The following discussion of our financial condition and results of operations should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended July 31, 2003. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. Factors which may affect our results include, but are not limited to, our ability to expand our customer base and to develop additional and leverage our existing distribution channels for our products and solutions, dependence on strategic and channel partners including their ability to distribute our products and meet or renew their financial commitments, our ability to address international markets, the effectiveness of our sales and marketing activities, the acceptance of our products in the marketplace, the timing and scope of deployments of our products by customers, fluctuations in customer sales cycles, our customers' ability to obtain additional funding, technical difficulties with respect to our products or products in development, the need for ongoing product development in an environment of rapid technological change, the emergence of new competitors in the marketplace, our ability to compete successfully against established competitors with greater resources, the uncertainty of future governmental regulation, our ability to manage growth and obtain patent protection and additional funds, general economic conditions and other risks discussed in this report and in our other filings with the Securities and Exchange Commission. All forward-looking statements and risk factors included in this report are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or risk factors.
We are a leading provider of Voice over Internet Protocol, or VoIP, telephony services. Since we began operations in 1995, we have evolved from a pioneer in developing PC-to-telephone calling services over the Internet to a next generation provider of high quality voice and enhanced telecommunication services throughout the world. Our strategic investors include IDT Corporation, a leading global telecommunications provider, and Liberty Media Corporation, a global media company. IDT and Liberty Media together own NTOP Holdings, LLC, which is our controlling shareholder. IDT has the right to vote the shares held by NTOP Holdings, LLC in most matters.
We announced on June 9, 2003, our plan to create Net2Phone Global Services and Net2Phone Cable Telephony and operate our business units under these two separate organizations. Our plan, which was approved by the Board of Directors in July 2003, is intended to provide our shareholders and the investment community with a clearer picture of Net2Phone's operations, and the ability to understand the value elements of our two business lines. Net2Phone Global Services delivers VoIP telephony services to businesses and consumers directly and through its global distribution network of over 450 resellers in over 130 countries, capitalizing on the growth, quality, flexibility and cost advantages of VoIP technologies. Net2Phone Cable Telephony offers cable operators a complete suite of services, enabling them to deliver residential phone service to their customers having comparable quality, features and functionality to that offered by traditional telephone companies. We provided segment reporting of the results of these two separate business lines, for the first time in our Annual Report on Form 10-K for the fiscal year ended July 31, 2003, as the businesses were segregated in the fourth quarter of fiscal 2003 and we began delivering services though these two business units on August 1, 2003.
Substantially all of our revenue has been, and is currently, derived from Net2Phone Global Services. We expect the Net2Phone Cable Telephony business to grow, and we expect it will begin to represent an increasing proportion of our revenue in future years. Net2Phone Cable Telephony signed its first contract with Liberty Cablevision of Puerto Rico on October 22, 2003, and is actively marketing its services to a wide array of cable operators in the U.S., Europe and Latin America whom we believe may prefer to buy our services rather than build their own cable telephony service. Net2Phone Cable Telephony works with cable operators to deploy an integrated, tested and operational telephony service, including customized operations support systems, network interfaces, carrier interconnects, telecommunications methods and procedures and real-time service assurance, including 24 x 7 network operations center support.
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with our Net2Phone Cable Telephony business will depend on the number of customers and contracts we establish and the type of service we provide to our customers. While we expect this business will initially adversely affect the profitability of our company as a whole, we believe the business will contribute to our earnings in the future as it achieves greater scale. We cannot predict when this will happen, or be certain that it will happen at all.
On October 29, 2003, we entered into a memorandum of understanding with IDT for the provision of telecommunication services by IDT to support our cable telephony business, pursuant to which we agreed to issue to IDT 6,900,000 shares of our Class A Common Stock. As a result of the issuance, we expect to incur non-cash charges to our earnings on a quarterly basis beginning from the date of the memorandum of understanding. See “Related party transactions” below.
We expect that our revenue for the second quarter of fiscal 2004 will be lower than our revenue for the first quarter of fiscal 2004. We expect our revenue to begin to increase in the second half of fiscal 2004 and into fiscal 2005. The preceding forward looking statement is based on management estimates, currently available information and assumptions which management believes to be reasonable, and is subject to change based on factors that may be beyond our control.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions 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 net sales and expenses during the reporting period. We continually evaluate our estimates, including those related to revenue recognition, bad debts, intangible assets, income taxes, fixed assets, access line costs, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the critical accounting policies noted in our Annual Report on Form 10-K for the year ended July 31, 2003 impact our most difficult, subjective and complex judgments used in the preparation of our consolidated financial statements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For more information about these and other accounting policies, please see our Annual Report.
Three Months Ended October 31, 2003 Compared to Three Months Ended October 31, 2002
Results of Operations
Revenue. Our revenue is primarily derived from per-minute charges we billed to our customers on a pre-paid basis and from the sale of VoIP equipment and services to resellers, IDT and other carriers. Revenue decreased 14.6% from $23.9 million for the three months ended October 31, 2002 to $20.4 million for the three months ended October 31, 2003. The decrease in revenue was primarily driven by a significant reduction in our sales of disposable calling cards, which have generated low-margin sales of $3.4 million during the three month ended October 31, 2002, compared to $0.8 million recorded during the three months ended October 31, 2003. We have also significantly reduced our workforce and scaled back certain low-margin services, including wholesale termination of telecommunications traffic.
Direct cost of revenue. Our direct cost of revenue consists primarily of network costs associated with carrying our customers' traffic on our network and leased networks, and routing their calls through a local telephone company to reach their final destination. It also includes the cost of purchasing, storing and shipping VoIP devices. Most of these costs were incurred within the units that now comprise Net2Phone Global Services. Direct cost of revenue decreased 21.6% from $13.9 million for the three months ended October 31, 2002 to $10.9 million for the three months ended October 31, 2003. As a percentage of total revenue, these costs decreased from 58.2% for the three months ended October 31, 2002 to 53.7% for the three months ended October 31, 2003. While the dollar cost decrease is primarily attributable to lower revenue, we are also realizing cost reductions from a more efficiently structured and utilized network and from more aggressively priced termination contracts. Our decision to reduce sales of disposable calling cards has allowed us to reduce correspondingly, higher direct costs associated with this service, and has allowed to us to pursue other, more profitable service offerings.
Selling, general and administrative. Selling, general and administrative expense consists of salaries of our employees and associated benefits, and the cost of insurance, legal, rent, utilities and other services, expenses associated with acquiring
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customers, including commissions paid to our sales force, advertising costs, travel, entertainment, referral fees and amounts paid in connection with revenue-sharing arrangements. Selling, general and administrative expense decreased 8.0% from $13.7 million for the three months ended October 31, 2002 to $12.6 million for the three months ended October 31, 2003 due to continuing cost management initiatives and elimination of certain expenses directly related to the restructurings of our operations and an overall reduction in employee headcount. During the three months ended October 31, 2003 we recorded a loss of $0.5 million relating to a buyout agreement executed with Cisco for several equipment and maintenance leases. We expect to incur significant selling, general and administrative expense related to anticipated future growth of our Net2Phone Cable Telephony business.
Depreciation and amortization. Depreciation and amortization remained constant at $2.5 million for the three months ended October 31, 2002 and for the three months ended October 31, 2003. As a percentage of total revenues, these costs increased from 10.4% for the three months ended October 31, 2002 to approximately 12.2% for the three months ended October 31, 2003.
Restructuring, severance, impairment and other items.Restructuring, severance, impairment and other items decreased from $5.2 million for the three months ended October 31, 2002 to $0.2 million for the three months ended October 31, 2003.
The following table summarizes the charges included in restructuring, severance, impairment and other items in the statements of operations:
| | | | | Three Months Ended October 31, | |
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| Separation agreements of former CEO and CFO | $ | 212 | | $ | 1,337 | |
| Exit and other costs | | 166 | | | 876 | |
| Workforce reductions | | 55 | | | 3,649 | |
| Reserve adjustments | | 15 | | | (2,133 | ) |
| Impairment charges, including recovery on assets held for sale | | (253 | ) | | 1,443 | |
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| | | Total | $ | 195 | | $ | 5,172 | |
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In the first half of fiscal 2002, both our Chief Executive Officer and Chief Financial Officer resigned as we began to implement an overall long term restructuring plan, which would scale down our operations, organize us to compete more efficiently, and allow us to redirect our focus and resources towards a more profitable business plan. During the two years since, we have executed our plan and implemented a series of strategic workforce reductions, sold business units and long-lived assets, as well as impaired such assets and goodwill. As we continue to execute our plan we are realizing lower costs and identifying more reliable revenue opportunities. While the majority of our restructuring costs were incurred during fiscals 2001 and 2002, we continued to incur these costs during fiscal 2003 and 2004. However, we expect that these expenditures will decrease prospectively. These costs were funded through current operations.
The decrease in restructuring, severance, impairment and other items in the first quarter of fiscal 2004 compared with the first quarter of fiscal 2003 is primarily attributable to lower charges related to (i) workforce reductions that resulted from a restructuring announced in the first quarter of fiscal 2003; (ii) exit costs that resulted primarily from the sale of a business and the write-off of capitalized software; (iii) the separation agreements with our former CEO and CFO as components of the agreements have been fully amortized; and (iv) impairment charges resulting from the elimination of various equipment and network build-outs in the first quarter of fiscal 2003.
These lower charges were partially offset by lower reserve adjustments in the first quarter of fiscal 2004 compared with the first quarter of 2003, as well as the recovery of $0.3 million of equipment that was previously written off. The lower reserve adjustments resulted from the reversal in the first quarter of fiscal 2003 of $2.1 million of previously recognized costs as a result of successful settlement negotiations with vendors regarding cancellation charges.
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Settlement of Cisco Litigation. In August 2002, Net2Phone and its ADIR subsidiary consummated the settlement of their lawsuit in the United States District Court for the District of New Jersey against Cisco and a Cisco executive who had been a member of the Board of Directors of ADIR Technologies, Inc., our majority-owned subsidiary. The suit arose out of the relationships that had been created in connection with Cisco’s and Net2Phone’s original investments in ADIR and out of ADIR’s subsequent purchase of NetSpeak, Inc. in August 2001. The parties settled the suit and all related claims against Cisco and the Cisco executive in exchange for: (i) the transfer, during the first quarter of fiscal 2003, to Net2Phone of Cisco’s and Softbank Asia Infrastructure Fund’s respective 11.5 percent and 7.0 percent interests in ADIR, and (ii) the payment by Cisco, during such quarter, of $19.5 million to Net2Phone and ADIR. As a result of this settlement, we recognized a gain of $58.0 million during fiscal 2003 consisting of a $38.9 million reduction in minority interests as a result of the transfer of the ADIR shares, receipt of settlement proceeds of $19.5 million less compensation expense of $0.4 million. No income taxes have been provided for with respect to the gain as we have sufficient net operating loss carry forwards to offset the gain. In fiscal 2002, we recorded $1.6 million of legal and other expenses related to this settlement.
Non-cash compensation. Non-cash compensation charges increased 5.9% from $1.7 million for the three months ended October 31, 2002 to $1.8 million for the three months ended October 31, 2003. As a percentage of total revenue, these costs increased from 7.1% for the three months ended October 31, 2002 to 8.8% for the three months ended October 31, 2003. This increase was due primarily to an increase our stock price at quarter end. On December 18, 2001, the Board of Directors approved the repricing of options outstanding under Net2Phone's 1999 Amended and Restated Stock Option and Incentive Plan. The repriced options are subject to variable accounting treatment and therefore, those repriced options that are vested and unexercised must be marked-to-market each quarter. Based on our stock price at October 31, 2003, we incurred compensation expense of $1.3 million related to these repriced options. If our stock price increases, we will continue to incur charges over the vesting period with respect to repriced options, until those options are exercised. To a lesser extent, non-cash compensation expense has also increased due to a stock based bonus compensation program initiated during fiscal 2003.
Income (loss) from operations. For the three months ended October 31, 2002 we recorded income from operations in the amount of $45.5 million as compared to a loss from operations of $7.6 million that we recorded for the three months ended October 31, 2003. The change is primarily due to the net gain of $58.4 million that we realized from the settlement of our Cisco litigation, which we recorded during the first quarter of fiscal 2003. Net of this gain we would have recorded a loss from operations of $12.9 million during the three months ended October 31, 2002, as compared to the $7.6 million loss from operations that we recorded during the three months ended October 31, 2003, which represents a 41.1% decrease in loss from operations quarter over quarter. This decrease is primarily attributable to lower restructuring, severance, impairment and other items, as well as operating expenses decreasing at a faster rate than revenue.
Interest income, net. Interest income consists primarily of interest earned on cash and cash equivalents. Interest income decreased 75.0% from $0.8 million for the three months ended October 31, 2002 to $0.2 million for the three months ended October 31, 2003. The reduction primarily results from lower cash balances, interest rate reductions, as well as interest expense relating to our Deutsche Bank obligation that was entered into in the third quarter of fiscal 2003 described below in “Liquidity and Capital Resources”.
Other income, net. Other income includes the losses or gains resulting from non-operating transactions. Other income increased from $0.02 million recorded during the three month ended October 31, 2002 to $12.5 million recorded for the three months ended October 31, 2003. This increase is primarily attributable to the gain realized from the final buyout of ADIR’s remaining minority interest holders during the first quarter of fiscal 2004.
Liquidity and Capital Resources
Historically, we have satisfied our cash requirements through a combination of cash flow from operating activities, leases, and sales of equity securities. For the most part, our cash requirements have been satisfied through our existing cash, cash equivalents and marketable securities balances.
The following table provides our cash flow data for the three months ended October 31, 2003 and 2002.
| | | Three Months Ended October 31, | |
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| Net cash (used in) provided by operating activities | $ | (5,761 | ) | $ | 12,502 | |
| Net cash provided by (used in) investing activities | | 7,454 | | | (1,956 | ) |
| Net cash provided by (used in) financing activities | | 1,993 | | | (259 | ) |
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| Net increase in cash and cash equivalents | $ | 3,686 | | $ | 10,287 | |
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As of October 31, 2003 we had total cash, cash equivalents, restricted cash, and marketable securities of $87.9 million and working capital of $49.6 million. As of October 31, 2003, of the $87.9 million, $0.5 million in short term restricted cash and $23.3 million in long term restricted cash, cash equivalents, and marketable securities was held as collateral for various letter of credit obligations, the majority of which related to our purchase of Aplio, S.A. from the stockholders of Aplio. On May 7, 2003, these obligations were assigned to Deutsche Bank AG London. Our payment obligations to Deutsche Bank are secured by standby letters of credit from a U.S. commercial bank, which are, in turn, collateralized by a $21.8 million money market account held by the bank. The letters of credit expire on August 4, 2006. Those restricted funds are classified as restricted cash, cash equivalents, and marketable securities-long term on our balance sheet. Net cash used in operating activities was $5.8 million during the three months ended October 31, 2003, compared with $12.5 million of net cash provided by operating activities during the same quarter in fiscal 2003. The decrease in cash flow provided by operating activities is primarily due to the receipt of $19.5 million, in the first quarter of fiscal 2003, from the settlement of litigation with Cisco Systems. This decrease was partially offset by significantly reduced operating costs, and favorable changes in working capital as a result of the timing of receipts and disbursements.
Net cash used in investing activities was $2.0 million during the first quarter of fiscal 2003, as compared to net cash provided by investing activities, of $7.5 million in the first quarter of fiscal 2004. This increase in cash provided by investing activities is primarily due to higher net cash proceeds from the sale of marketable securities. Our capital expenditures decreased from $2.1 million during the first quarter of fiscal 2003 to $1.3 million during the first quarter of fiscal 2004 as Net2Phone Global Services has completed the majority of its expansion of our domestic and international network infrastructure.
Net cash provided by (used in) financing activities changed from $(0.3) million during the three months ended October 31, 2002 to $2.0 million in the three months ended October 31, 2003. This change is due primarily to increased proceeds from stock option exercises and repayment of employee loans. We do not maintain an interest in any off balance sheet financing vehicles.
On November 25, 2003, we closed an underwritten common stock offering, which included 10.5 million shares offered to the public, an additional 1.0 million shares purchased by the underwriters as part of an over allotment option, and an aggregate of 2.5 million shares offered to IDT Corporation and Liberty Media Corporation, our controlling shareholders, at an offering price of $4.50 per share. We received net proceeds of approximately $59 million as a result of the offering. We intend to use the proceeds from the offerings for general corporate purposes, capital expenditures, and working capital, including funding our cable telephony business.
We believe that, based upon our present business plans, our existing cash resources will be sufficient to meet our currently anticipated working capital and capital expenditure requirements, and to fund any potential operating cash flow deficits in the foreseeable future. We believe that as the expected growth in our Net2Phone Cable Telephony subsidiary accelerates or if we acquire the business or assets of another company, we may need to raise additional capital from equity or debt sources. There can be no assurance that we will be able to raise such capital on favorable terms or at all. If we are unable to obtain such additional capital, we may be required to reduce the scope of our anticipated expansion, which could have a material effect on our business, financial condition or results of operations.
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and commercial commitments as of October 31, 2003.
| | | Payments Due by Period | |
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| Contractual Obligations | | Total | | | Less than
1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
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| Capital lease obligations | $ | 4,141 | | $ | 4,141 | | $ | — | | $ | — | | $ | — | |
| Operating leases | | 15,826 | | | 3,606 | | | 8,061 | | | 3,407 | | | 752 | |
| Other long term obligations | | 15,830 | | | — | | | 15,830 | | | — | | | — | |
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| Total contractual obligations | $ | 35,797 | | $ | 7,747 | | $ | 23,891 | | $ | 3,407 | | $ | 752 | |
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| | | Payments Due by Period | |
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| Other Commercial Commitments | | Total | | | Less than
1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
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| Standby letters of credit | $ | 23,157 | | $ | 370 | | $ | 22,315 | | $ | 162 | | $ | 310 | |
| Guarantees | | — | | | — | | | — | | | — | | | — | |
| Purchase commitments | | 629 | | | 629 | | | — | | | — | | | — | |
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| Total other commercial commitments | $ | 23,786 | | $ | 999 | | $ | 22,315 | | $ | 162 | | $ | 310 | |
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Related Party Transactions
We continue to maintain significant business relationships with IDT Corporation (“IDT”) and its affiliates, and IDT maintains a controlling ownership interest in us. In the three months ended October 31, 2003, we provided carrier services to IDT of $1.3 million and sold disposable calling cards to IDT affiliates totaling $0.2 million. In the three months ended October 31, 2003, we purchased wholesale carrier services from IDT of $1.0 million. In the three months ended October 31, 2002, we provided carrier services to IDT of $1.1 million and sold disposable calling cards to IDT affiliates totaling $2.0 million. In the three months ended October 31, 2002, we purchased wholesale carrier services from IDT of $3.2 million.
As we continue to de-emphasize domestic disposable calling cards and services provided to carriers, we anticipate the percentage of sales generated by transactions between Net2Phone Global Services and IDT and its affiliates will continue to decline. Going forward, we expect Net2Phone Cable Telephony to enter into service and other agreements with IDT and its affiliates related to our cable telephony activities.
Our corporate headquarters and several other facilities are leased from IDT. In the three months ended October 31, 2003, we paid IDT $0.5 million in facilities lease payments. In the three months ended October 31, 2002, we paid IDT $0.4 million in facilities lease payments. During the same period, we arranged for IDT’s treasury function to provide investment management services relating to our portfolio of marketable securities.
On occasion, we have aggregated long distance minutes and other services purchases with IDT.
We outsource some of our administrative functions to IDT when we believe IDT can provide resources more efficiently and cost effectively then we could ourselves. For example, IDT provides tax consulting services, investment management services and also internal audit support services. On occasion, we provide services to IDT, based on the need for such services. Fees for services are negotiated on a cost recovery basis. In the three months ended October 31, 2003 and 2002, we paid IDT approximately $0.04 million and $0.05 million, respectively, for such services.
The due from (to) IDT balances represent net amounts due from (to) IDT to (by) us principally for wholesale carrier services, sales of disposable cards and facilities lease payments. On October 31, 2003 and July 31, 2003 we owed IDT $0.6 million and $1.1 million, respectively. The average balance we owed to IDT during the three months ended October 31, 2003 was $0.4 million, compared with an average of $0.2 million owed to IDT for the three months ended October 31, 2002.
During the three months ended October 31, 2003 Net2Phone Cable Telephony billed IDT for telecommunications provisioning services totaling $0.05 million, while, in turn, incurring $0.05 million in carrier service charges from IDT relating to our cable telephony service offering for Liberty Cablevision of Puerto Rico. No similar services were provided during the three months ended October 31, 2002.
On October 29, 2003, we entered into a binding memorandum of understanding with IDT, which requires us to issue 6.9 million shares of Class A common stock to IDT at the time we execute a definitive telecommunications services agreement with IDT. The shares will be held in escrow to secure IDT’s performance obligations under the telecommunications services agreement and will be released to IDT in equal annual installments over five years. The shares are subject to variable accounting treatment and, therefore, a portion of the shares must be marked-to-market each quarter, resulting in a quarterly charge to earnings equal
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to the aggregate market value of one-fourth of the shares that will vest on each anniversary of the agreement. These charges may materially reduce our earnings. We expect that our first significant charge will be recorded in second quarter of fiscal 2004.
Effects of Inflation
Due to relatively low levels of inflation over the last several years, inflation has not had a material effect on our results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 are not materially exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold derivative financial instruments nor do we hold securities for trading or speculative purposes. We are exposed to changes in interest rates primarily from our investments in cash equivalents. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report. Based on such evaluation, such officers have concluded that, as of such date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Net2Phone (and its consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.
Changes in Internal Control over Financial Reporting. There were no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Multi-Tech
On February 15, 2000, Multi-Tech Systems, Inc. (“Multi-Tech”) filed suit against Net2Phone and other companies in the United States Federal District Court in Minneapolis, Minnesota. Multi-Tech alleged “the defendant companies are infringing because they are providing the end users with the software necessary to simultaneously transmit voice and data on their computers in the form of making a phone call over the Internet”. On August 16, 2002, following an initial hearing, the Court issued an order construing the claims of all the patents in the suit in a way that we consider favorable to our non-infringement defenses. On October 31, 2002, the Court entered a consent judgment dismissing the patent infringement claims asserted by Multi-Tech. On November 19, 2002, Multi-Tech filed an appeal with the United States Court of Appeals for the Federal Circuit. We continue to defend this appeal vigorously.
Class-Actions
Four substantially similar class-action lawsuits were filed in the United States District Court for the Southern District of New York on behalf of all persons who acquired our stock between July 29, 1999 and December 6, 2000. Net2Phone, certain of our executive officers, directors and underwriters involved in our initial public offering were named as defendants in these complaints. The complaints allege, in part, that certain underwriters of our initial public offering violated federal securities laws by failing to disclose that they had solicited and received undisclosed commissions and allocated shares in our initial
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Back to Contentspublic offering to those investors in exchange for their agreement to purchase our shares in the after-market at pre-determined prices. The complaints also allege that, whether or not Net2Phone and the named executives were aware of the underwriters’ arrangements, Net2Phone and the named executives have statutory liability under the federal securities laws for issuing a registration statement in connection with our initial public offering that failed to disclose that these allegedly undisclosed arrangements existed. The suits against us are substantially the same as suits asserting the same allegations that have been filed against several hundred other companies that closed their initial public offerings at or about the same time that we did. The court to which the various cases have been assigned has extended the deadline for all defendants to respond to the complaints. We have been able to secure the voluntary dismissal of the claims against those executive officers and directors named in the lawsuits. In addition, our underwriting agreement with our underwriters provides for indemnification of Net2Phone and its executives and directors for liabilities arising out of misstatements in our registration statement attributable to material non-disclosures by the underwriters. We intend to pursue our indemnification claims against the underwriters. In addition, we maintain directors and officers’ liability insurance coverage, which should substantially cover the costs of defending the various suits. However, an unfavorable decision in these matters could have a material adverse effect on our business operations, financial condition and results of operations.
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our stockholders during the first quarter of fiscal 2004.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
| Exhibit No. | Description |
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| 10.1 | Employment Agreement executed by the Registrant, Net2Phone Global Services, LLC and Bryan Wiener, dated November 25, 2003. |
| 31.1 | Certification of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Certification of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
b) Reports on Form 8-K.
We furnished a report on Form 8-K dated December 10, 2003 reporting under Item 12 our press release regarding our earnings for the quarter ended October 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NET2PHONE, INC. |
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| Date: December 15, 2003 | | By: | | /s/ Stephen M. Greenberg |
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| | | | | Stephen M. Greenberg |
| | | | | Chief Executive Officer |
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| Date: December 15, 2003 | | By: | | /s/ Arthur Dubroff |
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| | | | | Arthur Dubroff |
| | | | | Chief Financial Officer |
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