SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
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[_]Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
NET2PHONE, INC.
(Name of Registrant as Specified in Its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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(1) Title of each class of securities to which transaction applies:
........................................................................
(2) Aggregate number of securities to which transaction applies:
........................................................................
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[LOGO]
June 6, 2000
Dear Stockholder:
As you know or may be aware, Net2Phone, entered into an agreement with AT&T
Corp. and IDT Corporation on March 30th. As a result of that agreement, and
assuming you and your fellow stockholders approve the proposals outlined in the
enclosed notice of meeting and proxy statement, an AT&T-led consortium will
acquire approximately 32% of our outstanding capital stock and 39% of our
aggregate voting power. We also expect to enter into various commercial,
marketing, licensing and development agreements with both AT&T and IDT in
connection with the transaction.
This transaction is an exciting development for our company. We believe it
will facilitate our objective of becoming the global standard for Internet
telephony and further validate the investment made by each of you, as well as
our strategic investors, America Online, General Electric, Yahoo! and SOFTBANK,
and the $300 million in proceeds from the sale of our Class A Common Stock to
the consortium will add to our cash position. In addition:
. We believe that AT&T, which is among the world's premier voice, video and
data communications companies, will have a strong incentive to work with
us to develop and distribute our Internet telephony services and
products.
. We believe that companies focused on providing Internet-related services
and products will view us as a "neutral" provider of Internet telephony,
which should enhance our ability to enter into strategic alliances with
competing companies, building on our important alliances with America
Online, Yahoo! and other top Internet companies.
. We believe this transaction positions us at the nexus of the convergence
of communications technologies and gives us an edge over our competitors
in managing the rapidly changing technological and market landscape.
The enclosed proxy statement provides a comprehensive review of the proposed
transaction and related proposals. I urge you to read it carefully and vote
your proxy. We will hold the special meeting of stockholders on July 6th at
what will become our new headquarters in Newark, New Jersey.
Your Board of Directors believes that the transaction is in the best
interests of Net2Phone and its stockholders. We recommend a vote FOR approval
of the proposals outlined in the enclosed notice of meeting and proxy
statement.
I look forward to seeing you at the meeting.
Sincerely,
[SIGNATURE]
Clifford M. Sobel
Chairman
Net2Phone, Inc.
This letter may contain forward-looking statements that involve risks and
uncertainties. These statements may differ materially from actual future events
or results. Readers are referred to the documents filed by Net2Phone, Inc. with
the SEC, specifically the most recent reports which identify important risk
factors that could cause actual results to differ from those contained in the
forward-looking statements. Net2Phone, Inc. undertakes no obligation to review
or confirm analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
[LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 6, 2000
----------------
To our stockholders:
A Special Meeting of Stockholders of Net2Phone, Inc. will be held at what is
to become our new headquarters at 520 Broad Street, Newark, New Jersey, on
Thursday, July 6, 2000, beginning at 9:00 a.m. local time. At the meeting,
stockholders will act on the following matters:
. Approve an amendment to our Certificate of Incorporation to increase the
authorized shares of Class A Common Stock from 33,924,250 to 37,924,250,
which will allow us to issue 4,000,000 newly-authorized shares of Class A
Common Stock to a company, which will initially be majority-owned by AT&T
Corp., for an aggregate purchase price of $300,000,000;
. Approve an amendment to our Certificate of Incorporation to increase the
maximum number of directors who may serve on our Board of Directors from
11 to 13, effective upon the issuance of the 4,000,000 newly-authorized
shares of our Class A Common Stock;
. Approve an amendment to the Net2Phone, Inc. 1999 Amended and Restated
Stock Option and Incentive Plan to increase the number of shares
authorized for issuance from 11,040,000 to 14,940,000; and
. Any other matters that properly come before the meeting.
Only stockholders of record at the close of business on June 2, 2000 are
entitled to receive notice of and to vote at the special meeting or any
postponement or adjournment thereof.
Your vote is important. Whether you plan to attend the meeting or not, you
may vote your shares (1) via a toll-free telephone number, (2) via the
Internet or (3) you may mark, sign, date and mail the enclosed proxy card in
the envelope provided. Instructions regarding all three methods of voting
are contained on the proxy card. If you attend the meeting and prefer to
vote in person, you may do so even if you have already voted your shares.
You may revoke your proxy in the manner described in the proxy statement at
any time before it has been voted at the meeting.
By Order of the Board of Directors
[SIGNATURE]
Glenn J. Williams
Secretary and General Counsel
June 6, 2000
Hackensack, New Jersey
TABLE OF CONTENTS
ABOUT THE MEETING.......................................................... 1
What is the main reason for calling this special meeting?................ 1
If approved, what is the effect of the proposals described above?........ 1
What happens if these proposals are not approved by our stockholders?.... 2
Are there any other matters that will be considered at this special
meeting?................................................................ 2
What are the Board's recommendations?.................................... 2
Who is entitled to vote at the meeting?.................................. 3
Who can attend the meeting?.............................................. 3
What constitutes a quorum?............................................... 3
How do I vote?........................................................... 3
What if I vote and then change my mind?.................................. 4
What vote is required to approve each item?.............................. 4
Have any stockholders already agreed to vote their shares for the
proposals set forth in the accompanying notice of meeting?.............. 4
If my shares are held in "street name" by my broker or other nominee,
will my broker or nominee vote my shares for me?........................ 5
Will our independent auditors be present at the special meeting?......... 5
How are we soliciting this proxy?........................................ 5
Where can I find more information?....................................... 5
THE TRANSACTIONS........................................................... 6
What transactions gave rise to this special meeting?..................... 6
What are the potential benefits expected to result from the
transactions?........................................................... 7
What is the background of the transactions?.............................. 8
What factors were considered by the Special Committee in its
determination to approve the transactions?.............................. 14
What is the opinion of the Special Committee's financial adviser?........ 16
What is the recommendation of the full Board?............................ 20
Did our Board take any other actions at the March 30, 2000 meeting?......
Are there any governmental or regulatory approvals required in connection
with the transactions?.................................................. 20
What are the other conditions to the completion of the transactions?..... 21
Do our officers and directors have interests in the transactions
different from, or in addition to, their interests as stockholders of
Net2Phone generally?.................................................... 21
APPROVAL OF AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION................. 24
APPROVAL OF AN AMENDMENT TO THE NET2PHONE, INC. 1999 AMENDED AND RESTATED
STOCK OPTION AND INCENTIVE PLAN........................................... 29
EXECUTIVE COMPENSATION..................................................... 32
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF OUR PRINCIPAL STOCKHOLDERS,
DIRECTORS AND MANAGEMENT.................................................. 36
STOCKHOLDER PROPOSALS AND NOMINATIONS...................................... 38
WHERE YOU CAN FIND MORE INFORMATION........................................ 39
FORWARD-LOOKING STATEMENTS................................................. 39
OTHER MATTERS.............................................................. 40
ANNEXES
Annex A Letter Agreement among Net2Phone, Inc., IDT Corp. and AT&T Corp.
Annex B Letter Agreement between IDT Corp. and AT&T Corp.
Annex C Opinion of Salomon Smith Barney Inc.
Annex D Amendments to our Certificate of Incorporation
Annex E Net2Phone, Inc. 1999 Amended and Restated Stock Option and
Incentive Plan
NET2PHONE, INC.
171 Main Street
Hackensack, New Jersey 07601
----------------
PROXY STATEMENT
----------------
This proxy statement contains information related to the Special Meeting of
Stockholders to be held on July 6, 2000 at 9:00 a.m. local time, at what is to
become our new headquarters at 520 Broad Street, Newark, New Jersey, or at such
other time and place to which the special meeting may be adjourned or
postponed. The enclosed proxy is solicited by the Board of Directors of
Net2Phone. The proxy materials relating to the special meeting are first being
mailed to stockholders entitled to vote at the meeting on or about June 6,
2000.
ABOUT THE MEETING
What is the main reason for calling this special meeting?
On March 31, 2000, we announced that we entered into an agreement with AT&T
Corp. and IDT Corporation (see page 6). This agreement is attached hereto as
Annex A. Pursuant to the terms of the agreement, we agreed, among other things,
to seek approval of our stockholders of:
. an amendment to our Certificate of Incorporation to increase the
authorized shares of Class A Common Stock from 33,924,250 to 37,924,250
(see page 24), which will allow us to issue 4,000,000 newly-authorized
shares of Class A Common Stock to a newly-formed company (hereinafter
referred to as "Newco"), which initially will be majority-owned by AT&T,
for an aggregate purchase price of $300,000,000; and
. an amendment to our Certificate of Incorporation to increase the maximum
number of directors who may serve on our Board of Directors from 11 to 13
(see page 24), effective upon the issuance of the 4,000,000 newly-
authorized shares of our Class A Common Stock to Newco.
If approved, what is the effect of the proposals described above?
Approval of the amendments to our Certificate of Incorporation is a
condition to Newco's obligation to consummate the purchase from IDT of 14.9
million shares of our Class A Common Stock. If the amendments are approved and
the other conditions to the obligations of Newco and IDT are satisfied or
waived, IDT, which as of the record date holds 56% of the aggregate voting
power of our capital stock, will transfer 14.9 million of the approximately
24.9 million shares of our Class A Common Stock it currently owns to Newco for
$75 per share or approximately $1.1 billion in the aggregate and Newco will be
able to exercise its right to initially have three individuals designated and
appointed as new directors on our Board.
The authorization and issuance of shares of Class A Common Stock to Newco is
significant because Class A Common Stock with two votes per share automatically
converts into common stock with one vote per share upon any transfer unless the
transferee is a "permitted transferee" under our corporate charter, the
definition of which includes other holders of Class A Common Stock. By issuing
Class A Common Stock directly to Newco, we are causing Newco to become a
permitted transferee, so that the 14.9 million shares of our Class A Common
Stock being transferred by IDT will not be automatically converted into common
stock and will retain the right to two votes per share.
If stockholder approval is obtained and Newco purchases four million shares
of Class A Common Stock from Net2Phone and 14.9 million shares of Class A
Common Stock from IDT, Newco will replace IDT as our
1
largest stockholder and will control approximately 39% of our voting power. IDT
will control approximately 21% of our voting power. Also, IDT and Newco have
agreed with each other to vote, over the next three years, all of the shares of
Net2Phone capital stock owned by each of them in favor of mutually acceptable
nominees to our Board and to abstain from voting for nominees to the Board that
are not mutually acceptable. Accordingly, so long as they agree, Newco will
share with IDT the power to determine the election of all our directors through
their collective control of approximately 60% of our voting power; however, if
they are unable to agree on acceptable nominees, the votes of our other
stockholders will determine the election of our directors.
What happens if these proposals are not approved by our stockholders?
Without the required approval by our stockholders of the amendments to our
Certificate of Incorporation to be considered at this meeting:
. We would be unable to issue the shares of our Class A Common Stock and
increase the size of our Board as provided in the letter agreement
between AT&T, IDT and us attached hereto as Annex A. Newco would also not
be obligated to complete the purchase of shares from IDT. However, AT&T
and IDT have agreed on a contingent plan in the event our stockholders do
not approve the proposals. That contingent plan is set forth in the
letter agreement between AT&T and IDT attached hereto as Annex B. In
summary, under the contingent plan, Newco would loan approximately $1.1
billion to IDT on a non-recourse basis, which loan would be secured by
14.9 million shares of Net2Phone's Class A Common Stock currently owned
by IDT. Upon the earlier of the loan's maturity in five years (or later
if extended) or Newco becoming a permitted transferee of our Class A
Common Stock, the loan will be discharged in exchange for the 14.9
million shares of Class A Common Stock.
If Newco does not become a permitted transferee of our Class A Common
Stock before it acquires the 14.9 million shares of Class A Common Stock
from IDT, those shares which currently have two votes per share, would
convert into common stock with one vote per share, and Newco and IDT
would have approximately 20% and 27%, respectively, of our voting power.
. We would not receive proceeds of $300,000,000 from the issuance of
4,000,000 shares of our Class A Common Stock to Newco.
. We may not be able to agree on terms with AT&T and IDT for a license to
our present and future technology.
. Newco would not have the right to nominate and elect directors to our
Board.
Are there any other matters that will be considered at this special meeting?
Yes. We are also seeking to obtain the approval of our stockholders of an
amendment to the Net2Phone, Inc. 1999 Amended and Restated Stock Option and
Incentive Plan (see page 29). The plan is being amended to increase the number
of shares authorized for issuance under the plan from 11,040,000 to 14,940,000.
What are the Board's recommendations?
Our Board believes that the transactions and related proposals are advisable
and are fair to and in the best interests of Net2Phone and its stockholders
(see page 20) and recommends that you vote for approval of:
. the amendment to our Certificate of Incorporation to increase the
authorized number of shares of Class A Common Stock, which will permit us
to issue 4,000,000 newly-authorized shares of our Class A Common Stock to
Newco (see page 24);
2
. the amendment to our Certificate of Incorporation to increase the maximum
number of directors who may serve on our Board from 11 to 13, effective
upon the issuance of the 4,000,000 newly-authorized shares of our Class A
Common Stock to Newco (see page 24); and
. the amendment to the Net2Phone, Inc. 1999 Amended and Restated Stock
Option and Incentive Plan (see page 29).
Who is entitled to vote at the meeting?
Only stockholders of record at the close of business on the record date,
June 2, 2000, are entitled to receive notice of the special meeting and to vote
the shares of capital stock that they held on that date at the meeting, or any
postponement or adjournment of the meeting. Except as otherwise described below
on page 4 under "What vote is required to approve each item?" or as required by
law:
. holders of our Class A Common Stock are entitled to two votes per share
and holders of our common stock are entitled to one vote per share on
each matter to be voted upon; and
. holders of our Class A Common Stock and holders of our common stock will
vote together as a single class on all matters to be voted upon at this
special meeting.
As of the record date, we had 33,924,250 outstanding shares of Class A
Common Stock and 21,420,473 outstanding shares of common stock representing 76%
and 24%, respectively, of our voting power.
Who can attend the meeting?
All stockholders as of the record date, or their duly appointed proxies, may
attend the meeting. Registration and seating will begin at 8:00 a.m. Cameras,
recording devices and other electronic devices will not be permitted at the
meeting.
Please note that if you hold your shares in "street name" (that is, through
a broker or other nominee), you will need to bring a copy of your proxy card or
a brokerage statement reflecting your stock ownership as of the record date and
check in at the registration desk at the meeting.
What constitutes a quorum?
The presence at the meeting, in person or by proxy, of the holders of a
majority of our capital stock outstanding on the record date will constitute a
quorum for our meeting. Proxies received but marked as abstentions and broker
non-votes will be included in the calculation of the number of shares
considered to be present at the meeting.
How do I vote?
You can vote on matters to come before the meeting in four ways:
. By Internet.
. By toll-free telephone.
. By completing, dating and signing the enclosed proxy card and returning
it in the enclosed postage-paid envelope.
. By written ballot at the meeting.
Please see your proxy card for specific instructions on the above methods of
voting. The Internet and telephone voting procedures are designed to verify
your vote through the use of a Control Number that is provided on each proxy
card. Stockholders whose shares are held in "street name" may vote by Internet
or telephone only if the holder of record offers those options.
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Your shares will be voted as you indicate on your proxy card or during the
Internet or telephone voting procedures. If you vote the enclosed proxy using
one of the methods of voting but you do not indicate your voting preferences,
and with respect to any other matter that properly comes before the meeting,
the individuals named on the proxy card will vote your shares for the
amendments to our Certificate of Incorporation, the amendment to the Net2Phone,
Inc. 1999 Amended and Restated Stock Option and Incentive Plan, and as
otherwise recommended by the Board, or if no recommendation is given, in their
own discretion.
What if I vote and then change my mind?
You may revoke your proxy at any time before it is exercised by:
. filing with the Secretary of Net2Phone a notice of revocation;
. entering a new vote by Internet or telephone;
. sending in another duly executed proxy bearing a later date; or
. attending the meeting and casting your vote in person.
Your last vote will be the vote that is counted.
What vote is required to approve each item?
Amendment to Increase Authorized Shares. To amend our Certificate of
Incorporation to increase the authorized shares of Class A Common Stock, the
affirmative vote of the following holders is required for approval:
. pursuant to Section 242(b) of the Delaware General Corporation Law, the
holders of at least a majority of our outstanding Class A Common Stock;
. pursuant to Sections 212 and 242(a) of the Delaware General Corporation
Law, the holders of a majority of the voting power of our Class A Common
Stock (2 votes per share) and common stock (1 vote per share), voting
together as a single class; and
. pursuant to Article Fourth, Section 1(d)(2) of our Certificate of
Incorporation, the holders of at least 66 2/3% of our outstanding Class A
Common Stock and common stock, voting together as a single class, with
each share entitled to one vote.
A properly executed proxy marked "ABSTAIN" with respect to this proposal
will not be voted, although it will be counted for purposes of determining
whether there is a quorum. Accordingly, an abstention will have the effect of a
vote against this proposal to amend our Certificate of Incorporation.
Other Proposals. For each other proposal, the affirmative vote of the
holders of a majority of our outstanding capital stock represented in person or
by proxy and entitled to vote at the meeting will be required for approval. A
properly executed proxy marked "ABSTAIN" with respect to any such proposal will
not be voted, although it will be counted for purposes of determining whether
there is a quorum. Accordingly, an abstention will have the effect of a
negative vote.
Have any stockholders already agreed to vote their shares for the proposals set
forth in the accompanying notice of meeting?
Yes. IDT, which currently holds approximately:
. 73% of our outstanding Class A Common Stock;
. 56% of the voting power of our Class A Common Stock (2 votes per share)
and common stock (1 vote per share), voting together as a single class;
and
4
. 45% of the outstanding shares of our Class A Common Stock and common
stock, voting together as a single class, with each share entitled to one
vote;
has agreed pursuant to the letter agreement with AT&T attached hereto as Annex
B to vote all of the shares of capital stock of Net2Phone held by it in favor
of the proposals to amend our Certificate of Incorporation.
If my shares are held in "street name" by my broker or other nominee, will my
broker or nominee vote my shares for me?
If you do not provide your broker or other nominee with instructions on how
to vote your "street name" shares, your broker or nominee will not be permitted
to vote them. You should therefore be sure to provide your broker or nominee
with instructions on how to vote your shares.
If you do not give voting instructions to your broker or nominee, you will,
in effect, be voting against the amendments to our Certificate of Incorporation
and the amendment to our 1999 Amended and Restated Stock Option and Incentive
Plan, unless you appear in person at the meeting and vote in favor of the
proposals.
Will our independent auditors be present at the special meeting?
Members of Ernst & Young LLP, our independent auditors, are not expected to
be in attendance at the special meeting and will not be available to respond to
questions.
How are we soliciting this proxy?
We are soliciting this proxy on behalf of our Board by mail and will pay all
expenses associated therewith. Some of the officers and other employees of
Net2Phone also may, but without compensation other than their regular
compensation, solicit proxies by further mailing or personal conversations, or
by telephone, facsimile or other electronic means. We will also, upon request,
reimburse brokers and other persons holding stock in their names, or in the
names of nominees, for their reasonable out-of-pocket expenses for forwarding
proxy materials to the beneficial owners of the capital stock and to obtain
proxies.
Where can I find more information?
You may obtain more information from various sources as set forth under
"Where You Can Find More Information" on page 39.
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THE TRANSACTIONS
What transactions gave rise to this special meeting?
On March 31, 2000, we announced that we entered into an agreement with AT&T
Corp. and IDT Corporation, a copy of which is attached hereto as Annex A.
Pursuant to the terms of the agreement, we agreed, subject to stockholder
approval and the satisfaction of other conditions described below on page 21,
to issue to Newco 4,000,000 newly-authorized shares of our Class A Common Stock
for an aggregate purchase price of $300,000,000. In addition, the agreement
between AT&T and IDT, attached hereto as Annex B, provides that Newco, upon our
stockholders' approval and satisfaction of the other conditions in the
agreement (see page 21), purchase from IDT 14.9 million of the approximately
24.9 million shares of our Class A Common Stock it owns for an aggregate
purchase price of approximately $1.1 billion. If the matters outlined in the
accompanying notice of meeting are approved, upon consummation of these
transactions:
. Newco will own approximately 32% of our outstanding capital stock, but it
will control 39% of the aggregate voting power of our capital stock
because it will hold Class A Common Stock with two votes per share. Newco
also has a right of first refusal to purchase IDT's remaining shares of
our Class A Common Stock. If IDT sells all its remaining shares and Newco
exercises its right to purchase such shares, Newco will have
approximately a 49% economic interest and approximately a 59% voting
interest in Net2Phone. This right of first refusal expires on August 1,
2003.
. IDT's ownership of our outstanding capital stock will be reduced from
approximately 45% to 17%, and its voting power will be reduced from
approximately 56% to 21%. IDT's voting power can be further reduced by
the conversion of its remaining shares of our Class A Common Stock (2
votes per share) to our common stock (1 vote per share) upon Newco's cash
payment to IDT of an amount equal to 10% of the average daily closing
price per share of our common stock for the 20-day trading period ending
on the day prior to the date Newco notifies IDT that it wishes to
exercise its right of conversion. This right of conversion expires on
August 1, 2003.
. Newco and IDT will enter into a voting agreement with respect to the
election of mutually acceptable nominees to the Board. So long as they
agree on nominees, Newco and IDT will collectively control approximately
60% of our voting power and will therefore likely control the election of
all our directors; however, if they are unable to agree on acceptable
nominees, the votes of our other stockholders will determine the election
of our directors. This agreement terminates by its terms no later than
August 1, 2003.
. Initially, Newco also will have the right to designate three individuals
to be appointed as directors on our Board, one of whom shall be elected
to fill the vacancy created by the resignation of a director designated
by IDT. Newco and IDT has each agreed to use its best efforts, so long as
it beneficially owns between 15% and 85% of our voting power, to assure
that our Board consists of at least 5 directors who are not employees of
or affiliated with Net2Phone, IDT, AT&T or Newco or any of their
affiliates. These "independent" directors will take action on behalf of
our Board on matters involving or relating to our relationship with
Newco, IDT, AT&T and other interested parties.
Also pursuant to the letter agreement attached hereto as Annex A, we have
agreed, subject to and in connection with the transactions, to:
. grant to AT&T and IDT, on terms, conditions and pricing to be negotiated
that are no less favorable than those granted to other licensees of
Net2Phone, a license for our present and future technology; and
. enter into a registration rights agreement, which grants Newco certain
demand and piggyback registration rights with respect to the shares of
our capital stock acquired by it from IDT and from us, the form of which
is attached as Exhibit A to Annex A.
Further, pursuant to the letter agreement attached hereto as Annex A, AT&T
has agreed to support good faith negotiations to work together with us to enter
into commercial arrangements to:
. enter into a license, distribution, marketing and services agreement,
whereby AT&T will offer our services through AT&T's WorldNet Service
and work with other groups within AT&T to market and distribute our
services;
6
. develop and deploy new products and applications that integrate Voice
over Internet Protocol ("VoIP") technology into PBX's and other
communication products for the business market;
. develop a series of commercial and VoIP technology developmental
agreements, the goal of which would be to establish a framework for
working together to further develop and enhance each party's VoIP
technology and jointly develop new VoIP products and standards;
. develop broadband applications using VoIP technology;
. develop and implement such technologies as are required for the
interoperability of each party's services with the other's;
. develop "on-net" advantages in the delivery of each other's services;
. develop and evolve the standards for VoIP services and products; and
. classify each other as "preferred supplier" with respect to all
services offered by the parties.
As of the date of this proxy statement and except for the agreement relating to
AT&T's WorldNet Service, we have not entered into, and there is no binding
obligation for any of the parties to enter into, the agreements and
arrangements described above in this paragraph.
For more information on these transactions, you should read the letter
agreements attached hereto as Annex A and Annex B, which are incorporated
herein by reference.
What are the potential benefits expected to result from the transactions?
z We believe that these transactions will facilitate our objective of
becoming the global standard for VoIP for at least three reasons:
. We believe that AT&T will have a strong incentive to work with us to
develop and distribute our VoIP services and products.
. We believe that companies that are focused on providing Internet-
related services and products will view us as a "neutral" provider of
VoIP because AT&T is generally not perceived as primarily an Internet
company. Being perceived as neutral in the Internet marketplace
enhances our ability to enter into strategic alliances with competing
firms, such as America Online, Inc. ("AOL") and Yahoo!.
. We believe these transactions position us at the nexus of the
convergence of communications technologies. We believe this gives us an
edge over our competitors in managing the rapidly changing
technological and market landscape.
z IDT is effectively divesting itself of its majority voting control of
matters that are subject to stockholder approval. IDT has also agreed to
relinquish one of its three seats on our Board to Newco. We believe these
transactions enhance our independence and should increase our flexibility
to pursue strategic opportunities and investments. However:
. IDT and Newco are entering into a voting agreement, expiring August 1,
2003, relating to the election of directors and, so long as they agree,
together they will control the election of directors. Although, if they
are unable to agree on acceptable nominees, the votes of our other
stockholders will determine the election of our directors.
. Newco could in the future purchase IDT's remaining stake in Net2Phone
or otherwise take actions that would give Newco sole majority voting
control of Net2Phone, including, but not limited to, exercising its
option to convert IDT's remaining shares of our Class A Common Stock (2
votes per share) into shares of our common stock (1 vote per share) as
further described in the letter agreement attached hereto as Annex B.
. There is no restriction on Newco and IDT entering into a more
comprehensive voting agreement that addresses other matters besides the
election of our directors.
z The transactions will raise $300,000,000 in additional capital that we
intend to use to fund product and market development, strategic
acquisitions and investments and other general corporate purposes.
7
However, the proceeds have not been allocated to any specific investment
or transaction and our management has significant flexibility in applying
the proceeds.
Please review the principal positive and negative factors of the
transactions considered by the Special Committee to our Board discussed on
pages 14 to 16 below for additional considerations.
What is the background of the transactions?
Introduction
Our management and Board reviews, on a continuing basis, our competitive
strategy in light of the changing competitive environment of the VoIP industry
with the objective of identifying alternative strategies to enhance stockholder
value. Our management and Board have explored possible joint ventures, business
combinations and other strategic alternatives as a means of further enhancing
our competitive position in the rapidly changing and competitive
telecommunications market.
On February 4, 2000, AOL, which currently owns 2,250,000 shares of our Class
A Common Stock representing approximately 6.6% of our outstanding Class A
Common Stock and 500,000 shares of our common stock representing approximately
2.3% of our outstanding common stock, approached our management with an
informal proposal to increase its equity interest in Net2Phone by purchasing a
portion of IDT's equity interest in Net2Phone. We informed IDT's management of
AOL's interest in exploring the possibility of purchasing a significant portion
of its investment in Net2Phone.
On February 10, 2000, our management and representatives of IDT met with
representatives of AOL to discuss, among other things, AOL's interest in
purchasing IDT's equity interest in Net2Phone and to further develop AOL's
existing strategic alliance with us. Between February 10 and March 2, 2000, the
management of IDT and AOL had numerous discussions regarding a possible
transaction. During this time, IDT's management provided our management with
periodic updates as to the evolving status and structure of a potential
transaction.
On February 14, 2000, CNBC reported that AOL and IDT were discussing a sale
of IDT's stake in Net2Phone. While neither company commented on this report, it
was widely circulated in the news media and provoked interest and comments from
our existing and potential strategic partners.
On February 17, 2000, we retained Thomas Weisel Partners as financial
advisor to advise our management and Board on (1) the potential structure, from
a financial perspective, of a transaction between IDT and AOL relating to the
sale or transfer of our shares of Class A Common Stock held by IDT and (2) the
potential financial impact of such a transaction, including the impact on our
stockholders.
On February 21, 2000, AT&T management raised the possibility with IDT
management of pursuing a transaction involving the purchase of a portion of
IDT's equity interest in Net2Phone. That evening, senior management of AT&T and
IDT met to more formally discuss the potential transaction.
On February 22, 2000, IDT's management informed us that AT&T was interested
in pursuing a transaction and that, while proposals made by AOL remained
outstanding, IDT was now engaged in discussions with AT&T regarding the sale of
part of its stake in Net2Phone.
On February 23, 2000, our Board, along with our legal and financial
advisers, met to discuss at length the possible strategic impact of a
transaction between IDT and AOL on our business, financial results, prospects
and intercompany relationships and agreements with IDT and our other strategic
partners. The terms of a possible transaction between AOL and IDT were not
settled at that point, but the transaction under discussion did not involve any
proceeds for us or our public stockholders. At that meeting the Board
requested, and IDT agreed, that our management should be regularly informed of
and consulted regarding IDT's evolving plans.
On February 24, 2000, AT&T commenced financial and legal due diligence of
Net2Phone, which included presentations made by senior management of IDT and
Net2Phone.
8
On March 3, 2000, AT&T and IDT entered into a standstill agreement, whereby
IDT agreed not to sell or offer to sell its equity interest in Net2Phone to any
other party.
Over the next several weeks, IDT and AT&T held discussions to explore the
terms of a possible transaction about which our management was regularly
informed and consulted. During this time, our management also updated our Board
members on the evolving status and structure of the transaction, including at a
special meeting of our Board on March 14, 2000. Prior to AT&T and IDT reaching
an agreement on March 28, 2000, our management and Board did not directly
participate in the negotiations.
Special Meeting Of Our Board On March 20, 2000
On March 20, 2000, at a special meeting of our Board, IDT's management
described to our Board the proposed structure of a transaction being negotiated
by IDT and AT&T involving the sale by IDT to AT&T of 14.9 million shares of
Class A Common Stock. IDT's management stated that this sale would be
conditioned on the sale to AT&T by Net2Phone of newly-issued shares of Class A
Common Stock, as well as certain related transactions, including the licensing
of technology by Net2Phone to AT&T and IDT, commercial arrangements between
AT&T and IDT and other arrangements between AT&T and IDT with respect to IDT's
and AT&T's shares of our Class A Common Stock.
At the special meeting, the Board approved a resolution establishing an
independent Special Committee to review, analyze, consider and pursue
alternatives and responses to the proposed transactions and to approve or
disapprove the terms of the transactions as they related to us. The Board
delegated to the Special Committee all of its powers and authority with respect
to these transactions to the extent permitted by law. As to matters requiring
the approval of our stockholders, the Special Committee was directed to make
such recommendations to the Board as it deemed appropriate or advisable. It was
also authorized to retain its own legal counsel and financial advisers at our
expense.
The Special Committee consisted of four of our directors: Jesse P. King,
Harry C. McPherson (Chairman), James R. Mellor and Daniel H. Schulman. These
directors have no present or prior employment or other relationship with AT&T,
IDT or Net2Phone other than their membership on our Board and options to
purchase our common stock, except that Mr. Mellor served as a director of IDT
between August 1997 and June 1999 and holds currently exercisable options to
purchase 30,000 shares of IDT common stock and Mr. Schulman served in various
executive capacities with AT&T, including president of the AT&T Consumer
Markets Division, from May 1994 until July 1999 and owns approximately 1,300
shares of AT&T common stock.
The Initial Meeting of the Special Committee
The Special Committee held an initial meeting on March 24, 2000 at our
offices in Hackensack, New Jersey. At that meeting, the Special Committee
reviewed the relationships between Mr. Mellor and IDT and between Mr. Schulman
and AT&T and concluded that these relationships would not affect the ability of
its members to consider any proposed transactions with AT&T or IDT with a view
to protecting the best interests of Net2Phone and its public stockholders.
Also at that meeting, the Special Committee retained Hughes Hubbard & Reed
LLP as independent counsel to advise the Special Committee regarding its duties
and the legal aspects of the proposed transactions. At the same meeting, the
Special Committee retained Salomon Smith Barney Inc. as its financial adviser
to advise the Special Committee regarding the financial aspects of the proposed
transactions, to assist in any negotiations that might be appropriate and to
render an opinion as to fairness, from a financial point of view, to Net2Phone
of the consideration to be received by Net2Phone in any proposed transaction.
Each of these firms was selected after its representatives were interviewed by
the Special Committee regarding the qualifications of the firm to act as
adviser to the Special Committee. Following these interviews, the Special
Committee concluded that certain relationships unrelated to the proposed
transactions which Hughes Hubbard & Reed LLP had with Net2Phone and IDT, and
which Salomon Smith Barney had with AT&T, would not impair the ability of these
advisers to act independently on behalf of the Special Committee.
In addition to dealing with organizational matters during the morning of its
initial meeting, the Special Committee reviewed the principal points of the
proposed transactions between IDT and AT&T as it understood them at that time,
including the conditions that Net2Phone issue 4,000,000 shares of its Class A
Common
9
Stock to Newco and grant a non-exclusive license of its technology to AT&T.
These points were set forth in a draft term sheet, a copy of which IDT had
provided to each member.
During the afternoon of March 24, 2000, the members of the Special
Committee, together with its advisers, met at AT&T's corporate headquarters
with representatives of AT&T's senior management, as well as outside counsel to
AT&T. The AT&T representatives described the status of their negotiations with
IDT and the proposed organization of Newco, which was expected to be majority-
owned by AT&T.
These representatives also discussed the benefits which they believed would
be realized by Net2Phone as a result of the proposed transactions. Principal
among these benefits was that the interests of AT&T and the other Newco
participants in Net2Phone could attract a greater number of major Internet
service providers and portals than other alternatives available to Net2Phone,
thereby establishing Net2Phone's technology as the global standard for VoIP. A
further discussion of these potential benefits followed in response to
questions from members of the Special Committee and its advisers, as did
discussion of certain issues raised by the members of the Special Committee and
its advisers, including a discussion on the absence of any binding commitments
by AT&T to the terms for a non-exclusive license of Net2Phone's technology to
be granted to AT&T and the absence of any commitment by AT&T to enter into
other commercial arrangements with Net2Phone. Other matters discussed included
the role AT&T would have in the affairs of Net2Phone if it became a stockholder
and obtained Board representation.
In the course of the meeting with AT&T, the AT&T representatives expressed
their position on a number of points of interest to the Special Committee. They
stated that AT&T would not be willing to consider a purchase of a majority
interest in Net2Phone or an acquisition of Net2Phone as a whole. Furthermore,
the AT&T representatives expressed their concern that the existence of the
confidential negotiations between AT&T and IDT would soon leak into the
marketplace and stated that this concern had led them to impose a deadline of
March 31, 2000 for the Special Committee and our Board to act on the
transactions with Newco and/or AT&T. They added that it would be impossible to
negotiate the definitive terms of the proposed license of our technology to
AT&T or any other commercial arrangement in advance of this deadline and,
indeed, that it could take several months to do so.
Information Gathering and Analysis by the Special Committee
Following the meeting at AT&T, and after considering the matters described
above, members of the Special Committee preliminarily concluded that the
proposed transactions with AT&T provided Net2Phone with significant potential
benefits. Accordingly, the Special Committee, directly and through its
advisers, immediately began a period of intensive due diligence in order to be
in position to make a final decision regarding the transactions prior to March
31, 2000. At the Special Committee's direction, the Special Committee's legal
and financial advisers subsequently held numerous and lengthy in-person or
telephonic interviews with members of senior management of AT&T, IDT and
Net2Phone, as well as each of their inside and outside counsel and other
advisers. The Special Committee also obtained advice from Net2Phone's senior
management as to provisions management would like to see in an agreement with
AT&T and Newco. One or more members of the Special Committee participated in
some of these interviews and also had individual telephonic discussions with
members of senior management of IDT and Net2Phone.
Throughout this information-gathering process, members of the Special
Committee held numerous telephone conversations with the Special Committee's
advisers and among themselves to discuss the information being reviewed by them
and the strategic reasons for the proposed transactions. The Special Committee
and its advisers also reviewed the provisions of the unsigned agreement between
IDT and AT&T, copies of portions of which were furnished to them by AT&T
between March 25 and March 27, 2000 as negotiations on each portion were
completed.
10
Meetings of the Special Committee on March 29, 2000 and Formulation of
Negotiating Position
During the morning of March 29, 2000, the Special Committee held a meeting
with its advisers at the offices of Hughes Hubbard & Reed LLP in New York (with
two members participating by telephone) to review the information gathered
during the preceding four days, including a review of the terms of the
agreement between AT&T and IDT, as it was completed and signed on March 28,
2000 and as it appears at Annex B. In addition, the Special Committee reviewed
a letter which it had received from senior management of AT&T that morning. The
letter set forth various benefits which AT&T indicated it believed that the
proposed transaction would bring to Net2Phone and AT&T, including the following
benefits to Net2Phone:
. increased traffic volumes and customers;
. cost savings; and
. greater technological innovation.
In addition, the letter set forth the following examples of cooperative
actions that could be taken to create incremental value for both Net2Phone and
AT&T:
. facilitate strategic relationships with major portals and Internet
service providers, based on the premise that the proposed investment by
AT&T through Newco encourages these companies to have stronger
relationships with Net2Phone than they would be otherwise willing to
establish if Net2Phone were controlled by a direct competitor (for
example, an Internet service provider or an online service provider);
. encourage and facilitate the migration of some portion of AT&T's
residential customer base to Net2Phone to meet its demand for VolP
services;
. incorporate Net2Phone's technologies into AT&T's own network through a
commercial license under "most favored nation" terms;
. market Net2Phone's cable telephony solutions to residences and businesses
within AT&T's cable footprint; and
. coordinate technological innovation between Net2Phone and AT&T to develop
value-added applications and services, such as unified messaging, which
could be co-marketed.
Also at this meeting, Salomon Smith Barney reviewed for the Special
Committee Net2Phone's strengths and weaknesses, its stockholder profile and
certain market data regarding Net2Phone and its competitors, as well as
publicly available information concerning minority investments generally.
The members of the Special Committee and its advisers then engaged in a
review of Net2Phone's current financial position and business prospects and in
a general discussion about the proposed transactions with Newco and AT&T, the
potential benefits of the transactions to Net2Phone and its public stockholders
and the potential disadvantages or risks. Furthermore, the Special Committee
considered the advantages and disadvantages of the likely consequences of a
rejection of the transactions. In this regard, the Special Committee recognized
that IDT had absolute voting control of Net2Phone and that IDT had informed the
Special Committee that the only other company it had identified as a potential
buyer of Net2Phone or IDT's stock in Net2Phone was AOL, which was interested
only in purchasing IDT's Net2Phone stock. The Special Committee therefore
concluded that the likely consequences of a rejection of the transactions with
AT&T and Newco were a sale by IDT of its control block to AOL or possibly some
other as yet unidentified company or a continuation of the status quo, with
Net2Phone continuing to pursue other strategic alliances.
Following this discussion, the members of the Special Committee concluded
that approval of the proposed transactions with AT&T and Newco presented
substantial potential advantages to Net2Phone and its public stockholders over
the likely consequences of a rejection. However, the Special Committee
determined that it
11
would seek to negotiate with AT&T and IDT certain modifications of the
transactions designed to address issues discussed by the Special Committee and
further safeguard the interests of Net2Phone and its public stockholders. After
a general review of a range of possible modifications, including the
suggestions that had been made by Net2Phone's senior management, the Special
Committee directed Mr. McPherson, as Chairman, and the Special Committee's
advisers to develop for its consideration specific modifications which would
form a favorable but realistic basis for the Special Committee's negotiations.
After the meeting, Mr. McPherson, with the assistance of the Special
Committee's legal and financial advisers, formulated such a negotiating
position, which addressed, among other things, corporate governance issues and
the payment of royalties by AT&T.
At a telephonic meeting of the Special Committee held during the evening of
March 29, 2000, the Special Committee discussed in detail the proposed
negotiating points, as well as possible alternative and fallback positions, and
authorized Mr. McPherson, working together with the Special Committee's
advisers, to negotiate with AT&T and IDT on the basis of these points and,
thereafter, to report back to the Special Committee the results of those
negotiations.
Meeting of AT&T and Net2Phone Management
During the morning of March 30, 2000, the senior management of Net2Phone met
with the senior management of AT&T, at the offices of AT&T's legal counsel in
New York City. At that meeting, these individuals discussed in depth the
substantial potential advantages of an AT&T involvement in the ownership of
Net2Phone to both Net2Phone and AT&T, as well as the issues raised by
Net2Phone's management arising out of the absence from the AT&T and IDT letter
agreement of any binding commitments by AT&T to use Net2Phone's technology or
to pay minimum royalties. Although AT&T declined to enter into any binding
commitments to use the technology or to agree to pay any minimum level of
royalties, AT&T did agree to incorporate into an agreement, in the event that
AT&T and Net2Phone were to reach agreement on the sale by Net2Phone of
4,000,000 shares of Class A Common Stock to Newco, a commitment to support good
faith negotiations to enter into the terms of the following commercial
arrangements:
. AT&T would offer Net2Phone's services through AT&T's WorldNet Service.
. Each of AT&T and Net2Phone would be classified by the other party as a
"preferred supplier" where mutually beneficial and not inconsistent with
other existing commitments of the parties, with respect to all services
offered by the parties. AT&T would make available to Net2Phone the
opportunity to make presentations to senior operational management of
AT&T with respect to products offered by Net2Phone.
. AT&T and Net2Phone would work together to develop and deploy new products
and applications that integrate VoIP technology into PBX's and other
communication products for the business market.
. AT&T and Net2Phone would work together to:
. develop a series of commercial and VoIP technology developmental
agreements, the goal of which would be to establish a framework for
working together to further develop and enhance each of AT&T's and
Net2Phone's VoIP technology, and jointly develop new VoIP products and
services;
. develop broadband applications using VoIP technology;
. develop and implement such technologies as would be required for the
interoperability of each party's services with the other's;
. develop "on-net" advantages in the delivery of each other's services;
and
. develop and evolve the standards for VoIP services and products.
12
Net2Phone's management then informed the Special Committee of these
discussions and negotiations and reported to the Special Committee that AT&T's
commitment to negotiate in good faith on the points listed above satisfied its
concerns with the proposed transactions with Newco and AT&T and that it was
strongly in favor of the transactions.
Negotiations Among the Special Committee, AT&T and IDT
After receiving the report of Net2Phone's management, Mr. McPherson,
together with the Special Committee's advisers, met during the afternoon of
March 30, 2000 with senior management of AT&T and IDT, as well as their counsel
and the senior management of Net2Phone to negotiate the terms of the
transactions.
Mr. McPherson and a representative of Salomon Smith Barney, on behalf of the
Special Committee, then met with senior management of AT&T and IDT. At this
meeting, AT&T and IDT agreed that:
. the Board of Net2Phone would have a minimum of five independent directors
(defined as persons not affiliated with IDT, AT&T or any other
participant in Newco) and that approval of a majority of these
independent directors would be required for:
. any material transaction between Net2Phone and IDT, AT&T or any other
participant in Newco; and
. any business combination between Net2Phone and IDT or AT&T.
. the "most favored nation" requirements relating to licenses from
Net2Phone to IDT and AT&T would be modified as the Special Committee
proposed; and
. they would agree to support good faith negotiations to enter into the
terms of the commercial arrangements listed above under "Meeting of AT&T
and Net2Phone Management."
AT&T also stated, however, that it would not negotiate further with the
Special Committee, and, in view of an impending press story, AT&T conveyed to
the Special Committee its position that if Net2Phone's Board of Directors did
not take action that evening to satisfy the conditions set forth in the letter
agreement between AT&T and IDT, AT&T would decline to enter into the proposed
transactions with IDT and Net2Phone.
Meeting of the Special Committee on March 30, 2000
At a telephonic meeting held in the evening of March 30, 2000, the Special
Committee heard a report by Mr. McPherson and the Special Committee's advisers
on the negotiations with AT&T and IDT, as well as a financial presentation and
the delivery of an oral opinion of Salomon Smith Barney as to the fairness,
from a financial point of view, to Net2Phone of the cash consideration to be
received by Net2Phone for the issuance to Newco of 4,000,000 shares of our
Class A Common Stock, which we sometimes refer to herein as the "Newco
investment." See "What is the opinion of the Special Committee's financial
adviser?" below. The Special Committee considered the factors described under
"What factors were considered by the Special Committee in its determination to
approve the transactions?" below, and it determined that further negotiations
would be futile and could jeopardize the transactions with AT&T and Newco. The
Special Committee then concluded that the transactions with AT&T and Newco were
fair and in the best interests of Net2Phone and its public stockholders.
Accordingly, the Special Committee took the following actions:
. unanimously approved Net2Phone entering into the letter agreement with
AT&T and IDT attached hereto as Annex A;
. unanimously approved a recommendation to our Board that the Board propose
amendments to our Certificate of Incorporation increasing the number of
authorized shares of Class A Common Stock by 4,000,000 and expanding the
Board by two directors;
13
. unanimously approved a commitment to nominate designees of Newco to fill
the two additional Board seats and to fill a seat to be vacated by a
designee of IDT; and
. with one abstention, recommended that the Board approve the amendment to
our 1999 Amended and Restated Stock Option and Incentive Plan to provide
that the stock options held by employees of IDT do not terminate by
reason of the proposed transactions.
Following this meeting, respective counsel for the Special Committee,
Net2Phone, AT&T and IDT drafted the terms of the letter agreement which is
attached hereto as Annex A, including the Registration Rights Agreement
attached to such letter agreement as Exhibit A.
The Special Committee delivered its report to the full Board of Net2Phone
(absent Messrs. Schulman and Yudkovitz) at a special meeting held later that
evening. See "What is the recommendation of the full Board?" below (page 20).
On March 31, 2000, we issued a press release announcing the execution of the
letter agreement attached hereto as Annex A.
What factors were considered by the Special Committee in its determination to
approve the transactions?
In deciding to approve the letter agreement among Net2Phone, AT&T and IDT
attached hereto as Annex A and in taking the other actions taken by it on March
30, 2000, the Special Committee considered a number of factors, including
positive and negative factors. In light of the number of factors and their
varied nature, the Special Committee did not find it practical or appropriate
to assign relative weights to the factors; accordingly, it did not do so. In
addition, individual members of the Special Committee may have given different
weight to different factors.
The Special Committee's conclusions were made after considering all of the
factors as a whole and were not based on any individual factor. In reaching
their determination, the members of the Special Committee exercised their best
judgment, using the expertise of their independent legal and financial
advisers, their own collective business experience and their familiarity with
the parties and the industry. The principal positive factors considered by the
Special Committee included:
. Opportunity to Become the Global Standard for VoIP. The Special Committee
carefully reviewed and considered the information presented to it during
the various meetings and telephone conferences with the management of
Net2Phone, IDT and AT&T regarding the implications of a strategic
alliance with AT&T, including access to AT&T's technology and user base
and possibly to AT&T's strategic partners. The Special Committee also
considered the implications of an alliance with AT&T on Net2Phone's
ability to obtain or strengthen alliances with other critical strategic
partners, such as major Internet portals and service providers. In this
regard, the Special Committee took into account the endorsement of its
view by senior Net2Phone management. It also concluded that this
opportunity would be lost if the transactions with AT&T and Newco were
rejected and IDT instead sold its stock to AOL, the only other identified
potential purchaser.
. Other Strategic Opportunities. The public validation of Net2Phone's
technology represented by the magnitude of AT&T's investment led the
Special Committee to conclude that the transactions with AT&T and Newco
would increase the likelihood of additional strategic alliances.
. Likelihood of Substantial Revenues from AT&T. The magnitude of AT&T's
investment through Newco and AT&T's commitment to support good faith
negotiations for licensing and other commercial arrangements between AT&T
and Net2Phone led the Special Committee to conclude that there was a
substantial probability that Net2Phone would realize substantial revenues
from the licensing of its technology by AT&T and from other commercial
arrangements.
14
. Receipt of $300,000,000 in Cash. The Special Committee recognized that
Newco would be paying Net2Phone $300 million in cash for newly-issued
shares of Class A Common Stock, representing a significant premium over
the market value of Net2Phone's ordinary common stock.
. Opinion of the Special Committee's Financial Adviser. The Special
Committee considered the financial presentation of Salomon Smith Barney
and its opinion to the effect that, as of the date of the opinion and
based on and subject to the matters described in the opinion, the cash
consideration to be received by Net2Phone in the Newco investment was
fair from a financial point of view to Net2Phone. See "What is the
opinion of the Special Committee's financial adviser?" below.
. Reducing IDT's Voting Interest to Less Than 50%. The Special Committee
recognized that IDT's majority voting control of Net2Phone would be
eliminated by the proposed transactions, although it also recognized that
Newco and IDT would have a limited voting agreement and that Newco could,
under certain circumstances, purchase the remainder of Net2Phone's Class
A Common Stock held by IDT or cause the conversion of Net2Phone's Class A
Common Stock held by IDT to common stock. This voting agreement is
limited to a three-year period and to the election of directors; it
provides that, if IDT and Newco are unable to agree on acceptable
nominees, they will abstain from voting on those nominees as to which
they are unable to agree.
. Enhanced Protections of Disinterested Stockholders. The Special Committee
considered that the provisions which it successfully negotiated
concerning the requirement that there be a minimum of five independent
directors on the Net2Phone Board and that a majority of those directors
be required to approve certain transactions with AT&T, IDT or other
participants in Newco would benefit Net2Phone's disinterested
stockholders. It considered that there have been no such protective
provisions in the past and concluded that their addition represents
enhanced protection of the disinterested stockholders.
. Alternative Transactions. IDT had advised the Special Committee that it
was seeking to sell a substantial portion of its shares of Net2Phone's
Class A Common Stock, and that the only other potential purchaser which
had been identified was AOL. Because AOL was already a "permitted
transferee," IDT would have had the ability, without any action by our
Board, to transfer shares of Class A Common Stock without those shares
being converted into common stock. The Special Committee believed, for
the reasons set forth above and also because AOL would not have
concurrently purchased Class A Common Stock from Net2Phone for
$300,000,000, that a sale by IDT of its stock to AOL was not as
attractive as the transactions with AT&T and Newco.
. Need for Approval by Significant Number of Disinterested
Stockholders. The amendments to Net2Phone's Certificate of Incorporation
which are required for the transactions with AT&T and Newco require
approval by the holders of two-thirds of the total number of outstanding
shares of Net2Phone's Class A Common Stock and common stock. Accordingly,
the transactions with AT&T and Newco will require approval by holders of
at least 12,175,839 shares of the 30,444,723 shares of our capital stock
held by persons other than IDT, or approximately 40% of the shares of
capital stock held by persons other than IDT.
. Benefits of Extension of Stock Options. The Special Committee believed
that the extensions of the stock options held by IDT employees were in
the best interests of Net2Phone and its disinterested stockholders
because that extension was a condition to the other transactions with
AT&T and Newco and because those employees are expected to continue to
provide services to Net2Phone.
The principal negative factors, which the Special Committee believed were
outweighed by the positive factors, included:
. Uncertainty Regarding AT&T Licenses. The Special Committee recognized
that there is no commitment from AT&T to use Net2Phone's technology, and
therefore there is no assurance that AT&T will pay any royalties to
Net2Phone, notwithstanding the fact that its interest in Newco and
approximately $1.4 billion payment for Net2Phone's capital stock would
give it an incentive to do so.
15
. Possible Discouragement of Others. The Special Committee recognized that
the obligation of Net2Phone to grant non-exclusive "most favored nation"
licenses to AT&T and IDT will preclude Net2Phone from granting exclusive
licenses to others and may discourage others from seeking nonexclusive
licenses, particularly if AT&T fails to use Net2Phone's technology and
AT&T's failure to use it is deemed to be a negative reflection on the
technology.
. No Consideration Payable Directly to Public Stockholders. The Special
Committee recognized that, while IDT is being paid a premium for a
substantial portion of its Class A Common Stock, other stockholders of
Net2Phone would receive only indirect benefits from the AT&T and Newco
transactions.
. Possible Disadvantages of Having AT&T Through Newco as the Largest
Stockholder. While AT&T's investment through Newco in Net2Phone may be
regarded as having the advantages described above, it may also be
regarded as disadvantageous because AT&T, as a financially strong
company, might be less likely than others might be to agree to an
acquisition of Net2Phone as a whole by another company in a transaction
in which the Net2Phone public stockholders could realize a premium for
their shares.
. Possible Effect on AOL Relationship. The Special Committee considered the
fact that AOL might contend that the transactions with AT&T and Newco
represent a "change of control" of Net2Phone which would enable AOL to
terminate certain commercial arrangements with Net2Phone. Management of
Net2Phone, however, informed the Special Committee that it would
undertake to work with AOL, as a stockholder and strategic partner, to
satisfy any concerns AOL might have with the transactions with Newco and
AT&T in order to maintain the AOL arrangements.
. Acceleration of Stock Options and Possible Earnings Charge. The Special
Committee recognized that options held by sixteen members of Net2Phone
management would accelerate by reason of the transactions with AT&T and
Newco and that this acceleration could possibly adversely affect the
incentive of those individuals (see page 21). The Special Committee also
considered that the amendment extending the options held by employees of
IDT could result in a non-cash charge to Net2Phone's earnings that was
not determinable at that time (see page 22).
. Risk of Stockholder Disapproval. The Special Committee recognized that,
even if the Net2Phone stockholders fail to approve the amendments to
Net2Phone's Certificate of Incorporation and the purchase of 4,000,000
shares by Newco from Net2Phone does not occur, AT&T would nevertheless
receive a non-exclusive license from Net2Phone and likely acquire shares
of Net2Phone stock from IDT as a result of their loan arrangement.
What is the opinion of the Special Committee's financial adviser?
The Special Committee retained Salomon Smith Barney to act as its financial
adviser in connection with the proposed Newco investment. In connection with
its engagement, the Special Committee requested that Salomon Smith Barney
evaluate the fairness, from a financial point of view, to Net2Phone of the cash
consideration to be received by Net2Phone in the Newco investment pursuant to
the terms of the letter agreement attached hereto as Annex A. On March 30,
2000, at a meeting of the Special Committee held to evaluate the proposed Newco
investment, Salomon Smith Barney delivered to the Special Committee an oral
opinion, which opinion was confirmed by delivery of a written opinion dated
March 30, 2000, to the effect that, as of the date of the opinion and based on
and subject to the matters described in the opinion, the cash consideration to
be received by Net2Phone in the Newco investment was fair, from a financial
point of view, to Net2Phone.
In arriving at its opinion, Salomon Smith Barney:
. reviewed the letter agreements attached hereto as Annex A and Annex B;
. held discussions with senior officers, directors and other
representatives and advisers of Net2Phone and with senior officers and
other representatives and advisers of IDT and AT&T concerning the
business, operations and prospects of Net2Phone;
16
. examined publicly available business and financial information relating
to Net2Phone;
. examined publicly available financial forecasts for Net2Phone and other
information and data for Net2Phone which were provided to or otherwise
discussed with Salomon Smith Barney by the managements of Net2Phone, IDT
and AT&T, including information relating to the potential strategic
implications and operational benefits that may be realized by Net2Phone
as a result of the Newco investment and the block purchase from IDT;
. reviewed the financial terms of the Newco investment as described in the
letter agreement attached hereto as Annex A in relation to, among other
things, current and historical market prices and trading volumes of
Net2Phone common stock, the financial condition and historical and
projected revenues, earnings and other operating data of Net2Phone, and
the capitalization of Net2Phone;
. analyzed financial, stock market and other publicly available information
relating to the businesses of other companies whose operations Salomon
Smith Barney considered relevant in evaluating those of Net2Phone; and
. conducted other analyses and examinations and considered other financial,
economic and market criteria as Salomon Smith Barney deemed appropriate
in arriving at its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, on the accuracy and completeness of all financial and
other information and data that it reviewed or considered. With respect to
financial forecasts and other information and data, Salomon Smith Barney
reviewed with the management of Net2Phone publicly available forecasts relating
to Net2Phone and assumed, with the Special Committee's consent, without
independent verification or investigation, that the forecasts represented
reasonable estimates and judgments as to the future financial condition and
operating results of Net2Phone.
Salomon Smith Barney did not make and was not provided with an independent
evaluation or appraisal of the assets or liabilities, contingent or otherwise,
of Net2Phone and did not make any physical inspection of the properties or
assets of Net2Phone. Salomon Smith Barney expressed no opinion as to what the
value of our Class A Common Stock will be when issued in connection with the
Newco investment or the prices at which our common stock or Class A Common
Stock will trade or otherwise be transferable, as the case may be, after the
Newco investment. Salomon Smith Barney expressed no view as to, and its opinion
does not address, the relative merits of the Newco investment as compared to
any alternative business strategies that might exist for Net2Phone or the
effect of any other transaction in which Net2Phone might engage. In connection
with its engagement, Salomon Smith Barney was not requested to, and did not,
solicit third party indications of interest in the possible acquisition of all
or a part of, or investment in or strategic alliance with, Net2Phone.
Salomon Smith Barney's opinion was necessarily based on information
available, and financial, stock market and other conditions and circumstances
existing and disclosed to Salomon Smith Barney, as of the date of its opinion.
Although Salomon Smith Barney evaluated the cash consideration from a financial
point of view, Salomon Smith Barney was not asked to and did not recommend the
specific consideration payable in the Newco investment, which was determined
through negotiation between IDT and AT&T. No other instructions or limitations
were imposed by the Special Committee on Salomon Smith Barney with respect to
the investigations made or procedures followed by Salomon Smith Barney in
rendering its opinion.
The full text of Salomon Smith Barney's written opinion dated March 30,
2000, which describes the assumptions made, matters considered and limitations
on the review undertaken, is attached to this document as Annex C and is
incorporated into this document by reference. Salomon Smith Barney's opinion is
directed to the Special Committee and relates only to the fairness of the cash
consideration from a financial point of view to Net2Phone, does not address any
other aspect of the Newco investment or any related transaction and does not
constitute a recommendation to any stockholder with respect to any matter
relating to the proposed Newco investment.
17
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The
summary of these analyses is not a complete description of the analyses
underlying Salomon Smith Barney's opinion. The preparation of a fairness
opinion is a complex analytical process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to summary description.
Accordingly, Salomon Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors, without
considering all analyses and factors, could create a misleading or incomplete
view of the processes underlying its analyses and opinion.
In its analyses, Salomon Smith Barney considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
Net2Phone. No company, transaction or business used in those analyses as a
comparison is identical to Net2Phone or the proposed Newco investment, and an
evaluation of those analyses is not entirely mathematical. Rather, the analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
analyzed.
The estimates contained in Salomon Smith Barney's analyses and the valuation
ranges resulting from any particular analysis are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or securities do not
necessarily purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Salomon Smith
Barney's analyses and estimates are inherently subject to substantial
uncertainty.
Salomon Smith Barney's opinion and analyses were only one of a number of
factors considered by the Special Committee in its evaluation of the Newco
investment and should not be viewed as determinative of the views of the
Special Committee, the board of directors or management with respect to the
cash consideration or the proposed Newco investment.
The following is a summary of the material financial analyses performed by
Salomon Smith Barney in connection with the rendering of its opinion dated
March 30, 2000 to the Special Committee:
Selected Companies Analysis
Using publicly available information, Salomon Smith Barney analyzed the
market values and trading multiples of the following four selected publicly
traded internet telephony companies:
. deltathree.com, Inc.
. GRIC Communications, Inc.
. iBasis, Inc.
. ITXC Corp.
All multiples were based on closing stock prices on March 29, 2000.
Estimated financial data for the selected companies and Net2Phone were based on
publicly available research analysts' estimates. Salomon Smith Barney compared
firm values, calculated as equity market value, plus straight debt, minority
interest, straight preferred stock and out-of-the-money convertible securities,
less investments in unconsolidated subsidiaries, options and warrants proceeds
and cash, of Net2Phone and the selected companies as multiples of calendar
years 2000 and 2001 estimated revenues. Salomon Smith Barney then applied a
range of selected multiples derived from the selected companies of calendar
years 2000 and 2001 estimated revenues to corresponding financial data of
Net2Phone. This analysis resulted in an implied per share equity reference
range for Net2Phone of approximately $29.00 to $35.00.
18
Discounted Cash Flow Analysis
Salomon Smith Barney performed a discounted cash flow analysis of
Net2Phone's projected free cash flows during calendar years 2000 through 2005
based on publicly available research analysts' estimates. Salomon Smith Barney
calculated the range of estimated terminal values for Net2Phone by applying
selected terminal value multiples of 9.5x to 10.5x to Net2Phone's calendar
year 2005 estimated revenues. The resulting cash flows and terminal values of
Net2Phone were then discounted to present value using selected discount rates
ranging from 12.0% to 14.0%. After subtracting straight debt and minority
interest and adding cash, options and warrants proceeds and investments in
unconsolidated subsidiaries, this analysis resulted in an implied per share
equity reference range for Net2Phone of approximately $44.37 to $55.60.
Minority Investment Analysis
Salomon Smith Barney analyzed the mean and median premiums paid in selected
minority investments of less than 20% in public companies based on the closing
stock prices of those public companies one day and one month prior to public
announcement of the minority investment. Salomon Smith Barney then applied the
mean and median premiums from the selected minority investments to Net2Phone's
closing stock prices one day and one month prior to March 24, 2000, which was
the last trading day prior to public announcement of a significant investment
by Liberty Media in IDT, and one day and one month prior to March 29, 2000.
This analysis resulted in an implied per share equity reference range for
Net2Phone of approximately $57.48 to $65.39 based on Net2Phone's closing stock
price on March 24, 2000 and approximately $58.76 to $69.13 based on
Net2Phone's closing stock price on March 29, 2000.
Other Factors
In rendering its opinion, Salomon Smith Barney also reviewed and considered
other factors, including:
. historical trading prices for Net2Phone common stock for the period July
29, 1999 to March 27, 2000;
. the relationship between movements in Net2Phone's relative stock price
and movements in the relative stock prices of selected internet telephony
companies for the period July 29, 2000 to March 27, 2000;
. a shareholder and board of directors profile of Net2Phone, both on a
stand-alone basis and pro forma for the proposed Newco investment and the
block purchase from IDT; and
. a summary of selected published research analysts' reports for Net2Phone.
Miscellaneous
Under the terms of its engagement, Net2Phone has agreed to pay Salomon
Smith Barney for its financial advisory services in connection with the
proposed Newco investment an aggregate fee of $3.0 million. Net2Phone also has
agreed to reimburse Salomon Smith Barney for reasonable travel and other
expenses incurred by Salomon Smith Barney in performing its services,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Salomon Smith Barney and related persons against liabilities,
including any liabilities under the federal securities laws, arising out of
its engagement.
In the ordinary course of business, Salomon Smith Barney and its affiliates
may actively trade or hold the securities of Net2Phone, AT&T and IDT for their
own account or for the account of customers and, accordingly, may at any time
hold a long or short position in those securities. Salomon Smith Barney and
its affiliates have in the past provided, and are currently providing,
services to AT&T unrelated to the proposed Newco investment, for which
services Salomon Smith Barney and its affiliates have received and will
receive compensation. In addition, Salomon Smith Barney and its affiliates,
including Citigroup Inc. and its affiliates, may maintain relationships with
Net2Phone, AT&T, IDT and their respective affiliates.
19
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by the Special Committee based on its experience and
expertise. Salomon Smith Barney regularly engages in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for estate,
corporate and other purposes.
What is the recommendation of the full Board?
At a special meeting of our Board on March 30, 2000, following the Special
Committee's report and recommendation in favor of the transactions and related
proposals, and after careful consideration of a variety of factors, our Board,
with Messrs. Schulman and Yudkovitz absent, ratified and approved the Special
Committee's recommendations outlined above. Accordingly, the Board recommends
that our stockholders approve the transactions and related proposals set forth
in this proxy statement.
In deciding to approve the transactions and related proposals, our Board
considered a wide variety of factors, both positive and negative. In light of
the number of factors and their varied nature, our Board did not find it useful
to and did not attempt to quantify, rank or otherwise assign relative weights
to these factors. Some of the principal factors that our Board considered
included:
. The presentations by and discussions with members of the Special
Committee regarding the terms and conditions of the proposed
transactions, including the principal positive and negative factors
considered by the Special Committee (see pages 14 to 16 above) and their
favorable recommendation of the transactions.
. The judgment, advice and analyses of our management and their analysis of
conditions in the VoIP industry and the strategic options available to
us, including the principal positive and negative factors associated with
the transactions discussed from page 14 to page 16 above.
. The terms and conditions of the letter agreement attached hereto as Annex
A, including the receipt of $300,000,000 from Newco upon issuance of
4,000,000 shares of our Class A Common Stock.
. Salomon Smith Barney's written opinion to the Special Committee as to the
fairness, from a financial point of view, to Net2Phone of the cash
consideration to be received by us from Newco.
. The non-cash charge to our earnings as a result of our Board's agreement
to extend certain stock options (see page 22).
Did our Board take any other actions at the March 30, 2000 meeting?
Yes. Our Board determined that it would be in the best interests of
Net2Phone and its stockholders to set up a charitable foundation and grant or
award to that foundation approximately 500,000 options or shares, as the case
may be, subject to a comprehensive review of the relevant tax, legal and
related issues. The structure of the foundation and the terms of the grant or
award, as the case may be, have not been finalized as of the date of this proxy
statement.
Are there any governmental or regulatory approvals required in connection with
the transactions?
Yes. United States antitrust laws prohibit us and Newco from completing the
transactions until after we and our controlling stockholders have furnished
certain information and materials to the Antitrust Division of the Department
of Justice and the Federal Trade Commission and a required waiting period
expires or terminates. The appropriate parties involved in this transaction
each filed the required notification and report forms with the Antitrust
Division and the Federal Trade Commission on or about May 3, 2000, commencing a
30-day waiting period. Although the waiting period with respect to such filings
expired effective June 2, 2000, at 11:59 p.m. (EST), at any time before or
after the closing of the transactions, the Antitrust Division or the Federal
Trade Commission could take such action under the antitrust laws as it deems
necessary or desirable in the public interest, or certain other persons could
take action under the antitrust laws, including seeking to enjoin the
investment by Newco.
20
What are the other conditions to the completion of the transactions?
After obtaining stockholder approval to amend our Certificate of
Incorporation to authorize additional shares of Class A Common Stock and to
increase the size of our board, our issuance of 4,000,000 shares to Newco is
subject to the satisfaction or waiver of the following conditions:
. the imminent completion of the sale by IDT to Newco of 14.9 million
shares of our Class A Common Stock;
. the absence of an injunction prohibiting the transactions;
. the absence of any pending litigation initiated by a governmental
authority with respect to the transactions;
. the absence of any material adverse change in our business or operations
resulting from actions or inactions of our management, other than actions
or decisions not to act taken in good faith and excluding changes in
general economic conditions, general changes in our industry and general
changes in technology;
. the accuracy in all material respects of our reports filed with the
Securities and Exchange Commission as of the date filed; and
. the absence of any infringement by us of any intellectual property rights
of any third party that has or reasonably could be expected to have a
material adverse effect on our business.
Do our officers and directors have interests in the transactions different
from, or in addition to, their interests as stockholders of Net2Phone
generally?
In considering the recommendation of our Board with respect to the
transactions, our stockholders should be aware that certain officers and
directors of Net2Phone have interests in the transactions that are different
from, or in addition to, their interests as stockholders of Net2Phone
generally. The Special Committee and our Board were aware of these interests
and considered them, among other matters, in approving the transactions and
related proposals.
Acceleration of Stock Options. A portion of the options outstanding under
our stock option plan held by our officers and employees contain change of
control provisions that will give rise to accelerated vesting as a result of
the transactions. We have been advised by our independent accountants that the
accelerated vesting of stock options upon consummation of the transactions will
result in a one-time non-cash charge against earnings in the first quarter of
fiscal 2001 (assuming the transactions are consummated in the first quarter).
The following table shows the number of unvested options and the estimated non-
cash charge against earnings, assuming the proposals are approved at the
meeting and the transactions described herein are consummated.
Number of
unvested options Estimated non-
that accelerate as cash charge against
a result of earnings as a result
the transactions(1) of the transactions
------------------- --------------------
Our officers and employees as a group
(16 persons)........................ 2,576,404 $12,000,000
- --------
(1) The number of unvested options estimated to be outstanding as of July 31,
2000. Unvested stock options will become vested upon consummation of the
transactions.
In order to continue providing our officers and employees with incentive for
outstanding performance and to encourage them to remain at Net2Phone, we expect
to grant our officers and employees additional stock options in the future. The
primary purpose of longer term, equity based, incentive compensation, such as
stock options, is to motivate our officers and employees to maximize
stockholder value by linking a portion of their compensation directly to
stockholder return. Please see pages 29 to 31 below for a summary of our stock
option plan and a proposal to increase the number of shares authorized for
issuance under the plan.
21
Extension of Stock Options. Prior to our initial public offering, we entered
into various agreements with IDT under which IDT and its employees provide
administrative and telecommunication services to us. In order to provide those
IDT employees with incentive for outstanding performance, we previously granted
to those employees options to purchase our common stock pursuant to our stock
option plan. The transactions described in this proxy statement could cause the
options held by IDT employees to terminate. Therefore, our Board has agreed to
take all necessary action to ensure that the rights of the employees of IDT
under the plan are not terminated or affected in any way as a result of the
transactions.
We have been advised by our independent accountants that the Board's
agreement to extend the stock options will result in a one time non-cash charge
against earnings in the fourth quarter of fiscal 2000, which is currently
estimated to be approximately $28 million, and additional significant charges
over the remaining vesting period of such options. The Special Committee to our
Board was aware that there would be a non-cash charge resulting from the
extension of these options when negotiating with AT&T and IDT and considered
the impact of such a charge in light of the potential benefits expected to
result from the transactions.
This table shows the number of options held by employees of IDT that will be
extended and shows the estimated (as of May 31, 2000) non-cash charge against
earnings, assuming the proposals are approved at the meeting and the
transactions described herein are consummated.
Estimated non-cash
charge against
earnings resulting
Number of options from the extension
Name that will be extended(1) of options(2)
---- ------------------------ ------------------
IDT employees as a group (118
persons)......................... 840,000 $28,000,000
- --------
(1) The number of options estimated to be outstanding as of May 31, 2000.
(2) Estimate derived from the closing sales price of our common stock on the
Nasdaq National Market on May 31, 2000.
Interests of IDT. Three members of our Board are officers and/or directors
of IDT. One of these directors, Howard S. Jonas, is the Chairman and Chief
Executive Officer of IDT and is IDT's controlling stockholder. Additionally,
one of our directors and a member of the Special Committee, James R. Mellor,
was a director of IDT until June 1999. In addition, certain of our executive
officers, directors and employees hold shares of IDT common stock and options
to acquire shares of IDT common stock.
If the proposals described in this proxy statement are approved by our
stockholders, IDT and its stockholders, directors, officers and employees,
including those mentioned above, will likely benefit, directly or indirectly,
from the consummation of the transactions described herein. In connection with
the consummation of the transactions, IDT will receive gross proceeds of
approximately $1.1 billion from the sale of its 14.9 million shares of
Net2Phone's Class A Common Stock to Newco and a license to our present and
future technology on "most-favored nation" terms. Furthermore, IDT will likely
benefit from the other terms set forth in the letter agreement attached hereto
as Annex B, which provides for, among other things, the following:
. Newco has the right of first refusal to purchase IDT's remaining
10,004,250 shares of our Class A Common Stock. If this right is
exercised, Newco will have a 60% voting interest and a 49% economic
interest in Net2Phone. Newco also has an option to convert IDT's
remaining 10,004,250 shares of our Class A Common Stock into shares of
our common stock.
. During the 18 month period following March 28, 2000, if Newco buys shares
of our Class A Common Stock from another holder of shares of Class A
Common Stock, IDT will have the option to cause Newco to purchase up to 5
million additional shares of our Class A Common Stock held by IDT on the
same terms and conditions.
. AT&T and IDT have agreed to enter into commercial arrangements whereby
for a period of three years:
. each party will be a "preferred supplier" to the other with respect to
all services and products they offer;
. AT&T will supply at most favored customer prices two-thirds of IDT's
domestic telephony service needs, long distance, data, Internet
Protocol and local service, subject to existing commitments and
provided that IDT will, as a result, experience cost savings;
22
. AT&T will provide fiber or OC-X service to IDT on a most favored
customer basis;
. AT&T will sublease 40,000 square feet (with options to eventually
sublease an additional 160,000 square feet) at IDT's facilities in
Newark, New Jersey;
. AT&T and IDT will work together to reach an agreement for co-location
at each other's facilities;
. AT&T and IDT will enter into an outsourcing agreement pursuant to which
IDT will outsource network management to AT&T; and
. AT&T and IDT will enter into arrangements with respect to the purchase
of international services.
. AT&T will use its reasonable best efforts to cause Concert, a joint
venture between AT&T and British Telecom, to enter into a series of
commercial arrangements with IDT providing for:
. Concert and IDT to be "preferred suppliers" to each other with respect
to all products and services offered by them;
. for a period of three years, to work together to purchase from each
other services at preferred leading edge pricing structures;
. to work together to partner in building or jointly purchasing
international fibre networks or swapping capacity on each other's
networks; and
. to negotiate in good faith with respect to mutually beneficial co-
location arrangements.
23
APPROVAL OF AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION
What am I voting on?
Two proposals to amend our Certificate of Incorporation to:
. increase the authorized shares of Class A Common Stock from 33,924,250 to
37,924,250, which will allow us to issue 4,000,000 shares of the newly-
authorized Class A Common Stock to Newco for an aggregate purchase price
of $300,000,000, representing, after giving effect to the issuance of the
4,000,000 shares, 10.5% of the issued and outstanding shares of Class A
Common Stock and 6.7% of the issued and outstanding shares of our total
capital stock; and
. increase the maximum number of directors who may serve on our Board from
11 to 13, effective upon the issuance of the 4,000,000 newly-authorized
shares of our Class A Common Stock to Newco.
The full text of the proposed amendments to our Certificate of
Incorporation are set forth below in Annex D.
Proposal to Increase the Authorized Shares
What is authorized stock?
Our Certificate of Incorporation establishes the maximum number of shares
of capital stock that we may issue without obtaining additional stockholder
approval. This is called authorized stock.
What is the difference between authorized stock and issued stock?
Shares that have already been issued are referred to as "issued" or "issued
and outstanding." The difference between the total number of authorized shares
and the number of issued shares is the number of shares that we may issue in
the future without amending the Certificate of Incorporation. Although, the
rules and regulations of the Nasdaq National Market may require stockholder
approval of issuances under certain circumstances.
For example, as of June 2, 2000, we had 33,924,250 shares of Class A Common
Stock authorized and 33,924,250 issued and outstanding. As a result, we could
not have issued any additional shares of Class A Common Stock without
stockholder approval. If the amendment to our Certificate of Incorporation had
been adopted prior to that date, we could have issued an additional 4,000,000
shares.
What rights will the newly authorized and issued shares have?
If approved, the shares will have the same rights and privileges as the
currently issued and outstanding shares of our Class A Common Stock. The
rights and privileges of holders of our common stock and holders of our Class
A Common Stock are identical, except for voting rights, conversion rights and
restrictions on transferability.
The shares issued to Newco will not be registered under the Securities Act
of 1933 and, therefore, the shares may only be resold in compliance with the
Securities Act and any applicable state securities laws or under an available
exemption. We will, however, enter into a registration rights agreement with
Newco. The registration rights agreement will provide, among other things,
that we will be obligated to register for resale the shares owned by Newco as
requested by Newco or upon the occurrence of certain events.
What is the purpose and effect of this proposal?
The proposed amendment would allow us to issue 4,000,000 newly-authorized
shares of our Class A Common Stock to Newco pursuant to the terms and
conditions of the letter agreement attached hereto as Annex A for an aggregate
purchase price of $300,000,000. The issuance of those shares will facilitate
the transfer to Newco of 14.9 million shares of our Class A Common Stock
currently owned by IDT for the reasons set forth below.
24
We anticipate using the proceeds from the issuance of 4,000,000 shares of
our Class A Common Stock to Newco for product and market development, strategic
acquisitions and investments and other general corporate purposes. However, the
proceeds have not been allocated to any specific investment or transaction and
our management has significant flexibility in applying the proceeds. IDT will
receive all of the proceeds from the sale of the 14.9 million shares of Class A
Common Stock to Newco.
The authorization and issuance of shares of Class A Common Stock to Newco is
significant because Class A Common Stock with two votes per share converts into
common stock with one vote per share upon any transfer unless the transferee is
a "permitted transferee" under our Certificate of Incorporation, the definition
of which includes other holders of Class A Common Stock. By issuing Class A
Common Stock directly to Newco, we are effectively designating Newco as a
permitted transferee, so that the 14.9 million shares of our Class A Common
Stock being transferred by IDT will not be converted into common stock and will
retain the right to two votes per share. As the chart below demonstrates,
Newco's voting power in Net2Phone would be adversely affected if Newco is not
considered a permitted transferee prior to the transfer of shares by IDT.
Newco's Newco's
Voting Stake Voting Stake
(as permitted (as unpermitted
transferee)(1) transferee)(2)
-------------- ---------------
39% 20%
- --------
(1) Includes the purchase by Newco of an additional 4,000,000 shares of our
Class A Common Stock.
(2) Excludes the purchase by Newco of an additional 4,000,000 shares of our
Class A Common Stock.
The proposed amendment is not intended to inhibit a change in control of
Net2Phone. We are not aware of any other pending or threatened efforts to
acquire control of Net2Phone except as otherwise described in this proxy
statement.
How will I be affected by the issuance of the Class A Common Stock?
You will continue to own the same number of shares of common stock or Class
A Common Stock that you owned immediately prior to the issuance to Newco, but
each share of common stock or Class A Common Stock you own will represent a
smaller ownership and voting percentage of Net2Phone after the issuance of the
shares.
As the first graph below demonstrates, IDT currently possesses through its
controlling interest in Net2Phone the power to determine the election of our
directors and thereby the appointment of new management, as well as the power
to cause and approve any other action requiring the approval of holders of a
majority of the voting power of our capital stock, including most amendments to
our Certificate of Incorporation or any merger, consolidation or sale of all or
substantially all of our assets. Assuming IDT and Newco agree on how to
collectively vote their shares of our capital stock, your ability to influence
the election of our directors and our corporate policy will not change.
Accordingly and as the third graph below demonstrates, IDT and Newco will
collectively have the power to determine the election of our directors and
thereby the appointment of new management, as well as the power to cause and
approve any other action requiring the approval of holders of a majority of the
voting power of our capital stock, including most amendments to our Certificate
of Incorporation or any merger, consolidation or sale of all or substantially
all of our assets.
25
This graph depicts the current voting power of IDT as compared to our other
stockholders.
[GRAPH DEPICTING IDT'S CURRENT VOTING POWER (56%) AS COMPARED TO OUR OTHER
STOCKHOLDERS (44%)]
This graph depicts the individual voting power of IDT and Newco as compared
to our other stockholders immediately following the consummation of the
transactions.
[GRAPH DEPICTING INDIVIDUAL IDT (21%) AND NEWCO (39%) STOCKHOLDERS' VOTING
POWER AS COMPARED TO OUR OTHER STOCKHOLDERS (40%)]
This graph depicts the collective voting power of IDT and Newco as compared
to our other stockholders immediately following the consummation of the
transactions and assuming IDT and Newco act in concert when voting their
shares of our capital stock.
[GRAPH DEPICTING COLLECTIVE VOTING POWER OF IDT AND NEWCO STOCKHOLDERS (60%)
AS COMPARED TO OUR OTHER STOCKHOLDERS (40%)]
IDT and Newco are also entering into a voting agreement with respect to the
election of mutually acceptable nominees to our Board over the next three
years. Accordingly, so long as they agree, Newco and IDT, collectively, will
likely have the power to determine the election of our directors through their
collective control of 60% of our vote. If they are unable to agree on
acceptable nominees, the votes of our other stockholders will determine the
election of our directors.
Am I entitled to appraisal rights?
No. You will have no right under Delaware law to seek appraisal of the
value of your Net2Phone shares in connection with the matters being voted
upon.
26
Proposal to Increase the Number of Directors
How many directors are currently authorized under our Certificate of
Incorporation?
Our Certificate of Incorporation provides that our Board must consist of no
fewer than 5 and no more than 11 directors. Our Board presently consists of 11
directors divided into three classes, with each class serving a three-year
term.
What is the purpose and effect of this amendment?
The purpose of this amendment is to create new directorships to allow AT&T,
through Newco, to have the ability to exercise its right, effective upon its
purchase of 4,000,000 shares of our Class A Common Stock, to nominate and elect
two new directors to our Board prior to our next annual meeting. It is also our
understanding that IDT will cause one of its designated members to our Board to
resign and that AT&T, through Newco, will nominate a director to fill the
vacancy. As provided for in our Bylaws, the three newly-nominated directors
will be elected by a majority of our directors currently in office.
As discussed below under the section entitled "Executive Compensation--
Compensation of Directors," the new directors will be granted options to
purchase 10,000 shares of our common stock pursuant to our 1999 Amended and
Restated Stock Option and Incentive Plan.
What will our Board look like if the amendment is approved and the transactions
are consummated?
Class I Directors
Term Expiring at 2000 Annual Meeting
Jesse P. King
Operation Manager--Rockefeller Foundation's Next Generation Leadership Program
and the Preliminary Workshop
James R. Mellor
Director and retired Chairman and Chief Executive Officer--General Dynamics
Martin Y. Yudkovitz
President--NBC Interactive Media
Class II Directors
Term Expiring at 2001 Annual Meeting
Howard S. Balter
Chief Executive Officer--Net2Phone, Inc.
Howard S. Jonas
Chairman of the Board and Treasurer--IDT Corporation
Harry C. McPherson, Jr.
Partner--Verner, Liipfert, McPherson and Hand
Michael Fischberger
Senior Vice President of Domestic Telecommunications and Internet--IDT
Corporation
27
Class III Directors
Term Expiring at 2002 Annual Meeting
James A. Courter
President--IDT Corporation
Gary E. Rieschel
Executive Managing Director--SOFTBANK Technology Ventures
Clifford M. Sobel
Chairman of the Board--Net2Phone, Inc.
Daniel H. Schulman
Chief Executive Officer, President and Chief Operating Officer--priceline.com
Upon consummation of the transactions, it is anticipated that the three
directors to be nominated by AT&T, through Newco, will be divided equally among
the three classes of directors.
AT&T through Newco and IDT have each agreed to use its reasonable best
efforts, so long as each beneficially owns between 15% and 85% of the voting
power of our capital stock, to assure that our Board will consist of at least 5
directors who are not affiliated with Net2Phone, IDT, AT&T or Newco or any of
their affiliates. These "independent" directors will take action on behalf of
our Board on matters involving or relating to our relationship with Net2Phone,
Newco, IDT, AT&T and other interested parties.
28
APPROVAL OF AN AMENDMENT TO
THE NET2PHONE, INC.
1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN
Our Board has approved, subject to stockholder approval, an amendment to the
Net2Phone, Inc. 1999 Amended and Restated Stock Option and Incentive Plan,
effective as of March 30, 2000, and has directed that the amendment to the plan
be submitted as a proposal for stockholder approval at this special meeting.
The plan was originally adopted in April 1999.
What am I voting on?
A proposal to approve an amendment to our plan that would increase the
number of shares authorized for issuance under the plan from 11,040,000 to
14,940,000.
Before you decide how to vote, you should review the summary below and the
full text of the plan attached hereto as Annex E with the proposed change
highlighted in Section 5(a) of the plan.
What is the plan and why is it important to me?
The plan allows our officers, directors, key employees and consultants,
together with those of IDT and its subsidiaries, to receive awards of stock
options, stock appreciation rights, limited stock appreciation rights and
restricted stock in Net2Phone. The key provisions of the plan are summarized
below.
The plan is beneficial to us as a means of promoting the success and
enhancing the value of Net2Phone by linking the personal interests of the
participants to those of our stockholders and by providing participants with an
incentive for outstanding performance. These incentives also provide us
flexibility in our ability to attract and retain the services of directors,
officers, employees and others upon whose judgment, interest and special effort
the success of our business is largely dependent. Our Board believes that the
shares remaining available for issuance pursuant to the plan, approximately
1,000,000 shares, are insufficient to provide us with the necessary
flexibility. Accordingly, we are requesting our stockholders to consider and
approve the amendment to increase the number of shares authorized for issuance
under the plan.
How is the plan administered?
The compensation committee of our Board, which currently consists of Messrs.
King, Mellor, and Rieschel, administer the plan. Subject to the provisions of
the plan, the compensation committee determines the type of award, when and to
whom awards will be granted, the number of shares covered by each award and the
terms and kind of consideration payable with respect to awards. The
compensation committee may interpret the plan and may at any time adopt rules
and regulations for the plan as it deems advisable.
What types of awards are provided for under the plan?
Stock Options. Options granted under the plan may be incentive stock options
or nonqualified stock options. An option may be granted on the terms and
conditions as the compensation committee may approve, and generally may be
exercised for a period of up to ten years from the date of grant. Generally,
incentive stock options will be granted with an exercise price equal to the
fair market value on the date of grant. Additional limitations apply to
incentive stock options granted to a grantee that beneficially holds 10% or
more of our voting stock. The compensation committee may authorize loans to
individuals to finance their exercise of vested options. Options granted under
the plan become exercisable at those times and under the conditions determined
by the compensation committee. To date, the options that have been granted to
our executive officers will generally vest automatically in the event that
there is a change of control of our company (see page 21), if we are merged
into another company or if any of these individuals are employed by a
subsidiary of our company that is sold to another company.
29
Non-Employee Director Stock Options. The plan provides for automatic option
grants to eligible non-employee directors. Options to purchase 10,000 shares of
common stock have been granted to each eligible non-employee director and
options to purchase 10,000 shares of common stock will be granted to each new
eligible non-employee director upon the director's initial election to the
board. In addition, options to purchase 10,000 shares of common stock are
granted annually to each eligible non-employee director on the anniversary date
of his or her election to the board. Each of these options will have an
exercise price equal to the fair market value of a share of common stock on the
date of grant. All options granted to non-employee directors will be
immediately exercisable. All options held by non-employee directors, to the
extent not exercised, expire on the earliest of:
. the tenth anniversary of the date of grant;
. one year following the optionee's termination of directorship other than
for cause; and
. three months following the optionee's termination of directorship for
cause.
Stock Appreciation Rights and Limited Stock Appreciation Rights. Stock
appreciation rights and limited stock appreciation rights may be granted
simultaneously with the grant of an option or, in the case of nonqualified
stock options, at any time during its term. Generally, stock appreciation
rights and limited stock appreciation rights may be exercised only at that time
as the related option is exercisable. Upon exercise of a stock appreciation
right, a grantee will receive for each share for which a stock appreciation
right is exercised, an amount in cash or common stock, as determined by the
compensation committee, equal to the excess of the fair market value of a share
of common stock on the date the stock appreciation right is exercised over the
exercise price per share of the option to which the stock appreciation right
relates.
Limited stock appreciation rights may be exercised only during the 90 days
following a change in control, or a merger or similar transaction, involving
Net2Phone. Upon exercise of a limited stock appreciation right, a grantee will
receive, for each share for which a limited stock appreciation rights is
exercised, an amount in cash equal to the excess of the highest fair market
value of a share of our common stock during the 90-day period ending on the
date of the limited stock appreciation rights is exercised, or an amount equal
to the highest price per share paid for shares of our common stock in
connection with a merger or a change of control of Net2Phone, whichever is
greater, over the exercise price per share of the option to which the limited
stock appreciation rights relates. In no event, however, may the holder of a
limited stock appreciation right granted in connection with an incentive stock
option receive an amount in excess of the maximum amount that will enable the
option to continue to qualify as an incentive stock option. We have not granted
any stock appreciation rights or limited stock appreciation rights under the
plan as of the date of this proxy statement and, therefore, the transactions
described in this proxy statement will have no impact on such rights.
Restricted Stock. The plan also provides for the granting of restricted
stock awards, which are awards of common stock that may not be disposed of,
except by will or the laws of descent and distribution, for a period of time
determined by the compensation committee. The compensation committee may also
impose other conditions and restrictions on the shares as it deems appropriate,
including the satisfaction of performance criteria. All restrictions affecting
the awarded shares will lapse in the event of a merger or similar transaction
involving Net2Phone. We have not granted any restricted stock awards under the
plan as of the date of this proxy statement and, therefore, the transactions
described in this proxy statement will have no impact on such awards.
Can the plan be amended or terminated?
The board may amend or terminate the plan. However, as required by any law,
regulation or stock exchange rule, no change shall be effective without the
approval of our stockholders unless the board otherwise determines. In
addition, no change may adversely affect an award previously granted, except
with the written consent of the grantee. No awards may be granted under the
plan after the tenth anniversary of its initial adoption.
30
What are the new plan benefits?
The following table shows the stock option grants made, or to be made, under
our current plan during the period from August 1, 1999 to July 31, 2000 (to the
extent currently known), to:
. each of the executive officers named in the table on page 32;
. all current executive officers, as a group;
. all current directors who are not executive officers, as a group; and
. all employees, including all current officers who are not executive
officers, as a group.
Grants under the current plan are made at the discretion of our Board or
Compensation Committee. Accordingly, future grants under the plan are not yet
determinable, except for (1) the automatic annual grants of options to purchase
10,000 shares of our common stock granted to each non-employee director (as
defined under the plan) and (2) the options to purchase 10,000 shares of our
common stock to be granted to the three new directors nominated and elected to
our Board in connection with the transactions described in this proxy
statement.
1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN
Number of Shares
Subject to Dollar
Name and Position Options Granted Values($)(1)
----------------- ---------------- ------------
Howard S. Balter................................. -- --
Chief Executive Officer
H. Jeff Goldberg................................. -- --
Chief Technology Officer
David Greenblatt................................. -- --
Chief Operating Officer
Martin Rothberg.................................. -- --
Executive Vice President-Strategic Sales
Jonathan Rand.................................... 80,000 $360,000
Executive Vice President-International Sales and
Treasurer
Executive Group (11 persons)..................... 145,777 $247,500
Non-Employee Director Group (9 persons).......... 128,000(2) $116,000
Non-Executive Officer Employee Group (235 per- 1,536,998 $807,750
sons)...........................................
- --------
(1) Market value of shares based on a closing price of $29.50 on the Nasdaq
National Market on May 31, 2000, minus the exercise price. Shares subject
to an option with an option exercise price greater than $29.50 are
considered to have zero dollar value.
(2) Includes options to purchase 40,000 shares of our common stock granted to
Messrs. Mellor, King, Schulman and McPherson in consideration for services
rendered as members of the Special Committee. Also includes the automatic
annual grants of options to purchase an aggregate of 60,000 shares of our
common stock to be granted to our six non-employee directors (as defined
under the plan) prior to July 31, 2000. The three new directors to be
nominated and elected in connection with the proposed transactions will not
be granted their options until after the end of our current fiscal year.
31
EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation paid
to our Chief Executive Officer and the four other individuals who served as our
executive officers at the end of fiscal 1999 who earned the most cash
compensation for services rendered on our behalf. Except as otherwise
indicated, the salary and bonus information in this table includes amounts paid
by IDT for services rendered to us during fiscal 1999, in that all of these
officers were compensated by IDT and not by us directly, until January 1999.
All of the named executive officers listed below were compensated by IDT until
January 1999.
Summary Compensation Table
Long-Term
Compensation Awards
---------------------
Securities Securities
Underlying Underlying
Annual Compensation Net2Phone IDT
Fiscal -------------------- Options Options
Name and Principal Position Year Salary ($) Bonus ($) (#) (#)
--------------------------- ------ ---------- --------- ---------- ----------
Howard S. Balter(1)......... 1999 90,066 -- 1,874,499 --
Chief Executive Officer
H. Jeff Goldberg............ 1999 206,161 -- 460,000 --
Chief Technology Officer 1998 209,447 -- -- 50,000
David Greenblatt............ 1999 177,505 25,000 460,000 20,000
Chief Operating Officer 1998 104,238 -- -- 20,000
Martin Rothberg............. 1999 122,060 -- 360,000 --
Executive Vice President--
Strategic Sales 1998 78,762 -- -- 15,000
Jonathan Rand(2)............ 1999 109,587 -- 120,000 6,000
Executive Vice President-- 1998 66,704 -- -- 10,000
International Sales and
Treasurer
- --------
(1) Mr. Balter became our Chief Executive Officer in January 1999. Compensation
information for fiscal 1999 excludes compensation paid during the period in
which Mr. Balter served as IDT's Chief Operating Officer and Vice Chairman.
(2) Mr. Rand joined us in January 1998. Compensation information for fiscal
1998 excludes compensation paid during the period in which Mr. Rand
rendered services primarily to IDT.
32
Option Grants During Fiscal 1999
The following table describes the options to acquire shares of our common
stock that were granted to our executive officers in fiscal 1999:
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Annual Rates of
Underlying Granted to Stock Price Appreciation
Net2Phone Grantees in Exercise or for Option Term
Options Fiscal Base Price Expiration -------------------------
Name Granted (#) Year (%) ($/Sh) Date 5% ($) 10%($)
---- ----------- ------------- ----------- ---------- ------ ------------
Howard S. Balter........ 1,650,999 18.7 3.33 May 2009 34,836,079 58,742,544
Howard S. Balter........ 223,500 2.5 15.00 July 2009 2,107,605 5,343,885
Jonathan Fram........... 460,000 5.2 3.33 July 2009 9,706,000 16,366,800
Jonathan Fram........... 460,000 5.2 11.00 July 2009 6,177,800 12,838,600
Jonathan Fram........... 100,000 1.1 15.00 July 2009 943,000 2,391,000
David Greenblatt........ 360,000 4.1 3.33 May 2009 7,596,000 12,808,800
David Greenblatt........ 100,000 1.1 3.33 July 2009 2,110,000 3,558,000
H. Jeff Goldberg........ 360,000 4.1 3.33 May 2009 7,596,000 12,808,800
H. Jeff Goldberg........ 100,000 1.1 15.00 July 2009 943,000 2,391,000
Ilan M. Slasky.......... 360,000 4.1 3.33 May 2009 7,596,000 12,808,800
Jonathan Reich.......... 75,000 0.9 3.33 May 2009 1,582,500 2,668,500
Jonathan Reich.......... 200,000 2.3 15.00 July 2009 1,886,000 4,782,000
Martin Rothberg......... 360,000 4.1 3.33 May 2009 7,596,000 12,808,800
Jonathan Rand........... 45,000 0.5 3.33 May 2009 949,500 1,601,100
Jonathan Rand........... 75,000 0.9 15.00 July 2009 707,250 1,793,250
- --------
(1) Assumes that the fair market value of each grant on the date of each grant
was equal to the initial public offering price of $15.00 per share.
The following table describes the options to acquire shares of common stock
of IDT granted to the individuals named in the Summary Compensation Table
during fiscal 1999:
Potential
Realizable
Value at
Assumed Annual
Percent of Rates of Stock
Number of Total Options Price
Securities Granted to Appreciation
Underlying Grantees in Exercise or For Option Term
IDT Options Fiscal Base Price Expiration ---------------
Name Granted (#) Year (%) ($/Sh) Date 5% ($) 10%($)
---- ----------- ------------- ----------- ------------- ------ -------
David Greenblatt........ 20,000 1.76 12.00 January 2009 150,935 382,498
Jonathon Rand........... 6,000 .53 12.635 February 2009 47,639 120,726
33
Value of Net2Phone Options at Year End
The following table describes the value of Net2Phone options exercised in
fiscal 1999 and the value of unexercised options held by the individuals named
in the Summary Compensation Table at July 31, 1999.
Number of Securities Value of Unexercised In-
Number of Underlying Unexercised the-Money Options at
Shares Options at Fiscal Year-End Fiscal Year-End (2)
Acquired on Value -------------------------- -------------------------
Name Exercise Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ------------ ------------------------- -------------------------
Howard S. Balter........ 531,138 4,073,828 67,050/1,267,449 829,744/28,650,040
H. Jeff Goldberg........ 105,840 811,793 30,000/322,000 371,250/6,925,590
David Greenblatt........ 105,840 811,793 30,000/322,000 371,250/6,925,590
Martin Rothberg......... 105,840 811,793 0/252,000 0/6,059,340
Jonathan Rand........... 13,230 101,474 22,500/84,000 278,438/1,407,105
- --------
(1) All of the exercised options described in this table were exercised on May
17, 1999, before our initial public offering. The amounts in this table
assume that the fair market value of our common stock on that date was
$11.00 per share, the estimated mid-point of the offering price range of
our common stock set forth in the amendment to the registration statement.
(2) Options are considered "in-the-money," if the fair market value of the
underlying securities exceeds the exercise price of the options. The year-
end values represent the difference between the fair market value of the
common stock subject to the options (the closing price of Net2Phone's
common stock on July 30, 1999, as reported on the Nasdaq National Market,
was $27.375 per share) and the exercise price of the options.
Value of IDT Options at Year End
The following table describes the value of IDT options exercised in fiscal
1999 and the value of unexercised options held by the individuals named in the
Summary Compensation Table at July 31, 1999:
Number of Securities Value of Unexercised In-
Number of Underlying Unexercised the-Money Options at
Shares Options at Fiscal Year-End Fiscal Year-End (1)
Acquired On Value -------------------------- -------------------------
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- --------- ------------------------- -------------------------
Howard S. Balter........ 157,920 2,447,864 75,000/0 862,500/0
H. Jeff Goldberg........ 15,000 324,375 207,500/37,500 2,431,455/0
David Greenblatt........ 20,000 213,175 22,500/0 99,375/0
Martin Rothberg......... 0 0 22,500/7,500 226,250/8,750
Jonathan Rand........... 0 0 31,800/11,000 581,252/100,250
- --------
(1) Options are considered "in-the-money," if the fair market value of the
underlying securities exceeds the exercise price of the options. The year-
end values represent the difference between the fair market value of the
common stock subject to the options (the closing price of Net2Phone's
common stock on July 30, 1999, as reported on the Nasdaq National Market,
was $27.375 per share) and the exercise price of the options.
Employment Agreements
Clifford M. Sobel. We employ Clifford M. Sobel, our Chairman, under an
agreement which expires on September 2000, and which automatically extends
through September 2001 unless either we or Mr. Sobel notifies the other that
the extension will not take effect. Mr. Sobel receives an annual base salary of
$100,000.
34
Jonathan Fram. We employ Jonathan Fram, our President, under an agreement
which expires on June 30, 2002, and which may be renewed for successive one
year terms. Mr. Fram receives an annual base salary of $350,000 and he is
entitled to receive an annual bonus calculated on the basis of our gross
revenue, which bonus could be up to $100,000. Additionally, we granted Mr. Fram
options to purchase 920,000 shares of our common stock under our 1999 Amended
and Restated Stock Option and Incentive Plan. Of these options, 460,000 were
granted at an exercise price of $3.33 and 460,000 were granted at an exercise
price of $11.00. Options to purchase 153,333 shares of our common stock have
already vested and been exercised and sold by Mr. Fram. The remaining 766,667
options will vest in three equal annual installments, commencing on July 20,
2000. An option to purchase an additional 100,000 shares of our common stock
was granted to Mr. Fram on July 28, 1999. This option is immediately
exercisable and has an exercise price equal to the initial public offering
price of our common stock of $15.00 per share.
In the event Mr. Fram's employment is terminated without cause or for good
reason, he will receive a severance payment equal to nine months of base
salary. In addition, all unvested options immediately vest if we terminate Mr.
Fram's employment without cause, if Mr. Fram terminates his employment for good
reason, or if the options of any other employee are accelerated upon a change
of control of our company (see page 21). Mr. Fram may terminate his employment
with Net2Phone at any time during the term.
Compensation of Directors
Under our 1999 Amended and Restated Stock Option and Incentive Plan, we
granted options to purchase 10,000 shares of our common stock to each of our
non-employee directors, other than to our non-employee directors who serve as
officers or employees of IDT, at the time of our initial public offering, or at
the time they joined the board. Also under the plan, each non-employee director
receives an option to purchase 10,000 shares of our common stock each year.
These options are granted at the fair market value of our common stock on the
date of grant and are immediately exercisable.
We reimburse the reasonable expenses incurred by our board members in
attending board and committee meetings.
Compensation Committee Interlocks and Insider Participation
Our compensation committee was established in June 1999. The committee's
members are Messrs. King, Mellor, and Rieschel. Prior to May 1999, compensation
decisions relating to our executive officers, key employees and other senior
personnel were generally made by IDT, which owned 90% of our outstanding
capital stock until that time. Howard S. Jonas, James A. Courter, Hal Brecher
and Joyce J. Mason, each of whom are executive officers of IDT, served as
directors of Net2Phone during fiscal 1999. Howard S. Balter, our Chief
Executive Officer and a director, served as Chief Operating Officer, Vice
Chairman and a director of IDT until January 1999.
35
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF OUR PRINCIPAL
STOCKHOLDERS, DIRECTORS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our outstanding capital stock as of May 31, 2000, by:
. each person who is the beneficial owner of more than 5% of any class of
our capital stock;
. each of our directors;
. our chief executive officer and four other highest paid executive
officers; and
. our directors and executive officers as a group.
Except as otherwise indicated, all of the shares indicated in the table are
shares of common stock.
Shares Beneficially Percent of Capital
Holders Owned Stock(1)
------- ------------------- ------------------
IDT Corporation(2)..................... 24,904,250 45.0%
190 Main Street
Hackensack, New Jersey 07601
Howard S. Jonas(3)..................... 24,904,250 45.0%
c/o IDT Corporation
190 Main Street
Hackensack, New Jersey 07601
James A. Courter(4).................... 24,930,650 45.0%
c/o IDT Corporation
190 Main Street
Hackensack, New Jersey 07601
SOFTBANK Technology Ventures IV, 4,100,000 7.4%
L.P.(5)................................
333 West San Carlos Street, Suite 1225
San Jose, CA 95110
Gary E. Rieschel(6).................... 4,110,000 7.4%
c/o SOFTBANK Ventures IV, L.P.
333 West San Carlos Street, Suite 1225
San Jose, CA 95110
Yahoo! Inc.(7)......................... 3,390,778 6.1%
3420 Central Expressway
Santa Clara, California 95051
AOL, Inc.(8)........................... 2,795,000 5.1%
22000 AOL Way
Dulles, VA 20166
Clifford M. Sobel...................... 2,707,241 4.9%
c/o Net2Phone, Inc.
171 Main Street
Hackensack, New Jersey 07601
General Electric Company Group(9)(10).. 2,332,333 4.2%
120 Long Ridge Road
Stamford, Connecticut 06927
Janus Capital Corporation(11).......... 2,198,605 4.0%
100 Filmore Street
Denver, Colorado 80206-4923
36
Shares Beneficially Percent of Capital
Holders Owned Stock(1)
------- ------------------- ------------------
FMR Corp.(12).......................... 2,162,000 3.9%
82 Devonshire Street
Boston, Massachusetts 82109
Essex Investment Management 1,470,663 2.7%
Company(13).............................
125 High Street
Boston, MA 02110
Howard S. Balter(14).................... 890,032 1.6%
David Greenblatt(15).................... 214,040 *
H. Jeff Goldberg(16).................... 214,040 *
Martin Rothberg(17)..................... 167,040 *
Jonathan Rand(18)....................... 59,730 *
James R. Mellor(19)(20)................. 15,000 *
Jesse P. King(19)(20)................... 14,200 *
Martin J. Yudkovitz(10)(19)............. 10,000 *
Daniel H. Schulman(19)(20).............. 18,999 *
Michael Fischberger(21)................. 55,680 *
Harry C. McPherson, Jr.(19)(20)......... 15,000 *
Named Executive Officers and Directors
as a
group (15 persons)(22).................. 33,421,652 59.5%
- --------
* Less than one percent.
(1) Based upon the number of shares of our capital stock outstanding on June 2,
2000. All percentage calculations assume that all shares of Class A Common
Stock have been converted into shares of common stock.
(2) Based on a Schedule 13G dated February 14, 2000, filed by IDT. All of the
shares held by IDT are Class A Common Stock. IDT has sole voting and sole
dispositive power with respect to all such shares.
(3) Howard S. Jonas, together with a number of entities formed for the benefit
of charities and members of his family, owns shares of IDT's capital stock
that enable him to vote more than 50% of IDT's capital stock. Mr. Jonas is
also the Chairman and Chief Executive Officer of IDT. As a result, he may
be deemed to be the beneficial owner of the shares of our capital stock
owned by IDT. Mr. Jonas disclaims beneficial ownership of these shares.
(4) James A. Courter, one of our directors, is the President, Vice Chairman and
a director of IDT. As a result, in addition to the 26,400 shares of our
common stock that he holds directly, he may be deemed to be the beneficial
owner of the shares of our capital stock owned by IDT. Mr. Courter
disclaims beneficial ownership of these additional shares.
(5) Includes 4,022,920 shares of Class A Common Stock held by SOFTBANK
Technology Ventures IV, L.P. and 77,080 shares of Class A Common Stock held
by SOFTBANK Technology Advisers Fund L.P.
(6) Gary E. Rieschel is the Executive Managing Director of SOFTBANK Technology
Ventures and, as a result, he may exercise the power to vote and to dispose
of the shares held by SOFTBANK. Includes 10,000 shares issuable upon
exercise or presently exercisable stock options.
(7) Based on a Schedule 13G dated March 30, 2000, filed by Yahoo! Inc. Yahoo!
has sole voting and sole dispositive power with respect to all such shares.
(8) Based on a Schedule 13G dated February 15, 2000, filed by AOL. 2,250,000 of
these shares are shares of Class A Common Stock, 500,000 shares are shares
of common stock, and 45,000 of these shares are issuable upon exercise of
presently exercisable warrants, or warrants exercisable within 60 days. AOL
has sole voting and sole dispositive power with respect to all such shares.
37
(9) Includes 1,989,000 shares of Class A Common Stock held by GE Capital Equity
Investments, Inc. ("GECEI"), as to which GECEI and NBC share voting power;
GECEI and NBC have sole dispositive power as to 1,147,653 shares and
841,347 shares, respectively. Also includes (i) 333,333 shares of common
stock held by GECEI and (ii) 10,000 shares of common stock issuable upon
exercise of presently vested options granted to Martin J. Yudkovitz, over
which NBC has the power to direct disposition pursuant to a nominee
agreement with Mr. Yudkovitz. GECEI and NBC share voting power with respect
to all such shares of common stock; GECEI and NBC have sole dispositive
power as to 138,180 shares and 205,153 shares, respectively. GECEI and NBC
are subsidiaries of General Electric Company.
(10) Represents 10,000 shares of common stock issuable upon exercise of
presently vested options held by Martin J. Yudkovitz, over which NBC has
the power to direct the disposition pursuant to a nominee agreement. Mr.
Yudkovitz disclaims beneficial ownership of these shares.
(11) Based on a Schedule 13G dated January 11, 2000, filed by Janus and Thomas
H. Bailey, Chairman, President and a stockholder of Janus. Janus and Mr.
Bailey have shared voting and shared dispositive power with respect to all
such shares. Mr. Bailey disclaims beneficial ownership over all such
shares.
(12) Based on a Schedule 13G dated May 10, 2000, filed by FMR Corp. FMR has
sole voting and sole dispositive power with respect to all such shares.
(13) Based on a Schedule 13G dated January 10, 2000, filed by Essex. Essex has
sole voting power with respect to 1,470,663 shares and sole dispositive
power with respect to all such shares.
(14) Includes 337,920 shares held of record by a trust for the benefit of Mr.
Balter's family members, of which Mr. Balter and his spouse are the
trustees. Also includes an aggregate of 133,000 shares held of record by
trusts for the benefit of the family members of Messrs. Greenblatt, Slasky
and Rothberg, for which Mr. Balter acts as trustee. Also includes 290,974
shares that may be acquired currently or within 60 days through the
exercise of stock options.
(15) Includes 54,000 shares held of record by a trust for the benefit of Mr.
Greenblatt's family members, of which Mr. Balter is the trustee. Also
includes 84,970 shares that may be acquired currently or within 60 days
through the exercise of stock options.
(16) Includes 62,000 shares held of record by a trust for the benefit of Mr.
Goldberg's family members, of which Mr. Goldberg's spouse is the trustee.
Also includes 137,000 shares that may be acquired currently or within 60
days through the exercise of stock options.
(17) Includes 54,000 shares held of record by a trust for the benefit of Mr.
Rothberg's family members, of which Mr. Balter serves as the trustee. Also
includes 90,000 shares that may be acquired currently or within 60 days
through the exercise of stock options.
(18) Includes 13,230 shares held of record by a trust for the benefit of Mr.
Rand's family members. Also includes 46,500 shares that may be acquired
currently or within 60 days through the exercise of stock options.
(19) All of these shares are shares of common stock that may be acquired
currently or within 60 days through the exercise of stock options.
(20) Includes 5,000 shares that may be acquired currently or within 60 days
through the exercise of the option to purchase 10,000 shares granted to
the director in consideration for his services on the Special Committee.
The remaining 5,000 shares will vest in equal amounts on September 30,
2000 and December 31, 2000.
(21) Includes 30,000 shares that may be acquired currently or within 60 days
through the exercise of stock options.
(22) Includes the shares of Class A Common Stock held by IDT and SOFTBANK. Also
includes an aggregate of 762,643 shares issuable upon exercise of
presently exercisable stock options.
STOCKHOLDER PROPOSALS AND NOMINATIONS
We anticipate our 2000 Annual Meeting of Stockholders to be held on or about
December 8, 2000. Accordingly, stockholder proposals for our 2000 Annual
Meeting of Stockholders must be received at our principal executive offices by
August 10, 2000, to be considered for inclusion in our proxy materials relating
to such meeting.
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Stockholders may without advance notice to our Secretary nominate directors
or bring other business before the stockholders at the 2000 Annual Meeting of
Stockholders. Please note that this relates only to the matters you wish to
bring before your fellow stockholders at the annual meeting. This is separate
from the Securities and Exchange Commission's requirements to have your
proposal included in our proxy statement.
We reserve the right to reject, rule out of order, or take other appropriate
action with respect to any proposal or nomination that does not comply with
these and other applicable requirements.
WHERE YOU CAN FIND MORE INFORMATION
Government Filings: We file annual, quarterly and special reports and other
information with the Securities and Exchange Commission. You may read and copy
any document that we file:
. at the Commission's Public Reference Room, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549;
. at the Commission's regional offices located at 7 World Trade Center,
13th Floor, New York, New York 10048, and at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and
. at the Commission's web site at http://www.sec.gov.
Some locations may charge prescribed or modest fees for copies. You may obtain
information on the operation of the Public Reference Room by calling 1-800-SEC-
0330.
Stock Market: Our common stock is listed on the Nasdaq National Market and
similar information can be inspected and copied at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
FORWARD-LOOKING STATEMENTS
This proxy statement contains "forward-looking" information, as that term is
defined by the federal securities laws, about our financial condition, results
of operations and business. You can find many of these statements by looking
for words such as "may," "will," "expect," "anticipate," "believe," "estimate,"
and similar words used in this proxy statement.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties that may cause our actual results to be materially different
from any future results expressed or implied by us in those statements. The
risks and uncertainties include those risks, uncertainties and risk factors
identified, among other places, under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-
K for the year ended July 31, 1999.
The most important factors that could prevent us from achieving our stated
goals include, but are not limited to, the following:
. operating and financial risks related to managing rapid growth,
integrating acquired businesses and sustaining operating cash flow;
. potential fluctuation in quarterly results;
. volatility of stock price;
. rapid and significant changes in technology and markets;
. adverse changes in the regulatory or legislative environment affecting
our business; and
39
. failure to complete the transactions described in this proxy statement
timely or at all, and difficulties in combining operations of Net2Phone
and Newco and in realizing synergies expected from the transactions.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward-
looking statements. We caution you not to place undue reliance on the
statements, which speak only as of the date of this proxy statement.
The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that we or persons acting on our behalf may issue. We do not
undertake any obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this report or
to reflect the occurrence of unanticipated events.
OTHER MATTERS
As of the date of this proxy statement, the Board does not intend to present
at the special meeting any matters other than those described herein and does
not presently know of any matters that will be presented by other parties. If
any other matter requiring a vote of the stockholders should come before the
meeting, it is the intention of the persons named in the proxy to vote with
respect to any such matter in accordance with the recommendation of the Board
or, in the absence of such a recommendation, in accordance with the best
judgment of the proxy holder.
NET2PHONE, INC.
[SIGNATURE]
Glenn J. Williams
Secretary and General Counsel
June 6, 2000
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ANNEX A
LETTER AGREEMENT AMONG NET2PHONE, INC., IDT CORP. AND AT&T CORP.
March 30, 2000
AT&T Corp.
295 North Maple Avenue
Basking Ridge, NJ 07920
IDT Corporation
520 Broad Street
Newark, New Jersey 07102
Re: Purchase of Class A Common Stock and related transactions
Gentlemen:
This letter agreement (this "Agreement") will confirm the actions taken by
the Board of Directors (the "Board") of Net2Phone, Inc. (the "Company"), and by
a committee of independent directors of the Company to whom authority was duly
delegated by the Board, in connection with and in consideration for the
proposed purchase (the "Purchase") by AT&T Corp. ("AT&T") and its designees,
through a newly formed business entity ("Holdco"), from IDT Corporation ("IDT")
of 14,900,000 shares of Class A common stock, par value $.01 per share (the
"Class A Stock"), of the Company and certain related transactions, as set forth
in the Letter Agreement, dated March 28, 2000, between AT&T and IDT (the
"Letter Agreement").
1. Board Approval of the Amendment. The Board has duly adopted a resolution
setting forth amendments (the "Amendments") to the Company's certificate of
incorporation (i) increasing the number of authorized shares of Class A Stock
by four million and (ii) notwithstanding Section 4 of the Letter Agreement,
expanding the Board by two seats, and resolving to nominate designees named by
AT&T to such additional two seats. Promptly after the closing of the Purchase,
IDT shall cause one of its designated Board members to resign, and AT&T shall
nominate the replacement designee. AT&T and IDT agree to use their reasonable
best efforts to assure that at least five members of the Board will be members
not employed by, providing material services for compensation to or otherwise
affiliated with AT&T, IDT or any member of Holdco or any of their affiliates
(the "disinterested directors"); provided that the requirement for such
reasonable efforts by AT&T and IDT shall cease to apply at such time as Holdco
or IDT, as the case may be, becomes the beneficial owner of more than 85% or
less than 15% of the voting power of the Company.
2. Solicitation of Shareholder Approval. The Board has declared the
advisability of the Amendments and called a special meeting of the Company's
stockholders for the consideration of the Amendments. The Board, subject to its
fiduciary obligations, shall promptly take such actions as are necessary and
appropriate to cause the adoption of the Amendments, including causing an
information or proxy statement containing the recommendation of the Board of
Directors in favor of the Amendments to be distributed to stockholders as
promptly as practicable. The only additional corporate action required for the
Primary Issuance is the approval of the Amendments by the affirmative vote of
the holders of at least 66 2/3% of the outstanding Common Shares (as defined in
Article Fourth of the Company's certificate of incorporation) and the filing of
the Amendments with the Secretary of State of Delaware.
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3. Section 203 of the Delaware General Corporation Law. By resolution, the
Board has confirmed that the restrictions contained in Section 203 of the
Delaware General Corporation Law shall not apply to any business combination
between the Company and AT&T or Holdco.
4. Primary Issuance. Upon adoption of the Amendments, subject to the
satisfaction or waiver of the terms and conditions set forth in clauses (2)
through (10) of Section 3 of the Letter Agreement, and subject to the parties
to the Letter Agreement being ready, willing and able to consummate the
Purchase, the Company shall promptly issue and sell to Holdco, and Holdco will
purchase, four million shares of Class A Stock (the "Primary Issuance") for a
price of $75 per share. A result of the Primary Issuance will be to cause
Holdco to become a Holder within the meaning of Article Fourth, Section 3(e)(2)
of the Company's certificate of incorporation, with the effect that the shares
of Class A Stock to be sold to Holdco by IDT under the Letter Agreement will
not be converted by their terms into shares of Common Stock, par value $.01 per
share, of the Company upon the consummation of the Purchase.
5. "Piggyback" Registration Rights. The Board has granted to Holdco demand
and "piggyback" registration rights with respect to the shares of capital stock
of the Company hereafter acquired by it from IDT under the Letter Agreement,
substantially as provided in the form of the Registration Rights Agreement
attached hereto as Exhibit A.
6. Stock Option and Incentive Plan. The Board has adopted a resolution
amending Section 6(g) of the Company's Amended and Restated 1999 Stock Option
and Incentive Plan (the "Plan"), and any other sections of the Plan necessary
to ensure that no rights of IDT employees under the Plan will be terminated or
affected in any way as a result of the transactions contemplated in the Letter
Agreement.
7. License and Approval of Transactions by Disinterested Directors.
(a) The Company will grant (i) to AT&T, a license for all of the Company's
present and future technology for use in the present and future businesses of
AT&T and its affiliates and (ii) to IDT, a license for all of the Company's
present and future technology for use in the present and future businesses of
IDT and its affiliates. The Company also agrees that should the terms,
conditions and pricing of a license be given prior to, on or after the date of
the Letter Agreement by the Company to any other person (including, in the case
of AT&T, IDT, and in the case of IDT, AT&T) which are more favorable to the
licensee than those given to AT&T or IDT, as the case may be, which license has
been approved or ratified by a majority of the disinterested directors, such
terms, conditions and pricing shall be applicable to AT&T's license or IDT's
license, as the case may be, at such party's option. The Company agrees that
licenses granted by it shall in all cases be subject to approval or
ratification by a majority of the disinterested directors.
(b) Any contract or transaction, including a license, between AT&T or any
other participant in Holdco or any of their affiliates and the Company, or
between IDT or any of its affiliates and the Company, involving the potential
payment to or from the Company of more than $500,000, or any business
combination between the Company, on the one hand, and IDT, AT&T, any
participant in Holdco or any of their affiliates, on the other hand, shall be
subject to the approval of a majority of the disinterested directors of the
Company; provided that the requirement for such approval shall cease to apply
at such time as Holdco or IDT, as the case may be, becomes the beneficial owner
of more than 85% or less than 15% of the voting power of the Company; and
provided further that the requirement of disinterested director approval shall
not be required with respect to the granting of a license by the Company to
AT&T or IDT which does not contain terms, conditions and pricing that are more
favorable to the licensee than those contained in a license granted to any
other person, which license has been approved or ratified by a majority of
disinterested directors.
(c) This Section 7 supersedes Section 11 of the Letter Agreement, other than
the first sentence of Section 11 of the Letter Agreement which remains in full
force and effect.
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8. AT&T/Company Arrangements. AT&T and the Company will support good faith
negotiations to work together to enter into the following commercial
arrangements:
. AT&T will offer the Company's service on the WorldNet Internet service.
. Each of AT&T and the Company will be classified by the other party as a
"Preferred Supplier" where mutually beneficial and not inconsistent with
other commitments of the parties existing on the date of this Agreement,
with respect to all services offered by the parties. AT&T will make
available to the Company the opportunity to make presentations to senior
operational management of AT&T with respect to products offered by the
Company.
. AT&T and the Company will work together to develop and deploy new
products and applications that integrate Voice over Internet Protocol
(VoIP) technology into PBX's and other communication products for the
business market.
. AT&T and the Company will work together to develop a series of commercial
and VoIP technology developmental agreements. The goal of the agreements
will be to (i) establish a framework for working together to further
develop and enhance each of AT&T's and the Company's VoIP technology, and
(ii) jointly develop new VoIP products and services.
. AT&T and the Company will work together to develop broadband applications
using VoIP technology, it being understood that it is not the intent of
the parties to create a preferred position for the Company as a broadband
services provider.
. AT&T and the Company will work together in developing and implementing
such technologies as are required for the interoperability of each
party's services with the other's.
. AT&T and the Company will work together in developing "on-net" advantages
in the delivery of each other's services.
. AT&T and the Company will work together to develop and evolve the
standards for Internet telephony.
9. Voting Agreement. In the event that Holdco and IDT are unable to agree on
acceptable nominees to the Board (as described in Section 9 of the Letter
Agreement), Holdco and IDT will be counted as present for purposes of
determining a quorum at the shareholders meeting but will abstain from voting
on such nominees as to which Holdco and IDT are unable to agree.
10. Binding Intent. It is the intent of the parties hereto that the
agreements contained herein be legally binding on and enforceable against them.
This Agreement will be governed by and construed in accordance with the laws of
the State of New York applicable to contracts executed in and to be fully
performed in such State, without giving effect to its conflicts of law rules or
principles. Each party hereto (a) consents to submit itself to the personal
jurisdiction of any federal court located in the State of New York or any New
York state court in the event any dispute arises out of this Agreement or any
of the transactions contemplated by this Agreement, (b) agrees that it will not
attempt to deny such personal jurisdiction by motion or other request for leave
from any such court and (c) agrees that it will not bring any action relating
to this Agreement or any of the transactions contemplated by this Agreement in
any court other than a federal or state court sitting in the State of New York.
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect.
11. Definitive Documentation. The parties agree to negotiate in good faith
and enter into mutually acceptable definitive documentation with respect to the
transactions contemplated herein and in the Letter Agreement and on the terms
and conditions set forth herein and in the Letter Agreement.
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If the foregoing conforms to your understanding, please so signify by
signing in the space provided below. 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.
Very truly yours,
NET2PHONE, Inc.
/s/ Howard S. Balter
By: _________________________________
Accepted and Agreed:
AT&T Corp.
/s/ John C. Petrillo
By: _________________________________
IDT Corporation
/s/ James A. Courter
By: _________________________________
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EXHIBIT A TO ANNEX A
Form of Registration Rights Agreement
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of . , by and
between N Inc., a Delaware corporation (the "Company"), and Holdco, a .
corporation (the "Investor").
WHEREAS, the Company will issue and sell to the Investors . shares of
Class A Common Stock of the Company, par value $0.01 per share (the "Class A
Stock"), pursuant to the Subscription Agreement, dated as of . , 2000, between
the Company and the Investor (the "Subscription Agreement");
WHEREAS, I Corp., a Delaware corporation ("I Corp.") has agreed to sell to
the Investor 14,900,000 shares of Class A Stock, pursuant to the Purchase
Agreement, dated as of . , 2000, between I Corp. and the Investor (the
"Purchase Agreement");
WHEREAS, the Company has agreed to grant the registration rights set forth
herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Definitions. For the purposes of this Agreement:
(a) The term "Affiliate" means, with respect to any person or
entity, any other person or entity directly or indirectly controlling,
controlled by or under common control with the first such person or
entity.
(b) The term "current market value" means the average closing sale
price per share of Common Stock, par value $0.01 per share, of the
Company ("Common Stock"), on the NASDAQ National Market over the 10
trading days prior to the date of determination.
(c) The term "Holder" means a holder of Registrable Securities.
(d) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement
in compliance with the Securities Act of 1933, as amended (the "Act"),
and the declaration or ordering of effectiveness of such registration
statement.
(e) The term "Registrable Securities" means the shares of Class A
Common Stock issued to the Investor pursuant to the Subscription
Agreement and the shares of Class A Stock purchased by the Investor
pursuant to the Purchase Agreement (collectively, the "Securities") as
the same may exist, from time to time; provided, however, that such
Securities shall cease to be Registrable Securities when and to the
extent that (i) such Securities have been sold pursuant to an effective
registration statement under the Act, (ii) such Securities have become
eligible for resale pursuant to Rule 144(k) of the Act (or any similar
provision then in force) or another provision of Rule 144 of the Act
pursuant to which all of such Securities are immediately eligible for
resale or (iii) such Securities have ceased to be outstanding.
Section 2. Registration Rights.
2.1. (a) Registration Upon Demand.
(i) For a period of [three years] after August 1, 2003, one or more Holders
that in the aggregate beneficially own at least 50% of the Registrable
Securities may make a demand that the Company effect the registration of all or
part of such Holders' Registrable Securities (a "Demand Registration"). Upon
receipt of a valid request for a Demand Registration, the Company shall
promptly, and in any event no later than 15 days after such receipt, notify all
other Holders of the making of such demand and shall use its best efforts to
register under the Act as expeditiously as may be practicable the Registrable
Securities that Holders have requested the Company to register in accordance
with this Section 2.1. Notwithstanding the foregoing, the
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Company shall not be required to effect any registration if the Registrable
Securities that the Company shall have been requested to register shall, in the
aggregate, have a current market value of less than $5,000,000. The Holders
shall have the right to one Demand Registration pursuant to this Section
2.1(a)(i). Notwithstanding Section 2.1(a)(ii), if any registration demand is
made by Holders beneficially owning 50% or more of the Registrable Securities,
and no Demand Registration has been made prior to such time, then such
registration demand shall be treated for purposes of this Agreement as a Demand
Registration, regardless of the registration form used (including Form S-3).
(ii) Notwithstanding Section 2.1(a)(i) hereof, and in addition to the rights
granted under Section 2.1(a)(i) hereof, at any time after the Company becomes
eligible to register its securities on Form S-3 (or any successor form), one or
more holders that in the aggregate beneficially own at least 20% of the
Registrable Securities may make a demand that the Company effect the
registration of all or part of such Holders' Registrable Securities (an "S-3
Demand Registration"). Upon receipt of a valid request for an S-3 Demand
Registration, the Company shall promptly, and in any event no later than 15
days after such receipt, notify all other Holders of the making of such demand
and shall use its best efforts to register under the Act as expeditiously as
may be practicable the Registrable Securities which Holders have requested the
Company to register in accordance with this Section 2.1. Notwithstanding the
foregoing, the Company shall not be required to effect any registration if the
Registrable Securities that the Company shall have been requested to register
shall, in the aggregate, have a current market value of less than $1,000,000.
The Holders shall have the right to two S-3 Demand Registrations pursuant to
this Section 2.1(a)(ii).
(b) Effective Registration Statement. A registration requested pursuant to
Section 2.1(a) hereof shall not be deemed to have been effected (i) if a
registration statement with respect thereto has not been declared effective by
the Securities and Exchange Commission ("SEC"), (ii) if after it has become
effective, such registration is materially interfered with by any stop order,
injunction or similar order or requirement of the SEC or other governmental
agency or court for any reason not attributable to any of the Holders and has
not thereafter become effective, or (iii) the conditions to closing specified
in the underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived, other than by reason of a failure on
the part of a Holder.
2.2. "Piggy-Back" Registration.
(a) If the Company proposes to register any securities under the Act in
connection with any offering of its securities (other than a registration
statement on Form S-8 or Form S-4, or their successors, or any other form for a
similar limited purpose, or any registration statement covering only securities
proposed to be issued in exchange for securities or assets of another
corporation), whether or not for its own account, the Company shall furnish
promptly, and in any event not less than 15 days in advance, written notice to
the Holders of its intention to effect such registration and the intended
method of distribution in connection therewith. Upon the written request of a
Holder made to the Company within 15 days after the receipt of such notice by
the Company, the Company shall include in such registration the requested
number of the Holder's Registrable Securities (a "Piggy-Back Registration"). If
a Holder decides not to include all of its Registrable Securities in any
registration statement thereafter filed by the Company, the Holder shall
nevertheless continue to have the right to include any Registrable Securities
in any subsequent registration statement or registration statements as may be
filed by the Company with respect to offerings of its Common Stock and any
other securities, all upon the terms and conditions set forth herein.
(b) Nothing in this Section 2.2 shall create any liability on the part of
the Company or any other person to the Holders if the Company, for any reason,
decides not to file a registration statement proposed to be filed pursuant to
Section 2.2(a) or to withdraw such registration statement subsequent to its
filing (except for the Company's obligation to pay the expenses in connection
therewith as provided in Section 2.6), regardless of any action whatsoever that
a Holder may have taken, whether as a result of the issuance by the Company of
any notice under Section 2.2(a) or otherwise.
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2.3. Blackout Periods for Holders. If the board of directors of the Company
determines in good faith that the registration and distribution of Registrable
Securities (or the use of a registration statement or related prospectus) would
be materially detrimental to the Company or its shareholders and therefore the
board of directors determines that it is in the Company's best interest to
defer the filing, and promptly gives the Holders written notice of such
determination in the form of a certificate signed by an executive officer of
the Company following their request to register any Registrable Securities
pursuant to Section 2.1, the Company shall be entitled to postpone the filing
of the registration statement otherwise required to be prepared and filed by
the Company pursuant to Section 2.1 hereof for a reasonable period of time, but
not to exceed 90 days (a "Demand Blackout Period") after the date of such
request. The Company shall promptly notify each holder of the expiration or
earlier termination of any Demand Blackout Period.
2.4. Obligations of the Company. Whenever the Company is required to effect
the registration of any Registrable Securities under this Section 2, the
Company shall, at its expense and as expeditiously as may be practicable:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder,
use reasonable efforts to keep such registration statement effective for
ninety (90) days.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of
applicable law with respect to the disposition of all of the Registrable
Securities covered by such registration statement.
(c) Furnish to the Holders of Registrable Securities registering such
securities such numbers of copies of a prospectus, including a preliminary
prospectus (in the event of an underwritten offering), in conformity with
the requirements of applicable law, and such other documents as each such
Holder may reasonably request in order to facilitate the disposition of
Registrable Securities owned by it.
(d) Use best efforts to register and qualify the securities covered by
such registration statement under state blue sky laws in any U.S.
jurisdictions in which such registration and qualification is reasonably
requested by any Holder; provided, that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business
or to file a general consent to service of process in any such
jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form and substance as agreed to by the Company and the managing
underwriter of such offering.
(f) Promptly notify the Holders in writing:
(i) when the registration statement, the prospectus or any
prospectus supplement related thereto or post-effective amendment to
the registration statement has been filed, and, with respect to the
registration statement or any post-effective amendment thereto, when
the same has become effective;
(ii) of any request by the SEC for amendments or supplements to the
registration statement or related prospectus or any written request by
the SEC for additional information;
(iii) of the issuance by the SEC of any stop order suspending the
effectiveness of the registration statement or prospectus or any
amendment or supplement thereto or the initiation of any proceedings by
any person for that purpose, and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued; and
(iv) of the receipt by the Company of any written notification with
respect to the suspension of the qualification of any Registrable
Securities for sale in any jurisdiction or the initiation or overt
threat of any proceeding for such purpose.
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(g) Notify the Holders in writing on a timely basis, at any time when a
prospectus relating to such Registrable Securities is required to be
delivered under applicable law, of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and at the request of any such Holder promptly prepare and furnish
to such Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the offerees of such securities, such prospectus shall not
include an 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 not misleading in the light of the circumstances then existing.
(h) Furnish, at the request of any Holder participating in the
registration, on the date that such Registrable Securities are delivered to
the underwriters for sale, if such securities are being sold through
underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to
such securities becomes effective, (i) an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as if customarily given to underwriters
in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders participating in the registration,
addressed to the underwriters, if any, and to the Holders participating in
the registration of Registrable Securities and (ii) a "Cold Comfort" letter
dated as of such date, from the independent certified public accountants to
the underwriters in an underwritten public offering and reasonably
satisfactory to a majority in interest of the Holders participating in the
registration, addressed to the underwriters, if any, and if permitted by
applicable accounting standards, to the Holders participating in the
registration of Registrable Securities.
(i) Use best efforts to cause the transfer agent to remove restrictive
legends on certificates representing the securities covered by such
registration statement, as the Company determines to be appropriate, upon
advice of counsel.
(j) Use best efforts to list such Registrable Securities on any national
securities exchange on which any shares of the Common Stock are listed.
(k) Prepare and file with the SEC, promptly upon the request of any such
Holders, any amendments or supplements to such registration statement or
prospectus which, in the opinion of counsel for such Holders, is required
under the Act or the rules and regulations thereunder in connection with
the distribution of the Registrable Securities by such Holders.
(l) Make available for inspection by any Holder of such Registrable
Securities, any underwriter participating in any disposition pursuant to
such registration statement and any attorney, accountant or other agent
retained by any such seller or underwriter (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent
corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information (together with the
Records, the "Information") reasonably requested by any such Inspector in
connection with such registration statement. Any of the Information that
the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, shall not be disclosed by the
Inspectors unless (i) the release of such Information is ordered pursuant
to a subpoena or other order from a court of competent jurisdiction or (ii)
such Information has been made generally available to the public or (iii)
as necessary to enforce a Holder's rights under this Agreement. The Holder
of Registrable Securities, agrees that it will, upon learning that
disclosure of such Information is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent disclosure of
the Information deemed confidential and the Inspectors shall not disclose
such Information until such action is determined.
(m) Provide a transfer agent and registrar (which may be the same entity
and which may be the Company) for such Registrable Securities.
A-8
(n) Use its best efforts to take all other steps necessary to effect the
registration of such Registrable Securities pursuant to the terms
contemplated hereby.
2.5. Furnish Information.
(a) It shall be a condition precedent to the obligation of the Company to
include any Registrable Securities of any Holder in a registration statement
pursuant to this Section 2 that the Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it, any other
securities of the Company held by it, and the intended method of disposition of
such Registrable Securities as shall be required to effect the registration of
the Registrable Securities held by such Holder. Any such information shall be
provided to the Company within any reasonable time period requested by the
Company.
(b) Each Holder shall notify the Company, at any time when a prospectus is
required to be delivered under applicable law, of the happening of any event as
a result of which the prospectus included in the applicable registration
statement, as then in effect, in each case only with respect to information
provided by such Holder, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing. Such Holder shall immediately upon the happening of any such event
cease using such prospectus. Any other Holders shall cease using such
prospectus immediately upon receipt of notice from the Company to that effect.
If so requested by the Company, each Holder shall promptly return to the
Company any copies of any prospectus in its possession (other than one
permanent file copy) that contains an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing.
2.6. Expenses of Registration. The Company shall bear and pay all reasonable
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities pursuant to Section 2.1 or Section 2.2 including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, but excluding underwriting discounts and commissions
relating to the Registrable Securities. The Company also shall be required to
pay and bear the legal fees of one counsel for the Holders in an amount not to
exceed $25,000 in connection with any registration.
2.7. Underwriting Requirements. In connection with any underwritten offering
of a Holder's Registrable Securities, the Company shall not be required under
Section 2.4 to register any of such Registrable Securities in connection with
such underwritten offering unless the Holder accepts the underwriters selected
by the Company and then only in such quantity as the lead managing underwriter
determines, in its good faith discretion, will not jeopardize the success of
the offering by the Company. To the extent that the lead managing underwriter
will not permit the registration of all of the Registrable Securities sought to
be registered, in the case of a registration pursuant to Section 2.1 or 2.2,
the Registrable Securities to be included shall be apportioned among the
Holders on a pro rata basis (based on the number of Securities proposed to be
registered by each), first among the Holders of Registrable Securities to be
registered pursuant to Section 2.1, and thereafter among the Holders of
Registrable Securities to be registered pursuant to Section 2.2; provided,
however, that the right of the underwriters to exclude Registrable Securities
from the registration and underwriting as described above shall be restricted
such that all shares that are not Registrable Securities and all shares that
are held by persons who are employees or directors of the Company (or any
subsidiary of the Company) shall first be excluded from such registration and
underwriting before any Registrable Securities are so excluded. Notwithstanding
the foregoing, the Holders' Registrable Securities shall in no event be reduced
to less than one-third of the total number of shares of Common Stock to be
registered in connection with a Piggyback Registration. Those Registrable
Securities and other securities that are excluded from the underwriting by
reason of the managing underwriter's marketing limitation and all other
Registrable Securities not originally requested to be so included shall not be
included in such registration and shall be withheld from the market by the
Holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines necessary to effect the underwritten public
offering. No Holder of Registrable Securities shall be entitled to participate
in an
A-9
underwritten offering unless such Holder enters into, and performs its
obligations under, one or more underwriting agreements and any related
agreements and documents (including an escrow agreement and/or a power of
attorney with respect to the disposition of the Registrable Securities), in the
form that such Holder shall agree to with the lead managing underwriter of the
transaction. If any Holder disapproves of the terms of any underwriting, it may
elect, prior to the execution of any underwriting agreement, to withdraw
therefrom by written notice to the Company and the lead managing underwriter.
Any Registrable Securities so withdrawn from an underwriting by such Holder
shall be withdrawn from such registration and shall not be transferred in a
public distribution prior to 180 days following the effective date of the
registration statement relating thereto.
2.8. Delay of Registration. No Holder shall have any right to obtain or seek
an injunction restraining or otherwise delaying any registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 2.
2.9. Indemnification. In the event any Registrable Securities are included
in a registration statement under this Section 2:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder and each person, if any, who controls such Holder
within the meaning of the Act and the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and their respective directors, officers,
partners, employees, legal counsel and affiliates (each, an "Indemnified
Person"), against any losses, claims, damages, or liabilities joint or
several) to which they may become subject insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon (collectively, a "Violation") (i) any untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, including any final prospectus contained therein or any
amendments or supplements thereto or (ii) the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; or (iii) any violation by
the Company of the Act, the 1934 Act, any state securities law or any rule
or regulation promulgated under the Act, the 1934 Act or any state
securities law in connection with the offering covered by any registration
statement; and the Company will pay to each Indemnified Person any
reasonable legal or other expenses incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided that the indemnity agreement contained in this Section
2.9(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such
loss, claim, damage, liability or action to the extent that it arises out
of or is based upon a Violation which occurs in reliance upon and in strict
conformity with written information furnished by a Holder expressly for use
in connection with such registration or is caused by any failure by the
Holder to deliver a prospectus or preliminary prospectus (or amendment or
supplement thereto) as and when required under the Act after such
prospectus has been timely furnished by the Company.
(b) To the extent permitted by law, each Holder will indemnify and hold
harmless the Company, each of its directors, each of its officers who has
signed the registration statement, and 8 each person, if any, who controls
the Company within the meaning of the Act or the 1934 Act (each, an
"Indemnified Person"), against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing persons may become
subject, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each
case to the extent (and only to the extent) that such Violation is caused
by (x) any untrue statement or alleged untrue statement contained in, or by
any omission or alleged omission from, information furnished in writing to
the Company by the Holder specifically and expressly for use in any such
registration statement or prospectus but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in strict conformity with written
information furnished by such Holder specifically for use in the
preparation thereof or (y) any failure by the Holder to deliver a
prospectus or preliminary prospectus (or amendment or supplement thereto)
as and when required under the Securities Act after such prospectus has
been timely filed by the Company. Such Holder will pay any reasonable legal
or other
A-10
expenses incurred by any Indemnified Person pursuant to this Section 2.9(b)
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided that the indemnity agreement contained in
this Section 2.9(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is
effected without the consent of the Holder, which consent shall not be
unreasonably withheld; provided, further, that in no event shall any
indemnity under this Section 2.9(b) exceed the net proceeds from the
offering received by such Holder upon its sale of Registrable Securities
included in the registration statement.
(c) Promptly after receipt by an Indemnified Person under this Section
2.9 of notice of the commencement of any action (including any governmental
action), such Indemnified Person will, if a claim in respect thereof is to
be made against any indemnifying party under this Section 2.9, deliver to
the indemnifying party a written notice of the commencement thereof, and
the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the indemnifying parties; provided that an
Indemnified Person (together with all other indemnified parties that may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the reasonable fees and expenses to be paid by
the indemnifying party, if representation of such Indemnified Person by the
counsel retained by the indemnifying party would be inappropriate (in the
opinion of the Indemnified Person) due to actual or potential differing
interests between such Indemnified Person and any other party represented
by such counsel in such proceeding. The failure to deliver written notice
to the indemnifying party within a reasonable time of the commencement of
any such action, if materially prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
Indemnified Person under this Section 2.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any
liability that it may have to any Indemnified Person otherwise than under
this Section 2.9; provided, that in no event shall any indemnity under this
Section 2.9(b) exceed the net proceeds from the offering received by such
Holder upon its sale of Registrable Securities included in the registration
statement.
(d) If the indemnification provided for in this Section 2.9 is held by a
court of competent jurisdiction to be unavailable to an indemnified party
with respect to any losses, claims, damages or liabilities referred to
herein, the indemnifying party, in lieu of indemnifying such Indemnified
Person thereunder, agrees to contribute to the amount paid or payable by
such Indemnified Person as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the Indemnified
Person on the other in connection with the Violation(s) that resulted in
such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
of the Indemnified Person shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
Indemnified Person and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. No person found guilty of fraudulent misrepresentation (within
the meaning of the Section 11(f) of the Act) shall be entitled to
contribution hereunder from any person who was not guilty of such
fraudulent misrepresentation.
(e) The obligations of the Company and the Holders under this Section
2.9 shall survive the completion of any offering of Registrable Securities
under a registration statement pursuant to this Section 2.
2.10. Assignment of Registration Rights. Subject to the provisions of the
Purchase Agreement and the Subscription Agreement, the rights to cause the
Company to register Registrable Securities pursuant to this Section 2 may be
assigned by a Holder to a permitted transferee or assignee of Registrable
Securities which (a) is a subsidiary, parent, general partner, limited partner,
retired partner, affiliate, beneficial owner, member or retired member of a
Holder, or (b) is a Holder's family member or trust for the benefit of an
individual Holder; provided, however, (i) the transferor shall, within ten (10)
days after such transfer, furnish to the Company written notice of the name and
address of such transferee or assignee and the securities with respect to which
A-11
such registration rights are being assigned and (ii) such transferee shall
agree to be subject to all restrictions set forth in this Agreement.
2.11. Parity of Rights. The registration rights granted to the Holders under
this Agreement are not intended by the parties to be senior to any of the
registration rights granted to holders of the Company's capital stock under
that certain Series A Preferred Shareholder Registration Rights Agreement,
dated as of May 13, 1999, but rather to rank on a pari passu basis with such
rights. The parties agree to interpret the terms of this Agreement in a manner
consistent with the foregoing intention.
2.12. Rule 144 Reporting. With a view to making available to the Holders the
benefits of certain rules and regulations of the SEC that permit the sale of
the Registrable Securities to the public without registration, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in SEC Rule 144 or any similar or analogous rule
promulgated under the Act, at all times after the effective date of the
first registration filed by the Company for an offering of its securities
to the general public;
(b) File with the SEC, in a timely manner, all reports and other
documents required of the Company under the 1934 Act; and
(c) So long as a Holder owns any Registrable Securities, furnish such
Holder forthwith upon request: a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 of the Act, and
of the 1934 Act (at any time after it has become subject to such reporting
requirements); a copy of the most recent annual or quarterly report of the
Company; and such other reports and documents as a Holder may reasonably
request in availing itself of any rule or regulation of the SEC allowing it
to sell any such securities without registration.
Section 3. Miscellaneous.
3.1. Successors and Assigns. The provisions of this Agreement shall inure to
the benefit of and be binding upon the respective successors and permitted
assigns of the parties hereto, except that the Company may not assign any of
its obligations hereunder without the consent of Holders owning in the
aggregate 66 2/3% of the outstanding Registrable Securities. Nothing in this
Agreement, express or implied, is intended to confer upon any party, other than
the parties hereto or their respective successors and permitted assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement. Nothing contained herein shall be construed as permitting any
transfer of any securities of the Company in violation of any applicable law or
agreement.
3.2. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflict of laws provisions thereof. The Investor and the Company hereby submit
to the nonexclusive jurisdiction of the United States District Court for the
Southern District of New York and of any New York State court sitting in New
York City for purposes of all legal proceedings arising out of or relating to
this Agreement and the transactions contemplated hereby. Each of the Investor
and the Company irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
3.3. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.
3.4. Captions and Headings. The captions and headings used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
3.5. Notices. Unless otherwise provided, any notice or other communication
required or permitted to be given or effected under this Agreement shall be in
writing and shall be deemed effective upon (i) personal or
A-12
facsimile delivery to the party to be notified, (ii) one business day after
deposit with an internationally recognized courier service, delivery fees
prepaid, or (iii) three business days after deposit with the U.S. mail, return-
receipt requested, postage prepaid, and in each case, addressed to the party to
be notified at the following respective addresses, or at such other addresses
as may be designated by written notice; provided that any notice of change of
address shall be deemed effective only upon receipt.
If to the Company:
N Inc.
171 Main Street
Hackensack, New Jersey 07601
Attn:
Fax:
with a copy to:
.
.
.
Attn: .
Fax: .
If to the Investor:
.
.
.
Attn: .
Fax: .
with a copy to:
.
.
.
Attn: .
Fax: .
3.6. Amendments and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the Company has obtained written consent of Holders owning in the
aggregate 66 2/3% of the outstanding Registrable Securities affected by such
amendment, modification, supplement, waiver or departure; provided, however,
that no amendment, modification, supplement, waiver or consent to the departure
with respect to the provisions of Section 2 hereof shall be effective as
against any person unless consented to in writing by such person.
3.7. Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provisions shall be excluded from
this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
A-13
3.8. Entire Agreement. This Agreement (including the Schedule attached
hereto) contains the entire understanding of the parties hereto with respect to
the subject matter contained herein, and supersedes and cancels all prior
agreements, negotiations, correspondence, undertakings and communications of
the parties, oral or written, respecting such subject matter. There are no
restrictions, promises, representations, warranties, agreements or undertakings
of any party hereto with respect to the matters contemplated hereby, other than
those set forth herein or made hereunder.
3.9. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES ITS RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR THE SUBJECT MATTER HEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO
BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND
THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT
LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW AND STATUTORY CLAIMS. THIS SECTION 3.9 HAS BEEN FULLY DISCUSSED BY
EACH OF THE PARTIES HERETO AND THESE PROVISIONS SHALL NOT BE SUBJECT TO ANY
EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH
PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO (OR ASSIGNMENTS OF) THIS
AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL (WITHOUT A JURY) BY THE COURT.
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first above written.
N Inc.
By: _________________________________
Name:
Title:
Holdco
By: _________________________________
Name:
Title:
A-14
ANNEX B
LETTER AGREEMENT BETWEEN IDT CORP. AND AT&T CORP.
March 28, 2000
IDT Corporation
520 Broad Street
Newark, New Jersey 07102
Re: Net2Phone, Inc.
Gentlemen:
This letter agreement (this "Agreement") will confirm our understandings
relating to the proposed purchase (the "Purchase") from IDT Corporation ("I
Corp.") of 14,900,000 shares of Class A common stock, par value $.01 per share
(the "Class A Stock") of Net2Phone, Inc. (the "Company") and certain related
matters as set forth herein.
1. Purchase Price. The purchase price for the 14,900,000 shares of Class A
Stock will be $75 per share in cash, or an aggregate of $1,117,500,000, payable
at the Closing.
2. Structure. Subject to the terms and conditions set forth herein, AT&T
Corporation ("A Corp.") shall effect the Purchase through a newly formed
business entity ("Holdco"). A Corp. agrees, that it will retain, either
directly or indirectly through its controlled affiliates and Liberty Media
Group, a majority of the ownership and voting interests in Holdco, for a period
of three years from the Closing. In the event that the stockholders of the
Company do not approve the Amendments (as defined below), A Corp. shall have
the right to sell or transfer all or any portion of the ownership interests in
Holdco at any time; provided that if A Corp. ceases to own a majority of the
ownership and voting interests in Holdco, A Corp. shall cause Holdco to grant a
proxy until August 1, 2003 to I Corp. to vote any Common Shares owned by Holdco
or acquired by Holdco prior to August 1, 2003. Any sale or transfer by A Corp.
of its interest in Holdco shall not relieve A Corp. of its obligations to cause
the Purchase to occur and to cause Holdco to abide by the terms of this
Agreement, subject to the terms and conditions described herein. Until August
1, 2003, and provided that I Corp. owns not less than one million Common Shares
(as defined in Article Fourth of the Company's certificate of incorporation
("Common Shares")), Holdco shall not without I Corp.'s consent sell or transfer
all or any portion of its shares of Class A Stock or Common Stock purchased
pursuant to this Agreement.
3. Timing. The Closing shall occur upon the satisfaction or waiver of the
conditions described herein, provided that in no event shall the Closing occur
prior to August 1, 2000. The Closing will be conditioned upon (1) the Board of
Directors of the Company, no later than March 31, 2000, adopting the Amendments
(as defined below), declaring the advisability of the Amendments and calling a
special meeting of the Company's stockholders for the consideration of the
Amendments, (2) the receipt of all required regulatory approvals, (3) the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act, (4) the absence of an injunction making illegal or otherwise
prohibiting the consummation of any of the transactions contemplated in this
Agreement, (5) the absence of any pending litigation or regulatory proceeding
in either case initiated by a governmental authority against the Company or
with respect to the transactions contemplated by this Agreement, (6) the
absence of any material adverse change in the business or operations of the
Company resulting from the actions or inactions of the management of the
Company, excluding actions or decisions not to act taken in good faith and with
the appropriate degree of care, and excluding changes in general economic
conditions, general changes in the industry in which the Company is engaged and
general changes in technology, (7) the accuracy in all material respects of the
representations and warranties contained herein, (8) the performance of all
agreements to be performed hereunder prior to the Closing, (9) the accuracy
B-1
IDT Corporation
March 28, 2000
Page 2
in all material respects of the reports filed by the Company with the
Securities and Exchange Commission, as of their respective dates, and (10) the
absence of any infringement by the Company of any intellectual property rights
of any third party that has or reasonably could be expected to have a material
adverse effect on the business of the Company.
4. Sale of Additional Shares by the Company. It shall also be a condition of
A Corp.'s obligation to consummate the Purchase that the Company shall have
issued to Holdco four million shares of Class A Stock (the "Primary Issuance")
for a price of $75 per share (it being understood that the Primary Issuance
shall not be consummated unless the Purchase is consummated immediately
thereafter). The Board of Directors of the Company, no later than March 31,
2000, shall duly adopt a resolution setting forth amendments (the "Amendments")
to the Company's certificate of incorporation (i) increasing the number of
authorized shares of Class A Stock by four million and (ii) expanding the Board
of Directors of the Company by three seats, and resolving to nominate designees
named by A Corp. to such additional three seats, and shall by such date also
declare the advisability of the Amendments and call a special meeting of its
stockholders for the consideration of the Amendments. The Board of Directors of
the Company, subject to its fiduciary obligations, shall take such actions as
are necessary and appropriate to cause the adoption of the Amendments,
including causing an information or proxy statement containing the
recommendation of the Board of Directors in favor of the Amendments to be
distributed to stockholders as promptly as practicable. The only additional
corporate action required for the Primary Issuance is the approval of the
Amendments by the affirmative vote of the holders of at least 66 2/3% of the
outstanding Common Shares and the filing of the Amendments. By resolution, the
Board of Directors of the Company will confirm that the restrictions contained
in Section 203 of the Delaware General Corporation Law shall not apply to any
business combination between the Company and A Corp. or Holdco. A result of the
Primary Issuance will be to cause Holdco to become a Holder within the meaning
of Article Fourth, Section 3(e)(2) of the Company's certificate of
incorporation ("Holder"), with the effect that the shares of Class A Stock to
be sold to Holdco by I Corp. will not be converted by their terms into shares
of Common Stock upon the consummation of the Purchase. In addition, it is a
condition of A Corp.'s obligation to consummate the Purchase that the Board of
Directors of the Company, no later than March 31, 2000, shall have granted to
Holdco demand and "piggyback" registration rights with respect to the shares of
capital stock of the Company hereafter acquired by it hereunder, substantially
as provided in the form of the Registration Rights Agreement attached hereto as
Exhibit A which registration rights will be exercisable upon the lapse of the
restriction on Holdco's right to dispose of shares contained in Section 2.
5. Efforts by I Corp in Support of the Primary Issuance and the Amendments.
I Corp. agrees that it will vote all of the shares of capital stock of the
Company held by it in favor of the Amendments and will use its best efforts to
cause the Primary Issuance to be consummated in the manner contemplated herein.
I Corp. may terminate this Agreement within five business days of such date if,
by March 31, 2000, the Board of Directors of the Company has not adopted a
resolution amending Section 6(g) of the Company's Amended and Restated 1999
Stock Option and Incentive Plan (the "Plan"), and any other sections of the
Plan necessary to ensure that no rights of I Corp. employees under the Plan
will be terminated or affected in any way as a result of the transactions
contemplated by this Agreement. A Corp. may terminate this Agreement within 5
business days of such date if I Corp. breaches its obligations contained in the
first sentence of this paragraph or if the Board of Directors of the Company
fails to take the actions contemplated herein by March 31, 2000 or thereafter
withdraws or modifies in a manner adverse to A Corp. its recommendation in
favor of the Amendments.
6. Failure to Obtain Shareholder Approval of Amendments. If the approval of
the shareholders of the Company for the Amendments is not obtained by August 1,
2000, but upon the satisfaction or waiver of the other conditions to Closing on
or prior to September 30, 2000, Holdco shall promptly loan to I Corp.
$1,117,500,000, which loan (the "Loan") shall accrue interest at a per annum
rate of 7%, compounded
B-2
IDT Corporation
March 28, 2000
Page 3
quarterly; it being agreed that if such conditions have not been satisfied or
waived on or prior to September 30, 2000, then this Agreement shall terminate.
The Loan shall initially be for a term of five years, but shall be renewed
automatically for up to an aggregate of three one year periods unless not less
than six months prior to the then scheduled maturity of the Loan Holdco or I
Corp. provides notice that it has elected not to extend the maturity of the
Loan. Thereafter, at such time as Holdco becomes a Holder, I Corp. shall
promptly deliver to Holdco 14,900,000 shares of Class A Stock, whereupon the
Loan (including interest accrued thereon) will be discharged. Upon the maturity
of the Loan, I Corp. will promptly deliver to Holdco 14,900,000 shares of Class
A Stock (which upon delivery to Holdco will become an equal number of shares of
common stock, par value $.01 per share (the "Common Stock")), whereupon the
Loan will be discharged. From the date hereof and until the earlier of the
Closing or this Agreement terminates, or, if the Loan (including any interest
accrued thereon) is made, until the Loan is no longer outstanding, I Corp. will
not dispose, encumber or enter into any agreement to dispose or encumber the
14,900,000 shares of Class A Stock or otherwise take any action that would make
it unable to fulfill its obligation to deliver such shares upon the maturity of
the Loan. The agreement governing the Loan shall provide that Holdco's sole
recourse for non-payment of the Loan (including any interest thereon) will be
the 14,900,000 shares of Class A Stock or Common Stock, as applicable.
7. Right of First Refusal. The shares of Class A Stock currently owned by I
Corp. which are not subject to the Purchase (the "Remaining Shares") shall be
subject to a right of first refusal in favor of Holdco from the date hereof
until August 1, 2003 (the "Right of First Refusal Period"). I Corp. shall not
transfer any of the Remaining Shares during the Right of First Refusal Period
unless it shall have provided Holdco with notice in writing stating (1) that it
has received a firm offer to purchase such shares, (2) the fair market value of
the consideration proposed to be paid to I Corp. in such transfer (or, in the
case of a registered public offering, the fact that the consideration will be
the fair market value of the shares at the time the registration statement
becomes effective), as well as the other terms thereof and (3) in the case of a
proposed buyer who is also a Holder, the identity of the proposed buyer. In the
event that the aggregate purchase price of the Remaining Shares proposed to be
sold by I Corp. to a third party purchaser equals or exceeds $100,000,000,
Holdco shall have 21 days from the date of such written notice (the "Notice
Period") to advise I Corp. whether it wishes to exercise the Right of First
Refusal. If Holdco advises I Corp. in writing that it wishes to exercise the
Right of First Refusal, thereupon I Corp. and Holdco will be deemed to have
agreed to the sale to Holdco of such shares upon financial terms and conditions
no less favorable to I Corp. than those set forth in the notice, the closing
thereon to occur as promptly as practicable following the receipt of all
necessary regulatory approvals; provided, however, that if all necessary
regulatory approvals are not obtained within 90 days from the date of the
notice, the provisions in this Section 7 shall automatically terminate. If
Holdco notifies I Corp. in writing that it does not wish to purchase such
shares, or such 21 day period elapses without any written notification by
Holdco, then I Corp. shall be free to dispose of such shares upon terms and
conditions no more favorable to a third party than those set forth in the
notice for a period of 60 days; provided, however, that if I Corp. identified a
Holder as the proposed buyer in its notice to Holdco, such shares shall only be
sold to such Holder. If the aggregate purchase price of the Remaining Shares
proposed to be sold by I Corp. to a third party purchaser is less than
$100,000,000, the Notice Period (as defined above) shall be 7 days from the
date of written notice. Notwithstanding the foregoing, provided that
stockholder approval of the Amendments has been obtained and the Closing has
occurred, individual sales of not more than 100,000 shares of Class A Stock by
I Corp., up to an aggregate of 2,000,000 shares of Class A Stock during the
Right of First Refusal Period, shall not be subject to the provisions of this
Section 7.
8. Conversion of Remaining Shares. I Corp. shall convert such number of the
Remaining Shares as requested by Holdco into shares of Common Stock promptly
upon the payment in cash to I Corp. of an amount equal to 10% of the average
daily closing price per share of Common Stock for the 20-trading day period
B-3
IDT Corporation
March 28, 2000
Page 4
ending on the day prior to the date of such notice of conversion in respect of
each of the Remaining Shares requested to be converted, if so requested by
Holdco, during the period ending August 1, 2003.
9. Voting Agreement. Until August 1, 2003 or such earlier time as I Corp.
ceases to own two million or more Common Shares or until A Corp. ceases to own
a majority of the ownership and voting interests in Holdco, Holdco and I Corp.
will vote all of the Common Shares beneficially owned by each of them in favor
of mutually acceptable nominees to the Board of Directors of the Company. In
the event that Holdco and I Corp. are unable to agree on acceptable nominees,
Holdco and I Corp. will be counted as present for purposes of determining a
quorum at the shareholders meeting but will abstain from voting on such
nominees as to which Holdco and I Corp. are unable to agree.
10. Company Headquarters. The parties agree that they will support the move
to and continued presence for no less than 10 years of the headquarters of the
Company at 520 Broad Street in Newark, New Jersey, unless otherwise mutually
agreed.
11. Joint Venture and Licensing. A Corp. and Holdco will support the
formation of a joint venture between the Company and I Corp. for the
development and sale of Internet telephony network equipment using the
Company's VOIP technology. No later than March 31, 2000, the Board of Directors
of the Company will agree that (i) the Company will grant to A Corp. a license
for all of the Company's present and future technology for use in the present
and future businesses of A Corp. and its affiliates and (ii) the Company will
grant to I Corp. a license for all of the Company's present and future
technology for use in the present and future businesses of I Corp. and its
affiliates; it being agreed that should any term, condition or pricing of a
license be given prior to or after the date of this agreement by the Company to
any other person (including, in the case of A Corp., I Corp., and in the case
of I Corp., A Corp.) which is more favorable to the licensee than that given to
A Corp. or I Corp., as the case may be, such term, condition or pricing shall
be applicable to A Corp.'s license or I Corp.'s license, as the case may be, at
such party's option. Any contract or transaction between A Corp. and the
Company, or between I Corp. and the Company involving the potential payment to
or from the Company of more than $500,000, shall be subject to the approval of
a majority of the disinterested directors of the Company; provided that the
requirement for such approval shall cease to apply at such time as A Corp. or I
Corp., as the case may be, becomes the beneficial owner of more than 85% or
less than 15% of the voting power of the Company; and provided further that the
requirement of disinterested director approval shall not be required with
respect to the granting of a license by the Company to A Corp. or I Corp. which
does not contain terms, conditions and pricing that are more favorable to the
licensee than those contained in a license granted to any other person.
11(a). A Corp./I Corp. Arrangements. A Corp. and I Corp. agree that they
will enter into the following series of commercial and outsourcing arrangements
as soon as practicable following the date of this Agreement, with the intent to
use reasonable best efforts to have these agreements in place by Closing. The
agreements referred to in this Section 11 each shall be for a term of three
years, unless the parties agree otherwise.
. A Corp. and I Corp. will enter into an agreement, which will provide for
each party to be classified by the other party as a "Preferred Supplier"
where mutually beneficial and not inconsistent with other commitments of
the parties existing on the date of this Agreement, with respect to all
services and products offered by the parties.
. I Corp. and A Corp. will enter into an agreement pursuant to which A Corp
will supply 66% of the domestic service needs, including long distance,
data, IP, and local service, which I Corp. purchases from third parties;
provided that such agreement shall not require the substitution of A
Corp. for any supplier to I Corp. under an agreement existing on the date
of this Agreement, unless such existing commitment can be assigned or
transferred to A Corp. without causing an adverse effect to I Corp.'s
B-4
IDT Corporation
March 28, 2000
Page 5
business (including relations with customers and suppliers), financial
position or results of operations. A Corp. will manage such existing
supply commitments with the intent of providing integrated support to I
Corp., and transitioning to A Corp. the services covered by such existing
supply commitments as soon as it is reasonably practicable to do so in a
manner that benefits I Corp. and does not have any adverse effect on I
Corp's. business, financial condition or results of operations. A Corp.
shall provide the domestic services it provides on a most favored customer
basis, taking into account the types and volumes of services furnished. I
Corp.'s commitment to enter into this agreement will be contingent upon I
Corp. experiencing cost savings in each category of services provided (as
defined below) as compared with the cost to I Corp. of obtaining
comparable services of comparable quality from third parties. For the
purpose of calculating the cost savings, the parties will measure savings
within three (3) separate buckets or categories: (1) domestic voice
services; (2) data and IP services; and (3) fiber, colocation, and network
management services. The pricing terms for such services shall be adjusted
as commercially required to maintain competitiveness to ensure that the
principles set forth above in this paragraph continue to be observed
throughout the term of the agreement.
. The parties intend to purchase international services from one another,
with the understanding that the substantive commitments concerning such
services are as set forth in Section 11(b).
. I Corp. will obtain a domestic fiber ring from A Corp. (a Dark Fiber, Lit
Fiber or OC-X service, as agreed upon by the parties). The price shall be
the lowest rate that A. Corp. has offered for a comparable arrangement;
provided, however, that I Corp. will be under no obligation to acquire
such ring unless A Corp. provides the fiber ring at a price equal to or
lower than that at which I Corp. could obtain the same capabilities from
another source. A Corp. agrees to engineer the ring based on I Corp.'s
forecast of demand for use of the capacity on the ring and agrees to
price the capacity it provides based on the capacity required to meet
such forecasts of demand, whether or not it engineers the network for
greater capacity. The parties will agree on a plan to update such
forecasts from time to time as necessary to reflect I Corp.'s forecasted
needs. I Corp. agrees that it will terminate the traffic which it
services on this ring, provided that I Corp. shall be permitted first to
terminate traffic on capacity which I Corp. has or has contractually
committed to on the date of this agreement or under agreements to
terminate traffic that are in effect on the date of this Agreement.
. I Corp. and A Corp. will enter into an Outsourcing Agreement pursuant to
which I Corp. will outsource network management to A Corp. at mutually
agreed upon prices and terms. In addition, the parties intend to enter
into an agreement covering each party's use of the other party's web
hosting facilities.
. A Corp. will initially sublease from I Corp. 40,000 square feet (with
options to eventually rent an additional 160,000 square feet, contingent
on the availability of space) at I Corp.'s facility at 520 Broad Street,
Newark, New Jersey. The initial base rent shall be the lower of (1)
between $25 to $29 per square foot (the rate excludes utility and
construction costs), or (2) market rates for comparable space. Rent shall
be CPI adjusted on an annual basis, consistent with I Corp.'s underlying
lease. A Corp. agrees to locate a network operation center and/or a
switch or switches at the subleased premises.
. A Corp. and I Corp. will support good faith negotiations to reach an
agreement to colocate at each other's facilities.
11(b). Concert/I Corp. Arrangements. A Corp. will use its reasonable best
efforts to cause Concert to enter into the following series of commercial
arrangements with I Corp.
. Concert and I Corp. will enter into an agreement, which will provide for
each party to be classified by the other party as a "Preferred Supplier"
where mutually beneficial and not inconsistent with other commitments of
the parties existing on the date of this Agreement, with respect to all
services and products offered by the parties.
B-5
IDT Corporation
March 28, 2000
Page 6
. For a period of three (3) years from the date hereof, I Corp. and Concert
will work together to purchase from each other an annual aggregate amount
of services, including international termination, international
bandwidth, least cost routing infrastructure buildouts, international
toll free services, offshore UK wholesale delivery, co-location
opportunities, switching development and management, etc., provided
however that any commitment by a party under this paragraph will be
contingent on such party having excess demand that it cannot meet itself
through its network or through PTT correspondent arrangements, and upon
it being economically attractive to such party to outsource this demand
to the other party.
The parties agree to provide such services at Concert and I Corp.'s
respective preferred leading edge cost structures with consideration to
quality, volumes, availability of capacity and other key market and economic
conditions. Concert and I Corp. will provide each other with six (6) month
traffic projections identifying each party's price and volume requirements.
. Concert and I Corp. will support good faith negotiations to work together
to partner in building or jointly purchasing international fiber networks
or in swapping capacity on each other's networks.
. Concert and I Corp. will support good faith negotiations to reach an
agreement to colocate at each other's facilities and to use each other's
switching facilities to route traffic in mutually beneficial ways,
including, but not limited to, I Corp.'s utilization of Concert's
European and Asian switches for I Corp's opportunistic traffic.
12. Tag-along Provisions. If, during the 18 month period after the date
hereof, Holdco buys shares of Class A Stock from other current Holders, Holdco
will so notify I Corp. in writing, such notice to contain information regarding
number of shares, price and other material terms of the transaction and I Corp.
then will have the option, exercisable within 30 days of its having received
such written notice of such purchase, of causing Holdco to purchase up to five
million shares of Class A Stock (or if A Corp. has exercised its conversion
rights under paragraph 8, then Common Stock) from it on the same terms and
conditions as Holdco purchased shares from such other holder of Class A Stock;
provided, that the provisions of this paragraph will not apply to arrangements
entered into by Holdco or A Corp. solely in connection with obtaining
shareholder approval of the Amendments.
13. Definitive Documentation. The parties agree to negotiate in good faith
and enter into mutually acceptable definitive documentation with respect to the
transactions contemplated herein and on the terms and conditions set forth
herein.
14. Binding Intent. It is the intent of the parties hereto that the
agreements contained herein be legally binding on and enforceable against them
upon, and only upon, the Board of Directors of the Company taking the actions
identified herein as required to be taken no later than March 31, 2000. This
Agreement will be governed by and construed in accordance with the laws of the
State of New York applicable to contracts executed in and to be fully performed
in such State, without giving effect to its conflicts of law, rules or
principles. Each party hereto (a) consents to submit itself to the personal
jurisdiction of any federal court located in the State of New York or any New
York state court in the event any dispute arises out of this Agreement or any
of the transactions contemplated by this Agreement, (b) agrees that it will not
attempt to deny such personal jurisdiction by motion or other request for leave
from any such court and (c) agrees that it will not bring any action relating
to this Agreement or any of the transactions contemplated by this Agreement in
any court other than a federal or state court sitting in the State of New York.
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect.
B-6
IDT Corporation
March 28, 2000
Page 7
If the foregoing conforms to your understanding, please so signify by
signing in the space provided below. 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.
Very truly yours,
AT&T Corporation
/s/ JOHN C. PETRILLO
By: _________________________________
Accepted and Agreed:
IDT CORPORATION.
/s/ JAMES A. COURTER
By: _________________________________
B-7
ANNEX C
OPINION OF SALOMON SMITH BARNEY INC.
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
March 30, 2000
The Special Committee of the Board of Directors Net2Phone, Inc. 171 Main Street
Hackensack, New Jersey 07601
Members of the Special Committee:
You have requested our opinion as to the fairness, from a financial point of
view, to Net2Phone, Inc. ("Net2Phone") of the Cash Consideration (defined
below) to be received by Net2Phone pursuant to the terms and subject to the
conditions set forth in the letter agreement, dated March 30, 2000, among
Net2Phone, AT&T Corporation ("AT&T") and IDT Corporation ("IDT" and, such
agreement, the "NTOP-AT&T Letter Agreement"). As more fully described in the
NTOP-AT&T Letter Agreement, AT&T and its designees will, through a newly formed
entity ("Holdco"), purchase from Net2Phone, and Net2Phone will issue to Holdco,
an aggregate of 4,000,000 shares of the Class A common stock, par value $0.01
per share, of Net2Phone (the "Class A Common Stock"), which shares have voting
rights of two votes per share, at a purchase price of $75.00 per share in cash
(the "Cash Consideration" and, such issuance, the "NTOP Direct Investment").
Representatives of Net2Phone have advised us that IDT, the parent company and
controlling shareholder of Net2Phone, and AT&T have entered into a letter
agreement, dated March 28, 2000 (the "IDT-AT&T Letter Agreement"), providing
for, among other things, the sale by IDT to Holdco of an aggregate of
14,900,000 shares of Class A Common Stock held by IDT (the "IDT Block") for a
purchase price of $75.00 per share in cash (the "IDT Block Purchase"). The IDT-
AT&T Letter Agreement further provides, as a precedent condition to the IDT
Block Purchase, that the NTOP Direct Investment be consummated.
In arriving at our opinion, we reviewed the NTOP-AT&T Letter Agreement and
IDT-AT&T Letter Agreement, and held discussions with certain senior officers,
directors and other representatives and advisers of Net2Phone and certain
senior officers and other representatives and advisers of IDT and AT&T
concerning the business, operations and prospects of Net2Phone. We examined
certain publicly available business and financial information relating to
Net2Phone as well as certain publicly available financial forecasts for
Net2Phone and other information and data for Net2Phone which were provided to
or otherwise discussed with us by the managements of Net2Phone, IDT and AT&T,
including certain information relating to the potential strategic implications
and operational benefits that may be realized by Net2Phone as a result of the
NTOP Direct Investment and the IDT Block Purchase. We reviewed the financial
terms of the NTOP Direct Investment as set forth in the NTOP-AT&T Letter
Agreement in relation to, among other things: current and historical market
prices and trading volumes of the common stock, par value $0.01 per share, of
Net2Phone (the "Common Stock"); the financial condition and historical and
projected revenues, earnings and other operating data of Net2Phone; and the
capitalization of Net2Phone. We analyzed certain financial, stock market and
other publicly available information relating to the businesses of other
companies whose operations we considered relevant in evaluating those of
Net2Phone. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to
C-1
The Special Committee of the Board of Directors Net2Phone, Inc. March 30, 2000
Page 2
or otherwise reviewed by or discussed with us, we have reviewed with the
management of Net2Phone publicly available forecasts relating to Net2Phone and
have been advised by the management of Net2Phone, and have assumed with your
consent, that such forecasts represent reasonable estimates and judgments as to
the future financial condition and operating results of Net2Phone. We have not
made or been provided with an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Net2Phone nor have we made any
physical inspection of the properties or assets of Net2Phone. We are not
expressing any opinion as to what the value of the Class A Common Stock will be
when issued pursuant to the NTOP Direct Investment or the prices at which the
Common Stock or Class A Common Stock will trade or otherwise be transferable,
as the case may be, subsequent to the NTOP Direct Investment. We express no
view as to, and our opinion does not address, the relative merits of the NTOP
Direct Investment as compared to any alternative business strategies that might
exist for Net2Phone or the effect of any other transaction in which Net2Phone
might engage. In connection with our engagement, we were not requested to, and
we did not, solicit third party indications of interest in the acquisition of
all or a part of Net2Phone. Our opinion is necessarily based upon information
available to us, and financial, stock market and other conditions and
circumstances existing and disclosed to us, as of the date hereof.
Salomon Smith Barney Inc. has been engaged to render financial advisery
services to the Special Committee in connection with the NTOP Direct Investment
and will receive a fee for such services, a significant portion of which is
payable in connection with the delivery of this opinion. We and our affiliates
have in the past provided, and are currently providing, services to AT&T
unrelated to the NTOP Direct Investment, for which services we and our
affiliates have received and will receive compensation. In the ordinary course
of our business, we and our affiliates may actively trade or hold the
securities of Net2Phone and AT&T for our own account or for the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities. In addition, we and our affiliates (including Citigroup Inc.
and its affiliates) may maintain relationships with Net2Phone, AT&T and their
respective affiliates.
Our advisery services and the opinion expressed herein are provided for the
information of the Special Committee in its evaluation of the NTOP Direct
Investment, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on any
matters relating to the NTOP Direct Investment.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Cash Consideration to be
received by Net2Phone pursuant to the NTOP Direct Investment is fair, from a
financial point of view, to Net2Phone.
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
C-2
ANNEX D
AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION
Amendment to Increase Authorized Shares
If approved, the first sentence of the Preamble of ARTICLE FOURTH to our
Certificate of Incorporation would be amended and restated to read as follows:
ARTICLE FOURTH: The aggregate number of shares of all classes of
capital stock which the Corporation shall have the authority to issue
is 247,924,250 shares, consisting of (a) 200,000,000 shares of common
stock, par value $.01 per share ("Common Stock"), (b) 37,924,250 shares
of Class A common stock, par value $.01 per share (the "Class A Stock"
and, together with the common stock, the "Common Shares"), and (c)
10,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock").
Amendment to Increase Number of Directors
If approved and effective only upon the issuance of the 4,000,000 newly-
authorized shares of our Class A Common Stock to Newco, the first sentence of
ARTICLE FIFTH to our Certificate of Incorporation would be amended and restated
to read as follows:
The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than
five (5) and not more than thirteen (13) directors, the exact number of
which shall be fixed from time to time by the Board of Directors.
and the first sentence of ARTICLE FOURTH, Paragraph 1(h)(1) to our Certificate
of Incorporation would be amended and restated to read as follows:
Following issuance of the Series A Preferred and for so long as
shares of Series A Preferred remain outstanding, the holders of the
Series A Preferred Stock, voting as a separate class, shall be entitled
to elect 2 directors (the "Series A Directors.").
D-1
ANNEX E
NET2PHONE, INC.
1999 AMENDED AND RESTATED STOCK OPTION AND INCENTIVE PLAN
(AS AMENDED ON MARCH 30, 2000)
(Proposed change indicated in italics)
- --------------------------------------------------------------------------------
1. Purpose; Types of Awards; Construction.
The purpose of the Amended and Restated Net2Phone, Inc. 1999 Stock Option
and Incentive Plan (the "Plan") is to provide incentives to executive officers,
other key employees, directors and consultants of Net2Phone, Inc. (the
"Company"), or any parent or subsidiary of the Company which now exists or here
after is organized or acquired by the Company, to acquire a proprietary
interest in the Company, to continue as officers, employees, directors or
consultants, to increase their efforts on behalf of the Company and to promote
the success of the Company's business. The provisions of the Plan are intended
to satisfy the requirements of Section 16(b) of the Securities Exchange Act of
1934, as amended, and of Section 162(m) of the Internal Revenue Code of 1986,
as amended, and shall be interpreted in a manner consistent with the
requirements there of.
2. Definitions.
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Agreement" shall mean a written agreement entered into between the
Company and a Grantee in connection with an award under the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" means a change in ownership or control of the
Company effected through either of the following:
(i) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act (other than (A) the Company, (B) any trustee or other
fiduciary holding securities under an employee benefit plan of the Company,
(C) any corporation or other entity owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of Common stock, or (D) any person who, immediately prior to the
Initial Public Offering, owned more than 25% of the combined voting power
of the Company's then outstanding voting securities), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company's then outstanding voting
securities; or
(ii) during any period of not more than two consecutive years, not
including any period prior to the initial adoption of this Plan by the
Board, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director whose initial assumption
of office is in connection
(iii) with an actual or threatened election contest, including, but not
limited to a consent solicitation, relating to the election of directors of
the Company) whose election by the Board or nomination for election by
(iv) the Company's stockholders was approved by a vote of at least two-
thirds ( 2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute
at least a majority thereof.
E-1
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(e) "Committee" shall mean the Compensation Committee of the Board or such
other committee as the Board may designate from time to time to administer the
Plan.
(f) "Common Stock" shall mean shares of common stock, par value $.01 per
share, of the Company.
(g) "Company" shall mean Net2Phone Inc., a corporation organized under the
laws of the State of Delaware, or any successor corporation.
(h) "Continuous Service" means that the provision of services to the Company
or a Related Entity in any capacity of officer, employee, director or
consultant is not interrupted or terminated. Continuous Service shall not be
considered interrupted in the case of (i) any approved leave of absence, (ii)
transfers between locations of the Company or among the Company, any Related
Entity or any successor in any capacity of officer, employee, director or
consultant, or (iii) any change in status as long as the individual remains in
the service of the Company or a Related Entity in any capacity of officer,
employee, director or consultant (except as otherwise provided in the
applicable Agreement). An approved leave of absence shall include sick leave,
maternity leave, military leave or any other authorized personal leave. For
purposes of Incentive Stock Options, no such leave may exceed ninety (90) days
unless reemployment upon expiration of such leave is guaranteed by statute or
contract.
(i) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation of the Company with any other corporation
or other entity, other than (A) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving or parent
entity) 80% or more of the combined voting power of the voting securities
of the Company or such surviving or parent entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no "person" (as defined in the Exchange Act) acquired
25% or more of the combined voting power of the Company's then outstanding
securities; or
(ii) a plan of complete liquidation of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of its
assets (or any transaction having a similar effect).
(j) "Disability" shall mean a Grantee's inability to perform his or her
duties with the Company or any of its affiliates by reason of any medically
determinable physical or mental impairment, as determined by a physicians
elected by the Grantee and acceptable to the Company.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(l) "Fair Market Value" per share as of a particular date shall mean (i) the
closing sale price per share of common stock on the national securities
exchange on which the common stock is principally traded for such date or the
last preceding date on which there was a sale of such common stock on such
exchange, as the Committee shall determine, or (ii) if the shares of common
stock are then traded in an
(m) over-the-counter market, the average of the closing bid and asked prices
for the shares of common stock in such over-the-counter market for the last
preceding date on which there was a sale of such common stock in such market,
or (iii) if the shares of common stock are not then listed on a national
securities exchange or traded in an over-the-counter market, such value as the
Committee, in its sole discretion, shall determine; provided, however, that the
Fair Market Value per share on the date of the Initial Public Offering will
equal the Initial Public Offering price per share or such other price that the
Committee determines in its sole discretion.
(n) "Grantee" shall mean a person who receives a grant of Options, Stock
Appreciation Rights, Limited Rights or Restricted Stock under the Plan.
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(o) "IDT" shall mean IDT Corporation, a Delaware corporation, and any
successor corporation thereto.
(p) "Incentive Stock Option" shall mean any option intended to be, and
designated as, an incentive stock option within the meaning of Section 422 of
the Code.
(q) "Initial Public Offering" shall mean the underwritten initial public
offering of shares of common stock.
(r) "Insider" shall mean a Grantee who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
(s) "Limited Right" shall mean a limited stock appreciation right granted
pursuant to Section 10.
(t) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any Related Entity.
(u) "Nonqualified Stock Option" shall mean any option not designated as an
Incentive Stock Option.
(v) "Option" or "Options" shall mean a grant to a Grantee of an option or
options to purchase shares of common stock.
(w) "Option Agreement" shall have the meaning set forth in Section 6.
(x) "Option Price" shall mean the exercise price of the shares of common
stock covered by an Option.
(y) "Parent" shall mean any company (other than the Company) in an unbroken
chain of companies ending with the Company if, at the time of granting an
award under the Plan, each of the companies other than the Company owns stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other companies in such chain.
(z) "Plan" means this Net2Phone, Inc. 1999 Stock Option and Incentive Plan,
as amended from time to time.
(aa) "Related Entity" means any Parent, Subsidiary or any business,
corporation, partnership, limited liability company or other entity in which
the Company, a Parent or a Subsidiary holds a controlling ownership interest,
directly or indirectly. IDT and each of its Subsidiaries shall be deemed to be
a Related Entity.
(bb) "Restricted Period" shall have the meaning set forth in Section 11.
(cc) "Restricted Stock" means shares of common stock issued under the Plan
to a Grantee for such consideration, if any, and subject to such restrictions
on transfer, rights of refusal, repurchase provisions, forfeiture provisions
and other terms and conditions as shall be determined by the Committee.
(dd) "Retirement" shall mean a Grantee's retirement in accordance with the
terms of any tax-qualified retirement plan maintained by the Company or any of
its affiliates in which the Grantee participates.
(ee) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect,
promulgated under the Exchange Act, including any successor to such Rule.
(ff) "Stock Appreciation Right" shall mean the right, granted to a Grantee
under Section 9, to be paid an amount measured by the appreciation in the Fair
Market Value of a share of common stock from the date of grant to the date of
exercise of the right, with payment to be made in cash or common stock as
specified in the award or determined by the Committee.
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(gg) "Subsidiary" shall mean any company (other than the Company) in an
unbroken chain of companies beginning with the Company if, at the time of
granting an Option, each of the companies other than the last company in the
unbroken chain owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other companies in
such chain.
(hh) "Tax Event" shall have the meaning set forth in Section 17.
(ii) "Ten Percent Stockholder" shall mean a Grantee who, at the time an
Incentive Stock Option is granted, owns stock possessing more than ten
percent(10%) of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Administration.
(a) The Plan shall be administered by the Committee, the members of which
shall, except as may otherwise be determined by the Board, be "non-employee
directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the
Code. Prior to the formation of the Committee, the Board shall exercise all
powers of the Committee set forth herein.
(b) The Committee shall have the authority in its discretion, subject to and
not inconsistent with the express provisions of the Plan, to administer the
Plan and to exercise all the powers and authorities either specifically granted
to it under the Plan or necessary or advisable in the administration of the
Plan, including, without limitation, the authority to grant Options, Stock
Appreciation Rights, Limited Rights and Restricted Stock; to determine which
options shall constitute Incentive Stock Options and which Options shall
constitute Nonqualified Stock Options; to determine which Options (if any)
shall be accompanied by Limited Rights; to determine the purchase price of the
shares of common stock covered by each option; to determine the persons to
whom, and the time or times at which awards shall be granted; to determine the
number of shares to be covered by each award; to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan; to
determine the terms and provisions of the Agreements (which need not be
identical) and to cancel or suspend awards, as necessary; and to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
(c) All decisions, determinations and interpretations of the Committee shall
be final and binding on all Grantees of any awards under this Plan. No member
of the Board or Committee shall be liable for any action taken or determination
made in good faith with respect to the Plan or any award granted hereunder.
4. Eligibility.
Awards may be granted to executive officers, other key employees, directors
and consultants of the Company or of any Related Entity. In addition to any
other awards granted to Non-Employee Directors hereunder, awards shall be
granted to Non-Employee Directors pursuant to Section 14 hereof. In determining
the persons to whom awards shall be granted and the number of shares to be
covered by each award, the Committee shall take into account the duties of the
respective persons, their present and potential contributions to the success of
the Company and such other factors as the Committee shall deem relevant in
connection with accomplishing the purposes of the Plan.
5. Stock.
(a) The maximum number of shares of common stock reserved for the grant of
awards under the Plan shall be 14,940,000, subject to adjustment as provided in
Section 12 hereof. Such shares may, in whole or in part, be authorized but
unissued shares or shares that shall have been or may be reacquired by the
Company.
(b) If any outstanding award under the Plan should, for any reason expire,
be canceled or be forfeited (other than in connection with the exercise of a
Stock Appreciation Right or a Limited Right), without having
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been exercised in full, the shares of common stock allocable to the
unexercised, canceled or terminated portion of such award shall (unless the
Plan shall have been terminated) become available for subsequent grants of
awards under the Plan.
(c) Except as the Committee may otherwise determine, in no event may a
Grantee be granted during any calendar year Options to acquire more than
750,000 shares of common stock or more than 750,000 shares of Restricted Stock,
in each case subject to adjustment as provided in Section 12 hereof.
6. Terms and Conditions of Options.
(a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be
evidenced by a written agreement between the Company and the Grantee (the
"Option Agreement"), in such form and containing such terms and conditions as
the Committee shall from time to time approve, which Option Agreement shall
comply with and be subject to the following terms and conditions, unless
otherwise specifically provided in such Option Agreement. For purposes of
interpreting this Section 6, a director's service as a member of the Board
shall be deemed to be employment with the Company.
(b) NUMBER OF SHARES. Each Option Agreement shall state the number of shares
of common stock to which the Option relates.
(c) TYPE OF OPTION. Each Option Agreement shall specifically state that the
Option constitutes an Incentive Stock Option or a Nonqualified Stock Option. In
the absence of such designation, the Option will be deemed to be a Nonqualified
Stock Option.
(d) OPTION PRICE. Each Option Agreement shall state the Option Price, which,
in the case of an Incentive Stock Option, shall not be less than one hundred
percent (100%) of the Fair Market Value of the shares of common stock covered
by the Option on the date of grant. The Option Price shall be subject to
adjustment as provided in Section 12 hereof.
(e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at
the time of exercise, in cash or in shares of common stock (whether then owned
by the Grantee or issuable upon exercise of the Option) having a Fair Market
Value equal to such Option Price or in a combination of cash and common stock,
including a cashless exercise procedure through a broker-dealer; provided,
however, that in the case of an Incentive Stock Option the medium of payment
shall be determined at the time of grant and set forth in the applicable Option
Agreement.
(f) TERM AND EXERCISABILITY OF OPTIONS. Each Option Agreement shall provide
the exercise schedule for the Option as determined by the Committee, provided,
that, the Committee shall have the authority to accelerate the exercisability
of any outstanding option at such time and under such circumstances as it, in
its sole discretion, deems appropriate. The exercise period will be ten (10)
years from the date of the grant of the option unless otherwise determined by
the Committee; provided, however, that in the case of an Incentive Stock
Option, such exercise period shall not exceed ten (10) years from the date of
grant of such Option. The exercise period shall be subject to earlier
termination as provided in Sections 6(g) and 6(h) hereof. An Option may be
exercised, as to any or all full shares of common stock as to which the Option
has become exercisable, by written notice delivered in person or by mail to the
Company's transfer agent or other administrator designated by the Company,
specifying the number of shares of common stock with respect to which the
Option is being exercised.
(g) TERMINATION. Except as provided in this Section 6(g) and in Section 6(h)
hereof, an Option may not be exercised unless the Grantee is then in the employ
of or maintaining a director or consultant relationship with the Company or a
Related Entity (or a company or a Parent or Subsidiary of such company issuing
or
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assuming the Option in a transaction to which Section 424(a) of the Code
applies), and unless the Grantee has remained continuously so employed or in
the director or consultant relationship since the date of grant of the Option.
In the event that the employment or consultant relationship of a Grantee shall
terminate (other than by reason of death, Disability or Retirement), all
Options of such Grantee that are exercisable at the time of Grantee's
termination may, unless earlier terminated in accordance with their terms, be
exercised within three (3) months after the date of such termination (or such
different period as the Committee shall prescribe).
(h) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. If a Grantee shall die while
employed by, or maintaining a director or consultant relationship with, the
Company or a Related Entity, or within thirty (30) days after the date of
termination of such Grantee's employment, director or consultant relationship
(or within such different period as the Committee may have provided pursuant to
Section 6(g) hereof), or if the Grantee's employment, director or consultant
relationship shall terminate by reason of Disability, all Options theretofore
granted to such Grantee (to the extent otherwise exercisable) may, unless
earlier terminated in accordance with their terms, be exercised by the Grantee
or by the Grantee's estate or by a person who acquired the right to exercise
such Options by bequest or inheritance or otherwise by result of death or
Disability of the Grantee, at any time within 180 days after the death or
Disability of the Grantee (or such different period as the Committee shall
prescribe). In the event that an Option granted hereunder shall be exercised by
the legal representatives of a deceased or former Grantee, written notice of
such exercise shall be accompanied by a certified copy of letters testamentary
or equivalent proof of the right of such legal representative to exercise such
Option. In the event that the employment or consultant relationship of a
Grantee shall terminate on account of such Grantee's Retirement, all Options of
such Grantee that are exercisable at the time of such Retirement may, unless
earlier terminated in accordance with their terms, be exercised at any time
within one hundred eighty (180) days after the date of such Retirement (or such
different period as the Committee shall prescribe). Unless otherwise provided
in the applicable Agreement, in the case of awards granted to consultants who
do not provide services to the Company or to a Related Entity on an ongoing
basis, for the purpose of determining the rights of such consultant under the
Plan, the Committee shall determine the date, if any, upon which the
consultant's relationship with the Company or the Related Entity shall have
been terminated.
(i) OTHER PROVISIONS. The Option Agreements evidencing awards under the Plan
shall contain such other terms and conditions not inconsistent with the Plan as
the Committee may approve.
7. Nonqualified Stock Options.
Options granted pursuant to this Section 7 are intended to constitute
Nonqualified Stock Options and shall be subject only to the general terms and
conditions specified in Section 6 hereof.
8. Incentive Stock Options.
Options granted pursuant to this Section 8 are intended to constitute
Incentive Stock Options and shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in
Section 6 hereof:
(a) LIMITATION ON VALUE OF SHARES. To the extent that the aggregate Fair
Market Value of shares of common stock subject to Options designated as
Incentive Stock Options which become exercisable for the first time by a
Grantee during any calendar year (under all plans of the Company or any
Subsidiary) exceeds $100,000, such excess Options, to the extent of the shares
covered thereby in excess of the foregoing limitation, shall be treated as
Nonqualified Stock Options. For this purpose, Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the shares of common stock shall be determined as of the date that the
Option with respect to such shares was granted.
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(b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option
granted to a Ten Percent Stockholder, (i) the Option Price shall not be less
than one hundred ten percent (110%) of the Fair Market Value of the shares of
common stock on the date of grant of such Incentive Stock Option, and (ii) the
exercise period shall not exceed five (5) years from the date of grant of such
Incentive Stock Option.
9. Stock Appreciation Rights.
The Committee shall have authority to grant a Stock Appreciation Right to
the Grantee of any Option under the Plan with respect to all or some of the
shares of common stock covered by such related Option. A Stock Appreciation
Right shall, except as provided in this Section 9 or as may be determined by
the Committee, be subject to the same terms and conditions as the related
Option. Each Stock Appreciation Right granted pursuant to the Plan shall be
evidenced by a written Agreement between the Company and the Grantee in such
form as the Committee shall from time to time approve, which Agreement shall
comply with and be subject to the following terms and conditions, unless
otherwise specifically provided in such Agreement:
(a) TIME OF GRANT. A Stock Appreciation Right may be granted either at the
time of grant of the related option, or at any time thereafter during the term
of the Option; provided, however that Stock Appreciation Rights related to
Incentive Stock Options may only be granted at the time of grant of the related
Option.
(b) PAYMENT. A Stock Appreciation Right shall entitle the holder thereof,
upon exercise of the Stock Appreciation Right or any portion thereof, to
receive payment of an amount computed pursuant to Section 9(d).
(c) EXERCISE. A Stock Appreciation Right shall be exercisable at such time
or times and only to the extent that the related Option is exercisable, and
will not be transferable except to the extent the related option may be
transferable. A Stock Appreciation Right granted in connection with an
Incentive Stock Option shall be exercisable only if the Fair Market Value of a
share of common stock on the date of exercise exceeds the purchase price
specified in the related Incentive Stock Option. Unless otherwise approved by
the Committee, no Grantee shall be permitted to exercise any Stock Appreciation
Right (i) until six (6) months have elapsed from the date of grant or (ii)
during the period beginning two weeks prior to the end of each of the Company's
fiscal quarters and ending on the second business day following the day on
which the Company releases to the public a summary of its fiscal results for
such period.
(d) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right, the
Optionee shall be entitled to receive an amount determined by multiplying (i)
the excess of the Fair Market Value of a share of common stock on the date of
exercise of such Stock Appreciation Right over the Option Price of the related
Option, by (ii) the number of shares of common stock as to which such Stock
Appreciation Right is being exercised.
(e) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION RIGHTS UPON
EXERCISE. Upon the exercise of a Stock Appreciation Right, the related Option
shall be canceled to the extent of the number of shares of common stock as to
which the Stock Appreciation Right is exercised. Upon the exercise or surrender
of an option granted in connection with a Stock Appreciation Right, the Stock
Appreciation Right shall be canceled to the extent of the number of shares of
common stock as to which the Option is exercised or surrendered.
(f) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised by a
Grantee only by a written notice delivered to the Company in accordance with
procedures specified by the Company from time to time. Such notice shall state
the number of shares of common stock with respect to which the Stock
Appreciation Right is being exercised. A Grantee may also be required to
deliver to the Company the underlying Agreement evidencing the Stock
Appreciation Right being exercised and any related Option Agreement so that a
notation of such exercise may be made thereon, and such Agreements shall then
be returned to the Grantee.
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(g) FORM OF PAYMENT. Payment of the amount determined under Section 9(d) may
be made solely in whole shares of common stock in a number based upon their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the sole discretion of the Committee, solely in cash, or in a
combination of cash and shares of common stock as the Committee deems
advisable. If the Committee decides to make full payment in shares of common
stock, and the amount payable results in a fractional share, payment for the
fractional share will be made in cash.
10. Limited Stock Appreciation Rights.
The Committee shall have authority to grant a Limited Right to the Grantee
of any Option under the Plan with respect to all or some of the shares of
common stock covered by such related Option. Each Limited Right granted
pursuant to the Plan shall be evidenced by a written Agreement between the
Company and the Grantee, in such form as the Committee shall from time to time
approve, which Agreement shall comply with and be subject to the following
terms and conditions, unless otherwise specifically provided in such Agreement:
(a) TIME OF GRANT. A Limited Right granted in tandem with a Nonqualified
Stock Option may be granted either at the time of grant of the related Option
or any time thereafter during its term. A Limited Right granted in tandem with
an Incentive Stock Option may only be granted at the time of grant of the
related Option.
(b) EXERCISE. A Limited Right may be exercised only (i) during the ninety-
day period following the occurrence of a Change in Control or (ii) immediately
prior to the effective date of a Corporate Transaction. Each Limited Right
shall be exercisable only if, and to the extent that, the related Option is
exercisable and, in the case of a Limited Right granted in tandem with an
Incentive Stock Option, only when the Fair Market Value per share of common
stock exceeds the Option Price per share. Notwithstanding the provisions of the
two immediately preceding sentences (or unless otherwise approved by the
Committee), a Limited Right granted to a Grantee who is an Insider must be (x)
held by the Insider for at least six (6) months from the date of grant of the
Limited Right before it becomes exercisable and (y) automatically paid out in
cash to the Insider upon the occurrence of a Change in Control or a Corporate
Transaction (provided such six (6) month holding period requirement has been
met).
(c) AMOUNT PAYABLE. Upon the exercise of a Limited Right, the Grantee
thereof shall receive in cash whichever of the following amounts is applicable:
(i) in the case of the realization of Limited Rights by reason of an
acquisition of common stock described in clause (i) of the definition of
"Change in Control" (Section 2(c) above), an amount equal to the
Acquisition Spread as defined in Section 10(d)(ii) below; or
(ii) in the case of the realization of Limited Rights by reason of
stockholder approval of an agreement or plan described in clause (i) of the
definition of "Corporate Transaction" (Section 2(j) above), an amount equal
to the Merger Spread as defined in Section 10(d)(iv) below; or
(iii) in the case of the realization of Limited Rights by reason of the
change in composition of the Board described in clause (ii) of the
definition of "Change in Control" or stockholder approval of a plan or
agreement described in clause (ii) of the definition of Corporate
Transaction, an amount equal to the Spread as defined in Section 10(d)(v)
below.
Notwithstanding the foregoing provisions of this Section 10(c) (or unless
otherwise approved by the Committee), in the case of a Limited Right granted in
respect of an Incentive Stock Option, the Grantee may not receive an amount in
excess of the maximum amount that will enable such option to continue to
qualify under the Code as an Incentive Stock Option.
(d) DETERMINATION OF AMOUNTS PAYABLE. The amounts to be paid to a Grantee
pursuant to Section 10(c) shall be determined as follows:
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(i) The term "Acquisition Price per Share" as used herein shall mean,
with respect to the exercise of any Limited Right by reason of an
acquisition of common stock described in clause (i) of the definition of
Change in Control, the greatest of (A) the highest price per share shown on
the Statement on Schedule 13D or amendment thereto filed by the holder of
25% or more of the voting power of the Company that gives rise to the
exercise of such Limited Right, (B) the highest price paid in any tender or
exchange offer which is in effect at any time during the ninety-day period
ending on the date of exercise
(ii) of the Limited Right, or (C) the highest Fair Market Value per
share of common stock during the ninety-day period ending on the date the
Limited Right is exercised.
(iii) The term "Acquisition Spread" as used herein shall mean an amount
equal to the product computed by multiplying (A) the excess of (1) the
Acquisition Price per Share over (2) the Option Price per share of common
stock at which the related option is exercisable, by (B) the number of
shares of common stock with respect to which such Limited Right is being
exercised.
(iv) The term "Merger Price per Share" as used herein shall mean, with
respect to the exercise of any Limited Right by reason of stockholder
approval of an agreement described in clause (i) of the definition of
Corporate Transaction, the greatest of (A) the fixed or formula price for
the acquisition of shares of common stock specified in such agreement, if
such fixed or formula price is determinable on the date on which such
Limited Right is exercised, (B) the highest price paid in any tender or
exchange offer which is in effect at any time during the ninety-day period
ending on the date of exercise of the Limited Right, (C) the highest Fair
Market Value per share of common stock during the ninety-day period ending
on the date on which such Limited Right is exercised.
(v) The term "Merger Spread" as used herein shall mean an amount equal
to the product computed by multiplying (A) the excess of (1) the Merger
Price per Share over (2) the Option Price per share of common stock at
which the related Option is exercisable, by (B) the number of shares of
common stock with respect to which such Limited Right is being exercised.
(vi) The term "Spread" as used herein shall mean, with respect to the
exercise of any Limited Right by reason of a change in the composition of
the Board described in clause (ii) of the definition of Change in Control
or stockholder approval of a plan or agreement described in clause (ii) of
the definition of Corporate Transaction, an amount equal to the product
computed by multiplying (i) the excess of (A) the greater of (1) the
highest price paid in any tender or exchange offer which is in effect at
any time during the ninety-day period ending on the date of exercise of the
Limited Right or (2) the highest Fair Market Value per share of common
stock during the ninety-day period ending on the date the Limited Right is
exercised over (B) the Option Price per share of common stock at which the
related Option is exercisable, by (ii) the number of shares of common stock
with respect to which the Limited Right is being exercised.
(e) TREATMENT OF RELATED OPTIONS AND LIMITED RIGHTS UPON EXERCISE. Upon the
exercise of a Limited Right, the related Option shall cease to be exercisable
to the extent of the shares of common stock with respect to which such Limited
Right is exercised but shall be considered to have been exercised to that
extent for purposes of determining the number of shares of common stock
available for the grant of further awards pursuant to this Plan. Upon the
exercise or termination of a related Option, the Limited Right with respect to
such related Option shall terminate to the extent of the shares of common stock
with respect to which the related Option was exercised or terminated.
(f) METHOD OF EXERCISE. To exercise a Limited Right, the Grantee shall (i)
deliver written notice to the Company specifying the number of shares of common
stock with respect to which the Limited Right is being exercised, and (ii) if
requested by the Committee, deliver to the Company the Agreement evidencing the
Limited Rights being exercised and, if applicable, the Option Agreement
evidencing the related Option; the Company shall endorse thereon a notation of
such exercise and return such Agreements to the Grantee. The date of exercise
of a Limited Right that is validly exercised shall be deemed to be the date on
which there shall have been delivered the instruments referred to in the first
sentence of this paragraph (f).
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11. Restricted Stock.
The Committee may award shares of Restricted Stock to any eligible employee
or consultant. Each award of Restricted Stock under the Plan shall be evidenced
by a written Agreement between the Company and the Grantee, in such form as the
Committee shall from time to time approve, which Agreement shall comply with
and be subject to the following terms and conditions, unless otherwise
specifically provided in such Agreement:
(a) NUMBER OF SHARES. Each Agreement shall state the number of shares of
Restricted Stock to be subject to an award.
(b) RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of, except by will or
the laws of descent and distribution, for such period as the Committee shall
determine from the date on which the award is granted (the "Restricted
Period"). The Committee may also impose such additional or alternative
restrictions and conditions on the shares as it deems appropriate including the
satisfaction of performance criteria. Such performance criteria may include
sales, earnings before interest and taxes, return on investment, earnings per
share, any combination of the foregoing or rate of growth of any of the
foregoing, as determined by the Committee. Certificates for shares of stock
issued pursuant to Restricted Stock awards shall bear an appropriate legend
referring to such restrictions, and any attempt to dispose of any such shares
of stock in contravention of such restrictions shall be null and void and
without effect. During the Restricted Period, such certificates shall be held
in escrow by an escrow agent appointed by the Committee. In determining the
Restricted Period of an award, the Committee may provide that the foregoing
restrictions shall lapse with respect to specified percentages of the awarded
shares on successive anniversaries of the date of such award.
(c) FORFEITURE. Subject to such exceptions as may be determined by the
Committee, if the Grantee's continuous employment or consultant relationship
with the Company or a Related Entity shall terminate for any reason prior to
the expiration of the Restricted Period of an award, any shares remaining
subject to restrictions (after taking into account the provisions of Subsection
(e) of this Section 11) shall thereupon be forfeited by the Grantee and
transferred to, and retired by, the Company without cost to the Company or such
Related Entity.
(d) OWNERSHIP. During the Restricted Period the Grantee shall possess all
incidents of ownership of such shares, subject to Subsection (b) of this
Section 11, including the right to receive dividends with respect to such
shares and to vote such shares.
(e) ACCELERATED LAPSE OF RESTRICTIONS. Upon the occurrence of any of the
events specified in Section 13 (and subject to the conditions set forth
therein), all restrictions then outstanding on any shares of Restricted Stock
awarded under the Plan shall lapse as of the applicable date set forth in
Section 13. The Committee shall have the authority (and the Agreement may so
provide) to cancel all or any portion of any outstanding restrictions prior to
the expiration of the Restricted Period with respect to any or all of the
shares of Restricted Stock awarded on such terms and conditions as the
Committee shall deem appropriate.
12. Effect of Certain Changes.
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
extraordinary dividend, stock dividend (including a spin-off or split-off of a
Subsidiary), recapitalization, merger, consolidation, stock split, warrant or
rights issuance, or combination or exchange of such shares, or other similar
transactions, the Committee shall equitably adjust (i) the maximum number of
Options or
(b) shares of Restricted Stock that may be awarded to a Grantee in any
calendar year (as provided in Section 5 hereof), (ii) the number of shares of
common stock available for awards under the Plan, (iii) the number of such
shares covered by outstanding awards and/or (iv) the price per share of Options
or the applicable market value of Stock Appreciation Rights or Limited Rights,
in each such case so as to reflect such event and preserve the value of such
awards; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated.
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(c) CHANGE IN COMMON STOCK. In the event of a change in the common stock of
the Company as presently constituted that is limited to a change of all of its
authorized shares of common stock into the same number of shares with a
different par value or without par value, the shares resulting from any such
change shall be deemed to be the common stock within the meaning of the Plan.
13. Corporate Transaction.
Unless otherwise provided in the applicable Agreement, in the event of a
Corporate Transaction, each award which is at the time outstanding and
unexercised under the Plan shall automatically terminate and, in the case of an
award of Restricted Stock, shall be released from any restrictions on transfer
and repurchase or forfeiture rights, immediately prior to the specified
effective date of such Corporate Transaction. However, all such awards shall
not terminate if the awards are, in connection with the Corporate Transaction,
assumed by the successor corporation or Parent thereof.
14. Non-Employee Director Options.
The provisions of this Section 14 shall apply only to certain grants of
Options to Non-Employee Directors, as provided below. Except as set forth in
this Section 14, the other provisions of the Plan shall apply to grants of
Options to Non-Employee Directors to the extent not inconsistent with this
Section. For purposes of interpreting Section 6 of the Plan, a Non-Employee
Director's service as a member of the Board shall be deemed to be employment
with the Company.
(a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock Options
in accordance with this Section 14. The Option Price per share of common stock
purchasable under Options granted to Non-Employee Directors shall be the Fair
Market Value of a share on the date of grant. Options granted pursuant to this
Section 14 shall be subject to the terms of such section and shall not be
subject to discretionary acceleration of exercisability by the Committee.
(b) INITIAL GRANTS. On the date of the Initial Public Offering, each Non-
Employee Director will be granted automatically, without action by the
Committee, an Option to purchase 10,000 shares of common stock. The Option
Price shall equal the offering price of the common stock in connection with the
Initial Public Offering.
(c) SUBSEQUENT GRANTS. Each person who, after the Initial Public Offering,
becomes a Non-Employee Director for the first time, will, at the time such
director is elected and duly qualified, be granted automatically, without
action by the Committee, an Option to purchase 10,000 shares of common stock.
The Option Price shall equal the Fair Market Value of the common stock as of
the date of grant.
(d) ANNUAL GRANTS. On each anniversary date of a Non-Employee Director's
initial election to the Board, such Non-Employee Director will be granted
automatically, without action by the Committee, an Option to purchase 10,000
shares of common stock. The Option Price shall equal the Fair Market Value of
the common stock as of the date of grant.
(e) VESTING. Each option granted under this Section 14 shall be fully
exercisable on the date of grant. Sections 6(f), 6(g) and 6(h) hereof shall not
apply to Options granted to Non-Employee Directors.
(f) DURATION. Each Option granted to a Non-Employee Director shall expire on
the first to occur of (i) the tenth anniversary of the date of grant of the
Option, (ii) the first anniversary of the Non-Employee Director's termination
of service as a member of the Board other than for Cause or (iii) three months
following the Non-Employee Director's removal from the Board for Cause. The
Committee may not provide for an extended exercise period beyond the periods
set forth in this Section 14.
(g) DEFINITION OF "CAUSE." For purposes of this Section 14, "cause" shall
mean the termination of service as a member of the Board by a Non-Employee
Director due to any act of (i) fraud or intentional
E-11
misrepresentation, (ii) embezzlement, misappropriation or conversion of assets
or opportunities of the Company or any Subsidiary, or (iii) any other act
deemed by the Board to be detrimental to the Company.
15. Period During which Awards May Be Granted.
Awards may be granted pursuant to the Plan from time to time within a period
of ten (10) years from April 27, 1999, the date the Plan was initially adopted
by the Board.
16. Transferability of Awards.
(a) Incentive Stock Options (and any Stock Appreciation Rights related
thereto) may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by the laws of descent and distribution
and may be exercised, during the lifetime of the Grantee, only by the Grantee
or his or her guardian or legal representative.
(b) Nonqualified Stock Options (together with any Stock Appreciation Rights
or Limited Rights related thereto) shall be transferable in the manner and to
the extent acceptable to the Committee, as may be evidenced by a writing signed
by the Company and the Grantee, or in such other matter as the Committee shall
provide. Notwithstanding the transfer by a Grantee of a Nonqualified Stock
Option, the Grantee will continue to remain subject to the withholding tax
requirements set forth in Section 17 hereof.
(c) The terms of any award granted under the Plan, including the
transferability of any such award, shall be binding upon the executors,
administrators, heirs and successors of the Grantee.
17. Agreement by Grantee regarding Withholding Taxes.
If the Committee shall so require, as a condition of exercise of an Option,
Stock Appreciation Right or Limited Right or the expiration of a Restricted
Period (each, a "Tax Event"), each Grantee shall agree that no later than the
date of the Tax Event, the Grantee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes of any kind required by law to be withheld upon the Tax Event.
Alternatively, the Committee may provide that a Grantee may elect, to the
extent permitted or required by law, to have the Company deduct federal, state
and local taxes of any kind required by law to be withheld upon the Tax Event
from any payment of any kind due to the Grantee. The withholding obligation may
be satisfied by the withholding or delivery of common stock.
18. Rights as a Stockholder.
Except as provided in Section 11(d) hereof, a Grantee or a transferee of an
award shall have no rights as a stockholder with respect to any shares covered
by the award until the date of the issuance of a stock certificate to him or
her for such shares. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distribution
of other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 12(a) hereof.
19. No Rights to Employment.
Nothing in the Plan or in any award granted or Agreement entered into
pursuant hereto shall confer upon any Grantee the right to continue in the
employ of, or in a consultant relationship with, the Company or any Related
Entity or to be entitled to any remuneration or benefits not set forth in the
Plan or such Agreement or to interfere with or limit in any way the right of
the Company or any such Related Entity to terminate such Grantee's employment.
Awards granted under the Plan shall not be affected by any change in duties or
position of a Grantee as long as such Grantee continues to be employed by, or
in a consultant relationship with, the Company or any Related Entity.
E-12
20. Beneficiary.
A Grantee may file with the Committee a written designation of a beneficiary
on such form as may be prescribed by the Committee and may, from time to time,
amend or revoke such designation. If no designated beneficiary survives the
Grantee, the executor or administrator of the Grantee's estate shall be deemed
to be the Grantee's beneficiary.
21. Stockholder Approval; Amendment and Termination of the Plan.
(a) STOCKHOLDER APPROVAL. The Plan initially became effective when adopted
by the Board and stockholders of the Company on April 27, 1999 and shall
terminate on the tenth anniversary of such date. This amendment and restatement
of the Plan became effective upon its adoption by the Board on May 17, 1999.
(b) AMENDMENT AND TERMINATION OF THE PLAN. The Board at any time and from
time to time may suspend, terminate, modify or amend the Plan; however, unless
otherwise determined by the Board, an amendment that requires stockholder
approval in order for the Plan to continue to comply with Rule 16b-3 or any
other law, regulation or stock exchange requirement shall not be effective
unless approved by the requisite vote of stockholders. Except as provided in
Section 12(a) hereof, no suspension, termination, modification or amendment of
the Plan may adversely affect any award previously granted, unless the written
consent of the Grantee is obtained.
22. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto shall
be governed by the laws of the State of Delaware.
* * * * *
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________________________________________________________________________________
NET2PHONE, INC.
This Proxy is Solicited on Behalf of The Board of Directors
For The Special Meeting of Stockholders on July 6, 2000
The undersigned hereby appoints Clifford M. Sobel, Howard S. Balter, and
Glenn J. Williams, and each of them as proxies, each with full power of
substitution, and authorizes them to represent and to vote, as designated on
the reverse side of this form, all the shares of Class A Common Stock and/or
common stock of Net2Phone, Inc. held of record by the undersigned on June 2,
2000, at the Special Meeting of Stockholders to be held on July 6, 2000, at
9 a.m. at what is to become our new headquarters, 520 Broad Street, Newark,
New Jersey, or any adjournment or postponement.
IF NO OTHER INDICATION IS MADE ON THE REVERSE SIDE OF THIS FORM, THE PROXIES
WILL VOTE FOR ITEMS 1, 2, AND 3 AND, IN THEIR DISCRETION, UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Please mark, sign and date the reverse side and return the proxy card promptly
using the enclosed envelope or vote by telephone or using the Internet
following the instructions on the reverse side.
- --------------------------------------------------------------------------------
SPECIAL MEETING OF STOCKHOLDERS of
NET2PHONE, INC.
July 6, 2000
PROXY VOTING INSTRUCTIONS
TO VOTE BY MAIL
- ---------------
Please complete, date, sign and mail your proxy card in the postage-paid
envelope provided as soon as possible. Mailed proxies must be received no later
than 11:59 p.m. (EST) on July 5, 2000.
TO VOTE BY TELEPHONE (TOUCH-TONE PHONE ONLY)
- --------------------------------------------
Please call toll-free 1-800-PROXIES in the United States or Canada prior to
11:59 p.m. (EST) on July 5, 2000 and follow the instructions. Have your control
number and the proxy card available when you call.
TO VOTE BY INTERNET
- -------------------
Please access the web page at "www.voteproxy.com" prior to 11:59 p.m. (EST) on
July 5, 2000 and follow the on-screen instructions. Have your control number and
the proxy card available when you access the web page.
YOUR CONTROL NUMBER IS ------------------------> [ ]
Please do not vote by more than one method; the last vote received will be
the official vote.
Thank you for voting!
________________________________________________________________________________
________________________________________________________________________________
|
[X] Please mark your -- |
votes as in this | -----
example.
The Board of Directors recommends a vote "FOR" items 1, 2, and 3.
1. Approval of the FOR AGAINST ABSTAIN 2. Approval of the amendment FOR AGAINST ABSTAIN
amendment to our [_] [_] [_] to our Certificate of [_] [_] [_]
Certificate of Incorporation to increase
Incorporation to the maximum number of directors.
increase the authorized shares of our
Class A Common Stock. 3. Approval of the amendment to [_] [_] [_]
the Net2Phone, Inc. 1999 Amended and
Restated Stock Option and Incentive Plan.
4. In their discretion, the proxies are authorized
to vote upon all other matters that may
properly be presented at the Special Meeting.
The undersigned hereby revokes any proxy or proxies
heretofore given to vote such shares at said
meeting or any adjournment thereof.
Please sign EXACTLY as your name appears hereon.
When signing as attorney, executor, administrator,
trustee or guardian, please give your full title as
such. If more than one trustee, all should sign. If
shares are held jointly, both owners must sign.
------------------------------------------------
Signature
------------------------------------------------
Signature (if held jointly)
Date: ---------------------------------------- 2000
- --------------------------------------------------------------------------------