 1999
--------------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Affiliates...................................... $ -- $ 468 $ 3,896 $ 2,485 $ 4,077
Non-affiliates.................................. 1 778 1,742 1,184 2,355
--------- ------- ------- ------- --------
Total revenues................................ 1 1,246 5,638 3,669 6,432
Costs and operating expenses:
Cost of revenues................................ -- (1,065) (4,657) (2,649) (5,811)
Research and development expenses............... -- (294) (651) (479) (797)
Selling and marketing expenses.................. -- (632) (2,431) (1,603) (3,087)
General and administrative expenses (exclusive
of non-cash compensation expense)............. (179) (1,388) (1,842) (1,026) (2,080)
Non-cash compensation expense................... -- -- (743) (640) (8,926)
Amortization of goodwill........................ -- (197) (2,472) (1,714) (2,274)
--------- ------- ------- ------- --------
Total costs and operating expenses............ (179) (3,576) (12,796) (8,111) (22,975)
--------- ------- ------- ------- --------
Loss from operations.............................. (178) (2,330) (7,158) (4,442) (16,543)
Interest expense, net............................. -- (38) (186) (146) (915)
Minority interests................................ -- -- 223 -- --
--------- ------- ------- ------- --------
Net loss.......................................... $ (178) $(2,368) $(7,121) $(4,588) $(17,458)
--------- ------- ------- ------- --------
--------- ------- ------- ------- --------
Net loss per share--basic and diluted............. $ (0.03) $ (0.19) $ (0.37) $ (0.24) $ (0.89)
--------- ------- ------- ------- --------
--------- ------- ------- ------- --------
Weighted average shares outstanding--basic and
diluted......................................... 6,420 12,390 19,254 19,149 19,569
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
---- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $130 $ 3,196 $ 1,357 $ 432 $ 1,293
Working capital (deficiency)............................. 70 2,763 (3,232) (2,274) (3,890)
Total assets............................................. 396 8,403 25,676 22,337 24,582
Long-term debt due to affiliates......................... 344 -- 5,107 2,031 12,307
Total stockholder's equity (deficiency).................. (30) 6,272 12,370 14,800 3,838
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this prospectus.
OVERVIEW
We are a global provider of IP telephony services, which include our
carrier transmission services and enhanced Web-based and other communications
services. We were founded in 1996 to capitalize on the growth of the Internet as
a communications tool by commercially offering IP telephony services. In July
1997, RSL COM acquired a majority interest in our company, and in April 1998, we
became a wholly-owned subsidiary of RSL COM after RSL COM acquired the remaining
outstanding shares of our capital stock from third parties.
Since our inception, our primary activities have included:
o developing our business model
o hiring management and other key personnel
o building our IP network
o offering PC-to-phone, phone-to-phone and carrier transmission services
o entering into marketing relationships to promote our enhanced IP
communication services
o developing new services
o developing our interactive communications portal and customer care center
Since RSL COM's investment in our company in July 1997, we have relied on
RSL COM almost exclusively for our financing needs. With the proceeds of this
offering, we will be less dependent upon RSL COM for our funding needs.
In addition, since RSL COM's investment in our company, we have provided
RSL COM with a majority of our network capacity which has enabled us to maximize
the use of our available network capacity. We currently generate revenues
primarily from carrier transmission services for RSL COM and other
telecommunications carriers. As we continue to expand our marketing and
promotional efforts for our enhanced IP communications services, we expect
revenue from these services, over time, to represent a majority of our total
revenues. This shift in revenue mix would minimize our reliance upon carrier
transmission services for our revenues. In order to increase the number of users
of these services we believe we will have to significantly increase our
marketing and advertising expenditures. For these reasons our historical
operating results may not necessarily be indicative of our future operating
performance.
Revenues
Revenues are derived from affiliates and non-affiliates. Revenues from
affiliates consist of revenues received from RSL COM for carrier transmission
services we provide to RSL COM. The majority of the services we provide to RSL
COM are resold by RSL COM to other communications companies, and the remainder
are used directly by RSL COM's customers. Revenues from non-affiliates consist
of revenues from carriers other than RSL COM for carrier transmission services
and revenues from users of our enhanced IP communications services, including
PC-to-phone and phone-to-phone. All revenues are recognized as the service is
performed. Revenues are currently derived from usage charges on a per minute
basis. We expect our minutes of use to increase over time. However, prices have
been decreasing due to significant competition. This pricing pressure has begun
to negatively impact our gross margins, particularly with respect to our carrier
transmission services.
Carrier transmission services to RSL COM accounted for 63.4% of our total
revenues for the nine months ended September 30, 1999 and 69.1% of our total
revenues in 1998. Carrier transmission services to non-affilates accounted for
15.5% of our total revenues for the nine months ended September 30, 1999 and
5.6% of our total revenues in 1998. The provision of enhanced IP communications
services accounted for 18.7% of our total revenues for the nine months ended
September 30, 1999 and 20.5% in 1998.
22
<PAGE>
Costs and Operating Expenses
Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expenses and amortization of goodwill.
o Cost of revenues consist primarily of access, termination and
transmission costs paid to carriers that we incur when providing services
and fixed costs associated with leased transmission lines. The term of
our contracts for leased transmission lines is generally one year and
either party can terminate with prior notice. We incurred extraordinary
costs of approximately $1,596,000 in 1998 and $1,060,000 for the nine
months ended September 30, 1999 in integrating the hardware and software
purchased from Ericsson into our network, and anticipate that we will
incur additional costs of approximately $344,000 through the end of 1999.
To compensate us for our costs, Ericsson agreed to offset our payable to
them for network telecommunications equipment that we previously
purchased from them with a fair market value of $3 million, representing
Ericsson's reimbursement of costs incurred by us. As a result we
classified this payable as deferred revenues and costs which we recognize
as an offset to cost of revenues and research and development expenses as
they are incurred.
o Research and development expenses consist primarily of costs associated
with establishing our network and the initial testing of our services and
compensation expenses of software developers involved in new product
development and software maintenance. In the future, these expenses may
fluctuate as a percentage of revenue depending on the project undertaken
during the reporting period. Since our inception, we have expensed all
research and development costs in each of the periods in which they were
incurred.
o Selling and marketing expenses consist primarily of advertising and
promotional expenses incurred to attract potential users and network
partners. We expect to substantially increase our selling and marketing
expenses as we increase our marketing efforts in order to grow our user
base and increase the frequency of use by our registered users and new
users of our services. We anticipate that as we add new paid users we
will be able to spread these costs over a larger revenue base and
accordingly improve our operating margins.
o General and administrative expenses consist primarily of compensation and
benefits for management, finance and administrative personnel, deferred
compensation expense, occupancy costs, depreciation of fixed assets and
legal and accounting fees. We expect to hire additional personnel and to
incur expenses associated with being a public company, including costs of
directors' and officers' insurance and increased legal and accounting
fees.
o Amortization of goodwill consists of amortization of the goodwill related
to the purchase by RSL COM of all of the outstanding shares of our
capital stock. In July 1997, we issued shares representing 51% of
outstanding share captital to RSL COM for $5 million. No goodwill was
recorded as a result of this issuance. However, as a result of acquiring
a controlling interest in us, RSL COM recorded goodwill in the amount of
$450,000, representing our net liabilities. RSL COM then proceeded to
offer to purchase from our stockholders all of our outstanding shares it
did not already own. By April 1998, RSL COM had paid approximately
$14.7 million in cash and securities for the remaining 49% of our shares
that it did not own and RSL COM recorded goodwill in the amount of $14.7
million. As a result of these transactions, RSL COM "pushed down" a total
of approximately $15.2 million of goodwill to our financial statements,
accounted for in our financial statements as an increase in both goodwill
and additional paid-in capital of approximately $15.2 million in the
aggregate. The goodwill is being amortized by us over a five-year period.
The amortization of this goodwill has been reflected as a charge to
operations beginning in 1997. We have recorded amortization expense of
approximately $4.9 million through September 30, 1999. The future
amortization of the unamortized goodwill balance will result in charges
of approximately $750,000 in the fourth quarter of 1999, $3.0 million in
2000, $3.0 million in 2001, $3.0 million in 2002 and $500,000 in 2003.
We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to September 30, 1999. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.
23
<PAGE>
Deferred Compensation Charge
We will have to recognize significant recurring charges relating to
non-cash compensation expense due to the options to purchase 1,076,761 shares of
our common stock granted with an exercise price of $5.11 per share on April 1,
1999. The Company will recognize additional compensation expense for the
issuance of shares of our common stock and options to purchase shares of our
common stock in exchange for restricted units granted by RSL COM to our
employees. These non-cash charges will be recognized over the vesting period of
the options to be issued in exchange for unvested restricted units and in the
fourth quarter of 1999 with respect to the shares of common stock to be issued
in exchange for vested restricted units. Assuming an initial offering price of
$12.00 per share, the mid-point of the estimated price range, these charges
would total approximately $17.5 million, excluding $9.7 million in deferred
compensation expenses previously amortized. Based on this assumption, we will
recognize $2.0 million in the fourth quarter of 1999, $4.7 million during the
year ending December 31, 2000, and $1.1 million over the period from January 1,
2001 through May 31, 2002.
In addition, we will record approximately $672,000 of deferred compensation
expense related to the sale to Yahoo! of 167,238 shares of our common stock
(including a warrant to purchase 41,963 shares of common stock). In lieu of
purchasing the shares and warrant for cash, Yahoo! agreed to offset an account
payable in the amount of $1 million that we owe to Yahoo! under a marketing and
promotional agreement as consideration for the shares and warrant. The deferred
compensation expense represents the difference between each of the purchase
price of the common stock and the exercise price of the warrant as compared to
the fair value of the common stock at the date of sale, assuming an initial
public offering price of $12.00 per share. We will amortize this deferred
compensation expense over the one year life of our marketing and promotion
agreement with Yahoo!.
We will also record approximately $2.0 million of deferred compensation
expense related to the sale to CNET of 1,085,943 shares of our common stock and
a warrant to purchase 466,028 shares of common stock for approximately
$11 million. We will amortize the deferred compensation expense over the two
year life of our promotion agreement with CNET.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data presented
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------- ----------------------------------
1997 1998 1998 1999
------ ------ --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Affiliates............................................................ 37.6% 69.1% 67.7% 63.4%
Non-affiliates........................................................ 62.4 30.9 32.3 36.6
------ ------ ------- -------
Total revenues..................................................... 100.0 100.0 100.0 100.0
Costs and operating expenses:
Cost of revenues...................................................... 85.5 82.6 72.2 90.3
Research and development expenses..................................... 23.6 11.5 13.1 12.4
Selling and marketing expenses........................................ 50.7 43.1 43.7 48.0
General and administrative expenses (exclusive of non-cash
compensation expense).............................................. 111.4 32.7 28.0 32.3
Non-cash compensation expense......................................... -- 13.2 17.4 138.8
Amortization of goodwill.............................................. 15.9 43.9 46.7 35.4
------ ------ ------- -------
Total costs and operating expenses................................. 287.1 227.0 221.1 357.2
------ ------ ------- -------
Loss from operations.................................................... (187.1) (127.0) (121.1) (257.2)
Interest expense, net................................................... (3.0) (3.3) (4.0) (14.2)
Minority interests...................................................... -- 4.0 -- --
------ ------ ------- -------
(190.1)% (126.3)% (125.1)% (271.4)%
------ ------ ------- -------
------ ------ ------- -------
</TABLE>
24
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues
Affiliates. Revenues from affiliates were $4.1 million for the nine months
ended September 30, 1999 compared to $2.5 million for the nine months ended
September 30, 1998, an increase of $1.6 million, or 64.1%. The increase in
revenues from affiliates was due to an increase in sales of our services to RSL
COM. The increase in sales to RSL COM was due to the growth in our network
resulting in our ability to provide additional capacity to RSL COM and an
increase in demand for our services from RSL COM offset by decreases in prices.
Non-affiliates. Revenues from non-affiliates were $2.4 million for the
nine months ended September 30, 1999 compared to $1.2 million for the nine
months ended September 30, 1998, an increase of $1.2 million or 98.9%. Revenues
from carrier transmission services for telecommunications carriers other than
RSL COM were $1.0 million for the nine months ended September 30, 1999 compared
to $90,848 for the nine months ended September 30, 1998, an increase of
$928,418, or 1,021.9%. The increase was due primarily to an increased demand
from a larger customer base. Revenues from enhanced IP communications services
were $1.2 million for the nine months ended September 30, 1999 compared to
$729,414 for the nine months ended September 30, 1998, an increase of $499,051,
or 68.4%. The increase in revenues from enhanced IP communications services was
due to a greater number of PC-to-phone and phone-to-phone calls being placed by
an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 70.2% and 79.2% of revenues for the
periods ended September 30, 1999 and 1998, respectively. Other than RSL COM, no
other customer accounted for greater than 5% of our revenues during these
periods. We expect that revenues from carrier transmission services to RSL COM
and other carriers will continue to account for a majority of our revenues
through at least the end of 2000.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $5.8 million for the nine months
ended September 30, 1999 compared to $2.6 million for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, we
recognized a reduction in our costs of revenues of $299,136 as compared to
$506,250 for the nine months ended September 30, 1998 as a result of the
reimbursement of certain costs from Ericsson, our primary equipment vendor.
Excluding this reimbursement, cost of revenues would have been $6.1 million for
the nine months ended September 30, 1999 compared to $3.2 million for the nine
months ended September 30, 1998, an increase of $2.9 million, or 93.7%. The
increase in cost of revenues (excluding the reimbursement) was due primarily to
the increased costs associated with the increase in carrier transmission
services.
Research and development expenses. Research and development expenses were
$797,273 for the nine months ended September 30, 1999 compared to $479,030 for
the nine months ended September 30, 1998. During the nine months ended
September 30, 1999, we recognized reimbursement from Ericsson for expenses we
incurred in research and development of $760,285 compared to $488,951 for the
nine months ended September 30, 1998. Excluding this reimbursement, research and
development costs would have been $1.6 million for the nine months ended
September 30, 1999 compared to $968,000 for the nine months ended September 30,
1998, an increase of $589,577, or 60.9%. The increase in research and
development expenses (excluding the reimbursement) was due to greater costs
incurred in hiring personnel to develop new services and enhancements to our
existing services.
Selling and marketing expenses. Selling and marketing expenses were
$3.1 million for the nine months ended September 30, 1999 compared to
$1.6 million for the nine months ended September 30, 1998, an increase of
$1.5 million, or 92.6%. The increase in selling and marketing expenses was due
to the expansion of our marketing and promotional activities.
General and administrative expenses. General and administrative expenses
(exclusive of non-cash compensation expenses) were $2.1 million for the nine
months ended September 30, 1999 compared to
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$1.0 million for the nine months ended September 30, 1998, an increase of
$1.1 million, or 102.7%. The increase in general and administrative expenses was
primarily due to additional personnel and increased occupancy costs. We expect
that general and administrative expenses will continue to increase as we pay
executive compensation previously paid by RSL COM.
Non-cash compensation expenses. Non-cash compensation expenses were
$8.9 million for the nine months ended September 30, 1999 compared to $640,165
for the nine months ended September 30, 1998, an increase of $8.3 million, or
1,294.4%. The increase in non-cash compensation expenses was due to the
recognition of compensation expense for grants of employee stock options and RSL
COM restricted units held by our employees that are to be converted into shares
of our common stock or options to purchase our common stock upon completion of
this offering.
Amortization of goodwill. Amortization of goodwill was $2.3 million for
the nine months ended September 30, 1999 compared to $1.7 million for the nine
months ended September 30, 1998, an increase of $559,300, or 32.6%. The increase
in amortization of goodwill was due to a significant increase in goodwill during
1998 that resulted from RSL COM's acquisition of the remaining outstanding
shares of our common stock that it did not already own.
Loss from Operations
Loss from operations was $16.5 million for the nine months ended
September 30, 1999 compared to $4.4 million for the nine months ended
September 30, 1998, an increase of $12.1 million, or 272.4%. The increase in
loss from operations was due primarily to the increase in costs and operating
expenses, including non-cash compensation expense, and a decrease in prices we
charged for carrier transmission services. We expect to continue to incur losses
for the foreseeable future.
Interest Expense, Net
Interest expense, net was $914,901 for the nine months ended September 30,
1999 compared to $145,910 for the nine months ended September 30, 1998, an
increase of $768,991 or 527.0%. The increase in interest expense was primarily
due to increased borrowings from RSL COM to finance our working capital and
capital expenditure requirements.
Net Loss
Net loss was $17.5 million for the nine months ended September 30, 1999
compared to $4.6 million for the nine months ended September 30, 1998, an
increase of $12.9 million, or 280.5%. The increase in net loss was due to the
foregoing factors.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Affiliates. Revenues from affiliates were $3.9 million for the year ended
December 31, 1998 compared to $467,842 for the year ended December 31, 1997, an
increase of $3.4 million, or 732.8%. The increase in revenues from affiliates
was due to an increase in sales of our services to RSL COM. The increase in
sales to RSL COM was attributable to the growth in our network resulting in our
ability to provide additional capacity to RSL COM and an increase in demand for
our services from RSL COM.
Non-affiliates. Revenues from non-affiliates were $1.7 million for the
year ended December 31, 1998 compared to $777,799 for the year ended
December 31, 1997, an increase of $964,142, or 124.0%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
$317,503 for the year ended December 31, 1998 compared to $56,882 for the year
ended December 31, 1997, an increase of $260,621, or 458.2%. Revenues from
enhanced IP communications services were $1.2 million for the year ended
December 31, 1998 compared to $202,643 for the year ended December 31, 1997, an
increase of $951,151, or 469.4%. The increase in revenues from carrier
transmission and enhanced IP communications services was due to an increase in
the destinations we could terminate traffic to as a result of the expansion
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of our network and an increasing user base. Revenues from equipment sales were
$270,644 for the year ended December 31, 1998 compared to $498,504 for the year
ended December 31, 1997, a decrease of $227,860, or 45.7%. The decrease was due
primarily to our decision to focus on enhanced IP communications services rather
than equipment sales. Equipment sales are not expected to constitute a material
portion of revenues in the future.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $4.7 million for the year ended
December 31, 1998 compared to $1.1 million for the year ended December 31, 1997.
For the year ended December 31, 1998, we recognized a reduction in cost of
revenues of $694,250 as a result of the reimbursement for certain costs from
Ericsson. Excluding this reimbursement, cost of revenues would have totalled
$5.4 million, an increase of $4.3 million, or 402.5%. The increase in cost of
revenues (excluding the reimbursement) was due primarily to the increased costs
associated with the significant increase in carrier transmission services.
Research and development expenses. Research and development expenses were
$650,140 for the year ended December 31, 1998 compared to $294,150 for the year
ended December 31, 1997. For the year ended December 31, 1998, we recognized
reimbursement from Ericsson for expenses we incurred in research and development
of $901,385. Excluding this reimbursement, research and development expenses
would have been $1.6 million, an increase of $1.3 million, or 427.5%. The
increase in research and development expenses (excluding the reimbursement) was
due to greater costs incurred in hiring personnel to develop new services and
enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses were
$2.4 million for the year ended December 31, 1998 compared to $631,970 for the
year ended December 31, 1997, an increase of $1.8 million, or 284.7%. The
increase in selling and marketing expenses was due to the expansion of our
marketing and promotional activities.
General and administrative expenses. General and administrative (exclusive
of non-cash compensation expense) expenses for the year ended December 31, 1998
were $1.8 million compared to $1.4 million for the year ended December 31, 1997,
an increase of $454,764, or 32.8%. The increase in general and administrative
expenses was primarily due to additional personnel and increased occupancy
costs.
Non-cash compensation expense. Non-cash compensation expenses were
$742,780 for the year ended December 31, 1998 compared to zero for the year
ended December 31, 1997. The increase in non-cash compensation expense was due
to the recognition of compensation expense for grants of employee stock units.
Amortization of goodwill. Amortization of goodwill was $2.5 million for
the year ended December 31, 1998 compared to $197,249 for the year ended
December 31, 1997, an increase of $2.3 million, or 1,153.3%. The increase in
amortization of goodwill is due to an increase in goodwill which grew
significantly during 1998 as a result of RSL COM acquiring the remaining
outstanding shares of our company.
Loss from Operations
Loss from operations was $7.2 million for the year ended December 31, 1998
compared to $2.3 million for the year ended December 31, 1997, an increase of
$4.9 million, or 207.2%. The increase in loss from operations was due primarily
to the increase in costs and operating expenses and to a decrease in prices we
charged for carrier transmission services.
Interest Expense, Net
Interest expense, net was $186,295 for the year ended December 31, 1998
compared to $37,232 for the year ended December 31, 1997, an increase of
$149,063, or 400.4%. The increase in interest expense was due to increased
borrowings from RSL COM to support our working capital and capital expenditure
requirements.
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Net Loss
Net loss was $7.1 million for the year ended December 31, 1998 compared to
$2.4 million for the year ended December 31, 1997, an increase of $4.7 million,
or 200.8%. The increase in net loss was due to the foregoing factors.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM JUNE 1996 (INCEPTION)
TO DECEMBER 31, 1996
Revenues
Affiliates. Revenues from affiliates were $467,842 for the year ended
December 31, 1997. Revenues from RSL COM commenced in August 1997 shortly
following RSL COM's investment in us, and, accordingly, we did not generate any
revenues from RSL COM in 1996.
Non-affiliates. Revenues from non-affiliates were $777,799 for the year
ended December 31, 1997 compared to $933 for the seven month period ended
December 31, 1996. We commenced sales activities during the fourth quarter of
1996 and did not realize any material sales during 1996. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM
commenced in 1997 and were $56,882 for the year. We did not commence the
commercial sale of enhanced IP communications services until the first quarter
of 1997. Revenues from enhanced IP communications services were $202,643 for the
year ended December 31, 1997. Revenues from equipment sales for the year ended
December 31, 1997 were $498,504.
Costs and Operating Expenses
Cost of revenues. Cost of revenues was $1.1 million for the year ended
December 31, 1997. No such costs were incurred during 1996 since sales and
services had not yet commenced.
Research and development expenses. Research and development expenses were
$294,150 for the year ended December 31, 1997. No such costs were incurred in
1996 since research and development activities had not yet commenced.
Selling and marketing expenses. Selling and marketing expenses were
$631,970 for the year ended December 31, 1997. No such costs were incurred in
1996 since marketing efforts had not yet commenced.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1997 were $1.4 million compared to $179,138 for
the seven month period ended December 31, 1996, an increase of $1.2 million, or
674.6%. The increase in general and administrative expenses was primarily due to
additional personnel and increased occupancy costs that we incurred in
connection with the commencement of our commercial activities, as well as fees
and expenses incurred in connection with a private placement during 1997.
Amortization of goodwill. Amortization of goodwill was $197,249 for the
year ended December 31, 1997. We did not have any intangible assets during 1996.
Loss from Operations
Loss from operations was $2.3 million for the year ended December 31, 1997
compared to $178,205 for the seven month period ended December 31, 1996. The
increase in loss from operations was due to the increased costs associated with
our commencing commercial operations and establishing our network
infrastructure.
Interest Expense, Net
Interest expense, net was $37,232 for the year ended December 31, 1997
compared to $397 for the seven month period ended December 31, 1996. The
increase in interest expense was primarily due to accrued interest on our
convertible notes issued in a private placement during 1996.
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Net Loss
Net loss was $2.4 million for the year ended December 31, 1997 compared to
$178,602 for the seven month period ended December 31, 1996. The increase in net
loss was a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in June 1996, we have incurred significant operating
and net losses due in large part to the start-up and development of our
operations. As of September 30, 1999, we had an accumulated deficit of
approximately $27.1 million. We anticipate that we will continue to incur
operating and net losses as we implement our growth strategy.
From our inception, we funded losses and capital expenditures from cash
provided from financing activities, primarily the net proceeds of the private
placement of:
o capital stock sold to RSL COM for an aggregate amount of approximately
$5.0 million in July 1997
o capital stock and units of convertible notes and warrants to purchase our
capital stock sold to unrelated third parties for an aggregate amount of
approximately $1.2 million from July 1997 to April 1998
o capital stock sold to CNET for an aggregate amount of approximately
$11.0 million in October 1999
In July 1997, RSL COM acquired a 51% interest in our company for
approximately $5.0 million. Between July 1997 and April 1998, RSL COM acquired
all of the remaining shares of our outstanding capital stock from our
shareholders for approximately $14.7 million. In April 1998, our company was
merged into a wholly-owned subsidiary of RSL COM. Since RSL COM's acquisition of
a controlling interest in us in July 1997, RSL COM has funded our cash
requirements, which we have accounted for as inter-company loans bearing
interest at the rate of 14% per annum, due on demand after June 30, 2000. Upon
completion of an initial public offering by us, the maturity dates will be
extended to the first anniversary of the completion of such offering. As of
September 30, 1999, we owed approximately $12.3 million (principal and accrued
interest) to RSL COM.
Prior to the closing of this offering, RSL COM will provide us with a
$10 million line of credit (exclusive of the existing $12.3 million owed to RSL
COM as of September 30, 1999), due on demand after November 1, 2000 and bearing
interest at the rate of 14% per annum, which will be available to fund our
operating expenses. We are not subject to any negative or financial covenants
under either the RSL COM inter-company loans or line of credit. Further, there
are no restrictions on our ability to incur additional debt as a result of our
inter-company loans or line of credit with RSL COM. However, 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 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. Effectively, our ability to
incur indebtedness is limited by the amount of indebtedness that RSL COM and its
restricted subsidiaries, including our company, are permitted to incur under the
indentures. The limitations under RSL COM's restrictive indenture covenants
currently prohibit us from incurring any significant amount of additional debt.
We have further agreed with RSL COM that we will not incur any debt other than
inter-company debt without its written consent so long as we are a restricted
subsidiary.
In 1998 and during the nine months ended September 30, 1999, we incurred
approximately $6.0 million and $2.0 million, respectively, in capital
expenditures, including purchases of network components, the expansion of our
network and computer hardware and software costs. We expect to incur
approximately $10.0 million in additional capital expenditures through the end
of 2000.
As of September 30, 1999, we had approximately $1.3 million in cash and
cash equivalents. Principal uses of cash have been to fund operating losses,
working capital requirements and capital expenditures. We have had significant
negative cash flows from operating activities for each annual and quarterly
period to date.
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Net cash used in operating activities was $186,247 for the period from June
1996 to December 31, 1996, $1.6 million for the year ended December 31, 1997 and
$3.8 million for the year ended December 31, 1998. Net cash used in operating
activities was $2.8 million for the nine months ended September 30, 1998 and
$4.7 million for the nine months ended September 30, 1999. Net cash used in
operating activities in these periods consisted mostly of net operating losses
partially offset by increases in trade payables and deferred revenues.
Net cash used in investing activities was $205,809 for the period from June
1996 to December 31, 1996, $949,137 for the year ended December 31, 1997 and
$3.1 million for the year ended December 31, 1998. Net cash used in investing
activities was $2.0 million for both of the nine month periods ended
September 30, 1998 and 1999. Net cash used in investing activities in these
periods consisted mostly of capital expenditures for the purchase of computer
software and network equipment.
Net cash provided by financing activities was $522,048 for the period from
June 1996 to December 31, 1996, $5.6 million for the year ended December 31,
1997, and $5.0 million for the year ended December 31, 1998. Net cash provided
by financing activities was $2.0 million for the nine months ended
September 30, 1998 and $6.6 million for the nine months ended September 30,
1999. Cash provided by financing activities from June 1996 to December 31, 1997,
consisted primarily of proceeds from sales of capital stock and the issuance of
convertible notes and warrants to purchase capital stock, which was partially
offset by repayment of shareholder loans, short-term bank loans and loans from
RSL COM. For the year ended December 31, 1998 and the nine month periods ended
September 30, 1999 and 1998, cash provided by financing activities consisted of
borrowings from RSL COM.
RSL COM has agreed to continue to fund us through the earlier of the
completion of this offering and December 31, 2000. We believe that the net
proceeds from this offering, together with our existing cash and cash
equivalents, will be sufficient to meet our working capital requirements,
including operating losses, and capital expenditure requirements for at least
the next 18 months, assuming our business plan is implemented successfully.
Thereafter, we will be required to raise additional funds. Additional financing
may not be available when needed or, if available, such financing may not be on
terms favorable to us. If additional funds are raised through the issuance of
equity securities, our existing stockholders may experience significant
dilution. In addition, the indentures governing outstanding indebtedness of RSL
COM restrict our ability to incur indebtedness. We also have agreed with
RSL COM not to incur any debt (other than inter-company debt) without its
written consent so long as we are a restricted subsidiary of RSL COM. Those
limitations may require us to resort to other sources of funding, such as the
issuance of equity, we may need to rely upon RSL COM to provide any additional
capital to meet our working capital and capital expenditure requirements, and we
cannot assure you that RSL COM or any other third party will be willing or able
to provide additional capital on favorable terms or at all.
FRAUD PREVENTION
With the recent substantial growth of Internet use and e-commerce, the
Internet business community has been subject to significant credit card fraud.
We have attempted to reduce our exposure to such fraud by introducing various
advanced procedures and proprietary fraud prevention systems that monitor and
identify patterns and sources of credit card fraud and prevent fraudulent
transactions. We employ a full-time staff dedicated to monitoring fraudulent
activities. Once a fraud pattern is detected, the fraud pattern is brought to
the attention of our data programmers who seek to take appropriate action to
counter the fraudulent activity. As a result, we have been able to reduce our
credit card fraud exposure, which reached a peak of 19% of gross revenues during
1998, to less than 1% of gross revenues for the nine months ended September 30,
1999.
We have established reserves for bad debts in accordance with historical
levels of uncollectible receivables resulting primarily from such fraudulent
practices, on the basis of specific accounts receivable. Nevertheless, our
actual losses may exceed such reserves and could rise significantly above
anticipated levels. We cannot assure you that we will continue to be successful
in reducing or maintaining our current level of credit card fraud exposure.
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YEAR 2000 COMPLIANCE
The "Year 2000 issue" is the result of computer systems and programs using
two digits (rather than four) to identify a given year. Computer systems that
have time sensitive software may interpret the date code "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations or other computer errors causing disruptions of operations. The
potential for failures encompasses all aspects of our business, including our
computer systems and IP network, and could cause, among other things,
disruptions in the operation of the Internet and our interactive communications
portal and a temporary inability to engage in normal business activities.
Our State of Readiness
We may be affected by the Year 2000 issue related to our information
technology (IT) systems and non-IT systems operated by us or third parties.
Our IT systems include:
o gateways and gatekeepers developed by Ericsson
o routers developed by Cisco Systems, Inc.
o Hewlett-Packard Company Open View software
o software developed in-house to manage our network and support our portal
Our non-IT systems include:
o internal telephone systems
o leased office spaces and facilities
o office equipment
We completed a comprehensive assessment of the Year 2000 readiness of our
and third parties' IT and non-IT systems to ensure that these systems are, or
prior to December 31, 1999 will be, Year 2000 compliant. Our assessment plan
consisted of:
o conducting a comprehensive inventory of our IT and non-IT systems to
assess Year 2000 compliance
o testing our internally developed software and the commercial hardware and
software that support our network, Web site and other systems
o contacting third party vendors, suppliers and service providers of
material hardware, software and services necessary for the delivery of
our services to our users
o remediating any Year 2000 issues by repairing or, if necessary, replacing
any non-compliant systems
We completed our assesment plan which consisted of simulating and testing
the functioning of our entire network during the change from December 31, 1999
to January 1, 2000. We also successfully simulated and tested the functioning of
each individual component of our network during the change from December 31,
1999 to January 1, 2000. The tests were repeated several times and on each
occasion the network and each individual component of it functioned without any
interruption. We believe that the IT systems that we have developed internally
to operate our business are Year 2000 compliant based on the results of such
testing and because all of the software code for the systems that we have
internally developed is written with four digits to define the applicable year.
We have completed our assessment of our non-IT systems which we have identified
as containing embedded technology and, as a result, we are not aware of any Year
2000 issues relating to our non-IT systems which would cause disruptions in our
operations or impede our ability to provide services to our users.
Because third parties have developed and currently support many of the
systems we use, in addition to assessing our internal systems, a significant
part of our efforts have been to ensure that our externally developed IT and
non-IT systems are Year 2000 compliant. We have obtained confirmation from all
of our principalthird\party vendors, suppliers and service providers, including
Ericsson, Cisco and Hewlett-Packard,
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either directly in writing or via their Web sites, that they believe they have
resolved the Year 2000 issues relating to the systems, services and products
supplied to us.
Costs to Address Our Year 2000 Issues
To date, we have spent $50,000 on Year 2000 compliance issues through
September 30, 1999. Our costs primarily relate to the operating costs associated
with time spent by employees in the evaluation process and Year 2000 compliance
matters generally.
Risks of Our Year 2000 Issues
We are not currently aware of any Year 2000 compliance issues relating to
our systems that would cause disruptions in our operations or impede our ability
to provide our services. We cannot predict the extent to which the Year 2000
issue will affect our vendors, suppliers or service providers, or the extent to
which we would be vulnerable if such parties fail to resolve any Year 2000
issues on a timely basis. Year 2000 assessment and testing did not identify any
material non-compliant systems operated by us or our vendors, suppliers and
service providers. Therefore, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond our control, such as a prolonged
disruption or failure of the Internet or the telecommunications infrastructure.
Any failures or disruptions could prevent us from operating our network or
prevent users from accessing our portal and services, which could result in loss
of users, lost revenues, increased operating costs and material disruptions in
the operation of our business.
Our Contingency Plan
We do not currently have our own contingency plan to handle the most
reasonably likely worst case Year 2000 scenario that may occur if systems we are
dependent upon are not Year 2000 compliant and fail to operate effectively after
December 31, 1999. However, our systems are included in RSL COM's contingency
plans.
The primary goal of RSL COM's contingency plan is to identify, analyze and
correct any potential network or service interruptions related to Year 2000
problems that arise during the weekend of December 31, 1999 through Monday,
January 3, 2000. To achieve this goal, RSL COM intends to fully staff its
network operations centers, including ours, during the date change weekend to
monitor systems, and to take actions to ensure calls are completed, including
through the use of alternative quality back-ups to re-route traffic if
necessary. We expect that our network operations center will be in constant
communication with RSL COM's other network communications centers.
CURRENCY FLUCTUATIONS
We believe our exposure to foreign currency risk is immaterial. We have no
financial instruments denominated in any currency other than U.S. dollars and
are not party to any transactions that are sensitive to foreign currency
exchange rates. All of our revenues are in U.S. dollars and substantially all of
our costs are incurred in dollars, other than the salaries of our employees
located in Israel which are incurred in New Israeli Shekels, or NIS. Therefore,
we believe any appreciation of the NIS would have an immaterial effect on our
results of operations.
MARKET RISK
We believe our exposure to market risk is immaterial. We currently do not
invest in, or otherwise hold, for trading or other purposes, any financial
instruments subject to market risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP No. 98-1). This statement is applicable to our 1999
financial statements and requires us to capitalize certain payroll and payroll
related costs and other costs that are
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directly related to the development of certain of our systems. We amortize these
costs over the anticipated life of the systems. The adoption of SOP No. 98-1 did
not have a material impact on our financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." Statement of Position 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. We have expensed
these costs historically and therefore the adoption of this standard had no
impact on our results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities," (SFAS No. 133) which establishes accounting and reporting standards
for derivative instruments and hedging activities. Generally, it requires that
an entity recognize all derivatives as either an asset or liability and measure
those instruments at fair value, as well as identify the conditions for which a
derivative may be specifically designed as a hedge. SFAS No. 133 is effective
for all fiscal years beginning after June 15, 2000. We do not currently engage
or plan to engage in derivative or hedging activities and therefore there will
be no material impact to our results of operations, financial position or cash
flows upon the adoption of this standard.
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BUSINESS
OVERVIEW
We are a global provider of IP telephony services, which include our
carrier transmission services and enhanced Web-based and other communications
services. We have built a privately-managed, global network using IP technology,
and we have primarily been using this network to transmit traffic for
communications carriers, including RSL Communication, Ltd., our parent company.
We are now using our expertise in IP telephony to provide our users with a
package of enhanced IP communications services. Our interactive communications
portal, www.deltathree.com, is a single on-line source for the communications
needs of our users anywhere in the world. By combining user-friendly, Web-based
access with the advanced functionality of our privately-managed, global IP
telephony network, we offer our users a comprehensive solution for IP
communications services.
We currently offer the following services:
o PC-to-phone service, which enables our users to make calls directly from
their personal computers to a telephone
o D3 Box, our unified messaging service, which permits our users to
conveniently retrieve through a single-source all voice mails, e-mails
and faxes through the Web or by phone
o Click IT, which allows a party to simultaneously view a Web site and talk
directly with the business sponsoring the Web site
o Phone-to-phone service, which enables our users to make calls and send
faxes using a traditional telephone and fax machine at less-expensive
rates than available through traditional carriers
o Global roaming service, which enables businesses and individuals to use a
single account number to access our network from locations throughout the
world using country-specific, toll-free access numbers
We provide our services at a cost that is generally lower than that charged
by traditional carriers, because we minimize our network costs by using
efficient packet-switched technology and because we generally avoid local access
charges and by-pass international settlement charges by routing international
long distance calls over our privately managed network.
Our user base for enhanced IP communications services is expanding. At
December 31, 1998, we had more than 185,000 users of our enhanced IP
communications services, and as of October 1, 1999, we had more than 875,000
users, which include users of both our prepaid and promotional services. We
offer some of our services on a prepaid basis while we offer other services
without charge to attract and retain users. Over 55,000 of our users have paid
for our services.
Carrier transmission services generated 70.2% of our total revenues for the
nine months ended September 30, 1999 and 74.7% in 1998. Enhanced IP
communications services generated 18.7% of our total revenues for the nine
months ended September 30, 1999 and 20.5% in 1998. Historically, substantially
all of our revenues from enhanced IP communications services have been generated
from PC-to-phone and phone-to-phone, as our other services were only recently
introduced.
OUR OPPORTUNITY
GROWTH OF THE INTERNET AND E-COMMERCE
The Internet has emerged as a significant global communications and
commercial medium, enabling millions of people worldwide to communicate and
providing businesses with an attractive means of marketing and selling their
products and services. International Data Corporation (IDC), a market research
firm, estimates that there were approximately 142 million Internet users
worldwide at the end of 1998, and that the
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number of users worldwide will increase to approximately 500 million at the end
of 2003. Internet users are increasingly using the Web as a way to communicate.
Jupiter Communications, a market research firm, estimates that approximately
92.3% of all Internet users regularly use e-mail and 20.6% of all Internet users
regularly participate in on-line "chat" rooms. Further, Jupiter estimates that
an additional approximate 5.2% of all Internet users occasionally use e-mail and
an additional 32.4% of all Internet users occasionally participate in on-line
"chat" rooms. In addition, a recent study by E-Marketer, a market research firm,
estimates that 9.4 billion e-mail messages are delivered daily. Internet users
are also increasingly using the Web to purchase goods and services. IDC
estimates that Internet users worldwide purchased more than $50.0 billion of
goods and services in 1998, and that commerce over the Internet will grow to
approximately $1.3 trillion of goods and services in 2003.
THE INCREASING SIGNIFICANCE OF IP COMMUNICATIONS
Historically, the communications services industry has transmitted voice
and data over separate networks using different technologies. Traditional
carriers have typically built telephone networks based on circuit switching
technology, which establishes and maintains a dedicated path for each telephone
call until the call is terminated. Although a circuit-switched system reliably
transmits voice communications, circuit switching does not efficiently use
transmission capacity. When a telephone call is placed, a circuit is
established, and the circuit remains dedicated for transmission of the call and
unavailable to transmit any other call.
Data networks have typically been built utilizing packet switching
technology, such as IP, which divides signals into packets that are
simultaneously routed over different channels to a final destination where they
are reassembled in the original order in which they were transmitted. Packet
switching provides for more efficient use of the capacity in the network because
the network does not establish dedicated circuits and does not require a fixed
amount of bandwidth to be reserved for each transmission. As a result,
substantially greater traffic can be transmitted over a packet-switched network,
such as the Internet, than a circuit-switched network.
Traditional telecommunications carriers have historically avoided the use
of packet switching for transmitting voice calls due to poor sound quality
attributable to delays and lost packets which prevent real-time transmission.
However, recent improvements in packet switching, compression and broadband
access technologies, improved hardware and the use of privately-managed networks
(such as our network) have significantly improved the quality of packet-switched
voice calls, allowing for real-time transmission. Service providers that use
privately managed networks are able to reduce packet loss and latency, or delay,
because they are able to control the amount, timing and route of data
transmitted.
As a result, packet switching technology is now allowing service providers
to converge their traditional voice and data networks and more efficiently
utilize their networks by carrying voice, fax and data traffic over the same
network. These improved efficiencies of packet-switching technology create
network cost savings that can be passed on to the consumer in the form of lower
long distance rates. In addition, international telephone calls carried over the
Internet or private IP networks are less expensive than similar calls carried
over circuit-switched networks primarily because they bypass the international
settlement process, which represents a significant portion of international long
distance tariffs.
IDC estimates that in 1999, approximately 2.7 billion minutes will be
carried over IP networks, generating approximately $0.6 billion in revenues. IDC
also estimates that by 2004, IP minutes (retail and wholesale) and revenues will
grow to approximately 135.0 billion minutes and approximately $20.7 billion,
representing estimated compound annual growth rates of 119% and 103%,
respectively.
Beyond cost savings, we believe that advanced IP communications
technologies will further the potential for the Internet to become the preferred
medium of communications and commerce. For example, the integration of voice
communications into the Web could serve to enhance existing text-based modes of
Internet communications, such as e-mail and online chat, by adding a live,
low-cost means to communicate. In addition, the advanced functionality of IP
communications will provide e-commerce shoppers with the ability to speak
directly with customer service representatives of on-line retailers providing
the on-line retailer with the ability to offer responsive, real-time customer
support and service.
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INCREASE IN MODES OF COMMUNICATION
The global communications services industry, encompassing voice, fax and
data transmission, is experiencing significant growth. We believe the growth in
global communications services is being driven by:
o globalization of the world's economies and the worldwide trend toward
communications deregulation and liberalization
o the growth of data and Internet traffic
o declining prices and a wider choice of products and services
o technological advances and greater investment in communications
infrastructure
In addition, technological advancements have allowed for multiple modes of
communication, such as cellular, voice-mail, e-mail and fax. We expect rapid
growth in demand for services that unify and simplify the communications needs
of users. For example, IDC expects that the market for unified messaging
services will be more than $3.0 billion in 2002 from virtually nothing in 1997
and 1998.
LIMITATIONS OF EXISTING IP COMMUNICATIONS SOLUTIONS
Although the growth of IP telephony historically has been limited by poor
sound quality attributable to delays and packet loss, recent technological
advancements have significantly improved the quality of packet-switched
telephone calls. As a result, several large long distance carriers, including
AT&T and Sprint, have announced IP telephony service offerings.
In addition, most smaller service providers have begun to offer low-cost
Internet telephony services from PCs to telephones and from telephones to
telephones. Many of these service providers, however, offer their services only
in certain geographic areas and provide limited services. In addition, many of
these service providers use the Internet for transmission, rather than a
privately-managed IP network. In using the Internet, rather than a
privately-managed IP network, for transmission, these service providers have
less control over the network management and monitoring functions that are
necessary to ensure quality of service. Most of these service providers have not
had the benefit of a well-capitalized parent company to help finance a global,
privately-managed network.
OUR SOLUTION
To capitalize on the above trends, we offer a comprehensive communications
solution that combines the power of the Internet's communications and e-commerce
capabilities with the advanced functionality of a privately-managed IP network.
Key advantages we offer our users include:
o A SINGLE SOURCE FOR ACCESSING EVERYDAY MODES OF COMMUNICATION. Our
interactive communications portal is a one-stop source which allows our
users to manage and access everyday modes of communication, including
voice, fax and e-mail.
o USER-FRIENDLY, WEB-BASED ACCESS. Simply by clicking on our interactive
communications portal, our users can make PC-to-phone calls directly from
their computers and access their D3 Box to send e-mail and retrieve and
forward voice mail, e-mail and faxes from anywhere in the world at any
time. We believe that this offers users a more convenient and efficient
communications experience than that of traditional methods.
o A PRIVATELY-MANAGED IP NETWORK PROVIDING HIGH-QUALITY SERVICE. Our
privately-managed IP network enables us to achieve quality of service
levels that may not be available by utilizing the often congested
Internet, where voice calls are mixed with unpredictable traffic from the
Web. Our network operations center allows us to monitor all aspects of
our network 24 hours a day, 7 days a week, to provide uninterrupted and
continuous service to our users.
o VOICE INTEGRATED ON-LINE RETAILING. Our Click IT service allows
e-commerce shoppers to place a call to customer service representatives
of on-line retailers and other Web-based businesses while viewing
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the retailers' or businesses' Web sites. This provides e-commerce
shoppers with the opportunity to receive live customer service and the
ability to provide credit card information directly to a customer service
representative, thereby increasing the likelihood of consummating an
on-line transaction.
o GLOBAL REACH. We operate a privately-managed, IP telephony network, with
45 POPs in 29 countries. We are able to offer services to our users by
providing local access to our network as well as global access to our
services through the Web. In addition, through our POPs and the call
termination services provided to us by RSL COM, we are able to
cost-effectively terminate IP voice and fax communications worldwide.
o LOWER COSTS. We are able to charge lower rates than traditional long
distance carriers because we minimize our network costs by using
packet-switched technology, and because we generally avoid local access
charges and by-pass international settlement charges by routing
international long distance calls over our privately-managed IP network.
o COMPREHENSIVE USER SUPPORT THROUGH OUR ON-LINE INTERACTIVE CUSTOMER CARE
CENTER. Through our interactive communications portal, we have moved and
consolidated traditional customer care functions onto the Web. Our
comprehensive customer care and real-time billing center, which is
accessible directly on the Web, provides our users with the ability to
access their deltathree.com account to check billing and usage
information, increase their prepaid accounts and electronically
communicate with a deltathree.com customer service representative.
OUR STRATEGY
Our goal is to be the leading provider of IP telephony services and to make
our interactive communications portal the leading one-stop solution for the
communications needs of individuals and businesses. To achieve our goal, we plan
to:
o BUILD STRONG BRAND RECOGNITION. To date, we have used both on-line and
traditional marketing programs to create what we believe to be one of the
leading brand names in enhanced IP communications. We believe that
aggressive brand-building is important to obtain and sustain our
leadership position and to continue to attract users to our interactive
communications portal. We intend to continue to invest in branding
through traditional, direct media advertising. We also intend to increase
significantly our investment in branding through marketing and
advertising relationships with Internet companies and Web portals with
strong brand names or high traffic volumes and through our on-line agent
program.
o EXPAND AND ENHANCE OUR SERVICE OFFERINGS. We believe that expanding our
services will be critical to establishing ourselves as the leading
communications portal. We intend to capitalize upon our experience in
providing IP telephony services by introducing additional enhanced IP
communications services that appeal to the communications needs of
individuals and businesses. We also seek opportunities to bring
e-commerce and other enhanced IP communications tools to individuals and
businesses who want to fully utilize the multimedia capabilities of their
existing Web sites. For example, we intend to introduce new services,
including D3 Fax, IP-initiated conference calls, phone-to-PC, information
services and white boarding, to further complement our current services.
o ENSURE A POSITIVE USER EXPERIENCE. We believe that user satisfaction and
loyalty are heavily influenced by a user's experience with our
interactive communications portal. In order to enhance our appeal to
users, we intend to continue developing our interactive communications
portal by adding new features and technology to make it more user
friendly and efficient.
o ESTABLISH ADDITIONAL SOURCES OF REVENUE. Currently our revenues are
principally derived from carrier transmission services and, in part, from
our enhanced IP communications services. We intend to establish
additional sources of revenues from advertising sources, including the
sale of banner advertisements on our interactive communications portal to
leading retailers and marketers, and from monthly charges combined with
usage charges for services.
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o PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES. We intend to bolster our
number of users and our services through strategic acquisitions,
including the acquisition of new technologies, and alliances that offer
opportunities to acquire users or accelerate our entry into offering
additional enhanced IP communications services.
OUR INTERACTIVE COMMUNICATIONS PORTAL
Our interactive communications portal, www.deltathree.com, acts as a
single-source, on-line solution for our users and on-line marketing agents.
Through our interactive communications portal, our users can:
o view a description of all of our services, including pricing information
o sign up for any of our services, including PC-to-phone, unified
messaging and phone-to-phone
o download our software
o recharge their account, either by entering their credit card information
or authorizing automatic recharging
o send a PC-to-phone call
o retrieve and forward their voice mail, e-mail and faxes through their D3
Box
o check real-time billing and usage information
o communicate by e-mail with a deltathree.com customer service
representative
o view answers to frequently-asked questions
Through our interactive communications portal, our on-line marketing agents
can:
o view a description of our on-line agent program
o sign up to serve as an on-line agent
o receive marketing tools to put on their own Web sites
o monitor their daily results
o view trends
o view commissions by promotions
OUR SERVICES
We provide a comprehensive package of enhanced IP communications services.
We provide some of our services on a prepaid or a per usage basis, while we
offer other services for free to attract and retain users.
CURRENT SERVICES
We currently provide the following services:
PC-to-phone. Our PC-to-phone service enables a user to conveniently and
inexpensively place a call to a standard telephone anywhere in the world
directly from a personal computer while remaining on-line. In order to use this
service, a user need only download our software for free from our Web site and
have access to the Internet. Once the software is downloaded, the user is able
to place a call from the user's PC and, while browsing the Web, speak to a party
who uses a standard telephone.
We are able to provide our PC-to-phone service at rates generally lower
than those charged for traditional circuit switched calls. We are able to charge
lower rates because our service utilizes packet-switched technology and because
it routes calls directly from the Internet onto our privately-managed IP network
and to the called destination, thus avoiding access and settlement rates
associated with traditional
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international and domestic long distance telecommunications services. Our
PC-to-phone service allows ease of use by enabling a user to make a call
directly from a personal computer.
D3 Box. Our unified messaging service enables a user to conveniently
retrieve e-mail, voice mail and faxes, as well as send e-mail, from a single
source. We offer a user the flexibility of retrieving messages by either logging
on to www.deltathree.com or by placing a call using a standard telephone. A user
retrieving messages through a computer can conveniently access and forward all
e-mail, voice mail and faxes, while a user retrieving messages through a
standard telephone can hear voice mail and have e-mail read by a
computer-simulated voice.
Click IT. Our Click IT service is a Web-based e-commerce service enabling
individuals and businesses to place a link on their Web sites which, when
clicked on by a user viewing the site, automatically initiates a telephone call
from the user's computer to a designated telephone number specified by the owner
of the Web site. In addition, a pop-up screen appears which advertises the
host's products and services. This service allows e-commerce and business Web
pages to support real-time voice calls from on-line customers. Our Click IT
service can also be used to enable a user to place a call from his or her PC to
any telephone number without having to download PC-to-phone software. We call
this service Click IT phone booth.
Phone-to-phone. Our phone-to-phone service enables a user to inexpensively
place a call or send a fax from a standard telephone or a fax machine to
anywhere in the world. Phone-to-phone calls originate and terminate on the PSTN,
but travel primarily over our privately-managed IP network. Through our
privately-managed IP network, we are able to carry phone-to-phone voice
communications traffic. Similar to our PC-to-phone service, our phone-to-phone
service is generally less expensive than traditional carriers' services. Users
can access this service by dialing a local or toll-free access number and
providing a pin number. Users are charged for toll and long distance calls on a
per-minute basis. We receive payment for these calls by debiting pre-paid user
accounts opened on-line and through the sale of pre-paid calling cards.
Global roaming. Our global roaming service enables businesses and
individuals to use a single account number to place phone-to-phone calls over
our network from locations throughout the world using country-specific,
toll-free access numbers, thereby bypassing local access charges. We currently
offer toll-free access numbers in Austria, Canada, Finland, France, Germany,
Hong Kong, Italy, Sweden, Switzerland, the United Kingdom and the United States.
Carrier transmission services. To maximize use of our available network
capacity, we offer carrier transmission services over our privately-managed IP
network to telecommunications carriers. RSL COM is currently our largest carrier
customer. RSL COM utilizes our network primarily to resell our transmission
services to other communications carriers, as well as for the traffic RSL COM
carries for its own retail customers.
FUTURE SERVICES
We intend to leverage our network to provide, and utilize our technological
expertise to develop, additional enhanced IP communications services. These
services will be accessible through our interactive communications portal.
We currently expect our future services will include the following:
<TABLE>
<CAPTION>
ENHANCED SERVICE SUMMARY DESCRIPTION
<S> <C>
IP-initiated conference calls............. Enables a user to set up a conference call through our interactive
communications portal either by sending a notice of the planned call
to all of the participants and having each participant dial a
toll-free number or by arranging for each of the participants to be
called by the automated system at the designated call time. This
service eliminates the need for a conference operator, thereby saving
time and money.
</TABLE>
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<TABLE>
<CAPTION>
ENHANCED SERVICE SUMMARY DESCRIPTION
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.
<S> <C>
D3 Fax.................................... Enables users to conveniently send faxes directly from their computer
to a standard fax machine anywhere in the world over the Internet. To
use this service, a user only need download our software, set up a
deltathree.com account and be connected to the Web when they wish to
send a fax.
Information services...................... Enables a user to have easy access to communications information,
such as phone and e-mail directory services, with a single click on
our interactive communications portal. We believe this service will
further the use of our interactive communications portal as a single
source for users' communications needs.
White boarding............................ Enables multiple users to view and edit the same document on their
computers while speaking with each other through their PCs. We
believe this service will be an efficient and cost-effective tool for
businesses.
PC-to-PC.................................. A voice enabled IP phone and chat service that enables users to place
calls directly from their PC to other PCs while remaining on-line.
Like PC-to-phone, in order to use this product a user will need only
to download our software for free from our Web site and have access
to the Internet.
</TABLE>
CUSTOMER CARE
Our services are supported by our on-line interactive customer care and
billing center, which enables a user to set up a deltathree.com account, receive
an account number and a personal identification number, pay by credit card for
services, find answers to frequently asked questions and contact our customer
service representatives. Once a user has established an account, the user can
prepay for additional usage by credit card as well as access real-time detailed
information which includes call logs and transaction records. Through our
on-line billing system, a user can personalize the billing information to select
the data most relevant to the user.
Most user concerns can be addressed on-line. Users can find answers to many
of their questions by referring to the "frequently asked questions" information
section of our Web site. Other questions can be addressed by our customer
support department that responds to user inquiries primarily through an on-line
dialogue conducted by way of e-mails. We strive to continually improve our
customer care center on our interactive communications portal to meet the
evolving needs of our users.
OUR MARKETING, ADVERTISING AND PROMOTIONAL PROGRAMS
We have developed and will continue to develop diversified marketing,
advertising and promotional programs to stimulate demand for our services by
increasing brand awareness. In the past, we have allocated limited resources to
marketing, advertising and promoting our services, relying primarily on RSL COM
to generate demand for our services. We intend to increase our independent
marketing efforts substantially in
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order to increase our user base and to increase the frequency of use of our
services by our registered users and new users. We will also seek to form new
relationships with Internet businesses which we believe can promote our services
to a wide range of potential users and generate demand for our services.
Our marketing, advertising and promotional programs include:
ON-LINE MARKETING RELATIONSHIPS. We encourage other companies to link
their Web sites to us either by creating "communications centers" on their Web
sites or by placing a deltathree.com banner on their Web sites and directing
their customers to us for their communications needs. We pay fees for the
placement of these banners and, in addition, we offer these companies a
percentage of the revenue generated by users that click-through their Web site
to use our services. We have recently entered into marketing relationships with
the following five Internet companies:
o Yahoo! In October 1999, we entered into a marketing and promotion
agreement with Yahoo! Under this agreement, Yahoo! has agreed to include banners
and other promotions on various Yahoo! domestic and international Web sites that
will link to areas of our Web site dedicated to our PC-to-phone service and
certain of our other enhanced IP communications services. Yahoo! will also send
e-mails to certain international and domestic registered users of Yahoo! e-mail
with exclusive offers for our PC-to-phone service. In addition, Yahoo! will
create and place on Yahoo! Broadcast.com audio advertisements for our enhanced
IP communications services. The initial term of this contract is one year. We
have committed to pay Yahoo! $850,000 per quarter for the services provided.
o CNET. In October 1999, we entered into a marketing and promotion
agreement with CNET. Under this agreement merchants on CNET's shopping sites
will be able to integrate our PC-to-phone software to enable users to make a
PC-to-phone call directly to such merchant from the CNET shopping site using our
Click IT service. In addition, CNET has agreed to display banners and other
promotions on its Web sites that will link to our Web site. The initial term of
the contract is two years. We have agreed to pay CNET $1,062,500 per quarter for
the services provided. We have committed to pay an additional $1,250,000 in each
year of the contract, a portion of which was allocated to the third quarter of
1999.
o CBS.com. In August 1999, we entered into a marketing agreement with
CBS.com. Under this agreement, we are the exclusive provider of enhanced IP
communications services, including PC-to-phone, phone-to-phone, unified
messaging and Click It services, on the CBS.com Web site. CBS will provide links
from its Web pages to our Web site and promote our services through co-branded
areas on its Web site, known as the "DeltaThree/CBS Communication Center," and
through a dedicated monthly e-mail to e-mail addresses contained in its
database. In addition, our advertising banners will be placed on the
CBSMarketWatch.com Web site. The term of this agreement is two years. We have
agreed to pay CBS $424,998 per quarter for the services provided.
o Sony.com. In August 1999, we entered into a marketing agreement with
Sony.com. Under this agreement, a co-branded area known as the "Communication
Center" will be established and will offer users links to our enhanced IP
communications services. Sony has agreed to include fixed links to the
Communication Center on the Sony.com Web site, which includes sonymusic.com,
sony.spe.com, station.sony.com and infobeat.com. The initial term of this
agreement is two years. We have agreed to pay Sony $180,000 per quarter for the
services provided.
o Xoom.com. In June 1999, we entered into a co-marketing agreement with
Xoom.com, Inc. Xoom will provides links to our interactive communications portal
and promotes our services through co-branded areas on its Web site and through
periodic e-mails to its customers. Xoom has established an IP "Communications
Hub" on its home page. In addition, under this agreement, Xoom will:
o integrate our services with the Xoom chat network of 250,000 chat
rooms
o offer our services with Xoom greeting cards
o integrate our services with Xoom's directory services (White Pages &
Yellow Pages)
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The initial term of this agreement is two years. We have agreed to pay Xoom
$240,000 per quarter for the services provided.
We continue to seek to identify additional Internet businesses and Web
portals with strong brand names or high traffic volumes with which we can
establish marketing relationships similar to those described above. We will
expense costs under these agreements as they are incurred. As we have only
recently entered into the marketing relationships described above, to date we
have not generated material revenue from them.
PRIVATE LABELING. We have entered into agreements with three service
providers to distribute our services under their own private labels. Instead of
sending customers to the deltathree.com interactive communications portal, a
service provider markets our services under its own brand name, while
contracting with us to provide the services under their private label. In our
agreements with these providers, we often stipulate that the provider's Web site
will say "powered by deltathree.com." Our private label customers include both
on-line and off-line providers who market our services to their customer base.
We believe service providers are attracted to our private label services because
it allows them to capitalize on their name recognition in their home market
while providing our high-quality, low-cost services.
Our agreement with MediaRing Pte Ltd was our first private labeling
agreement and served as our prototype for this promotional effort and serves as
a continuing source of revenues. Under this agreement, we integrate our
PC-to-phone service into MediaRing's PC-to-PC service, thereby providing
MediaRing's customers with a bundled package of communications services. Our
services are provided under MediaRing's brand name; however, MediaRing's Web
site states that it is "powered by deltathree.com." In addition, we also provide
the back-office and billing support for MediaRing.
ON-LINE AGENT COMMISSION PROGRAM. We have developed a Web-based agent
program that allows for rapid agent enrollment and agent account maintenance.
Through our on-line agent interactive center, any individual with their own Web
site can:
o take a tour of our on-line agent program
o complete an application to be an on-line agent
o be approved within 24-48 hours after completing the application
o if approved, execute our on-line agent agreement through a secured site
o receive an agent identification number and instructions on how to
proceed as an agent
o download deltathree.com banners to post on their Web site
o track the number of people who have clicked through to
www.deltathree.com and signed up for our services
o track the commissions that are due to them
Agents may devise their own marketing programs, including Web-links, direct
mail campaigns or co-branding of our services in select markets. Agents receive
as commissions a percentage of revenue generated from end users who sign up for
our services through the agent's Web site. We believe that providing our agents
with easy, on-line access to these marketing tools helps us to maximize the
number of agents selling our services while significantly reducing the resources
needed to recruit agents.
OFF-LINE AGENT COMMISSION PROGRAM. Our off-line agent commission program
allows non-Web agents to design their own marketing programs to solicit sales of
our services. Off-line agents market and advertise through traditional channels
such as newspaper and magazine advertisements, direct mail campaigns and
telemarketing campaigns. Off-line agents receive a percentage of revenue
generated from users who sign up for our services through the agent's programs.
We currently have relationships with more than 30 off-line agents that have
generated revenue for us.
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RESELLER PROGRAM. We offer individuals and businesses the opportunity to
become resellers of our services through our reseller program. Resellers are
able to purchase bulk deltathree.com account numbers at wholesale rates that
they are then able to resell to private individuals as either phone-to-phone
calling cards or PC-to-phone accounts.
DIRECT SALES. We have a direct sales force that is targeting organizations
that are currently not optimizing the marketing potential of their Web sites. As
with other on-line agents, we offer these on-line agents the opportunity to
market our services and products through their Web pages to generate revenue
from services we deliver as a result of links from their Web sites.
TRADITIONAL AND ON-LINE ADVERTISING. We intend to continue to advertise in
both traditional advertising mediums, such as direct mail, newspapers and
magazines, and through emerging on-line formats, such as banners.
INNOVATIVE MARKETING TOOLS. We intend to continue to develop innovative
marketing products and promotions to increase our user base. For example, in
December 1998, we introduced innovative voice-enabled electronic greeting cards
on a promotional basis. Sent over the Web, V-Greetings enable the recipient to
click on a link in the greeting card, automatically downloading our PC-to-phone
software allowing the recipient to place a free PC-to-phone call to the card
sender's standard telephone. V-Greeting cards are available on-line and are
designed to promote different holidays, such as Christmas, Chanukah, Valentine's
Day, Mother's Day and Chinese New Year and other special occasions. To date,
more than 700,000 V-Greeting cards have been sent. Of those V-Greeting cards
that have been sent, approximately 135,000 of the recipients have downloaded our
PC-to-phone software and made a free PC-to-phone call. We believe that V-
Greeting cards is an effective marketing tool to introduce our services to
potential users.
OUR NETWORK
In order to provide high-quality, low-cost service, we operate a
privately-managed, IP telephony network. By managing our network, we have the
ability to regulate traffic volumes for the communications traffic we carry and
directly control the quality of our services from our originating POP to the
termination point. In addition, our network allows us to avoid the significant
transmission delays associated with the highly congested Internet, which may
impede delivery of high-quality, reliable services to our users. As of October
1, 1999, our network consisted of:
o 45 POPs in 29 countries
o gateways, gatekeepers and routers at each POP
o hubs in New York, Los Angeles, London, Frankfurt and Hong Kong
o dedicated leased bandwidth
o interconnections with the RSL COM network
o peering arrangements with Internet backbone providers, enabling
transmission efficiency
o a technologically-advanced network operations center
POPS
We intend to further develop our network to increase our number of POPs. We
currently have 45 POPs in the following locations:
Austria (Vienna)
Bangladesh (Dhaka)
Belgium (Brussels)
Brazil (Rio de Janeiro)
Brazil (Sao Paulo)
Brazil (Sao Paulo 2)
China (Beijing)
China (Beijing 2)
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China (Beijing 3)
China (Shanghai)
Colombia (Bogota)
Colombia (Cali)
Czech Republic (Prague)
Ecuador (Quayaquil)
Finland (Helsinki)
France (Paris)
Germany (Frankfurt)
Greece (Athens)
Greece (Heraklion)
Greece (Rhodes)
Greece (Saloniki)
Holland (Rotterdam)
Hong Kong
Hungary (Budapest)
Iceland (Reykjavik)
India (Bombay)
Israel (Jerusalem)
Israel (Rosh Ha'ayin)
Israel (Tel Aviv)
Japan (Tokyo)
Korea (Seoul1)
Korea (Seoul2)
Malaysia (Kuala Lumpur)
Norway (Oslo)
Russia (Moscow)
Russia (Nijnei)
Russia (Samara)
Russia (St. Petersburg)
Singapore
Spain (Madrid)
Sweden (Stockholm)
Turkey (Istanbul)
United Kingdom (London)
United States (Los Angeles)
United States (New York)
GATEWAYS, GATEKEEPERS AND ROUTERS
The gateway acts as an entrance into and exit from our network for
communications traffic. At the origination POP, the gateway accepts the
communications traffic from the public switched telephone network (PSTN) and
compresses this traffic into IP packets for transmission over our network. The
gatekeeper determines the most cost-effective route for each packet of
communications traffic and the routers then direct the packets to their
destination. Upon termination, the gateway decompresses and reconverts the
packets into a circuit-switched signal, thereby enabling the traffic to exit our
network on to the PSTN. We use gateways and gatekeepers developed by Ericsson
and routers developed by Cisco.
HUBS
Our network has five hubs located in New York, Los Angeles, London,
Frankfurt and Hong Kong which serve as backbone points for our network and which
allow our network to directly interconnect with the PSTN and the Internet. In
addition, at each of our five hubs, we co-locate our gateways with the Ericsson
international gateway switches on RSL COM's network. Our multiple hub structure
provides us with the ability to handle high volumes of traffic transmitted over
our network. By establishing multiple hubs, we have greater flexibility to
choose from multiple bandwidth suppliers, allowing us to optimize quality and
cost savings. In addition, our multiple hub structure enables us to more
efficiently direct the routing of traffic. For example, communications traffic
between Belgium and France does not need to be routed to our New York hub but
can be sent through our London hub. This enables better use of allocated
bandwidth and reduces delay between originating and terminating sites.
LEASED BANDWIDTH
We connect our hubs and POPs through a network of dedicated leased
bandwidth. By leasing bandwidth, we can avoid using the Internet as our primary
means for the transmission of communications traffic. We can therefore avoid the
significant transmission delays associated with the highly-congested Internet,
which may impede delivery of high-quality, reliable services to our users.
Through our relationship with RSL COM, which owns or leases substantial
bandwidth for its own business, we have access to bandwidth. We are able to take
advantage of RSL COM's volume discounts and achieve cost efficiencies that we
could not achieve on our own. In addition, we also lease bandwidth directly or
indirectly from several other telecommunications carriers.
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INTERCONNECTIONS WITH RSL COM NETWORK
RSL COM interconnects its network with our network in addition to supplying
us with low-cost bandwidth. The interconnections with RSL COM provide us with
access to major PSTNs throughout the world, the ability to terminate
communications traffic virtually anywhere in the world and the ability to
terminate traffic over RSL COM's network in the event of a network failure.
PEERING
Our network also connects with Internet exchange points to provide access
to and from the Internet. We have direct and indirect peering arrangements with
Internet backbone providers in order to support IP services to and from the
Internet. These arrangements allow us to access the Internet directly,
minimizing the amount of time our users' communications traffic has to travel
over the Internet.
NETWORK OPERATIONS CENTER
To service our network effectively, we have established a network
operations center (NOC) which monitors and manages our network from a central
location, 7 days a week, 24 hours a day. The NOC monitors all aspects of our
network, including the routers, databases, switches, leased lines, Internet
connections, gatekeepers and gateways, to ensure that they are functioning at
optimal levels. In the event of a failure of any of these network components,
NOC personnel are provided with a real-time, systems-generated notification via
an instant messaging system consisting of pagers, cellular phones, screen
pop-ups and e-mail, which identifies the malfunction so that proper measures can
be taken to restore service in a timely fashion. Our NOC utilizes a combination
of proprietary and leading industry technologies based upon Hewlett-Packard Open
View software. By utilizing technologically-advanced, real-time management and
monitoring systems, we seek to reduce system downtime and ensure that our users
will not experience any noticeable interruption in their service.
ADVANTAGES OF OUR NETWORK
Our network is engineered to provide the following advantages:
o scalability. The software and hardware that we use in our network is
scalable, allowing for new POPs to be easily integrated into our network
with minimal incremental investment.
o flexibility. Our multiple hub structure and our interconnections with
RSL COM and other carriers provide us with numerous routing options and
greater flexibility to handle changing traffic patterns.
o rapid integration of services. We can introduce new services and
duplicate existing services without having to deploy additional equipment
at each POP on our network.
o manageability. Our privately-managed network allows us to directly
control the quality of our services over our network from one central
location.
o accessibility. Our privately-managed network allows users to gain access
to our enhanced services from any country in which a POP has been
established.
o global reach. By using our network, we are able to cost-effectively
terminate communications traffic to over 200 countries.
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PROPRIETARY RIGHTS
We rely or expect to be able to rely on patent, trademark and trade secret
laws, confidentiality agreements and other contractual arrangements with our
employees, strategic partners and others to protect our proprietary rights.
We have a registered trademark for "Delta Three(Registered)" in the United
States. We have submitted trademark applications for the name "Delta
Three(Trademark)" for the following jurisdictions: Brazil, Colombia, Japan,
Mexico, the Russian Federation, Venezuela and the European Community under EC
trademark regulation. In addition, we have submitted trademark applications in
the United States for the names "V-Greetings(Trademark)," "Click IT(Trademark),"
"D3 Fax(Trademark)," "deltathree.com(Trademark)," "D3 Box(Trademark)" and
"deltathree.com the Communications Portal(Trademark)." We do not currently own
any registered copyrights. In addition, we have filed one patent application in
each of the United States and Israel for a remote telephone configuration in
connection with our V-Greeting product. These applications may not result in any
patents or trademarks being issued and, if issued, these patents or trademarks
may not provide adequate protection against competitive technology and may not
be held valid and enforceable if challenged. In addition, other parties may
assert rights as inventors of the underlying technologies, which could limit our
ability to fully exploit the rights conferred by any patents that we receive.
Our competitors may be able to design around any of the patents that we receive,
and other parties may obtain patents that we would need to license or circumvent
in order to exploit our patents.
To further safeguard our intellectual property, we have a policy that
requires our employees to execute confidentiality and technology ownership
agreements when they begin their relationships with us.
For a discussion of recent litigation, see "--Legal Proceedings."
REGULATORY ENVIRONMENT
REGULATION OF IP TELEPHONY
The use of the Internet and private IP networks to provide telephone
service is a recent market development. While we believe that the provision of
voice communications services over the Internet and private IP networks is
currently permitted under United States law, some foreign countries have laws or
regulations that may prohibit voice communications over the Internet.
United States. We believe that, under United States law, based on specific
regulatory classifications and recent regulatory decisions, the enhanced IP
communications services that we provide constitute information services (as
opposed to regulated telecommunications services). As such, our services are not
currently regulated by the Federal Communications Commission (FCC) or any state
agencies charged with regulating telecommunications carriers. Nevertheless,
aspects of our operations may be subject to state or federal regulation,
including regulation governing universal service funding, disclosure of
confidential communications, copyright and excise tax issues. However, we cannot
assure you that our services will not be regulated in the future. Several
efforts have been made in the United States to enact federal legislation that
would either regulate or exempt from regulation communications services provided
over the Internet. Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations. Such regulation may
negatively impact the cost of doing business over the Internet and materially
adversely affect our business, operating results, financial condition and future
prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon some providers of Internet and IP
telephony, primarily those which provide Internet and IP telephony services to
end users located within the United States. Although the FCC decided that
information service providers, including Internet and IP telephony providers,
are not telecommunications carriers, various companies have challenged that
decision. Congressional dissatisfaction with the FCC's conclusions could result
in requirements that the FCC impose greater or lesser regulation, which in turn
could materially adversely affect our business, financial condition, operating
results and future prospects. On April 10, 1998, the FCC issued a report to
Congress discussing its implementation of universal service provisions contained
in the 1996 amendments to the Communications Act of 1934. In the report, the FCC
indicated that it would examine the question of whether certain forms of
phone-to-phone IP telephony are information services or
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telecommunications services. The two are treated differently in several
respects, with certain information services being more lightly regulated and not
subject to universal service contribution obligations. The FCC noted that it did
not have, as of the date of the report, an adequate record on which to make a
definitive ruling, but that the record suggested that certain forms of
phone-to-phone IP telephony appear to have the same functionality as non-IP
telecommunications services and lack the characteristics that would render them
information services. In September 1998, two regional Bell operating companies
advised Internet and IP telephony providers that they would impose access
charges on Internet and IP telephony traffic. It is uncertain at this time
whether these companies will actually impose access charges or when such charges
will become effective. In addition, one of these regional Bell operating
companies has recently filed a petition with the FCC seeking the imposition of
access charges on phone-to-phone Internet and IP telephony services. If the FCC
were to determine that certain services are subject to FCC regulations as
telecommunications services, the FCC may require providers of Internet and IP
telephony services to be subject to traditional common carrier regulation, make
universal service contributions, and/or pay access charges. It is also possible
that the FCC may adopt a regulatory framework other than traditional common
carrier regulation which would apply to Internet and IP telephony providers. Any
such determinations could materially adversely affect our business, financial
condition, operating results and future prospects to the extent that they
negatively affect the cost of doing business over the Internet or otherwise slow
the growth of the Internet.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet and IP telephony services. Several state
regulatory authorities have initiated proceedings to examine the regulation of
such services. Others could initiate proceedings to do so.
Based on information users provide to us when they sign up to use our
services, we estimate that approximately 30% of our enhanced IP communications
services are provided to users in the United States.
International. The regulatory treatment of Internet and IP telephony
outside of the United States varies widely from country to country. A number of
countries that currently prohibit competition in the provision of voice
telephony may also prohibit Internet and IP telephony. Other countries permit
but regulate Internet and IP telephony. Some countries will evaluate proposed
Internet and IP telephony service on a case-by-case basis and determine whether
it should be regulated as a voice service or as another telecommunications
service. Finally, in many countries, Internet and IP telephony has not yet been
addressed by legislation or regulatory action. Increased regulation of the
Internet and/or Internet and IP telephony providers or the prohibition of
Internet and IP telephony in one or more countries could materially adversely
affect our business, financial condition, operating results and future
prospects.
For example, we believe that our services fall outside the classification
of regulated voice telephony services in the European Union. The European Union
regulatory regime distinguishes between voice telephony services and other
telecommunications services. In Services Directive 90/388/EEC, issued in 1990,
the European Commission required Member States to allow competition for all
telecommunications services except voice telephony and certain other services.
The Services Directive was amended in 1996 by Commission Directive 96/19/EC,
which required the liberalization of all telecommunications services, including
voice telephony, by January 1, 1998, except in certain member states that were
granted extended compliance periods. In addition, Directive 96/19/EC requires
that services other than voice telephony be subjected to no more than a general
authorization or declaration procedure. For purposes of these Directives, "voice
telephony" is defined as the commercial provision for the public of the direct
transport and switching of speech in real time between public switch network
termination points.
On January 10, 1998, the Commission issued a Notice addressing whether IP
telephony was voice telephony and thus subject to regulation as voice telephony
by the Member States. As noted by the Commission, a determination that IP
telephony constitutes "voice telephony" may trigger significant regulatory
consequences with respect to, among other things, licensing requirements and
contributions to universal service funding. Consistent with its earlier
directives, the Commission stated that Internet telephony could properly be
considered voice telephony only if all elements of its "voice telephony"
definition were met. In this January 1998 Notice, the Commission concluded that
no form of IP telephony currently meets the definition of "voice telephony"
subject to Member States' regulation. The Commission noted, however, that its
conclusion that IP telephony cannot be considered voice telephony may not apply
to particular forms
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of service provisions where, for example, an IP telephony service is marketed as
an alternative form of voice telephony service, users can dial out to any
telephone number, and the provider guarantees the quality of the IP voice
service by bandwidth reservation and claims that the quality of the IP voice
service is the same as traditional voice telephony service. Accordingly, the
Commission concluded that while voice over the Internet services cannot "for the
time being" be generally classified as "voice telephony," the situation must be
kept under review in light of technological and market developments. The
Commission intends to review its Notice periodically, and its next review is
scheduled to occur before January 1, 2000.
In light of this conclusion, providers of IP telephony should be subjected
to no more than a general authorization or declaration requirement by the
European Union Member States. The Member States of the European Union are:
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United Kingdom.
However, we cannot assure you that more stringent regulatory requirements will
not be imposed by individual Member States, since the Commission's Notice is not
binding on the Member States. The Member States therefore are not obligated to
reach the same conclusions as the Commission on this subject so long as they
adhere to the definition of "voice telephony" in the Services Directive. In
fact, France is currently conducting an investigation into how IP telephony
should be regulated. We cannot assure you that the services provided over our
network will not be deemed voice telephony subject to heightened regulation by
one or more EU Member States. Moreover, we cannot assure you that our failure or
the failure of any of our partners to obtain any necessary authorizations will
not have a material adverse effect on our business, financial condition,
operating results and future prospects.
As we make our services available in foreign countries, and as we
facilitate sales by our partners to end users located in foreign countries, such
countries may claim that we are required to qualify to do business in the
particular foreign country. Such countries may also claim that we are subject to
regulation, including requirements to obtain authorization for the provision of
voice telephony or other telecommunications services, or for the operation of
telecommunications networks. It is also possible that such countries may claim
that we are prohibited in all cases from providing our services or conducting
our business as conducted in those countries. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could materially adversely affect our
business, financial condition, operating results and future prospects, including
by subjecting us to taxes and penalties and/or by precluding us from, or
limiting us in, enforcing contracts in such jurisdictions.
Our partners may also currently be, or in the future may become, subject to
requirements to qualify to do business in a particular foreign country, comply
with regulations, including requirements to obtain authorizations for the
provision of voice telephony or other telecommunications services or for the
operation of telecommunications networks, or to cease providing services or
conducting their business as conducted in that country. We cannot be certain
that our partners either are currently in compliance with any such requirements,
will be able to comply with any such requirements, and/or will continue in
compliance with any such requirements. The failure of our partners to comply
with such requirements could materially adversely affect our business, financial
condition, operating results and future prospects.
OTHER REGULATION AFFECTING THE INTERNET
United States. Congress has recently adopted legislation that regulates
certain aspects of the Internet, including on-line content, user privacy and
taxation. For example, the Internet Tax Freedom Act prohibits certain taxes on
Internet uses through October 21, 2001. We cannot predict whether substantial
new taxes will be imposed on our services after that date. In addition, Congress
and other federal entities are considering other legislative and regulatory
proposals that would further regulate the Internet. Congress is, for example,
currently considering legislation on a wide range of issues including Internet
spamming, database privacy, gambling, pornography and child protection, Internet
fraud, privacy and digital signatures. Various states have adopted and are
considering Internet-related legislation. Increased United States regulation of
the Internet may slow its growth, particularly if other governments follow suit,
which may negatively impact the cost of doing business over the Internet and
materially adversely affect our business, financial condition, results of
operations and future prospects.
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International. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive on data protection that imposes restrictions on the processing of
personal data which are more restrictive than current United States privacy
standards. Under the directive, personal data may not be collected, processed or
transferred outside the European Union unless certain specified conditions are
met. In addition, persons whose personal data is processed within the European
Union are guaranteed a number of rights, including the right to access and
obtain information about their data, the right to have inaccurate data
rectified, the right to object to the processing of their data for direct
marketing purposes and in certain other circumstances, and rights of legal
recourse in the event of unlawful processing. The Directive will affect all
companies that process personal data in, or receive personal data processed in,
the European Union, and may affect companies that collect or transmit
information over the Internet from individuals in the European Union Member
States. In particular, companies with establishments in the European Union may
not be permitted to transfer personal data to countries that do not maintain
adequate levels of data protection.
In addition, the European Union has adopted a separate, complementary
directive which pertains to privacy and the processing of personal data in the
telecommunications sector. This directive establishes certain requirements with
respect to, among other things, the processing and retention of subscriber
traffic and billing data, subscriber rights to non-itemized bills, and the
presentation and restriction of calling and connected line identification. In
addition, a number of European countries outside the European Union have
adopted, or are in the process of adopting, rules similar to those set forth in
the European Union directives. Although we do not engage in the collection of
data for purposes other than routing calls and billing for our services, the
data protection directives are quite broad and the European Union privacy
standards are stringent. Accordingly, the potential effect of these data
protection rules on the development of our business is uncertain.
COMPETITION
We compete in both the market for enhanced IP communications services and
the market for carrier transmission services. Each of these markets on a
stand-alone basis is highly competitive and has numerous service providers.
According to International Data Corporation (IDC), a market research firm,
by mid-1999 there were an estimated 300 IP telephony service providers
worldwide. In an August 1999 report on IP telephony services, IDC indicated that
based on 1998 IP telephony minutes carried, we accounted for 9.8% of the market.
According to this report, Net2Phone and Jens Corporation are the only providers
with greater market shares than ours, representing approximately 39.4% and 16.4%
of the market, respectively, in 1998. Jens Corporation's services are directed
primarily to callers based in Japan. IDC further indicated that while most IP
telephony traffic is carried by start-up service providers, traditional carriers
such as Singapore Telecom, Korea Telecom, Telia and Bell Atlantic are
establishing market presence.
ENHANCED IP COMMUNICATIONS SERVICES
The market for enhanced Internet and IP communications services is new and
rapidly evolving. We believe that the primary competitive factors determining
success in the Internet and IP communications market are:
o quality of service
o the ability to meet and anticipate customer needs through multiple
service offerings
o responsive customer care services
o price
Future competition could come from a variety of companies both in the
Internet and telecommunications industries. These industries include major
companies who have greater resources and larger subscriber bases than we have,
and have been in operation for many years. We also compete in the growing market
of discount telecommunications services including calling cards, prepaid cards,
call-back services, dial-around or 10-10 calling and collect calling services.
In addition, some Internet service providers have begun to
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aggressively enhance their real time interactive communications, focusing
initially on instant messaging, although we expect them to begin to provide
PC-to-phone services.
Internet and IP Telephony Providers. Many companies provide, or are
planning to provide, certain portions of the complete communications solution we
offer, including Net2Phone, Jens Corporation, JFAX.COM, GlocalNet and Poptel.
Traditional Telecommunications Carriers. Several traditional
telecommunications companies, including industry leaders such as AT&T, Sprint,
Deutsche Telekom, MCI WorldCom and Qwest Communications International, have
recently announced their intention to offer enhanced Internet and IP
communications services in both the United States and internationally. All of
these competitors are significantly larger than we are and have:
o substantially greater financial, technical and marketing resources
o larger networks
o a broader portfolio of services
o stronger name recognition and customer loyalty
o well-established relationships with many of our target customers
o an existing user base to which they can cross-sell their services
These and other competitors may be able to bundle services and products
that are not offered by us together with enhanced Internet and IP communications
services, which could place us at a significant competitive disadvantage. Many
of our competitors enjoy economies of scale that can result in lower cost
structure for transmission and related costs, which could cause significant
pricing pressures within the industry.
CARRIER TRANSMISSION SERVICES
We compete with telecommunications providers, long distance carriers and
other long distance resellers and providers of carrier services for our carrier
transmission services. Our primary competitors in providing carrier transmission
services include:
o long distance carriers, including AT&T, MCI WorldCom and Sprint
Corporation
o foreign carriers, including British Telecom, Deutsche Telekom and Nippon
Telegraph and Telephone Corporation
o global telecommunications alliances, including Global One and BT/AT&T
o emerging carriers providing transmission services over the Internet,
including ITXC Corp., iBasis and AT&T Global Clearinghouse
o wholesale carrier providers, including STAR Telecommunications, Inc.,
GRIC Communications and Pacific Gateway Exchange
Competition for carrier traffic is primarily based on price. Decreasing
telecommunications rates have resulted in intense price competition and we
expect that competition will continue to increase significantly as
telecommunications rates decrease. Increased competition could force us to
further reduce our prices and profit margins, and may reduce our market share.
PROPERTIES
We maintain our executive offices at 430 Park Avenue, New York, New York,
occupying approximately 3,000 square feet, which we sub-lease from RSL COM. This
sub-lease extends until June 29, 2001. We pay RSL COM annual rent of $96,000 for
this space.
We lease a 1,184 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem, Israel. The
term of this lease extends until January 31, 2003, with an
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option to extend the lease for an additional five year period. We pay annual
rent of approximately $240,000 plus Israeli value-added tax. We sublease a
portion of our facility to third parties.
Under a services agreement with RSL COM, we share space for employees and
equipment at eight locations with RSL COM. One of these locations is 60 Hudson
Street, New York, New York. This space houses our international gateway and
domestic switches. RSL COM provides these facilities to us at no direct cost.
The services agreement expires September 3, 2004 with automatic extensions for
additional one-year terms unless terminated by one of the parties upon 30 days
notice prior to the end of the term.
EMPLOYEES
As of October 31, 1999, we employed 80 full-time and 10 part-time
employees, of which 74 are located in Israel and 16 are located in New York. We
consider our relationship with our employees to be good. None of our employees
is covered by collective bargaining agreements.
Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are, unless exempt, obligated to perform up to 31 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Some of the our
officers and employees are currently obligated to perform annual reserve duty.
While we have operated effectively under these requirements since we began
operations, no assessment can be made as to the full impact of such requirements
on our workforce or business if conditions should change, and no prediction can
be made as to the effect on us of any expansion of such obligations.
LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a suit
against us, RSL COM and an RSL COM subsidiary in the United States District
Court for the Southern District of New York. Aerotel alleges that we are
infringing on a patent issued to Aerotel in November 1987 by making, using,
selling and offering for sale prepaid telephone card products in the United
States. Aerotel seeks an injunction to stop us from using the technology covered
by this patent, monetary damages in an unspecified amount and reimbursement of
attorneys' fees. This litigation was only recently filed and we are presently
evaluating these claims. We believe that we have meritorious defenses to the
claim and we intend to defend the lawsuit vigorously. However, the outcome of
the litigation is inherently unpredictable and an unfavorable result may have a
material adverse effect on our business, financial condition and results of
operations. Regardless of the ultimate outcome, the litigation could result in
substantial expenses to us and significant diversion of efforts by our
managerial and other personnel.
We are not a party to any other material litigation and are not aware of
any other pending or threatened litigation that could have a material adverse
effect on us or our business taken as a whole.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our
directors, executive officers and key employees.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Elie C. Wurtman...................................... 30 Co-founder, Co-Chairman of the Company and Chairman
of the Board of Directors
Amos Sela............................................ 56 Chief Executive Officer, President and Director
Jacob A. Davidson.................................... 30 Co-founder and Co-Chairman of the Company
Mark J. Hirschhorn................................... 35 Vice President and Chief Financial Officer
Noam Bardin.......................................... 28 Co-founder, Vice President of Technology and Chief
Technology Officer
Shimmy Zimels........................................ 34 Vice President of Operations
Dr. Baruch D. Sterman................................ 38 Vice President of Research and Development and
Product Integration
Marc M. Tobin........................................ 33 General Counsel
Avery S. Fischer..................................... 32 Director
Itzhak Fisher........................................ 43 Director
Robert R. Grusky..................................... 42 Director
Yadin Kaufmann....................................... 40 Director
Jacob Z. Schuster.................................... 50 Director
Donald R. Shassian................................... 44 Director
Nir Tarlovsky........................................ 33 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 1991. From 1991 to 1996, Mr. Sela served as vice president of
DCL Technologies Ltd, a company specializing in the growth and management of
high technology start-up companies. From 1983 to 1990, Mr. Sela served as
general manager of Gold Net Ltd., a value-added service provider of information
services. Mr. Sela received a masters in physics and mathematics from Hebrew
University in Jerusalem.
JACOB A. DAVIDSON co-founded our company and has been a co-chairman of our
company since October 1999. Mr. Davidson is not a director of our company. From
April 1999 to October 1999 Mr. Davidson acted as our president. From May 1996 to
March 1999, Mr. Davidson served as chairman of the board of our company.
Mr. Davidson co-founded Ambient Corporation and served as its chief executive
officer and its chairman from June 1996 until September 1999. Mr. Davidson
co-founded Pioneer Management Corporation and was the managing director from
January 1992 to June 1996.
MARK J. HIRSCHHORN has been our vice president and chief financial officer
since April 1999. Prior to joining our company, Mr. Hirschhorn served in various
positions at RSL COM, including vice president-finance from August 1997 to May
1999, global controller from January 1996 to May 1999 and assistant secretary
from September 1996 to May 1999. From October 1987 to December 1995,
Mr. Hirschhorn was employed at Deloitte & Touche LLP, most recently as senior
manager.
NOAM BARDIN co-founded our company and has been vice president of
technology and chief technology officer since June 1997. Prior to serving as
vice president, Mr. Bardin served as our global network director from November
1996 to May 1997. From November 1995 to October 1996, Mr. Bardin served as
director of
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operations for Ambient Corporation. From January 1995 to October 1995,
Mr. Bardin worked for several Israeli high-tech companies in helping to secure
government grants and assistance. Prior to 1995, Mr. Bardin attended Hebrew
University.
SHIMMY ZIMELS has been our vice president of operations since July 1997.
Prior to joining our company, Mr. Zimels was the controller and vice president
of finance of Net Media Ltd., a leading Israeli-based Internet service provider,
from June 1995 to June 1997. From April 1991 to May 1995, Mr. Zimels was a
senior tax auditor for the Income Tax Bureau of the State of Israel.
DR. BARUCH D. STERMAN has been our vice president of research and
development and product integration since May 1998. Prior to joining our
company, Dr. Sterman worked as a consultant for Israeli businesses in database
design, billing systems, and automated data flow from August 1996 to May 1998.
After receiving a doctorate in Physics in June 1993, Dr. Sterman founded a
start-up company, Gal-Or Lasers, that developed a compact laser (of his own
design) for industrial and medical use.
MARC M. TOBIN has been our general counsel since August 1998 and our
corporate secretary since September 1999. Prior to joining our company, Mr.
Tobin served as corporate counsel to Slim Fast Foods Company from October 1991
to July 1998 and assistant corporate secretary from March 1995 to July 1998.
AVERY S. FISCHER has been a director of our company since September 1999
and was the secretary of our company from July 1997 until September 1999.
Mr. Fischer has served as vice president of legal affairs and general counsel of
RSL COM since January 1999 and legal counsel of RSL COM since January 1997. From
1994 to 1997, he was an associate with the law firm of Rosenman & Colin LLP, New
York, New York with a practice concentrating in mergers and acquisitions,
securities and general corporate counseling. From 1993 to 1994, Mr. Fischer was
an associate with the law firm of Shea & Gould, New York, New York, with a
practice concentrating in commercial and securities litigation.
ITZHAK FISHER has been a director of our company since July 1997.
Mr. Fisher was a co-founder of RSL COM and has been a director, president and
chief executive officer of RSL COM since its inception in 1994. From 1992 to
1994, Mr. Fisher served as general manager of Clalcom Inc., a telecommunications
company. From 1990 to 1992, Mr. Fisher served as the special consultant to the
president of BEZEQ, the Israel Telecommunication Corp., Israel's national
telecommunications company. Mr. Fisher co-founded, and was a director, president
and chief executive officer of Medic Media, Inc., a company engaged in the
business of renting telephone and television systems in hospitals throughout
Israel.
ROBERT R. GRUSKY has been appointed a director of our company effective
upon closing of this offering. Mr. Grusky has been President of RSL Investments
Corporation since April 1998 and Senior Advisor to Ronald S. Lauder since April
1997. From 1985 to 1997, Mr. Grusky was at Goldman, Sachs & Co. as a member of
its mergers and acquisitions department and later in its principal investment
area. In 1990, Mr. Grusky took a one-year leave of absence during which he was
appointed a White House Fellow by President Bush and served as Assistant to the
then Secretary of Defense Dick Cheney. He is a director of Central European
Media Enterprises, Ltd., ITI Holdings, S.A. and an advisory director of Tinicom
Capital Partners, L.P. and The Hachly School. He is also a member of the Board
of Trustees of The Multiple Myeloma Foundation.
YADIN KAUFMANN has been appointed director of our company effective upon
the closing of this offering. Mr. Kaufmann is a co-founder of MainXchange Ltd.
and has served as its chairman from February 1997 until the present and as its
chief executive officer from February 1997 until January 1999. In 1990,
Mr. Kaufmann co-founded Veritas Venture Capital Management Ltd., a venture fund
that invests primarily in early-stage technology companies in Israel, and has
since 1990 been its co-managing director. From 1987 until 1995, he was involved
in the management of Athena Venture Partners, and from 1986 until 1987 he was an
associate at the law firm Herzog, Fox & Ne'eman. Mr. Kaufmann currently serves
on the Board of Directors of Carmel Biosensors Ltd.
JACOB Z. SCHUSTER has been a director of our company since May 1999. He has
been a director, executive vice president and assistant secretary of RSL COM
since 1994. Mr. Schuster served as treasurer of RSL COM from 1994 through 1998,
and was chief financial officer from February 1997 until December 1998.
Mr. Schuster has been president and treasurer of RSL Management Corporation
since November 1995 and executive vice president of RSL Investments Corporation
since March 1994. From 1986 to 1992, Mr. Schuster was a general partner and
treasurer of Goldman Sachs and has been a limited partner since 1992.
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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.
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.
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 director will be eligible to receive on an
annual basis options to purchase 10,000 shares of common stock with an exercise
price equal to the fair market value on the date of grant. See "1999 Directors'
Plan."
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to or upon the completion of this offering, our board of directors
will create an executive committee, a compensation committee and an audit
committee.
We expect that our executive committee will be composed of at least three
directors. The executive committee will have such powers and duties as shall be
determined by the board of directors.
We expect that our compensation committee will be composed of three
directors, including at least two independent directors, to be appointed prior
to or soon after completion of this offering. The compensation committee will
have the authority to evaluate our compensation policies, determine our
executive compensation policies and guidelines and administer our stock option
and compensation plans.
We expect that our audit committee will be composed of three directors to
be appointed prior to or soon after completion of this offering. The audit
committee will be charged with the following responsibilities:
o recommending the engagement of independent accountants to audit our
financial statements
o discussing the scope and results of the audit with our independent
accountants
o reviewing the functions our management and our independent accountants
pertaining to our financial statements
o performing such other related duties and functions as are deemed
appropriate by the audit committee and the board of directors
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation decisions in 1998 were made by RSL COM's
compensation committee, in the case of Mr. Wurtman and Mr. Davidson, and by
Mr. Wurtman and Mr. Davidson, with our board's approval, in the case of
Mr. Bardin. Following the closing of this offering, our compensation committee
will make all compensation decisions regarding our executive officers. In 1998
no interlocking relationship existed between our board of directors and the
board of directors or compensation committee of any other company, except that
Messrs. Wurtman and Davidson were directors of Ambient, the board of which makes
all compensation decisions for Ambient. Mr. Davidson was also Ambient's chief
executive officer. See "Related Party Transactions--Ambient."
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EXECUTIVE COMPENSATION
In 1998, RSL COM paid the compensation of our executive officers listed
below other than Mr. Bardin. In addition, during 1998, RSL COM employed
Mr. Hirschhorn, our current chief financial officer, as vice president of
finance of RSL COM, and in that position, Mr. Hirschhorn provided financial
services to us.
The following table sets forth information concerning the compensation
during the year ended December 31, 1998 for our then chief executive officer and
the other most highly compensated executive officers of the Company whose total
salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1998 ANNUAL
COMPENSATION ($)
----------------------- LONG-TERM ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY ($) BONUS ($) COMPENSATION COMPENSATION ($)
- ---------------------------------------------------------- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C>
Elie Wurtman, president and chief executive officer(2).... 153,000 162,500 -- --
Jacob Davidson, chairman of the board (2)................. 81,250 81,250 -- --
Noam Bardin, chief technology officer..................... 120,000 10,000 -- --
</TABLE>
- ------------------
(1) The positions stated are those held by the named executive officers in 1998.
(2) Mr. Wurtman and Mr. Davidson were paid by RSL COM.
OPTION GRANTS IN LAST FISCAL YEAR
Neither we nor RSL COM granted options or stock appreciation rights to the
named executive officers in 1998.
OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
There were no option exercises by our named executive officers in 1998. The
following table sets forth information for the named executive offices with
respect to restricted units held as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
RESTRICTED UNITS AT RESTRICTED UNITS AT
YEAR END (#) YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE ($) EXERCISABLE
NAME ON EXERCISE (#) REALIZABLE /UNEXERCISABLE(1) /UNEXERCISEABLE(2)
- ----------------------------------------------- --------------- ---------- ------------------- -------------------
<S> <C> <C> <C> <C>
Elie Wurtman................................... -- -- --/-- --/--
Jacob Davidson................................. -- -- --/-- --/--
Noam Bardin.................................... -- -- 248,483/0 514,360/0
</TABLE>
- ------------------
(1) The number of securities was calculated based on our decision to exchange
the vested restricted units on a one-for-one basis for shares of our common
stock effective upon closing of this offering.
(2) Value was calculated using a $2.08 per unit value based on the price paid by
RSL COM to acquire 30% of our outstanding share capital in 1998 and a
nominal exercise price.
STOCK OWNERSHIP OF OUR DIRECTORS AND EXECUTIVE OFFICERS
None of our executive officers or directors currently own any of our
capital stock. However, four of our executive officers hold an aggregate of
385,148 restricted units granted under the RSL COM 1997 stock incentive plan
described below with an exercise price of $0.004. In addition, in April 1999 we
granted options to purchase an aggregate of 1,076,761 shares of common stock at
an exercise price of $5.11 per share to Messrs. Sela, Wurtman, Davidson,
Hirschhorn, Bardin and Zimels, executive officers of our company. We
55
<PAGE>
also intend to grant options to purchase 24,848 shares of our common stock to
each of our directors who are not our employees under our proposed 1999
Directors' Plan. In addition, we expect that our executive officers, directors
and employees and RSL COM employees will be offered the opportunity to purchase
shares of our common stock at the initial public offering price in this offering
from the shares reserved for employees and directors of our company and RSL COM.
The following table sets forth information for our directors and executive
officers with respect to the options or restricted units they hold.
<TABLE>
<CAPTION>
VALUE OF
SHARES TO BE UNEXERCISED
PURCHASED PURSUANT TO IN-THE-MONEY
OPTIONS/RESTRICTED EXERCISE OPTIONS/RESTRICTED
DIRECTOR/OFFICER UNITS PRICE UNITS*
- ----------------------------------------------------------- --------------------- ---------- ------------------
<S> <C> <C> <C>
Elie Wurtman............................................... 165,656 $ 5.11 $1,141,370
Amos Sela.................................................. 273,332 5.11 1,883,257
Jacob Davidson............................................. 115,959 5.11 798,958
Mark Hirschhorn............................................ 173,938 5.11 1,198,432
Noam Bardin................................................ 173,938/248,483 5.11/.004 4,179,234
Shimmy Zimels.............................................. 173,938/86,969 5.11/.004 2,241,712
Baruch Sterman............................................. 24,848 .004 298,077
Marc Tobin................................................. 24,848 .004 298,077
Itzhak Fisher.............................................. 24,848 12.00* --
Nir Tarlovsky.............................................. 24,848 12.00* --
Donald Shassian............................................ 24,848 12.00* --
Jacob Schuster............................................. 24,848 12.00* --
Yadin Kaufmann............................................. 24,848 12.00* --
Robert Grusky.............................................. 24,848 12.00* --
Avery Fischer.............................................. 24,848 12.00* --
</TABLE>
- ------------------
* Based on an initial public offering price of $12.00 per share, the mid-point
of the estimated price range.
We have adopted a policy to encourage all of our executive officers and
directors not to sell in excess of 50% of their holdings in us while they are
our employees or directors, except for personal estate planning or tax purposes.
STOCK OPTION INFORMATION; RSL COM 1997 STOCK INCENTIVE PLAN
Historically, we have not had a stock option plan. As of September 30, 1999
1,121,324 RSL COM restricted units granted to our employees were outstanding. Of
these, 836,147 restricted units granted in 1997 and 1998 have an exercise price
of $0.004; 189,262 restricted units granted in 1998 have an exercise price of
$2.08; and 95,915 restricted units granted in April 1999 have an exercise price
of $5.11. These restricted units were originally redeemable for shares of RSL
COM or cash (at RSL COM's discretion) based on the value of RSL COM attributable
to us. The restricted units generally vest over three-year periods and must be
redeemed by the employee before the seventh anniversary of their date of grant.
In connection with the offering, as of September 30, 1999, we committed to
exchange shares of our common stock or options to purchase shares of our common
stock for restricted units held, as follows:
(1) To holders of restricted units that have vested, we will issue
restricted shares of our common stock on a one-for-one basis, to be issued
under our 1999 Stock Incentive Plan upon payment of the related exercise
price; these restricted shares will fully vest 180 days after completion of
this offering.
(2) To holders of restricted units that have not yet vested, we will
issue options to purchase our common stock on a one-for-one basis; these
options will also be issued under our 1999 Stock Incentive Plan and will
have the same exercise price (adjusted for our 2.48-for-one stock split)
and vesting schedules as the RSL COM restricted units.
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<PAGE>
If all holders of restricted units exchange their restricted units for
shares of common stock or options to purchase common stock, then we will issue
748,288 restricted shares of common stock and options to purchase 372,976 shares
of common stock, in connection with this exchange.
1999 STOCK INCENTIVE PLAN
We expect to adopt a stock incentive plan prior to the completion of this
offering. The purpose of the plan is to foster and promote the long-term
financial success of our company and materially increase shareholder value by
(a) motivating superior performance by means of performance-related incentives,
(b) encouraging and providing for the acquisition of an ownership interest in
our company by executive officers, other employees and consultants and
(c) enabling us to attract and retain the services of an outstanding management
team upon whose judgment, interest and effort the successful conduct of our
operations is largely dependent.
GENERAL. The plan provides for the grant of (i) incentive stock options
and non-incentive stock options to purchase our common stock; (ii) stock
appreciation rights, which may be granted in tandem with or independently of
stock options; (iii) restricted stock and restricted units; (iv) incentive stock
and incentive units; (v) deferred stock units; and (vi) stock in lieu of cash.
We have reserved 4,000,000 shares of our common stock for issuance upon exercise
of awards to be granted under the plan.
ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors. This
committee will be made up of at least two directors who are not our employees
and whose membership on the committee (i) does not adversely impact our ability
to deduct compensation payments made under the plan and (ii) will permit
recipients of awards to avail themselves of exemptions under federal securities
laws.
ELIGIBILITY AND EXTENT OF PARTICIPATION. The plan provides for
discretionary grants of awards to officers of the company within the meaning of
Rule 16a-1(f) of the Exchange Act and to other employees and consultants of the
company. Directors who are non-employees are prohibited from participating in
the plan. The maximum number of shares for which options or stock appreciation
rights may be granted to any one participant in a calendar year is 600,000 of
the shares of common stock available under the plan.
STOCK OPTIONS. Under the plan, the committee may grant both incentive and
non-incentive stock options for common stock of the company. The options
generally will have a term of seven years and will become exercisable in three
equal installments commencing on the first anniversary of the date of grant. The
purchase price per share payable upon exercise of an option will be established
by the committee; provided, however, that such option exercise price may be no
less than the fair market value of a share of our common stock on the date of
grant (or 110% of the fair market value, in the case of incentive stock option
grants to persons holding more than 10% of voting power of all classes of our
capital stock). The option exercise price is payable by one of the following
methods or a combination of methods to the extent permitted by the committee:
(i) in cash or its equivalent, or (ii) subject to the approval of the committee,
in shares of common stock owned by the participant for at least six months prior
to the date of exercise. The committee may provide that a participant who
delivers shares of common stock to exercise an option when the market value of
the common stock exceeds the exercise price of the option will be automatically
granted reload options for the number of shares delivered to exercise the
option. Reload options will be subject to the same terms and conditions as the
related option except that the exercise price will be the fair market value on
the date the reload option is granted and such reload option will not be
exercisable for six months.
STOCK APPRECIATION RIGHTS. The committee may grant stock appreciation
rights in tandem with or independently of a stock option. Stock appreciation
rights entitle the participant to receive the excess of the fair market value of
a stated number of shares of common stock on the date of exercise over the base
price of the stock appreciation right. The base price may not be less than 100%
of the fair market value of the common stock on the date the stock appreciation
right is granted. The committee will determine when a stock appreciation right
is exercisable, the method of exercise, and whether settlement of the stock
appreciation right is to be made in cash, shares of common stock or a
combination of cash and shares.
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<PAGE>
RESTRICTED STOCK AND RESTRICTED UNITS. The committee may grant awards in
the form of restricted stock and restricted units. For purposes of the plan,
restricted stock is an award of common stock and a restricted unit is a
contractual right to receive common stock (or cash based on the fair market
value of common stock). Such awards are subject to such terms and conditions, if
any, as the committee deems appropriate. Unless otherwise determined by the
committee, participants are entitled to receive either currently or at a future
date, dividends or other distributions paid with respect to restricted stock
and, if and to the extent determined by the committee, either to be credited
with or receive currently an amount equal to dividends paid with respect to the
corresponding number of shares covered by restricted units. Restricted stock and
restricted units become vested and nonforfeitable and the restricted period
shall lapse upon the third anniversary of the date of grant unless the committee
determines otherwise.
INCENTIVE STOCK AND INCENTIVE UNITS. The plan allows for the grant of
awards in the form of incentive stock and incentive units. For purposes of the
plan, incentive stock is an award of common stock and an incentive unit is a
contractual right to receive common stock. Such awards will be contingent upon
the attainment, in whole or in part, of certain performance objectives over a
period to be determined by the committee. With regard to a particular
performance period, the committee has the discretion, subject to the plan's
terms, to determine the terms and conditions of such awards, including the
performance objectives to be achieved during such period and the determination
of whether and to what degree such objectives have been attained. Unless
otherwise determined by the committee, participants are entitled to receive,
either currently or at a future date, all dividends and other distributions paid
with respect to the incentive stock and, if and to the extent determined by the
committee, either to be credited with or receive currently an amount equal to
dividends paid with respect to the corresponding number of shares covered by the
incentive units.
ELECTIVE UNITS. On such date or dates established by the committee and
subject to such terms and conditions as the committee will determine, a
participant may be permitted to defer receipt of all or a portion of his annual
compensation and/or annual incentive bonus ("deferred annual amount") and
receive the equivalent amount in elective stock units based on the fair market
value of the common stock on the date of grant. To the extent determined by the
committee, a participant may also receive supplemental stock units for a
percentage of the deferred annual amount. On the date of a participant's
termination of employment, the participant will receive a number of shares of
common stock equal to the number of elective units and supplemental units held
on that date. Elective units carry no voting rights until the shares have been
issued. The committee will determine whether any dividend equivalents
attributable to elective units are paid currently or credited to the
participant's account and deemed reinvested in common stock. Elective units and
dividend equivalents with respect to the elective units are fully vested at all
times. Unless the committee provides otherwise, supplemental units and dividend
equivalents with respect to the supplemental units will become fully vested on
the third anniversary of the date the corresponding deferred amount would have
been paid.
STOCK IN LIEU OF CASH. The plan authorizes the committee to grant awards
of common stock to executive officers in lieu of all or a portion of an award
otherwise payable in cash pursuant to any bonus or incentive compensation plan
of the company, based on the fair market value of the common stock.
AMENDMENT AND TERMINATION. No awards may be granted under the plan after
the expiration of ten years from the date of the plan's adoption. The board of
directors or the committee may amend, suspend or terminate the plan or any
portion of it at any time. However, no amendment may be made to the plan without
shareholder approval if such amendment would (1) increase the number of shares
of common stock subject to the plan, (2) change the price at which options may
be granted, or (3) remove the administration of the plan from the committee.
1999 PERFORMANCE INCENTIVE PLAN
We expect to adopt a performance incentive plan prior to the completion of
this offering. The purpose of the plan is to assist the company and its
subsidiaries to attract, retain, motivate and reward the best qualified
executive officers and key employees by providing them with the opportunity to
earn competitive compensation directly linked to our performance.
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<PAGE>
GENERAL. Under the plan, bonuses are payable if we meet any one or more of
several performance criteria, which are to be set annually by the committee,
after receipt of the proposed annual budget for the coming year from management.
It is expected that proposed performance criteria for the coming year will be
presented by management in the fourth quarter of the current year and approved
not later than March 31 of the next year. It is expected that the period over
which performance is to be measured will be one year.
The committee shall determine whether bonuses payable under the plan will
be paid in cash, shares of common stock or in any combination thereof, provided
that not less than 50% of any bonus shall be in cash. No more than 400,000
shares common stock may be issued under the plan.
ADMINISTRATION. The plan will be administered by our compensation
committee or such other committee as designated by our board of directors. This
committee will be made up of directors who are not our employees and whose
membership on the committee (i) does not adversely impact our ability to deduct
compensation payments made under the plan and (ii) will permit recipients of
awards to avail themselves of exemptions under federal securities laws. The
committee will establish the performance targets and certify whether such
performance targets have been achieved.
BONUS. Bonus amounts are determined as follows: if 100% of the
pre-established targets are achieved, participants will generally be eligible to
receive a bonus equal to their base salary for such year. If 120% of such
targets are achieved, the bonus potentially payable to participants will
generally equal twice their base salary for such year and, if 80% of such
targets are achieved, the bonus potentially payable to participants will
generally equal 25% of their base salary for such year. To the extent our
results exceed 80% of the targets but is less than 120% of the targets, the
amount of the bonus payable to participants will be adjusted proportionately
based on where such results fall within the ranges set forth above.
Once eligibility has been determined, a bonus, if applicable, will consist
of two components. Fifty percent of the amount determined pursuant to the
formula described above will be payable if the targets are achieved. Up to an
additional 50% of such amount will be payable in the discretion of the
committee. In addition, the plan permits the committee to grant discretionary
bonuses to participants, notwithstanding that a bonus would not otherwise be
payable under the plan, to recognize extraordinary individual performance.
ELIGIBILITY. Each executive officer of the company and each key employee
who is recommended by the chief executive officer and selected by the committee
and approved by the board of directors is eligible to receive a bonus under the
plan.
OTHER TERMS. No plan participant may receive a bonus with respect to any
plan year in excess of $1,000,000. The committee may impose conditions with
respect to an award of common stock, including conditioning the vesting of
shares on the performance of additional service. The committee may permit a
participant to receive all or a portion of his bonus payable in common stock. If
a participant's employment terminates prior to the completion of performance
period, the committee shall determine whether a prorated bonus may be paid to
such a participant. In addition, the plan permits a participant to elect to
defer payment of his or her bonus on terms and conditions established by the
committee.
AMENDMENT AND TERMINATION. Either the board of directors or the committee
may amend, suspend, discontinue or terminate the plan, provided that, unless the
board determines otherwise, any amendment or termination of the plan that
requires stockholder approval will not be effective until stockholder approval
is obtained.
1999 EMPLOYEE STOCK PURCHASE PLAN
We expect to adopt an employee stock purchase plan prior to the completion
of this offering. The purpose of the employee stock purchase plan is to align
employee and shareholder long-term interests by facilitating the purchase of
common stock by employees and to enable employees to develop and maintain
significant ownership of common stock.
GENERAL. The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code, and to assure the
participants of the tax advantages provided
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<PAGE>
thereby. The number of shares of our common stock available for issuance under
the employee stock purchase plan is limited to 1,350,000 shares of common stock.
ADMINISTRATION. The employee stock purchase plan will be administered by a
committee established by the board of directors. The committee may make such
rules and regulations and establish such procedures for the administration of
the employee stock purchase plan as it deems appropriate.
ELIGIBILITY. All employees of the company and its designated subsidiaries
who have at least one year of service and work more than 20 hours per week and
five months in a calendar year will be eligible to participate in the employee
stock purchase plan, except that employees who are "highly compensated" within
the meaning of Section 414(q) of the Code and employees who are five percent or
more stockholders of the company or any parent or subsidiary of the company will
not be eligible to participate.
GRANTS. Pursuant to the employee stock purchase plan, each eligible
employee will be permitted to purchase shares of common stock up to two times
per calendar year through regular payroll deductions in an aggregate amount
equal to 1% to 10% of the employee's base pay, as elected by the employee, for
each payroll period. Under the employee stock purchase plan, a participant's
right to purchase shares of common stock may not accrue at a rate that exceeds
$25,000 of fair market value of common stock during any calendar year.
OFFERING PERIOD; PURCHASE PERIOD. The initial offering period will
commence on the first trading day on or after the effective date of the employee
stock purchase plan and end on the last trading day on or prior to the second
anniversary of the commencement date. Each subsequent offering period will have
a duration of approximately one year, commencing on the first trading day and
ending on the last trading day of each calendar year (commencing with calendar
year 2001). Each "purchase period" will have a duration of approximately six
months.
EXERCISE PRICE. As of the last day of each "purchase period" ending within
an "offering period," participating employees will be able to purchase shares of
common stock with payroll deductions for a purchase price equal to the lesser
of:
o 85% of the fair market value of common stock on the date the offering
period begins and
o 85% of the fair market value of common stock on the last day of the
purchase period.
A right to purchase shares which is granted to a participant under the
employee stock purchase plan is not transferable otherwise than by will or the
laws of descent and distribution.
1999 DIRECTORS' PLAN
We expect to adopt a directors' stock compensation plan prior to the
completion of this offering. The purposes of the directors' plan are to enable
us to attract, maintain and motivate qualified directors and to enhance a
long-term mutuality of interest between our directors and shareholders of our
common stock by granting our directors options to purchase our shares.
Under the directors' plan, on the first business day following each annual
meeting of our shareholders during the term of the directors' plan, each
director who is not an employee of our company will be granted options to
acquire 10,000 shares of our common stock with an exercise price per share equal
to the fair market value of a share of our common stock on the date of grant.
These options will have a seven-year term and will become exercisable on the
first anniversary of the date of grant. In addition, each director who is not an
employee of our company on the date of the completion of this offering will be
granted options to acquire 25,000 shares of our common stock with an exercise
price per share equal to the initial public offering price. Each individual who
becomes a director and is not an employee of our company following completion of
this offering will be granted options to acquire 25,000 shares of common stock
with an exercise price per share equal to the fair market value on the date of
grant. These options will have a seven-year term and will be immediately
exercisable, but if exercised, subject to the 180-day lock-up to be imposed on
our officers and directors. The maximum number of shares that may be issued
under the directors' plan is 600,000. The plan will terminate December 31, 2009,
unless sooner terminated by our stockholders.
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EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Sela, Hirschhorn,
Wurtman, Davidson, Bardin and Zimels, each with the following principal terms:
o The agreement is effective as of April 1, 1999 and will end on March 31,
2002.
o The employee is entitled to receive a base salary as stated below,
increased on each January 1, commencing January 1, 2001, by an amount
equal to his base salary then in effect, multiplied by the applicable
cost of living index during the prior year. The employee's base salary,
as adjusted for cost of living increases, may be further increased at the
option and in the discretion of the board of directors.
o The employee shall be granted options to purchase shares of our common
stock as set forth below, under our proposed 1999 Stock Incentive Plan,
at an exercise price of $5.08 per share. The employee's options are
exercisable in installments, as long as the employee is employed by us on
the applicable
o vesting date, and after an option is exercisable, that option remains
exercisable until the expiration of seven years from the date of the
agreement. If the employee is terminated for any reason prior to
September 30, 2000, following such date, any unvested options will
expire. If the employee is terminated for cause, following such date, all
options will expire. In the case of Messrs. Sela, Hirschhorn, Bardin and
Zimels, the options are exercisable in three equal installments on each
of April 1, 2000, 2001 and 2002. In the case of Messrs. Wurtman and
Davidson, 50% of the options are exercisable on April 1, 2000 and the
remaining options are exercisable in two equal installments on each of
April 1, 2001 and April 1, 2002.
o The employee's options are immediately exercisable in full upon a change
of control. The employee's options, following any termination of the
employee's employment, other than for cause, remain exercisable for the
lesser of two years and the remaining term of his options.
o If the employee's employment is terminated by us without cause or by the
employee for good reason, the employee is entitled to receive previously
earned but unpaid salary, vested benefits and a payment equal to his base
salary as in effect immediately prior to the termination date.
o If the employee dies or is unable to perform his duties, he or his
representative or estate or beneficiary will be paid, in addition to any
previously earned but unpaid salary and vested benefits, 12 months' total
base salary reduced, in the case of disability, by any disability
benefits he receives.
The following table sets forth the position, base salary and number of
shares of common stock represented by the options granted for each of Messrs.
Wurtman, Sela, Davidson, Hirschhorn, Bardin and Zimels, pursuant to their
respective employment agreements:
<TABLE>
<CAPTION>
OPTIONS TO
PURCHASE
SHARES OF
POSITION BASE SALARY COMMON STOCK
---------------------------------------- ----------- ------------
<S> <C> <C> <C>
Elie C. Wurtman......................... Co-Chairman of the Company and Chairman $ 180,000(1) 165,656
of the Board of Directors
Amos Sela............................... Chief Executive Officer and President $ 230,000 273,332
Jacob A. Davidson....................... Co-Chairman of the Company $ 180,000(1) 115,959
Mark J. Hirschhorn...................... Vice President and Chief Financial $ 200,000 173,938
Officer
Noam Bardin............................. Vice President of Technology and $ 170,000 173,938
Operations and Chief Technology
Officer
Shimmy Zimels........................... Vice President of Operations $ 170,000 173,938
</TABLE>
- ------------------
(1) Messrs. Wurtman and Davidson will devote 50% of their time to us beginning
on April 1, 2000 and their base salaries will at that time be reduced to
$90,000 each.
Following RSL COM's purchase of Mr. Davidson's and Mr. Wurtman's interests
in us in July 1997, they entered into employment agreements with RSL COM dated
July 1997. These agreements terminated at the end of March 1999. They entered
into new employment agreements with us as of April 1, 1999.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of our Class B common stock and common stock as of
October 20, 1999 and as adjusted to reflect the sale of the shares of common
stock offered under this prospectus, including shares offered in exchange for
RSL COM restricted units, and the beneficial ownership of shares of the capital
stock of RSL COM as of October 20, 1999 by:
o each person who we know owns beneficially more than 5% of our common
stock
o each of our directors individually
o each of our named executive officers individually
o all of our executive officers and directors as a group
The information in the table assumes the underwriters do not exercise their
option to purchase additional shares.
Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their shares of common stock.
Each person listed below disclaims beneficial ownership of their shares, except
to the extent of their pecuniary interests therein. Shares of common stock that
an individual or group has the right to acquire within 60 days of October 20,
1999 pursuant to the exercise of options are deemed to be outstanding for the
purpose of computing the percentage ownership of such person or group, but are
not deemed outstanding for the purpose of calculating the percentage owned by an
other person listed.
<TABLE>
<CAPTION>
SHARES OF DELTATHREE.COM
CAPITAL STOCK
BENEFICIALLY OWNED(1) SHARES OF RSL COM
-------------------------------------------------- CAPITAL STOCK
PERCENTAGE VOTING POWER BENEFICIALLY OWNED(2)
------------------ ------------------ ----------------------------------
BEFORE AFTER BEFORE AFTER VOTING
NUMBER OFFERING OFFERING OFFERING OFFERING NUMBER PERCENTAGE POWER
---------- -------- -------- -------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
RSL Communications, Ltd.
767 Fifth Avenue
Suite 4300,
New York, New York 10153............... 19,569,459 94.0% 73.6% 99.4% 96.5% -- --% --%
Ronald S. Lauder
c/o RSL Communications, Ltd. (3)....... 19,569,459 94.0 73.6 99.4 96.5 16,447,636(10) 29.7 57.6
CNET Investments, Inc.
150 Chestnut Street
San Francisco, California 94111........ 1,551,971(4) 7.3 5.7 * * -- -- --
DIRECTORS AND EXECUTIVE OFFICERS:
Itzhak Fisher(5)......................... -- -- (9) -- * 3,310,481(11) 6.0 11.5
Nir Tarlovsky(5)......................... -- -- (9) -- * 791,058(12) 1.4 *
Donald R. Shassian(5).................... -- -- (9) -- * 18,000(13) * *
Jacob Z. Schuster(5)..................... -- -- (9) -- * 1,689,404(14) 3.1 6.0
Yadin Kaufmann........................... -- -- (9) -- * 1,000(15) * *
Robert Grusky............................ -- -- (9) -- * 4,500(16) * *
Avery S. Fischer(5)...................... -- -- (9) -- * 5,980(17) * *
Elie C. Wurtman(6)....................... -- -- -- -- -- -- -- --
Jacob A. Davidson(6)..................... -- -- -- -- -- -- -- --
Noam Bardin(6)(7)........................ -- -- * * * -- -- --
All Directors and Executive Officers as a
group (fifteen persons)(8)(9).......... -- -- 2.1 * * 5,820,423 10.6 17.9
</TABLE>
- ------------------
* Less than 1%.
(1) Before this offering our outstanding share capital consists of
(a) 19,569,459 shares of Class B common stock, (b) 167,238 shares of common
stock issued to Yahoo! (including a warrant to purchase 41,963 shares of
common stock, assuming a cashless exercise) and (c) 1,085,943 shares of
common stock issued to CNET (excluding a warrant to purchase 466,028 shares
of common stock), and after this offering, unless otherwise indicated, our
outstanding share capital consists of (a) 19,569,459 shares of
(Footnotes continued on next page)
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<PAGE>
(Footnotes continued from previous page)
Class B common stock and (b) 7,001,469 shares of common stock (which
includes shares of common stock issued to Yahoo! and CNET, 41,963 shares of
common stock issued to Yahoo! upon a cash-less exercise of a warrant and
748,288 shares issued in exchange for RSL restricted units that had
vested).
(2) RSL COM's outstanding share capital consists of 24,267,283 shares of
Class B common stock and 30,591,975 shares of Class A common stock. Shares
of Class B common stock of RSL COM are convertible at any time into shares
of Class A common stock of RSL COM for no additional consideration on a
share-for-share basis. Shares of Class A common stock of RSL COM are
entitled to one vote for each share and shares of Class B common stock of
RSL COM are entitled to 10 votes for each share.
(3) Ronald S. Lauder, together with a number of entities, including entities
formed for the benefit of charities and members of his family, own shares
of RSL COM's capital stock that enable him to vote more than 50% of RSL
COM's capital stock. As a result, he may be deemed to be the beneficial
owner of our capital stock owned by RSL COM. Mr. Lauder disclaims
beneficial ownership of these shares.
(4) Includes a warrant to purchase 466,028 shares of common stock.
(5) The address for the director listed is c/o RSL Communications, Ltd.
(6) The address for director or executive officer listed is c/o us.
(7) Mr. Bardin holds 248,483 RSL COM restricted units that will be exchanged
for 248,483 shares of our common stock upon completion of this offering.
(8) Four of our fifteen directors and executive officers collectively hold
385,148 RSL COM restricted units that will be exchanged for 385,148 shares
of our common stock upon completion of this offering.
(9) On completion of this offering, we will issue to each of our seven
directors who is not an employee of our company options to purchase 24,848
shares of our common stock at an exercise price equal to the initial public
offering price. If exercised, the shares issued would represent less than
1% of our outstanding share capital.
(10) Consists of (a) 502,336 shares of Class A common stock of RSL COM,
(b) 15,481,527 shares of Class B common stock, (c) 3,873 shares of Class A
common stock issuable upon exercise of an equal number of currently
exercisable options granted to Mr. Lauder under RSL COM's 1997 Directors'
Compensation Plan and (d) 459,900 shares issuable upon exercise of a
warrant issued to Mr. Lauder. The shares of Class B common stock consist
of: (a) 9,496,295 shares owned by RSL Investments Corporation, a
corporation wholly owned by Mr. Lauder, (b) 1,814,579 shares owned by
EL/RSLG Media, of which The 1995 Estee Lauder RSL Trust, of which Mr.
Lauder is a trustee and the beneficiary is a 50% shareholder, (c) 907,290
shares owned by RAJ Family Partners, of which Mr. Lauder is a limited
partner and a shareholder of the general partner, and (d) 3,428,363 shares
owned directly by Mr. Lauder.
(11) Consists of (a) 177,839 shares of Class A common stock of RSL COM and
(b) 3,132,642 shares of Class B common stock of RSL COM owned by Fisher
Investment Partners, L.P., of which Mr. Fisher is the sole general partner
and the Fisher 1997 Family Trust is the sole limited partner. Mr. Fisher
disclaims beneficial ownership of these shares.
(12) Consists of (a) 718,915 shares of Class A common stock of RSL COM owned by
Tarlovsky Investment Partners, of which Mr. Tarlovsky is the sole general
partner and the Tarlovsky 1997 Family Trust is the sole limited partner and
(b) 72,143 shares of Class A common stock issuable upon exercise of an
equal number of currently exercisable options granted to Mr. Tarlovsky
under RSL COM's 1997 Stock Incentive Plan.
(13) Represents 18,000 shares of Class A common stock of RSL COM.
(14) 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.
(15) Represents 1,000 shares of Class A common stock of RSL COM.
(16) Represents 4,500 shares of Class A common stock of RSL COM.
(17) 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, a co-chairman of our
company and chairman of the board and Jacob Davidson, a co-chairman of our
company. Mr. Wurtman was a director of Ambient until September 1999.
Mr. Davidson was chief executive officer and chairman of Ambient from June 1996
until September 1999. Mr. Davidson owns a 7% interest in Ambient. Under the
cooperation agreement, we provided them with office services for approximately
$1,000 per month. We also rented approximately 150 square meters of our facility
in Jerusalem, Israel to Ambient. In addition, Ambient rented approximately 675
square feet of office space to us before we moved into our new facilities in
Jerusalem for a total of approximately $13,500. The cooperation agreement and
the sub-lease to Ambient were terminated as of September 1, 1999.
RSL COM
On July 23, 1997, RSL COM acquired 51% of our outstanding share capital.
From that date through March 31, 1998, RSL COM continued to purchase additional
shares from our other stockholders. On March 31, 1998, we entered into a merger
agreement with RSL COM and our remaining minority stockholders. Pursuant to the
agreement, we merged with and into a newly formed wholly-owned subsidiary of RSL
COM. Since RSL COM's acquisition of a controlling interest in us, RSL COM has
funded our cash requirements through inter-company loans bearing interest at the
rate of 14% per annum. As of September 30, 1999, we owed approximately
$12.3 million (principal and accrued interest) to RSL COM. The inter-company
loans is due on demand after September 30, 2000. Upon completion of an initial
public offering by us, the maturity dates will be extended to the first
anniversary of the completion of such offering. RSL COM will, upon completion of
this offering, provide us a $10 million line of credit (in addition to the
existing $12.3 million), bearing interest at the rate of 14% per annum, due on
demand after November 1, 2000. We have agreed with RSL COM that we will not
incur any debt other than inter-company debt without its written consent so long
as we are a restricted subsidiary.
RSL COM currently owns all of our capital stock. Following the completion
of this offering, RSL COM will continue to be our controlling stockholder and
will own 100% of the outstanding Class B common stock, which will represent
approximately 96.5% of the combined voting power of all of our outstanding
capital stock and approximately 73.6% of the economic interest in our company
(or 96.2% and 71.6% if the underwriters' over-allotment option is exercised in
full).
For so long as RSL COM continues to beneficially own shares of capital
stock representing more than 50% of the combined voting power of our outstanding
capital stock, it will be able to approve any matter submitted to a vote of our
stockholders, including, among other things, the election of all members of the
board of directors. In addition, our non-competition provision in the services
agreement with RSL COM terminates on September 3, 2001. See "--Services
Agreement." Therefore, various conflicts of interest could arise between
ourselves and RSL COM.
RSL COM has advised us that it currently has no plans to dispose of the
shares of Class B common stock owned by it. However, RSL COM has no contractual
obligation to retain its shares of our Class B common stock, except RSL COM has
agreed, subject to specified exceptions, not to sell or otherwise dispose of any
shares of our Class B common stock for a period of 180 days from the date of
this prospectus without the prior written consent of Lehman Brothers Inc. This
lock-up agreement does not restrict RSL COM from selling shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. As a result, there can be no assurance
concerning the period of time during which RSL COM will retain its ownership of
our Class B common stock owned by it following the offering. See "--Registration
Rights Agreement."
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<PAGE>
INTERCOMPANY COMPLIANCE AGREEMENT
We have entered into an agreement with RSL COM under which we have agreed
not to take any action which would cause RSL COM to default under its
indentures. In order to help RSL COM comply with its indentures, we have also
agreed to obtain RSL COM's written consent before incurring any debt and to
provide RSL COM with information that it requires for its reporting obligation
under its indentures and under the securities laws.
SERVICES AGREEMENT
We entered into a services agreement with RSL COM on July 23, 1997, which
was subsequently amended and restated as of September 3, 1999. As amended and
restated, the agreement extends to September 2, 2004, and is automatically
extended for additional one-year terms unless terminated by RSL COM or us. The
services agreement may be terminated by us or RSL COM for cause, by the
non-bankrupt party in the event of bankruptcy of the other party or by RSL COM
should RSL COM and/or its affiliates hold less than 50% of the voting control of
our outstanding common stock.
Services and Facilities
Under the agreement, if we require equipment space or limited office space
at any location where RSL COM maintains an office or equipment, RSL COM is
required to use its reasonable best efforts to provide us such space. However,
RSL COM is not obligated to provide us with office space for more than that
required by two full-time employees, and RSL COM is entitled to vacate space
without it being deemed a breach of the agreement. We are required to pay
RSL COM our proportionate share of all lease payments associated with such
office or equipment space. In addition, RSL COM is required to make reasonable
efforts to assist us in obtaining Internet, frame relay and dedicated lines from
third parties in countries where RSL COM has communication switches colocated
with our network servers at the same price that RSL COM pays such third parties.
As of September 30, 1999, we colocated offices in five locations and equipment
in five locations. RSL COM is also required to use its reasonable efforts to
purchase dedicated bandwidth connectivity on our behalf from third party
bandwidth suppliers at the same price as RSL COM pays such third party
suppliers. As a result, we realize certain bulk pricing benefits received by RSL
COM.
Under the services agreement, RSL COM is also required to provide us with
the following services:
o domestic inbound traffic termination--RSL COM is required to
terminate our domestic inbound traffic through RSL COM's switches in
countries where our servers and RSL COM's switches are co-located.
This termination service is provided to us at the then prevailing
fair market rates for such service.
o international outbound termination--RSL COM is required to terminate
our international outbound telephone traffic in each country where
our servers and RSL COM's switches are co-located and RSL COM has
contracted to receive such services in the ordinary course. This
termination service is provided to us at the then prevailing fair
market rates for such service.
o traffic origination--RSL COM is required to use its best efforts to
assist us in obtaining services, including toll-free services, from
local third parties which will provide our users with the ability to
access our network at the same rates offered by such third parties
to RSL COM in countries where our servers and RSL COM's switches are
colocated.
o use of RSL COM switches--RSL COM is required to provide us with use
of RSL's switches to connect our carrier customers in each location
where our servers and RSL COM's switches are colocated. The
termination rate is $0.01 per minute. We are charged for a minimum
usage of 100,000 minutes per month per switch per connection,
whether or not such minutes are used. In addition, RSL COM provides
our carrier customers billing and other similar customer-related
services at a charge of $0.01 per minute of carrier traffic usage.
Based on switches currently used, RSL COM charges us a minimum of
$7,000 per month.
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<PAGE>
o use of prepaid calling platform--RSL COM is required to provide us
with access to, and use of, RSL COM's prepaid calling platform in
each location where our servers and RSL COM's switches are
co-located. If we elect to use RSL COM's prepaid calling platform,
we will be charged for a minimum of 100,000 minutes per month. The
fee for using RSL COM's prepaid calling platform is $0.01 per minute
of traffic usage. In addition, RSL COM is required to provide us
with additional customer-related services for our prepaid calling
services at a rate of $0.015 per minute of traffic usage. To date,
we have not elected to purchase such services.
In the event any of RSL COM's current or future strategic partner objects to RSL
COM providing us with any of the foregoing services, RSL COM can cease providing
the service to us. A strategic partner is a minority shareholder in RSL COM or
any RSL COM subsidiary owning more than 10% of the common stock of such entity.
However, RSL COM is required to use reasonable efforts to encourage its
strategic partners not to object. To date, no strategic partner has objected to
RSL COM providing us with these services.
Under the services agreement, we are required to provide Internet telephony
services and facilities to RSL COM necessary to route RSL COM's international
telecommunications traffic between all originations and destinations we service.
The agreement provides that we are required to use, at RSL COM's request, up to
50% of our network capacity to route RSL COM's international telecommunications
traffic between our origination and termination points. For a period two years
from the date of the closing of this offering, provided this offering occurs
prior to June 30, 2000, RSL COM has committed to purchase a minimum of
50 million minutes per annum of voice and fax transmission services from us. If
RSL COM fails in this commitment RSL COM will be required to pay us a shortfall
charge of 10% of the average daily weighted coverage price per minute charged by
us to RSL COM in the last three months of each annual period. If we are no
longer a subsidiary of RSL COM, RSL COM's minimum purchase obligation will
cease. These services are provided to RSL COM at the then prevailing fair market
rates.
Marketing
Under the services agreement, we and RSL COM will engage in joint
marketing. Each of us is required to place, in a prominent location, a link on
its home page Web site to the other's home page Web site. We will also
cross-sell each other's products and services, including through promotional
materials and customer service representatives and other additional promotional
efforts. However, neither we nor RSL COM are required to market or promote a
product or service of the other if such product or service competes with the
other party's product or service.
Non-Competition
Under the services agreement between us and RSL COM, RSL COM is prohibited
from competing with us in providing Internet telephony services as described in
the services agreement, provided that we provide RSL COM with any requested
Internet telephony services promptly and with quality assurance. However, this
non-competition provision terminates on September 3, 2001 and the scope of such
provision is subject to the following limitations:
o RSL COM and its subsidiaries may acquire up to 20% in an entity providing
Internet telephony services;
o RSL COM and its subsidiaries may be stockholders in entities providing
Internet telephony services, provided that Internet telephony services
are ancillary to the business of that entity;
o the non-competition provision does not apply to RSL COM's subsidiaries
that become publicly traded companies; and
o Internet telephony services under the non-competition provision are
limited to (1) phone to phone services marketed as IP to the general
public, including both individuals and businesses and (2) the following
Web-based enhanced communication services: PC-to-phone, D3 box, Click IT,
Global Roaming, IP-initiated conference calls, Phone-to-PC, D3 Fax,
information services and white boarding.
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<PAGE>
CARRIER TRANSMISSION SERVICES
RSL COM purchases carrier transmission services from us. RSL COM accounted
for 37.6%, 69.1% and 63.4% of our revenues in the years 1997 and 1998 and for
the nine months ended September 30, 1999, respectively. Rates are established
based on market rates. The balance of our revenues in these periods were derived
from services provided to non-affiliates.
REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with RSL COM under which we have given
RSL COM the right to require us on three occasions to register for sale the
shares of common stock they hold. RSL COM will not be allowed to exercise these
registration rights during the 180-day lock-up period. RSL COM also has an
unlimited number of "piggyback" registration rights. This means that any time we
register our common stock for sale, RSL COM will have the right to include their
common stock in that offering and sale.
We have agreed to pay all expenses that result from registration of
RSL COM's common stock under the registration rights agreement (other than
underwriting commissions for the common stock it sells and RSL COM's taxes). We
have also agreed to indemnify RSL COM against liabilities that may result from
their sale of common stock they hold, including Securities Act liabilities.
MANAGEMENT AGREEMENT
We have entered into an agreement with RSL COM pursuant to which RSL COM
has agreed from the time we complete this offering until such time as we are no
longer a subsidiary of RSL COM, RSL COM will provide to us the following
services:
o international legal services
o financial services, including assistance in accounting, financial
reporting, budgeting, business controls, tax and treasury related
matters
o corporate finance and mergers and acquisition advisory services
o assistance with network planning
o product development
o assistance with strategic planning
o availability of RSL COM management.
We have agreed to pay to RSL COM $20,000 per month for these services, subject
to adjustments for inflation.
RSL COM PRIMECALL CO-BRANDING AND SERVICES AGREEMENT
We have entered into an agreement with RSL COM PrimeCall, a subsidiary of
RSL COM, to develop a prepaid IP calling card product. PrimeCall will arrange
for the production of the calling card, as well as assisting us with sales,
marketing and distribution. We will record all revenues from the sales of the
calling cards. In exchange for the services PrimeCall provides to us, we will
agree to establish and administer a Web site for PrimeCall to help enable
PrimeCall to market and sell its calling cards over the Web and place 500,000
RSL COM PrimeCall's banners on our site per month. We will oversee for PrimeCall
all billing, collections and fullfillment for on-line orders.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the material provisions of our capital
stock. This summary does not purport to be complete. For a more detailed
description, see our amended and restated certificate of incorporation and
by-laws, copies of which we have filed as exhibits to the registration
statement.
Our authorized capital stock consists of 200,000,000 shares of Class A
common stock (which we refer to as common stock in this prospectus), 200,000,000
shares of Class B common stock and 25,000,000 shares of preferred stock, par
value $0.001 per share. Immediately prior to the closing of this offering, we
will restate our certificate of incorporation to reflect a 2.48 to one stock
split of our common and Class B common stock. Upon closing of the offering,
there will be 7,001,469 shares of our common stock and 19,569,459 shares of our
Class B common stock outstanding.
COMMON STOCK AND CLASS B COMMON STOCK
General
The rights of holders of common stock are subject to the rights of holders
of any preferred stock which may be issued in the future. All outstanding shares
of common stock are, and the shares of common stock to be sold by us in this
offering when issued will be, duly authorized, validly issued, fully paid and
nonassessable. Upon liquidation, dissolution or winding up of our company, the
holders of common stock are entitled to share ratably in all net assets
available for distribution to stockholders after payment to creditors. The
holders of common stock and Class B common stock have identical rights except
with respect to voting, conversion and transfer. The common stock is not
redeemable and has no preemptive or conversion rights.
Voting Rights
Holders of our common stock are entitled to one vote per share on all
matters submitted for stockholder vote, except matters submitted to the vote of
another class or series of shares, while holders of Class B common stock are
entitled to ten votes per share. Holders of common stock and Class B common
stock are not entitled to cumulative voting rights. Cumulative voting for the
election of directors is not provided for in our amended and restated
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election.
Dividends
Holders of common stock and Class B common stock are entitled to receive
dividends out of assets legally available for this purpose at the times and in
the amounts as the board of directors may from time to time determine. Holders
of our common stock and Class B common stock will share equally on a per share
basis in any dividend declared by the board of directors, subject to any
preferential rights of any outstanding preferred stock. Dividends consisting of
shares of common stock and Class B common stock may be paid only as follows:
(1) shares of common stock may be paid only to holders of common stock, and
shares of Class B common stock may be paid only to holders of Class B common
stock; and (2) the number of shares so paid will be equal on a per share basis
with respect to each outstanding share of common stock and Class B common stock.
We have not paid any dividends on our common stock and do not anticipate paying
any cash dividends on such stock in the foreseeable future. See the section of
this prospectus entitled "Dividend Policy" for more information.
Merger or Consolidation
In the event of a merger or consolidation, the holders of common stock and
Class B common stock will be entitled to receive the same per share
consideration, if any, except that if the consideration includes voting
securities (or the right to acquire voting securities, or securities
exchangeable for, or convertible into, voting securities), we are required,
unless the holders of Class B common stock agree, to provide for the holders of
Class B common stock to receive consideration entitling them to ten times the
number of votes per share as the consideration being received by holders of the
common stock.
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Conversion of Class B Common Stock
Our Class B common stock will be convertible into common stock on a
share-for-share basis at the option of the holder at any time, or automatically
upon transfer to a person or entity which is not a permitted transferee.
Permitted transferees will include RSL COM, its direct and indirect
majority-owned subsidiaries, successors of RSL COM following a merger,
consolidation or reorganization if RSL COM is not the surviving entity, or
Ronald S. Lauder or members of his family, a trust established by him for his
family members or entities controlled by him. Ronald S. Lauder is the
controlling shareholder of RSL COM. In the event a permitted transferee receives
Class B common stock and after that time ceases to qualify as a permitted
transferee, all Class B common stock held by that permitted transferee will
automatically convert into shares of our common stock.
PREFERRED STOCK
Our board of directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued from time to time in one or more
series, and the board of directors may fix the number of shares of each series
and the designation, powers, privileges, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The specific matters that our board of directors may determine include the
following:
o the designation of each series
o the number of shares of each series
o the rate of any dividends
o whether any dividends shall be cumulative or non-cumulative
o the terms of any redemption
o the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of affairs of our company
o rights and terms of any conversion or exchange
o restrictions on the issuance of shares of the same series or any other
series
o any voting rights
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our by-laws provide that directors and officers shall be indemnified by our
company to the fullest extent authorized by Delaware law, as it now exists or
may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with services for or on behalf of us. The by-laws also
authorize us to enter into one or more agreements with any person that provide
for indemnification greater or different from that provided in the by-laws. To
the extent that indemnification for liabilities arising under the Securities Act
may be permitted for directors, officers and controlling persons of our company,
we have been advised that in the opinion of the Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
LIMITATION OF LIABILITY OF DIRECTORS
Our amended and restated certificate of incorporation provides, as
authorized by Section 102(b)(7) of the Delaware General Corporation Law (DGCL),
that our directors will not be personally liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability imposed by law, as in effect from time to time, for the following:
o any breach of the director's duty of loyalty to our company or our
stockholders
o any act or omission not in good faith or which involved intentional
misconduct or a knowing violation of law
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<PAGE>
o unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL
o any transaction from which the director derived an improper personal
benefit
The inclusion of this provision in our amended and restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against our directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
our company and our stockholders.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
Our amended and restated certificate of incorporation provides that we have
opted-out of the provisions of Section 203 of the Delaware General Corporation
Law. Section 203 prohibits a publicly held Delaware corporation from engaging in
a "business combination" with "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless:
o prior to such date, the board of directors of the corporation
approves either the business combination or the transaction that
resulted in the stockholder's becoming an interested stockholder;
o upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock,
excluding shares held by directors, officers and certain employee
stock plans; or
o on or after the consummation date the business combination is
approved by the board of directors and by the affirmative vote at an
annual or special meeting of stockholders of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes, among other
things, a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an "interested stockholder" is
generally a person who, together with affiliates and associates of such person:
o owns 15% or more of the corporation's voting stock; or
o is an affiliate or associate of the corporation and was the owner of
15% or more of the outstanding voting stock of the corporation at
any time within the prior three years.
LISTING
We have applied to have our common stock quoted on The Nasdaq National
Market under the symbol "DDDC."
TRANSFER AGENT
Our transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company. Its address is 40 Wall Street, New York, New York
10005, and its telephone number at this location is (212) 936-5100.
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SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 7,001,469 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 7,751,469 shares of common stock outstanding. In addition, we will
have 19,569,459 shares of Class B common stock outstanding, all of which will be
owned by RSL COM. All of the common stock sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except for shares acquired by our directors and executive officers and our
affiliates. The shares of Class B common stock to be retained by RSL COM are not
being acquired under this offering and will have restrictions on resale.
LOCK-UP
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo!, CNET and all of our officers and directors
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers, they will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of capital stock or any securities which may be converted
into or exchanged for any shares of capital stock for a period of 180 days from
the date of this prospectus, except that RSL COM may sell shares of Class B
common stock to a purchaser or purchasers of the shares who agree to be bound by
the same restrictions that bind RSL COM. Individuals participating in the
directed share program and employees holding options to purchase our common
stock on the closing of this offering (other than those subject to the 180-day
lock-up) will be prohibited from disposing shares of common stock for a period
of 90 days after the date of this prospectus. We can give no assurance as to how
long RSL COM or any of the other parties subject to the lock-up agreements will
continue to hold its common stock after this offering.
RULE 144
The shares of Class B common stock held by RSL COM and the shares of common
stock acquired by any of our affiliates will be subject to the resale
limitations of Rule 144 of the Securities Act. Rule 144 defines an affiliate as
a person that directly or indirectly, through one or more intermediaries,
controls or is controlled by, or is under common control with, the issuer.
In general, a stockholder subject to Rule 144 who has beneficially owned
shares of common stock of an issuer for at least one year may, within any
three-month period, sell up to the greater of:
o 1% of the total number of shares of common stock then outstanding or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the stockholder's required filing of notice of
sale
Rule 144 requires stockholders to aggregate their sales with other
stockholders with which it is affiliated for purposes of complying with this
volume limitation. A stockholder who has owned common stock for at least two
years, and who has not been an affiliate of the issuer for at least 90 days, may
sell common stock free from the volume limitation and notice requirements of
Rule 144.
We cannot estimate the number of shares of common stock that may be sold by
third parties in the future because these sales will depend on market prices and
other factors.
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REGISTRATION RIGHTS
After the closing of this offering, RSL COM or its transferees will be
entitled to request that we register their shares under the Securities Act. See
"Related Party Transactions--RSL COM--Registration Rights Agreement."
On October 18, 1999 in exchange for the offset of an account payable to
Yahoo! of $1 million, we issued to Yahoo! 125,275 shares of our common stock and
a warrant to purchase 41,963 shares of our common stock at an exercise price of
$7.98 per share, assuming a cashless exercise. The warrant will be automatically
exercised upon completion of this offering unless earlier exercised. The shares
issued to Yahoo! are subject to restrictions on resale. However, Yahoo! will be
entitled to request that we register their shares under the Securities Act
beginning 180 days after completion of this offering and to include their shares
and our future registered equity offerings.
On October 20, 1999, we issued to CNET Investments, Inc. for approximately
$11 million 1,085,943 shares of our common stock and warrants to purchase
466,028 shares of our common stock at an exercise price of $10.13 per share
exercisable for the term of our promotion agreement with CNET, Inc. CNET
Investments will be entitled to request that we register their shares under the
Securities Act beginning 180 days after completion of this offering and to
include their shares in our future registered equity offerings.
If RSL COM sells 75% or more of its equity interest in us, it has the right
to require Yahoo! and CNET to sell their holdings in us as well.
IMPORTANT UNITED STATES FEDERAL TAX CONSEQUENCES
OF OUR COMMON STOCK TO NON-U.S. HOLDERS
This is a general discussion of certain U.S. federal tax consequences of
the acquisition, ownership, and disposition of our common stock issued pursuant
to this offering by a holder that, for U.S. federal income tax purposes, is not
a "U.S. person" as we define that term below (a "Non-U.S. Holder"). We assume in
this discussion that you will hold our common stock as a capital asset
(generally, property held for investment). We do not discuss all aspects of U.S.
federal taxation that may be important to you in light of your individual
investment circumstances, such as special tax rules that apply to you, for
example, if you are a dealer in securities, financial institution, bank,
insurance company, tax-exempt organization, partnership or owner of more than 5%
of our common stock. Our discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended, Treasury Regulations, judicial
opinions, published positions of the U.S. Internal Revenue Service, or the IRS,
and other applicable authorities, all as in effect on the date of this
prospectus and all of which are subject to differing interpretations or change,
possibly with retroactive effect. We have not sought, and will not seek, any
ruling from the IRS with respect to the tax consequences discussed in this
prospectus, and there can be no assurance that the IRS will not take a position
contrary to the tax consequences discussed below or that any position taken by
the IRS would not be sustained. We urge you to consult your tax advisor about
the U.S. federal tax consequences of acquiring, holding, and disposing of our
common stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
For purposes of this discussion, a "U.S. person" means any one of the
following:
o a citizen or resident of the U.S.
o a corporation, partnership, or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision of the
U.S.
o an estate, the income of which is includable in gross income for U.S.
federal income tax purposes regardless of its source
o a trust, the administration of which is subject to the primary
supervision of a U.S. court and that has one or more U.S. persons who
have the authority to control all substantial decisions of the trust
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DIVIDENDS
Dividends paid to a Non-U.S. Holder will generally be subject to
withholding of U.S. federal income tax at the rate of 30%. If, however, the
dividend is effectively connected with the conduct of a trade or business in the
U.S. by the Non-U.S. Holder, the dividend will be subject to U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders under certain circumstances, the branch
profits tax. Non-U.S. Holders should consult any applicable income tax treaties
that may provide for a reduction of withholding taxes. For purposes of
determining whether tax is to be withheld at a reduced rate as specified by a
treaty, we generally will presume that dividends we pay on or before
December 31, 2000, to an address in a foreign country are paid to a resident of
that country.
Under recently finalized Treasury regulations, which in general apply to
dividends that we pay after December 31, 2000, to obtain a reduced rate of
withholding under a treaty, a Non-U.S. Holder generally will be required to
provide certification as to that Non-U.S. Holder's entitlement to treaty
benefits. These regulations also provide special rules to determine whether, for
purposes of applying a treaty, dividends that we pay to a Non-U.S. Holder that
is an entity should be treated as paid to holders of interests in that entity.
GAIN ON DISPOSITION
A Non-U.S. Holder will generally not be subject to U.S. federal income tax,
including by way of withholding, on gain recognized on a sale or other
disposition of our common stock unless any one of the following is true:
o the gain is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder
o the Non-U.S. Holder is a nonresident alien individual present in the U.S.
for 183 or more days in the taxable year of the disposition and certain
other requirements are met
o the Non-U.S. Holder is subject to tax pursuant to provisions of the U.S.
federal income tax law applicable to certain U.S. expatriates
o we are or have been during certain periods a "U.S. real property holding
corporation" for U.S. federal income tax purposes
If we are or have been a U.S. real property holding corporation, a Non-U.S.
Holder will generally not be subject to U.S. federal income tax on gain
recognized on a sale or other disposition of our common stock provided that:
o the Non-U.S. Holder does not hold (and has not held during certain
periods), directly or indirectly, more than 5% of our outstanding common
stock and
o our common stock is and continues to be traded on an established
securities market for U.S. federal income tax purposes
We believe that our common stock will be traded on an established
securities market for this purpose in any quarter during which it is quoted on
Nasdaq.
If we are or have been during certain periods a U.S. real property holding
corporation and the above exception does not apply, a Non-U.S. Holder will be
subject to U.S. federal income tax with respect to gain realized on any sale or
other disposition of our common stock as well as to a withholding tax (generally
at a rate of 10% of the proceeds). Any amount withheld pursuant to a withholding
tax will be creditable against a Non-U.S. Holder's U.S. federal income tax
liability.
Gain that is effectively connected with the conduct of a trade or business
in the U.S. by the Non-U.S. Holder will be subject to the U.S. federal income
tax imposed on net income on the same basis that applies to U.S. persons
generally, and, for corporate holders and under certain circumstances, the
branch profits tax, but will generally not be subject to withholding. Non-U.S.
Holders should consult any applicable income tax treaties that may provide for
different rules.
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UNITED STATES FEDERAL ESTATE TAXES
Our common stock that is owned or treated as owned by an individual who is
not a citizen or resident of the U.S. (as specially defined for U.S. federal
estate tax purposes) on the date of that person's death will be included in his
or her estate for U.S. federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, we must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends that we paid to a holder, and the amount of tax that we
withheld on those dividends. This information may also be made available to the
tax authorities of a country in which the Non-U.S. Holder resides.
Under current U.S. Treasury Regulations, U.S. information reporting
requirements and backup withholding tax will generally not apply to dividends
that we pay on our common stock to a Non-U.S. Holder at an address outside the
U.S. Payments of the proceeds of a sale or other taxable disposition of our
common stock by a U.S. office of a broker are subject to both backup withholding
at a rate of 31% and information reporting, unless the holder certifies as to
its Non-U.S. Holder status under penalties of perjury or otherwise establishes
an exemption. Information reporting requirements, but not backup withholding
tax, will also apply to payments of the proceeds of a sale or other taxable
disposition of our common stock by foreign offices of U.S. brokers or foreign
brokers with certain types of relationships to the U.S., unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Holder and
certain other conditions are
met or the holder otherwise established an exemption.
Backup withholding is not an additional tax. Any amounts that we withhold
under the backup withholding rules will be refunded or credited against the
Non-U.S. Holder's U.S. federal income tax liability if certain required
information is furnished to the IRS.
The U.S. Treasury Department has promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general,
those regulations do not significantly alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. The final regulations are generally
effective for payments made after December 31, 2000, subject to transition
rules.
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, U.S. Bancorp Piper Jaffray Inc., Lazard Freres & Co. LLC and
Fidelity Capital Markets, a division of National Financial Services Corporation,
are acting as representatives, has agreed to purchase from us the respective
number of shares of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Lehman Brothers Inc.........................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........................
U.S. Bancorp Piper Jaffray Inc..............................................
Lazard Freres & Co. LLC.....................................................
Fidelity Capital Markets,
a division of National Financial Services Corporation.....................
----------
Total..................................................................... 5,000,000
----------
----------
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include that:
o the representations and warranties made by us to the underwriters are
true
o there is no material change in the financial markets
o we deliver customary closing documents to the underwriters
The representatives had advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to selected dealers, who may
include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and
the selected dealers may reallow, a concession not in excess of $ per
share to brokers and dealers. After the offering, the underwriters may change
the offering price and other selling terms.
The following table summarizes the underwriting discounts and commissions
we will pay. The underwriting discounts and commissions are equal to the public
offer price per share less the amount paid to us per share. The underwriting
discounts and commissions will equal 7% of the public offer price.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions to be
paid by us................................................ $ $ $
</TABLE>
We estimate that the total expenses of the offering, including
registration, filing and listing fees, printing fees and legal and accounting
expenses but excluding underwriting discounts and commissions, will be
approximately $1.5 million.
We have granted to the underwriters an option to purchase up to an
aggregate of 750,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time, and from time
to time, until 30 days after the date of the underwriting agreement. To the
extent the underwriters exercise this option, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to that underwriter's initial commitment as indicated in the
preceding table, and
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we will be obligated, under the over-allotment option, to sell the shares of
common stock to the underwriters.
We have agreed that, without the prior written consent of Lehman Brothers
Inc., we will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of capital stock or any securities which may be converted into or
exchanged for any shares of capital stock for a period of 180 days from the date
of this prospectus. RSL COM, Yahoo! and CNET and all of our officers and
directors have agreed under lock-up agreements that, without the prior written
consent of Lehman Brothers Inc., they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of capital stock or any securities which
may be converted into or exchanged for any shares of capital stock for a period
of 180 days from the date of this prospectus, except that RSL COM may sell
shares of Class B common stock to a purchaser or purchasers of the shares who
agree to be bound by the same restrictions that bind RSL COM. Individuals
participating in the directed share program and employees holding options to
purchase our common stock on the closing of this offering (other than those
subject to the 180-day lock-up) will be prohibited from disposing shares of
common stock for a period of 90 days after the date of this prospectus. See
"Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider prevailing market conditions,
our historical performance and capital structure, estimates of our business
potential and earning prospects, an overall assessment of our management and the
consideration of the above factors in relation to market valuation of companies
in related businesses.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
Intranet and other proprietary electronic technology.
We have agreed to indemnify the underwriters against liabilities relating
to the offering, including liabilities under the Securities Act, liabilities
arising from breaches of the representations and warranties contained in the
underwriting agreement, and liabilities incurred in connection with the directed
share program referred to below, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares of
common stock than are set forth on the cover page of this prospectus. If the
underwriters create a short position, then the representatives may reduce that
short position by purchasing common stock in the open market. The
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option described in this prospectus.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
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Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters make any representation that the representatives
will engage in such transactions or that any such transaction, once commenced,
will not be discontinued without notice.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, Lehman Brothers Inc. has reserved up to 500,000 shares of
the common stock, or 10% of the common stock offered by this prospectus, for
sale pursuant to a directed share program to officers, directors and employees
(and their family members) of RSL COM and its affiliates (including us) and
friends of management of RSL COM and us. All of the persons purchasing the
reserved shares must commit to purchase no later than the close of business on
the day following the date of this prospectus. The number of shares available
for sale to the general public will be reduced to the extent these persons
purchase the reserved shares.
Lehman Brothers Inc. has served as co-manager for two security offerings
for RSL COM in the past and has received customary compensation for these
services. Lehman Brothers Inc. has also served as the solicitation agent in
connection with RSL COM's recent solicitation of consents from certain of its
noteholders and received $750,000 as compensation for this service.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Certain legal matters in connection with the offering will be passed upon for
the underwriters by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998 and
September 30, 1999 and for the period from June 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998 and the nine
month period ended September 30, 1999 included in this prospectus and in the
registration statement have been audited by Brightman Almagor & Co., a member
firm of Deloitte Touche Tohmatsu, independent auditors, as stated in their
report appearing in this prospectus, and are included in reliance upon the
report of that firm given upon their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common
stock offered in this prospectus. This prospectus does not contain all the
information which is in the registration statement. Certain parts of the
registration statement are omitted as allowed by the rules and regulations of
the Commission. We refer you to the registration statement for further
information about our company and the securities offered in this prospectus.
Statements contained in this prospectus concerning the provisions of documents
filed as exhibits are not necessarily complete, and reference is made to the
copy so filed, each such statement being qualified in all respects by such
reference. You can inspect and copy the registration statement and the reports
and other information we file with the Commission under the Exchange Act at the
public reference room maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain
information on the operation of the public reference room by calling the
Commission at 1-800-SEC-0330. The same information will be available for
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of this material from the public reference room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site which
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<PAGE>
provides on-line access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
Upon the effectiveness of the registration statement, we will become
subject to the information requirements of the Exchange Act. We will then file
reports, proxy statements and other information under the Exchange Act with the
Commission. You can inspect and copy these reports and other information of our
company at the locations set forth above or download these reports from the
Commission's Web site.
We will apply to have our common stock quoted on The Nasdaq National
Market. Reports, proxy statements and other information concerning us can be
inspected at the National Association of Securities Dealers, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
RSL COM's Class A common stock is traded on Nasdaq under the symbol RSLC.
RSL COM is subject to the reporting requirements of the Exchange Act.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DELTATHREE.COM, INC.
<TABLE>
<S> <C>
Independent Auditors' Report..................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999.............. F-3
Consolidated Statements of Operations for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 (unaudited) and 1999...................................... F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficiency) for the period from
June 1996 (inception) to December 31, 1996 and for the years ended December 31, 1997 and 1998
and for the nine months ended September 30, 1999............................................... F-5
Consolidated Statements of Cash Flows for the period from June 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998 and for the
nine months ended September 30, 1998 (unaudited) and 1999...................................... F-6
Notes to Consolidated Financial Statements....................................................... F-7
</TABLE>
F-1
<PAGE>
The following report is in the form that will be signed upon completion of
the stock split described in Note 12A to the consolidated financial statements,
assuming that from October 27, 1999 to the date of such completion, no other
material events have occurred that would affect the accompanying consolidated
financial statements or required disclosure therein. If the stock split ratio
changes, all references to numbers of shares, per share amounts and stock option
data included within the consolidated financial statements will also change.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
November 1, 1999
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF
DELTATHREE.COM, INC.
We have audited the accompanying consolidated balance sheets of
deltathree.com, Inc. (the "Company") as of December 31, 1997 and 1998 and
September 30, 1999 and the related consolidated statements of operations,
changes in stockholder's equity (deficiency) and cash flows for the period from
June 1996 (inception) to December 31, 1996 and each of the two years in the
period ended December 31, 1998 and for the nine months ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1998 and September 30, 1999, and the consolidated results
of its operations and cash flows for the period from June 1996 (inception) to
December 31, 1996 and each of the two years in the period ended December 31,
1998 and for the nine months ended September 30, 1999 in conformity with
generally accepted accounting principles.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
October 27, 1999, except for Note 12A as to which the date is , 1999
F-2
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 3,196,082 $ 1,356,562 $ 1,292,887
Accounts receivable--net.......................................... 825,200 543,335 862,266
Due from affiliates............................................... -- 2,191,903 920,036
Prepaid expenses and other current assets......................... 166,287 620,676 1,151,652
------------ ------------ -------------
Total current assets................................................. 4,187,569 4,712,476 4,226,841
------------ ------------ -------------
Investments.......................................................... 105,000 90,000 90,000
------------ ------------ -------------
Property and equipment:
Telecommunications equipment...................................... 849,824 7,910,224 9,947,932
Furniture, fixtures and other..................................... 200,122 735,991 686,502
------------ ------------ -------------
1,049,946 8,646,215 10,634,434
Less accumulated depreciation..................................... (177,738) (376,792) (745,092)
------------ ------------ -------------
Property and equipment--net....................................... 872,208 8,269,423 9,889,342
------------ ------------ -------------
Goodwill--net........................................................ 3,183,875 12,488,125 10,214,490
Deposits............................................................. 54,549 115,497 161,374
------------ ------------ -------------
Total assets......................................................... $ 8,403,201 $25,675,521 $ 24,582,047
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.................................................. $ 949,716 $ 4,301,763 $ 4,148,126
Due to affiliates................................................. 120,487 1,403,163 722,835
Deferred revenues and costs....................................... 159,778 1,610,081 734,465
Other current liabilities......................................... 194,295 629,096 2,511,002
------------ ------------ -------------
Total current liabilities............................................ 1,424,276 7,944,103 8,116,428
------------ ------------ -------------
Long-term liabilities:
Long-term debt due to affiliates.................................. -- 5,106,602 12,306,880
Severance pay obligations......................................... 26,775 233,247 320,340
------------ ------------ -------------
Total long-term liabilities.......................................... 26,775 5,339,849 12,627,220
------------ ------------ -------------
Convertible notes payable to affiliates.............................. 679,965 -- --
------------ ------------ -------------
Minority interests................................................... -- 21,399 --
------------ ------------ -------------
Total liabilities.................................................... 2,131,016 13,305,351 20,743,648
------------ ------------ -------------
Commitments and contingencies
Stockholder's equity:
Class A Common stock, authorized in September 1999--par value
$0.001; 200,000,000 shares authorized as of September 30, 1999;
no shares issued and outstanding at December 31, 1997 and 1998
and September 30, 1999.......................................... -- -- --
Class B Common stock --par value $0.001; 100,000,000, 20,000,000
and 20,000,000 shares authorized at December 31, 1997 and 1998
and September 30, 1999, respectively; 18,938,249, 19,569,460 and
19,569,460 issued and outstanding at December 31, 1997 and 1998
and September 30, 1999, respectively............................ 18,938 19,569 19,569
Preferred stock, authorized in September 1999--par value $0.001;
25,000,000 shares authorized as of September 30, 1999; no shares
issued and outstanding at December 31, 1997 and 1998 and
September 30, 1999.............................................. -- -- --
Additional paid-in capital........................................ 8,799,431 23,083,638 37,178,351
Deferred compensation............................................. -- (1,065,882) (6,234,375)
Accumulated deficit............................................... (2,546,184) (9,667,155) (27,125,146)
------------ ------------ -------------
Total stockholder's equity........................................... 6,272,185 12,370,170 3,838,399
------------ ------------ -------------
Total liabilities and stockholder's equity........................... $ 8,403,201 $25,675,521 $ 24,582,047
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED DECEMBER 31, SEPTEMBER 30,
TO DECEMBER 31, ---------------------------- -----------------------------
1996 1997 1998 1998 1999
--------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Affiliates................... $ -- $ 467,842 $ 3,896,106 $ 2,484,541 $ 4,077,278
Non-affiliates............... 933 777,799 1,741,941 1,184,324 2,355,076
--------- ------------ ------------ ------------ ------------
Total revenues................. 933 1,245,641 5,638,047 3,668,865 6,432,354
Costs and operating expenses:
Cost of revenues............. -- 1,064,940 4,657,373 2,648,748 5,811,171
Research and development
expenses.................. -- 294,150 650,140 479,030 797,273
Selling and marketing
expenses.................. -- 631,970 2,431,371 1,603,221 3,087,336
General and administrative
expenses--(exclusive of
non-cash compensation
expense shown below)...... 179,138 1,387,682 1,842,446 1,025,861 2,079,809
Non-cash compensation
expense................... -- -- 742,780 640,165 8,926,220
Amortization of goodwill..... -- 197,249 2,472,214 1,714,335 2,273,635
--------- ------------ ------------ ------------ ------------
Total costs and operating
expenses..................... 179,138 3,575,991 12,796,324 8,111,360 22,975,444
--------- ------------ ------------ ------------ ------------
Loss from operations........... (178,205) (2,330,350) (7,158,277) (4,442,495) (16,543,090)
Interest expense, net.......... (397) (37,232) (186,295) (145,910) (914,901)
Minority interests............. -- -- 223,601 -- --
--------- ------------ ------------ ------------ ------------
Net loss....................... $(178,602) $ (2,367,582) $ (7,120,971) $ (4,588,405) $(17,457,991)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Net loss per share--basic and
diluted...................... $ (0.03) $ (0.19) $ (0.37) $ (0.24) $ (0.89)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Weighted average shares
outstanding--basic and
diluted...................... 6,420,194 12,390,043 19,253,855 19,148,652 19,569,459
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
DELTATHREE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CLASS B TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDER'S
--------------------- PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIENCY)
---------- ------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
at June 1996 (Inception).................. -- $ -- $ -- $ -- $ -- $ --
Issuance of capital stock................... 7,659,507 7,659 140,831 -- -- 148,490
Net loss.................................... (178,602) (178,602)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1996...................... 7,659,507 7,659 140,831 (178,602) -- (30,112)
Issuance of capital stock................... 11,278,742 11,279 5,319,976 5,331,255
Recognition of pushdown of goodwill......... 3,338,624 3,338,624
Net loss.................................... (2,367,582) (2,367,582)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1997...................... 18,938,249 18,938 8,799,431 (2,546,184) -- 6,272,185
Conversion of debt and warrants to equity... 631,210 631 656,581 657,212
Deferred compensation expense............... 1,808,662 (1,808,662) --
Amortization of deferred compensation
expense................................... 742,780 742,780
Recognition of pushdown of goodwill......... 11,818,964 11,818,964
Net loss.................................... (7,120,971) (7,120,971)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at December 31, 1998...................... 19,569,459 19,569 23,083,638 (9,667,155) (1,065,882) 12,370,170
Deferred compensation expense............... 14,094,713 (14,094,713) --
Amortization of deferred compensation
expense................................... 8,926,220 8,926,220
Net loss.................................... (17,457,991) (17,457,991)
---------- ------- ----------- ------------ ------------ -----------
BALANCE
at September 30, 1999..................... 19,569,459 $19,569 $37,178,351 $(27,125,146) $(6,234,375) $ 3,838,399
---------- ------- ----------- ------------ ------------ -----------
---------- ------- ----------- ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ---------------------------------------------------
1996 1997 1998
--------------- ------------------------ ------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(178,602) $ (2,367,582) $ (7,120,971)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 5,371 369,616 2,671,268
Amortization of deferred compensation........... -- -- 742,780
Write-down of investment........................ -- -- 25,000
Minority interests.............................. -- -- (223,601)
Increase in liability for severance pay......... -- 26,775 147,628
Provision for losses on accounts receivable..... -- 100,000 226,542
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...... (22,173) (925,200) 78,216
Decrease (increase) in other current assets and
due from affiliates........................... (42,900) (198,263) (2,269,872)
Increase (decrease) in accounts payable......... 23,547 926,169 1,733,912
Increase (decrease) in deferred revenues........ -- -- (1,595,635)
Increase in current liabilities and due to
affiliates.................................... 28,510 446,050 1,826,832
--------- ------------ ------------
(7,645) 745,147 3,363,070
--------- ------------ ------------
Net cash used in operating activities............... (186,247) (1,622,435) (3,757,901)
--------- ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................ (160,809) (889,137) (3,003,004)
Increase in deposits.............................. -- -- (60,948)
Equity investments................................ (45,000) (60,000) (25,000)
Other............................................. -- -- 15,000
--------- ------------ ------------
Net cash used in investing activities............... (205,809) (949,137) (3,073,952)
--------- ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock........... 148,490 5,331,255 --
Proceeds from issuance of convertible notes....... 343,558 520,000 --
Retirement of convertible notes................... -- (208,298) --
Proceeds (repayment) of long-term debt from
affiliates...................................... 30,000 (30,000) 5,000,000
Proceeds from short-term borrowings............... -- 24,705 --
Payment of other long-term debt................... -- -- (7,667)
--------- ------------ ------------
Net cash provided by financing activities........... 522,048 5,637,662 4,992,333
--------- ------------ ------------
Increase (decrease) in cash and cash equivalents.... 129,992 3,066,090 (1,839,520)
Cash and cash equivalents at beginning of period.... -- 129,992 3,196,082
--------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 129,992 $ 3,196,082 $ 1,356,562
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ -- $ -- $ --
--------- ------------ ------------
--------- ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock................................... $ -- $ -- $ 657,212
--------- ------------ ------------
--------- ------------ ------------
Assets acquired with vendor credits............... $ -- $ -- $ 3,000,000
--------- ------------ ------------
--------- ------------ ------------
Recognition of pushdown of goodwill............... $ -- $ 3,338,624 $ 11,818,964
--------- ------------ ------------
--------- ------------ ------------
<CAPTION>
Nine Months
Ended
September 30, 1999
---------------------------------------
1998 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (4,588,405) $(17,457,991)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 1,815,277 2,641,765
Amortization of deferred compensation........... 640,164 8,926,220
Write-down of investment........................ -- --
Minority interests.............................. -- (21,399)
Increase in liability for severance pay......... 8,578 39,679
Provision for losses on accounts receivable..... -- (294,074)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable...... 432,883 (24,857)
Decrease (increase) in other current assets and
due from affiliates........................... (2,204,181) 742,428
Increase (decrease) in accounts payable......... 675,879 (153,637)
Increase (decrease) in deferred revenues........ (804,993) (875,616)
Increase in current liabilities and due to
affiliates.................................... 1,212,146 1,772,397
------------ ------------
1,775,753 12,752,906
------------ ------------
Net cash used in operating activities............... (2,812,652) (4,705,085)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment................ (1,941,092) (1,988,048)
Increase in deposits.............................. -- --
Equity investments................................ -- --
Other............................................. (25,000) --
------------ ------------
Net cash used in investing activities............... (1,966,092) (1,988,048)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of capital stock........... -- --
Proceeds from issuance of convertible notes....... -- --
Retirement of convertible notes................... -- --
Proceeds (repayment) of long-term debt from
affiliates...................................... 2,014,314 6,629,458
Proceeds from short-term borrowings............... -- --
Payment of other long-term debt................... -- --
------------ ------------
Net cash provided by financing activities........... 2,014,314 6,629,458
------------ ------------
Increase (decrease) in cash and cash equivalents.... (2,764,430) (63,675)
Cash and cash equivalents at beginning of period.... 3,196,082 1,356,562
------------ ------------
Cash and cash equivalents at end of period.......... $ 431,652 $ 1,292,887
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest........................................ $ -- $ --
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of convertible notes and warrants into
capital stock................................... $ 657,212 $ --
------------ ------------
------------ ------------
Assets acquired with vendor credits............... $ 3,000,000 $ --
------------ ------------
------------ ------------
Recognition of pushdown of goodwill............... $ 11,818,964 $ --
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- BUSINESS DESCRIPTION
Description of business
Deltathree.com, Inc. (the "Company"), a Delaware corporation,
is a global provider of Internet Protocol ("IP") telephony
services, which include the transmission of voice and data
traffic for communications carriers and the provision of
enhanced Web-based and other communications services to
individuals and businesses.
The Company was founded in 1996 to capitalize on the growth
of the Internet as a communications tool. The Company
commercially provides IP telephony services over a
privately-managed IP network. The Company operates a
privately-managed IP network with 45 points of presence
(POPs) in 29 countries as of October 27, 1999.
The Company has a limited operating history and its prospects
are subject to the risks, expenses and uncertainties
frequently encountered by companies in the new and rapidly
evolving markets for Internet and telecommunications
services. In addition, the Company is financially dependent
on RSL Communications Ltd. ("RSL COM") (see below).
The Company's research and development activities are
conducted in Israel by its wholly owned subsidiary, Delta
Three Israel Ltd. ("Delta Ltd.").
In 1997, the Company established a 95%-owned subsidiary,
Internet Technologies Colombia SA ("SA"), to provide the
Company's network services in Colombia. In 1998, the Company
established a 51%-owned subsidiary, Eltel Services Company
Ltd. ("Eltel"), to provide the Company's network services in
the Philippines. Eltel ceased operations in 1998 and the
Company's investment in Eltel was written-off. In 1998, the
Company also established a 51%-owned subsidiary, Delta Three
Direct LLC ("Direct"), to provide direct marketing for the
Company. The Company is in the process of dissolving Direct.
As of June 30, 1999, the Company also had a 5% interest in
the share capital of Internet Telecom, Ltd., an Israeli
corporation engaged in research and development of Internet
telephony.
Acquisition of the Company by RSL COM
The Company is a wholly owned subsidiary of RSL COM, a
publicly traded multinational telecommunications company. RSL
COM and its subsidiaries and affiliates (excluding the
Company) are collectively referred to herein as "RSL COM" or
"Affiliates." Approximately 69% of the Company's revenues for
the year ended December 31, 1998 were derived from
transactions with RSL COM. (RSL COM has also provided the
Company with substantially all of the Company's working
capital since July 1997.)
In July 1997, the Company issued 8,150,895 shares of capital
stock to RSL COM pursuant to a stock purchase agreement with
RSL COM (representing 51% of the Company's outstanding
capital stock at that time) for aggregate gross consideration
of $5,000,000. In addition, at the time of the closing under
the stock purchase agreement, the Company issued 2,353,440
shares of capital stock into escrow, which were released to
RSL COM in 1997 for no additional consideration under the
anti-dilution provisions of the stock purchase agreement
relating to the July 1997 issuance. During the remainder of
1997, RSL COM acquired additional shares of capital stock
from the Company's existing stockholders for aggregate
consideration of $2,856,750. As of December 31, 1997, RSL COM
held approximately 75% of the Company's outstanding capital
stock.
By April 1998, RSL COM acquired the remaining outstanding
capital stock of the Company held by the Company's remaining
stockholders for total consideration of $11,818,964 and
F-7
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 -- BUSINESS DESCRIPTION (CONTINUED)
merged the Company with a newly formed, wholly owned
subsidiary of RSL COM, with the Company remaining as the
surviving corporation.
The acquisition of the Company by RSL COM has been
"pushed-down" into the Company's financial statements as of
July 1997, with an increase to both goodwill and additional
paid-in capital in the amount of $15,157,588. The goodwill is
being amortized by the Company over a five-year period.
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation--The
consolidated financial statements include the accounts of
deltathree.com, Inc. and its subsidiaries. The results of
subsidiaries acquired or disposed of during the year are
included from the date of acquisition to the date of
disposal, if applicable. All significant intercompany
accounts and transactions have been eliminated in
consolidation. Each of the Company's subsidiaries has a
December 31 year end.
Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions,
primarily for allowances for doubtful accounts receivable and
the useful lives of fixed assets and intangible assets, that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents--The Company considers all highly
liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Allowance for Doubtful Accounts--The Company estimates the
allowance for doubtful accounts by reviewing the status of
significant past due receivables and analyzing historical bad
debt trends and the Company then reduces accounts receivables
by such allowance for doubtful accounts to expected net
realizable value.
Investments--Investments in less than 20% of the share
capital of other companies are presented at cost. In the
event that management identifies a decline of an other than
temporary nature in the estimated fair value of an investment
to an amount below cost, such investment is written down to
fair market value.
Property and Equipment and Related Depreciation--Property and
equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful
lives of the depreciable assets, which range from two to ten
years. Improvements are capitalized, while repair and
maintenance costs are charged to operations as incurred. The
useful life of telecommunications network equipment purchased
from Ericsson (see Note 11B) is 10 years. During 1998, $3.0
million of the Company's equipment purchases from Ericsson
was initially recorded in the Company's consolidated balance
sheets as a credit to property and equipment and an
offsetting debit to accounts payable. After the Company
reached agreement with Ericsson relating to difficulties
encountered by the Company in integrating hardware and
software purchased from Ericsson (see Note 11B), the Company
reclassified the $3.0 million accounts payable to deferred
revenues and costs.
Goodwill and Related Amortization--Goodwill represents the
excess of cost over the fair value of the Company's net
assets, pushed down as a result of RSL COM's acquisition of
the Company, and is being amortized using the straight-line
method over five years.
F-8
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-lived Assets and Goodwill--The Company's
long-lived assets and goodwill are reviewed for impairment on
a quarterly basis and whenever events or changes in
circumstances occur indicating that the net carrying amount
may not be recoverable. The Company reviews for impairment by
comparing the carrying value of the long-lived asset or
goodwill to the estimated undiscounted future cash flows
expected to result from the use of the long-lived assets (and
their eventual disposition) or the goodwill. If the sum of
the expected undiscounted future cash flows is less than the
carrying amount of assets, the Company would recognize an
impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the
carrying amount of the long-lived asset or goodwill exceeds
the fair value of the long-lived asset or goodwill based on
estimated future discounted cash flows. The Company
determined that, as of December 31, 1997 and 1998 and
September 30, 1999, there had been no impairment in the
carrying value of long-lived assets or goodwill.
Revenue Recognition and Deferred Revenue--The Company records
revenue based on minutes (or fractions thereof) of customer
usage. The Company records payments received in advance for
prepaid services and services to be supplied under
contractual agreements as deferred revenue until such related
services are provided.
Cost of Revenues--Cost of revenues is comprised primarily of
access, transmission and termination costs based on actual
minutes in addition to monthly circuit lease costs and is net
of reimbursements from vendors.
Research and Development Expenses--Research and development
expenses, net of reimbursements from vendors, are expensed as
incurred.
Advertising Expenses--Advertising expenses are expensed as
incurred. For the period from June 30, 1996 to December 31,
1996, the years ended December 31, 1997 and 1998 and the
nine-month period ended September 30, 1999, advertising
expenses were approximately $0, $24,000, $124,000 and
$52,000, respectively.
Income Taxes--The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109
establishes financial accounting and reporting standards for
the effect of income taxes that result from activities during
the current and preceding years. SFAS No. 109 requires an
asset and liability approach for financial reporting for
income taxes. The Company's foreign subsidiaries file
separate income tax returns in the jurisdiction of their
operations.
Net Loss per Share--In accordance with the Company's adoption
of SFAS No. 128, "Earnings Per Share", the net loss per share
is calculated by dividing the net loss attributable to
capital stock by the weighted average number of shares
outstanding. Outstanding common stock options are not
included in the net loss per share calculation as their
effect is anti-dilutive. The adoption of SFAS No. 128 did not
materially affect the Company's presentation of net loss per
share.
Concentration of Credit Risk--The Company is subject to
concentrations of credit risk which consist principally of
trade accounts receivable and cash and cash equivalents.
The Company maintains its cash with various financial
institutions. The Company performs periodic evaluations of
the relative credit standing of these institutions.
F-9
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The majority of the Company's noncarrier customers prepay for
their services. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit
risk of customers, historical trends and other information.
Fair Value of Financial Instruments--The carrying amounts of
cash and cash equivalents, accounts and other receivables and
accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of
outstanding borrowings approximate fair value due to their
short-term interest rate.
Effects of Recently Issued Accounting Standards--In June
1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display
of comprehensive income and its components. The Company has
no elements of comprehensive income.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and hedging activities. Generally, it requires
that an entity recognize all derivatives as either an asset
or liability and measure those instruments at fair value, as
well as identify the conditions for which a derivative may be
specifically designed as a hedge. SFAS No. 133 is effective
for fiscal years beginning after June 15, 2000. The Company
does not currently engage or plan to engage in any derivative
or hedging activities. The adoption of SFAS No. 133 is not
expected to have a material impact on the Company.
During 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use"
("SOP No. 98-1"). The Company amortizes these costs over the
anticipated life of the systems. The adoption of SOP No. 98-1
did not have a material impact on the Company's financial
statements.
Stock-based Compensation--The Company has adopted the
disclosure provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation," and elected to continue the
accounting set forth in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has provided the necessary pro forma disclosures
as if the fair value method had been applied (See Note 12F).
Segment Reporting--Effective January 1, 1998, the Company
adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes
standards for the way business enterprises report information
about operating segments, as well as enterprise-wide
disclosures about products and services, geographic areas and
major customers. See Note 15 for enterprise-wide disclosures
required by SFAS No. 131.
Unaudited Financial Statements--The unaudited interim
September 30, 1998 financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
which are, in management's opinion, necessary for a fair
presentation of the results for the interim period presented.
Reclassifications--Certain previously reported amounts have
been reclassified to conform with the current period
presentation.
3 -- ACCOUNTS RECEIVABLE-NET
Accounts receivable are stated net of an allowance for
doubtful accounts of $100,000, $326,542 and $32,468 at
December 31, 1997 and 1998 and September 30, 1999,
respectively.
F-10
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 -- DUE FROM/TO AFFILIATES
The balances due from and due to Affiliates are for services
rendered and are non-interest bearing.
5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Prepaid commissions................................... $ -- $144,768 $ --
Deposits with credit card companies................... -- 199,401 150,000
Government of Israel (VAT refund and other)........... -- 59,763 106,161
Deposits with suppliers............................... -- 86,799 75,499
Prepaid expenses...................................... 20,455 28,055 669,121
Loan to employee...................................... -- 31,917 --
Other................................................. 145,832 69,973 150,871
-------- -------- -----------
Total prepaid expenses and other current
assets............................................ $166,287 $620,676 $ 1,151,652
-------- -------- -----------
-------- -------- -----------
</TABLE>
6 -- GOODWILL-NET
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Goodwill from acquisition of the Company by RSL COM
(see Note 1)...................................... $3,338,624 $15,157,588 $15,157,588
Deferred financing costs............................ 42,500 -- --
Less -- accumulated amortization.................... (197,249) (2,669,463) (4,943,098)
----------- ------------ -----------
Total goodwill--net................................. $3,183,875 $12,488,125 $10,214,490
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
7 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Accrued expenses..................................... $ -- $361,187 $ 1,314,983
Employees and related expenses....................... 64,750 144,013 1,106,281
Deposits from customers.............................. -- 118,672 14,957
Other................................................ 129,545 5,224 74,781
-------- -------- -----------
Total other current liabilities...................... $194,295 $629,096 $ 2,511,002
-------- -------- -----------
-------- -------- -----------
</TABLE>
F-11
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 -- LONG-TERM DEBT DUE TO AFFILIATES
The long-term debt issued in 1998 to RSL COM bears interest at a
fixed annual rate of 14% and is due on demand after September 30,
2000. Upon completion of an initial public offering by the
Company, the maturity date will be extended to the first
anniversary of the completion of such offering.
9 -- SEVERANCE PAY OBLIGATIONS
Delta Ltd., the Company's Israeli subsidiary, is subject to
certain Israeli law and labor agreements that determine the
obligations of Delta Ltd. to make severance payments to dismissed
employees and to employees leaving employment under certain other
circumstances. The obligation for severance pay benefits, as
determined by Israeli law, is based upon length of service and
the employee's most recent salary. This obligation is partially
funded through regular deposits made by Delta Ltd. into
unaffiliated severance pay funds and by the purchase from
unaffiliated insurance companies of managers' insurance policies.
Amounts funded are controlled by the fund trustees and insurance
companies and are not under the control and management of Delta
Ltd.
Expenses relating to employee termination benefits were $26,775,
$147,628, $8,578 and $39,679 for the years ended December 31,
1997 and 1998 and for the nine months ended September 30, 1998
(unaudited) and 1999, respectively. No expenses were incurred for
the period from June 1996 (inception) to December 31, 1996.
10 -- CONVERTIBLE NOTES PAYABLE TO AFFILIATES
During 1996 and 1997, RSL COM purchased from third parties
convertible notes issued by the Company. The notes were
convertible into capital stock at conversion rates of $0.80 and
$1.30, respectively. In connection with the issuance of the
notes, warrants were issued to purchase capital stock with
exercise prices of $0.80 and $1.30 per share. During 1998, all of
the notes were converted into, and warrants were exercised for,
shares of capital stock, in each case under their original terms.
11 -- COMMITMENTS AND CONTINGENCIES
A. Services agreement with RSL COM
In July 1997, the Company entered into a three-year services
agreement with RSL COM. Pursuant to the services agreement with
RSL COM, RSL COM is required to use its reasonable best efforts
to provide the Company with certain office and equipment space
and to assist the Company in obtaining Internet, frame-relay
and dedicated lines from third parties. In addition, RSL COM is
required under the agreement to provide the Company with
various communications services at rates set forth in the
agreement. The agreement also provides that the Company is
required, at RSL COM's request, to use up to 50% of its network
capacity to route RSL COM's international telecommunications
traffic at rates set forth in the agreement.
Based on a cost analysis performed by the Company, management
believes that the amounts reflected in the financial statements
pursuant to the above services agreement do not materially
differ from amounts which the Company would have recognized or
incurred in providing or obtaining equivalent services on an
arms-length basis. During September 1999, this agreement was
amended. Consistent with the original services agreement, the
amendment also supports the continued provision of services at
fair market value.
F-12
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
B. Technology and marketing agreement with Ericsson
In October 1997, the Company entered into a technology and
marketing alliance with Ericsson for the development and
deployment of advanced IP telephony gateways and communications
software. Under the alliance agreement, the Company is entitled
to purchase hardware and software on preferential terms.
During 1998, due to difficulties in integrating the hardware
and software purchased from Ericsson into the Company's
network, the Company incurred significant costs and anticipates
that it will incur additional costs in 1999. To compensate the
Company for its costs, Ericsson agreed to offset amounts owed
by the Company to Ericsson for network telecommunications
equipment previously purchased from Ericsson with a fair value
of $3 million. This offset represents Ericsson's reimbursement
of the costs previously incurred and expected to be incurred by
the Company. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, the Company recognized
$901,385 and $760,285, respectively, as an offset to research
and development expenses, and $694,250 and $299,136,
respectively, as an offset to cost of revenues incurred in
respect of the network telecommunications equipment. The
remaining balance is reflected as deferred revenues and costs
and will be recorded as an offset to such costs as they are
incurred.
C. Other marketing and cooperation agreements
The Company has entered into marketing and cooperation
agreements with various other companies that maintain sites on
the Web. Pursuant to certain of these agreements, the Company
is obligated to pay commissions based on revenues derived from
such Web links.
D. Indentures governing debt of RSL COM
The Company is subject to covenants by reason of its status as a restricted
subsidiary of RSL COM under the indentures governing a substantial amount of
RSL COM's debt. These restrictions significantly limit the ability of the
Company to incur additional indebtedness or create liens on its assets. The
Company's ability to incur indebtedness is limited by the amount of
indebtedness that RSL COM and the Company are permitted to incur under the
indentures. Such restrictions also limit the Company's ability to pay
dividends or make other distributions in respect of the Company's capital
stock, sell assets, engage in mergers or acquisitions or make some types of
investments. These restrictions also limit the ability of a third party to
acquire a controlling interest in the Company. These restrictions may
prohibit transactions that would otherwise be beneficial to the Company.
E. Lease commitments
The Company leases office space from RSL COM in New York at an annual cost
of $96,000. The lease term extends until June 2001.
In addition, the Company leases offices in Israel at an annual cost of
$240,000. The lease term extends until February 2003, with an option to
extend the lease for an additional five years.
F-13
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
F. Legal Proceedings.
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced
a suit against the Company, RSL COM and an RSL COM subsidiary
in the United States District Court for the Southern District
of New York. Aerotel alleges that we are infringing on a patent
issued to Aerotel in November 1987 by making, using, selling
and offering for sale prepaid telephone card products in the
United States. Aerotel seeks an injunction to stop us from
using the technology covered by this patent, monetary damages
in an unspecified amount and reimbursement of attorneys' fees.
This litigation was only recently filed and we are presently
evaluating these claims. The Company believes that it has
meritorious defenses to the claim and it intends to defend the
lawsuit vigorously. However, the outcome of the litigation is
inherently unpredictable and an unfavorable result may have a
material adverse effect on the Company's business, financial
condition and results of operations. Regardless of the ultimate
outcome, the litigation could result in substantial expenses to
the Company and significant diversion of efforts by the
Company's managerial and other personnel.
12 -- STOCKHOLDERS' EQUITY
A. Stock Split.
The Company expects to revise its capital structure in connection with its
initial public offering to effect a 2.48-for-one stock split for each
outstanding share of its capital common stock. All references to per share
amounts and the number of shares in these financial statements have been
restated to reflect this expected stock split.
B. Description of capital stock
As of December 31, 1997, the Company's authorized share capital was
100,000,000 shares of Class B common stock, par value $0.001, of which
18,938,249 shares were issued and outstanding.
As of December 31, 1998, the Company's authorized share capital was
20,000,000 shares of Class B common stock, par value $0.001, of which
19,569,459 shares were issued and outstanding.
In September 1999, the Company authorized two additional classes of capital
stock, the Class A common stock, par value $0.001, and preferred stock, par
value $0.001. As of September 30, 1999, the Company's authorized share
capital was 200,000,000 shares of Class A common stock, of which none were
issued and outstanding, 20,000,000 shares of Class B common stock, of which
19,569,459 shares were issued and outstanding, and 25,000,000 shares of
preferred stock,of which none were issued and outstanding.
Effective upon the authorization of the Class A common stock, each share of
Class B common stock is convertible into one share of Class A common stock
at any time. The holders of the Class B common stock are entitled to ten
votes per share. The holders of the Class A common stock are entitled to one
vote per share.
C. Yahoo! Inc. Transaction.
On October 18, 1999, the Company issued to Yahoo! Inc. in exchange for an
offset to an account payable owed by the Company to Yahoo! in the amount of
$1 million 125,275 shares of Class A common stock and a warrant to purchase
41,963 shares of Class A common stock at an exercise price of $7.98 per
share, assuming a cashless exercise. The offset to accounts payable will be
recorded as a debit (contra) to stockholders' equity in the Company's
consolidated balance sheets. The Company will record approximately $672,000
of deferred
F-14
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
compensation expense related to the issuance of the shares and
warrant representing the difference between each of the purchase price of
the Class A common stock and the exercise price of the warrant as compared
to the initial public offering price of the Class A common stock (using the
Black Scholes option pricing model for determining the fair value of the
warrant). The Company will amortize this deferred compensation expense over
the one year life of the Yahoo! advertising and promotion agreement referred
to below.
In addition, on October 18, 1999, the Company entered into an advertising
and promotion agreement whereby Yahoo! Inc. will provide 226,038,600 page
views to the Company over a one year period commencing in December 1999. In
consideration for such, the Company will compensate Yahoo! Inc. $5,000,000
of which the first $1,000,000 will be offset against accounts payable owed
by the Company to Yahoo under the agreement. The $5,000,000 will be charged
to expense using the straight line basis over the one year life of the
contract.
D. CNET Transaction.
On October 20, 1999, the Company issued to CNET Investments,
Inc. 1,085,943 shares of common stock and a warrant to purchase
466,028 shares of Class A common stock at an exercise price of
$19.31 per share, or approximately $11.0 million in the
aggregate. The Company will record approximately $2.0 million
of deferred compensation expense related to the issuance of the
shares and warrant representing the difference between each of
the purchase price of the Class A common stock and the exercise
price of the warrant as compared to the initial public offering
price of the Class A common stock (using the Black Scholes
option pricing model for determining the fair value of the
warrant). The Company will amortize this deferred compensation
expense over the two year life of the CNET promotion agreement
referred to below.
In addition, the Company entered into a marketing and promotion
agreement with CNET, Inc., effective as of September 22, 1999,
whereby CNET, Inc. will provide various promotions to the
Company to assist the Company in promoting its pc-to-phone
product and related services. In consideration for this
promotion, the Company will compensate CNET, Inc. a total of
$11,000,000 over a two year period. The Company will expense
the $11.0 million of payments under the marketing and promotion
agreement using the straight line method over the two year
period of the agreement.
E. Restricted Units
As of December 31, 1998 and September 30, 1999, a total of 1,048,851 and
1,121,324 restricted units, respectively, had been granted to employees of
the Company under the 1997 RSL COM Stock Incentive Plan. Of these restricted
units, 836,147 have an exercise price of $.0004 and 189,262 have an exercise
price of $2.08. In April 1999, an additional 95,915 restricted units were
granted to employees of the Company with an exercise price of $5.11. The
majority of the restricted units vest over a three-year period from the date
of grant and are exercisable for a period of seven years from the date of
grant. Upon completion of the Company's contemplated initial public
offering, the Company will issue shares of the Company's Class A common
stock in exchange for vested restricted units on a one-for-one basis upon
payment of the related exercise price and will issue options to purchase
shares of the Company's Class A common stock in exchange for unvested
restricted units on a one-for-one basis, with the same exercise prices
(adjusted for the stock split referred to in Note 12A) and vesting schedules
as the corresponding restricted units. For purposes of these financial
statements, the Company has assumed that the restricted units will convert
into shares of common stock on a one-for-one basis.
F-15
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to generally accepted accounting principles, the restricted units
are considered variable grants. Consequently, changes in the fair value of
the underlying shares at each balance sheet date affect the aggregate amount
of deferred compensation recorded by the Company. The Company recorded
deferred compensation in connection with the restricted unit grants of
approximately $1,800,000 through December 31, 1998 and an additional
$6,600,000 during the nine months ended September 30, 1999, representing the
difference between the exercise price and the deemed fair value of the
Company's common stock at such date, based on a fair value of restricted
units of $2.08 and $8.18 per unit as of December 31, 1999 and September 30,
1999, respectively. Such amount is included as a reduction of stockholder's
equity and is being amortized by charges to operations over the vesting
period. Amortization of the deferred compensation amounted to $742,780 and
$6,635,574 for the year ended December 31, 1998 and the nine months ended
September 30, 1999, respectively.
Upon completion of the Company's contemplated initial public offering, the
Company will record an additional $4.5 million of deferred compensation
expense for the difference between the fair value of the restricted units
and the deemed fair value of the Company's Class A common stock, based on an
assumed initial public offering price of $12.00 per share.
F. Stock Options
In April 1999, the Company agreed to grant options to purchase an aggregate
of 1,076,761 shares of the Company's Class A common stock at an exercise
price of $5.11 to executive officers of the Company, subject to completion
of the Company's contemplated initial public offering. Such options vest
over a three year period from the date of grant and are exercisable for a
period of seven years from the date of grant.
The Company recorded deferred compensation related to the stock options of
approximately $7,500,000 as of September 30, 1999, representing the
difference between the exercise price and the deemed fair market value of
the Company's Class A common stock at such date. Such amount is included as
a reduction of stockholder's equity and is being amortized by charges to
operations over the three year vesting period. Amortization of the deferred
compensation amounted to $2,290,646 for the nine months ended September 30,
1999.
Had compensation cost for the Company's stock options and restricted units
been determined based on fair value at the grant date in accordance with
SFAS No. 123, the Company's pro forma net loss and pro forma diluted net
loss per share would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION)
TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported....................................... $ (178,602) $(2,367,582) $ (7,120,971)
---------- ------------ ------------
---------- ------------ ------------
Pro forma......................................... $ (178,602) $(2,367,582) $ (6,475,211)
---------- ------------ ------------
---------- ------------ ------------
Net loss per share--basic and diluted:
As reported....................................... $ (0.03) $ (0.19) $ (0.37)
---------- ------------ ------------
---------- ------------ ------------
Pro forma......................................... $ (0.03) $ (0.19) $ (0.34)
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
For the purpose of presenting pro forma information required
under SFAS 123, the fair value of the restricted units and
option grants has been estimated on the date of grant using
the Black-
F-16
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12 -- STOCKHOLDERS' EQUITY (CONTINUED)
Scholes option pricing model with a risk-free interest rate of 6%,
a 3-year expected life, zero expected volatility and no
dividends.
13 -- RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses (which commenced in 1997)
consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
-------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Salaries and related expenses........... $ 91,318 $ 947,943 $ 605,735 $ 1,137,619
Consulting and advisory fees............ -- 196,981 -- --
Depreciation and amortization........... 83,057 41,214 46,295 85,451
Travel.................................. -- 146,432 121,609 94,551
Other................................... 119,775 218,955 194,342 239,937
------------ ------------ ------------ ------------
294,150 1,551,525 967,981 1,557,558
Less--reimbursement by Ericsson (see
Note 11B)............................. -- (901,385) (488,951) (760,285
------------ ------------ ------------ ------------
Total research and development
expenses.............................. $ 294,150 $ 650,140 $ 479,030 $ 797,273
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
14 -- INCOME TAXES
A. Tax loss carryforwards
As of December 31, 1998, the Company had net operating loss
carryforwards generated in the U.S. and Israel of approximately
$3,000,000 and $3,300,000, respectively. The Company's U.S. net
operating loss carryforwards will expire at various dates
beginning in 2011 if not utilized. In addition, a portion of
those net operating loss carryforwards could be subject to
limitation due to RSL COM's acquisition of the Company. The
Company's net operating losses generated in Israel may be
carried forward indefinitely.
B. In accordance with SFAS No. 109, the components of deferred
income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
--------- ---------- -------------
<S> <C> <C> <C>
Net operating losses carryforwards................. $900,000 $3,500,000 $ 9,800,000
Less valuation allowance........................... (900,000) (3,500,000) (9,800,000)
--------- ---------- -----------
Net deferred tax assets............................ $ -- $ -- $ --
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
As of December 31, 1997 and 1998 and as of September 30, 1999, a
valuation allowance of $900,000, $3,500,000 and $9,800,000,
respectively, is provided as the realization of the deferred tax
assets are not assured.
F-17
<PAGE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 -- SEGMENT REPORTING, GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS
The Company operates in a single industry segment, IP
communications services, and makes business decisions and allocates
resources accordingly.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1997 1998 1998 1999
---------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues by geographical location:
United States......................................... $ 679,821 $4,922,073 $3,060,431 $4,088,235
Europe................................................ 37,339 528,157 364,501 870,573
Argentina............................................. 284,202 33,432 40,092 113,309
Hong Kong and China................................... 149,232 -- 87,011 688,586
Other................................................. 95,047 154,385 116,830 671,651
---------- ---------- ----------- ----------
Total revenues...................................... $1,245,641 $5,638,047 $3,668,865 $6,432,354
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Revenues from principal customers:
Affiliates............................................ $ 467,842 $3,896,106 $2,484,541 $4,077,278
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Other principal customer.............................. $ 276,000 $ -- $ -- $ --
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1997 1998 1999
-------- ---------- -------------
<S> <C> <C> <C>
Long-lived assets:
United States........................................... $448,424 $4,375,898 $ 1,722,038
Israel.................................................. 250,535 2,077,091 4,385,126
Other................................................... 173,249 1,816,434 3,782,178
-------- ---------- -----------
Total long-lived assets................................. $872,208 $8,269,423 $ 9,889,342
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
F-18
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
5,000,000 SHARES
[LOGO]
Common Stock
------------------------------
PROSPECTUS
, 1999
------------------------------
LEHMAN BROTHERS
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
LAZARD FRERES & CO. LLC
FIDELITY CAPITAL MARKETS
a division of National Financial
Services Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of common stock being registered, all of which will
be paid by the Registrant*:
<TABLE>
<S> <C>
SEC registration fee...................................................................... $ 24,943
NASD filing fee........................................................................... 9,473
Nasdaq National Market listing fee........................................................ 80,000
Transfer agent and registrar fees......................................................... 7,500
Printing and engraving fees............................................................... 250,000
Legal fees and expenses................................................................... 650,000
Blue sky fees and expenses................................................................ 10,000
Accounting fees and expenses.............................................................. 375,000
Miscellaneous............................................................................. 93,084
----------
Total................................................................................... $1,500,000
----------
----------
</TABLE>
- ------------------
* All fees except the Securities and Exchange Commission and NASD filing fees
are estimates.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law ("DGCL"), as amended,
allows a corporation to eliminate the personal liability of directors of a
corporation to the corporation or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit.
Section 145 of the DGCL provides, among other things, that the Company may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the Company) by reason of the fact that the
person is or was a director, officer, agent or employee of the Company or is or
was serving at the Company's request as a director, officer, agent or employee
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgment, fines and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding. The power to indemnify applies (a) if such
person is successful on the merits or otherwise in defense of any action, suit
or proceeding, or (b) if such person acted in good faith and in a manner he
reasonably believed to be in the best interest, or not opposed to the best
interest, of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The power to
indemnify applies to actions brought by or in the right of the Company as well
but only to the extent of defense expenses (including attorneys' fees but
excluding amounts paid in settlement) actually and reasonably incurred and not
to any satisfaction of judgement or settlement of the claim itself, and with the
further limitation that in such actions no indemnification shall be made in the
event of any adjudication of negligence or misconduct in the performance of his
duties to the Company, unless the court believes that in light of all the
circumstances indemnification should apply.
Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for such actions. A
director who was either absent when the unlawful actions were approved or
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 2.48 to 1 stock split prior to completion of the offering.
Share numbers set forth below are presented on a post-split basis.
A predecessor company to the Registrant, Delta Three, Inc., was formed in
June 1996 ("Old Delta Three"). During 1996, Old Delta Three issued a total of
7,535,277 (post-split) shares of its common stock to private investors to
generate initial start-up capital in transactions exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act")
pursuant to Section 4(2) of the Securities Act. Shares for a total consideration
of $164,755 were issued to 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 62,121 $ 25,000
July 15, 1996................................................. 2 31,060 $ 12,500
July 16, 1996................................................. 6 95,666 $ 38,500
August 1, 1996................................................ 7 6,243,160 $ 16,265
August 15, 1996............................................... 3 126,726 $ 51,000
October 15, 1996.............................................. 1 24,848 $ 10,000
November 5, 1996.............................................. 3 951,693 $ 11,490
---------
Total....................................................... $ 164,755
---------
---------
</TABLE>
II-2
<PAGE>
In the first half of 1997, Old Delta Three issued 124,242 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 24,848 shares were purchased for $0.004
per share.
On December 23, 1996, Old Delta Three conducted a $300,000 private
placement of units consisting of convertible notes and warrants to individual
accredited investor subscribers in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. There were
twelve investors in the December placement, each investing $25,000 for which
each investor received one unit consisting of a $25,000 convertible note (at a
conversion price of $0.80 per share and a warrant permitting the purchase of up
to 31,060 shares at an exercise price of $0.8 per share. In addition, one
investor made a short term loan to Old Delta Three for $5,000 for which it
received a warrant to purchase up to 12,424 shares at an exercise price of $0.8
per share. An additional investor was paid a 10% commission and 3% expense
allowance, in the form of convertible notes and warrants, for acting as a
placement agent which such services were valued at $50,000. No general
solicitations were made in connection with this transaction; Old Delta Three
obtained representations from the investors as to their accredited investor
status and the securities were legended to indicate the restricted nature of
them.
Old Delta Three conducted a similar private placement of units in April
1997 consisting of convertible notes and warrants for an aggregate of $520,000
in transactions exempt from the registration requirements of the Securities Act
in reliance on Rule 505 thereof. 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
$1.30 per share) and a warrant permitting the purchase of up to 24,848 shares at
an exercise price of $1.30 per share. No general solicitations were made in
connection with this transaction; Old Delta Three obtained representations from
the investors as to their accredited investor status and the securities were
legended to indicate the restricted nature of them.
In June 1997, under a restricted stock agreement for employees and
directors of Old Delta Three Old Deta Three granted shares to certain employees
of Old Delta Three totaling 491,999 shares of common stock of Old Delta Three,
pursuant to transactions exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof and Rule 701 thereunder. These
grants were to have vested over a two year period. Upon the merger described
below, these grants were converted to restricted units with an exercise price of
$0.004 per share granted by RSL Communications, Ltd. ("RSL COM"), the
Registrant's parent company, under RSL COM's 1997 Stock Incentive Plan, pursuant
to RSL COM's registration statement on Form S-8 related to such plan.
Pursuant to a stock purchase agreement among RSL COM, Old Delta Three and
shareholders of Old Delta Three representing a controlling interest in Old Delta
Three, dated July 23, 1997, Old Delta Three issued to RSL COM 8,101,467 shares
of its common stock. An additional 2,339,168 shares of common stock were issued
into escrow. The shares were issued in a transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. The escrowed shares were released from escrow to RSL COM prior to
completion of the merger described below. The total consideration for all the
shares issued, including the escrowed shares, was $5 million. At or about the
same time as the July 23, 1997 transaction, RSL COM purchased shares from most
of the then existing shareholders of Old Delta Three as well as the units sold
in December 1996 and April 1997 from the then existing unitholders.
Pursuant to an Agreement and Plan of Merger dated March 31, 1998, Old Delta
Three was merged into RSL Acquisition Corp., a wholly-owned subsidiary of RSL
COM, the name of which new entity was changed to Delta Three, Inc. Old Delta
Three ceased to exist upon consummation of the merger. Shareholders of Old Delta
Three, other than RSL COM, received cash and shares of RSL COM in exchange for
their shares of Old Delta Three. As of the consummation of the merger, RSL COM
was the only shareholder of the Registrant and was issued 18,061,156 shares of
common stock. Subsequent to the merger, RSL COM exercised all the warrants and
convertible notes held by it in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof. As of the
date of this registration statement, there are no security holders of the
Registrant other than RSL COM.
II-3
<PAGE>
Pursuant to a stock and warrant purchase agreement, on October 18, 1999,
the Registrant issued to Yahoo! Inc. 125,275 shares of common stock and a
warrant to purchase 125,275 shares of common stock with an exercise price of
$7.932 per share, for $1,000,000, in a transaction exempt from the registration
requirements of the Securities Act, pursuant to Section 4(2) thereof.
Pursuant to a stock and warrant purchase agreement, on October 20, 1999,
the Registrant issued to CNET Investments, Inc. 1,085,943 shares of common stock
and warrants to purchase 466,028 (post-split) shares of common stock at an
exercise price of $19.31 per share for $10,999,994.76, in a transaction exempt
from the registration requirements of the Securities Act, pursuant to
Section 4(2) thereof.
In connection with this offering, shares of common stock outstanding prior
to the offering were converted into shares of Class B common stock. This
conversion was effected without registration under the Securities Act in
reliance on Section 3(a)(9) of the Securities Act on a one-for-one basis.
The Registrant changed its name to its current name, deltathree.com, Inc.,
on May 17, 1999.
II-4
<PAGE>
ITEM 16. EXHIBITS.
A. EXHIBITS
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.+
4.1 Specimen Certificate of Common Stock.*
4.2 Specimen Certificate of Class B Common Stock.*
4.3 Registration Rights Agreement dated September 1, 1999, between RSL Communications, Ltd.
and deltathree.com, Inc.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated September 3, 1999.+
10.2 Credit Facility dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.+
10.3 Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4 Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.
10.5 Form of deltathree.com, Inc. 1999 Performance Incentive Plan.
10.6 Form of deltathree.com, Inc. 1999 Directors' Plan.+
10.7 Employment Agreement effective as of April 1, 1999, between Amos Sela and deltathree.com,
Inc.+
10.8 Employment Agreement effective as of April 1, 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.+
10.9 Employment Agreement effective as of April 1, 1999, between Noam Bardin and
deltathree.com, Inc.
10.10 Employment Agreement effective as of April 1, 1999, between Shimmy Zimels and
deltathree.com, Inc.
10.11 Employment Agreement effective as of April 1, 1999, between Elie C. Wurtman and
deltathree.com, Inc.
10.12 Employment Agreement effective as of April 1, 1999, between Jacob A. Davidson and
deltathree.com, Inc.
10.13 Investor Rights Agreement dated as of September 29, 1999 between Yahoo! Inc. and
deltathree.com, Inc.+
10.14 Form of warrant issued to Yahoo! Inc on October 18, 1999.+
10.15 Management Agreement dated as of November 1, 1999 between deltathree.com, Inc. and RSL
Communications, Ltd.
10.16 Amendment to Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated November 1, 1999.
10.17 Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.
10.18 Form of warrant issued to CNET Investments, Inc. on October 20, 1999.
10.19 Co-Branding and Services Agreement effective as of October 1, 1999, between RSL COM
PrimeCall, Inc. and deltathree.com, Inc.
10.20 Intercompany Compliance Agreement dated as of November 1, 1999, between RSL
Communications, Ltd, RSL Communications PLC and deltathree.com, Inc.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ------------------------------------------------------------------------------------------
<S> <C>
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.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) It will provide to the underwriters at the closing specified in
the underwriting agreements certificates in such denominations and
registered in such amount as required by the underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
New York on the 2nd day of November, 1999.
DELTATHREE.COM, INC.
By: /s/ Mark J. Hirschhorn
----------------------
Mark J. Hirschhorn
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------------- --------------------
<S> <C> <C>
* Chief Executive Officer, President November 2, 1999
- ------------------------------------------ and Director (Principal Executive
Amos Sela Officer)
/s/ Mark J. Hirschhorn Chief Financial Officer (Principal November 2, 1999
- ------------------------------------------ Accounting and Financial Officer)
Mark J. Hirschhorn
* Co-Chairman of the Company November 2, 1999
- ------------------------------------------ and Chairman of the Board of Directors
Elie C. Wurtman
* Co-Chairman of the Company November 2, 1999
- ------------------------------------------
Jacob A. Davidson
* Director November 2, 1999
- ------------------------------------------
Itzhak Fisher
* Director November 2, 1999
- ------------------------------------------
Nir Tarlovsky
* Director November 2, 1999
- ------------------------------------------
Donald R. Shassian
* Director November 2, 1999
- ------------------------------------------
Jacob Z. Schuster
* Director November 2, 1999
- ------------------------------------------
Avery S. Fischer
* By: /s/ Mark J. Hirschhorn Attorney-In-Fact November 2, 1999
----------------------
Mark J. Hirschhorn
</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/ Robert Grusky Director November 2, 1999
- ------------------------------------------
Robert Grusky
/s/ Yadin Kaufmann Director November 2, 1999
- ------------------------------------------
Yadin Kaufmann
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2 Form of Amended and Restated By-laws of deltathree.com, Inc.+
4.1 Specimen Certificate of Common Stock.*
4.2 Specimen Certificate of Class B Common Stock.*
4.3 Registration Rights Agreement dated September 1, 1999, between RSL Communications, Ltd.
and deltathree.com, Inc.+
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
10.1 Amended and Restated Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc., dated September 3, 1999.+
10.2 Credit Facility dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.+
10.3 Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4 Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.
10.5 Form of deltathree.com, Inc. 1999 Performance Incentive Plan.
10.6 Form of deltathree.com, Inc. 1999 Directors' Plan.+
10.7 Employment Agreement effective as of April 1, 1999, between Amos Sela and deltathree.com,
Inc.+
10.8 Employment Agreement effective as of April 1, 1999, between Mark J. Hirschhorn and
deltathree.com, Inc.+
10.9 Employment Agreement effective as of April 1, 1999, between Noam Bardin and
deltathree.com, Inc.
10.10 Employment Agreement effective as of April 1, 1999, between Shimmy Zimels and
deltathree.com, Inc.
10.11 Employment Agreement effective as of April 1, 1999, between Elie C. Wurtman and
deltathree.com, Inc.
10.12 Employment Agreement effective as of April 1, 1999, between Jacob A. Davidson and
deltathree.com, Inc.
10.13 Investor Rights Agreement dated as of September 29, 1999 between Yahoo! Inc. and
deltathree.com, Inc.+
10.14 Form of warrant issued to Yahoo! Inc. on October 18, 1999.+
10.15 Management Agreement dated as of November 1, 1999 between deltathree.com, Inc. and RSL
Communications, Ltd.
10.16 Amendment to Services Agreement by and between RSL Communications, Ltd. and
deltathree.com, Inc. dated November 1, 1999.
10.17 Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.
10.18 Form of warrant issued to CNET Investments, Inc. on October 20, 1999.
10.19 Co-Branding and Services Agreement effective as of October 1, 1999, between RSL COM
PrimeCall, Inc. and deltathree.com, Inc.
10.20 Intercompany Compliance Agreement dated as of November 1, 1999, between RSL
Communications, Ltd, RSL Communications PLC and deltathree.com, Inc.
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>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
------------------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
------------------------------------------------------------
DELTATHREE.COM, INC. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the "GCL"),
does hereby certify as follows:
(1) The name of the Corporation is deltathree.com, Inc. The
Corporation was originally incorporated under the name RSL Acquisition Corp. The
original certificate of incorporation of the Corporation was filed with the
office of the Secretary of State of the State of Delaware on January 27, 1998.
Such certificate of incorporation was amended on May 17, 1999 and was further
amended on September 24, 1999.
(2) This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation (the "Board of Directors")
and by the stockholders of the Corporation in accordance with Sections 228, 242
and 245 of the GCL.
(3) This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
(4) Effective upon the filing of this Restated Certificate of
Incorporation with the Secretary of State, each share of Class A Common Stock
outstanding shall be reclassified on a basis of 2.48483594491554 shares of Class
A Common Stock for each share of Class A Common Stock outstanding and,
accordingly, each share of Class A Common Stock outstanding shall, without
further action by the Corporation or any stockholder, be deemed to represent
2.48483594491554 shares of Common Stock, provided that all fractional shares
resulting therefrom shall be eliminated and each holder thereof shall be
entitled to receive a cash payment equal to such holder's fraction of a share of
Common Stock
<PAGE>
multiplied by the per share fair market value, as determined by the Board of
Directors.
(5) Effective upon the filing of this Restated Certificate of
Incorporation with the Secretary of State each share of Class B Common Stock
outstanding shall be reclassified on a basis of 2.48483594491554 shares of Class
B Common Stock for each share of Class B Common Stock outstanding and,
accordingly, each share of Class B Common Stock out standing shall, without
further action by the Corporation or any stockholder, be deemed to represent
2.48483594491554 shares of Class B Common Stock, provided that all fractional
shares resulting therefrom shall be eliminated and each holder thereof shall be
entitled to receive a cash payment equal to such holder's fraction of a share of
Class B Common Stock multiplied by the per share fair market value, as
determined by the Board of Directors.
(6) The text of the Certificate of Incorporation is amended and
restated in its entirety as follows:
FIRST: The name of the Corporation is deltathree.com, Inc. (the
"Corporation").
SECOND: The address of the registered office of the Corporation is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle, State of Delaware 19801. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of stock
which the Corporation shall have authority to issue is 425,000,000 shares of
capital stock, consisting of (i) 200,000,000 shares of Class A common stock, par
value $0.001 per share (the "Class A Common Stock"), (ii) 200,000,000 shares of
Class B common stock, par value $0.001 per share (the "Class B Common Stock")
and (iii) 25,000,000 shares of preferred stock, par value $0.001 per share (the
"Preferred Stock"). The Class A Common Stock and the Class B Common Stock are
hereinafter referred to collectively as the "Common Stock."
2
<PAGE>
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, of each class of the Common Stock
are as follows:
(1) Voting Rights. Subject to the rights of the holders of
Preferred Stock, and subject to any other provisions of this Amended and
Restated Certificate of Incorporation, as it may be amended from time to time,
the shares of Common Stock shall have the following voting rights: (i) each
share of Class A Common Stock shall entitle the holder thereof to one (1) vote
upon all matters upon which stockholders shall have the right to vote; and (ii)
each share of Class B Common Stock shall entitle the holder thereof to ten (10)
votes upon all matters which stockholders shall have the right to vote. The
holders of Common Stock are not entitled to cumulative voting rights.
(2) Dividends; Stock Splits. Subject to the rights of the
holders of Preferred Stock, and subject to any other provisions of this Amended
and Restated Certificate of Incorporation, as it may be amended from time to
time, holders of shares of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Corporation
when, as and if declared thereon by the Board of Directors from time to time out
of assets or funds of the Corporation legally available therefor. Holders of
Class A 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. No dividend or other
distribution may be declared or paid on any share of Class A Common Stock unless
a like dividend or other distribution is simultaneously declared or paid, as the
case may be, on each share of Class B Common Stock, nor shall any dividend or
other distribution be declared or paid on any share of Class B Common Stock
unless a like dividend or other distribution is simultaneously declared or paid,
as the case may be, on each share of Class A Common Stock, in each case without
preference or priority of any kind; provided, however, that all dividends and
distributions on the Class A Common Stock and Class B Common Stock payable in
shares of Common Stock of the Corporation shall be made in shares of Class A
Common Stock and Class B Common Stock, respectively. In no event will shares of
either class of Common Stock be split, divided or combined unless the
outstanding shares of the other class of
3
<PAGE>
Common Stock shall be proportionately split, divided or combined.
(3) Liquidation, Dissolution, etc. In the event of any
liquidation, dissolution or winding up (either voluntary or involuntary) of the
Corporation, the holders of shares of Class A and Class B Common Stock shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution after payments to creditors and to the holders of any Preferred
Stock of the Corporation that may at the time be out standing, ratably in
proportion to the number of shares of Common Stock held by them, respectively.
In any such distribution, shares of Class A Common Stock and Class B Common
Stock shall be treated equally on a per share basis.
(4) Merger, etc. In the event of a merger or consolidation of
the Corporation with or into another entity (whether or not the Corporation is
the surviving entity), the holders of each share of Class A Common Stock and
Class B Common Stock shall be entitled to receive the same per share
consideration as the per share consideration, if any, received by the holders of
each share of the other class of Common Stock, except that if the consideration
includes voting securities (or the right to acquire voting securities, or
securities exchangeable for, or convertible into, voting securities), holders
of Class B Common Stock shall receive consideration entitling them to ten times
the number of votes per share as the consideration being received by holders of
the Class A Common Stock.
(5) Conversion of Class B Common Stock.
(i) Voluntary Conversion. Each share of Class B Common
Stock shall be convertible, at the option of its record holder, into one validly
issued, fully paid and non-assessable share of Class A Common Stock at any time.
(ii) Automatic Conversion. In the event of any transfer
of any share of Class B Common Stock to a person or entity that (i) is not a
permitted transferee or (ii) is a permitted transferee but ceases to be a
permitted transferee subsequent to such transfer, such share of Class B Common
Stock shall automatically, without any further action, convert into one validly
issued, fully paid and non-assessable share of Class A Common Stock. Permitted
transferees shall include (A) RSL Communications, Ltd. ("RSL COM"), (B) a
majority-owned subsidiary of RSL COM, (C) a successor of RSL COM
4
<PAGE>
following a merger, consolidation or reorganization of RSL COM whereby RSL COM
is not the surviving entity or (D) Ronald S. Lauder or members of his family or
a trust established by Ronald S. Lauder for his family members, or entities
controlled by or under common control with Ronald S. Lauder. Majority-owned
subsidiary for these purposes shall mean an entity, more than 50% of the voting
shares of which are owned either directly or indirectly through one or more
intermediaries, by RSL COM.
(6) No Preemptive or Subscription Rights. No holder of shares
of Common Stock shall be entitled to preemptive or subscription rights.
(7) Power to Sell and Purchase Shares. Subject to the
requirements of applicable law, the Corporation shall have the power to issue
and sell all or any part of any shares of any class of stock herein or hereafter
authorized to such persons, and for such consideration, as the Board of
Directors shall from time to time, in its discretion, determine, whether or not
greater consideration could be received upon the issue or sale of the same
number of shares of another class, and as otherwise permitted by law. Subject
to the requirements of applicable law, the Corporation shall have the power to
purchase any shares of any class of stock herein or hereafter authorized from
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not less consideration
could be paid upon the purchase of the same number of shares of another class,
and as otherwise permitted by law.
(c) Preferred Stock. The Board of Directors is hereby expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to
5
<PAGE>
receive dividends (which may be cumulative or non-cumulative) at such rates, on
such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as from time
to time fixed by the Board of Directors, and such number shall never be less
than three nor more than thirteen. Election of directors need not be by written
ballot unless the By-Laws so provide.
(c) A director shall hold office until the annual meeting for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(d) Any director may be elected by a majority of the Board of
Directors to fill a vacancy. If the vacancy results from an increase in the
number of directors, such director shall hold office for a term that shall
coincide with the remaining term of directors then in office. Any director
elected to fill a vacancy not resulting from an increase in the number of
directors shall have the same remaining term as that of his predecessor.
Subject to the rights, if any, of the holders of
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<PAGE>
shares of Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time, with or without cause by the
affirmative vote of the holders of at least a majority of the voting power of
the Corporation's then outstanding capital stock entitled to vote generally in
the election of directors. Notwithstanding the foregoing, whenever the holders
of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Amended and Restated Certificate of Incorporation
applicable thereto.
(e) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Amended and Restated Certificate of Incorporation, and any By-Laws adopted
by the stockholders; provided, however, that no By-Laws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such By-Laws had not been adopted.
SIXTH: No director shall be personally liable to the Corporation or any of
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. If the GCL is amended hereafter to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent authorized
by the GCL, as so amended. Any repeal or modification of this Article SIXTH by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SEVENTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or
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<PAGE>
permitted by law, as now or hereafter in effect, and such right to
indemnification shall continue as to a person who has ceased to be a director or
officer of the Corporation and shall inure to the benefit of his or her heirs,
executors and personal and legal representatives; provided, however, that,
except for proceedings to enforce rights to indemnification, the Corporation
shall not be obligated to indemnify any director or officer (or his or her
heirs, executors or personal or legal representatives) in connection with a
proceeding (or part thereof) initiated by such person unless such proceeding (or
part thereof) was authorized or consented to by the Board of Directors. The
right to indemnification conferred by this Article SEVENTH shall include the
right to be paid by the Corporation the expenses incurred in defending or
otherwise participating in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by
the Board of Directors, provide rights to indemnification and to the advancement
of expenses to employees and agents of the Corporation similar to those
conferred in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and Restated
Certificate of Incorporation, the By-Laws of the Corporation, any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer of
the Corporation existing at the time of such repeal or modification with
respect to any acts or omissions occurring prior to such repeal or modification.
EIGHTH: The Corporation hereby elects not to be governed by Section 203 of
the GCL pursuant to Section 203(b)(3) therein.
NINTH: Meetings of stockholders may be held within or without the State of
Delaware, as the By-Laws may
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<PAGE>
provide. The books of the Corporation may be kept (subject to any provision
contained in the GCL) outside the State of Delaware at such place or places as
may be designated from time to time by the Board of Directors or in the By-Laws
of the Corporation.
TENTH: In furtherance and not in limitation of the powers conferred upon
it by the laws of the State of Delaware, the Board of Directors or the
stockholders shall have the power to adopt, amend, alter or repeal the
Corporation's By-Laws. The affirmative vote of at least a majority of the entire
Board of Directors or a majority of the voting power of the Corporation's then
outstanding capital stock entitled to vote shall be required to adopt, amend,
alter or repeal the Corporation's By-Laws.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Amended and
Restated Certificate of Incorporation, the Corporation's By-Laws or the GCL,
and all rights herein conferred upon stockholders are granted subject to such
reservation.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed on its behalf this _______
day of _____________, 1999.
deltathree.com, Inc.
By:___________________________________
Name:
Title:
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Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
November 1, 1999
deltathree.com, Inc.
430 Park Avenue, Suite 500
New York, NY 10022
Re: deltathree.com, Inc.
Registration Statement on Form S-1
(File No. 333-86503)
Ladies and Gentlemen:
We have acted as counsel to deltathree.com, Inc., a Delaware corporation
(the "Company"), in relation to the initial public offering by the Company of up
to 5,000,000 shares (including 750,000 shares subject to an over-allotment
option) (the "Shares") of the Company's common stock, par value $0.001 per share
(the "Common Stock").
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-86503) as filed with the Securities and
Exchange Commission (the "Commission") on September 3, 1999 under the Act; (ii)
Amendment No. 1 to the Registration Statement as filed with the Commission on
October 19, 1999 under the Act; (iii) Amendment No. 2 to the Registration State-
ment as filed with the Commission on November 1, 1999 under the Act (such
Registration Statement, as so amended, being hereinafter referred to as the
"Regis-
<PAGE>
deltathree.com, Inc.
November 1, 1999
Page 2
tration Statement"); (iv) the form of Underwriting Agreement (the "Underwriting
Agreement") proposed to be entered into by and among the Company, as issuer, and
Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, U.S.
Bancorp Piper Jaffray Inc., Lazard Freres & Co. LLC, and Fidelity Capital
Markets, a division of National Services Corporation, as representatives of the
several underwriters named therein (the "Underwriters") to be filed as an
exhibit to the Registration Statement; (v) a specimen certificate representing
the Common Stock; (vi) the Amended and Restated Certificate of Incorporation of
the Company, as currently in effect; (vii) the Amended and Restated By-Laws of
the Company, as currently in effect; (viii) the form of Amended and Restated
Certificate of Incorporation of the Company intended to be filed to reflect the
Company's proposed 2.48-for-1 stock split and (viii) certain resolutions of the
Board of Directors of the Company, dated September 1, 1999 and September 23,
1999, and drafts of certain resolutions (the "Draft Resolutions") of the Pricing
Committee of the Board of Directors of the Company (the "Pricing Committee"),
relating to the issuance and sale of the Shares and related matters. We also
have examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and records as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of executed documents, we have assumed that the parties thereto,
other than the Company, had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof on such
parties. As to any facts material to the opinions expressed herein which we have
not independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
<PAGE>
deltathree.com, Inc.
November 1, 1999
Page 3
Members of our firm are admitted to the bar in the State of New York and we
do not express any opinion as to the laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, and we do not express any
opinion as to the effect of any other laws on the opinion stated herein.
Based upon and subject to the foregoing, we are of the opinion that when
(i) the Registration Statement becomes effective under the Act; (ii) the Draft
Resolutions have been adopted by the Pricing Committee; (iii) the price at which
the Shares are to be sold to the Underwriters pursuant to the Underwriting
Agreement and other matters relating to the issuance and sale of the Shares have
been approved by the Pricing Committee in accordance with the Draft Resolutions;
(iv) the Underwriting Agreement has been duly executed and delivered; and (v)
certificates representing the Shares in the form of the specimen certificate
examined by us have been manually signed by an authorized officer of the
transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar, and have been delivered to and paid for by the
Underwriters at a price per share not less than the per share par value of the
Common Stock as contemplated by the Underwriting Agreement, the issuance and
sale of the Shares will have been duly authorized, and the Shares will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
us under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher
& Flom LLP
<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.
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<PAGE>
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Committee" shall mean the Compensation Committee of the Board, or such
other Board committee as may be designated by the Board to administer the Plan.
"Common Stock" shall mean the Class A common shares, par value $0.001
per share, of the Company.
"Company" shall mean Deltathree.com, Inc., a Delaware corporation, and
any successor thereto.
"Deferred Annual Amount" shall mean, with respect to any year, the
amount of compensation that a Participant elects to defer in exchange for an
award of Elective Units as determined pursuant to Section 9 hereof.
"Disability" shall mean long-term disability as defined under the terms
of the Company's applicable long-term disability plans or policies.
"Disinterested Director" shall mean a director of the Company who is
both a "Non-Employee Director" within the meaning of Rule 16b-3 under the
Exchange Act and an "outside director" within the meaning of Section 162(m) of
the Code.
"Dividend Equivalent" shall mean a right granted to a Participant to
receive cash or Common Stock equal in value to dividends paid with respect to
Common Stock.
"Early Retirement" shall mean retirement at or after the earliest age
at which the Participant may retire and receive an immediate, but actuarially
reduced, retirement benefit under any defined benefit pension plan maintained
by the Company or any of its Subsidiaries in which such Participant
participates, or, in the absence of any such applicable plan, as determined by
the Committee.
"Effective Date" shall mean the date on which the Plan is approved by
the shareholders of the Company.
"Elective Units" shall mean a contractual right to receive a share of
Common Stock at the time and subject to the conditions set forth in Section 9
hereof, in respect of a Participant's Deferred Annual Amount.
2
<PAGE>
"Eligible Employee" shall mean each Executive Officer and each other
employee or consultant of the Company or its Subsidiaries, but shall not include
Directors who are not employees of any such entity.
"Employment" shall mean, for purposes of Sections 5(e), 7(b) and 8(b),
continuous and regular salaried employment with the Company or a Subsidiary,
which shall include (unless the Committee shall otherwise determine) any period
of vacation, any approved leave of absence or any salary continuation or
severance pay period and, at the discretion of the Committee, may include
service with any former Subsidiary of the Company.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Executive Officer" shall mean those persons who are officers of the
Company within the meaning of Rule 16a-1(f) of the Exchange Act.
"Fair Market Value" shall mean, on any date, the closing price of a
Share as reported on the National Association of Securities Dealers Automated
Quotation/National Market System ("NASDAQ/NMS") (or on such other recognized
market or quotation system on which the trading prices of the Share are traded
or quoted at the relevant time). Notwithstanding the foregoing, (i) in the case
of any Award made on the date of the initial public offering of the Company's
Common Stock, "Fair Market Value" on such date shall be the price at which the
Company's Common Stock is sold to the public in such initial public offering and
(ii) in the case of any Award made prior to the date of the initial public
offering of the Company's Common Stock, "Fair Market Value" on such date shall
be as determined in good faith by the Board.
"Incentive Stock" shall mean any Award of Common Stock granted under
Section 8 which becomes vested and nonforfeitable upon the attainment, in whole
or in part, of performance objectives determined by the Committee.
"Incentive Stock Option" shall mean an Option which is intended to meet
the requirements of Section 422 of the Code.
"Incentive Unit" shall mean any Award of a contractual right granted
under Section 8 to receive Common Stock (or, at the discretion of the Committee,
cash based on the Fair Market Value of the Common Stock) which becomes vested
and
3
<PAGE>
nonforfeitable upon the attainment, in whole or in part, of performance
objectives determined by the Committee.
"Nonstatutory Stock Option" shall mean an Option which is not intended
to be an Incentive Stock Option.
"Normal Retirement" shall mean retirement at or after the earliest age
at which the Participant may retire and receive a retirement benefit without an
actuarial reduction for early commencement of benefits under any defined benefit
pension plan maintained by the Company or any of its Subsidiaries in which such
Participant participates, or, in the absence of any such applicable plan, as
determined by the Committee.
"Option" shall mean the right to purchase the number of shares of
Common Stock specified by the Committee, at a price and for the term fixed by
the Committee in accordance with the Plan and subject to any other limitations
and restrictions as this Plan and the Committee shall impose.
"Participant" shall mean an Eligible Employee who is selected by the
Committee to receive an Award under the Plan.
"Plan" shall mean the Deltathree.com, Inc., 1999 Stock Incentive Plan,
described herein, and as may be amended from time to time.
"Reload Option" shall have the meaning ascribed thereto in Section
5(f).
"Restricted Period" shall mean the period during which a grant of
Incentive Stock, Restricted Stock, Incentive Units or Restricted Units is
subject to forfeiture.
"Restricted Stock" shall mean any Award of Common Stock granted under
Section 7 which becomes vested and nonforfeitable, in whole or in part, upon the
completion of such period of service as shall be determined by the Committee.
"Restricted Unit" shall mean any Award of a contractual right granted
under Section 7 to receive Common Stock (or, at the discretion of the Committee,
cash based on the Fair Market Value of the Common Stock) which becomes vested
and nonforfeitable, in whole or in part, upon the completion of such period of
service as shall be determined by the Committee.
4
<PAGE>
"Share" shall mean a share of Common Stock.
"Stock Appreciation Right" shall mean a contractual right granted under
Section 6 to receive cash, Common Stock or a combination thereof.
"Subsidiary" shall mean any corporation of which the Company possesses
directly or indirectly fifty percent (50%) or more of the total combined voting
power of all classes of stock of such corporation and any other business
organization, regardless of form, in which the Company possesses directly or
indirectly fifty percent (50%) or more of the total combined equity interests in
such organization.
"Supplemental Units" shall mean an award made pursuant to Section 9
with respect to a number of shares of Common Stock in excess of the number of
shares of Common Stock corresponding to the Participant's Elective Units.
3. Administration
The Plan shall be administered by the Committee which shall consist of
at least two Directors of the Company chosen by the Board each of whom is a
Disinterested Director. The Committee shall have the responsibility of
construing and interpreting the Plan and of establishing and amending such rules
and regulations as it deems necessary or desirable for the proper administration
of the Plan. Any decision or action taken or to be taken by the Committee,
arising out of or in connection with the construction, administration,
interpretation and effect of the Plan and of its rules and regulations, shall,
to the maximum extent permitted by applicable law, be within its absolute
discretion (except as otherwise specifically provided herein) and shall be
conclusive and binding upon all Participants and any person claiming under or
through any Participant. No member of the Board or the Committee shall be liable
for any action taken or determination made in good faith with respect to the
Plan or any Award granted hereunder.
4. Maximum Amount of Shares Available for Awards
(a) Maximum Number of Shares. The maximum number of shares of Common
Stock in respect of which Awards may be made under the Plan shall be 4,000,000
shares of Common Stock of the Company. Without limiting the generality of the
foregoing, whenever shares are received by the Company in connection with the
exercise of or payment for any Award
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<PAGE>
granted under the Plan only the net number of shares actually issued shall be
counted against the foregoing limit.
(b) Shares Available for Issuance. Shares of Common Stock may be made
available from the authorized but unissued shares of the Company or from Shares
held in the Company's treasury and not reserved for some other purpose. In
addition, if any Award in respect of Shares is canceled or forfeited for any
reason without delivery of shares of Common Stock, the shares subject to such
Award shall thereafter again be available for award pursuant to the Plan.
(c) Adjustments Upon Certain Events. In the event of any Share dividend
or Share split, recapitalization (including, without limitation, the payment of
an extraordinary dividend), merger, consolidation, combination, spin-off,
distribution of assets to shareholders, exchange of shares, or other similar
corporate change, the aggregate number of Shares available for Options under
Section 4(a) or subject to outstanding Options and the respective prices
applicable to outstanding Options shall be appropriately adjusted.
(d) No Adjustment If Value Received. Except as hereinbefore expressly
provided, the issuance by the Company of shares of stock of any class or
securities convertible into shares of stock of any class, for cash, property,
labor or services, upon direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or other securities, and in any
case whether or not for fair value, shall not affect, and no adjustment by
reason thereof shall be made with respect to the number of Shares subject to
Options to be awarded to an Eligible Employee pursuant to Section 5.
5. Stock Options
(a) Grant. Subject to the provisions of the Plan, the Committee shall
have the authority to grant Options to Eligible Employees and to determine (i)
the number of shares to be covered by each Option, (ii) the exercise price
therefor and (iii) the conditions and limitations applicable to the exercise of
the Option. Notwithstanding the foregoing, in no event shall the Committee
grant any Participant Options in any single calendar year with respect to more
than 600,000 shares of Common Stock authorized for issuance under the Plan, as
such number may be adjusted pursuant to Section 4(c). The Committee shall have
the authority to grant Incentive Stock Options or Nonstatutory Stock Options. In
the case
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
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<PAGE>
otherwise at or after the date of grant, stock certificates evidencing any
shares of Restricted Stock so granted shall be held in the custody of the
Secretary of the Company until the Restricted Period lapses, and, as a condition
to the grant of any Award of shares of Restricted Stock, the Participant shall
have delivered to the Secretary of the Company a certificate, endorsed in blank,
relating to the shares of Common Stock covered by such Award.
(b) Termination of Employment. Unless the Committee otherwise
determines at or after grant, the rights of a Participant with respect to an
award of Restricted Stock or Restricted Units outstanding at the time of the
Participant's termination of Employment shall be determined under this Section
7(b). In the event that a Participant's Employment terminates due to the
Participant's (i) death, (ii) Disability, (iii) Early Retirement with the
consent of the Committee or (iv) Normal Retirement, any award of Restricted
Stock or Restricted Units shall become vested and nonforfeitable as to that
number of shares which is equal to the number of shares of Common Stock subject
to such Award times a fraction, the numerator of which is the number of days
actually worked during the Restricted Period (or, in the case of an Award which
has previously vested in part (an "Installment Award"), the number of days
worked since the last vesting date) and the denominator of which is the total
number of days during the Restricted Period (or, in the case of an Installment
Award, the number of days between the last vesting date and the end of the
Restricted Period). Unless the Committee otherwise determines, any portion of
any Restricted Stock or Restricted Unit Award that has not become nonforfeitable
at the date of a Participant's termination of Employment shall be forfeited as
of such date.
(c) Delivery of Shares. Upon the expiration or termination of the
Restricted Period and the satisfaction (as determined by the Committee) of any
other conditions determined by the Committee, the restrictions applicable to the
Restricted Stock or Restricted Units shall lapse and a stock certificate for the
number of shares of Common Stock with respect to which the restrictions have
lapsed shall be delivered, free of all such restrictions, except any that may
be imposed by law, to the Participant or the Participant's beneficiary or
estate, as the case may be. No payment will be required to be made by the
Participant upon the delivery of such shares of Common Stock and/or cash, except
as otherwise provided in Section 11(a) of the Plan. At or after the date of
grant, the Committee may accelerate the vesting of any award of Restricted Stock
or Restricted Units or waive any conditions to the vesting of any such award.
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.
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<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 Class A 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
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<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.
3
<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,
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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
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<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.
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(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-
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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 1,350,000 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
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<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.
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<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
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<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:
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>
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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<PAGE>
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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<PAGE>
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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<PAGE>
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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Execution Copy
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 Noam Bardin ("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 Vice President of
Technology and Chief Technology Officer 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 Chief
Executive Officer (the "CEO") of the Company. 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
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means any entity that controls, is controlled by or is under common control with
the Company. Executive shall report to the CEO.
(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$170,000; 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
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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 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 seven-year 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.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible to
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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 remuneration 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.
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
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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.
(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.
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(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.
"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
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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.
"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
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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, 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
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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 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
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(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
(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
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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
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continue, modify or vacate the terms of any injunctive relief ordered by the
court.
(h) Notwithstanding the terms of this agreement that provide that New York
law shall govern, the arbitration and the provisions in this agreement dealing
with arbitration shall be governed exclusively by the United States (Federal)
Arbitration Act, 9 U.S.C. Sections 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.
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(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 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:
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19 Kfar Etzion St.
Jerusalem, Israel
93392
if to the Company, to the Company at
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
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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.
(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.
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Date:_____________ _________________________
Executive
deltathree.com, Inc.
Date:_____________ BY:______________________
Title:___________________
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Execution Copy
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 Shimmy Zimels ("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 Vice President of
Operations 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 Chief Executive Officer (the "CEO") of
the Company. The duties of the Executive shall include serving as an officer or
director or otherwise performing services for any "Affiliate" of the
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Company as requested by the Company. An "Affiliate" of the Company means any
entity that controls, is controlled by or is under common control with the
Company. Executive shall report to the CEO.
(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 fochevery 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$170,000; 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.
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(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 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 seven-year 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.
4. Benefits, Perquisites and Expenses.
(a) Benefits. During the Employment Period, Executive shall be eligible to
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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 remuneration 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.
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
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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.
(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.
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(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.
"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
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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.
"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
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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, 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
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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 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
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(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
(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
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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
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continue, modify or vacate the terms of any injunctive relief ordered by the
court.
(h) Notwithstanding the terms of this agreement that provide that New York
law shall govern, the arbitration and the provisions in this agreement dealing
with arbitration shall be governed exclusively by the 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.
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(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 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:
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10 Bar Kochba St.
Jerusalem
Israel 97875
if to the Company, to the Company at
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
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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.
(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.
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Date:_____________ ________________________________________
Executive
deltathree.com, Inc.
Date:_____________ BY:_____________________________________
Title:__________________________________
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Execution Copy
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 Elie Wurtman ("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 Chairman of the Board of
Directors (the "Chairman") and Co-Chairman of the Company and shall perform such
duties and services consistent with such position and such other duties and
services as set forth on Schedule A attached hereto. Executive shall also
perform such other duties and services as may be assigned to him from time to
time by the Company's Board of Directors. Executive shall be the Chairman of the
Company's Executive Committee, or other similar committee, designated by the
Board of
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Directors of the Company. 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 under common control with the
Company. Executive shall report to the Board of Directors of the Company.
(b) Full-time and Part-time employment. Executive shall (i) until the
first year anniversary of the Commencement Date (the "First Anniversary"),
devote his full business time to the services required of him hereunder, and
(ii) from the first year anniversary of the Commencement Date until the end of
the Employment Period (the "Remainder Term"), devote 50% of his business time to
the services required of him hereunder; in either case, 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.
Subject to the terms of this Agreement, if after the First Anniversary, but not
at any time prior to such time, Executive may hold management positions in any
other company. During the Employment Period, 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 or competes with the Company, and in such event, Executive shall
receive five days' written notice to disengage from such business activity.
Executive may serve on the Board of Directors of other corporations which do not
compete with the Company. 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. The Company shall pay Executive (i) until the First
Anniversary, a base salary at the annual rate of US$180,000 and (ii) during the
Remainder Term, a base salary an the annual rate of US$90,000, provided that,
Executive's annual base salary during the Remainder Term 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
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same may be decreased during the Remainder Term, or 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 "Performance Plan"); provided, however, that beginning in year 2000
(as adjusted for the difference in Executive's salary for the first quarter of
the year 2000) until the end of the Term, the base salary for calculating the
bonus, if any, under the Performance Plan for each such year shall be the base
salary then in effect. Under the Performance Plan, the portion of the bonus
relating to Executive's individual performance shall be based solely on
Executives performance in business development and public relations. All of the
performance criteria for Executive's bonus shall be determined and set annually
by the Compensation Committee after receipt of the proposed annual budget for
the coming year from management and must be approved by the Board of Directors.
Any discretionary portion of the bonus shall be determined by the Compensation
Committee. If the Company shall 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 66,667 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 Number Exercisable
---------------------- ------------------
First Anniversary of the Commencement Date 33,334
Second Anniversary of the Commencement Date 16,667
Third Anniversary of the Commencement Date 16,666
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
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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.
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. Executive shall be entitled to, until the First
Anniversary, five weeks' paid vacation annually, and during the Remainder Term,
two and one-half weeks paid vacation, 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 remuneration 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
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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.
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
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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.
(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
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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.
"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 (iv) a willful and material breach of Executive's duties or
obligations under this Agreement, including, without limitation, Executive's
failure to devote (a) full business time to the Company prior to the First
Anniversary or (b) 50% of his business time during the Remainder Term, in
accordance with Section 2(b) of this Agreement. Notwithstanding the foregoing, a
termination shall not be treated as a
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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.
"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; (iii) a material breach of this
Agreement by the Company; (iv) relocation of Executive's principal place of
business to a location outside of Israel. 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
Performance 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
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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, 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, if such 12 month period begins
(x) during the first two years of the Term, his initial Base Salary or (y)
during the third year of the Term, the base salary at such time; 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
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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 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
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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
(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 (if ownership is greater than 5% of the equity of such
entity), 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-
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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.
(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.
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(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.
(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
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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 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
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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:
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if to the Executive, to the Executive at:
c/o Robert Finkel, Esq.
25 Holly Lane
#1C
Chestnut Hill, MA 02467
if to the Company, to the Company at
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.
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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.
(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
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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.
__________________________
Executive
deltathree.com, Inc.
BY:______________________
Title:_____________________
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Schedule A
Additional Duties of Executive
Executive shall have the following additional responsibilities:
(a) Business Development: Executive shall work closely with the executive
responsible for business development and the CEO to identify, qualify,
analyze and close strategic acquisitions and strategic alliances and
partnerships for the Company. All such acquisitions, alliances or
strategic partnerships shall always be subject to the review and approval
of the CEO and, as applicable, the Board of Directors.
Executive shall be invited to attend and contribute at all meetings of any
planned Business Development Review & Qualification Committee comprised of
the CEO, the CFO, the executive responsible for business development and
the executive responsible for sales & marketing.
(b) Promotion & Positioning: Executive shall have an active role, together
with the CEO, in the promotion and positioning of the Company as a leading
provider of web communications services; provided, that Executive
responsible for sales & marketing has direct responsibility for promotion
and advertisement and the CFO has direct responsibility for relations with
the investment community and all of the Company's analysts. Executive
shall be a "Corporate Spokesman" (on a non-exclusive basis, sharing this
role with the CEO and/or the CEO's designees).
Executive shall be invited to attend and contribute at all meetings of any
planned Promotion & Positioning Committee comprised of the CEO, the CFO,
the executive responsible for business development and the executive
responsible for sales & marketing.
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Execution Copy
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 Jacob Davidson ("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 Co-Chairman of the Company
and shall perform such duties and services consistent with such position as
described in the Company's By-laws and such other duties and services as set
forth on Schedule A attached hereto. Executive, as Co-Chairman of the Company,
shall not be a member of the Board of Directors of the Company. Executive shall
also perform such other duties and services 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
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"Affiliate" of the Company as requested by the Company. An "Affiliate" of the
Company means any entity that controls, is controlled by or is under common
control with the Company. Executive shall report to the Board of Directors of
the Company.
(b) Full-time and Part-time employment. Executive shall (i) until the first
year anniversary of the Commencement Date (the "First Anniversary"), devote his
full business time to the services required of him hereunder, and (ii) from the
first year anniversary of the Commencement Date until the end of the Employment
Period (the "Remainder Term"), devote 50% of his business time to the services
required of him hereunder; in either case, 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.
Subject to the terms of this Agreement, if after the First Anniversary, but not
at any time prior to such time, Executive may hold management positions in any
other company. During the Employment Period, 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 or competes with the Company, and in such event, Executive shall
receive five days' written notice to disengage from such business activity.
Executive may serve on the Board of Directors of other corporations which do not
compete with the Company. 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. The Company shall pay Executive (i) until the First
Anniversary, a base salary at the annual rate of US$180,000 and (ii) during the
Remainder Term, a base salary an the annual rate of US$90,000, provided that,
Executive's annual base salary during the Remainder Term 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 decreased during the
Remainder Term, or 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.
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(b) Performance Incentive Plan. During the Employment Period, Executive
shall be eligible to participate in the Company's 1999 Performance Incentive
Plan (the "Performance Plan"); provided, however, that beginning in year 2000
(as adjusted for the difference in Executive's salary for the first quarter of
the year 2000) until the end of the Term, the base salary for calculating the
bonus, if any, under the Performance Plan for each such year shall be the base
salary then in effect. Under the Performance Plan, the portion of the bonus
relating to Executive's individual performance shall be based solely on
Executives performance in business development and public relations. All of the
performance criteria for Executive's bonus shall be determined and set annually
by the Compensation Committee after receipt of the proposed annual budget for
the coming year from management and must be approved by the Board of Directors.
Any discretionary portion of the bonus shall be determined by the Compensation
Committee. If the Company shall 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 46,667 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 Number Exercisable
---------------------- ------------------
First Anniversary of the Commencement Date 23,333
Second Anniversary of the Commencement Date 11,667
Third Anniversary of the Commencement Date 11,667
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.
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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.
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. Executive shall be entitled to, until the First
Anniversary, five weeks' paid vacation annually, and during the Remainder Term,
two and one-half weeks paid vacation, 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 remuneration 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 (iv) a
willful and material breach of Executive's duties or obligations under this
Agreement, including, without limitation, Executive's failure to devote (a) full
business time to the Company prior to the First Anniversary or (b) 50% of his
business time during the Remainder Term, 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; (iii) a material breach of this Agreement by the Company; (iv)
relocation of Executive's principal place of business to a location outside of
Israel. 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 Performance 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, if such 12 month period begins
(x) during the first two years of the Term, his initial Base Salary or (y)
during the third year of the Term, the base salary at such time; 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
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Company's and its Affiliates' methods of doing business; research,
telecommunications technology, its actual and potential clients, transactions
and suppliers (including the Company's 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 (if ownership is greater than 5% of the equity of such
entity), 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.
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(B) If a single name appears on both lists, that individual shall be
appointed.
(C) If more than one name appears on both parties' lists, the
Arbitrator shall be selected from the common names by mutual agreement of
the parties or by the toss of a coin.
(D) If the lists contain no names in common, each party shall strike
four names from the other party's list and the Arbitrator shall be selected
from the remaining two names by mutual agreement of the parties or by the
toss of a coin.
(E) If the CPR ceases to have a Panel or it is otherwise impossible to
select the Arbitrator from the Panel as contemplated by this Agreement, the
Arbitrator shall be selected by the President of the CPR in the manner that
the President deems closest to satisfying the purposes of this Section, or,
if such person is unable to do so, by the President of the Association of
the Bar of the City of New York.
(d) The Arbitrator, after appropriate consultation with the parties, shall
(i) determine, in his or her sole discretion, the rules governing the
arbitration proceeding, including whether and to what extent the parties shall
have any right to pre-hearing discovery or other forms of disclosure, the manner
of presentation of arguments and/or evidence before or at any hearing, whether
and to what extent formal rules of evidence shall govern the proceeding and the
parties' rights following the proceeding, and (ii) be governed in exercising
such discretion by the goal of reaching a fair and reasonable decision in an
expeditious and efficient manner while endeavoring to streamline the process and
avoid undue litigation costs.
(e) The Arbitrator shall assess the costs of the proceeding (including the
prevailing party's reasonable 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
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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.
(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.
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(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 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:
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if to the Executive, to the Executive at:
c/o deltathree.com, Inc.
Jerusalem Technology Park
P.O. Box 48265
Jerusalem, 96951
Israel
if to the Company, to the Company at
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.
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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.
(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
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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.
___________________________
Executive
deltathree.com, Inc.
BY:________________________
Title:_____________________
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Schedule A
Additional Duties of Executive
Executive shall have the following additional responsibilities:
(a) Business Development: Executive shall work closely with the executive
responsible for business development and the CEO to identify, qualify,
analyze and close strategic acquisitions and strategic alliances and
partnerships for the Company. All such acquisitions, alliances or strategic
partnerships shall always be subject to the review and approval of the CEO
and, as applicable, the Board of Directors.
Executive shall be invited to attend and contribute at all meetings of any
planned Business Development Review & Qualification Committee comprised of
the CEO, the CFO, the executive responsible for business development and the
executive responsible for sales & marketing.
(b) Promotion & Positioning: Executive shall have an active role, together with
the CEO, in the promotion and positioning of the Company as a leading
provider of web communications services; provided, that Executive
responsible for sales & marketing has direct responsibility for promotion
and advertisement and the CFO has direct responsibility for relations with
the investment community and all of the Company's analysts. Executive shall
be a "Corporate Spokesman" (on a non-exclusive basis, sharing this role with
the CEO and/or the CEO's designees).
Executive shall be invited to attend and contribute at all meetings of any
planned Promotion & Positioning Committee comprised of the CEO, the CFO, the
executive responsible for business development and the executive responsible
for sales & marketing.
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MANAGEMENT AGREEMEENT
This Management Agreement (this "Agreement"), dated as of November 1,
1999, by and between RSL Communications, Ltd., a Bermuda company ("RSL COM") and
deltathree.com, Inc., a Delaware corporation (the "Company"). Capitalized terms
used herein and not otherwise defined shall have the respective meanings
assigned to them in clause 1.1 hereof.
WHEREAS, the Company is a wholly-owned Subsidiary of RSL COM and will
continue to be a Subsidiary immediately following the proposed Initial Public
Offering;
WHEREAS, RSL COM has incurred and will continue to incur, directly and
through other members of the RSL Group, overhead expenses in relation to
services provided to the Company Group;
WHEREAS, the Company Group benefits from the services RSL COM provides to,
and expenses incurred by RSL COM on behalf of, the Company Group;
WHEREAS, the Company has agreed to make payment to RSL COM in
consideration of these services, on the terms set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties, intending to be legally bound, agree
as follows:
1 Definitions and interpretation
1.1 Definitions
For purposes of this Agreement, the following terms shall have the
following meanings:
Affiliate of any Person means a Person that controls, is controlled
by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of
such entity, whether through ownership of voting securities or other
interests, by contract or otherwise;
Business Day means a day on which banks are open for business in New
York, New York, excluding a Saturday, Sunday or public holiday;
Commencement Date means the date the Initial Public Offering is
consummated;
Company Group means the Company and its Subsidiaries from time to
time;
CPI means the Consumer Price Index for all Urban Consumers as
published by the Bureau of Labor Statistics of the United States
Department of Labor for the New York Northeastern New Jersey Area,
all items (1967-100);
Initial Public Offering means an underwritten initial public
offering of common stock of the Company pursuant to an effective
registration statement under the Securities Act of 1933, as amended;
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Insolvency Event in relation to a party means the happening of one
or more of these events:
(a) an application is made to a court for an order that it be
wound up, declared bankrupt or that a provisional liquidator
or receiver or receiver and manager be appointed, unless the
application is withdrawn, struck out or dismissed within 7
Business Days of it being made;
(b) a receiver, administrator, manager, receiver and manager or
agent is appointed to administer it or any part of its
undertaking or property, or any encumbrancer is validly
entitled to exercise any power of sale over any part of its
undertaking or property;
(c) a liquidator or provisional liquidator is appointed;
(d) it is insolvent, as disclosed in its accounts or otherwise,
states that it is insolvent or it is presumed to be insolvent
under any applicable law;
(e) it states that it is unable to pay its debts or is unable to
pay its debts as and when they fall due; or
(f) anything having a substantially similar effect to any of the
events specified above happens to it under the law of any
jurisdiction;
Management Fee means the monthly fee payable by the Company to RSL
COM pursuant to clause 5;
Management Services means the services set out in Schedule 1
attached hereto;
Review Date means December 31, 2000 and December 31 of each
subsequent year;
RSL Group means RSL COM and its Affiliates from time to time, not
including the Company Group;
Services Agreement means the Amended and Restated Services Agreement
between RSL COM and the Company, dated September 3, 1999, relating
to, among other things, the supply of leased line capacity, data
communications facilities, traffic termination services and physical
space; and
Subsidiary means, in relation to a Person, any Person of which at
least a majority of the securities or interests having by the terms
thereof voting power to elect at least a majority of the board of
directors or others performing similar functions with respect to
such Person is directly or indirectly owned or controlled by such
Person or by any one or more of its Subsidiaries; provided, however,
that no Person shall be deemed to be a Subsidiary of such other
Person unless such other Person controls, or has the right, power or
ability to control, that Person.
1.2 Interpretation
In this Agreement, headings and boldings are for convenience only
and do not affect the interpretation of this Agreement and, unless
the context otherwise requires:
(a) words importing the singular include the plural and vice
versa;
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(b) words importing a gender include any gender;
(c) other parts of speech and grammatical forms of a word or
phrase defined in this Agreement have a corresponding meaning;
(d) an expression importing a natural person includes any company,
partnership, joint venture, association, corporation or other
Person;
(e) a reference to a clause, party, or schedule is a reference to
a clause of, and a party and schedule to, this Agreement and a
reference to this Agreement includes any schedule;
(f) a reference to a document includes all amendments or
supplements to, or replacements or novations of, that
document;
(g) a reference to a party to a document includes that party's
successors and permitted assigns;
(h) a reference to $ or dollars is to US dollars; and
(i) the expressions:
(1) comply with includes observe and perform;
(2) permit includes suffer or cause, including by way of
omission; and
(3) including and similar words are not words of limitation.
1.3 Business Day
Where the day on or by which any thing is to be done is not a
Business Day, that thing must be done on or by the next Business
Day.
2 Conditions precedent
2.1 Conditions
The obligations and liabilities of the parties under this Agreement
are conditional on the Company consummating the Initial Public
Offering.
2.2 Cut-off date
If the condition precedent in clause 2.1 is not satisfied on or
before March 31, 2000, or such later date as the parties agree in
writing, this Agreement will terminate and will have no further
effect, and neither party will be liable to the other.
3 Commencement and term
This Agreement will commence on the Commencement Date and will
continue until terminated in accordance with clause 7.
4 Provision of Management Services
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(a) The Company acknowledges that the Company and the other
members of the Company Group have received, and will continue
to receive during the term of this Agreement, the benefit of
the Management Services.
(b) RSL COM will provide, or procure the provision of, the
Management Services in a manner consistent with:
(1) the provision of the Management Services to the Company
Group prior to the commencement of this Agreement; and
(2) the provision of similar services by RSL COM to the
various telecommunications operating companies
throughout the world that form part of the RSL Group.
5 Fees and payment
5.1 Amount of Management Fee
(a) The amount of the Management Fee payable in respect of each
month up to and including December 2000 is $15,000 per month.
(b) The Management Fee will be adjusted as from each Review Date
in accordance with clause 5.2.
5.2 Adjustment of Management Fee - CPI
(a) Subject to clause 5.2(c), the Management Fee will be adjusted
from each Review Date in accordance with the following
formula:
A = B x C divided by D
A = the Management Fee payable from the relevant Review
Date;
B = the Management Fee immediately before the relevant
Review Date;
C = the CPI in respect of the quarter immediately before
the relevant Review Date; and
D = the CPI in respect of the quarter immediately before
the previous Review Date or (in the case of the first
Review Date) the commencement date of this Agreement.
(b) If the Bureau of Labor Statistics of the United States
Department of Labor or equivalent authority ceases to issue
the CPI then the published index which most closely resembles
it must be used for the purpose of clause 5.2(a).
(c) Clause 5.2(a) will not apply if the parties agree in writing
before any Review Date that an alternative Management Fee is
to apply after that date.
5.3 Payment of Management Fee
(a) On the first Business Day of each month, the Company must pay
to RSL COM
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<PAGE>
the Management Fee in respect of the preceding month.
(b) Any amount which is not paid as required by clause 5.3(a) will
accrue interest from the date such amount was due at the rate
of RSL COM's "weighted average cost of capital" ("WACC") as
calculated by RSL COM and/or its advisers from time to time.
As of the date of this Agreement, RSL COM's WACC is 14.66%.
Promptly upon calculation of a new WACC, RSL COM shall notify
the Company of such new rate and immediately upon such
notification, the new WACC shall be effective under the terms
of this Agreement and shall remain in effect until RSL COM's
next calculation thereof.
5.4 Set off
The Company may set off any amount which is payable by RSL COM to
the Company by crediting that amount towards the amount payable by
the Company under this Agreement.
5.5 Currency
All payments to RSL COM shall be made in U.S. Dollars.
6 Liability
6.1 Liability
(a) Neither RSL COM, any other member of the RSL Group, nor any of
their respective directors, officers and employees will have
any liability whatsoever to the Company Group for any loss or
damage incurred by the Company Group arising out of or in
connection with the provision of the Management Services,
except to the extent that such loss or damage is caused by the
willful misconduct of RSL COM.
(b) The parties acknowledge that RSL COM enters into clause 6.1(a)
on its own account and as agent for:
(1) its directors, officers and employees; and
(2) the other members of the RSL Group and their respective
directors, officers and employees,
and that RSL COM holds the benefit of that clause in trust for
itself and for such other persons.
6.2 Indemnity
The Company agrees to indemnify RSL COM in respect of any claim,
action, damage, loss, liability, cost, charge, expense, outgoing or
payment (including without limitation legal fees) which RSL COM
pays, suffers, incurs or is liable for, by reason of any action or
claim brought against RSL COM in respect of the provision of the
Management Services, except to the extent caused by to the
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willful misconduct of RSL COM.
7 Termination
7.1 Change of control
Either party may terminate this Agreement upon three months' written
notice to the other at any time after the Company is no longer a
Subsidiary of the RSL Group.
7.2 Events of default
Either party (the "non-defaulting party") may terminate this
Agreement immediately by notice to the other (the "defaulting
party") if:
(a) the defaulting party commits a material breach of this
Agreement and that failure or breach is incapable of remedy
or, if capable of remedy, continues for 20 Business Days after
the defaulting party is given a notice by the non-defaulting
party requiring the breach to be remedied;
(b) the defaulting party is repeatedly or persistently in breach
of or default under any of the provisions of this Agreement;
(c) the defaulting party ceases to carry on its business or a
material part of its business;
(d) the defaulting party ceases to hold any material license,
approval, authorization or consent required to enable it to
comply with its obligations under this Agreement; or
(e) an Insolvency Event occurs in relation to the defaulting
party.
7.3 Effect of termination
Upon termination of this Agreement, each party is released (as of
the effective date of such termination) from any further obligation
under this Agreement except that:
(a) such termination will not affect any rights that either party
may have by reason of a breach of this Agreement occurring
prior to termination; and
(b) such termination will not affect any party's right to receive
payments that are due and owing to it under this Agreement at
the date of termination.
8 Dispute resolution
8.1 Submission to arbitration
(a) The parties agree to submit any disputes arising out of,
relating to, or in connection with, the interpretation,
execution or performance of this Agreement to final and
binding arbitration in New York, New York.
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(b) The parties consent to the jurisdiction of the Supreme Court
of the State of New York, and of the United States District
Court for the Southern District of New York, for all purposes
in connection with arbitration, including the entry of
judgment on any award; and consent that any process, notice of
motion or other application to either of those courts, and any
papers in connection with arbitration, may be served by
registered or certified mail, return receipt requested, by
personal service, or in such other manner as may be
permissible under the rules of the applicable court or
arbitration tribunal, provided a reasonable time for
appearance is allowed.
8.2 Arbitration rules
(a) The rules of the American Arbitration Association (AAA) will
apply to any arbitration except to the extent modified by this
clause 8.
(b) The arbitration will be conducted in English before three
arbitrators. Each party may appoint one arbitrator, and the
arbitrators so appointed shall choose another arbitrator. If
the arbitrators chosen by the parties cannot agree on the
choice of the other arbitrator within a period of 30 days
after their appointment, then the other arbitrator shall be
appointed by the AAA.
(c) The arbitrators must state the reasons upon which the award is
based. The award of the arbitrators will be final and binding
upon the parties and will not be subject to appeal to any
court or other authority, except to the extent required by
applicable law. Judgment upon the award may be entered in any
court having jurisdiction, and application may be made to any
such court for a judicial acceptance of the award and an order
for enforcement.
8.3 Costs
Each party must bear its own costs and expenses in connection with
any arbitration, but must share equally in the expenses and fees
assessed by the AAA.
9 Miscellaneous
9.1 Waivers
(a) Waiver of any right arising from a breach of this Agreement or
of any right, power, authority, discretion or remedy arising
upon default under this Agreement must be in writing and
signed by the party granting the waiver.
(b) A failure or delay in exercise, or partial exercise, of:
(1) a right arising from a breach of this Agreement; or
(2) a right, power, authority, discretion or remedy created
or arising upon default under this Agreement,
does not result in a waiver of that right, power, authority,
discretion or remedy.
(c) A party is not entitled to rely on a delay in the exercise or
non-exercise of a right,
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power, authority, discretion or remedy arising from a breach
of this Agreement or on a default under this Agreement as
constituting a waiver of that right, power, authority,
discretion or remedy.
(d) A party may not rely on any conduct of another party as a
defense to exercise of a right, power, authority, discretion
or remedy by that other party.
(e) This clause may not itself be waived except by writing.
9.2 Variation
A variation of any term of this Agreement must be in writing and
signed by the parties.
9.3 Assignment
(a) Subject to clause 9.3(b), rights arising out of or under this
Agreement are not assignable by one party without the prior
written consent of the other party (which consent must not be
unreasonably withheld).
(b) RSL COM may at any time assign its rights under this Agreement
to an Affiliate.
(c) A breach of clause 9.3((a)) by one party entitles the other
party to immediately terminate this Agreement.
(d) Clause 9.3((c)) does not affect the construction of any other
part of this Agreement.
9.4 Further assurances
Each party must do all things and execute all further documents
necessary to give full effect to this Agreement.
9.5 Governing law and jurisdiction
This Agreement is governed by, and must be construed in accordance
with, the laws of New York, without regard to the conflict of laws
provisions thereof, other than as to its laws of arbitration which
shall be governed under the United States Arbitration Act or other
applicable federal law.
9.6 Relationship
Nothing in this Agreement or in any other instrument, agreement or
other document delivered pursuant to or in connection with it will
deem either party the partner, joint venture, agent or employee of
the other.
9.7 Prohibition and enforceability
(a) Any provision of, or the application of any provision of, this
Agreement or any right, power, authority, discretion or remedy
which is prohibited in any jurisdiction is, in that
jurisdiction, ineffective only to the extent of that
prohibition.
(b) Any provision of, or the application of any provision of, this
Agreement which is
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void, illegal or unenforceable in any jurisdiction does not
affect the validity, legality or enforceability of that
provision in any other jurisdiction or of the remaining
provisions in that or any other jurisdiction.
9.8 Costs and expenses
Each party must pay its own legal costs and expenses in respect of
the negotiation, preparation, completion and execution of this
Agreement.
9.9 Notices
(a) Any notice or other communication including, but not limited
to, any request, demand, consent or approval, to or by a party
to this Agreement must be delivered personally or sent by
prepaid airmail post or facsimile and:
(1) must be in legible writing and in English addressed as
shown below:
(A) if to RSL COM:
Address: Clarendon House
Church Street
Hamilton HM CX, Bermuda
Attention: President
Facsimile: (441) 292-4720
- --------------------------------------------------------------------------------
9
<PAGE>
With a copy to:
RSL Communications, N. America, Inc.
767 Fifth Avenue, Suite 4300
New York, New York 10153 USA
Attention: General Counsel
Facsimile: 212-317-1940
and
(B) if to the Company:
Address: 430 Park Avenue, Suite 500
New York, New York 10022
Attention: General Counsel
Facsimile: (212) 588-3674
or as specified to the sender by any party by notice;
(2) where the sender is a company, must be signed by an
officer of the sender;
(3) is regarded as being given by the sender and received by
the addressee:
(A) if by delivery in person or by internationally
recognized overnight courier, when delivered to
the addressee;
(B) if by post, seven Business Days from and including
the date of postage; or
(C) if by facsimile transmission, when legibly
received by the addressee,
but if the delivery or receipt is on a day which is not
a Business Day or is after 4:00 p.m. (addressee's time)
it is regarded as received at 9:00 a.m. on the following
Business Day; and
(4) can be relied upon by the addressee and the addressee is
not liable to any other person for any consequences of
that reliance if the addressee believes it to be
genuine, correct and authorized by the sender.
(b) A facsimile transmission is regarded as legible unless the
addressee telephones the sender within two hours after
transmission is received or regarded as received under clause
9.9(a)(3) and informs the sender that it is not legible.
(c) In this clause 9.9, a reference to an addressee includes a
reference to an addressee's officers, agents or employees.
9.10 No third party beneficiaries
Save where expressly provided to the contrary, nothing in this
Agreement will confer any rights upon any person which is not a
party to this Agreement.
9.11 Entire agreement
This Agreement supersedes all previous agreements in respect of the
Management
- --------------------------------------------------------------------------------
10
<PAGE>
Services and embodies the entire agreement between the parties. The
Services Agreement shall remain in full force and effect and shall
be in no way modified by the terms and conditions of this Agreement.
9.12 Counterparts
(a) This Agreement may be executed in any number of counterparts.
(b) All counterparts, taken together, constitute one instrument.
(c) A party may execute this Agreement by signing any counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Management
Agreement to be executed as of the date first written above.
RSL Communications, Ltd.
By:
Name:
Title:
deltathree.com, Inc.
By:
Name:
Title:
- --------------------------------------------------------------------------------
11
<PAGE>
Schedule 1 - Management Services
All management services provided by the RSL Group for the benefit of the Company
Group, including:
1. International legal counsel
2. Financial services, including, assistance in accounting, financial
reporting, budgeting, business controls, tax and treasury related matters
3. Corporate finance and mergers and acqusitions advisory services
4. Assistance with network planning
5. Product development
6. Assistance with strategic planning
7. Availability of RSL COM management
The Management Services do not include any services provided by the RSL Group
under the Services Agreement.
- --------------------------------------------------------------------------------
12
<PAGE>
AMENDMENT NO. 1 TO SERVICES AGREEMENT
THIS AMENDMENT dated November 1, 1999 (this "Amendment"), is by and between
deltathree.com, Inc., a Delaware corporation ("Delta") and RSL Communications,
Ltd., a Bermuda corporation ("RSL"). Capitalized terms used herein without
definition shall have the meanings ascribed to such terms in the Services
Agreement (as hereinafter defined).
RECITALS
WHEREAS, Delta and RSL are parties to that certain Amended and Restated
Services Agreement, dated as of September 3, 1999 (the "Services Agreement"),
pursuant to which 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;
WHEREAS, Delta and RSL desire to amend the Services Agreement in the manner
set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter contained, Delta and RSL hereby agree as follows:
1. Amendment of Section 4.01. Section 4.01 of the Services Agreement is
hereby deleted in its entirety and replaced with the following:
"Section 4.01. Internet Telephony Services. (a) Delta shall, at RSL's
direction, provide RSL with Internet telephony services and facilities necessary
to route RSL's international 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.
Except as expressly provided in Section 4.01(b) below, with respect to each of
Delta's Routes, Delta shall make the Internet Telephony Services available to
RSL at then prevailing fair market rates.
(b) Subject to Section 4.01(a) of this Agreement, for a period of two years
from the date of the closing of an underwritten initial public offering (the
"Delta IPO") of Delta's common stock (the "Commitment Period"), RSL shall commit
to purchase a minimum of 50 million minutes per annum of voice and fax carrier
transmission services (the "Minimum Commitment") from Delta at a price equal to
the average prevailing fair market rate charged by Delta to other carriers.
<PAGE>
In the event that RSL fails to meet the Minimum Commitment during any year of
the Commitment Period for any reason other than (i) an interruption or
impairment of services not caused by RSL or (ii) failure by Delta to meet
reasonable levels of quality of such services, RSL shall be liable to Delta for
a shortfall charge of 10% of the Commitment Price (as defined below) for each
minute by which the Minimum Commitment exceeds RSL's actual usage of Delta's
carrier services. Notwithstanding the foregoing, in the event that (i) the Delta
IPO is not completed by June 30, 2000 or (ii) collectively RSL and/or its
Affiliates holds less than fifty percent (50%) of the voting control of Delta's
outstanding shares, there shall be no obligation of RSL with respect to the
Minimum Commitment and the provisions of this Section 4.01(b) shall be null and
void and of no further force and effect." The shortfall charge shall be payable
within 30 days following the end of each year of the Commitment Period.
"Commitment Price" shall mean the average of the daily weighted average price
per minute charged by Delta to RSL in the last quarter of each year of the
Commitment Period.
2. Ratification; Entire Agreement. Except as hereby amended, the Services
Agreement is in all respects ratified and confirmed. This Amendment and the
Services Agreement embody the entire agreement and understanding of the parties
with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings, oral or written, relative to said
subject matter.
3. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
RSL COMMUNICATIONS, LTD.
By
-------------------------------
Name:
Title:
DELTATHREE.COM, INC.
By
-------------------------------
Name:
Title:
<PAGE>
DELTATHREE.COM, INC.
INVESTOR RIGHTS AGREEMENT
October 20, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. General....................................................3
1.1 Certain Definitions............................3
1.2 Demand Registration............................5
1.3 Company Registration...........................6
1.4 Expenses of Registration.......................7
1.5 Registration Procedures........................8
1.6 Indemnification...............................10
1.7 Information by Holder.........................13
1.8 Rule 144 Reporting............................13
1.9 Transfer of Registration Rights...............14
1.10 Termination of Rights.........................14
1.11 "Market Stand-Off" Agreement; Agreement to
Furnish Information.......................................14
2. Affirmative Covenants of the Company......................15
2.1 Financial Information.........................15
2.2 Board of Directors............................16
2.3 ..............................................16
3. Drag Along Rights; Tag-Along Rights.......................16
3.1 ..............................................16
3.2 ..............................................19
4. Right of First Refusal on Company Issuance. ..............19
4.1 ..............................................19
4.2 ..............................................20
4.3 ..............................................21
5. Miscellaneous.............................................21
5.1 Governing Law.................................21
5.2 Survival......................................21
5.3 Transfer of Shares............................21
5.4 Successors and Assigns........................22
5.5 Entire Agreement..............................22
5.6 Amendment and Waiver..........................23
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5.7 Notices, Etc..................................23
5.8 Delays or Omissions...........................23
5.9 Counterparts..................................24
5.10 Severability..................................24
ii
<PAGE>
DELTATHREE.COM, INC.
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (this "Agreement") is entered into as
of the 20th day of October, 1999, by and between deltathree.com, Inc., a
Delaware corporation (the "Company"), RSL Communications, Ltd., a Bermuda
corporation and the principal shareholder of the Company ("RSL COM") and CNET
Investments, Inc., a Delaware corporation and a wholly-owned subsidiary of CNET,
Inc. (the "Investor").
RECITALS
Whereas, the Company proposes to sell and issue 437,028 shares of
its Class A Common Stock (the "Stock") and a warrant (the "Warrant") to purchase
shares of common stock (the "Warrant Stock" and, together with the 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.
3
<PAGE>
"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 1.9 hereof.
"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, (i) all registration, qualification and filing fees, (ii) printing
and mailing expenses, (iii) escrow fees, (iv) fees, expenses and disbursements
of counsel for the Company, (v) blue sky fees and expenses, (vi) 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); (vii) the cost of any agreements among
underwriters, underwriting agreements and any legal investment memoranda, any
selling agreements and any other documents; (viii) any expenses incident to
securing any required review by the National
4
<PAGE>
Association of Securities Dealers, Inc.; (ix) transfer agents' and registrars'
fees and expenses and the fees and expenses of any other agent or trustee; (x)
all fees and expenses payable in connection with the listing of the securities
on any securities exchange or automated interdealer quotation system; and (xi)
the costs and expenses of the Company and its officers relating to analyst or
investor presentations or any "road show" undertaken in connection with the
registration.
"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).
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. Subject to the limitations of this Section 1.2, the Company shall
prepare and file with the Commission a registration statement with respect to
the Registrable Securities so requested to be registered, as soon as
practicable, and in any event within 90 days after such request has been given.
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:
5
<PAGE>
(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) October 20, 2001 and
(B) one hundred eighty days (180) 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;
(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
6
<PAGE>
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 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
7
<PAGE>
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. The preceding sentence
shall not apply if, at the time of such withdrawal, the Holder has learned of a
material adverse change in the condition, business or prospects of the Company
from that known to the holder at the time of their request. Unless otherwise
stated, all other Selling Expenses relating to securities registered on behalf
of the Holder shall be borne by the Holder.
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 sixty
(60) days.
8
<PAGE>
(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 each of the Holders participating in such
registration and to the underwriters, if any, of the securities being registered
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such Holder or underwriters may reasonably request
in order to facilitate the public offering of such securities.
(d) After the filing of the registration statement, promptly
notify each selling Holder in writing of the effectiveness thereof and of any
stop order issued or threatened by the Commission and take all commercially
reasonable actions required to prevent the entry of such stop order or to
promptly remove it if entered and promptly notify each selling Holder of such
lifting or withdrawal of such order;
(e) 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.
(f) 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.
(g) As promptly as practicable, 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.
9
<PAGE>
(h) 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.
(i) 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.
(j) In the case of a registered public offering involving an
underwriting, use commercially reasonable best efforts to furnish each selling
Holder and to the underwriters, if any, of the securities being registered (i)
an opinion of counsel for the Company addressed to each selling Holder and dated
the date of the closing under the underwriting agreement (if any) (of if the
offering is not underwritten, dated the effective date of the registration
statement) and (ii) a "cold comfort" letter addressed to each selling Holder and
signed by the independent public accountants who have audited the financial
statements of the Company included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
underwriters in connection with the consummation of underwritten public
offerings of securities and such other matters as the selling Holders may
reasonably request and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements.
(k) Send appropriate officers of the Company to attend any
"road shows" and analyst and investor presentations scheduled in connection with
any such registration and use its reasonable best efforts to cooperate as
reasonably requested by selling Holders in the marketing of the Registrable
Securities, and all reasonable out-of-pocket expenses incurred by the Company or
such officers in connection with such attendance or cooperation will be paid by
the Company.
(l) Furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration affected pursuant
to Section 1.2 or 1.3 unlegended certificates representing ownership of the
Registrable Securities being sold in such denomination as shall be requested by
selling Holders or the underwriters, if any.
10
<PAGE>
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 or Section 20 of the
Exchange 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 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).
11
<PAGE>
(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 that sign the registration statement, 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 or Section 20 of the Exchange 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 Indemnified
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,
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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
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(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.
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 third 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:
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(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 three 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
underwriters which are consistent with the foregoing or which are necessary to
give further effect thereto. In addition, if requested in writing 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. Affirmative Covenants of the Company and RSL COM
2.1 Financial Information
The Company hereby covenants and agrees to 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
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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 and statements
of stockholders' equity 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.
2.2 Board of Directors
RSL COM hereby covenants and agrees, within two months following the
Closing Date (as such term is defined in the Purchase Agreement), to vote its
shares of common stock of the Company, to cause the initial election of one
designated representative nominated by the Investor and approved by RSL COM to
the board of directors (the "Board") of the Company.
2.3 The covenants set forth in Section 2.1 of this Agreement shall
terminate, and be of no further force and effect, upon the earlier of (i) the
closing of the Company's IPO, and (ii) the Holder owning less than 75% of the
Shares it purchased pursuant to the Purchase Agreement (subject to adjustment
for stock splits, stock dividends, etc.).
3. Drag Along Rights; Tag-Along Rights
3.1 Notwithstanding Section 5.3 of this Agreement, if RSL COM
proposes to sell, assign, mortgage, transfer, pledge, hypothecate or otherwise
dispose of at least 75% of all shares of common stock of the company owned by
RSL COM to a third party in one or a series of related transactions (the,
"Transfer"), 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 3.1.
RSL COM shall send written notice (the "Drag-Along Notice") of the
exercise of its rights pursuant to this Section 3.1 to each of the Holders in
the
17
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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 3.1 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 (or, if such delivery is not permitted by applicable law, an
unconditional agreement to deliver such equity pursuant to this Section 3.1 at
the closing of such drag-along sale against delivery to such purchaser of the
consideration per share therefor), 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 or documents 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 3.1 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 3.1, RSL COM shall return to the
Investor Group all certificates representing shares of Common Stock that the
Investor Group delivered for Transfer pursuant hereto and that were not
purchased pursuant to this Section 3.1 and any documents in the possession of
the Company executed by any members of the Investor Group in connection with the
proposed sale.
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 3.1, RSL COM shall give notice thereof to the Investor Group, shall
remit to
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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.
The rights of RSL COM, and the obligations of each member of the
Investor Group, under this Section 3.1 shall terminate upon the consummation of
the IPO.
The rights and obligations of the Investor Group under this Section
shall be subject to the following conditions:
(i) upon the consummation of any drag-along sale, all of the Holders
participating therein will receive the same form and amount of consideration per
share, as the case may be, or if any Holder is given an option as to the form
and amount of consideration to be received, all Investors participating therein
will be given the same option;
(ii) No Holder will be obligated to pay more than its pro rata share
(based on the aggregate consideration to be received in respect of its equity in
the drag-along sale) of the costs, fees and expenses incurred in connection with
the drag-along sale to the extent such costs, fees and expenses are incurred
for the benefit of all such Holders and are not otherwise paid by the Company or
the acquiring party;
(iii) If the Holders are required to provide any representations or
indemnities in connection with such drag-along sale (other than representations
and indemnities concerning each Holder's title to the equity and authority,
power and right to enter into and consummate the transfer without contravention
of any law or agreement), then liability for misrepresentation or indemnity
shall be expressly stated to be several but not joint and each Holder shall not
be liable for more than its pro rata share (based on the aggregate consideration
to be received in respect of its equity in the drag-along sale) of any liability
for misrepresentation or indemnity; and
(iv) in the case of any drag-along sale, the Company will use
commercially reasonable efforts to limit the liability of any Investor for
misrepresentation or indemnity to its pro rata share (based on the aggregate
consideration to be received in respect of its equity in the drag-along sale) of
the aggregate purchase price.
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3.2 Notwithstanding Section 5.3 of this Agreement, prior to making
any Transfer of its shares of common stock of the Company, RSL COM shall give at
least fifteen (15) days' prior written notice (a "Sale Notice") to the Investor,
which notice shall include the terms and conditions of such proposed Transfer,
including the identity of each prospective transferee. The Investor may within
fifteen (15) business days of the receipt of the Sale Notice give written notice
(each, a "Tag-Along Notice") to RSL COM of its intention to participate in such
proposed Transfer and specifying the number of shares of common stock that it
desires to include in such proposed Transfer.
(ii) If the Investor does not give RSL COM a timely Tag-Along Notice
with respect to the Transfer proposed in the Sale Notice, RSL COM may transfer
the shares specified in the Sale Notice within 90 days after expiration of the
15-day period described above, on the terms and conditions set forth in the Sale
Notice. If a timely Tag-Along Notice is delivered, then RSL COM shall use all
reasonable efforts to cause each prospective transferee to agree to acquire all
shares identified in all Tag-Along Notices that are timely given to RSL COM,
upon the same terms and conditions (including, without limitation, the ability
to receive a ratable share of all consideration being paid, directly or
indirectly, to RSL COM) as set forth in the Sale Notice. If such prospective
transferee is unwilling or unable to acquire all of such additional shares upon
such terms, then RSL COM may elect either to cancel such proposed Transfer or to
allocate the maximum number of shares that each prospective transferee is
willing to purchase among RSL COM and the Investor in the proportion that RSL
COM's and the Investor's ownership of capital stock of the Company bears to the
total ownership of capital stock of the Company by RSL COM and the Investor with
respect to such Transfer.
4. Right of First Refusal on Company Issuance.
4.1 The Company shall, prior to any proposed issuance by the Company
of any of its equity securities (the "New Securities"), offer to the Holder by
written notice the right, for a period of ten (10) business days, to purchase
for cash at an amount equal to the price or other consideration for which such
New Securities are to be issued, a portion of such New Securities equal to a
fraction (the "Pro Rata Fraction"), the numerator of which shall be the total
number of shares of Common Stock held by such Holder and the denominator of
which shall be the total number of shares of equity securities outstanding
immediately prior to the issuance of the New Securities, including any shares of
equity securities issuable upon exercise of any rights, options and warrants
then exercisable (the "Total Stock").
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The Company's written notice to the Registered Holders shall describe the
securities proposed to be issued by the Company and specify the number, price
and payment terms. The Holder may accept the Company's offer as to such holders
Pro Rata Fraction of New Securities or any lesser number, by written notice
thereof given by it to the Company prior to the expiration of the aforesaid ten
(10) business day period, in which event the Company, concurrent with the
proposed issuance of New Securities covered by this Section 4, shall promptly
sell and the Holder shall buy, upon the terms specified, the number of
securities agreed to be purchased by the Holder. The Company shall be free at
any time prior to 120 days after the date of its notice of offer to the Eligible
Stockholders to offer and sell to any third party or parties all or any portion
of the remainder of such New Securities proposed to be issued by the Company
(including but not limited to the New Securities that the Holder had not agreed
to purchase), at a price and on payment terms no less favorable, and on other
terms not less favorable in any material respect, to the Company than those
specified in such notice of offer to the Holder. However, if such third party
sale or sales are not consummated within such 120 day period, the Company shall
not sell such securities as shall not have been purchased within such period
without again complying with this Section 4.
4.2 Notwithstanding the foregoing, the rights of the Holder pursuant
to this Section 4 shall not apply to equity securities issued or issuable:
(a) upon exercise of any warrants to purchase shares of Common
Stock issued and outstanding on the date hereof;
(b) pursuant to the acquisition of another corporation by the
Company or issued in connection with any merger, consolidation, combination, or
purchase of all or substantially all of the assets or other reorganization which
shall be approved in accordance with the Company's Certificate of Incorporation;
(c) as a dividend or distribution to holders of Common Stock
or other pro rata distributions of shares of Common Stock to holders of Common
Stock;
(d) to holders of RSL Communications Ltd. restricted units;
(e) to employees, consultants, officers, directors or other
eligible participants under the Company's proposed stock option and benefit
plans;
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(f) directly or upon exercise of options, warrants, or rights,
or upon conversion of convertible securities issued to lending institutions or
equipment leasing companies in connection with the leasing or financing of
purchases by the Company of tangible assets or equipment;
(g) to any strategic partner, at a price per share equal to or
greater than $25.17, in connection with any strategic partnering arrangement the
primary purpose of which is not to raise capital, which strategic partnering
arrangement and which issuance have been approved by the Company's Board of
Directors; or
(h) in connection with the Company's Initial Public Offering
or equity securities issued or issuable on or about the same time, and at the
same price, as the Initial Public Offering.
4.3 The rights granted under the provisions of this Section 4 shall
terminate upon the effective date of the registration statement filed in
connection with the Company's Initial Public Offering.
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
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(A) The Holder or Holders shall not, from the Closing Date up
until the date which is one year following the Closing Date (the "Lock-Up
Period"), offer, sell, contract to sell, announce its intention to sell, pledge
or otherwise dispose of, directly or indirectly, any Shares, the Warrant or any
securities purchased upon exercise of the Warrant; provided, however, that the
Lock-Up Period will terminate upon the earlier of (i) termination of the
marketing and promotion agreement, entered into between the Company and the
Investor on even date hereof, in accordance with its terms, after the date which
is one year following the Closing Date, and (ii) the closing of a merger,
consolidation, acquisition of all or substantially all of the assets or stock,
of the Company by another 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.
(B) Notwithstanding Section 5.3(A) above, following the date
which is the six month anniversary of the consummation of the IPO (the "Six
Month Date"), if the average Fair Market Value, for a consecutive thirty day
period following the Six Month Date, of one share of Common Stock is at least
two hundred fifty percent of the price at which Common Stock was sold by the
Company in connection with the IPO, the Holder shall have the right to sell the
Shares pursuant to Section 1.2 of this Agreement. For purposes of this Section
5.3(B), the Fair Market Value of one share of Common Stock shall mean the
average of the closing bid and asked prices of the Common Stock quoted in the
Over-the-Counter Market Summary or the closing price quoted on the Nasdaq
National Market or any exchange on which the Common Stock is listed, whichever
is applicable, as published in the Western Edition of The Wall Street Journal
for the ten trading days prior to the date on which Purchaser proposes to sell
Shares in accordance with this Section 5.3(B).
5.4 Successors and Assigns
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
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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.
5.5 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.
5.6 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.
5.7 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
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<PAGE>
upon request) or such other address as a party may request by notifying the
other in writing.
5.8 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 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.
5.9 Counterparts
This Agreement may be executed in any number of counterparts, each
of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
5.10 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
RSL COMMUNICATIONS, LTD.
a Bermuda corporation
--------------------------------------------
Signature of Authorized Signatory
--------------------------------------------
Print Name and Title
CNET INVESTMENTS, INC.
a Delaware corporation
--------------------------------------------
Signature of Authorized Signatory
--------------------------------------------
Print Name and Title
26
<PAGE>
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.2 Number of Shares: 187,549
Date of Issuance: October 20, 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 CNET Investments, Inc., a Delaware corporation
and a wholly-owned subsidiary of CNET, Inc., 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) October 20, 2002, (ii) the date which is twenty four months after
the closing of the initial public offering (the "Initial Public Offering"), of
the Company's Class A common stock, $.001 par value per share, or (iii) the
termination, in accordance with its terms, of the marketing and promotional
agreement, entered into between the Company and the Registered Holder dated even
date herewith (the "Exercise Period"), in whole 187,549 fully paid and
nonassessable shares of Class A Common Stock, par value $.001 per share, or any
other equity securities that may be issued in addition thereto or in
substitution therefor, as provided herein (the "Common Stock") at a price of
$47.99 per share (the "Exercise Price"). This warrant (the "Warrant") is being
issued pursuant to 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.
<PAGE>
(a) This Warrant may be exercised in whole or part 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 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").
(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)) divided by 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).
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(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
the Company's Board of Directors; provided, however, that if this Warrant is
exercised (i) 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, or (ii) following the Initial Public
Offering, the fair market value of the Warrant Stock shall be the average of the
closing bid and asked prices of the Common Stock quoted in the Over-the-Counter
Market Summary or the closing price quoted on the Nasdaq National Market or any
exchange on which the Common Stock is listed, whichever is applicable, as
published in the Western Edition of The Wall Street Journal on the last business
day prior to the exercise of this Warrant.
(d) As soon as practicable after the exercise of this Warrant, and
in any event within 10 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.
2. Other Adjustments.
(a) Stock Dividends, Splits, Combinations, Reclassification, etc. In
the event that the Company shall, while this Warrant remains in effect, (i) pay
a dividend or make a distribution on its Common Stock payable in shares of its
Common Stock, (ii) subdivide shares of its outstanding Common Stock into a
greater number of shares, (iii) combine its outstanding Common Stock into a
smaller number of shares, or (iv) issue any shares of its capital stock by
reclassification of its Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation), the Registered Holder shall be entitled to purchase the aggregate
number and kind of shares which, if the Warrant had been exercised at the
Exercise Price in effect immediately prior to such event, the Registered Holder
would have owned upon such exercise and been entitled to receive by virtue of
such dividend, distribution, subdivision, combination or reclassification; and
the Exercise Price shall automatically be adjusted immediately after the payment
date, in the case of a dividend or distribution, or the effective date, in the
case of a subdivision, combination or reclassification, to allow the purchase of
such aggregate number and kind of shares.
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(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
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 pursuant to this
Section 2, 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 this Section 2.
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
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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. Transfers. Neither this Warrant nor any securities purchased upon
exercise of this Warrant may be transferred unless (x) in accordance with
Section 5.3(A) of the Investor Rights Agreement, between the Company and the
Registered Holder, and attached hereto as Exhibit C, and (y) either (i) such
transfer is registered under the Securities Act and any applicable state
securities or blue sky laws, (ii) the Company has received 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 promulgated under the Securities Act or any successor rule
thereto, or (iii) the Company otherwise satisfies itself that such transfer is
exempt from registration. Upon any transfer of all or a portion of the Warrant
in compliance with this Section 6, the transferee shall be deemed a Registered
Holder.
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. Except as provided in Section 6 hereto,
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
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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
unless exercised during the Exercise Period. 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 Common
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 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
(c) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company, or
(d) of any redemption of the Common 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
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securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, transfer, dissolution, liquidation,
winding-up, redemption or conversion. Such notice shall be mailed at least ten
(10) days prior to the record date or effective date for the event specified in
such notice.
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 Common 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:
CNET Investments, Inc.
150 Chestnut Street
San Francisco, California 94111
Attention: Chief Financial Officer
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with a copy to:
CNET Investments, Inc.
150 Chestnut Street
San Francisco, California 94111
Attention: General Counsel
If to the Company:
deltathree.com, Inc.
430 Park Avenue
New York, NY 10022
Fax: (212) 588-3674
Attention: CEO
with a copy to:
deltathree.com, Inc.
Jerusalem Technology Park
PO Box 48265
Jerusalem 96951, Israel
Fax: (972) 2 649-1200
Attention: General Counsel
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
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hereof as a stockholder of the Company; and except as otherwise provided
herein, no 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 accordance with Section
1(C)(ii).
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 CNET Investments, 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.
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IN WITNESS WHEREOF, THE Company has executed this Warrant as of the
date first written above.
deltathree.com, Inc.
By:______________________________
<PAGE>
Exhibit A
PURCHASE AGREEMENT
<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)
<PAGE>
Exhibit C
INVESTOR RIGHTS AGREEMENT
<PAGE>
Execution Copy
CO-BRANDING AND SERVICES AGREEMENT
Co-Branding and Services Agreement, effective as of October 1, 1999
(this "Agreement"), between RSL COM PrimeCall, Inc., a Delaware corporation
("PrimeCall"), and deltathree.com, Inc. (formerly known as Delta Three, Inc.), a
Delaware corporation ("DeltaThree").
W I T N E S S E T H :
WHEREAS, PrimeCall is a leading provider and distributor of prepaid
calling cards;
WHEREAS, DeltaThree 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;
WHEREAS, each of PrimeCall and DeltaThree desires to co-brand a
DeltaThree prepaid IP telephony calling card (the "Calling Card");
WHEREAS, PrimeCall desires to begin selling and advertising its prepaid
calling products on-line utilizing the Internet;
WHEREAS, PrimeCall has agreed to provide to DeltaThree certain services
in connection with the Calling Card and DeltaThree has agreed to provide certain
services in connection with the development of an on-line business to PrimeCall.
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 be effective as of
the date first stated above and shall continue for a term of three (3) years,
unless terminated earlier in accordance with the provisions of this Agreement
(the "Term"); provided, however, that PrimeCall may elect to terminate this
Agreement, upon thirty (30) days' written notice, at any time from and after the
time that collectively RSL Communications, Ltd. and/or its Affiliates holds less
than fifty percent (50%) of the voting control of DeltaThree's outstanding
shares. "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
Co-Branding of Calling Card and Joint Marketing
Section 2.01. Calling Card. PrimeCall and DeltaThree shall jointly
develop a DeltaThree prepaid calling card product (or modify and improve an
existing PrimeCall product) which bears the logos of each of DeltaThree and
PrimeCall. In order to lower the cost structure and increase the competitiveness
of the Calling Card, DeltaThree and PrimeCall shall each use their reasonable
best efforts to increase the percentage of the traffic derived from the use of
the Calling Card which will be carried via the DeltaThree Network. For purposes
of this Agreement, the "DeltaThree Network" shall mean Internet Protocol (IP)
communications services, which utilize the Internet and networks, based on IP to
provide telecommunications products and services. It is fully understood that
the Calling Card is a DeltaThree product and accordingly all revenues derived
therefrom will inure to the benefit of DeltaThree.
Section 2.02. On-Line Marketing. Each of PrimeCall and DeltaThree agree
to place, in a prominent location, a link on its home page website to the
other's home page website.
Section 2.03. Limited License. Throughout the Term of this Agreement,
the parties hereby agree to grant to each other a limited license to use each
other's proprietary marks solely in connection with the sale, distribution,
marketing and promotion of each party's calling cards by the other party. Both
parties hereto shall exercise such license in compliance with the quality and
other standards established by the party owning such marks. Except as set forth
herein, neither party shall use the other party's proprietary marks without the
prior, express, written consent of the other party. All rights to either party's
proprietary marks shall remain with the owner of the marks.
ARTICLE III
Services Provided by PrimeCall
Section 3.01. Printing of Calling Cards. PrimeCall shall negotiate and
contract on behalf of DeltaThree for the printing of the Calling Cards.
PrimeCall will afford DeltaThree with the benefit of any discount pricing it
receives with respect to the printing of its own calling cards. All agreements
with respect to the printing of the Calling Cards shall be approved in advance
by DeltaThree. DeltaThree shall reimburse PrimeCall for all costs incurred by
PrimeCall in connection with the manufacturing and printing of the Calling
Cards.
Section 3.02. Toll-Free Access Number. PrimeCall shall procure on
behalf of DeltaThree a unique toll-free "800" access number for users of the
Calling Card. DeltaThree shall be responsible for all costs in connection
therewith.
Section 3.03. Pricing and Marketing. PrimeCall shall provide DeltaThree
with pricing and marketing services in connection with the Calling Card,
including without limitation, developing a cost structure for the sale of the
Calling Cards, pricing specific routes and determining discount rates.
DeltaThree shall be responsible for all costs in connection therewith.
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Section 3.04. Sales and Distribution. PrimeCall's sales force shall
assist in selling the Calling Card and PrimeCall shall handle all aspects of the
distribution of the Calling Card, including without limitation, the negotiation
of agreements with distributors, inventory control, billing and collections. All
such agreements shall be approved in advance by DeltaThree. DeltaThree shall be
responsible for all costs in connection with such sales and distribution
efforts.
Section 3.05. Customer Service. PrimeCall shall negotiate and contract
on behalf of DeltaThree to out-source customer service for users of the Calling
Card. DeltaThree shall reimburse PrimeCall for all customer service expenses
directly related to users of the Calling Card. Notwithstanding the foregoing,
the level of customer service shall be subject to the approval of DeltaThree.
Section 3.06. Reporting. On or before the tenth day of each calendar
month, PrimeCall shall prepare for DeltaThree a report detailing the total
revenues and expenses associated with the sale and use of the Calling Cards in
the previous month. In the event that DeltaThree disputes any amounts set forth
on the report, DeltaThree shall provide PrimeCall with written notice of such
dispute, which notice shall detail the reasons for the dispute, within seven (7)
days of its receipt thereof. The parties shall negotiate in good faith to
resolve any such disputes.
Section 3.07. Procedures. The services to be provided by PrimeCall in
accordance with this Article III shall be provided to DeltaThree in accordance
with reasonable procedures for operation and may be changed from time to time if
agreed upon by each of PrimeCall and DeltaThree.
ARTICLE IV
Services Provided by DeltaThree
Section 4.01. Web Site Development and Services. Within three (3)
months of the date hereof, DeltaThree shall establish and administrate a
PrimeCall web site (the "PrimeCall Web Site") in consultation with PrimeCall
which will enable PrimeCall to market and sell its calling cards via the World
Wide Web and provide on-line support for such sales. The PrimeCall Web Site
shall be a fully functional e-commerce site, with all ordering and billing
performed on-line. DeltaThree shall provide ongoing upgrades to the PrimeCall
Web Site, shall develop a database for the PrimeCall Web Site, and shall oversee
all billing, collections and fulfillment for on-line orders. PrimeCall shall
establish its own merchant account with Citibank or another accredited United
States banking institution and provide DeltaThree with all information
pertaining to such account to enable DeltaThree to process all on-line credit
card transactions for PrimeCall. PrimeCall shall be fully liable for all
charge-backs, refunds and commission payments associated with the processing of
PrimeCall's on-line credit card transactions by DeltaThree. DeltaThree shall
establish for PrimeCall an on-line interactive center whereby PrimeCall shall be
able to monitor the on-line sales of its calling cards. All calling card and
pricing information shall be
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provided by PrimeCall. DeltaThree shall be responsible for all costs and
expenses in connection with the operation and maintenance of the PrimeCall Web
Site and the services provided pursuant to this Section 4.01 shall be provided
at no additional cost to PrimeCall; provided, however, that PrimeCall shall be
fully responsible for all costs associated with the purchase of hardware,
software and domain names related to the PrimeCall website. PrimeCall agrees to
cooperate and provide necessary support to assist DeltaThree in providing the
services under this Section 4.01 and shall be responsible for supplying
DeltaThree with the content and graphics (look and feel) of the PrimeCall
website. In addition, upon the execution of this Agreement, each party shall
appoint an account manager to work directly on the implementation of this
Agreement.
Section 4.02. Reporting. On or before the tenth day of each calendar
month, DeltaThree shall prepare for PrimeCall a report detailing the total
revenues and expenses associated with the sale of PrimeCall's calling cards via
the World Wide Web in the previous month. In the event that PrimeCall disputes
any amounts set forth on the report, PrimeCall shall provide DeltaThree with
written notice of such dispute, which notice shall detail the reasons for the
dispute, within seven (7) days of its receipt thereof. The parties shall
negotiate in good faith to resolve any such disputes.
Section 4.03. Advertising and Promotion. In addition to the link
provided pursuant to Section 2.02 hereof, DeltaThree shall develop internet
advertisements for PrimeCall and shall provide 500,000 advertising impressions
on the DeltaThree home page during each month of the Term of this Agreement in
the form of banners, box ads, or the equivalent. DeltaThree shall also conduct
certain mutually agreed to targeted e-mail promotions upon the request of
PrimeCall. The services provided pursuant to this Section 4.03 shall be provided
at no additional cost to PrimeCall.
ARTICLE V
Payments
Section 5.01. Payment Terms. Any amounts due hereunder shall be
calculated and paid in U.S. dollars on a monthly basis within twenty-five (25)
business days following the receipt of the reports detailed in Sections 3.06 and
4.02 hereof or any other invoices provided for herein. All payments shall be
made via wire transfer in accordance with written instructions from the parties.
ARTICLE VI
Termination
Section 6.01. Termination for Cause. In the event that either PrimeCall
or DeltaThree materially breaches any of its duties or obligations hereunder,
which breach shall not be cured within thirty (30) days after written notice is
given to the breaching party specifying the breach, then either PrimeCall or
DeltaThree, 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
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date shall be no earlier than ten (10) days after the date of such notice.
Section 6.02. Termination for Bankruptcy. In the event of the
Bankruptcy (as hereinafter defined) of either PrimeCall or DeltaThree, 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 6.03. Effect of Termination. In the event of the termination of
this Agreement, all rights and obligations of PrimeCall and DeltaThree 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 PrimeCall or
DeltaThree 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 this Agreement and (iii) the provisions of Article
VII shall continue in full force and effect.
ARTICLE VII
Limited Warranty
Section 7.01. Disclaimer of General Warranty by PrimeCall. PRIMECALL
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 PRIMECALL BE LIABLE TO
DELTATHREE 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 DELTATHREE HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF PRIMECALL FOR DAMAGES OR ALLEGED
DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS
LIMITED TO, AND WILL NOT EXCEED, DELTATHREE'S DIRECT DAMAGES.
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Section 7.02. Disclaimer of General Warranty by DeltaThree. DELTATHREE
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 DELTATHREE BE LIABLE TO
PRIMECALL 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 PRIMECALL HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE. THE LIABILITY OF DELTATHREE FOR DAMAGES OR ALLEGED
DAMAGES HEREUNDER, WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS
LIMITED TO, AND WILL NOT EXCEED, PRIMECALL'S DIRECT DAMAGES.
Section 7.03 General Network Disclaimer. NEITHER PARTY REPRESENTS OR
WARRANTS THAT ITS NETWORK, GATEWAYS OR, THE SERVICES PROVIDED HEREUNDER ARE
COMPLETELY ERROR FREE OR WILL OPERATE WITHOUT PACKET LOSS OR INTERRUPTION NOR DO
THEY WARRANT ANY CONNECTION TO OR ANY TRANSMISSION OVER THE INTERNET.
ARTICLE VIII
Confidentiality
Section 8.01. Confidentiality. PrimeCall and DeltaThree 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 PrimeCall or DeltaThree, as the
case may be, or (ii) is or becomes available to PrimeCall or DeltaThree on a
non-confidential basis from a source other than the other party hereto or any of
its advisors, agents or affiliates, provided that such source is not known by
PrimeCall or DeltaThree, 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
PrimeCall and DeltaThree recognize that the absence of a time limitation in this
Section 8.01 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, PrimeCall and DeltaThree
each agree and submit to the imposition of such a limitation as said court shall
deem reasonable.
Section 8.02. Equitable Remedies PrimeCall and DeltaThree each
specifically recognize that any breach of Section 8.01 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
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(and without limiting the availability of legal or equitable, including
injunctive, remedies under any other provisions of this Agreement), each of
PrimeCall and DeltaThree 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, PrimeCall and
DeltaThree each agree that the provisions of Section 8.01 shall be considered
separate and apart from the remaining provisions of this Agreement and shall be
enforced as such.
ARTICLE IX
Miscellaneous
Section 9.01. 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, DeltaThree and
PrimeCall 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 DeltaThree and/or
PrimeCall.
Section 9.02. 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 9.03. 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:
If to DeltaThree:
430 Park Avenue, 5th Floor
New York, NY 10022
Fax No.: 212-588-3674
Attention: Chief Financial Officer
With a copy to:
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430 Park Avenue, 5th Floor
New York, NY 10022
Fax No.: 212-588-3674
Attention: General Counsel
If to PrimeCall:
430 Park Avenue, 5th Floor
New York, NY 10022
Fax No.: (212) 588-3601
Attention: President
With a copy to:
430 Park Avenue, 5th Floor
New York, NY 10022
Fax No.: 212-588-3601
Attention: General Counsel
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 9.04. Independent Contractors. At all times the parties hereto
shall be considered independent contractors and this Agreement shall not create
any agency, partnership or employment relationship between the parties. Except
as specifically set forth herein, neither party shall have the right to act for
or on behalf of or in the name of the other party.
Section 9.05. 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 9.06. Waivers. The waiver, express or implied, by a party
hereto of any rights hereunder or of any failure to perform or breach hereof by
the other party shall not constitute or be deemed a waiver of any other right
hereunder or any other failure to perform or breach hereof by the other party,
whether of a similar or dissimilar nature.
Section 9.07. 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.
Section 9.08. Severability. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, the remainder of this Agreement and the application of such provision
to other persons or circumstances shall not be affected unless the provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
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Section 9.09. 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 DeltaThree without the
prior written consent of PrimeCall. PrimeCall may assign this Agreement to any
affiliate of PrimeCall or in connection with a merger or consolidation of
PrimeCall or a sale of all or substantially all of PrimeCall's business. Except
as provided in the preceding sentence, this Agreement may not be assigned by
PrimeCall without the prior written consent of DeltaThree.
Section 9.10. 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 9.11. 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 9.03. 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 9.12. 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 9.13. Third Parties. There are no intended third party
beneficiaries to this Agreement.
Section 9.14. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
RSL COM PRIMECALL, INC.
By
---------------------------------
Name: Arnold Goodstein
Title: President and CEO
DELTATHREE.COM, INC.
By
---------------------------------
Name: Amos Sela
Title: President and CEO
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INTERCOMPANY COMPLIANCE AGREEMENT
---------------------------------
AGREEMENT, dated as of November __, 1999, among RSL Communications,
Ltd., a Bermuda corporation ("Parent"), RSL Communications PLC, a United Kingdom
corporation ("RSL PLC"), and deltathree.com, Inc., a Delaware corporation
("deltathree," and together with its subsidiaries, the "deltathree Parties").
WHEREAS, RSL PLC and deltathree are majority-owned subsidiaries of
Parent and each of deltathree's subsidiaries is majority-owned by deltathree;
WHEREAS, pursuant to separate indentures (as the same may be amended,
the "Existing Indentures"), RSL PLC has issued, and Parent has guaranteed,
$172,507,000 12 1/4% Senior Notes due 2006 (the "1996 Notes"), $200,000,000 9__%
Senior Notes due 2008, $100,000,000 12% Senior Notes due 2008, $200,000,000 10
1/2% Senior Notes due 2008, $175,000,000 9__% Senior Notes due 2009,
$328,084,000 10__% Senior Discount Notes due 2008 and DM296,000,000 10% Senior
Discount Notes due 2008 (the "Existing Notes");
WHEREAS, in the future, Parent or a subsidiary of Parent may enter
into additional indentures (as the same may be amended, the "Additional
Indentures" and, together with the Existing Indentures, the "Indentures")
providing for the issuance of additional notes (the "Additional Notes" and,
together with the Existing Notes, the "Notes");
WHEREAS, the Existing Indentures contain, and Parent expects that any
Additional Indentures will contain, covenants limiting the ability of Parent and
its subsidiaries, including the deltathree Parties, to take certain actions,
including, among others, to incur debt or make guarantees, create liens, sell
stock or assets, and make loans and other investments;
WHEREAS, deltathree is contemplating an initial public offering of
its Class A common stock (the "IPO") and, in connection with the IPO, Parent has
agreed to enter into one or more agreements (the "Services Agreements") with
deltathree pursuant to which, among other things, Parent will agree (a) to
provide deltathree certain services that are important to the operations of the
deltathree Parties (the "Services") and (b) not to compete with deltathree for a
period of two years;
<PAGE>
WHEREAS, Parent has used a portion of the proceeds of the issuance of
the Existing Notes to fund (a) the provision of important services to the
deltathree Parties and (b) cash requirements of the deltathree Parties, and, in
the future, Parent expects to use the proceeds of the issuance of the Existing
Notes and Additional Notes to fund its provision of the Services and, to the
extent Parent may determine desirable, cash requirements of the deltathree
Parties; and
WHEREAS, in connection with Parent's entering into the Services
Agreements the parties hereto committed to enter into this Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual
agreements, covenants and provisions herein contained and for good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Compliance with Indentures. (a) No deltathree Party shall take any
action, or omit to take any action, which act or omission would, of itself,
constitute a default or event of default under any Indenture, provided that this
Section 1(a) shall not apply (i) with respect to any Additional Indenture unless
and until Parent shall have provided deltathree a copy of that Indenture
pursuant to Section 2(b) or (ii) to any act or omission which Parent has
confirmed in writing pursuant to Section 1(c) would not constitute a default or
event of default under any Indenture.
(b) No deltathree party shall incur, or commit to incur, any
indebtedness without the prior written consent of Parent, which consent may be
witheld in Parent's sole discretion. For the purposes of this Section 1(b), (i)
the meaning of the term "incur" includes the meaning given to the term "Incur"
under the Existing Indentures and shall include the meaning given to any
analogous term under any Additional Indenture, and (ii) the meaning of the term
"indebtedness" includes the meaning given to the terms "Indebtedness" and "Debt"
under the Existing Indentures and shall include the meaning given to any
analogous term under any Additional Indenture, provided that this Section 1(b)
shall not apply to the incurrence of any indebtedness within the meaning of any
Additional Indenture unless and until Parent shall have provided deltathree a
copy of that Indenture pursuant to Section 2(b).
(c) If a deltathree Party is uncertain whether a proposed act or
omission would constitute a default or event of default under any Indenture,
such deltathree Party may consult with Parent. If Parent determines that the
proposed act or omission would not constitute a default or event of default
under any Indenture, Parent shall, at the request of such deltathree Party,
confirm such determination in writing, provided that the sole effect of such
confirmation shall be to exempt such act or omission from Section 1(a) and may
not be relied on by any deltathree Party for any other purpose or by any third
party for any purpose.
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(d) In connection with any default or event of default under any
Indenture resulting from any act or omission of a deltathree Party, each
deltathree Party shall immediately take such actions as Parent may request to
cure such default or event of default .
2. Further Actions.
(a) deltathree shall cause each of its subsidiaries to comply with
the terms of this Agreement. At any time and from time to time, upon the written
request of Parent, each deltathree Party shall (i) provide such information as
Parent may deem necessary or desirable to ensure compliance with the Indentures,
including, but not limited to, as to outstanding indebtedness incurred, liens
created, loans and investments made, and the aggregate amount of other
restricted payments, (ii) cause any party that hereafter becomes a subsidiary of
such deltathree Party to become a party to and bound by the terms of this
Agreement as a deltathree Party and (iii) duly execute and deliver such further
instruments and documents and take such further actions as Parent may reasonably
request for the purpose of obtaining or preserving the full benefits of this
Agreement.
(b) Parent has provided deltathree with copies of each of the
Existing Indentures as in effect on the date hereof and shall provide
deltathree, prior to or promptly after effectiveness, copies of each Additional
Indenture and all amendments and supplements to, and waivers and consents under,
each Indenture.
3. Required Information.
(a) Each deltathree Party shall provide to Parent from time to time
such information (including, without limitation, financial reports and
financial, tax and other records) as Parent may reasonably require in order to:
(i) prepare certificates of compliance in accordance with
any Indenture;
(ii) determine the aggregate indebtedness of the deltathree
Parties;
(iii) otherwise ensure that there are no breaches of any
Indenture;
(iv) comply with any applicable laws, including, without
limitation, the reporting obligations of Parent or any
of its subsidiaries under United States federal and
state securities laws;
(v) comply with the reporting obligations of any stock
exchange on which the securities of Parent or any of its
subsidiaries are listed from time to time; and
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(vi) limit or avoid liability under the securities laws of
any jurisdiction in connection with any action being
taken by Parent or any of its subsidiaries.
(b) Each deltathree Party consents to the disclosure of information
supplied to Parent in the circumstances set out in this Section 3 to the extent
that such disclosure is required by the terms of an Indenture, the reporting
obligations of any stock exchange, or the laws (including the securities laws)
of the United States or of any other jurisdiction.
(c)Each of the directors of deltathree who are also officers and/or
directors of Parent shall be permitted to disclose information made available to
such director to Parent.
4. Notices. Any notice or other communication required or permitted
to be given under this Agreement shall be delivered by hand; sent by express
mail, first-class, registered or certified mail, postage prepaid, or a reputable
overnight delivery service; or transmitted by telecopy. Any such notice or other
communication shall be deemed to have been given and received (i) if by personal
delivery or telecopy, on the day such personal delivery is made or such telecopy
is transmitted, (ii) if by first-class, registered or certified mail, on the
fifth business day after the mailing thereof or (iii) if by reputable overnight
delivery service for next day delivery, on the business day after the sending
thereof. Such notices or other communications shall be addressed as follows:
If to Parent or RSL PLC, addressed to such party at:
c/o RSL Communications, N. America, Inc.
767 Fifth Avenue
Suite 4300
New York, NY 10153
Fax No.: (212) 317-1940
Attention: General Counsel
If to a deltathree Party, addressed to such party at:
430 Park Avenue, 5th Floor
` New York, NY 10022
Fax No.: (212) 588-3674
Attention: General Counsel
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or to such other address(es) as any party shall give the other parties notice by
like means.
5. Termination. This Agreement shall terminate as to any
deltathree Party upon the earliest to occur of (a) the delivery by Parent to
deltathree of Parent's written acknowledgment that this Agreement has been
terminated as to such deltathree Party, (b) such time as Parent ceases to own
(directly or indirectly) any capital stock of such deltathree Party and (c) such
time as Parent has not been responsible or accountable for a period of 30
consecutive days for any action of such deltathree Party under the provisions of
any Indenture, unless this clause (c) applies as a result of an election by
Parent or any subsidiary under the Indentures not to treat such deltathree Party
as a "Restricted Subsidiary" (or equivalent).
6. Amendments; Waivers. The provisions of this Agreement may not
be amended or modified except by a writing signed by the parties hereto. The
failure of any party at any time or times to require performance of any
provision of this Agreement shall in no manner affect the rights at a later time
to enforce the same. No waiver by any party of the breach of any term contained
in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such breach or the breach of any other term of this Agreement.
7. Severability. If the final determination of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, (a) the remaining terms and provisions hereof shall be unimpaired
and (b) the invalid or unenforceable term or provision shall be deemed replaced
by a term or provision that is valid and enforceable and that comes closest to
expressing the intention of the invalid or unenforceable term or provision.
8. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the respective parties hereto and their respective
successors and assigns.
9. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the state of New York (without regard
to the conflict of laws principles or rules thereof).
10. Submission to Jurisdiction; Waiver of Immunity. Each of the
parties, for itself and its successors and assigns, hereby irrevocably waives
any objection, and agrees not to assert, as a defense in any legal or equitable
action, suit or proceeding arising out of or relating to this Agreement, that
(i) it is not subject thereto or that such action, suit or proceeding may not be
brought or is not maintainable in such courts,
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(ii) the venue thereof may not be appropriate and (iii) the internal laws of the
State of New York do not govern the validity, interpretation or effect of this
Agreement.
11. Equitable Remedies. Each of the deltathree Parties
acknowledges and agrees that, because of the unique and extraordinary nature of
the covenants contained herein, any breach or threatened breach of the
provisions of this Agreement will cause irreparable injury and incalculable harm
to Parent and/or its subsidiaries and that Parent shall, accordingly, be
entitled to apply for and to obtain injunctive relief, which shall be in
addition to any and all other rights and remedies available to the nonbreaching
party at law or in equity.
12. Indemnification. Each of the deltathree Parties
indemnifies Parent, RSL PLC and each of their respective subsidiaries (each an
"Indemnified Party") in respect of any claim, action, damage, loss, liability,
cost, charge, expense or payment (including, without limitation, attorneys' fees
and expenses) which the Indemnified Party pays, suffers, incurs or is liable
for, by reason of any breach or threatened breach of this Agreement by a
deltathree Party, including any such amounts incurred in connection with the
enforcement of this Agreement.
13. Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original, but all
such counterparts shall together constitute but one and the same instrument.
14. Entire Agreement. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof, and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to
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the subject matter hereof.
IN WITNESS THEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
RSL COMMUNICATIONS, LTD.
By:
----------------------------------
Name:
Title:
RSL COMMUNICATIONS PLC.
By:
----------------------------------
Name:
Title:
DELTATHREE.COM, INC.
By:
----------------------------------
Name:
Title:
7
