Mail Stop 0407
December 15, 2004
Mr. Arthur Dubroff
Chief Financial Officer
Net2Phone, Inc.
520 Broad Street
Newark, NJ 07102
RE: Net2Phone, Inc.
Form 10-K for the fiscal year ended July 31, 2004
Filed October 14, 2004
Form 10-Q for the quarter ended October 31, 2004
File No. 0-26763
Dear Mr. Dubroff:
We have reviewed your filings and have the following
comments.
We have limited our review to only your financial statements and
related disclosures and will make no further review of your
documents. As such, all persons who are responsible for the
adequacy
and accuracy of the disclosure are urged to be certain that they
have
included all information required pursuant to the Securities
Exchange
Act of 1934. Please address the following comments in future
filings. If you disagree, we will consider your explanation as to
why our comment is inapplicable or a revision is unnecessary.
Please
be as detailed as necessary in your explanation. In some of our
comments, we may ask you to provide us with supplemental
information
so we may better understand your disclosure. After reviewing this
information, we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the fiscal year ended July 31, 2004
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations, page 40
1. It appears that your segments contribute in a disproportionate
way
to your operating results. In future filings, discuss your
results
of operations on a segment basis. Refer to Section 501.06 of the
Codification of Financial Reporting Policies. In addition to
discussing your segment measure of profitability, we believe that
you
should discuss in MD&A the items that reconcile your measure of
segment profitability to operating profit on a GAAP basis, as
discussed in footnote 28 of Section 501.06 of the Codification of
Financial Reporting Policies.
Comparison of Fiscal Years Ended July 31, 2003 and 2002
2. Tell us the nature and amount of your "one-time connectivity
reserve reversals," which decreased your direct cost of revenue in
fiscal 2003. Disclose the amount of such reversals in future
filings.
3. We note at page 43 that your selling, general and
administrative
expenses include amounts paid in connection with revenue-sharing
arrangements. Describe for us the nature of your current revenue-
sharing arrangements and tell us your basis for classifying the
payments as selling, general and administrative expense.
Item 9A. Controls and Procedures
4. We note that your chief executive officer and your chief
financial
officer concluded that your disclosure controls and procedures
were
"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." Please supplementally confirm that your disclosure controls
and procedures are effective to ensure that information required
to
be disclosed in the reports that you file under the Exchange Act
is
recorded, processed, summarized and reported, within the time
periods
specified in the Commission`s rules and forms and are also
effective
to ensure that information required to be disclosed in the reports
that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your principal
executive
and principal financial officers, to allow timely decisions
regarding
required disclosure. See Rule 13a-15(e) of the Exchange Act.
Please
also revise your future filings accordingly. Alternatively, you
may
simply state, in future filings, that your disclosure controls and
procedures are effective.
Consolidated Statements of Operations
5. In future filings, revise your presentation of the caption
"direct
cost of revenue (exclusive of items shown below)" to specifically
indicate the items to which you are referring. If your caption is
intended to refer to items other than depreciation and
amortization,
tell us why the other items are not included within "direct cost
of
revenue."
Note 2 - Summary of Significant Accounting Policies
Revenue Recognition
6. We note that you recognize revenue from pre-payments for
services
after you conduct evaluations of outstanding, remaining pre-
payment
balances and determine, based on historical data, that such
balances
are not likely to be utilized. Please clarify the nature of these
services and tell us the terms of the agreement. Tell us how you
determined that it is appropriate to recognize revenue before you
have no further obligations with respect to the pre-paid services.
Also, describe for us the amount and nature of the historical
transactions which you use to support your accounting policy.
Note 14 - Related Party Transactions
7. Please address the following items regarding your memorandum of
understanding with IDT:
* Tell us your basis in the accounting literature for applying
variable accounting treatment to the shares that will be held in
escrow to be released to IDT in equal annual installments.
* We note that you have recorded a charge of $3.4 million during
fiscal 2004, which represents the market value of the 1.0 million
shares that you may issue and subsequently release from escrow to
IDT
for services and benefits provided by IDT during fiscal 2004.
Clarify for us how you will compensate IDT for these services and
benefits if a definitive agreement is not reached and the shares
are
not issued.
* Tell us how you applied the guidance in SFAS 128 in determining
that it was appropriate to include the 1.0 million shares for
purposes of computing basic earnings per share.
* Describe for us why you believe that differentiating between
direct
cost of revenue and selling, general and administrative expenses
for
the service provided by IDT is not practicable. Describe in more
detail the nature of the services and why these services do not
have
readily identifiable market values. In addition, tell us how you
determined the number of shares to be issued in exchange for the
services.
Form 10-Q for the quarter ended October 31, 2004
Note 10 - Subsequent Events
8. We note your disclosure that you have introduced a warrant
incentive program. Tell us how you account for the warrants
issued
under this program and your basis in the accounting literature.
* * * *
Please respond to these comments within 10 business days or
tell us when you will provide us with a response. Please furnish
a
letter that keys your responses to our comments and provides any
requested supplemental information. Please file your response
letter
on EDGAR. Please understand that we may have additional comments
after reviewing your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that
* the company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filings; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filings or
in
response to our comments on your filings.
You may contact Melissa Hauber, Staff Accountant, at (202) 942-
2858
or Carlos Pacho, Senior Assistant Chief Accountant, at (202) 942-
1876
if you have questions regarding comments on the financial
statements
and related matters. Please contact me at (202) 942-1990 with any
other questions.
Sincerely,
Larry M. Spirgel
Assistant Director
??
??
??
??
Mr. Arthur Dubroff
Net2Phone, Inc.
December 15, 2004
Page 5 of 5