<PAGE>
As filed with the Securities and Exchange Commission on September 23, 1999
Registration No. 333-80411
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 4 to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ITXC Corp.
(Exact name of registrant as specified in its charter)
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Delaware 4813 22-35-31960
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdictionof Classification Code Number) Identification no.)
incorporation or
organization) 600 College Road East
Princeton, New Jersey 08540
(609) 419-1500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Mr. Edward B. Jordan
Chief Financial Officer
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
(609) 419-1500, Ext. 108
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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with copies to
Peter H. Ehrenberg Edward P. Tolley III
Lowenstein Sandler PC Simpson Thacher & Bartlett
65 Livingston Avenue 425 Lexington Avenue
Roseland, New Jersey 07068 New York, New York 10017
(973) 597-2500 (212) 455-2000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed maximum
Title of each class of aggregate offering Amount of
securities to be registered price(1) registration fee(2)
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<S> <C> <C>
Common Stock, par value $.001
per share.................... $93,437,500 $25,976
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</TABLE>
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Of which $23,978 was previously paid.
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 23, 1999
PROSPECTUS
6,250,000 Shares
[LOGO OF ITXC]
ITXC Corp.
Common Stock
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This is our initial public offering of shares of common stock. We are offering
6,250,000 shares. Of the 6,250,000 shares being offered, we are offering
5,000,000 shares in the United States and Canada and 1,250,000 shares outside
the United States and Canada.
We expect the public offering price to be between $11.00 and $13.00 per share.
The shares have been approved for listing on the Nasdaq National Market under
the symbol "ITXC", subject to official notice of issuance.
Investing in the shares involves risks. Risk Factors begin on page 5.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount......................................... $ $
Proceeds to ITXC.............................................. $ $
</TABLE>
We have granted the U.S. underwriters and the international underwriters a 30-
day option to purchase up to an aggregate of 937,500 additional shares of
common stock on the same terms and conditions as set forth above solely to
cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
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Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
, 1999
<PAGE>
[Outside panel of fold-out: A graphic depicting ITXC.net as a global network
overlayed on the public Internet.]
<PAGE>
[Inside panel of fold-out: A graphic showing map of the world depicting
locations of ITXC equipment, ITXC equipment at customer locations and locations
where ITXC affiliates have equipment to place and complete calls on our network.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Historical Financial Data....................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Our Business............................................................. 31
Management............................................................... 51
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Executive Compensation..................................................... 55
Certain Transactions....................................................... 64
Principal Stockholders..................................................... 67
Description of Capital Stock............................................... 70
Shares Eligible for Future Sale............................................ 73
Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders........... 75
Underwriting............................................................... 79
Legal Matters.............................................................. 83
Experts.................................................................... 84
Additional Information..................................................... 84
Index to Consolidated Financial Statements................................. F-1
</TABLE>
i
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PROSPECTUS SUMMARY
This summary highlights selected information about us. It may not contain
all of the information that you find important. You should carefully read this
entire document, including the "Risk Factors" section beginning on page 5 and
the consolidated financial statements and their related notes beginning on page
F-1. Unless otherwise indicated, the information in this prospectus assumes
that the underwriters will not exercise their over-allotment option and that
each outstanding share of our Series B convertible preferred stock and Series C
convertible preferred stock will be converted into two shares of our common
stock upon the closing of the offerings. All share information has been
adjusted to reflect our recent two-for-one stock split.
Our Company
We are a leading global provider of high quality Internet-based voice and
fax services. Our network and proprietary software allow our customers to
capitalize on the convergence of the traditional telephone network with both
private and public data networks, such as the Internet. ITXC.net, our actively
managed network that is overlayed on the public Internet, delivers high quality
voice communications over the Internet and other data networks. As part of
ITXC.net, we have established ITXC facilities in the U.S. and have arrangements
with affiliates outside of the U.S. to place and complete telephone calls on
our network. We believe that ITXC.net provides our customers with the cost
savings of data networks and the global reach of the Internet and provides us
with a platform for delivering additional value-added services. We intend to
continue to rapidly deploy ITXC.net on a global basis by taking advantage of
the growth of the Internet.
In April 1998, we introduced our WWeXchangeSM service, our first application
using ITXC.net. This service provides international call completion over the
Internet to our carrier and communications service provider customers and
enables them to offer their own customers phone-to-phone global voice services.
We have achieved significant growth in the use of our network since we began
offering this service. The number of minutes of traffic over ITXC.net increased
from 47,000 during the quarter ended June 30, 1998, to over 24.5 million during
the quarter ended June 30, 1999. We believe that this growth demonstrates that
our proprietary technology and techniques, which we refer to as BestValue
RoutingSM, are effective in enhancing the quality of voice and fax services
delivered over the Internet. We actively manage ITXC.net with BestValue Routing
to avoid congestion and select optimal routes.
We have developed a reliable network by using the Internet for transport and
our affiliates' local infrastructure for completing calls. We have used our
early entrant status to deploy what we believe to be the broadest global
network for Internet telephony. We believe that the scale of our network
provides us with a significant advantage in increasing market share and
introducing new services. In addition to our facilities in the U.S., our
affiliates
1
<PAGE>
place and complete calls on our network in over 71 international cities and
operate more than 110 ITXC.net points of presence. Our affiliates include Bell
Atlantic, China Telecom and Korea Telecom. On a typical day, we originate voice
or fax traffic from over 30 countries and deliver it to more than 140
countries.
In addition, we are developing products and services that we believe will
strengthen our relationships with our customers and enable us to provide them
with enhanced services. For example, we recently introduced a new proprietary
device called a SNARCTM. This device allows our customers to access our network
directly from their premises which eliminates the costs of special traditional
telephone connections dedicated to connecting with our network hubs and
improves the economics of our services to them.
We believe that data networks offer superior functionality to traditional
telephone networks and that the Internet, when actively managed, will usually
be the network of choice for both existing and enhanced voice and fax services.
We believe that our early entrant status and our experience in providing high
quality voice communication over ITXC.net since April 1998 position us to take
advantage of the convergence of these services and data networks, including the
Internet.
Our Strategy
Our goal is to be the leading provider of Internet-based voice and fax
services. In order to achieve this goal we intend to:
. Exploit our early entrant status and worldwide network
. Rapidly expand ITXC.net by adding additional affiliates worldwide
. Capitalize on the cost advantages of the Internet
. Establish ITXC.net as the standard for quality in our industry
. Provide our customers with direct access to ITXC.net
. Continue to provide leadership in the development of industry
standards
. Deliver additional Internet voice services over ITXC.net
Principal Executive Offices
Our principal executive offices are located at 600 College Road East,
Princeton, New Jersey 08540, and our telephone number is (609) 419-1500.
2
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The Offerings
Common stock offered by ITXC:
<TABLE>
<C> <S>
U.S. offering............... 5,000,000 shares
International offering...... 1,250,000 shares
Total................... 6,250,000 shares
Common stock outstanding after
the offerings................. 34,795,632 shares (1)
Use of proceeds................ We estimate that we will receive net proceeds
from the offerings of approximately $68.2
million, or $78.6 million if the underwriters
exercise their over-allotment option in full,
assuming an initial public offering price of
$12.00 per share and after deducting the
estimated underwriting discounts and offering
expenses. We intend to use the net proceeds:
. to fund capital expenditures and operating
expenses to expand our network and improve
our technology;
. to finance increased sales and marketing
efforts focused primarily upon
international expansion;
. to repay debt under our line of credit; and
. for general corporate purposes.
We may also use a portion of the net proceeds
to acquire complementary businesses or
technologies. We cannot specify with certainty
all of the particular uses for the net
proceeds we will have upon completion of the
offerings. See "Use of Proceeds."
Nasdaq National Market symbol.. "ITXC"
</TABLE>
(1) Based on share information as of August 30, 1999. See "Risk Factors" for
information about additional shares which may be issued in the future,
including those currently reserved for issuance.
3
<PAGE>
Summary Consolidated Financial Data
The following summary financial data for the period from our July 21, 1997
date of inception to December 31, 1997 and for the year ended December 31, 1998
are derived from our audited consolidated financial statements. The following
summary financial data for the six months ended June 30, 1998 and 1999 are
derived from our unaudited financial statements. You should read the
information that we have presented below in conjunction with our consolidated
financial statements, related notes and other financial information included
elsewhere in this prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Use of Proceeds" and
"Capitalization."
<TABLE>
<CAPTION>
Period From
July 21, 1997
(date of inception) Six Months
to Year ended ended June 30,
December 31, December 31, ----------------
1997 1998 1998 1999
------------------- ------------ ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue.................... $ 59 $ 1,891 $ 523 $ 7,753
Total costs and expenses... 706 9,189 2,524 15,235
Net loss................... (646) (7,207) (2,059) (7,326)
Basic and diluted net loss
per share applicable to
common stockholders....... (0.09) (0.88) (0.26) (0.90)
Weighted average shares
used in computation of
basic and diluted net loss
per share applicable to
common stockholders....... 7,005 8,185 7,992 8,603
Pro forma basic and diluted
net loss per share........ (0.45) (0.29)
Weighted average shares
used in computation of pro
forma basic and diluted
net loss per share........ 16,155 24,841
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................. $ 10,037 $10,037 $76,464
Total assets.................................. 19,471 19,471 85,898
Long-term obligations, including current
portion...................................... 1,923 1,923 200
Working capital............................... 7,429 7,429 73,856
Total stockholders' equity (deficit).......... (13,149) 12,092 80,242
</TABLE>
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The pro forma line items in the operating statement data presented above and
the pro forma column in the balance sheet data presented above give effect to
the conversion of all outstanding shares of our convertible preferred stock
into common stock as if such conversion had occurred at the dates of issuance.
The as adjusted column in the balance sheet data presented above reflects the
sale of 6,250,000 shares of common stock in the offerings at an assumed initial
public offering price of $12.00 per share and after deducting the estimated
underwriting discounts and offering expenses payable by us. The as adjusted
column also reflects the use of $1.7 million of the net proceeds of the
offerings to repay all outstanding indebtedness on our line of credit.
4
<PAGE>
RISK FACTORS
You should carefully consider the following factors as well as the other
information in this prospectus before deciding to invest in shares of our
common stock.
As a company with a limited operating history in a new and rapidly changing
industry, it is difficult to predict our future growth and operating results.
Our limited operating history makes predicting our future growth and
operating results difficult. We were incorporated in Delaware in 1997 and began
our first commercial service in April 1998. Our management team and other
employees have worked at ITXC for only a short period of time. Before
investing, you should consider the risks and uncertainties that an early stage
company like ours will face in the new and rapidly evolving market for
Internet-voice services. Before investing, consider that we have not proven
that we can:
. increase awareness of our brand and continue to build user loyalty;
. maintain our current, and develop new, relationships with the
unrelated third parties that complete voice and fax calls over our
network, our affiliates, as well as with our customers;
. respond effectively to competitive pressures; and
. continue to develop and upgrade our network and technology.
If we cannot accomplish these goals, our business may not succeed.
We have not been profitable and expect future losses.
To date, we have not been profitable. We may never be profitable or, if we
become profitable, we may be unable to sustain profitability. We have incurred
significant losses since inception. We reported net losses of $0.6 million for
the inception period from July 21, 1997 through December 31, 1997, $7.2 million
for the year ended December 31, 1998 and $7.3 million for the six months ended
June 30, 1999. We expect to continue to incur significant losses for the
foreseeable future. As of June 30, 1999, our accumulated deficit was $15.2
million. Our revenue may not grow or may not even continue at the current
level.
The growth of ITXC.net depends upon the growth of the Internet, which may not
continue.
The growth of ITXC.net depends on continued growth in the use of the
Internet generally and on the growth in the use of the Internet through
telephones and other devices, rather than personal computers. Growth of the
Internet may be inhibited by a number of factors, such as:
. quality of infrastructure;
. security concerns;
. technological failures, such as viruses;
5
<PAGE>
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
Even if Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline.
We are growing rapidly and effectively managing our growth may be difficult.
Our business has grown rapidly in terms of customers, employees and the size
of ITXC.net since our inception. This growth has placed a significant strain on
our resources and systems which has resulted in fluctuations in our network
expenses. Our business model depends on continued rapid growth which will put a
further strain on our resources, systems and management. If we are not able to
effectively manage our growth by implementing systems, expanding ITXC.net and
hiring, training and managing employees, our ability to offer our services will
be materially harmed.
Our business may be harmed because we rely on a third-party communications
infrastructure over which we have no control.
Our service could be disrupted, our reputation could be hurt and we could
lose customers, if the quality and maintenance of the third-party
communications infrastructure on which we rely suffers. This infrastructure,
including the Internet, is used to carry our voice traffic between our
customers and affiliates. We have no control over whether the infrastructure on
which we rely will be adequately maintained by these third parties or whether
these third parties are able to upgrade or improve their equipment and prevent
it from becoming obsolete. If these third parties fail to maintain, upgrade or
improve this equipment, our business may be materially harmed.
If we cannot maintain relationships with the only two vendors of gateway
equipment upon which ITXC.net depends, our network expenses could rise
significantly.
ITXC.net is currently configured to use gateway equipment and software which
is only manufactured by two vendors, Lucent Technologies and VocalTec
Communications. A gateway is a computer server that translates voice and voice-
related signaling back and forth between a traditional telephone network and a
data network. Gateways provided by other vendors are not currently
interoperable with ITXC.net. If we or our affiliates are unable to maintain
current purchasing terms with Lucent and VocalTec, we will have to make
significant technological modifications to ITXC.net which could raise our
network expenses significantly and have a material adverse affect on our
business, financial condition, operating results and future prospects.
Our network may not be able to handle increased traffic and a large number of
simultaneous calls, which could hurt our reputation and result in a loss of
customers.
Our network relies on hardware and software that we or our affiliates have
developed or acquired. We expect that our network traffic and volume of
simultaneous calls will increase significantly. If the hardware and software
used in our network cannot accommodate this additional volume, our reputation
could be damaged and we could lose customers.
6
<PAGE>
Failure to attract and retain affiliates and customers will harm our business.
If we are unable to attract and retain affiliates and customers, the traffic
on ITXC.net may not increase and we may not be able to increase our global
reach. Our ability to attract and retain affiliates and customers will depend
on a number of factors, including:
. our ability to reach agreement with telecommunications companies,
telephony resellers and Internet service providers regarding the
terms and conditions applicable to our business relationship;
. our success in marketing our services to potential new and existing
affiliates and customers;
. pricing by traditional carriers;
. the rate at which we are able to deploy our network and services;
. our ability to locate qualified foreign affiliates and call
termination providers;
. consolidation in the telecommunications industry; and
. the quality of the customer and technical support we provide.
Our quarterly operating results may fluctuate and could fall below expectations
of investors and industry analysts, resulting in a decline in our stock price.
Our quarterly operating results have varied widely in the past and could
fluctuate significantly in the future. Therefore, you should not rely on
quarter-to-quarter comparisons for indications of future performance. Certain
factors may influence our quarterly operating results, including:
. the amount and timing of capital expenditures and other costs
relating to the expansion of ITXC.net;
. the introduction of new or enhanced services or changes in pricing
policies by us or our competitors; and
. economic conditions specific to the Internet or all or a portion of
the technology sector.
If we cannot successfully address these factors, our operating results may fall
below analyst and investor expectations and the price of our common stock could
decline.
Ten customers account for 87% of our revenues; the loss of any one of these
customers may significantly reduce our revenue.
The loss of any of our significant customers may significantly reduce our
revenue. During 1998, our 10 largest customers accounted for approximately 87%
of our revenue. ABT Computer, Inc., a telecommunications reseller and our
largest customer for the year ended December 31, 1998, accounted for 20% of our
revenue during that year. Other large customers include AT&T, which accounted
for all of our consulting revenue for the year ended December 31, 1998, and
IDT, an international carrier and Internet service provider, which accounted
for 13% of our total revenue for 1998. We do not have exclusive arrangements
with our customers. As a result, our significant customers may decrease or
discontinue use of our service.
7
<PAGE>
The lack of interoperability among hardware produced by different vendors may
limit our ability to grow a worldwide, fully interoperable network.
Unless an interoperability standard is widely adopted and used by
manufacturers of gateways and other hardware, ITXC.net's growth will be
limited. Our business model depends on the growth of ITXC.net. Without a widely
adopted interoperability standard, terminators of voice traffic over the
Internet will continue to be required to only accept voice traffic which was
originated on gateways made by the same manufacturer as their terminating
gateway.
If the iNOW! interoperability initiative or another similar initiative is
not widely adopted and implemented, our network may not grow and our business
could be adversely affected.
Our marketing efforts could be adversely affected if we do not lead the
development of new interoperability standards.
If we do not play a leadership role in the development of new
interoperability standards, the perception that we are an industry leader could
be jeopardized. We achieved that perception, in part, by leading the effort to
develop the iNOW! initiative. A standard for the interoperability of Internet
voice services and products other than iNOW! could emerge without our
participation. If that happens, our marketing efforts could be adversely
affected.
Intense price competition and the nature of the calls that we place over
ITXC.net may limit our revenues.
Our revenues are not solely tied to the number of minutes of calls that are
placed over ITXC.net. Intense competition could reduce the prices that we
charge for our services. In addition, our revenues are affected by the types of
calls placed over ITXC.net. Calls placed over certain routes or to certain
termination points may generate less revenue than calls of a similar duration
made over different routes or to different termination points.
Intense price competition could reduce the demand for our service.
We may not be able to compete successfully in the developing Internet
telephony market. Many of our competitors are larger than us and have
substantially greater financial resources than we do. The market for our
services has been extremely competitive and is expected to be so for the
foreseeable future. Internet protocol and Internet telephony service providers
such as AT&T Global Clearinghouse, GRIC Communications, and iBasis route
traffic to destinations worldwide and compete directly with us. Other internet
telephony service providers focus on a retail customer base and may in the
future compete with us. In addition, major telecommunications companies, such
as AT&T, Deutsche Telekom, MCI Worldcom and Qwest Communications, have entered
or plan to enter the Internet telephony market. See "Our Business--
Competition."
If we are unable to keep up with rapid technological change in our industry in
a cost-effective manner, our revenues will decrease.
The market we serve, the market for voice services over the Internet, is
characterized by rapid technological developments, evolving industry standards
and customer demands and
8
<PAGE>
frequent new services announcements, such as new hardware and software entrants
and releases. In order for us to remain competitive and continue positive
growth of our business and increase the use of our network, we must respond to
these developments quickly and in a cost-effective manner. If we fail to
respond in this manner, our technology could become obsolete, our customers
will choose other alternatives to transmit their traffic and our revenues will
decrease.
We may need additional capital in the future to expand ITXC.net and it may not
be available on acceptable terms or at all, which could force us to curtail or
cease our operations.
The development of our business depends on our ability to expand the global
reach of ITXC.net. The net proceeds of the offerings and our cash flow from
operations could be insufficient to expand ITXC.net to meet future customer
demands. To date, our cash flow from operations has been insufficient to cover
our expenses and capital needs. We may require significant additional capital
in the future which may not be available on terms acceptable to us or at all.
If we cannot raise adequate capital on acceptable terms, we may be forced to
restrict the growth of ITXC.net, we may not be able to attract new affiliates
and we may have to curtail or cease our operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Foreign political and economic instability could harm our ability to maintain a
global presence.
A key component of our business plan is our global network of affiliates.
Our ability to maintain and expand our global reach may be harmed by foreign
political and economic instability. Before investing, consider that the
following factors may inhibit our ability to maintain and expand our global
presence:
. potentially longer payment cycles outside of the U.S.;
. difficulty in collecting accounts receivable from foreign affiliates;
. weaknesses in particular foreign economies;
. changes in diplomatic and trade relationships;
. foreign taxes; and
. the economic and administrative burdens of complying with a variety of
foreign laws, trade standards, tariffs and trade barriers.
Damage to our systems and network could interrupt our service and result in
reduced revenue and harm to our reputation.
Our operations are dependent on our ability to maintain the components of
ITXC.net and our other computer and telecommunications systems in effective
working order. In addition, our systems may be damaged by natural disasters,
equipment failure or intentional acts of vandalism. If we fail to safeguard our
systems and network and experience frequent or long system delays or
interruptions, we may not be able to provide our service in a consistent and
cost-effective manner--which will result in reduced revenue and harm to our
reputation.
9
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Our proprietary rights may be difficult to protect.
Our efforts to protect our intellectual property rights through patent,
copyright, trademark and trade secret laws in the United States and in other
countries may not prevent misappropriation, and our failure to protect our
proprietary rights could materially adversely affect our business, financial
condition, operating results and future prospects.
A third party could, without authorization, copy or otherwise appropriate
our proprietary network information. Our agreements with employees and others
who participate in development activities could be breached, we may not have
adequate remedies for any breach, and our trade secrets may otherwise become
known or independently developed by competitors. See "Our Business--Proprietary
Rights."
Acquisitions may disrupt our business and divert the attention of our
management.
Our industry is characterized by growth through acquisitions. To compete
effectively, we may need to make investments in complementary companies,
technologies and assets. Acquisitions could disrupt our ongoing business,
distract the attention of our small number of senior managers and make it
difficult to maintain our network and operational standards, controls and
procedures.
We also may not be able to successfully integrate the services, products and
personnel of any acquisition into our operations. We may be required to incur
debt or issue equity securities, which may be dilutive to you, to pay for
acquisitions. Our acquisitions may not result in any return, or a sufficient
return, on our investment and we may lose all or a substantial portion of our
investment.
Our success is dependent on the continued service of our key management and
technical personnel.
Our future success depends, in part, on the continued service of our key
management and technical personnel, including Tom I. Evslin, John G. Musci, and
Edward B. Jordan, three of our senior executive officers. If any of those
individuals were unable or unwilling to continue in their present positions,
our business, financial condition, operating results and future prospects could
be materially adversely affected. We do not carry key person life insurance on
our personnel, other than Mr. Evslin, and only Messrs. Evslin and Musci have
employment agreements.
We may have difficulty attracting and retaining the skilled employees we need
to execute our growth plan.
From time to time we have experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees. Our future success depends on our ability to attract, retain and
motivate highly skilled employees, particularly engineering and technical
personnel. Competition for employees in our industry is intense. We may not be
able to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future.
10
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Year 2000 compliance efforts and uncorrected errors could interrupt our
business and subject us to claims.
Our year 2000 compliance efforts may involve significant time and expense,
and uncorrected problems could materially and adversely affect our business,
financial condition, results of operations, liquidity and future prospects. We
may face claims based on year 2000 issues arising from the integration of
multiple products, including ours, within an overall system.
In addition, we rely on networks and computer hardware and software, some of
which may not be year 2000 compliant. To the extent our vendors and suppliers
fail to certify that they are year 2000 compliant, we may find it necessary to
terminate our relationships with them. If we terminate these relationships, we
may not be able to find suitable replacement vendors or suppliers on terms
favorable to us, or at all.
We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies we are dependent upon are not year
2000 compliant and fail to operate effectively after the year 2000. For
information regarding our efforts to prepare for year 2000 issues, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
If we are required to purchase the 51% interest of our South American joint
venture that we do not presently own, your holdings and our liquidity could be
adversely impacted.
In connection with the formation of our South American joint venture, we
entered into a buyout agreement with the other parties to the joint venture. If
we exercise our right to purchase the interests of these parties under the
buyout agreement, they may elect to receive cash or our common stock. The
amount of the purchase price could be substantial and, if we exercise our
rights and these parties elect to receive cash, the payment of such purchase
price could materially adversely impact our liquidity. If we pay these parties
in common stock, you may incur substantial dilution. We may not have the
capital necessary to fund a purchase of joint venture interests that we would
otherwise desire to make.
Future government regulation and legal uncertainties could affect our ability
to provide our services.
Our business, financial condition, operating results and future prospects
could be materially adversely affected if Congress, the Federal Communications
Commission, state regulatory authorities, foreign governments or other bodies
begin to regulate or, in the case of certain foreign governments, prohibit
Internet telephony.
United States. Although our services are not currently actively regulated by
the FCC, aspects of our operations may be subject to state or federal
regulation in the future. Increased regulation of the Internet may slow its
growth, and impact our cost of providing our service over the Internet. In
addition, the FCC may in the future impose surcharges or other regulations upon
us which could materially adversely affect our business, financial condition,
operating results and future prospects.
11
<PAGE>
International. Increased regulation of the Internet and/or Internet
telephony providers or the prohibition of Internet telephony in one or more
foreign countries could materially adversely affect our business, financial
condition, operating results and future prospects.
Our failure to qualify to do business in a foreign jurisdiction in which we
are required to do so or to comply with foreign laws and regulations could harm
our ability to conduct international operations.
Additionally, it is possible that laws--new or already in existence--may be
applied by the U.S. and/or other countries to transport services provided over
the Internet, including laws governing:
. sales and other taxes;
. user privacy;
. pricing controls;
. characteristics and quality of products and services;
. consumer protection;
. cross-border commerce, including laws that would impose tariffs, duties
and other import restrictions; and
. other claims based on the nature and content of Internet materials,
including claims of defamation, negligence and the failure to meet
necessary obligations.
If such laws are applied to our services, our ability to conduct our business
could be materially adversely affected.
The beneficial ownership of a significant amount of our common stock by our
directors and officers could delay or prevent a change in control of ITXC.
The concentrated beneficial ownership of our common stock could delay or
prevent a change in control of ITXC that might otherwise be beneficial to you.
Immediately after the closing of the offerings, our executive officers and
directors and their respective affiliates will beneficially own approximately
55.2% of our outstanding common stock. Accordingly, these stockholders will be
able to exert significant influence over matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combinations.
We have broad discretion in the use of the proceeds of these offerings and may
not use them effectively.
We have only specified how our management intends to use $41.7 million of
the $68.2 million net proceeds of the offerings. We cannot specify with
certainty how our management will use the remaining net proceeds of the
offerings. Our management will have broad discretion in the application of
proceeds and the timing of the expenditure of all of the net proceeds. If our
management fails to apply those proceeds effectively, we may not be successful
in expanding ITXC.net and growing our business and revenues.
12
<PAGE>
Our certificate of incorporation and bylaws and Delaware law will contain
provisions that could discourage a takeover.
Provisions of our certificate of incorporation and by-laws and Delaware law
may discourage, delay or prevent a merger or acquisition that you may consider
favorable. These provisions of our certificate of incorporation and by-laws
will:
. establish a classified board of directors in which only a portion of the
total number of directors will be elected at each annual meeting;
. authorize the board to issue preferred stock;
. prohibit cumulative voting in the election of directors;
. limit the persons who may call special meetings of stockholders;
. prohibit stockholder action by written consent; and
. establish advance notice requirements for nominations for the election
of the board of directors or for proposing matters that can be acted on
by stockholders at stockholder meetings.
The sale of a substantial number of shares of our common stock after the
offerings may adversely affect our stock price.
A substantial amount of our common stock is held by persons who have agreed
not to sell their shares until 180 days after the offerings. After that time,
those holders could decide to sell some or all of their shares.
The market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market after the offerings or
the perception that substantial sales could occur. These sales also might make
it difficult for us to sell equity securities in the future at a time when, and
at a price which, we deem appropriate.
You will experience an immediate and substantial dilution if you purchase
common stock in these offerings.
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
the offerings. In addition, to the extent that outstanding options and warrants
to purchase common stock are exercised, there could be substantial additional
dilution. See "Dilution."
You will experience dilution when we issue the additional shares of common
stock that we are permitted or required to issue under options, warrants and
our employee stock purchase plan.
You should be aware that we are permitted, and in some cases obligated, to
issue shares of common stock in addition to the common stock that will be
outstanding after the offerings. If and when we issue these shares, the
percentage of the common stock you own
13
<PAGE>
will be diluted. The following is a summary of additional shares of common
stock that we have currently reserved for issuance as of July 31, 1999:
. 7,184,526 shares are issuable upon the exercise of options or other
benefits under our stock incentive plan, consisting of:
. outstanding options to purchase 5,289,276 shares at a weighted
average exercise price of $1.10 per share, of which options covering
346,710 shares were exercisable as of July 31, 1999; and
. 1,895,250 shares available for future awards after July 31, 1999;
. 879,766 shares are issuable upon the exercise of outstanding warrants at
a weighted average exercise price of $.85 per share; and
. 500,000 shares are issuable under our employee stock purchase plan.
For a description of our stock incentive plan and our employee stock
purchase plan, see "Executive Compensation--1998 Incentive Stock Option Plan"
and "Executive Compensation--Employee Stock Purchase Plan."
The stock prices of Internet-related companies such as ours are highly volatile
and could drop unexpectedly resulting in costly litigation and harm to our
business.
Many companies in our industry have been the subject of class action
litigation by investors following periods of volatility in the price of their
publicly traded securities. If the market value of our common stock experiences
adverse fluctuations, and we become the subject of this type of litigation,
regardless of the outcome, we will incur substantial legal costs. In addition,
this type of litigation may strain our resources and divert management
attention, causing our business to suffer.
This prospectus contains forward-looking statements that may not be accurate
indicators of future performance.
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Our Business" and elsewhere in this prospectus
are forward-looking statements. These forward-looking statements include, but
are not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks" and "estimates" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements. These factors consist primarily of the risks identified under "Risk
Factors."
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the offerings will be approximately
$68.2 million, or $78.6 million if the underwriters exercise their over-
allotment option in full, assuming an initial public offering price of $12.00
per share and after deducting the estimated underwriting discounts and offering
expenses.
We estimate that:
. approximately $20.0 million of the net proceeds will be used to fund
capital expenditures and operating expenses to expand our network and
improve our technology; and
. approximately $20.0 million of the net proceeds will be used to finance
increased sales and marketing expenses focused primarily upon
international expansion.
The actual amounts may vary due to:
. the status of our efforts to develop new services;
. the demands placed upon our existing technology;
. the market response to our business initiatives; and
. our need to respond to technological and competitive developments.
We intend to use a portion of the net proceeds from the offerings to repay
approximately $1.7 million of debt outstanding under our line of credit. Our
credit agreement provides both for a revolving line of credit which expired in
August 1999 and an equipment sub-line of credit which expires in 2002, three
years after the last draw down. Borrowings under the revolving line of credit
bear interest at a rate per annum equal to the higher of our lender's published
prime rate plus 0.5% and the weighted average federal funds rate available to
our lender plus 1.5%. Borrowings under the equipment sub-line of credit bear
interest at a rate per annum equal to the higher of our lender's published
prime rate plus 0.75% and the weighted average federal funds rate available to
our lender plus 2.0%. Our credit agreement contains a mandatory repayment
provision which requires us to repay the outstanding indebtedness upon
consummation of the offerings. We have used the amounts borrowed under our
credit agreement for working capital purposes.
We may also use a portion of the net proceeds to acquire complementary
businesses or technologies, although we currently do not have any agreements
and we are not involved in any negotiations with respect to any such
transactions.
The balance of the net proceeds will be used for general corporate purposes.
Pending such uses, we intend to invest the net proceeds in direct or
guaranteed obligations of the United States, interest-bearing, investment-grade
instruments or certificates of deposit.
Since we cannot specify with certainty the precise manner in which the net
proceeds will be allocated, our management will have broad discretion in the
application of the net proceeds.
15
<PAGE>
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant. In addition, our credit agreement
restricts our ability to declare and pay dividends without the consent of our
lender.
16
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of June 30, 1999. This unaudited information is
presented:
. on an actual basis;
. after giving pro forma effect to the conversion of our outstanding
preferred stock; and
. as further adjusted to reflect our receipt and application of the
estimated net proceeds from the sale of 6,250,000 shares of common stock
offered in the offerings at an assumed initial public offering price of
$12.00 per share and after deducting the estimated underwriting
discounts and offering expenses, and the use of approximately $1.7
million of net proceeds of the offerings to repay all outstanding
indebtedness on our line of credit.
Please read the capitalization table together with the sections of this
prospectus entitled "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements included in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
-------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 9,830 $ 9,830 $76,257
======== ======= =======
Equipment note payable........................ $ 1,723 $ 1,723 $ --
Capital lease obligations, less current
portion ..................................... 123 123 123
Series B redeemable convertible preferred
stock, 5,865,104 shares issued and
outstanding; no shares issued and outstanding
pro forma and as adjusted.................... 9,877 -- --
Series C redeemable convertible preferred
stock, 3,229,975 shares issued and
outstanding; no shares issued and outstanding
pro forma and as adjusted.................... 15,364 -- --
Stockholders' equity:
Preferred stock, $0.001 par value; no shares
issued and outstanding, pro forma and as
adjusted................................... -- -- --
Common stock, $0.001 par value; 67,500,000
shares authorized; 10,283,806 shares issued
and outstanding; 28,473,964 shares issued
and outstanding pro forma; 34,723,964
shares issued and outstanding as adjusted.. 10 28 35
Additional paid-in capital.................. 13,592 38,815 106,958
Deferred employee compensation.............. (11,571) (11,571) (11,571)
Accumulated deficit......................... (15,180) (15,180) (15,180)
-------- ------- -------
Total stockholders' equity (deficit)........ $(13,149) $12,092 $80,242
======== ======= =======
Total capitalization.......................... $ 13,938 $13,938 $80,365
======== ======= =======
</TABLE>
17
<PAGE>
DILUTION
As of June 30, 1999, our net tangible book value, after giving pro forma
effect to the conversion of our outstanding preferred stock, was $11.0 million,
or $.39 per share of common stock. Net tangible book value per share represents
the amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the number of shares of common stock outstanding. As of
June 30, 1999, our net tangible book value, as further adjusted for the sale of
6,250,000 shares offered in the offerings at an assumed initial public offering
price of $12.00 per share, and after deducting the estimated underwriting
discounts and offering expenses, would have been $2.28 per share of common
stock. This represents an immediate increase of $1.89 per share to existing
stockholders and an immediate dilution of $9.72 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Per
Share
------
<S> <C>
Assumed initial public offering price per share......................... $12.00
Pro forma net tangible book value per share as of June 30, 1999... $0.39
Increase per share attributable to new investors.................. $1.89
Pro forma net tangible book value per share after the offerings......... 2.28
------
Dilution per share to new investors..................................... $ 9.72
======
</TABLE>
The following table sets forth, as of June 30, 1999, the number of shares of
common stock purchased from ITXC, the total consideration contributed and the
average price per share contributed by existing stockholders and by new
investors. The following table assumes the issuance by ITXC of 6,250,000 shares
in the offerings at an assumed initial public offering price of $12.00 per
share, before deducting the estimated underwriting discounts and offering
expenses. The following table also gives effect to the conversion of our
outstanding preferred stock.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
-------------------- --------------------------------
Percent Percent Average
After After Price
Number Offerings Amount Offerings Per Share
---------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 28,473,964 82% $ 26,592,338 26% $ 0.93
New investors........... 6,250,000 18 75,000,000 74 12.00
---------- --- ------------ ---
Total................... 34,723,964 100% $101,592,338 100%
========== === ============ ===
</TABLE>
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data for the period from July 21, 1997, our
date of inception, to December 31, 1997 and for the year ended December 31,
1998 are derived from our audited consolidated financial statements. The
following selected financial data for the six months ended June 30, 1998 and
1999 are derived from our unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of our financial
position and results of operations for the interim periods. Our operating
results for the six months ended June 30, 1999 are not necessarily a reliable
indicator of the results that may be expected for the entire year ending
December 31, 1999. The pro forma line items in the operating data presented
below and the pro forma column in the balance sheet data presented below give
effect to the conversion of all outstanding shares of Series B and Series C
preferred stock into common stock upon the closing of the offerings, as if such
conversion had occurred at the dates of issuance. You should read the
information that we have presented below in conjunction with our consolidated
financial statements, related notes and other financial information included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
July 21, 1997
(date of Six Months
inception) to Year ended ended June 30,
December December -------------------
31, 1997 31, 1998 1998 1999
------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Operating Data: (in thousands, except per share data)
Revenue:
Telecommunications revenue........ $ -- $ 1,238 $ 46 $ 6,764
Consulting revenue................ 59 653 476 988
------ ------- ------- -------
Total revenue...................... 59 1,891 523 7,753
Cost and expenses:
Data communications and
telecommunications............... -- 2,017 101 6,890
Cost of consulting revenue........ -- 192 69 --
Network operations................ -- 1,321 456 1,283
Sales and marketing............... 349 2,518 983 2,524
Development....................... -- 594 244 474
General and administrative........ 352 2,009 551 2,677
Depreciation and amortization..... 5 345 52 699
Non-cash employee compensation.... -- 194 68 688
------ ------- ------- -------
Total costs and expenses........... 706 9,189 2,524 15,235
------ ------- ------- -------
Loss from operations............... (647) (7,298) (2,001) (7,482)
Interest income.................... 1 231 39 221
Interest expense................... -- (140) (97) (66)
------ ------- ------- -------
Net loss........................... (646) (7,207) (2,059) (7,326)
Accretion of redemption value of
mandatorily redeemable convertible
preferred stock................... (14) (4) (443)
------- ------- -------
Net loss applicable to common
stockholders...................... $ (646) $(7,222) $(2,062) $(7,769)
====== ======= ======= =======
Basic and diluted net loss per
share applicable to common
stockholders...................... $(0.09) $ (0.88) $ (0.26) $ (0.90)
====== ======= ======= =======
Weighted average shares used in
computation of basic and diluted
net loss per share applicable to
common stockholders............... 7,005 8,185 7,992 8,603
Pro forma basic and diluted net
loss per share (unaudited)........ $ (0.45) $ (.29)
======= =======
Weighted average shares used in
computation of pro forma basic and
diluted net loss per share
(unaudited)....................... 16,155 24,841
<CAPTION>
December 31, Pro forma
------------------------ June 30, June 30,
1997 1998 1999 1999
------------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments.................. $ 498 $ 4,171 $10,037 $10,037
Total assets....................... 795 7,834 19,471 19,471
Long-term obligations, including
current portion................... 1,437 1,923 1,923
Working capital.................... (227) 2,069 7,429 7,429
Total stockholders' equity (defi-
cit).............................. 52 (6,118) (13,149) 12,092
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global provider of Internet-based voice and fax services.
From our inception in July 1997 through April 1998, our operating activities
were focused primarily on:
. developing monitoring and analysis software to enable us to efficiently
and cost effectively route voice over the Internet which we refer to as
BestValue Routing;
. developing relationships with affiliates throughout the world to
increase the global reach of ITXC.net;
. developing additional business strategies to supplement our affiliate
network; and
. hiring our initial employee group.
In April 1998, we launched our first service delivered over ITXC.net--our
WWeXchange service. Our operations since that time have included:
. increasing our voice traffic, from 2,746 minutes during April 1998 to
approximately 24.5 million minutes during the quarter ended June 30,
1999;
. refining our monitoring and analysis software in order to achieve
BestValue Routing;
. expanding our affiliate network to 75 affiliates at July 31, 1999 and
increasing the global reach of ITXC.net; and
. increasing our employee headcount, from 29 employees on April 1, 1998 to
93 employees on July 31, 1999.
Our primary sources of revenue have been the fees that we receive from
customers for terminating calls that they have originated on the Internet.
To date, our revenue for terminating calls over ITXC.net has depended
primarily upon the following factors:
. the volume of voice traffic carried over ITXC.net, which is measured in
terms of minutes of voice traffic;
. the mix of voice traffic carried over ITXC.net, which reflects the fact
that calls made over certain routes will generate greater revenues than
calls of a similar duration made over other routes; and
. pricing pressures resulting from competitive conditions in our markets.
Increased competition from other providers of Internet telephony services
and traditional telephony services could materially adversely affect revenues
in future periods.
We have also received consulting revenue derived from a market trial
agreement that we entered into with a third-party shortly after our inception
in order to generate funds to
20
<PAGE>
sustain operations. Under that agreement, we earned a portion of the revenue
ratably over the term of the agreement and the remainder of the revenue as we
met specific milestones. We do not consider it likely that consulting revenue
will continue beyond the quarter ended June 30, 1999.
To date, we have derived a significant portion of our revenue from a small
number of customers. The loss of a major customer could have a material adverse
effect on our business, financial condition, operating results and future
prospects.
Our operating expenses have been primarily:
. Data Communications and Telecommunications Expenses. Internet-related
expenses, consisting primarily of:
. costs associated with sending voice traffic over the Internet,
primarily fees that we pay to our affiliates to terminate or assist
us in terminating calls, fees that we pay when we find it necessary
to utilize the traditional telephone network or private data
networks to terminate calls and expenses incurred in connecting our
customers to our network; these expenses are largely proportional to
the volume of voice traffic carried over our network; and
. costs associated with buying Internet access at ITXC-operated
locations; these costs are largely proportional to the bandwidth of
access available and do not typically vary based upon volume.
. Network Operations Expenses. Expenses associated with operating the
network, consisting primarily of the salaries, payroll taxes and
benefits that we pay for those employees directly involved in the
operation of ITXC.net and related expenses.
. Sales and Marketing Expenses. Expenses relating to the salaries, payroll
taxes, benefits and commissions that we pay for sales personnel and
expenses associated with the development and implementation of our
promotion and marketing campaigns. We anticipate that sales and
marketing expenses will increase in the future as we expand our internal
sales force, hire additional marketing personnel and increase
expenditures for promotion and marketing. We expect that such expenses
will also increase as telecommunications revenue increases.
. Development Expenses. Salary, payroll tax and benefit expenses that we
pay for employees and consultants who work on the development of our
network management approaches and future applications of our technology.
We believe that investing in the enhancement of our technology is
critical to our future success. We expect that our development expenses
will increase in future periods, based upon various factors, including:
. the importance to us of BestValue Routing;
. the pace of technological change in our industry; and
. our goal of expanding the applications of our technology.
. General and Administrative Expenses. Salary, payroll tax and benefit
expenses and related costs for general corporate functions, including
executive management, administration, facilities, information technology
and human resources. We expect
21
<PAGE>
that general and administrative expenses will increase in the future as
we hire additional personnel and incur additional costs related to the
growth of our business and operations. In addition, we expect to expand
our facilities and incur associated expenses to support our anticipated
growth.
. Non-cash Employee Compensation Expenses. Non-cash employee compensation
represents compensation expense incurred in connection with the grant of
certain stock options to our employees with exercise prices less than
the fair value of our common stock at the respective dates of grant.
During the six months ended June 30, 1999 we granted options to purchase
3,186,750 shares of common stock at exercise prices less than fair value
resulting in non-cash charges of approximately $11.7 million. Such
charges will be expensed, generally over the next three to seven years,
in connection with the underlying vesting periods of the options
granted.
We believe that the services we provide over the Internet are not currently
actively regulated in the United States. Several efforts have been made,
however, to enact federal legislation that would regulate certain aspects of
the Internet. If adopted, such legislation could increase our costs
significantly and could materially adversely affect our business, operating
results, financial condition and future prospects. See "Our Business--
Government Regulation."
As ITXC.net continues to grow, we anticipate that from time to time our
operating expenses may increase on a per minute basis. This increase is related
to our decision to route additional traffic over the traditional telephone
network or private data networks in order to maintain quality transmissions
during relatively short periods of time as we transition our network to
increased levels of capacity. During these periods, we occasionally experience
reductions in volume from certain customers. Historically, we have
satisfactorily resolved these transition issues. However, we anticipate that in
the future other anticipated or unanticipated operating problems associated
with the growth of ITXC.net may develop.
Since our inception in July 1997, we have experienced operating losses in
each quarterly and annual period and negative cash flows from operations in
each quarter since we commenced offering services over ITXC.net in April 1998.
As of June 30, 1999, we had an accumulated deficit of $15.2 million. The profit
potential of our business is unproven, and our limited operating history makes
an evaluation of us and our prospects difficult. We may not achieve
profitability or, if we achieve profitability, we might not sustain
profitability. See "Risk Factors."
Results of Operations
Comparison of the Six Months Ended June 30, 1998 and 1999
Revenue
We did not commence commercial services over ITXC.net until the quarter
ended June 30, 1998. Accordingly, we earned only $46,000 in telecommunications
revenue during the six months ended June 30, 1998. Our telecommunications
revenue for the six months ended
22
<PAGE>
June 30, 1999 of $6.8 million was more than five times the amount of
telecommunications revenue that we generated during the eight months of 1998
when ITXC.net was operational.
We increased our consulting revenue from $476,000 during the six months
ended June 30, 1998 to $988,000 during the six months ended June 30, 1999,
reflecting the accomplishment of various performance requirements under our
market trial agreement during each such period. We have now satisfied all of
the performance requirements under our market trial agreement and received all
consulting payments required by that agreement. We do not expect to earn
significant consulting revenue in subsequent periods.
Operating Expenses
Data Communications and Telecommunications Expenses. We did not incur data
communications and telecommunications expenses until we began providing service
over ITXC.net in April 1998. Accordingly, we incurred only $101,000 of such
expenses during the six months ended June 30, 1998. During the six months ended
June 30, 1999, such expenses amounted to $6.9 million, compared to
telecommunications revenue of $6.8 million. The ratio of such expenses to
telecommunication revenue reflects our early stage of operations: we have not
yet reached a point where significant economies of scale can be realized from
an increased volume of traffic.
Cost of Consulting Revenue. We did not incur any material expenses under our
market trial agreement during any of the periods described in this prospectus.
During the six months ended June 30, 1998, such costs represented 14% of
consulting revenue. We did not incur these expenses during the six months ended
June 30, 1999 since the substantive work required to meet the final performance
milestones was completed during 1998. During the six months ended June 30,
1999, we presented an update report.
Network Operations Expenses. Network operations expenses increased from
$456,000 during the six months ended June 30, 1998 to $1.3 million during the
six months ended June 30, 1999. Expenses during the earlier period were
incurred in preparing for the implementation of our WWeXchange service in April
1998 and in the initial delivery of that service. During the six months ended
June 30, 1999, such expenses reflected the cost of operating our 24-hours-a-
day, 7 days-a-week network operations center and represented 19% of
telecommunications revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$983,000 during the six months ended June 30, 1998 to $2.5 million during the
six months ended June 30, 1999. This increase primarily represents personnel
costs associated with the hiring of additional sales and marketing employees
and commissions paid on the telecommunications revenue that we generated during
the six months ended June 30, 1999.
Development Expenses. Development expenses increased from $244,000 during
the six months ended June 30, 1998 to $474,000 during the six months ended June
30, 1999, reflecting the costs of additional personnel and consultants for
development tasks.
23
<PAGE>
General and Administrative Expenses. Our general and administrative expenses
increased from $551,000 during the six months ended June 30, 1998 to $2.7
million during the six months ended June 30, 1999. These increases were
primarily due to an increase in salaries and benefits, recruiting costs and
facilities expenses resulting from the growth in our business and facilities,
as well as an increase in the number of general and administrative personnel
hired to support our growth.
Non-cash Employee Compensation Expenses. Non-cash employee compensation
expense increased from $68,000 during the six months ended June 30, 1998 to
$688,000 during the six months ended June 30, 1999 representing amortization of
deferred compensation incurred in connection with the grant of options at
exercise prices less than fair value.
Interest Income, Net
Our interest income, net principally represents income from our cash and
investments which, in turn, were derived from capital contributions made by our
investors. In addition to the initial capital invested near the inception of
our business, we raised net proceeds of $9.9 million and $14.9 million from a
group of investors in transactions completed during April 1998 and February
1999, respectively. See "Certain Transactions." The interest generated from
these capital contributions exceeded the interest that we paid on our line of
credit by $156,000 during the six months ended June 30, 1999. Interest we paid
on our line of credit and non-cash interest related to the issuance of common
stock warrants in connection with bridge financing provided by two officers
exceeded interest generated from capital contributions by $58,000 during the
six months ended June 30, 1998.
Loss From Operations
We incurred operating losses of $2.0 million and $7.5 million during the six
months ended June 30, 1998 and 1999, respectively. We do not consider these
amounts to be comparable, since the first amount reflects operations prior to
the introduction and during the initial stage of services over our network,
while the latter figure reflects our active operation of our network. We
anticipate that we will incur additional operating and net losses for the
foreseeable future. The amount of these losses may exceed the amount of the
losses that we have incurred in prior periods.
Comparison of the Inception Period from July 21, 1997 to December 31, 1997
and the Year Ended December 31, 1998
Revenue
We did not have any revenue for terminating calls during the inception
period. Our telecommunications revenue for the year ended December 31, 1998,
reflecting operations from April 1998 to year-end, was $1.2 million.
Our consulting revenue increased from $59,000 during the inception period to
$653,000 during the year ended December 31, 1998, reflecting the timing of the
performance thresholds under our market trial agreement. We do not expect to
earn substantial consulting revenue in subsequent periods.
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Operating Expenses
Data Communications and Telecommunications Expenses. We did not incur any
data communications and telecommunications expenses during the inception
period. During the year ended December 31, 1998, such expenses amounted to $2.0
million, as compared to telecommunications revenue of $1.2 million during that
period. During the initial period of operations, it was necessary for us to
rely upon the traditional telephone network and private data networks more than
we currently do, since we had fewer affiliates at that juncture. We also had
not reached a point where significant economies of scale could be realized.
Cost of Consulting Revenue. The cost of consulting revenue amounted to
$192,000 during the year ended December 31, 1998 which represented 29% of
consulting revenue. We did not incur any such expenses during the inception
period.
Network Operations Expenses. We did not incur any network operations
expenses during the inception period. During the year ended December 31, 1998,
such expenses amounted to $1.3 million, which represented 107% of our
telecommunications revenue during that period. Network operations expenses are
not proportional to the volume of our traffic; regardless of our volume, we
were required to pay the salaries and related costs associated with operating
our network operations center.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$349,000 during the inception period to $2.5 million during the year ended
December 31, 1998. This increase reflects enhanced sales and marketing efforts
that we undertook once our network was operating, a growth in our sales and
marketing staffs and commissions paid on the telecommunications revenue that we
generated during the year ended December 31, 1998.
Development Expenses. We did not incur development expenses during the
inception period. We recorded $594,000 of such expenses during the year ended
December 31, 1998, reflecting our hiring of employees and engaging of
consultants for development tasks.
General and Administrative Expenses. Our general and administrative expenses
increased from $352,000 during the inception period to $2.0 million during the
year ended December 31, 1998. These increases were primarily due to an increase
in salaries and benefits, recruiting costs and facilities expenses resulting
from the growth in our business and facilities, as well as from a substantial
increase in the number of general and administrative personnel hired to support
our growth.
Non-cash Employee Compensation Expenses. Non-cash employee compensation
expense amounted to $194,000 during the year ended December 31, 1998
representing amortization of deferred compensation incurred in connection with
the grant of options at exercise prices less than fair value. There was no non-
cash employee compensation expense during the inception period.
Interest Income, Net
The interest generated primarily from our April 1998 private placement
exceeded by $91,000 the interest that we paid on our line of credit and non-
cash interest related to
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issuance of common stock warrants during the year ended December 31, 1998. Our
interest income was minimal, and we paid no interest during the period from
inception through December 31, 1997.
Loss From Operations
We incurred operating losses of $647,000 and $7.3 million during the
inception period and the year ended December 31, 1998, respectively. We do not
consider these amounts to be comparable, since the first amount reflects
operations prior to the introduction of services over our network, while the
latter figure reflects our active operation of our network during our initial
period of operations. We anticipate that we will incur additional operating and
net losses for the foreseeable future.
Liquidity and Capital Resources
Since our inception in July 1997, we have financed our operations primarily
through the private placement of our capital stock and, to a lesser extent,
through equipment financing, and for the period after June 30, 1999, capital
leases. As of June 30, 1999, we had $10.0 million in cash, cash equivalents and
short-term investments.
Net cash provided by financing activities was $0.5 million for the inception
period in 1997, $11.0 million for the year ended December 31, 1998 and $15.2
million for the six months ended June 30, 1999 and was primarily attributable
to net proceeds from the issuance of our capital stock.
Net cash provided by operating activities was negligible for the inception
period. Net cash used in operating activities amounted to $5.3 million for the
year ended December 31, 1998 and $5.4 million for the six months ended June 30,
1999. Cash used in operating activities in both of these periods was primarily
the result of net operating losses and increased accounts receivable, partially
offset by increases in accounts payable and accrued expenses.
Net cash used in investing activities was negligible for the inception
period in 1997, $2.3 million for the year ended December 31, 1998 and $3.9
million for the six months ended June 30, 1999. Cash used in investing
activities in each period was primarily related to purchases of property and
equipment.
As of June 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases. As of December 31, 1998, future minimum
payments for non-cancelable operating leases having terms in excess of one year
amounted to $583,000, of which $364,000 is payable or was paid in 1999 and
$206,000 is payable in 2000. Although we have no material commitments for
capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel, including the deployment of
additional networks hubs and SNARCs.
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In August 1998, we arranged a revolving line of credit with a financial
institution which provides for maximum borrowings of $5.0 million, of which
$4.0 million may be borrowed under an equipment line of credit for the purchase
of certain capital equipment. This credit agreement is collateralized by
substantially all of our assets. The revolving line of credit has a one year
term that requires principal payments commencing in August 1999. The equipment
sub-line of credit expires in 2002. As of June 30, 1999, the amount outstanding
under the credit agreement was $1.7 million. The credit agreement includes a
mandatory repayment clause requiring that we repay the balance outstanding in
the event we consummate an initial public offering of our securities with net
proceeds of at least $20 million. We intend to repay the entire amount
outstanding under this credit agreement with a portion of the proceeds of the
offerings.
Accrued interest under the revolving line of credit is due in monthly
installments through August 1999. Accrued interest under the equipment sub-line
of credit is due monthly until the principal amount is repaid three years after
the final draw down. Borrowings under the revolving line of credit bear
interest at a rate per annum equal to the higher of our lender's published
prime rate plus 0.5% and the weighted average federal funds rate available to
our lender plus 1.5%. Borrowings under the equipment sub-line of credit bear
interest at a rate per annum equal to the higher of our lender's published
prime rate plus 0.75% and the weighted average federal funds rate available to
our lender plus 2.0%. Amounts outstanding under the credit agreement not paid
when due will bear interest at a default rate equal to 3.0% above the rates
otherwise applicable to the loans made to us. As of December 31, 1998, we were
in violation of one financial covenant under the credit agreement. That
covenant required our current assets to exceed our current liabilities by a
specified multiple, which multiple varies for each quarter through the quarter
ending September 30, 1999. We have obtained a letter from our lender waiving
the violation as of December 31, 1998. As of June 30, 1999, we were in
compliance with all of the financial covenants under the credit agreement. We
expect that we will be able to comply with those covenants for at least the
next twelve months.
We paid our lender a one-time facility fee of $25,000 in August 1998.
We have received a commitment letter from our lender to increase our line of
credit to $10,000,000 upon the closing of the offerings.
In connection with the formation of our South American joint venture, ITXC
Comunicacoes Ltda., we entered into a buyout agreement with the other parties
to the joint venture. That agreement provides us with certain rights to
purchase the interests of the other parties, and provides the other parties
with certain rights to cause us to purchase their interests, each in a number
of specific circumstances. Our offerings constitute one of these circumstances.
The other parties have waived their rights to cause us to purchase their
interests in the joint venture as a result of our offerings. We maintain the
right to purchase their interests in the joint venture should we desire to do
so shortly after the closing of the offerings. If we elect to purchase their
interests, we will be required to pay a purchase price based on a formula that
cannot be calculated until we know the joint venture's revenue and gross
profits for the six months ended August 31, 1999. We are under no obligation to
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exercise our call right in connection with the offerings. If we do exercise our
call right, the other parties to the joint venture agreement will be able to
elect to be paid in cash or in our common stock valued at the initial public
offering price.
If we do not elect to exercise our call rights in connection with the
offerings, each of the parties will again have its put and call rights in the
event that:
. we reach an impasse with our joint venture partners;
. we are acquired or enter into certain other business combinations;
. ITXC Comunicacoes Ltda. fails to meet certain performance thresholds in
five South American countries; or
. we fail to meet certain performance thresholds in the same countries.
If any of these triggers occur, we will have the right to purchase the
interests of our joint venture partners and our partners will have the
opportunity to exercise their put rights. The purchase price in these
circumstances will either be based upon a formula price, in the case of most
acquisitions or other business combinations, or an appraisal of the joint
venture's fair market value in all other instances. Under the formula approach,
the joint venture will be valued at a percentage of ITXC's value comparable to
the percentage that the revenues of ITXC Comunicacoes Ltda., determined under
Brazilian accounting principles, represent of our revenues, determined under
U.S. accounting principles, subject to certain contractual adjustments based
upon the profitability of the joint venture.
If our partners exercise their put rights, we will be able to specify
whether they receive cash or our common stock. If we exercise our call rights,
our partners may elect to receive cash or our common stock. The amount of the
purchase price under any of these scenarios could be substantial and, if we
exercise a call right and our partners elect to receive cash, the payment of
such purchase price could materially adversely impact our liquidity. We cannot
assure you that we will have the capital necessary to fund a purchase of joint
venture interests that we would otherwise desire to make.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the responses of our competitors, the resources we
allocate to ITXC.net and the development of future applications of our
technology, our success in marketing and selling our services, and other
factors. We have experienced substantial increases in our capital expenditures
since our inception, consistent with growth in our operations and staffing, and
we anticipate that our capital expenditures will continue to increase in the
future. Additionally, we will evaluate possible acquisitions of, or investments
in, complementary businesses, technologies or services and plan to expand our
sales and marketing programs. We currently believe that our available cash
equivalents, combined with the net proceeds from the offerings, will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months. We may need to raise additional
funds, however, in order to fund more rapid expansion, to develop new or
enhance existing services, to respond to competitive pressures or to acquire or
invest in complementary business, technologies or services. Additional funding
may not be available on favorable terms or at all.
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Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance regarding accounting for computer software developed or obtained for
internal use, including the requirement to capitalize specified costs and
amortization of such costs. We do not expect the adoption of this standard to
have a significant impact on our financial results.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
SOP 98-5 is effective for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up costs and
organization costs. It requires the costs of start-up activities and
organization costs to be expensed as incurred. As we expensed these costs as
incurred, we believe that the adoption of this standard will have no impact on
our operating results, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. As we do not currently
engage in derivatives or hedging transactions, we believe that there will be no
current impact to our results of operations, financial position or cash flows
upon the adoption of SFAS No. 133.
Year 2000 Compliance
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our potential areas of exposure include:
. services purchased from third parties;
. information technology, including computers and software; and
. non-information technology, including telephone systems and other
equipment used internally.
All areas that we believe are important to our operations are being tested
and validated for year 2000 compliance. Our hardware and software has been
acquired subsequent to July 17, 1997, and hence at a time when manufacturers
were well aware of the year 2000 issue. Since several of our vendors were
scheduled to release new versions during the second calendar quarter of 1999,
we have deferred certain aspects of our year 2000 analysis. We intend to
complete our year 2000 compliance assessment plan in the third quarter of 1999
and our compliance testing and related documentation by the end of the third
quarter of 1999. Until our assessment is completed we will not be able to
evaluate whether our systems
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will need to be revised or replaced, or the cost involved. However, we do not
expect this cost to exceed $1.0 million. We expect to spend most of the amount
on the replacement of readily available hardware and software. We expect the
source of this amount to be working capital or equipment financing.
In addition, we are in the process of seeking verification from our key
vendors and suppliers that they are year 2000 complaint. If they are not
presently compliant, we are requesting a description of their plans to become
compliant. To the extent that vendors fail to provide certification that they
are year 2000 compliant, we may find it necessary to terminate and seek to
replace those relationships.
In the most reasonably likely worst case scenario, year 2000 problems could
adversely impact, and could render inoperative, one or more components in the
infrastructures in some foreign countries. Year 2000 difficulties experienced
in foreign countries or by our affiliates could materially adversely affect our
network. We do not currently have a contingency plan to deal with the worst-
case scenario that might occur if technologies upon which we are dependent are
not year 2000 compliant and fail to operate effectively after the year 2000. We
intend to develop a plan for this scenario upon the completion of our
compliance assessment plan.
If our present efforts to address year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with whom we
conduct business do not successfully address such issues, our financial
condition, operating results, liquidity and future prospects could be
materially adversely affected.
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OUR BUSINESS
Overview
We are a leading global provider of high quality Internet-based voice and
fax services. Our services allow communications users and service providers,
such as traditional telephone companies, Internet service providers and data
network providers, to capitalize on the convergence of the public Internet and
the traditional telephone network. We believe that our scale, reputation for
high quality and ability to rapidly implement new services addresses the
substantial opportunities that are resulting from this convergence.
We have developed and deployed ITXC.net, an actively-managed network
overlayed on the public Internet, to deliver high quality voice communications
while providing our customers with the cost savings and global reach of the
Internet. We believe that the rapid growth of commercial traffic on ITXC.net
demonstrates that we have successfully used our proprietary BestValue Routing
to address the quality problems which early attempts at Internet telephony have
encountered.
To date, we have concentrated our efforts on rapidly deploying ITXC.net
worldwide. We have established ITXC-owned facilities in the U.S. and have
arranged call termination and origination services with affiliates throughout
the world. We have used our affiliate structure to achieve what we believe is
the broadest global network in the Internet telephony marketplace. As of July
31, 1999, we had affiliates in more than 71 international cities operating more
than 110 ITXC.net points of presence. On a typical day, we carry voice traffic
from over 30 countries to more than 140 countries. By using the Internet for
transport and our affiliates' local infrastructure for terminating voice
traffic, we have developed a reliable network, which we are expanding rapidly,
at substantially lower capital expense than traditional carrier networks.
In April 1998, we introduced our WWeXchange service, the first application
enabled by ITXC.net. This service provides international call completion to our
customers and enables them to offer their own customers phone-to-phone global
voice service. We have achieved a high network usage growth rate since
commencing our WWeXchange service. The following table sets forth the number of
minutes of voice traffic carried over ITXC.net during the past five quarters:
<TABLE>
<CAPTION>
Quarter ended Minutes
------------- ----------
<S> <C>
June 30, 1998.................................................. 46,700
September 30, 1998............................................. 643,700
December 31, 1998.............................................. 4,087,100
March 31, 1999................................................. 11,076,600
June 30, 1999.................................................. 24,492,700
</TABLE>
We have recently introduced a new proprietary device called a SNARC, which
we believe will facilitate the use of our network by our customers. These
devices allow our customers to access our network directly from their premises,
avoiding the costs of dedicated connections to network hubs and improving the
economics of our services to them. We believe that SNARCs will strengthen our
customers' relationships with us and position us to deploy enhanced services.
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In addition to our WWeXchange service, we intend to introduce more advanced
communications applications enabled by ITXC.net. We expect that these services
will allow our customers to offer additional Internet-based voice products and
services to their customers. Examples of services we may introduce include:
. enhanced phone-to-phone services;
. personal computer-to-phone service and phone-to-personal computer
service;
. device-to-phone service and phone-to-device service, including devices
such as personal digital assistants;
. voice-enhanced e-commerce;
. unified messaging, combining voice, fax and e-mail communications; and
. single telephone number service, in which a single billing and reach me
number follows the subscriber.
Industry Overview
Convergence of Global Telecommunications and Data Services
The global telecommunications industry has grown at a rapid rate over the
last decade, driven by domestic and international deregulation, technological
development, network deployment and the globalization of business. The number
of communications service providers has also been increasing as a result of
competition fostered by domestic and international deregulation. These factors
have contributed to a substantial decrease in the cost of telephony services
delivered over the traditional telephone network. This decrease in price,
however, has been offset by an increase in total revenue driven by the growth
in demand that low prices have created. Based on country-by-country information
and other data provided by the International Telecommunications Union, total
telecommunications services revenue was approximately $700 billion in 1997.
According to Insight Research Corporation, an industry research firm, this
market is projected to grow to approximately $1.3 trillion by 2003. According
to TeleGeography, a market research firm, the total market for international
long distance services in 1997 totalled approximately $65.9 billion.
TeleGeography also expects international long distance traffic to grow from
94.1 billion minutes in 1998 to 143.2 billion minutes in 2001.
In addition, over the last decade, the volume of traffic on data networks
has grown at an even faster rate. According to TeleGeography, in 1998 data
surpassed voice as the dominant traffic for the U.S. long distance market. This
growth has been driven by several factors, including technological innovation,
high penetration of personal computers and, in particular, by the rapid
expansion of the Internet as a global medium for communications, information
and commerce. International Data Corporation, a market research firm, estimates
that the number of Internet users worldwide will grow from approximately 142
million in 1998 to approximately 399 million in 2002. This increase in data
traffic has necessitated additional data network capacity and quality. As a
result, businesses have invested billions of dollars in order to meet this
need.
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We believe that the combination of increasing demand on the traditional
telephone network and the proliferation of data networks, with their enhanced
functionality and efficiency, is driving the convergence of voice traffic and
data networks, including the Internet. We expect this transfer of traffic to
accelerate as corporations and network infrastructure providers attach
increasing value to data networks and as the functionality of computers and
computing devices, such as personal digital assistants, is enhanced by voice
capability.
Network Infrastructure
The basic technology of traditional telecommunications is designed for slow
mechanical switches. Communications over the traditional telephone network are
routed through circuits which must dedicate resources to each call until the
call ends, regardless of whether anyone is actually talking on the circuit.
This circuit-switching technology incurs a significant cost per call and does
not efficiently support the integration of voice with data services.
Data networks, however, use electronic switching. They break the data stream
into small, individually addressed packages of data which are routed
independently of each other from the origin to the destination. Therefore, they
do not require a fixed amount of bandwidth to be reserved between the origin
and destination of each call. This allows multiple voice or voice and data
calls to be pooled, resulting in these networks being able to carry more calls
with an equal amount of bandwidth.
The Emergence of Voice on Data Networks
Internet telephony consists of both traditional and enhanced voice and fax
services, including the addition of interactive voice capability to web sites,
among others. Internet telephony serves both the extensive market of existing
phone users and the expanding market of computer users. We believe data
networks provide lower cost than the traditional telephone network and are
better suited to deliver future enhanced services to both phone users and
computer users.
Telephony based on Internet protocols emerged in 1995, with the invention of
a personal computer program that allowed the transport of voice communications
over the Internet via a microphone connected to a personal computer. Initial
sound quality was poor and the service required that both parties to the
conversation use personal computers instead of telephones. In 1996, the advent
of the gateway for the first time offered anyone with access to a telephone the
ability to complete calls on the Internet. A gateway facilitates Internet
transport of telephone services traditionally carried over the traditional
telephone network.
The Economics of Internet Telephony
Long distance telephone calls transported over the Internet are less
expensive than similar calls carried over the traditional telephone network
primarily because the cost of using the Internet is not determined by the
distance those calls need to travel. Also, routing calls over the Internet is
more cost-effective than routing calls over the traditional telephone
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network, because the technology that enables Internet telephony is more
efficient than traditional telephone network technology. The greater efficiency
of data networks creates cost savings that can be passed on to the consumer in
the form of lower long distance rates.
Beyond cost benefits, innovation in the provision of enhanced services is
expected to yield increased functionality as well. We believe such enhanced
functionality will expand the addressable market for Internet services to
include anyone with a telephone. We believe this market is potentially larger
than the market for any other existing Internet service which requires a
computer for access. Moreover, computer users will benefit from interactive
voice being an option in web browsing and other computer-based communications.
Limitations of Existing Internet Telephony Solutions
The growth of Internet telephony has been limited in the past due to
perceived poor sound quality caused by technical issues such as delays in
packet transmission and bandwidth limitations related to Internet network
capacity and local access constraints. However, the continuing addition of data
network infrastructure, recent improvements in packet-switching and compression
technology, new software algorithms and improved hardware have substantially
reduced delays in packet transmissions and the effect of these delays.
International Data Corporation projects that Internet protocol telephony
revenue will grow rapidly to over $23.4 billion in 2003.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. Smaller Internet telephony
service providers have also begun to offer low-cost Internet telephony services
from personal computers to telephones and from telephones to telephones.
Traditional carriers have substantial investments in traditional telephone
network technology, and therefore have been slow to embrace Internet
technology. We believe that these service offerings by large long distance
carriers and smaller providers are generally available in limited geographic
areas and can only complete calls to a limited number of locations.
We believe that the infrastructure required for a global network is too
expensive for most companies to deploy on their own. This mandates that the
network be a combination of gateways owned by different operators. For a
network to achieve optimal functionality, however, the gateways need to be
interoperable, or able to communicate with one another. As a result, uniform
standards for vendors and manufacturers of Internet telephony equipment and
software need to be developed.
In recent years, commercial web sites have grown in popularity. Efforts to
enhance these web sites with voice enabled e-commerce features such as click-
and-call contact with a customer service agent have been hampered by the early
quality problems with voice on the Internet described above.
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The ITXC Solution
We believe that the rapid growth of commercial traffic on ITXC.net
demonstrates that we deliver high quality, low cost voice and fax
communications over the Internet and are well positioned to deliver enhanced
voice services. The key advantages of our solution include:
. Quality. We believe that we deliver to our customers high quality voice
communications over the Internet at competitive pricing. We maintain
high quality primarily through our proprietary BestValue Routing
technology and techniques, which include ITXC-developed monitoring and
analysis software and rapid human response from our 24-hours-a-day, 7-
days-a-week network operations center. In addition, we blend the
redundancy of the public Internet with our use of multiple termination
affiliates in many cities to help assure the reliability and quality of
our network. We use dedicated data networks and even the traditional
telephone network when data networks are not available to further assure
consistent quality.
. Lower Costs. By using the public Internet, we are able to reach and
rapidly deploy many affiliates throughout the world at a substantially
lower capital expense than building the dedicated connections that a
traditional telephony carrier would require. Also, as a result of our
ability to use the public Internet, we believe that we have
significantly lower marginal costs than the traditional telephone
network or a private data network.
. Interoperability. We have led an effort called iNOW! resulting in
guidelines for interoperability. As of July 31, 1999, more than 35
Internet telephony vendors had agreed to comply with the iNOW!
initiative. The VocalTec Communications and Lucent Technologies
equipment installed on ITXC.net is already interoperable for voice under
a version of iNOW!. We believe that as a result, we and our affiliates
have the only multi-vendor interoperable network in the Internet
protocol telephony industry. Although we have transferred the iNOW!
trademark and web site to an industry standards body, we intend to
continue to provide leadership in interoperability of voice over the
Internet services.
. Global Scale. Our network is overlayed on the public Internet to provide
a global communications medium to voice service providers. ITXC.net is
scalable--by using the public Internet and our global network of
affiliates, we are able to rapidly and easily add capacity when needed.
Many of the ITXC-supplied components of our network, such as routers and
gateways, are relatively inexpensive, allowing us to add additional
capacity without significant capital expenditures. In addition, we
believe that we are able to connect new affiliates to ITXC.net in
significantly less time than it would take for a traditional telephony
carrier or dedicated data network to establish a dedicated connection.
For example, we connected 16 cities in China to ITXC.net within three
weeks after we signed an agreement with China Telecom. Moreover, we have
a business model of purchasing terminating minutes directly from
affiliates and selling call completion to customers and affiliates. This
model eliminates the need for complex settlement between carriers which
had previously slowed the deployment of a global network.
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. Easy Access. We offer our customers two ways to connect from their
switches to ITXC.net: through normal dedicated connections and through
SNARCs. SNARCs are specially built devices, which we own and install on
our customers' premises in order to eliminate the cost of dedicated
connections from their switches to our network hubs. SNARCs allow our
customers to benefit from the global termination capabilities of
ITXC.net by bringing the advantages of voice over the Internet to the
customer's premises.
. Enhancement of E-commerce Services. Because ITXC.net can deliver high
quality voice on the Internet globally, we believe it can become a
preferred network for a variety of voice-enhanced web sites and enable
us to offer services to e-commerce providers who want to provide their
customers with the ability to talk over the Internet while browsing a
web site.
. Attractive Platform for New Services. Because of our leadership position
in establishing interoperability standards and the breadth of our
deployed network, developers of new services are bringing products to us
for evaluation and possible deployment on ITXC.net.
Our Strategy
Our goal is to be the leading provider of Internet-based voice and fax
services. In order to achieve this goal we intend to:
. Exploit Our Early Entrant Status and Worldwide Network
As of July 31, 1999, we had aggressively deployed ITXC.net in 36
countries. We believe that with the increasing use of this network,
ITXC has developed a reputation in the communications industry for
providing high quality voice and fax services over the Internet. In
addition, we believe our experience as one of the first providers of
Internet-based voice services has placed us at the forefront of
developing the proprietary tools and techniques which enable us to
offer our service. We intend to continue to enhance and capitalize upon
our reputation and experience in the communications industry as we
provide existing and new voice and fax services.
. Rapidly Expand ITXC.net by Adding Additional Affiliates Worldwide
We have used our affiliate structure to quickly achieve a global reach
for ITXC.net. We believe that this approach allows us to quickly expand
and develop a broader network than our competitors. We intend to
continue to rapidly add new affiliates worldwide in order to provide
our customers with additional termination points.
. Capitalize on the Cost Advantages of the Internet
By overlaying ITXC.net on the public Internet, we believe that we are
able to capture significant cost and capital savings. Instead of
incurring the capital expense to deploy a global physical network, we
are able to carry a substantial portion of our customer's traffic using
the existing Internet infrastructure together with our affiliate
network. We believe that it would require significantly more capital
for a carrier using traditional methods of network deployment to
implement a network with the
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same capacity and global reach as ITXC.net. Additionally, the cost of
transporting our traffic over the Internet is largely not distance
sensitive, since we only pay for the bandwidth we use. We believe these
factors enable us to benefit from significant cost savings that are not
available to operators of the traditional telephone network or private
data networks.
. Establish ITXC.net as the Standard for Quality in Our Industry
By combining our BestValue Routing approach with our knowledge of
gateway and Internet technology, we believe that we have demonstrated
that the Internet can be an effective medium for two-way voice and fax
communication. By continuing to provide reliable high quality voice and
fax service with a global reach, our goal is to be the network of
choice for new enhanced services that incorporate voice.
. Provide our Customers with Direct Access to ITXC.net
We are committed to providing our customers with high quality, low cost
voice service. SNARCs provide our customers with a voice communications
solution that minimizes reliance on the traditional telephone network.
By installing SNARCs on customer premises, we can provide our customers
with direct access to all of the ITXC.net termination points worldwide
without the need for a direct, dedicated connection to one of our
network hubs. We believe that, in the future, an extension of our SNARC
program will connect our customers' customers directly to the Internet.
. Continue to Provide Leadership in the Development of Industry Standards
We are a founder of the iNOW! initiative. This initiative began as a
collaboration with Lucent Technologies and VocalTec Communications to
establish industry standards for interoperability among Internet voice
products and services. We believe that our leadership of the iNOW!
initiative may further strengthen our position in the industry.
We believe that the iNOW! initiative has already set the industry
standard for gateway interoperability. As a result of the iNOW!
initiative, Lucent Technologies and VocalTec Communications gateways
are already interoperable for voice traffic on ITXC.net. This provides
ITXC and its affiliates with a choice of vendors which other service
providers do not have. As of July 31, 1999, more than 35 other vendors
of gateways, IP telephony components and other equipment and software
had agreed to comply with the iNOW! initiative. Such vendors include
3Com, Alcatel, Ascend, Cisco Systems, Intel Corporation, through its
subsidiary, Dialogic, ECI Telecom, Motorola, Netrix, Samsung
Electronics and Siemens. By leading these efforts among suppliers,
manufacturers, software vendors and carriers, we believe ITXC.net will
be positioned to exploit new opportunities in Internet voice services.
. Deliver Additional Internet Voice Services Over ITXC.net
We believe that Internet telephony represents only the beginning of the
evolution of the Internet as a medium for voice and fax services.
Through enhancements to ITXC.net, we believe that we can provide the
network for wide commercial deployment of new voice and fax services
from traditional telephony technology
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suppliers like Lucent Technologies, new entrants like Cisco Systems,
Internet telephony companies like VocalTec Communications and a number
of start-ups. We believe that, in the future, the Internet will serve
as a platform for existing and enhanced voice and fax services that may
be accessed from traditional phones, personal computers and a variety
of devices that span the range between telephones and personal
computers.
ITXC.net
ITXC.net allows us to deliver reliable, high quality voice and fax service
through an actively-managed network overlayed on the public Internet.
We have implemented a global communications network by using the public
Internet to connect ITXC-owned network hubs in the U.S. and, as of July 31,
1999, more than 139 affiliate-owned gateways in 35 countries. We use ITXC-
developed software and skilled network management personnel to help assure the
reliability and quality of voice transmission over the Internet. To further
enhance the reliability of ITXC.net, we are also able to route and terminate
voice traffic through alternate channels.
The key components of ITXC.net include:
. The Public Internet
ITXC.net routes voice traffic over the public Internet, which allows
traditional telephone users to benefit from its cost savings. By using
the Internet we are able to reach and rapidly deploy many affiliates
throughout the world at what we believe to be significantly lower
capital costs than that of building the dedicated connections that a
traditional telephony carrier or dedicated data network would require.
. Global Network of Affiliates
We have a global network of independent affiliates that own their own
gateways and originate and/or terminate voice traffic over ITXC.net. We
have used our affiliate structure to rapidly achieve what we believe to
be the broadest global network in the Internet telephony marketplace.
As of July 31, 1999, we had affiliates in more than 71 international
cities operating more than 110 ITXC.net points of presence in 36
countries. Our affiliates range from small Internet service providers
to traditional telephone companies.
. Multiple Access Points
As of July 31, 1999, we had two network hubs, one in New York and one
in Los Angeles, each consisting of a switch and multiple gateways. Our
customers access ITXC.net through dedicated connections from their
switches to these network hubs or by using SNARCs located on their
premises. SNARCs connect our customers' switches to the Internet and
ITXC.net and thereby avoid costly, distance-based dedicated line
charges associated with connecting customer switches to our network
hubs. As of July 31, 1999, we had installed 30 SNARCs at 15 customer
sites.
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. BestValue Routing
Our BestValue Routing approach employs ITXC-developed software and
techniques to efficiently and cost-effectively route voice traffic over
ITXC.net. We believe that our ability to develop and deploy intelligent
routing methods represents a significant competitive advantage. We
believe that this approach enables us to provide consistent, reliable
quality, since we are able to avoid the majority of Internet congestion
points and minimize packet loss and delay.
We implement our BestValue Routing approach from our 24-hours-a-day, 7-
days-a-week network operations center, where we poll our affiliates'
gateways periodically to assure their stability, test the quality of
Internet connections to the gateways and collect call detail records in
near real-time to monitor the quality of calls placed over our network.
We use network analysis software to compare monitoring data to
predetermined parameters from our database of call detail records. This
software generates reports on a per route basis when the measured
parameters fail to meet predetermined standards. Frequent analysis of
this information allows us to rapidly correct network problems such as
congestion or inoperative gateways.
Our monitoring and analysis software helps our staff to manage a
routing scheme across multiple switches and gateways around the world.
Our routing technicians establish predetermined percentages of traffic
to be sent to each provider, based both on price and quality. If a
particular Internet route or termination provider is not meeting our
standards, our staff switches to a better quality route and then
resolves the problem. For example, if transport through the public
Internet proves to be unreliable on a particular route, we can reroute
the traffic through dedicated data networks or the traditional
telephone network to terminate the call in a traditional manner. The
use of multiple termination affiliates in many cities in which we
operate provides us with numerous termination possibilities to help
ensure completed calls with consistent quality.
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The following diagram depicts the functions of BestValue Routing:
[Map of BestValue Routing Over ITCX.net]
Our Strategic Carrier and Technology Partners
We believe that our strategic relationships with carrier affiliates are
important because they allow us to extend the geographic reach of ITXC.net. We
believe that these relationships will lead to a broader origination/termination
presence in key areas and allow us to provide service over our own network for
more of our customers. We also expect that these relationships will assist us
in focusing our development of new voice services. We currently have strategic
carrier relationships with Bell Atlantic, China Telecom and Korea Telecom.
. Bell Atlantic. We have a nonexclusive affiliate agreement with Bell
Atlantic which we believe to be the first Internet protocol
telephony agreement for a regional Bell operating company. Under the
agreement, Bell Atlantic is terminating traffic originated by our
affiliates worldwide. This arrangement provides our customers with
high capacity and quality termination on the east coast of the
United States using a data network format, as opposed to the
traditional telephone network format.
. China Telecom. We entered into an agreement and are currently
exchanging billable calls with China Telecom, the largest
telecommunications service provider in the People's Republic of
China, to originate calls from and terminate calls throughout China.
Under this agreement, China Telecom uses our
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WWeXchange Service to provide routing and settlement to worldwide
destinations and provides termination services on calls that we send
to China.
. Korea Telecom. We have entered into a non-exclusive agreement
regarding international Internet telephony services with Korea
Telecom, the largest telecommunications service provider in South
Korea. Under this agreement, we have agreed jointly with Korea
Telecom to provide international Internet telephony services and
value-added services through the use of Internet telephony and other
telecommunications services between the Republic of Korea, the
United States and other locations. Korea Telecom uses ITXC.net to
complete outbound calls and is terminating calls sent over ITXC.net.
Under our agreements with these affiliates, we pay them for all authorized
calls that they terminate for us, at agreed-upon rates. We provide them with
limited technical assistance and assist them in obtaining appropriate gateways
and other equipment from third-party providers.
We do not currently generate significant revenues from any of these
affiliates. They are important to us because they provide expanded global reach
for ITXC.net and termination points in locations which are significant for our
customers.
Because gateways are critical to the infrastructure of ITXC.net, we have
strategic relationships with Lucent Technologies and VocalTec Communications,
both of which are leading gateway manufacturers. Lucent Technologies has also
provided us with vendor financing in connection with the purchase of gateways.
VocalTec Communications is an equity investor in ITXC. Additionally, we have
worked closely with both companies to develop gateway interoperability
standards through our iNOW! initiative.
We expect our strategic relationships to continue and that our relationships
with these and other technology partners will help drive the development of new
voice, fax and voice-enabled services over ITXC.net.
Our Services
WWeXchange Service
In April 1998, we introduced our WWeXchange service, the first application
enabled by ITXC.net. This service provides international call completion to our
customers and enables them to offer their own customers phone-to-phone global
voice and fax service. Our WWeXchange service relies upon Internet telephony
technology. Such technology permits calls originated by a telephone to be
transmitted over the Internet. We believe that Internet telephony is the first
technology that allows non-computer users to access the Internet.
Our WWeXchange service provides our customers with high quality, low cost
global long distance service without their having to understand or deploy
Internet telephony technology themselves. We believe that the high quality of
calls completed using our WWeXchange service allows our customers to use
ITXC.net as an alternative to traditional voice traffic networks.
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We believe that our affiliates benefit from our WWeXchange service because
they:
. rapidly obtain a flow of international traffic without incurring
significant sales or marketing costs;
. obtain high quality international long distance for their originated
calls at lower rates than through traditional telephony;
. connect directly to other affiliates while having a single billing
relationship with us; and
. have a global reach without incurring the incremental costs of
building and operating multiple facilities.
SNARCs
SNARCs are specially built gateways that we place on selected customer
premises in order to eliminate the cost of backhaul from customer switches to
our switches. Until we launched our SNARC program in April 1999, customers had
to bear the expense of running dedicated circuits from their facilities to
their suppliers. This is known as backhaul. Our customers also typically ran
circuits from their facilities to our network hubs in New York or Los Angeles.
However, the introduction of our SNARC program reduces the expense of backhaul
by transporting traffic directly to the Internet and ITXC.net in whatever city
the customer is located. We believe that this use of Internet capability to
eliminate the expense of backhaul will make us more attractive to customers
located away from major telephony hubs. As of July 31, 1999, we had installed
30 SNARCs at 15 customer sites.
Future Enhanced Voice Services
We intend to make significant investments to develop and market additional
services for use over ITXC.net. We believe that as a result of the convergence
of the data and communications networks and the capabilities and size of
ITXC.net, we will be able to offer next-generation, enhanced voice services to
both new and existing customers. In addition, we believe that ITXC.net's open
architecture, combined with the strength and size of our customers, affiliates
and strategic relationships, will attract developers of voice services to our
network.
We may introduce the following enhanced voice services in the future and we
may introduce other services not listed. However, we cannot assure you that we
will be able to successfully develop or implement these or other services in
the future.
. Enhanced Phone-to-Phone Service: Planned enhancements to our
existing WWeXchange service include:
. 800 and 900 service;
. number portability;
. subscriber authentication;
. conferencing services; and
. subscriber identification through voice prints and voice
commands.
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. Personal Computer-to-Phone Service and Phone-to-Personal Computer
Service: ITXC.net may be used to terminate calls that originate on
personal computers as well as calls that originate on telephones. We
believe that ITXC.net has the same advantages of consistent quality,
broad coverage and competitive prices for personal computer-
originated calls as it does for telephone-originated calls. We
believe that subscribers would also be able to specify that they
want to receive ordinary telephone calls on a personal computer
rather than a standard telephone and ITXC.net would be able to
complete these calls.
. Device-to-Phone Service and Phone-to-Device Service: There are
Internet phone devices available on the market today that allow
owners to make calls over the Internet. While there is no
incremental cost for these calls over the cost of Internet access,
calls can only be made to others who have Internet phones. We may
use ITXC.net to enable the completion of inexpensive calls from
these devices to any telephone. In addition, we believe that other
devices, such as personal digital assistants, will become voice-
enabled.
. Unified Messaging Service: We may be able to offer a service over
ITXC.net that our customers can use to provide their customers with
telephone access to voice messages, e-mail and faxes. In addition,
our customers may be able to provide to their customers access to
voice mail from personal computers.
. Voice-enhanced E-commerce: Internet web sites used both for sales
and for customer service are being enhanced by the addition of
click-and-call services which allow the viewer to talk through his
or her personal computer to an agent, who sees what the user sees,
can answer questions and take orders. As with other Internet
telephony applications, voice quality has been an obstacle to the
wide-spread deployment of click-and-call services. We believe that
we can use ITXC.net and its capabilities to add consistent quality
to voice-enhanced e-commerce.
. Single Number Service: We believe that ITXC.net will be able to
support a product service enabling subscribers to maintain a single,
permanent telephone number for all calls regardless of their
location. This single number would serve as a billing number when
the subscriber is placing calls and as a reach-me number for
receiving calls. The number could be reassigned to any phone or
personal computer. This type of call-forwarding would take advantage
of Internet-addressing and ITXC.net to eliminate most of the costs
and technical obstacles which have prevented the widespread
deployment of such services on the traditional telephone network.
Sales, Marketing and Distribution
Our sales and marketing goals are to:
. expand the use of our WWeXchange service by our existing call
origination customers and affiliates and further expand our call
origination customer base;
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. expand our terminating affiliate base;
. increase the number of carriers that are ITXC affiliates; and
. establish a market leadership position among providers of voice and
fax services over the Internet.
We use the reputations and industry relationships cultivated by our senior
management and our status as an early entrant to attract affiliates to
ITXC.net. We typically meet potential affiliates at Internet voice trade shows
and seminars we conduct on Internet telephony. We often meet potential
customers through directed sales calls by our sales personnel and at telephony
trade shows. We also target strategic affiliates internationally and have made
joint sales calls with Lucent Technologies or VocalTec Communications.
We have a dedicated sales force that is supplemented by members of our
executive management team. Our salespeople are based regionally within the
United States and in Singapore and London, as well as in our corporate office.
We also have sales agents located in China and Venezuela. Our senior management
focuses on maintaining and cultivating relationships with our customers. We
assign our sales representatives specific accounts based on their level of
experience, location and the quality of the relationship between the
representative and the customer. We compensate our sales staff based in large
part on incentive-based goals and measurements. In addition to our marketing
and sales staff, we rely on our executive and operations personnel, including
the staff of our 24-hours-a-day, 7-days-a-week network operations center, to
identify sales opportunities within existing customer accounts and to provide
quality customer service.
We also maintain an Internet web site which, among other things, provides
information to prospective customers and affiliates concerning the technical
and other requirements for becoming a part of ITXC.net.
Our primary marketing and sales support is centralized and directed from our
headquarters office in Princeton, New Jersey. We have a full-time staff
dedicated to our marketing efforts. The marketing and sales support staff are
charged with implementing our marketing strategies, prospecting and producing
sales presentation materials and proposals.
New Services Development and Implementation
Our development team is dedicated to the improvement and enhancement of the
monitoring and analysis software tools and Internet management systems we use
to ensure BestValue Routing, the enhancement of our management systems,
including our billing and customer care software, and the development and
implementation of new voice services. Our future success will depend, in part,
on our ability to improve existing technology and develop and/or implement new
voice services that incorporate leading technology.
Our Subsidiaries
Our consolidated subsidiaries are ITXC Data Transport Services LLC, a
Delaware limited liability company formed in March 1998, and ITXC Asia PTE Ltd,
a Singapore
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company formed in October 1998, both of which are wholly-owned by ITXC. In
addition, we have a 49% interest in ITXC Comunicacoes Ltda., a Brazilian
limited liability company formed in September 1998. Our South American joint
venture owns and operates network hubs in Sao Paulo and Rio de Janeiro, Brazil.
The 51% interest that we do not own is owned by Brazilian telecommunications
companies. ITXC Comunicacoes intends to deploy facilities, or cause affiliates
to deploy facilities, in other cities in Brazil as well as in Argentina,
Paraguay, Chile and Uruguay. We have granted ITXC Comunicacoes the exclusive
right to deploy ITXC.net facilities in those regions. All of the voice traffic
originated from ITXC Comunicacoes travels over ITXC.net.
Competition
The long distance telephony market and the Internet telephony market are
highly competitive. There are several large and numerous small competitors, and
we expect to face continuing competition for ITXC.net based on price and
service offerings from existing competitors and new market entrants in the
future. The principal competitive factors in our market include price, quality
of service, breadth of geographic presence, customer service, reliability,
network capacity and the availability of enhanced communications services. Our
competitors include major and emerging telecommunications carriers in the
United States and foreign telecommunications carriers.
.Internet Protocol and Internet Telephony Service Providers
During the past several years, a number of companies have introduced
services that make Internet telephony or voice services over the
Internet available to businesses and consumers. AT&T Global
Clearinghouse, GRIC Communications and iBasis, Inc. route traffic to
destinations worldwide and compete directly with us. Other Internet
telephony service providers focus on a retail customer base and may in
the future compete with us. These companies may offer the kinds of
voice services we intend to offer in the future. In addition, companies
currently in related markets have begun to provide voice over the
Internet services or adapt their products to enable voice over the
Internet services. These related companies may potentially migrate into
the Internet telephony market as direct competitors.
.Telecommunications Companies and Long Distance Providers
A number of telecommunications companies, including AT&T, Deutsche
Telekom, MCI WorldCom and Qwest Communications, currently maintain, or
plan to maintain, data networks to route the voice traffic of other
telecommunications companies. These companies, which tend to be large
entities with substantial resources, generally have large budgets
available for research and development, and therefore may further
enhance the quality and acceptance of the transmission of voice over
the Internet.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these
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competitors may be able to adopt more aggressive pricing policies, which could
hinder our ability to market our Internet-based voice services. We believe that
one of our key competitive advantages is our ability to deliver reliable, high
quality voice service over the Internet in a cost-effective manner. We cannot
assure you, however, that this advantage will enable us to succeed against
comparable service offerings from our competitors.
Government Regulation
Regulation of Internet Telephony
The use of the Internet to provide telephone service is a recent market
development. At present, we are not aware of any domestic, and are only aware
of a few foreign, laws or regulations that prohibit voice communications over
the Internet.
United States. We believe that, under United States law, the Internet-
related services that we provide constitute information services, as opposed to
regulated telecommunications services, and, as such, are not currently actively
regulated by the FCC or any state agencies charged with regulating
telecommunications carriers. Nevertheless, aspects of our operations may be
subject to state or federal regulation, including regulation governing
universal service funding, disclosure of confidential communications, copyright
and excise tax issues. We cannot assure you that Internet-related services will
not be actively regulated in the future. Several efforts have been made in the
U.S. to enact federal legislation that would either regulate or exempt from
regulation services provided over the Internet. Increased regulation of the
Internet may slow its growth, particularly if other countries also impose
regulations. Such regulation may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, operating
results, financial condition and future prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon certain providers of Internet
telephony, primarily those which, unlike us, provide Internet telephony
services to end users located within the U.S. While the FCC has presently
decided that information service providers, including Internet telephony
providers, are not telecommunications carriers, various companies have
challenged that decision. Congressional dissatisfaction with FCC conclusions
could result in requirements that the FCC impose greater or lesser regulation,
which in turn could materially adversely affect our business, financial
condition, operating results and future prospects.
On April 10, 1998, the FCC issued a report to Congress discussing its
implementation of certain universal service provisions contained in 1996
amendments to the Communications Act of 1934. In the report, the FCC indicated
that it would examine the question of whether certain forms of phone-to-phone
Internet telephony are information services or telecommunications services. The
two are treated differently in several respects, with certain information
services being regulated to a lesser degree. The FCC noted that it did not
have, as of the date of the report, an adequate record on which to make a
definitive pronouncement, but that the record suggested that certain forms of
phone-to-phone Internet telephony appear to have the same functionality as non-
Internet telecommunications services and lack the characteristics that would
render them information services.
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If the FCC were to determine that certain Internet-related services
including Internet telephony services are subject to FCC regulations as
telecommunications services, the FCC could subject providers of such services
to be subject to traditional common carrier regulation, including requirements
to make universal service contributions, and/or pay access charges. It is also
possible that the FCC may adopt a regulatory framework other than traditional
common carrier regulation which would apply to Internet telephony providers.
Any such determinations could materially adversely affect our business,
financial condition, operating results and future prospects of ITXC to the
extent that any such determinations negatively affect the cost of doing
business over the Internet or otherwise slow the growth of the Internet.
State regulatory authorities may also retain jurisdiction to regulate the
provision of intrastate Internet telephony services. Several state regulatory
authorities have initiated proceedings to examine the regulation of such
services. Others could initiate proceedings to do so.
One of our subsidiaries is subject to regulation by the FCC and the New York
Public Service Commission as a result of having been granted authorizations to
provide telecommunications services by these entities. Although the
certificated entity is currently not providing any regulated telecommunications
services, it is possible that the FCC or the New York Public Service Commission
could seek to assert jurisdiction over our unregulated operations.
International. The regulatory treatment of Internet telephony outside of the
U.S. varies widely from country to country. A number of countries that
currently prohibit competition in the provision of voice telephony also
prohibit Internet telephony. Other countries permit but regulate Internet
telephony. Some countries will evaluate proposed Internet telephony service on
a case-by-case basis and determine whether it should be regulated as a voice
service or as another telecommunications service. Finally, in many countries,
Internet telephony has not yet been addressed by legislation. Increased
regulation of the Internet and/or Internet telephony providers or the
prohibition of Internet telephony in one or more countries could materially
adversely affect our business, financial condition, operating results and
future prospects.
The European Union regulatory regime, for example, distinguishes between
voice telephony services and other telecommunications services. In Services
Directive 90/388/EEC, issued in 1990, the European Commission required member
states of the European Union to allow competition for all telecommunications
services except voice telephony and certain other services. The Services
Directive was amended in 1996 by Commission Directive 96/19/EC, which required
the liberalization of all telecommunications services, including voice
telephony, by January 1, 1998. In addition, Directive 96/19/EC held that
services other than voice telephony could be subjected to no more than a
general authorization or declaration procedure. For purposes of these
directives, voice telephony is defined as the commercial provision for the
public of the direct transport and switching of speech in real time between
public switch network termination points.
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On January 10, 1998, the Commission issued a communication addressing
whether Internet telephony was voice telephony and thus subject to regulation
by the member states of the European Union. Consistent with its earlier
directives, the Commission stated that Internet telephony could properly be
considered voice telephony, and thus subject to regulation by the member
states, only if all elements of its voice telephony definition were met. In
this January 1998 communication, the European Commission concluded that no form
of Internet telephony currently meets the definition of voice telephony subject
to regulation by the member states of the European Union. The European
Commission stated that only phone-to-phone communications reasonably could be
considered voice telephony and that, at present, even phone-to-phone Internet
telephony does not meet all elements of its voice telephony definition.
Therefore, the European Commission concluded that voice over Internet services
cannot for the time being be classified as voice telephony.
As a result of the European Commission's conclusion, providers of Internet
telephony should be subjected to no more than a general authorization or
declaration requirement by European Union member states. The member states of
the European Union are: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden
and the United Kingdom. However, we cannot assure you that more stringent
regulatory requirements will not be imposed by individual member states of the
European Union, since Commission communications, unlike directives, are not
binding on the member states. The member states therefore are not obligated to
reach the same conclusions as the Commission on this subject so long as they
adhere to the definition of voice telephony in the Services Directive. In fact,
France is currently conducting an investigation into how Internet telephony
should be regulated. Moreover, in its January 10, 1998 IP Telephony
Communication, the European Commission stated that providers of Internet
telephony whose services satisfy all elements of the voice telephony definition
and whose users can dial out to any telephone number can be considered
providers of voice telephony and may be regulated as such by the member states
of the European Union. We cannot assure you that the services provided over
ITXC.net will not be deemed voice telephony subject to heightened regulation by
one or more member states. Moreover, we cannot assure you that the failure of
ITXC or any of our customers or affiliates to obtain any necessary
authorizations will not have a material adverse effect on our business,
financial condition, operating results and future prospects.
We are also providing service in countries where regulation of Internet
telephony is far more restrictive than in the European Union. Specifically, we
have a strategic affiliate relationship with China Telecom to provide Internet
telephony services in the People's Republic of China. See "--Our Strategic
Carrier and Technology Partners." China currently prohibits foreign ownership
of telecommunications companies and strictly limits competition in the
telecommunications sector. Internet telephony is now being provided on an
experimental basis in China by China Telecom, Unicom, and Jitong Communications
in three non-competing geographic regions. It remains uncertain how Internet
telephony will be treated in China once the trial period ends and specifically,
whether China Telecom and/or others will be granted more permanent
authorization to provide Internet telephony in China.
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In addition, as we make our services available in foreign countries, and as
we facilitate sales by our customers and affiliates to end users located in
foreign countries, such countries may claim that we are required to qualify to
do business in the particular foreign country, that we are otherwise subject to
regulation, including requirements to obtain authorization, or that we are
prohibited in all cases from conducting our business as conducted in that
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction in which we are required to do so or to comply with foreign laws
and regulations could materially adversely affect our business, financial
condition, operating results and future prospects, including by subjecting us
to taxes and penalties and/or by precluding us from, or limiting us in,
enforcing contracts in such jurisdictions.
Our customers and affiliates may also currently be, or in the future may
become, subject to requirements to qualify to do business in a particular
foreign country, to otherwise comply with regulations, including requirements
to obtain authorization, or to cease from conducting their business as
conducted in that foreign country. We cannot be certain that our customers and
affiliates either are currently in compliance with any such requirements, will
be able to comply with any such requirements, and/or will continue in
compliance with any such requirements. The failure of our customers and
affiliates to comply with such requirements could materially adversely affect
our business, financial condition, operating results and future prospects.
Certain Other Regulation Affecting the Internet
United States. Congress has recently adopted legislation that regulates
certain aspects of the Internet, including online content, user privacy and
taxation. In addition, Congress and other federal entities are considering
other legislative and regulatory proposals that would further regulate the
Internet. Congress is, for example, currently considering legislation on a wide
range of issues including Internet spamming, database privacy, gambling,
pornography and child protection, Internet fraud, privacy and digital
signatures. Various states have adopted and are considering Internet-related
legislation. Increased U.S. regulation of the Internet may slow its growth,
particularly if other governments follow suit, which may negatively impact the
cost of doing business over the Internet and materially adversely affect our
business, financial condition, results of operations and future prospects.
International. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive that imposes restrictions on the collection and use of personal data.
Under the directive, citizens of the European Union are guaranteed rights to
access their data, rights to know where the data originated, rights to have
inaccurate data rectified, rights to recourse in the event of unlawful
processing and rights to withhold permission to use their data for direct
marketing. The directive could, among other things, affect U.S. companies that
collect or transmit information over the Internet from individuals in European
Union member states, and will impose restrictions that are more stringent than
current Internet privacy standards in the U.S. In particular, companies with
offices located in European Union countries will not be allowed to send
personal information to countries that do not maintain adequate standards of
privacy. Although we do not engage in the collection of data for purposes other
than routing our
49
<PAGE>
services and billing for our services, the directive is quite broad and the
European Union privacy standards are stringent. Accordingly, the potential
effect on ITXC of development in this area is uncertain.
Proprietary Rights
Proprietary rights are important to our success and our competitive
position. As of July 31, 1999, we had four pending applications for trademarks
in the U.S. and 15 pending applications for trademarks in other parts of the
world. We have also applied for one patent in the U.S. for our network
monitoring and management techniques. The laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the U.S.,
and effective copyright, trademark and trade secret protection may not be
available in such jurisdictions. In general, our efforts to protect our
intellectual property rights through copyright, trademark and trade secret laws
may not be effective to prevent misappropriation of our content, and our
failure to protect our proprietary rights could materially adversely affect our
business, financial condition, operating results and future prospects. Despite
such protection, a third party could, without authorization, copy or otherwise
appropriate our proprietary network information. Our agreements with employees
and others who participate in development activities could be breached, we may
not have adequate remedies for any breach, and our trade secrets may otherwise
become known or independently developed by competitors.
We rely upon license agreements with respect to our use of the software and
hardware provided to us by our vendors. Those license agreements may not
continue to be available to us on acceptable terms, or at all.
We have transferred to an independent entity certain intellectual property
that we have developed for iNOW!
Employees
As of July 31, 1999, we employed 93 people. None of our employees is subject
to any collective-bargaining arrangements, and we consider our relations with
our employees to be good.
Properties
Our principal executive office is located in Princeton, New Jersey, where we
lease approximately 22,000 square feet. We have network hubs in New York City
and Los Angeles under co-location arrangements. We have a sales offices in
Singapore and we intend to open a sales office in London during 1999. ITXC
Comunicacoes has a sales office in Sao Paulo, Brazil. We believe that our
existing facilities are adequate for our current requirements and that
additional space can be obtained on commercially reasonable terms to meet
future requirements.
Legal Proceedings
From time to time, we are involved in various legal proceedings relating to
claims arising in the ordinary course of business. We are not a party to any
legal proceeding, the adverse outcome of which is expected to have a material
adverse effect on our business, financial condition, operating results or
future prospects.
50
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Tom I. Evslin........ 56 Chairman of the Board, Chief Executive Officer and
President
John G. Musci........ 43 Executive Vice President, Chief Operating Officer
and Director
Edward B. Jordan..... 38 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Mary A. Evslin....... 51 Vice President, Marketing and Customer Success
Bradley E. Miller.... 33 Vice President, Operations
Steven J. Ott........ 39 Vice President, Global Sales
Eric G. Weiss........ 33 Vice President and Business Unit Manager,
WWeXchange Service
William P. Collatos.. 45 Director(/1/)(/2/)
Elon A. Ganor........ 49 Director(/1/)(/2/)
Frederick R. Wilson.. 38 Director(/1/)(/2/)
</TABLE>
- --------
(1) Member of our compensation committee.
(2) Member of our audit committee.
Tom I. Evslin, our founder, has been Chairman of the Board, Chief Executive
Officer and President since our inception in July 1997. From December 1994
until July 1997, Mr. Evslin was employed by AT&T, where he designed its
Internet strategy and launched and ran its Internet service provider, AT&T
WorldNet Service. From December 1991 until December 1994, he worked for
Microsoft, where he last served as General Manager, Server Applications
Division from May 1993. From 1969 to 1991, he was Chairman and Chief Executive
Officer of Solutions, Inc., a communications software development company. He
is the Chairman of the Policy Committee and a member of the Board of the Voice
On The Net Coalition. Mr. Evslin served on the board of directors of VocalTec
from 1997 until his resignation on June 10, 1999. He is Mary A. Evslin's
husband.
John G. Musci joined us in February 1999 as Executive Vice President and
Chief Operating Officer and as a Director. From June 1998 until February 1999,
Mr. Musci served as Senior Vice President of Wholesale Switched Services at
Qwest Communications International, an Internet communications company. He held
various positions at LCI International, a long distance telecommunications
company, including Senior Vice President--Wholesale Switched Services, from
1985 until June 1998, when LCI was acquired by Qwest. Prior to 1985, Mr. Musci
held various positions at AT&T Information Systems and Ohio Bell.
Edward B. Jordan has been an Executive Vice President since February 1999,
has served as our Chief Financial Officer, Secretary and Treasurer since he
joined us in September 1997 and has served as a Director since April 1998. From
September 1997 until
51
<PAGE>
February 1999, he was our Vice President, Administration. For ten years prior
to joining us, Mr. Jordan was employed by Dialogic Corporation, a manufacturer
of computer telephony products, serving first as Controller and then as Chief
Financial Officer, Treasurer and Vice President. Prior to joining Dialogic, Mr.
Jordan served in the Audit Department of Deloitte & Touche from 1982 to 1986.
Mr. Jordan is a certified public accountant.
Mary A. Evslin has been our Vice President, Marketing and Customer Success
since July 1997. From 1993 through July 1997, Ms. Evslin served as a volunteer
for The American Red Cross and for various charitable organizations. From 1992
to 1993, Ms. Evslin was employed by Attachmate Corporation, a provider of
mainframe connectivity software to businesses, as Manager of Service Marketing.
From 1986 to 1992, she served as President of Solutions International, a
software marketing company. From 1978 to 1986, Ms. Evslin served as Vice
President of Marketing and Sales at Solutions, Inc., a communications software
development company. She is Tom I. Evslin's wife.
Bradley E. Miller joined us as our Vice President, Operations in November
1997. From June 1996 to November 1997, Mr. Miller was Director of Operations at
CGX Telecom/CAIS Internet, a tier 1 Internet service provider. From May 1995
until June 1996, Mr. Miller was a Management Information Systems Manager at US
Assist, an international travel assistance company. From June 1987 until May
1995, he was the Director of Operations at Donohoe Constructions Company, a
construction firm.
Steven J. Ott has been our Vice President, Global Sales since January 1998.
From August 1994 to January 1998, Mr. Ott served as Vice President of Global
Sales and Support at Voxware, Inc., a software company providing core audio
compression algorithms and applications to technology companies. Prior to
August 1994, Mr. Ott served first as a Director and then as Vice President of
Corporate Development at Legent Corporation, a software development company.
Eric G. Weiss joined us in October 1997 as our Business Unit Manager,
WWeXchange Service and served in that capacity until May 1998. From May 1998 to
present, Mr. Weiss has served as Vice President and Business Unit Manager,
WWeXchange Service. From May 1995 to October 1997, he was employed by Dialogic
Corporation as a Product Line Manager. From September 1994 until May 1995, Mr.
Weiss was a Manager with BCE Ventures, Bell Canada Enterprises (BCE) Inc., a
telecommunications firm. From 1991 until September 1994, he held various
management positions with Hewlett Packard Company, a manufacturer of electronic
equipment.
William P. Collatos has been a Director since April 1998. Mr. Collatos is a
founding General Partner of Spectrum Equity Investors, L.P., a private equity
investment firm which invests in telecommunications, information and media
companies. Prior to co-founding Spectrum in 1994, Mr. Collatos was a founding
General Partner of Media/Communications Partners and a General Partner of TA
Associates. Mr. Collatos currently serves on the boards of directors of
Jazztel, plc, and Golden Sky Systems, Inc. and serves on the board of directors
of Galaxy Telecom GP, the general partner of Galaxy Telecom, LP.
52
<PAGE>
Elon A. Ganor has been a Director since October 1997. He has served as the
Chairman of the Board of VocalTec Communications, Ltd. since 1993. He was CEO
of VocalTec between 1993 and 1998.
Frederick R. Wilson has served as a Director since April 1998. He founded
Flatiron Partners, a venture capital firm which primarily invests in Internet-
oriented companies, in August 1996. For ten years prior to August 1996, Mr.
Wilson worked for Euclid Partners, an early-stage venture capital firm. Mr.
Wilson is a director of The Street.com and StarMedia Network.
Officers who do not have an employment agreement with us, serve at the
discretion of our board of directors and hold office until their successors are
elected and qualified or until their earlier resignation or removal.
Upon the closing of the offerings, our board of directors will be divided
into three classes. Each class will consist, as nearly as possible, of one-
third of the whole number of the board of directors. Directors for each class
will be elected at the annual meeting of stockholders held in the year in which
the term for such class expires. Upon election, directors will serve for three
years, and will hold office until their successors are elected and qualified.
There are currently six members of our board of directors. Tom I. Evslin and
Frederick R. Wilson are in class I; their terms will expire in 2000. John G.
Musci and Elon A. Ganor are in class II; their terms will expire in 2001.
Edward B. Jordan and William P. Collatos are in class III; their terms will
expire in 2002. We intend to add an additional independent director after the
closing of the offerings.
Board Committees
Our board of directors has three standing committees: an audit committee, a
compensation committee and a CEO committee.
The audit committee consists of Messrs. Collatos, Wilson and Ganor, with Mr.
Collatos serving as Chairman. The audit committee recommends the firm to be
appointed as independent accountants to audit our financial statements and to
perform services related to the audit; reviews the scope and results of the
audit with the independent accountants; reviews our year-end operating results
with our management and the independent accountants; considers the adequacy of
our internal accounting and control procedures; reviews the non-audit services
to be performed by the independent accountants, if any; and evaluates the
accountants' independence.
The compensation committee consists of Messrs. Collatos, Wilson and Ganor,
with Mr. Wilson serving as Chairman. The compensation committee reviews,
recommends and approves compensation arrangements for executive officers and
other senior level employees, and administers certain benefit and compensation
plans and arrangements.
The CEO committee is composed solely of Mr. Evslin. The CEO committee grants
stock options and determines the basic terms of option grants to certain
employees under our stock
53
<PAGE>
incentive plan in accordance with the terms set for that plan by our
compensation committee. Our plan grants the CEO committee this authority with
respect to persons other than directors, specified executive officers,
consultants and other individuals identified by the compensation committee.
Outside Director Compensation
We have not yet paid any compensation to non-employee directors. We
anticipate that in the future, non-employee directors may receive annual fees,
meeting fees and periodic option grants.
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total cash and non-cash compensation that
we paid or accrued during the year ended December 31, 1998 with respect to our
Chief Executive Officer and our four other most highly compensated executive
officers. The principal components of these individuals' current cash
compensation are the annual base salary and bonus included in the Summary
Compensation Table. We have also described below other compensation these
individuals receive under employment agreements and our stock incentive plan.
Mr. Musci, our chief operating officer, joined us in February 1999. His base
salary for 1999 is $200,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------- ----------------------
Number of Securities
Underlying
Options/SARs
Name and Principal Position Salary($) Bonus($) (#)
---------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Tom I. Evslin................ 232,308 150,000(/1/) --
Chairman of the Board, Pres-
ident and Chief Executive
Officer
Edward B. Jordan............. 120,192 -- --
Executive Vice President and
Chief Financial Officer
Mary A. Evslin............... 107,788 -- --
Vice President, Marketing
and Customer Success
Steven J. Ott................ 96,153 32,924(/2/) 350,000
Vice President, Global Sales
Bradley E. Miller............ 119,134 -- --
Vice President, Operations
</TABLE>
- --------
(1) Earned in 1998, but not paid until 1999.
(2) Consists of commissions earned by Mr. Ott in 1998.
The following tables present certain information regarding stock options
granted to the named executive officers during 1998 and 1999 under our stock
incentive plan.
Options Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
-------------------------------------------------- ----------------------
Number of % of total
Securities Options
Underlying Granted to Exercise Price
Options Employees in Per Share Expiration
Name Granted (#) 1998 ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------ -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tom I. Evslin........... -- -- -- -- -- --
Edward B. Jordan........ -- -- -- -- -- --
Mary A. Evslin.......... -- -- -- -- -- --
Steven J. Ott........... 350,000 23.0 0.30 1/7/08 66,034 167,343
Bradley E. Miller....... -- -- -- -- -- --
</TABLE>
55
<PAGE>
Options Grants in 1999 Through July 31, 1999
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term
--------------------------------------------------- -----------------
% of total
Options
Number of Granted to
Securities Employees in
Underlying 1999 Through Exercise Price
Options July 31, Per Share Expiration
Name Granted (#) 1999 ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------ -------------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tom I. Evslin........... 30,000 1.0 4.00 6/8/09 75,467 191,249
Edward B. Jordan........ 200,000 6.3 1.16 2/25/09 145,904 369,748
200,000 6.3 4.00 6/8/09 503,116 1,274,994
Mary A. Evslin.......... 50,000 1.6 4.00 6/8/09 125,779 318,748
Steven J. Ott........... 50,000(1) 1.6 .63 1/7/09 19,653 49,804
30,000 1.0 4.00 6/8/09 75,467 191,249
Bradley E. Miller....... 50,000 1.6 4.00 6/8/09 125,779 318,745
</TABLE>
- --------
(1) These options were granted under the terms of Mr. Ott's offer of
employment.
The following table presents information regarding the number and value of
stock options held by the named executive officers at December 31, 1998. The
value calculations are based upon an assumed value at December 31, 1998 of
$12.00 per share, representing the midpoint of the estimated price range.
Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 (#) at December 31, 1998 ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Tom I. Evslin............... -- -- -- --
Edward B. Jordan............ 200,000 400,000 2,399,000 4,798,000
Mary A. Evslin.............. 66,668 133,332 799,683 1,599,317
Steven J. Ott............... -- 350,000 -- 4,095,000
Bradley E. Miller........... 66,668 133,332 794,749 1,589,451
</TABLE>
56
<PAGE>
The following table presents information regarding the number and value of
stock options granted to the named executive officers during the period from
January 1, 1999 through July 31, 1999. The value calculations are based upon an
assumed value of $12.00 per share, representing the midpoint of the estimated
price range.
Value of Options Granted During 1999 Through July 31, 1999
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options Granted In-the-Money Options
During 1999 Granted During 1999
---------------------------- -----------------------------
Name Exercisable(1) Unexercisable Exercisable (1) Unexercisable
- ---- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Tom I. Evslin....... 30,000 -- 240,000 --
Edward B. Jordan.... -- 400,000 -- 3,768,000
Mary A. Evslin...... -- 50,000 -- 400,000
Steven J. Ott....... -- 80,000 -- 808,750
Bradley E. Miller... -- 50,000 -- 400,000
</TABLE>
- --------
(1) Represents options exercisable within 60 days after July 31, 1999; does not
include options which will become exercisable upon the consummation of the
offerings.
None of the executive officers named in the tables above exercised any stock
options during 1998. Between January 1, 1999 and July 31, 1999, Tom I. Evslin
exercised options to purchase 30,000 shares of common stock, Edward B. Jordan
exercised options to purchase 200,000 shares of common stock, Mary A. Evslin
exercised options to purchase 66,668 shares of common stock, and Steven J. Ott
exercised options to purchase 116,668 shares of common stock.
Employment Agreements
Tom I. Evslin. We have entered into an employment agreement with Tom I.
Evslin, our Chairman, President and Chief Executive Officer. The agreement
expires on March 31, 2000. Under his agreement, Mr. Evslin is entitled to
receive a base salary of $250,000 and annual bonuses which, in 1999, can amount
to 100% of base salary less $75,000 and thereafter can amount to 100% of base
salary. The actual amount of bonuses paid or to be paid is determined by our
compensation committee before the start of the year in which the bonus is to be
paid and is contingent upon ITXC's achieving certain performance objectives.
Mr. Evslin is eligible to receive an additional bonus under our cash incentive
plan.
If Mr. Evslin's employment with us is terminated by us without cause, or by
Mr. Evslin for good reason, Mr. Evslin is entitled to receive his salary and
other benefits for a period of one year, as well as a pro rata portion of his
annual bonus for the year in which the termination occurs. If Mr. Evslin's
employment is terminated for any other reason, our obligation to pay any
further compensation or benefits ends. Mr. Evslin's employment agreement also
prohibits him from being employed by a competing business for a period of two
years if his employment is terminated by us for cause or by him without good
reason or for a period of one year if his employment is terminated for any
other reason, including expiration of the term of his employment agreement.
57
<PAGE>
Under his employment agreement, Mr. Evslin is also bound to keep certain
information confidential and to assign to us any intellectual property
developed by him during the term of his employment.
John G. Musci. We have also entered into an employment agreement with John
G. Musci, our Executive Vice President and Chief Operating Officer. The term of
Mr. Musci's employment agreement began on February 8, 1999 and expires on
February 7, 2001. Under his employment agreement, Mr. Musci is entitled to
receive an annual base salary of not less than $200,000 and, for 1999, a bonus
not to exceed 200% of his annual base salary, subject to the attainment of
certain objectives as established by our board of directors; provided, however,
that Mr. Musci is entitled to receive a bonus of $75,000 for the six month
period ending July 31, 1999. For the calendar year 2000 and thereafter, he is
eligible to receive a cash bonus under our cash incentive plan. Mr. Musci is
also entitled to receive up to $100,000 in relocation expenses.
Under his employment agreement, Mr. Musci received non-qualified options
covering 1,500,000 shares of ITXC common stock at an exercise price of $.625
per share under our stock incentive plan. A total of 1,000,000 of Mr. Musci's
options will vest and become exercisable at the rate of 33 1/3% on December 21,
1999, 2000 and 2001. The remaining 500,000 will vest and become exercisable on
December 21, 2005. These options could, however, vest and become exercisable
under certain circumstances, prior to December 21, 2005.
Under his employment agreement, if Mr. Musci is terminated for cause or any
reason other than constructive termination or wrongful termination, he is
entitled to receive accrued base salary, bonus and other benefits and forfeits
any unvested options. If Mr. Musci is terminated by reason of a constructive
termination or wrongful termination, in addition to any accrued base salary,
bonus and other benefits, Mr. Musci is entitled to receive as severance a lump
sum payment in cash equal to his current salary as of the date of termination
for a period equal to the greater of the remainder of the then current term or
six months, certain additional benefits and an acceleration of the vesting
period for any of his options that have not vested as of the date of the
termination. Upon expiration of the term of his employment, Mr. Musci is
entitled to receive as severance his base salary compensation in effect at the
time of the termination for a period of six months, any accrued base salary,
bonus and other benefits and forfeits any unvested options.
Mr. Musci's employment agreement prohibits him from becoming associated with
any competing business for the applicable severance period in the case of a
company wrongful termination or expiration of his term of employment or for six
months in the case of his termination for any other reason.
Under his employment agreement, Mr. Musci is also bound to keep certain
information confidential and to assign to us any intellectual property
developed by him during the term of his employment.
58
<PAGE>
Compensation Committee Interlocks and Insider Participation
During 1998, our compensation committee consisted of Messrs. Evslin, Ganor
and Wilson. Mr. Evslin is our Chairman of the Board, President and Chief
Executive Officer and, until June 1999, served on the board of directors and
compensation committee of VocalTec Communications. Mr. Ganor is the Chairman of
the Board of VocalTec Communications. Other than Mr. Evslin, none of the
members of our compensation committee served as an officer or employee of ITXC
or any of its subsidiaries during fiscal 1998.
In October 1997, we entered into an agreement with VocalTec Communications
under which:
. we issued to VocalTec Communications:
. 1,800,000 shares of common stock;
. 278,000 shares of Series A convertible preferred stock;
. warrants to purchase 122,000 shares of Series A convertible
preferred stock; and
. warrants to purchase 1,200,000 shares of common stock, the
exercisability of which was conditioned, in part, upon our use of
the credit described below.
. we received from VocalTec Communications $500,000 in cash and the rights
to certain information regarding VocalTec Communications' business; and
. we received a credit entitling us to purchase $1.0 million of VocalTec
Communications' equipment.
In April 1998:
. VocalTec's shares of Series A convertible preferred stock were converted
into a total of 556,000 shares of our common stock; and
. VocalTec's preferred stock warrant was converted into a warrant to
purchase a total of 244,000 shares of our common stock.
In June 1999, VocalTec exercised its outstanding warrants, acquiring
1,444,000 shares of common stock upon payment of $722.
VocalTec Communications also acquired 668,622 shares of our Series B
convertible preferred stock and 215,332 shares of our Series C convertible
preferred stock as part of our April 1998 and February 1999 private placements.
See "Certain Transactions--ITXC Equity Financings."
We also have an ongoing business relationship with VocalTec Communications.
From inception through June 30, 1999, we purchased $1.0 million of hardware and
software from VocalTec Communications. We offset the purchase price of these
products against the $1.0 million credit that we received in connection with
our 1997 agreement with VocalTec Communications.
59
<PAGE>
1998 Incentive Stock Option Plan
Our stock incentive plan was adopted by our board of directors on February
17, 1998 and by our shareholders on April 2, 1998. Under the plan, incentive
stock options and non-qualified stock options to purchase shares of our common
stock may be granted to directors, officers, employees and consultants. As of
July 31, 1999, stock options covering 1,895,250 shares were available for grant
under the plan, including options covering 1,000,000 shares that will become
available upon consummation of the offerings, and stock options to purchase
5,289,276 shares were outstanding with a weighted average exercise price of
$1.10 per share. On January 1 of each year, commencing January 1, 2000, the
number of shares of common stock available for issuance under the plan will be
increased by the least of:
. 2,000,000 shares;
. 3% of the outstanding shares; or
. a number of shares determined by our board of directors.
The per share exercise price for incentive stock options granted under the
plan will equal the fair market value of the underlying common stock on the
date of grant. The option price for shares purchased through the exercise of an
option is payable in cash or, at the discretion of our Chief Executive Officer
or compensation committee, in common stock or a combination of both.
Our Chief Executive Officer or compensation committee determines the initial
vesting period and the expiration date(s) of each option at the time that it is
granted. As of July 31, 1999, ITXC had not granted any incentive stock options.
Under the plan, we may also issue stock appreciation rights, either alone or
in connection with options, restricted stock awards and performance awards. As
of July 31, 1999, we had not issued any such stock appreciation rights,
restricted stock awards or performance awards.
The plan provides that in the event of a change in control, all options
outstanding on that date will be immediately and fully exercisable upon
termination of an option holder's employment or service for certain specified
reasons within twelve months following the change in control. In addition,
under certain circumstances upon such specified termination, an option holder
may be permitted to exchange any unexercised options for a cash payment.
The plan provides for options to terminate within specified periods of time
after employment is terminated, depending upon the reason for termination. If
an option holder's employment is terminated for cause, his or her options will
terminate immediately upon termination of employment. Unless otherwise provided
by the compensation committee or our board of directors, options are not
transferable by the option holder and can be exercised only by the option
holder during his or her lifetime or upon the option holder's death only by the
personal representative of his or her estate. The plan may be amended or
terminated by the board of directors at any time; provided, that no such action
may adversely affect any outstanding options without the consent of the
applicable option holder.
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<PAGE>
The grant of a non-qualified option has no tax consequences to us or to the
option holder. Upon exercise of a non-qualified option, the option holder will
recognize taxable ordinary income equal to the excess of the fair market value
on the date of the exercise of the shares of common stock acquired over the
exercise price of the non-qualified option, and that amount will be deductible
by us for federal income tax purposes. The option holder will, upon a later
sale of shares, recognize short term or long term capital gain or loss,
depending on the holding period of the shares, but we will not be entitled to
an additional tax deduction.
Employee Stock Purchase Plan
We have an employee stock purchase plan intended to meet the qualifications
for such a plan under applicable federal income tax laws. The plan will be
administered by the compensation committee of our board of directors. The
number of shares available for purchase under the plan presently consists of
500,000 shares of common stock and will increase on January 1 of each year,
commencing January 1, 2000, in an amount equal to the least of:
. 600,000 shares of common stock;
. 1% of the common stock outstanding on January 1; or
. a number of shares of common stock specified by our board.
Shares of our common stock will be offered to our employees under the plan
through a series of successive offering periods, not to exceed 24 months, until
either the maximum number of shares available for issuance under the plan has
been purchased or the plan has been otherwise terminated. Each offering period
is of a duration determined by the compensation committee of our board of
directors. The initial offering period will begin when the plan becomes
effective and terminates on the last business day in July 2001. The next
offering period will commence on the first business day in August 2001, and
subsequent periods will commence as determined by the compensation committee.
In order to be eligible to participate in the plan, an employee must be
engaged, on a regularly scheduled basis of more than 20 hours per week of work
for ITXC for more than 5 months per calendar year, in the rendition of personal
services to ITXC. Non-employee directors and non-employee officers are not
eligible to participate.
Each employee who meets the employment criteria on the start date of the
initial offering period will be eligible to enter that offering period or any
subsequent offering period on the start date of any purchase period during
which he or she remains employed by us. Employees who meet the eligibility
criteria after the start date of the initial offering period will be eligible
to enter that offering period or any subsequent offering period on the start
date of any purchase period within the applicable offering period on which he
or she meets the eligibility criteria with at least 3 months of service with
ITXC or one of our corporate affiliates. The date on which an employee enters
an offering period is his or her entry date for the purposes of that offering
period.
61
<PAGE>
Employees who would, immediately after the grant, own or hold outstanding
options or other rights to purchase stock possessing 5% or more of the total
combined voting power or value of all classes of our stock may not be granted
any rights to purchase stock under the plan. Employees whose rights to purchase
stock under this plan or any other qualifying plan would exceed $25,000 worth
of stock in any calendar year are also prohibited from participating.
Employees who participate in the plan will authorize us to deduct any
multiple of one percent of their total cash compensation during each purchase
period up to a maximum of 10% of their total cash compensation, which includes:
. regular base salary;
. pre-tax contributions made by the employee to certain benefits plans;
and
. overtime payments, bonuses, commissions, profit-sharing distributions
and other incentive-type payments.
The maximum number of shares of common stock that an employee may purchase
during any purchase period is 3,000 shares.
During periods when employees are permitted to make purchases, the purchase
price of the shares of common stock will be equal to 85% of the lesser of:
. the fair market value of the common stock on the employee's entry date
into the applicable offering period; or
. the fair market value of the common stock on the date of purchase.
However, the purchase price for any employee whose entry date is other than the
start date of the offering period shall not be less than the fair market value
of the common stock on the start date of that offering period.
Employees may end their participation in the plan at any time during an
offering period. An employee's participation ends automatically upon
termination of an employee's employment. In general, any payroll deductions for
the purchase period in which the purchase right terminates will be refunded
without interest.
In the event of a stockholder-approved merger or consolidation in which
securities possessing more than 50% of the total combined voting power of our
outstanding securities are transferred to a person or persons different from
the persons holding those securities immediately prior to the transaction, or
in the event of a stockholder-approved sale, transfer or other disposition of
all or substantially all of our assets in complete liquidation or dissolution
of ITXC, each outstanding purchase right shall automatically be exercised. ITXC
will use its best efforts to provide written notice in advance of the
occurrence of any of these transaction. Upon receipt of such notice, employees
may terminate their outstanding purchase rights.
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<PAGE>
Purchase rights granted under the plan are not assignable or transferable by
the employee other than by will or the laws of descent.
The plan will terminate upon the earliest of:
. the last business day in August 2009;
. the date on which all shares available for issuance under the plan have
been sold under purchase rights exercised under the plan; or
. the date on which all purchase rights are exercised in connection with
any corporate transaction described above.
1999 Cash Incentive Plan
We designed our cash incentive plan to encourage and reward our employees
for their contributions to our performance. All of our employees, except
salespeople, are eligible to participate in this plan. Employees who are
eligible receive quarterly and annual bonuses calculated according to a formula
which takes into account an individual performance factor and a company
performance factor. This bonus is calculated each quarter and at the end of
each year. A total of 50% of the potential bonus is paid out quarterly and 50%
is paid out annually.
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<PAGE>
CERTAIN TRANSACTIONS
For a description of our relationship with VocalTec Communications, see
"Executive Compensation--Compensation Committee Interlocks and Insider
Participation."
Loans from Senior Management
Between February 9, 1998 and April 22, 1998, we borrowed an aggregate of
$550,000 from Tom I. Evslin, our Chairman of the Board, Chief Executive Officer
and President, and $200,000 from Edward B. Jordan, our Executive Vice President
and Chief Financial Officer, and delivered a series of demand notes to these
officers. The notes bore interest at a rate of 10% per year. On April 27, 1998,
each of those notes was canceled and we paid accrued interest to Mr. Evslin and
Mr. Jordan in the amounts of $5,762 and $932, respectively. In consideration
for canceling those notes, Mr. Evslin and Mr. Jordan received 322,581 and
117,302 shares of Series B convertible preferred stock, respectively, and
warrants to purchase 645,162 and 234,604 shares of common stock, respectively.
We valued the Series B convertible preferred stock issued to Mr. Evslin and Mr.
Jordan at the same $1.705 per share price paid by all other purchasers of the
Series B convertible stock. Thus, Mr. Evslin's shares and Mr. Jordan's shares
had an aggregate value of $550,000 and $200,000, respectively. We concluded
that the fair value of the warrants granted to Mr. Evslin and Mr. Jordan was
$90,000, which was included in interest expense during 1998.
ITXC Equity Financings
In April 1998, we sold to a limited group of investors a total of 5,865,104
shares of our Series B convertible preferred stock at a purchase price of
$1.705 per share. The following table sets forth the names of those investors
who, either directly or through an affiliate, are presently directors, officers
or five percent stockholders of ITXC, the number of shares of Series B
convertible preferred stock that such investors acquired, the aggregate
purchase price paid by such investors and the aggregate number of shares of our
common stock that will be issued upon conversion of the preferred shares when
the offerings are completed. Each share of Series B convertible preferred stock
is convertible into two shares of our common stock.
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock to
Investor Principal Relationship to ITXC Purchased Price ($) be Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
Chase Venture Capital See "Principal
Associates, L.P........ Stockholders." 1,361,290 2,321,000 2,722,580
Intel Corporation....... See "Principal 1,173,021 2,000,000 2,346,042
Stockholders."
Spectrum Equity
Investors II, L.P. and
SEA 1998 II, L.P....... Spectrum Equity 1,173,021 2,000,000 2,346,042
Investors II, LLP is one
of our principal
shareholders. William P.
Collatos, the managing
general partner of
Spectrum Equity
Investors II, L.P. and
an affiliate of SEA 1998
II, L.P., is one of our
directors.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock to
Investor Principal Relationship to ITXC Purchased Price($) be Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
DS Polaris, Ltd.,
Polaris Fund II (Tax
Exempt Investors), LLC,
Polaris Fund II, LLC,
Polaris Fund II, L.P.,
DS Polaris Trust
Company (foreign
residents) (1997), Ltd.
and Canada--Israel
Opportunity Fund LP.... See "Principal Stockholders." 753,079 1,284,000 1,506,158
VocalTec
Communications......... VocalTec Communications is 668,622 1,140,000 1,337,244
one of our principal
stockholders. Elon A. Ganor,
the Chairman of the Board of
VocalTec, is one of our
directors.
Tom I. Evslin and Mary
A. Evslin.............. Chairman of the Board, Chief 322,581 550,000 645,162
Executive Officer and
President; and Vice
President, Marketing and
Customer Success
The fl@tiron Fund LLC... Frederick R. Wilson, the 296,188 505,000 592,376
manager of The fl@tiron Fund
LLC, is one of our directors.
Edward B. Jordan........ Executive Vice President and 117,302 200,000 234,604
Chief Financial Officer
</TABLE>
As part of that financing, we entered into various agreements with our
investors, including a stockholders' agreement, the principal terms of which
will automatically terminate upon the closing of the offerings, and a
registration rights agreement.
In February 1999, we sold to a limited group of investors a total of
3,229,975 shares of our Series C convertible preferred stock at a purchase
price of $4.644 per share. The following table sets forth the names of those
investors who, either directly or through an affiliate, are presently
directors, officers or five percent stockholders of ITXC, the number of shares
of Series C convertible preferred stock that such investors acquired, the
aggregate purchase price paid by such investors and the aggregate number of
shares of our common stock that will be issued upon conversion of the preferred
shares when the offerings are completed. Each share of Series C convertible
preferred stock is convertible into two shares of our common stock.
65
<PAGE>
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock to
Investor Principal Relationship to ITXC Purchased Price($) be Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
Spectrum Equity Investors
II, L.P. and SEA 1998 II,
L.P...................... Spectrum Equity Investors II, 1,173,559 5,450,008 2,347,118
LLP is one of our principal
shareholders. William P.
Collatos, the managing
general partner of Spectrum
Equity Investors II, L.P. and
an affiliate of SEA 1998 II,
L.P., is one of our
directors.
Chase Venture Capital
Associates, L.P.......... See "Principal Stockholders." 870,138 4,040,921 1,740,276
Intel Corporation......... See "Principal Stockholders." 484,496 2,249,999 968,992
DS Polaris, Ltd., Polaris
Fund II (Tax Exempt
Investors), LLC, Polaris
Fund II, LLC, Polaris
Fund II, L.P., DS Polaris
Trust Company (foreign
residents) (1997), Ltd.
and Canada-Israel
Opportunity Fund L.P. ... See "Principal Stockholders." 263,194 1,222,273 526,388
The Flatiron Fund 1998/99,
LLC and Flatiron
Associates, LLC.......... Frederick R. Wilson, the 223,256 1,036,801 446,512
manager of The Flatiron Fund
1998/99, LLC, and Flatiron
Associates, LLC is one of our
directors.
VocalTec Communications...
VocalTec Communications is 215,332 1,000,002 430,664
one of our principal
stockholders. Elon A. Ganor,
the Chairman of the Board of
VocalTec, is one of our
directors.
</TABLE>
As part of that financing, we entered into various agreements with our
investors, including a stockholders' agreement, the principal terms of which
will automatically terminate upon the closing of the offerings, and a
registration rights agreement.
Third Amended Registration Rights Agreement
Each of the current holders of our Series B and Series C convertible
preferred stock, including Mr. and Mrs. Evslin and Mr. Jordan, and the Company
entered into an amended registration rights agreement whereby each stockholder
has the right, under certain circumstances and subject to certain conditions,
to request that we register under the Securities Act shares of common stock
held by them. Subject to certain conditions and exceptions, those stockholders
also have the right to require that shares of common stock held by them be
included in any registration under the Securities Act commenced by us. Please
see "Description of Capital Stock--Registration Rights" for additional
information.
Stock Option Exercises
From January 1, 1999 through August 30, 1999, certain of our executive
officers exercised stock options, resulting in the issuance of a total of
480,004 shares of common stock.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock, as of July 31, 1999 and as adjusted
to reflect the sale of our common stock in the offerings, by:
. each person known by us to beneficially own more than five percent of
our outstanding common stock,
. each of our directors,
. each executive officer named in the Summary Compensation Table, and
. all of our executive officers and directors as a group.
Unless otherwise indicated, the person or persons named have sole voting and
investment power. In determining the number and percentage of shares
beneficially owned by each person, shares that may be acquired by such person
under options or warrants exercisable within 60 days of July 31, 1999 are
deemed beneficially owned by such person and are deemed outstanding for
purposes of determining the total number of outstanding shares for such person
and are not deemed outstanding for such purpose for all other stockholders. The
following table assumes the conversion of all shares of our Series B and Series
C convertible preferred stock which will automatically convert into common
stock upon the closing of the offerings.
<TABLE>
<CAPTION>
Percent of Total
----------------------------
Percent Before Percent After
Executive Officers and Directors Shares Beneficially Owned Offerings (%) Offerings (%)
- -------------------------------- ------------------------- -------------- -------------
<S> <C> <C> <C>
Tom I. Evslin........... 7,444,310(/1/)(/2/)(/3/) 25.5 21.0
John G. Musci........... --(/1/) -- --
Edward B. Jordan........ 870,512(/1/)(/3/) 3.0 2.5
Mary A. Evslin.......... 7,444,310(/1/)(/2/) 25.5 21.0
Steven J. Ott........... 116,668(/1/) * *
Bradley E. Miller....... 66,668(/1/) * *
Elon A. Ganor........... 5,567,908(/4/) 19.5 16.0
William P. Collatos..... 4,693,160(/5/) 16.5 13.5
Frederick R. Wilson..... 1,038,888(/6/) 3.6 3.0
All executive officers
and directors as a
group (10 persons)..... 19,864,782 66.8 55.2
<CAPTION>
Other Beneficial Owners of 5%
or More of ITXC's Common Stock
- ------------------------------
<S> <C> <C> <C>
VocalTec Communications,
Ltd.................... 5,567,908(/4/)(/7/) 19.5 16.0
Spectrum Equity Invest-
ors II L.P............. 4,693,160(/5/)(/8/) 16.5 13.5
Chase Venture Capital
Associates, L.P........ 4,462,856(/6/)(/9/) 15.6 12.8
Intel Corporation....... 3,315,034(/10/) 11.6 9.5
DS Polaris Ltd.......... 2,032,546(/11/) 7.1 5.8
</TABLE>
- --------
* Represents less than one percent.
67
<PAGE>
(1) The table above includes the following number of shares which the following
persons may acquire under options and warrants held as of July 31, 1999 and
exercisable within 60 days of such date:
<TABLE>
<S> <C>
Tom I. Evslin..................................................... 711,828
John G. Musci..................................................... --
Edward B. Jordan.................................................. 434,604
Mary A. Evslin.................................................... 711,828
Steven J. Ott..................................................... --
Bradley E. Miller................................................. 66,668
All executive officers and directors as a group................... 1,213,100
</TABLE>
The table above excludes:
. options covering 500,000 shares of common stock granted to Mr. Musci
in February 1999 which will vest on the earliest of the date on which
a change in control of his former employer, Qwest Communications
International, occurs, the seventh anniversary of the date on which
the options were granted and such other date as is provided for in
our stock incentive plan;
. options covering 200,000 shares of common stock granted to Mr. Jordan
in February 1999 which will vest upon the consummation of the
offerings; and
. options covering an additional 1,000,000 shares of common stock
granted to Mr. Musci, an additional 400,000 shares of common stock
granted to Mr. Jordan and an additional 893,330 shares granted to
other executive officers, all of which were granted on or before July
31, 1999 and will not vest prior to September 29, 1999.
(2) Tom I. Evslin and Mary A. Evslin are married to each other. Each may be
deemed to be the beneficial owner of the other's shares. The table or
footnote above reflects, for each of Tom I. Evslin and Mary A. Evslin, the
shares of common stock that Mr. Evslin owns, the shares of common stock
that Ms. Evslin owns, the shares of common stock that they own jointly and
the shares of common stock which each of them may purchase on or before
September 29, 1999 upon the exercise of options and warrants. With the
exception of shares held as joint tenants, each of Tom I. Evslin and Mary
A. Evslin disclaim beneficial ownership of the shares owned of record by
the other. Their principal business address is 600 College Road East,
Princeton, New Jersey 08540.
(3) Tom I. Evslin and Edward B. Jordan are each investors in Flatiron
Associates, LLC, a fund described in note 6 below. Mr. Evslin is deemed to
be the beneficial owner of 652 shares of the common stock owned by
Flatiron Associates, LLC and Mr. Jordan is deemed to be the beneficial
owner of 1,304 shares of the common stock owned by Flatiron Associates,
LLC, representing their respective percentage interests in that entity.
Mr. Evslin's shares also include 5,000 shares owned by an adult child who
resides with Mr. Evslin. Mr. Jordan's shares also include 5,000 shares
owned by his children, who are minors.
(4) This number represents 5,567,908 shares of common stock beneficially owned
by VocalTec Communications, Ltd. Mr. Ganor is the Chairman of the Board of
VocalTec Communications, Ltd. Mr. Ganor disclaims beneficial ownership of
these shares.
(5) This number represents 4,649,000 shares of common stock beneficially owned
by Spectrum Equity Investors II, L.P. and 44,160 shares of common stock
beneficially
68
<PAGE>
owned by SEA 1998 II, L.P. Mr. Collatos is a managing general partner of
Spectrum Equity Investors II, L.P. and an affiliate of SEA 1998 II, L.P.
Mr. Collatos disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest therein.
(6) This number represents 592,376 shares of common stock beneficially owned
by The fl@tiron Fund LLC, 405,168 shares of common stock beneficially
owned by The Flatiron Fund 1998/99, LLC and 41,344 shares of common stock
beneficially owned by Flatiron Associates, LLC. Mr. Wilson is a manager
of The fl@tiron Fund LLC, The Flatiron Fund 1998/99, LLC and Flatiron
Associates, LLC. Mr. Wilson disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest therein. The
Flation entities are parties to certain co-investment arrangements with
affiliates of Chase Venture Capital Associates. These parties disclaim
beneficial ownership of each other's securities.
(7) The principal business address of VocalTec Communications is 25
Industrial Parkway, Northvale, New Jersey 07647.
(8) The principal business address of Spectrum Equity Investors II, L.P. is
One International Place, Boston, Massachusetts 02110.
(9) The principal business address of Chase Venture Capital Associates, L.P.
is 380 Madison Avenue, New York, New York 10017.
(10) The principal business address of Intel Corporation is 2200 Mission
College Boulevard, Santa Clara, California 95052.
(11) This number represents 37,418 shares of common stock beneficially owned
by DS Polaris Ltd., 738,928 shares of common stock beneficially owned by
Polaris Fund II (Tax Exempt Investors), LLC, 487,692 shares of common
stock beneficially owned by Polaris Fund II, LLC, 184,732 shares of
common stock beneficially owned by Polaris Fund II, L.P., 434,112 shares
of common stock beneficially owned by DS Polaris Trust Company (foreign
residents) (1997), Ltd. and 149,664 shares of common stock beneficially
owned by Canada-Israel Opportunity Fund L.P. We have been informed that
DS Polaris Ltd. is the manager of Polaris Fund II (Tax Exempt Investors)
LLC and Polaris Fund II, LLC, the general partner of Polaris Fund II,
L.P. and DS Polaris Trust Company (foreign residents) (1997), Ltd. and an
affiliate of Canada-Israel Opportunity Fund L.P. The principal business
address of DS Polaris Ltd. is 37 Shaul Hamelech Avenue, Tel Aviv, Israel.
69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
This is a summary of the material terms and provisions of our capital stock
and we refer you to our second restated certificate of incorporation, which has
been filed as an exhibit to the registration statement of which this prospectus
is a part.
Our authorized capital stock consists of 67,500,000 shares of common stock,
par value $.001 per share, and 15,000,000 shares of preferred stock, par value
$.001 per share. As of July 31, 1999, our outstanding capital stock consisted
of 10,340,474 shares of common stock, 5,865,104 shares of Series B convertible
preferred stock and 3,229,975 shares of Series C convertible preferred stock.
No other shares of any class or series were issued or outstanding as of July
31, 1999. In addition, the following shares of common stock were reserved for
issuance as of July 31, 1999:
. 11,730,208 shares were reserved for issuance upon conversion of our
Series B convertible preferred stock;
. 6,459,950 shares were reserved for issuance upon conversion of our
Series C convertible preferred stock;
. 879,766 shares were reserved for issuance upon the exercise of warrants
held by Tom I. Evslin and Edward B. Jordan at an exercise price of
$0.8525 per share;
. 5,289,276 shares were reserved for issuance upon exercise of outstanding
stock options granted under our stock incentive plan;
. 1,895,250 shares were reserved for issuance upon the exercise of stock
options or other benefits which may be granted under our stock incentive
plan; and
. 500,000 shares were reserved for issuance under our employee stock
purchase plan.
Upon the closing of the offerings, each share of Series B convertible
preferred stock and Series C convertible preferred stock will be automatically
converted into two shares of our common stock. In addition, upon the closing of
the offerings, we intend to amend and restate our certificate of incorporation
and by-laws. The description of our capital stock above and the description
that follows gives effect to these issuances and the intended amendments.
Common Stock
Voting Rights. Each holder of shares of our common stock is entitled to one
vote per share on all matters to be voted on by stockholders. Holders of common
stock are not entitled to cumulate votes in the election of directors.
Dividend Rights. The holders of common stock are entitled to dividends and
other distributions if, as and when declared by our board of directors out of
assets legally available therefor, subject to the rights of any holder of
preferred stock. See "Dividend Policy."
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<PAGE>
Other Rights. Upon the liquidation, dissolution or winding up of ITXC, the
holders of shares of common stock would be entitled to share pro rata in the
distribution of all of our assets remaining available for distribution after
satisfaction of all of our liabilities and the payment of the liquidation
preference of any outstanding preferred stock. The holders of our common stock
have no preemptive or other subscription rights to purchase shares of ITXC. No
share of our common stock issued in connection with or outstanding prior to the
offerings is subject to any assessment.
Preferred Stock
Our board of directors has the authority, without further action by the
stockholders, to issue our authorized and unissued shares of preferred stock in
one or more series and to fix the number of shares, designations, voting
powers, preferences, optional and other special rights and the restrictions or
qualifications relating to each such series. The rights, preferences,
privileges and powers of each series of preferred stock may differ with respect
to dividend rates, amounts payable on liquidation, voting rights, conversion
rights, redemption provisions, sinking fund provisions and other matters. The
issuance of shares of preferred stock could decrease the amount of earnings and
assets available for distribution to holders of shares of common stock and
could adversely affect the rights and powers, including voting rights, of
holders of shares of common stock. The existence of authorized and undesignated
shares of preferred stock may also have an adverse effect on the market price
of the common stock. While we have no present intention to issue shares of
preferred stock, any such issuance of preferred stock could have the effect of
delaying, deferring or preventing a change of control of ITXC.
Registration Rights
Under a registration rights agreement, certain of our stockholders have the
right, under certain circumstances and subject to certain conditions, to
require us to register under the Securities Act shares of our common stock held
by them. Subject to certain conditions and exceptions, such investors also have
the right to require that shares of common stock held by them be included in
any registration under the Securities Act commenced by us. No such stockholder
has requested to register its shares of common stock in the offerings. The
registration rights agreement provides that we will pay all expenses in
connection with the registrations requested by such stockholders. The
registration rights agreement also provides that we will indemnify the
stockholders for certain liabilities they may incur under the securities laws.
In addition, under the agreement forming our South American joint venture,
our joint venture partners have the right, under certain circumstances and
subject to certain conditions, to cause us to register under the Securities Act
of 1933 up to 25% of the shares of our common stock that they may acquire under
the buy-out provisions of our joint venture agreement.
71
<PAGE>
Certain Change of Control Provisions
We are a Delaware corporation and are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in certain
business combinations with a 15% stockholder for a period of three years
following the date the person became a 15% stockholder, unless, with certain
exceptions, the business combination or the transaction in which the person
became a 15% stockholder is approved in a prescribed manner. Generally, the
business combinations covered by this statute include a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the 15%
stockholder. In determining whether a stockholder is a 15% stockholder, the
Delaware statute generally includes the voting shares owned by the stockholder
and the stockholder's affiliates and associates.
The authorization of undesignated preferred stock makes it possible for our
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
ITXC.
Our certificate of incorporation will provide for staggered terms for
members of our board of directors and will eliminate the right of shareholders
to act without a meeting. Additionally, our by-laws will establish an advance
notice procedure for stockholder proposals and for nominating candidates for
election as directors. The amendment of any of these provisions would require
approval of at least two-thirds of the outstanding common stock.
The above-mentioned provisions of Delaware law and of our certificate of
incorporation and by-laws may have the effect of delaying, deterring or
preventing a change in control of ITXC, may discourage bids for the common
stock at a premium over the prevailing market price, and may adversely affect
the market price, and the voting and other rights of the holders, of the common
stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock will be Continental
Stock Transfer and Trust Company.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offerings, we will have 34,795,632 shares of
common stock issued and outstanding, based on share information as of August
30, 1999. All of the 6,250,000 shares of common stock to be sold in the
offerings and any shares sold upon exercise of the underwriters' over-allotment
options will be freely tradable without restrictions or further registration
under the Securities Act, except for any shares purchased by an affiliate of
ITXC as the term affiliate is defined in Rule 144 under the Securities Act,
which shares will be subject to the resale limitations of Rule 144. After the
completion of the offerings, all of our outstanding shares of common stock
other than the shares offered hereby will be restricted securities as the
phrase restricted securities is defined in Rule 144 and will be subject to
certain restrictions on disposition. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act. Sales of
restricted securities in the public market, or the availability of such shares
for sale, could have an adverse effect on the price of the common stock.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares
of common stock for at least one year, including a person who may be deemed an
affiliate of ITXC for Rule 144 purposes, is entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of one
percent of the total number of outstanding shares of the class of stock sold or
the average weekly reported trading volume of the class of stock being sold
during the four calendar weeks preceding such sale. A person who is not deemed
an affiliate of ITXC for Rule 144 purposes at any time during the three months
preceding a sale and who has beneficially owned shares for at least two years
is entitled to sell such shares under Rule 144 without regard to the volume
limitations as described above. As defined in Rule 144, an affiliate of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with,
such issuer. The foregoing summary of Rule 144 is not intended to be a complete
description of that Rule.
Existing stockholders, including directors and executive officers of ITXC,
who, after the offerings, will hold in the aggregate 28,545,632 shares of
common stock, have signed lock-up agreements. Subject to certain exceptions,
those stockholders have agreed that for a period of 180 days after the date of
this prospectus they will not offer, sell, contract to sell or otherwise
dispose of any shares of common stock or securities exercisable or exchangeable
for common stock or enter into any derivative transaction with similar effect
as a sale of common stock, unless they receive the prior written consent of
Lehman Brothers Inc.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from us by our employees,
directors, officers, consultants or advisors prior to the date we become
subject to the reporting requirements of the Securities Exchange Act of 1934,
as amended, under written compensatory benefit plans or written contracts
relating to the compensation of these persons. In addition, Rule 701 will apply
to certain stock options granted by us before we became subject to the
reporting requirements of the Securities
73
<PAGE>
Exchange Act, along with the shares acquired upon exercise of these options,
including exercises after the date of the offerings. Securities issued in
reliance on Rule 701 are restricted securities and, commencing 90 days after we
become subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, subject to the contractual restrictions described above, may be
sold by:
. persons other than affiliates, subject only to the manner of sale
provisions set forth in Rule 144, and
. by affiliates, under Rule 144 without compliance with its one-year
minimum holding period requirements.
Except as indicated above, we are unable to estimate the amount, timing and
nature of future sales of outstanding common stock. Prior to the offerings,
there has been no public market for the common stock, and no prediction can be
made as to the effect, if any, that market sales of shares of common stock or
the availability of shares for sale will have on the market price of the common
stock prevailing at any given time. Nevertheless, sales of significant numbers
of shares of common stock in the public market could adversely affect the
market price of the common stock and could impair our ability to raise capital
through an offering of our equity securities. See "Underwriting."
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<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary describes the material United States federal income
and estate tax consequences of the ownership of ITXC common stock by a non-U.S.
holder. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such non-U.S. holders in light of their
personal circumstances. Furthermore, the discussion below is based upon the
provisions of United States federal income tax law and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may
be repealed, revoked or modified so as to result in United States federal
income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of common stock should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, U.S. holder means a holder of ITXC common stock that is:
. a citizen or resident of the United States, or someone treated as a
United States citizen or resident individual for United States federal
income tax purposes,
. a corporation or partnership created or organized, or treated as created
or organized for United States federal income tax purposes, in or under
the laws of the United States or any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source,
. a trust the administration of which is subject to the primary
supervision of a court within the United States and the control of one
or more United States persons as described in section 7701(a)(30) of the
Internal Revenue Code of 1986 or
. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a domestic trust.
As used herein, non-U.S. holder means a holder of ITXC common stock that
does not fit within the description of a U.S. holder above.
Dividends
Dividends paid to a non-U.S. holder of ITXC common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by the
non-U.S. holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the non-U.S. holder,
are not subject to the withholding tax, but instead are subject to United
States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure
requirements must be satisfied in order
75
<PAGE>
for such effectively connected dividends to be exempt from withholding. Any
such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Until January 1, 2001, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country, unless the payer
has knowledge to the contrary, for purposes of the withholding tax discussed
above and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a tax treaty
rate. However, under United States Treasury regulations, a non-U.S. holder of
ITXC common stock who wishes to claim the benefit of an applicable treaty rate
and avoid back-up withholding for dividends paid after December 31, 2000 will
be required to satisfy applicable certification and other requirements.
A non-U.S. holder of ITXC common stock eligible for a reduced rate of United
States withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
ITXC common stock unless:
(1) the gain is effectively connected with a trade or business of the Non-
U.S. Holder in the United States, and, where a tax treaty applies, is
attributable to a United States permanent establishment of the non-U.S.
holder,
(2) in the case of a non-U.S. holder who is an individual and holds the
ITXC common stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or
other disposition and certain other conditions are met, or
(3) ITXC is or has been treated as a U.S. real property holding corporation
for United States federal income tax purposes.
An individual non-U.S. holder described in clause (1) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual non-U.S. holder described in
clause (2) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States source capital losses (even though
the individual is not considered a resident of the United States). If a non-
U.S. holder that is a foreign corporation falls under clause (1) above, it will
be subject to tax on its gain under regular graduated United States federal
income tax rates and, in addition, may be subject to the branch profits tax
equal to 30% of its effectively connected earnings and profits within the
meaning of the Internal Revenue Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable income
tax treaty.
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<PAGE>
ITXC believes it is not and does not anticipate becoming a U.S. real
property holding corporation for United States federal income tax purposes. If
ITXC is or becomes a U.S. real property holding corporation, so long as the
ITXC common stock continues to be regularly traded on an established securities
market, only a non-U.S. holder who holds or held, at any time during the
shorter of the five year period preceding the date of disposition or the
holder's holding period, more than five percent of the ITXC common stock will
be subject to U.S. federal income tax on the disposition of the ITXC common
stock.
Special rules may apply to certain non-U.S. holders, such as entities which
are treated as controlled foreign corporations, passive foreign investment
companies or foreign personal holding companies under the Internal Revenue
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them
and their beneficial owners.
Federal Estate Tax
ITXC common stock held by an individual non-U.S. holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
ITXC must report annually to the IRS and to each non-U.S. holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty.
Until January 1, 2001, backup withholding at the rate of 31% generally will
not apply to dividends paid to a non-U.S. holder at an address outside the
United States unless the payer has knowledge that the payee is a U.S. person.
From January 1, 2001 and thereafter, however, a non-U.S. holder will be subject
to back-up withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of ITXC common stock by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner certifies under penalties of
perjury that it is a non-U.S. holder or otherwise establishes an exemption. In
general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of ITXC common stock by or through a foreign
office of a broker. If, however, such broker is for United States federal
income tax purposes a U.S. person, a controlled foreign corporation, or a
foreign person that derives 50% or more of its gross income for a certain
period from the conduct of a trade or business in the United States, or, for
taxable years beginning after December 31, 2000, a foreign partnership in which
one or more United States persons, in the aggregate, own more than 50% of the
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<PAGE>
income or capital interests in the partnership or if the partnership is engaged
in a trade or business in the United States, such payments will be subject to
information reporting, but not backup withholding, unless:
. such broker has documentary evidence in its records that the beneficial
owner is a non-U.S. holder and certain other conditions are met, or
. the beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
78
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters of the offering in the United States
and Canada named below, for whom Lehman Brothers Inc., CIBC World Markets Corp.
and First Analysis Securities Corporation are acting as U.S. representatives,
and the underwriters of the concurrent offering outside the United States and
Canada named below, for whom Lehman Brothers International (Europe), CIBC World
Markets International Limited and First Analysis Securities Corporation are
acting as international representatives, severally agreed to purchase, and we
have agreed to sell to the underwriters, the number of shares of common stock
set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
Number
U.S. Underwriters of shares
----------------- ---------
<S> <C>
Lehman Brothers Inc...............................................
CIBC World Markets Corp...........................................
First Analysis Securities Corporation.............................
---------
Total............................................................... 5,000,000
=========
<CAPTION>
Number
International Underwriters of shares
-------------------------- ---------
<S> <C>
Lehman Brothers International (Europe)............................
CIBC World Markets International Limited..........................
First Analysis Securities Corporation.............................
---------
Total............................................................... 1,250,000
=========
</TABLE>
Lehman Brothers, on behalf of the underwriters, expects to deliver the
shares on or about , 1999.
We refer to the U.S. underwriters and international underwriters as the
underwriters and the U.S. representatives and international representatives as
the representatives. The underwriting agreement provides that the obligations
of the several underwriters to purchase the shares included in the offerings
are subject to approval of legal matters by counsel as well as to other
conditions. The underwriters are obligated to purchase all the shares, other
than those covered by the over-allotment option described below, if they
purchase any of the shares. The offering price and underwriting discounts and
commissions per share for the U.S. offering and the international offering are
identical.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The
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<PAGE>
underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share on sales to certain other dealers. If all of the
shares are not sold at the initial offering price, the representatives may
change the public offering price and the other selling terms. The
representatives have advised us that the underwriters do not intend to confirm
any sales to any accounts over which they exercise discretionary authority in
excess of 5% of the total number of shares offered by them.
We have granted to the U.S. underwriters and the international underwriters
a 30-day option to purchase up to an aggregate of 937,500 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise the option solely for the purpose of covering
over-allotments, if any, in connection with the offerings. To the extent the
option is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial purchase commitment.
We, our executive officers and directors and, with certain limited
exceptions, all of our other existing stockholders have agreed not to do any of
the following, whether any transaction described in clause (1), (2) or (3)
below is to be settled by delivery of common stock or other securities, in cash
or otherwise, in each case without the prior written consent of Lehman
Brothers, on behalf of the underwriters, for a period of 180 days after the
date of this prospectus:
(1) offer, sell, pledge, or otherwise dispose of, or enter into any
transaction or device which is designed or could be expected to, result
in the disposition by any person at any time in the future of, any
shares of common stock or securities convertible into or exchangeable
for common stock or substantially similar securities, other than any of
the following:
. the common stock sold under this prospectus;
. the common stock to be issued concurrent with the closings upon the
mandatory conversion of our outstanding preferred stock;
. shares of common stock we issue under employee benefit plans, stock
option plans or other employee compensation plans existing on the
date of this prospectus or under currently outstanding options,
warrants or rights;
. shares of common stock that we may issue in the event that we
exercise our right or are obligated to acquire the 51% equity
interest in our South American joint venture that we do not
currently own; and
. shares of common stock or securities convertible into or
exchangeable for common stock that we may issue in a private
placement transaction, provided that such shares are not publicly
resold for a period of 180 days after the date of this prospectus.
(2) sell or grant options, rights or warrants with respect to any shares of
our common stock or securities convertible into or exchangeable for our
common stock or substantially similar securities, other than the grant
of options under benefit plans existing on the date hereof; and
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<PAGE>
(3) enter into any swap or other derivatives transaction that transfers to
another, in whole or in part, any of the economic benefits of risks or
ownership of shares of common stock.
The U.S. underwriters and the international underwriters have entered into
an agreement among U.S. underwriters and international underwriters, under
which each U.S. underwriter has agreed that, as part of the distribution of the
shares of common stock offered in the U.S. offering:
. it is not purchasing any of these shares for the account of anyone other
than a person who is deemed to be a U.S. person under the definition
that we have set forth below; and
. it has not offered or sold and will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the U.S. offering to anyone other than a U.S. person.
In addition, under the agreement among U.S. underwriters and international
underwriters, each international underwriter has agreed that, as part of the
distribution of the shares of common stock offered in the international
offering:
. it is not purchasing any of the shares for the account of a U.S. person;
and
. it has not offered or sold, and will not offer, sell, resell or deliver,
directly or indirectly, any of these shares or distribute any prospectus
relating to the international offering to any U.S. person.
The limitations described above do not apply to stabilization transactions
or to other transactions specified in the underwriting agreement and the
agreement among U.S. underwriters and international underwriters, including
. some purchases and sales between U.S. underwriters and international
underwriters;
. some offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion;
. purchases, offers or sales by a U.S. underwriter who is also acting as
an international underwriter or by an international underwriter that is
also acting as a U.S. underwriter; and
. other transactions specifically approved by the U.S. representatives and
the international representatives.
As used in this section, the term U.S. person means any resident or national
of the United States or Canada, any corporation, partnership or other entity
created or organized in or under the laws of the United States or Canada, or
any estate or trust the income of which is subject to United States or Canadian
federal income taxation regardless of the source, the term United States means
the United States of America (including the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction, and
the term Canada means Canada, its provinces, its territories, its possessions
and other areas subject to its jurisdiction.
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<PAGE>
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 600,000 shares of common stock offered by this prospectus
for our directors, officers, employees and related persons. The number of
shares of common stock available for sale to the public will be reduced to the
extent these persons purchase such reserved shares. Any reserved shares which
are not purchased by these persons will be offered by the underwriters to the
general public on the same basis as the other shares offered by this
prospectus.
Prior to the offerings, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and
capital structure, estimates of our business potential and earnings prospects,
an overall assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "ITXC", subject to official notice of issuance.
Any offer of the shares of common stock in Canada will be made only under an
exemption from the prospectus filing requirement and an exemption from the
dealer registration requirement; where such an exemption is not available,
offers shall be made only by a registered dealer, in the relevant Canadian
jurisdiction where any such offer is made.
Each international underwriter has represented and agreed to all of the
following:
. It has not offered or sold and, prior to the date six months after the
date of issue of the shares of common stock, will not offer or sell any
shares of common stock to persons in the United Kingdom by means of any
document, other than to persons whose ordinary business it is to buy and
sell securities or debentures, whether as principal or agent, or in
circumstances that do not constitute an offer to the public within the
meaning of Public Offers of Securities Regulations 1995.
. It has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares of common stock in, from or otherwise involving
the United Kingdom.
. It has only issued or passed on, and will only issue or pass on, to any
person in the United Kingdom any document received by it in connection
with the issue of the shares of common stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom such document may otherwise be issued or passed upon and that it
will procure that any purchaser from it of any shares of common stock
undertakes to comply with the provisions of this paragraph.
Under the agreement among the U.S. underwriters and international
underwriters, sales may be made between the U.S. underwriters and the
international underwriters of a number of shares of common stock as may be
mutually agreed. The price of any shares so sold shall be the public offering
price as then in effect for the shares of common stock being sold by the U.S.
underwriters and the international underwriters less an amount equal to the
selling concession allocable to those shares of common stock, unless otherwise
determined by
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<PAGE>
mutual agreement. To the extent that there are sales between the U.S.
underwriters and the international underwriters under the agreement among the
U.S. underwriters and the international underwriters, the number of shares of
common stock available for sale by the U.S. underwriters or by the
international underwriters may be more or less than the amount specified on the
cover page of this prospectus.
In connection with the offerings, Lehman Brothers, on behalf of the
underwriters, may purchase and sell shares of our common stock in the open
market. These transaction may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offerings, which creates a syndicate short position.
Syndicate covering transactions involve purchases of our common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of our common stock made for the purpose of preventing or retarding a
decline in the market price of our common stock while the offerings are in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Lehman Brothers, in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that syndicate member.
Any of these activities may cause the price of our common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be affected in the over-the-counter
market or otherwise and, if commenced, may be discontinued at any time.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges in accordance with the laws and
practices of the country of purchase, in addition to the offering price set
forth on the cover of this prospectus.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933, or to contribute to payments the
underwriters may be required to make in respect of any of those liabilities.
Certain of the representatives and their affiliates may in the future
provide investment banking, financial advisory and other services to us for
which these representatives may receive customary fees and commissions.
LEGAL MATTERS
Certain legal matters relating to the offerings will be passed upon for us
by Lowenstein Sandler PC, Roseland, New Jersey. Certain legal matters relating
to the ITXC common stock will be passed upon for the U.S. underwriters and
international underwriters by Simpson Thacher & Bartlett, New York, New York.
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<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for the period from our
July 21, 1997 date of inception to December 31, 1997 and the year ended
December 31, 1998, as set forth in their report. Our financial statements are
included in the prospectus and elsewhere in the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the
registration statement, certain portions of which are omitted as permitted by
the rules and regulations of the SEC. For further information pertaining to us
and the common stock to be sold in the offerings, reference is made to the
registration statement, including the exhibits thereto and the financial
statements and notes filed as a part thereof. This prospectus summarizes
material provisions of contracts and other documents to which we refer you.
Since this prospectus may not contain all of the information that you may find
important, you may desire to review the full text of these documents. We have
included copies of these documents as exhibits to our registration statement.
You should only rely on the information contained in this prospectus and the
registration statement. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering
to sell, and seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of our
common stock.
On the closing of the offerings, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information, as well as the registration statement and the
exhibits thereto, may be inspected, without charge, at the public reference
facility maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, and at the SEC's regional offices located at Seven
World Trade Center, New York, New York 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Please call
the SEC at 1-800-SEC-0330 for information regarding the public reference rooms.
Copies of such material may also be obtained from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected on the SEC's web site at
http://www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June 30,
1999 (Unaudited)......................................................... F-3
Statements of Operations for the period from July 21, 1997 (date of
inception) to December 31, 1997 and the year ended December 31, 1998 and
the six months ended June 30, 1998 and 1999 (Unaudited).................. F-4
Statements of Stockholders' Equity for the period from July 21, 1997 (date
of inception) to December 31, 1997 and the year ended December 31, 1998
and the six months ended June 30, 1999 (Unaudited)....................... F-5
Statements of Cash Flows for the period from July 21, 1997 (date of
inception) to December 31, 1997 and the year ended December 31, 1998 and
the six months ended June 30, 1998 and 1999 (Unaudited).................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
ITXC Corp. and subsidiaries
We have audited the accompanying consolidated balance sheets of ITXC Corp.
and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year ended December 31, 1998 and the period from July 21, 1997
(date of inception) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ITXC Corp.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998 and the
period from July 21, 1997 (date of inception) to December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Metropark, New Jersey
February 3, 1999, except for paragraphs
9 to 12 of Note 9 and Note 13 as to which the date
is September 20, 1999
F-2
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
stockholders'
equity
December 31 June 30, June 30,
1999
1997 1998 1999 (Note 12)
--------- ---------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents............. $ 497,877 $3,971,237 $ 9,829,928
Short-term investments-
restricted.............. -- 200,000 207,434
Accounts receivable, net
of allowance of $172,475
in 1998 and $612,927 in
1999.................... -- 500,739 2,441,418
Prepaid expenses and
other current assets.... 18,846 121,459 482,169
--------- ---------- ------------
Total current assets....... 516,723 4,793,435 12,960,949
Property and equipment,
net....................... 278,420 3,015,529 6,254,906
Deposits and other assets.. -- 24,833 254,895
--------- ---------- ------------
Total assets............... $ 795,143 $7,833,797 $ 19,470,750
========= ========== ============
Liabilities, mandatorily
redeemable convertible
preferred stock and
stockholders' equity
(deficit)
Current liabilities:
Accounts payable......... $ 167,261 $ 831,275 $ 3,990,830
Accrued liabilities and
other current
liabilities............. 135,000 786,043 1,203,320
Deferred revenue......... 441,176 888,232 --
Customer deposits........ -- 142,500 261,492
Current portion of
capital lease
obligations............. -- 76,705 76,705
--------- ---------- ------------
Total current liabilities.. 743,437 2,724,755 5,532,347
Equipment note payable..... -- 1,200,000 1,723,191
Capital lease obligations,
less current portion...... -- 160,368 122,899
Commitments and
contingencies
Series B Redeemable
Convertible Preferred
Stock, $.001 par value,
issued and outstanding,
none in 1997; 5,865,104
shares in 1998 and 1999;
and pro forma none,
$10,000,000 liquidation
preference................ -- 9,866,723 9,877,385 --
Series C Redeemable
Convertible Preferred
Stock, $.001 par value,
issued and outstanding,
none in 1997 and 1998;
3,229,975 shares in 1999;
and pro forma none,
$22,500,000 liquidation
preference................ -- -- 15,364,042 --
Stockholders' equity
(deficit):
Series A Convertible
Preferred Stock, $.001
par value, issued and
outstanding, 278,000
shares in 1997; none in
1998 and 1999; and pro
forma, none, $347,500
liquidation preference... 278 -- -- --
Common Stock, $.001 par
value, authorized
67,500,000 shares; issued
and outstanding,
7,800,000 shares in 1997;
8,381,000 shares in 1998;
and 10,283,806 shares in
1999; and pro forma
28,473,964 shares ....... 7,800 8,381 10,284 $ 28,474
Additional paid-in
capital.................. 1,447,822 2,293,516 13,591,813 38,815,050
Software credit
subscription............. (757,000) -- -- --
Deferred employee
compensation............. -- (566,201) (11,571,116) (11,571,116)
Subscription receivable... (900) -- -- --
Accumulated deficit....... (646,294) (7,853,745) (15,180,095) (15,180,095)
--------- ---------- ------------ ------------
Total stockholders' equity
(deficit)................. 51,706 (6,118,049) (13,149,114) $ 12,092,313
============
Total liabilities,
mandatorily redeemable
convertible preferred
stock and stockholders'
equity (deficit).......... $ 795,143 $7,833,797 $ 19,470,750
========= ========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
July 21, 1997
(date of
inception) to Year ended Six months
December 31, December 31, ended June 30,
1997 1998 1998 1999
------------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications
revenue................ $ -- $ 1,238,008 $ 46,323 $ 6,764,428
Consulting revenue...... 58,824 652,944 476,472 988,232
---------- ----------- ----------- -----------
Total revenue............. 58,824 1,890,952 522,795 7,752,660
Costs and expenses:
Data communications and
telecommunications..... -- 2,016,757 100,989 6,890,475
Cost of consulting
revenue................ -- 192,203 69,373 --
Network operations...... -- 1,320,587 455,713 1,282,738
Sales and marketing..... 349,100 2,517,752 983,260 2,523,519
Development............. -- 594,104 244,388 474,005
General and
administrative......... 351,774 2,009,088 551,297 2,677,124
Depreciation and
amortization........... 5,000 344,587 51,569 699,070
Non-cash employee
compensation........... -- 194,288 67,540 687,592
---------- ----------- ----------- -----------
Total costs and expenses.. 705,874 9,189,366 2,524,129 15,234,523
---------- ----------- ----------- -----------
Loss from operations...... (647,050) (7,298,414) (2,001,334) (7,481,863)
Interest income........... 756 230,538 39,119 221,064
Interest expense.......... -- (139,575) (96,693) (65,551)
---------- ----------- ----------- -----------
Net loss.................. (646,294) (7,207,451) (2,058,908) (7,326,350)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock.......... (14,217) (3,554) (443,120)
---------- ----------- ----------- -----------
Net loss applicable to
common stockholders...... $ (646,294) $(7,221,668) $(2,062,462) $(7,769,470)
========== =========== =========== ===========
Basic and diluted net loss
per share applicable to
common stockholders...... $ (0.09) $ (0.88) $ (0.26) $ (0.90)
========== =========== =========== ===========
Weighted average shares
used in computation of
basic and diluted net
loss per share applicable
to common stockholders... 7,004,908 8,184,556 7,992,462 8,602,658
Pro forma basic and
diluted net loss per
share (unaudited)........ $ (0.45) $ (0.29)
=========== ===========
Weighted average shares
used in computation of
pro forma basic and
diluted net loss per
share (unaudited)........ 16,154,670 24,840,634
</TABLE>
See accompanying notes.
F-4
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period from July 21, 1997 (date of inception) to June 30, 1999
<TABLE>
<CAPTION>
Series A Convertible
Preferred Stock Common Stock Additional Software Deferred
----------------------- ------------------ Paid-in Credit Employee Subscription Accumulated
Shares Amount Shares Amount Capital Subscription Compensation Receivable Deficit
----------- ---------- ---------- ------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
Common Stock... -- -- 7,800,000 $ 7,800 $ 23,100 $ -- -- (900) --
Issuance of
Series A Stock
and Preferred
Warrant........ 278,000 $ 278 -- -- 424,722 -- -- -- --
Issuance of
Common Warrants
for software
credit......... -- -- -- -- 1,000,000 (1,000,000) -- -- --
Utilization of
software
credit......... -- -- -- -- -- 243,000 -- -- --
Net loss........ -- -- -- -- -- -- -- -- $ (646,294)
----------- -------- ---------- ------- ----------- ----------- ------------ ----- ------------
Balance, December
31, 1997........ 278,000 278 7,800,000 7,800 1,447,822 (757,000) -- (900) (646,294)
Conversion of
Series A Stock
and Preferred
Warrant to
Common Stock... (278,000) (278) 556,000 556 (278) -- -- -- --
Repayment of
subscription
receivable..... -- -- -- -- (900) -- -- 900 --
Issuance of
Common Stock
for services... -- -- 25,000 25 10,600 -- -- -- --
Utilization of
software
credit......... -- -- -- -- -- 757,000 -- -- --
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- (14,217) -- -- -- --
Deferred non-
cash employee
compensation... -- -- -- -- 760,489 -- (760,489) -- --
Amortization of
non-cash
deferred
employee
compensation... -- -- -- -- -- -- 194,288 -- --
Non cash
interest
expense........ -- -- -- -- 90,000 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (7,207,451)
----------- -------- ---------- ------- ----------- ----------- ------------ ----- ------------
Balance, December
31, 1998........ -- -- 8,381,000 8,381 2,293,516 -- (566,201) -- (7,853,745)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred stock
(unaudited).... -- -- -- -- (443,120) -- -- -- --
Deferred non-
cash employee
compensation
(unaudited).... -- -- -- -- 11,692,507 -- (11,692,507) -- --
Amortization of
non-cash
deferred
employee
compensation
(unaudited).... -- -- -- -- -- -- 687,592 -- --
Issuance of
common stock
for exercise of
warrants....... -- -- 1,444,000 1,444 (722) -- -- -- --
Issuance of
common stock
for exercise of
options........ -- -- 458,806 459 49,632 -- -- -- --
Net loss
(unaudited).... -- -- -- -- -- -- -- -- (7,326,350)
----------- -------- ---------- ------- ----------- ----------- ------------ ----- ------------
Balance, June 30,
1999
(unaudited)..... -- $ -- 10,283,806 $10,284 $13,591,813 $ -- $(11,571,116) $ -- $(15,180,095)
=========== ======== ========== ======= =========== =========== ============ ===== ============
<CAPTION>
Total
-------------
<S> <C>
Issuance of
Common Stock... $ 30,000
Issuance of
Series A Stock
and Preferred
Warrant........ 425,000
Issuance of
Common Warrants
for software
credit......... --
Utilization of
software
credit......... 243,000
Net loss........ (646,294)
-------------
Balance, December
31, 1997........ 51,706
Conversion of
Series A Stock
and Preferred
Warrant to
Common Stock... --
Repayment of
subscription
receivable..... --
Issuance of
Common Stock
for services... 10,625
Utilization of
software
credit......... 757,000
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... (14,217)
Deferred non-
cash employee
compensation... --
Amortization of
non-cash
deferred
employee
compensation... 194,288
Non cash
interest
expense........ 90,000
Net loss........ (7,207,451)
-------------
Balance, December
31, 1998........ (6,118,049)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred stock
(unaudited).... (443,120)
Deferred non-
cash employee
compensation
(unaudited).... --
Amortization of
non-cash
deferred
employee
compensation
(unaudited).... 687,592
Issuance of
common stock
for exercise of
warrants....... 722
Issuance of
common stock
for exercise of
options........ 50,091
Net loss
(unaudited).... (7,326,350)
-------------
Balance, June 30,
1999
(unaudited)..... $(13,149,114)
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
July 21, 1997
(date of Six months ended
inception) to Year ended June 30,
December 31, December 31, ------------------------
1997 1998 1998 1999
------------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss................ $(646,294) $(7,207,451) $(2,058,908) $(7,326,350)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 5,000 344,587 51,569 699,070
Provision for doubtful
accounts............. -- 172,475 -- 719,528
Amortization of non-
cash deferred
employee
compensation......... -- 194,288 67,540 687,592
Issuance of common
stock for services... -- 10,625 -- --
Non-cash interest
expense.............. -- 90,000 90,000 --
Changes in operating
assets and
liabilities:
Increase in accounts
receivable......... -- (673,214) (13,726) (2,660,207)
Increase in prepaid
expenses and other
assets............. (18,846) (127,446) (86,858) (346,242)
Increase in accounts
payable and accrued
expenses........... 302,261 1,315,057 201,466 3,576,832
Increase (decrease)
in customer
deposits and
deferred revenue... 441,176 589,556 677,008 (769,240)
--------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities............. 83,297 (5,291,523) (1,071,909) (5,419,017)
Investing activities
Purchase of property and
equipment.............. (40,420) (2,073,696) (707,253) (3,938,447)
Purchase of short-term
investments............ -- (200,000) -- (7,434)
--------- ----------- ----------- -----------
Net cash used in
investing activities... (40,420) (2,273,696) (707,253) (3,945,881)
Financing activities
Proceeds from equipment
line of credit......... -- 1,200,000 -- 523,191
Proceeds from
stockholder note....... -- 750,000 750,000 --
Repayment of capital
lease obligations...... -- (13,927) -- (37,469)
Issuance of common
stock.................. 30,000 900 900 50,813
Issuance of convertible
preferred stock........ 425,000 9,101,606 9,101,606 14,931,584
Deferred costs of
initial public
offering............... -- -- -- (244,530)
--------- ----------- ----------- -----------
Net cash provided by
financing activities... 455,000 11,038,579 9,852,506 15,223,589
--------- ----------- ----------- -----------
Increase (decrease) in
cash................... 497,877 3,473,360 8,073,344 5,858,691
Cash and cash
equivalents at
beginning of period.... -- 497,877 497,877 3,971,237
--------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 497,877 $ 3,971,237 $ 8,571,221 $ 9,829,928
========= =========== =========== ===========
Supplemental disclosures
of cash flow
information
Cash paid for interest.. -- $ 36,446 $ 6,693 $ 65,554
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, December 31, 1998 and June 30, 1999
(All information as of June 30, 1999 and for the six month periods ended June
30, 1999 and 1998 is unaudited)
1. Organization and Nature of Business
ITXC Corp. (the "Company") is a Delaware corporation, incorporated on July
21, 1997. The Company was founded for the purpose of providing Internet voice,
fax and voice-enabled services primarily to traditional telephone companies,
Internet service providers and telecommunications resellers, under the brand
name WWeXchange SM for which revenues commenced in 1998. During 1997, the
Company was in the development stage and was primarily developing and
constructing its network, and provided consulting services under a market
trial agreement with a company in the telecommunications industry (see Note
9). During 1998 the Company exited the development stage. The Company operates
in one business segment.
Subsidiaries and Joint Venture
In March 1998, ITXC Data Transport Services LLC ("Data Transport"), a wholly
owned subsidiary, was formed for the purpose of holding licenses and
agreements with certain carriers and re-sellers and to acquire and operate
switching equipment for the Company.
In July 1998, ITXC Asia PTE Ltd, a wholly-owned subsidiary (Singapore
company), was formed for the purpose of selling and marketing the Company's
services in Asia.
In July 1998, the Company obtained a 49% interest in ITXC Comunicacoes Ltda
("ITXC Ltda"), a newly formed Brazilian joint venture, in consideration of
rights to certain technology, which will provide exchange carrier long-
distance services in Brazil. The Company's ownership interest in ITXC Ltda is
accounted for under the equity method of accounting. No investment has been
recorded by the Company as no consideration has been paid. The Company will
record its 49% share in the profits of ITXC Ltda when it becomes profitable
and to the extent prior losses are recouped. The Company is entitled to
receive a 4% royalty, based on ITXC Ltda revenue carried over the Company's
network, after a $1.47 million royalty threshold amount is reached and subject
to the elimination of intercompany income.
The ITXC Ltda joint venture agreement, as amended, provides for an exit
clause triggered by an initial public offering of common stock by the Company
and certain other events. The clause provides the Company a call option and
provides TeleNova Communicacoes Ltda and its assignee (collectively,
"TeleNova") a put option which requires the Company to acquire TeleNova's
interest in ITXC Ltda at a price based on a formula, as defined in the
agreement. The formula price cannot be determined until ITXC Ltda's revenue
and gross profits for the six months ended August 31, 1999 are known. TeleNova
has waived its put right in connection with the Company's initial public
offering; however, both the Company and TeleNova maintain certain call and put
rights, respectively, upon the occurence of certain other future events.
F-7
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Nature of Business (continued)
Basis of Consolidation
The consolidated financial statements include the accounts of ITXC Corp. and
its wholly-owned subsidiaries, Data Transport and ITXC Asia PTE, Ltd. All
significant intercompany balances and transactions have been eliminated in
consolidation.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-Term Investments
Short-term investments consist of a certificate of deposit with a maturity
within one year of December 31, 1998. Such investment is classified as
available-for-sale and, accordingly, is carried at fair value which
approximates cost.
Concentration of Credit Risk
The Company transacts a significant volume of business with several
customers. Four customers represented 35%, 20%, 13% and 11%, respectively, of
1998 total revenue and three customers represented 15%, 14% and 13%,
respectively, of total revenue for the six months ended June 30, 1999.
Accounts receivable from these customers were approximately $417,800 and
$915,900 at December 31, 1998 and June 30, 1999, respectively. The Company
performs a credit evaluation of all new customers and requires certain
customers to provide collateral in the form of a cash deposit.
For the period from July 21, 1997 to December 31, 1997, one customer
accounted for 100% of consulting revenue under the market trial agreement
referred to in the first paragraph of Note 1.
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated over the
estimated useful lives and leasehold improvements are depreciated over the
term of the lease or over the estimated useful lives, whichever is shorter,
utilizing the straight-line method as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C>
Network equipment and software................................ 3
Furniture, fixtures and office equipment...................... 3-7
Leasehold improvements........................................ 2
</TABLE>
F-8
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes telecommunications revenue and the related costs at
the time the services are rendered. Telecommunications revenue is derived from
fees charged to terminate Internet based voice and fax services over our
network.
In 1997, the Company entered into a market trial agreement with a third
party. Under that agreement, the Company conducted a market trial to determine
the market opportunity, operational requirements and business arrangements
with respect to offering wholesale switching, transport, billing and
settlement services relating to Internet protocol telephony services. While
the agreement was in effect, the Company conducted a market trial of its
wholesale switching, transport, billing and settlement services and provided
periodic reports according to an agreed upon schedule. These reports provide
marketing analyses, service descriptions, operations analyses and business
structure and competitive analyses. The Company recognizes consulting revenue
under the market trial agreement as certain milestones are attained and cash
collections are assured, as specified in the contract, and in accordance with
Statement of Financial Accounting Standards, No. 68, Research and Development
Arrangements. This agreement requires certain research reports to be delivered
by the Company and accepted by the customer, for payments under the contract
to become due and payable. At December 31, 1997 and 1998, $441,176 and
$888,232, respectively, of revenue has been deferred in connection with this
market trial agreement for payments received in advance of delivery and
acceptance of certain reports, which was fully earned by June 30, 1999.
Advertising
Advertising costs are expensed as incurred. During 1997, 1998 and the six
month periods ended June 30, 1998 and 1999, the Company expensed approximately
$14,000, $119,000, $94,000 and $43,000, respectively, of such costs.
Income Tax
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities (i.e. temporary differences) and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to
F-9
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Employees", using an intrinsic value approach to measure compensation expense,
if any. Appropriate disclosures using a fair value based method, as provided
by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), are also reflected in the accompanying notes
to the financial statements. Options issued to non-employees are accounted for
in accordance with SFAS 123, using a fair value approach. The Company has not
issued any options to non-employees.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement on Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance regarding accounting for computer software developed or obtained for
internal use, including the requirement to capitalize specified costs and
amortization of such costs. The Company does not expect the adoption of this
standard to have a significant impact on the Company's financial results.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP
98-5, effective for fiscal years beginning after December 15, 1998, which
provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred. As the Company expensed these costs as
incurred, the adoption of this standard will have no impact on the Company's
results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivatives and Hedging Activities (SFAS 133), which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. As the Company
does not currently engage in derivatives or hedging transactions, there will
be no current impact to the Company's results of operations, financial
position or cash flows upon the adoption of SFAS 133.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-10
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Interim Financial Statements
The accompanying unaudited interim financial statements as of June 30, 1999
and for each of the six month periods ended June 30, 1998 and 1999 include all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the Company's financial position, results of operations and
cash flows for the periods presented. All such adjustments are of a normal
recurring nature. The results of the Company's operations for the six months
ended June 30, 1998 and 1999 are not necessarily indicative of the results of
operations for a full fiscal year.
3. Accounts Receivable
The Company estimates the amount of the allowance for doubtful accounts
required to reduce accounts receivable to expected net realizable value by
reviewing the status of significant past-due receivables and analyzing
historical bad debt trends.
The Company did not write-off any accounts receivable during 1997, 1998 and
the six months ended June 30, 1998. The Company wrote-off approximately
$279,000 of accounts receivable during the six month period ended June 30,
1999.
4. Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Network equipment and software................ $243,000 $1,955,887 $5,365,842
Furniture, fixtures and office equipment...... 40,420 1,147,946 1,676,438
Leasehold improvements........................ -- 261,283 261,283
-------- ---------- ----------
283,420 3,365,116 7,303,563
Less accumulated depreciation and
amortization................................. 5,000 349,587 1,048,657
-------- ---------- ----------
$278,420 $3,015,529 $6,254,906
======== ========== ==========
</TABLE>
Equipment under capital leases totaled approximately $251,000 at December
31, 1998 and June 30, 1999. Included in accumulated depreciation is
approximately $14,000 and $56,000 related to such assets at December 31, 1998
and June 30, 1999, respectively.
At December 31, 1997 and 1998, network equipment and software includes
$243,000 and $1 million, respectively, of software which is used in internet
gateways and switches. This software was purchased from a stockholder, which
was paid for by issuance of common stock warrants (see Note 9). At December
31, 1998 and June 30, 1999, $733,000 and $290,000, respectively, of software
has not been deployed into operations; accordingly, depreciation of this
software will commence when it is placed into operations.
F-11
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Accrued Expenses
Accrued liabilities and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Compensation...................................... $ 31,095 $262,807 $ 590,471
Payroll tax withholding liability................. 277,051
Accrued contract costs............................ -- 300,000 --
Professional fees................................. 36,500 -- 148,759
Repairs and maintenance costs..................... 16,000 -- --
Employee relocation costs......................... 30,500 100,000 95,585
Other............................................. 20,905 123,236 91,454
-------- -------- ----------
$135,000 $786,043 $1,203,320
======== ======== ==========
</TABLE>
Accrued contract costs represent the remaining minimum payments due under a
contract with a telecommunication vendor, which the Company terminated in
December 1998.
6. Income Taxes
Due to operating losses, the Company has no income tax liability for 1997,
1998 or the six months ended June 30, 1999.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997 and 1998 and June 30, 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------- June 30,
1997 1998 1999
--------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward.......... $ 242,837 $ 2,977,041 $ 5,126,115
Other.................................... 13,971 189,754 775,236
--------- ----------- -----------
256,808 3,166,795 5,901,351
Less valuation allowance................... (256,808) (3,108,838) (5,843,481)
--------- ----------- -----------
Deferred tax asset......................... -- 57,957 57,870
Deferred tax liabilities:
Fixed assets............................. -- (57,957) (57,870)
--------- ----------- -----------
Net deferred tax asset..................... $ -- $ -- $ --
========= =========== ===========
</TABLE>
F-12
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes (continued)
A reconciliation setting forth the differences between the effective tax
rate of the Company and the U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------------ ------------------------------------
1997 1998 1998 1999
---------------- ------------------ ---------------- ------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax (benefit) at 34%... $(219,740) 34.0% $(2,450,533) 34.0% $(700,029) 34.0% $(2,490,959) 34.0%
State income tax
(benefit), net of
federal benefit........ (38,389) 5.9 (404,338) 5.6 (61,973) 3.0 (388,297) 5.3
Nondeductible expenses.. -- -- 7,750 (0.1) 2,760 (0.1) 5,880 (0.1)
Other................... 1,321 (0.2) (4,909) 0.1 74,446 (3.6) 138,733 (1.9)
Increase in valuation
allowance.............. 256,808 (39.7) 2,852,030 (39.6) 684,796 (33.3) 2,734,643 (37.3)
--------- ----- ----------- ----- --------- ----- ----------- -----
Total................... $ -- -- $ -- -- $ -- -- $ -- --
========= ===== =========== ===== ========= ===== =========== =====
</TABLE>
At December 31, 1998, the Company has a federal and state net operating loss
("NOL") carryforward of approximately $6.9 million. The federal NOL
carryforwards expire from 2012 to 2018. The state NOL carryforwards expire
from 2004 to 2005. The Company has not performed a detailed analysis to
determine whether an ownership change under Section 382 of the Internal
Revenue Code occurred, but believes that it is likely that such a change
occurred during 1998. The effect of an ownership change would be the
imposition of an annual limitation on the use of NOL carryforwards
attributable to periods before change. The Company has not determined the
amount of the potential limitation, but believes that all of the NOL will be
available for use within the carryforward period.
The Company's existing deferred tax assets at December 31, 1997 and 1998,
and June 30, 1999 have been reduced by a valuation allowance of $256,808,
$3,108,838, and $5,843,481, respectively, due to the uncertainty regarding the
realization of such deferred tax assets.
7. Debt
The Company has a revolving credit agreement with a bank, which provides for
maximum borrowings of $5 million, of which $4 million may be borrowed under an
equipment line of credit for the purchase of certain capital equipment. The
revolving line expires August 20, 1999, with available borrowings determined
based on a formula including accounts receivable. The equipment line expires
three years after the final draw down, which may be taken through June 30,
1999, with available borrowings determined based on a formula including
billable minutes. At December 31, 1998, the maximum available borrowings were
$1.4 million, of which $1.2 million is outstanding.
The Company is contractually required to make an annual payment based on the
previous years' excess cash flow, as defined. The agreement also includes a
mandatory repayment clause requiring that the Company repay the balance
outstanding in the event that the Company consummates an initial pubic
offering with net proceeds of at least $20 million.
F-13
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Debt (continued)
The revolving line bears interest at the greater of (i) the bank's prime
rate plus 0.5%, or (ii) the federal funds rate plus 1.5%. The equipment line
bears interest at the greater of (i) the bank's prime rate plus 0.75%, or (ii)
the federal funds rate plus 2.0%. The rate in effect at December 31, 1998
under the equipment line was 8.5%, representing the bank's prime rate plus
0.75%.
Borrowings under the credit agreement are collateralized by substantially
all of the Company's assets and the Company is required to maintain restricted
cash balances of $200,000. In addition, the Company is required to maintain
compliance with certain financial covenants. As of December 31, 1998 the
Company was in violation of one financial covenant and has obtained a letter
from the bank waiving the violation at that date. Under the credit agreement,
commencing in 1999 the covenant that was violated becomes less restrictive. As
a result, the Company believes that it will maintain compliance with such
covenant throughout 1999.
The fair value of the Company's debt approximates its carrying value.
8. Commitments and Contingencies
The Company leases an office facility under a non-cancelable operating lease
which commenced June 15, 1998, has a term of five years and provides for
minimal annual base rental payments of $314,000. The Company may, at its
option, terminate the lease after 18 months or 36 months. The lease contains
one five year renewal option at the then applicable fair market rental rate.
In addition, the lease requires the Company to pay increases in real estate
taxes and other operating costs of the properties above base year amounts.
During 1998, the Company also entered into capital lease agreements for
furniture and equipment.
Future minimum lease payments for noncancelable operating and capital leases
having initial or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Operating Capital
--------- --------
<S> <C> <C>
1999........................................................ $364,000 $ 95,436
2000........................................................ 206,000 95,436
2001........................................................ 8,000 79,530
2002........................................................ 5,000 --
--------
270,402
Less amounts representing interest.......................... 33,329
--------
Present value of net minimum lease payments................. $237,073
========
</TABLE>
F-14
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Commitments and Contingencies (continued)
Rental expense for all operating leases was approximately $15,000, $217,000,
$76,000 and $192,000 in 1997 and 1998 and in the six month periods ended June
30, 1998 and 1999, respectively.
Legal Matters
The Company is involved in certain claims and legal actions arising in the
normal course of business. Management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
9. Capital Stock
On July 21, 1997, the Company issued 6,000,000 shares of Common Stock to its
founder and president for $30,000.
On October 1, 1997, the Company issued 1,800,000 shares of Common Stock to
an investor for $900, which was paid subsequent to December 31, 1997. On
October 1, 1997, the Company issued ten warrants to purchase an aggregate of
1,200,000 shares of Common Stock at par value to an investor in exchange for a
software credit in the amount of $1 million to be used within three years
against the purchase of products from the investor. Each warrant became
exercisable for each $100,000 of the software credit utilized by the Company.
At December 31, 1998, $1 million of the software credit had been utilized by
the Company for the purchase of software, and, accordingly, all warrants were
exercisable. Also, on October 1, 1997, the Company sold to the same investor
278,000 shares of Series A Convertible Preferred Stock (the "Series A Stock"),
and a warrant to purchase an additional 122,000 shares of Series A Stock (the
"Preferred Warrant") with an exercise price of par value, for aggregate
proceeds of $500,000.
On April 27, 1998, in connection with the sale of the Series B Redeemable
Convertible Preferred Stock, all of the outstanding shares of Series A Stock
were converted into 556,000 shares of Common Stock and the Preferred Warrant
was converted into a warrant to purchase 244,000 shares of Common Stock. Such
warrants and the warrant to purchase 1,200,000 shares of common stock are
exercisable at any time prior to the earlier of October 1, 2004 or the
consummation of an initial public offering of the Company's common stock. All
1,444,000 warrants were exercised subsequent to December 31, 1998.
On November 18, 1997, the Company issued a warrant to purchase up to
3,800,000 shares of Common Stock, with an exercise price of $1.32 per share,
to a customer to whom the Company provides consulting services (see Note 1).
The fair value of the warrant was determined to be de minimis on the date of
grant. The warrant was not exercised, and, on April 6, 1998, was cancelled.
F-15
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Capital Stock (continued)
Series B Mandatorily Redeemable Convertible Preferred Stock
On April 27, 1998, the Company issued 5,865,104 shares of Series B
Mandatorily Redeemable Convertible Preferred Stock ("Series B Stock") to
various investors at a purchase price of $1.705 per share, resulting in net
proceeds of $9,852,000. In this private placement, 439,883 shares were sold to
two officers of the Company and 668,622 shares were sold to the holders of the
Series A Stock and the Preferred Warrant.
Each share of Series B Stock has a liquidation value of $1.705 per share and
is convertible into two shares of Common Stock, subject to anti-dilution
provisions, as defined. The Series B Stock will automatically convert into
Common Stock on the consummation of an initial public offering of the
Company's Common Stock with gross proceeds of at least $30 million and at a
price per share of at least $5.805 (as adjusted). To the extent not previously
converted to Common Stock, on March 31, 2005 a stockholder may request the
Company to redeem any or all shares of Series B Stock held, at its liquidation
value, subject to the rights of the Series C Stock.
The holders of the Series B Stock vote together with all other classes of
stock on all actions taken by the stockholders of the Company, and together
with the Series C Stock, have the right to elect two directors to the
Company's Board of Directors.
In connection with the Series B Stock private placement, the two officers of
the Company who participated in the offering provided the Company with bridge
financing of $750,000 which was converted into Series B Stock. In addition,
the Company issued the two officers warrants to purchase an aggregate of
879,766 shares of Common Stock with an exercise price of $.8525 per share. The
warrants are exercisable at any time prior to April 30, 2008. The fair value
of these warrants was determined to be $90,000 at the date of the grant, which
is included in 1998 interest expense.
Series C Mandatorily Redeemable Convertible Preferred Stock
On February 24, 1999, the Company issued 3,229,975 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (the "Series C Stock") to
various investors at a purchase price of $4.644 per share, resulting in net
proceeds of $14,932,000. The Series C Stock has a liquidation preference value
of $22,500,000 and has conversion and redemption features identical to the
Series B Stock, except that redemption may be requested commencing December
31, 2004. The holders of the Series C Stock vote together with all other
classes of stock on all actions taken by the stockholders of the Company, and,
together with the holders of the Series B Stock, have the right to elect two
directors to the Company's Board of Directors.
F-16
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Capital Stock (continued)
Also, on February 24, 1999 the Board of Directors increased the total
authorized preferred stock from 10,000,000 shares to 15,000,000 shares.
Registration Rights
Certain of the common and preferred stockholders have registration rights
under an agreement which, as amended on February 24, 1999, provides for the
registration of Common Stock held by such stockholders, on or after one year
from the completion of an initial public offering of the Company's Common
Stock.
Put Rights
In connection with the Series B and Series C Stock offerings, each of the
common and preferred stockholders were granted the right to require the
Company to repurchase all of their outstanding stock, in the event of a change
of control of the Company, as defined. The repurchase price per share is the
greater of (i) the price obtained by the Company in its most recent sale of
equity securities, (ii) the weighted average price paid by the new controlling
investor, or (iii) the fair value of the securities being repurchased.
Common Shares Reserved
As of December 31, 1998, the Company had reserved shares of Common Stock for
issuance as follows:
<TABLE>
<CAPTION>
Number of
Shares
----------
<S> <C>
Exercise of common stock options............................... 4,400,000
Exercise of common stock warrants.............................. 2,323,766
Conversion of Series B Stock................................... 11,730,208
</TABLE>
Stock Option Plan
On February 17, 1998, the Company adopted the 1998 Stock Incentive Plan (the
"Plan"). The Plan, as amended, provides for the granting of awards to purchase
up to 6,700,000 shares of common stock. The Plan provides for award grants in
the form of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance units and performance
shares.
Under the terms of the Plan, a committee of the Company's Board of Directors
may grant options to purchase shares of the Company's Common Stock to
employees, directors and consultants of the Company at such prices as may be
determined by the committee, principally
F-17
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Capital Stock (continued)
equal to or greater than fair value at the date of grant. Options granted
under the Plan generally vest over three years and expire after ten years.
The Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1998
------------------- --------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year................................ -- -- 1,598,340 $ 0.05
Options granted...................... 1,598,340 $0.05 1,517,910 0.35
Options cancelled.................... -- -- (475,000) (0.15)
--------- ----- --------- ------
Options outstanding, end of year..... 1,598,340 $0.05 2,641,250 $ 0.21
========= ===== ========= ======
</TABLE>
The weighted-average fair value of options granted in 1997 and 1998 was
$.015 and $.575, respectively.
The following table summarizes information about fixed price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------- ------------------------
Weighted- Weighted- Number Weighted-
Range of Number Average Average Exercisable at Average
Exercise of Remaining Exercise December 31, Exercise
Prices Shares Contractual Life Price 1998 Price
--------- --------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$.01-$.08 1,150,000 8.7 years $ .03 383,334 $.03
.26-.30 882,000 9.1 years .30 36,666 .26
.43 609,250 9.2 years .43 -- --
--------- -------
$.01-$.43 2,641,250 $ .21 420,000 $.05
========= ========= ===== ======= ====
</TABLE>
Had the Company been accounting for its employee stock options under the
fair value method of SFAS No. 123, there would not have been a material impact
on the Company's net loss or basic and diluted net loss per share available to
common stockholders during 1998 or 1997.
During 1998 and the six month period ended June 30, 1999 the Company granted
options to employees to purchase an aggregate of 1,517,910 and 3,186,750
shares, respectively, of common stock at exercise prices ranging from $.30 to
$4.00. The exercise price of each of these option grants was below the fair
value of the Company's common stock at the respective dates of grant,
resulting in aggregate non-cash compensation of approximately $760,000 and
$11.7 million in 1998 and the six month period ended June 30, 1999,
respectively, which will be amortized to expense over the option vesting
periods, generally three to seven years.
F-18
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Earnings (Loss) Per Share
The Company computes net loss per share under the provisions of SFAS No.
128, "Earnings per Share" (SFAS 128), and SEC Staff Accounting Bulletin No. 98
(SAB 98).
Under the provisions of SFAS 128 and SAB 98, basic and diluted net loss per
share is computed by dividing the net loss available to common stockholders
for the period by the weighted average number of shares of Common Stock
outstanding during the period. The calculation of diluted net loss per share
excludes potential common shares if the effect is antidilutive. Basic earnings
per share is computed by dividing income or loss applicable to common
stockholders by the weighted average number of shares of Common Stock
outstanding during this period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock
method and assuming conversion of the Company's Preferred Stock. In addition,
income or loss is adjusted for dividends and other transactions relating to
preferred shares for which conversion is assumed. The diluted earnings per
share amount equals basic earnings per share because the Company had a net
loss and the impact of the assumed exercise of the stock options and warrants
and the assumed preferred stock conversion is not dilutive.
11. Geographic Data
During the six months ended June 30, 1999, the Company generated
approximately 5% of its revenue from customers domiciled in countries other
than the United States, primarily in Asia. For the period from inception to
December 31, 1997 and the year ended December 31, 1998, substantially all of
the Company's revenue was derived from domestic operations.
12. Unaudited Pro Forma Information
The Company is planning to file a registration statement with the Securities
and Exchange Commission that would permit the Company to sell shares of common
stock in an initial public offering (IPO). Under the Company's Certificate of
Incorporation, all outstanding Series B and Series C Stock will convert into
Common Stock on a two-for-one basis (reflecting the stock split described in
Note 13), upon the closing of the Company's IPO of Common Stock.
The unaudited pro forma balance sheet information and the pro forma net loss
per share reflect the effects of the automatic conversion of all series of the
Company's mandatorily redeemable convertible preferred stock to common stock
upon the closing of the IPO.
F-19
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Unaudited Pro Forma Information (continued)
The unaudited pro forma information gives effect to a conversion price of
$.8525 for Series B Stock and $2.322 for Series C Stock. The actual conversion
price may be different upon actual conversion as a result of anti-dilution
provisions.
The unaudited pro forma net loss per share assumes the conversion of the
Series B and Series C Stock to Common Stock as if it had been converted at the
date of issuance, even though the result is antidilutive.
The following table presents the calculation of basic and diluted net loss
per share and pro forma net loss per share.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999 (Unaudited)
------------------------------ ------------------------------
Denominator Denominator
(Weighted (Weighted
Numerator Average Per Numerator Average Per
(Net Loss) Shares) Share (Net Loss) Shares) Share
----------- ----------- ----- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per common share.. $(7,221,668) 8,184,556 $(.88) $(7,769,470) 8,602,658 $(.90)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock........ 14,217 -- -- 443,120 -- --
Assumed conversion of
shares of mandatorily
redeemable convertible
preferred stock into
shares of common stock
at issuance............ -- 7,970,114 -- -- 16,237,976 --
----------- ---------- ----- ----------- ---------- -----
Pro forma basic and
diluted net loss per
common share........... $(7,207,451) 16,154,670 $(.45) $(7,326,350) 24,840,634 $(.29)
=========== ========== ===== =========== ========== =====
</TABLE>
13. Subsequent Events
On August 25, 1999, the Company's Board of Directors approved a 2 for 1
stock split of its Common Stock which became effective on September 20, 1999.
The Common Stock numbers and preferred stock conversion ratios included in the
financial statements reflect the stock split for all periods presented.
On September 20, 1999, the Company's stockholders approved an increase in
the authorized Common Stock to 67,500,000 shares which became effective on
September 20, 1999. On July 23, 1999, the Company's stockholders approved an
increase in the number of shares which may be granted under the Company's 1998
Stock Incentive Plan to 7,700,000 shares, effective upon the closing of the
IPO.
F-20
<PAGE>
[Inside back cover: A graphic depicting ITXC logo surrounded by portions of
global map and people talking on telephones.]
<PAGE>
[MAP]
6,250,000 Shares
[LOGO]
ITXC Corp.
Common Stock
-----------
PROSPECTUS
, 1999
-----------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
Until , 1999, all dealers selling shares of the common stock, whether or
not participating in these offerings, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities in any state or jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated September 23, 1999
PROSPECTUS
6,250,000 Shares
[LOGO]
ITXC Corp.
Common Stock
- --------------------------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
6,250,000 shares. Of the 6,250,000 shares being offered, we are offering
1,250,000 shares outside the United States and Canada and 5,000,000 shares in
the United States and Canada.
We expect the public offering price to be between $11.00 and $13.00 per share.
The shares have been approved for listing on the Nasdaq National Market under
the symbol "ITXC", subject to official notice of issuance.
Investing in the shares involves risks. Risk Factors begin on page 5.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount......................................... $ $
Proceeds to ITXC.............................................. $ $
</TABLE>
We have granted the U.S. underwriters and the international underwriters a 30-
day option to purchase up to an aggregate of 937,500 additional shares of
common stock on the same terms and conditions as set forth above solely to
cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered:
<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
SEC registration fee.......................................... $ 25,976
NASD filing fee............................................... 9,125
Nasdaq listing fee............................................ 95,000
Printing and engraving expenses............................... 275,000
Legal fees and expenses....................................... 400,000
Accounting fees and expenses.................................. 275,000
Transfer agent and registrar fees............................. 3,000
Directors and officers' liability insurance................... 420,000
Miscellaneous................................................. 96,899
----------
Total..................................................... $1,600,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law (DGCL), a
corporation has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his being a director or officer of the corporation if it is determined that he
acted in good faith and in a manner he believed to be in (or not opposed to)
the interests of the corporation, and, in the case of a criminal proceeding, he
had no reason to believe his conduct was unlawful. Our certificate of
incorporation provides that we will indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that he is or was a director
or officer of ITXC, or is or was serving at our request as a director, officer,
employee, manager or agent of another entity, against certain liabilities,
costs and expenses. It further permits us to maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of ITXC, or is
or was serving at our request as a director, officer, employee or agent of
another entity against any liability asserted against such person and incurred
by such person in any such capacity or arising out of his status as such,
whether or not we would have the power to indemnify such person against such
liability under the DGCL.
Section 102(b)(7) of the DGCL permits a corporation, in its certificate of
incorporation, to limit or eliminate, subject to certain statutory limitations,
the personal liability of directors to the corporation or its stockholders for
monetary damages for breaches of fiduciary duty, as a director except for
liability (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the DGCL, or (d) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
Article TENTH of our Certificate of Incorporation contains the following
provision regarding limitation of liability of our directors and officers:
"No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit."
The underwriting agreement contains provisions pursuant to which each
underwriter severally agrees to indemnify us, any person controlling us within
the meaning of Section 15 of the Securities Act of 1933, or Section 20 of the
Securities Exchange Act of 1934, each of our directors, and each officer of
ITXC who signs this registration statement with respect to information relating
to such underwriter furnished in writing to us by or on behalf of such
underwriter specifically for inclusion in this registration statement.
Item 15. Recent Sales of Unregistered Securities
Since ITXC was incorporated in July 1997, ITXC sold shares of its capital
stock in the following transactions, each of which was intended to be exempt
from the registration requirements of the Securities Act of 1933:
On July 21, 1997, ITXC sold to its Chief Executive Officer, Tom Evslin,
6,000,000 shares of common stock, for an aggregate purchase price of $30,000.
For the foregoing transaction, ITXC relied upon the exemption from registration
under Section 4(2) of the Securities Act; such shares continue to bear a
restrictive legend.
On October 1, 1997, ITXC sold to one accredited investor 1,800,000 shares of
common stock, for an aggregate cash purchase price of $900 and the contribution
by the investor of certain property. On October 1, 1997, ITXC sold to that same
investor 278,000 shares of Series A convertible preferred stock (which
converted into 556,000 shares of common stock), warrants covering 122,000
shares of such Series A convertible preferred stock (which have been converted
into warrants to purchase 244,000 shares of common stock) and warrants covering
1,200,000 shares of common stock (exercisable subject, in part, to ITXC's
utilization of software credits) in exchange for $500,000 in cash, and $1.0
million of software credits to purchase VocalTec equipment. Such shares of
Series A convertible preferred stock have been converted into common stock. For
the foregoing transactions, ITXC relied upon the exemption from registration
under Section 4(2) of the Securities Act; such shares continue to be subject to
a restrictive legend.
On April 27, 1998, ITXC sold an aggregate of 5,865,104 shares of its Series
B Convertible Preferred Stock for an aggregate cash consideration of $10.0
million to a total of fourteen accredited investors. For the foregoing
transaction, ITXC relied upon the exemption from registration under Regulation
D under the Securities Act. Each of these shares continues to be subject to
restrictive legends.
II-2
<PAGE>
On September 23, 1998, ITXC issued 25,000 shares of common stock to Howard
Fischer Associates, Inc. for consideration consisting of certain services
provided to ITXC. For the foregoing transaction, ITXC relied upon the exemption
from registration under Section 4(2) of the Securities Act. Such shares
continue to bear a restrictive legend.
On February 24, 1999, ITXC sold an aggregate of 3,229,975 shares of its
Series C Convertible Preferred Stock for aggregate cash consideration of $15.0
million to a total of fourteen accredited investors. For the foregoing
transaction, ITXC relied upon the exemption from registration under Regulation
D under the Securities Act. Further, each of these shares continues to be
subject to restrictive legends.
On April 27, 1998, ITXC entered into certain warrant agreements with Mr.
Evslin and Mr. Jordan. Their warrants are fully vested and currently
exercisable and entitle the holder to purchase 645,162 shares of common stock
and 234,604 shares of common stock, respectively. For the foregoing
transaction, ITXC relied upon the exemption from registration under Section
4(2) of the Securities Act.
From inception through August 30, 1999, ITXC granted to certain of its
officers, directors and employees options to purchase up to an aggregate of
6,431,000 shares of common stock. Options to purchase 530,474 of such shares
were exercised. For the foregoing transactions, ITXC relied upon the exemption
from registration contained in Sections 3(b) and 4(2) of the Securities Act and
Rule 701 promulgated thereunder relative to sales pursuant to certain
compensatory benefits plans.
On June 11, 1999, VocalTec Communications exercised all of the warrants
previously granted to it by ITXC. As a result, ITXC issued 1,444,000 shares of
its common stock upon payment to it of $722. For the foregoing transaction,
ITXC relied upon the exemption from registration under Section 4(2) of the
Securities Act; such shares continue to be subject to a restrictive legend.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
No. Description
----- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Second Restated Certificate of Incorporation*
3.2 Form of Third Restated Certificate of Incorporation to be filed upon
consummation of the offerings*
3.3 By-laws, as amended*
3.4 Form of Amended and Restated By-laws to be in effect upon the
consummation of the offerings*
3.5 Amendment to Certificate of Incorporation
4.1 Third Amended and Restated Registration Rights Agreement, dated February
24, 1999*
4.2 Form of certificate representing shares of common stock*
5.1 Opinion of Lowenstein Sandler PC
10.1 Amended and Restated Employment Agreement between the Registrant and Tom
Evslin*
10.2 Employment Agreement between the Registrant and John G. Musci*
10.3 1998 Stock Incentive Plan, as amended*
10.4 Employee Cash Incentive Plan*
10.5 Employee Stock Purchase Plan*
10.6 Joint Venture and Quotaholders Agreement, dated as of July 19, 1998, by
and between TeleNova Comunicacoes Ltda. and ITXC Corp.*
10.7 First Amendment to Joint Venture and Quotaholders' Agreement, dated
August 18, 1998, by and between TeleNova Comunicacoes Ltda. and ITXC
Corp.*
10.8 Memorandum and Amendment to Joint Venture and Quotaholders' Agreement,
dated as of May 31, 1999, by and among ITXC Corp., TeleNova Comunicacoes
Ltda. and Telesisa Sistemas emTelecomunicacoes S.A.*
10.9 Lease Agreement, dated February 2, 1998 by and between the Registrant
and Peregrine Investment Partners--I*
10.10 First Amendment to Lease dated April 16, 1999, by and between the
Registrant and Peregrine Investment Partners--I*
10.11 Form of Amendment to 1998 Stock Incentive Plan to be effective upon
consummation of the offerings*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Ernst &Young LLP
23.2 Consent of Lowenstein Sandler PC (included in Exhibit 5.1)
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
</TABLE>
- --------
*Previously filed.
(b) Financial Statement Schedules: Not applicable
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing of the offerings described in the Underwriting Agreement,
certificates in such denominations and registered in such names as requested by
the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been
II-4
<PAGE>
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issues.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Princeton, State of New Jersey, on September 23, 1999.
ITXC Corp.
/s/ Edward B. Jordan
By: _________________________________
Edward B. Jordan
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registrant's Registration Statement has been signed by the
following persons in the capacities indicated on this 23rd day of September,
1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Tom I. Evslin* Chairman, President and
______________________________________ Chief Executive Officer
Tom I. Evslin
/s/ John G. Musci* Director
______________________________________
John G. Musci
/s/ Edward B. Jordan Chief Financial and
______________________________________ Accounting Officer and
Edward B. Jordan Director
/s/ William P. Collatos* Director
______________________________________
William P. Collatos
/s/ Elon A. Ganor* Director
______________________________________
Elon A. Ganor
/s/ Frederick R. Wilson* Director
______________________________________
Frederick R. Wilson
</TABLE>
<TABLE>
<S> <C>
</TABLE>
/s/ Edward B. Jordan
*By: ____________________________
Edward B. Jordan
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description
----- -----------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Second Restated Certificate of Incorporation*
3.2 Form of Third Restated Certificate of Incorporation to be filed upon
consummation of the offerings*
3.3 By-laws, as amended*
3.4 Form of Amended and Restated By-laws to be in effect upon the
consummation of the offerings*
3.5 Amendment to Certificate of Incorporation
4.1 Third Amended and Restated Registration Rights Agreement, dated February
24, 1999*
4.2 Form of certificate representing shares of common stock*
5.1 Opinion of Lowenstein Sandler PC
10.1 Amended and Restated Employment Agreement between the Registrant and Tom
Evslin*
10.2 Employment Agreement between the Registrant and John G. Musci*
10.3 1998 Stock Incentive Plan, as amended*
10.4 Employee Cash Incentive Plan*
10.5 Employee Stock Purchase Plan*
10.6 Joint Venture and Quotaholders Agreement, dated as of July 19, 1998, by
and between TeleNova Comunicacoes Ltda. and ITXC Corp.*
10.7 First Amendment to Joint Venture and Quotaholders' Agreement, dated
August 18, 1998, by and between TeleNova Comunicacoes Ltda. and ITXC
Corp.*
10.8 Memorandum and Amendment to Joint Venture and Quotaholders' Agreement,
dated as of May 31, 1999, by and among ITXC Corp., TeleNova Comunicacoes
Ltda. and Telesisa Sistemas emTelecomunicacoes S.A.*
10.9 Lease Agreement, dated February 2, 1998 by and between the Registrant
and Peregrine Investment Partners--I*
10.10 First Amendment to Lease dated April 16, 1999, by and between the
Registrant and Peregrine Investment Partners--I*
10.11 Form of Amendment to 1998 Stock Incentive Plan to be effective upon
consummation of the offerings*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Ernst &Young LLP
23.2 Consent of Lowenstein Sandler PC (included in Exhibit 5.1)
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed.
<PAGE>
Exhibit 3.5
CERTIFICATE OF AMENDMENT
TO
SECOND RESTATED
CERTIFICATE OF INCORPORATION
OF
ITXC CORP.
ITXC Corp. (the "Corporation"), a Delaware corporation, hereby certifies as
follows:
ARTICLE I
1.1. The name of the Corporation is ITXC Corp.
1.2. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of Delaware on July 21, 1997. A Restated
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of Delaware on April 22, 1998. A Second Restated Certificate of
Incorporation of the Corporation was filed with the Secretary of State of
Delaware on February 23, 1999.
1.3. This Certificate of Amendment to the Second Restated Certificate of
incorporation of the Corporation has been duly adopted in accordance with
Sections 242 of the General Corporation Law of the State of Delaware and written
consent has been given in accordance with Section 228 of the General
Corporation Law of the State of Delaware.
ARTICLE II
Article Fourth of the Corporation's certificate of incorporation is amended
to read in its entirety as follows:
"The total number of shares of stock which the Corporation shall have
authority to issue is Eighty Two Million Five Hundred Thousand (82,500,000)
shares, of which Sixty Seven Million Five Hundred Thousand (67,500,000)
shares are designated as Common Stock, having a par value of $.001 per
share ("Common Stock"), and Fifteen Million (15,000,000) shares are
designated as Preferred Stock, having a par value of $.001 per share
("Preferred Stock"). The board of directors is authorized to issue the
Preferred Stock from time to time in one or more classes or series thereof,
each such class or series to have voting powers (if any), conversion (if
any), designations, preferences and relating, participating, optional or
other special rights, and such qualifications, limitations or restrictions
thereof, as shall be determined by the board of directors and stated and
expressed in a resolution or resolutions thereof providing for the issuance
of such Preferred Stock. Subject to the powers, preferences and rights of
any Preferred Stock, including any class or series
<PAGE>
thereof, having preferences or priority over, or rights superior to, the
Common Stock and except as otherwise provided by law, the holders of the
Common Stock shall have and possess all powers and voting and other rights
pertaining to the stock of the Corporation and each share of Common Stock
shall be entitled to one vote.
Upon this Certificate of Amendment to the Second Restated Certificate
of Incorporation of the Corporation becoming effective in accordance with
the General Corporation Law of the State of Delaware (the "Effective
Time"), each share of Common Stock, par value $.001 per share, of the
Corporation issued and outstanding immediately prior to the Effective Time
shall be automatically reclassified as and converted into two (2) validly
issued, fully paid and nonassessable share of Common Stock, par value $.001
per share, of the Corporation."
-2-
<PAGE>
IN WITNESS WHEREOF, ITXC Corp. has caused this certificate to be signed by
John G. Musci, its Executive Vice President, on the ____ day of September, 1999.
ITXC Corp.
By: _______________________________________
John G. Musci, Executive Vice President
-3-
<PAGE>
EXHIBIT 5.1
September 23, 1999
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
Dear Sirs:
In connection with the pending registration under the Securities Act of 1933, as
amended (the "Act"), of the shares of common stock of ITXC Corp., a Delaware
Corporation (the "Company"), offered for sale pursuant to the registration
statement described below (the "Shares"), we have examined such corporate
records, certificates and other documents and such questions of law as we have
considered necessary or appropriate for the purposes of this opinion. On the
basis of such examination, we advise you that, when the Company's Registration
Statement on Form S-1 (No. 333-80411) has become effective under the Act, the
terms of the Shares and of their issue and sale have been duly established in
conformity with the Company's certificate of incorporation, and the Shares have
been issued and sold as contemplated in such Registration Statement, the Shares
will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to such
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus included within such Registration Statement.
Very truly yours,
LOWENSTEIN SANDLER PC
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 3, 1999 (except for paragraphs 9 to 12 of Note
9 and Note 13, as to which the date is September 20, 1999), in Amendment No. 4
to the Registration Statement (Form S-1 No. 333-80411) and related Prospectus of
ITXC Corp. for the registration of 7,187,500 shares of its common stock.
/s/Ernst & Young LLP
Metropark, New Jersey
September 22, 1999
