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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 000-28063
DELTATHREE.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 13-4006766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
430 PARK AVENUE, SUITE 500
NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 588-3670
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS THE SECURITIES ARE REGISTERED
- ----------------------------------------- -----------------------------------
Class A Common Stock, par value $0.001 Nasdaq National Market
per share
Indicate by a check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
The aggregate market value of the Registrant's Class A common stock
held by non-affiliates of the Registrant on March 22, 2000 was
approximately $293,608,219 million. On such date, the last sale price of
the Registrant's Class A common stock was $33.375 per share. Solely for
purposes of this calculation, shares beneficially owned by directors and
officers of the Registrant and persons owning 5% or more of the
Registrant's Class A common stock have been excluded, in that such persons
may be deemed to be affiliates of the Registrant. Such exclusion should not
be deemed a determination or admission by the Registrant that such
individuals or entities are, in fact, affiliates of the Registrant.
The number of shares outstanding of the Registrant's capital stock,
as of March 22, 2000, is as follows:
NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS AT MARCH 22, 2000
- ----------------------------------------- -----------------------------------
Class A Common Stock, $0.001 par value 9,142,702
Class B Common Stock, $0.001 par value 19,569,459
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DELTATHREE.COM, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS..........................................................3
ITEM 2. PROPERTIES.......................................................21
ITEM 3. LEGAL PROCEEDINGS................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.......................................23
ITEM 6. SELECTED FINANCIAL DATA...........................................26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............48
ITEM 11. EXECUTIVE COMPENSATION..........................................51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................66
SIGNATURES................................................................68
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................F-1
DELTATHREE.COM, INC.
1999 ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
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
PC-to- phone, D3 Box, Click IT, phone-to-phone, global roaming and
YourDay.com.
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.
Carrier transmission services accounted for 71.7% of our total
revenues in 1998 and 59.8% of our total revenues in 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.
We market our enhanced IP communications services through our own
Web site. In addition, we market these services through "communications
centers" on the Web sites of other Internet companies. Communications
centers enable viewers of those Web sites to directly access our services
without leaving those Web sites. We have sought to establish marketing
relationships with Internet companies that have strong brand names and high
traffic volumes. To date, we have marketing relationships with CBS.com,
CNET, Sony.com, Xoom.com and Yahoo! and we are continuing to pursue
marketing relationships with other companies. We also have entered into
distribution and marketing arrangements with communications equipment and
software companies.
In February 2000, we acquired YourDay.com, Inc., a leading on-line
calendar and scheduling system that seamlessly integrates Personal Digital
Assistants (PDAs), telephones and the Internet. As a result of this
acquisition, users will be able to access their calendars and schedules on
the Internet, over the phone or with their PDAs by using a synchronization
tool for fast response and easy transfer of data. YourDay.com will be
integrated into our existing service offerings.
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. RSL COM currently owns shares of our Class B common
stock representing approximately 95.5% of the combined voting power of all
classes of our capital stock and approximately 68.1% 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
67.2% of our total revenues in 1999.
We registered 6,000,000 shares of our Class A common stock on a
Form S-1 registration statement, which became effective on November 22,
1999. We received net proceeds of approximately $96,255,000 from the sale
of the 6,900,000 shares at the initial public offering price of $15.00 per
share on November 29, 1999. The managing underwriters for this offering
were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper Jaffray,
Lazard Freres & Co. LLC and Fidelity Capital Markets.
INDUSTRY SEGMENTS
We only report in one industry segment. See "Notes to Consolidated
Financial Statements - Note 14."
DESCRIPTION OF BUSINESS
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 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.
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 INTERACTIVE COMMUNICATIONS PORTAL
Our interactive communications portal, www.deltathree.com, acts as a
single-source, on-line solution for our users and on-line marketing agents.
Through our interactive communications portal, our users can:
o view a description of all of our services, including pricing
information
o sign up for any of our services, including PC-to-phone, unified
messaging and phone-to-phone
o download our software
o recharge their account, either by entering their credit card
information or authorizing automatic recharging
o send a PC-to-phone call
o retrieve and forward their voice mail, e-mail and faxes through
their D3 Box
o check real-time billing and usage information
o communicate by e-mail with a deltathree.com customer service
representative
o view answers to frequently-asked questions
Through our interactive communications portal, our on-line
marketing agents can:
o view a description of our on-line agent program
o sign up to serve as an on-line agent
o receive marketing tools to put on their own Web sites
o monitor their daily results
o view trends
o view commissions by promotions
OUR SERVICES
We provide a comprehensive package of enhanced IP communications
services. We provide some of our services on a prepaid or a per usage
basis, while we offer other services for free to attract and retain users.
CURRENT SERVICES
We currently provide the following services:
PC-to-phone. Our PC-to-phone service enables a user to conveniently
and inexpensively place a call to a standard telephone anywhere in the
world directly from a personal computer while remaining on-line. In order
to use this service, a user need only download our software for free from
our Web site and have access to the Internet. Once the software is
downloaded, the user is able to place a call from the user's PC and, while
browsing the Web, speak to a party who uses a standard telephone.
We are able to provide our PC-to-phone service at rates generally
lower than those charged for traditional circuit switched calls. We are
able to charge lower rates because our service utilizes packet-switched
technology and because it routes calls directly from the Internet onto our
privately-managed IP network and to the called destination, thus avoiding
access and settlement rates associated with traditional international and
domestic long distance telecommunications services. Our PC-to-phone service
allows ease of use by enabling a user to make a call directly from a
personal computer.
D3 Box. Our unified messaging service enables a user to
conveniently retrieve e-mail, voice mail and faxes, as well as send e-mail,
from a single source. We offer a user the flexibility of retrieving
messages by either logging on to www.deltathree.com or by placing a call
using a standard telephone. A user retrieving messages through a computer
can conveniently access and forward all e-mail, voice mail and faxes, while
a user retrieving messages through a standard telephone can hear voice mail
and have e-mail read by a computer-simulated voice.
Click IT. Our Click IT service 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.
YourDay.com. YourDay.com is an on-line calendar and scheduling
system that integrates personal assistant digital products, telephones and
the Internet to allow individuals to access their scheduling and business
data information from one centrally located Web site.
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:
ENHANCED SERVICE SUMMARY DESCRIPTION
IP-initiated conference calls....... Enables a user to set up a conference
call through our interactive
communications portal either by
sending a notice of the planned call
to all of the participants and having
each participant dial a toll-free
number or by arranging for each of
the participants to be called by the
automated system at the designated
call time. This service eliminates
the need for a conference operator,
thereby saving time and money.
Phone-to-PC......................... Enables a user to receive phone calls
directly through the user's PC while
remaining on-line. For example, a
user on the internet will receive a
pop-up screen stating that someone is
calling. The user can then choose to
forward the call to voice mail or to
answer the call from the computer
without logging off the internet. We
believe this service will be
attractive to users with a single
telephone line, who would otherwise
miss incoming calls while on-line or
would need to install additional
phone lines.
D3 Fax.............................. Enables users to conveniently send
faxes directly from their computer to
a standard fax machine anywhere in
the world over the Internet. To use
this service, a user only need
download our software, set up a
deltathree.com account and be
connected to the Web when they wish
to send a fax.
Information services................ Enables a user to have easy access to
communications information, such as
phone and e-mail directory services,
with a single click on our
interactive communications portal. We
believe this service will further the
use of our interactive communications
portal as a single source for users'
communications needs.
White boarding...................... Enables multiple users to view and
edit the same document on their
computers while speaking with each
other through their PCs. We 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.
CUSTOMER CARE
Our services are supported by our on-line interactive customer care
and billing center, which enables a user to set up a deltathree.com
account, receive an account number and a personal identification number,
pay by credit card for services, find answers to frequently asked questions
and contact our customer service representatives. Once a user has
established an account, the user can prepay for additional usage by credit
card as well as access real-time detailed information which includes call
logs and transaction records. Through our on-line billing system, a user
can personalize the billing information to select the data most relevant to
the user.
Most user concerns can be addressed on-line. Users can find answers
to many of their questions by referring to the "frequently asked questions"
information section of our Web site. Other questions can be addressed by
our customer support department that responds to user inquiries primarily
through e-mails. We seek to respond to e-mail inquiries within 24 hours. We
strive to continually improve our customer care center on our interactive
communications portal to meet the evolving needs of our users. In addition
to our on-line customer care, we also provide 24 hour, seven days a week
telephone support.
OUR MARKETING, ADVERTISING AND PROMOTIONAL PROGRAMS
We have developed and will continue to develop diversified
marketing, advertising and promotional programs to stimulate demand for our
services by increasing brand awareness. In the past, we have allocated
limited resources to marketing, advertising and promoting our services,
relying primarily on RSL COM to generate demand for our services. We intend
to increase our independent marketing efforts substantially in order to
increase our user base and to increase the frequency of use of our services
by our registered users and new users. We will also seek to form new
relationships with Internet businesses which we believe can promote our
services to a wide range of potential users and generate demand for our
services.
Our marketing, advertising and promotional programs include:
ON-LINE MARKETING RELATIONSHIPS. We encourage other companies to
link their Web sites to us either by creating "communications centers" on
their Web sites or by placing a deltathree.com banner on their Web sites
and directing their customers to us for their communications needs. We pay
fees for the placement of these banners and, in addition, we offer these
companies a percentage of the revenue generated by users that click-through
their Web site to use our services. To date, we have entered into marketing
relationships with six Internet companies, as described below, and we are
continuing to pursue marketing relationships with other companies.
o SenseNet. In February 2000, we entered into a services agreement
with SenseNet Inc. Under this agreement, SenseNet has agreed to provide a
hyperlink from its Web site to our Web site. In addition, we will provide
our IP telephony services to SenseNet. The initial term of this agreement
is six months. SenseNet has agreed to pay us a minimum of $416,666.67 per
month during the term of the agreement, due on or prior to December 31,
2000.
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, in addition to a $600,000 initial
payment, 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 $30,000 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)
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.
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
1.1 million V-Greeting cards have been sent. Of those V-Greeting cards that
have been sent, approximately 360,000 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 March 22, 2000, our network consisted of:
o 46 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 46 POPs in the following locations:
Austria (Vienna) Hong Kong
Bangladesh (Dhaka) Hungary (Budapest)
Belgium (Brussels) Iceland (Reykjavik)
Brazil (Rio de Janeiro) India (Bombay)
Brazil (Sao Paulo) Israel (Jerusalem)
Brazil (Jose de Compos) Israel (Rosh Ha'ayin)
China (Beijing) Israel (Tel Aviv)
China (Beijing 2) Korea (Seoul 1)
China (Beijing 3) Korea (Seoul 2)
China (Shanghai) Malaysia (Kuala Lumpur)
Colombia (Bogota) Mexico (Mexico City)
Colombia (Cali) Norway (Oslo)
Czech Republic (Prague) Peru (Lima)
Ecuador (Quayaquil) Russia (Moscow)
Ecuador (Quito 1) Russia (Nijnei)
Ecuador (Quito 2) Russia (Samara)
Finland (Helsinki) Russia (St. Petersburg)
France (Paris) Spain (Madrid)
Germany (Frankfurt) Sweden (Stockholm)
Greece (Athens) Turkey (Istanbul)
Greece (Rhodes) United Kingdom (London)
Greece (Saloniki) United States (Los Angeles)
Holland (Rotterdam) 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.
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.
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(TM),"
"YourDay.com(TM)" and "Anytime, Anywhere(TM)" in the United States. We have
submitted trademark applications for the name "Delta Three(TM)" 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(TM)," "Click IT(TM)," "D3
Fax(TM)," "deltathree.com(TM)," "D3 Box(TM)" and "deltathree.com the
Communications Portal(TM)." 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 IP
communications services that we provide constitute information services (as
opposed to regulated telecommunications services). As such, our services
are not currently regulated by the Federal Communications Commission (FCC)
or any state agencies charged with regulating telecommunications carriers.
Nevertheless, aspects of our operations may be subject to state or federal
regulation, including regulation governing universal service funding,
disclosure of confidential communications, copyright and excise tax issues.
However, we cannot assure you that our services will not be regulated in
the future. Several efforts have been made in the United States to enact
federal legislation that would either regulate or exempt from regulation
communications services provided over the Internet. Increased regulation of
the Internet may slow its growth, particularly if other countries also
impose regulations. Such regulation may negatively impact the cost of doing
business over the Internet and materially adversely affect our business,
operating results, financial condition and future prospects.
In addition, the FCC is currently considering whether to impose
surcharges or other common carrier regulations upon some providers of
Internet and IP telephony, primarily those which provide Internet and IP
telephony services to end users located within the United States. Although
the FCC decided that information service providers, including Internet and
IP telephony providers, are not telecommunications carriers, various
companies have challenged that decision. Congressional dissatisfaction with
the FCC's conclusions could result in requirements that the FCC impose
greater or lesser regulation, which in turn could materially adversely
affect our business, financial condition, operating results and future
prospects. On April 10, 1998, the FCC issued a report to Congress
discussing its implementation of universal service provisions contained in
the 1996 amendments to the Communications Act of 1934. In the report, the
FCC indicated that it would examine the question of whether certain forms
of phone-to-phone IP telephony are information services or
telecommunications services. The two are treated differently in several
respects, with certain information services being more lightly regulated
and not subject to universal service contribution obligations. The FCC
noted that it did not have, as of the date of the report, an adequate
record on which to make a definitive ruling, but that the record suggested
that certain forms of phone-to- phone IP telephony appear to have the 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. On September
29, 1999, the FCC released a notice of inquiry seeking information on the
extent to which phone-to-phone IP telephony services might impact the
accessibility of telecommunications services to people with disabilities,
including opportunities for achieving greater accessibility for IP
telephony and the extent to which IP telephony is now, or soon will be, an
effective substitute for conventional circuit-switched telephony. On
October 22, 1999, the FCC released a notice of proposed rulemaking on
collecting information on the status of local telephone service competition
and the deployment of advanced telecommunications capability. The FCC
recognized that, while it does not regulate Internet services, IP telephony
may become an important substitute for circuit-switched telephony and
should be included in evaluating local competition. Also, the FCC asked
whether it should undertake a more specific determination of the extent to
which the Internet is being used to provide 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 our cost of doing business or otherwise slow
the growth of our business.
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. If such regulations are adopted, they could materially adversely affect
our business, financial condition, operating results and future prospects.
Based on information users provide to us when they sign up to use our
services, we estimate that approximately 55% of our IP communications
services are provided to carriers or 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, or more aggressive enforcement
of existing regulations in such countries, could materially adversely
affect our business, financial condition, operating results and future
prospects.
For example, we believe that our services fall outside the
classification of regulated voice telephony services in the European Union.
The European Union regulatory regime distinguishes between voice telephony
services and other telecommunications services. In Services Directive
90/388/EEC, issued in 1990, the European Commission required Member States
to allow competition for all telecommunications services except voice
telephony and certain other services. The Services Directive was amended in
1996 by Commission Directive 96/19/EC, which required the liberalization of
all telecommunications services, including voice telephony, by January 1,
1998, except in certain member states that were granted extended compliance
periods. In addition, Directive 96/19/EC requires that services other than
voice telephony be subjected to no more than a general authorization or
declaration procedure. For purposes of these Directives, "voice telephony"
is defined as the commercial provision for the public of the direct
transport and switching of speech in real time between public switch
network termination points.
On January 10, 1998, the Commission issued a Notice addressing
whether IP telephony was voice telephony and thus subject to regulation as
voice telephony by the Member States. As noted by the Commission, a
determination that IP telephony constitutes "voice telephony" may trigger
significant regulatory consequences with respect to, among other things,
licensing requirements and contributions to universal service funding.
Consistent with its earlier directives, the Commission stated that Internet
telephony could properly be considered voice telephony only if all elements
of its "voice telephony" definition were met. In this January 1998 Notice,
the Commission concluded that no form of IP telephony currently meets the
definition of "voice telephony" subject to Member States' regulation. The
Commission noted, however, that its conclusion that IP telephony cannot be
considered voice telephony may not apply to particular forms of service
provisions where, for example, an IP telephony service is marketed as an
alternative form of voice telephony service, users can dial out to any
telephone number, and the provider guarantees the quality of the IP voice
service by bandwidth reservation and claims that the quality of the IP
voice service is the same as traditional voice telephony service.
Accordingly, the Commission concluded that while voice over the Internet
services cannot "for the time being" be generally classified as "voice
telephony," the situation must be kept under review in light of
technological and market developments. The Commission intends to review its
Notice periodically.
On November 10, 1999, the Commission released a communication
stating: "Assuming that over time the voice over the Internet service meets
the key criteria for classification as voice telephony under the regulatory
framework," this service would be regulated like other voice telephony
services and covered by general authorizations. The Commission has
announced that it is drafting a report on regulating the quality of voice
telephony services and related consumer protection issues and another
report discussing the new Internet telecommunications services and their
impact on the European Union's regulatory and policy framework. We cannot
predict what the content of such reports will be, or what impact, if any,
they may have on our business.
Based on the Commission's current position, 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.
One of our competitors recently disclosed that access to its
PC-to-phone service was blocked in certain countries in Asia and the Middle
East by government-controlled telecommunications companies, and that it
intended to negotiate agreements to continue to provide its services in
those countries but could not give assurances that such negotiations would
be successful. Another of our competitors recently disclosed that it has
received a letter from the Israel Minister of Communications requesting
that it cease and desist terminating calls over the Internet in Israel.
Although we have not received any similar notices from these regulators and
we do not know specifically how these competitors operate in such countries
or why they received such notices, there can be no assurance that such
regulators or any other regulator may not block our service or send us
similar cease and desist orders in the future.
OTHER REGULATION AFFECTING THE INTERNET
United States. Congress has recently adopted legislation that
regulates certain aspects of the Internet, including on-line content, user
privacy and taxation. For example, the Internet Tax Freedom Act prohibits
certain taxes on Internet uses through October 21, 2001. We cannot predict
whether substantial new taxes will be imposed on our services after that
date. In addition, Congress and other federal entities are considering
other legislative and regulatory proposals that would further regulate the
Internet. Congress is, for example, currently considering legislation on a
wide range of issues including Internet spamming, database privacy,
gambling, pornography and child protection, Internet fraud, privacy and
digital signatures. Various states have adopted and are considering
Internet-related legislation. Increased United States regulation of the
Internet may slow its growth, particularly if other governments follow
suit, which may negatively impact the cost of doing business over the
Internet and materially adversely affect our business, financial condition,
results of operations and future prospects.
International. The European Union has also enacted several
directives relating to the Internet. The European Union has, for example,
adopted a directive on data protection that imposes restrictions on the
processing of personal data which are more restrictive than current United
States privacy standards. Under the directive, personal data may not be
collected, processed or transferred outside the European Union unless
certain specified conditions are met. In addition, persons whose personal
data is processed within the European Union are guaranteed a number of
rights, including the right to access and obtain information about their
data, the right to have inaccurate data rectified, the right to object to
the processing of their data for 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 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.
EMPLOYEES
As of December 31, 1999, we employed 89 full-time and 16 part-time
employees, of which 87 are located in Israel and 18 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 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.
ITEM 2. 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.
In December 1999, we entered into a lease for headquarters of our
United States operations with an annual rent of approximately $398,000,
increasing annually to $530,000 during the final year of the lease. The lease
term extends until December 2009, with an option to extend the lease for an
additional five years.
We lease a 1,184 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem,
Israel. The term of this lease extends until January 31, 2003, with an
option to extend the lease for an additional five year period. We pay
annual rent of approximately $240,000 plus Israeli value-added tax. In
addition, we have signed a lease for an additional 256 square meters in an
existing location in Israel. The term of this lease begins on April 1, 2000
and extends until January 31, 2003, with an option to extend the lease for
an additional five years. We will pay an annual rent of approximately
$52,000 plus Israeli value-added tax for this additional space. 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.
ITEM 3. 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. We have answered the
complaint, and the parties are currently engaged in pre-trial discovery. As
we continue to evaluate these claims, we believe that we have meritorious
defenses to the claims 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Effective as of November 17, 1999, the appointment of Robert R.
Grusky, Yadin Kaufmann and Oakleigh Thorne as directors of the Company was
unanimously approved by written consent of the Company's stockholders. Amos
Sela, Elie C. Wurtman, Itzhak Fisher, Nir Tarlovsky, Donald R. Shassian,
Jacob Z. Schuster and Avery S. Fischer continued to serve as directors of
the Company following such approval.
Effective as of November 18, 1999, RSL COM, the holder of a
majority of the shares of the Company's common stock that were outstanding
as of that date, consented to the amendment of the Company's certificate of
incorporation to provide for a stock split by way of a reclassification of
the Company's Class A and Class B common stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our common stock has traded on the Nasdaq National Market under the
symbol "DDDC" since November 22, 1999. The following table sets forth the
per share range of high and low closing sales prices of our common stock
for the periods indicated:
HIGH LOW
($) ($)
----------- ------------
Year ended December 31, 1999
Fourth quarter................................ 29.375 25.00
Year ended December 31, 2000 62.375 22.375
First quarter (through March 22, 2000)........
On March 22, 2000, the last reported sale price for our common
stock on the Nasdaq National Market was $33.375 per share. The market price
for our stock is highly volatile and fluctuates in response to a wide
variety of factors.
Holders
As of March 22, 2000, we had approximately 64 holders of record of
our common stock. This does not reflect persons or entities who hold their
stock in nominee or "street" name through various brokerage firms.
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.
Recent Sales of Unregistered Securities
A predecessor company to us, Delta Three, Inc., was formed in June
1996 ("Old Delta Three"). During 1996, Old Delta Three issued a total of
7,535,277 (post-split) shares of its common stock to private investors to
generate initial start-up capital in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) of the Securities Act. Shares
for a total consideration of $164,755 were issued to 22 investors over a
five-month period in privately negotiated transactions with no general
solicitations being made. The purchasers delivered representations as to
their investment intents and all securities issued were legended to
indicate the restricted nature of the securities. These shares were issued
as follows:
DATE NO. OF INVESTORS NO. OF SHARES TOTAL CONSIDERATION
July 2, 1996......... 1(1) 62,121 $25,000
July 15, 1996........ 2(2) 31,060 $12,500
July 16, 1996........ 6(3) 95,666 $38,500
August 1, 1996....... 6(4) 6,243,160 $16,265
August 15, 1996...... 3(5) 126,726 $51,000
October 15, 1996..... 1(6) 24,848 $10,000
November 5, 1996..... 3(7) 951,693 $11,490
-------
Total........... $164,755
========
- -----------------------------
(1) Elliot Schwartz
(2) Arlene & Elliot Schwartz and Schwartz Family Trust Fund B
(3) Michael Ettinger, Schwartz Family Trust C, Ida & Michael Ettinger,
Walter Wolak, Rosalyn Schneller & Elliot Schwartz and Elliot Schwartz,
as custodian for Alex Weller
(4) Jacob Davidson, Pioneer Management Corporation, Inc., Fred Sager, Noam
Bardin, Lee Kaplan and Michna Avni
(5) Modern Technology Corp., Charlotte Horowitz and Shelly Weller & Elliot
Schwartz
(6) Kerry Kassovar
(7) Joseph H. Popolow, Stephen J. Perone and Jane F. Moysak
In the first half of 1997, Old Delta Three issued 124,242 shares of
its common stock to each of Israel Securities Center Corp. and Michael
Selesny in exchange for investment banking services related to identifying
private investors in Old Delta Three transaction exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. These 24,848 shares were purchased for $0.004 per share.
On December 23, 1996, Old Delta Three conducted a $300,000 private
placement of units consisting of convertible notes and warrants to
individual accredited investor subscribers in transactions exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof. There were twelve investors in the December placement, Eva D.
Glass, Bert Amador, Albert Resnick, John M. Walsh, Andrew S. Edson &
Marilyn Edson, Larry Alpert, H. Manes, Mark Katzman, Neil Katzman, Edmond
O'Donnell, Dr. Debabrata Chakrabarty and Smithfield Corp., each investing
$25,000 for which each investor received one unit consisting of a $25,000
convertible note (at a conversion price of $0.80 per share) and a warrant
permitting the purchase of up to 31,060 shares at an exercise price of $0.8
per share. In addition, one investor, Thomas Mann, made a short term loan
to Old Delta Three for $5,000 for which it received a warrant to purchase
up to 12,424 shares at an exercise price of $0.8 per share. An additional
investor, Northeast Securities, Inc., was paid a 10% commission and a 3%
expense allowance, in the form of convertible notes and warrants, for
acting as a placement agent which such services were valued at $50,000. No
general solicitations were made in connection with this transaction. Old
Delta Three obtained representations from the investors as to their
accredited investor status and the securities were legended to indicate the
restricted nature of them.
Old Delta Three conducted a similar private placement of units in
April 1997 consisting of convertible notes and warrants for an aggregate of
$520,000 in transactions exempt from the registration requirements of the
Securities Act in reliance on Rule 505 thereof. A total of 16 units were
issued to the following investors: Surety Bank & Trust Co. Ltd., Bert
Amador, Harvey R. Manes, M.D., Steven A. Portnoy, Kantibhai S. Patel IRA,
The Gross Investment Company, L.P., M.A.S. Hallaba IRA and Northeast
Securities, Inc. The price of each unit was $32,500 and consisted of a
$32,500 convertible note (at a conversion price of $1.30 per share) and a
warrant permitting the purchase of up to 24,848 shares at an exercise price
of $1.30 per share. No general solicitations were made in connection with
this transaction. Old Delta Three obtained representations from the
investors as to their accredited investor status and the securities were
legended to indicate the restricted nature of them.
In June 1997, under a restricted stock agreement for employees and
directors of Old Delta Three, Old Delta 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
COM 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. These shared 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 shareholders.
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
Delta Three, Inc. 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.
Pursuant to a stock and warrant purchase agreement, on October 18,
1999, we 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 $7.98
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, we 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 from $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 our initial public offering consummated on
November 29, 1999, 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.
Pursuant to an Agreement and Plan of Merger dated as of February 3,
2000, YourDay Acquisition Corp., our wholly-owned subsidiary, was merged
with and into YourDay.com, Inc. Pursuant to the merger, we issued 229,443
shares of common stock to stockholders of YourDay.com, Inc., in a
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
Use of Proceeds
On November 22, 1999, we offered 6,000,000 shares of our common
stock in an initial public offering. These shares were registered with the
Securities and Exchange Commission on a registration statement on Form S-1
(file no. 333-86503), which became effective on November 22, 1999. We
received net proceeds of approximately $96,255,000 from the sale of
6,900,000 shares at the initial public offering price of $15.00 per share
after deducting underwriting commissions and discounts and expenses of
approximately $6,300,000. The managing underwriters for our initial public
offering were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper
Jaffray, Lazard Freres & Co. LLC and Fidelity Capital Markets.
As of the date of this report, we have not made any specific
allocations with respect to the net proceeds from our initial public
offering. We expect that we will use the net proceeds 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.
ITEM 6. SELECTED 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 annual report 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, 1998 and 1999. Their report
appears elsewhere in this annual report. The selected balance sheet data as
of December 31, 1996 is derived from an audited financial statement not
included in this annual report.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1996
(INCEPTION)TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
------------ -------------------------------
1996 1997 1998 1999
------------ --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C>
Affiliates................................... $ $ -- 468 $ 3,896 $ 7,431
Non-affiliates .............................. 1 778 1,742 3,621
------------ --------- --------- ---------
Total revenues............................ 1 1,246 5,638 11,052
Costs and operating expenses:
Cost of revenues............................. -- (892) (4,459) (9,723)
Research and development expenses............ -- (294) (650) (1,233)
Selling and marketing expenses............... -- (632) (2,431) (7,403)
General and administrative expenses (exclusive
of non-cash compensation expense)......... (179) (1,388) (1,842) (2,754)
Non-cash compensation expense................ -- -- (743) (19,116)
Depreciation and amortization of goodwill.... -- (370) (2,671) (3,721)
------------ --------- --------- ---------
Total costs and operating expenses........ (179) (3,576) (12,796) (43,950)
------------ --------- --------- ---------
Loss from operations............................ (178) (2,330) (7,158) (32,898)
Interest expense, net........................... -- (37) (186) (873)
Minority interest............................... -- -- 223 --
------------ --------- --------- ---------
Net loss........................................ $ (178)$ (2,367) $ (7,121) $ (33,771)
============ ========= ========= =========
Net loss per share--basic and diluted............ $ (0.03)$ $ $
============ ========= ========= =========
Weighted average shares outstanding--basic
and diluted.................................... 6,420 12,390 19,254 20,418
AS OF DECEMBER 31,
--------------------------------------------
1996 1997 1998 1999
------------ --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents $ 130 $ 3,196 $ 1,357 $ 89,957
Working capital (deficiency) 70 2,763 (3,232) 82,941
Total assets 396 8,403 25,676 126,832
Long-term debt due to affiliates 344 -- 5,107 --
Total stockholder's equity (deficiency) (30) 6,272 12,370 102,580
</TABLE>
ITEM 7. 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
annual report.
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 until our
initial public offering, we have relied on RSL COM almost exclusively for
our financing needs. With the proceeds of our initial public offering, we
are 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 46.7% of our
total revenues in 1999 and 69.1% of our total revenues in 1998. Carrier
transmission services to non-affiliates accounted for 12.7% of our total
revenues in 1999 and 5.6% of our total revenues in 1998. The provision of
enhanced IP communications services accounted for 18.4% of our total
revenues in 1999 and 20.5% in 1998.
Costs and Operating Expenses
Costs and operating expenses consist of cost of revenues, research
and development expenses, selling and marketing expenses, general and
administrative expense, depreciation and amortization of goodwill and
non-cash stock compensation.
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 $1.6
million in 1998 and $1.4 million in 1999 in integrating the
hardware and software purchased from Ericsson into our network.
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, occupancy costs 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 capital 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 $5.5 million through December 31, 1999. The
future amortization of the unamortized goodwill balance will
result in charges of approximately $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 December 31, 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.
Deferred Compensation Charge
We have recognized approximately $24.3 million of deferred
compensation charges in 1999 related to non-cash compensation expense due
to the issuance of 2,198,025 shares of our common stock to our employees
granted with exercise prices below the fair market value in periods prior
to December 31, 1999. We recorded an additional approximately $4.4 million
of deferred compensation charges in connection with our sale of stock and
warrant to both Yahoo! and CNET. The deferred compensation charge
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. We began amortizing this deferred
compensation charge during the fourth quarter of 1999.
We will amortize the deferred compensation charge over a
twelve-month period for Yahoo! and a twenty-four month period for CNET. We
recognized $19.1 million in non-cash compensation expense in 1999, and we
will recognize an additional $10.7 million during the period January 1,
2000 through May 31, 2002.
RESULTS OF OPERATIONS
The following table sets forth the statement of operations data presented
as a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
------- --------- --------
Revenues:
Affiliates................ 37.6% 69.1% 67.2%
Non-affiliates ........... 62.4 30.9 32.8
------- --------- --------
Total revenues......... 100.0 100.0 100.0
Costs and operating expenses:
Cost of revenues.......... 71.6 79.1 88.0
Research and development
expenses................ 23.6 11.5 11.2
Selling and marketing
expenses................ 50.7 43.1 67.0
General and administrative
expenses (exclusive of
non-cash compensation
expense)................ 111.4 32.7 24.9
Non-cash compensation
expense................. -- 13.2 173.0
Depreciation and
amortization of goodwill. 29.7 47.4 33.7
------- --------- --------
Total costs and
operating expenses... 287.1 227.0 397.6
------- --------- --------
Loss from operations......... (187.1) (127.0) (297.6)
Interest expense, net........ (3.0) (3.3) (7.9)
Minority interests........... -- 4.0 --
------- --------- --------
(190.1)% (126.3)% (305.5)%
======= ========= ========
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Affiliates. Revenues from affiliates were $7.4 million for the year
ended December 31, 1999 compared to $3.9 million for the year ended
December 31, 1998, an increase of $3.5 million or 89.7%. The increase in
revenues from affiliates was due to an increase in sales of our services by
RSL COM to its customers. The increase in sales by RSL COM was due to the
growth in our network resulting in our ability to provide additional
capacity and to the quality of services that we provide.
Non-affiliates. Revenues from non-affiliates were $3.6 million for
the year ended December 31, 1999 compared to $1.7 million for the year
ended December 31, 1998, an increase of $1.9 or 111.8%. Revenues from
carrier transmission services for telecommunications carriers other then
RSL COM were $1.4 million for the year ended December 31, 1999 compared to
$164,902 for the year ended December 31, 1998, an increase of $1,254,190.
The increase was due primarily to an increased demand from a larger
customer base. Revenues from IP communications services were $2.0 million
for the year ended December 31, 1999 compared to $1.2 million for the year
ended December 31, 1998, an increase of $0.8 million or 66.7%. The increase
in revenues from 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 71.7% and 59.8% of revenues for
the years ended December 31, 1998 and December 31, 1999, respectively.
Other than RSL COM, no other customer accounted for greater then 5% of our
revenues during these periods. We expect the 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 $9.7 million for the year
ended December 31, 1999 compared to $4.5 million for the year ended
December 31, 1998. During the year ended December 31, 1999, we recognized
$299,136 compared to $694,250 for the year ended December 31, 1998 as the
reimbursement of certain costs from Ericsson, our primary equipment vendor.
Such reimbursement reduced our cost of revenues during both periods.
Excluding this reimbursement, cost of revenues would have been $10.0
million for the year ended December 31, 1999 compared to $5.2 million for
the year ended December 31, 1998, an increase of $4.8 million or 92.3%. The
increase in cost of revenues (excluding the reimbursement) was due
primarily to increased costs associated with the significant increase in
carrier transmission services. During 1998, due to difficulties in
integrating the hardware and software purchased from Ericsson into our
network, we incurred significant costs and anticipate that we will incur
additional costs through the end of 1999. To compensate us for our costs,
Ericsson agreed to provide us at no cost with network telecommunications
equipment with a fair market value of $3 million, representing Ericsson's
participation in such research and development costs, which we recognize as
an offset to cost of revenues and research and development expenses.
Research and development expenses. Research and development
expenses were $1.2 million for the year ended December 31, 1999 compared to
$650,140 for the year ended December 31, 1998. During the year ended
December 31, 1999, we recognized reimbursement from Ericsson for expenses
we incurred in research and development of $1.1 million compared to
$901,385 for the year ended December 31, 1998. Excluding this
reimbursement, research and development costs would have been $2.3 million
for the year ended December 31, 1999 compared to $1.6 million for the year
ended December 31, 1998, an increase of $0.7 million or 43.8%. The increase
in research and development expenses (excluding the reimbursement) was due
to greater costs incurred in hiring personnel to develop several new
services and enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses were
$7.4 million for the year ended December 31, 1999 compared to $2.4 million
for the year ended December 31, 1998, an increase of $5.0 million or
208.3%. The increase in selling and marketing expenses was due to the
expansion of our marketing and promotional activities. Selling and
marketing expenses for the year ended December 31, 1998 included expenses
related to a promotional campaign we conducted during this period.
General and administrative expenses. General and administrative
expenses were $2.8 million for the year ended December 31, 1999 compared to
$1.8 million for the year ended December 31, 1998, an increase of $1.0
million or 55.6%. The increase in general and administrative expenses was
primarily due to additional personnel and increased occupancy costs.
Non-cash compensation expenses. Non-cash compensation expenses were
$19.1 million for the year ended December 31, 1999 compared to $743,000 for
the year ended December 31, 1998, an increase of $18.4 million. 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 were converted into shares of
our common stock or options to purchase our common stock and the issuance
of shares and warrants to both CNET and Yahoo!.
Depreciation and amortization of goodwill. Depreciation and
amortization of goodwill was $3.0 million for year ended December 31, 1999
compared to $2.5 million for the year ended December 31, 1998, an increase
of $0.5 million or 20.0%. The increase in amortization of goodwill was due
to an increase in goodwill which grew significantly during 1998 as a result
of RSL COM acquiring the remaining outstanding shares of our company.
Loss from Operations
Loss from operations was $32.9 million for the year ended December
31, 1999 compared to approximately $7.2 million for the year ended December
31, 1998, an increase of $25.7 million or 356.9%. The increase in loss from
operations was due to the increase in costs and operating expenses and to a
decrease in prices we charged for carrier transmission services. We expect
to continue to incur losses for the foreseeable future.
Interest Expense, Net
Interest expense, net was $873,601 for the year ended December 31,
1999 compared to $186,295 for the year ended December 31, 1998, an increase
of $687,306 or 368.9%. The increase in interest expense was due to greater
borrowings from RSL COM to finance our working capital and capital
expenditure requirements.
Net Loss
Net loss was approximately $33.8 million for the year ended
December 31, 1999 compared to $7.1 million for the year ended December 31,
1998, an increase of $26.7 million or 376%. The increase in net loss was
due to the foregoing factors.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Affiliates. Revenues from affiliates were $3.9 million for the year
ended December 31, 1998 compared to $467,842 for the year ended December
31, 1997, an increase of $3.4 million, or 732.8%. The increase in revenues
from affiliates was due to an increase in sales of our services to RSL COM.
The increase in sales to RSL COM was attributable to the growth in our
network resulting in our ability to provide additional capacity to RSL COM
and an increase in demand for our services from RSL COM.
Non-affiliates. Revenues from non-affiliates were $1.7 million for
the year ended December 31, 1998 compared to $777,799 for the year ended
December 31, 1997, an increase of $964,142, or 124.0%. Revenues from
carrier transmission services for telecommunications carriers other than
RSL COM were $317,503 for the year ended December 31, 1998 compared to
$56,882 for the year ended December 31, 1997, an increase of $260,621, or
458.2%. Revenues from enhanced IP communications services were $1.2 million
for the year ended December 31, 1998 compared to $202,643 for the year
ended December 31, 1997, an increase of $951,151, or 469.4%. The increase
in revenues from carrier transmission and enhanced IP communications
services was due to an increase in the destinations we could terminate
traffic to as a result of the expansion of our network and an increasing
user base. Revenues from equipment sales were $270,644 for the year ended
December 31, 1998 compared to $498,504 for the year ended December 31,
1997, a decrease of $227,860, or 45.7%. The decrease was due primarily to
our decision to focus on enhanced IP communications services rather than
equipment sales. Equipment sales are not expected to constitute a material
portion of revenues in the future.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $4.5 million for the year
ended December 31, 1998 compared to $0.9 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 totaled $5.2 million, an increase of $4.3 million, or
477.8%. 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.
Depreciation and amortization of goodwill. Depreciation and
amortization of goodwill was $2.7 million for the year ended December 31,
1998 compared to $370,249 for the year ended December 31, 1997, an increase
of $2.3 million, or 621.2%. 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.
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.
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 December 31, 1999, we had an accumulated deficit of
approximately $43.4 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 $0.6 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 December 31, 1999, we owed approximately $14.8
million (principal and accrued interest) to RSL COM.
Prior to the closing of our initial public offering, RSL COM made
available to us a $10 million line of credit (exclusive of the existing
$14.8 million owed to RSL COM as of December 31, 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. To date, we have not
drawn on the RSL COM line of credit. We are not subject to any negative or
financial covenants under either the RSL COM inter-company loans or line of
credit. Although we are neither the debtor nor the guarantor under any of
the indentures that govern a substantial amount of RSL COM's debt, we are
subject to financial restrictions by reason of our status as a restricted
subsidiary of RSL COM under such indentures. Such restrictions
significantly limit and could prohibit the ability of RSL COM and its
restricted subsidiaries, including our company, to incur additional
indebtedness or to create liens on their assets. The limitations on
indebtedness under the indentures generally are based on the application of
tests derived from RSL COM's consolidated financial statements.
Effectively, our ability to incur indebtedness is limited by the amount of
indebtedness that RSL COM and its restricted subsidiaries, including our
company, are permitted to incur under the indentures. The limitations under
RSL COM's restrictive indenture covenants currently prohibit us from
incurring any significant amount of additional debt. We have further agreed
with RSL COM that we will not incur any debt other than inter-company debt
without its written consent so long as we are a restricted subsidiary.
In 1998 and 1999, we incurred approximately $6.0 million and $2.8
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 December 31, 1999, we had approximately $90.0 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.
Net cash used in operating activities was $1.6 million for the year
ended December 31, 1997, $3.8 million for the year ended December 31, 1998
and $9.8 million for the year ended December 31, 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 $949,137 for the year
ended December 31, 1997, $3.1 million for the year ended December 31, 1998
and $3.5 million for the year ended December 31, 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 $5.6 million for the
year ended December 31, 1997, $5.0 million for the year ended December 31,
1998 and $101.9 million for the year ended December 31, 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 eleven
months ended November 30, 1999, cash provided by financing activities
consisted of borrowings from RSL COM. We received net proceeds of
approximately $96,255,000 upon the completion of our initial public
offering on November 29, 1999.
We believe that our available 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.
YEAR 2000 SOFTWARE COMPLIANCE
We have not experienced any significant problems associated with
year 2000 issues to date. Similarly, to our knowledge, our distributors,
suppliers and other third parties with whom we conduct business have not
experienced material year 2000 problems to date.
RISK FACTORS
In addition to the other information in this report, the following
factors should be carefully considered in evaluating our business and
prospects.
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 $33.8 million in 1999, and a net loss
of approximately $7.1 million in 1998. As of December 31, 1999, our
accumulated deficit was approximately $43.4 million. As a percentage of
revenues, our net loss was 305.6% in 1999 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 $7.4 million in 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 59.8% of our total revenues in 1999
and 74.7% in 1998. Enhanced IP communications services generated 18.0% of
our total revenues in 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
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
adversely affect our ability to attract sufficient Web traffic and reduce
our attractiveness to advertisers. Brand recognition may become more
important in the future with the growing number of Internet sites and IP
communications providers.
IF WE FAIL TO ESTABLISH MARKETING RELATIONSHIPS THAT PROVIDE US VISIBILITY,
WE MAY NOT BE ABLE TO SUFFICIENTLY INCREASE OUR SALES
We believe that our success depends, in part, on our ability to
develop and maintain marketing and promotional relationships with Internet
companies and communications equipment and software companies that
themselves have strong brand names or high traffic volumes. If we are
unable to establish and maintain these relationships, we may not be able to
increase sales of our services, and we may lose users.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE AND
MAY HAVE TO REQUEST IT FROM RSL COM WHO HAS NO OBLIGATION TO PROVIDE IT
We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for
service quality, capacity and competitive pricing. Also, the introduction
of our new enhanced IP communications services will require significant
marketing and promotional expenses that we often incur before we begin to
receive the related revenue. If our cash flow from operations is not
sufficient to meet our capital expenditure and working capital
requirements, we will need to raise additional capital from other sources.
Although we are neither the debtor nor the guarantor under any of the
indentures that govern a substantial amount of RSL COM's debt, we are a
"restricted subsidiary" under these indentures and will continue to be one
after the completion of the offering. The limitations under RSL COM's
restrictive indenture covenants prohibit RSL COM and its restricted
subsidiaries, including us, from incurring any significant amount of
additional debt. We have agreed with RSL COM not to take any action which
would cause RSL COM to default under its indentures and not to incur any
debt, other than inter-company debt, without its written consent so long as
we are a restricted subsidiary of RSL COM. These limitations may require us
to resort to other sources of funding, such as the issuance of equity. If
we issue additional equity, investors could experience dilution. If we are
unable to raise additional capital through the issuance of equity, we may
need to rely upon RSL COM to provide any additional capital to meet our
working capital and capital expenditure requirements and we cannot assure
you that RSL COM or any other third party will be willing or able to
provide additional capital on favorable terms. If we are unable to obtain
additional capital, we may be required to reduce the scope of our business
or our anticipated growth, which would reduce our revenues.
WE MAY BE UNABLE TO MANAGE OUR EXPANSION AND ANTICIPATED GROWTH EFFECTIVELY
We have grown and expect to continue to grow rapidly. This growth has
placed, and is likely to continue to place, a significant strain on our
managerial, operational and financial resources. To manage our growth, we
must continue to implement and improve our operational and financial
systems, as well as our managerial controls and procedures. We cannot
assure you that we have made adequate allowances for the costs and risks
associated with this expansion, that our systems, procedures or controls
will be adequate to support our operations or that our management will be
able to successfully offer and expand our services. If we are unable to
effectively manage our expanding operations, our revenues may not increase,
our cost of operations may rise and we may not be profitable.
POTENTIAL FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAKE IT DIFFICULT
FOR INVESTORS TO PREDICT OUR FUTURE PERFORMANCE
Our quarterly operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside our control.
The factors generally within our control include:
o the rate at which we are able to attract users to purchase our
enhanced IP communications services
o the amount and timing of expenses to enhance marketing and
promotion efforts and to expand our infrastructure
o the timing of announcements or introductions of new or enhanced
services by us
The factors outside our control include:
o the timing of announcements or introductions of new or enhanced
services by our competitors
o technical difficulties or network interruptions in the Internet
or our privately managed network
o general economic and competitive conditions specific to our
industry
The foregoing factors also may create other risks affecting our
long-term success, as discussed in the other risk factors.
We believe that quarter-to-quarter comparisons of our historical
operating results may not be a good indication of our future performance,
nor would our operating results for any particular quarter be indicative of
our future operating results.
OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS
We expect the volume of traffic we carry over our network to
increase significantly as we expand our operations and service offerings.
Our network may not be able to accommodate this additional volume. In order
to ensure that we are able to handle additional traffic, we may have to
enter into long-term agreements for leased capacity. To the extent that we
overestimate our capacity needs, we may be obligated to pay for more
transmission capacity than we actually use, resulting in costs without
corresponding revenues. Conversely, if we underestimate our capacity needs,
we may be required to obtain additional transmission capacity from more
expensive sources. If we are unable to maintain sufficient capacity to meet
the needs of our users, our reputation could be damaged and we could lose
users.
WE FACE A RISK OF FAILURE OF COMPUTER AND COMMUNICATIONS SYSTEMS USED IN
OUR BUSINESS
Our business depends on the efficient and uninterrupted operation
of our computer and communications systems as well as those that connect to
our network. We maintain communications systems in five facilities in New
York, Los Angeles, London, Frankfurt and Jerusalem. Our systems and those
that connect to our network are subject to disruption from natural
disasters or other sources of power loss, communications failure, hardware
or software malfunction, network failures and other events both within and
beyond our control. In December 1998, we experienced a system disruption
while we were installing a new billing system and users were unable to
access our Web site for six hours. In July 1999, we experienced a system
disruption with respect to our unified messaging service, D3 Box, while the
product was being market tested. For a period of three days the system was
down and users were unable to send or retrieve new messages. Any system
interruptions that cause our services to be unavailable, including
significant or lengthy telephone network failures or difficulties for users
in communicating through our network or portal, could damage our reputation
and result in a loss of users.
OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES
Our computer infrastructure is potentially vulnerable to physical
or electronic computer viruses, break-ins and similar disruptive problems
and security breaches which could cause interruptions, delays or loss of
services to our users. We believe that the secure transmission of
confidential information over the Internet, such as credit card numbers, is
essential in maintaining user confidence in our services. We rely on
licensed encryption and authentication technology to effect secure
transmission of confidential information, including credit card numbers. It
is possible that advances in computer capabilities, new technologies or
other developments could result in a compromise or breach of the technology
we use to protect user transaction data. A party that is able to circumvent
our security systems could misappropriate proprietary information or cause
interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible
liability. Although we have experienced no security breaches to date of
which we are aware, we cannot guarantee you that our security measures will
prevent security breaches.
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. We have answered the complaint, and the
parties are currently engaged in pre-trial discovery. As we continue to
evaluate 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
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 1999, we experienced
losses from fraud of approximately $25,000. 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. 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 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.
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 67.2% of our revenues for the years ended December 31,
1997, December 31, 1998 and December 31, 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 through November 29, 2001. 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 our initial public offering, RSL COM owns all
of our Class B common stock and will therefore own approximately 95.5% of
the voting power of our company.
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
In addition, five of our ten 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
Although we are neither the debtor nor the guarantor under any of
the indentures that govern a substantial amount of RSL COM's debt, we are
subject to covenants by reason of our status as a restricted subsidiary of
RSL COM under such indentures. As of March 1, 2000, RSL COM had
approximately $1.4 billion of debt outstanding under these indentures. This
debt is unsecured. These restrictions significantly limit the ability of
RSL COM and its restricted subsidiaries, including our company, to incur
additional indebtedness or create liens on their assets. The limitations on
indebtedness under the indentures generally are based on the application of
tests derived from RSL COM's consolidated financial statements.
Effectively, our ability to incur indebtedness is limited by the amount of
indebtedness that RSL COM and its restricted subsidiaries, including our
company, are permitted to incur under the indentures. The limitations under
RSL COM's restrictive indenture covenants currently prohibit us from
incurring any significant amount of additional debt. We have also agreed
with RSL COM not to take any action which would cause RSL COM to default
under its indentures and not to incur any debt, other than inter-company
debt, without its written consent so long as we are a restricted subsidiary
of RSL COM. In addition, currently the restrictions under the RSL COM
indentures effectively prohibit us from paying dividends and limit our
ability to make other distributions in respect of our capital stock, sell
assets, engage in mergers or acquisitions or make some types of
investments. Such restrictions also limit the ability of a third party to
acquire a controlling interest in our company. These restrictions may
prohibit transactions that would otherwise be beneficial to our company.
THE INTERESTS OF RSL COM MAY CONFLICT WITH OUR INTERESTS
The interests of RSL COM, our controlling stockholder and principal
customer, may conflict with our interests.
Services. We have entered into a services agreement with RSL COM
for the provision of traffic termination services, colocation rights and
other network support services. We provide carrier transmission services to
RSL COM. Because of these transactions and RSL COM's controlling position
in our company, conflicts of interest could arise relating to the nature,
quality and pricing of services or products provided by us to RSL COM or by
RSL COM to us.
Financial Support. Historically, RSL COM has funded our working
capital and operating losses. As a result, we owe RSL COM $14.8 million, as
of December 31, 1999. Also, to the extent that we require additional
working capital we may need to turn to RSL COM. Because of RSL COM's
control over us, conflicts of interest could arise relating to the
prepayment of borrowings, the provision of additional funding and the terms
of such funding and general issues relating to the uses and sources of our
funds.
Board Conflicts. Five of our ten 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.
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,
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 OUR STOCK
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.
VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS
Since trading commenced in November 1999, the market price of our
common stock has been highly volatile and may continue to be 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.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Securities and Exchange Commission's rule related to market
risk disclosure requires that we describe and quantify our potential losses
from market risk sensitive instruments attributable to reasonably possible
market changes. Market risk sensitive instruments include all financial or
commodity instruments and other financial instruments (such as investments
and debt) that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements required by this
item are included in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The following table sets forth certain information concerning our
directors, executive officers and key employees.
NAME AGE POSITION
Elie C. Wurtman 30 CO-FOUNDER, CO-CHAIRMAN OF THE
COMPANY AND CHAIRMAN OF THE
BOARD OF DIRECTORS
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, INTERIM CHIEF
EXECUTIVE OFFICER, PRESIDENT,
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
OAKLEIGH THORNE 42 DIRECTOR
- --------------------------------------------
*PRIOR TO APRIL 1, 2000, AMOS SELA SERVED AS CHIEF EXECUTIVE OFFICER AND
PRESIDENT.
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.
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. Effective April 1,
2000, Mr. Bardin will serve as president and interim chief executive
officer of our company. Prior to serving as vice president, Mr. Bardin
served as our global network director from November 1996 to May 1997. From
November 1995 to October 1996, Mr. Bardin served as director of operations
for Ambient Corporation. From January 1995 to October 1995, Mr. Bardin
worked for several 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 a director of our company since the
closing of our initial public offering. Mr. Grusky has been President of
RSL Investments Corporation since April 1998. Mr. Grusky has been a senior
managing member of Hope Capital Partners, L.P., a public equities
investment partnership, and a co-founder and principal of New Mountain
Capital LLC, a private equity fund, since January 2000. From April 1997 to
January 2000, Mr. Grusky was Senior Advisor to Ronald S. Lauder. From 1985
to 1997, Mr. Grusky was at Goldman, Sachs & Co. as a member of its mergers
and acquisitions department and later in its principal investment area. In
1990, Mr. Grusky took a one-year leave of absence during which he was
appointed a White House Fellow by President Bush and served as Assistant to
the then Secretary of Defense Dick Cheney. He is a director of Central
European Media Enterprises, Ltd., ITI Holdings, S.A. and an advisory
director of Tinicum Capital Partners, L.P. He is also a member of the Board
of Trustees of the Hackley School and The Multiple Myeloma Foundation.
YADIN KAUFMANN has been a director of our company since the closing
of our initial public 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.
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.
OAKLEIGH THORNE has been a director of our company since the
closing of our initial public offering. Since October 1996, Mr. Thorne has
served as the chairman and chief executive officer of TBG Information
Investors, LLC, a private equity partnership, and as the co-president of
Blumenstein/Thorne Information Partners I, L.P., a private equity
partnership. He was president and chief executive officer of Commerce
Clearing House, a provider of tax and business law information, software
and services from April 1995 to August 1996, and the executive vice
president of Commerce Clearing House from January 1991 to April 1995. Since
March 1998, Mr. Thorne has been a director of Medscape, a web-based
healthcare company. He also serves as the chairman of the board of SCP
Communications.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
Our certificate of incorporation, as amended and restated, provides
that the number of members of our board of directors shall be not less than
three and not more than thirteen. Our number of directors is currently ten.
At each annual meeting of stockholders, directors will be elected to hold
office for a term of one year and until their respective successors are
elected and qualified. All of the officers identified above serve at the
discretion of our board of directors.
We have established an executive committee, a compensation
committee and an audit committee to devote attention to specific subjects
and to assist the Board in the discharge of its responsibilities. The
functions of these committees and their current members are set forth
below.
The Executive Committee is empowered to act on any matter except
those matters specifically reserved to the full Board of Directors by
applicable law. Itzhak Fisher, Donald R. Shassian, Nir Tarlovsky and Elie
C. Wurtman are the current members of the Executive Committee.
The Compensation Committee is responsible for evaluating our
compensation policies, determining our executive compensation policies and
guidelines and administering our stock option and compensation plans. Yadin
Kaufmann, Jacob Z. Schuster and Oakleigh Thorne are the current members of
the Compensation Committee.
The Audit Committee recommends to the Board the appointment of the
firm selected to serve as our independent auditors and our subsidiaries and
monitors the performance of such firm; reviews and approves the scope of
the annual audit and evaluates with the independent auditors our annual
audit and annual financial statements; reviews with management the status
of internal accounting controls; evaluates issues having a potential
financial impact on us which may be brought to the Audit Committee's
attention by management, the independent auditors or the Board; and
evaluates our public financial reporting documents. Jacob Z. Schuster,
Donald R. Shassian and Robert R. Grusky are the current members of the
Audit Committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and
reports of changes in beneficial ownership of common stock and other equity
securities of the Company. Directors, officers and greater than 10%
stockholders are required by SEC regulations to furnish the Company with
all Section 16(a) forms they file.
To the Company's knowledge, based solely upon review of the copies
of such reports furnished to the Company, all of the Company's directors,
officers and greater than 10% stockholders have complied with the
applicable Section 16(a) reporting requirements, except for the Statements
of Beneficial Ownership on Form 3 relating to the beneficial ownership of
shares of common stock by Shimmy Zimels, Jacob A. Davidson, Marc Tobin,
Baruch D. Sterman, Elie C. Wurtman, Noam Bardin, Amos Sela, Mark J.
Hirschhorn, Yadin Kaufmann, Oakleigh Thorne, Avery S. Fischer, Itzhak
Fisher, Robert R. Grusky, Jacob Z. Schuster, Donald R. Shassian, Nir
Tarlovsky, RSL Communications Ltd. and CNET Investment Inc., which were not
filed on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain summary information
concerning the compensation paid or awarded to the chief executive officer
of the Company and the four other most highly compensated executive
officers of the Company in 1999 whose total salary and bonus exceeded
$100,000.
<TABLE>
<CAPTION>
1999 ANNUAL
COMPENSATION ($) LONG-TERM ALL OTHER
---------------------
SALARY ($) BONUS ($) COMPENSATION COMPENSATION ($)
---------- ---------- ------------ ----------------
<S> <C> <C> <C> <C>
Amos Sela, president and chief executive officer....... 230,000 115,000 -- --
Mark J. Hirschhorn, chief financial officer........... 200,000 160,000 -- --
Noam Bardin, chief technology officer.................. 170,000 136,000 -- --
Shimmy Zimels, vice president of operatons............. 170,000 136,000 -- --
Elie Wurtman, co-chairman of the company............... 180,000 90,000 -- --
</TABLE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information regarding stock options
granted to the named executive officers during 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
SHARES OF % OF TOTAL EXERCISE POTENTIAL REALIZABLE VALUE AT
COMMON STOCK OPTIONS PRICE FAIR MARKET ASSUMED RATES OF STOCK PRICE
UNDERLYING GRANTED TO PER VALUE ON APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN SHARE GRANT DATE EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) ($/SH) DATE 0% 5% 10%
- ----- ------------ ----------- ------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amos Sela ......... 273,332 21.4 5.11 15.00 4/1/06 2,703,253 4,372,357 6,592,975
Mark J. Hirschhorn 173,938 13.6 5.11 15.00 4/1/06 1,720,246 2,782,401 4,195,517
Noam Bardin ....... 173,938 13.6 5.11 15.00 4/1/06 1,720,246 2,782,401 4,195,517
Shimmy Zimels...... 173,938 13.6 5.11 15.00 4/1/06 1,720,246 2,782,401 4,195,517
Elie Wurtman....... 165,656 13.0 5.11 15.00 4/1/06 1,638,338 2,649,918 3,995,749
</TABLE>
- ---------------
* Excludes options issued in exchange for RSL COM restricted units.
OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES
The following table sets forth information for the named executive
offices with respect to options held as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES YEAR END (#) YEAR-END
ACQUIRED VALUE EXERCISABLE ($) EXERCISABLE
NAME ON EXERCISE(#) REALIZABLE /UNEXERCISABLE /UNEXERCISABLE
- ----- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Amos Sela.................... 0 0 0/273,332 0/5,641,572
Mark J. Hirschhorn.......... 0 0 0/173,938 0/3,590,080
Noam Bardin.................. 248,483 6,397,443 0/173,938 0/3,590,080
Shimmy Zimels................ 86,969 2,239,104 0/173,938 0/3,590,080
Elie Wurtman................. 0 0 0/165,656 0/3,419,140
</TABLE>
COMPENSATION OF DIRECTORS
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 was not our employee received
options to purchase 24,848 shares of common stock upon completion of our
initial public 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."
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 $5.11 per share. The
employee's options are exercisable in installments, as long as the
employee is employed by us on the applicable vesting date, and
after an option is exercisable, that option remains exercisable
until the expiration of seven years from the date of the agreement.
If the employee is terminated for any reason prior to September 30,
2000, following such date, any unvested options will expire. If the
employee is terminated for cause, following such date, all options
will expire. In the case of Messrs. Sela, Hirschhorn, Bardin and
Zimels, the options are exercisable in three equal installments 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 of the Board of Directors $ 180,000(1) 165,656
Amos Sela(2) ................... 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
Chief Technology Officer
Shimmy Zimels .................. Vice President of Operations $ 170,000 173,938
(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.
(2) Effective April 1, 2000, we and Mr. Sela have mutually agreed to
terminate his employment agreement.
</TABLE>
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.
1999 STOCK INCENTIVE PLAN
We have a stock incentive plan. 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.
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 have a performance incentive plan. The purpose of the plan is to
assist the company and its subsidiaries to attract, retain, motivate and
reward the best qualified executive officers and key employees by providing
them with the opportunity to earn competitive compensation directly linked
to our performance.
GENERAL. Under the plan, bonuses are payable if we meet any one or
more of several performance criteria, which are to be set annually by the
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 have an employee stock purchase plan. The purpose of the
employee stock purchase plan is to align employee and shareholder long-term
interests by facilitating the purchase of common stock by employees and to
enable employees to develop and maintain significant ownership of common
stock.
GENERAL. The employee stock purchase plan is intended to comply
with the requirements of Section 423 of the Internal Revenue Code, and to
assure the participants of the tax advantages provided thereby. 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 have a directors' stock compensation plan. The purposes of the
directors' plan are to enable us to attract, maintain and motivate
qualified directors and to enhance a long-term mutuality of interest
between our directors and shareholders of our common stock by granting our
directors options to purchase our shares.
Under the directors' plan, on the first business day following each
annual meeting of our shareholders during the term of the directors' plan,
each director who is not an employee of our company will be granted options
to acquire 10,000 shares of our common stock with an exercise price per
share equal to the fair market value of a share of our common stock on the
date of grant. These options will have a seven-year term and will become
exercisable on the first anniversary of the date of grant. In addition,
each director who is not an employee of our company on the date of the
completion of this offering will be granted options to acquire 24,848
shares of our common stock with an exercise price per share equal to the
initial public offering price. Each individual who becomes a director and
is not an employee of our company following completion of this offering
will be granted options to acquire 24,848 shares of common stock with an
exercise price per share equal to the fair market value on the date of
grant. These options will have a seven-year term and will be immediately
exercisable, but if exercised, subject to the 180-day lock-up to be imposed
on our officers and directors. The maximum number of shares that may be
issued under the directors' plan is 600,000. The plan will terminate
December 31, 2009, unless sooner terminated by our stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Executive compensation decisions in 1999 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 our initial public offering, our
compensation committee will make all compensation decisions regarding our
executive officers. In 1999 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."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 March 1, 2000 and the beneficial ownership of shares of the capital
stock of RSL COM as of March 1, 2000 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
o each stockholder who is selling stock in this offering
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 March 1, 2000 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.CO SHARES OF RSL COM
CAPITAL STOCK CAPITAL STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
----------------------- --------------------------
PERCENT-
NUMBER AGE(1) NUMBER PERCENTAGE(2)
-------- ------- --------- -------------
PRINCIPAL STOCKHOLDERS:
RSL Communications, Ltd.
767 Fifth Avenue
Suite 4300,
<S> <C> <C> <C> <C>
New York, New York 10153.......... 19,569,459 68.1% -- --%
Ronald S. Lauder(3)
c/o RSL Communications, Ltd....... 19,574,459 68.1 15,947,636 (16) 29.1
CNET Investments, Inc.
150 Chestnut Street
San Francisco, California 94111... 1,551,971(4) 5.4 -- --
DIRECTORS AND EXECUTIVE OFFICERS:
Itzhak Fisher(5)(6).................. 25,848 * 3,310,481(17) 6.0
Nir Tarlovsky(5)(6).................. 34,848 * 863,199(18) 1.6
Donald R. Shassian(5)(6)............. 29,848 * 101,333(19) *
Jacob Z. Schuster(5)(7).............. 34,848 * 1,689,404(20) 3.1
Yadin Kaufmann(6)(8)................. 24,848 * 1,000(21) *
Robert R. Grusky(6)(9)............... 26,848 * 3,500(22) *
Avery S. Fischer(5)(6)............... 31,848 * 14,375(23) *
Oakleigh Thorne(6)(10)............... 25,298 * -- --
Elie C. Wurtman(11)(12).............. 165,656 * -- --
Shimmy Zimels(11)(13)................ 263,407 * -- --
Noam Bardin(11)(13).................. 427,421 1.5 -- --
Mark J. Hirschhorn(11)(13)........... 183,938 * -- --
Amos Sela(11)(14).................... 278,332 * -- --
All Directors and Executive
Officers as a group (sixteen
persons)(15)......................... 1,725,143 5.8 5,995,772 10.9
</TABLE>
- -------------------
* Less than 1%.
(1) Percentage of beneficial ownership is based on (a) 19,569,459 shares
of Class B common stock issued to RSL COM and (b) 9,147,575 shares of
common stock (excluding a warrant issued to CNET to purchase 466,028
shares of common stock) outstanding as of March 1, 2000.
(2) Percentage of beneficial ownership is based on RSL COM's outstanding
share capital of 24,267,283 shares of Class B common stock and
30,591,975 shares of Class A common stock as of March 1, 2000. 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) Includes options to purchase 24,848 shares of common stock.
(7) Consists of (a) 10,000 shares of 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 (b) options to
purchase 24,848 shares of common stock. Mr. Schuster disclaims
beneficial ownership of the shares owned by Schuster Family Partners.
(8) The address for Mr. Kaufmann is 91 Medinat Hayehudim St., Herzlia
Pituach 46120, Israel.
(9) The address for Mr. Grusky is c/o New Mountain Capital LLC, 712 Fifth
Avenue, 23rd Floor, New York, NY 10019.
(10) The address for Mr. Thorne is P.O. Box 871, Lake Forest, IL 60045.
(11) The address for director or executive officer listed is c/o us.
(12) Includes options to purchase 165,656 shares of common stock.
(13) Includes options to purchase 173,938 shares of common stock.
(14) Includes options to purchase 273,332 shares of common stock.
(15) Includes options to purchase 1,279,545 shares of common stock.
(16) Consists of (a) 2,336 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) 3,263,363 shares owned
directly by Mr. Lauder.
(17) 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.
(18) 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) 144,284 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.
(19) Consists of (a) 18,000 shares of Class A common stock of RSL COM and
(b) options to purchase 83,333 shares of Class A common stock of RSL
COM.
(20) 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.
(21) Represents 1,000 shares of Class A common stock of RSL COM.
(22) Represents 4,500 shares of Class A common stock of RSL COM.
(23) Consists of (a) 5,980 shares of Class A common stock of RSL COM and
(b) options to purchase 8,395 shares of Class A common stock of RSL
COM.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all of the transactions set forth below were made on an
arms-length basis. All future transactions between us and our officers,
directors, principal stockholders and affiliates will be approved by a
majority of the board of directors, including a majority of the outside
directors, and will continue to be on terms no less favorable to us than
could be obtained from unaffiliated third parties.
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 December 31, 1999, we owed approximately $14.8 million (principal and
accrued interest) to RSL COM. The inter-company loans are due on demand
after October 1, 2000. Prior to the closing of our initial public offering,
RSL COM made available to 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. To date, we have not drawn on the RSL
COM line of credit. 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.
Since our initial public offering, RSL COM has been our controlling
stockholder and owns 100% of the outstanding Class B common stock, which
represents approximately 95.5% of the combined voting power of all of our
outstanding capital stock and approximately 68.1% of the economic interest
in our company.
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 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 the consummation of our initial
public offering 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."
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 December 31,
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.
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
our initial public offering, RSL COM has committed to purchase a minimum of
50 million minutes per annum of voice and fax transmission services from
us. If RSL COM fails in this commitment RSL COM will be required to pay us
a shortfall charge of 10% of the average daily weighted coverage price per
minute charged by us to RSL COM in the last three months of each annual
period. If we are no longer a subsidiary of RSL COM, RSL COM's minimum
purchase obligation will cease. These services are provided to RSL COM at
the then prevailing fair market rates. However, the services agreement does
not specify procedures for establishing such rates.
Marketing
Under the services agreement, we and RSL COM will engage in joint
marketing. Each of us is required to place, in a prominent location, a link
on its home page Web site to the other's home page Web site. We will also
cross- sell each other's products and services, including through
promotional materials and customer service representatives and other
additional promotional efforts. However, neither we nor RSL COM are
required to market or promote a product or service of the other if such
product or service competes with the other party's product or service.
Non-Competition
Under the services agreement between us and RSL COM, RSL COM is
prohibited from competing with us in providing Internet telephony services
as described in the services agreement, provided that we provide RSL COM
with any requested Internet telephony services promptly and with quality
assurance. However, this non-competition provision terminates on September
3, 2001 and the scope of such provision is subject to the following
limitations:
o RSL COM and its subsidiaries may acquire up to 20% in an entity
providing Internet telephony services;
o RSL COM and its subsidiaries may be stockholders in entities
providing Internet telephony services, provided that Internet
telephony services are ancillary to the business of that entity;
o the non-competition provision does not apply to RSL COM's
subsidiaries that become publicly traded companies; and
o Internet telephony services under the non-competition provision
are limited to (1) phone to phone services marketed as IP to the
general public, including both individuals and businesses and
(2) the following Web- based enhanced communication services:
PC-to-phone, D3 box, Click IT, Global Roaming, IP-initiated
conference calls, Phone-to-PC, D3 Fax, information services and
white boarding.
CARRIER TRANSMISSION SERVICES
RSL COM purchases carrier transmission services from us. RSL COM
accounted for 37.6%, 69.1% and 67.2% of our revenues in the years 1997,
1998 and 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 completed our initial public 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.
RELEASE AND INDEMNIFICATION AGREEMENT
We entered into an agreement with RSL COM, pursuant to which we
have agreed to release each other from any claims existing or arising from
acts or events occurring or failing to occur prior to the date of the
agreement, other than those arising from this agreement, the services
agreement, the registration rights agreement, the management agreement, the
intercompany credit agreement, the compliance agreement and other
commercial transactions between us and RSL COM. Further, we have agreed to
indemnify each other for breaches of the existing agreements described
above.
RELATIONSHIPS WITH OTHER INVESTORS
YAHOO! INC.
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, in addition to a $600,000 initial
payment, for the services provided.
On October 18, 1999, in exchange for an offset of an account
payable to Yahoo! of $1 million, we issued to Yahoo! 125,275 shares of our
common stock. In addition, on November 23, 1999, Yahoo! exercised a warrant
to purchase 58,626 shares of our common stock. 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 the completion of our initial public offering and to include
their shares in our future registered equity offerings.
CNET INVESTMENTS, INC.
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.
On October 20, 1999, we issued to CNET 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 $19.31 per share
exercisable for the term of our promotion agreement with CNET. CNET will be
entitled to request that we register their shares under the Securities Act
beginning 180 days after the completion of our initial public offering and
to include their shares in our future registered equity offerings.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The Consolidated Financial Statements filed as part of this
Annual Report on Form 10-K are identified in the Index to Consolidated
Financial Statements on page F-1 hereto.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
on the financial statements or notes thereto.
(a)(2) Exhibits.
The following exhibits are filed herewith or are
incorporated by reference to exhibits previously filed with the Securities
and Exchange Commission.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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.
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** Intercompany Compliance Agreement dated as of November 1,
1999, between RSL Communications, Ltd., RSL Communications
PLC and deltathree.com, Inc.
10.20** Development and Promotion Agreement effective as of September
22, 1999 between CNET, Inc. and deltathree.com, Inc.
10.21** Form of Proposed Release and Indemnification Agreement
between RSL Communications, Ltd. and deltathree.com, Inc.
10.22 Agreement and Plan of Merger dated as of February 3, 2000
between deltathree.com, Inc., YourDay Acquisition Corp.,
YourDay.com, Inc. and SenseNet Inc.
21.1 Subsidiaries of Registrant.
23.1 Consent of Brightman Almagor & Co.
24.1 Power of Attorney (included on the signature page to this
Annual Report).
- -----------------------------
** Incorporated by reference to our registration statement on Form S-1
(Registration No. 333-86503).
(b) Reports on Form 8-K.
During fiscal 1999, we did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, New York on the 27th day of March, 2000.
DELTATHREE.COM, INC.
By: /s/ Mark J. Hirschhorn
-----------------------
Mark J. Hirschhorn
Chief Financial Officer
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 this Annual Report, 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Amos Sela
- ------------------------------- Chief Executive Officer, President March 27, 2000
Amos Sela and Director (Principal Executive Officer)
/s/ Mark J. Hirschhorn
- ------------------------------- Chief Financial Officer (Principal March 27, 2000
Mark J. Hirschhorn Accounting and Financial Officer)
/s/ Elie C. Wurtman
- ------------------------------- Co-Chairman of the Company March 27, 2000
Elie C. Wurtman and Chairman of the Board of Directors
/s/ Jacob A. Davidson
- ------------------------------ Co-Chairman of the Company March 27, 2000
Jacob A. Davidson
/s/ Itzhak Fisher
- ------------------------------ Director March 27, 2000
Itzhak Fisher
/s/ Nir Tarlovsky
- ------------------------------ Director March 27, 2000
Nir Tarlovsky
/s/ Donald R. Shassian
- ----------------------------- Director March 27, 2000
Donald R. Shassian
/s/ Jacob Z. Schuster
- ---------------------------- Director March 27, 2000
Jacob Z. Schuster
/s/ Avery S. Fischer
- ---------------------------- Director March 27, 2000
Avery S. Fischer
/s/ Robert R. Grusky
- ---------------------------- Director March 27, 2000
Robert R. Grusky
/s/ Yadin Kaufmann
- ---------------------------- Director March 27, 2000
Yadin Kaufmann
/s/ Oakleigh Thorne
- ---------------------------- Director March 27, 2000
Oakleigh Thorne
</TABLE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DELTATHREE.COM, INC.
PAGE
----
<S> <C>
Independent Auditors' Report...............................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999...............................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998 and 1999............................................................................F-4
Statements of Changes in Stockholder's Equity (Deficiency) for
the Years Ended December 31, 1997, 1998 and 1999.........................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999..............................................................................F-6
Notes to Consolidated Financial Statements.................................................F-7
</TABLE>
All Financial Statement Schedules have been omitted because (i) the
required information is not present in amounts sufficient to require
submission of the schedule, (ii) the information required is included in
the Financial Statements or the Notes thereto or (iii) the information
required in the schedules is not applicable to the Company.
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, 1998 and 1999 and
the related consolidated statements of operations, changes in stockholders'
equity (deficiency) and cash flows each of the three years in the period
ended December 31, 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, 1998 and 1999, and the consolidated results of
its operations and cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
BRIGHTMAN ALMAGOR & CO.
CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)
A MEMBER OF DELOITTE TOUCHE TOHMATSU
Tel Aviv, Israel
January 26, 2000
<TABLE>
<CAPTION>
DELTATHREE.COM, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1999
----------- -----------
($ IN THOUSANDS)
ASSETS
Current assets:
<S> <C> <C>
CASH AND CASH EQUIVALENTS................................ $ 1,357 $ 89,957
SHORT-TERM INVESTMENTS................................... -- 11,276
ACCOUNTS RECEIVABLE--NET.................................. 543 903
DUE FROM AFFILIATES...................................... 2,192 1,760
PREPAID EXPENSES AND OTHER CURRENT ASSETS................ 621 3,090
----------- -----------
TOTAL CURRENT ASSETS.......................................... 4,713 106,986
----------- -----------
INVESTMENTS................................................... 90 90
----------- -----------
PROPERTY AND EQUIPMENT:
TELECOMMUNICATIONS EQUIPMENT............................. 7,910 9,844
FURNITURE, FIXTURES AND OTHER............................ 736 721
----------- -----------
8,646 10,565
LESS ACCUMULATED DEPRECIATION............................ (376) (1,066)
----------- -----------
PROPERTY AND EQUIPMENT--NET............................... 8,270 9,499
----------- -----------
GOODWILL--NET.................................................. 12,488 9,457
----------- -----------
DEPOSITS...................................................... 115 800
----------- -----------
TOTAL ASSETS.................................................. $ 25,676 $126,832
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
SHORT-TERM DEBT DUE TO AFFILIATES........................ $ -- $ 14,752
ACCOUNTS PAYABLE......................................... 4,302 2,580
DUE TO AFFILIATES........................................ 1,403 626
DEFERRED REVENUES AND COSTS.............................. 1,610 538
OTHER CURRENT LIABILITIES................................ 629 5,548
----------- -----------
TOTAL CURRENT LIABILITIES..................................... 7,944 24,044
----------- -----------
LONG-TERM LIABILITIES:
LONG-TERM DEBT DUE TO AFFILIATES......................... 5,107 --
SEVERANCE PAY OBLIGATIONS................................ 233 208
----------- -----------
TOTAL LONG-TERM LIABILITIES................................... 5,340 208
----------- -----------
MINORITY INTEREST............................................. 21 --
----------- -----------
TOTAL LIABILITIES............................................. 13,305 24,252
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
CLASS A COMMON STOCK, AUTHORIZED AT DECEMBER 31,
1999--PAR VALUE $0.001; 200,000,000 SHARES;
ISSUED AND OUTSTANDING 0 AT DECEMBER 31, 1998;
8,918,132 AT DECEMBER 31, 1999....................... -- 9
CLASS B COMMON STOCK--PAR VALUE $0.001; 200,000,000
AND 200,000,000 AT DECEMBER 31, 1998 AND 1999,
RESPECTIVELY; 19,569,459 AND 19,569,459
ISSUED AND OUTSTANDING AT DECEMBER 31, 1998
AND 1999, RESPECTIVELY............................... 20 20
PREFERRED STOCK, PAR VALUE $0.001; 25,000,000 SHARES
AUTHORIZED AS OF DECEMBER 31, 1999; NO SHARES
ISSUED AND OUTSTANDING AT DECEMBER 31, 1998
AND 1999............................................. 31,O --
ADDITIONAL PAID-IN CAPITAL............................... 23,084 157,891
RECEIVABLE FOR CAPITAL STOCK............................. -- (1,232)
DEFERRED COMPENSATION.................................... (1,066) (10,670)
ACCUMULATED DEFICIT...................................... (9,667) (43,438)
----------- -----------
TOTAL STOCKHOLDER'S EQUITY.................................... 12,371 102,580
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................... $ 25,676 $ 126,832
=========== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
($ IN THOUSANDS,
EXCEPT SHARE DATA)
REVENUES:
<S> <C> <C> <C>
AFFILIATES......................................... $ 468 $ 3,896 $ 7,431
NON-AFFILIATES..................................... 778 1,742 3,621
---------- ----------- ----------
TOTAL REVENUES.......................................... 1,246 5,638 11,052
---------- ----------- ----------
COSTS AND OPERATING EXPENSES:
COST OF REVENUES................................... 892 4,459 9,723
RESEARCH AND DEVELOPMENT EXPENSES.................. 294 650 1,233
SELLING AND MARKETING EXPENSES..................... 632 2,431 7,403
GENERAL AND ADMINISTRATIVE EXPENSES (EXCLUSIVE OF NON-CASH
COMPENSATION EXPENSE SHOWN BELOW).............. 1,388 1,842 2,754
NON-CASH COMPENSATION EXPENSE...................... -- 743 19,116
DEPRECIATION AND AMORTIZATION...................... 370 2,671 3,721
---------- ----------- ----------
TOTAL COSTS AND OPERATING EXPENSES...................... 3,576 12,796 43,950
---------- ----------- ----------
LOSS FROM OPERATIONS.................................... (2,330) (7,158) (32,898)
INTEREST EXPENSE, NET................................... (37) (186) (873)
MINORITY INTEREST....................................... -- 223 --
---------- ----------- ----------
NET LOSS................................................ $ (2,367) $ (7,121)$ (33,771)
========== =========== ==========
NET LOSS PER SHARE--BASIC AND DILUTED.................... $ (0.19) $ (0.37)$ (1.65)
========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING--BASIC AND DILUTED... 12,390,043 19,253,855 20,418,457
========== =========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DELTATHREE.COM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIENCY)
($ IN THOUSANDS, EXCEPT SHARE DATA)
RECEIVABLE TOTAL
CLASS A CLASS B ADDITIONAL FOR STOCKHOLDERS'
COMMON STOCK COMMON STOCK PAID-IN CAPITAL ACCUMULATED DEFERRED EQUITY
-------------- ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFAULT COMPENSATION (DEFICIENCY)
------ ------- ------ ------ ---------- ---------- ----------- ------------ -------------
BALANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
at January 1, 1997..... -- $ -- 7,659,507 $ 8 $ 141 $ -- $ (179) $ -- $ (30)
Issuance of capital stock 11,278,742 11 5,320 5,331
Recognition of pushdown
of goodwill............ 3,338 3,338
Net loss.................. (2,367) (2,367)
------ ------- ---------- ------ ---------- ---------- ----------- ------------ -------------
BALANCE
At DecembeR 31, 1997... -- -- 18,938,249 19 8,799 -- (2,546) -- 6,272
Conversion of debt and
warrants to equity 631,210 1 657 658
Deferred compensation
expense................ 1,809 (1,809) --
Amortization of deferred
compensation expense... 743 743
recognition of pushdown
of goodwilL............ 11,819 11,819
Net loss.................. (7,121) (7,121)
------ ------- ---------- ------ ---------- ---------- ----------- ------------ -------------
BALANCE
At December 31, 1998 -- -- 19,569,459 20 23,084 -- (9,667) (1,066) 12,371
Issuance of common stock
in initial public offering,
net of expenses (includ-
ing over-allotment of
shares)............... 6,900,000 7 93,855 93,862
Issue of shares to
employees............. 748,288 1 232 (232) 1
Issue of shares to
YAHOO!................ 183,901 * 1,000 (1,000) *
Issue of shares to CNET.. 1,085,943 11,000 11,001
Deferred compensation
expense to Yahoo! and
CNET.......... 4,397 (4,397) --
Deferred compensation
expense to employees 24,323 (24,323) --
Amortization of deferred
compensation expense 19,116 19,116
Net loss................. (33,771) (33,771)
------ ------- ---------- ----- ----------- ---------- ------------ ------------ --------------
BALANCE
At december 31, 1999. 8,918,132 $ 9 19,569,459 20 $ 157,891 $(1,232) $ (43,438) $ (10,670 $ 102,580
========= ====== ========== ===== ============ ========== ============ =========== ==============
* Less than $1,000
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
DELTATHREE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---- ---- ----
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss................................................. $ (2,367)$ (7,121)$ (33,771)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 370 2,671 3,721
Amortization of deferred compensation.......... -- 743 19,116
Write-down of investment........................ -- 25 --
Minority interest............................... -- (224) (21)
Increase (decrease) in liability for severance pay 27 148 (25)
Provision for losses on accounts receivable..... 100 227 (275)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..... (925) 78 (85)
Increase in other current assets and due from affiliates(198) (2,270) (2037)
Increase (decrease) in accounts payable........ 926 1,734 (793)
Decrease in deferred revenues................... -- (1,595) (1,072)
Increase in current liabilities and due to affiliates 446 1,827 5,467
----------- ----------- ----------
746 3,364 23,996
----------- ----------- ----------
Net cash used in operating activities.................... (1,621) (3,757) (9,775)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................. (889) (3,003) (2,848)
Increase in deposits................................ -- (61) (685)
Equity investments.................................. (60) (25) --
Other............................................... -- 15 --
----------- ----------- ----------
Net cash used in investing activities.................... (949) (3,074) (3,533)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term investments -- -- (11,276)
Proceeds from issuance of capital stock............. 5,331 -- 104,864
Proceeds from issuance of convertible notes......... 520 -- --
Retirement of convertible notes..................... (208) -- --
Proceeds from short-term debt from affiliates....... -- -- 8,320
Proceeds from long-term debt from affiliates........ (30) 5,000 --
Proceeds from short-term borrowings................. 25 -- --
Payment of other long-term debt..................... -- (8) --
----------- ----------- ----------
Net cash provided by financing activities................ 5,638 4,992 101,908
----------- ----------- ----------
Increase (decrease) in cash and cash equivalents......... 3,068 (1,839) 88,600
Cash and cash equivalents at beginning of year........... 128 3,196 1,357
----------- ----------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 3,196 $ 1,357 $ 89,957
=========== =========== ==========
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
captal stock $ -- $ 657 $ --
=========== =========== ==========
Assets acquired with vendor credits................. $ -- $ 3,000 $ --
=========== =========== ==========
Recognition of pushdown of goodwill................. $ 3,338 $ 11,819 $ --
=========== =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
DELTATHREE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS DESCRIPTION
a. 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
46 points of presence (POPs) in 29 countries as of December 31,
1999.
The Company's research and development activities are conducted in
Israel by its wholly owned subsidiary, Delta Three Israel Ltd.
("Delta Ltd.").
b. Acquisition of the Company by RSL COM--The Company is a
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% and 67% of
the Company's revenues for the year ended December 31, 1998 and
1999, respectively, were derived from transactions with RSL COM.
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 $2,857,000. 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 $11,819,000 and 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 $15,158,000. The goodwill is being amortized by the
Company over a five-year period.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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.
b. Use of estimates--The preparation of the 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.
c. 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.
d. 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.
e. 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.
f. 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 over their estimated life or the life
of the lease, whichever is shorter, while repair and maintenance
costs are charged to operations as incurred. The useful life of
telecommunications network equipment purchased from Ericsson (see
Note 10b) is 10 years. During 1998, $3 million of the Company's
equipment purchases from Ericsson was initially recorded in the
Company's consolidated balance sheets as a debit to property and
equipment and an offsetting credit 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 10b), the Company reclassified
the $3 million accounts payable to deferred revenues and costs.
g. 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.
h. 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, 1999, there had been no impairment in the
carrying value of long-lived assets or goodwill.
i. 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.
j. 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.
k. Research and development expenses--Research and development
expenses, net of reimbursements from vendors, are expensed as
incurred.
l. Advertising expenses--Advertising expenses are expensed as
incurred. For the years ended December 31, 1997, 1998 and 1999,
advertising expenses were approximately $24,000, $124,000 and
$87,000, respectively.
m. 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.
n. 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.
o. Concentration of credit risk--The Company is subject to
concentrations of credit risk which consist principally of trade
accounts receivable and cash and cash equivalents.
The Company maintains its cash with various financial
institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions.
The majority of the Company's non-carrier 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.
p. Fair value of financial instruments--The carrying amounts of
cash and cash equivalents, short-term investments, accounts
receivable and 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.
q. Effects of recently issued accounting standards--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.
r. 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 11g).
s. Reclassifications--Certain previously reported amounts have
been reclassified to conform with the 1999 presentation.
NOTE 3 -- ACCOUNTS RECEIVABLE, NET
Accounts receivable are stated net of an allowance for doubtful
accounts of $ 326,000 and $52,000 at December 31, 1998 and 1999,
respectively.
NOTE 4 -- DUE FROM/TO AFFILIATES
The balances due from and due to affiliates are for services
rendered and are non-interest bearing.
NOTE 5 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the
following:
DECEMBER 31,
-------------------------
1998 1999
------------ ------------
($ IN THOUSANDS)
------------
Prepaid commissions.................................. $ 145 $ --
Deposits with credit card companies.................. 199 150
Government of Israel (VAT refund and other).......... 60 55
Deposits with suppliers.............................. 87 --
Prepaid expenses..................................... 28 1,333
Loan to employee..................................... 32 977
Other................................................ 70 575
------------ ------------
Total prepaid expenses and other current assets...... $ 621 $ 3,090
============ ============
NOTE 6 -- GOODWILL, NET
Goodwill consists of the following:
DECEMBER 31,
-------------------------
1998 1999
------------ ------------
($ IN THOUSANDS)
-----------
Goodwill from acquisition of the Company by RSL COM
(see Note 1).................................... $ 15,158 $ 15,158
Less--accumulated amortization........................ (2,670) (5,701)
------------ ------------
Total goodwill, net............................. $ 12,488 $ 9,457
============ ============
NOTE 7 -- SHORT-TERM DEBT DUE TO AFFILIATES
The short-term debt issued in 1998 to RSL COM bears interest at a
fixed annual rate of 14% and is due on October 1, 2000.
NOTE 8 -- OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
DECEMBER 31,
-------------------------
1998 1999
------------ ------------
($ IN THOUSANDS)
Accrued expenses..................................... $ 361 $ 2,971
Employees and related expenses....................... 144 2,451
Deposits from customers.............................. 119 15
Other................................................ 5 111
------------ ------------
Total other current liabilities................. $ 629 $ 5,548
============ ============
NOTE 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.
NOTE 10 -- 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. In 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.
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 and 1999, due to difficulties in integrating the
hardware and software purchased from Ericsson into the Company's
network, the Company incurred significant costs. 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 years ended December 31, 1998 and 1999, the
Company recognized $901,000 and $1,105,000, respectively, as an
offset to research and development expenses, and $694,000 and
$299,000, respectively, as an offset to cost of revenues incurred
in respect of the network telecommunications equipment.
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--In December 1999, the Company entered into a
lease for headquarters of its United States operations with an
initial cost of approximately $398,000, increasing to $530,000
during the final year of the lease. The lease term extends until
December 2009 with an option to extend the lease for an additional
five years.
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.
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. In
addition, the Company entered into a lease for additional space in
its existing location in Israel at an annual cost of approximately
$52,000. The term of the lease begins April 1, 2000 and extends
until January 31, 2003, with an option to extend the lease for an
additional five years.
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. The Company has answered the complaint, and the parties are
currently engaged in pre-trial discovery. As the Company continues
to evaluate 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.
NOTE 11 -- STOCKHOLDER'S EQUITY
a. Share capital--Following the Company's initial public offering,
effective November 1999, the Company's shares are listed on the
NASDAQ National Market System.
b. Stock split--All references to per share amounts and the number
of shares in these financial statements have been restated to
reflect the stock split of 2.48-for-one, effected in November
1999.
c. Description of capital stock--As of December 31, 1998, the
Company's authorized share capital was 200,000,000 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 December 31, 1999, the
Company's authorized share capital was 200,000,000 shares of Class
A common stock, of which 8,918,132 were issued and outstanding,
200,000,000 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.
d. Yahoo! Inc. transaction--On October 18, 1999, the Company
issued to Yahoo! Inc. 125,275 shares of Class A common stock and a
warrant to purchase 125,275 shares of Class A common stock at an
exercise price of $7.98 per share. The Company recorded the $1
million purchase price of the 125,275 Class A common stock as a
receivable. The Company has elected to offset the Yahoo!
receivable against the first $1 million due under a separate
advertising and promotional agreement, as described below. In
December 1999, Yahoo! exercised the warrant utilizing a cashless
exercise, and the Company issued to Yahoo! 58,626 shares of Class
A common stock. The Company recorded $1,007,000 of deferred
compensation expense related to the issuance of the shares
representing the difference between each of the purchase price of
the Class A common stock as compared to the fair value of the
Class A common stock and the fair value of the warrant. The fair
value of warrant has been measured by utilizing the Black-Scholes
option pricing model. Amortization of the deferred compensation
for the year ended December 31, 1999 amounted to $168,000.
In addition, on October 18, 1999, the Company entered into a
binding 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. Under the terms of
the advertising and promotion agreement, the Company made a cash
payment of $600,000 on the effective date of the agreement and an
additional twelve cash payments of $283,333 over the twelve months
following the effective date. The $5,000,000 is charged to expense
using the straight-line basis over the one-year life of the
contract.
e. 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 which was received in cash by the Company upon
the issuance of the shares. The Company recorded approximately
$2.7 million of deferred compensation expense related to the
issuance of the shares representing the difference between each of
the purchase price of the Class A common stock as compared to the
fair value of the Class A common stock and the issuance of the
warrant (using the Black-Scholes option pricing model for
determining the fair value of the warrant). Amortization of the
deferred compensation for the year ended December 31, 1999
amounted to $225,000.
In addition, the Company entered into a binding development and
promotion agreement with CNET, Inc., effective as of September 22,
1999, whereby CNET, Inc. will provide various promotions to the
Company to assist the Company in promoting its PC-to-Phone product
and related services. In consideration for this promotion, the
Company will compensate CNET, Inc. a total of $11,000,000 over a
two-year period. In the first year, the Company will pay CNET a
one-time payment of $330,000, payments aggregating $920,000 for
special promotions and $354,000 per month. In the second year, the
Company will pay CNET an aggregate amount of $1,250,000 for
special promotions and $354,000 per month.
f. Restricted units--Through April 1999, a total of 1,121,324
restricted units had been granted to employees of the Company
under the 1997 RSL COM Stock Incentive Plan. The restricted units
were convertible to shares of RSL COM Class A common stock or cash
(at RSL's discretion) based on the value of the Company on
December 31 of each year, as determined with reference to the
value of RSL COM. Of these restricted units, 836,147 had an
exercise price of $0.004 and were granted in 1997 and 1998 and
189,262 had an exercise price of $2.08 and were granted in 1998.
In April 1999, an additional 95,915 restricted units were granted
to employees of the Company with an exercise price of $5.11. The
majority of the restricted units vest over a three-year period
from the date of grant and were exercisable for a period of seven
years from the date of grant. Upon completion of the Company's
initial public offering, the Company issued 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 issued 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 and vesting
schedules as the corresponding restricted units.
Pursuant to generally accepted accounting principles, the
restricted units were considered variable grants. Consequently,
the changes in the fair value of the underlying shares at each
balance sheet date affected the aggregate amount of deferred
compensation recorded by the Company. The Company recorded
deferred compensation in connection with the restricted unit
grants of $1,800,000 through December 31, 1998 and an additional
$14,393,000 during the year ended December 31, 1999. The
additional amount for 1999 resulting from the difference between
the fair value of the restricted units and the initial offering
price of $15 is included as a reduction of stockholder's equity
and is being amortized by charges to operations over the vesting
period.
g. 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 $9,930,000 as of December 31, 1999,
representing the difference between the exercise price and the
initial public offering price of $15. Such amount is included as a
reduction of stockholders' equity and is being amortized by
charges to operations over the three-year vesting period.
In addition in November 1999, the Company adopted the 1999 Stock
Incentive Plan ("the Plan") . Under the Plan, 4,000,000 shares
were reserved for issuance upon the exercise of awards to be
granted. In addition, the Company's compensation committee may
grant both incentive and non-incentive stock options for common
stock of the Company. The options generally have a term of seven
years and become exercisable in three equal instalments commencing
on the first anniversary of the date of the grant. The purchase
price per share payable upon exercise of an option is no less than
the fair market value of the share at the date of grant. As of
December 31, 1999, options to purchase 502,800 shares were
outstanding with exercise prices of $15 and $25 per share.
A summary of the status of the Company's stock option plans as of
December 31, 1999, and changes during the year then ended, is
presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
Options outstanding at beginning of year............ -- $ --
Options issued in exchange for RSL COM restricted units 372,976 1.80
Granted during year................................. 1,579,561 8.90
-------------
Outstanding at end of year.......................... 1,952,537 7.54
=============
Weighted average fair value of options granted
during the year..................................... $9.00
==============
</TABLE>
Had compensation cost for the Company's stock options and
restricted units been determined based on fair value at the grant
date in accordance with SFAS No. 123, the Company's pro forma net
loss and pro forma diluted net loss per share would have been as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ------------ ------------
($ IN THOUSANDS)
------------ ------------
Net loss:
<S> <C> <C> <C>
As reported.............................. $ (2,367) $ (7,121) $ (33,771)
Pro forma................................ $ (2,367) $ (6,475) $ (34,357)
Net loss per share--basic and diluted:
As reported.............................. $ (0.19) $ (0.37) $ (1.65)
Pro forma................................ $ (0.19) $ (0.34) $ (1.68)
</TABLE>
For the purpose of presenting pro forma information required
under SFAS 123, the fair value of each restricted unit and
option grant has been estimated on the date of the grant
using the minimum value method for grants in 1997 and 1998
and the period to November 22, 1999 (the date of the
Company's initial public offering) and the Black-Scholes
method for grants made after the Company became a public
entity. The following assumptions were used: Dividend yield
of 0.00%; risk-free interest rate of 6%; a three-year
expected life; a volatility rate of 70% (when using the
Black-Scholes method).
Because the determination of the fair value of all options
granted after the Company became a public entity included an
expected volatility factor, in addition to the factors
described in the preceding paragraph and because additional
option grants are expected to be made each year, the above
pro forma disclosures are not representative of the pro
forma effects of reported net income for future years.
h. Employee Stock Purchase Plan--During 1999, the Board of
Directors approved an Employee Stock Purchase Plan (the
"ESPP"), effective beginning November 23, 1999. Under the
ESPP, the maximum number of shares to be made available
under the ESPP is 5% of the number of outstanding shares.
All full-time employees who have been employed by the
Company for at least one calendar quarter are eligible to
participate in the ESPP. Employee stock purchases are made
through payroll deductions.
Under the terms of the ESPP, employees may not deduct an
amount that exceeds $25,000 in total value of stock in any
one year. The purchase price of the stock will be the lower
of 85% of the fair market value on the first trading day of
the offering period or the last trading day of the purchase
period. The ESPP shall terminate upon the first to occur of
(i) December 31, 2009 or (ii) the date on which the ESPP is
terminated by the Board of Directors. There were no
purchases under the ESPP during 1999.
NOTE 12 -- RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses (which commenced in 1997)
consist of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ------------ ------------
($ IN THOUSANDS)
------------ ------------
Salaries and related expenses............ $ 92 $ 948 $ 1,735
Consulting and advisory fees............. -- 197 225
Travel................................... -- 146 125
Other.................................... 202 260 253
---------- ------------ ------------
294 1,551 2,338
Less--reimbursement by Ericsson
(see Note 10b)........................... -- (901) (1,105)
---------- ------------ ------------
Total research and development expenses.. $ 294 $ 650 $ 1,233
========== ============ ============
NOTE 13 -- INCOME TAXES
a. Tax loss carryforwards--As of December 31, 1999, the
Company had net operating loss carryforwards generated in
the U.S. and Israel of approximately $12,046,000 and
$6,548,000, respectively. The Company's U.S. net operating
loss carryforwards will expire at various dates beginning in
2011 if not utilized. In addition, a portion of those net
operating loss carryforwards could be subject to limitation
due to RSL COM's acquisition of the Company. The Company's
net operating losses generated in Israel may be carried
forward indefinitely.
b. In accordance with SFAS No. 109, the components of deferred
income taxes as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ------------ ------------
($ IN THOUSANDS)
------------ ------------
Net operating losses carryforwards...... $ 900 $ 3,500 $ 14,403
Less valuation allowance................ (900) (3,500) (14,403)
---------- ------------ ------------
Net deferred tax assets ................ $ -- $ -- $ --
========== ============ ============
As of December 31, 1997, 1998 and 1999, a valuation
allowance of $900,000, $3,500,000 and $14,403,000
respectively, is provided as the realization of the deferred
tax assets are not assured.
NOTE 14 -- SEGMENT REPORTING, GEOGRAPHICAL INFORMATION AND MAJOR
CUSTOMERS
The Company operates in a single industry segment, IP
communications services, and makes business decisions and
allocates resources accordingly.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ------------ ------------
($ IN THOUSANDS)
------------ ------------
Revenues by geographical location:
United States....................... $ 680 $ 4,922 $ 7,521
Europe.............................. 37 528 1,326
South America....................... 284 34 113
Far East............................ 149 -- 1,174
Other................................... 96 154 918
---------- ------------ ------------
Total revenues ..................... $ 1,246 $ 5,638 $ 11,052
Revenues from principal customers:
Affiliates ......................... $ 467 $ 3,896 $ 7,431
========== ============ ============
Other principal customer............ $ 276 $ -- $ --
========== ============ ============
DECEMBER 31,
---------------------------
1998 1999
------------ -------------
($ IN THOUSANDS)
-------------
Long-lived assets:
United States................................$ 4,376 $ 4,933
Israel....................................... 2,077 1,899
Other........................................ 1,817 2,667
------------ -------------
Total long-lived assets......................$ 8,270 $ 9,499
============ =============
Exhibit 10.22
AGREEMENT AND PLAN
OF
MERGER
BY AND AMONG
DELTATHREE.COM INC.,
YOURDAY ACQUISITION
CORP.,
YOURDAY.COM, INC.
AND
SENSENET INC.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
ARTICLE I
<S> <C>
THE MERGER...........................................................................2
Section 1.1 The Merger......................................................2
Section 1.2 Closing.........................................................2
Section 1.3 Effective Time of the Merger....................................2
ARTICLE II
EFFECTS OF THE MERGER................................................................2
Section 2.1 Certificate of Incorporation....................................2
Section 2.2 By-laws.........................................................2
Section 2.3 Effect of the Merger............................................2
Section 2.4 Directors.......................................................3
Section 2.5 Officers........................................................3
ARTICLE III
CONVERSION OF SHARES.................................................................3
Section 3.1 Conversion of Company Shares in the Merger......................3
Section 3.2 Consideration...................................................4
Section 3.3 Exchange of Certificates........................................5
Section 3.4 No Fractional Securities........................................7
Section 3.5 Dissenters' Rights..............................................7
Section 3.6 Closing of the Company's Transfer Books.........................8
Section 3.7 Tax Consequences................................................8
Section 3.8 Taking of Necessary Action; Further Action......................8
ARTICLE IV
REPRESENTATION AND WARRANTIES OF PARENT AND ACQUISITION SUB..........................8
Section 4.1 Organization and Qualifications.................................8
Section 4.2 Capitalization..................................................9
Section 4.3 Authority; Non-Contravention; Approvals.........................9
Section 4.4 Securities Reports and Financial Statements....................10
Section 4.5 Absence of Undisclosed Liabilities.............................11
Section 4.6 Information Statement..........................................11
Section 4.7 Brokers and Finders............................................11
Section 4.8 Tax Matters....................................................11
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................11
Section 5.1 Organization and Qualification.................................12
Section 5.2 Capitalization.................................................12
Section 5.3 Subsidiaries...................................................13
Section 5.4 Authority; Non-Contravention; Approvals........................13
Section 5.5 Financial Statements...........................................14
Section 5.6 Absence of Certain Changes.....................................15
Section 5.7 Absence of Undisclosed Liabilities.............................16
Section 5.8 Absence of Litigation..........................................16
Section 5.9 Information Statement..........................................17
Section 5.10 No Violation of Law............................................17
Section 5.11 Material Contracts.............................................17
Section 5.12 No Breach of Material Contracts................................18
Section 5.13 Taxes..........................................................18
Section 5.14 Employee Benefits Plans; ERISA.................................19
Section 5.15 Labor Controversies............................................20
Section 5.16 Environmental Matters..........................................20
Section 5.17 Title to Assets................................................22
Section 5.18 Company Stockholder Approval...................................22
Section 5.19 Intellectual Property..........................................22
Section 5.20 Insurance......................................................25
Section 5.21 Brokers and Finders............................................25
Section 5.22 Interested Party Transactions..................................25
Section 5.23 Minute Books...................................................25
Section 5.24 Complete Copies of Materials...................................25
Section 5.25 Board Approval.................................................26
Section 5.26 Third Party Consents...........................................26
Section 5.27 Inventory......................................................26
Section 5.28 Accounts Receivable............................................26
Section 5.29 Tax Matters....................................................26
Section 5.30 Representations Complete.......................................26
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF SENSENET..........................................26
Section 6.1 Organization and Qualifications..................................27
Section 6.2 Authority; Non-Contravention; Approvals..........................27
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER..............................................28
Section 7.1 Conduct of Business by the Company Pending the Merger..........28
Section 7.2 Control of the Company's Operations............................30
Section 7.3 Acquisition Transactions.......................................30
ARTICLE VIII
ADDITIONAL AGREEMENTS...............................................................31
Section 8.1 Access to Information..........................................31
Section 8.2 Majority Stockholder Approval..................................32
Section 8.3 Registration Rights............................................32
Section 8.4 Expenses and Fees..............................................33
Section 8.5 Agreement to Cooperate.........................................33
Section 8.6 Public Statements..............................................34
Section 8.7 Warrants.......................................................34
Section 8.8 Benefit Plans..................................................34
Section 8.9 Notification of Certain Matters................................34
Section 8.10 Directors' and Officers' Indemnification.......................35
Section 8.11 Information Statement..........................................35
Section 8.12 Tax-Free Treatment of Merger...................................35
Section 8.13 Blue Sky Laws..................................................36
Section 8.14 FIRPTA Certificate.............................................36
Section 8.15 Transfers of Title.............................................36
Section 8.16 Noncompetition; Nonsolicitation................................36
ARTICLE IX
CONDITIONS..........................................................................37
Section 9.1 Conditions to Each Party's Obligation to
Effect the Merger..............................................37
Section 9.2 Additional Conditions to Obligation of the
Company to Effect the Merger...................................38
Section 9.3 Additional Conditions to Obligations of Parent
and Acquisition Sub to Effect the Merger.......................38
Section 9.4 Frustration of Conditions......................................40
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER...................................................40
Section 10.1 Termination....................................................40
Section 10.2 Effect of Termination..........................................41
Section 10.3 Amendment......................................................41
Section 10.4 Waiver.........................................................41
ARTICLE XI
INDEMNIFICATION AND ESCROW..........................................................42
Section 11.1 Indemnification by SenseNet....................................42
Section 11.2 Procedure for Third Party Claims...............................42
Section 11.3 Indemnity Period...............................................43
ARTICLE XII
GENERAL PROVISIONS..................................................................43
Section 12.1 Non-Survival of Representations and Warranties.................43
Section 12.2 Notices........................................................43
Section 12.3 Interpretation.................................................44
Section 12.4 Miscellaneous..................................................44
Section 12.5 Counterparts...................................................44
Section 12.6 Parties In Interest............................................44
Section 12.7 Exhibits and Schedules.........................................45
Section 12.8 Severability...................................................45
Section 12.9 Definition of Knowledge........................................45
Section 12.10 Transfer Taxes.................................................45
Section 12.11 Arbitration....................................................45
LIST OF EXHIBITS AND SCHEDULES
Exhibit A: Form of Voting Agreement
Exhibit B: Form of Escrow Fund Agreement
Exhibit C: Form of FIRPTA Certificate and Notice to the
IRS under Treasury
Regulation 1.897-2(h)(2)
Exhibit D: Form of Tax Opinion of Carter, Ledyard & Milburn
and Certificates in
Support Thereof
Exhibit E: Form of Investment Letter
Exhibit F: Form of Services Agreement
Exhibit G: Terms of Sublease
Schedule 5.2(b): Outstanding Company Warrants
Schedule 5.2(d): List of Beneficial Owners of Company Securities
Schedule 5.6: Absence of Certain Changes
Schedule 5.11: Material Contracts
Schedule 5.13: Contested Taxes
Schedule 5.15: Labor Controversies
Schedule 5.19(b): Intellectual Property
Schedule 5.19(c): Agreements Concerning Intellectual Property
Schedule 5.19(d): Applications & Registrations Concerning Intellectual
Property
Schedule 5.22 Interested Party Transactions
Schedule 5.26 Third Party Consents
Schedule 7.1: List of Expenditures
Schedule 9.3(l): List of Employees
</TABLE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, entered into as of February 3,
2000 (the "Agreement"), by and among DELTATHREE.COM, INC., a Delaware
corporation ("Parent"), YOURDAY ACQUISITION CORP., a Delaware corporation
and a direct, wholly- owned subsidiary of Parent ("Acquisition Sub"),
YOURDAY.COM, INC., a Delaware corporation (the "Company") and SENSENET
INC., a Delaware corporation ("SenseNet").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Acquisition
Sub, the Company and SenseNet have each determined that the merger of
Acquisition Sub with and into the Company (the "Merger") is consistent with
and in furtherance of the long-term business strategy of Parent and the
Company and is in the best interests of Parent, the Company and their
respective stockholders;
WHEREAS, the respective Boards of Directors of Parent, Acquisition
Sub and the Company have each approved the Merger upon the terms and
subject to the conditions set forth herein, in accordance with the
provisions of Delaware law;
WHEREAS, as a condition and inducement to Parent to enter into this
Agreement and incur the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Parent and SenseNet have entered
into a Voting Agreement in the form of Exhibit A attached hereto (the
"Voting Agreement"), pursuant to which, among other things, SenseNet has
agreed to vote all shares of Company Common Stock (as defined in Section
3.1) held by it in favor of approval and adoption of this Agreement and the
Merger; and
WHEREAS, as a condition and inducement to Parent to enter into this
Agreement and incur the obligations set forth herein, concurrently with the
execution and delivery of this Agreement, Parent, Acquisition Sub and
SenseNet are entering into an escrow fund agreement in the form of Exhibit
B attached hereto (the "Escrow Fund Agreement"), pursuant to which certain
shares of Parent Common Stock (as defined in Section 3.2) issuable to
SenseNet are to be placed in an escrow account to secure certain
indemnification obligations of SenseNet to Parent; and
WHEREAS, it is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"),
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained herein, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 THE MERGER. Upon the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section
1.3) in accordance with the Delaware General Corporation Law (the "DGCL"),
Acquisition Sub shall be merged with and into the Company and the separate
corporate existence of Acquisition Sub shall thereupon cease. The Company
shall be the surviving corporation in the Merger and is hereinafter
sometimes referred to as the "Surviving Corporation." The Surviving
Corporation will be governed by the laws of the State of Delaware as a
direct, wholly-owned subsidiary of Parent.
Section 1.2 CLOSING. The closing of the Merger (the
"Closing") shall take place at 10:00 a.m., New York time, on a date to be
specified by the parties, which shall be no later than the third business
day after satisfaction or waiver of all of the conditions set forth in
Article IX of this Agreement (the "Closing Date"), at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, NY
10036, unless another time, date or place is agreed to in writing by the
parties hereto.
Section 1.3 EFFECTIVE TIME OF THE MERGER. The Merger shall
become effective at such time (the "Effective Time") as shall be stated in
a Certificate of Merger, consistent with the terms of this Agreement, to be
filed with the Secretary of State of the State of Delaware in accordance
with the relevant provisions of the DGCL (the "Merger Filing").
ARTICLE II
EFFECTS OF THE MERGER
Section 2.1 CERTIFICATE OF INCORPORATION. From and after the
Effective Time, the Certificate of Incorporation of the Acquisition Sub
shall be the Certificate of Incorporation of the Surviving Corporation
until amended and changed pursuant to the provisions of the DGCL, except
that Article I of the Certificate of Incorporation of the Acquisition Sub
shall be amended to read as follows: "The name of the Corporation shall be
Yourday.com, Inc.".
Section 2.2 BY-LAWS. From and after the Effective Time, the
present By- Laws of the Acquisition Sub shall be the By-Laws of the
Surviving Corporation and shall continue in full force and effect until
changed, altered or amended as therein provided and in the manner
prescribed by the provisions of the DGCL.
Section 2.3 EFFECT OF THE MERGER. At the Effective Time, the
effect of the Merger shall be as provided in this Agreement and the
applicable provisions of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, except as otherwise
provided herein, all the property, rights, privileges, powers and
franchises of Acquisition Sub and the Company shall vest in the Surviving
Corporation; all debts, liabilities and duties of Acquisition Sub and the
Company shall become the debts, liabilities and duties of the Surviving
Corporation in the same manner as if the Surviving Corporation had itself
incurred them; and the separate corporate existence of the Company with all
its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger, except as set forth herein.
Section 2.4 DIRECTORS. From and after the Effective Time,
the directors of Acquisition Sub shall be the directors of the Surviving
Corporation to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, until their
successors are duly elected or appointed. In furtherance thereof, the
Company shall secure, effective at the Effective Time of the Merger, such
resignations of its incumbent directors as is necessary to enable the
designees of Parent to be elected or appointed to the Board of Directors of
the Company, and the Company shall take all actions available to the
Company to cause such designees of Parent to be so elected or appointed at
the Effective Time. Concurrently, the Company shall, if requested by
Parent, also take all action necessary to cause persons designated by
Parent to constitute each committee of the Board of Directors of the
Company.
Section 2.5 OFFICERS. From and after the Effective Time, the
officers of Acquisition Sub shall be the officers of the Surviving
Corporation, in each case until their respective successors are duly
elected or appointed. In furtherance thereof, the Company shall secure,
effective at the Effective Time of the Merger, such resignations of its
incumbent officers as is necessary to enable the officers of Acquisition
Sub to be elected or appointed as officers of the Company, and the Company
shall take all actions available to the Company to cause such designees of
Parent to be so elected or appointed at the Effective Time.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER.
Subject to Section 3.4 regarding fractional shares, at the Effective Time,
by virtue of the Merger and without any action on the part of (A) any
holder of any shares of the Company's common stock, par value $0.01 per
share ("Company Common Stock") and (B) any holder of any shares of the
Company's Series A Preferred Stock, par value $0.01 per share ("Company
Preferred Stock"):
(a) Each share of Company Common Stock and Company
Preferred Stock issued and outstanding immediately prior to the Effective
Time (other than Dissenting Shares, as defined in Section 3.5), shall be
converted in accordance with Section 3.3 into the right to receive the Per
Share Merger Consideration (as defined in Section 3.2); provided, however,
that a number of shares of Parent Common Stock (as defined below) equal to
twelve and one-half percent (12.5%) of the number of shares of Parent
Common Stock that would otherwise be issuable to SenseNet pursuant to this
Section 3.1 shall be held back, deposited into the escrow fund established
pursuant to the Escrow Fund Agreement (the "Escrow Fund") and be subject to
the terms of the Escrow Fund Agreement.
(b) Each share of common stock, par value $0.001 per
share, of Acquisition Sub issued and outstanding immediately prior to the
Effective Time ("Acquisition Sub Common Stock") shall be converted into and
exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each stock certificate of
Acquisition Sub evidencing ownership of any such shares shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
Section 3.2 CONSIDERATION.
(a) The consideration to be issued in respect of each
share of Company Common Stock and Company Preferred Stock in the Merger
(the "Per Share Merger Consideration") will be that number of shares of
Class A common stock of Parent, par value $0.001 per share ("Parent Common
Stock"), which is determined by dividing $10,500,000 by the number of
shares of Company Common Stock and Company Preferred Stock outstanding
immediately prior to the Effective Time, calculated on a fully diluted
basis, assuming the exercise of any warrants or options to acquire Company
Common Stock outstanding immediately prior to the Effective Time ("Company
Warrants"); and further dividing the resulting amount by the Parent Average
Trading Price (as defined below).
(b) For purposes hereof, the "Parent Average Trading
Price" shall mean the average of the closing sales prices of a share of
Parent Common Stock, as quoted on the Nasdaq National Stock Market for the
seven (7) days on which the New York Stock Exchange is open for business
("Trading Days") immediately prior to February 4, 2000.
(c) No fractional shares of Parent Common Stock shall
be issued in the Merger, and, in lieu thereof, a Fractional Share Payment
(as defined in Section 3.4) shall be made.
(d) No adjustment in the number of shares of Parent
Common Stock issuable in the Merger shall be made as a result of any
increase or decrease in the market price of Parent Common Stock prior to
the Effective Time. The Per Share Merger Consideration shall be subject to
equitable adjustment in the event of any stock split, stock dividend,
reverse stock split or other change in the number of shares of Parent
Common Stock or Company Common Stock outstanding occurring after the date
hereof and prior to Closing.
(e) The Company will use commercially reasonable
efforts to ensure that security holders who hold Company Warrants shall
take all necessary action such that each holder of a Company Warrant shall
have the right to receive, in lieu of the shares of Company Common Stock or
Company Preferred Stock theretofore issuable upon the exercise of such
Company Warrant, the aggregate number of shares of Parent Common Stock that
the holder of such Company Warrant would have been entitled to receive
pursuant to this Section 3.2 had such holder exercised the Company Warrant
in full immediately prior to the Effective Time, minus the number of shares
of Parent Common Stock (or fraction of a share of Parent Common Stock)
equal to the quotient of the aggregate exercise price of such Company
Warrant divided by the Parent Average Trading Price. Any Company Warrant
which, nonetheless, remains outstanding at the Effective Time shall become
exercisable for Parent Common Stock in accordance with the terms of such
Company Warrant.
Section 3.3 EXCHANGE OF CERTIFICATES.
(a) From and after the Effective Time, all
outstanding Company Common Stock and Company Preferred Stock shall no
longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing shares
of Company Common Stock or Company Preferred Stock (a "Company
Certificate") shall cease to have any rights with respect thereto, except
the right to receive in exchange therefor, upon surrender thereof to an
exchange agent appointed by Parent (the "Exchange Agent"), a certificate or
certificates representing the number of whole shares of Parent Common Stock
to which such holder is entitled pursuant to Section 3.1 plus the
Fractional Share Payment (as defined in Section 3.4). Notwithstanding any
other provision of this Agreement, until holders or transferees of Company
Certificates have surrendered them for exchange as provided herein, no
dividends or other distributions declared or made after the Effective Time
with respect to Parent Common Stock with a record date after the Effective
Time shall be paid with respect to any Parent Common Stock represented by
such certificates, and no Fractional Share Payment shall be made. Upon
surrender of a Company Certificate to the Exchange Agent, together with a
letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, there shall be paid to the holder of such
certificate by Parent, without interest, (i) promptly, the amount of (A)
any Fractional Share Payment with respect to a fractional share of Parent
Common Stock to which such holder is entitled, and (B) except as provided
in (ii) below, dividends or other distributions with a record date after
the Effective Time which theretofore became payable with respect to whole
shares of Parent Common Stock, and (ii) at the appropriate payment date,
the amount of dividends or other distributions, with a record date after
the Effective Time but prior to surrender and a payment date occurring
after surrender, payable with respect to such whole shares of Parent Common
Stock.
(b) If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Company
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Company Certificate so surrendered
shall be properly endorsed and otherwise in proper form for transfer and
the person requesting such exchange shall have paid to Parent or the
Exchange Agent any applicable transfer or other taxes required by reason of
such issuance.
(c) Promptly after the Effective Time, Parent shall
deposit, or cause to be deposited, with the Exchange Agent certificates
representing the number of shares of Parent Common Stock required to effect
the exchanges referred to in paragraph (a) above (other than shares of
Parent Common Stock to be deposited with the Escrow Agent pursuant to the
Escrow Fund Agreement) and cash, for purposes of the Fractional Share
Payment. Parent shall thereafter from time to time deposit, or cause to be
deposited, with the Exchange Agent cash, for payment of any dividend or
distributions in respect of such shares of Parent Common Stock with a
record date after the Effective Time.
(d) As soon as reasonably practicable after the
Effective Time, the Parent or the Surviving Corporation shall cause the
Exchange Agent to mail to each holder of record as of the Effective Time of
a Company Certificate, whose shares were converted into the right to
receive shares of Parent Common Stock, (i) a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title
to the Company Certificates shall pass, only upon delivery of the Company
Certificates to the Exchange Agent) and shall be in such form and have such
other provisions as Parent shall specify, and (ii) instructions for use in
effecting the surrender of the Company Certificates in exchange for
certificates representing shares of Parent Common Stock and the Fractional
Share Payment. Upon surrender of a Company Certificate for cancellation to
the Exchange Agent, together with a duly executed and completed letter of
transmittal, the holder of such Company Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of
whole shares of Parent Common Stock into which the shares of Company Common
Stock theretofore represented by the Company Certificates so surrendered
shall have been converted pursuant to the provisions of Section 3.1, and
the Company Certificates so surrendered shall be canceled. Notwithstanding
the foregoing, neither the Exchange Agent nor any party hereto shall be
liable to a holder of shares of Company Common Stock for any shares of
Parent Common Stock or dividends or distributions thereon delivered to a
public official pursuant to applicable abandoned property, escheat or
similar laws.
(e) Promptly following the date which is six (6)
months after the Effective Time, the Parent or the Surviving Corporation
shall cause the Exchange Agent to deliver to Parent all certificates
(including certificates representing shares of Parent Common Stock),
property and other documents in its possession relating to the transactions
described in this Agreement. Thereafter, each holder of a Company
Certificate may surrender such Company Certificate to the Parent and
(subject to applicable abandoned property, escheat and similar laws)
receive in exchange therefor the shares of Parent Common Stock and any
dividends or distributions with respect to shares of Parent Common Stock
and any Fractional Share Payment, in each case without any interest thereon
to which such person is entitled pursuant to this Agreement.
(f) In the event any Company Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such Company Certificate to be lost, stolen or
destroyed, and the posting of a bond by such person in such amount as
Parent may direct as indemnity against any claim that may be made against
it or the Exchange Agent with respect to such Company Certificate, the
Exchange Agent, Parent or the Surviving Corporation, as the case may be,
shall issue in exchange for such lost, stolen or destroyed Company
Certificate, certificates representing the proper number of shares of
Parent Common Stock deliverable in respect thereof determined in accordance
with this Section 3.3, and cash, for the Fractional Share Payment and any
other dividends or distributions in respect of shares of Parent Common
Stock with a record date after the Effective Time.
Section 3.4 NO FRACTIONAL SECURITIES. No certificates
representing fractional shares of Parent Common Stock shall be issued in
the Merger, and no stock dividend, stock split or interest shall relate to
any fractional security, and such fractional share interests shall not
entitle the owner thereof to vote or to any other rights of a security
holder. In lieu of any such fractional shares, each holder of Company
Common Stock or Company Preferred Stock, who would otherwise have been
entitled to receive a fractional share of Parent Common Stock upon
surrender of Company Certificates for exchange pursuant to this Article
III, after aggregating all fractional shares of Parent Common Stock which
would have been received by such Holder, shall be entitled to receive from
the Exchange Agent a cash payment (the "Fractional Share Payment") equal to
the product of (i) the fractional share interest to which such holder would
otherwise be entitled multiplied by (ii) the Parent Average Trading Price.
Section 3.5 DISSENTERS' RIGHTS. For purposes of this
Section, "Dissenting Shares" shall mean any shares of Company Common Stock
or Company Preferred Stock outstanding immediately prior to the Effective
Time and held by a holder who has not voted in favor of the Merger or
consented thereto in writing, and who has demanded appraisal for such
shares of Company Common Stock or Company Preferred Stock in accordance
with Section 262 of the DGCL.
(a) Subject to (b) below, notwithstanding any
provision of this Agreement to the contrary, Dissenting Shares shall not be
converted into or represent a right to receive the Per Share Merger
Consideration or cash in lieu of fractional shares of Parent Common Stock
pursuant to this Article III, but the holder thereof shall be entitled to
only such rights as are granted by the DGCL.
(b) Notwithstanding the provisions of Section 3.5(a),
if any holder of shares of Company Common Stock or Company Preferred Stock
who demands appraisal of such holder's shares of Company Common Stock or
Company Preferred Stock under the DGCL effectively withdraws or loses
(through failure to perfect or otherwise) his right to appraisal, then as
of the Effective Time or the occurrence of such event, whichever occurs
later, such holder's shares of Company Common Stock or Company Preferred
Stock shall automatically be converted into and represent only the right to
receive the Per Share Merger Consideration and cash in lieu of fractional
shares of Parent Common Stock as provided in this Article III, without
interest, upon surrender of the Company Certificates representing such
shares of Company Common Stock or Company Preferred Stock pursuant to
Section 3.3.
(c) The Company shall give Parent (i) prompt notice
of any written demands for appraisal or payment of the fair value of any
shares of Company Common Stock or Company Preferred Stock, withdrawals of
such demands, and any other instruments served on the Company pursuant to
the DGCL received by the Company, and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under
the DGCL. Except with the prior written consent of Parent, the Company
shall not voluntarily make any payment with respect to any demands for
appraisal or settle, or offer to settle, any such demands.
Section 3.6 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the
Effective Time, the stock transfer books of the Company shall be closed and
no transfer of shares of Company Common Stock or Company Preferred Stock
which were outstanding immediately prior to the Effective Time shall
thereafter be made. From and after the Effective Time, the holders of
Company Certificates evidencing ownership of shares of Company Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights as stockholders of the Company, except as otherwise provided herein
or by law. If, after the Effective Time, Company Certificates are presented
to Parent or the Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Article III.
Section 3.7 TAX CONSEQUENCES. It is intended by the parties
hereto that the transactions contemplated hereby shall constitute a
reorganization within the meaning of Section 368(a) of the Code. Each party
and its affiliates shall use commercially reasonable efforts (i) to cause
such transactions to so qualify and (ii) to not take any action that would
cause such transactions not to qualify as a reorganization under such
Section. The parties will take the position for all purposes that the
transactions qualify as a reorganization under such Section. The shares of
Parent Common Stock to be issued in the Merger are being delivered solely
in exchange for Company Common Stock, Company Preferred Stock or Company
Warrants, and no portion thereof is to be allocated for tax purposes to any
of the covenants or undertakings of any party hereto.
Section 3.8 TAKING OF NECESSARY ACTION; FURTHER ACTION. If,
at any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement and to vest the
Surviving Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of the Company, the
officers and directors of Parent, Acquisition Sub and the Surviving
Corporation are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and
necessary action, so long as such action is not inconsistent with this
Agreement.
ARTICLE IV
REPRESENTATION AND WARRANTIES OF PARENT AND ACQUISITION SUB
Parent and Acquisition Sub each represent and warrant to the
Company, as of the date hereof, as follows:
Section 4.1 ORGANIZATION AND QUALIFICATIONS. Parent and
Acquisition Sub are corporations duly organized, validly existing and in
good standing under the laws of the State of Delaware and each has the
requisite corporate power and authority to own, lease and operate its
assets and properties and to carry on its business as it is now being
conducted. Each of Parent and Acquisition Sub is qualified to do business
and is in good standing in each jurisdiction in which the properties owned,
leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so
qualified and in good standing will not, when taken together with all other
such failures, have a material adverse effect on the business, operations,
properties, assets, condition (financial or other) or results of operations
of Parent, Acquisition Sub and Parent's other subsidiaries, taken as a
whole (a "Parent Material Adverse Effect"). Neither Parent nor Acquisition
Sub is in violation of any of the provisions of their respective
Certificate of Incorporation or By-Laws.
Section 4.2 CAPITALIZATION.
(a) The authorized capital stock of Parent consists
of 200,000,000 shares of Parent Common Stock, par value $0.001 per share,
200,000,000 shares of Class B common stock, par value $0.001 per share, and
25,000,000 shares of preferred stock, par value $0.001 per share. As of the
date hereof, 8,918,132 shares of Parent Common Stock and 19,569,459 shares
of Class B common stock were outstanding. All shares of Parent Common Stock
to be issued in connection with the Merger shall be, when issued, duly
authorized and validly issued, nonassessable and free of preemptive rights
granted by Parent or by applicable law.
(b) The authorized capital stock of Acquisition Sub
consists of 100 shares of Subsidiary Common Stock, $0.001 par value, of
which 100 shares are issued and outstanding and owned beneficially and of
record by Parent.
Section 4.3 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) Parent and Acquisition Sub each have full
corporate power and authority to enter into this Agreement and, subject to
the Parent Required Statutory Approval (as defined in Section 4.3(c)), to
consummate the transactions contemplated hereby. This Agreement has been
approved by the Boards of Directors of Parent and Acquisition Sub and by
the sole stockholder of Acquisition Sub, and no other corporate proceedings
on the part of Parent or Acquisition Sub are necessary to authorize the
execution and delivery of this Agreement or the consummation by Parent and
Acquisition Sub of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by each of Parent and Acquisition Sub,
and, assuming the due authorization, execution and delivery hereof by the
Company and SenseNet, constitutes a valid and legally binding agreement of
each of Parent and Acquisition Sub, enforceable against each of them in
accordance with its terms, except that such enforcement may be subject to
(i) bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting or relating to enforcement of creditors' rights generally,
and (ii) general equitable principles.
(b) The execution and delivery of this Agreement by
each of Parent and Acquisition Sub does not, and the performance of this
Agreement and the transactions contemplated hereby by Parent and
Acquisition Sub shall not, violate, conflict with or result in a breach of
any provision of, or constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, or result in
the termination of, or accelerate the performance required by, or result in
a right of termination or acceleration under, any of the terms, conditions
or provisions of (i) the respective Certificate of Incorporation or By-Laws
and/or other organizational documents of Parent or Acquisition Sub, (ii)
any statute, law, ordinance, rule, regulation, judgment, decree, order,
injunction, writ, permit or license of any court or governmental authority,
domestic or foreign, applicable to Parent or Acquisition Sub or any of
their respective properties or assets, or (iii) any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument, obligation or agreement of any kind to which
Parent or Acquisition Sub is now a party or by which Parent, Acquisition
Sub or any of their respective properties or assets may be bound, subject
in the case of the terms, conditions or provisions described in clause (ii)
above, to obtaining (prior to the Effective Time) the Parent Required
Statutory Approval (as defined below). Excluded from the foregoing
sentences of this paragraph (b) are such violations, conflicts, breaches,
defaults, terminations, accelerations or creations of liens, security
interests, charges or encumbrances that would not, in the aggregate,
materially impair the ability of Parent or Acquisition Sub to consummate
the transactions contemplated by this Agreement.
(c) Except for the making of the Merger Filing with
the Secretary of State of the State of Delaware in connection with the
Merger (the "Parent Required Statutory Approval"), no declaration, filing
or registration with, or notice to, or authorization, consent or approval
of, any governmental or regulatory body or authority, domestic or foreign,
is necessary for the execution and delivery of this Agreement by Parent or
Acquisition Sub or the consummation by Parent or Acquisition Sub of the
transactions contemplated hereby, other than such declarations, filings,
registrations, notices, authorizations, consents or approvals which, if not
made or obtained, as the case may be, would not, in the aggregate,
materially impair the ability of Parent or Acquisition Sub to consummate
the transactions contemplated by this Agreement.
Section 4.4 SECURITIES REPORTS AND FINANCIAL STATEMENTS.
Parent has filed with the Securities and Exchange Commission (the "SEC")
all forms, statements (including proxy statements), reports and documents
(including all exhibits, amendments and supplements thereto) required to be
filed by it prior to the date hereof under each of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Securities Act of 1933,
as amended (the "Securities Act"), and the respective rules and regulations
thereunder, all of which, as amended if applicable, complied in all
material respects with all applicable requirements of the appropriate act
and the rules and regulations thereunder (collectively, the "Parent SEC
Reports"). As of their respective dates, the Parent SEC Reports did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
interim consolidated financial statements of Parent included in such
reports (collectively, the "Parent Financial Statements") have been
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) and fairly present the financial position of Parent and its
subsidiaries as of the dates thereof and the results of their operations
and changes in financial position for the periods then ended, subject, in
the case of the unaudited interim financial statements, to normal year-end
and audit adjustments and any other adjustments described therein.
Section 4.5 ABSENCE OF UNDISCLOSED LIABILITIES. Except as
disclosed in the Parent SEC Reports, neither Parent nor any of its
subsidiaries has any material liabilities or obligations (whether absolute,
accrued, contingent or otherwise) of any nature, except: (a) liabilities,
obligations or contingencies which are accrued or reserved against in the
Parent Financial Statements or reflected in the notes thereto, (b)
liabilities, obligations or contingencies which (i) would not, in the
aggregate, have a Parent Material Adverse Effect, or (ii) have been
discharged or paid in full prior to the date hereof; and (c) liabilities
and obligations which are of a nature not required to be reflected in the
consolidated financial statements of Parent and its subsidiaries prepared
in accordance with generally accepted accounting principles consistently
applied.
Section 4.6 INFORMATION STATEMENT. None of the information
supplied or to be supplied by Parent or Acquisition Sub for inclusion in
the information statement to be distributed to holders of Company
Certificates (the "Information Statement") will, at the time of the mailing
of the Information Statement and any amendments or supplements thereto, and
at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation
is made by Parent or Acquisition Sub with respect to information supplied
by the Company for inclusion therein.
Section 4.7 BROKERS AND FINDERS. Neither the Parent nor any
of its officers, directors or employees has employed any investment banker,
broker or finder or incurred any liability for any investment banking fees,
financial advisory fees, brokerage fees, commissions or finder's fees in
connection with the transactions contemplated hereby.
Section 4.8 TAX MATTERS. None of Parent, Acquisition Sub or
any affiliate of either has taken or agreed to take any action, nor do any
of the foregoing have any knowledge of any fact or circumstance that would
prevent the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Acquisition Sub,
as of the date hereof, as follows:
Section 5.1 ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry
on its business as it is now being conducted and as proposed to be
conducted. The Company is qualified to do business and is in good standing,
where applicable, in each jurisdiction in which the properties owned,
leased or operated by it or the nature of the business conducted by it
makes such qualification necessary, except where the failure to be so
qualified and in good standing will not, when taken together with all other
such failures, have a material adverse effect on the business, operations,
properties, prospects, assets, condition (financial or other) or results of
operations of the Company, taken as a whole (a "Company Material Adverse
Effect"). True, accurate and complete copies of the Company's Certificate
of Incorporation and By-Laws, in each case as in effect on the date hereof,
including all amendments thereto, have heretofore been delivered to Parent.
The Company is not in violation of any of the provisions of its Certificate
of Incorporation or By-Laws.
Section 5.2 CAPITALIZATION.
(a) The authorized capital stock of the Company
consists of 10,000,000 shares of Company Common Stock and 2,000,000 shares
of Company Preferred Stock. As of the date hereof, 4,015,350 shares of
Company Common Stock and 881,250 shares of Company Preferred Stock were
issued and outstanding, and no shares of Company Common Stock or Company
Preferred Stock are issued and held in the treasury of the Company. All of
the issued and outstanding shares of the Company's capital stock have been
duly authorized and validly issued and are fully paid, nonassessable and
free of preemptive rights granted by the Company or by applicable law. The
rights, preferences and privileges of the Company Preferred Stock are as
set forth in the Company's Certificate of Incorporation. Since the date of
the filing of the Certificate of Designation of the Company Preferred
Stock, there have not occurred any events that would cause any adjustment
or readjustment in the applicable conversion prices of such Company
Preferred Stock. Each share of Company Preferred Stock is convertible into
one share of Company Common Stock
(b) Except as set forth in the Company's Certificate
of Incorporation or on Schedule 5.2(b), as of the date hereof, there are
(i) no outstanding subscriptions, options, calls, contracts, commitments,
understandings, restrictions, arrangements, rights or warrants, including
any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, indebtedness having general voting rights or debt
convertible into securities having such rights ("Voting Debt"), obligating
the Company or any subsidiary of the Company to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of the capital
stock of, or Voting Debt of, the Company or securities convertible into or
exchangeable for such shares or obligating the Company or any subsidiary of
the Company to grant, extend or enter into any such subscription, option,
call, contract, commitment, understanding, arrangement, right or warrant,
(ii) no voting trusts, proxies or other agreements or understandings to
which the Company or any subsidiary of the Company is a party or is bound
with respect to the voting of any shares of capital stock of the Company
and, to the knowledge of the Company, there are no such trusts, proxies,
agreements or understandings by, between or among any of the Company's
stockholders with respect to Company Common Stock, and (iii) there are no
outstanding contractual obligations of the Company to repurchase, redeem or
otherwise acquire any Company Common Stock, or other capital stock of the
Company or to provide funds to make any investment (in the form of a loan,
capital contribution or otherwise) in any other entity.
(c) No Indebtedness (as defined below) of the Company
contains any restriction upon (i) the prepayment of any of such
Indebtedness, (ii) the incurrence of Indebtedness by the Company, or (iii)
the ability of the Company to grant any lien on its properties or assets.
For purposes of this Agreement, "Indebtedness" shall mean (i) all
indebtedness for borrowed money or for the deferred purchase price of
property or services (other than current trade liabilities incurred in the
ordinary course of business and payable in accordance with customary
practices), (ii) any other indebtedness that is evidenced by a note, bond,
debenture or similar instrument, (iii) all obligations under financing
leases, (iv) all obligations in respect of acceptances issued or created,
(v) all liabilities secured by any lien on any property and (vi) all
guarantee obligations.
(d) Schedule 5.2(d) sets forth a true, complete and
correct list of each legal and beneficial owner of Company securities and
the number and class of such securities owned by each such holder.
Section 5.3 SUBSIDIARIES. The Company does not directly or
indirectly own any equity or similar interest in, or any interest
convertible or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, joint venture or other business
association or entity.
Section 5.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) The Company has full corporate power and
authority to enter into this Agreement and, subject to the Company
Stockholder Approval (as defined in Section 8.2 and the Company Required
Statutory Approval (as defined in Section 5.4(c)), to consummate the
transactions contemplated hereby. This Agreement has been approved by the
Board of Directors of the Company, and no other corporate proceedings on
the part of the Company are necessary to authorize the execution and
delivery of this Agreement or, except for the Company Stockholder Approval,
the consummation by the Company of the transactions contemplated hereby.
This Agreement has been duly executed and delivered by the Company, and,
assuming the due authorization, execution and delivery hereof by Parent,
Acquisition Sub and SenseNet, constitutes a valid and legally binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally, and
(ii) general equitable principles.
(b) The execution and delivery of this Agreement by
the Company does not, and the performance of this Agreement and the
transactions contemplated hereby by the Company shall not, violate,
conflict with or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate
the performance required by, or result in a right of termination or
acceleration under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company under any of the terms, conditions or provisions of (i) the
Certificate of Incorporation or By-Laws of the Company, (ii) any statute,
law, ordinance, rule, regulation, judgment, decree, order, injunction,
writ, permit or license of any court or governmental authority applicable
to the Company or any of its respective properties or assets, or (iii) any
note, bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of
any kind to which the Company is now a party or by which the Company or any
of its respective properties or assets may be bound, subject (x) in the
case of the terms, conditions or provisions described in clause (ii) above,
to obtaining (prior to the Effective Time) the Company Required Statutory
Approval and the Company Stockholder Approval, and (y) in the case of the
terms, conditions or provisions described in clause (iii) above, to
obtaining (prior to the Effective Time) consents required from lenders,
lessors or other third parties. Excluded from the foregoing sentences of
this paragraph (b), insofar as they apply to the terms, conditions or
provisions described in clauses (ii) and (iii) of the first sentence of
this paragraph (b), are such violations, conflicts, breaches, defaults,
terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not individually or in the aggregate,
have a Company Material Adverse Effect.
(c) Except for the making of the Merger Filing with
the Secretary of State of the State of Delaware in connection with the
Merger (the "Company Required Statutory Approval"), no declaration, filing
or registration with, or notice to, or authorization, consent or approval
of, any governmental or regulatory body or authority is necessary for the
execution and delivery of this Agreement by the Company or the consummation
by the Company of the transactions contemplated hereby.
Section 5.5 FINANCIAL STATEMENTS. The Company has previously
provided Parent with its unaudited balance sheet as of December 31, 1999
(the "Balance Sheet"), and the related statements of results of operations
(collectively, the "Financial Statements"). The Financial Statements fairly
present, in all material respects, in accordance with United States
generally accepted accounting principles ("U.S. GAAP") consistently
applied, the financial position of the Company as of such dates and its
results of operations and cash flows for such fiscal periods except, for
normal recurring year end adjustments which adjustments will not be
material, either individually or in the aggregate, and the absence of
footnotes.
Section 5.6 ABSENCE OF CERTAIN CHANGES.
Except as and to the extent set forth in the Financial Statements
or in Schedule 5.7 from December 31, 1999 (the "Balance Sheet Date") to the
date of this Agreement, the Company and its subsidiaries have not:
(a) suffered any Material Adverse Effect;
(b) incurred any liabilities or obligations
(absolute, accrued, contingent or otherwise), except non-material items
incurred in the ordinary course of business and consistent with past
practice, which exceed $25,000 in the aggregate;
(c) paid, discharged or satisfied any claims,
liabilities or obligations (absolute, accrued, contingent or otherwise)
other than the payment, discharge or satisfaction in the ordinary course of
business and consistent with past practice of liabilities and obligations
reflected or reserved against in the Balance Sheet or incurred in the
ordinary course of business and consistent with past practice since the
Balance Sheet Date;
(d) permitted or allowed any of their properties or
assets (real, personal or mixed, tangible or intangible) to be subjected to
any liens, except for liens for current Taxes not yet due or liens the
incurrence of which would not have a Material Adverse Effect on the
Company;
(e) cancelled any debts or waived any claims or
rights of substantial value;
(f) sold, transferred, or otherwise disposed of any
of their material properties or assets (real, personal or mixed, tangible
or intangible), except in the ordinary course of business, consistent with
past practice;
(g) granted any increase in the compensation or
benefits of any director, officer, employee or consultant of the Company or
its subsidiaries (including any such increase pursuant to any bonus,
pension, profit sharing or other plan or commitment) or any increase in the
compensation or benefits payable or to become payable to any director,
officer, employee or consultant of the Company or its subsidiaries, except
in the case of employees other than officers of the Company or its
subsidiaries for such increases in compensation or benefits made in the
ordinary course of business, consistent with past practice;
(h) made any change in severance policy or practices;
(i) made any capital expenditure or acquired any
property, plant and equipment for a cost in excess of $25,000 per fiscal
quarter in the aggregate;
(j) declared, paid or set aside for payment any
dividend or other distribution in respect of their respective capital stock
or redeemed, purchased or otherwise acquired, directly or indirectly, any
shares of capital stock or other securities of the Company or its
subsidiaries;
(k) made any change in any method of Tax or financial
accounting or accounting practice or made or changed any election for
Federal, state, local or foreign Tax purposes;
(l) made any Tax election, settled or compromised any
Federal, state, local or foreign income Tax liability, or waived or
extended the statute of limitations in respect of any such Taxes;
(m) paid, loaned or advanced any amount to, or sold,
transferred or leased any material properties or assets (real, personal or
mixed, tangible or intangible) to, or entered into any agreement or
arrangement with, any of their respective officers, directors or
shareholders or any affiliate or associate of any of their officers,
directors or shareholders except for directors' fees, and compensation to
officers at rates not inconsistent with the Company or its subsidiaries'
past practice; or
(n) agreed, whether in writing or otherwise, to take
any action described in this Section 5.6.
Section 5.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as
disclosed in the Balance Sheet, the Company did not have, as of the Balance
Sheet Date, any liabilities or obligations (whether absolute, accrued,
contingent or otherwise) of any nature, except: (a) liabilities,
obligations or contingencies (i) which are accrued or reserved against in
the Company Financial Statements or reflected in the notes thereto, or (ii)
which were incurred in the ordinary course of business and consistent with
past practices; (b) liabilities, obligations or contingencies which (i)
would not, in the aggregate, have a Company Material Adverse Effect, or
(ii) have been discharged or paid in full prior to the date hereof; and (c)
liabilities and obligations which are of a nature not required to be
reflected in the of the Company Financial Statements and which were
incurred in the normal course of business.
Section 5.8 ABSENCE OF LITIGATION. Except as disclosed in
the Financial Statements, (a) there is no claim of any kind, suit, action,
proceeding, litigation, arbitration, investigation or controversy affecting
the Company pending or, to the knowledge of the Company, threatened; and
(b) the Company is not subject to any continuing order of, or written
agreement or memorandum of understanding with, or continuing material
investigation by, any governmental entity or authority, or any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator, except
as which, individually or in the aggregate, would not have a Company
Material Adverse Effect.
Section 5.9 INFORMATION STATEMENT. None of the information
supplied or to be supplied by the Company for inclusion in the Information
Statement will, at the time of the mailing of the Information Statement and
any amendments or supplements thereto, and at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Section 5.10 NO VIOLATION OF LAW. Except as disclosed in the
Financial Statements, the Company is not in violation of or has been given
notice or been charged with any violation of, any law, statute, order,
rule, regulation, ordinance or judgment including, without limitation, any
applicable environmental law, ordinance or regulation of any governmental
or regulatory body or authority, except for violations which, individually
or in the aggregate, would not reasonably be expected to have a Company
Material Adverse Effect. The Company has all permits, licenses, franchises,
variances, exemptions, orders and other governmental authorizations,
consents and approvals necessary to conduct its business as presently
conducted or proposed to be conducted (collectively, the "Company
Permits"), except for permits, licenses, franchises, variances, exemptions,
orders, authorizations, consents and approvals the absence of which,
individually or in the aggregate, would not have a Company Material Adverse
Effect. The Company is not in violation of the terms of any Company Permit,
except for delays in filing reports or violations which, individually or in
the aggregate, would not have a Company Material Adverse Effect.
Section 5.11 MATERIAL CONTRACTS. Except for the contracts
and agreements described in Schedule 5.11 (collectively, the "Material
Contracts"), neither the Company nor any of its subsidiaries is a party to
or bound by any contract, including without limitation:
(a) any distributor, sales, advertising, agency or
manufacturer's representative contract;
(b) any continuing contract for the purchase of
materials, supplies, equipment or services involving in the case of any
such contact more than $25,000 over the life of the contract;
(c) any contract that expires or may be renewed at
the option of any person other than the Company so as to expire more than
one (1) year after the date of this Agreement;
(d) any trust indenture, mortgage, promissory note,
loan agreement or other contract for the borrowing of money, any currency
exchange, commodities or other hedging arrangement or any leasing
transaction of the type required to be capitalized in accordance with U.S.
GAAP;
(e) any contract for capital expenditures in excess
of $25,000 in the aggregate;
(f) any contract limiting the freedom of the Company
to engage in any line of business or to compete with any other "person" as
that term is defined in the Exchange Act, or, other than those entered into
in the ordinary course of business, consistent with past practice, any
confidentiality, secrecy or non-disclosure contract;
(g) any material contract pursuant to which the
Company is a lessor of any machinery, equipment, motor vehicles, office
furniture, fixtures or other personal property;
(h) any contract with any affiliate of the Company;
or
(i) any agreement of guarantee, support,
indemnification, assumption or endorsement of, or any similar commitment
with respect to, the obligations, liabilities (whether accrued, absolute,
contingent or otherwise) or indebtedness of any other person.
Section 5.12 NO BREACH OF MATERIAL CONTRACTS. All Material
Contracts are in written form. Each of the Company and its subsidiaries has
in all material respects performed the obligations required to be performed
by it and is entitled to all benefits under, and to its knowledge, is not
alleged to be in default in respect of, any Material Contract. Each of the
Material Contracts is in full force and effect, and there exists no default
or event of default or event, occurrence, condition or act, with respect to
the Company or any of it subsidiaries or, to the knowledge of the Company,
with respect to the other contracting party, which, with the giving of
notice, the lapse of time or the happening of any other event or
conditions, would reasonably be expected to become a default or event of
default under the terms of any Material Contract. True, correct and
complete copies of all Material Contracts have been delivered or made
available to the Parent or its representatives.
Section 5.13 TAXES. (a)The Company has (i) properly
completed and timely filed with the appropriate Tax Authority all Tax
Returns required to be filed by it for all periods and such Tax Returns are
true, correct and complete in all material respects, and (ii) duly paid in
full all Taxes due (or where payment is not yet due, has provided adequate
accruals in the Financial Statements in accordance with U.S. GAAP) except
such as are set forth in Schedule 5.13 and are being contested in good
faith by appropriate government proceedings and with respect to which the
Company is maintaining reserves adequate for their payment. The Company has
no material liability for Taxes accruing after the date of the Financial
Statements. Neither the IRS nor any other Tax Authority (as hereinafter
defined) is now asserting, either through audits, administrative
proceedings, court proceedings or otherwise, or, to the best of the
Company's knowledge, threatening to assert against the Company any
deficiency or claim for additional Taxes. No audit of any Tax Return of the
Company is being conducted by any Tax Authority. No agreement, contract, or
arrangement to which the Company is a party may result in the payment of
any amount that would not be deductible by reason of Section 280G or 404 of
the Code (or any comparable provision under state, local or foreign Tax
laws). The Company is not a party to any Tax sharing or Tax allocation
agreements, and the Company has no liability or potential liability under
any such agreements or under Treas.Reg. Section 1.1502-6 (or any comparable
provision under state, local or foreign Tax laws) or otherwise. The Company
has never been a "United States real property holding corporation" within
the meaning of Section 897 of the Code. The Company has not been granted
any waiver of any statute of limitations with respect to, or any extension
of a period for the assessment of, any Tax. There are no Tax liens on any
assets of the Company. The Company has not received any rulings from or
entered into any agreements with the IRS or any other governmental entity
or Tax Authority or agency. The accruals and reserves for Taxes reflected
in the Financial Statements are adequate to cover all Taxes accruable
through the date thereof (including Taxes being contested). The Company is
not required to include in income either (i) any material amount in respect
of any adjustment under Section 481 of the Code, or (ii) any material
installment sale gain. The Company has not made an election under Section
341(f) of the Code.
(b) For purposes of this Agreement, the term "Tax" or
"Taxes" shall mean (i) all taxes, charges, fees, levies or other like
assessments imposed by the United States, or any state, local or foreign
government or subdivision or agency thereof (a "Tax Authority") whether
computed on a separate, consolidated, unitary, combined or any other basis
(including, without limitation, net or gross income, gross receipts,
alternative or add-on minimum, profits, stamps, premium, environmental
stamp, duty, property, value-added, excise, sales, withholding, social
security, occupation, use, service, service use, license, payroll,
franchise, transfer and recording taxes, fees and charges, windfall
profits, severance, customs, import, export, employment or similar taxes)
and such terms shall include any interest, fines, penalties and additional
amounts imposed or with respect to any such taxes, charges, fees, levies or
other like assessments, (ii) any liability for the payment of any amounts
of the type described in (i) as a result of being or having been a member
of an affiliated, consolidated, combined, or unitary group for any taxable
period, and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of being a transferee of or a
successor to any person, or as a result of any express or implied
obligation to indemnify any other person.
(c) For purposes of this Agreement, the term "Tax
Return" shall mean any return, statement, report, form (including, without
limitation, any estimated, withholding, or information tax returns or
reports) or other document or information required to be supplied or
actually provided to a Tax Authority in connection with Taxes.
Section 5.14 EMPLOYEE BENEFITS PLANS; ERISA.
(a) Neither the Company nor any trade or business,
whether or not incorporated (an "ERISA Affiliate"), that together with the
Company would be deemed a "single employer" within the meaning of section
4001(b) of ERISA currently maintains, contributes to or has any obligation
or liability to or under, or has within the five-year period immediately
preceding the date hereof maintained, contributed to or had any obligation
or liability to or under, any "pension" plan, fund or program (within the
meaning of section 3(2) of ERISA). The Company does not maintain or
contribute to or have any other obligation or liability to or under any
other material employee benefit plans, programs, arrangements and
practices, including employee benefit plans within the meaning set forth in
Section 3(3) of ERISA, or other similar material arrangements for the
provision of benefits. The Company has no obligation to create any
additional such plan or to amend any such plan so as to increase benefits
thereunder, other than under existing collective bargaining agreements or
to comply with applicable law.
(b) The Company is not a party to any employment,
severance, consulting or other similar contracts with any employees,
consultants, officers or directors of the Company other than such contracts
that are disclosed in the Company Financial Statements. The Company is not
a party to any collective bargaining agreements.
Section 5.15 LABOR CONTROVERSIES. Except as set forth in
Schedule 5.15, (a) there are no material controversies pending or, to the
knowledge of the Company, threatened between the Company and any of its
employees or former employees or employees or former employees of SenseNet,
and the Company is not aware of any facts or circumstances which could give
rise to any such controversy; (b) to the knowledge of the Company, there
are no material organizational efforts presently being made or threatened
involving any of the employees of the Company or employees of SenseNet who
devote a material portion of their time to the operations of the Company;
(c) the Company has complied in all material respects with all laws
relating to the employment of employees, including, without limitation, any
provisions thereof relating to wages, hours, occupational health and
safety, collective bargaining, civil rights, unfair labor practices,
administration of leave and rights under the Consolidated Omnibus Budget
Reconciliation Act of 1985; (d) no person has, to the knowledge of the
Company, asserted that the Company is liable in any material amount for any
arrears of wages or any taxes or penalties for failure to comply with any
of the foregoing; (e) the Company has in all material respects withheld all
amounts required by law or by agreement to be withheld from the wages,
salaries, and other payments to employees, and is not liable for any
material arrears of wages or any taxes or any penalty for failure to comply
with any of the foregoing; (f) the Company is not liable for any material
payment to any trust or other fund or to any governmental or administrative
authority, with respect to unemployment compensation benefits, social
security or other benefits or obligations for employees (other than routine
payments to be made in the normal course of business and consistent with
past practice); and (g) there are no pending claims against the Company
under any workers compensation plan or policy or for long term disability.
To the Company's knowledge, no employees of the Company or any SenseNet
employee who devotes a material portion of his or her time to the
operations of the Company are in violation of any term of any employment
contract, patent disclosure agreement, non-competition agreement, or any
restrictive covenant to a former employer relating to the right of any such
employee to be employed by the Company or any of its subsidiaries because
of the nature of the business conducted by the Company or to the use of
trade secrets or proprietary information of others. No key employees or
officers of the Company or any SenseNet employee who devotes a material
portion of his time to the operations of the Company have given notice to
the Company, nor is the Company otherwise aware, that any such key employee
or officer intends to terminate his or her employment with the Company or
SenseNet.
Section 5.16 ENVIRONMENTAL MATTERS. For purposes of this
Agreement, "Environmental Law" means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit,
authorization, approval, consent, order, judgment, decree, injunction,
requirement or agreement with any governmental entity relating to (i) the
protection, preservation or restoration of the environment (including,
without limitation, air, water vapor, surface water, groundwater, drinking
water supply, surface land, subsurface land, plant and animal life or any
other natural resource) or to human health or safety, or (ii) the exposure
to, or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of
Hazardous Substances, in each case as amended and as in effect as of the
date hereof. The term Environmental Law includes, without limitation, (x)
the Federal Comprehensive Environmental Response Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal
Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal
Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto), the Federal
Solid Waste Disposal and the Federal Toxic Substances Control Act, the
Federal Insecticide, Fungicide and Rodenticide Act, the Federal
Occupational Safety and Health Act of 1970, each as amended and as in
effect as of the date hereof, or any state counterpart thereof (and
including any state, local or foreign law relating to the subjects set
forth in the foregoing clauses (i) and (ii)), and (y) any common law or
equitable doctrine (including, without limitation, injunctive relief and
tort doctrines such as negligence, nuisance, trespass and strict liability)
that may impose liability or obligations for injuries, damages or penalties
due to, or threatened as a result of, the presence of, effects of or
exposure to any Hazardous Substance.
For purposes of this Agreement, "Hazardous Substance" means
any substance presently listed, defined, designated or classified as
hazardous, toxic, radioactive, or dangerous, or otherwise regulated under
any Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any government authority or any Environmental Law
including, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste,
industrial substance or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos or asbestos containing material, urea
formaldehyde foam insulation, lead or polychlorinated biphenyls.
Except as set forth in the Company Financial Statements, (i)
the Company has conducted its business in compliance with all applicable
Environmental Laws, including, without limitation, having all permits,
licenses and other approvals and authorizations necessary for the operation
of business as presently conducted, (ii) none of the properties owned or
leased by the Company contain any Hazardous Substance as a result of any
activity of the Company or otherwise in amounts exceeding the levels
permitted by all applicable Environmental Laws, (iii) the Company has not
received any formal or informal notices, demand letters or requests for
information from any federal, state, local or foreign governmental entity
or third party indicating that the Company may be in violation of, or
liable under, any Environmental Law in connection with the ownership or
operation of its business, (iv) there are no civil, criminal or
administrative actions, suits, demands, claims, hearings, investigations or
proceedings pending or threatened against the Company relating to any
violation, or alleged violation, of any Environmental Law, (v) no reports
or notices have been submitted to or filed, or are required to be submitted
or filed, by the Company concerning the release of any Hazardous Substance
or the threatened or actual violation of any Environmental Law, (vi) no
Hazardous Substance has been disposed of, released or transported in
violation of any applicable Environmental Law on or from any properties
owned by the Company, or as a result of any activity of the Company during
the time such properties were owned, leased or operated by the Company, or
as a result of any other cause, (vii) there have been no environmental
investigations, studies, audits, tests, reviews or other analyses regarding
compliance or noncompliance with any applicable Environmental Law arranged
for, conducted by or which are or were in possession of or the existence of
which is known to the Company relating to the activities of the Company, or
conditions on any property owned, leased or operated by the Company, (viii)
there are no underground storage tanks on, in or under any properties owned
by the Company and no underground storage tanks have been closed or removed
from any of such properties during the time such properties were owned,
leased or operated by the Company, (ix) there is no asbestos or asbestos
containing material present in any of the properties owned by the Company
and no asbestos has been removed from any of such properties during the
time such properties were owned, leased or operated by the Company, and (x)
neither the Company, nor any of its respective properties, is subject to
any material liabilities or expenditures (fixed or contingent) relating to
any suit, settlement, court order, administrative order, regulatory
requirement, judgment or claim asserted or arising under any Environmental
Law, except for violations of the foregoing clauses (i) through (x) that,
individually, or in the aggregate, would not have a Company Material
Adverse Effect.
Section 5.17 TITLE TO ASSETS. The Company has good and
marketable title to all its respective properties and assets, real and
personal, free and clear of all mortgages, liens, pledges, charges or
encumbrances of any nature whatsoever, except (a) liens for Taxes not yet
due and payable; (b) such imperfections in title and easements and
encumbrances, if any, as are not material in character, amount or extent
and do not materially and adversely affect the value or interfere with the
present use of the property subject thereto or affected thereby, or
otherwise materially impair the Company's present or proposed business
operations; (c) as disclosed in the Company Financial Statements; or (d)
mortgages incurred in the ordinary course of business. The property and
equipment of the Company and each of its subsidiaries that are used in the
operations of business are in good operating condition and repair, subject
to normal wear and tear. All leases under which the Company leases any
material real or personal property (copies of which have been made
available to Parent) are in good standing, valid and effective in
accordance with their respective terms, and there is not, under any of such
leases, any existing default or event which with notice or lapse of time or
both would become a default other than defaults under such leases which
individually or in the aggregate will not have a Company Material Adverse
Effect.
Section 5.18 COMPANY STOCKHOLDER APPROVAL. The affirmative
vote of the holders of a majority of the outstanding shares of Company
Common Stock and Company Preferred Stock, voting together as a single class
is the only stockholder vote necessary to approve the transactions
contemplated by this Agreement.
Section 5.19 INTELLECTUAL PROPERTY. (a) For purposes hereof
(A) "Intellectual Property" shall mean trademarks, service marks, trade
names, Internet domain names (including, without limitation, YourDay.com),
designs, logos, slogans, and general intangibles of like nature, together
with all goodwill, registrations and applications related to the foregoing
(collectively, "Trademarks"); patents and industrial designs (including any
continuations, divisionals, continuations-in-part, renewals, reissues, and
applications for any of the foregoing); copyrights (including any
registrations and applications for any of the foregoing); Software (as
defined below); "mask works" (as defined under 17 USC ss. 901) and any
registrations and applications for "mask works"; technology, trade secrets
and other confidential information, know-how, proprietary processes,
formulae, algorithms, models, and methodologies (collectively, "Trade
Secrets"); rights of publicity and privacy relating to the use of the
names, likenesses, voices, signatures and biographical information of real
persons (including, without limitation, Laetitia Casta); in each case used
in or necessary for the conduct of the Company's business as currently
conducted or contemplated to be conducted and (B) "Software" means any and
all (a) computer programs, including any and all software implementation of
algorithms, models and methodologies, whether in source code or object code
form, (b) databases and compilations, including any and all data and
collections of data, and (c) all documentation, including user manuals and
training materials, relating to any of the foregoing.
(b) Schedule 5.19(b) sets forth, for the Intellectual
Property owned by the Company, a complete and accurate list of all United
States and foreign (a) patents and patent applications; (b) trademark
registrations (including Internet domain registrations), trademark
applications, and material unregistered trademarks; (c) copyright
registrations and mask work, copyright and mask work applications, and
material unregistered copyrights. Schedule 5.19(b) lists all Software
(other than readily available commercial software programs having an
acquisition price of less than $5,000) which are owned, licensed or leased,
by the Company, and identifies which Software is owned, licensed or leased,
as the case may be.
(c) Schedule 5.19(c) sets forth a complete and
accurate list of all agreements (whether oral or written, and whether
between the Company and third parties or inter-corporate) to which the
Company is a party or otherwise bound: (i) granting or obtaining any right
to use or practice any rights under any Intellectual Property, or (ii)
restricting the Company's rights to use any Intellectual Property,
including license agreements, development agreements, distribution
agreements, settlement agreements, consent to use agreements, and covenants
not to sue (collectively, the "License Agreements"). The License Agreements
are valid and binding obligations of all parties thereto, enforceable in
accordance with their terms, and there exists no event or condition which
will result in a violation or breach of, or constitute (with or without due
notice of lapse of time or both) a default by any party under any such
License Agreement. The Company has not licensed or sublicensed its rights
in any Intellectual Property other than pursuant to the License Agreements.
No royalties or other fees are payable by the Company to any third parties
for the use of or right to use any Intellectual Property except pursuant to
the License Agreements.
(d) Except as set forth on Schedule 5.19(d):
(i) The Company owns, or has a valid right to use,
free and clear of all liens, all of the
Intellectual Property. The Company is listed
in the records of the appropriate United
States, state, or foreign registry as the sole
current owner of record for each application
and registration listed on Schedule 5.19(d).
(ii) The Intellectual Property owned by the Company
and any Intellectual Property used by the
Company is subsisting, in full force and
effect, and has not been cancelled, expired,
or abandoned, and is valid and enforceable.
(iii) There is no pending or threatened claim, suit,
arbitration or other adversarial proceeding
before any court, agency, arbitral tribunal,
or registration authority in any jurisdiction
involving the Intellectual Property owned by
the Company or the Intellectual Property
licensed to the Company alleging that the
activities or the conduct of the Company's
business infringes upon, violates or
constitutes the unauthorized use of the
intellectual property rights of any third
party or challenging the Company's ownership,
use, validity, enforceability or
registrability of any Intellectual Property.
There are no settlements, forebearances to
sue, consents, judgments, or orders or similar
obligations other than the License Agreements
which (a) restrict the Company's rights to use
any Intellectual Property, (b) restrict the
Company's business in order to accommodate a
third party's intellectual property rights or
(c) permit third parties to use any
Intellectual Property owned or controlled by
the Company.
(iv) The conduct of the Company's business as
currently conducted or planned to be conducted
does not infringe upon (either directly or
indirectly such as through contributory
infringement or inducement to infringe) any
intellectual property rights owned or
controlled by any third party. To the
knowledge of the Company, no third party is
misappropriating, infringing, diluting or
violating any Intellectual Property owned or
used by the Company and no such claims, suits,
arbitrations or other adversarial proceedings
have been brought against any third party by
the Company.
(v) The Company has taken reasonable measures to
protect the confidentiality of Trade Secrets,
including requiring its employees and other
parties having access thereto to execute
written non- disclosure agreements. No Trade
Secret has been disclosed or authorized to be
disclosed to any third party other than
pursuant to a non-disclosure agreement. No
party to any non-disclosure agreement relating
to its Trade Secrets is in breach or default
thereof.
(vi) No current or former partner, director,
officer, or employee of the Company (or any of
its respective predecessors in interest) or
SenseNet will, after giving effect to the
transactions contemplated herein, own or
retain any rights to use any of the
Intellectual Property owned or used by the
Company.
Section 5.20 INSURANCE. Except as would not have a Company
Material Adverse Effect, all of the Company's liability, theft, life,
health, fire, title, worker's compensation and other forms of insurance,
surety bonds and umbrella policies, insuring the Company and its directors,
officers, employees, independent contractors, properties, assets and
businesses, are valid and in full force and effect (without any premium
past due or pending notice of cancellation) and are adequate for the
business of the Company as now conducted and as proposed to be conducted,
and there are no claims, singly or in the aggregate, in excess of the
limitations of coverage set forth in such policies. The Company has no
knowledge of any fact indicating that such policies will not continue to be
available to the Surviving Corporation upon substantially similar terms
subsequent to the Effective Time. The provision and/or reserves in the
Company Financial Statements are adequate for any and all self-insurance
programs maintained by the Company.
Section 5.21 BROKERS AND FINDERS. Neither the Company nor
any of its officers, directors or employees has employed any investment
banker, broker or finder or incurred any liability for any investment
banking fees, financial advisory fees, brokerage fees, commissions or
finder's fees in connection with the transactions contemplated hereby.
Section 5.22 INTERESTED PARTY TRANSACTIONS. Neither the
Company nor any of its subsidiaries is indebted to any director, officer,
employee or agent of the Company or any such subsidiaries (except for
amounts due as normal salaries and bonuses and in reimbursement of ordinary
expenses), and except as set forth in Schedule 5.22 no such person is
indebted to the Company or any of its subsidiaries.
Section 5.23 MINUTE BOOKS. The minute books of the Company
and its subsidiaries made available to Parent or its representatives
contain a complete and accurate summary in all material respects of all
meetings of directors and shareholders or actions by written consent since
the time of incorporation of the Company and its subsidiaries through the
date of this Agreement, and reflect all transactions referred to in such
minutes accurately in all material respects.
Section 5.24 COMPLETE COPIES OF MATERIALS. The Company has
delivered or made available true and complete copies of each document which
has been requested by Parent or its counsel in connection with their due
diligence review of the Company to the extent such documents exist.
Section 5.25 BOARD APPROVAL. The Board of Directors of the
Company has unanimously (i) approved this Agreement and the Merger, (ii)
determined that the transactions contemplated herein and therein are
advisable and in the best interests of the shareholders of the Company and
on terms that are fair to such shareholders and (iii) recommended that the
shareholders of the Company approve the Merger.
Section 5.26 THIRD PARTY CONSENTS. Schedule 5.26 lists all
contracts that require a consent to the transactions contemplated hereby,
as the case may be, prior to the Effective Time, so that Parent shall be
made a party in place of the Company (or any of its subsidiaries) or an
assignee.
Section 5.27 INVENTORY. The Company has no inventory.
Section 5.28 ACCOUNTS RECEIVABLE. Subject to any reserves
set forth in the Financial Statements, the accounts receivable shown on the
Financial Statements represent and will represent bona fide claims against
debtors for sales and other charges, and are not subject to accounts and
allowances disclosed in the Financial Statements is sufficient to provide
for any losses which may be sustained on realization of the receivables.
Section 5.29 TAX MATTERS. None of SenseNet, the Company, or
any affiliate of either has taken or agreed to take any action, nor do any
of the foregoing have any knowledge of any fact or circumstance that would
prevent the Merger from qualifying as a reorganization within the meaning
of Section 368(a) of the Code.
Section 5.30 REPRESENTATIONS COMPLETE. None of the
representations or warranties made by the Company herein or in any schedule
hereto, or certificate furnished by the Company pursuant to this Agreement,
when all such documents are read together in their entirety, contains or
will contain at the Closing Date any untrue statement of a material fact,
or omits or will omit at the Closing Date to state any material fact
necessary in order to make the statements contained herein or therein, in
the light of the circumstances under which made, not misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF SENSENET
SenseNet represents and warrants to Parent and Acquisition Sub, as
of the date hereof, as follows:
Section 6.1 ORGANIZATION AND QUALIFICATIONS. SenseNet is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power and
authority to own, lease and operate its assets and properties and to carry
on its business as it is now being conducted. SenseNet is qualified to do
business and is in good standing in each jurisdiction in which the
properties owned, leased or operated by it or the nature of the business
conducted by it makes such qualification necessary, except where the
failure to be so qualified and in good standing will not, when taken
together with all other such failures, have a material adverse effect on
the business, operations, properties, assets, condition (financial or
other) or results of operations of SenseNet, taken as a whole. SenseNet is
in not violation of any of the provisions of its Certificate of
Incorporation or By-Laws.
Section 6.2 AUTHORITY; NON-CONTRAVENTION; APPROVALS.
(a) SenseNet has full corporate power and authority
to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been approved by the Board of
Directors of SenseNet, and no other corporate proceedings on the part of
SenseNet are necessary to authorize the execution and delivery of this
Agreement or the consummation by SenseNet of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by SenseNet,
and, assuming the due authorization, execution and delivery hereof by the
Company, Parent and Acquisition Sub, constitutes a valid and legally
binding agreement of SenseNet, enforceable against it in accordance with
its terms, except that such enforcement may be subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting or
relating to enforcement of creditors' rights generally, and (ii) general
equitable principles.
(b) The execution and delivery of this Agreement by
SenseNet does not, and the performance of this Agreement and the
transactions contemplated hereby by SenseNet shall not, violate, conflict
with or result in a breach of any provision of, or constitute a default (or
an event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, any of the terms, conditions or provisions of (i) the
Certificate of Incorporation or By-Laws and/or other organizational
documents of SenseNet, (ii) any statute, law, ordinance, rule, regulation,
judgment, decree, order, injunction, writ, permit or license of any court
or governmental authority, domestic or foreign, applicable to SenseNet or
any of its respective properties or assets, or (iii) any note, bond,
mortgage, indenture, deed of trust, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind to
which SenseNet is now a party or by which SenseNet or any of its respective
properties or assets may be bound. Excluded from the foregoing sentences of
this paragraph (b) are such violations, conflicts, breaches, defaults,
terminations, accelerations or creations of liens, security interests,
charges or encumbrances that would not, in the aggregate, materially impair
the ability of SenseNet to consummate the transactions contemplated by this
Agreement.
(c) No declaration, filing or registration with, or
notice to, or authorization, consent or approval of, any governmental or
regulatory body or authority, domestic or foreign, is necessary for the
execution and delivery of this Agreement by SenseNet or the consummation by
SenseNet of the transactions contemplated hereby, other than such
declarations, filings, registrations, notices, authorizations, consents or
approvals which, if not made or obtained, as the case may be, would not, in
the aggregate, materially impair the ability of SenseNet to consummate the
transactions contemplated by this Agreement.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE
MERGER. Except as otherwise contemplated by this Agreement, after the date
hereof and prior to the Effective Time or earlier termination of this
Agreement, unless Parent shall otherwise agree in writing, the Company
shall:
(a) conduct its business in the ordinary and usual
course of business and consistent with past practice;
(b) not (i) amend or propose to amend its Certificate
of Incorporation or By-Laws, (ii) split, combine, subdivide or reclassify
any class of its outstanding capital stock, or (iii) declare, set aside or
pay any dividend or distribution payable in cash, stock, property or
otherwise in respect of any class of its capital stock;
(c) not issue, sell, pledge, dispose of or encumber,
agree to issue, sell, pledge, dispose of or encumber or otherwise cause to
become outstanding, any additional shares of, or any options, warrants or
rights of any kind to acquire any shares of their capital stock of any
class or any debt or equity securities convertible into or exchangeable for
such capital stock or amend any of the terms of any such securities
outstanding on the date hereof;
(d) not (i) incur, assume or prepay or become
contingently liable with respect to any indebtedness for borrowed money
other than in accordance with the Company's current borrowing arrangements,
if any (ii) redeem, purchase, acquire or offer to purchase or acquire any
shares of its capital stock or any options, warrants or rights to acquire
any of its capital stock or any security convertible into or exchangeable
for its capital stock, (iii) take or fail to take any action which action
or failure would cause the Company or its stockholders (except to the
extent that any stockholders receive cash in lieu of fractional shares) to
recognize gain or loss for federal income tax purposes as a result of the
consummation of the Merger, (iv) make any acquisition of any assets or
businesses or expenditures for fixed or capital assets other than
expenditures set forth on attached Schedule 7.1 or expenditures in the
ordinary course of business which, in such cases of $25,000 or more, shall
be on terms reasonably acceptable to Parent, (vi) sell, pledge, dispose of
or encumber any assets or businesses other than sales in the ordinary
course of business which, in such cases involving $25,000 or more, shall be
on terms reasonably acceptable to Parent, (vii) assume, guarantee, endorse
or otherwise become liable or responsible (whether directly, contingently
or otherwise) for the obligations of any third party, (viii) make any
loans, advances or capital contributions to, or investments in, any third
party, or (ix) mortgage or pledge any of its material properties or assets,
tangible or intangible, or create or suffer to exist any lien thereupon;
(e) use all commercially reasonable efforts to
preserve intact its business organizations and goodwill, keep available the
services of their respective present officers and employees and
consultants, and preserve the goodwill and business relationships with
customers, vendors and others having business relationships with them and
not engage in any action, directly or indirectly, with the intent to
adversely impact the transactions contemplated by this Agreement;
(f) confer on a regular and frequent basis with one
or more representatives of Parent to report operational matters of
materiality and the general status of ongoing operations;
(g) not enter into or amend any employment,
severance, special pay arrangement with respect to termination of
employment or other similar arrangements or agreements with any directors,
officers or key employees, except in the ordinary course and consistent
with past practice which, in cases involving $25,000 or more, shall be on
terms reasonably acceptable to Parent;
(h) not organize any new subsidiary, acquire any
capital stock or equity securities of any corporation or acquire any equity
or ownership interest (financial or otherwise) in any business;
(i) make any change in the compensation payable or to
become payable to any of its officers, directors, employees, agents or
consultants (other than normal recurring increases in wages to employees
who are not executives in the ordinary course of business consistent with
past practice);
(j) not adopt, enter into or amend any bonus, profit
sharing, compensation, stock option, pension, retirement, deferred
compensation, health care, employment or other employee benefit plan,
agreement, trust, fund or arrangement for the benefit or welfare of any
employee or retiree except as required to comply with changes in applicable
law or increases in wages in the ordinary course and consistent with past
practice for non- executive employees;
(k) maintain with adequately capitalized insurance
companies insurance coverage for its assets and its businesses in such
amounts and against such risks and losses as are consistent with past
practice;
(l) license (except in the ordinary course of
business) or otherwise transfer, dispose of, permit to lapse or otherwise
fail to preserve any of the Company's Intellectual Property, or dispose of
or disclose to any person any trade secret, formula, process or know-how
not theretofore a matter of public knowledge;
(m) cancel any debts or waive, release or relinquish
any contract rights or other rights of substantial value other than in the
ordinary course of business, consistent with past practices;
(n) authorize, recommend, propose or enter into or
announce an intention to authorize, recommend, propose or enter into a term
sheet, letter of intent, agreement in principle or a definitive agreement
with respect to any merger, consolidation, liquidation, dissolution, or
business combination, any acquisition of a material amount of property or
assets or securities, or any disposition of a material amount of property
or assets or securities;
(o) make any change with respect to accounting
policies or procedures;
(p) pay, discharge or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or satisfaction
in the ordinary course of business, consistent with past practices, of
liabilities reflected or reserved against in the Financial Statements or
incurred in the ordinary course of business consistent with past practices
since the date thereof;
(q) commit or agree (in writing or otherwise) to take
any of the foregoing actions or any action, or fail to take any action,
that would cause the failure of any condition set forth in Section 9.2; or
(r) not make any election relating to Taxes, change
any election relating to Taxes already made, adopt or change any accounting
method relating to Taxes, enter into any closing agreement relating to
Taxes, settle any claim or assessment relating to Taxes, consent to any
claim or assessment relating to Taxes or any extension or waiver of the
statute of limitations for any such claim or assessment.
(s) pay all Taxes and file all Tax Returns when due.
Section 7.2 CONTROL OF THE COMPANY'S OPERATIONS. Nothing
contained in this Agreement shall give to Parent, directly or indirectly,
rights to control or direct the Company's operations prior to the Effective
Time. Prior to the Effective Time, the Company shall exercise, consistent
with and subject to the terms and conditions of this Agreement, complete
control and supervision of its operations.
Section 7.3 ACQUISITION TRANSACTIONS. After the date hereof
and prior to the Effective Time or earlier termination of this Agreement in
accordance with its terms, the Company shall not, and shall cause its
officers, directors, employees, stockholders representatives and agents not
to, directly or indirectly, (i) initiate, solicit, engage or seek any
inquiries or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders)
to acquire all or any significant portion of the business, asserts or
properties of the Company or more than twenty percent (20%) of the capital
stock of the Company, whether by merger, purchase of assets, tender offer
or otherwise, whether for cash, securities or any other consideration or
combination thereof except for the transaction contemplated herein (any
such transactions being referred to herein as "Acquisition Proposals"),
(ii) engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating
to an Acquisition Proposal, or (iii) otherwise cooperate in any effort or
attempt to make, implement or accept an Acquisition Proposal. Upon
execution of this Agreement, the Company will immediately cease any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. The Company will promptly
notify Parent after receipt of any Acquisition Proposal or any notice that
any person is considering making a Acquisition Proposal or any request for
nonpublic information relating to the Company or for access to the
properties, books or records of the Company by any person that has advised
the Company that it may be considering making, or that has made, a
Acquisition Proposal and will keep Parent timely informed of the status and
details of any such Acquisition Proposal notice, request or any
correspondence or communications related thereto and shall provide Parent
with a true and complete copy of such Acquisition Proposal notice or
request or correspondence or communications related thereto, if it is in
writing, or a written summary thereof, if it is not in writing. Neither the
Company's Board of Directors nor any committee thereof shall (i) withdraw
or modify, or propose to withdraw or modify, in a manner adverse to Parent
or Acquisition Sub, the approval or recommendation by the Company's Board
of Directors or any such committee of this Agreement or the Merger, or (ii)
approve or recommend or propose to approve or recommend, any Acquisition
Proposal or (iii) enter into any agreement with respect to any Acquisition
Proposal.
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 ACCESS TO INFORMATION. The Company shall afford
Parent and its accountants, counsel and other representatives, reasonable
access during normal business hours during the period prior to the
Effective Time to (i) all of the Company's and its subsidiaries'
properties, books, contracts, commitments and records, and (ii) all other
information concerning the business, properties and personnel of the
Company and its subsidiaries as Parent may reasonably request. SenseNet
shall provide Parent will reasonable access during normal business hours to
the employees of SenseNet listed on Schedule 9.3(l) for the purpose of
discussing their employment by Parent or the Company after the Effective
Time. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly
upon request. Parent shall afford counsel to the Company information or
copies of documentation and reasonable access to its senior management to
complete the opinion referred to in Section 9.2(b) below. Parent and
Acquisition Sub shall hold and shall use their commercially reasonable
efforts to cause the Parent's representatives to hold, and the Company
shall hold and shall use its commercially reasonable efforts to cause the
Company's representatives to hold, in strict confidence all non-public
documents and information furnished to Parent and Acquisition Sub or to the
Company, as the case may be, in connection with the transactions
contemplated by this Agreement. Notwithstanding the foregoing (i) Parent
and the Company may disclose such information as may be necessary in
connection with seeking the Parent Required Statutory Approval, the Company
Required Statutory Approval and the Company Stockholder Approval (as
defined in Section 8.2 below), and (ii) each of Parent, Acquisition Sub and
the Company may disclose any information that it is required by law or
judicial or administrative order to disclose.
Section 8.2 MAJORITY STOCKHOLDER APPROVAL. The Company
shall, as promptly as practicable, submit the transactions contemplated
hereby for the approval of its majority stockholder and shall use its
commercially reasonable efforts to obtain stockholder approval and adoption
(the "Company Stockholder Approval") of this Agreement and the transactions
contemplated hereby. The Company shall, through its Board of Directors,
recommend to its majority stockholder approval of the transactions
contemplated by this Agreement.
Section 8.3 REGISTRATION RIGHTS. (a) If, after the Effective
Time but prior to the expiration of one year after the Effective Time,
Parent shall decide to register any of its securities either for its own
account or the account of any holders of its Common Stock, other than a
registration relating solely to employee benefit plans, or a registration
relating to a corporate reorganization or other transaction on Form S-4 (or
any successor or similar form), or a registration on any registration form
that does not permit secondary sales, Parent will promptly give to each
holder of Parent Common Stock written notice thereof; and use its best
efforts to include in such registration (and any related qualification
under blue sky laws or other compliance), except as set forth in Section
8.3(b) below, and in any underwriting involved therein, all the shares of
Parent Common Stock ("Registrable Securities") specified in a written
request or requests, made by any holder thereof and received by the Company
within twenty (20) business days after the written notice from Parent
described above is mailed or delivered by Parent. Such written request may
specify all or a part of a holder's Registrable Securities. Parent shall
bear all expenses in connection with any such registration.
(b) If the registration of which Parent gives notice
is for a registered public offering involving an underwriting, Parent shall
so advise the holders of Parent Common Stock as a part of the written
notice given pursuant to Section 8.3(a). In such event, the right of any
holder of Parent Common Stock to registration pursuant to this Section
8.3(a) shall be conditioned upon such holder's participation in such
underwriting and the inclusion of such holder's Registrable Securities in
the underwriting to the extent provided herein. All holders proposing to
distribute their securities through such underwriting shall (together with
Parent and the other holders of securities of Parent with registration
rights to participate therein distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with
the representative of the underwriter or underwriters selected by Parent.
Notwithstanding any other provision of this Section 8.3, if the
representative of the underwriters advises Parent in writing that marketing
factors make a limitation on the number of shares to be underwritten
appropriate, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of
Registrable Securities to be included in, the registration and
underwriting. Parent shall so advise all holders of Registrable Securities
requesting registration.. If any holder of Registrable Securities does not
agree to the terms of any such underwriting, it shall be excluded therefrom
by written notice from Parent or the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration.
(c) Rule 144 Reporting. With a view to making
available the benefits of certain rules and regulations of the SEC that may
permit the sale of the Registrable Securities to the public without
registration, Parent agrees to use its best efforts to:
(i) Make and keep public information regarding
Parent available as those terms are understood and defined
in Rule 144 under the Securities Act, at all times from and
after ninety (90) days following the effective date of the
first registration under the Securities Act filed by Parent
for an offering of its securities to the general public;
(ii) File with the SEC in a timely manner all
reports and other documents required of Parent under the
Securities Act and the Exchange Act at any time after it has
become subject to such reporting requirements;
(iii) So long as a holder owns any Registrable
Securities, furnish to the holder forthwith upon written
request a written statement by Parent as to its compliance
with the reporting requirements of Rule 144, and of the
Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy
of the most recent annual or quarterly report of Parent, and
such other reports and documents so filed as a holder may
reasonably request in availing itself of any rule or
regulation of the SEC allowing a holder to sell any such
securities without registration.
(d) Termination of Registration Rights. The right of
any holder of Registrable Securities to request registration or inclusion
in any registration shall terminate if all shares of Registrable Securities
held by such holder may immediately be sold under Rule 144 during any
ninety (90) day period.
Section 8.4 EXPENSES AND FEES. Each party hereto agrees to
bear its own expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement, except Parent shall pay and be
responsible for all fees and expenses incurred in connection with the
printing, filing and mailing of the Information Statement.
Section 8.5 AGREEMENT TO COOPERATE. Subject to the terms and
conditions herein provided, each of the parties hereto shall use all
commercially reasonable efforts to take, or cause to be taken, all action
and to do, or cause to be done, all things necessary, proper or advisable
pursuant to all agreements, contracts, indentures or other instruments to
which the parties hereto are a party, or under any applicable laws and
regulations to consummate and make effective the transactions contemplated
by this Agreement, including using its commercially reasonable efforts to
(i) obtain all necessary or appropriate waivers, consents and approvals
from lenders, landlords, security holders or other parties whose waiver,
consent or approval is required to consummate the Merger and (ii) effect
all necessary registrations, filings and submissions with any governmental
or regulatory authority.
Section 8.6 PUBLIC STATEMENTS. The parties (i) shall consult
with each other prior to issuing any press release or any written public
statement with respect to this Agreement or the transactions contemplated
hereby, and (ii) shall not issue any such press release or written public
statement prior to such consultation, except as may be required by law and
applicable listing requirements.
Section 8.7 WARRANTS. The Company shall use its reasonable
best efforts to ensure that all outstanding warrants to purchase capital
stock of the Company, including all Company Warrants, are exercised prior
to Closing. Notwithstanding the foregoing, any Company Warrant which
remains outstanding at the Effective Time shall be exercisable for Parent
Common Stock in accordance with the terms of such Company Warrant and this
Agreement.
Section 8.8 BENEFIT PLANS. Parent agrees to provide benefit
plans of general applicability which will be made available to employees of
the Company and employees of SenseNet who will become employees of the
Company at the Effective Time and for at least the initial term of the
Employment Agreements, the terms of which shall be at least as favorable as
those found in the benefit plans of Parent in effect for the benefit of
similarly situated employees prior to the Effective Time; provided,
however, that the terms of the plans so provided may be modified at any
time during such period to the extent Parent determines that such
modifications are necessary in order for such plans to maintain their
tax-qualified or tax-exempt status under the Code, or to comply with the
requirements of ERISA or any other applicable law. Parent also agrees to
give such employees credit for all eligibility and vesting they have
accrued during their respective terms of employment with the Company.
Section 8.9 NOTIFICATION OF CERTAIN MATTERS. Each of the
Company, Parent, Acquisition Sub and SenseNet agrees to give prompt notice
to each other of, and to use their respective commercially reasonable
efforts to prevent or promptly remedy (i) the occurrence or failure to
occur or the impending or threatened occurrence or failure to occur, of any
event which occurrence or failure to occur would be likely to cause any of
its representations or warranties in this Agreement to be untrue or
inaccurate in any material respect at any time from the date hereof to the
Effective Time, and (ii) any material failure on its part to comply with or
satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 8.9 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section 8.10 DIRECTORS' AND OFFICERS' INDEMNIFICATION. The
provisions of this Section 8.10 are intended to be for the benefit of, and
will be enforceable by, each director and officer of the Company entitled
to indemnification from the Company. Parent will not permit the Company to
merge or consolidate with any other entity, dissolve, or otherwise cease
its corporate existence unless Parent makes adequate provisions for the
assumption of the obligations imposed by this Section 8.10. Any amendment,
repeal, or modification of the provisions with respect to indemnification
that are set forth in the Company's Certificate of Incorporation and the
Company's By-laws shall not in any manner affect adversely the rights
thereunder of individuals who at, or at any time prior to, the Effective
Time, were directors or officers of the Company. From and after the
Effective Time, Parent will, for a period of three (3) years after the
Closing, to the fullest extent permitted by law, cause the Company to
fulfill and honor in all respects the obligations of the Company pursuant
to any indemnification agreements between the Company and its directors and
officers and any indemnification provisions under the Company's Certificate
of Incorporation or By-laws as in effect immediately prior to the Effective
Time.
Section 8.11 INFORMATION STATEMENT. As soon as practicable
after the execution of this Agreement, the Company shall prepare, with the
cooperation of Parent, an Information Statement (the "Information
Statement") for the stockholders of the Company to approve the Merger and
the transactions contemplated by this Agreement. The Information Statement
shall constitute a disclosure document for the offer and issuance of the
shares of Parent Common Stock to be received by the holders of Company
Capital Stock in the Merger. Parent and the Company shall each use its
reasonable best efforts to cause the Information Statement to comply with
applicable federal and state securities laws requirements. Each of Parent
and the Company agrees to provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing party or its counsel, may be required
or appropriate for inclusion in the Information Statement, or in any
amendments or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation of the
Information Statement. The Company will promptly advise Parent, and Parent
will promptly advise the Company, in writing if at any time prior to the
Effective Time either the Company or Parent shall obtain knowledge of any
facts that might make it necessary or appropriate to amend or supplement
the Information Statement in order to make the statements contained or
incorporated by reference therein not misleading or to comply with
applicable law. The Information Statement shall include the recommendation
of the Company Board in favor of this Agreement and the Merger and the
conclusion of the Board of Directors that the terms and conditions of the
Merger are fair and reasonable to the stockholders of the Company. Anything
to the contrary contained herein notwithstanding, the Company shall not
include in the Information Statement any information with respect to Parent
or its affiliates or associates, the form and content of which information
shall not have been approved by Parent prior to such inclusion.
Section 8.12 TAX-FREE TREATMENT OF MERGER. Parent and the
Company shall each use its commercially reasonable efforts to cause the
Merger to be treated as a tax-free reorganization for federal and state
income tax purposes and agree that this Agreement shall serve as the Plan
of Reorganization therefor.
Section 8.13 BLUE SKY LAWS. Parent shall take such steps as
may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of the Parent Common
Stock in connection with the Merger. The Company shall use its reasonable
best efforts to assist Parent as may be necessary to comply with the
securities and blue sky laws of all jurisdictions which are applicable in
connection with the issuance of Parent Common Stock in connection with the
Merger.
Section 8.14 FIRPTA CERTIFICATE. The Company shall, prior to
the Closing Date, provide Parent with a properly executed certificate and a
notice to the IRS provided for under Treasury Regulations Sections
1.897-2(h)(2) and 1.1445-2(c) (together, the "FIRPTA Certificate"),
substantially in the form of Exhibit C attached hereto, together with
written authorization for the Parent to deliver such notice to the IRS on
behalf of the Company on or after the Closing Date.
Section 8.15 TRANSFERS OF TITLE. SenseNet shall execute and
deliver in a form reasonably satisfactory to Parent any and all
documentation reasonably requested by Parent to effect the transfer to the
Company of any and all Intellectual Property or tangible assets owned by
the Company or used by the Company in the operation of its business.
Section 8.16 NONCOMPETITION; NONSOLICITATION. Except as
otherwise agreed to in writing by SenseNet and Parent or the Surviving
Corporation, for the period commencing on the Closing Date and ending
thirty-six (36) months after the Closing Date, SenseNet shall not, and
shall cause its subsidiaries not to, directly or indirectly, in any
capacity, do any of the following (the "Competing Activities"):
(a) engage in any business which develops,
manufactures, markets or sells products or services which offer
substantially free-standing functionality which is similar to the products
and services of the Surviving Corporation (or its subsidiaries which
directly engage in providing such products or services) as such products or
services are constituted as of the Effective Time (the "Business");
provided, however, that SenseNet shall not be precluded from the ownership
of securities of corporations that are listed on a national securities
exchange or traded in the national over-the-counter market in an amount
that shall not exceed one percent (1%) of the issued and outstanding voting
securities of such corporations; and provided, further, that, for purposes
of clarity, SenseNet and Parent agree that the development, manufacture,
sale or marketing of the SenseNet II Office suite or any successor, so long
as SenseNet does not disproportionately market or promote the calendaring
module contained within SenseNet II office suite or any successor, shall
not violate this Agreement;
(b) enter into any joint venture or other business
relationship with any individual, partnership, corporation, limited
liability company, association, business trust, joint venture, or other
entity of any kind or nature (a "Person") with the primary purpose of
engaging in the Business, notwithstanding that such Person may, as of the
effective date of such relationship, engage, directly or indirectly, in the
Business,
(c) call upon any Person who is, at that time or was
within two (2) years prior to that time, an employee of Parent, the
Surviving Corporation or their respective subsidiaries or affiliates for
the purpose or with the intent of soliciting or enticing such employee away
from or out of the employ the Parent or the Surviving Corporation;
(d) enter into (i) any acquisition of SenseNet by any
Person (whether by means of merger or other form of corporate
reorganization in which outstanding shares of SenseNet are exchanged for
securities or other consideration issued or caused to be issued by the
acquiring Person) or (ii) any sale of all or substantially all of its
assets to, any Person which derives more than 10% of its revenue from the
Business; or
(e) publish any statement or make any statement
(under any circumstances reasonably likely to become public) critical of
the Surviving Corporation.
ARTICLE IX
CONDITIONS
Section 9.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT
THE MERGER. Unless waived by each of the parties, the respective
obligations of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated
hereby, as appropriate, shall have been approved and adopted by the
requisite vote of the stockholders of the Company under applicable law;
(b) No preliminary or permanent injunction or other
order or decree by any court of competent jurisdiction which prevents the
consummation of the Merger shall have been issued and remain in effect
(each party agreeing to use its commercially reasonable efforts to have any
such injunction, order or decree lifted);
(c) No action shall have been taken, and no statute,
rule, order or regulation shall have been enacted, entered or enforced by
any state, federal or foreign government or governmental agency which would
prevent the consummation of the Merger or make the consummation of the
Merger illegal; and
(d) All governmental waivers, consents, orders,
authorizations and approvals of any governmental or regulatory authority,
domestic or foreign, legally required for the consummation of the Merger
and the transactions contemplated hereby, shall have been obtained and be
in effect at the Effective Time.
Section 9.2 ADDITIONAL CONDITIONS TO OBLIGATION OF THE
COMPANY TO EFFECT THE MERGER. Unless waived by the Company, the obligation
of the Company to effect the Merger shall be subject to the fulfillment at
or prior to the Closing of the following additional conditions:
(a) Parent and Acquisition Sub shall have performed
in all material respects their agreements contained in this Agreement
required to be performed on or prior to the Effective Time, and the
representations and warranties of Parent and Acquisition Sub contained in
this Agreement shall be true and correct in all material respects (except
that where any statement in a representation or warranty expressly includes
a standard of materiality, such statement shall be true and correct in all
respects) on and as of the date made and on and as of the Closing Date,
except for those representations and warranties which address matters only
as of a particular date (which shall remain true and correct as of such
date), as if made at and as of such date, and the Company shall have
received a certificate of an officer of each of Parent and Acquisition Sub
to that effect;
(b) The Company shall have received an opinion of
Carter, Ledyard & Milburn, independent counsel to the Company, in form and
substance reasonably satisfactory to the Company, effective as of the
Closing Date and based on the representations of the Company and Parent
substantially as set forth in Exhibit D hereto, to the effect that (i) the
Merger of Acquisition Sub with and into the Company pursuant to this
Agreement and applicable state law will be treated for United States
federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, (ii) Parent, Acquisition Sub and the Company
will each be a party to the reorganization within the meaning of Section
368(b) of the Code, and (iii) the stockholders of the Company will not
recognize gain or loss as a result of the Merger, except to the extent such
stockholders receive any Fractional Share Payment;
(c) The Company shall have received an opinion from
Skadden, Arps, Slate, Meagher & Flom LLP, independent counsel to Parent and
Acquisition Sub, dated the Closing Date, reasonably satisfactory to the
Company; and
(d) All waivers, consents, orders, authorizations,
and approvals required to be obtained, and all filings required to be made
by Parent and Acquisition Sub for the authorization, execution and delivery
of this Agreement and the consummation by Parent and Acquisition Sub of the
transactions contemplated hereby shall have been obtained and made by
Parent and Acquisition Sub, except where the failure to obtain the waivers,
consents, orders, authorization or approvals required to be obtained or any
filings required to be made would not have a Parent Material Adverse
Effect, taken as a whole.
Section 9.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT
AND ACQUISITION SUB TO EFFECT THE MERGER. Unless waived by Parent and
Acquisition Sub, the obligations of Parent and Acquisition Sub to effect
the Merger shall be subject to the fulfillment at or prior to the Effective
Time of the following additional conditions:
(a) The Company shall have performed in all material
respects its agreements contained in this Agreement required to be
performed on or prior to the Effective Time and the representations and
warranties of the Company contained in this Agreement shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects) on and as of the
date made and on and as of the Closing Date, except for those
representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such date), as
if made at and as of such date, and Parent shall have received a
Certificate of the President of the Company, in form and substance
reasonably satisfactory to Parent, to that effect and certifying to the
fulfillment of the conditions set forth in Sections 9.3(c), 9.3(d) and
9.3(f).
(b) Parent shall have received an opinion from the
law firm of Carter, Ledyard & Milburn, independent counsel to the Company,
effective as of the Closing Date, reasonably satisfactory to Parent as to
such matters as are customarily the subject of an opinion to the acquiring
company by counsel for the acquired company in similar transactions.
(c) Since the date hereof, there shall have been no
changes that constitute, and no event or events shall have occurred which
have resulted in or constitute, a Company Material Adverse Effect.
(d) The Company Warrants, prior to or at the
Effective Time, shall either have been exercised or will be convertible
into warrants to purchase Parent Common Stock, pursuant to the terms of
such Company Warrants and this Agreement.
(e) [Intentionally omitted]
(f) All outstanding shares of Company Preferred Stock
shall have been converted into Company Common Stock in accordance with the
Company's Certificate of Incorporation or the terms of such Company
Preferred Stock shall permit their exchange in the Merger for shares of
Parent Common Stock.
(g) Parent shall have received an executed investment
representation letter in the form attached hereto as Exhibit E from each
holder of Company Common Stock, Company Preferred Stock or Company
Warrants.
(h) SenseNet shall have executed and delivered to
Parent a Services Agreement in the form attached hereto as Exhibit F.
(i) SenseNet shall have executed and delivered to
Parent a Sublease Agreement containing the terms set forth on Exhibit G
hereto, and any required consent of a third party to such sublease shall
have been obtained and delivered to Parent.
(j) Parent shall have received the FIRPTA Certificate
as required by Section 8.14.
(k) Parent shall have received any documentation
requested pursuant to section 8.15.
(l) SenseNet shall have delivered a written notice to
each of the employees listed on Schedule 9.3(l), terminating their
employment with SenseNet effective as of the Effective Time.
(m) The directors and officers of the Company shall
have delivered to Parent written resignations as contemplated by Sections
2.4 and 2.5 hereof.
Section 9.4 FRUSTRATION OF CONDITIONS. Neither Parent nor
the Company may rely on the failure of any condition set forth in this
Article IX to be satisfied if such failure was caused by such party's
failure to comply with or perform any of its covenants or obligations set
forth in this Agreement.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 TERMINATION. This Agreement may be terminated
by the mutual consent of the parties, or at any time prior to the Closing
Date, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company, as follows:
(a) The Company shall have the right to terminate
this Agreement,
(i) if the Merger is not completed by March
15, 2000 except if the failure of the Merger to occur on or
before such date has been caused by or resulted from the
action or failure to act of the Company;
(ii) if the Merger is enjoined by a final,
unappealable order of a court of competent jurisdiction
having jurisdiction not entered at the request or with the
support of the Company or any of its affiliates or
associates; or
(iii) if Parent (A) has breached any
representation, warranty or covenant in any material
respect, and (B) does not cure such default in all material
respects within twenty (20) days after written notice of
such default is given to Parent by the Company.
(b) Parent shall have the right to terminate this
Agreement,
(i) if the Merger is not completed by March
15, 2000 except if the failure of the Merger to occur on or
before such date has been caused by or resulted from the
action or failure to act of Parent;
(ii) if the Merger is enjoined by a final,
unappealable order of a court of competent jurisdiction
having jurisdiction not entered at the request or with the
support of Parent or any of its affiliates or associates; or
(iii) if the Company (A) has breached any
representation, warranty or covenant in any material
respect, and (B) does not cure such default in all material
respects within twenty (20) days after written notice of
such default is given to the Company by Parent.
Section 10.2 EFFECT OF TERMINATION. In the event of
termination of this Agreement by either Parent or the Company as provided
in Section 10.1, this Agreement shall forthwith become void and there shall
be no further obligation on the part of the Company, Parent, Acquisition
Sub, or their respective officers or directors (except as set forth in this
Section 10.2 and in Sections 8.1 and 8.6, all of which shall survive the
termination), provided, however, that nothing in this Section 10.2 shall
relieve any party from liability for any breach of this Agreement.
Section 10.3 AMENDMENT. This Agreement may not be amended
except by action taken by the parties' respective Boards of Directors or
duly authorized committees thereof and then only by an instrument in
writing signed on behalf of each of the parties hereto and in compliance
with applicable law, provided, that an amendment made subsequent to
adoption of this Agreement by the stockholders of the Company shall not (i)
alter or change the amount or kind of consideration to be received on
conversion of the Company Common Stock or Company Preferred Stock, or (ii)
alter or change any of the terms and conditions of the Agreement if such
alteration or change would materially adversely affect the holders of
Company Common Stock or Company Preferred Stock.
Section 10.4 WAIVER. At any time prior to the Effective
Time, any party hereto may (a) extend the time for the performance of any
of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in
any document delivered pursuant thereto, and (c) waive compliance with any
of the agreements or conditions contained herein. Any such extension or
waiver shall not be deemed to be continuing or to apply to any future
obligation or requirement of any part hereto provided herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be
valid if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE XI
INDEMNIFICATION AND ESCROW
Section 11.1 INDEMNIFICATION BY SENSENET. SenseNet shall
indemnify Parent and the Surviving Corporation and any employee, director,
officer or agent of each of them (the "Indemnified Parties") against, hold
each of them harmless from, and reimburse each of them for any claim,
costs, loss, liability or expense (including reasonable attorneys' fees and
expenses) or other damage (including, without limitation, expectation,
actual, punitive and consequential damages) (collectively, "Damages")
arising, directly or indirectly, from or in connection with: (a) any
inaccuracy in any of the warranties or representations of the Company or
SenseNet in this Agreement, (b) any failure by the Company or SenseNet to
perform or comply with any covenant or obligation in this Agreement, or (c)
any Third Party Claim (as defined below) relating to an inaccuracy or
failure referred to in clause (a) or (b) above.
Section 11.2 PROCEDURE FOR THIRD PARTY CLAIMS. Promptly
after receipt by an Indemnified Party under Section 11.1 of notice of the
commencement of any action or demand or claim by a third party (a "Third
Party Claim") which gives rise to Damages, such Indemnified Party shall, if
a claim in respect thereof is to be made against an indemnifying party
under such Section, give notice to SenseNet of its assertion of such claim
for indemnification and of the commencement of the action of its assertion
of such claim for indemnification and of the commencement of the action or
assertion of the Third Party Claim with respect to which the claim for
indemnification pertains. Failure so to notify SenseNet shall not relieve
SenseNet of any liability that it may have to any Indemnified Party except
to the extent that the defense of such action or Third Party Claim is
materially prejudiced thereby. If any such action (other than any action
with respect to Taxes) shall be brought or a Third Party Claim shall be
asserted against an Indemnified Party and it shall give notice to SenseNet
of the commencement or assertion thereof, SenseNet shall, be entitled, at
its own expense and not with recourse to the Escrow Fund (other than in the
case of a final disposition or settlement of such action or Third Party
Claim), to participate therein and, to the extent that it shall wish, to
assume the defense thereof with counsel reasonably satisfactory to such
Indemnified Party and, after notice from SenseNet to such Indemnified Party
of its election to assume the defense thereof, SenseNet shall not be liable
to such Indemnified Party under this Article XI for any fees of other
counsel or any other expense (unless such fees or expenses are incurred at
the request of SenseNet), in each case subsequently incurred by such
Indemnified Party in connection with the defense thereof. If SenseNet
receives notice of any action or Third Party Claim, it shall promptly
notify the Indemnified Party as to whether, at its expense and not with
recourse to the Escrow Fund, it intends to control the defense thereof. If
SenseNet defends an action, it shall have full control over the litigation,
including settlement and compromise thereof, subject only to the following:
no compromise or settlement thereof may be effected by SenseNet without the
Indemnified Party's consent (which shall not be unreasonably withheld)
unless (i) there is no finding or admission of any violation of law and no
effect on any other claims that may be made against the Indemnified Party
and (ii) the sole relief provided is monetary damages that are paid in full
by SenseNet. If notice is given to SenseNet of the commencement of any
action and it does not, within twenty (20) days after the Indemnified
Party's notice is given, give notice to the Indemnified Party of its
election to assume the defense thereof, the Indemnified Party shall have
full control over the litigation, including settlement and compromise
thereof.
Section 11.3 INDEMNITY PERIOD. No claim for indemnification
under Section 11.1(a) of this Agreement may be made unless notice is given
by the party seeking such indemnification to the party from whom
indemnification is sought on or prior to the date that is eighteen months
following the Effective Time, except with respect to breaches of
representations or warranties relating to Tax matters, as to which notice
must be given prior to the expiration of the applicable statute of
limitations.
ARTICLE XII
GENERAL PROVISIONS
Section 12.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties contained in Articles IV and V of this
Agreement shall survive the Merger for a period of eighteen (18) months,
except that the representations set forth in Section 5.13 shall survive
until the expiration of the applicable statute of limitations. The
covenants and agreements set forth in this Agreement shall survive in
accordance with their terms.
Section 12.2 NOTICES. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, deposited with a nationally recognized overnight courier
(return receipt requested) or sent via facsimile to the parties at the
following addresses (or at such other address for a party as shall be
specified by like notice):
(a) If to Parent or Acquisition Sub, to:
deltathree.com, Inc.
430 Park Avenue, Suite 500
New York, New York 10022
Attention: Mark Hirschhorn
Facsimile Number: 212-588-3674
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Attention: David J. Goldschmidt, Esq.
Facsimile Number: 212-735-2000
(b) If to the Company, to:
YourDay.com, Inc.
304 Hudson Street
New York, New York 10013
Attention: Dane Atkinson
Facsimile Number: 212-824-5009
with a copy to:
Carter, Ledyard & Milburn
2 Wall Street
New York, New York 10005
Attention: Thomas Davis, Esq.
Facsimile Number: 212-732-3232
Section 12.3 INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. In this Agreement, unless
a contrary intention appears (i) the words "herein," "hereof" and
"hereunder" and other words of similar impact refer to this Agreement as a
whole and not to any particular Article, Section or other subdivision, and
(ii) reference to any Article or Section means such Article or Section
hereof. No provision of this Agreement shall be interpreted or construed
against any party hereto solely because such party or its legal
representative drafted such provision.
Section 12.4 MISCELLANEOUS. This Agreement (including the
documents and instruments referred to herein) (a) constitutes the entire
agreement and supersedes all other prior agreements and understandings,
both written and oral, among the parties, or any of them, with respect to
the subject matter hereof, (b) is not intended to confer upon any other
person any rights or remedies hereunder except for rights of indemnified
parties under Article XI, and (c) shall not be assigned by operation of law
or otherwise. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING
VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH
STATE, without regard to the conflicts of law, principles thereof.
Section 12.5 COUNTERPARTS. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same agreement. Each of the
parties agrees to accept and be bound by facsimile signatures hereto.
Section 12.6 PARTIES IN INTEREST. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto, and
nothing in this Agreement, express or implied, is intended to confer upon
any other person any rights or remedies of any nature whatsoever under or
by reason of this Agreement.
Section 12.7 EXHIBITS AND SCHEDULES. All Exhibits and
Schedules referred to in this Agreement shall be attached hereto and are
incorporated by reference herein.
Section 12.8 SEVERABILITY. If any term or other provision of
this Agreement in invalid, illegal or incapable of being enforced by any
rule of law or public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of being
enforced, parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that transactions contemplated
hereby are fulfilled to the extent possible.
Section 12.9 DEFINITION OF KNOWLEDGE. For those warranties
and representations set forth in Article V which are subject to the
qualification "to the Company's knowledge," the Company will be deemed to
have knowledge of a matter if (a) Dane Atkinson or Bernar Bekirov have
knowledge of the matter, or (b) such matter has come, or should reasonably
be expected to have come, to the attention of any of such individuals if
such individual had conducted a reasonable due diligence review of the
Company's operations and business, including, without limitation,
reasonable inquiries to key personnel of the Company regarding the business
and operations of the Company and a review of, and discussion with key
personnel regarding, pertinent books and records of the Company.
Section 12.10 TRANSFER TAXES. All excise, sales, use,
transfer (including real property transfer or gains), stamp, documentary,
filing, recordation and other similar taxes, together with any interest,
additions or penalties with respect thereto and any interest in respect of
such additions or penalties, resulting directly from the transactions
contemplated by this Agreement (the "Transfer Taxes"), shall be borne by
the stockholders of the Company (determined without giving effect to the
Merger). Any Tax Returns that must be filed in connection with Transfer
Taxes shall be prepared and filed when due by the party primarily or
customarily responsible under the applicable local law for filing such Tax
Returns, and such party will use its reasonable efforts to provide such Tax
Returns to the other party at least ten (10) days prior to the due date for
such Tax Returns.
Section 12.11 ARBITRATION. Any dispute, controversy or claim
arising between the parties relating to this Agreement (whether such
dispute arises under any federal, state or local statute or regulation, or
at common law), shall be resolved by final and binding arbitration before a
single arbitrator; provided, however, that the foregoing provision shall
not apply to Third Party Claims or to other claims made under Article XI
hereof, which shall be controlled by the terms of Article XI and the Escrow
Fund Agreement. The arbitrator shall be selected, the arbitrator shall
comply with, and the arbitration shall be conducted in New York City in
accordance with, the commercial arbitration rules of the American
Arbitration Association in effect at the time the dispute arises. In such
arbitration proceedings, the arbitrator shall have the discretion, to be
exercised in accordance with applicable law, to allocate among the parties
the arbitrator's fees, tribunal and other administrative and litigation
costs and, to the prevailing party, attorneys' fees. The award of the
arbitrator may be confirmed before and entered as a judgment of any court
having jurisdiction of the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
DELTATHREE.COM, INC.
-----------------------
By: Mark J. Hirschhorn
Its: Vice President &
Chief Financial
Officer
YOURDAY ACQUISITION CORP.
-----------------------
By: Mark J. Hirschhorn
Its: Chief Financial
Officer
YOURDAY.COM, INC.
-----------------------
By: Dane Atkinson
Its: President
SENSENET INC.
-----------------------
By: Dane Atkinson
Its: President
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
------------------------------
YourDay Acquisition Corp.
Delta Three Israel Ltd.
Internet Technologies Colombia SA
Delta Three Direct LLC (1)
- -------------------
(1) The Company is in the process of dissolving this subsidiary.
EXHIBIT 23.1
Independent Auditors' Consent
-----------------------------
We consent to the use in this Annual Report on Form 10-K of deltathree.com,
Inc. our report dated January 26, 2000. We also consent to the reference to
us under the heading "Selected Financial Data" in such Annual Report.
/s/ Brightman Almagor & Co.
- -------------------------------------------
Brightman Almagor & Co.
(A member firm of Deloitte Touche Tohmatsu)
Tel Aviv, Israel
March 28, 2000
