Prospectus Summary
This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including "Risk Factors" and the financial statements, before making an investment decision.
Net2Phone
Net2Phone is a leading provider of services enabling users to make high- quality, low-cost telephone calls over the Internet. These services are commonly referred to as Internet telephony. Our Internet telephony services enable our customers to call individuals and businesses worldwide using their personal computers or traditional telephones. According to International Data Corporation, a leading market research firm, we were the largest provider of Internet calls in the world in 1998 with a 39.4% market share in terms of minutes of use.
In August 1996, we introduced our first service, "PC2Phone." We believe that PC2Phone was the first commercial telephone service to connect calls between personal computers and telephones over the Internet. In September 1997, we introduced "Phone2Phone," a service that enables international and domestic calls to be made over the Internet using traditional telephones. Our customers often pay substantially less for long-distance calls they make using our services than they would for calls made over traditional long distance networks, such as those owned by AT&T, Sprint and MCI WorldCom.
We are using our expertise in Internet telephony to integrate live voice capabilities into the Web. We have developed simple, easy to use PC2Phone software that operates on a personal computer and allows individuals and businesses to:
. speak with sales or customer service representatives of online retailers and other Web-based businesses while visiting their Web sites;
. speak with individuals or businesses listed on various online directories, such as Yahoo! People Search; and . call almost any telephone number in the world.
We promote our services through relationships with international resellers and leading Internet companies, including:
. Netscape. Our PC2Phone software will be integrated on an exclusive basis into future versions of Netscape's Internet browser, including the Netscape Communicator products, for the term of our agreement. Netscape will also include a Net2Phone icon on the Netscape Navigator Personal Toolbar and has begun to integrate our services into the Netscape Netcenter site, which will allow Netcenter users to access our services from anywhere on the Web.
. ICQ. We have entered into an agreement with ICQ, a subsidiary of America Online, Inc., to provide Internet telephony services to users of ICQ's instant messaging service. ICQ will integrate some of our Internet telephony services into ICQ's instant messaging software on an exclusive basis, allowing ICQ users to make PC-to-phone and PC-to-PC calls and to receive phone-to-PC calls. We will also co-brand a prepaid phone-to- phone calling card with the ICQ service, allowing users to place calls from the United States and 19 other countries to virtually anywhere in the world.
. Yahoo! and Excite. Our Web-based Internet telephony service is integrated into the Yahoo! People Search online telephone directory and Excite's Web sites in its International Network, which includes the United Kingdom, Germany, France, Japan, Italy, Australia, Sweden and the Netherlands.
Our strategy for building on our leadership position in our market and making live voice communication a common feature on the Internet includes the following key elements:
. driving usage through resellers and strategic partners;
. pursuing multiple sources of revenue;
. enhancing worldwide brand recognition;
. making our software readily available worldwide; and . expanding and enhancing our products and services.
Upon the closing of this offering, IDT will own approximately 48.3% of our outstanding capital stock. IDT owns Class A stock that has twice the voting power of our common stock. As a result, IDT will control 58.2% of our vote.
Our principal executive offices are located at 171 Main Street, Hackensack, New Jersey 07601, and our telephone number at that address is (201) 530-4000.
Recent Developments
We experienced substantial growth in revenue and customers in the fiscal year ended July 31, 1999. During this period, we generated revenue of $33.3 million and a loss from operations of $24.5 million, including a non-cash compensation charge of $17.9 million, as compared to revenue of $12.0 million and a loss from operations of $3.5 million in 1998. Over 90% of our revenue in fiscal 1999 was derived from prepaid per-minute charges from our PC2Phone and Phone2Phone services. In addition, as of the end of fiscal 1999, we served over 325,000 active customers who spent an average of approximately 60 minutes per month placing calls over the Internet, as compared to over 110,000 active customers who spent an average of approximately 45 minutes per month as of the end of fiscal 1998.
We have also recently entered into arrangements with the following strategic partners:
. Priceline.com. We have entered into a memorandum of understanding and a co-marketing agreement with priceline.com, an Internet commerce service that allows users to name their own price to purchase goods and services over the Internet. Under the terms of our memorandum of understanding, we expect to offer our international and domestic Phone2Phone services as a premier provider through priceline.com, enabling priceline.com customers to name their own price to purchase blocks of minutes of our Phone2Phone services. We also expect to work with priceline.com to develop an offer-by-phone service that will enable consumers to make offers to purchase Phone2Phone services from us on a per-call basis. Under the terms of our co-marketing agreement, we will participate in a co-marketing program with priceline.com through December 31, 1999.
. Go2Net. We have entered into an exclusive three-year agreement with Go2Net, a network of branded, technology- and community-driven Web sites, to distribute and market our Internet telephony products and services throughout the Go2Net Network. Under the agreement, co-branded versions of our Internet telephony products and services will be integrated into the Go2Net Network. We will also create with Go2Net and CommTouch Software Ltd., a provider of email solutions, a unified communication and messaging platform on the Go2Net Network that will enable users to send and receive voice mail, faxes, email and telephone calls over the Internet.
. InfoSpace.com. InfoSpace.com will place on its affiliate Web sites and, on an exclusive basis, on its own Web site, for a period of two years, advertisements, promotions, links, banners, logos and integrated access to our PC2Phone Service and, upon release, our new unified messaging service.
. AT&T. We have entered into an agreement with AT&T to be the exclusive provider of PC-to-phone service on the AT&T WorldNet Beta Site for a period of 90 days through January 15, 2000.
. Sprint. Sprint is testing our Internet telephony technology and international network for international consumer long distance calls to Asia through a service called Sprint Callternatives. As part of this test, we provide dedicated customer service, 24 hours a day, seven days a week, to assist customer inquiries in multiple languages, including Mandarin, Cantonese and Korean. In addition, our advanced billing technology allows users of this service to view their telephone accounts in real time from our Web site.
We have recently strengthened our board of directors with the addition of four new members, Martin Yudkovitz, President of NBC Interactive Media, Daniel Schulman, President, Chief Operating Officer and a director of priceline.com, Michael Fischberger, Senior Vice President of Domestic Telecommunications and Internet services at IDT, and Harry C. McPherson, Jr., a partner in the law firm of Verner, Liipfert, Bernhard, McPherson and Hand, Chartered.
We have enhanced our product and service offerings and anticipate releasing the next version of our PC2Phone software in beta form by November 30, 1999, and commercially by December 31, 1999. This new version of our software incorporates advanced digital technologies for improved sound quality and a variety of new features, including Voice-Mailbox, a free voice-mail service that will store incoming messages as email attachments, free PC2PC calling and PC2Fax. In addition, we have developed a unified messaging service, which includes voice, fax and electronic messaging with multiple points of access. We anticipate releasing our unified messaging service in beta form in early 2000.
The Offering
Common stock offered by Net2Phone....... 3,400,000 shares Common stock offered by the selling 2,900,000 shares stockholders.............................
Total............................... 6,300,000 shares Capital stock to be outstanding after this offering:
Common stock.......................... 17,672,616 shares Class A stock......................... 33,924,250 shares Total............................... 51,596,866 shares Use of proceeds......................... We expect to use the proceeds: for developing and maintaining strategic relationships; for advertising and promotion; for upgrading and expanding our network; for international expansion; for research and development; for potential acquisitions; and for general corporate purposes, including working capital.
Nasdaq National Market symbol........... NTOP The share information set forth above excludes 7,354,150 shares of common stock issuable upon the exercise of stock options outstanding as of November 3, 1999. The outstanding stock options have a weighted average exercise price of $9.10 per share.
Unless otherwise noted, the information in this prospectus:
. assumes 11,672,616 shares of common stock outstanding as of November 3, 1999; and . assumes 36,524,250 shares of Class A stock outstanding as of November 3, 1999.
Each share of Class A stock entitles the holder to two votes, while holders of our common stock are entitled to one vote. Each share of Class A stock is convertible into one share of common stock, and automatically converts into common stock upon transfer.
Our fiscal year ends on July 31 of each calendar year. All references to fiscal years in this prospectus refer to the fiscal years ending in the indicated calendar years. For example, "fiscal 1999" refers to the fiscal year ended July 31, 1999.
The table below sets forth summary financial information for the periods indicated. This information is not necessarily indicative of the results of operations or financial position which would have resulted had we operated as an independent entity during the periods indicated. It is important that you read this information together with the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus.
Summary Financial Information Year Ended July 31, 1997 1998 1999
Statement of Operations:
Revenue.............................. $ 2,652,303 $12,005,972 $ 33,256,457
Costs and expenses:
Direct cost of revenue, excluding
depreciation...................... 1,553,443 6,848,759 17,818,010
Selling and marketing.............. 76,724 2,887,766 8,828,167
General and administrative......... 2,599,283 5,087,628 10,836,072
Depreciation and amortization...... 120,500 726,508 2,316,545
Compensation charge from the
issuance of stock options......... -- -- 17,919,541
Total costs and expenses......... 4,349,950 15,550,661 57,718,335
Loss from operations................. (1,697,647) (3,544,689) (24,461,878)
Net interest......................... -- -- (243,314)
Net loss............................. $(1,697,647) $(3,544,689) $(24,705,192)
The pro forma balance sheet data summarized below gives effect to:
. the sale of 6,210,000 shares of common stock in our initial public offering;
. the conversion of 3,140,000 shares of our Series A convertible preferred stock into 9,420,000 shares of our Class A stock at the closing of our initial public offering;
. the exercise of options to purchase 75,000 shares of our common stock at a price of $3.33 per share and options to purchase 50,000 shares of our common stock at an exercise price of $15.00 prior to the closing of our initial public offering for proceeds of $999,750; and . the application of $7.0 million of the net proceeds from our initial public offering to pay a portion of the loan payable to IDT.
The pro forma as adjusted balance sheet summarized below additionally reflects the sale of 3,400,000 shares of common stock by us in this offering.
July 31, 1999 Pro Forma Actual Pro Forma As Adjusted
Balance Sheet Data: Cash and cash equivalents............... $20,379,048 $99,638,298 $266,108,798 Working capital......................... 6,303,452 92,562,702 259,033,202 Total assets............................ 50,816,891 130,076,141 296,546,641 Accounts payable to IDT................. 3,735,395 3,735,395 3,735,395 Loan payable to IDT..................... 14,000,000 7,000,000 7,000,000 Total stockholders' (deficit) equity.... (4,062,867) 110,125,383 276,595,883