<PAGE>
As filed with the Securities and Exchange Commission on June 10, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
jurisdiction
of incorporation or Classification Code Number) Identification no.)
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
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<S> <C> <C>
Common Stock, par value $.001
per share..................... $86,250,000 $23,978
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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.
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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 June 10, 1999
PROSPECTUS
Shares
[Logo]
ITXC Corp.
Common Stock
-------------
This is our initial public offering of shares of common stock. We are
offering shares. Of the shares being offered, we are offering
shares in the United States and Canada and shares outside the United
States and Canada. The public offering price and underwriting discount are
identical for both the U.S. offering and the international offering. The
closing of the international offering is a condition to the closing of the U.S.
offering.
We expect the public offering price to be between $ and $ per share. No
public market currently exists for our shares.
We have applied to list the shares on the Nasdaq National Market under the
symbol "ITXC".
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 a 30-day option to purchase up to
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, on behalf of the U.S. underwriters, expects to deliver the
shares on or about , 1999.
-------------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
About this Prospectus.................................................... i
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Historical Financial Data....................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Our Business............................................................. 26
Management............................................................... 40
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Executive Compensation..................................................... 43
Certain Transactions....................................................... 48
Principal Stockholders..................................................... 50
Description of Capital Stock............................................... 52
Shares Eligible for Future Sale............................................ 55
Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders........... 56
Underwriting............................................................... 59
Legal Matters.............................................................. 63
Experts.................................................................... 63
Additional Information..................................................... 63
Index to Financial Statements.............................................. F-1
</TABLE>
ABOUT THIS PROSPECTUS
Unless otherwise indicated, the information in this prospectus assumes:
. the underwriters will not exercise their over-allotment option;
. each outstanding share of our Series B convertible preferred stock and
Series C convertible preferred stock will be converted into one share of
our common stock upon the closing of the offerings;
. 722,000 shares of our common stock will be issued at or before the
closing of the offerings upon the exercise of warrants held by VocalTec
Communications, Ltd., one of our principal stockholders; and
. since June 10, 1999, no options to purchase our common stock have been
exercised.
You should only rely on the information contained in this prospectus. 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.
Unless the text of this prospectus requires a different meaning, all
references to "ITXC," "we" or "our" refer to ITXC Corp., a Delaware
corporation incorporated in July 1997, and its 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
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. When we refer to
"affiliates" with respect to our network, we are referring to unrelated third-
parties that terminate voice, fax and voice-related traffic on our network.
See the section of this prospectus entitled "Risk Factors" beginning on
page 5 for a discussion of certain factors that you should consider before
investing in the common stock offerings that we have described in this
prospectus.
All trademarks and trade names appearing in this prospectus are the
property of their respective holders.
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.
i
<PAGE>
NOTE TO READER
This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of
shares of common stock. The second prospectus relates to a concurrent offering
outside the United States and Canada of shares of common stock. The
prospectuses for the U.S. offering and the international offering will be
identical with the exception of the following alternate pages for the
international offering: a front cover page and a back cover page. These
alternate pages appear in this registration statement immediately following the
complete prospectus for the U.S. offering.
ii
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information about us. It is not complete
and may not contain all of the information that you should consider before
investing in our common stock. 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.
Our Company
We are a leading global provider of high quality Internet-based voice, fax
and voice-enabled services. Our network and proprietary software allow our
customers to capitalize on the convergence of traditional circuit- switched
voice networks with both private and public packet-based data networks
including the Internet. We have developed and deployed ITXC.net, an actively
managed overlay network designed to deliver high quality voice communications
over the Internet and other data networks. As part of ITXC.net, we have
established ITXC-owned facilities in the U.S. and arranged call termination and
origination with affiliates throughout the world. We believe that ITXC.net
enables us to provide our customers with the cost savings of data networks and
the global reach of the Internet, while providing a platform for additional
value-added services. We believe that the proliferation of high capacity data
networks provides the necessary infrastructure to rapidly deploy ITXC.net on a
global basis.
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 commencing
this service, increasing from 47,000 minutes of traffic during the quarter
ended June 30, 1998, to over 11.0 million minutes of traffic during the quarter
ended March 31, 1999, and more than 12.6 million minutes of traffic during the
two month period ended May 31, 1999. We believe that the rapid growth of
traffic on ITXC.net demonstrates that our proprietary technology and
techniques, which we refer to as BestValue RoutingSM, are effective in
enhancing the quality of voice, fax and voice-enabled 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, scalable network by using the Internet for
transport and our affiliates' local infrastructure for terminating traffic. Our
early entrant status has resulted in 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 value-added services. We have established ITXC-owned facilities in
the U.S. and have arranged call origination and termination services with
affiliates in more than 75 international cities operating more then 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 have recently introduced a new proprietary device called a
SNARCTM, 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.
We believe that data networks offer superior functionality to circuit-
switched networks and, when actively managed, that the Internet will usually be
the network of choice for voice, fax and voice-enabled services. We believe
that our early entrant status and our experience in providing high quality
voice communication over ITXC.net since April 1998 positions us to take
advantage of the convergence of voice-enabled services and data networks,
including the Internet.
1
<PAGE>
Our Strategy
Our goal is to be the leading provider of Internet-based voice, fax and
voice-enabled services. In order to achieve this goal we intend to:
. Exploit Our Network Scale and Early Entrant Status
. Rapidly Expand ITXC.net by Adding Additional Affiliates Worldwide
. Capitalize on the Attributes of the Internet
. Establish ITXC.net as the Standard for Quality in Our Industry
. Bring Internet Voice Capability to Our Customers' Premises
. Continue to Provide Leadership in Interoperability Initiatives
. Deliver Additional Voice-Enabled 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. The
address of our Web site is http://www.itxc.com. Information contained on our
Web site shall not be deemed to be a part of this prospectus.
2
<PAGE>
The Offerings
Common stock offered by ITXC:
<TABLE>
<C> <S>
U.S. offering............... shares
International offering...... shares
Total................... shares
Common stock outstanding after
the offerings................. shares
Use of proceeds................ We estimate that we will receive net proceeds
from the offerings of approximately $
million, or $ million if the underwriters
exercise their over-allotment option in full,
assuming an initial public offering price of
$ per share and after deducting the estimated
underwriting discounts and offering expenses.
We intend to use the net proceeds to repay
approximately $1.7 million of debt under our
line of credit, expand the number of network
hubs and customer-installed gateways, further
develop our technology and BestValue Routing
approach, develop additional applications for
our technology 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>
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 will be diluted. The following is a
summary of additional shares of common stock that we have currently approved
for issuance as of June 10, 1999:
. 3,120,997 shares are issuable upon the exercise of options under our
1998 Stock Incentive Plan, consisting of:
. outstanding options to purchase 2,574,872 shares at a weighted
average exercise price of $1.97 per share, of which options covering
158,091 shares were exercisable as of June 10, 1999; and
. options covering 546,125 shares available for future awards after the
offerings; and
. 439,883 shares are issuable upon the exercise of outstanding warrants at
a weighted average exercise price of $1.71 per share.
For a description of our 1998 Stock Incentive Plan, see "Executive
Compensation--1998 Incentive Stock Option Plan."
3
<PAGE>
Summary Consolidated Financial Data
The following summary financial data for the period from 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 quarters ended March 31, 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) Quarter
to Year ended ended March 31,
December 31, December 31, ----------------
1997 1998 1998 1999
------------------- ------------ ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue..................... $ 500 $ 1,538 $ 300 $ 3,029
Total costs and expenses.... 706 8,995 931 6,014
Net loss.................... (205) (7,276) (631) (2,944)
Basic and diluted net loss
per share applicable to
common stockholders........ (0.06) (1.78) (0.16) (0.73)
Weighted average shares used
in computation of basic and
diluted net loss per share
applicable to common
stockholders............... 3,502 4,092 3,900 4,191
Pro forma basic and diluted
net loss per share......... (0.83) (0.24)
Weighted average shares used
in computation of pro forma
basic and diluted net loss
per share.................. 8,799 12,034
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments................................... $16,709 $16,710
Total assets................................... 22,015 22,016
Long-term obligations, including current
portion....................................... 1,936 1,936 213
Working capital................................ 13,518 13,519
Total stockholders' equity (deficit)........... (8,983) 15,929
</TABLE>
- --------
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 Series B and Series C
convertible preferred stock into common stock upon the closing of the offerings
and the assumed exercise of warrants covering 722,000 shares of our common
stock by a principal stockholder as if such conversion and exercise had
occurred at the dates of issuance. The "as adjusted" column in the balance
sheet data presented above also reflects the sale of shares of common
stock in the offerings at an assumed initial public offering price of $ per
share after deducting the estimated underwriting discounts and offering
expenses payable by us and 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.
Our business is difficult to evaluate because we have a limited operating
history.
We were incorporated in July 1997 and began our first commercial service in
April 1998. We have had limited revenue since our inception. In addition, our
senior management team and other employees have worked together at ITXC for
only a short period of time. Our chief operating officer, John G. Musci, has
only joined us in February 1999. Consequently, we have a limited operating
history upon which you can evaluate our business.
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 a net loss of $0.2 million for
the inception period from July 21, 1997 through December 31, 1997, $7.3 million
for the year ended December 31, 1998 and $2.9 million for the quarter ended
March 31, 1999. We expect to continue to incur significant losses for the
foreseeable future. As of March 31, 1999, our accumulated deficit was $10.4
million. Our limited operating history makes predicting our future operating
results, including operating expenses, difficult. Our revenue may not grow or
may not even continue at the current level.
We cannot predict our success because our business model is unproven.
Our success depends on the continued growth of ITXC.net as a network for
voice, fax and voice-enabled services. The growth of ITXC.net depends, in part,
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. Although Internet usage and popularity have grown rapidly,
we cannot be certain that this growth will continue in its present form, at its
current rate or at all. Our market is new and rapidly changing. Our business,
financial condition, operating results and future prospects would be materially
adversely affected if the Internet does not continue to grow as a
telecommunications medium. This growth may be inhibited by a number of factors,
such as:
. quality of infrastructure;
. security concerns;
. technological failures such as viruses;
. regulatory encroachments;
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
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.
The success of our business ultimately will depend upon the acceptance of
our services by telecommunications companies, telephony resellers and Internet
service providers and other potential customers. Although, as of June 10, 1999,
we had affiliates in more than 80 international cities, we cannot predict
whether demand for our services will continue to develop, particularly at the
volume or prices we need to become profitable.
5
<PAGE>
We are growing rapidly and effectively managing our growth may be difficult.
We have grown and expect to continue to grow rapidly both by adding new
voice-enabled services and expanding our existing services. This growth is
likely to place a significant strain on our resources and systems. To manage
our growth, we must implement systems and hire, train and manage our employees.
We cannot assure you that our management will be able to effectively or
successfully manage our growth. The failure to manage our growth effectively
could have a material adverse effect on our business, financial condition,
operating results and future prospects.
Capacity limits on our technology and network hardware and software may be
difficult to project and we may not be able to expand and upgrade our systems
to meet increased use.
If traffic over ITXC.net continues to increase, it will be necessary for us
to expand and upgrade our technology and network hardware and software. We may
not be able to accurately project the rate of increase on our network and we
may not be able to expand and upgrade our systems and network hardware and
software capabilities to accommodate increased traffic on our network. If we do
not appropriately expand and upgrade our systems and network hardware and
software, our business, financial condition, operating results and future
prospects will be materially adversely affected.
We rely on third party communications infrastructure, hardware, software and
the Internet.
Our success will depend upon the capacity, reliability and security of the
infrastructure owned by third parties, including our affiliates, used to carry
telecommunications between our end users and the Internet. We have no control
over the quality and maintenance of a significant portion of that
infrastructure and whether or not those third parties are able to upgrade or
improve their equipment. We rely upon equipment and software provided to us by
our vendors, most importantly the gateway equipment and software provided by
Lucent Technologies and VocalTec Communications; our affiliates also rely on
such equipment and software. We cannot assure you that we or our affiliates
will be able to continue to purchase gateways from these vendors on acceptable
terms or at all. If we or our affiliates are unable to maintain current
purchasing terms with these vendors, our business, financial condition,
operating results and future prospects could be materially adversely affected.
Our ability to attract and retain affiliates and customers depends on many
factors we cannot control.
Our ability to increase the number of our affiliates and customers, and our
ability to retain those affiliates and customers, will depend on a number of
factors, many of which are beyond our control. These factors include:
. 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;
. consolidation in the telecommunications industry; and
. the quality of the customer and technical support we provide.
Because of these factors, our actual revenue or the rate at which we add new
affiliates and customers may differ from past trends, the forecasts of industry
analysts, or a level that meets the expectations of investors. If we are unable
to add new affiliates and customers, the traffic on ITXC.net may not increase
and we may not be able to increase our global reach.
6
<PAGE>
Fluctuations in our operating results may negatively impact our stock price.
We expect that our quarterly operating results will fluctuate significantly
due to many factors, many of which are beyond our control, including:
. volume of traffic;
. management of our growth;
. the rate at which telecommunications companies, telephony resellers and
Internet service providers use our services;
. our dependence on a limited number of customers;
. economic conditions specific to the Internet, as well as general
economic and market conditions;
. our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
. intense competition;
. our ability to collect on our accounts receivable;
. the international regulatory environment;
. the uncertain adoption of the Internet as a telecommunications medium
for the transport of telecommunications;
. changes in revenue splits with our affiliates; and
. risks associated with potential acquisitions.
Due to the limited history of businesses relying on the Internet as a
telecommunications medium, we believe that period-to-period comparisons of our
operating results are not meaningful. Additionally, if our operating results in
one or more quarters do not meet industry analysts' or your expectations, the
price of our common stock could be materially adversely affected.
We depend on a small number of customers for most of our revenue.
To date, we have derived a significant portion of our revenue from a small
number of customers. During 1998, our 10 largest customers accounted for
approximately 85% of our revenue. ABT Computer, Inc., a telecommunications
reseller and our largest customer for the year ended December 31, 1998,
accounted for 25% 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 16% of our total revenue for 1998. Moreover, we
cannot assure you that our existing customers will continue to engage us in the
future. The loss of any significant customer could have a material adverse
effect on our business, financial condition, operating results and future
prospects.
We may not be able to establish or maintain acceptable relationships with our
customers.
We cannot assure you that we will be able to establish or maintain
relationships with our customers. Even if we are able to establish and maintain
those relationships, there can be no assurance that we will be able to do so on
terms favorable to us or in the quantities or at the rate we need to become
profitable. These events could have a material adverse effect on our business,
financial condition, operating results and future prospects.
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
because 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. Currently gateways
manufactured by Lucent Technologies and VocalTec Communications interoperate
with respect to voice communications but not fax communications. We cannot
7
<PAGE>
assure you that the iNow! interoperability initiative or another similar
initiative will be adopted and implemented by a broad enough array of
manufacturers to allow for the interoperability needed for ITXC.net's growth.
New interoperability standards may develop without our participation.
While we believe we have led the development and implementation of the iNow!
initiative, it is possible that another standard for the interoperability of
Internet voice services and products will be developed without our
participation. If that happens we may be disadvantaged by having to conform
ITXC.net to that new industry standard.
There is intense competition for the services that we offer.
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
VIP Calling 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 all entered or plan to enter the Internet telephony
market. Many of our competitors are larger than us and have substantially
greater financial resources than we do. We cannot assure you that we will be
able to compete successfully in the developing Internet telephony market.
Intense price competition in our markets could materially adversely affect our
business, financial condition, operating results and future prospects. See "Our
Business--Competition."
Our market is characterized by rapid technological change with which we may not
be able to keep up in a cost-effective way.
Our market is characterized by rapid technological change and frequent new
product and services announcements. Significant technological changes could
render the technology we use obsolete. If we are unable to successfully respond
to these developments or do not respond in a cost-effective way, our business,
financial condition, operating results and future prospects will be materially
adversely affected. To be successful, we must adapt to our rapidly changing
market by continually improving the responsiveness, reliability, services and
features of our network and by developing new features and applications to meet
customer needs. We cannot assure you that we will be able to adapt to these
challenges or respond in a way to meet them. Our failure to do so would have a
material adverse effect on our business, financial condition, operating results
and future prospects.
We may need additional capital in the future and it may not be available on
acceptable terms.
The development of our business may require significant additional capital
in the future to fund our operations, to finance the investments in equipment
and corporate infrastructure needed for the expansion of our network, to
enhance and expand the range of services we offer and to respond to competitive
pressures and perceived opportunities, such as investment, acquisition and
international expansion activities. To date, our cash flow from operations has
been insufficient to cover our expenses and capital needs. We cannot assure you
that additional financing will be available on terms favorable to us, or at
all. If adequate funds are not available on acceptable terms, we may be forced
to curtail or cease our operations. Moreover, even if we are able to continue
our operations, the failure to obtain additional financing could have a
material adverse effect on our business, financial condition, operating results
and future prospects. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
We are subject to risks of international operations.
Because we conduct business internationally, we are subject to certain
risks, directly and indirectly through our affiliates, including:
. inability to locate qualified local affiliates and call termination
suppliers;
8
<PAGE>
. unexpected changes in regulatory requirements, including the regulation
of Internet access;
. foreign currency fluctuations, which could result in increased operating
expenses and reduced revenue;
. potentially longer payment cycles;
. difficulty in accounts receivable collection;
. weaknesses in particular foreign economies;
. foreign taxes; and
. the burdens of complying with a variety of foreign laws, trade
standards, tariffs and trade barriers.
We are also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships. There
can be no assurance that the risks associated with our international operations
will not materially adversely affect our business, financial condition,
operating results and future prospects.
Adoption of the Internet as a telecommunications medium is uncertain.
The growth of ITXC.net requires validation of the Internet as an effective
medium for the delivery of voice, fax and voice-enabled services. This
validation has yet to fully occur. Acceptance of voice, fax and voice-enabled
services over the Internet by telephone companies and telephony resellers will
also depend on growth in the commercial use of the Internet. If widespread
commercial use of the Internet does not develop, or develops more slowly than
expected, or if the Internet does not develop as an effective and measurable
telecommunications medium, our business, financial condition, operating results
and future prospects would be materially adversely affected.
We are subject to risks associated with system failures, delays and other
inadequacies.
Our success depends on our ability to provide reliable voice service over
the Internet. Any damage to or failure of the Internet, our connections to the
Internet, our affiliates' connections to the Internet, our computer hardware
and software or our affiliates' computer hardware or software, whether from
operational disruption, natural disaster, computer viruses, hacking or
otherwise, resulting in an interruption in our operations, could have a
material adverse effect on our reputation among existing and potential new
customers, our business, financial condition, operating results and future
prospects. Our systems and operations are vulnerable to damage or interruption
from fires, earthquakes, floods and other natural disasters, power loss,
telecommunications failures, network software flaws, transmission cable cuts,
physical or electronic break-ins, sabotage, year 2000 problems, intentional
acts of vandalism and similar events that may or may not be beyond our control.
The occurrence of any of these events could interrupt our services and could
have a material adverse effect on our business, financial condition, operating
results and future prospects.
Our proprietary rights may be difficult to protect.
Proprietary rights are important to our success and our competitive
position. To protect them, we generally rely on copyright, trademark and trade
secret laws and confidentiality agreements with employees and third parties.
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.
The laws of some foreign countries also do not protect our proprietary
rights to the same extent as do the laws of the United States, and effective
patent, copyright, trademark and trade secret protection may not be available
in such jurisdictions. In general, our efforts to protect our intellectual
property rights through patent, copyright, trademark and trade secret laws may
not prevent misappropriation, and our failure to protect our
9
<PAGE>
proprietary rights could materially adversely affect our business, financial
condition, operating results and future prospects. See "Our Business--
Proprietary Rights."
Acquisitions may disrupt or otherwise have a negative impact on our business.
We may make investments in complementary companies, technologies and assets,
which could be subject to risks, including the following:
. acquisitions may cause a disruption in our ongoing business, distract
our management and other resources and make it difficult to maintain our
standards, controls and procedures;
. we may acquire companies in markets in which we have little experience;
. we 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 existing stockholders, to pay for acquisitions; and
. 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.
We depend on our key personnel and may have difficulty attracting and retaining
the skilled employees we need to execute our growth plans.
Our future success depends, in part, on the continued service of our key
management and technical personnel, including Tom I. Evslin, our Chairman,
President and Chief Executive Officer, John G. Musci, our Executive Vice
President and Chief Operating Officer, and Edward B. Jordan, our Executive Vice
President and Chief Financial Officer. 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.
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.
We face Year 2000 risks.
Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January
1, 2000, computer systems and software used by many companies in a wide variety
of industries, including technology, transportation, utilities, finance and
telecommunications, may produce erroneous results or fail unless they have been
modified or upgraded to process date information correctly. 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 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,
including the Internet, the circuit-switched telephone network and private data
networks, and computer hardware and software, including our affiliates'
gateways, owned and maintained by third-parties, some of which may not be Year
2000 compliant. The failure of a network or computer hardware or software owned
and maintained by a third party, as a result of lack of Year 2000 compliance,
could materially and adversely affect our business, financial condition,
operating results and future prospects. In addition, 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 cannot assure you that we will be able to find suitable
replacement vendors or suppliers on terms favorable to us, or at all. Our
failure to find replacement vendors or suppliers could have a material adverse
effect on our business, financial condition, operating results and future
10
<PAGE>
prospects. 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."
Our South American joint venture agreement may impose substantial obligations
on us in the event that we are required to, or seek to, purchase the 51%
interest that we do not presently own.
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.
The agreement provides us with certain rights to purchase the interests of the
other parties (a call), and provides the other parties with certain rights to
cause us to purchase their interests (a put), each in a number of specific
circumstances. 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, however, 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. If we pay our partners in common stock, our stockholders may incur
substantial dilution. 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.
We may be subject to government regulation and legal uncertainties which could
harm us.
United States. We believe that, under U.S. law, the Internet-related
services that we provide constitute information services (as opposed to
telecommunications services) and, as such, are not currently actively regulated
by the Federal Communications Commission, or FCC, or any state agencies charged
with regulating telecommunications carriers. Nevertheless, aspects of our
operations may be subject to state or federal regulation, including regulations
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. Increased regulation of
the Internet may slow its growth, particularly if other countries also impose
regulation. Such regulation may negatively impact the cost of doing business
over the Internet and, materially adversely affect our business, financial
condition, operating results and future prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other 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.
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 have also
prohibited Internet telephony. Other countries permit but regulate Internet
telephony. Some countries will evaluate the 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.
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
11
<PAGE>
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.
Our customers and affiliates may also currently be, or in the future become,
subject to requirements to qualify to do business in a particular foreign
country or to otherwise comply with regulations, including requirements to
obtain authorization, or to cease 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 comply,
will be able to comply with any such requirements, and/or will continue to
comply with any such requirements. The failure of our customers and affiliates
to comply with applicable laws and regulations could materially adversely
affect our business, financial condition, operating results and future
prospects.
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;
. copyright, trademark and patent infringement; 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 Congress, the FCC, state regulatory authorities, foreign governments or
other bodies begin to regulate or, in the case of certain foreign governments,
prohibit Internet telephony, we cannot assure you that any such regulation will
not materially adversely affect our business, financial condition, operating
results or future prospects.
Our executive officers and directors own a large percentage of our voting stock
and could exert significant influence over matters requiring stockholder
approval after these offerings.
Immediately after the closing of the offerings, our executive officers and
directors and their respective affiliates will own approximately % 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. This concentration could have the effect of delaying or
preventing a change in control of ITXC.
We will have broad discretion in using the proceeds of these offerings.
Our management will have broad discretion over the allocation of the net
proceeds from the offerings, as well as over the timing of their expenditure.
As a result, investors will be relying on our management's judgment with only
limited information about its specific intentions for the use of the proceeds.
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 a stockholder 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.
If we or our existing shareholders sell additional shares of our common stock
after the offerings, it could hurt the market price of our common stock.
If our principal stockholders sell a substantial number of shares of common
stock after the offerings, those sales could adversely affect the market price
of our common stock and could impair our ability to raise capital through the
sale of equity securities. Upon the closing of the offerings, we will have
shares of common stock outstanding (including the 9,095,079 shares of common
stock to be issued upon the conversion of the Series B preferred stock and the
Series C preferred stock and 722,000 shares of common stock to be issued upon
the assumed exercise of warrants owned by VocalTec Communications). In
addition, we have reserved for issuance 3,120,997 shares of common stock
issuable upon exercise of stock options and 439,883 shares of common stock
issuable upon exercise of outstanding warrants. The shares ( ) shares
if the over-allotment option is exercised in full) sold in the offerings will
be freely transferable without restriction under the Securities Act, unless
they are held by "affiliates" of ours as that term is used under the Securities
Act. Of the remaining shares, shares will be freely transferable
without restriction under the Securities Act, unless they are held by our
"affiliates" and will be available for public sale upon expiration of the
"lock-up" agreements described below. The remaining shares will be
"restricted securities" as that term is defined in Rule 144 and subject to the
volume restrictions of Rule 144. Substantially all of these restricted
securities are entitled to demand and piggyback registration rights under
certain circumstances.
We intend to file a registration statement on Form S-8 under the Securities
Act approximately ninety days after the offerings are completed in order to
register shares of common stock reserved for issuance under our 1998 Stock
Incentive Plan. This registration would permit the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing.
In connection with the offerings and subject to certain exceptions, we, all
of our executive officers and directors and, with certain limited exceptions,
all of our other existing stockholders have signed "lock-up" agreements
pursuant to which they have agreed not to sell any shares of common stock, or
any securities which may be converted into or exchanged for any such shares of
common stock or substantially similar securities, for a period of 180 days
after the date of this prospectus without the prior written consent of Lehman
Brothers. See "Underwriting."
The value of shares of common stock purchased in the offerings will be diluted.
Persons purchasing shares of common stock in the offerings will incur
immediate and substantial dilution in net tangible book value per share. In
addition, to the extent that outstanding options and warrants to purchase
common stock are exercised, there could be substantial additional dilution. See
"Dilution."
13
<PAGE>
There has been no prior market for our common stock; our stock price is likely
to be highly volatile.
Prior to the offerings, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our common stock or how
liquid that market might become. The initial public offering price for our
shares will be determined by negotiations between us and the representatives of
the underwriters and may not be indicative of prices that will prevail in any
future trading market. The stock market has experienced extreme price and
volume fluctuations. In particular, the market prices of the securities of
Internet-related companies have been especially volatile. In the past,
companies that have experienced volatility in the market price of their stock
have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and a diversion of our management's attention and resources.
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, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the offerings will be approximately
$ million, or $ million if the underwriters exercise their over-allotment
option in full, assuming an initial public offering price of $ per share and
after deducting the estimated underwriting discounts and offering expenses.
We intend to use the net proceeds from the offerings to repay approximately
$1.7 million of debt outstanding under our line of credit, expand the number of
network hubs, currently located solely in New York City and Los Angeles,
further develop our technology and BestValue Routing approach, expand our SNARC
program, develop additional applications for our technology and for general
corporate 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. As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds we will have upon
completion of the offerings. Accordingly, our management will have broad
discretion in the application of the net proceeds.
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.
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.
15
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of March 31, 1999. This unaudited information is
presented:
. on an actual basis;
. on a pro forma basis to give effect, upon the closing of the offerings,
to the automatic conversion of all outstanding shares of preferred stock
into common stock and the assumed exercise of warrants covering 722,000
shares of common stock by a principal stockholder; and
. on a pro forma basis as further adjusted to reflect our receipt and
application of the estimated net proceeds from the sale of shares of
common stock offered in the offerings at an assumed initial public
offering price of $ 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 March 31, 1999
------------------------------
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands, unaudited)
<S> <C> <C> <C>
Cash and cash equivalents....................... $16,509 $16,510 $
======= ======= =======
Equipment note payable.......................... $ 1,723 $ 1,723 $ --
Capital lease obligations, less current portion
............................................... 137 137 137
Series B redeemable convertible preferred stock,
5,865,104 shares issued and outstanding; no
shares issued and outstanding pro forma and as
adjusted....................................... 9,872 -- --
Series C redeemable convertible preferred stock,
3,229,975 shares issued and outstanding; no
shares issued and outstanding pro forma and as
adjusted....................................... 15,040 -- --
Stockholders' equity:
Preferred stock, $0.001 par value; no shares
issued and outstanding, pro forma and as
adjusted..................................... -- -- --
Common stock, $0.001 par value; 22,500,000
shares authorized; 4,190,500 shares issued
and outstanding; 14,007,579 shares issued and
outstanding pro forma; shares
issued and outstanding as adjusted........... 4 14
Additional paid-in capital.................... 3,650 28,552
Deferred employee compensation................ (2,212) (2,212) (2,212)
Accumulated deficit........................... (10,425) (10,425) (10,425)
------- ------- -------
Total stockholders' equity (deficit).......... $(8,983) $15,929 $
======= ======= =======
Total capitalization............................ $17,789 $17,789 $
======= ======= =======
</TABLE>
16
<PAGE>
DILUTION
As of March 31, 1999, our net tangible book value on a pro forma basis,
giving effect to the conversion of our Series B and Series C convertible
preferred stock and the assumed exercise of warrants covering 722,000 shares of
common stock, was $14,959,696, or $1.07 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 March 31, 1999, our net tangible book
value, on a pro forma basis as further adjusted for the sale of shares
offered in the offerings at an assumed initial public offering price of $ per
share after deducting the estimated underwriting discounts and offering
expenses and the use of approximately $1.7 million of the net proceeds of the
offerings to repay all outstanding indebtedness on our line of credit, would
have been approximately $ per share of common stock. This represents an
immediate increase of $ per share to existing stockholders and an immediate
dilution of $ 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......................... $
Pro forma net tangible book value per share as of March 31, 1999........ $ 1.07
Increase per share attributable to new investors........................
Pro forma net tangible book value per share after the offerings.........
------
Dilution per share to new investors..................................... $
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 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 (assuming the issuance by ITXC of
shares in the offerings at an assumed initial public offering price of $
per share, before deducting the estimated underwriting discounts and offering
expenses).
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- -------------------------- -----------
Percent Percent Average
After After Price
Number Offerings Amount Offerings Per Share
------ --------- ------ --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors...........
--- --- --- ---
Total................... 100% $ 100%
=== === === ===
</TABLE>
17
<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 quarters ended March 31, 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 quarter ended March 31, 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 and the
assumed exercise of warrants covering 722,000 shares of our common stock, as if
such conversion and exercise 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 Quarter
inception) to Year ended ended March 31,
December December -------------------
31, 1997 31, 1998 1998 1999
------------- ---------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Operating Data: (in thousands, except per share data)
Revenue:
Telecommunications revenue....... $ -- $ 1,238 $ -- $ 2,429
Consulting revenue............... 500 300 300 600
------ ------- ------- -------
Total revenue..................... 500 1,538 300 3,029
Cost and expenses:
Data communications and
telecommunications.............. -- 2,017 -- 2,528
Cost of consulting revenue....... -- 192 30 --
Network operations............... -- 1,321 167 546
Sales and marketing.............. 349 2,518 375 1,009
Development...................... -- 594 54 183
General and administrative....... 352 2,009 287 1,367
Depreciation and amortization.... 5 345 19 278
Non-cash employee compensation... -- -- -- 104
------ ------- ------- -------
Total costs and expenses.......... 706 8,995 931 6,014
------ ------- ------- -------
Loss from operations.............. (206) (7,457) (631) (2,985)
------ ------- ------- -------
Interest income................... 1 231 -- 69
Interest expense.................. -- (50) -- (27)
------ ------- ------- -------
Net loss.......................... (205) (7,276) (631) (2,944)
Accretion of redemption value of
mandatorily redeemable
convertible preferred stock...... (14) (113)
------- -------
Net loss applicable to common
stockholders..................... $ (205) $(7,290) $ (631) $(3,057)
====== ======= ======= =======
Basic and diluted net loss per
share applicable to common
stockholders..................... $(0.06) $ (1.78) $ (0.16) $ (0.73)
====== ======= ======= =======
Weighted average shares used in
computation of basic and diluted
net loss per share applicable to
common stockholders.............. 3,502 4,092 3,900 4,191
Pro forma basic and diluted net
loss per share (unaudited)....... $ (0.83) $ (0.24)
======= =======
Weighted average shares used in
computation of pro forma basic
and diluted net loss per share
(unaudited)...................... 8,799 12,034
<CAPTION>
December 31, Pro forma
------------------------ March 31, March 31,
1997 1998 1999 1999
------------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................. $ 498 $ 4,171 $16,709 $16,710
Total assets...................... 795 7,834 22,015 22,016
Long-term obligations, including
current portion.................. 1,437 1,936 1,936
Working capital................... 214 2,157 13,518 13,519
Total stockholders' equity (defi-
cit)............................. 493 (6,030) (8,983) 15,929
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global provider of Internet-based voice, fax and voice-
enabled 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 7.5 million minutes during May 1999;
. refining our monitoring and analysis software in order to achieve
BestValue Routing;
. expanding our affiliate network to 54 affiliates at June 10, 1999 and
increasing the global reach of ITXC.net; and
. increasing our employee headcount, from 29 employees on April 1, 1998 to
76 employees on June 10, 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 volume of voice traffic carried over ITXC.net, which is measured in
terms of minutes of voice traffic. 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 sustain operations.
Under that agreement, we earned revenue as we met specific milestones. We do
not consider it likely that consulting revenue will continue beyond the quarter
ending 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. See "Risk Factors."
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 circuit-switched 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
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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. 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, we expect that our development expenses will increase in
future periods.
. 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 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 quarter ended March 31, 1999 we granted options to purchase
1,047,875 shares of common stock at exercise prices less than fair value
resulting in non-cash charges of approximately $2.3 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.
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 March 31, 1999, we had an accumulated deficit of $10.4 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 Quarters Ended March 31, 1998 and 1999
Revenue
We did not commence commercial services over ITXC.net until the quarter
ended June 30, 1998. Accordingly, we did not have any revenue for terminating
calls during the quarter ended March 31, 1998. Our telecommunications revenue
for the quarter ended March 31, 1999 of $2.4 million was nearly double 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 $300,000 during the quarter ended
March 31, 1998 to $600,000 during the quarter ended March 31, 1999, reflecting
the accomplishment of various performance requirements under our market trial
agreement during each such period. We believe that we have now satisfied all
of the performance requirements under our market trial agreement and that our
anticipated consulting revenue of $300,000 for the quarter ending June 30,
1999 will represent the final revenue under that agreement. We do not expect
to earn significant consulting revenue in subsequent periods.
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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 did not incur any such expenses
during the quarter ended March 31, 1998. During the quarter ended March 31,
1999, such expenses amounted to $2.5 million, compared to telecommunications
revenue of $2.4 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 quarter ended March 31, 1998, such costs represented 10% of
consulting revenue.
Network Operations Expenses. Network operations expenses increased from
$167,000 during the quarter ended March 31, 1998 to $546,000 during the quarter
ended March 31, 1999. Expenses during the earlier quarter were incurred in
preparing for the implementation of our WWeXchange service in April 1998.
During the quarter ended March 31, 1999, such expenses reflected the cost of
operating our 24-hours-a-day, 7 days-a-week network operations center and
represented 22.5% of telecommunications revenue.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$375,000 during the quarter ended March 31, 1998 to $1.0 million during the
quarter ended March 31, 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 quarter ended March 31, 1999.
Development Expenses. Development expenses increased from $54,000 during the
quarter ended March 31, 1998 to $183,000 during the quarter ended March 31,
1999, reflecting the costs of additional personnel and consultants for
development tasks.
General and Administrative Expenses. Our general and administrative expenses
increased from $287,000 during the quarter ended March 31, 1998 to $1.4 million
during the quarter ended March 31, 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 amounted to $104,000 during the quarter ended March 31, 1999
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 quarter ended March 31, 1998.
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 $41,000 during the quarter ended March 31, 1999. We had no such
income or expense during the quarter ended March 31, 1998.
Loss From Operations
We incurred operating losses of $631,000 and $3.0 million during the
quarters ended March 31, 1998 and 1999, 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. We anticipate that we will incur
additional operating and net losses for the foreseeable future.
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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 declined from $500,000 during the inception period to
$300,000 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.
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 circuit-switched 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 64% 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 exceeded 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. We did not incur any non-cash
employee compensation expenses during the inception period or the year ended
December 31, 1998.
Interest Income, Net
The interest generated primarily from our April 1998 private placement
exceeded by $181,000 the interest that we paid on our line of credit 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.
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Loss From Operations
We incurred operating losses of $206,000 and $7.5 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. See "Risk Factors."
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. As of March 31, 1999, we had $16.7 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 $15.4
million for the quarter ended March 31, 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 $1.4 million for the quarter ended March 31,
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 $1.5
million for the quarter ended March 31, 1999. Cash used in investing activities
in each period was primarily related to purchases of property and equipment.
As of March 31, 1999, our principal commitments consisted of obligations
outstanding under operating leases. 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.
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 expires in August 1999. The equipment sub-line of credit expires
three years after the final draw down, which may be taken through June 30,
1999. As of March 31, 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, but we have
obtained a letter from our lender waiving the violation at that date. We paid
our lender at a one-time facility fee of $25,000 in August 1998.
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We have received a commitment letter from our lender to increase our line of
credit to $10,000,000 upon the closing of our 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 (a call), and provides the other
parties with certain rights to cause us to purchase their interests (a put),
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 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 an
acquisition or other business combination, 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. represent of our
revenues, 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. See "Risk Factors."
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. See "Risk Factors."
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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 development 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, which is effective for fiscal years beginning after December 15,
1998, 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," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. 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 will need to be revised or
replaced, or the cost involved. However, we do not expect this cost to exceed
$1.0 million.
In addition, we are in the process of seeking verification from our key
vendors and suppliers that they are year 2000 complaint, or, if they are not
presently compliant, to provide 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.
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 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, fax
and voice-enabled 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 circuit-switched networks. 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 June
10, 1999, we had affiliates in more than 75 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, scalable network 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 four 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
</TABLE>
In addition, we carried 4,993,100 and 7,620,400 minutes over ITXC.net during
April 1999 and May 1999, respectively.
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.
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 voice-enabled Internet-based
products 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;
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. 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 circuit-switched networks. 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 provided by
the International Telecommunications Union, the total market for worldwide
telecommunications was approximately $668.2 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.
We believe that the combination of increasing demand on circuit-switched
networks 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 circuit-switched networks 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 are packet-based and
do not require a fixed amount of bandwidth to be reserved for each call. This
allows multiple voice or voice and data calls to be pooled, resulting in packet
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 voice and fax services and
enhanced voice-enabled 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 circuit-switched
networks and are better suited to deliver future enhanced services to both
phone users and computer users.
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Telephony based on Internet protocols, or IP telephony, 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 is a
computer server which translates voice and voice-related signaling (phone
numbers) back and forth between a circuit-switched network and data networks. A
gateway therefore facilitates Internet transport of telephone services
traditionally carried over a circuit-switched network.
The Economics of Internet Telephony
Long distance telephone calls transported over the Internet are less
expensive than similar calls carried over circuit-switched networks 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 traditional circuit-switched networks,
because the packet-switching technology that enables Internet telephony is more
efficient than traditional circuit-switched voice technology. This greater
efficiency creates network 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 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 circuit-switched
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
to talk" contact with a customer service agent have been hampered by the early
quality problems with voice on the Internet described above.
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-enabled services. The key advantages of our solution include:
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. 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 circuit-switched
networks 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 circuit-switched 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 a circuit-switched or a
dedicated data network.
. Interoperability. We have led an effort called iNow! resulting in
guidelines for interoperability. As of June 10, 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 IP 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 IP services.
. Global Scale. Our overlay network uses the Internet to provide a global
communications medium to voice service providers. ITXC.net is a scalable
network--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 circuit-switched
carrier or dedicated data network to establish a dedicated connection.
For example, we connected eighteen 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.
. 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-enabled 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, fax and
voice-enabled services. In order to achieve this goal we intend to:
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. Exploit Our Network Scale and Early Entrant Status
As of June 10, 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 voice and fax and introduce voice-enabled 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 Attributes 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 same capacity and global reach as
ITXC.net. Additionally, the cost of transporting our traffic is largely
not distance sensitive, since we only pay only for the bandwidth we
use. We believe these factors enable us to benefit from significant
cost savings that are not available to operators of circuit- switched
or dedicated 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 voice-enabled services.
. Bring Internet Voice Capability to Our Customers' Premises
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 circuit-switched networks. 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 Interoperability Initiatives
We are a founder of the iNow! initiative, which 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, thereby
providing ITXC and its affiliates with a choice of vendors which other
service providers do not have. As of June 10, 1999, more than 35 other
vendors of gateways, IP telephony components and other equipment and
software had agreed to comply with the iNow! initiative, including
3Com, Alcatel, Ascend, Cisco Systems, Dialogic, ECI Telecom, Motorola,
Netrix, Samsung Electronics and Siemens. By leading these efforts among
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suppliers, manufacturers, software vendors and carriers, we believe
ITXC.net will be positioned to exploit new opportunities in Internet
voice services.
. Deliver Additional Voice-Enabled Services Over ITXC.net
We believe that Internet telephony represents only the beginning of the
evolution of the Internet as a medium for voice, fax and voice-enabled
services. Through enhancements to ITXC.net, we believe that we can
provide the network for wide commercial deployment of new voice, fax
and voice-enabled services from traditional telephony technology
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 voice, fax and voice-enabled 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 June 10,
1999, more than 200 affiliate-owned gateways in 36 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
circuit-switched 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 June 10, 1999, we had affiliates in more than 75 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.
. 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 this 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
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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 on circuit-switched networks 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.
. Multiple Access Points
As of June 10, 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 circuit-switched
dedicated line charges associated with connecting customer switches to
our network hubs. As of June 10, 1999, we had installed 15 SNARCs at
eight customer sites.
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-enabled services. We currently have
strategic carrier relationships with Bell Atlantic, China Telecom and Korea
Telecom.
. Bell Atlantic. Under what we believe to be the first IP telephony
agreement for a regional Bell operating company, Bell Atlantic is
terminating traffic originated by our affiliates worldwide to
provide our customers with high capacity and quality termination on
the east coast of the United States.
. 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.
. Korea Telecom. Korea Telecom, the largest telecommunications service
provider in South Korea, uses ITXC.net to complete outbound calls
and is terminating calls sent over ITXC.net.
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.
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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. We believe that our WWeXchange service is the first
application to allow 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.
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 June 10, 1999, we had installed
15 SNARCs at eight customer sites.
Future Voice and Voice-Enabled 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, voice-enabled 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 and voice-enabled
services to our network.
We may introduce the following voice and voice-enabled 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;
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. subscriber authentication;
. conferencing services; and
. subscriber identification through voice prints and voice
commands.
. 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-n-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 circuit-switched networks.
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;
. expand our terminating affiliate base;
. increase the number of carriers that are ITXC affiliates; and
. establish a market leadership position among providers of voice, fax
and voice-enabled 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.
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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-enabled services. Our future success will depend,
in part, on our ability to improve existing technology and develop and/or
implement new voice-enabled services that incorporate leading technology.
ITXC Comunicacoes
We own 49% of ITXC Comunicacoes, a Brazilian limited liability company which
owns and operates network hubs in Sao Paolo and Rio de Janiero, Brazil. The
remaining 51% 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.
.IP 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, VIP Calling 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-enabled services we intend to offer in the future. In addition,
companies currently in related markets have
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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, packet switched 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 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 Federal Communications Commission, or 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 protocol telephony are
information services or telecommunications services. (The two are treated
differently in several respects, with certain information services being more
lightly regulated to a lesser degree.) The FCC noted that it did not have, as
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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
protocol telecommunications services and lack the characteristics that would
render them information services. If the FCC were to determine that certain
services are subject to FCC regulations as telecommunications services, the FCC
may require providers of Internet telephony services to be subject to
traditional common carrier regulation, 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 ITXC to the extent that they 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 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.
On January 10, 1998, the Commission issued a Communication addressing
whether IP telephony was voice telephony and thus subject to regulation by the
Member States. 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 IP telephony currently meets the
definition of "voice telephony" subject to Member States' regulation. The
European Commission stated that only phone-to-phone communications reasonably
could be considered voice telephony and that, at present, even phone-to-phone
IP 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 IP
telephony should be subjected to no more than a general authorization or
declaration requirement by the European Union Member States. (The
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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, 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 IP telephony should be
regulated. Moreover, in its January 10, 1998 IP Telephony Communication, the
European Commission stated that providers of IP 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. 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 EU 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
the Company's business, financial condition, operating results and future
prospects.
We are also providing service in countries where regulation of IP Telephony
is far more restrictive than in the European Union. Specifically, we have a
strategic affiliate relationship with China Telecom to provide IP 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. IP 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 IP
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 IP telephony in China.
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.
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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 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 June 10, 1999, we had 4 pending applications for trademarks in
the U.S. and 13 pending applications for trademarks in other parts of the
world. We have also applied for 1 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 June 10, 1999, we employed 76 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 14,800 square feet. We have entered into an agreement with
our current landlord to lease an addition 7,200 square feet in Princeton,
commencing this summer. We have network hubs in New York City and Los Angeles
pursuant to 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 Paolo, Brazil. We believe that our existing facilities,
including our Princeton expansion, 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.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Chairman of the Board, Chief Executive Officer and
Tom I. Evslin........ 55 President
Executive Vice President, Chief Operating Officer
John G. Musci........ 43 and Director
Edward B. Jordan..... 38 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
Mary A. Evslin....... 50 Vice President, Marketing and Customer Success
Bradley E. Miller.... 33 Vice President, Operations
Steven J. Ott........ 39 Vice President, Global Sales
Vice President and Business Unit Manager,
Eric G. Weiss........ 32 WWeXchange Service
William P. Collatos.. 45 Director(/1/)(/2/)
Elon A. Ganor........ 48 Director(/1/)(/2/)
Frederick R. Wilson.. 37 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 ISP, 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 (VON) Coalition. 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 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
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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. 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 the Manager of BCE
Ventures, with 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, 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.
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
41
<PAGE>
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 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.
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<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 1998 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($) (#)
---------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Tom I. Evslin................ 232,308 150,000(/1/) --
Chairman of the Board, Pres-
ident and Chief Executive
Officer
Edward B. Jordan............. 120,192 -- --
Executive Vice President and
Chief Financial Officer
Mary A. Evslin............... 107,788 -- --
Vice President, Marketing
and Customer Success
Steven J. Ott................ 96,153 32,924(/2/) 175,000
Vice President, Global Sales
Bradley E. Miller............ 119,134 -- --
Vice President, Operations
</TABLE>
- --------
(1) Earned in 1998, but not paid until 1999.
(2) Consists of commissions earned by Mr. Ott in 1998.
Options/SAR Grants in 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term
------------------------------------------------------ ----------------------
Number of % of total
Securities Options/SARs
Underlying Granted to Exercise Price
Options/SARs Employees in Per Share Expiration
Name Granted (#) 1998 ($/Sh) Date 5% ($) 10% ($)
---- ------------ ------------ -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tom I. Evslin........... -- -- -- -- -- --
Edward B. Jordan........ -- -- -- -- -- --
Mary A. Evslin.......... -- -- -- -- -- --
Steven J. Ott........... 175,000(/1/) 11.6 0.60 1/7/08 66,034 167,343
Bradley E. Miller....... -- -- -- -- -- --
</TABLE>
- --------
(1) These options were granted to Mr. Ott during 1998 under our 1998 Stock
Incentive Plan.
43
<PAGE>
Aggregated Option/SAR Exercises in 1998
and Year-end Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options/SARs at the-Money Options/SARs
December 31, 1998 (#) at December 31, 1998 ($)(1)
------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Tom I. Evslin........... -- --
Edward B. Jordan........ 100,000 200,000
Mary A. Evslin.......... 33,334 66,666
Steven J. Ott........... -- 175,000
Bradley E. Miller....... 33,334 66,666
</TABLE>
- --------
(1) Based upon an assumed value at December 31, 1998 of $ per share,
representing the midpoint of the estimated price range.
Between January 1, 1999 and June 10, 1999, we granted options to purchase
15,000 shares of common stock to Tom I. Evslin, options to purchase 750,000
shares of common stock to John G. Musci, options to purchase 200,000 shares of
common stock to Edward B. Jordan, options to purchase 25,000 shares of common
stock to Mary A. Evslin, options to purchase 40,000 shares of common stock to
Steven J. Ott, and options to purchase 25,000 shares of common stock to Bradley
E. Miller under our 1998 Stock Incentive Plan. Of the options granted to Mr.
Ott, options covering 25,000 shares were granted pursuant to the terms of his
offer of employment.
None of the executive officers named in the table above exercised any stock
options during 1998. Between January 1, 1999 and June 10, 1999, Edward B.
Jordan exercised options to purchase 100,000 shares of common stock, Mary A.
Evslin exercised options to purchase 33,334 shares of common stock, and Steven
J. Ott exercised options to purchase 58,334 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. Pursuant to 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 and is contingent upon ITXC's achieving certain
performance objectives before the start of the year in which the bonus is to be
paid. Mr. Evslin is eligible to receive an additional bonus under our 1999 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. 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. Pursuant to 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
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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. Pursuant to his
employment agreement, Mr. Musci received non-qualified options covering 750,000
shares of ITXC common stock at an exercise price of $1.25 per share under our
Stock Incentive Plan. 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.
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 the 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
pursuant to which:
. we issued to VocalTec Communications:
. 900,000 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 600,000 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 278,000 shares of our common stock; and
. VocalTec's preferred stock warrant was converted into a warrant to
purchase a total of 122,000 shares of our common stock.
We have assumed that VocalTec Communications will exercise all of its
warrants prior to the closing of the offerings. The exercise price is $.001 per
share, representing the par value.
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."
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<PAGE>
We also have an ongoing business relationship with VocalTec Communications.
From inception through March 31, 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.
1998 Incentive Stock Option Plan
Our 1998 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, certain executive officers, any
consultant and any other "selected person" (as determined by the Compensation
Committee) upon approval of our Compensation Committee and to any part-time or
full-time employee or officer who is not a "selected person" upon approval of
our Chief Executive Officer. On February 17, 1999, the Board approved an
amendment to our Plan to increase to 3,350,000 the number of shares reserved
for issuance under the 1998 Incentive Stock Option Plan. As of June 10, 1999,
stock options covering 546,125 shares were available for grant under the Plan,
and stock options to purchase 2,574,872 shares were outstanding with a weighted
average exercise price of $1.97 per share. As of June 10, 1999, ITXC had not
granted any incentive stock options. The per share exercise price for 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.
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 June 10, 1999, we had not issued any such stock appreciation rights.
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 a 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 the 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 at any time; provided, that no such action may
adversely affect any outstanding options without the consent of the applicable
option holder.
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.
1999 Cash Incentive Plan
We designed our 1999 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
46
<PAGE>
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, pursuant to a series of demand notes. Those 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 $5,761.64 and $931.51, 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
322,581 and 117,302 shares of common stock, respectively.
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
$1.705 per share. The following table sets forth the names of those investors
who, either directly or through an affiliate, are presently directors, officers
or five percent stockholders of ITXC, the number of shares of Series B
convertible preferred stock that such investors acquired and the aggregate
purchase price paid by such investors.
<TABLE>
<CAPTION>
Shares Total
Investor Principal Relationship to ITXC Purchased Price ($)
-------- ------------------------------ --------- ---------
<C> <S> <C> <C>
Chase Venture Capital
Associates, L.P........ See "Principal Stockholders." 1,361,290 2,321,000
Intel Corporation....... See "Principal Stockholders." 1,173,021 2,000,000
Spectrum Equity
Investors II, L.P. and Spectrum Equity Investors II, LLP 1,173,021 2,000,000
SEA 1998 II, L.P....... 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.
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
VocalTec VocalTec Communications is one of 668,622 1,140,000
Communications......... our principal stockholders. Elon
A. Ganor, the Chairman of the
Board of VocalTec, is one of our
directors.
Tom I. Evslin and Mary Chairman of the Board, Chief 322,581 550,000
A. Evslin.............. Executive Officer and President;
and Vice President, Marketing and
Customer Success
The fl@tiron Fund LLC... Frederick R. Wilson, the manager 296,188 505,000
of The fl@tiron Fund LLC, is one
of our directors.
Edward B. Jordan........ Executive Vice President and 117,302 200,000
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 $4.644 per share. The following table sets forth the names of
48
<PAGE>
those investors who, either directly or through an affiliate, are presently
directors, officers or five percent stockholders of ITXC, the number of shares
of Series C convertible preferred stock that such investors acquired and the
aggregate purchase price paid by such investors.
<TABLE>
<CAPTION>
Shares Total
Investor Principal Relationship to ITXC Purchased Price($)
-------- ------------------------------ --------- ---------
<C> <S> <C> <C>
Spectrum Equity
Investors II, L.P. and Spectrum Equity Investors II, LLP 1,173,559 5,450,008
SEA 1998 II, L.P....... 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
Intel Corporation....... See "Principal Stockholders." 484,496 2,249,999
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
The Flatiron Fund
1998/99, LLC and Frederick R. Wilson, the manager
Flatiron Associates, of The Flatiron Fund 1998/99,
LLC.................... LLC, and Flatiron Associates, LLC
is one of our directors. 223,256 1,036,801
VocalTec VocalTec Communications is one of 215,332 1,000,002
Communications......... 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.
At or prior to the closing of the offerings, each share of Series B and
Series C convertible preferred stock will automatically convert into one share
of ITXC common stock.
Third Amended Registration Rights Agreement
Each of the current holders of our Series B and Series C convertible
preferred stock, Mr. and Mrs. Evslin and Mr. Jordan, and the Company entered
into a Third 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.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock, as of April 30, 1999 and as adjusted
to reflect the sale of our common stock in the offerings, by (i) each person
known by us to beneficially own more than five percent of our outstanding
common stock, (ii) each of our directors, (iii) each executive officer named in
the Summary Compensation Table, and (iv) 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 pursuant to options or warrants exercisable within 60 days of April
30, 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 and assumes the
exercise by VocalTec Communications of warrants for 722,000 shares of common
stock.
<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........... 3,678,496(/1/)(/2/) 25.6
John G. Musci........... --(/1/) --
Edward B. Jordan........ 334,604(/1/) 2.4
Mary A. Evslin.......... 3,678,496(/1/)(/2/) 25.6
Steven J. Ott........... 58,334(/1/) * *
Bradley E. Miller....... 33,334(/1/) * *
Elon A. Ganor........... 2,783,954(/3/) 19.9
William P. Collatos..... 2,346,580(/4/) 16.8
Frederick R. Wilson..... 519,444(/5/) 3.7
All executive officers
and directors as a
group
(10 persons)........... 9,788,080 66.7
<CAPTION>
Other Beneficial Owners of 5%
or More of ITXC's Common Stock
- ------------------------------
<S> <C> <C> <C>
VocalTec Communications,
Ltd.................... 2,783,954(/3/)(/6/) 19.9
Spectrum Equity Invest-
ors II L.P............. 2,346,580(/4/)(/7/) 16.8
Chase Venture Capital
Associates, L.P........ 2,231,428(/8/) 15.9
Intel Corporation....... 1,657,517(/9/) 11.8
DS Polaris Ltd.......... 1,016,273(/10/) 7.3
</TABLE>
- --------
* Represents less than one percent.
(1) The table above includes the following number of shares which the following
persons may acquire pursuant to options held as of April 30, 1999 and
exercisable within 60 days of such date:
<TABLE>
<S> <C>
Tom I. Evslin....................................................... 33,334
John G. Musci....................................................... --
Edward B. Jordan.................................................... 100,000
Mary A. Evslin...................................................... 33,334
Steven J. Ott....................................................... 58,334
Bradley E. Miller................................................... 33,334
All executive officers and directors as a group..................... 258,336
</TABLE>
The table above excludes:
. options covering 15,000 shares of common stock which were granted to
Mr. Evslin on June 8, 1999 and which were exercisable as of the date
of grant;
50
<PAGE>
. options covering 250,000 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, Quest 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 1998 Stock Incentive Plan;
. options covering 100,000 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 1,041,664 shares of common stock
granted to Mr. Musci, Mr. Jordon and other executive officers on or
before April 30, 1999 which will not vest prior to June 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
June 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) This number represents 2,783,954 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.
(4) This number represents 2,324,500 shares of common stock beneficially owned
by Spectrum Equity Investors II, L.P. and 22,080 shares of common stock
beneficially 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.
(5) This number represents 296,188 shares of common stock beneficially owned
by The fl@tiron Fund LLC, 202,584 shares of common stock beneficially
owned by The Flatiron Fund 1998/99, LLC and 20,672 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.
(6) The principal business address of VocalTec Communications is 25 Industrial
Parkway, Northvale, New Jersey 07647.
(7) The principal business address of Spectrum Equity Investors II, L.P. is
One International Place, Boston, Massachusetts 02110.
(8) The principal business address of Chase Venture Capital Associates, L.P.
is 380 Madison Avenue, New York, New York 10017.
(9) The principal business address of Intel Corporation is 2200 Mission
College Boulevard, Santa Clara, California 95052.
(10) This number represents 19,709 shares of common stock beneficially owned by
DS Polaris Ltd., 369,464 shares of common stock beneficially owned by
Polaris Fund II (Tax Exempt Investors), LLC, 243,846 shares of common
stock beneficially owned by Polaris Fund II, LLC, 92,366 shares of common
stock beneficially owned by Polaris Fund II, L.P., 217,056 shares of
common stock beneficially owned by DS Polaris Trust Company (foreign
residents) (1997), Ltd. and 74,832 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 Shaun Hamelech Avenue, Tel Aviv, Israel.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms and provisions of our capital stock is
not complete and is qualified in its entirety by reference 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.
As of June 10, 1999, our authorized capital stock consisted of 22,500,000
shares of common stock, par value $.001 per share, and 15,000,000 shares of
preferred stock, par value $.001 per share. On that date, our outstanding
capital stock consisted of 4,419,503 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 June 10, 1999. In addition, the following shares of common
stock were reserved for issuance on that date:
. 5,865,104 shares were reserved for issuance upon conversion of our
Series B convertible preferred stock;
. 3,229,975 shares were reserved for issuance upon conversion of our
Series C convertible preferred stock;
. 722,000 shares were reserved for issuance upon the exercise of warrants
held by VocalTec Communications at an exercise price of $.001 per share;
. 439,883 shares were reserved for issuance upon the exercise of warrants
held by Tom Evslin and Edward B. Jordan at an exercise price of $1.705
per share;
. 2,574,872 shares were reserved for issuance upon exercise of outstanding
stock options granted under our 1998 Stock Incentive Plan; and
. 546,125 shares were reserved for issuance upon the exercise of stock
options or other benefits which may be granted under our 1998 Stock
Incentive 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 one share of our common stock. Furthermore, we expect that
VocalTec Communications will exercise its warrants covering 722,000 shares of
our common stock at or before the closing of the offerings, since such warrants
would otherwise expire upon the closing of the offerings. Upon the closing of
the offerings, our authorized capital stock will consist of shares of
common stock, par value $.001 per share, and shares of preferred stock,
par value $.001 per share, and we will have shares of common stock
outstanding. Also, in connection with the offerings, we intend to amend and
restate our certificate of incorporation and by-laws. 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."
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 further call or assessment.
52
<PAGE>
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
Pursuant to our Third Amended Registration Rights Agreement, certain of our
stockholders have the right, under certain circumstances and subject to certain
conditions, to request that we 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 Third Amended 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, pursuant to 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
pursuant to the buy-out provisions of our joint venture agreement.
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 a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless (with
certain exceptions) the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock.
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 also 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
53
<PAGE>
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 .
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the offerings, we will have shares of common
stock issued and outstanding. All of the 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 that term 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, we will have 14,236,582 shares of common stock
outstanding which will be "restricted securities" as that term 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. See "Risk Factors."
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, 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 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 14,224,082 shares of
common stock, have agreed, pursuant to lock-up agreements, that they will not,
for a period of 180 days after the date of this prospectus, subject to certain
limited exceptions, without the prior written consent of Lehman Brothers Inc.,
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.
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, pursuant to 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 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 (1) by persons other than
affiliates, subject only to the manner of sale provisions set forth in Rule
144, and (2) 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 of 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 "Risk Factors" and
"Underwriting."
55
<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 (as defined below) as of the date hereof. 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 the Internal Revenue Code
of 1986, as amended (the "Code"), 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, a "U.S. Holder" means a holder of ITXC common stock that is
(i) 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), (ii) 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, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source and (iv) a trust (X) 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 Code or (Y) that has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a domestic trust. A "Non-
U.S. Holder" is a holder of ITXC common stock that is not a U.S. Holder.
Dividends
Dividends paid to a Non-U.S. Holder of ITXC common stock generally will be
subject to withholding of United States 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 for such "effectively connected income"
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 (the "Final
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 as
discussed below) 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 pursuant to 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 (the "IRS").
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 (i) the gain is effectively connected
56
<PAGE>
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, (ii) 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 (iii)
ITXC is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes.
An individual Non-U.S. Holder described in clause (i) 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 (ii) 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 (i) 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 Code for the taxable year, as adjusted for certain items, unless
it qualifies for a lower rate under an applicable income tax treaty.
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 "controlled
foreign corporations", "passive foreign investment companies" and "foreign
personal holding companies", that are subject to special treatment under the
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.
Under current law, 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). Under
the Final Regulations, 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
57
<PAGE>
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 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 (1) 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 (2) 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.
58
<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...............................................................
===
<CAPTION>
Number
International Underwriters of shares
-------------------------- ---------
<S> <C>
Lehman Brothers International (Europe)............................
CIBC World Markets International Limited..........................
First Analysis Securities Corporation.............................
---
Total...............................................................
===
</TABLE>
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 closing of the U.S. offering is a condition to the closing of
the international offering and the closing of the international offering is a
condition to the closing of the U.S. offering.
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 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
59
<PAGE>
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 without the prior written approval of the customer.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares of our
common stock at the public offering price less the underwriting discount. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, in connection with the offerings. To the extent this 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; and
. the common stock to be issued concurrent with the closings upon the
mandatory conversion of our outstanding preferred stock; and
. shares of common stock we issue pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or pursuant to currently
outstanding options, warrants or rights;
(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 pursuant to option plans existing on the date hereof; and
(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, pursuant
to 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 U.S. Person (as defined below); and
. it has not offered or sold, 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, pursuant to 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.
60
<PAGE>
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.
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 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.
We have applied to list our common stock on the Nasdaq National Market
under the symbol "ITXC".
Any offer of the shares of common stock in Canada will be made only
pursuant to 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 been 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
61
<PAGE>
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.
Pursuant to 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 mutual agreement. To the extent that there are sales between the
U.S. underwriters and the international underwriters pursuant to 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.
62
<PAGE>
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.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for the period from
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 Securities and Exchange Commission 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 Securities and
Exchange Commission. 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. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement or such other document, each such statement being
qualified in all respects by such reference.
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 Securities and Exchange
Commission. 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 Securities and
Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW,
Washington, D.C. 20549, and at the Securities and Exchange Commission'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 Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
63
<PAGE>
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 March 31,
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 quarters ended March 31, 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 quarter ended March 31, 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 quarters ended March 31, 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 as to which the date
is February 24, 1999
F-2
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro forma
stockholders'
equity
December 31 March 31, March 31,
1997 1998 1999 1999
--------- ---------- ----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.............. $ 497,877 $3,971,237 $16,509,233
Short-term investments-
restricted............... -- 200,000 200,000
Accounts receivable, net
of allowance of $172,475
in 1998 and $205,693 in
1999..................... -- 500,739 769,103
Prepaid expenses and other
current assets........... 18,846 121,459 266,692
--------- ---------- -----------
Total current assets........ 516,723 4,793,435 17,745,028
Property and equipment,
net........................ 278,420 3,015,529 4,245,508
Deposits.................... -- 24,833 24,621
--------- ---------- -----------
Total assets................ $ 795,143 $7,833,797 $22,015,157
========= ========== ===========
Liabilities, mandatorily
redeemable convertible
preferred stock and
stockholders' equity
(deficit)
Current liabilities:
Accounts payable.......... $ 167,261 $ 831,275 $ 2,618,290
Accrued liabilities and
other current
liabilities.............. 135,000 786,043 1,129,925
Deferred revenue.......... -- 800,000 200,000
Customer deposits......... -- 142,500 201,914
Current portion of capital
lease obligations........ -- 76,705 76,705
--------- ---------- -----------
Total current liabilities... 302,261 2,636,523 4,226,828
Equipment note payable...... -- 1,200,000 1,723,191
Capital lease obligations,
less current portion....... -- 160,368 136,509
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 9,872,054 --
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................. -- -- 15,039,699 --
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
22,500,000 shares; issued
and outstanding, 3,900,000
shares in 1997; 4,190,500
shares in 1998 and 1999;
and pro forma 14,007,579
shares ................... 3,900 4,191 4,191 $ 14,008
Additional paid-in
capital................... 1,451,722 1,447,217 3,649,948 28,552,606
Software credit
subscription.............. (757,000) -- -- --
Deferred employee
compensation.............. -- -- (2,212,493) (2,212,493)
Subscription receivable.... (900) -- -- --
Accumulated deficit........ (205,118) (7,481,225) (10,424,770) (10,424,770)
--------- ---------- ----------- -----------
Total stockholders' equity
(deficit).................. 492,882 (6,029,817) (8,983,124) $15,929,351
========= ========== =========== ===========
Total liabilities,
mandatorily redeemable
convertible preferred stock
and stockholders' equity
(deficit).................. $ 795,143 $7,833,797 $22,015,157
========= ========== ===========
</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 Three months
December 31, December 31, ended March 31,
1997 1998 1998 1999
------------- ------------ --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Telecommunications
revenue................ $ -- $ 1,238,008 $ -- $ 2,429,413
Consulting revenue...... 500,000 300,000 300,000 600,000
---------- ----------- --------- -----------
Total revenue............. 500,000 1,538,008 300,000 3,029,413
Costs and expenses:
Data communications and
telecommunications..... -- 2,016,757 -- 2,528,183
Cost of consulting
revenue................ -- 192,203 30,000 --
Network operations...... -- 1,320,587 166,781 546,312
Sales and marketing..... 349,100 2,517,752 374,580 1,008,506
Development............. -- 594,104 53,583 182,554
General and
administrative......... 351,774 2,009,088 287,110 1,367,072
Depreciation and
amortization........... 5,000 344,587 18,551 278,136
Non-cash employee
compensation........... -- -- -- 103,684
---------- ----------- --------- -----------
Total costs and expenses.. 705,874 8,995,078 930,605 6,014,447
---------- ----------- --------- -----------
Loss from operations...... (205,874) (7,457,070) (630,605) (2,985,034)
Interest income........... 756 230,538 -- 68,778
Interest expense.......... -- (49,575) -- (27,289)
---------- ----------- --------- -----------
Net loss.................. (205,118) (7,276,107) (630,605) (2,943,545)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock.......... (14,217) (113,446)
---------- ----------- --------- -----------
Net loss applicable to
common stockholders...... $ (205,118) $(7,290,324) $(630,605) $(3,056,991)
========== =========== ========= ===========
Basic and diluted net loss
per share applicable to
common stockholders...... $ (0.06) $ (1.78) $ (0.16) $ (0.73)
========== =========== ========= ===========
Weighted average shares
used in computation of
basic and diluted net
loss per share applicable
to common stockholders... 3,502,454 4,092,278 3,900,000 4,190,500
Pro forma basic and
diluted net loss per
share (unaudited)........ $ (0.83) $ (0.24)
=========== ===========
Weighted average shares
used in computation of
pro forma basic and
diluted net loss per
share (unaudited)........ 8,799,335 12,033,705
</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 March 31, 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... -- -- 3,900,000 $3,900 $ 27,000 $ -- -- (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........ -- -- -- -- -- -- -- -- $ (205,118)
----------- -------- --------- ------ ---------- ----------- ----------- ----- ------------
Balance, December
31, 1997........ 278,000 278 3,900,000 3,900 1,451,722 (757,000) -- (900) (205,118)
Conversion of
Series A Stock
and Preferred
Warrant to
Common Stock... (278,000) (278) 278,000 278 -- -- -- -- --
Repayment of
subscription
receivable..... -- -- -- -- (900) -- -- 900 --
Issuance of
Common Stock
for services... -- -- 12,500 13 10,612 -- -- -- --
Utilization of
software
credit......... -- -- -- -- -- 757,000 -- -- --
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- (14,217) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (7,276,107)
----------- -------- --------- ------ ---------- ----------- ----------- ----- ------------
Balance, December
31, 1998........ -- -- 4,190,500 4,191 1,447,217 -- -- -- (7,481,225)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred stock
(unaudited).... -- -- -- -- (113,446) -- -- -- --
Deferred non-
cash employee
compensation
(unaudited).... -- -- -- -- 2,316,177 -- (2,316,177) -- --
Amortization of
non-cash
deferred
employee
compensation
(unaudited).... -- -- -- -- -- -- 103,684 -- --
Net loss
(unaudited).... -- -- -- -- -- -- -- -- (2,943,545)
----------- -------- --------- ------ ---------- ----------- ----------- ----- ------------
Balance, March
31, 1999
(unaudited)..... -- $ -- 4,190,500 $4,191 $3,649,948 $ -- $(2,212,493) $ -- $(10,424,770)
=========== ======== ========= ====== ========== =========== =========== ===== ============
<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........ (205,118)
------------
Balance, December
31, 1997........ 492,882
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)
Net loss........ (7,276,107)
------------
Balance, December
31, 1998........ (6,029,817)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred stock
(unaudited).... (113,446)
Deferred non-
cash employee
compensation
(unaudited).... --
Amortization of
non-cash
deferred
employee
compensation
(unaudited).... 103,684
Net loss
(unaudited).... (2,943,545)
------------
Balance, March
31, 1999
(unaudited)..... $(8,983,124)
============
</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 Three months ended
inception) to Year ended March 31,
December 31, December 31, ----------------------
1997 1998 1998 1999
------------- ------------ --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss.................. $(205,118) $(7,276,107) $(630,605) $(2,943,545)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 5,000 344,587 18,551 278,136
Provision for doubtful
accounts............... -- 172,475 -- 312,294
Amortization of non-cash
deferred employee
compensation........... -- -- -- 103,684
Issuance of common stock
for service............ -- 10,625 -- --
Changes in operating
assets and liabilities:
Increase in accounts
receivable........... -- (673,214) -- (580,657)
Increase in prepaid
expenses and other
assets............... (18,846) (127,446) (39,112) (145,021)
Increase in accounts
payable and accrued
expenses............. 302,261 1,315,057 335,931 2,130,891
Increase (decrease) in
customer deposits and
deferred revenue..... -- 942,500 -- (540,586)
--------- ----------- --------- -----------
Net cash provided by (used
in) operating
activities............... 83,297 (5,291,523) (315,235) (1,384,804)
Investing activities
Purchase of property and
equipment................ (40,420) (2,073,696) (448,214) (1,508,116)
Purchase of short-term
investments.............. -- (200,000) -- --
--------- ----------- --------- -----------
Net cash used in investing
activities............... (40,420) (2,273,696) (448,214) (1,508,116)
Financing activities
Proceeds from equipment
line of credit........... -- 1,200,000 -- 523,191
Proceeds from stockholder
note..................... -- 750,000 300,000 --
Repayment of capital lease
obligations.............. -- (13,927) -- (23,859)
Issuance of common stock.. 30,000 900 -- --
Issuance of convertible
preferred stock.......... 425,000 9,101,606 -- 14,931,584
--------- ----------- --------- -----------
Net cash provided by
financing activities..... 455,000 11,038,579 300,000 15,430,916
--------- ----------- --------- -----------
Increase (decrease) in
cash..................... 497,877 3,473,360 (463,449) 12,537,996
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 $ 34,428 $16,509,233
========= =========== ========= ===========
Supplemental disclosures
of cash flow information
Cash paid for interest.... -- $ 36,446 -- $ 27,289
========= =========== ========= ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, December 31, 1998 and March 31, 1999
(All information as of March 31, 1999 and for the three month periods ended
March 31, 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 research 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, for consideration of
$1.47 million to be paid in the form of credit against future royalties, which
will provide exchange carrier long-distance services in Brazil. No investment
has been recorded by the Company as no consideration has been paid.
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.
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.
F-7
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
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 represent 74% of 1998 total revenue and three
customers represent 59% of total revenue for the three months ended March 31,
1999. Accounts receivable from these customers were approximately $417,800 and
$448,500 at December 31, 1998 and March 31, 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 revenue under a market trial research agreement.
At December 31, 1998 and March 31, 1999, $800,000 and $200,000,
respectively, of revenue has been deferred in connection with this market
trial research agreement.
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>
Revenue Recognition
The Company recognizes carrier revenue and the related costs at the time the
services are rendered. The Company recognizes consulting revenue under its
research and development contract as certain milestones are attained and cash
collections are assured, as specified in the contract.
Advertising
Advertising costs are expensed as incurred. During 1997, 1998 and the three
month periods ended March 31, 1998 and 1999, the Company expensed
approximately $14,000, $119,000, $59,000 and $11,000, 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.
F-8
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
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 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.
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 development 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, 1999. 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.
Interim Financial Statements
The accompanying unaudited interim financial statements as of March 31, 1999
and for each of the three month periods ended March 31, 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 three months
ended March 31, 1998 and 1999 are not necessarily indicative of the results of
operations for a full fiscal year.
F-9
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Accounts Receivable
The Company did not write-off any accounts receivable during 1997, 1998 and
the three months ended March 31, 1998. The Company wrote-off approximately
$279,000 of accounts receivable during the three month period ended March 31,
1999.
4. Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1997 1998 1999
-------- ---------- -----------
(Unaudited)
<S> <C> <C> <C>
Network equipment and software................ $243,000 $1,955,887 $3,200,677
Furniture, fixtures and office equipment...... 40,420 1,147,946 1,411,271
Leasehold improvements........................ -- 261,283 261,283
-------- ---------- ----------
283,420 3,365,116 4,873,231
Less accumulated depreciation and
amortization................................. 5,000 349,587 627,723
-------- ---------- ----------
$278,420 $3,015,529 $4,245,508
======== ========== ==========
</TABLE>
Equipment under capital leases totaled approximately $251,000 at December
31, 1998 and March 31, 1999. Included in accumulated depreciation is
approximately $14,000 and $35,000 related to such assets at December 31, 1998
and March 31, 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 March 31, 1999, $733,000 and $330,000, respectively, of software
has not been deployed into operations; accordingly, depreciation of this
software will commence when it is placed into operations.
5. Accrued Expenses
Accrued liabilities and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
-------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Compensation...................................... $ 31,095 $262,807 $ 657,926
Accrued contract costs............................ -- 300,000 --
Professional fees................................. 36,500 -- --
Repairs and maintenance costs..................... 16,000 -- --
Other............................................. 51,405 223,236 471,999
-------- -------- ----------
$135,000 $786,043 $1,129,925
======== ======== ==========
</TABLE>
F-10
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
Due to operating losses, the Company has no income tax liability for 1997,
1998 or the three months ended March 31, 1999.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997 and 1998 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
-------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........... $ 66,632 $ 2,836,880 $ 3,711,637
Other..................................... 13,971 189,754 367,110
-------- ----------- -----------
80,603 3,026,634 4,078,747
Less valuation allowance.................... (80,603) (2,968,677) (4,020,877)
-------- ----------- -----------
Deferred tax asset.......................... -- 57,957 57,870
Deferred tax liabilities:
Fixed assets.............................. -- (57,957) (57,870)
-------- ----------- -----------
Net deferred tax asset...................... $ -- $ -- $ --
======== =========== ===========
</TABLE>
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, March 31,
----------------------------------- -----------------------------------
1997 1998 1998 1999
--------------- ------------------ ---------------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax (benefit) at 34%... $(69,740) 34.0% $(2,473,876) 34.0% $(214,406) 34.0% $ (963,662) 34.0%
State income tax
(benefit), net of
federal benefit........ (12,184) 5.9 (413,307) 5.6 (35,282) 5.6 (141,570) 5.0
Nondeductible expenses.. -- -- 7,750 (0.1) 1,534 (0.2) 2,350 (0.1)
Other................... 1,321 (0.6) (8,641) 0.2 (20,083) 3.2 50,682 1.8
Increase in valuation
allowance.............. 80,603 (39.3) 2,888,074 (39.7) 268,237 (42.6) 1,052,200 (37.1)
-------- ----- ----------- ----- --------- ----- ---------- -----
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 March 31, 1999 have been reduced by a valuation allowance of $80,603,
$2,968,677, and $4,020,877, respectively, due to the uncertainty regarding the
realization of such deferred tax assets.
F-11
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
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-12
<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,
$26,000 and $80,000 in 1997 and 1998 and in the three month periods ended
March 31, 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 3,000,000 shares of Common Stock to its
founder and president for $30,000.
On October 1, 1997, the Company issued 900,000 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 600,000
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 an equal number of shares of Common Stock and the
Preferred Warrant was converted into a warrant to purchase an equal number of
shares of Common Stock. Such warrants and the warrant to purchase 600,000
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.
On November 18, 1997, the Company issued a warrant to purchase up to
1,900,000 shares of Common Stock, with an exercise price of $2.63 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.
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 one share 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 $11.61 (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.
F-13
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Capital Stock (continued)
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
439,883 shares of Common Stock with an exercise price of $1.705 per share. The
warrants are exercisable at any time prior to April 30, 2008. The fair value
of these warrants was determined to be de minimis at the date of the grant.
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.
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................................ 2,200,000
Exercise of common stock warrants............................... 1,161,883
Conversion of Series B Stock.................................... 5,865,104
</TABLE>
F-14
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Capital Stock (continued)
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 3,350,000 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 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...... -- -- 799,170 $0.11
Options granted......... 799,170 $0.11 758,955 0.70
Options cancelled....... -- -- (237,500) (.29)
------- ----- --------- -----
Options outstanding, end
of year................ 799,170 $0.11 1,320,625 $0.42
======= ===== ========= =====
</TABLE>
The weighted-average fair value of options granted in 1997 and 1998 was $.03
and $.16, 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>
$.01-$.16 575,000 8.7 years $ .06 191,667 $.06
.52-.60 441,000 9.1 years .59 18,333 .52
.85 304,625 9.2 years .85 -- --
--------- -------
$.01-$.85 1,320,625 $ .42 210,000 $.10
========= ========= ===== ======= ====
</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 the three month period ended March 31, 1999 the Company granted
options to employees to purchase an aggregate of 1,047,875 shares of common
stock at exercise prices ranging from $1.25 to $2.32. 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 non-cash compensation of
approximately $2.3 million which will be amortized to expense over the options
vesting periods, generally three to seven years.
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).
F-15
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Earnings (Loss) Per Share (continued)
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 three months ended March 31, 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 one-for-one basis as adjusted for any stock splits, 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, and the assumed exercise of certain warrants to
purchase 722,000 shares of common stock at $.001 per share.
The unaudited pro forma information gives effect to a conversion price of
$1.705 for Series B Stock and $4.644 for Series C Stock. The actual conversion
price may be different upon actual conversion.
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 and the exercise of warrants to purchase 722,000 shares of
Common Stock, as if they had been exercised on the date of issuance, even
though the result is antidilutive.
F-16
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Unaudited Pro Forma Information (continued)
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 March 31, 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.. $(7,290,324) 4,092,278 $(1.78) $(3,056,991) 4,190,500 $(0.73)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock........ 14,217 -- -- 113,446 -- --
Assumed conversion of
shares of mandatorily
redeemable convertible
preferred stock into
shares of common stock
at issuance............ -- 3,985,057 -- -- 7,121,205 --
Assumed exercise of
warrants for shares of
common stock at
issuance............... -- 722,000 -- -- 722,000 --
----------- --------- ------ ----------- ---------- ------
Pro forma basic and
diluted net loss per
common share........... $(7,276,107) 8,799,335 $(0.83) $(2,943,545) 12,033,705 $(0.24)
=========== ========= ====== =========== ========== ======
</TABLE>
F-17
<PAGE>
Shares
[Logo]
ITXC Corp.
Common Stock
-------------------------------------
PROSPECTUS
, 1999
-------------------------------------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
<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 June 10, 1999
PROSPECTUS
Shares
[Logo]
ITXC Corp.
Common Stock
-------------
This is our initial public offering of shares of common stock. We are
offering shares. Of the shares being offered, we are offering
shares outside the United States and Canada and shares in the United
States and Canada. The public offering price and underwriting discount are
identical for both the international offering and the U.S. offering. The
closing of the U.S. offering is a condition to the closing of the international
offering.
We expect the public offering price to be between $ and $ per share. No
public market currently exists for our shares.
We have applied to list the shares on the Nasdaq National Market under the
symbol "ITXC".
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 international underwriters a 30-day option to purchase up
to 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, on behalf of the international underwriters, expects to
deliver the shares on or about , 1999.
-------------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
, 1999
<PAGE>
Shares
[Logo]
ITXC Corp.
Common Stock
-------------------------------------
PROSPECTUS
, 1999
-------------------------------------
Lehman Brothers
CIBC World Markets
First Analysis Securities Corporation
<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............................................. $23,978
NASD filing fee.................................................. 9,125
Nasdaq listing fee............................................... 95,000
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Transfer agent and registrar fees................................ *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be completed by amendments
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. 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."
II-1
<PAGE>
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,
3,000,000 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 900,000 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, warrants
covering 122,000 shares of such Series A convertible preferred stock (which
have been converted into warrants to purchase 122,000 shares of common stock)
and warrants covering 600,000 shares of common stock (exercisable subject, in
part, to ITXC's utilization of software credits) in exchange for $500,000 in
cash, $1.0 million of software credits to purchase VocalTec equipment and the
rights to certain information regarding VocalTec Communications' business. 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 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 continue to be subject to restrictive
legends.
On September 23, 1998, ITXC issued 12,500 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
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 the shares continue 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 322,581 shares of common stock
and 117,302 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 June 10, 1999, ITXC granted to certain of its
officers, directors and employees options to purchase up to an aggregate of
2,803,875 shares of common stock. Options to purchase 229,003 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.
II-2
<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*
4.1 Third Amended and Restated Registration Rights Agreement, dated February
24, 1999
5.1 Opinion of Lowenstein Sandler PC*
10.1 Second 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
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst &Young LLP
23.2 Consent of Lowenstein Sandler PC (to be included in Exhibit 5.1)
24.1 Powers of Attorney
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules: Not applicable
II-3
<PAGE>
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 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Princeton, State of New
Jersey, on June 10, 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
Registration Statement has been signed by the following persons in the
capacities indicated on this 10th day of June, 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>
/s/ Edward B. Jordan
*By: ____________________________
Edward B. Jordan
Attorney-in-Fact
II-5
<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*
4.1 Third Amended and Restated Registration Rights Agreement, dated February
24, 1999
5.1 Opinion of Lowenstein Sandler PC*
10.1 Second 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
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst &Young LLP
23.2 Consent of Lowenstein Sandler PC (to be included in Exhibit 5.1)
24.1 Powers of Attorney
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
ITXC CORP.
ITXC Corp. (the "Corporation"), a Delaware corporation, hereby certifies as
follows:
1. The name of the Corporation is ITXC Corp.
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.
3. This second restated certificate of incorporation of the Corporation
has been duly adopted in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the written consent, in accordance
with Section 228 of the General Corporation Law, of the holders of a majority of
the outstanding stock entitled to vote thereon and a majority of the outstanding
stock of each class entitled to vote thereon as a class.
4. This restated certificate of incorporation amends, restates and
integrates the provisions of the certificate of incorporation of the
Corporation.
5. The text of the certificate of incorporation of the Corporation is
hereby amended, restated and integrated to read in its entirety as follows:
FIRST: The name of the Corporation is ITXC Corp. (the "Corporation").
-----
SECOND: The registered office of the Corporation is to be located at 9
------
East Loockerman Street, in the City of Dover, in the County of Kent, in the
State of Delaware. The name of its registered agent at that address is National
Registered Agents, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
------
have authority to issue is Thirty Seven Million Five Hundred Thousand
(37,500,000) shares, of which Twenty Two Million Five Hundred Thousand
(22,500,000) 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
<PAGE>
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 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.
FIFTH:
-----
1. Designation and Amount. There is established a series of Preferred
Stock which is designated as "Convertible Preferred Stock." The number of
shares constituting such series shall be Four Hundred Thousand (400,000), with a
par value of $.001 per share. The relative rights, preferences, restrictions
and other matters relating to the Convertible Preferred Stock are contained in
this Article Fifth of this restated certificate of incorporation. The
outstanding shares of this Series have been retired.
2. Definitions. As used in this Article Fifth of this restated
certificate of incorporation, the following terms shall have the following
meanings:
(a) "Automatic Conversion Event" means the earlier of any of the
following events on or prior to October 1, 1998: (i) written
notice of conversion to the Corporation by a Holder; (ii) the
initial public offering of the Corporation's securities; and
(iii) the closing, or a series of closings, of equity investments
in the Corporation of at least Ten Million ($10,000,000) Dollars.
(b) "Board of Directors" means the board of directors of the
Corporation.
(c) "Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in the City of New York, New
York are authorized or obligated by law or executive order to
close.
(d) "Capital Stock" means any and all shares, rights to purchase,
warrants, options, convertible securities, participations in or
other equivalents of or interests (other than security interests)
in (however designated and whether voting or nonvoting) corporate
stock.
(e) "Common Stock" means the Common Stock, $.001 par value per share,
and all shares hereafter authorized of any class of common
- 2 -
<PAGE>
stock of the Corporation, and, in the case of a reclassification,
recapitalization or other similar change in such Common Stock or
in the case of a consolidation or merger of the Corporation with
or into another Person, such capital stock to which a holder of a
share of Common Stock would have been entitled upon the
occurrence of such event.
(f) "Conversion Rate" has the meaning set forth in section 5(a)
hereof.
(g) "Convertible Preferred Stock" means the Convertible Preferred
Stock of the Corporation, $.001 par value per share, established
pursuant to this Article Fifth of this restated certificate of
incorporation.
(h) "Holder" of a share of Convertible Preferred Stock means the
Person in whose name such share of Convertible Preferred Stock is
registered on the books of the Corporation.
(i) "Person" means an individual, a corporation, a partnership, a
joint venture, an association, a joint-stock company, a trust, a
business trust, a government or any agency or any political
subdivision, any unincorporated organization, or any other
entity.
3. Liquidation Preference.
(a) (i) In the event of any liquidation, dissolution or winding up of
the Corporation under applicable Delaware law, the Holders of the
Convertible Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or
funds of the Corporation to the holders of Common Stock, an
amount per share of $1.25 (as adjusted for any share dividends,
combinations or subdivision with respect to such shares of
Convertible Preferred Stock) for each share of Convertible
Preferred Stock.
(ii) Prior to the distribution of assets to holders of Common
Stock as a result of any liquidation, dissolution or winding up
of the Corporation (including, without limitation, as a result of
the sale of the assets of the Corporation), the Holders of
Convertible Preferred Stock shall be entitled to convert the
shares of Convertible Preferred Stock to Common Stock pursuant to
the provisions of Section 5 below.
(iii) If the assets and funds thus distributed among the Holders
of the Convertible Preferred Stock shall be insufficient to
permit the payment to such Holders of the full aforesaid
preferential amount set
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forth in subsection (i) above, then the entire assets and funds
of the Corporation legally available for distribution to
shareholders shall be distributed pro rata among the Holders of
the Convertible Preferred Stock in proportion to the preferential
amount each such holder is otherwise entitled to receive.
(b) After payment to the Holders of the Convertible Preferred Stock
of the amounts set forth in subsection 3(a) above, the remaining
assets and funds of the Corporation legally available for
distribution to shareholders, if any, shall be distributed pro
rata to the holders of Common Stock, in proportion to their
respective shareholdings in the Corporation.
(c) Whenever the distribution provided for in this Section 3 shall be
payable in securities or property other than cash, the value of
such distribution shall be the fair market value of such
securities or property as determined in good faith by the Board
of Directors, or by the liquidator, if applicable, in the case of
any liquidation, dissolution or winding up.
4. Voting Rights of Convertible Preferred Stock
(a) Except as set forth in this Article Fifth of this restated
certificate of incorporation or as otherwise required by law,
Holders of shares of Convertible Preferred Stock shall be
entitled to vote together with the holders of shares of Common
Stock as if the Convertible Preferred Stock and Common Stock were
a single class on all matters submitted for a vote of
stockholders, and shall be entitled to notice of all
stockholders' meetings and to act by written consent in the same
manner as the holders of Common Stock. Each share of Convertible
Preferred Stock shall entitle the Holder thereof to such number
of votes per share as shall equal the number of shares of Common
Stock into which such share of Convertible Preferred Stock is
then convertible or would then be convertible if such conversion
had occurred immediately prior to the taking of such vote. Any
shares of Convertible Preferred Stock owned, directly or
indirectly, by the Corporation or any of its subsidiaries shall
not have voting rights hereunder and shall not be counted in
determining the presence of a quorum.
(b) The foregoing voting provisions shall not apply if, at or prior
to the time when the action with respect to which such vote would
otherwise be required to be effected, all outstanding shares of
Convertible Preferred Stock shall have been converted into Common
Stock.
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5. Conversion
(a) Automatic and Voluntary Conversion; Conversion Rate. (i) From
October 1, 1997 until October 1, 1998, subject to the terms and
conditions in this Article Fifth of this restated certificate of
incorporation and to the adjustment as specified below, the
Holders of Convertible Preferred Stock (A) have the right at any
time upon written request to convert Convertible Preferred Stock
into Common Stock and (B) shall automatically have their
Convertible Preferred Stock converted upon an Automatic
Conversion Event, such that each one (1) share of Convertible
Preferred Stock shall be converted to one (1) share of Common
Stock (the number of shares of Common Stock to be received by
converting one (1) share of Convertible Preferred Stock being the
"Conversion Rate").
(ii) In the event that shares of the Convertible Preferred Stock
are not converted into Common Stock on or prior to October 1,
1998, the Corporation shall exchange all outstanding shares of
the Convertible Preferred Stock for a promissory note in the
principal amount determined by multiplying the number of such
outstanding shares of the Convertible Preferred Stock by $1.25,
payable on October 1, 1999 together with interest at a rate of 6%
per annum from the date of issuance to the date of payment. The
promissory note shall also have such other customary terms and
conditions and shall be prepayable at anytime without penalty.
(b) Adjustments to Conversion Rate. The Conversion Rate shall be
subject to adjustment in the following cases:
(i) In the event the Corporation shall at any time change as a
whole, by subdivision or combination in any manner or by the
issuance of a share dividend, the number of shares of Common
Stock then outstanding into a different number of shares, then
thereafter the number of shares of Common Stock issuable upon the
conversion of Convertible Preferred Stock shall be increased or
decreased, as the case may be, in direct proportion to the
increase or decrease in the number of shares of Common Stock by
reason of such change; provided, however, that no adjustment in
the Conversion Rate shall be made hereunder in either of the
following cases: (i) a share dividend on the Common Stock where
the identical share dividend in shares of Common Stock was paid
also on the Convertible Preferred Stock, or (ii) a subdivision or
combination of the Common Stock where the identical subdivision
or combination was made pro rata also in respect of the
Convertible Preferred Stock.
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(ii) In the event of any capital reorganization, or of any
reclassification of the share capital of the Corporation or in
case of the consolidation or merger of the Corporation with or
into any other corporation (other than a consolidation or merger
in which the Corporation is the continuing corporation and which
does not result in any change in the Common Stock), each share of
Convertible Preferred Stock shall after such capital
reorganization, reclassification of share capital, consolidation
or merger of the Corporation, shall entitle the holder to obtain
the kind and number of shares of Common Stock or other securities
or property of the Corporation, or of the Corporation resulting
from such consolidation or surviving such merger, as the case may
be, to which such holder would have been entitled if he had held
the Common Stock issuable upon conversion of such Convertible
Preferred Stock immediately prior to such capital reorganization,
reclassification of capital stock, consolidation or merger.
(c) Reservation of Shares; Shares to be Fully Paid and Nonassessable.
The Corporation shall reserve, free from preemptive rights, out
of its authorized but unissued shares, or out of shares held in
its treasury, sufficient shares of Common Stock to provide for
the conversion of all shares of Convertible Preferred Stock from
time to time outstanding. The Corporation covenants that all
shares of Common Stock which may be issued upon conversion of
shares of Convertible Preferred Stock will upon issuance be fully
paid and nonassessable by the Corporation and free from all liens
and charges with respect to the issuance thereof and the
Corporation shall pay all transfer taxes, if any, arising out of
the issuance thereof.
6. Replacement of Certificates. If any mutilated certificate representing
shares of Convertible Preferred Stock is surrendered to the Corporation, or if a
Holder claims the certificate representing shares of Convertible Preferred Stock
has been lost, destroyed or willfully taken, the Corporation shall issue a
replacement certificate of like tenor and date if:
(i) the Holder provides an indemnity bond or other security
sufficient, in the reasonable judgment of the Corporation, to
protect the Corporation and any authenticating agent and any of
their officers, directors, employees or representatives from any
loss which any of them may suffer if a certificate representing
shares of Convertible Preferred Stock is replaced, and
(ii) the Holder satisfies any other reasonable requirements of the
Corporation.
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<PAGE>
7. Reacquired Shares. Any shares of Convertible Preferred Stock which are
converted, purchased or otherwise acquired by the Corporation, shall be retired
and canceled by the Corporation promptly thereafter. No such shares shall upon
their cancellation be reissued.
SIXTH:
-----
1. Designation and Amount. There is established a series of Preferred
Stock which is designated as "Series B Convertible Preferred Stock." The number
of shares constituting such series shall be 5,865,104 shares, with a par value
of $.001 per share. The relative rights, preferences, restrictions and other
matters relating to the Series B Convertible Preferred Stock are contained in
this Article Sixth of this second restated certificate of incorporation.
2. Voting.
2A. General. Except as may be otherwise provided in this Article
-------
Sixth of this restated certificate of incorporation or by law, the Series B
Convertible Preferred Stock shall vote together with all other classes and
series of stock of the Corporation as a single class on all actions to be taken
by the stockholders of the Corporation, including, but not limited to, actions
amending the Certificate of Incorporation of the Corporation to increase the
number of authorized shares of Common Stock. Each share of Series B Convertible
Preferred Stock shall entitle the holder thereof to such number of votes per
share on each action on which the Series B Convertible Preferred Stock shall
vote as shall equal the number of shares of Common Stock (including fractions of
a share) into which each share of Series B Convertible Preferred Stock is then
convertible.
2B. Board Size. The entire Board of Directors of the Corporation
----------
shall consist of seven members. In addition to any other requirement applicable
to the amendment of the Corporation's Certificate of Incorporation, the first
sentence of this Section 2B shall not be amended to increase the maximum number
of directors constituting the Board of Directors to a number in excess of seven
without the written consent or affirmative vote of the holders of a majority of
the then outstanding shares of "Director Voting Preferred Stock" (as hereinafter
defined) given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a series. For purposes of this Restated Certificate
of Incorporation, the term "Director Voting Preferred Stock" shall mean the
Series B Convertible Preferred Stock and any other series of the Corporation's
Preferred Stock which is designated as "Director Voting Preferred Stock".
2C. Board Seats. The holders of the Director Voting Preferred Stock,
-----------
voting as a separate class, shall be entitled to elect two directors of the
Corporation (the "Preferred Designees"). The holders of the Director Voting
Preferred Stock and the holders of the Common Stock, voting together as a single
class, shall be entitled to elect five directors of the Corporation (the "Common
Designees"). Notwithstanding the
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foregoing or anything else to the contrary provided in the Certificate of
Incorporation, if the Corporation fails or refuses, for any reason or for no
reason, to redeem on the Redemption Date (as defined in paragraph 7 of this
Article Sixth) all of the then outstanding shares of Series B Convertible
Preferred Stock for which redemption has been requested in accordance with the
terms and provisions of paragraph 7 of this Article Sixth, the holders of the
Director Voting Preferred Stock, voting as a separate class, shall be entitled
to elect a number of directors of the Corporation constituting a majority of the
entire Board of Directors at such time, and the remaining directors shall be
elected in the manner prescribed in the second sentence of this subparagraph 2C.
At any meeting (or in a written consent in lieu thereof) held for the purpose of
electing directors, (i) the presence in person or by proxy (or the written
consent) of the holders of a majority of the voting power of the outstanding
shares of Director Voting Preferred Stock then outstanding shall constitute a
quorum of the Director Voting Preferred Stock for the election of directors to
be elected solely by the holders of the Director Voting Preferred Stock and (ii)
the presence in person or by proxy (or the written consent) of the holders of a
majority of the voting power of the outstanding shares of Director Voting
Preferred Stock and Common Stock shall constitute a quorum of the Director
Voting Preferred Stock and Common Stock for the election of directors to be
elected jointly by the holders of the Director Voting Preferred Stock and the
holders of the Common Stock. A vacancy in any directorship elected solely by the
holders of the Director Voting Preferred Stock shall be filled only by vote or
written consent of the holders of the Director Voting Preferred Stock as
provided above, and a vacancy in any directorship elected jointly by the holders
of the Director Voting Preferred Stock and the holders of the Common Stock shall
be filled only by vote or written consent of the holders of the Director Voting
Preferred Stock and the holders of the Common Stock as provided above.
3. Dividends. The holders of the Series B Convertible Preferred Stock
shall be entitled to receive, out of funds legally available therefor, dividends
at the same rate as dividends (other than dividends paid in additional shares of
Common Stock) are paid with respect to the Common Stock (treating each share of
Series B Convertible Preferred Stock as being equal to the number of shares of
Common Stock (including fractions of a share) into which each share of Series B
Convertible Preferred Stock is then convertible).
4. Liquidation. Upon any Liquidation (as defined below) of the
Corporation, the holders of the shares of Series B Convertible Preferred Stock
shall first be entitled, subject to the rights of holders of the Series C
Convertible Preferred Stock but before any distribution or payment is made upon
the Common Stock or any other class or series of stock ranking on Liquidation
junior to the Series B Convertible Preferred Stock (the Common Stock and any
such other class or series of stock, the "Junior Stock"), to be paid, in
preference to the Junior Stock, an amount in cash per share equal to $1.705 (as
adjusted for stock splits, stock dividends and the like), and no more, such
amount payable with respect to one share of Series B Convertible Preferred Stock
being sometimes referred to as the "Liquidation Preference Payment" and with
respect to all shares of Series B Convertible Preferred Stock being sometimes
referred to as the "Liquidation Preference Payments." If upon such Liquidation
of the Corporation, whether voluntary or involuntary, the assets to
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<PAGE>
be distributed among the holders of Series B Convertible Preferred Stock shall
be insufficient to permit payment in full to the holders of Series B Convertible
Preferred Stock of the Liquidation Preference Payments, then the entire assets
of the Corporation to be so distributed shall be distributed ratably among the
holders of Series B Convertible Preferred Stock. Upon any such Liquidation of
the Corporation, immediately after the holders of Series B Convertible Preferred
Stock shall have been paid in full the Liquidation Preference Payments, the
remaining net assets of the Corporation available for distribution shall be
distributed among the holders of the Junior Stock. Written notice of such
Liquidation, stating a payment date, the amount of the Liquidation Preference
Payments and the place where said Liquidation Preference Payments shall be
payable, shall be delivered in person, mailed by certified or registered mail,
return receipt requested, or sent by telecopier or telex, not less than 20 days
prior to the payment date stated therein, to the holders of record of Series B
Convertible Preferred Stock, such notice to be addressed to each such holder at
its address as shown by the records of the Corporation. As used in this Article
Sixth of this restated certificate of incorporation, the term "Liquidation"
shall be deemed to consist of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, a consolidation or merger of the
Corporation into or with any other entity or entities which results in the
exchange of outstanding shares of the Corporation for securities or other
consideration issued or paid or caused to be issued or paid by any such other
entity or affiliate thereof (other than a merger to reincorporate the
Corporation in a different jurisdiction) in which the shareholders of the
Corporation do not continue to hold at least a 50% interest in the successor
entity, a transaction or series of transactions that results in the transfer of
more than 50% of the voting power of the Corporation and the sale, lease,
abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets.
5. Restrictions. At any time when shares of Series B Convertible
Preferred Stock are outstanding, except where the vote or written consent of the
holders of a greater number of shares of Series B Convertible Preferred Stock of
the Corporation is required by law or by the Corporation's Certificate of
Incorporation, and in addition to any other vote required by law or the
Corporation's Certificate of Incorporation, without the approval of the holders
of a majority of the then outstanding shares of Series B Convertible Preferred
Stock, given in writing or by vote at a meeting, consenting or voting (as the
case may be) separately as a series, the Corporation will not:
5A. (i) Create or authorize the creation of any additional class or
series of shares of stock or rights to acquire stock unless the same is Junior
Stock, (ii) increase the authorized amount of the Series B Convertible Preferred
Stock, (iii) increase the authorized amount of any additional class or series of
shares of stock unless the same is Junior Stock, or (iv) create or authorize any
obligation or security convertible into shares of Series B Convertible Preferred
Stock or into shares of any other class or series of stock unless the same is
Junior Stock, whether any such creation, authorization or increase shall be by
means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
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<PAGE>
5B. Consent to any Liquidation (whether in one transaction or in a
series of transactions), or permit any subsidiary to do any of the foregoing;
5C. Amend, alter or repeal its Certificate of Incorporation or By-
laws in a manner adverse to holders of Series B Convertible Preferred Stock;
5D. Purchase, redeem or set aside any sums for the purchase or
redemption of, or pay any dividend or make any distribution on, any shares of
Junior Stock, except for dividends or other distributions payable on the Common
Stock solely in the form of additional shares of Common Stock and except for the
purchase of shares of Common Stock from employees or former employees of the
Corporation who acquired such shares directly from the Corporation, if each such
purchase is made pursuant to contractual rights held by the Corporation under
agreements entered into with persons in connection with their employment with
the Corporation or pursuant to employee benefit plans;
5E. Redeem or otherwise acquire any shares of Series B Convertible
Preferred Stock except as expressly authorized in paragraph 7 of this Article
Sixth or pursuant to a purchase offer made pro rata to all holders of the shares
of Series B Convertible Preferred Stock on the basis of the aggregate number of
outstanding shares of Series B Convertible Preferred Stock then held by each
such holder; or
5F. Issue any indebtedness for borrowed money which, when aggregated
with all outstanding indebtedness for borrowed money of the Corporation and its
subsidiaries, would exceed the consolidated net worth (i.e., assets minus
liabilities, determined in accordance with generally accepted accounting
principles, consistently applied) of the Corporation and its subsidiaries at the
last day of the calendar month preceding the calendar month in which such
issuance is effected.
6. Conversions. The holders of shares of Series B Convertible Preferred
Stock shall have the following conversion rights:
6A. Right to Convert. Subject to the terms and conditions of this
----------------
paragraph 6, the holder of any share or shares of Series B Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Series B Convertible Preferred Stock (except that upon any Liquidation
of the Corporation, the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series B Convertible Preferred Stock upon such Liquidation) into such number
of fully paid and nonassessable shares of Common Stock as is obtained by (i)
multiplying the number of shares of Series B Convertible Preferred Stock so to
be converted by $1.705 and (ii) dividing the result by the conversion price of
$1.705 per share or, in case an adjustment of such price has taken place
pursuant to the further provisions of this paragraph 6, then by the conversion
price as last adjusted and in effect at the date any share or shares of Series B
Convertible Preferred Stock are surrendered for conversion (such price, or such
price as last adjusted, being referred to as the "Conversion Price"). Such
rights of conversion shall be exercised by the holder thereof by giving written
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<PAGE>
notice that the holder elects to convert a stated number of shares of Series B
Convertible Preferred Stock into Common Stock and by surrender of a certificate
or certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series B
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in such notice, together with a statement of the name or names
(with address) in which the certificate or certificates for shares of Common
Stock shall be issued.
6B. Issuance of Certificates: Time Conversion Effected. Promptly
--------------------------------------------------
after the receipt of the written notice referred to in subparagraph 6A and
surrender of the certificate or certificates for the share or shares of Series B
Convertible Preferred Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion of such
share or shares of Series B Convertible Preferred Stock. To the extent
permitted by law, such conversion shall be deemed to have been effected and the
Conversion Price shall be determined as of the close of business on the date on
which such written notice shall have been received by the Corporation and the
certificate or certificates for such share or shares shall have been surrendered
as aforesaid, and at such time the rights of the holder of such share or shares
of Series B Convertible Preferred Stock shall cease, and the person or persons
in whose name or names any certificate or certificates for shares of Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented thereby.
6C. Fractional Shares: Dividends, Partial Conversion. No fractional
------------------------------------------------
shares shall be issued upon conversion of Series B Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay, to the
extent permitted by law, in cash an amount equal to all dividends declared and
unpaid on the shares of Series B Convertible Preferred Stock surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph 6B. In case the number of shares of Series B
Convertible Preferred Stock represented by the certificate or certificates
surrendered pursuant to subparagraph 6A exceeds the number of shares converted,
the Corporation shall, upon such conversion, execute and deliver to the holder,
at the expense of the Corporation, a new certificate or certificates for the
number of shares of Series B Convertible Preferred Stock represented by the
certificate or certificates surrendered which are not to be converted. If any
fractional share of Common Stock would, except for the provisions of the first
sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay, to the
extent permitted by law, to the holder surrendering the Series B Convertible
Preferred Stock for conversion an amount in cash equal to the current fair
market value of such fractional share as determined in good faith by the Board
of Directors of the Corporation.
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6D. Adjustment of Price Upon Issuance of Common Stock. Except as
-------------------------------------------------
provided in subparagraph 6E, if and whenever the Corporation shall issue or
sell, or is, in accordance with subparagraphs 6D(l) through 6D(7), deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Conversion Price in effect immediately prior to the time of such
issue or sale, then, forthwith upon such issue or sale, the Conversion Price
shall be reduced to the price determined by dividing (i) an amount equal to the
sum of (a) the number of shares of Common Stock outstanding immediately prior to
such issue or sale multiplied by the then existing Conversion Price and (b) the
consideration, if any, received or deemed to be received by the Corporation upon
such issue or sale (the "Consideration"), by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale.
For purposes of this subparagraph 6D, the following subparagraphs
6D(l) to 6D(7) shall also be applicable (subject, in each such case, to the
provisions of subparagraph 6E hereof):
6D.(1) Issuance of Rights or Options. In case at any time the
Corporation shall in any manner grant (directly and not by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the sum (which sum shall
constitute the applicable Consideration) of (x) the total amount, if any,
received or receivable by the Corporation as consideration for the granting of
such Options, plus (y) the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus (z), in
the case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be less
than the Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options or the issuance of such
Convertible Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the Conversion
Price shall be made upon the actual issue of such Common Stock or of such
Convertible Securities upon exercise of such Options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible Securities.
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<PAGE>
6D.(2) Issuance of Convertible Securities. In case the Corporation
shall in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately exercisable,
and the price per share for which Common Stock is issuable upon such conversion
or exchange (determined by dividing (i) the sum (which sum shall constitute the
applicable Consideration) of (x) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such Convertible
Securities, plus (y) the minimum aggregate amount of additional consideration,
if any, payable to the Corporation upon the conversion or exchange thereof, by
(ii) the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities) shall be less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale of
such Convertible Securities and thereafter shall be deemed to be outstanding,
provided that (a) except as otherwise provided in subparagraph 6D(3), no
adjustment of the Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities and (b)
no further adjustment of the Conversion Price shall be made by reason of the
issue or sale of Convertible Securities upon exercise of any Options to purchase
any such Convertible Securities for which adjustments of the Conversion Price
have been made pursuant to other provisions of this subparagraph 6D.
6D.(3) Change in Option Price or Conversion Rate. Upon the happening
of any of the following events, namely, if the purchase price provided for in
any Option referred to in subparagraph 6D(l), the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities
referred to in subparagraph 6D(l) or 6D(2), or the rate at which Convertible
Securities referred to in subparagraph 6D(l) or 6D(2) are convertible into or
exchangeable for Common Stock shall change at any time (including, but not
limited to, changes under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event shall
forthwith be readjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or conversion
rate, as the case may be, at the time initially granted, issued or sold, but
only if as a result of such adjustment the Conversion Price then in effect
hereunder is thereby reduced; and on the termination of any such Option or any
such right to convert or exchange such Convertible Securities (including without
limitation upon the redemption or purchase for cash of all such Convertible
Securities by the Corporation), the Conversion Price then in effect hereunder
shall forthwith be increased to the Conversion Price which would have been in
effect at the time of such termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such termination,
never been issued.
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6D.(4) Stock Dividends. Subject to Section 6F hereof, in case the
Corporation shall declare a dividend or make any other distribution upon any
stock of the Corporation (other than the Common Stock) payable in Common Stock,
Options or Convertible Securities, then any Common Stock, Options or Convertible
Securities, as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
6D.(5) Consideration for Stock. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
Consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a Consideration other than
cash, the amount of the Consideration other than cash received by the
Corporation shall be deemed to be the fair value of such Consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the Corporation, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such consideration
as determined in good faith by the Board of Directors of the Corporation.
6D.(6) Record Date. In case the Corporation shall take a record of
the holders of its Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D.(7) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any of its wholly-owned subsidiaries, and the
disposition of any such shares shall be considered an issue or sale of Common
Stock for the purpose of this subparagraph 6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to the
---------------------------------------
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance from and after
April 22, 1998 of (A) options to purchase (x) up to an aggregate of 3,350,000
shares (appropriately adjusted to reflect the occurrence of any event described
in subparagraph 6F) of Common Stock to directors, officers, employees or
consultants of the Corporation in connection with their service as directors of
the Corporation, their employment by the Corporation or their
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<PAGE>
retention as consultants by the Corporation, plus (y) such additional amount of
shares of Common Stock pursuant to the Corporation's 1998 Stock Incentive Plan
or any other stock option programs approved by the Board of Directors and
stockholders of the Company, provided that the authority to grant such
additional options shall have been approved directly by the Compensation
Committee of the Board of Directors or indirectly by instructions from the
Compensation Committee to a director or another Board committee, (B) options to
purchase shares of Common Stock issuable to John Musci ("Musci") by the
Corporation by operation of certain antidilution provisions in the Employment
Agreement dated as of February 4, 1999, between the Corporation and Musci, (C)
options granted by means of assumption in any merger or other business
combination, (D) the shares issuable upon the exercise of the options described
in clauses (A),(B) and (C) above, (E) up to 722,000 shares of Common Stock
(appropriately adjusted to reflect the occurrence of any event described in
subparagraph 6F) issuable upon the exercise of warrants issued by the
Corporation to VocalTec Communications, Inc. on October 1, 1997, (F) warrants
issued by the Corporation to Tom Evslin and Edward Jordan in April 1998 and the
issuance pursuant to such warrants of up to 439,883 shares of Common Stock
(appropriately adjusted to reflect the occurrence of any event described in
subparagraph 6F) and (G) warrants or rights to purchase equity securities of the
Corporation (not to exceed 100,000 shares of Common Stock in the aggregate
(calculated on an as-converted basis and appropriately adjusted to reflect the
occurrence of any event described in subparagraph 6F) that may be issued to
lending institutions, licensors of tangible or intangible property or equipment
leasing companies in connection with licensing, leasing or financing
transactions approved by the Board of Directors of the Corporation, and the
shares issuable upon the exercise of such warrants or rights.
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely, in case the outstanding
shares of Common Stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation
(other than in connection with a merger or other reorganization in which the
Corporation is not the surviving entity) shall be effected in such a way that
holders of Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for Common Stock, then, as a condition of such
reorganization or reclassification, lawful and adequate provisions shall be made
whereby each holder of a share or shares of Series B Convertible Preferred Stock
shall thereupon have the right to receive upon the conversion of such share or
shares of the Series B Convertible Preferred Stock, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore receivable upon the conversion of such share or shares
of Series B Convertible Preferred
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<PAGE>
Stock, such shares of stock, securities or assets as may be issued or payable
with respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization or reclassification not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as nearly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of shares of Series B
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, which notice shall state the Conversion Price resulting from
such adjustment, setting forth in reasonable detail the method upon which such
calculation is based.
6I. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation; or
(4) there shall be a Liquidation.
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Series B Convertible Preferred
Stock at the address of such holder as shown on the books of the Corporation (a)
at least 20 business days' prior written notice of the date on which the books
of the Corporation shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification or Liquidation and (b) in the case
of any such reorganization, reclassification or Liquidation, at least 20
business days' prior written notice of the date when the same shall take place.
Such notice in accordance with the foregoing clause (a) shall also specify, if
known, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto and such
notice in accordance with the foregoing clause (b) shall also specify the date
on which the holders of Common Stock shall be entitled to exchange their Common
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<PAGE>
Stock for securities or other property deliverable upon such reorganization,
reclassification or Liquidation, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times reserve
--------------------
and keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series B Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series B Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable
(except for taxes which are not payable by the Corporation pursuant to Section
6L hereof) and free from all taxes, liens and charges with respect to the issue
thereof, and, without limiting the generality of the foregoing, the Corporation
covenants that, to the extent permitted by law, it will from time to time take
all such action as may be requisite to assure that the par value per share of
the Common Stock is at all times equal to or less than the Conversion Price in
effect at the time. The Corporation will not take any action which results in
any adjustment of the Conversion Price if the total number of shares of Common
Stock issued and issuable after such action upon conversion of the Series B
Convertible Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Certificate of Incorporation.
6K. No Reissuance of Series B Convertible Preferred Stock. Shares of
-----------------------------------------------------
Series B Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall automatically be retired and shall not be
reissued as shares of Series B Convertible Preferred Stock; upon such conversion
and the filing of any certificate required by the Delaware General Corporation
Law, such shares shall be restored to the status of authorized but unissued
shares of Preferred Stock; and the Corporation may from time to time take such
appropriate corporate action as may be necessary to reduce accordingly the
number of authorized shares of Series B Convertible Preferred Stock.
6L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Series B Convertible Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series B Convertible
Preferred Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Series B Convertible Preferred Stock
or of any shares of Common Stock issued or issuable upon the conversion of any
shares of Series B Convertible Preferred Stock in any manner which interferes
with the timely conversion of such Series B Convertible Preferred Stock, except
as may otherwise be required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6, the
--------------------------
term "Common Stock" shall mean and include the Corporation's authorized Common
Stock, par
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<PAGE>
value $0.001 per share as constituted on April 22, 1998, and shall also include
any capital stock of any class of the Corporation thereafter authorized which
shall not be limited to a fixed sum or percentage in respect of the rights of
the holders thereof to participate in dividends or in the distribution of assets
upon the Liquidation of the Corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series B Convertible Preferred
Stock shall include only shares designated as Common Stock of the Corporation on
the date of filing of this instrument, or in case of any reorganization or
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation shall have
--------------------
consummated an underwritten public offering of shares of Common Stock led by a
nationally recognized reputable underwriter (as reasonably determined by the
Preferred Designees) (i) raising gross proceeds (on behalf of the Corporation
and selling stockholders) of at least $30,000,000 and (ii) at a price per share
to the public of at least $11.61 per share (appropriately adjusted to reflect
the occurrence of any event described in subparagraph 6F or 6G), then effective
upon the closing of the sale of such shares by the Corporation pursuant to such
public offering, all outstanding shares of Series B Convertible Preferred Stock
shall automatically convert to shares of Common Stock on the basis set forth in
this paragraph 6. Holders of shares of Series B Convertible Preferred Stock so
converted may deliver to the Corporation at its principal office (or such other
office or agency of the Corporation as the Corporation may designate by notice
in writing to such holders) during its usual business hours, the certificate or
certificates for the shares so converted. As promptly as practicable
thereafter, the Corporation shall issue and deliver to such holder a certificate
or certificates for the number of whole shares of Common Stock to which such
holder is entitled, together with any cash dividends and payment in lieu of
fractional shares to which such holder may be entitled pursuant to subparagraph
6C. Until such time as a holder of shares of Series B Convertible Preferred
Stock shall surrender his or its certificates therefor as provided above, such
certificates shall be deemed to represent the shares of Common Stock issuable
pursuant to this Section 6O.
7. Redemption. The shares of Series B Convertible Preferred Stock shall
be redeemed as follows:
7A. Optional Redemption. On March 31, 2005 (the "Redemption Date"),
-------------------
at the request of any holder of Series B Convertible Preferred Stock, the
Corporation shall, to the extent permitted by law, and subject to the rights of
the holders of the Series C Convertible Preferred Stock, redeem any or all of
the shares of Series B Convertible Preferred Stock held by such holder on the
Redemption Date (the "Redemption").
7B. Redemption Price and Payment. The Series B Convertible Preferred
----------------------------
Stock to be redeemed on the Redemption Date shall be redeemed by paying for each
share in cash an amount equal to $1.705 per share (appropriately adjusted to
reflect the occurrence of any event described in subparagraph 6F or 6G), such
amount being referred
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<PAGE>
to as the "Redemption Price." Such payment shall be made in full on the
Redemption Date to the holders entitled thereto.
7C. Redemption Mechanics. At least 20 but not more than 30 days
--------------------
prior to the Redemption Date, written notice (the "Redemption Notice") shall be
given by the Corporation by delivery in person, certified or registered mail,
return receipt requested, telecopier or telex, to each holder of record (at the
close of business on the business day next preceding the day on which the
Redemption Notice is given) of shares of Series B Convertible Preferred Stock
notifying such holder of the Redemption and specifying the Redemption Price, the
Redemption Date and the place where said Redemption Price shall be payable. The
Redemption Notice shall be addressed to each holder at his address as shown by
the records of the Corporation. From and after the close of business on the
Redemption Date, unless there shall have been a default in the payment of the
Redemption Price, all rights of holders of shares of Series B Convertible
Preferred Stock (except the right to receive the Redemption Price) shall cease
with respect to those shares that have been redeemed, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series B Convertible Preferred Stock on
the Redemption Date are insufficient to redeem the total number of outstanding
shares of Series B Convertible Preferred Stock for which redemption has been
requested, the holders of shares of Series B Convertible Preferred Stock
requesting redemption shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would be
payable with respect to the number of shares for which redemption has been
requested by such holder if all such outstanding shares for which redemption was
so requested were redeemed in full. The shares of Series B Convertible
Preferred Stock for which redemption is requested, but that are not redeemed,
shall remain outstanding and entitled to all rights and preferences provided
herein. At any time thereafter when additional funds of the Corporation are
legally available for the redemption of such shares of Series B Convertible
Preferred Stock, such funds will be used, at the end of the next succeeding
fiscal quarter, to redeem the balance of such shares, or such portion thereof
for which funds are then legally available, on the basis set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any shares
---------------------------------------------------
of Series B Convertible Preferred Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and shall not be reissued as shares of Series B Convertible Preferred Stock;
upon such redemption and the filing of any certificate required by the Delaware
General Corporation Law, such shares shall be restored to the status of
authorized but unissued shares of Preferred Stock; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series B Convertible
Preferred Stock.
SEVENTH: The election of directors need not be by written ballot unless
-------
the By-laws so provide.
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<PAGE>
EIGHTH: The Board of Directors of the Corporation is authorized and
-------
empowered from time to time in its discretion to make, alter, amend or repeal
By-laws of the Corporation, except as such power may be restricted or limited by
the General Corporation Law of the State of Delaware.
NINTH: Whenever a compromise or arrangement is proposed between this
-----
Corporation and its creditors or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code, or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors of this Corporation, as the case may be, agree
to any compromise or arrangement and to any reorganization of this Corporation
as a consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the creditors or
class of creditors of this Corporation, as the case may be, and also on this
Corporation.
TENTH: 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.
ELEVENTH:
--------
1. Right to Indemnification. The Corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently
exists or may hereafter be amended, any person (an "Indemnitee") who was or is
made or is threatened to be made a party or is otherwise involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the Corporation or,
while a director or officer of the Corporation, is or was serving at the request
of the Corporation as a director, officer, employee, manager or agent of another
corporation or of a partnership, limited liability company, joint venture,
trust, enterprise or nonprofit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Indemnitee.
Notwithstanding the preceding sentence, except as otherwise provided in Section
3 of this Article Eleventh, the Corporation shall be required to indemnify an
Indemnitee in connection with a Proceeding (or part thereof) commenced by such
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<PAGE>
Indemnitee only if the commencement of such Proceeding (or part thereof) by the
Indemnitee was authorized by the Board of Directors of the Corporation.
2. Prepayment of Expenses. The Corporation shall pay the expenses
(including attorneys' fees) incurred by an Indemnitee in defending any
Proceeding in advance of its final disposition, provided, however, that to the
-----------------
extent required by law, such payment of expenses in advance of the final
disposition of the Proceeding shall be made only upon receipt of an undertaking
by the Indemnitee to repay all amounts advanced if it should be ultimately
determined that the Indemnitee is not entitled to be indemnified under this
Article Eleventh or otherwise.
3. Claims. If a claim for indemnification or advancement of expenses
under this Article Eleventh is not paid in full within sixty days after a
written claim therefor by the Indemnitee has been received by the Corporation,
the Indemnitee may file suit to recover the unpaid amount of such claim and, if
successful in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or advancement of expenses under applicable law.
4. Nonexclusivity of Rights. The rights conferred on any Indemnitee by
this Article Eleventh shall not be exclusive of any other rights which such
Indemnitee may have or hereafter acquire under any statute, provision of this
restated certificate of incorporation, the Corporation's by-laws or any
agreement, vote of stockholders or disinterested directors or otherwise.
5. Other Sources. The Corporation's obligation, if any, to indemnify or
to advance expenses to any Indemnitee who was or is serving at its request as a
director, officer, employee, manager or agent of another corporation,
partnership, limited liability company, joint venture, trust, enterprise or
nonprofit entity shall be reduced by any amount such Indemnitee may collect as
indemnification or advancement of expenses from such other corporation,
partnership, limited liability company, joint venture, trust, enterprise or non-
profit enterprise.
6. Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article Eleventh shall not adversely affect any right or
protection hereunder of any Indemnitee in respect of any act or omission
occurring prior to the time of such repeal or modification.
7. Other Indemnification and Prepayment of Expenses. This Article
Eleventh shall not limit the right of the Corporation, to the extent and in the
manner permitted by law, to indemnify and to advance expenses to persons other
than Indemnitees when and as authorized by appropriate corporate action.
TWELFTH: Notwithstanding anything herein to the contrary, the number of
-------
authorized shares of Common Stock may be increased or decreased (but not below
the
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<PAGE>
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority in voting power of the outstanding stock of the
Corporation entitled to vote generally irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, ITXC Corp. has caused this certificate to be signed by
Edward B. Jordan, its Chief Financial Officer, on the 23rd day of February,
1999.
/s/ Edward B. Jordan
-----------------------------------------
Edward B. Jordan, Chief Financial Officer
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<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
ITXC CORP.
(a Delaware corporation)
(as amended through February 17, 1999)
__________________________
ARTICLE I
OFFICES
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SECTION 1. OFFICES. The Corporation shall maintain its registered
-------
office in the State of Delaware at 9 East Loockerman Street, in the City of
Dover, in the County of Kent, and its resident agent at such address is National
Registered Agents, Inc. The Corporation may also have offices in such other
places in the United States or elsewhere as the Board of Directors may, from
time to time, appoint or as the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
SECTION 1. ANNUAL MEETINGS. Annual meetings of stockholders for the
---------------
election of directors and for such other business as may properly be conducted
at such meeting shall be held at such place, either within or without the State
of Delaware, and at such time and date as the Board of Directors shall determine
by resolution and set forth in the notice of the meeting. In the event that the
Board of Directors fails to so determine the time, date and place for the annual
meeting, it shall be held, beginning in 1998, at the principal office of the
Corporation at 10 o'clock A.M. on the last Thursday in April of each year.
SECTION 2. SPECIAL MEETINGS. Special meetings of stockholders,
----------------
unless otherwise prescribed by the laws of the State of Delaware, may be called
by the Chairman of the
<PAGE>
Board, the President or by resolution of the Board of Directors and shall be
called by the Chairman of the Board, President or Secretary upon the written
request of (a) any director, (b) holders of not less than 20% of the outstanding
shares of either the Corporation's Series B Convertible Preferred Stock or
Series C Convertible Preferred Stock or (c) holders of outstanding shares of the
capital stock of the Corporation entitled to not less than 10% of the aggregate
voting power of all outstanding shares of capital stock of the Corporation.
Notice of each special meeting shall be given in accordance with Section 3 of
this Article II. Unless otherwise permitted by law, business transacted at any
special meeting of stockholders shall be limited to the purpose stated in the
notice.
SECTION 3. NOTICE OF MEETINGS. Whenever stockholders are required or
------------------
permitted to take any action at a meeting, a written notice of the meeting,
which shall state the place, date and time of the meeting, and, in the case of a
special meeting, the purposes for which the meeting is called, shall be mailed
to or delivered to each stockholder of record entitled to vote thereat. Such
notice shall be given not less than ten (10) days nor more than sixty (60) days
before the date of any such meeting.
SECTION 4. QUORUM. Unless otherwise required by law or the
------
Certificate of Incorporation, the holders of a majority of the issued and
outstanding stock entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum for the transaction of business at all meetings
of stockholders. When a quorum is once present to organize a meeting, the
quorum is not broken by the subsequent withdrawal of any stockholders.
SECTION 5. VOTING. Unless otherwise provided in the Certificate of
------
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder. Upon the request of not less than 10%
in interest of the stockholders entitled to vote at a meeting, voting shall be
by written ballot. All elections of directors shall be decided by plurality
vote of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. Unless otherwise provided in the
Certificate of Incorporation, all elections of directors shall be by written
ballot. Unless otherwise required by
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<PAGE>
law or the Certificate of Incorporation and except as otherwise provided herein
with respect to the election of directors, the vote of a majority of the
outstanding shares, present in person or represented by proxy and entitled to
vote on the subject matter, at a meeting at which a quorum is present shall
constitute the act of the stockholders.
SECTION 6. CHAIRMAN OF MEETINGS. The Chairman of the Board of
--------------------
Directors of the Corporation, if one is elected, or, in his absence or
disability, the President of the Corporation, shall preside at all meetings of
the stockholders.
SECTION 7. SECRETARY OF MEETING. The Secretary of the Corporation
--------------------
shall act as Secretary at all meetings of the stockholders. In the absence or
disability of the Secretary, the Chairman of the Board of Directors or the
President shall appoint a person to act as Secretary at such meetings.
SECTION 8. ACTION WITHOUT MEETING. Unless otherwise provided by the
----------------------
Certificate of Incorporation, any action required by law to be taken at any
annual or special meeting of stockholders, or any action which may be taken at
such meetings, may be taken without a meeting, without prior notice and without
a vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote were present and voted. Every
written consent shall bear the date of signature of each stockholder who signs
the consent. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
SECTION 9. ADJOURNMENT. At any meeting of stockholders of the
-----------
Corporation, if less than a quorum be present, a majority of the stockholders
entitled to vote thereat, present in person or by proxy, shall have the power to
adjourn the meeting from time to time without notice other than announcement at
the meeting until a quorum shall be present. Any business may be transacted at
the adjourned meeting which might have been transacted at the meeting originally
noticed. If the adjournment is for more than 30 days, or if after the
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<PAGE>
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
ARTICLE III
BOARD OF DIRECTORS
------------------
SECTION 1. POWERS. The business and affairs of the Corporation shall
------
be managed by or under the direction of its Board of Directors. The Board shall
exercise all of the powers and duties conferred by law except as provided by the
Certificate of Incorporation or these By-Laws.
SECTION 2. NUMBER AND TERM.
---------------
(a) Number. In the event that there are any shares of the
------
Corporation's Series B Convertible Preferred Stock or Series C Convertible
Preferred Stock (the "Director Voting Preferred Stock") outstanding, the number
of directors shall be fixed in accordance with the terms and provisions of such
Director Voting Preferred Stock. In the event that there are not any shares of
the Corporation's Director Voting Preferred Stock outstanding, (i) the number of
directors shall be fixed at no less than one nor more than seven and (ii) within
such limits, the number of directors shall be fixed from time to time by the
Board of Directors.
(b) Term. The Board of Directors shall be elected by the
----
stockholders at their annual meeting, and each director shall be elected to
serve for the term of one year and until his successor shall be elected and
qualified or until his earlier resignation or removal. Directors need not be
stockholders.
SECTION 3. RESIGNATIONS. Any director may resign at any time. Such
------------
resignation shall be made in writing, and shall take effect at the time
specified therein, and if no time is specified, at the time of its receipt by
the President or Secretary. The acceptance of a resignation shall not be
necessary to make it effective.
SECTION 4. REMOVAL. Any director elected by the holders of the
-------
Corporation's Director Voting Preferred Stock (a "Preferred Director") may be
removed either with or without cause at any time by the affirmative vote of the
holders of a majority of the
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<PAGE>
outstanding shares of Director Voting Preferred Stock then entitled to vote for
the election of such director at any annual or special meeting of the
stockholders called for that purpose. Any director elected jointly by the
holders of the Corporation's Director Voting Preferred Stock and the
Corporation's Common Stock (a "Preferred/Common Director")may be removed either
with or without cause at any time by the affirmative vote of the holders of a
majority in voting power of the shares of the Corporation's Director Voting
Preferred Stock and the Corporation's Common Stock then entitled to vote for the
election of such director at any annual or special meeting of the stockholders
called for that purpose. Vacancies created pursuant to the first sentence of
this Section 4 may be filled at such meeting by the affirmative vote of the
holders of a majority of the outstanding shares of Director Voting Preferred
Stock then entitled to vote for the election of a Preferred Director. Vacancies
created pursuant to the second sentence of this Section 4 may be filled at such
meeting by the affirmative vote of the holders of a majority in voting power of
the shares then entitled to vote for the election of a Preferred/Common
Director.
SECTION 5. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies
-----------------------------------------
occurring in any directorship and newly created directorships shall be filled in
accordance with the terms and provisions governing the Director Voting
Convertible Preferred Stock if any shares of such series are outstanding. Any
director so chosen shall hold office for the unexpired term of his predecessor
and until his successor shall be elected and qualify or until his earlier death,
resignation or removal.
SECTION 6. MEETINGS. The newly elected directors shall hold their
--------
first meeting to organize the Corporation, elect officers and transact any other
business which may properly come before the meeting. An annual organizational
meeting of the Board of Directors shall be held immediately after each annual
meeting of the stockholders, or at such time and place as may be noticed for the
meeting.
Regular meetings of the Board may be held without notice at such
places and times as shall be determined from time to time by resolution of the
directors.
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<PAGE>
Unless otherwise required by the laws of the State of Delaware,
special meetings of the Board shall be called by the Chairman of the Board,
President or Secretary on the written request of any director with at least two
days' notice to each director and shall be held at such place as may be
determined by the directors or as shall be stated in the notice of the meeting.
SECTION 7. QUORUM, VOTING AND ADJOURNMENT. A majority of the total
------------------------------
number of directors or any committee thereof shall constitute a quorum for the
transaction of business. The vote of a majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board or any
committee thereof. In the absence of a quorum, a majority of the directors
present thereat may adjourn such meeting to another time and place. Notice of
such adjourned meeting need not be given if the time and place of such adjourned
meeting are announced at the meeting so adjourned.
SECTION 8. COMMITTEES.
----------
(a) The following provisions shall apply during the "First Period" (as
hereinafter defined):
(i) There shall be an Audit Committee of the Board (to be
established in accordance with Section 8(a)(ii) hereof) and a Compensation
Committee of the Board (to be established in accordance with Section 8(a)(iii)
hereof). The Board of Directors may designate one or more additional committees
(each, an "Additional Committee"), including but not limited to an Executive
Committee, each such Additional Committee to be established in accordance with
Section 8(a)(iv) hereof. Any such Additional Committee, to the extent provided
in such resolution of the Board, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation and may authorize the seal of the Corporation to be
affixed to all papers which may require it; but no committee of the Board shall
have such power or authority in reference to the following matters: (i)
approving or adopting, or recommending to the stockholders, any action or matter
expressly required by the Delaware General Corporation Law to be submitted to
stockholders for approval or (ii) adopting, amending or repealing any By-law of
the Corporation. All committees of the Board shall keep
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<PAGE>
minutes of their meetings and shall report their proceedings to the Board when
requested or required by the Board.
(ii) The Audit Committee shall consist of at least two members.
The Audit Committee shall review, act on and report to the Board with respect to
auditing and accounting matters applicable to the Corporation, including the
selection of the Company's independent auditors, the scope of the annual audits,
the fees to be paid to the auditors, the performance of the Corporation's
auditors and the accounting practices of the Corporation.
(iii) The Compensation Committee shall consist of at least two
members. The Compensation Committee shall be responsible for recommending to the
Board of Directors the salaries and incentive compensation of the employee-
officers of the Corporation. The Compensation Committee shall also administer
the Company's 1998 Stock Incentive Plan to the extent provided in such Plan and
such other employee benefit plans of the Corporation as shall be delegated to
the Compensation Committee by the Board of Directors.
(iv) Except with respect to any committee established to
administer any aspect of the Corporation's 1998 Stock Incentive Plan, each
Additional Committee shall consist of at least two members..
(v) For purposes of this Section 8(a), the following terms shall
have the following meanings:
(1) The term "Stockholders' Agreement" shall mean the
stockholders' agreement, dated as of April 27, 1998, by and among the
Corporation and each of the then existing stockholders of the Corporation, as
amended.
(2) The term "First Period" shall mean the period commencing
on the date that the Stockholders' Agreement is executed and expiring upon the
termination of the Stockholders' Agreement
(b) After the First Period, the Board of Directors may designate one
or more committees, including but not limited to an Executive Committee, each
such committee to consist of one or more of the directors of the Corporation.
Any such committee, to the extent
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<PAGE>
provided in such resolution of the Board, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it; but no committee of the Board
shall have the power or authority in reference to the following matters: (i)
approving or adopting, or recommending to the stockholders, any action or matter
expressly required by the Delaware General Corporation Law to be submitted to
stockholders for approval or (ii) adopting, amending or repealing any By-law of
the Corporation. All committees of the Board shall keep minutes of their
meetings and shall report their proceedings to the Board when requested or
required by the Board.
SECTION 9. ACTION WITHOUT A MEETING. Unless otherwise restricted by
------------------------
the Certificate of Incorporation, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if all members of the Board or any committee thereof, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or such committee, as the
case may be.
SECTION 10. COMPENSATION. The Board of Directors shall have the
------------
authority to fix the compensation of directors for their services. A director
may also serve the Corporation in other capacities and receive compensation
therefor.
SECTION 11. TELEPHONIC MEETING. Unless otherwise restricted by the
------------------
Certificate of Incorporation, members of the Board, or any committee designated
by the Board, may participate in a meeting by means of conference telephone or
similar communications equipment in which all persons participating in the
meeting can hear each other. Participation in a meeting by means of conference
telephone or similar communications equipment shall constitute the presence in
person at such meeting.
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<PAGE>
ARTICLE IV
OFFICERS
--------
SECTION 1. The officers of the Corporation shall include a Chairman
of the Board, a President and a Secretary, each of whom shall be elected by the
Board of Directors and shall hold office for a term of one year and until their
successors are elected and qualify or until their earlier resignation or
removal. In addition, the Board of Directors may elect one or more Vice
Presidents, including an Executive Vice President, a Treasurer and one or more
Assistant Treasurers and one or more Assistant Secretaries, who shall hold their
office for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors. The initial
officers shall be elected at the first meeting of the Board of Directors and,
thereafter, at the annual organizational meeting of the Board held after each
annual meeting of the stockholders. Any number of offices may be held by the
same person.
SECTION 2. OTHER OFFICERS AND AGENTS. The Board of Directors may
-------------------------
appoint such other officers and agents as it deems advisable, who shall hold
their office for such terms and shall exercise and perform such powers and
duties as shall be determined from time to time by the Board of Directors.
SECTION 3. CHAIRMAN. The Chairman of the Board of Directors shall be
--------
a member of the Board and shall preside at all meetings of the Board of
Directors and of the stockholders. The Chairman of the Board may be, but need
not be, the Chief Executive Officer of the Corporation. If the Board designates
the Chairman to be the Chief Executive Officer of the Corporation, the Chairman
of the Board shall exercise such duties as customarily pertain to the position
of Chief Executive Officer, and shall have general and active management of the
property, business and affairs of the Corporation, subject to the supervision
and control of the Board. If the Board does not designate the Chairman of the
Board to be the Chief Executive Officer of the Corporation, the Chairman of the
Board shall have such powers and perform such other duties as from time to time
may be assigned to him by the Board of Directors.
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<PAGE>
SECTION 4. PRESIDENT. If the Board of Directors does not designate
---------
the Chairman of the Board to be the Chief Executive Officer of the Corporation,
the President shall be the Chief Executive Officer of the Corporation. If the
President serves as the Chief Executive Officer of the Corporation, he shall
exercise such duties as customarily pertain to the office of President and Chief
Executive Officer, he shall have general and active management of the property,
business and affairs of the Corporation, subject to the supervision and control
of the Board, and he shall perform such other duties as prescribed from time to
time by the Board or these By-Laws. If the Chairman of the Board serves as the
Chief Executive Officer of the Corporation, the President shall perform such
duties as prescribed from time to time by the Board, the Chairman of the Board
or these By-Laws.
In the absence, disability or refusal of the Chairman of the Board to
act, or the vacancy of such office, the President shall preside at all meetings
of the stockholders and of the Board of Directors. Except as the Board of
Directors shall otherwise authorize, the Chairman of the Board, the President
and any Vice President shall execute bonds, mortgages and other contracts on
behalf of the Corporation, and shall cause the seal to be affixed to any
instrument requiring it and, when so affixed, the seal shall be attested by the
signature of the Secretary or the Treasurer or an Assistant Secretary or an
Assistant Treasurer.
SECTION 5. VICE PRESIDENTS. Each Vice President, if any are elected,
---------------
of whom one or more may be designated an Executive Vice President, shall have
such powers and shall perform such duties as shall be assigned to him by the
Chief Executive Officer or the Board of Directors.
SECTION 6. TREASURER. The Treasurer shall have custody of the
---------
corporate funds, securities, evidences of indebtedness and other valuables of
the Corporation and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. He shall deposit all
moneys and other valuables in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation, taking proper vouchers therefor.
He shall render to the Chief
-10-
<PAGE>
Executive Officer and Board of Directors, upon their request, a report of the
financial condition of the Corporation. If required by the Board of Directors,
he shall give the Corporation a bond for the faithful discharge of his duties in
such amount and with such surety as the Board shall prescribe.
The Treasurer shall have such further powers and perform such other
duties incident to the office of Treasurer as from time to time are assigned to
him by the Board.
SECTION 7. SECRETARY. The Secretary shall be the Chief
---------
Administrative Officer of the Corporation and shall: (a) cause minutes of all
meetings of the stockholders and directors to be recorded and kept; (b) cause
all notices required by these By-Laws or otherwise to be given properly; (c) see
that the minute books, stock books, and other non-financial books, records and
papers of the Corporation are kept properly; and (d) cause all reports,
statements, returns, certificates and other documents to be prepared and filed
when and as required. The Secretary shall have such further powers and perform
such other duties as prescribed from time to time by the Board.
SECTION 8. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Each
----------------------------------------------
Assistant Treasurer and each Assistant Secretary, if any are elected, shall be
vested with all the powers and shall perform all the duties of the Treasurer and
Secretary, respectively, in the absence or disability of such officer, unless or
until the Board of Directors shall otherwise determine. In addition, Assistant
Treasurers and Assistant Secretaries shall have such powers and shall perform
such duties as shall be assigned to them by the Board.
SECTION 9. CORPORATE FUNDS AND CHECKS. The funds of the Corporation
--------------------------
shall be kept in such depositories as shall from time to time be prescribed by
the Board of Directors. All checks or other orders for the payment of money
shall be signed by the Chairman of the Board, the President, any Vice President
or the Treasurer or such other person or agent as may from time to time be
authorized and with such countersignature, if any, as may be required, by the
Board of Directors.
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<PAGE>
SECTION 10. CONTRACTS AND OTHER DOCUMENTS. The Chairman of the
-----------------------------
Board, the President, any Vice President or the Treasurer, or such other officer
or officers as may from time to time be authorized by the Board of Directors or
any other committee given specific authority in the premises by the Board of
Directors during the intervals between the meetings of the Board of Directors,
shall have power to sign and execute on behalf of the Corporation deeds,
conveyances and contracts, and any and all other documents requiring execution
by the Corporation.
SECTION 11. OWNERSHIP OF STOCK OF ANOTHER CORPORATION. The Chairman
-----------------------------------------
of the Board, the President, any Vice President or the Treasurer, or such other
officer or agent as shall be authorized by the Board of Directors, shall have
the power and authority, on behalf of the Corporation, to attend and to vote at
any meeting of stockholders of any corporation in which the Corporation holds
stock and may exercise, on behalf of the Corporation, any and all of the rights
and powers incident to the ownership of such stock at any such meeting,
including the authority to execute and deliver proxies and consents on behalf of
the Corporation.
SECTION 12. DELEGATION OF DUTIES. In the absence, disability or
--------------------
refusal of any officer to exercise and perform his duties, the Board of
Directors may delegate to another officer such powers or duties.
SECTION 13. RESIGNATION AND REMOVAL. Any officer of the Corporation
-----------------------
may be removed from office for or without cause at any time by the Board of
Directors. Any officer may resign at any time in the same manner prescribed
under Section 3 of Article III of these By-Laws.
SECTION 14. VACANCIES. The Board of Directors shall have power to
---------
fill vacancies occurring in any office.
ARTICLE V
STOCK
-----
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<PAGE>
SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the
---------------------
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by, the Chairman of the Board or the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary, certifying the number and class of shares of stock in the
Corporation owned by him. Any or all of the signatures on the certificate may
be a facsimile. The Board of Directors shall have the power to appoint one or
more transfer agents and/or registrars for the transfer or registration of
certificates of stock of any class, and may require stock certificates to be
countersigned or registered by one or more of such transfer agents and/or
registrars.
SECTION 2. TRANSFER OF SHARES. Shares of stock of the Corporation
------------------
shall be transferable upon its books by the holders thereof, in person or by
their duly authorized attorneys or legal representatives, upon surrender to the
Corporation by delivery thereof to the person in charge of the stock and
transfer books and ledgers. Such certificates shall be cancelled and new
certificates shall thereupon be issued. A record shall be made of each
transfer. Whenever any transfer of shares shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of the
transfer if, when the certificates are presented, both the transferor and
transferee request the Corporation to do so. The Board shall have power and
authority to make such rules and regulations as it may deem necessary or proper
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation.
SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. A new
-------------------------------------------------
certificate of stock may be issued in the place of any certificate previously
issued by the Corporation, alleged to have been lost, stolen or destroyed, and
the Board of Directors may, in their discretion, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to give the
Corporation a bond, in such sum as the Board may direct, not exceeding double
the value of the stock, in order to indemnify the Corporation against any claims
that may be made against it in connection therewith. A new certificate of stock
may be issued in the place of any certificate previously issued by the
Corporation which has
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<PAGE>
become mutilated without the posting by the owner of any bond upon the surrender
by such owner of such mutilated certificate.
SECTION 4. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The stock ledger
-------------------------------------
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Delaware General Corporation Law (S) 219
or the books of the Corporation, or to vote in person or by proxy at any meeting
of stockholders.
SECTION 5. DIVIDENDS. Subject to the provisions of the Certificate
---------
of Incorporation and Delaware General Corporation Law, the Board of Directors
may at any regular or special meeting, declare dividends upon the stock of the
Corporation either (i) out of its surplus, as defined in and computed in
accordance with Delaware General Corporation Law (S) 154 and (S) 244 or (ii) in
case there shall be no such surplus, out of its net profits for the fiscal year
in which the dividend is declared and/or the preceding fiscal year. Before the
declaration of any dividend, the Board of Directors may set apart, out of any
funds of the Corporation available for dividends, such sum or sums as from time
to time in their discretion may be deemed proper for working capital or as a
reserve fund to meet contingencies or for such other purposes as shall be deemed
conducive to the interests of the Corporation.
ARTICLE VI
NOTICE AND WAIVER OF NOTICE
---------------------------
SECTION 1. NOTICE. Whenever any written notice is required to be
------
given by law, the Certificate of Incorporation or these By-Laws, such notice, if
mailed, shall be deemed to be given when deposited in the United States mail,
postage prepaid, addressed to the person entitled to such notice at his address
as it appears on the books and records of the Corporation.
SECTION 2. WAIVER OF NOTICE. Whenever notice is required to be given
----------------
by law, the Certificate of Incorporation or these By-Laws, a written waiver
thereof signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at
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<PAGE>
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any meeting of the stockholders, directors,
or members of a committee of the Board need be specified in any written waiver
of notice.
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<PAGE>
ARTICLE VII
AMENDMENT OF BY-LAWS
--------------------
SECTION 1. AMENDMENTS. Subject to the terms and provisions of the
----------
Director Voting Preferred Stock and the Stockholders' Agreement, these By-Laws
may be amended or repealed or new By-Laws may be adopted by the affirmative vote
of a majority of the Board of Directors at any regular or special meeting of the
Board. Subject to the terms and provisions of the Director Voting Preferred
Stock and the Stockholders' Agreement, By-Laws adopted by the Board of Directors
may be amended or repealed by shareholders.
ARTICLE VIII
SECTION 1. SEAL. The seal of the Corporation shall be circular in
----
form and shall have the name of the Corporation on the circumference and the
jurisdiction and year of incorporation in the center.
SECTION 2. FISCAL YEAR. The fiscal year of the Corporation shall end
-----------
on December 31 of each year, or such other twelve consecutive months as the
Board of Directors may designate.
SECTION 3. INDEMNIFICATION. 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, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall be indemnified by the Corporation
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,
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<PAGE>
conviction or upon a plea of nolo contendere or its equivalent shall not, of
---------------
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery of Delaware,
or such other court shall deem proper.
Any indemnification pursuant to the first two paragraphs of this
Section 3 of this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
such paragraphs. Such determination shall be made, with respect to a person who
is a director or officer at the time of such determination, (i) by a majority
vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (ii) by a committee of such directors
designated by majority vote of such directors, even though less than
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a quorum, or (iii) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (iv) by the
stockholders.
SECTION 4. Advance of Expenses. Expenses (including attorneys' fees)
-------------------
incurred by an officer, director, employee or agent in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking satisfactory to the Board of
Directors by or on behalf of such director, officer, employee or agent to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
SECTION 5. Remedies Not Exclusive. The indemnification and
----------------------
advancement of expenses provided by this Article VIII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
SECTION 6. INSURANCE. The Corporation may purchase and maintain
---------
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Corporation or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
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<PAGE>
EXHIBIT 4.1
THIRD AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIRD AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT dated as of
February 24, 1999, by and among ITXC CORP., a Delaware corporation (the
"Company") with its principal place of business at 600 College Road East,
Princeton, New Jersey 08540, Tom Evslin, Mary Evslin (Tom Evslin and Mary
Evslin, collectively, "Evslin"), Edward Jordan ("Jordan" and, together with
Evslin, the "Founders"), and the several persons listed as "Purchasers" on the
signature pages hereto as "Purchasers" (hereinafter at times referred to
individually as a "Purchaser" and collectively as the "Purchasers").
WHEREAS, the Company, the Founders and certain of the Purchasers (the
"April 1998 Purchasers") are parties to a Second Amended and Restated
Registration Rights Agreement dated as of April 27, 1998 (the "Original
Registration Rights Agreement"); and
WHEREAS, pursuant to a Series C Convertible Preferred Stock Purchase
Agreement dated as of February 24, 1999 (the "Series C Stock Purchase
Agreement"), among the Company and certain of the Purchasers (the "February
Purchasers"), the Company has agreed to issue and sell to the February
Purchasers an aggregate of 3,229,975 shares of Series C Convertible Preferred
Stock, $0.001 par value ("Series C Preferred Stock"), of the Company and to
enter into this Agreement; and
WHEREAS, it is a condition to the obligations of the February Purchasers
and the Company under the Series C Stock Purchase Agreement that the parties to
the Original Stockholders Agreement enter into this Agreement in order to amend,
restate and replace the Original Registration Rights Agreement, and to provide
for such additional terms hereinafter set forth, and the parties hereto are
willing to execute this Agreement and be bound by the provisions hereof;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and in the Series C Stock Purchase Agreement, the parties hereto agree that the
Original Registration Rights Agreement shall be amended and restated in its
entirety to provide as follows:
1. Certain Definitions. As used herein, the following terms shall
-------------------
have the following respective meanings:
ITXC Third Amended Registration Rights Agreement
<PAGE>
"Common Stock" shall mean the Common Stock, par value $0.001 per
------------
share, of the Company, or such shares of stock as are issuable upon conversion
thereof.
"Commission" shall mean the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Shares" shall mean the shares of Common Stock issued upon
-----------------
conversion of the Preferred Shares.
"Evslin Warrants" shall mean warrants to purchase up to 322,581 shares
---------------
of Common Stock issued to Evslin on April 27, 1998 and outstanding as of the
execution of this Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Founders Stock" shall mean 3,000,000 shares of Common Stock held by
--------------
Evslin, up to 290,323 shares of Common Stock issuable upon exercise of the
Evslin Warrants and up to 105,572 shares of Common Stock issuable upon exercise
of the Jordan Warrants, the certificates for which, in each case, are required
to bear the legend set forth in Section 2 hereof, excluding any such shares
which have been (i) registered under the Securities Act pursuant to an effective
registration statement filed thereunder and disposed of in accordance with the
registration statement covering them or (ii) publicly sold pursuant to Rule 144
(or any successor or similar rule) adopted under the Securities Act; provided,
--------
however, that the only securities which the Company shall be required to
- -------
register pursuant to this Agreement shall be shares of Common Stock; provided
--------
further, however, that in any underwritten public offering contemplated by
- ------- -------
Section 4 or 6 hereof, the holders of Warrants shall be entitled to sell such
Warrants to the underwriters for exercise and the sale of the shares of Common
Stock issued upon such exercise.
"Jordan Warrants" shall mean warrants to purchase up to 117,302 shares
---------------
of Common Stock issued to Jordan on April 27, 1998 and outstanding as of the
execution of this Agreement.
"Public Sale" shall mean any sale of preferred or Common Stock to the
-----------
public pursuant to an offering registered under the Securities Act or to the
public pursuant to the provisions of Rule 144 (or any successor or similar rule)
adopted under the Securities Act.
ITXC Third Amended Registration Rights Agreement
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<PAGE>
"Preferred Shares" shall mean, collectively, the Series B Preferred
----------------
Shares and the Series C Preferred Shares.
"Registration Expenses" shall mean the expenses so described in
---------------------
Section 8 hereof.
"Restricted Stock" shall mean (i) 1,178,000 shares of Common Stock
----------------
issued to VocalTec as of the date hereof, (ii) up to 722,000 shares of Common
Stock issuable upon exercise of the VocalTec Warrants, (iii) up to 32,258 shares
of Common Stock issuable upon exercise of the Evslin Warrants, (iv) up to 11,730
shares of Common Stock issuable upon exercise of the Jordan Warrants, (v) the
Conversion Shares, excluding any of such shares which have been (A) registered
under the Securities Act pursuant to an effective registration statement filed
thereunder and disposed of in accordance with the registration statement
covering them or (B) publicly sold pursuant to Rule 144 (or any successor or
similar rule) adopted under the Securities Act, and (vi) the Preferred Shares;
provided, however, that the only securities which the Company shall be required
- -------- -------
to register pursuant to this Agreement shall be shares of Common Stock; provided
--------
further, however, that in any underwritten public offering contemplated by
- ------- -------
Section 4 or 6 hereof, the holders of Warrants shall be entitled to sell such
Warrants to the underwriters for exercise and the sale of the shares of Common
Stock issued upon such exercise; and provided further that, for purposes of the
----------------
computation of the number of shares of Restricted Stock outstanding, the holders
of Preferred Shares shall be treated as the holders of the Conversion Shares
then issuable upon conversion of such Preferred Shares.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean the expenses so described in Section 8
----------------
hereof.
"Series B Preferred Shares" shall mean an aggregate of 5,865,104
-------------------------
shares of Series B Convertible Preferred Stock, $0.001 par value, of the
Company, purchased by the April 1998 Purchasers pursuant to the Series B
Convertible Preferred Stock Purchase Agreement dated as of April 27, 1998, among
the Company and the April 1998 Purchasers.
"Series C Preferred Shares" shall mean an aggregate of 3,229,974
-------------------------
shares of Series C Preferred Stock purchased by the February 1999 Purchasers
pursuant to the Series C Stock Purchase Agreement.
"VocalTec Warrants" shall mean warrants to purchase up to 722,000
-----------------
shares of Common Stock issued to VocalTec on October 1, 1997 and outstanding on
the date hereof.
ITXC Third Amended Registration Rights Agreement
-3-
<PAGE>
"Warrants" shall mean, collectively, the Evslin Warrants, the Jordan
--------
Warrants and the VocalTec Warrants.
2. Restrictive Legend. Each certificate representing one or more
------------------
shares of Restricted Stock or Founders Stock and each certificate issued upon
exchange or transfer thereof, other than in a Public Sale, shall be stamped or
otherwise imprinted with a legend substantially in the following form:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAW, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
THEY HAVE BEEN SO REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE."
3. Notice of Proposed Transfer. Prior to any proposed transfer of
---------------------------
any share of Restricted Stock or Founders Stock (other than under the
circumstances described in Section 4, 5 or 6 hereof), the holder thereof shall
give written notice to the Company of its intention to effect such transfer.
Each such notice shall describe the manner of the proposed transfer and, if
requested by the Company, shall be accompanied by an opinion of counsel
reasonably satisfactory to the Company (it being agreed that Kalow, Springut &
Bressler LLP shall be satisfactory) to the effect that the proposed transfer of
the Founders Stock or Restricted Stock, as the case may be, may be effected
without registration under the Securities Act and any applicable state
securities law, whereupon the holder of such Founders Stock or Restricted Stock,
as the case may be, may transfer such Founders Stock or Restricted Stock, as the
case may be, in accordance with the terms of its notice; provided, however, that
-------- -------
no such opinion or other documentation shall be required if such notice states
that no value is being given for the transfer and covers (i) a distribution by a
partnership to its partners or by a limited liability company to its members or
(ii) a transfer by a partnership, corporation or limited liability company to an
affiliated entity or an entity that is under common management with the
transferring partnership, corporation or limited liability company. Each
certificate of Founders Stock or Restricted Stock, as the case may be,
transferred as above provided shall bear the legend set forth in Section 2,
unless (i) such transfer is to the public in accordance with the provisions of
Rule 144 (or any other rule permitting Public Sale without registration under
the Securities Act) or (ii) the opinion of counsel referred to above is to the
further effect that the transferee and any subsequent transferee (other than an
affiliate of the Company) would be entitled to transfer such securities in a
Public Sale without registration under the Securities Act. The restrictions
provided for in this Section shall not apply to securities that are not required
to bear the legend prescribed by Section 2 in accordance with the provisions of
that Section.
4. Required Registration.
---------------------
ITXC Third Amended Registration Rights Agreement
-4-
<PAGE>
(a) At any time on or after the first anniversary of the effective
date of an initial public offering of the Company's Common Stock under the
Securities Act, the holders of Restricted Stock constituting at least a majority
of the total Restricted Stock outstanding at such time (excluding Restricted
Stock held by Evslin and Jordan and their permitted transferees from such
calculation) may request the Company to register all or any portion of the
Restricted Stock held by such requesting holder or holders for sale in the
manner specified in such notice.
(b) Promptly following receipt of any notice under this Section 4 (the
"Initial Notice"), the Company shall immediately notify any holders of
Restricted Stock from whom an Initial Notice has not been received and any
holder of Founders Stock and shall use its best efforts to register under the
Securities Act, for Public Sale in accordance with the method of disposition
specified in the Initial Notice from requesting holders, the number of shares of
Restricted Stock specified in the Initial Notice (and the number of shares of
Restricted Stock or Founders Stock specified in any notices received from such
other holders of Restricted Stock and holders of Founders Stock within twenty
(20) days after their receipt of notice from the Company); provided, however,
-------- -------
that the number of shares of Restricted Stock and Founders Stock to be included
in an underwritten offering may be reduced (first, pro rata among the requesting
--- ----
holders of Founders Stock based upon the number of shares of Founders Stock for
which registration has been requested and then, if necessary, pro rata among
--- ----
holders of Restricted Stock based upon the aggregate original purchase price
represented by the shares of Restricted Stock for which registration has been
requested) if and to the extent that the managing underwriter, if the proposed
method of disposition specified by the requesting holders in the Initial Notice
shall be an underwritten public offering, shall be of the opinion that such
inclusion would materially adversely affect the marketing of the Restricted
Stock. If such method of disposition shall be an underwritten public offering,
the Company shall designate the managing underwriter of such offering, subject
to the approval of the selling holders of a majority of the Restricted Stock
covered by the offering, which approval shall not be unreasonably withheld. The
Company shall be obligated to register Restricted Stock and Founders Stock
pursuant to this Section 4 on two (2) occasions only; provided that such
--------
obligation shall be deemed satisfied only when a registration statement covering
all shares of Restricted Stock and Founders Stock specified in notices received
as aforesaid, for sale in accordance with the method of disposition specified by
the requesting holders, shall have become effective and, if such method of
disposition is a firm commitment underwritten public offering, all such shares
shall have been sold pursuant thereto.
(c) Notwithstanding anything to the contrary in this Agreement, (i)
the Company may delay for up to sixty (60) days the filing or effectiveness of a
registration statement pursuant to a request under this Section 4 if the Board
of Directors of the Company shall determine that such a registration would not
be in the best interests of the Company at such time, during which period the
requesting holders may withdraw their request, in which case the requesting
holders will not be deemed to have made a request for registration under this
Section 4 and (ii) if, after any such registration statement is declared
effective, (x) the Board of Directors of the Company shall determine that sales
of securities under such a registration would not be in the best interests of
the Company at such time and (y) the Company requests that selling stockholders
refrain from
ITXC Third Amended Registration Rights Agreement
-5-
<PAGE>
selling shares thereunder in any distribution other than an underwritten
offering, the holders of Restricted Stock and Founders Stock shall honor such
request, provided that (a) in no event shall the Company make any request under
this clause (ii) if it has previously made a similar request under clause (ii)
of the last proviso of Section 5(a) hereof, (b) any such request under this
clause (ii) shall not be made on more than one occasion and (c) the aggregate
number of days covered by any such request under this clause (ii) shall not
exceed sixty (60) days.
(d) The Company shall be entitled to include in any registration
statement referred to in this Section 4, for sale in accordance with the method
of disposition specified by the requesting holders in the Initial Notice, shares
of Common Stock to be sold by the Company for its own account, except as and to
the extent that, in the opinion of the managing underwriter (if such method of
disposition shall be an underwritten public offering), such inclusion would
adversely affect the marketing of the Restricted Stock (if any) to be sold.
Except for registration statements on Form S-4, registration statements on Form
S-8, registration statements on a form not available for registering the
Restricted Stock for sale to the public, registration statements on Form S-3 to
be filed by the Company to register shares of Common Stock issued in
consideration for an acquisition, or registration statements on Form S-1
covering solely an employee benefit plan, the Company will not file with the
Commission any other registration statement with respect to its Common Stock,
whether for its own account or that of other holders, from the date of receipt
of an Initial Notice from requesting holders pursuant to this Section 4 until
the completion of the period of distribution of the registration contemplated
thereby or withdrawal of such registration.
5. Form S-3 Registration.
---------------------
(a) If at any time (i) the Company shall receive from any holder or
holders of Restricted Stock a written request or requests that the Company
effect a registration of all or any portion of the shares of Restricted Stock on
Form S-3 or any successor thereto and specifying the proposed manner of
disposition of such Shares (an "S-3 Request"), and (ii) the Company is a
registrant under the Securities Act entitled to use Form S-3 or any successor
thereto to register such shares, the Company will:
(i) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other holders of
any shares of Restricted Stock and Founders Stock; and
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities
laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other government requirements or
regulations) as may be so requested and as would permit or facilitate
the sale and distribution of all or such portion of such holder's or
holders' Restricted Stock as are specified in the S-3 Request,
together with all or such portion of the Restricted
ITXC Third Amended Registration Rights Agreement
-6-
<PAGE>
Stock of any holder or holders of Restricted Stock joining in such S-3
Request and all or such portion of the shares of Founders Stock of any
holder or holders of Founders Stock joining in such request as are
specified in a written request given within thirty (30) days after
receipt of such written notice from the Company; provided, however,
-----------------
that the Company shall not be obligated to effect any such
registration, qualification or compliance pursuant to this Section 5
more than once in any 180-day period; and provided further, however,
---------------- -------
that the number of shares of Restricted Stock and Founders Stock to be
included in any underwriting effected pursuant to this Section 5 may
be reduced (first, pro rata among the requesting holders of Founders
--- ----
Stock based upon the number of shares of Founders Stock for which
registration has been requested and then, if necessary, pro rata among
--- ----
holders of Restricted Stock based upon the aggregate original purchase
price represented by the shares of Restricted Stock for which
registration has been requested) if and to the extent that the
managing underwriter, if the proposed method of disposition specified
in the S-3 Request shall be an underwritten public offering, shall be
of the opinion that the inclusion of all shares covered by such
notices would materially adversely affect the marketing of the
Restricted Stock. Subject to the foregoing, the Company shall file a
registration statement covering the Restricted Stock so requested to
be registered as soon as practicable after receipt of the S-3 Request
of the holder or holders of Restricted Stock to do so.
Notwithstanding anything to the contrary in this Agreement, (i) the Company may
delay for up to sixty (60) days the filing or effectiveness of a registration
statement pursuant to a request under this Section 5 if the Board of Directors
of the Company shall determine that such registration would not be in the best
interests of the Company at such time, during which period the requesting
holders may withdraw their request, in which case the requesting holders will
not be deemed to have made a request for registration under this Section 5 and
(ii) if, after any such registration statement is declared effective, (x) the
Board of Directors of the Company shall determine that sales of securities under
such a registration would not be in the best interests of the Company at such
time and (y) the Company requests that selling stockholders refrain from selling
shares thereunder in any distribution other than an underwritten offering, the
holders of Restricted Stock and Founders Stock shall honor such request,
provided that (a) in no event shall the Company make any request under this
clause (ii) if it has previously made a similar request under clause (ii) of the
last proviso of Section 4(c) hereof, (b) any such request under this clause (ii)
shall not be made on more than one occasion and (c) the aggregate number of days
covered by any such request under this clause (ii) shall not exceed sixty (60)
days.
(b) Registrations effected pursuant to this Section 5 shall not be
counted as requests for registration effected pursuant to Section 4.
(c) Commencing one year after the Company becomes subject to the
requirements of Section 12 or 15(d) of the Securities Exchange Act of 1934, as
amended, the
ITXC Third Amended Registration Rights Agreement
-7-
<PAGE>
Company shall use its best efforts to satisfy the registrant requirements
applicable for use of registration statements on Form S-3 (or any successor form
thereto) for the resale of securities by selling stockholders.
6. Incidental Registration. If the Company at any time (other than
-----------------------
pursuant to Section 4 or 5 hereof) proposes to register any of its Common Stock
under the Securities Act for sale to the public, whether for its own account or
for the account of other security holders or both (except with respect to
registration statements on Forms S-4 or S-8 or another form not available for
registering the Restricted Stock for sale to the public, a registration
statement on Form S-3 to be filed by the Company to register shares of Common
Stock issued in consideration for an acquisition, or a registration statement on
Form S-1 covering solely an employee benefit plan), it will give written notice
at such time to all holders of outstanding Restricted Stock and Founders Stock
of its intention to do so. Upon the written request of any such holder, given
within thirty (30) days after receipt of any such notice by the Company, to
register any of its Restricted Stock or Founders Stock, as the case may be
(which request shall state the intended method of disposition thereof), the
Company will use its best efforts to cause the Restricted Stock or Founders
Stock or both, as the case may be, as to which registration shall have been so
requested, to be included in the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent requisite to
permit the sale or other disposition by the holder (in accordance with its
written request) of such Restricted Stock or Founders Stock, as the case may be,
so registered; provided that nothing herein shall prevent the Company from
--------
abandoning or delaying any such registration at any time. In the event that any
registration pursuant to this Section 6 shall be, in whole or in part, an
underwritten public offering of Common Stock, any request by a holder pursuant
to this Section 6 to register Restricted Stock or Founders Stock, as the case
may be, shall specify that such Restricted Stock or Founders Stock, as the case
may be, is to be included in the underwriting on the same terms and conditions
as the shares of Common Stock otherwise being sold through underwriters under
such registration. The number of shares of Restricted Stock or Founders Stock
or both, as the case may be, to be included in such an underwriting may be
reduced (first, pro rata among the requesting holders of Founders Stock based
--- ----
upon the number of shares of Founders Stock for which registration has been
requested and then, if necessary, pro rata among holders of Restricted Stock
--- ----
based upon the aggregate original purchase price represented by the shares of
Restricted Stock for which registration has been requested), if and to the
extent that the managing underwriter shall be of the opinion that such inclusion
would adversely affect the marketing of the securities to be sold by the Company
therein; provided, however, that such number of shares of Restricted Stock shall
-------- -------
not be reduced if any shares are to be included in such underwriting for the
account of any person other than the Company or requesting holders of Restricted
Stock or Founders Stock; and provided, further, that except in the case of the
-------- -------
Company's initial public offering of Common Stock, in no event shall such number
of shares of Restricted Stock be reduced so that the number of shares of
Restricted Stock so to be registered is less than thirty percent (30%) of the
aggregate number of shares to be offered in such underwriting (excluding
Restricted Stock held by Evslin and Jordan and their permitted transferees from
such
ITXC Third Amended Registration Rights Agreement
-8-
<PAGE>
calculation). If the offering covered by this Section 6 shall be an underwritten
public offering, the Company shall designate the managing underwriter of such
offering.
7. Registration Procedures. If and whenever the Company is
-----------------------
required by the provisions of Section 4, 5 or 6 hereof to use its best efforts
to effect the registration of any of the Restricted Stock or Founders Stock or
both, as the case may be, under the Securities Act, the Company will, as
expeditiously as possible:
(a) prepare (and afford counsel for the selling holders reasonable
opportunity to review and comment thereon) and file with the Commission a
registration statement (which, in the case of an underwritten public
offering pursuant to Section 4 hereof, shall be on Form S-1, S-3 or other
form of general applicability satisfactory to the managing underwriter
selected as therein provided) with respect to such securities and use its
best efforts to cause such registration statement to become and remain
effective for the period of the distribution contemplated thereby
(determined as hereinafter provided);
(b) prepare (and afford counsel for the selling holders reasonable
opportunity to review and comment thereon) and file with the Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for the period specified in paragraph (a)
above and use its best efforts to comply with the provisions of the
Securities Act with respect to the disposition of all Restricted Stock or
Founders Stock or both, as the case may be, covered by such registration
statement in accordance with the sellers' intended method of disposition
set forth in such registration statement for such period;
(c) furnish to each seller and to each underwriter such number of
copies of the registration statement and the prospectus included therein
(including each preliminary prospectus) as such persons may reasonably
request in order to facilitate the Public Sale or other disposition of the
Restricted Stock or Founders Stock or both, as the case may be, covered by
such registration statement;
(d) use its best efforts to register or qualify the Restricted Stock
or Founders Stock or both, as the case may be, covered by such registration
statement under the securities or blue sky laws of such jurisdictions as
the sellers of Restricted Stock or Founders Stock or both, as the case may
be, or, in the case of an underwritten public offering, the managing
underwriter, shall reasonably request (provided that the Company will not
be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this paragraph
(d), (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any jurisdiction);
ITXC Third Amended Registration Rights Agreement
-9-
<PAGE>
(e) use its best efforts to list the Restricted Stock covered by such
registration statement with any securities exchange on which any Common
Stock of the Company is then listed;
(f) immediately notify each seller under such registration statement
and each underwriter, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any
event as a result of which the prospectus contained in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing;
(g) use its best efforts (if the offering is underwritten) to furnish,
at the request of any seller, on the date that Restricted Stock or Founders
Stock or both, as the case may be, is delivered to the underwriters for
sale pursuant to such registration: (i) an opinion dated such date of
counsel representing the Company for the purposes of such registration,
addressed to the underwriters and either addressed to such seller or
specifically entitling such seller to rely thereupon, stating that such
registration statement has become effective under the Securities Act and
that (A) to the best knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Securities Act, (B) the registration statement, the related prospectus, and
each amendment or supplement thereof, comply as to form in all material
respects with the requirements of the Securities Act and the applicable
rules and regulations of the Commission thereunder (except that such
counsel need express no opinion as to financial statements, the notes
thereto, and the financial schedules and other financial and statistical
data contained therein) and (C) to such other effects as may reasonably be
requested by counsel for the underwriters, and (ii) a letter dated such
date from the independent public accountants retained by the Company,
addressed to the underwriters and to such seller (or, if such accountants
refuse to deliver such a letter to such seller, then to the Company),
stating that they are independent public accountants within the meaning of
the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the registration statement
or the prospectus, or any amendment or supplement thereof, comply as to
form in all material respects with the applicable accounting requirements
of the Securities Act, and such letter shall additionally cover such other
financial matters (including information as to the period ending no more
than five business days prior to the date of such letter) with respect to
the registration in respect of which such letter is being given as such
underwriters may reasonably request; and
(h) subject to applicable confidentiality obligations, make available
for inspection by each seller, any underwriter participating in any
distribution pursuant to such registration statement, and any attorney,
accountant or other agent retained by such
ITXC Third Amended Registration Rights Agreement
-10-
<PAGE>
seller or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by
any such seller, underwriter, attorney, accountant or agent in connection
with such registration statement.
For purposes of paragraphs (a) and (b) above and of Section 4(c) hereof, the
period of distribution of Restricted Stock or Founders Stock or both, as the
case may be, in a firm commitment underwritten public offering shall be deemed
to extend until each underwriter has completed the distribution of all
securities purchased by it, and the period of distribution of Restricted Stock
or Founders Stock or both, as the case may be, in any other registration shall
be deemed to extend until the earlier of the sale of all Restricted Stock or
Founders Stock or both, as the case may be, covered thereby or six months after
the effective date thereof.
In connection with each registration hereunder, the selling holders of
Restricted Stock or Founders Stock, as the case may be, will furnish to the
Company in writing such information with respect to themselves and the proposed
distribution by them as shall be reasonably necessary in order to assure
compliance with federal and applicable state securities laws. In addition, any
such selling holder of Restricted Stock or Founders Stock, as the case may be,
will deliver to the underwriters and the Company such documentation as is
customary in the securities business for such registrations of securities.
In connection with each registration pursuant to Sections 4, 5 and 6
hereof covering an underwritten public offering, the Company agrees to enter
into a written agreement with the managing underwriter selected in the manner
herein provided, in such form and containing such provisions as are customary in
the securities business for such an arrangement between major underwriters and
companies of the Company's size and investment stature; provided, however, that
-------- -------
such agreement shall not contain any such provision applicable to the Company
which is inconsistent with the provisions hereof; and provided, further, that
-------- -------
the time and place of the closing under said agreement shall be as mutually
agreed upon between the Company and such managing underwriter.
8. Expenses. All expenses incurred by the Company in complying
--------
with Sections 4, 5 or 6 hereof, including without limitation all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees of the National Association
of Securities Dealers, Inc., transfer taxes, fees of transfer agents and
registrars and costs of insurance, but excluding any Selling Expenses, are
herein called "Registration Expenses". All underwriting discounts and selling
commissions applicable to the sale of Restricted Stock or Founders Stock and all
fees and expenses of counsel representing sellers of Restricted Stock and
Founders Stock (unless such counsel is also counsel to the Company) are herein
called "Selling Expenses".
The Company will pay all Registration Expenses in connection with each
registration statement filed pursuant to Sections 4, 5 and 6 hereof. All
Selling Expenses in
ITXC Third Amended Registration Rights Agreement
-11-
<PAGE>
connection with any registration statement filed pursuant to Section 4, 5 or 6
hereof shall be borne by the participating sellers in proportion to the number
of shares sold by each, or by such persons other than the Company (except to the
extent the Company shall be a seller) as they may agree.
9. Indemnification. (a) In the event of a registration of any of the
---------------
Restricted Stock or Founders Stock or both, as the case may be, under the
Securities Act pursuant to Section 4, 5 or 6 hereof, the Company will indemnify
and hold harmless each seller of such Restricted Stock or Founders Stock, as the
case may be, thereunder and each underwriter of Restricted Stock or Founders
Stock, as the case may be, thereunder and each officer, director and each other
person, if any, who controls such seller or underwriter within the meaning of
the Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which such seller or underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Restricted Stock or
Founders Stock, as the case may be, was registered under the Securities Act
pursuant to Section 4, 5 or 6, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each such seller, each such underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
-------- -------
any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with information
furnished by such seller, such underwriter or such controlling person in writing
specifically for use in such registration statement or prospectus.
(b) In the event of a registration of any of the Restricted Stock or
Founders Stock or both, as the case may be, under the Securities Act pursuant to
Section 4, 5 or 6 hereof, each seller of such Restricted Stock or Founders
Stock, as the case may be, thereunder, severally and not jointly, will indemnify
and hold harmless the Company and each officer, director and each other person,
if any, who controls the Company within the meaning of the Securities Act, each
officer of the Company who signs the registration statement, each director of
the Company, each underwriter and each person who controls any underwriter
within the meaning of the Securities Act, against all losses, claims, damages or
liabilities, joint or several, to which the Company or such officer or director
or underwriter or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the registration
statement under which such Restricted Stock or Founders Stock, as the case may
be, was registered under the Securities Act pursuant to Section 4, 5 or 6, any
preliminary prospectus or final prospectus contained therein, or any amend-
ITXC Third Amended Registration Rights Agreement
-12-
<PAGE>
ment or supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and each such officer, director, underwriter and controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that such seller will be liable hereunder in any such case if
- -------- -------
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus; and
provided further, however, that in the event that more than one seller shall
- ---------------- -------
bear liability hereunder, the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of shares sold
by such seller under such registration statement bears to the total public
offering price of all securities sold thereunder; and provided further, however,
---------------- -------
that in no event shall any seller's liability exceed the proceeds (net of
underwriting discounts and commissions) received by such seller from the sale of
Restricted Stock or Founders Stock, as the case may be, covered by such
registration statement.
(c) Promptly after receipt by an indemnified party hereunder of notice
of the commencement of any action, such indemnified party shall, if a claim in
respect thereof is to be made against the indemnifying party hereunder, notify
the indemnifying party in writing thereof, but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party other than under this Section 9. In case any such action
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume and undertake the defense thereof, the indemnifying
party shall not be liable to such indemnified party under this Section 9 for any
legal expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation and of
liaison with counsel so selected; provided, however, that, if the defendants in
-------- -------
any such action include both the indemnified party and the indemnifying party
and the indemnified party shall have reasonably concluded that there may be
reasonable defenses available to it which are different from or additional to
those available to the indemnifying party, or if the interests of the
indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a
separate counsel and to assume such legal defenses and otherwise to participate
in the defense of such action, with the expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
Notwithstanding the foregoing, any indemnified party shall have the right to
retain its own counsel in any such action, but the fees and disbursements of
such counsel shall be at the
ITXC Third Amended Registration Rights Agreement
-13-
<PAGE>
expense of such indemnified party unless (i) the indemnifying party shall have
failed to retain counsel for the indemnified person as aforesaid or (ii) the
indemnifying party and such indemnified party shall have mutually agreed to the
retention of such counsel. It is understood that the indemnifying party shall
not, in connection with any action or related actions in the same jurisdiction,
be liable for the fees and disbursements of more than one separate firm
qualified in such jurisdiction to act as counsel for the indemnified party. The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
(d) If the indemnification provided for in paragraphs (a) and (b) of
this Section 9 is unavailable or insufficient to hold harmless an indemnified
party under such paragraphs in respect of any losses, claims, damages or
liabilities or actions in respect thereof referred to therein, then each
indemnifying party shall in lieu of indemnifying such indemnified party
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the sellers of such Restricted Stock and Founders Stock, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any notice under paragraph (c) of
this Section 9. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the Company, on the one hand, or the sellers
of such Restricted Stock and Founders Stock, on the other hand, and to the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the sellers of
Restricted Stock and Founders Stock agree that it would not be just and
equitable if contributions pursuant to this paragraph were determined by pro
---
rata allocation (even if all of the sellers of such Restricted Stock and
- ----
Founders Stock were treated as one entity for such purpose) or by any other
method of allocation which did not take account of the equitable considerations
referred to above in this paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities or
action in respect thereof, referred to above in this paragraph, shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph, the sellers of such Restricted
Stock and Founders Stock shall not be required to contribute any amount in
excess of the amount, if any, by which the total price at which the Common Stock
sold by each of them was offered to the public exceeds the amount of any damages
which they would have otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission. No person guilty of fraudulent
misrepresentations (within the meaning of Section 11(f) of the Securities Act),
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation.
ITXC Third Amended Registration Rights Agreement
-14-
<PAGE>
The indemnification of underwriters provided for in this Section 9
shall be on such other terms and conditions as are at the time customary and
reasonably required by such underwriters. In that event the indemnification of
the sellers of Restricted Stock or Founders Stock or both, as the case may be,
in such underwriting shall at the sellers' request be modified to conform to
such terms and conditions.
10. Changes in Stock. If, and as often as, there are any changes in
----------------
the Common Stock by way of stock split, stock dividend, combination or
reclassification, or through merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions hereof, as may be required, so that the rights and privileges
granted hereby shall continue with respect to the Common Stock as so changed and
shall apply to any securities received in any such transaction.
11. [Reserved]
--------
12. Rule 144 Reporting. The Company agrees with you as follows:
------------------
(a) The Company shall make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after the 90th day after its initial registration statement
is declared effective by the Commission.
(b) The Company shall use its best efforts to file with the Commission
in a timely manner all reports and other documents as the Commission may
prescribe under Section 13(a) or 15(d) of the Exchange Act at any time after the
Company has become subject to such reporting requirements of the Exchange Act.
(c) The Company shall furnish to each holder of Restricted Stock or
Founders Stock forthwith upon request (i) a written statement by the Company as
to its compliance with the reporting requirements of Rule 144 (at any time from
and after the date it first becomes subject to such reporting requirements), and
of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), (ii) a copy of the most recent annual
or quarterly report of the Company, and (iii) such other reports and documents
so filed with the Commission as a holder may reasonably request to avail itself
of any rule or regulation of the Commission allowing a holder of Restricted
Stock or Founders Stock to sell any such securities without registration.
13. Miscellaneous.
-------------
(a) Each holder of Restricted Stock and Founders Stock will agree, to
the extent reasonably requested by any underwriter of securities of the Company
in connection with an initial public offering of the Company's Common Stock, to
enter into an agreement not to sell or otherwise transfer or dispose of any
shares of Common Stock for such period of time (not to exceed 180 days)
following the effective date of a registration statement of the Company filed
ITXC Third Amended Registration Rights Agreement
-15-
<PAGE>
under the Securities Act, which agreement shall also bind the executive officers
and directors of the Company on terms and conditions substantially similar to
those which shall apply to holders of Restricted Stock and Founders Stock.
(b) All covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto, including, without limitation, the rights
to indemnification under Section 9 hereof, shall bind and inure to the benefit
of the respective successors and assigns of the parties hereto whether so
expressed or not. Without limiting the generality of the foregoing, the
registration rights conferred herein on the holders of Restricted Stock or
Founders Stock, as the case may be, shall inure to the benefit of any and all
subsequent holders from time to time of the Restricted Stock and the Founders
Stock.
(c) All notices, requests, consents and other communications hereunder
shall be in writing and shall be mailed by first class registered mail, postage
prepaid, addressed as follows:
if to the Company, to it at 600 College Road East, Princeton, New
Jersey 08540, attention: Chairman, facsimile number (609) 419-1511, with a copy
to Peter Ehrenberg, Esq., Lowenstein Sandler PC, 65 Livingston Avenue, Roseland,
New Jersey 07065, facsimile number (973) 597-2400;
if to any holder of Restricted Stock, to him, her or it, as the case
may be, at its address as set forth on Annex I hereto;
if to any holder of Founders Stock, to him, her or it, as the case may
be, at its address set forth on Annex II hereto;
if to any subsequent holder of Restricted Stock or Founders Stock, to
it at such address as may have been furnished to the Company in writing by such
holder;
or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Restricted Stock or
Founders Stock), or to the holders of Restricted Stock or Founders Stock (in the
case of the Company).
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of New Jersey.
(e) This Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and may not be modified or amended
except in writing executed by the Company, the holders of a majority of the
total number of shares of Restricted Stock and the holders of a majority of the
total number of shares of Founders Stock.
(f) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
ITXC Third Amended Registration Rights Agreement
-16-
<PAGE>
(g) The Company shall not grant to any third party any registration
rights more favorable than or inconsistent with any of those contained herein,
so long as any of the registration rights under this Agreement remains in
effect.
(h) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
(i) This Agreement shall further amend and restate, and shall replace
in its entirety, the Original Registration Rights Agreement.
[This Page Intentionally Ends Here]
ITXC Third Amended Registration Rights Agreement
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amended and Restated Registration Rights Agreement as of the date first above
written.
ITXC CORP.
By: /s/Tom Evslin
________________________________
Name: Tom Evslin
______________________________
Title: CEO
_____________________________
FOUNDERS:
/s/ Tom Evslin
___________________________________
Tom Evslin
/s/ Mary Evslin
___________________________________
Mary Evslin
/s/ Tom Evslin and Mary Evslin
___________________________________
Tom Evslin and Mary Evslin, JTWROS
/s/ Edward B. Jordan
___________________________________
Edward Jordan
CHASE VENTURE CAPITAL ASSOCIATES,
L.P.
By: Chase Capital Partners,
its General Partner
/s/ J. Robert Greene
By: _______________________________
ITXC Third Amended Registration Rights Agreement
-18-
<PAGE>
Name: J. Robert Greene
_____________________________
Title: G.P.
_____________________________
THE FL@TIRON FUND LLC
By: /s/ Fred Wilson
_____________________________
Name: Fred Wilson
Title: Managing Member
THE FLATIRON FUND 1998/99, LLC
By: /s/ Fred Wilson
_____________________________
Name: Fred Wilson
Title: Managing Member
FLATIRON ASSOCIATES, LLC
By: Flatiron Partners, LLC
its Manager
By: /s/ Fred Wilson
_____________________________
Name: Fred Wilson
Title: Managing Member
ITXC Third Amended Registration Rights Agreement
-19-
<PAGE>
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II,
L.P., its General Partner
/s/ William P. Collatos
By: _______________________________
Name: William P. Collatos
Title: General Partner
SEA 1998 II, L.P.
/s/ Randy Henderson
By: _______________________________
Name: Randy Henderson
______________________________
Title: Vice President
______________________________
VOCALTEC COMMUNICATIONS, INC.
/s/ Elon Ganor
By: _______________________________
Name: Elon Ganor
______________________________
Title: Chairman of the Board
______________________________
INTEL CORPORATION
/s/ Arvind Sodhani
By: _______________________________
Name: Arvind Sodhani
______________________________
Title: Vice President and Treasurer
______________________________
POLARIS FUND II, LLC (Tax Exempt
Investors)
/s/ Chemi Peres
By: _______________________________
Name: Chemi Peres
______________________________
Title:
______________________________
ITXC Third Amended Registration Rights Agreement
-20-
<PAGE>
POLARIS FUND II, LLC
/s/ Chemi Peres
By: _____________________________
Name: Chemi Peres
____________________________
Title:
____________________________
POLARIS FUND, L.P.
/s/ Chemi Peres
By: _____________________________
Name: Chemi Peres
____________________________
Title:
____________________________
DS POLARIS TRUST COMPANY
(Foreign residents)(1997), LTD.
/s/ Chemi Peres
By: _____________________________
Name: Chemi Peres
____________________________
Title:
____________________________
DS POLARIS, LTD.
/s/ Chemi Peres
By: _____________________________
Name: Chemi Peres
____________________________
Title:
____________________________
CANADA-ISRAEL OPPORTUNITY FUND, LP
/s/ Chemi Peres
ITXC Third Amended Registration Rights Agreement
-21-
<PAGE>
By: _____________________________
Name: Chemi Peres
____________________________
Title:
____________________________
ITXC Third Amended Registration Rights Agreement
-22-
<PAGE>
Annex 1
-------
Addresses for Notice of Holders of Restricted Stock
---------------------------------------------------
Notice to Evslin or Jordan shall be addressed to either such person c/o
ITXC Corp., 600 College Road East, Princeton, New Jersey 08540, to such
individual's attention, with a copy to Peter Ehrenberg, Esq., Lowenstein Sandler
PC, 65 Livingston Avenue, Roseland, New Jersey 07068.
Notices to other holders of Restricted Stock shall be addressed as follows:
VocalTec Communications, Inc.
25 Industrial Parkway
Northvale, NJ 07647
Attn: Elon Ganor,
Chief Executive Officer
and Chairman
- ----------------------------------
Chase Venture Capital Associates,
L.P.
380 Madison Avenue, 12th floor
New York, NY 10017
Attn: Mr. I. Robert Greene
- ----------------------------------
The Fl@tiron Fund LLC
The Flatiron Fund 1998/99, LLC
Flatiron Associates, LLC
257 Park Avenue South
New York, NY 10017
Attn: Mr. Fred Wilson
- ----------------------------------
Intel Corporation
2200 Mission College Boulevard
Mail Stop RN6 6-37
Santa Clara, CA 95052
Attn: Treasurer
- ----------------------------------
ITXC Third Amended Registration Rights Agreement
-23-
<PAGE>
- ----------------------------------
Spectrum Equity Investors II, L.P.
SEA 1998 II, L.P.
One International Place, 29th
Floor
Boston, MA 02110
- ----------------------------------
Polaris Fund II, LLC (Tax Exempt
Investors)
Polaris Fund II, LLC
Polaris Fund, L.P.
DS Polaris Trust Company (foreign
residents)(1997), Ltd.
Canada-Israel Opportunity Fund, LP
DS Polaris, Ltd.
37 Shaul Hamelech Avenue
Tel Aviv 64928
Israel
- ----------------------------------
ITXC Third Amended Registration Rights Agreement
-24-
<PAGE>
Annex 2
-------
Addresses for Notice of Holders of Founders Stock
-------------------------------------------------
Notice to Evslin or Jordan shall be addressed to either such person c/o
ITXC Corp., 600 College Road East, Princeton, New Jersey, to such individual's
attention, with a copy to Peter Ehrenberg, Esq., Lowenstein Sandler PC, 65
Livingston Avenue, Roseland, New Jersey 07068.
ITXC Third Amended Registration Rights Agreement
-25-
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
AGREEMENT made this 4th day of February, 1999, by and between ITXC
Corp., a corporation formed under the laws of the State of Delaware (the
"Company"), and John G. Musci (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive and the Executive
wishes to accept such employment, and each desires to enter into an agreement to
provide for the terms and conditions of such employment set forth herein;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. Employment
----------
The Company agrees to employ the Executive during the Term specified
in section 2, and the Executive agrees to accept such employment, upon the terms
and conditions hereinafter set forth.
2. Term
----
(a) Subject to Section 6 below and the other terms and conditions of
this Agreement, the Executive's employment by the Company shall be for a term
(the "Term") commencing on February 1, 1999 and expiring on the date (hereafter
referred to as the "Expiration Date") which is (a) January 31, 2001 or (b) any
later date to which the Term may be extended by written agreement of the
parties. Notwithstanding anything contained herein to the contrary, in the
event that the Executive's employment with the Company continues after the
Expiration Date, the Executive's employment shall be deemed to be "at will". The
effective date of the termination of the Executive's employment with the
Company, regardless of the reason therefor, is referred to in this Agreement as
the "Date of Termination".
(b) Upon termination of the employment of the Executive with the
Company on or after the Expiration Date, the Company shall pay the Executive,
subject to appropriate offsets, as permitted by applicable law, for debts or
money due to the Company (collectively, "Offsets"), any earned but unpaid salary
and bonus compensation, and any unused accrued vacation, only through or as of,
and any unpaid reimbursement expenses outstanding as of, the
<PAGE>
Date of Termination. Any benefits to which the Executive or his beneficiaries
may be entitled to under the plans and programs described in section 5(b) below,
or any other applicable plans and programs, as of the Date of Termination shall
be determined in accordance with the terms of such plans and programs. In
addition, unless the Executive's employment terminates on or after the
Expiration Date other than as a result of the Executive's death, disability or
by the Company for Cause (as defined in section 6(a), the Company shall continue
to pay the Executive his rate of base salary compensation then in effect for a
period of six months. Except as provided in this section 2(b), in connection
with the Executive's termination of employment pursuant to section 2(a), the
Company shall have no further liability to the Executive or the Executive's
heirs, beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature.
3. Duties and Responsibilities
---------------------------
(a) During the Term, the Executive shall have the position of
Executive Vice President and Chief Operating Officer or such other title as may
be agreed between the Executive and the Company. The Executive shall perform
such duties and responsibilities as may be assigned to him from time to time
consistent with his position, and in the absence of such assignment, such duties
as are customary and commensurate with such position. The Executive further
agrees to accept election, and to serve during all or any part of the Term, as a
director of the Company and as an officer or director of any subsidiary of the
Company, without any additional compensation therefor.
(b) The Executive's employment by the Company shall be full-time and
exclusive, and during the Term, the Executive agrees that he will (i) devote
substantially all of his business time and attention, his best efforts, and all
his skill and ability to promote the interests of the Company and its
affiliates; (ii) carry out his duties in a competent and professional manner;
(iii) work with other employees of the Company and its affiliates in a competent
and professional manner; and (iv) generally promote the interests of the Company
and its affiliates. Notwithstanding the foregoing, the Executive shall be
permitted to engage in civic or charitable activities and manage his personal
investments, provided that such activities (individually or collectively) do not
materially interfere with the performance of his duties or responsibilities
under this Agreement.
(c) The Executive's principal office shall initially be located in
Plainsboro, New Jersey, subject to necessary travel requirements of his position
and duties hereunder. The Company reserves the right to move Executive's
principal office to a location within a 50 miles of said location.
4. Compensation
------------
(a) As compensation for his services hereunder, the Company shall pay
the Executive, in accordance with its normal payroll practices, base salary
compensation at an annual rate not less than the greater of $200,000.00 or the
base salary of the Executive most recently approved by the Board of Directors of
the Company.
-2-
<PAGE>
(b) Subject to the attainment of such individual and Company
objectives as the Board of Directors of the Company shall establish, the
Executive may be awarded a cash bonus for each three month period of employment
not to exceed, on an annualized basis, 200% of the Executive's annual base
salary then in effect; provided, however, that the minimum cash bonus to be paid
the Executive for the three month period of employment commencing February 1,
1999 shall be $50,000 and the minimum cash bonus to be paid the Executive for
the three month period of employment commencing May 1, 1999 shall be $25,000.
(c) As of the first day of the Term, the Executive shall be granted
non-qualified options ("First Day Options") under the ITXC Corp. Stock Incentive
Plan (the "Stock Incentive Plan") to purchase 750,000 shares of ITXC Corp.
common stock. The exercise price of such First Day Options shall be the fair
market value of ITXC Corp. common stock on December 31, 1998 (the "Grant Date")
as determined in accordance with the terms of the Stock Incentive Plan.
500,000 of such First Day Options shall vest and become exercisable at
the rate of thirty-three and one-third percent (33-1/3%) on each one-year
anniversary of the Grant Date, commencing with January 1, 2000. The remaining
250,000 such First Day Options shall vest and become exercisable on January 1,
2006; provided, however, that if a "change in control" of [Qwest] (as defined
under the [Qwest Stock Option Plan]) occurs before January 1, 2001, 125,000 of
such First Day Options shall thereupon immediately vest if the price paid for
each share of [Qwest] common stock in connection with such change in control is
at least $35.00 per share but no more than $40.00 per share, and 250,000 of such
First Day Options shall thereupon immediately vest if the price paid for each
share of Qwest common stock in connection with such change in control is more
than $40.00 per share. Except as provided by section 6(d) or the Stock
Incentive Plan, upon the Executive's termination of employment with the Company,
all First Day Options which are not vested shall be forfeited.
In the event that, within 18 months after the Grant Date, the Company
engages in one or more private equity placements (each a "Placement") at a time
when shares of the Company's Series C Convertible Preferred Stock have a value
of less than $9.29 per share, the Company shall grant Executive, as of the date
of each such Placement, such number of additional non-qualified options (the
"Additional Options") under the Stock Incentive Plan (or any successor plan) as
may be required to maintain the equity ownership percentage of the Executive in
the Company (on a fully diluted basis) to the extent represented by Executive's
outstanding Options (whether or not vested and including any Additional Options
granted hereunder in connection with a prior Placement) immediately prior to the
Placement plus any shares of ITXC Corp. common stock which have been issued to
the Executive as a result of his exercise of Options prior to such Placement.
The exercise price of the Additional Options shall be the fair market value of
ITXC Corp. common stock on such date of grant as determined in accordance with
the terms of the Stock Incentive Plan (or any successor plan). The Additional
Options shall vest in accordance with the same vesting schedule described above
with respect to First Day Options, as if such Additional Options had been
granted on the Grant Date.
-3-
<PAGE>
For purposes of this Agreement, First Day Options and Additional
Options, if any, shall be collectively referred to as "Options". Except as set
forth herein, the Options shall be subject in all respects to the terms and
conditions of the plan governing the Options.
(d) All compensation paid to the Executive shall be subject to
applicable tax withholding requirements.
5. Expenses; Fringe Benefits
-------------------------
(a) The Company agrees to pay or to reimburse the Executive during the
Term for all reasonable, ordinary and necessary vouchered business or
entertainment expenses incurred in the performance of his services hereunder in
accordance with the policy of the Company as from time to time in effect.
(b) During the Term, the Executive and, to the extent eligible, his
dependents, shall be entitled to participate in and receive all benefits under
any employee benefit plans and programs provided by the Company (including
without limitation, 401(k), medical, dental, disability, group life (including
accidental death and dismemberment) and business travel insurance plans and
programs) applicable generally to the employees of the Company, subject,
however, to the terms and conditions of the various plans and programs in effect
from time to time.
(c) The Executive shall accrue paid personal time off days in
accordance with the personal time off days policy of the Company applicable
generally to executives of the Company in effect from time to time. In
addition, the Executive shall be entitled to five (5) additional paid personal
time off days to be used in connection with the Executive's relocation to New
Jersey.
(d) Notwithstanding anything contained herein to the contrary, the
Company reserves the right to modify, amend or terminate any employee benefit
plan or policy as it deems appropriate in its discretion; provided that unless
required by law, the Company shall not amend, modify or terminate any such plan
or policy in a manner that treats the Executive differently from other similarly
situated employees.
(e) The Executive agrees to relocate his principal residence within
driving commuting distance of the Company's Plainsboro, New Jersey office by not
later than August 15, 1999. The Company shall, subject to receipt of
appropriate expense reports and vouchers, promptly reimburse the Executive for
Relocation Expenses in an aggregate amount not to exceed $100,000.00.
Relocation Expenses shall include normal and customary moving expenses
(including packing and unpacking, personal effects, automobiles), temporary
living expenses, house and school hunting trips, real estate commission on the
sale of Executive's current home, attorneys fees and closing costs on a new
home, mortgage points on a new mortgage in excess of two points (but only if
mortgages for two points or less are unavailable in the marketplace on
reasonable lending terms), and commuting costs incurred until the earlier of the
date Executive relocates his principal residence or August 15, 1999. To the
extent that the Relocation Expenses
-4-
<PAGE>
for which Executive receives reimbursement from the Company are not deductible
for Federal income tax purposes, the Company will "gross-up" the payments based
on Executive's effective Federal income tax rate for 1999 and any such "gross-
up" payment shall be deemed a Relocation Expense for purposes of this paragraph
and subject to the $100,000.00 limitation set forth above. Notwithstanding
anything contained herein to the contrary, if Executive's employment with the
Company terminates prior to February 1, 2000 for any reason other than as a
result of death or disability or pursuant to sections 6(a) or 6(b) hereof, no
Relocation Expenses shall be paid or reimbursed by the Company (other than
Relocation Expenses that are commuting expenses) and the Executive shall within
thirty (30) days of such termination of employment repay the Company for any
Relocation Expenses (other than Relocation Expenses that are commuting expenses)
that have been paid or reimbursed by the Company.
6. Termination
-----------
(a) The Company, by direction of its Board of Directors and/or Chief
Executive Officer, shall be entitled to terminate the Term prior to the
Expiration Date and to discharge the Executive for "Cause" effective upon the
giving of written notice. The term "Cause" shall be limited to the following
grounds:
(i) The willful and continued failure by the Executive to
substantially perform any of his material duties hereunder or to
follow the reasonable and lawful orders of the Board of Directors of
the Company or the Chief Executive Officer of the Company;
(ii) The Executive's misappropriation of material assets of the
Company;
(iii) Use of alcohol or illegal drugs, materially interfering
with the performance of the Executive's obligations under this
Agreement;
(iv) Indictment, arraignment or conviction of a felony or of any
crime involving moral turpitude, dishonesty or theft;
(v) The commission by the Executive of any willful or intentional
act, or the Executive's willful or intentional failure to act, which
could reasonably be expected to injure the reputation, business or
business relationships of the Company; provided, however, that no act
or failure to act on the part of the Executive shall be deemed to be
willful or intentional if it was due primarily to an error of judgment
or negligence, but shall be deemed willful or intentional if done, or
omitted to be done, by the Executive not in good faith and without
reasonable belief that his action or omission was in or not opposed to
the best interests of the Company. Failure to meet performance
standards or objectives of the Company by itself shall not constitute
Cause for purposes of this Agreement.
-5-
<PAGE>
(vi) Any material breach (not covered by any of the clauses (i)
through (v)) of any term, provision or condition of this Agreement or
of any Company policy.
(b) The Executive shall be entitled to terminate this Agreement and
the Term hereunder prior to the Expiration Date in the event that the Company is
in default of a material term of this Agreement, which default remains uncured
for a period of 30 days after written notice of such default from the Executive
to the Company, such notice to specify the specific nature of the claimed
default and the manner in which the Executive requires such default to be cured.
Notwithstanding any such termination, or in the event the Company terminates the
employment of the Executive prior to the Expiration Date in breach of its
obligations under this Agreement (hereinafter referred to as a "Termination
Without Cause"), the restrictions set forth in section 8 shall remain in full
force and effect.
(c) Upon the termination of the employment of the Executive with the
Company pursuant to section 6(a) or by virtue of a resignation other than
pursuant to a termination under section 6(b) below, the Company shall pay the
Executive, subject to any Offsets, (i) any earned but unpaid salary
compensation, (ii) any earned but unpaid cash bonus, (iii) any unused accrued
vacation, and (iv) any unpaid reimbursable expenses (except as provided under
Section 5(d), in each case, as of the Date of Termination. Any benefits to
which the Executive or his beneficiaries may be entitled to under the plans and
programs described in section 5(b) above, or any other applicable plans and
programs, as of his Date of Termination shall be determined in accordance with
the terms of such plans and programs. Except as provided in this section 6(c),
the Company shall have no further liability to the Executive or the Executive's
heirs, beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature.
(d) In the event of the termination of the Executive's employment by
the Executive pursuant to section 6(b) above or in the event of a Termination
Without Cause by the Company (each such event being called a "Wrongful
Termination"), as liquidated damages, the Executive shall be entitled to
continue to receive from the Company, subject to any Offsets and for so long as
the Executive is not in breach of his obligations to the Company under sections
8 and 9 hereof, (i) his then applicable salary compensation when otherwise
payable through the remainder of the then current Term hereof reduced by any
income earned by the Executive as a result of gainful activity during the
remainder of such Term whether as an employee, principal, partner, agent,
consultant, co-venturer or in any other capacity (hereinafter referred to as
"Other Employment"), (ii) any earned but unpaid bonus as of the Date of
Termination, and (iii) any unpaid reimbursable expenses outstanding, and any
unused accrued paid personal time off days, as of the Date of Termination. Any
benefits to which Executive or his beneficiaries may be entitled to under the
plans and programs described in section 5(b) above, or any other applicable
plans and programs, as of his Date of Termination shall be determined in
accordance with the terms of such plans and programs; provided, however, that
the first six months of the Executive's cost of continued "COBRA" medical
coverage, should such coverage be elected, shall be the same as the cost paid by
active executives of the Company for group health coverage. In addition, the
Executive shall continue to vest in the Options in accordance with the terms set
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<PAGE>
forth in section 4(c) for the remainder of the Term. Except as provided in this
section 6(d) in connection with a Wrongful Termination, (x) the Company shall
have no further liability to the Executive or the Executive's heirs,
beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature and (y) the Executive shall be
under no obligation to mitigate his damages or to seek Other Employment;
provided that, as indicated in this section 6(d), any income the Executive earns
from Other Employment shall reduce payments by the Company under section
6(d)(i). From time to time, upon the Company's reasonable request, the
Executive shall provide the Company written verification of amounts earned from
Other Employment. In the event the Executive fails to supply such information,
the obligations of the Company to the Executive under this section 6(d) shall
terminate. It is agreed that a termination of the Executive's employment on or
after the Expiration Date shall not be deemed a Wrongful Termination.
7. Disability; Death
-----------------
(a) In the event the Executive shall be unable to perform his duties
hereunder by virtue of illness or physical or mental incapacity or disability
(from any cause or causes whatsoever) in substantially the manner and to the
extent required hereunder prior to the commencement of such disability (all such
causes being herein referred to as "disability"), the Company shall have the
right to terminate the Executive's employment hereunder as at the end of any
calendar month during the continuance of such disability upon at least 30 days'
prior written notice to him. In the event of the Executive's death, the Date of
Termination shall be the date of such death.
(b) In the event the Executive's employment terminates pursuant to
section 7(a), the Executive, or in the case of his death, the Executive's
estate, shall be entitled to receive, subject to any Offsets, (i) all salary and
bonus compensation earned but unpaid as of the Date of Termination and (ii) any
unpaid reimbursable expenses outstanding, and any unused accrued vacation, as of
such date. Any benefits to which the Executive or his beneficiaries may be
entitled under the plans and programs described in sections 5(b) above, or any
other applicable plans and programs, as of his Date of Termination shall be
determined in accordance with the terms of such plans and programs. Except as
provided in this section 7(b), in the event of the Executive's termination due
to disability or death, the Company shall have no further liability to the
Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amounts of whatever
nature.
8. Confidential Information In consideration of the covenants of the
------------------------
Company herein, the Executive agrees as follows:
(a) The Executive hereby agrees and acknowledges that he has and has
had access to or is aware of Confidential Information. The Executive hereby
agrees that he shall keep strictly confidential and will not prior to or after
his Date of Termination, without the Company's express written consent, divulge,
furnish or make accessible to any person or entity, or make use of for the
benefit of himself or others, any Confidential Information obtained, possessed,
or known by him except as required in the regular course of performing the
duties
-7-
<PAGE>
and responsibilities of his employment by the Company while in the employ
of the Company, and that he will, prior to or upon his Date of Termination
deliver or return to the Company all such Confidential Information that is in
written or other physical or recorded form or which has been reduced to written
or other physical or recorded form, and all copies thereof, in his possession,
custody or control. The foregoing covenant shall not apply to (i) any
Confidential Information that becomes generally known or available to the public
other than as a result of a breach of the agreements of the Executive contained
herein, (ii) any disclosure of Confidential Information by the Executive that is
expressly required by judicial or administrative order; provided however that
the Executive shall have (x) notified the Company as promptly as possible of the
existence, terms and circumstances of any notice, subpoena or other process or
order issued by a court or administrative authority that may require him to
disclose any Confidential Information, and (y) cooperated with the Company, at
the Company's request, in taking legally available steps to resist or narrow
such process or order and to obtain an order or other reliable assurance that
confidential treatment will be given to such Confidential Information as is
required to be disclosed.
(b) For purposes of this Agreement, "Confidential Information" means
any information including without limitation plans, specifications, drawings,
sketches, models, samples, data, computer programs, documentation, reports,
accountings, and other technical and/or business information, that can be
communicated by any means whatsoever, including without limitation oral, visual,
written and electronic transmission, that relates to the Company's current or
future business, products, services or development including, without
limitation:
(i) products and services, including without limitation existing
hardware and software products and hardware and software in various
stages of research and development;
(ii) business policies, practices, and customer and supplier
lists and information pertaining to customers and suppliers; and
(iii) information received from others that the Company is
obligated to treat as confidential or proprietary.
Confidential Information shall include any materials that relate to,
pertain to, record or embody any of the foregoing.
"Confidential Information" shall not include information which would
otherwise fit the definition of Confidential Information above if Executive can
conclusively establish to the Company that such information has:
(i) entered or was in the public domain other than due to the
breach by Executive or another, by act or omission, of any obligation
owed to the Company;
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<PAGE>
(ii) become demonstrably known to Executive prior to the
Company's disclosure of such information to Executive;
(iii) become demonstrably known by or available to Executive from
a source other than the Company subsequent to the disclosure by the
Company of such information to Executive, without any breach - by act
or omission - of any obligation of confidentiality owed to the
Company, as evidenced by written documents received by Executive.
9. Post-Employment Obligations In consideration of the covenants of
---------------------------
the Company herein, the Executive agrees as follows:
(a) The Executive agrees that his services hereunder are of a special,
unique, extraordinary and intellectual character, and his position with the
Company places him in a position of confidence and trust with employees,
suppliers of the Company. The Executive further agrees and acknowledges that in
the course of the Executive's employment with the Company, the Executive has
been and will be privy to Confidential Information. The Executive consequently
agrees that it is reasonable and necessary for the protection of the trade
secrets, goodwill and business of the Company that the Executive make the
covenants contained herein. Accordingly, the Executive agrees that while he is
in the employ of the Company and for a period of six months after the Date of
Termination (regardless of the reason for his ceasing to be employed by the
Company), he shall not, without the prior written consent of the Company,
directly or indirectly, anywhere within the United Sates or Canada:
(i) become Associated With any Competing Business; or
(ii) solicit, sell, call upon or induce others to solicit, sell
or call upon, directly or indirectly, any customer or prospective
customer of the Company for the purpose of inducing any such customer
or prospective customer to purchase, license or lease a product or
service of a Competing Business; or
(iii) employ, solicit for employment, or advise or recommend to
any other person that they employ or solicit for employment or
retention as a consultant, any person who is, or was at any time
within twelve (12) months prior to the Date of Termination, an
employee of, or exclusive consultant to, the Company.
(b) For purposes of this section 9, the following terms shall have the
following meanings:
"Competing Business" means that portion or segment of the business of
any person, corporation (for profit or not for profit) or other entity which
indirectly or directly provides wholesale internet telephony services, including
without limitation, (i) linking internet telephone service providers ("ITSPs")
to each other; (ii) providing billing and settlement services
-9-
<PAGE>
to internet telephony customers; and/or (iii) connecting participating ITSPs to
telephone numbers using a combination of internet providers and traditional
telephony for wholesale or retail customers.
"Associated With" means serving as an owner, officer, employee,
independent contractor, agent or a holder of 5% or more of any class of equity
securities of, director, trustee, member, consultant or partner of any person,
corporation (for profit or not for profit) or other entity engaged in a
Competing Business.
(c) If the Executive commits a breach or is about to commit a breach,
of any of the provisions of sections 8 or 9 hereof, the Company shall have the
right to have the provisions of this Agreement specifically enforced by any
court having equity jurisdiction without being required to post bond or other
security and without having to prove the inadequacy of the available remedies at
law, it being acknowledged and agreed that any such breach or threatened breach
will cause irreparable injury to the Company and that money damages will not
provide an adequate remedy to the Company. In addition, the Company may take
all such other actions and remedies available to them under law or in equity and
shall be entitled to such damages as they can show they have sustained by reason
of such breach.
(d) The parties acknowledge that the type and periods of restriction
imposed in the provisions of sections 8 and 9 hereof are fair and reasonable and
are reasonably required for the protection of the Company and the goodwill
associated with the business of the Company; and that the time, scope,
geographic area and other provisions of sections 8 and 9 have been specifically
negotiated by sophisticated parties and are given as an integral part of this
Agreement, it being understood that the Company's stores are located throughout
the United States and accordingly it is reasonable that the restrictive
covenants set forth herein are not limited by narrow geographic area but
generally by the location of the Company's stores. The Executive specifically
acknowledges that the restrictions contemplated by this Agreement will not
prevent him from being employed or earning a livelihood. If any of the
covenants in sections 8 or 9 hereof, or any part thereof, is hereafter construed
to be invalid or unenforceable, the same shall not affect the remainder of the
covenants or covenants, which shall be given full effect, without regard to the
invalid portions. If any of the covenants contained in sections 8 or 9 hereof,
or any part thereof, is held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that the court making
such determination shall have the power to reduce the duration and/or areas of
such provision and, in its reduced form, such provision shall then be
enforceable. The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in sections 8 or 9 hereof above upon the courts
of any state or other jurisdiction within the geographical scope of such
covenants. In the event that the courts of any one or more of such states or
other jurisdictions shall hold such covenants wholly unenforceable by reason of
the breadth of such scope or otherwise, it is the intention of the parties
hereto that such determination not bar or in any way affect the right of the
Company to the relief provided above in the courts of any other states or other
jurisdictions within the geographical scope of such covenants, as to breaches of
such covenants in such other respective states or other jurisdictions, the above
covenants as they relate to each state or other jurisdiction being, for this
purpose, severable into diverse and independent covenants.
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<PAGE>
10. Intellectual Property
---------------------
The Executive will disclose to the Company all ideas, inventions and
business plans developed by him during the period of his employment with the
Company which relate directly or indirectly to the business of the Company,
including without limitation, any design, logo, slogan or campaign or any
process, operation, product or improvement which may be patentable or
copyrightable. The Executive agrees that all patents, licenses, copyrights,
tradenames, trademarks, service marks, advertising campaigns, promotional
campaigns, designs, logos, slogans and business plans developed or created by
the Executive in the course of his employment hereunder, either individually or
in collaboration with others, will be deemed works for hire and the sole and
absolute property of the Company. The Executive agrees, that at the Company's
request, he will take all steps necessary to secure the rights thereto to the
Company by patent, copyright or otherwise.
11. Enforceability
--------------
The failure of any party at any time to require performance by another
party of any provision hereunder shall in no way affect the right of that party
thereafter to enforce the same, nor shall it affect any other party's right to
enforce the same, or to enforce any of the other provisions in this Agreement;
nor shall the waiver by any party of the breach of any provision hereof be taken
or held to be a waiver of any subsequent breach of such provision or as a waiver
of the provision itself.
12. Assignment
----------
This Agreement is a personal contract and the Executive's rights and
obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. The rights and obligation of the Company
hereunder shall be binding upon and run in favor of the successors and assigns
of the Company; provided, however, the Company may not assign or transfer its
rights or obligations under this Agreement unless such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law.
13. Modification
------------
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement.
14. Severability; Survival
----------------------
In the event any provision or portion of this Agreement is determined
to be invalid or unenforceable for any reason, in whole or in part, the
remaining provisions of this
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<PAGE>
Agreement shall nevertheless be binding upon the parties with the same effect as
though the invalid or unenforceable part had been severed and deleted. The
respective rights and obligations of the parties hereunder shall survive the
termination of the Executive's employment to the extent necessary to the
intended preservation of such rights and obligations.
15. Notice
------
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall be
deemed effective (a) upon person delivery, if delivered by hand, or (b) three
days after the date of deposit in the mails, postage prepaid if mailed by
certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission or prepaid overnight courier service, and in each case,
addressed as follows:
If to the Executive:
-------------------
John G. Musci
445 N. Hametown Rd.
Akron, Ohio 44333
If to the Company:
------------------
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
Attention: Chief Executive Officer
Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. Applicable Law
--------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New Jersey, without application of conflict or law
provisions applicable herein.
17. Subsidiaries and Affiliates
---------------------------
As used herein, the term "subsidiary" shall mean any corporation or
other business entity controlled directly or indirectly by the corporation or
other business entity in question, and the term "affiliate" shall mean and
include any corporation or other business entity directly or indirectly
controlling, controlled by or under common control with the corporation or other
business entity in question.
18. No Conflict
-----------
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<PAGE>
The Executive represents and warrants that he is not subject to any
agreement, instrument, order, judgment or decree of any kind, or any other
restrictive agreement of any character, which would prevent him from entering
into this Agreement or which would be breached by the Executive upon his
performance of his duties pursuant to this Agreement.
19. Entire Agreement
----------------
This Agreement represents the entire agreement between the Company and
the Executive with respect to the subject matter hereof, and all prior
agreements, plans and arrangements relating to the employment of the Executive
the Company are nullified and superseded hereby.
20. Headings
--------
The headings contained in this Agreement are for reference purposes
only, and shall not affect the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ITXC CORP.
By:/s/ Tom Evslin
------------------------------------
Name: Tom Evslin
Title: Chairman
Executive's Signature
/s/ John G. Musci
---------------------------------------
John G. Musci
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<PAGE>
EXHIBIT 10.3
ITXC CORP.
1998 STOCK INCENTIVE PLAN
(as amended through February 17, 1999)
1. Introduction.
------------
This Plan was approved by the Board of Directors of the Company
on February 17, 1998 and by the shareholders of the Company by unanimous written
consent dated April 2, 1998.
2. Purpose.
-------
The purpose of this Plan is to strengthen the Company by
providing an incentive to its officers, employees, Consultants and directors and
thereby encourage them to devote their abilities and industry to the success of
the Company's business enterprise. It is intended that this purpose be achieved
by extending to officers, employees, Consultants and directors of the Company
and its subsidiaries an added long-term incentive for high levels of performance
and unusual efforts through the grant of Incentive Stock Options, Nonqualified
Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units
and Performance Shares (as each term is hereinafter defined).
3. Definitions.
-----------
For purposes of the Plan, the following terms shall have the
following meanings:
"Agreement" means the written agreement between the Company and an
Optionee or Grantee evidencing the grant of an Option or Award and setting forth
the terms and conditions thereof.
"Authority" means either the Compensation Committee or the CEO
Committee, depending upon the context in which such term is used. With respect
to Awards and Options awarded or to be awarded to Selected Persons, the term
"Authority" refers to the Compensation Committee. With respect to Awards and
Options awarded or to be awarded to Non-Selected Persons, the term "Authority"
refers to the CEO Committee.
"Award" means a grant of Restricted Stock, a Stock Appreciation
Right, a Performance Award or any or all of them.
"Board" means the Board of Directors of the Company.
<PAGE>
"Cause" shall mean (i) a failure by an Eligible Individual to perform
his or her material employment responsibilities in accordance with instructions
given to such Eligible Individual by one or more persons to whom such Eligible
Individual reports, which failure is not cured within 20 days after such
Eligible Individual receives written notice thereof, or (ii) an Eligible
Individual's conviction in connection with a felony or a misdemeanor, but with
respect to a misdemeanor, only if such conviction directly and substantially
calls into question such Eligible Individual's integrity or ability to perform
his or her employment responsibilities after such conviction.
"CEO Committee" shall mean a committee of the Board consisting solely
of the Company's Chief Executive Officer; provided, however, if the Company's
Chief Executive Officer is not a member of the Board or if the Board determines
at any time that it does not desire to have the Plan administered by any
committee other than the Compensation Committee, all references to the CEO
Committee hereunder shall be deemed to be references to the Compensation
Committee
"Change in Capitalization" means any increase or reduction in the
number of Shares, or any change (including, but not limited to, a change in
value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company, by reason of a reclassification,
recapitalization, merger, consolidation, reorganization, spin-off, split-up,
issuance of warrants or rights or debentures, stock dividend, stock split or
reverse stock split, extraordinary cash dividend, property dividend, combination
or exchange of shares, repurchase of shares, change in corporate structure or
otherwise.
"Change in Control" shall mean the occurrence of one or more of
the following events:
(i) the consummation of any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or
pursuant to which Shares would be converted into cash, securities or
other property, other than a merger of the Company in which the
holders of the Company's Shares immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (ii) the consummation of
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the
assets of the Company, other than to a subsidiary or affiliate, or
(iii) an approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company, or (iv)
(A) a purchase by any person (as such term is defined in Section 13(d)
of the Exchange Act), corporation or other entity of any voting
securities of the Company (the "Voting Securities") (or securities
convertible into Voting Securities) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, unless,
prior to the making of such purchase of Voting Securities (or
securities convertible into Voting Securities), the Board shall
determine that the making of such purchase shall not constitute a
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<PAGE>
Change in Control, or (B) any action pursuant to which any person (as
such term is defined in Section 13(d) of the Exchange Act),
corporation or other entity (other than the Company or any benefit
plan sponsored by the Company or any of its subsidiaries) shall become
the "beneficial owner" (as such term is defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of Voting Securities
representing fifty-one (51%) percent or more of the combined voting
power of the Company's then outstanding Voting Securities ordinarily
(and apart from any rights accruing under special circumstances)
having the right to vote in the election of directors (calculated as
provided in Rule 13d-3(d) in the case of rights to acquire any such
securities), unless, prior to such person so becoming such beneficial
owner, the Board shall determine that such person so becoming such
beneficial owner shall not constitute a Change in Control, or (v) at
any time during any period of two consecutive years, a situation in
which individuals who at the beginning of such period constituted the
entire Board shall have ceased for any reason to constitute at least a
majority thereof, unless the election or nomination for election of
each new director during such two-year period is approved by a vote of
at least a majority of the directors then still in office who were
directors at the beginning of such two-year period.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means ITXC Corp., a Delaware corporation.
"Compensation Committee" means the full Board or a committee
appointed by the Board to perform the functions assigned to the Compensation
Committee hereunder.
"Consultant" shall mean any person who performs consulting
services for, or who serves as an advisor to, any member of the Group.
"Disability" means a physical or mental infirmity which impairs
an Optionee's ability to perform substantially his or her duties for ninety (90)
days in any 360 consecutive day period.
"Division" means any of the operating units or divisions of the
Company or any Subsidiary designated as a Division by the Compensation
Committee.
"Effective Date" shall mean the first date, if any, on which the
Securities and Exchange Commission declares effective a registration statement
filed by the Company with the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
"Eligible Individual" means any officer, employee, Consultant or
director of any member of the Group, but only if such officer, employee,
Consultant or director is designated by the Compensation Committee (with respect
to Selected Persons) or the CEO
- 3 -
<PAGE>
Committee (with respect to Non-Selected Persons) as a recipient of Options or
Awards subject to the conditions set forth herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any date means the average of the high and low
sales prices of the Shares on such date on the principal national securities
exchange on which the Shares are listed or admitted to trading, or, if the
Shares are not so listed or admitted to trading, the closing sales price of a
Share on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") on such date, or if such closing price is not available, the
arithmetic mean of the per share closing bid price and per share closing asked
price of the Shares on such date as quoted on NASDAQ or such other market in
which such prices are regularly quoted, or, if there have been no such published
bid or asked quotations with respect to the Shares on such date, or if the
Shares are not publicly traded, the Fair Market Value shall be the value
established by the Compensation Committee (with respect to Selected Persons) or
the CEO Committee (with respect to Non-Selected Persons) in good faith and, in
the case of an Incentive Stock Option, in accordance with Section 422 of the
Code.
"Grantee" means a person to whom an Award has been granted under the
Plan.
"Group" means the Company (including any Division of the Company),
each Parent of the Company and each Subsidiary of the Company (including any
Division of any such Subsidiary).
"Incentive Stock Option" means an Option satisfying the requirements
of Section 422 of the Code and designated by the Compensation Committee (with
respect to Selected Persons) or the CEO Committee (with respect to Non-Selected
Persons) as an Incentive Stock Option.
"Incentives" shall mean Awards or Options granted or to be granted
pursuant to the Plan.
"Nonqualified Stock Option" means an Option which is not an Incentive
Stock Option.
"Non-Selected Person" means any part-time or full-time employee or
officer of any member of the Group other than any such employee or officer who
is a Selected Person.
"Option" means an option granted pursuant to Section 5 hereof.
"Optionee" means a person to whom an Option has been granted under
the Plan.
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<PAGE>
"Parent" means any corporation which is a parent corporation (within
the meaning of Section 424(e) of the Code) with respect to the Company.
"Performance Awards" means Performance Units, Performance Shares or
either or both of them.
"Performance Cycle" means the time period specified by the
Compensation Committee (with respect to Selected Persons) or the CEO Committee
(with respect to Non-Selected Persons), at the time a Performance Award is
granted, during which the performance of the Company, a Subsidiary or a Division
will be measured.
"Performance Shares" means Shares issued or transferred to an
Eligible Individual under Section 9.3 hereof.
"Performance Unit" means Performance Units granted to an Eligible
Individual under Section 9.2 hereof
"Restricted Stock" means Shares issued or transferred to an
Eligible Individual pursuant to Section 8 hereof.
"Plan" means this ITXC Corp. 1998 Stock Incentive Plan, as amended
and restated.
"Pooling Transaction" means an acquisition of the Company in a
transaction which is intended to be treated as a "pooling of interests" under
generally accepted accounting principles.
"Share" means a share of the common stock, par value $0.001 per
share, of the Company.
"Selected Person" means (i) any director of the Company, (ii) any Ten-
Percent Stockholder, (iii) after the Effective Date, any person who is
identified by the Company as an executive officer of the Company or who is
advised by the Company's counsel that he or she is subject to the restrictions
imposed under Section 16 of the Exchange Act, (iv) any Consultant and (v) any
other person designated from time to time by the Compensation Committee as a
"Selected Person" for purposes of the Plan.
"Stock Appreciation Right" means a right to receive all or some
portion of the increase in the value of the Shares as provided in Section 7
hereof.
"Subsidiary" means any corporation which is a subsidiary corporation
(within the meaning of Section 424(f) of the Code) with respect to the Company.
- 5 -
<PAGE>
"Successor Corporation" means a corporation, or a parent or subsidiary
thereof within the meaning of Section 424(a) of the Code, which issues or
assumes a stock option in a transaction to which Section 424(a) of the Code
applies.
"Ten-Percent Stockholder" means an Eligible Individual, who, at the
time an Incentive Stock Option is to be granted to him or her, owns (within the
meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company,
or of a Parent or a Subsidiary.
4. Administration.
--------------
4.1 Administrative Body.
-------------------
4.1.1 CEO Committee. The CEO Committee shall have
-------------
authority to administer the Plan to the express extent provided for in the Plan.
4.1.2 Compensation Committee. Except to the extent that
----------------------
the Plan expressly provides for the CEO Committee to administer the Plan, the
Plan shall be administered by the Compensation Committee. All questions of
interpretation as to whether the CEO Committee or the Compensation Committee
shall have the authority to take any action with respect to a particular
Eligible Individual shall be resolved by the Compensation Committee, whose
determination shall be final and conclusive.
4.2 Authority. The Compensation Committee shall serve as the
---------
Authority with respect to Selected Persons. The CEO Committee shall serve as
the Authority with respect to Non-Selected Persons. Subject to applicable law
and the terms of the Plan, the Authority shall have plenary authority to:
(A) determine those Eligible Individuals to whom Options
shall be granted under the Plan and the number of Incentive Stock Options and/or
Nonqualified Stock Options to be granted to each Eligible Individual and to
prescribe the terms and conditions of each Option, including the purchase price
per Share subject to each Option, and make any related amendment or modification
to any Agreement consistent with the terms of the Plan; and
(B) select those Eligible Individuals to whom Awards shall
be granted under the Plan and to determine the number of Stock Appreciation
Rights, Performance Units, Performance Shares, and/or Shares of Restricted Stock
to be granted pursuant to each Award, the terms and conditions of each Award,
including, if applicable, the restrictions or performance criteria relating to
such Units or Shares, the maximum value of each Performance Unit and Performance
Share, and make any related amendment or modification to any Agreement
consistent with the terms of the Plan;
- 6 -
<PAGE>
(C) determine the duration and purposes for leaves of
absence which may be granted to an Eligible Individual on an individual basis
without constituting a termination of employment or service for purposes of the
Plan; and
(D) subject to Section 6.2 hereof, accelerate the date on
which previously granted Incentives may be exercised.
The terms, conditions and restrictions of Incentives may vary from Eligible
Individual to Eligible Individual and from Incentive to Incentive. Acceleration
of Incentives may be to any date, including the date on which an Incentive is
granted.
4.3 Role of the Compensation Committee. Subject to applicable law
----------------------------------
and the terms of the Plan, the Compensation Committee shall have plenary
authority, with respect to Incentives granted to all Eligible Individuals, to
(a) prescribe the form of agreements awarding and governing all Incentives, (b)
interpret the Plan, (c) establish any rules or regulations determined by the
Compensation Committee to be necessary for the proper administration of the
Plan; (d) provide for the limited transferability of Options to certain family
members, family trusts or family partnerships of Optionees; (e) make all other
determinations necessary for the proper administration of the Plan (other than
determinations with respect to Non-Selected Persons delegated to the CEO
Committee as the Authority for Incentives granted and to be granted to Non-
Selected Persons), including, but not limited to, correcting any defect or
supplying any omission, or reconciling any inconsistency in the Plan or in any
Agreement, in the manner and to the extent it shall deem necessary or advisable
to make the Plan fully effective and comply with applicable law; and (f)
generally, exercise such powers and perform such acts as are deemed necessary or
advisable to promote the best interests of the Company with respect to the Plan.
The Compensation Committee's decisions on matters pertaining to the Plan shall
be final and conclusive on the Group, all Eligible Individuals and their
respective successors, assigns, transferees, heirs and representatives.
4.4 Limitations on the Role of the CEO Committee; Scope. From time
---------------------------------------------------
to time, the Compensation Committee shall deliver to the CEO Committee a
memorandum setting forth the maximum number of Shares for which the CEO
Committee may grant Incentives during a specified period of time and setting
forth the guidelines under which the CEO Committee may grant such Incentives
during such period. Such memorandum may be amended by the Compensation
Committee at any time. Without the prior approval of the Compensation
Committee, the CEO Committee shall not grant Incentives in any such period in
excess of the applicable maximum Share limit established by the Compensation
Committee and shall not grant Incentives that do not satisfy the applicable
guidelines established by the Compensation Committee. Subject to the
limitations of the CEO Committee's authority hereunder, the CEO Committee's
decisions on matters pertaining to the Plan shall be final and conclusive on the
Group, all Non-Selected Persons and their respective successors, assigns,
transferees, heirs and representatives.
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<PAGE>
4.5 Procedures. The Compensation Committee, and the CEO Committee
----------
(collectively, the "Committees") shall hold meetings at such times as may be
necessary for the proper administration of the Plan. Each of the Committees
shall keep minutes of its meetings. A quorum of the Compensation Committee
shall consist of a majority of the members of such Committee and a majority of a
quorum may authorize any action. Any decision or determination reduced to
writing and signed by a majority of the members of the Compensation Committee or
by the sole member of the CEO Committee shall be as fully effective as if made
by a majority vote at a meeting duly called and held. No member of any of the
Committees shall be liable for any action, failure to act, determination or
interpretation made in good faith with respect to this Plan or any transaction
hereunder, except for liability arising from his or her own willful misfeasance,
gross negligence or reckless disregard of his or her duties. The Company hereby
agrees to indemnify each member of each of the Committees for all costs and
expenses and, to the extent permitted by applicable law, any liability incurred
in connection with defending against, responding to, negotiating for the
settlement of or otherwise dealing with any claim, cause of action or dispute of
any kind arising in connection with any actions in administering this Plan or in
authorizing, or denying authorization to, any transaction hereunder.
5. Stock Subject to the Plan.
-------------------------
5.1 The maximum number of Shares that may be made the subject of
Options and Awards granted under the Plan is 3,350,000. Upon a Change in
Capitalization, the maximum number of Shares shall be adjusted in number and
kind pursuant to Section 11 hereof. The Company shall reserve for the purposes
of the Plan, out of its authorized but unissued Shares or out of Shares held in
the Company's treasury, or partly out of each, such number of Shares as shall be
determined by the Board.
5.2 Whenever any outstanding Option or Award or portion thereof
expires, is canceled or is otherwise terminated for any reason without having
been exercised or payment having been made in respect of the entire Option or
Award, the Shares allocable to the expired, canceled or otherwise terminated
portion of the Option or Award may again be the subject of Options or Awards
granted hereunder.
6. Option Grants for Eligible Individuals.
--------------------------------------
6.1 Power of the Authority. Subject to the provisions of the Plan
----------------------
and to Section 4 hereof, each Authority shall have full and final power to
select those Eligible Individuals who will receive Options, the terms and
conditions of which shall be set forth in an Agreement; provided, however, that
-------- -------
no person shall receive any Incentive Stock Options unless he or she is an
employee of the Company, a Parent or a Subsidiary at the time the Incentive
Stock Option is granted.
6.2 Purchase Price. The purchase price or the manner in which the
--------------
purchase price is to be determined for Shares under each Option shall be
determined by the
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<PAGE>
applicable Authority and set forth in the Agreement; provided, however, that the
-------- -------
purchase price per Share under each Incentive Stock Option shall not be less
than 100% of the Fair Market Value of a Share on the date the Incentive Stock
Option is granted (or 110% in the case of an Incentive Stock Option granted to a
Ten-Percent Stockholder). Notwithstanding any provision herein to the contrary,
with respect to any Option granted on or after the Effective Date at an exercise
price that is expressly designated by the applicable Authority at the time of
grant as an exercise price of less than 100% of the Fair Market Value of a Share
on such date, such Option shall not vest sooner than three years from the date
of grant (and shall not have its vesting accelerated to a date that is less than
three years from the date of grant) unless such vesting (or acceleration) arises
as a result of (a) the Optionee's satisfying performance criteria established by
the applicable Authority, (b) the termination of the Optionee's employment by a
member of the Group without Cause or due to the Optionee's death or Disability
or (c) provisions to be made in connection with a Change in Control.
6.3 Maximum Duration. Options granted hereunder shall be for such
----------------
term as the applicable Authority shall determine, provided that an Incentive
Stock Option shall not be exercisable after the expiration of ten (10) years
from the date it is granted (or five (5) years in the case of an Incentive Stock
Option granted to a Ten-Percent Stockholder) and a Nonqualified Stock Option
shall not be exercisable after the expiration of ten (10) years from the date it
is granted. The applicable Authority may, subsequent to the granting of any
Option, extend the term thereof but in no event shall the term as so extended
exceed the maximum term provided for in the preceding sentence.
6.4 Vesting. Subject to Sections 6.2, 6.7 and 10 hereof, each Option
-------
shall become exercisable in such installments (which need not be equal) and at
such times as may be designated by the applicable Authority and set forth in the
Agreement. Unless the applicable Authority provides otherwise, Options shall
vest in three equal installments on the first, second and third anniversaries of
the date of grant. To the extent not exercised, installments shall accumulate
and be exercisable, in whole or in part, at any time after becoming exercisable,
but not later than the date the Option expires. Subject to Section 6.2 hereof,
the applicable Authority may accelerate the exercisability of any Option or
portion thereof at any time.
6.5 Method of Exercise. The exercise of an Option shall be made only
------------------
by a written notice delivered in person or by mail to the Secretary of the
Company at the Company's principal executive office, specifying the number of
Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise by any one or a combination of the
following: (I) cash or (II) transferring Shares to the Company upon such terms
and conditions as determined by the applicable Authority or (iii) a combination
of cash and such transfer of Shares. Notwithstanding the foregoing, the
applicable Authority shall have discretion to determine, at the time of grant of
each Option or at any later date (up to and including the date of exercise), the
form of payment acceptable in respect of the exercise of such Option. Any
Shares transferred to the Company as payment of the purchase price under an
Option shall be valued at their Fair
- 9 -
<PAGE>
Market Value on the day preceding the date of exercise of such Option. If
requested by the applicable Authority, the Optionee shall deliver the Agreement
evidencing the Option to the Secretary of the Company who shall endorse thereon
a notation of such exercise and return such Agreement to the Optionee. No
fractional Shares (or cash in lieu thereof) shall be issued upon exercise of an
Option and the number of Shares that may be purchased upon exercise shall be
rounded to the nearest number of whole Shares.
6.6 Rights of Optionees. No Optionee shall be deemed for any purpose
-------------------
to be the owner of any Shares subject to any Option unless and until (I) the
Option shall have been exercised pursuant to the terms thereof, (II) the Company
shall have issued and delivered a certificate representing the Shares to the
Optionee and (III) the Optionee's name shall have been entered as a stockholder
of record on the books of the Company. Thereupon, the Optionee shall have full
voting, dividend and other ownership rights with respect to such Shares, subject
to such terms and conditions as may be set forth in the applicable Agreement.
6.7 Effect of Change in Control. Notwithstanding anything contained
---------------------------
in the Plan or an Agreement to the contrary, all Options outstanding on the date
of a Change in Control shall become immediately and fully exercisable upon
termination of the Optionee's employment or service within twelve (12) months
following such Change in Control if such termination is by a member of the Group
or any successor thereto without Cause or by the Optionee in connection with a
material adverse change in the Optionee's responsibilities or duties. In
addition, to the extent set forth in an Agreement evidencing the grant of an
Option, an Optionee will be permitted to surrender for cancellation within sixty
(60) days after such termination, any Option or portion of an Option to the
extent not yet exercised and the Optionee will be entitled to receive a cash
payment in an amount equal to the excess, if any, of the Fair Market Value, on
the date preceding the date of surrender, of the Shares or other securities
subject to the Option or portion thereof surrendered over (y) the aggregate
purchase price for such Shares or other securities under the Option or portion
thereof surrendered. In the event an Optionee's employment or service with the
Company is terminated as described above following a Change in Control, each
Option held by the Optionee that was exercisable as of the date of termination
of the Optionee's employment or service (including by way of acceleration) shall
remain exercisable for a period ending not before the earlier of the first
anniversary of the termination of the Optionee's employment or service or the
expiration of the stated term of the Option.
6.8 Modification or Substitution. The applicable Authority may, in
----------------------------
its discretion, modify outstanding Options or accept the surrender of
outstanding Options (to the extent not exercised) and grant new Options in
substitution for them, provided that as so modified such Options are consistent
with the terms of the Plan. Notwithstanding the foregoing, no modification of
an Option shall adversely alter or impair any rights or obligations under the
Option without the Optionee's consent.
6.9 Non-transferability. No Option granted hereunder shall be
-------------------
transferable by the Optionee to whom granted otherwise than by will or the laws
of descent and
- 10 -
<PAGE>
distribution unless specifically authorized by the Compensation Committee
pursuant to Section 4.3(d) hereof, and unless transferred in a manner permitted
by the Compensation Committee an Option may be exercised during the lifetime of
such Optionee only by the Optionee or his or her guardian or legal
representative. The terms of such Option shall be final, binding and conclusive
upon the beneficiaries, executors, administrators, heirs and successors of the
Optionee.
6.10 Conversion Rights. The Compensation Committee may, at any time,
-----------------
and from time to time, convert all or any of the Options into Stock Appreciation
Rights or Performance Units. If Options are converted into Stock Appreciation
Rights, the purchase price per Share of the Option shall be deemed to be the
Fair Market Value of a Share on the date the Stock Appreciation Right is
granted. If Options are converted into Performance Units, the Compensation
Committee may, in its discretion, denominate the Unit in the number of Shares
subject to the Option or some lesser number which reflects the appreciation in
the Shares over the Option purchase price per Share. The term of each Stock
Appreciation Right or Performance Unit shall be equal to the remaining term of
the Options which had been awarded, subject to the right of the applicable
Authority to accelerate the exercisability of any Stock Appreciation Right or
Performance Unit in accordance with the terms of the Plan.
7. Stock Appreciation Rights. The applicable Authority may, in its
-------------------------
discretion, either alone or in connection with the grant of an Option, grant
Stock Appreciation Rights in accordance with the Plan; the terms and conditions
of such Stock Appreciation Rights shall be set forth in an Agreement. If
granted in connection with an Option, a Stock Appreciation Right shall cover the
same Shares covered by the Option (or such lesser number of Shares as the
applicable Authority may determine) and shall, except as provided in this
Section 7, be subject to the same terms and conditions as the related Option.
7.1 Time of Grant. A Stock Appreciation Right may be granted (I)
-------------
at any time if unrelated to an Option, or (II) if related to an Option, either
at the time of grant, or at any time thereafter during the term of the Option.
7.2 Stock Appreciation Right Related to an Option.
---------------------------------------------
(A) Exercise. A Stock Appreciation Right granted in
--------
connection with an Option shall be exercisable at such time or times and only to
the extent that the related Option is exercisable, and will not be transferable
except to the extent the related Option may be transferable. A Stock
Appreciation Right granted in connection with an Incentive Stock Option shall be
exercisable only if the Fair Market Value of a Share on the date of exercise
exceeds the purchase price specified in the related Incentive Stock Option
Agreement.
(B) Amount Payable. Upon the exercise of a Stock
--------------
Appreciation Right related to an Option, the Grantee shall be entitled to
receive an amount determined by multiplying (A) the excess of the Fair Market
Value of a Share on the date preceding the date of exercise of such Stock
Appreciation Right over the per Share purchase price under the related Option,
by (B) the number of Shares as to which such Stock Appreciation
- 11 -
<PAGE>
Right is being exercised. Notwithstanding the foregoing, the applicable
Authority may limit in any manner the amount payable with respect to any Stock
Appreciation Right by including such a limit in the Agreement evidencing the
Stock Appreciation Right at the time it is granted.
(C) Exercise. Upon the exercise of a Stock Appreciation
--------
Right granted in connection with an Option, the Option shall be canceled to the
extent of the number of Shares as to which the Stock Appreciation Right is
exercised, and upon the exercise of an Option granted in connection with a Stock
Appreciation Right or the surrender of such Option pursuant to Section 6.7
hereof, the Stock Appreciation Right shall be canceled to the extent of the
number of Shares as to which the Option is exercised or surrendered.
7.3 Stock Appreciation Right Unrelated to an Option. The applicable
-----------------------------------------------
Authority may grant to Eligible Individuals Stock Appreciation Rights unrelated
to Options. Stock Appreciation Rights unrelated to Options shall contain such
terms and conditions as to exercisability, vesting and duration as the
applicable Authority shall determine, but in no event shall they have a term of
greater than ten (10) years. Upon exercise of a Stock Appreciation Right
unrelated to an Option, the Grantee shall be entitled to receive an amount
determined by multiplying (A) the excess of the Fair Market Value of a Share on
the date preceding the date of exercise of such Stock Appreciation Right over
the Fair Market Value of a Share on the date such Stock Appreciation Right was
granted, by (B) the number of Shares as to which such Stock Appreciation Right
is being exercised. Notwithstanding the foregoing, the applicable Authority may
limit in any manner the amount payable with respect to any such Stock
Appreciation Right by including such a limit in the Agreement evidencing such
Stock Appreciation Right at the time it is granted.
7.4 Method of Exercise. Stock Appreciation Rights shall be exercised
------------------
by a Grantee only by a written notice delivered in person or by mail to the
Secretary of the Company at the Company's principal executive office, specifying
the number of Shares with respect to which the Stock Appreciation Right is being
exercised. If requested by the applicable Authority, the Grantee shall deliver
the Agreement evidencing the Stock Appreciation Right being exercised and the
Agreement evidencing any related Option to the Secretary of the Company who
shall endorse thereon a notation of such exercise and return such Agreement to
the Grantee.
7.5 Form of Payment. Payment of the amount determined under Sections
---------------
7.2(B) or 7.3 may be made, in the discretion of the applicable Authority, solely
in whole Shares in a number determined as their Fair Market Value on the date
preceding the date of exercise of the Stock Appreciation Right, or solely in
cash, or in a combination of cash and Shares. If the applicable Authority
decides to make full payment in Shares and the amount payable results in a
fractional Share, payment for the fractional Share will be made in cash.
7.6 Modification or Substitution. Subject to the terms of the Plan,
----------------------------
the Committee may modify outstanding Awards of Stock Appreciation Rights or
accept the surrender of outstanding Awards of Stock Appreciation Rights (to the
extent not exercised) and
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<PAGE>
grant new Awards in substitution for them, provided that as so modified such
Stock Appreciation Rights are consistent with the terms of the Plan.
Notwithstanding the foregoing, no modification of an Award shall adversely alter
or impair any rights or obligations under the Agreement without the Grantee's
consent.
7.7 Effect of Change in Control. Notwithstanding anything contained
---------------------------
in this Plan to the contrary, all Stock Appreciation Rights shall become
immediately and fully exercisable upon termination of the Grantee's employment
or service within twelve (12) months following a Change in Control if such
termination is by a member of the Group or any successor thereto without Cause
or by the Grantee in connection with a material adverse change in the Grantee's
responsibilities or duties. In the event a Grantee's employment or service with
the Company is terminated as described above following a Change in Control, each
Stock Appreciation Right held by the Grantee that was exercisable as of the date
of termination of the Grantee's employment or service (including by way of
acceleration) shall remain exercisable for a period ending not before the
earlier of the first anniversary of the termination of the Grantee's employment
or service or the expiration of the stated term of the Stock Appreciation Right.
8. Restricted Stock.
----------------
8.1 Grant. The Applicable Authority may grant to Eligible
-----
Individuals Awards of Restricted Stock, and may issue Shares of Restricted Stock
in payment in respect of vested Performance Units (as hereinafter provided in
Section 9.2 hereof), which shall be evidenced by an Agreement between the
Company and the Grantee. Each Agreement shall contain such restrictions, terms
and conditions as the applicable Authority may, in its discretion, determine and
(without limiting the generality of the foregoing) such Agreements may require
that an appropriate legend be placed on Share certificates. Awards of
Restricted Stock shall be subject to the terms and provisions set forth below in
this Section 8. Notwithstanding the foregoing, but subject to all provisions
herein regarding a Change in Control, all Shares issuable pursuant to a
Restricted Stock Award granted after the Effective Date shall be subject to at
least one of the following conditions:
(A) except as otherwise provided in Section 8.4(B) hereof,
the Grantee shall be required to forfeit his or her Shares if the Grantee ceases
to be employed by a member of the Group within three years after the date of
grant other than by reason of the death or Disability of the Grantee or a
termination without Cause by a member of the Group; or
(B) the Grantee shall be required to forfeit the Shares if
the Grantee fails to satisfy performance criteria approved by the applicable
Authority.
8.2 Rights of Grantee. Shares of Restricted Stock granted
-----------------
pursuant to an Award hereunder shall be issued in the name of the Grantee as
soon as reasonably practicable after the Award is granted, provided that the
Grantee has executed an Agreement evidencing the Award, the appropriate blank
stock powers and, in the discretion of the applicable Authority, an escrow
agreement and any other documents which the applicable Authority may require as
a
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<PAGE>
condition to the issuance of such Shares. If a Grantee shall fail to execute
the Agreement evidencing a Restricted Stock Award, the appropriate blank stock
powers and, in the discretion of the applicable Authority, an escrow agreement
and any other documents which the Committee may require within the time period
prescribed by the Committee at the time the Award is granted, the Award shall be
null and void. At the discretion of the applicable Authority, Shares issued in
connection with a Restricted Stock Award shall be deposited together with the
stock powers with an escrow agent (which may be the Company) designated by the
applicable Authority. Unless the applicable Authority determines otherwise and
as set forth in the Agreement and as set forth in Section 8.6 hereof, upon
delivery of the Shares to the escrow agent, the Grantee shall have all of the
rights of a stockholder with respect to such Shares, including the right to vote
the Shares and to receive all dividends or other distributions paid or made with
respect to the Shares.
8.3 Non-transferability. Until any restrictions upon the Shares
-------------------
of Restricted Stock awarded to a Grantee shall have lapsed in the manner set
forth in Section 8.4 hereof, such Shares shall not be sold, transferred or
otherwise disposed of by, and shall not be pledged or otherwise hypothecated by,
nor shall they be delivered to, the Grantee.
8.4 Lapse of Restrictions.
---------------------
(A) Generally. Subject to Section 8.1 hereof, restrictions
---------
upon Shares of Restricted Stock awarded hereunder shall lapse at such time or
times and on such terms and conditions as the applicable Authority may
determine, which restrictions shall be set forth in the Agreement evidencing the
Award.
(B) Effect of Change in Control. Notwithstanding anything
---------------------------
to the contrary contained in the Plan, unless the Agreement evidencing the Award
provides to the contrary, all restrictions upon any Shares of Restricted Stock
(other than restrictions imposed by applicable law) shall lapse immediately and
all such Shares shall become fully vested in the Grantee upon termination of the
Grantee's employment or service within twelve (12) months following a Change in
Control if such termination is by a member of the Group or any successor thereto
without Cause or by the Grantee in connection with a material adverse change in
the Optionee's responsibilities or duties.
8.5 Modification or Substitution. Subject to the terms of the
----------------------------
Plan, the applicable Authority may modify outstanding Awards of Restricted Stock
or accept the surrender of outstanding Shares of Restricted Stock (to the extent
the restrictions on such Shares have not yet lapsed) and grant new Awards in
substitution for them, provided that as so modified such Awards of Restricted
Stock are consistent with the terms of the Plan. Notwithstanding the foregoing,
no modification of an Award shall adversely alter or impair any rights or
obligations under the Agreement without the Grantee's consent.
8.6 Treatment of Dividends. At the time the Award of Shares of
----------------------
Restricted Stock is granted, the applicable Authority may, in its discretion,
determine that the
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<PAGE>
payment to the Grantee of dividends, or a specified portion thereof, declared or
paid on such Shares by the Company shall be (I) deferred until the lapsing of
the restrictions imposed upon such Shares and (II) held by the Company for the
account of the Grantee until such time. In the event that dividends are to be
deferred, the applicable Authority shall determine whether such dividends are to
be reinvested in Shares (which shall be held as additional Shares of Restricted
Stock) or held in cash. If deferred dividends are to be held in cash, there may
be credited at the end of each year (or portion thereof) interest on the amount
of the account at the beginning of the year at such rate per annum as the
applicable Authority, in its discretion, may determine. Payment of deferred
dividends in respect of Shares of Restricted Stock (whether held in cash or as
additional Shares of Restricted Stock), together with interest accrued thereon,
if any, shall be made upon the lapsing of restrictions imposed on the Shares in
respect of which the deferred dividends were paid, and any dividends deferred
(together with any interest accrued thereon) in respect of any Shares of
Restricted Stock shall be forfeited upon the forfeiture of such Shares.
8.7 Delivery of Shares. Upon the lapse of the restrictions on
------------------
Shares of Restricted Stock, the Company shall cause a stock certificate to be
delivered to the Grantee with respect to such Shares, free of all restrictions
hereunder.
9. Performance Awards.
------------------
9.1 Performance Objectives. Performance Awards may be granted
----------------------
subject to the attainment of performance objectives or the passage of time.
Performance objectives for Performance Awards may be expressed in terms of (I)
earnings per Share, (II) pre-tax profits, (III) net earnings or net worth, (IV)
return on equity or assets, (V) any combination of the foregoing, or (VI) any
other standard or standards deemed appropriate by the applicable Authority at
the time the Award is granted. Performance objectives may be in respect of the
performance of the Company and its Subsidiaries (which may be on a consolidated
basis), a Subsidiary or a Division. Performance objectives may be absolute or
relative and may be expressed in terms of a progression within a specified
range. Prior to the end of a Performance Cycle, the applicable Authority, in
its discretion, may adjust the performance objectives to reflect a Change in the
Capitalization, a change in the tax rate or book tax rate of the Company or any
Subsidiary, or any other event which may materially affect the performance of
the Company, a Subsidiary or a Division, including, but not limited to, market
conditions or a significant acquisition or disposition of assets or other
property by the Company, a Subsidiary or a Division. In the event that a
Performance Award is granted on or after the Effective Date and is subject to no
conditions other than the passage of time, the minimum amount of time necessary
to satisfy any such condition shall be three years, subject to acceleration in
the event that employment is terminated by any member of the Group without
Cause, by the Grantee as a result of the Grantee's death or Disability or under
the circumstances described in Section 9.4 hereof.
9.2 Performance Units. The applicable Authority, in its
-----------------
discretion, may grant Awards of Performance Units to Eligible Individuals, the
terms and conditions of which shall be set forth in an Agreement between the
Company and the Grantee. Performance Units may be denominated in Shares or a
specified dollar amount and, contingent upon the
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<PAGE>
attainment of specified performance objectives within the Performance Cycle,
represent the right to receive payment, as provided in Section 9.2(B) hereof, of
(I) in the case of Share-denominated Performance Units, the Fair Market Value of
a Share on the date the Performance Unit was granted, the date the Performance
Unit became vested or any other date specified by the applicable Authority, (II)
in the case of dollar-denominated Performance Units, the specified dollar amount
or (III) a percentage (which may be more than 100%) of the amount described in
clause (i) or (ii) depending on the level of performance objective attainment;
provided, however, that the applicable Authority may, at the time a Performance
- -------- -------
Unit is granted, specify a maximum amount payable in respect of a vested
Performance Unit. Each Agreement shall specify the number of the Performance
Units to which it relates, the performance objectives which must be satisfied in
order for the Performance Units to vest and the Performance Cycle within which
such objectives must be satisfied.
(A) Vesting and Forfeiture. A Grantee shall become vested
----------------------
with respect to the Performance Units to the extent that the performance
objectives or other vesting criteria set forth in the Agreement are satisfied.
(B) Payment of Awards. Payment to Grantees in respect of
-----------------
vested Performance Units shall be made within one hundred twenty (120) days
after the last day of the Performance Cycle to which such Award relates unless
the Agreement evidencing the Award provides for the deferral of payment, in
which event the terms and conditions of the deferral shall be set forth in the
Agreement. Subject to Section 9.4, such payments may be made entirely in Shares
valued at their Fair Market Value as of the last day of the applicable
Performance Cycle or such other date specified by the applicable Authority,
entirely in cash, or in such combination of Shares and cash as the applicable
Authority, in its discretion, shall determine at any time prior to such payment;
provided, however, that if the applicable Authority, in its discretion,
- -------- -------
determines to make such payment entirely or partially in Shares of Restricted
Stock, the applicable Authority shall determine the extent to which such payment
will be in Shares of Restricted Stock and the terms of such Restricted Stock at
the time the Award is granted.
9.3 Performance Shares. The applicable Authority, in its
------------------
discretion, may grant Awards of Performance Shares to Eligible Individuals, the
terms and conditions of which shall be set forth in an Agreement between the
Company and the Grantee. In addition to the terms and provisions specified in
this Section 9.3, each Agreement shall contain such other restrictions, terms
and conditions as the applicable Authority may, in its discretion, determine and
(without limiting the generality of the foregoing) such Agreements may require
that an appropriate legend be placed on Share certificates. Awards of
Performance Shares shall be subject to the following terms and provisions:
(A) Rights of Grantee. The applicable Authority shall
-----------------
provide at the time an Award of Performance Shares is made, the time or times at
which the actual Shares represented by such Award shall be issued in the name of
the Grantee; provided, however, that no Performance Shares shall be issued until
-------- -------
the Grantee has executed an Agreement evidencing
- 16 -
<PAGE>
the Award, the appropriate blank stock powers and, in the discretion of the
applicable Authority, an escrow agreement and any other documents which the
applicable Authority may require as a condition to the issuance of such
Performance Shares. If a Grantee shall fail to execute the Agreement evidencing
an Award of Performance Shares, the appropriate blank stock powers and, in the
discretion of the applicable Authority, an escrow agreement and any other
documents which the applicable Authority may require within the time period
prescribed by the applicable Authority at the time the Award is granted, the
Award shall be null and void. At the discretion of the applicable Authority,
Shares issued in connection with an Award of Performance Shares shall be
deposited together with the stock powers with an escrow agent (which may be the
Company) designated by the applicable Authority. Unless the applicable Authority
determines otherwise, subject to Section 9.3(D) hereof, upon delivery of the
Shares to the escrow agent, the Grantee shall have, in the discretion of the
applicable Authority, all of the rights of a stockholder with respect to such
Shares, including the right to vote the Shares and to receive all dividends or
other distributions paid or made with respect to the Shares.
(B) Non-transferability. Until any restrictions upon the
-------------------
Performance Shares awarded to a Grantee shall have lapsed in the manner set
forth in Sections 9.3(C) or 9.4, such Performance Shares shall not be sold,
transferred or otherwise disposed of and shall not be pledged or otherwise
hypothecated, nor shall they be delivered to the Grantee. The applicable
Authority may also impose such other restrictions and conditions on the
Performance Shares, if any, as it deems appropriate.
(C) Lapse of Restrictions. Subject to Section 9.4,
---------------------
restrictions upon Performance Shares (other than restrictions imposed by
applicable law) awarded hereunder shall lapse and such Performance Shares shall
become vested at such time or times and on such terms, conditions and
satisfaction of performance objectives as the applicable Authority may, in its
discretion, determine at the time an Award is granted.
(D) Treatment of Dividends. At the time the Award of
----------------------
Performance Shares is granted, the applicable Authority may, in its discretion,
determine that the payment to the Grantee of dividends, or a specified portion
thereof, declared or paid on actual Shares represented by such Award which have
been issued by the Company to the Grantee shall be (I) deferred until the
lapsing of the restrictions imposed upon such Performance Shares and (II) held
by the Company for the account of the Grantee until such time. In the event that
dividends are to be deferred, the applicable Authority shall determine whether
such dividends are to be reinvested in Shares (which shall be held as additional
Performance Shares) or held in cash. If deferred dividends are to be held in
cash, there may be credited at the end of each year (or portion thereof)
interest on the amount of the account at the beginning of the year at such rate
per annum as the applicable Authority, in its discretion, may determine. Payment
of deferred dividends in respect of Performance Shares (whether held in cash or
in additional Performance Shares), together with interest accrued thereon, if
any, shall be made upon the lapsing of restrictions imposed on the Performance
Shares in respect of which the deferred dividends were paid, and any dividends
deferred (together with any interest accrued thereon) in respect of any
Performance Shares shall be forfeited upon the forfeiture of such Performance
Shares.
- 17 -
<PAGE>
(E) Delivery of Shares. Upon the lapse of the restrictions
------------------
on Performance Shares awarded hereunder, the Company shall cause a stock
certificate to be delivered to the Grantee with respect to such Shares, free of
all restrictions hereunder.
9.4 Effect of Change in Control. Notwithstanding anything
---------------------------
contained in the Plan or any Agreement to the contrary, in the event of a Change
in Control:
(A) With respect to the Performance Units, the Grantee may
(I) become vested in a percentage of Performance Units as determined by the
applicable Authority at the time of the Award of such Performance Units and as
set forth in the Agreement and (II) be entitled to receive in respect of all
Performance Units which become vested as a result of a Change in Control, a cash
payment within thirty (30) days after such Change in Control in an amount as
determined by the applicable Authority at the time of the Award of such
Performance Unit and as set forth in the Agreement.
(B) With respect to the Performance Shares, restrictions
(other than restrictions imposed by applicable law) may lapse immediately on all
or a portion of the Performance Shares as determined by the applicable Authority
at the time of the Award of such Performance Shares and as set forth in the
Agreement.
(C) The Agreements evidencing Performance Shares and
Performance Units may provide, as determined by the applicable Authority, for
the treatment of those Awards (or portions thereof) which do not become vested
as the result of a Change in Control, including, but not limited to, provisions
for the adjustment of applicable performance objectives.
9.5 Non-transferability. No Performance Awards shall be
-------------------
transferable by the Grantee otherwise than by will or the laws of descent and
distribution.
9.6 Modification or Substitution. Subject to the terms of the
----------------------------
Plan, the Committee may modify outstanding Performance Awards or accept the
surrender of outstanding Performance Awards and grant new Performance Awards in
substitution for them, provided that as so modified such Performance Awards are
consistent with the terms of the Plan. Notwithstanding the foregoing, no
modification of a Performance Award shall adversely alter or impair any rights
or obligations under the Agreement without the Grantee's consent.
10. Effect of a Termination of Employment or Service. The Agreement
------------------------------------------------
evidencing the grant of each Option and each Award may set forth the terms and
conditions applicable to such Option or Award upon a termination or change in
the status of the employment or service of the Optionee or Grantee with the
Company, a Subsidiary or a Division (including a termination or change by reason
of the sale of a Subsidiary or a Division), as the applicable Authority may, in
its discretion, determine at the time the Option or Award is granted or
thereafter. In the absence of such provisions in an Agreement and unless
specifically set forth
- 18 -
<PAGE>
in an Agreement to the contrary, (a) in the event that an Optionee's or
Grantee's employment or service with the Company is terminated for Cause, the
Incentives granted to the Optionee or Grantee hereunder shall immediately
terminate in full, in the case of Options, no rights thereunder may be
exercised, and in all other cases, no payment will be made with respect thereto,
(b) in the event that an Optionee's employment or service with the Company is
terminated due to the death or Disability of such Optionee, all Options and
Stock Appreciation Rights owned by such Optionee shall be exercisable in full,
for a period ending on the earlier of the expiration date of such Incentive or
twelve (12) months after such termination (at the end of which period, all such
Options and Stock Appreciation Rights shall lapse), by such decedent's executors
or personal administrators or by such disabled Optionee, (c) in the event that a
Grantee's employment or service with the Company is terminated due to the death
or Disability of such Grantee, all Incentives owned by such Grantee that are
covered by Sections 8 and 9 hereof shall expire on the earlier of the expiration
date of such Incentives or twelve (12) months after such termination (at the end
of which period, all such Incentives shall lapse),unless exercised in advance
thereof by such decedent's executors or personal administrators or by such
disabled Grantee, provided, however, that to the extent that the passage of time
is a condition to the realization of any such Incentive, the Grantee shall be
deemed to have satisfied such passage of time condition, and (d) in the event
that an Optionee's or Grantee's employment or service with the Company is
terminated by the Company without Cause or by the Optionee or Grantee for any
reason other than such Optionee's or Grantee's death or Disability, all
Incentives owned by such Optionee or Grantee shall be exercisable, but only to
the extent exercisable on the date of termination of employment, by such
Optionee or Grantee for a period of up to the sooner of (a) ninety (90) days
after the termination of employment and (b) the expiration date of such
Incentives (at the end of which period, all such Incentives shall lapse).
11. Adjustment Upon Changes in Capitalization.
-----------------------------------------
11.1 In the event of a Change in Capitalization, the Compensation
Committee shall conclusively determine the appropriate adjustments, if any, to
(I) the maximum number and class of Shares or other stock or securities with
respect to which Options or Awards may be granted under the Plan, (II) the
maximum number or class of Shares or other stock or securities with respect to
which Options may be granted to any Eligible Individual during the term of the
Plan and (III) the number and class of Shares or other stock or securities which
are subject to outstanding Options or Awards granted under the Plan, and the
purchase price therefor if applicable.
11.2 Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code.
11.3 If, by reason of a Change in Capitalization, a Grantee of an
Award shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to, new, additional or different Shares or securities, such
new, additional or different shares shall
- 19 -
<PAGE>
thereupon be subject to all of the conditions, restrictions and performance
criteria which were applicable to the Shares subject to the Award or Option, as
the case may be, prior to such Change in Capitalization.
12. Effect of Certain Transactions.
------------------------------
Subject to Sections 6.7, 7.7, 8.4(B) and 9.4 hereof, or as otherwise
provided in an Agreement, in the event of (I) the liquidation or dissolution of
the Company or (II) a merger or consolidation of the Company (a "Transaction"),
the Plan and the Options and Awards issued hereunder shall continue in effect in
accordance with their respective terms except that following a Transaction each
Optionee and Grantee shall be entitled to receive in respect of each Share
subject to any outstanding Options or Awards, as the case may be, upon exercise
of any Option or payment or transfer in respect of any Award, the same number
and kind of stock, securities, cash, property, or other consideration that each
holder of a Share was entitled to receive in the Transaction in respect of a
Share; provided, however, that such stock, securities, cash, property, or other
consideration shall remain subject to all of the conditions, restrictions and
performance criteria which were applicable to the Awards prior to such
Transaction.
13. Pooling Transactions.
--------------------
Notwithstanding anything contained in the Plan or any Agreement to the
contrary, in the event of a Change in Control which is also intended to
constitute a Pooling Transaction, the Compensation Committee shall take such
actions, if any, which are specifically recommended by an independent accounting
firm retained by the Company to the extent reasonably necessary in order to
assure that the Pooling Transaction will qualify as such, including but not
limited to (I) deferring the vesting, exercise, payment or settlement with
respect to any Option or Award, (II) providing that the payment or settlement in
respect of any Option or Award be made in the form of cash, Shares or securities
of a successor or acquirer of the Company, or a combination of the foregoing and
(III) providing for the extension of the term of any Option or Award to the
extent necessary to accommodate the foregoing, but not beyond the maximum term
permitted for any Option or Award.
14. Company's Rights with Respect to Shares.
---------------------------------------
14.1 Except as set forth herein, Shares acquired pursuant to
the Plan may not be transferred without the Company's consent. Before any Shares
acquired under the Plan may be sold, the Shares shall first be offered to the
Company in accordance with the following terms and conditions:
(A) The Grantee or Optionee shall deliver a notice to the
Company stating his bona fide intention to sell or transfer the Shares, the
number of Shares to be sold or transferred, the price at which the Grantee or
Optionee proposes to sell or transfer the Shares and the name of the proposed
purchaser or transferee, all accompanied by proof
- 20 -
<PAGE>
reasonably satisfactory to the Company that the Grantee or Optionee has actually
received a bona fide offer to purchase the Shares on the terms stated in his
notice.
(B) Within 30 days after receipt of the notice, the Company
or its assignee may elect to purchase any or all Shares to which the notice
refers, at the price at which the Grantee or Optionee has received a bona fide
offer to purchase the Shares.
(C) If all of the Shares to which the notice refers are not
elected to be purchased as provided in subsection (ii) hereof, the Grantee or
Optionee may sell the remaining Shares to any person named in the notice at the
price specified in the notice or at a higher price, provided that such sale or
transfer is consummated within 60 days of the date of the notice to the Company,
and provided further that (x) the sale is in accordance with all the terms and
conditions of this provision and (y) the Grantee or Optionee furnishes the
Company with reasonable proof of the date and terms of the sale.
(D) The sale must be in accordance with Section 18.5 hereof.
The provisions of this Section 14.1 and Section 14.2 hereof shall terminate on
(i) the effective date of a registration statement filed by the Company under
the Securities Act of 1933, as amended, with respect to an underwritten public
offering of Shares or (ii) the closing date of a sale of assets or merger of the
Company pursuant to which shareholders of the Company receive securities of a
buyer whose securities are publicly traded. The provisions of clauses (i)
through (iii) of this Section 14.1 shall not apply to a transfer of any Shares
by the Grantee or Optionee, either during his or her lifetime or on death by
will or intestacy, to his ancestors, descendants or spouse, or any custodian or
trustee for the account of such ancestors, descendants or spouse, provided,
however, in such case, such transferee shall receive and hold the Shares subject
to the provisions of the Plan and there shall be no further transfer of the
Shares except in accordance with this provision.
14.2 Upon the exercise of an Option or payment of an Award or
at any time thereafter, the Company shall have the right to (i) repurchase any
or all Shares held by the Grantee or Optionee that were acquired pursuant to the
Plan at a purchase price determined by the Compensation Committee to represent
the fair market value of the repurchased Shares at the time of such repurchase,
(ii) convert any or all of those Shares to non-voting shares or (iii) allow the
Optionee to retain those Shares, subject to the other terms and conditions of
the Plan. To exercise its rights under either clause (i) or (ii), the Company
must give to the Grantee or Optionee notice to that effect. The notice shall
state the date, which shall not be more than 60 days after the date of the
notice, and the procedure for the repurchase or conversion. The Grantee or
Optionee must comply with the terms and procedure stated in the notice.
15. Termination and Amendment of the Plan.
-------------------------------------
The Plan shall terminate on the day preceding the tenth anniversary of
the date of its initial adoption by the Board and no Option or Award may be
granted thereafter under
- 21 -
<PAGE>
the Plan. The Board may sooner terminate the Plan and the Board may at any time
and from time to time amend, modify or suspend the Plan; provided, however,
that: -------- -------
15.1 No such amendment, modification, suspension or termination
shall impair or adversely alter any Options or Awards theretofore granted under
the Plan, except with the consent of the Optionee or Grantee, nor shall any
amendment, modification, suspension or termination deprive any Optionee or
Grantee of any Shares which he or she may have acquired through or as a result
of the Plan; and
15.2 To the extent necessary under applicable law or stock
exchange rules applicable to the Shares, no amendment shall be effective unless
approved by the stockholders of the Company in accordance with applicable law
and regulations.
16. Non-Exclusivity of the Plan.
---------------------------
The adoption of the Plan by the Board shall not be construed as
amending, modifying or rescinding any previously approved incentive arrangement
or as creating any limitations on the power of the Board to adopt such other
incentive arrangements as it may deem desirable, including, without limitation,
the granting of stock options otherwise than under the Plan, and such
arrangements may be either applicable generally or only in specific cases.
17. Limitation of Liability.
-----------------------
As illustrative of the limitations of liability of the Company, but
not intended to be exhaustive thereof, nothing in the Plan shall be construed
to:
(I) give any person any right to be granted an Option or Award
other than at the sole discretion of the applicable Authority;
(II) give any person any rights whatsoever with respect to Shares
except as specifically provided in the Plan;
(III) limit in any way the right of the Company to terminate the
employment of any person at any time; or
(IV) be evidence of any agreement or understanding, expressed or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
18. Regulations and Other Approvals; Governing Law.
----------------------------------------------
- 22 -
<PAGE>
18.1 Except as to matters of federal law, this Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Delaware without giving effect to
conflicts of law principles.
18.2 The obligation of the Company to sell or deliver Shares with
respect to Options and Awards granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Compensation
Committee.
18.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.
18.4 Each Option and Award is subject to the requirement that,
if at any time the Compensation Committee determines, in its discretion, that
the listing, registration or qualification of Shares issuable pursuant to the
Plan is required by any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the grant of an Option or
Award or the issuance of Shares, no Options or Awards shall be granted or
payment made or Shares issued, in whole or in part, unless listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions as acceptable to the Committee.
18.5 Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended, and is not otherwise exempt from
such registration, such Shares shall be restricted against transfer to the
extent required by the Securities Act of 1933, as amended, and Rule 144 or other
regulations thereunder. The Committee may require any individual receiving
Shares pursuant to an Option or Award granted under the Plan, as a condition
precedent to receipt of such Shares, to represent and warrant to the Company in
writing that the Shares acquired by such individual are acquired without a view
to any distribution thereof and will not be sold or transferred other than
pursuant to an effective registration thereof under said Act or pursuant to an
exemption applicable under the Securities Act of 1933, as amended, or the rules
and regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
18.6 Certificates representing Share purchased or received
under the Plan shall have endorsed upon them the following legend, or such other
legend as the Company may reasonably require to comply with applicable law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER
- 23 -
<PAGE>
AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE CORPORATION. THESE SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER
ANY STATE SECURITIES LAWS, THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ALL APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED."
19. Miscellaneous.
-------------
19.1 Multiple Agreements. The terms of each Option or Award may
-------------------
differ from other Options or Awards granted under the Plan at the same time, or
at some other time. The applicable Authority may also grant more than one
Option or Award to a given Eligible Individual during the term of the Plan,
either in addition to, or in substitution for, one or more Options or Awards
previously granted to that Eligible Individual.
19.2 Withholding of Taxes.
--------------------
(A) The Company may make such provisions and take such steps
as it may deem necessary or appropriate for the withholding of any taxes which
the Company is required by any law or regulation of any governmental authority,
whether federal, state or local, domestic or foreign, to withhold in connection
with any Option or the exercise thereof, any Stock Appreciation Right or the
exercise thereof, or the grant of any other Award, including, but not limited
to, the withholding of cash or Shares which would be paid or delivered pursuant
to such exercise or Award or another exercise or Award under this Plan until the
Grantee reimburses the Company for the amount the Company is required to
withhold with respect to such taxes, or canceling any portion of such Award or
another Award under this Plan in an amount sufficient to reimburse itself for
the amount it is required to so withhold. The Compensation Committee may permit
a Grantee (or any beneficiary or other person authorized to act) to elect to pay
a portion or all of any amounts required or permitted to be withheld to satisfy
federal, state, local or foreign tax obligations by directing the Company to
withhold a number of whole Shares which would otherwise be distributed and which
have a Fair Market Value sufficient to cover the amount of such required or
permitted withholding taxes.
(B) If an Optionee makes a disposition, within the meaning
of Section 424(c) of the Code and regulations promulgated thereunder, of any
Share or Shares issued to such Optionee pursuant to the exercise of an Incentive
Stock Option within the two-
- 24 -
<PAGE>
year period commencing on the day after the date of the grant or within the one-
year period commencing on the day after the date of transfer of such Share or
Shares to the Optionee pursuant to such exercise, the Optionee shall, within ten
(10) days of such disposition, notify the Company thereof, by delivery of
written notice to the Company at its principal executive office.
(C) The Committee shall have the authority, at the time of
grant of an Option or Award under the Plan or at any time thereafter, to award
tax bonuses to designated Optionees or Grantees, to be paid upon their exercise
of Options or payment in respect of Awards granted hereunder. The amount of any
such payments shall be determined by the Committee. The Committee shall have
full authority in its absolute discretion to determine the amount of any such
tax bonus and the terms and conditions affecting the vesting and payment
thereof.
- 25 -
<PAGE>
20. Commencement Date. The Plan is effective as of February __,
-----------------
1998, the date of its initial adoption by the Board; provided, however, that it
is intended that options granted prior to such date by the Company will become
subject to the Plan. The Plan was approved by the stockholders of the Company
in accordance with Delaware law.
- 26 -
<PAGE>
Exhibit 10.4
1999 Cash Incentive Plan
I) Employees
The purpose of the cash incentive plan, is to incent and reward employees for
the companies performance and the employee's contribution toward that
performance. It is intended to have all employees who have an effect on company
performance share at varying levels based upon job level classification and
individual performance. The plan uses a Company Performance Factor (CPF) to fund
dollars into each employees potential pool of incentive cash compensation. The
employees individual performance determines how much of the potential pool they
will receive.
Eligibility:
All employees except Salespeople and the CEO,COO and CFO. Sales people are
covered under the sales commission plan and The CEO, COO and CFO are covered
under the Sr. Executive Salary and Incentive Plan. You must be employed at the
time the bonuses are paid to be eligible for that quarter's or the annual bonus.
Incentive Bonus Pool
Employees will be entitled to a quarterly and annual Incentive Bonus Pool (IBP)
that will be calculated as the product of a fixed percentage, the bonus
percentage (BP) times quarterly Gross Base Salary (GBS) times the Company
Performance Factor mentioned above.(See Table 1 below) The more senior the
employee the greater the Bonus Percentage of their Gross Base Salary that is put
towards the Incentive Bonus Pool. Once the Incentive Bonus Pool is established
the employees actual bonus will be calculated as the product of the employees
Individual Performance Factor (IPF), based on attainment of individual goals and
objectives and the Incentive Bonus Pool . This bonus will be calculated each
quarter and at the end of each year. 50% of the potential Bonus will be paid out
quarterly(12.5% per quarter), and 50% will be paid annually. The Gross Base
Salary in effect at the start of the quarter will be used for the quarterly
calculation. The average of the salaries used in the quarterly calculations will
be used for the annual calculation.
Actual Incentive Bonus (AB) = Incentive Bonus Pool (IBP) * Individual
Performance Factor (IPF) (See Table # 2)
Quarterly Incentive Bonus Pool (IBP)= .125(Quarter) * Gross Base Salary(GBS)
*Bonus Percentage (BP) (See Table # 1) * Corporate Performance Factor (CPF)
Adjusted for Variable Gross Margin and Operating Expense criteria (See Table #3)
Annual Incentive Bonus Pool (IBP)= .50(Annual) *Average Gross Base Salary(GBS)
*Bonus Percentage (BP) (See Table # 1) * Corporate Performance Factor (CPF)
Adjusted for Variable Gross Margin and Operating Expense criteria (See Table #3)
Table 1
<TABLE>
<CAPTION>
Job Title Level % of Base
(BP)
-----------------------------------------------
<S> <C> <C>
Vice Presidents 70 50%
-----------------------------------------------
Directors 60 30%
-----------------------------------------------
Mangers II 50 20%
-----------------------------------------------
Individual 40 15%
Contributors IV
-----------------------------------------------
Managers I and 30 10%
Individual
Contributors III
-----------------------------------------------
Individual 20 5%
Contributors II
-----------------------------------------------
Individual 10 5%
Contributors I
-----------------------------------------------
Title 1999 Bonus
%(BP)
-----------------------------------------------
CEO 150%
-----------------------------------------------
COO 100%
-----------------------------------------------
CFO 75%
-----------------------------------------------
</TABLE>
<PAGE>
Individual Performance Factor
Individual performance will be reviewed quarterly against a specific set of
objectives agreed upon in advance (at the end of the previous quarter) by the
employee and his/her manager. Each quarter the manager will evaluate the
attainment of these objectives as a percentage. An Individual Performance Factor
(IPF) will be created on the following linear scale.
Table # 2
<TABLE>
<CAPTION>
Actual Attainment % of Individual Performance
Quarterly Objectives Factor (IPF)/1/
-----------------------------------------------------
<S> <C>
100% 1.30
-----------------------------------------------------
85% 1.00
-----------------------------------------------------
70% 0.40
-----------------------------------------------------
60% 0.20
-----------------------------------------------------
Below 60%/2/ 0.00
-----------------------------------------------------
</TABLE>
Company Performance Factor
It is our intent to use EBITDA, as the measurement of company performance in
future years, however, during the first year we are planning for a negative
EBITDA, which can bring some mathematical anomalies to the calculation. For
this reason we have decided to go with Revenue as the measurement, with certain
criteria on Gross Margins and Operating Expenses to insure we are focused on
both the top and bottom lines. The company attainment is a percentage of actual
Revenues as compared planned Revenues and yield the following Company
Performance Factor (CPF) as defined in Table #3 below:
Revenue Targets will be set by the annual budget and adjusted if necessary by
the Board on a quarterly basis.
Table #3
<TABLE>
<CAPTION>
Actual Revenue Company Performance
Attainment % of Factor (CPF)/4/
Planned Revenue/3/
-----------------------------------------------------
<S> <C>
Over 200% 2.00
-----------------------------------------------------
105% to 200% 1.05 to 2.00 Linearly
-----------------------------------------------------
100% to 105% 1.05
-----------------------------------------------------
50% to 99% 0.02 to 1.00 Linearly
-----------------------------------------------------
Below 50%/5/ 0.00
-----------------------------------------------------
</TABLE>
- -----------------
/1/ The IPF for Individual Attainment between any of these percentages will be
interpolated linearly
/2/ Below 60% Individual attainment no bonus (Individual or Corporate )will be
paid to that employee.
/3/ In order to insure that we are driving the revenue with good margin minutes,
if variable gross margin falls between 6% and 12% of revenue a reduction of 50%
will be made to the Company Performance Factor. If the variable gross margin is
below 6% the Company Performance factor will be zero.
/4/ The Company Performance Factor will be adjusted down by 2% for every
percentage point increase in operating expenses over planned operating expenses
to insure that we are managing our operating expenses to plan. Periodically,
opportunities, that will require additional funding , not reflected in the
budgeted operating expenses, will arise. Once the Board of Directors approves,
these expenditures, the operating expense target will be adjusted to reflect the
new spending levels.
<PAGE>
By Example:
If our revenue plan was $4 million for the quarter and our actual revenue was
$4.4 Million, with a variable margin of 18% and our planned operating expenses
were to be $1,360,000 , and actual operating expenses were $1,500,000, or 10%
over the planned $1,360,000. The calculation would be as follows:
($4.4/$4.0) x (1-.2) = .88 Attainment was 110% for a CPF of 1.1 reduced by
20% since Operating Expenses were over by 10% ( 2% x 10).
If the Operating expenses had been $1.7 Million, or 25% over the CPF would be
.55 Attainment of 110% for a CPF of 1.1 adjusted down by 50% ( 2% x 25)
- --------------
/5/ Note: Below 50% Revenue attainment no bonus (Individual or Corporate) will
be paid to any employee.
<PAGE>
EXHIBIT 10.6
Joint Venture
and
Quotaholders Agreement
This Agreement ("Agreement") is made and entered into as of this 19th day of
July, 1998, by and between:
a) TeleNova Comunicacoes Ltda., a limited liability quota company, duly
organized and existing under the laws of the Federative Republic of Brazil
("Brazil"), having its principal place of business at Alameda Araguaia, 933,
conj. 46, Alphaville, Barueri, State of Sao Paulo, Brazil, registered with the
C.G.C./M.F. under No. 02.519.780/0001-06 (hereinafter referred to as
"TeleNova"); and
b) ITXC Corp., a corporation duly organized and existing under the laws of the
State of Delaware, USA, having its principal place of business at 219 North
Center Drive, North Brunswick, NJ (hereinafter referred to as "ITXC" and,
collectively with TeleNova, the "Quotaholders" or "Parties" and each a
"Quotaholder" or "Party");
RECITALS
1. In accordance with the Memorandum of Understanding ("MOU") dated May
11, 1998, the Quotaholders have agreed to form a limited liability
quota company (hereinafter referred to as the "Company") according to
the laws of Brazil, for the purpose of jointly and exclusively
developing the wholesale IP telephony market, IP telephony being a
novel type of telephony based upon packet-switching technology and
Internet protocol, in the countries of Brazil, Argentina, Uruguay,
Paraguay and
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Chile (hereinafter referred to as the "Territory"), it being
understood that such Territory may be expanded, in the future, by
mutual agreement of the Parties, to one or more additional South
America countries.
2. ITXC desires to extend its presence into the Territory by offering
wholesale IP telephony services in the Territory through the formation
and operation with TeleNova of the Company. The Parties expect that
the Company will offer wholesale IP telephony services similar to
those currently being offered by ITXC in the United States and other
parts of the world, in accordance with the terms and conditions set
forth herein.
3. ITXC possesses certain valuable and proprietary technical, business,
and financial information and documentation relating to its current
and future technical, business and marketing plans which will be
privately disclosed by ITXC to TeleNova and the Company and are not
generally available to the public.
4. TeleNova also possesses certain valuable and proprietary technical,
business, and financial information and documentation relating to its
current and future technical, business and marketing plans which will
be privately disclosed by TeleNova to ITXC and the Company and are not
generally available to the public.
Now, therefore, in consideration of the mutual covenants and agreements
contained herein, the Parties hereby agree as follows:
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Article 1
Purpose of the Agreement
1.1 The purpose of this Agreement is to set forth the understandings, rights
and obligations of the Quotaholders with respect to their conduct as
quotaholders of the Company and the provision of the Company Services (as
defined in Section 3.1 hereof).
1.2 This Agreement shall be filed at the principal office of the Company and
shall be enforceable according to the laws of Brazil.
Article 2
Representations and Warranties
2.1 TeleNova represents and warrants to ITXC that:
(a) it is a limited liability quota company duly organized, validly
existing and in good standing under the laws of Brazil, and all
material information provided by it in connection with this Agreement
is correct in all material respects;
(b) it has full power and authority to make and enter into this Agreement
and it has taken all required company actions, to the extent required
by the laws of Brazil, and it has obtained the unqualified approval of
the transactions contemplated by this Agreement by resolution of its
administrators and quotaholders; and
(c) neither the execution and delivery of this Agreement, nor consummation
of the transactions contemplated hereunder, requires it or any of its
Affiliates (as defined in Section 5.4 hereof) to obtain any permits,
authorizations or consents under applicable current law from any
governmental body or from
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any person, firm, company or corporation under any existing agreement
to which it or any of its Affiliates may be a party, and such
execution, delivery and consummation will not result in the breach of
or give rise to cause for termination of any agreement, contract or
organizational document to which it or its Affiliates may be a party.
2.2 ITXC represents and warrants to TeleNova that:
(a) it is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, USA, and all
material information provided by it in connection with this Agreement
is correct in all material respects;
(b) it has full power and authority to make and enter into this Agreement
and it has taken all required corporate actions, to the extent
required by the laws of the State of Delaware, USA, and it has
obtained the unqualified approval of the transactions contemplated by
this Agreement by resolution of its directors;
(c) neither the execution and delivery of this Agreement, nor consummation
of the transactions contemplated hereunder, requires it or any of its
Affiliates to obtain any permits, authorizations or consents under
applicable current law from any governmental body or from any person,
firm, company or corporation under any existing agreement to which it
or any of its Affiliates may be a party, and such execution, delivery
and consummation will not result in the breach of or give rise to
cause for termination of any agreement, contract or organizational
document to which it or its Affiliates may be a party;
(d) it has full ownership, without any limitations or encumbrances, of all
rights in connection with the state-of-the-art technology related to
the global IP network, as described in Exhibit "F" attached hereto, it
employs to deliver its IP
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telephony service, other than technology which ITXC licenses from
third-parties (which technology is integrated and customized by ITXC);
and
(e) it is in the process of deploying a worldwide IP network in other to
allow the termination and origination of calls outside the Territory.
Article 3
Company
3.1 The objectives of the Company shall initially consist principally of the
installation and operation of one or more IP telephony hubs and twelve or more
"mini-hubs" (as hereinafter defined) in the Territory to be operated solely
according to ITXC's technical, quality and operational guidelines, in order to
provide the following services (the "Company Services") in the Territory: IP
telephony network development and management, routing, authorization, financial
settlement, call detail record processing, high-speed link with ITXC's United
States hub, regional marketing programs, cross-network platform bridging, third-
party gateway certification and homologation, and all acts or operations which
are presently related directly or indirectly to said objectives, including
participation as a quotaholder, shareholder or partner in other commercial or
industrial ventures, undertakings or consortia permitted by applicable law. The
Company shall use its best efforts to develop an Internet telephony market in
the Territory.
3.2 The Company shall provide the Company Services, which are basically ITXC
current and future services, in the Territory. The Company will initially
deploy one hub and twelve (12) minihubs throughout the Territory, thereby
creating a network of IP gateway points of presence (POPs) at its sole
expense and according to a deployment schedule agreed upon by the Parties,
as set forth in the Initial Business Plan, hereto attached as Exhibit C,
and in the Investment Schedule, hereto attached as Exhibit D, both jointly
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prepared by the Parties, to help generate and terminate IP telephony
traffic for the Company's operations. For the purpose of this Agreement,
the term "mini-hub" means all hardware and software systems that may be
required to connect a circuit-switched network to a packet switched network
(IP Network), including, but not limited to, switches, routers,
multiplexors, digital signal processing boards and any other hardware or
software deemed necessary by the Parties for this function. All
specifications for the Company's hub and mini-hubs will be provided by
ITXC. The existent TeleNova IP telephony operation and gateway(s),
including infra-structure, shall be considered valuable assets to be
contributed by TeleNova to the Company, as part of the capital contribution
as set forth in Article 4 and as listed in Exhibit B attached hereto.
3.2.1 In order to link the POPs above mentioned, the Company will lease or
otherwise acquire the necessary IP connections within the Territory at its
sole expense. The Company will also lease or otherwise acquire the
necessary IP connections between the Territory and other parts of the
world; such connections will be jointly leased with ITXC, with the costs
equally split.
3.2.2 The Company will seek the appropriate licenses from the regulatory
agencies in the Territory in order to operate the IP connections referred
to in 3.2.1 above.
3.3 In order to facilitate the Company's provision of the Company Services in
the Territory, ITXC shall, during the term of this Agreement: (a) provide to the
Company a worldwide (to the extent that ITXC provides such origination and
termination on a worldwide basis) IP telephony origination and termination
global footprint at carrier prices; (b) purchase from the Company termination
services in the Territory for worldwide traffic at carrier prices; (c) develop
for the Company software and operational procedures applicable to the WWeXchange
service offering; (d) provide the Company with advice and training regarding
network certification, compatibility, interoperability, testing and monitoring
services; (e) provide the Company with updates to applicable vendor software and
maintenance
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releases used with the Company Services, and (f) on terms agreed to by the
Parties, provide sales assistance and marketing materials to the Company. ITXC
will provide the Company with comparable assistance in connection with the
provision of Future Services (as hereinafter defined) offered by ITXC. For the
purposes of this Agreement, the term "carrier prices" means cost-based pricing
typically used by carriers for traffic exchange between carriers. In the context
of this Agreement, "carrier prices" represent rates which are no more than four
cents U.S. ($.04) per minute greater than variable costs plus allocated costs
(gateways, routers, switches and dedicated lines) and which are no greater than
prices charged to other customers (without regard to quantity restriction).
3.4 In order to facilitate the Company's provision of the Company Services in
the Territory, TeleNova shall: (a) help develop the wholesale IP telephony
market by retailing IP telephony, directly or through third Parties, in selected
markets throughout the Territory; (b) construct and operate, at its sole
expense, discretion and schedule, if and when market conditions allow, an IP
backbone in the Territory on which capacity will be sold to the Company when
available on a commercially competitive and "most favored customer" basis; and
(c) assign and transfer to the Company the existing investment made in IP
telephony and other hub revenue services identified by mutual agreement of the
Parties, as part of its capital contribution. TeleNova will provide the Company
with comparable assistance in connection with the provision of Future Services
offered by the Company.
3.5 In addition to the Company Services as they exist as of the date hereof,
the Parties intend that the Company will provide future products and services in
the Territory that will be developed and/or provided by ITXC in other parts of
the world, but only to the extent that ITXC and TeleNova agree that it is both
feasible and legal for the Company to provide such products and services in the
Territory ("Future Services"). ITXC shall offer the Company the right and
license to provide such Future Services, and the Company shall be obligated to
provide such Future Services in the Territory, under the same terms and
conditions that the Company has agreed to provide the Company Services,
including, without limitation, a royalty of
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four percent (4%) of gross revenue and reciprocal carrier pricing for services
provided by the Company to ITXC or by ITXC to the Company.
3.6 If a Future Service does require the provision of services by ITXC to the
Company or by the Company to ITXC as part of the operational service delivery
process and the concept of "carrier pricing" cannot be reasonably applied to
these services, the Parties shall negotiate in good faith inter-company pricing
for these services which achieves the same effect as carrier pricing for
WWeXchange.
3.7 ITXC and the Company shall settle between themselves the wholesale inter-
company charges for the origination, transportation and termination of IP
telephony calls in the same manner that ITXC settles the charges for such
services with other wholesale carriers throughout the world. ITXC will pay
wholesale carrier charges to the Company for those Company Services essentially
equivalent to the types of services for which ITXC normally pays carrier
wholesale charges, and the Company will pay wholesale carrier charges to ITXC
for the provision of services provided by ITXC for which ITXC normally receives
wholesale carrier charge payments. The cost of IP links between the Territory
and the rest of the world will be equally shared by the Company and ITXC.
3.8 The Parties hereby acknowledge that even though the initial activities of
the Company shall be restricted to the Territory, it is the firm intention of
the Parties to consider the possibility of expanding the Territory to encompass
all countries in South America. Such expansion shall be effected only upon the
execution by the Parties of an amendment to this Agreement executed by the
Parties and expressly authorizing such expansion.
3.9 During the term of this Agreement, ITXC shall be responsible for providing
guidance to the Company regarding all technical, operational and service quality
requirements and specifications for the Company to properly operate and
implement its objectives, either herein defined or that may be agreed upon in
the future by the Parties. TeleNova shall be responsible for providing guidance
to the Company regarding the marketing,
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commercialization and distribution of services and/or products offered by the
Company within the Territory, subject in all cases to the requirements of U.S.
export law. ITXC will also provide descriptions and marketing aids for products
such as WWeXchange.
3.10 Each Quotaholder shall assign and transfer to the Company its presently
existing business relationships involving wholesale IP telephony services
in the Territory, as set forth in Schedule 3.10 annexed hereto and made a
part hereof.
3.11 The cost of the creation of the Company, together with internal expenses,
shall be borne and paid for by the Company. TeleNova and ITXC will each
bear the costs of its own counsel and other representatives in connection
with the preparation, negotiation and execution of this Agreement.
3.12 The Articles of Association of the Company (hereinafter referred to as the
"Articles of Association") shall be as set forth in Exhibit "A" annexed
hereto and made a part hereof. In the event of a conflict between the
provisions of the Articles of Association and the provisions of this
Agreement with respect to any matter, then such matter shall be governed
by the provisions of this Agreement; provided, however, that the parties
shall cause the Articles of Association, if necessary, to be amended so as
to remove any such conflict.
3.13 The Company shall have its headquarters in Barueri, the State of Sao
Paulo, Brazil, at Alameda Araguaia, 933, conj. 46, sub-conj. 1,
Alphaville.
Article 4
Capital Structure of the Company
4.1 The Company will be organized as a limited liability quota company. The
initial capital of the Company shall be the equivalent in reais, at an
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agreed upon exchange rate, of $3,000,000.00 (three million U.S. dollars) (the
"Initial Required Contribution"), 51% of which Initial Required Contribution
($1,530,000 or one million five hundred and thirty thousand U.S. dollars) shall
be contributed by TeleNova and 49% of which Initial Required Contribution
($1,470,000 or one million four hundred seventy thousand U.S. dollars) shall be
contributed by ITXC. The Quotaholders shall subscribe for the quotas to be
issued originally by the Company in the following manner:
Party Investment Ratio Number of Quotas
------ ---------------- ----------------
TeleNova 51 % 1,530,000
ITXC 49 % 1,470,000
The paid-up capital of the Company shall be represented by 3,000,000 (three
million) quotas, each with a par value of the real equivalent to one U.S. dollar
($ 1.00) at the same exchange rate as above. Payment for the initial capital of
the Company shall be made in cash or credit for equipment contributed by
TeleNova or advance credit for royalty payments equal to ITXC initial capital
contribution.
4.2 Notwithstanding any provision herein to the contrary, TeleNova hereby
agrees to extend interim loans to the Company, directly or through third
parties, in an aggregate amount, the equivalent in reais of which is not to
exceed $1 million (one million U.S. dollars), pursuant to the Initial Business
Plan annexed hereto as Exhibit C, if and when needed by the Company during the
seventeen-month period ending December 31, 1999, in order to preserve its cash
position above $300,000.00 (three hundred thousand U.S. dollars). All such
interim loans will be made by TeleNova and repaid by the Company, including the
repayment of interest, in reais. These loans will not be guaranteed by ITXC and
will be in the form of 12 (twelve) months notes bearing an interest rate equal
to the lending rate to businesses offered by BankBoston Brazil at the time each
loan is requested by the Company from TeleNova. The notes are repayable by the
Company in advance without any penalties, with the partial interest rate
calculated pro-rata.
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4.2.1 Notwithstanding any provision herein to the contrary, the Company,
subsequent to December 31, 1999, shall not be required to remit a payment
pursuant to Section 4.2 hereof in excess of the equivalent in reais of
$100,000.00 (one hundred thousand U.S. dollars) in any calendar month if
such payment amount in excess of the equivalent in reais of $100,000.00
U.S. dollars would cause the Company's cash position to fall below
$300,000.00 (three hundred thousand U.S. dollars).
4.3 No Quotaholder shall be required to make any capital contributions other
than its required portions of the Initial Required Contribution. If, after the
Initial Required Contribution has been made or the 17-month period described in
Section 4.2 hereof has elapsed, a determination is made to raise additional
capital in accordance with Subsection 8(b) hereof, each of the Quotaholders
shall have the right, but not have the obligation, to contribute such additional
capital. Except as prohibited by law and unless specifically waived in writing
by the Quotaholder to be bound, in such instance each Quotaholder shall have
preemptive rights to subscribe, in proportion to its then respective holdings in
the quota capital of the Company, for any additional quotas or other securities
to be issued subsequent to the initial capitalization set forth in this Article
4.
4.4 ITXC shall have the option, subject to TeleNova's prior approval (which
approval shall not be unreasonably withheld or delayed), within ninety (90) days
from the date of this Agreement, such date inclusive, to assign and transfer to
a party foreign to Brazil ("US Investor") from its assigned quotas, up to 24%
(twenty-four percent) of the Company quota capital. TeleNova shall also have
the option, within ninety (90) days from the date of this Agreement, such date
inclusive, to assign and transfer from its assigned quotas to Telesis Sistemas
em Telecomunicacoes Ltda/Message up to 25% (twenty-five percent) of the Company
quota capital. In the event of any such assignment pursuant to this Section
4.4, the assignee shall thereafter be deemed to be a "Quotaholder" and a "Party"
hereunder and, as a condition to any such assignment, such assignee shall
execute an agreement (in form and substance satisfactory to ITXC and TeleNova)
to be
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subject to each of the terms of this Agreement applicable to such assignor
in such assignor's capacity as a quotaholder of the Company.
4.5. Payment for quotas issued as provided for in Section 4.1 above shall be
made in cash, in reais, or an advance credit for royalty payments equal to ITXC
initial capital contribution; provided, however, that payment may be made by
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contribution of any other property if the Parties collectively consent to the
form of such payment, agree on the value of the property contributed, and said
value is confirmed by an independent appraisal, if required by applicable law,
or requested by any of the other Quotaholders. Subject to the foregoing, any
Quotaholder who is obligated hereunder to make a capital contribution and fails
to make such contribution, in whole or in part, in accordance with the
conditions stipulated in this Agreement, shall be deemed to be in arrears and
shall be required to pay interest thereon, in reais, at the interest rate equal
to the lending rate to businesses offered by BankBoston Brazil, as such lending
rate may change from time to time.
4.6. The Company shall use its best efforts to obtain any funds which it may
require to properly and orderly conduct its business in addition to the initial
capitalization set forth in Section 4.1 above, through loans or, if the
appropriate approval is given, pursuant to Subsection 8(b) hereof, by the
issuance of further equity capital. To the extent that (i) loans, other than
the loans described in Section 4.2, are required for implementation of any
project or approved business plan, (ii) a guarantee is required for the Company
to obtain said loans and (iii) the Quotaholders unanimously agree that the
Quotaholders shall provide such a guarantee, then in such event, the
Quotaholders shall provide said guarantee (said guarantee to be several and not
joint) in proportion to their then respective holdings in the quota capital of
the Company, provided said loans are consistent with loans then being made in
the normal course of business by financial institutions and/or governmental
agencies in Brazil and loans with like terms cannot be obtained without such a
guarantee; provided, however, that if all of the Quotaholders agree to provide
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such a guarantee, and one or more of the Quotaholders is not required to
guarantee said loans, any Quotaholder not so required shall indemnify each
Quotaholder issuing such guarantee in
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proportion to its then respective holding in the quota capital of the Company.
Article 5
Restrictions on Quota Transfer
5.1 If any Quotaholder (hereinafter referred to as the "Offeror") wishes to
sell (i) the quotas of the Company held by it and/or (ii) its rights in any
increase in the number of quotas (said quotas and/or rights hereinafter
collectively referred to as the "Equity") to any third party (hereinafter
referred to as the "Offered Equity"), the Offeror shall be free to sell said
Offered Equity, provided the Offeror first gives written notice to each other
Quotaholder (each of whom is hereinafter referred to an the "Offeree"), offering
said Offered Equity to the Offeree at the price and under the terms and
conditions that the Offeror is willing to sell to a third party (the
"Purchaser"). If there is more than one Offeree, each Offeree shall have the
right to purchase its pro rata share of the Offered Equity. The Offeree shall
have fifteen (15) days after receipt of said notice within which to elect, by
giving written notice to the Offeror, to purchase said Offered Equity, in whole
or in part. In case the Offeree elects to purchase said Offered Equity, in
whole or in part, it shall complete such purchase within forty-five (45) days
after notice of such election. If the Offeree does not elect to purchase all of
the Offered Equity, the Offeror shall be free to sell the remaining Offered
Equity, at the price, under the terms and conditions, and to the Purchaser set
forth in Offeror's notice provided for in this Section 5.1; provided, however,
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that, if said sale is not consummated within ninety (90) days after the
expiration of the period(s) in which the Offeree had said right of first
refusal, the Offeror shall be required to offer the Offered Equity to the
Offeree pursuant to the provisions of this Section 5.1, prior to selling or
offering to sell the Offered Equity to the Purchaser or to any other third
party. Within thirty (30) days after consummation of the transaction with the
Purchaser, the Offeror shall furnish to the Offeree a statement made by a duly
authorized officer of Offeror, under penalty of law, setting forth the name of
the Purchaser and the price, terms and conditions under which the
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transaction was consummated and stating that the transaction was bona fide and
at arms-length.
5.2 If any Quotaholder wishes to pledge or otherwise encumber the Equity, in
whole or in part, said Quotaholder shall be free to do so, provided that it
first obtains the prior written consent of each other Quotaholder, which consent
shall not be unreasonably withheld or delayed, provided that the percentage of
the Equity pledged is less than 50% of the outstanding Equity and provided that
such Quotaholder's creditor agrees in writing to comply with the rights of first
refusal specified in Section 5.1 hereof, in the case of execution and to require
any purchaser of said Equity, prior to consummating said sale, to agree in
writing to be bound by the terms and conditions of this Agreement.
5.3 The sale and purchase of Offered Equity by the Quotaholders pursuant to the
provisions of this Article 5 shall be subject to the following conditions
precedent:
(a) regardless of the nature of the offer made by a third party, the
purchase price shall be payable in cash (on such terms, including the
timing of installments and the applicable interest rate, if any, as
are offered by the proposed Purchaser) and the sale and purchase shall
take place at a location mutually acceptable to the buyer and seller;
(b) the Offered Equity shall be delivered to the buyer free and clear of
all liens, encumbrances, equities or claims of any party, and the
buyer shall receive good and marketable title thereto;
(c) any governmental license, currency exchange permit or other approval
which may be required shall have been obtained and a copy thereof
shall have been furnished to the Parties; and
(d) in the event of a sale of Offered Equity, in whole or in part, to a
party other than the Offeree, the Offeror shall require such
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buyer, prior to consummating said sale, to agree in writing to be
bound by the terms and conditions of this Agreement.
5.4 Notwithstanding the above restrictions, any Quotaholder may, on notice to
the other Quotaholder(s), at any time, and from time to time, sell, assign,
transfer or otherwise dispose of the Equity, in whole or in part, to one (1) or
more Affiliates. An "Affiliate" of a Quotaholder is a company or other entity
controlled by, controlling or under common control with such Quotaholder.
5.5 Any sale, assignment, transfer, pledge, or other disposition or encumbrance
of any of the Equity, except as expressly permitted by this Agreement, shall be
void and unenforceable, and such transaction shall not be registered on the
books of the Company.
5.6 Notwithstanding any provision herein to the contrary, no Brazilian resident
shall transfer any equity interest in the Company to a non-Brazilian resident if
the effect of such transfer shall be to materially adversely affect the Company
or any Quotaholder of the Company.
Article 6
Management of the Company
6.1. The Company shall be managed by four (4) managers, to be appointed,
removed or re-appointed by the Quotaholders as follows:
<TABLE>
<CAPTION>
Position Selected by
-------- -----------
<S> <C>
Administrative Officer TeleNova
Finance Manager ITXC
Marketing and Sales Manager TeleNova
Technical and Operations Manager ITXC
</TABLE>
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The Chief Executive Officer of the Company shall be selected from among the
officers listed above by agreement of ITXC and TeleNova and shall be subject to
removal by TeleNova or ITXC at any time. Unless otherwise agreed by ITXC and
TeleNova, ITXC and TeleNova shall re-examine the appointment of the Chief
Executive Officer every two years.
Article 7
Distribution of Profits
The Quotaholders shall exercise their voting rights at General Quotaholders
Meetings to approve a reasonable cash dividend; provided, however, that said
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dividend shall not place a financial constraint or otherwise jeopardize the
Company's need for adequate capital to operate and prosper.
Article 8
Quotaholders Actions
All matters presented for action by the Quotaholders at any General Quotaholders
Meeting shall require (i) the approval of TeleNova and ITXC and (ii) if TeleNova
and ITXC do not collectively own more than fifty percent (50%) of the quotas
represented at said Meeting, then also by majority vote of the quotas
represented at said Meeting; provided, however, that unless otherwise agreed by
all Quotaholders, the General Quotaholders Meeting may only pass resolutions on
matters mentioned in the agenda for said Meeting; provided further that the
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following matters shall require for passage (i) the approval of TeleNova and
ITXC and (ii) if TeleNova and ITXC do not collectively own at least sixty-six
percent (66%) of the outstanding quota capital of the Company, then also the
affirmative vote of at least 66% (sixty-six percent) of the outstanding quota
capital of the Company:
(a) amendments to the Articles of Association of the Company;
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(b) any increase in the capital of the Company or the issuance of other
securities;
(c) the Company's participation in other companies or ventures;
(d) total debt financing in excess of $1 million (one million U.S.
dollars), or its equivalent in another currency, with the exception of
loans secured in the ordinary course of business, such as discounting
or pledging of trade bills and excluding the loans contemplated by
Section 4.2;
(e) annual and multiyear budgets of the Company;
(f) distribution of profits, including the declaration and amount of
dividends;
(g) individual capital expenditures in excess of $100,000 (one hundred
thousand U.S. dollars), or its equivalent in another currency;
(h) the license, sale or purchase of technology, patents, patent
applications or trademarks by the Company; and
(i) the settlement of legal proceedings in which the amount in controversy
exceeds $1 million (one million U.S. dollars), or its equivalent in
another currency;
provided further that the following items shall require for passage (i) the
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approval of TeleNova and ITXC and (ii) if TeleNova and ITXC do not collectively
own at least seventy five percent (75%) of the outstanding quota capital of the
Company, then the following items shall also require the affirmative vote of at
least seventy five percent (75%) of the outstanding quota capital of the
Company:
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(j) any sale or other form of disposition of any assets of the Company
outside the ordinary course of business or of all or substantially all
of the Company's assets;
(k) any change in the objectives of the Company as specified in Section
3.1 hereof;
(l) a decision to commence a new business of the Company or to cease
providing wholesale IP telephony services, or to offer or provide any
other service that is not part of ITXC's portfolio;
(m) the selection and/or dismissal of the Company's independent auditors;
(n) the merger, spin-off, transformation or consolidation of the Company
into or with another corporation or the acquisition of a controlling
interest in another company;
(o) the granting of guarantees, "avais", securities and/or collateral
guarantees on behalf of individuals or entities other than the
Company; and
(p) the admission of insolvency, the proposal of a composition and/or
bankruptcy with creditors, and the dissolution or liquidation of the
Company and the appointment of a liquidator therefor.
Article 9
Confidential Information
9.1 Confidentiality And Information Exchange.
9.1.1 It is the intention of the Parties to transfer or exchange
information, including Confidential Information, as may be necessary to perform
their respective obligations under this Agreement. Confidential
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Information may be disclosed in oral, visual, or written form. The receiving
Party shall make use of the Confidential Information only for the purposes of
this Agreement. The receiving Party shall protect the disclosed Confidential
Information by using the same degree of care, but no less than a reasonable
degree of care, to prevent the unauthorized use, dissemination, or publication
of the Confidential Information as the receiving Party uses to protect its own
Confidential Information of a like nature. At a minimum, the receiving Party
agrees not to copy any Confidential Information without the disclosing Party's
written consent, or to publish or otherwise disclose any Confidential
Information to any third Party. The receiving Party's duty to hold Confidential
Information in confidence expires upon the earlier of (i) five (5) years after
expiration or termination of this Agreement, or (ii) authorized disclosure of
the Confidential Information; provided, however, that a Party's obligation to
hold the computer source code, and computer object code of each other Party that
has not been identified as being for distribution ("Non-Distributed Object
Code") in confidence shall be perpetual. The expiration of the duty of
confidentiality shall not modify other restrictions on the receiving Party.
9.1.2 The furnishing of any Confidential Information among the
Parties hereunder shall not constitute the granting of any right or license to
use such information except as expressly provided for in this Agreement.
9.1.3 Each Party receiving any other Party's Confidential Information
hereunder agrees that it shall disclose Confidential Information only to those
of its employees, contractors, representatives and consultants with a need to
know such Confidential Information and who have first agreed with the receiving
Party, either as a condition of employment or in order to obtain the
Confidential Information, to be bound by terms and conditions substantially
similar to those contained in this Article 9. With respect to computer source
code and Non-Distributed Object Code, each Party agrees to disclose the computer
source code and/or Non-Distributed Object Code of any other Party to those of
its employees, contractors, representatives and consultants with a need to know
who have previously agreed in writing to be bound by the disclosure and other
restrictions contained in this Article 9. In addition, prior to disclosure of
computer
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source code or Non-Distributed Object Code to any employee, contractor,
representatives or consultant, the receiving Party shall provide the disclosing
Party with a list of those individuals who will have access to such computer
source code and/or Non-Distributed Object Code and the business affiliation of
such individuals. Each Party expressly reserves the right to prohibit any
individual or any entity from obtaining access to its computer source code
and/or Non-Distributed Object Code upon a showing of good cause for such
prohibition.
9.1.4 All Confidential Information shall remain the property of the
disclosing Party, and such Confidential Information and all copies thereof (if
any), shall be promptly returned to the disclosing Party upon request or, at the
disclosing Party's sole option, destroyed, in which case the disclosing Party
shall be notified promptly in writing when its Confidential Information has been
destroyed.
9.1.5 For the purpose of this Agreement, Confidential Information
shall mean all confidential, technical, business, legal and other information
and data furnished by a Party to any other Party hereunder, whether in oral,
written, graphic or machine-readable form, which is clearly identified or
labeled as confidential or proprietary at the time of disclosure or within
thirty (30) business days after verbal disclosure, and all computer source code
and Non-Distributed Object Code, whether labeled or not.
9.1.6 For the purpose of this Agreement, Confidential Information
shall not include any information which:
1) is already known to the receiving Party evidenced by
documentation in the receiving Party's possession or is publicly
available at the time of disclosure;
2) is disclosed to the receiving Party by a third party who is not
in breach of an obligation of confidentiality;
3) becomes publicly available after disclosure through no act of
the receiving Party;
4) was or is independently developed by the receiving Party without
breach of this Agreement; or
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5) is required to be disclosed by law or order of a court of
competent jurisdiction, provided that such disclosure shall only
be to the extent required and prior to disclosure the receiving
Party shall provide prompt written notice to the disclosing
Party sufficient to permit the disclosing Party the opportunity
to oppose such court order.
9.1.7 The receiving Party further agrees that it shall be responsible
to the disclosing Party for any disclosure or misuse of the disclosing Party's
Confidential Information which results from a failure to comply with this
Agreement. Unauthorized disclosure of Confidential Information will diminish
the value of the proprietary interests that are the subject of this Agreement.
Accordingly, if the receiving Party breaches any of its obligations hereunder,
the disclosing Party may be entitled to equitable relief to protect its interest
therein, including but not limited to injunctive relief, as well as money
damages.
Article 10
Project Implementation
Promptly after the execution of this Agreement, the Parties shall use their
best efforts to cause the Company to begin operations and engage in the normal
course of business. Such actions, several of which shall be continuing
obligations, shall include, but not be limited to, the following: (a)
installation of the Territory hub; (b) installation of mini-hubs; (c) entering
into agreement(s) with third party gateway operators; (d) seeking to develop IP
telephony in the Territory, through market programs and seminars, as well as
advertising campaigns; (e) creating an IP network interconnecting the hub and
minihubs in the Territory; and (f) interconnecting the Territory network to
ITXC's global origination and termination footprint.
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Article 11
Manpower for the Company
Except as otherwise specifically provided in this Agreement or in the
Articles of Association, the management of the Company shall have final
responsibility for the selection and employment of the Company's employees.
Article 12
Operation
The Company shall seek to be a profit-making enterprise and shall have its
own sales/marketing organization in the Territory, but not outside the
Territory.
Article 13
Business Plan
Capitalization of the Company shall be effected in accordance with the
Business Plan attached hereto as Exhibit C, with capital contributions as set
forth in the Investment Schedule attached hereto as Exhibit D.
Article 14
Exclusivity
14.1 Except as otherwise provided pursuant to Articles 14 and 16 hereof, ITXC
shall not, independently, without the Company, provide Company Services or
Future Services, or products or services similar to Company Services or Future
Services, in the Territory during the term of this
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Agreement. Specifically, ITXC agrees not to compete with the Company in the
Territory for the provision of Company Services, Future Services, or any similar
product or service.
14.2 Except as otherwise provided pursuant to Articles 14 and 16 hereof,
TeleNova shall not, independently, without the Company, provide Company Services
or Future Services, or products or services similar to such Company Services or
Future Services, in the Territory during the term of this Agreement.
Specifically, TeleNova agrees not to compete with the Company in the Territory
for the provision of Company Services, Future Services, or any similar product
or service.
14.3 Except as otherwise provided pursuant to Articles 14 and 16 hereof (a) the
Company shall not provide any products or services outside the Territory,
regardless of whether such products or services are similar or dissimilar
to Company Services or Future Services; (b) the Company shall not provide
Company Services or Future Services within the Territory to any person or
entity accessing such Company Services or Future Services from outside the
Territory except to those customers of ITXC using the ITXC IP telephony
system to access the Territory; (c) by way of example and not limitation,
the Company may not terminate any call in the Territory that originates
outside the Territory, except those calls that reach the Territory through
ITXC's WWeXchange network, or any other service provided by ITXC; (d) the
Company shall not purchase any IP telephony services outside the Territory
except from ITXC. ITXC shall not purchase any IP telephony services within
the Territory except from the Company.
14.4 Non Performance.
----------------
14.4.1 Definitions. For purposes of this Section 14.4, the following
-----------
terms shall have the following meanings:
"Arrangement" shall mean a "Country Non-Exclusivity Arrangement" as
described in Sections 14.4.3 and 14.4.5 hereof or a "Territory Non-
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Exclusivity Arrangement" as described in Sections 14.4.3 and 14.4.4 hereof.
"Initial Period" shall mean the year calendar years 1999 and 2000.
"Minimum ITXC Threshold" shall mean, for the Initial Period, 50% of the
aggregate amount of traffic that the Initial Business Plan contemplates will be
directed by ITXC into the Territory during the Initial Period.
"Minimum Ltda Country Threshold" shall mean, for each country in the
Territory, for the Initial Period, 50% of the aggregate amount of traffic that
the Initial Business Plan contemplates will be originated in such country during
the Initial Period, including traffic between two points in such country,
traffic between such country and another country in the Territory and between
such country and a country outside of the Territory.
"Minimum Ltda Territory Threshold" shall mean, for the Initial Period, the
sum of the Minimum Ltda Country Thresholds for each country in the Territory.
"MinimumThreshold" shall mean a Minimum ITXC Threshold, a Minimum Ltda
Country Threshold or a Minimum Ltda Territory Threshold.
"Two Year Periods" shall mean each of the two year periods ending on
December 31, 2002, 2004, 2006, 2008, 2010 and 2012.
14.4.2 Subsequent Thresholds. For each of the Two Year Periods, the
---------------------
Parties shall negotiate in good faith to develop a Minimum ITXC Threshold, a
Minimum Ltda Country Threshold for each country in the Territory and a Minimum
Ltda Territory Threshold, it being understood that negotiation of such amounts
shall commence no later than 120 days prior to the commencement of each
applicable Two Year Period.
14.4.3 Failure to Satisfy Thresholds. In the event that the Company fails
-----------------------------
to satisfy any Minimum Ltda Country Threshold during the Initial
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Period or any Two Year Period, ITXC may, at its option, effect a "Country Non-
Exclusivity Arrangement" as described in Section 14.4.5 hereof. In the event
that the Company fails to satisfy a Minimum Ltda Territory Threshold during the
Initial Period or any Two Year Period, ITXC may, at its option, effect a
"Territory Non-Exclusivity Arrangement" as described in Section 14.4.4 hereof.
In the event that ITXC fails to satisfy a Minimum ITXC Threshold during the
Initial Period or any Two Year Period, then the Company may, at its option,
effect a "Territory Non-Exclusivity Arrangement" as described in Section 14.4.4
hereof. In all instances, the Parties shall lose their rights to effect any such
Arrangement with respect to the Initial Period or any Two Year Period in the
event that notice of exercise of such right is not delivered by the Party
desiring to exercise such right to all other Parties within 45 days after the
Parties confirm in writing that any Minimum Threshold has not been satisfied.
14.4.4 Territory Non-Exclusivity Arrangement. Notwithstanding any
--------------------------------------
provision in this Agreement to the contrary, in the event that ITXC or the
Company elects to effect a Territory Non-Exclusivity Arrangement, the following
provisions shall apply:
(a) Sections 14.1, 14.2 and 14.3 of this Agreement shall cease to be
effective.
(b) The Company may, but shall not be required to, be a customer of ITXC
for services and may provide services for competitors of ITXC. The Company also
may enter into agreements with competitors of ITXC or use any other network it,
at its sole discretion, chooses.
(c) ITXC may, but shall not be required to, be a customer of the Company
for origination or termination services within the Territory. Thus, by way of
example, ITXC may, in such event, terminate calls in the Territory through
either the Company or any other unrelated entity that provides termination
services in the Territory.
(d) For a period of six months after a Territory Non-Exclusivity
Arrangement commences, the carrier pricing provisions of this Agreement
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applicable to transfers between the Company and ITXC shall continue to apply.
Thereafter, the Parties shall negotiate such pricing as the Parties determine to
be appropriate and shall be under no obligation to reach agreement with respect
to such pricing.
(e) For a period of up to 12 months after a Territory Non-Exclusivity
Arrangement commences, the Company may, at its option, elect (by delivery of
written notice to ITXC) to continue to use proprietary technology of ITXC, such
proprietary technology defined in Exhibit "F" attached hereto, not typically
provided by ITXC to its customers and suppliers. During the period, if any,
that the Company continues to utilize such technology, the Company shall
continue to pay ITXC the 4% royalty contemplated by the License Agreement. In
the event that the Company does not make such an election to utilize such
technology or ceases to utilize such technology, upon such cessation, the
Parties shall cause the License Agreement to be terminated.
(f) Upon commencement of a Territory Non-Exclusivity Arrangement, the
Company shall change its name and its trademarks, in a manner reasonably
satisfactory to ITXC, so as to assure that there is no similarity between ITXC's
name and trademarks and the Company's name and trademarks.
(g) Upon commencement of a Territory Non-Exclusivity Arrangement, ITXC
shall no longer be required to provide Future Services to the Company.
(h) Both Parties shall make reasonable commercial efforts to honor existing
obligations to Company's customers in the Territory in a non-disruptive manner.
14.4.5 Country Non-Exclusivity Arrangement. Notwithstanding any provision
-----------------------------------
in this Agreement to the contrary, in the event that ITXC elects to effect a
Country Non-Exclusivity Arrangement (as distinguished from a Territory Non-
Exclusivity Arrangement) with respect to one or more specific countries within
the Territory (each, an "Affected Country" and
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collectively the "Affected Countries"), then the following provisions shall
apply:
(a) Sections 14.1, 14.2 and 14.3 shall cease to be effective with respect
to the Affected Countries; in all other countries, the provisions of Sections
14.1, 14.2 and 14.3 shall continue to apply.
(b) Upon the commencement of a Country Non-Exclusivity Arrangement, the
Parties shall amend this Agreement so as to exclude the Affected Country or
Countries from the Territory.
(c) Upon the commencement of a Country Non-Exclusivity Arrangement, the
following provisions shall apply with respect to each Affected Country:
(1) The Company may, but shall not be required to, be a customer of
ITXC for services in such Affected Country and may provide origination or
termination services in such Affected Country for competitors of ITXC . The
Company also may, in such Affected Country, enter into agreements with
competitors of ITXC or use any other network it, at its sole discretion,
chooses.
(2) ITXC may, but shall not be required to, be a customer of the
Company for origination or termination services within such Affected Country.
Thus, by way of example, ITXC may, in such event, terminate calls in such
Affected Country through either the Company or any other unrelated entity that
provides termination services in such Affected Country.
(3) For a period of six months after such Country Non-Exclusivity
Arrangement commences, the carrier pricing provisions of this Agreement
applicable to transfers between the Company and ITXC in the Affected Country
shall continue to apply. Thereafter, the Parties shall negotiate such pricing
with respect to the Affected Country as the Parties
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determine to be appropriate and shall be under no obligation to reach agreement
with respect to such pricing.
(4) For a period of up to 12 months after such Country Non-
Exclusivity Arrangement commences, the Company may, at its option, elect (by
delivery of written notice to ITXC) to continue to use, with respect to such
Affected Country, proprietary technology of ITXC, such proprietary technology
defined in Exhibit "F" attached hereto, not typically provided by ITXC to its
customers and suppliers. During the period, if any, that the Company continues
to utilize such technology with respect to such Affected Country, the Company
shall continue to pay ITXC the 4% royalty contemplated by the License Agreement.
In the event that the Company does not make such an election to utilize such
technology with respect to such Affected Country or ceases to utilize such
technology with respect to such Affected Country, upon such cessation, the
Parties shall cause the License Agreement to be amended to exclude such Affected
Country from the territory covered by the License Agreement.
(5) Upon commencement of such Country Non-Exclusivity Arrangement,
ITXC shall no longer be required to provide Future Services to the Company with
respect to the Affected Country.
(6) The Parties shall negotiate in good faith to reach a mutually
satisfactory agreement with respect to the withdrawal of the Company from the
Affected Country in a manner that will enable the Company to honor its existing
commitments. Such resolution could, but need not, involve ITXC's purchase of
assets of the Company utilized in the Affected Country. Such agreement, if
approved by each of the Parties, may supersede one or more of the preceding
provisions of this Section 14.4.5.
14.4.6 Inconsistency. In the event of any inconsistency between the provisions
of this Section 14.4 and any other provision of this Agreement, the
provisions of this Section 14.4 shall prevail.
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Article 15
Accounting and Records
15.1 The Company shall keep complete and accurate books, records, accounts and
supporting documents, using principles and procedures in accordance with
generally accepted Brazilian accounting principles. Promptly following the close
of each calendar year, but not later than the following March 31, the Company
shall furnish to each Quotaholder a written report covering its financial
condition and profitability. In addition, the Company shall furnish each
Quotaholder monthly reports (in a form satisfactory to each Quotaholder)
covering its financial condition and profitability.
15.2 The accounting periods for the Company shall be January 1 through December
31 of each calendar year.
15.3 At the end of each accounting period, the books, records and accounts of
the Company shall be audited at the expense of the Company by an independent
auditing firm then acting as the Company's independent auditor.
15.4 Each of the Quotaholders or their representatives shall have access to the
books, records, accounts and supporting documents maintained by the Company in
accordance with Section 15.1 above, during the Company's normal business hours.
In addition, each Quotaholder shall have the right, at its expense, to have such
books, records, accounts and supporting documents audited by its own auditor or
by an independent auditing firm.
15.5 This Article 15 shall survive termination or expiration of this Agreement.
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Article 16
Term and Termination
16.1 This Agreement shall commence on the date first above written and shall
continue in full force during the entire existence of the Company, or until
terminated in any of the following ways:
16.1.1 This Agreement may be terminated at any time upon the mutual
written agreement of the Parties.
16.1.2 This Agreement shall be terminated upon the liquidation or
dissolution of the Company.
16.1.3 This Agreement shall be terminated at such time as the Company
ceases to do business.
16.1.4 This Agreement shall be terminated if a Party (i) applies for or
consents to the appointment of a receiver, trustee or liquidator for all or a
substantial part of its properties or assets, (ii) makes a general assignment
for the benefit of its creditors, (iii) is adjudicated a bankrupt or insolvent,
or (iv) files a voluntary petition in bankruptcy, or a petition or answer
seeking reorganization or an arrangement with creditors or to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or
liquidation law or statute, or an answer admitting the material allegations of a
petition filed against it in any proceeding under any such law.
16.1.5 This Agreement shall terminate immediately at such time as ITXC no
longer has an ownership interest in the Company.
16.1.6 If any Party materially breaches its obligations under this
Agreement, any non-breaching Party may terminate this Agreement upon thirty (30)
days written notice to the breaching Party and such termination shall be
effective on the thirty-first (31st) day after receipt of an express written
notice of breach if (a) the breaching Party does not correct such material
breach within such thirty (30) day cure period, or (b) in the case of
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a material breach that is correctable but is not reasonably capable of being
corrected within such thirty (30) day cure period, the breaching Party does not
take reasonably practicable steps to correct such breach and to prevent a
recurrence.
16.2 The expiration or termination of this Agreement for any reason
whatsoever shall not affect any liability of any Party already accrued prior to
the effective date of such expiration or termination, nor shall such expiration
or termination affect the survival of any right, duty or obligation expressly
stated elsewhere in this Agreement to survive such expiration or termination,
including, without limitation, obligations to Company's customers.
16.3 Puts and Calls. Within fifteen days after the date hereof, TeleNova
--------------
and ITXC shall enter into an amendment to this Agreement that shall provide for
a series of puts and calls to apply in the event that (i) ITXC effects an
initial public offering, (ii) ITXC is acquired, (iii) either TeleNova or ITXC
effects a Territory Non-Exclusive Arrangement pursuant to Section 14 hereof or
(iv) an impasse develops. Such amendment shall be consistent with each of the
provisions of the Exit Clause Outline annexed hereto as Exhibit H and shall
acknowledge that to the extent that TeleNova acquires stock pursuant to such
puts and calls, such stock generally will not be registered under any applicable
securities law. In the event that TeleNova and ITXC are unable to agree upon
the text of such amendment within such fifteen day period, then either such
Party shall have the right to terminate this Agreement and the License Agreement
without liability upon notice to each of the Parties.
Article 17
Specific Performance
17.1 Each of the Quotaholders shall vote the quota capital of the Company
which it owns or controls, directly or indirectly, and shall cause its
representatives involved in the management of the Company, if any, to take
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whatever action or steps are necessary or appropriate to carry out and perform
the various terms and provisions of this Agreement and the Schedules and
Exhibits annexed hereto.
17.2 In accordance with article 118 of the Brazilian Corporations Law, each
Party shall have the right to enforce by judicial process the full and specific
performance of this Agreement or any provision hereof.
Article 18
Trademark and Service Mark License
During the existence of this Agreement, ITXC shall extend to the
Company, for use solely in the Territory on an exclusive basis, a license of the
ITXC technology, trademarks, service marks, brand name(s) and trade dress
pursuant to the Trademark, Service and Technology License Agreement annexed
hereto and incorporated herein as Exhibit E (the "License Agreement').
Article 19
Force Majeure
No Party shall be liable for delay in performance or failure to
perform its obligations in whole or in part pursuant to the terms of this
Agreement due to causes reasonably beyond the control of such Party, including,
without limitation, labor dispute, strike, labor shortage, war or act of war
(whether an actual declaration is made or not), insurrection, riot or civil
commotion, act of public enemy, accident, fire, flood or other act of God, act
of any governmental authority, including but not limited to restrictions imposed
by any regulatory agencies, judicial action, short or reduced supply of fuel or
raw materials, technical failure where such Party has exercised ordinary care in
the prevention thereof, or other causes beyond the control
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of such Party, whether or not similar to the matters herein enumerated, and any
such delay or failure shall not be considered a breach of this Agreement.
Article 20
Non-Assignment
This Agreement shall be binding upon and inure to the benefit of the
Parties hereto and their respective successors and assigns; provided, however,
------------------
that, except to the extent permitted by Articles 4, 5 and 16, none of the
Parties shall transfer or assign its rights or delegate its performance
obligations hereunder without the prior written consent of the other Parties,
which shall not be unreasonably withheld or delayed; provided further that,
----------------
before any such transfer or assignment becomes effective, the assignee shall
have agreed in writing to be bound by the provisions of this Agreement. Any
transfer, assignment or delegation made or attempted in violation of this
Article 20 shall be void and of no effect.
Article 21
Notices
Notices. Any notice, request, instruction, consent, approval or other
document required or permitted to be given hereunder shall be in writing and
shall be valid and sufficient if dispatched by registered or certified mail,
postage prepaid, in any post office in the United States or Brazil, or via
confirmed facsimile, addressed as follows:
If to ITXC: With a Copy to:
- ----------- ---------------
ITXC Corp. LOWENSTEIN SANDLER PC
219 North Center Drive, North 65 Livingston Avenue
Brunswick, NJ USA 08902 Roseland, NJ USA 07068
Facsimile: 732-940-9614 Facsimile: 973-597-2400
Attn: Mr. Thomas Evslin Attn: Peter H. Ehrenberg, Esq.
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If to TeleNova: With a Copy to:
- --------------- ---------------
TeleNova Comunicacoes Ltda. Pereira Filho Advogados
Al. Araguaia, 933, conj. 46 Av. Padre Pereira Andrade,
Alphaville, Barueri 669
State of Sao Paulo/Brazil 05469-000 -Sao Paulo / SP
Attn: Mr. Claudio Collado Brazil
If to Company: With a Copy to:
- -------------- ---------------
ITXC Comunicacoes Ltda. Pereira Filho Advogados
Alameda Araguaia, Av. Padre Pereira de Andrade,
933, conj. 46, sub-conj. 1, 669
Alphaville, Barueri, 05469-000 - Sao Paulo / SP
Sao Paulo, Brazil Brazil
Attn: Mr. Claudio Collado
and to:
LOWENSTEIN SANDLER PC
65 Livingston Avenue
Roseland, NJ USA 07068
Facsimile: 973-597-2400
Attn: Peter H. Ehrenberg, Esq.
All notices sent by confirmed facsimile shall be deemed to be effective on
the date of transmission. All notices properly sent by mail shall be deemed
given eight (8) days after the date such notice was deposited with the proper
postal authorities. In case any Party changes its address to which notice is to
be received, written notice of such change shall be given without delay to all
other Parties.
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Article 22
Governing Law and Dispute Resolution
22.1 The validity, interpretation and performance of this Agreement and any
dispute connected herewith shall be governed and construed in accordance with
the laws of Brazil.
22.2 Notwithstanding anything to the contrary herein, any dispute arising
pursuant to or in any way related to this Agreement or the transactions
contemplated hereby, including any question concerning the Agreement's validity,
scope, construction, or application, shall be resolved through arbitration in
Miami, Florida, USA. All arbitrations shall be conducted in accordance with the
commercial rules and regulations of the American Arbitration Association, in
force at the time of any such dispute, by one (1) arbitrator selected by mutual
agreement of the parties. The non-prevailing party shall pay all reasonable
expenses associated with such arbitration, including the expense of the
arbitrator, travel, and reasonable attorney's fees. The decision of the
arbitrator, based upon written findings of fact and conclusions of law applying
the laws of Brazil, shall be binding upon the parties, and judgment in
accordance with that decision may be entered in any court having jurisdiction
thereof. In no event shall the arbitrators be authorized to grant any punitive,
incidental or consequential damages of any nature or kind whatsoever. The
parties, their representatives, other participants and arbitrator shall hold the
existence, content, and result of mediation and arbitration in confidence to the
maximum extent permitted by law. In the event that there is no clear prevailing
party, the arbitrator shall determine the prevailing party, the cost of the
arbitrator shall be shared equally between the Parties and each party shall be
responsible for its own costs and expenses. This Section 22.2 shall survive
termination or expiration of this Agreement.
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Article 23
Warranty and Limitation of Liability.
23.1 WARRANTY DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED OTHERWISE, THE SERVICES
BEING PROVIDED BY ITXC AND TELENOVA ARE PROVIDED "AS IS" AND NEITHER ITXC NOR
TELENOVA MAKES ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT, OR THOSE ARISING FROM A COURSE OF
PERFORMANCE, OR A COURSE OF DEALING OR TRADE USAGE. ITXC AND TELENOVA
SPECIFICALLY MAKE NO WARRANTY WITH RESPECT TO ANY COMPUTER SOFTWARE, OR
INFORMATION PROVIDED BY IT OR LICENSED BY IT AND DO NOT WARRANT THAT THE
SOFTWARE OR SERVICES PROVIDED OR INTENDED TO BE USED HEREUNDER ARE ERROR FREE,
WILL OPERATE WITHOUT INTERRUPTION OR PROVIDE SECURE OPERATIONS.
23.2 DISCLAIMER OF DAMAGES. IN NO EVENT SHALL ANY PARTY BE LIABLE TO ANY OTHER
PARTY FOR ANY SPECIAL, COLLATERAL, INDIRECT, EXEMPLARY, INCIDENTAL OR
CONSEQUENTIAL DAMAGES FOR BREACH OF ANY OF THE PROVISIONS OF THIS AGREEMENT,
REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH OF CONTRACT, TORT,
STRICT LIABILITY OR OTHERWISE, AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF GOODWILL, LOSS OF PROFITS, LOSS
OF REVENUE OR LOSS OF USE. THESE LIMITATIONS OF LIABILITY SHALL APPLY
NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY HEREIN.
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Article 24
Miscellaneous
24.1 This Joint Venture and Quotaholders' Agreement and the Trademark, Service
and Technology License Agreement together with the Exhibits and Schedules
annexed hereto and thereto, sets forth and constitutes the entire agreement and
understanding among the Parties hereto with respect to the subject matter hereof
and merges and supersedes all previous communications, negotiations, warranties,
representations, understandings and agreements, either oral or written, among
the Parties with respect to the subject matter hereof. No amendment or
modification of this Agreement shall be binding on any Party hereto, unless
reduced to writing and duly executed by an authorized representative of each of
the other Parties hereto. The failure to enforce or the delay in enforcement of
any provision, right or option of this Agreement by any Party hereto shall in no
way be construed to be a waiver of such provision, right or option, nor shall
such action be deemed a waiver of any other right which that Party may otherwise
have at law or in equity.
24.2 Each Party shall deliver to the other a legal opinion acceptable to the
other Party in the form attached hereto as Exhibit G.
24.3. Article headings as to the contents of particular articles are for
convenience only and are in no way to be construed as part of this Agreement or
as a limitation of the scope of the particular articles to which they refer.
This Section 24.3 shall survive termination or expiration of this Agreement.
24.4 Each Party represents and warrants to each other Party that no finder or
broker has been employed by it in negotiations regarding the transactions
provided for by this Agreement. Each Party shall indemnify and hold the other
Parties harmless from and against any and all liabilities, damages, costs and
expenses arising out of any breach by the indemnifying Party of such
representation and warranty.
-37-
<PAGE>
24.5 Each Party shall give the other Parties such evidence of the authorization
of its company to proceed with execution and performance of this Agreement as
such Parties shall reasonably require.
24.6 While it is the intent of the Quotaholders to agree on certain matters as
herein provided, including the manner in which their representatives in Company
management, initially pursuant to Article 6 hereof would be instructed to decide
certain matters requiring the prior approval of said management, it is
understood and agreed that said representatives, pursuant to Brazilian law,
shall make such decisions exercising sound and prudent business judgment.
24.7 No Party shall, directly or indirectly, make any payments or gifts in
violation of the laws of Brazil or of the Foreign Corrupt Practices Act of the
United States of America.
24.8 Any of the Quotaholders may make advances on behalf of the Company, and the
Company shall reimburse such Quotaholder for any such advances, provided such
advances were approved by the Parties at the time they were made.
24.9 If any term or provision of this Agreement is held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but such provision or
provisions shall be ineffective only to the extent of such invalidity,
illegality or unenforceability without invalidating the remainder of such
provision or provisions or the remaining provisions of this Agreement. In such
case, this Agreement shall be construed as if such invalid, illegal or
unenforceable provision or provisions had never been contained herein, unless
the deletion of such provision or provisions would result in such a material
change as to cause performance by a party to be unreasonable.
24.10 Any taxes levied on income, such as withholding and remittance taxes,
shall be borne by the Party which is the recipient and beneficiary of the
income.
-38-
<PAGE>
24.11 The Parties hereto will use its best efforts to implement this Agreement
in a tax-efficient way.
In Witness Whereof, this Agreement has been executed on behalf of each of
the Parties by their duly authorized representatives as of the date first above
written.
TeleNova Comunicacoes Ltda. ITXC Corp.
By : /s/ Claudio C. Riechelmann By : /s/ Tom Evslin
--------------------------- -----------------
Title : Manag. Director Title : Chairman
Date : 07/19/98 Date : 7/19/98
Witness:
/s/ MA Evslin
1. ______________________ 2. ____________________
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<PAGE>
EXHIBIT 10.7
FIRST AMENDMENT TO
JOINT VENTURE AND QUOTAHOLDERS AGREEMENT
This First Amendment ("Amendment") to the Joint Venture and Quotaholders
Agreement between the parties hereto dated July 19, 1998 ("Joint Venture
Agreement"), is made this 18th day of August, 1998, by and between TeleNova
Comunicacoes Ltda., a limited liability quota company, duly organized and
existing under the laws of the Federative Republic of Brazil ("Brazil"), having
its principal place of business at Alameda Araguaia, 933, conj. 46, Alphaville,
Barueri, State of Sao Paulo, Brazil, registered with the C.G.C./M.F. under No.
02.519.780/0001-06 (hereinafter referred to as "TeleNova"); and ITXC Corp., a
corporation duly organized and existing under the laws of the State of Delaware,
USA, having its principal place of business at 219 North Center Drive, North
Brunswick, NJ (hereinafter referred to as "ITXC");
INTRODUCTION:
-------------
A. The Joint Venture Agreement is in full force and effect as of the date
hereof; and
B. This Amendment is contemplated by and is being made in accordance with
Section 16.3 of the Joint Venture Agreement.
COVENANTS:
----------
In consideration of the promises and mutual covenants contained in this
Amendment, and for other good and valuable consideration, which each of the
<PAGE>
parties acknowledges has been received and is sufficient to create a binding
contract, TeleNova and ITXC agree as follows:
1. Section 16.3 of the Joint Venture Agreement is hereby deleted in its
entirety and replaced with the following Section 16.3:
"16.3 IPO Puts and Calls.
------------------
16.3.1 Definitions. For purposes of this Agreement, the following
-----------
terms shall have the following meanings:
"Appraised Value" shall mean the fair market value of the Company, as
determined either by mutual agreement of TeleNova and ITXC or, lacking such
agreement, by an independent appraisal firm (the fees of which shall be shared
by the Parties in proportion to the Quotas that they own) mutually satisfactory
to TeleNova and ITXC. Any firm so selected to be the appraisal firm hereunder
is referred to herein as the "Appraiser".
"Evslin/Jordan Common Shares" shall mean the 3,000,000 shares of ITXC
Common Stock presently owned of record by Tom Evslin and/or Mary Evslin and the
shares of ITXC Common Stock issuable upon exercise of the stock options
presently held by Edward Jordan.
"Exchange Act" shall mean the United States Securities Exchange Act of
1934, as amended.
"Fraction" shall mean, for each Non-ITXC Party (as hereinafter defined), a
fraction, the numerator of which is the aggregate number of Quotas held by such
Non-ITXC Party as of a particular closing and the denominator of which is the
aggregate number of Quotas held by all of the Parties (including, without
limitation, ITXC) as of such closing. Thus, by way of example, TeleNova's
Fraction at the time of the Initial Required Contribution is equal to 0.51 or
51%.
"GAAP" shall mean generally accepted accounting principles, consistently
applied.
<PAGE>
"Gross Margin" shall mean Gross Profit as a percentage of the Company's
sales (less any sales tax applicable in Brazil).
"Gross Profit" shall mean the Company's sales (less any sales tax
applicable in Brazil) minus the Company's direct termination costs and the
Company's allocated costs of gateways, routers, switches, local PSTN loops,
Internet connections, ITXC royalties and direct IP circuits. Selling, general
and administrative expenses are not subtracted from the Company's sales in
calculating "Gross Profit". It is intended by the Parties that Gross Profit
shall be calculated in the manner reflected in the Initial Business Plan. The
specific line items in the Company's income statement to be analyzed in
determining Gross Profit shall be calculated in accordance with Brazilian GAAP.
"IPO" shall mean a "Qualified Public Offering", provided that the final
prospectus utilized by ITXC in connection with such public offering states that
upon consummation of such offering, ITXC's Common Stock will be publicly traded
or quoted on the New York Stock Exchange, the American Stock Exchange or the
National Association of Securities Dealers Automated Quotation System (NASDAQ).
"IPO Call Price" shall have the same meaning as "IPO Put Price", except
that each reference to "ninety percent (90%)" in the definition of "IPO Put
Price" shall be deemed to be a reference to "one hundred percent (100%)" in the
definition of "IPO Call Price".
"IPO Gross Margin" shall mean the Company's Gross Margin during the Pre-IPO
Period.
"IPO Price" shall mean the per share price at which securities of ITXC are
offered to the public in an IPO, as set forth on the cover page of ITXC's
prospectus.
"IPO Put Price" shall mean the following if the IPO Ratio is greater than
or equal to one (1): (i) if the Company's IPO Gross Margin is greater than 20%,
the IPO Put Price shall be ninety percent (90%) of an amount equal to "x"
multiplied by "y" multiplied by "z", where "x" represents the Trailing Company
Revenues, "y" represents the IPO Ratio and "z" equals 1.15, (ii) if the
Company's IPO Gross Margin is greater than 15% but not greater than 20%, the IPO
Put Price shall be ninety percent (90%) of an amount equal to "x" multiplied by
"y" multiplied by
<PAGE>
"z", where "x" represents the Trailing Company Revenues, "y" represents the IPO
Ratio and "z" equals 1.10, (iii) if the Company's IPO Gross Margin is greater
than 10% but not greater than 15%, the IPO Put Price shall be ninety percent
(90%) of an amount equal to "x" multiplied by "y", where "x" represents the
Trailing Company Revenues and "y" represents the IPO Ratio, (iv) if the
Company's IPO Gross Margin is greater than 5% but not greater than 10%, the IPO
Put Price shall be ninety percent (90%) of an amount equal to "x" multiplied by
"y" multiplied by "z", where "x" represents the Trailing Company Revenues, "y"
represents the IPO Ratio and "z" equals 0.75, (v) if the Company's IPO Gross
Margin is greater than 0% but not greater than 5%, the IPO Put Price shall be
ninety percent (90%) of an amount equal to "x" multiplied by "y" multiplied by
"z", where "x" represents the Trailing Company Revenues, "y" represents the IPO
Ratio and "z" equals 0.5 and (vi) if the Company's Gross Margin is less than or
equal to 0%, then the IPO Put Price shall equal the Company's Pre-IPO Book
Value. If the IPO Ratio is less than one (1), the IPO Put Price shall equal the
Appraised Value.
"IPO Modified Put Price" shall have the same meaning as "IPO Put Price",
except that each reference to "ninety percent (90%)" in the definition of "IPO
Put Price" shall be deemed to be a reference to "ninety-five percent (95%)" in
the definition of "IPO Modified Put Price".
"IPO Ratio" shall mean the ratio of the IPO Value to the Trailing ITXC
Revenues.
"IPO Value" shall mean the IPO Price multiplied by the sum of (a) the
number of shares of ITXC Common Stock outstanding (i.e., excluding shares
subject to unexercised stock options and warrants) on the date that the SEC
declares the Registration Statement effective under the Securities Act and (b)
the number of shares of ITXC's Common Stock offered by ITXC to the public in its
IPO (excluding shares subject to the underwriters' over-allotment option).
"Initial Post-Lock-Up Period" shall mean the period commencing on the first
day after the expiration of the lock-up period provided for in the lock-up
letter described in Section 16.3.5(a)(ii) and terminating one year after the
"Effective Date" (as defined in Section 16.3.5(a)).
"Non-ITXC Party" shall mean TeleNova and, if TeleNova's assignment and
transfer option contemplated in Section 4.4 hereof is consummated, Telesis
Sistemas em Telecomunicacoes Ltda/Message.
<PAGE>
"Pre-IPO Book Value" shall mean the total assets of the Company as of the
last day of the Pre-IPO Period minus the total liabilities of the Company as of
the last day of the Pre-IPO Period, determined in accordance with Brazilian
GAAP.
"Pre-IPO Period" shall mean the six month period ending on the last day of
the calendar month immediately preceding the calendar month in which ITXC
initially files its Registration Statement with the SEC.
"Qualified Public Offering" shall mean an underwritten public offering of
shares of ITXC's Common Stock led by a nationally recognized reputable
underwriter (as reasonably determined by ITXC's Board of Directors) (i) raising
gross proceeds (on behalf of ITXC and selling stockholders) of at least $20
million (U.S.) and (ii) at a price per share to the public of at least $6.82
(U.S.) per share (appropriately adjusted to reflect the occurrence of any event
described in subparagraphs 6F or 6G of the Certificate of Designations,
Preferences and Rights of ITXC's Series B Convertible Preferred Stock as filed
by ITXC with the Delaware Secretary of State on April 24, 1998).
"Registration Statement" shall mean the registration statement to be filed
by ITXC with the SEC in order to effect the IPO.
"Restricted Period" shall mean the period commencing on the date of either
a "Nonexclusive Closing" (as defined in Section 16.5) or an "Impasse Closing"
(as defined in Section 16.6.2) and terminating one year after either such
closing.
"SEC" shall mean the United States Securities and Exchange Commission.
"Securities Act" shall mean the United States Securities Act of 1933, as
amended.
"Trailing Company Revenues" shall mean (x) the total revenues of the
Company during the Pre-IPO Period (calculated in accordance with Brazilian
GAAP), multiplied by (y) two (2).
"Trailing ITXC Revenues" shall mean (x) the total revenues of ITXC during
the Pre-IPO Period (calculated in accordance with U.S. GAAP, multiplied by (y)
two (2).
<PAGE>
16.3.2 IPO Put Right. In the event that ITXC decides to pursue an
-------------
IPO during the term of this Agreement, ITXC shall notify the Non-ITXC Parties
(as hereinafter defined) at least 60 days prior to the filing of its
Registration Statement of its intention to effect an IPO. During the period
commencing on the date that TeleNova receives such notice and ending 25 days
thereafter (the "Put Notice Period"), each of the Parties other than ITXC (each,
a "Non-ITXC Party" and collectively, the "Non-ITXC Parties") shall have the
right to cause ITXC to purchase all of the Quotas held by such Non-ITXC Party at
an aggregate price equal to the IPO Put Price multiplied by such Non-ITXC
Party's Fraction. In the event that a Non-ITXC Party provides notice of its
exercise of its put rights in a timely and appropriate manner, at a closing (the
"Closing") to be held concurrent with the closing of the IPO, ITXC shall
purchase from such Non-ITXC Party, and such Non-ITXC Party shall sell to ITXC,
all of such Non-ITXC Party's Quotas at the purchase price described in this
Section 16.3.2. In the event that the closing of the IPO does not occur for any
reason, the Closing shall not be held and the exercise of such put right shall
be void and of no effect. At ITXC's option, such purchase price may be paid in
cash or in shares of ITXC's Common Stock, valued at the IPO Price, or in such
combination of cash and such shares as ITXC shall determine, provided that such
determination is made within five business days after a Non-ITXC Party notifies
ITXC that it intends to exercise its put rights pursuant to this Section 16.3.2.
16.3.3 IPO Call Right. At any time prior to the end of the Put
--------------
Notice Period, ITXC may give notice to any Non-ITXC Party that has not declared
its intention to exercise its put rights pursuant to Section 16.3.2 hereof (a
"Non-Put Party") that ITXC intends to exercise its call rights pursuant to this
Section 16.3.3. In the event that ITXC provides notice of its exercise of its
call rights in a timely and appropriate manner, at a closing (the "Closing") to
be held concurrent with the closing of the IPO, ITXC shall purchase from each
Non-Put Party, and each Non-Put Party shall sell to ITXC, all of such Non-Put
Party's Quotas at a purchase price equal to the IPO Call Price multiplied by
such Non-Put Party's Fraction. In the event that the closing of the IPO does not
occur for any reason, the Closing shall not be held and the exercise of such
call right shall be void and of no effect. At the option of TeleNova, such
purchase price may be paid in cash or in shares of ITXC's Common Stock, valued
at the IPO Price, or in such combination of cash and such shares as TeleNova
shall determine, provided that such determination is made within five business
days after ITXC notifies TeleNova that it intends to exercise its call rights
pursuant to this Section 16.3.3.
<PAGE>
16.3.4 Simultaneous Exercise of Puts and Calls. In the event that
---------------------------------------
one or more Non-ITXC Parties exercises its put rights pursuant to Section 16.3.2
hereof simultaneously with the exercise by ITXC of its call rights pursuant to
Section 16.3.3 hereof, then all of the provisions of Section 16.3.2 shall apply
to the transaction between ITXC and each such exercising Non-ITXC Party, except
that all references to the term "IPO Put Price" shall be deemed to be references
to the "IPO Modified Put Price", such exercising Non-ITXC Party shall have the
right to designate the form (cash or stock) of one half of the purchase price
applicable to such Non-ITXC Party's transaction with ITXC and ITXC shall have
the right to designate the form (cash or stock) of one half of such purchase
price. The provisions of Section 16.3.3 hereof shall apply to the Non-ITXC
Parties that do not exercise their put rights.
16.3.5 Securities Matters. In the event that ITXC issues shares of
------------------
its Common Stock pursuant to Sections 16.3.2, 16.3.3 or 16.3.4 hereof (the
"Issued Shares"), the following provisions shall apply:
(a) Prior to the date on which the SEC declares the Registration
Statement effective (the "Effective Date"), each Party that is to receive such
shares shall deliver to ITXC (i) an investment letter, in form and substance
satisfactory to ITXC, that will enable ITXC to issue such shares of ITXC Common
Stock to such Party without registration under the Securities Act or any
applicable jurisdiction's securities laws and (ii) a lock-up letter, in form and
substance substantially identical to the lock-up letter to be signed in
connection with the IPO by each ITXC director who owns capital stock of ITXC,
pursuant to which such Party shall agree not to transfer, sell, pledge or
otherwise dispose of such shares for a specified period of time after the
Effective Date.
(b) Each certificate representing such shares shall bear such legends
as ITXC shall reasonably conclude shall be required under the Securities Act.
(c) Subject to the lock-up letters described in Section
16.3.5(a)(ii), if the Issued Shares are issued as a result of the exercise of a
put right by a Non-ITXC Party, then ITXC and such Non-ITXC Party shall enter
into an agreement, in form and substance reasonably satisfactory to ITXC,
pursuant to which ITXC shall agree that if Tom Evslin sells any Evslin/Jordan
Common Shares during the Initial Post-Lock-Up Period, then ITXC shall, at such
Non-ITXC Party's request, register for resale under the Securities Act up to 25%
of such Non-ITXC Party's Issued Shares, provided that (i) such registration
obligation shall cease as of the
<PAGE>
last day of the Initial Post-Lock-Up Period, and (ii) such agreement shall
provide that such Non-ITXC Party's registration rights shall be subordinate to
the rights of holders of ITXC preferred stock as of July 19, 1998, including,
without limitation, the securities held by VocalTec Communications, Inc.,
including both common and preferred shares ("Existing Rights").
16.3.6 Cooperation. In the event that any Party exercises a put
-----------
right pursuant to Section 16.3.2 hereof or a call right pursuant to Section
16.3.3 hereof, all Non-ITXC Parties shall cooperate with ITXC in its efforts to
consummate the IPO. Such cooperation shall include, among other things,
providing ITXC's underwriters with such information as such underwriters shall
reasonably request, confirming its obligations hereunder and making timely
delivery of all indicia of ownership of Quotas so as to assure that the IPO
closing and the Closing are consummated in accordance with the provisions of any
underwriting agreement executed by ITXC in connection with the IPO.
16.3.7 Limitation on Call Right. Notwithstanding any provision
------------------------
herein to the contrary, at or prior to any Closing held pursuant to Section
16.3.3, ITXC shall complete the payment (in cash or as otherwise permitted
hereunder) of any Initial Required Contribution which ITXC has not yet fully
paid."
2. The following text shall be inserted into the Joint Venture Agreement as
Sections 16.4 through 16.6 inclusive, as indicated:
"16.4 Business Combination Puts and Calls.
16.4.1 Additional Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
"Business Combination" shall mean a transaction pursuant to which (a)
ITXC shall merge or consolidate with another corporation or entity as a result
of which the shareholders of ITXC immediately prior to such transaction shall
own, immediately after such transaction, less than 50% of the aggregate voting
power of all classes of stock or equity of the entity that controls ITXC after
such transaction or, if ITXC is the surviving corporation, less than 50% of the
aggregate voting power of all classes of stock of ITXC, (b) more than 50% of the
outstanding capital stock of ITXC is acquired by a single purchaser or (c) ITXC
sells all or substantially all of its assets outside the ordinary course of
business.
<PAGE>
"Business Combination Gross Margin" shall mean the Company's Gross
Margin during the Pre-Business Combination Period.
"Business Combination Call Price" shall have the same meaning as
"Business Combination Put Price", except that each reference to "ninety percent
(90%)" in the definition of "Business Combination Put Price" shall be deemed to
be a reference to "one hundred percent (100%)" in the definition of "Business
Combination Call Price".
"Business Combination Put Price" shall mean the following if the
Business Combination Ratio is greater than or equal to one (1): (i) if the
Company's Business Combination Gross Margin is greater than 20%, the Business
Combination Put Price shall be ninety percent (90%) of an amount equal to "x"
multiplied by "y" multiplied by "z", where "x" represents the Trailing Period
Company Revenues, "y" represents the Business Combination Ratio and "z" equals
1.15, (ii) if the Company's Business Combination Gross Margin is greater than
15% but not greater than 20%, the Business Combination Put Price shall be ninety
percent (90%) of an amount equal to "x" multiplied by "y" multiplied by "z",
where "x" represents the Trailing Period Company Revenues, "y" represents the
Business Combination Ratio and "z" equals 1.10, (iii) if the Company's Business
Combination Gross Margin is greater than 10% but not greater than 15%, the
Business Combination Put Price shall be ninety percent (90%) of an amount equal
to "x" multiplied by "y", where "x" represents the Trailing Period Company
Revenues and "y" represents the Business Combination Ratio, (iv) if the
Company's Business Combination Gross Margin is greater than 5% but not greater
than 10%, the Business Combination Put Price shall be ninety percent (90%) of an
amount equal to "x" multiplied by "y" multiplied by "z", where "x" represents
the Trailing Period Company Revenues, "y" represents the Business Combination
Ratio and "z" equals 0.75, (v) if the Company's Business Combination Gross
Margin is greater than 0% but not greater than 5%, the Business Combination Put
Price shall be ninety percent (90%) of an amount equal to "x" multiplied by "y"
multiplied by "z", where "x" represents the Trailing Period Company Revenues,
"y" represents the Business Combination Ratio and "z" equals 0.5 and (vi) if the
Company's Business Combination Gross Margin is less than or equal to 0%, then
the Business Combination Put Price shall equal the Company's Pre-Business
Combination Book Value. If the Business Combination Ratio is less than one (1),
the Business Combination Put Price shall equal the Appraised Value.
<PAGE>
"Business Combination Modified Put Price" shall have the same meaning
as "Business Combination Put Price", except that each reference to "ninety
percent (90%)" in the definition of "Business Combination Put Price" shall be
deemed to be a reference to "ninety-five percent (95%)" in the definition of
"Business Combination Modified Put Price".
"Business Combination Ratio" shall mean the ratio of the Business
Combination Value to the Trailing Period ITXC Revenues.
"Business Combination Value" shall mean the following with respect to
a Liquid Business Combination: (i) with respect to a Cash Liquid Business
Combination, "Business Combination Value" shall mean the aggregate amount of
cash to be paid to ITXC's shareholders (or to ITXC in the case of an asset sale)
upon consummation of such Business Combination (excluding any contingent
consideration), (ii) with respect to a Marketable Security Liquid Business
Combination, "Business Combination Value" shall mean the aggregate market value
(measured by multiplying the aggregate number of shares issuable pursuant to the
applicable Definitive Agreement by the average closing sale price of the
applicable Marketable Security during the last five trading days immediately
prior to the Business Combination Effective Date) of the Marketable Securities
to be issued to ITXC's shareholders (or to ITXC in the case of an asset sale)
upon consummation of such Business Combination (excluding any contingent
consideration) and (iii) with respect to a Cash/Marketable Security Liquid
Business Combination, "Business Combination Value" shall mean the sum of (x) the
aggregate amount of cash to be paid to ITXC's shareholders (or to ITXC in the
case of an asset sale) upon consummation of such Business Combination (excluding
any contingent consideration) and (y) the aggregate market value (measured by
multiplying the aggregate number of shares issuable pursuant to the applicable
Definitive Agreement by the average closing sale price of the applicable
Marketable Security during the last five trading days immediately prior to the
Business Combination Effective Date) of the Marketable Securities to be issued
to ITXC's shareholders (or to ITXC in the case of an asset sale) upon
consummation of such Business Combination (excluding any contingent
consideration). With respect to a Business Combination that does not constitute
a Liquid Business Combination, "Business Combination Value" shall mean the value
of the consideration to be received by ITXC's shareholders (or by ITXC in the
case of an asset sale) upon consummation of such Business Combination (excluding
any contingent consideration) as determined in good faith by the Board of
Directors of ITXC at the time that such Board approves the applicable
<PAGE>
Definitive Agreement or by ITXC's principal shareholder in the event that the
Business Combination is structured as a stock purchase.
"Definitive Agreement" shall mean a written agreement, executed by
ITXC and approved by ITXC's Board of Directors, pursuant to which ITXC shall
agree to enter into a Business Combination, which agreement may be subject to
standard conditions typically applicable to Business Combinations.
"Liquid Business Combination" shall mean a Business Combination in
which the shareholders of ITXC (or ITXC in the case of a sale of assets) receive
cash and/or Marketable Security upon consummation of such Business Combination.
A "Cash Liquid Business Combination" shall mean a Business Combination in which
shareholders of ITXC (or ITXC in the case of a sale of assets) receive solely
cash upon consummation of such Business Combination, a "Marketable Security
Liquid Business Combination" shall mean a Business Combination in which
shareholders of ITXC (or ITXC in the case of a sale of assets) receive solely
Marketable Securities upon consummation of such Business Combination and a
"Cash/Marketable Security Liquid Business Combination" shall mean a Business
Combination in which shareholders of ITXC (or ITXC in the case of a sale of
assets) either receive a combination of cash and Marketable Securities upon
consummation of such Business Combination or are entitled to elect to receive
either cash or Marketable Securities upon consummation of such Business
Combination.
"Marketable Security" shall mean a security which is either listed on
the New York Stock Exchange or the American Stock Exchange or is quoted on the
National Market System of the National Association of Securities Dealers
(NASDAQ).
"Pre-Business Combination Book Value" shall mean the total assets of
the Company as of the last day of the Pre-Business Combination Period minus the
total liabilities of the Company as of the last day of the Pre-Business
Combination Period, determined in accordance with Brazilian GAAP.
"Pre-Business Combination Period" shall mean the six month period
ending on the last day of the calendar month immediately preceding the calendar
month in which a Definitive Agreement is executed.
<PAGE>
"Trailing Period Company Revenues" shall mean (x) the total revenues
of the Company during the Pre-Business Combination Period (calculated in
accordance with Brazilian GAAP), multiplied by (y) two (2).
"Trailing Period ITXC Revenues" shall mean (x) the total revenues of
ITXC during the Pre-Business Combination Period (calculated in accordance with
U.S. GAAP, multiplied by (y) two (2).
16.4.2 Business Combination Put Right. In the event that ITXC
------------------------------
decides to pursue a Business Combination during the term of this Agreement, ITXC
shall notify the Non-ITXC Parties at least 30 days prior to the effective date
of the Business Combination (the "Business Combination Effective Date"). During
the period commencing on the date that TeleNova receives such notice and ending
15 days prior to the Effective Date (the "Put Notice Period"), each Non-ITXC
Party shall have the right to cause ITXC to condition the consummation of such
Business Combination upon the consummation of a transaction (to occur at or
prior to the Business Combination Effective Date) pursuant to which ITXC or any
other party to such Business Combination (ITXC or any such other party being
hereinafter referred to as the "Acquirer") would purchase, and such Non-ITXC
Party would sell, all of the Quotas held by such Non-ITXC Party at an aggregate
price equal to the Business Combination Put Price multiplied by such Non-ITXC
Party's Fraction. In the event that a Non-ITXC Party provides notice of its
exercise of its put rights in a timely and appropriate manner, at a closing (the
"Closing") to be held concurrent with the closing of the Business Combination,
the Acquirer shall purchase from such Non-ITXC Party, and such Non-ITXC Party
shall sell to the Acquirer, all of such Non-ITXC Party's Quotas at the purchase
price described in this Section 16.4.2. In the event that the closing of the
Business Combination does not occur for any reason, the Closing shall not be
held and the exercise of such put right shall be void and of no effect. At the
Acquirer's option, such purchase price may be paid in cash or in shares of the
Acquirer's Common Stock, in the same form and class and with the same
registration rights as the shares received by ITXC in the Business Combination,
valued in the same manner as securities are valued for purposes of determining
the Business Combination Value, or in such combination of cash and such shares
(valued in the same manner as securities are valued for purposes of determining
the Business Combination Value) as the Acquirer shall determine; provided,
however, if the Acquirer's Common Stock does not represent a Marketable
Security, the number of shares of the Acquirer's common stock to be delivered
shall be increased by a multiple of 10% over the number of shares that would be
delivered if the valuation were made
<PAGE>
solely in the manner utilized for purposes of determining Business Combination
Value.
16.4.2.1 In the event that (i) a Non-ITXC Party exercises its put
rights pursuant to this Section 16.4.2, (ii) as a result of the Business
Combination, the Evslin/Jordan Common Shares will be converted into a security
that is registered under the Securities Act (the "Registered Security") and
(iii) the Acquirer elects to deliver to such Non-ITXC Party a portion of such
purchase price in the form of the Acquirer's common stock, then such Non-ITXC
Party shall have the right to cause ITXC to condition such Business Combination
upon such Non-ITXC Party's receipt (to the extent that such Non-ITXC Party is
receiving stock, and not cash, pursuant to the exercise of such put right), upon
consummation of the Business Combination, of the Registered Security for a
period expiring one (1) year after the Business Combination Effective Date.
16.4.3 Business Combination Call Right. During the Put Notice Period,
-------------------------------
ITXC shall have the right to demand that each Non-ITXC Party sell its Quotas to
the Acquirer at or immediately prior to the Business Combination Effective Date.
In the event that ITXC provides notice of its exercise of its call rights during
the Put Notice Period to each of the Non-ITXC Parties, at a closing (the
"Closing") to be held concurrent or immediately prior to the closing of the
Business Combination, ITXC shall cause the Acquirer to purchase from each Non-
ITXC Party, and each Non-ITXC Party shall sell to the Acquirer, all of such Non-
ITXC Party's Quotas at a purchase price equal to the Business Combination Call
Price multiplied by such Non-ITXC Party's Fraction. In the event that the
closing of the Business Combination does not occur for any reason, the Closing
shall not be held and the exercise of such call right shall be void and of no
effect. At TeleNova's option, such purchase price may be paid in cash or in
shares of the Acquirer's Common Stock, valued in the same manner as securities
are valued for purposes of determining the Business Combination Value, or in
such combination of cash and such shares (valued in the same manner as
securities are valued for purposes of determining the Business Combination
Value) as TeleNova shall determine; provided, however, if the Acquirer's Common
Stock does not represent a Marketable Security, the number of shares of the
Acquirer's Common Stock to be delivered shall be increased by a multiple of 10%
over the number of shares that would be delivered if the valuation were made
solely in the manner utilized for purposes of determining the Business
Combination Value.
<PAGE>
16.4.4 Simultaneous Exercise of Puts and Calls. In the event that
---------------------------------------
one or more Non-ITXC Parties exercises its put rights pursuant to Section 16.4.2
hereof simultaneously with the exercise by ITXC of its call rights pursuant to
Section 16.4.3 hereof, then all of the provisions of Section 16.4.2 shall apply
to the transaction between ITXC and each such exercising Non-ITXC Party except
that (i) all references to the term "Business Combination Put Price" shall be
deemed to be references to the "Business Combination Modified Put Price", (ii)
such exercising Non-ITXC Party shall have the right to designate the form (cash
or stock) of one half of the purchase price applicable to such Non-ITXC Party's
transaction with ITXC, (iii) ITXC shall have the right to designate the form
(cash or stock) of one half of the purchase price and (iv) Section 16.4.2.1
shall apply with respect to any stock received by such Non-ITXC Party as a
result of the immediately preceding clause iii of this Section 16.4.4. The
provisions of Section 16.4.3 shall apply to the Non-ITXC Parties that do not
exercise their put rights.
16.4.5 Securities Matters. In the event that the Acquirer issues
------------------
shares of its common stock pursuant to Sections 16.4.2, 16.4.3 or 16.4.4 hereof,
the following provisions shall apply:
(a) Prior to the Business Combination Effective Date, each Party that
is to receive such shares shall, if requested to do so by the Acquirer, deliver
to the Acquirer an investment letter, in form and substance satisfactory to the
Acquirer, but substantially identical in form and substance to the equivalent
letter signed by ITXC (if ITXC is required to sign such a letter), that will
enable the Acquirer to issue such shares of common stock to such Party without
registration under the Securities Act or any applicable jurisdiction's
securities laws without registration under the Securities Act or any applicable
jurisdiction's securities laws.
(b) Each certificate representing such shares shall bear such legends
as the Acquirer shall reasonably conclude shall be required under the Securities
Act, provided, however, that ITXC agrees to the same legends in the shares it
receives as payment from the Acquirer, if ITXC actually receives any such
shares.
16.4.6 Cooperation. In the event that any Party exercises a put
-----------
right pursuant to Section 16.4.2 hereof or a call right pursuant to Section
16.4.3 hereof, all Non-ITXC Parties shall cooperate with ITXC in its efforts to
consummate the applicable Business Combination. Such cooperation shall include,
among other things, providing the parties to such Business Combination with such
information as such underwriters shall reasonably request, confirming its
obligations hereunder
<PAGE>
and making timely delivery of all indicia of ownership of Quotas so as to assure
that the Business Combination closing and the Closing are consummated in
accordance with the provisions of the applicable Definitive Agreement.
16.4.7 Limitation on Call Right. Notwithstanding any provision
------------------------
herein to the contrary, at or prior to any Closing held pursuant to Section
16.4.3, ITXC shall complete the payment (in cash or as otherwise permitted
hereunder) of any Initial Required Contribution which ITXC has not yet fully
paid.
16.5 Nonexclusive Arrangement. After December 31, 1999, in the event
============------------
that either ITXC or TeleNova effects a Territory Non-Exclusive Arrangement
pursuant to Section 14.4 hereof, then each Non-ITXC Party shall have the right
to cause ITXC to purchase from such Non-ITXC Party (a "Nonexclusive Put Right"),
and ITXC shall have the right to cause each Non-ITXC Party to sell to ITXC (a
"Nonexclusive Call Right"), all of such Non-ITXC Party's equity interests in the
Company (the "TeleNova Equity") in accordance with the provisions of this
Section 16.5. Each Non-ITXC Party shall have the right to exercise its
Nonexclusive Put Right if it delivers written notice of such exercise to ITXC at
any time within thirty (30) days after either (a) TeleNova delivers to ITXC
notice that it has elected to effect a Territory Non-Exclusive Arrangement or
(b) TeleNova receives from ITXC notice that ITXC has elected to effect a
Territory Non-Exclusive Arrangement. ITXC shall have the right to exercise its
Nonexclusive Call Right if it delivers written notice of such exercise to the
Non-ITXC Parties at any time within thirty (30) days after either (a) ITXC
delivers to TeleNova notice that it has elected to effect a Territory Non-
Exclusive Arrangement or (b) ITXC receives from TeleNova notice that TeleNova
has elected to effect a Territory Non-Exclusive Arrangement. In the event that
a Non-ITXC Party exercises its Nonexclusive Put Right on a timely basis or ITXC
exercises its Nonexclusive Call Right on a timely basis, TeleNova and ITXC shall
cause the TeleNova Equity to be appraised in accordance with the definition of
Appraised Value set forth in Section 16.3.1 hereof. Within thirty (30) days
after ITXC and TeleNova receive notice of the results of such appraisal, a
closing shall be held at ITXC's headquarters (the "Nonexclusive Closing"). At
the Nonexclusive Closing, ITXC shall deliver to such Non-ITXC Party
consideration in an aggregate amount equal to the Appraised Value multiplied by
such Non-ITXC Party's Fraction. In the event that the Nonexclusive Closing is
conducted following the exercise by one or more Non-ITXC Parties of its
Nonexclusive Put Right, ITXC shall have the right to determine whether such
consideration shall be paid to such exercising Non-ITXC Party in cash or in the
equivalent value (to be
<PAGE>
determined in accordance with Section 16.5(c) hereof) of shares of ITXC's Common
Stock. In the event that the Nonexclusive Closing is held solely as a result of
ITXC's exercise of its Nonexclusive Call Right, TeleNova shall have the right to
determine whether such purchase price shall be paid in cash or in shares of ITXC
Common Stock. In the event that such purchase price is to be paid in shares of
ITXC Common Stock, the following provisions shall apply:
(a) ITXC shall have the right to delay the Nonexclusive Closing for a
reasonable period of time in order to enable ITXC to obtain such shareholder and
other approvals as ITXC shall require in order to effect such transaction. In
the event that ITXC is unable to obtain such approvals within 120 days after
either ITXC or TeleNova effects a Territory Nonexclusive Arrangement, then the
purchase price payable pursuant to this Section 16.5 shall be paid by ITXC in
cash.
(b) At the Nonexclusive Closing, each Non-ITXC Party shall deliver to ITXC
an investment letter, in form and substance reasonably satisfactory to ITXC,
that will enable ITXC to issue such shares of ITXC Common Stock (the
"Nonexclusive Issued Shares") to each non-ITXC Party without registration under
the Securities Act or any applicable jurisdiction's securities laws. If the
Nonexclusive Issued Shares are being delivered solely as a result of the
exercise by a Non-ITXC Party of a Nonexclusive Put Right at a time after ITXC
has consummated an IPO, then ITXC and such Non-ITXC Party shall enter into an
agreement, in form and substance reasonably satisfactory to ITXC, pursuant to
which ITXC shall agree that if Tom Evslin sells any Evslin/Jordan Common Shares
during the Restricted Period, then ITXC shall, at such Non-ITXC Party's
request, register for resale under the Securities Act up to 25% of such Non-ITXC
Party's Nonexclusive Issued Shares, provided that (i) such registration
obligation shall cease as of the last day of the Restricted Period, and (ii)
such agreement shall provide that such Non-ITXC Party's registration rights
shall be subordinate to the Existing Rights (as defined in Section 16.3.5(c)(ii)
hereof).
(c) In the event that ITXC's Common Stock is registered under the Exchange
Act and either listed on the New York Stock Exchange or American Stock Exchange
or quoted on the National Market System of the National Association of
Securities Dealers, Inc. at the time of the Nonexclusive Closing, for purposes
of determining the number of shares of ITXC Common Stock to be delivered at the
Nonexclusive Closing, each share of ITXC Common Stock shall be valued at a price
equal to the average closing sales price of ITXC's Common
<PAGE>
Stock during the five trading days immediately preceding the date on which the
Nonexclusive Closing is held. If, at the time of such Nonexclusive Closing,
ITXC's Common Stock is not registered pursuant to the Exchange Act or is not so
listed or quoted, then TeleNova and ITXC shall cause the Appraiser to determine
the per share value of ITXC's Common Stock as part of the appraisal described in
this Section 16.5.
(d) Each certificate representing such shares shall bear such legends as
ITXC shall reasonably conclude shall be required under the Securities Act,
provided however that the Evslin/Jordan Common Shares also bear such legends.
Notwithstanding any provision herein to the contrary, at or prior to any
Nonexclusive Closing held upon exercise of a Nonexclusive Call Right, ITXC shall
complete the payment (in cash or as otherwise permitted hereunder) of any
Initial Required Contribution which ITXC has not yet fully paid.
16.6 Impasse.
-------
16.6.1 Definition of "Impasse". For purposes of this Agreement, an
-----------------------
"Impasse" shall be deemed to have occurred in the event that (a) the Parties are
unable to agree upon any material matter (such as, without limitation,
implementation of the Business Plan, financial or economic issues involving the
Company, entering into business associations or partnerships, determining the
Business Combination Value for a Business Combination that does not constitute a
Liquid Business Combination in accordance with Section 16.4 hereof, the
development of thresholds applicable under Section 14.4 hereof or any other
matter that causes a material adverse effect on the Company) with respect to
which this Agreement or the License Agreement contemplates that agreement of the
Parties shall be reached, (b) TeleNova and ITXC are unable to agree upon
significant matters respecting the management of the Company's affairs, (c)
TeleNova and ITXC are in such dispute that the Company is unable to function
normally in the best interests of its Quotaholders or (d) in case any Party
applies for or consents to the appointment of a receiver, trustee or liquidator
for all or a substantial part of its properties or assets, makes a general
assignment for the benefit of its creditors, is adjudicated a bankrupt or
insolvent, or files a voluntary petition in bankruptcy, or a petition or answer
seeking reorganization or an arrangement with creditors, or to take advantage of
any bankruptcy, reorganization, insolvency, readjustment of bank debt,
dissolution or liquidation
<PAGE>
law or statute, or an answer admitting the material allegations of a petition
filed against it in any proceeding under any such law.
16.6.2 Impasse Closing. In the event that an Impasse exists and,
---------------
after good faith negotiations between TeleNova and ITXC, such Impasse is not
resolved, then each Non-ITXC Party shall have the right to cause ITXC to
purchase from such Non-ITXC Party (an "Impasse Put Right"), and ITXC shall have
the right to cause each Non-ITXC Party to sell to ITXC (an "Impasse Call
Right"), all of such Non-ITXC Party's equity interests in the Company (the
"TeleNova Equity") in accordance with the provisions of this Section 16.6. Each
Non-ITXC Party shall have the right to exercise its Impasse Put Right if it
delivers written notice of such exercise to ITXC at any time within thirty (30)
days after either TeleNova or ITXC advises the Non-ITXC Parties in writing that
an Impasse has occurred and that such good faith negotiations have not resulted
in the resolution of such Impasse. ITXC shall have the right to exercise its
Impasse Call Right if it delivers written notice of such exercise to the Non-
ITXC Parties at any time within such thirty day period. In the event that any
Non-ITXC Party exercises its Impasse Put Right on a timely basis or ITXC
exercises its Impasse Call Right on a timely basis, TeleNova and ITXC shall
cause the TeleNova Equity to be appraised in accordance with the definition of
Appraised Value set forth in Section 16.3.1 hereof. Within thirty (30) days
after ITXC and TeleNova receive notice of the results of such appraisal, a
closing shall be held at ITXC's headquarters (the "Impasse Closing"). At the
Impasse Closing, ITXC shall deliver to such Non-ITXC Party consideration in an
aggregate amount equal to the Appraised Value multiplied by such Non-ITXC
Party's Fraction. In the event that the Impasse Closing is conducted following
the exercise by one or more Non-ITXC Parties of its Impasse Put Right, ITXC
shall have the right to determine whether such consideration shall be paid to
such exercising Non-ITXC Party in cash or in the equivalent value (to be
determined in accordance with Section 16.6(c) hereof) of shares of ITXC's Common
Stock. In the event that the Impasse Closing is held solely as a result of
ITXC's exercise of its Impasse Call Right, TeleNova shall have the right to
determine whether such purchase price shall be paid in cash or in shares of ITXC
Common Stock. In the event that such purchase price is to be paid in shares of
ITXC Common Stock, the following provisions shall apply:
(a) ITXC shall have the right to delay the Impasse Closing for a
reasonable period of time in order to enable ITXC to obtain such shareholder and
other approvals as ITXC shall require in order to effect such transaction. In
the
<PAGE>
event that ITXC is unable to obtain such approvals within 120 days after either
TeleNova or ITXC advises the other Parties that an Impasse has occurred, then
the purchase price payable pursuant to this Section 16.6 shall be paid by ITXC
in cash.
(b) At the Impasse Closing, each Non-ITXC Party shall deliver to ITXC an
investment letter, in form and substance reasonably satisfactory to ITXC, that
will enable ITXC to issue such shares of ITXC Common Stock (the "Impasse Issued
Shares") to each Non-ITXC Party without registration under the Securities Act or
any applicable jurisdiction's securities laws. If the Impasse Issued Shares are
being delivered solely as a result of the exercise of an Impasse Put Right by a
Non-ITXC Party at a time after ITXC has consummated an IPO, then ITXC and such
Non-ITXC Party shall enter into an agreement, in form and substance reasonably
satisfactory to ITXC, pursuant to which ITXC shall agree that if Tom Evslin
sells any Evslin/Jordan Common Shares during the Restricted Period, then ITXC
shall, at such Non-ITXC Party's request, register for resale under the
Securities Act up to 25% of such Non-ITXC Party's Impasse Issued Shares,
provided that (i) such registration obligation shall cease as of the last day of
the Restricted Period, and (ii) such agreement shall provide that such Non-ITXC
Party's registration rights shall be subordinate to the Existing Rights (as
defined in Section 16.3.5(c)(ii) hereof).
(c) In the event that ITXC's Common Stock is registered under the
Exchange Act and either listed on the New York Stock Exchange or American Stock
Exchange or quoted on the National Market System of the National Association of
Securities Dealers, Inc. at the time of the Impasse Closing, for purposes of
determining the number of shares of ITXC Common Stock to be delivered at the
Impasse Closing, each share of ITXC Common Stock shall be valued at a price
equal to the average closing sales price of ITXC's Common Stock during the five
trading days immediately preceding the date on which the Impasse Closing is
held. If, at the time of such Impasse Closing, ITXC's Common Stock is not
registered pursuant to the Exchange Act or is not so listed or quoted, then
TeleNova and ITXC shall cause the Appraiser to determine the per share value of
ITXC's Common Stock as part of the appraisal described in this Section 16.6.
(d) Each certificate representing such shares shall bear such legends
as ITXC shall reasonably conclude shall be required under the Securities Act,
provided, however, that the Evslin/Jordan Common Shares also bear such legends.
<PAGE>
Notwithstanding any provision herein to the contrary, at or prior to any Impasse
Closing held upon exercise of an Impasse Call Right, ITXC shall complete the
payment (in cash or as otherwise permitted hereunder) of any Initial Required
Contribution which ITXC has not yet fully paid."
3. Capitalized terms defined herein, unless modified hereby, shall have the
meanings set forth in the Joint Venture Agreement.
4. This Amendment shall be binding on the parties hereto, their successors and
assigns.
5. The terms, conditions and covenants of the Joint Venture Agreement not
amended by this Amendment shall remain in full force and effect.
In Witness Whereof, this Amendment has been executed on behalf of each of
the Parties by their duly authorized representatives as of the date first above
written.
<TABLE>
<S> <C>
TeleNova Comunicacoes Ltda. ITXC Corp.
/s/ Claudio Collado /s/ Hiran Marques /s/ Edward B. Jordan
By : ______________________________________ By : ______________________________________
Managing Director G.A Chief Financial Officer
Title : ______________________________________ Title : ______________________________________
8/31/98 8/19/98 August 18, 1998
Date : ______________________________________ Date : ______________________________________
</TABLE>
Witness:
/S/ Chris Gennari
<PAGE>
1. ______________________ 2. ____________________
<PAGE>
EXHIBIT 10.8
MEMORANDUM AND AMENDMENT
This memorandum and amendment (the "Memorandum"), dated as of May 31, 1999,
is by and among ITXC Corp. ("ITXC"), TeleNova Comunicacoes Ltda. ("TeleNova")
and Telesisa Sistemas emTelecomunicacoes S.A. ("Telesisa") for the purposes of
setting forth certain procedural matters pertaining to the Joint Venture
Agreement, dated as of July 19, 1998, between ITXC and TeleNova, as amended (as
amended, the Agreement"), and amending certain portions of the Agreement. All
capitalized terms in this Memorandum that are not defined in this Memorandum
have the meanings ascribed to such terms in the Agreement. Each Party (i.e.,
ITXC, TeleNova, and Telesisa) hereby acknowledges and agrees as follows:
1. TeleNova and Telesisa acknowledge that on or before May 17, 1999, ITXC
provided it with written notice that ITXC intends to effect an IPO (the "IPO
Notice") and intends to file a Registration Statement with the SEC on or before
June 30, 1999.
2. To the extent, if any, that the Agreement requires ITXC to provide
TeleNova and Telesisa with the IPO Notice at least sixty days prior to the
initial filing of the Registration Statement, TeleNova and Telesisa hereby waive
that requirement and a knowledge that ITXC shall be deemed to have given
sufficient notice of the IPO for purposes of Section 16.3 of the Agreement.
3. TeleNova and Telesisa waive any and all rights that they may have to
exercise the IPO Put Right described in Section 16.3.2 of the Agreement.
4. The definition of "Pre-IPO Period" in Section 16.3.1 of the Agreement
for the purpose of the calculation of Trailing ITXC Revenues shall remain as in
effect before the execution of this Memorandum and Understanding; however,
solely for the purpose of the calculation of Trailing Company Revenues, such
definition is hereby amended to provide as follows:
"`Pre-IPO Period' shall mean the six month period from March 1, 1999
through and including August 31, 1999."
5. ITXC waives any right that it may have to presently exercise its call
rights under Section 16.3.3 of the Agreement. In lieu of such rights, Section
16.3.3 of the Agreement is hereby amended in its entirety to provide as follows:
"IPO Call Right. At any time during the period from September 1, 1999
--------------
through and including the later of (i) September 15, 1999 and (ii) the
tenth calendar day after the Company provides ITXC with its financial
<PAGE>
statements for the period from March 1, 1999 through August 31, 1999, ITXC
may give notice to any Non-ITXC Party (a "Non-Put Party") that ITXC intends
to exercise its call rights pursuant to this Section 16.3.3. Such notice
shall include and be accompanied by the full text of the investment letter,
lock-up letter and legend or legends referred to in Section 16.3.5(a) and
16.3.5(b) of the Agreement. Such notice shall be preceded by a telephonic
meeting between ITXC and the Non-ITXC Parties, scheduled at ITXC's
convenience, in order to set forth procedural matters pertaining to the
exercise of ITXC's call rights. In the event that (a) ITXC provides a Non-
Put Party with notice of exercise of its call rights in a timely and
appropriate manner and (b) ITXC consummates its IPO on or before November
30, 1999, then, at a closing (the "Closing") to be held on the later of the
fifteenth day after such Non-Put Party receives such notice and the day on
which the IPO is consummated, ITXC shall purchase from such Non-Put Party,
and such Non-Put Party shall sell to ITXC, all of such Non-Put Party's
Quotas at a purchase price equal to the IPO Call Price multiplied by such
Non-Put Party's Fraction. In the event that the IPO is not consummated on
or before November 30, 1999 for any reason, the Closing shall not be held
and the exercise of such call rights shall be void and of no effect. At
the option of such Non-Put Party, such purchase price may be paid in cash
or in shares of ITXC's Common Stock, valued at the IPO Price, or in such
combination of cash and such shares as such Non-Put Party shall determine,
provided that such determination is made within five business days after
ITXC notifies such Non-Put Party that it intends to exercise its call
rights pursuant to this Section 16.3.3. For purposes of this Agreement, the
IPO shall be deemed to be consummated on the first date on which the
proceeds of the IPO are paid to ITXC."
6. The Parties acknowledge that the deliveries contemplated by Section
16.3.5 (a) of the Agreement shall be made prior to the Closing.
7. If ITXC exercises its call pursuant to Section 16.3 of the Agreement,
ITXC will, promptly after such information is available to ITXC, provide to each
Non-ITXC Party the data necessary to calculate the Trailing ITXC Revenues (i.e.,
ITXC's revenues during the Pre-IPO Period). ITXC will also provide each Non-ITXC
Party with its current estimate of the IPO Value and will update that estimate
from time to time through the time that the IPO Price is ultimately determined.
8. Under the United States securities laws, it is essential that the
information provided by ITXC to each Non-ITXC Party with respect to the proposed
IPO be held in strict confidence. Each Non-ITXC Party will maintain the
confidentiality of such information, except to the extent that ITXC makes such
information public at a later date. All information to be supplied by ITXC
-2-
<PAGE>
pursuant to paragraph 7 above will be held in confidence by each Non-ITXC Party
pursuant to Article 9 of the Agreement.
9. In all other respects, the Agreement remains in full force and effect.
10. In the event that (i) the Registration Statement relating to the IPO
for which notice has been acknowledged in Section 1 hereof is not initially
filed with the SEC on or before June 30, 1999 or (ii) such IPO is not
consummated as contemplated by Section 16.3.3 of the Agreement on or before
November 30, 1999, this Memorandum and Amendment shall be void and the Agreement
shall be deemed to contain each of the terms set forth in the Agreement
immediately prior to the execution of this Memorandum and Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as of the
date first above stated.
ITXC CORP.
/s/ Tom Evslin
By:__________________________
Tom Evslin, Chairman
TELESISA SISTEMAS EMTELECOMUNICACOES S.A.
/s/ Antonio Borrali /s/ Rubers Frangiotti
By:__________________________________________
President Administrative Director
TELENOVA COMUNICACOES LTDA.
/s/ Hiran Margues
By:_________________________________
Hiran Margues, G.A.
-3-
<PAGE>
EXHIBIT 10.09
LEASE AGREEMENT
BETWEEN
Peregrine Investment Partners
a Pennsylvania Limited Partnership
("Landlord")
AND
ITXC CORP.
("Tenant")
<PAGE>
BASIC LEASE PROVISIONS
----------------------
This Lease consists of the Cover Sheet, Table of Contents, Basic Lease
Provisions, General Lease Provisions, Riders and Exhibits, all of which are
attached and incorporated by reference for all purposes. The terms defined in
the Basic Lease Provisions, General Lease Provisions, Riders and Exhibits shall
be deemed to have the meanings ascribed, wherever used herein. The Cover Sheet,
Table of Contents and headlines of paragraphs, Riders and Exhibits are for
convenience only and shall not be deemed to enlarge or diminish the meanings of
the provisions of this Lease.
LEASE DATE: February 28, 1998
LANDLORD: Peregrine Investment Partners - I, a Pennsylvania Limited
Partnership
One Belmont Avenue, Suite 401
Bala Cynwyd, Pennsylvania 19004
Authorized Representative: Barry Howard
TENANT: Name: ITXC CORP.
Address: 219 North Center Drive
North Brunswick, New Jersey 08902
Authorized Representative: Edward Jordan
Telephone: (732) 940-4333
LAND: The tract of land located in the Township of Plainsboro,
Middlesex County,
New Jersey and described in Exhibit "A".
BUILDING: The building commonly known as Arbor 600, 600 College Road East,
Princeton Forrestal Center, New Jersey, situated on the Land.
PREMISES: The portion of the First (1st) floor of the Building shown on the
floor plan attached as Exhibit "A-2".
TERM: Five (5) years
LEASE COMMENCEMENT DATE: On or about June 15, 1998 (subject to adjustment
pursuant to Section 2 of the General Lease Provisions).
LEASE EXPIRATION DATE: May 31, 2003 (subject to adjustment pursuant to Section 2
of the General Lease Provisions).
BASIC RENT: $314,056.80 per year payable in consecutive, equal monthly
installments of $26,171.40 during the Term of the Lease.
-2-
<PAGE>
ADDITIONAL RENT:
1. Increases in Real Estate Taxes: Tenant's Allocated Share of
------------------------------
the increase in real estate taxes (including special assessments,
rental receipts or gross real estate taxes, if any, and any other
taxes now or hereinafter imposed in the nature of or in
substitution for real estate taxes) levied on the Building and
the Land in excess of the annual real estate taxes for the later
of (i) calendar year 1998 or (ii) the calendar year of the Lease
Commencement Date (the "Base Year"). Real estate taxes shall not
include interest or penalties assessed for the late payment of
such taxes.
2. Increases in Operating Costs: Tenant's Allocated Share of the
----------------------------
increase during the Term of the Lease in the Operating Costs (as
defined in the General Lease Provisions) over the annual
Operating Costs for the later of (i) calendar year 1998 or (ii)
the calendar year of the Lease Commencement Date (the "Base
Year").
ELECTRICAL SERVICE COST AMOUNT: $1.00 per rentable square foot, until adjusted
by survey as provided in Section 6 of the General Lease
Provisions.
SECURITY DEPOSIT: See Section 3(e).
LATE CHARGE: Two percent (2%) of the Installment of Rent due and unpaid.
OVERDUE INTEREST RATE: Two percent (2%) per annum in excess of the "prime rate"
then in effect at Citibank, N.A. in New York City (but not to
exceed the maximum rate of interest to be charged Tenant for the
use, forbearance or detention of money).
REIMBURSEMENT INTEREST RATE: Two percent (2%) per annum in excess of the "prime
rate" then in effect at Citibank, N.A. in New York City (but not
to exceed the maximum rate of interest to be charged Tenant for
the use, forbearance or detention of money).
TENANT'S ALLOCATED SHARE: 5.98% which Landlord and Tenant agree is the
approximate proportion which the rentable area of the Premises
bears to the total rentable area of the Building. Tenant's
Allocated Share is subject to change in the event of a change in
the Rentable Area of the Premises.
RENTABLE AREA: Premises - 14,814 square feet.
Building - 247,656 square feet
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The calculation of the Rentable Area of the Premises shall be the
product of multiplying (i) the usable area and (ii) the sum of an
add-on factor of 16.6% plus 100%. The usable area of the Premises
shall be measured from the interior surface of the exterior glass
line to the centerline of the wall separating adjacent tenants
and the inside surface of the wall separating the Tenant area
from common areas with no reduction for columns or other
penetrations within the Premises.
PERMITTED USE: General office use and use for internet telephony switching and
related ancillary uses, provided that the use of the Premises
shall remain primarily office space.
STANDARD INDUSTRIAL CLASSIFICATION: Tenant's Standard Industrial Classification,
as designated by the Standard Industrial Classification Manual
prepared by the Office of Management and Budget (the "SIC
Number") is 4813.
BROKER: Insignia/Edward S. Gordon Company, Inc.
Park 80 West Plaza I
Saddle Brook, New Jersey 07663
(201 ) 71 2-5649
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GENERAL LEASE PROVISIONS
THIS LEASE AGREEMENT (the "Lease") is made on the Lease Date between
Landlord and Tenant.
WHEREAS, Tenant desires to lease space in the Building from Landlord and
Landlord is willing to lease space in the Building to Tenant upon the terms,
conditions, covenants and agreements set forth in this Lease. Intending to be
legally bound hereby, Landlord and Tenant agree:
1. Premises. Landlord hereby leases to Tenant, and Tenant hereby
--------
leases from Landlord the Premises, for the Term and upon the terms, agreements,
covenants and conditions set forth in this Lease. The Premises are shown as
outlined in the attached Exhibit A-2. The Lease also includes the right,
together with other tenants of the Building and members of the public, to use
the common areas of the Building (hereinafter referred to as the "Common
Facilities") subject to such restrictions as may be incorporated in this Lease.
The Lease does not include any other rights not specifically set forth herein.
2. Term. The Term of the Lease is for the period set forth in the
----
Basic Lease Provisions, beginning on the Lease Commencement Date and ending at
midnight on the Lease Expiration Date. If under the provisions of this Lease the
Term begins on a date other than the Lease Commencement Date set forth in the
Basic Lease Provisions, then Landlord shall advise Tenant in writing of the
date, and that date shall be the Lease Commencement Date. If Tenant shall be
delayed by the completion of the Demolition Work (as defined in Exhibit "B")
beyond April 15, 1998, then the Lease Commencement Date shall be extended on a
day-for-day basis with the period of such delay. The Lease Expiration Date
shall also be adjusted to provide a term of occupancy equal to the Term set
forth in the Basic Lease Provisions.
3. Rent. Security Deposit. Tenant shall pay as rent for the Premises
----------------------
the following amounts (each of which shall be considered rent and all of which
are collectively referred to in this Lease as "Rent"):
(a) Basic Rent. The Basic Rent payable in advance on the first day of
----------
each month in monthly installments without prior notice or demand and without
any set-off or deduction whatsoever at Landlord's principal office in the City
of Philadelphia or at such other place as Landlord may direct. The Basic Rent
for the first full month and the final month of the Term will be paid on the
date of this Lease. The Basic Rent for the unexpired portion of any month in
which the Term begins will be paid on the Lease Commencement Date.
(b) Additional Rent. Tenant will pay as additional rent ("Additional
---------------
Rent") at the times herein stated (if no times are stated, then on the first day
of the month after Landlord notifies Tenant of the amount of such additional
rent, except that any additional rent resulting from the adjustments provided
below determined after the Expiration Date of the Lease shall be paid within
thirty days after Landlord notifies Tenant of the additional amount due):
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(i) Increases in Real Estate Taxes. Tenant's Allocated Share of
------------------------------
Increases in Real Estate Taxes (as defined in the Basic Lease Provisions). At
any time or times after the Base Year, Landlord may submit to Tenant a statement
of Landlord's reasonable estimate of any such tax increase over the Real Estate
Taxes during the Base Year and within thirty (30) days after delivery of such
statement and each month thereafter, Tenant shall pay to Landlord, as additional
monthly rent, an amount equal to one-twelfth (1/12) of the amount determined to
be Tenant's Allocated Share of such increase. Within ninety (90) days after the
expiration of each calendar year in which Tenant's monthly rent is increased
pursuant to this paragraph, Landlord may submit, or upon the request of Tenant,
Landlord shall submit, a statement showing the determination of the actual
amount of the total increase and Tenant's Allocated Share of such increase,
together with a copy of the Real Estate Tax bill. If such statement shows that
Tenant's monthly payments pursuant to this paragraph exceeded Tenant's Allocated
Share of the actual increase incurred for the preceding calendar year, then
Tenant may deduct such overpayment from its next payment or payments of monthly
rent. If such statement shows that Tenant's share of Landlord's actual increase
exceeded Tenant's monthly payments for the preceding calendar year, then Tenant
shall pay the total amount of such deficiency to Landlord within thirty (30)
days after the delivery of such statement. In the event that the Lease
Expiration Date is not December 31st, the increase to be paid by Tenant for the
calendar year in which the Lease Expiration Date occurs shall be determined by
multiplying the amount of Tenant's share thereof for the full calendar year by a
fraction with the number of days during such calendar year prior to the Lease
Expiration Date as the numerator and with 365 as the denominator. Landlord
represents that there is no abatement, credit or deferral of Real Estate Taxes
for the Base Year.
(ii) Increases in Operating Costs. Tenant's Allocated Share of
----------------------------
Increases in Operating Costs. The Operating Costs are hereby defined as the sum
of the following costs and expenses: (A) gas, electricity, water and sewer
charges and other utility charges (including surcharges) of whatever nature
(except to the extent separately charged to tenants under Section 6 of the
Lease); (b) insurance (including but not restricted to liability, fire,
casualty, boiler, plate glass, false arrest and defamation, workmen's
compensation, fidelity bonds, extended coverage, and any other form of insurance
which is reasonably required in the operation of a commercial property) (C)
building personnel costs, including but not limited to salaries, wages, fringe
benefits, and other direct and indirect costs of engineers, superintendents,
watchmen, porters, management and security personnel and any other building
personnel; (D) costs of service and maintenance contracts, including, but not
limited to, chillers, heat pumps, cooling towers, energy management systems,
boilers, sprinklers, controls, elevators, mail chutes and boxes, windows,
landscaping, common area maintenance, paving, security, janitorial and general
cleaning, snow and ice removal, exterminating and trash removal, and management
fees; (E) all other maintenance and repair expenses and costs of supplies which
are deducted by Landlord in computing its Federal income tax liability; (F) any
other costs and expenses (i.e., items which are not capital improvements)
incurred by Landlord in operating the Building or Common Facilities, if any, (G)
the amortized cost of purchasing and installing any energy saving device in the
Building; and (H) the cost of any additional services not provided to the
Building or
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Common Facilities at the Lease Commencement Date but thereafter provided by
Landlord in the prudent management of the Building and Common Facilities. In the
event that any business, rent or other taxes which are now or hereafter levied
upon Tenant's use or occupancy of the Premises or Tenant's business at the
Premises or on Landlord by virtue of Tenant's occupancy of the Premises are
enacted, changed or altered so that any of such taxes are levied against
Landlord or the mode of collection of such taxes is changed so that Landlord is
responsible for collection or payment of such taxes, any and all such taxes
shall be deemed to be a part of the Operating Costs and Tenant shall pay the
taxes that would otherwise be imposed on it to Landlord. Operating Costs shall
not include (A) principal or interest payments on any mortgages, deeds of trust
or other financing encumbrances, (B) leasing commissions payable by Landlord,
(C) deductions for depreciation of the Building or (D) capital improvements
which are not deducted by Landlord in computing its Federal income tax liability
(except as otherwise expressly provided herein). For purposes hereof, "Operating
Expenses" shall also not include the following: (a) expenses incurred in
connection with the leasing of space in the Building, including, without
limitation, leasing commissions, rent concessions, tenant improvements, tenant
buyouts and advertising expenses and legal fees and disbursements in connection
with leases, lease terminations, modifications, renewals and extensions; (b)
executive salaries and benefits above the grade of building manager; (c) repairs
or other work (including rebuilding) occasioned by insured fire, windstorm or
other casualty or by condemnation; (d) depreciation; (e) interest on, and
amortization of, any debts; (f) rent payable under any ground lease to which
this Lease is subject; (g) expenses incurred in negotiating and enforcing leases
against tenants, including attorneys' fees; (h) costs of financing, re-financing
or re-structuring any debt obligations with respect to the Building and related
legal fees and disbursements; (i) fines, penalties and late payments incurred by
Landlord due to Landlord's violations of law, permits, leases or contracts
pertaining to the Building; (j) expenses in connection with services of a type
which are not available to Tenant but which are provided to another tenant or
occupant of the Building; (k) expenses which arise out of additions to the
Building; (1) insurance increases due to any extra-hazardous uses made in the
Building by Landlord or any other tenants; (m) expenses for repairs or other
work covered by insurance proceeds; (n) expenses incurred in connection with the
sale of the Building and/or the Land or any interest therein; (o) cost of any
work or service performed in any instance for or supplied to a specific tenant
(including Tenant) at the cost of such tenant; (p) compensation paid to clerks,
attendants or similar persons in commercial concessions operated by Landlord;
(q) the cost of installing, operating and maintaining any specialty service,
such as an observatory, broadcasting facilities, luncheon club, health, athletic
or recreational club; (r) any fee or expenditure in excess of the amount which
would be paid in an arm's length transaction paid to any corporation or entity
which controls, is controlled by or under control with Landlord or any partner
or shareholder of Landlord or any person which is a relative by blood or
marriage of any shareholder, partner or officer or director of Landlord; and (s)
cost of correcting defects in the original design and construction of the
Building. At any time or times after the Base Year Landlord may submit to Tenant
an estimate of the increase of the Operating Costs and within thirty (30) days
after the delivery of such statement, and each month thereafter, Tenant will pay
to Landlord, as additional monthly rent, an amount equal to one-twelfth (1/12)
of the amount determined to be Tenant's Allocated Share of such increase. Within
ninety (90) days after the expiration of each calendar year in which Tenant's
monthly rent is increased pursuant to this paragraph, Landlord may submit, or
upon the request of Tenant, Landlord shall submit, a
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statement showing the determination of the total increase and Tenant's
proportionate share of such increase. Notwithstanding anything to the contrary
set forth in this section 3(b)(ii), if Landlord shall fail to render the
required statement for any calendar year by June 1 of the succeeding calendar
year, Tenant may cease to pay installments of Operating Expenses until such time
as such statement is rendered. At the time that Landlord's Statement is
rendered, Tenant shall, within thirty (30) days following receipt thereof, pay
to Landlord the installments of Operating Expenses withheld by Tenant. If Tenant
shall deliver notice to Landlord that it desires to examine the records
concerning Operating Expenses before the end of the second anniversary of the
date Tenant receives Landlord's Statement, Landlord shall provide access to, and
Tenant shall have the right to examine such records for a period of ninety (90)
days after Landlord makes such records available to Tenant or its agents. If
affer an examination of the records, either Landlord and Tenant agree or an
arbiter determines that there occurred an overpayment of Operating Expenses by
Tenant equal to or greater than five percent (5%), then Landlord shall pay to
Tenant interest on such overpayment at the Overdue Rate then in effect from the
date of such payment until the date the Tenant receives such refund. If it is
determined that a miscalculation or mathematical error exists with respect to
any particular categories of Operating Expenses for the year in question, and
provided that Landlord verifies such miscalculation or error and shall
reasonably and in good faith determine that such miscalculation or error existed
in previous operating years, then such categories of Operating Expenses for each
of the lease years for which such calculation or mathematical error exists shall
be adjusted accordingly. If such statement shows that Tenant's share of
Landlord's actual increase exceeded Tenant's monthly payments for the preceding
calendar year, then Tenant shall pay the total amount of such deficiency to
Landlord. Such deficiency shall constitute additional rent hereunder due and
payable with the first monthly installment of Rent due after rendition of said
statement, or if payments have been accelerated pursuant to Section 15 below,
within ten (10) days after rendition of such statement. In the event that the
Lease Expiration Date is not December 31st, the increase to be paid by Tenant
for the calendar year in which the Lease Expiration Date occurs shall be
determined by multiplying the amount of Tenant's share thereof for the full
calendar year by a fraction with the number of days during such calendar year
prior to the Lease Expiration Date as the numerator and 365 as the denominator.
(c) Demand; Time. Each of the foregoing amounts of Rent shall be paid
------------
to Landlord without demand and without deduction, set-off or counterclaim on the
first (1st) day of every month during the Term of this Lease. If Landlord shall
at any time or times accept Rent after it shall become due and payable, such
acceptance shall not excuse a delay upon subsequent occasions, or constitute, or
be construed as, a waiver of any or all of Landlord's rights hereunder.
(d) Base Expense Adjustments. In the determination of the Base Real
------------------------
Estate Taxes and the Base Operating Expenses Landlord shall make appropriate
adjustments to the actual costs in order to reflect what the base expenses would
have been if the Building were 95% occupied if in the base year average
occupancy was less than 95%.
(e) Security Deposit. Tenant shall deposit with Landlord on or before
----------------
March 30, 1998, a security deposit (the "Security Deposit") in the amount of the
estimated cost of Tenant fit-out, which shall not be in an amount less than
$100,000.00. If the final cost of Tenant's
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<PAGE>
fit-out shall exceed the amount of the Security Deposit initially paid by
Tenant, then Tenant shall pay such excess to Landlord within five (5) days
following demand. Landlord, in the event that the Building is sold, shall
transfer and deliver the Security Deposit to the purchaser of the Building and
shall notify Tenant thereof, and thereupon Landlord shall be discharged from any
further liability with reference thereto. Notwithstanding the foregoing, in the
event Tenant shall have closed on and received at least $10,000,000.00 of the
proceeds of its anticipated $24,000,000.00 private placement by March 30, 1998,
Tenant shall not be required to post the Security Deposit as provided herein. If
Tenant shall be required to post the Security Deposit, then the same shall be
returned to Tenant upon the earlier of (i) the receipt of the private placement
proceeds, as aforesaid, or (ii) the completion of the Tenant Fit-Out and the
payment of all contractors (within lien releases). In lieu of a cash deposit,
Tenant may post with Landlord a letter of credit in the amount of the Security
Deposit issued by a bank reasonably satisfactory to Landlord.
4. Use of Premises. Tenant will use and occupy the Premises solely
---------------
for the Permitted Use and then only in accordance with the uses permitted under
applicable zoning and other governmental regulations; without the prior written
consent of Landlord the Premises will be used for no other purpose. Tenant will
not use or occupy the Premises for any unlawful purpose and will comply with all
present and future laws, ordinances, regulations, and orders of the United
States of America and any other public or quasi-public authority having
jurisdiction over the Premises or the Common Facilities.
5. Common Facilities.
-----------------
(a) The Common Facilities shall at all times be subject to the
exclusive control and management of Landlord. Landlord shall have the right to
establish, modify and enforce reasonable rules and regulations with respect to
the Common Facilities; to change the areas, locations and arrangements of Common
Facilities; to enter into, modify and terminate easement and other agreements
pertaining to the use and maintenance of the Common Facilities; to construct
surface or elevated parking areas and facilities; to establish and change the
level of parking surfaces; to establish, modify and enforce rules, regulations
for parking facilities provided by Landlord, if any; to close all or any portion
of such parking areas or other Common Facilities to such extent as may, in the
opinion of Landlord, be necessary to prevent a dedication thereof or the accrual
of any rights to any person or to the public therein; to close temporarily any
or all portions of the said areas or facilities; and to do and perform such
other acts in and to said areas and improvements as Landlord, in the exercise of
good business judgment, shall determine to be advisable, provided that none of
the foregoing shall adversely affect Tenant or Tenant's agents' access to or use
of the Premises or reduce the usable area of the Premises. Landlord agrees that
it shall not enact any rule or regulation with respect to the Common Facilities,
including the parking facilities, that unduly interferes with Tenant's permitted
use of the Premises. Landlord agrees that it shall apply the rules and
regulations to the tenants of the Building in a uniform manner and shall not
discriminate against Tenant in applying such rules and regulations.
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(b) Landlord reserves the right in its sole discretion to change,
rearrange, alter, modify, reduce or supplement any or all of the Common
Facilities so long as adequate facilities in common are made available to the
Tenant, provided that none of the foregoing shall adversely affect Tenant or
Tenant's agents' access to or use of the Premises or reduce the usable area of
the Premises.
6. Services and Utilities
----------------------
(a) Landlord will furnish air-conditioning during the seasons of the
year when air-conditioning is required and heat during the seasons of the year
when heat is required with a system designed to perform in accordance with those
specifications set forth in Exhibit "C" attached hereto and made a part hereof.
Landlord will supply reasonably adequate water, exterior window cleaning, char
and janitorial and such other service (done after 5:30 PM Monday through Friday,
only (except legal holidays)) and such other building services and maintenance
of the Building, Building systems and Common Facilities as are required in
Landlord's sole but reasonable judgment commensurate with the standards of a
first-class office facility. Landlord shall not be obligated to provide
janitorial service if Tenant refuses entry to the cleaning staff after 5:30 PM.
Landlord will also provide elevator service by means of automatically-operated
elevators. Landlord shall have the right to remove elevators from service if
required for moving freight, or for servicing, maintaining or constructing the
Building. If due to use of the Premises or rearrangement of partitioning after
the initial preparation of the Premises interference with normal operation of
the air-conditioning in the Premises results, necessitating changes in the air-
conditioning system servicing the Premises, such changes shall be made by
Landlord upon written notice to Tenant at Tenant's sole cost and expense. Tenant
agrees to lower and close window coverings when necessary because of the sun's
position whenever the air-conditioning system is in operation and Tenant agrees
at all times to cooperate fully with Landlord and to abide by all the Rules and
Regulations which Landlord may prescribe for the proper functioning and
protection of the air-conditioning system.
(b) Landlord shall furnish the electric energy that Tenant shall
require in the Premises consistent with the electrical specifications set forth
in Exhibit "D" attached hereto and made a part hereof. Tenant shall pay to
Landlord as Additional Rent the cost of all electric energy furnished to Tenant
at the Premises, other than for heating and air-conditioning purposes.
Additional Rent for such electric energy shall be calculated and payable as
follows:
Within a reasonable time after the Commencement Date, subsequent to
Tenant's having taken occupancy of the Premises and having installed and
commenced the use of Tenant's electrical equipment, Landlord shall cause at
Landlord's expense, a survey to be made by a reputable independent electrical
engineer of the estimated use of electric energy (other than for heat and air-
conditioning) to the Premises, and shall compute the cost thereof for the
quantity so determined at prevailing retail rates charged to Landlord. The
electric service charges shall equal the cost to Landlord, including rate
increases as provided for in this Section, of the estimated use of electrical
energy (other than for heat and air conditioning) so determined. Tenant shall
have the right to review the survey prepared by Landlord's engineer and to
dispute
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its findings, based on the findings of Tenant's engineer. Tenant shall pay
Landlord the cost of such electric energy, as so calculated on a monthly basis,
as Additional Rent, together with its payment of Basic Rent. Prior to such
calculation such cost shall be calculated on the basis of the Electrical Service
Cost Amount.
Tenant's use of electric energy in the Premises shall not at any time
exceed the capacity of any of the electrical conductors and equipment serving
the Premises, as the same are specified in Exhibit "D". In order to insure that
such capacity is not exceeded and to avoid possible adverse effect upon the
electric service to the Building, Tenant shall not, without Landlord's prior
written consent in each instance, connect any additional fixtures, appliances or
equipment to the electric distribution system or make any alteration or addition
to the electric system of the Premises existing on (or planned by Tenant and
disclosed to Landlord as of the Commencement Date. If Tenant furnishes Landlord
a sufficiently detailed description of Tenant's proposed electrical equipment
and the capacity thereof prior to Commencement Date and in accordance with the
requirements of Exhibit "B", completion of Improvements, attached hereto (the
"Work Letter"), Landlord agrees to review Tenant's proposal and not to
unreasonably withhold prior approval to that proposal within a reasonable time
after its submission provided that such plans do not require the provision of
additional electrical capacity by the utility serving the Building. If Landlord
consents, all additional risers or other equipment required shall be provided by
Landlord at Tenant's sole cost and expense and paid for by Tenant upon
Landlord's demand. As a condition to granting such consent, Landlord, at
Tenant's sole expense, may cause a new survey to be made of the use of electric
energy (other than for heating and air-conditioning) in order to calculate the
potential additional electric energy to be made available to Tenant based upon
the estimated additional capacity of such additional risers or other equipment.
When the amount of such increase is so determined and the estimated cost thereof
is calculated, the amount of monthly Additional Rent payable pursuant to this
Section shall be adjusted to reflect the additional costs and shall be payable
as herein provided.
If there is an increase or decrease in the rate schedule (including
surcharges or demand adjustments) of the public utility for the supply of
electrical service to the Building or the imposition of any tax with respect to
such service or increase in any such tax following the Commencement Date, the
Additional Rent payable hereunder shall be adjusted equitably to reflect the
increase or decrease in rate or imposition or increase in the aforesaid tax. All
computations shall be made on the basis of Tenant's surveyed usage as if a meter
measuring such usage to the Premises exclusively was in place.
(c) All services and utilities provided by Landlord shall be provided
during normal hours of operation of the Building (except char and janitorial
services which are described above), which are 7:30 AM to 6:00 PM Monday through
Friday and 8:00 AM to 12:00 noon Saturday. There are no normal hours of
operation of the Building on Sundays or legal holidays and Landlord shall not be
obligated to maintain or operate the Building at such times unless special
arrangements are made by Tenant. Landlord will furnish all services and
utilities required by this Lease only during the normal hours of operation of
the Building, unless otherwise specified herein. One automatically operated
elevator shall be subject to call at all times. Tenant shall have access to the
Premises on a 24-hour per day and 7-day per week basis. If
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Tenant requires airconditioning or heat beyond the normal hours of operation set
forth herein and provided arrangements are made with the Landlord's agent,
Landlord will furnish such air-conditioning or heat if the Tenant agrees to pay
for the same with the next monthly installment of rent in accordance with the
then-current schedule of costs and assessments therefor, which such schedules
shall be published from time to time by Landlord and furnished to Tenant, the
same being determined by Landlord's engineer to reflect Landlord's cost, not to
exceed $50.00 per hour. Landlord shall not be liable for failure to furnish, or
for delays, suspensions or reductions in furnishing, any of the utilities or
services required to be performed by Landlord caused by breakdown, maintenance,
repairs, strikes, scarcity of labor or materials, acts of God, Landlord's
conformance to governmental legislation, regulation, or judicial or
administrative orders, or from any other cause whatsoever.
(d) In the event an interruption of any of the services to be
provided by Landlord described in this Section 6 or elsewhere in this Lease
(other than interruption caused by reasons beyond Landlord's reasonable
control), which interruption substantially interferes with Tenant's conduct of
business at the Premises, continues for more than three (3) consecutive business
days, all items of rent and additional rent shall thereafter be abated during
the continuity of such substantial interference until such services are restored
to where no substantial interference continues.
7. Completion of Improvements. The Premises shall be improved in
--------------------------
accordance with the terms and conditions of the Work Letter attached hereto as
Exhibit "B".
8. Covenants of Tenant. Tenant will (at Tenant's sole cost
-------------------
and expense):
(a) pay to Landlord all amounts due as Basic Rent and Additional
Rent; and pay to Landlord: (i) the Late Charge on all overdue installments of
Basic Rent and on all overdue payments of Additional Rent or other sums payable
to Landlord under this Lease that are ten (10) days past due. Tenant
acknowledges and agrees that the purpose of the Late Charge is to compensate
Landlord for its costs in collecting the same and is a liquidated amount; and
(ii) in addition to the Late Charge, interest, at the Overdue Interest Rate on
all overdue installments of Basic Rent from five (5) days following the due date
thereof to and including the date of payment and on all payments of Additional
Rent or other sums payable to Landlord hereunder from five (5) days following
the date of demand therefor to and including the date of payment;
(b) keep the Premises in good order and repair, reasonable
wear and tear and damage by casualty excepted;
(c) surrender the Premises at the end of this Lease in the same
condition in which Tenant has agreed to keep it during the Term hereof;
(d) be responsible for the maintenance of all plumbing and other
fixtures in and serving only the Premises, whether installed by Landlord or by
Tenant;
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<PAGE>
(e) be responsible (except to the extent provided in Section 13,
below) for repairs and replacements to the Premises and the Building made
necessary by reason of damage thereto caused by Tenant or its agents, servants,
invitees or employees;
(f) comply with all laws and all enactments and regulations of any
governmental authority relating or applicable to Tenant's particular occupancy
of the Premises, and hold Landlord harmless from all consequences for failure to
do so;
(g) promptly notify Landlord of any damage to or defects in the
Premises, and of any injuries to persons or property which occur therein;
(h) pay for any alterations, improvements or additions made by Tenant
to the Premises and any light bulbs, tubes and other non-standard Building items
made by or for Tenant, and allow no lien to attach to the Building with respect
to any of the foregoing;
(i) comply with the rules and regulations set forth in Exhibit C
hereto and with all reasonable changes in and additions to them, notice of which
is given by Landlord to Tenant (such rules and regulations are and all such
changes and additions will be part of this Lease); and
(j) comply with all reasonable recommendations of Landlord's or
Tenant's insurance carriers relating to layout, use and maintenance of the
Premises.
9. Negative Covenants of Tenant. Tenant will not:
----------------------------
(a) damage the Premises or any other part of the Building, or use any
part of the Building not designated for use by Tenant except as such right is
given by special written arrangement apart from this Lease;
(b) bring into or permit to be kept in the Premises any
dangerous, explosive or obnoxious substances;
(c) have property of substantial size or quantity delivered to or
removed from the Premises without first making arrangements reasonably
satisfactory to Landlord;
(d) bring into the Premises or use any furniture or equipment that
might be harmful thereto or harmful or annoying to others in the Building, or
place any weight in the Premises beyond its safe carrying capacity;
(e) install any equipment of any kind or nature which will or might
necessitate changes, replacements or additions to, or in the use of, the water
system, heating system, plumbing system, air conditioning system or electrical
system of the Premises or the Building unless approved by Landlord in writing;
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<PAGE>
(f) paint, affix or display in any other manner on any portion of the
outside or inside of the Building, any sign, advertisement or notice except
those on the directories and doors of offices, and then only those approved by
Landlord as to place, number, size, color and style; or
(g) conduct itself or permit its agents, servants, employees, guests
or visitors to conduct themselves in a manner which, in Landlord's judgment, is
unlawful, improper or unsafe.
10. Tenant's Actions Requiring Landlord's Consent. Without the prior
---------------------------------------------
written consent of Landlord, Tenant will not:
(a) Use the Premises other than for the Permitted Use;
(b) voluntarily or involuntarily assign, mortgage or pledge this
Lease or sublet all or any part of the Premises, except in strict compliance
with the provisions of Section 17, below;
(c) alter, improve or add to the Premises (all alterations,
improvements, additions and fixtures will belong to Landlord and remain in the
Premises at the end of the Lease except that if Landlord designates at the time
of their installation that any of the same be removed, Tenant will do so and
will restore or repair any damage to the Premises caused by such installation or
removal, all at its expense). If Landlord shall consent to such alteration,
improvements or additions by Tenant, such consent shall not be deemed to be any
agreement or consent by Landlord pursuant to N.J.S.A. (S)2A:44-68 or any
successor statute thereto, to subject Landlord's interest in the Premises,
Building or Land to any mechanics' or materialmens' lien which may be filed in
respect to such alterations, improvements or additions under by or on behalf of
Tenant. Tenant shall be entitled to replace the entrance door and/or entrance
wall to the Premises at its expense and in a manner that does not cause any
interference to other tenants of the Building, subject to Landlord's approval of
Tenant's proposed design and location. Tenant shall further be entitled to
install a satellite dish antennae or similar equipment to facilitate Tenant's
computer and telephony communications, which installation shall be subject to
the approval by Landlord as to the location and size of the equipment, which
approval shall not be unreasonably withheld. Tenant shall further be entitled to
place its name on the outer door of the Premises and also in the interior
reception area, provided such signage shall be subject to Landlord's approval.
Landlord's consent as to the matters of covered by this subparagraph (c) shall
not be unreasonably withheld.
11. Covenants of Landlord.
----------------------
(a) Quiet Enjoyment. Landlord covenants that it has the right to
---------------
make this Lease for the Term, and that if Tenant shall pay the rent and perform
all of the covenants, terms, conditions and agreements of this Lease to be
performed by Tenant, Tenant shall freely, peaceably and quietly occupy and enjoy
the Premises without interference by Landlord or any party claiming through or
under Landlord, except for the provisions of paragraph (b) hereof.
(b) Reservation. Landlord reserves to itself and its successors and
-----------
assigns (whether acting itself or through persons authorized by it) the
following rights (all of which are
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hereby consented to by Tenant). Landlord may exercise these rights from time to
time without notice and without liability to Tenant for damage or injury to
property, persons or business and without effecting an eviction, constructive or
actual, or disturbance of Tenant's use or possession of the Premises or giving
rise to any claim for set off or abatement of Rent or otherwise affecting
Tenant's obligations hereunder:
(i) To decorate and to make repairs, alterations, additions, changes
or improvements, whether structural or otherwise, in and about the Building or
any part thereof and for such purposes to enter upon the Premises, and during
the continuance of any such work, to temporarily close doors, entryways, common
areas, public space and corridors in the Building, to interrupt or temporarily
suspend Building Services and facilities and to change the arrangement and
location of entrances or passageways, doors and doorways, corridors, elevators,
stairs, toilets, or other public parts of the Building, so long as the Premises
are reasonably accessible and Tenant is not unreasonably disturbed in use or
possession thereof. If Landlord desires to perform any repairs, additions or
alterations to the Building or the Premises, Landlord shall take commercially
reasonable measures to minimize any disruption to Tenant's operations at the
Premises.
(ii) To have and retain paramount title to the Premises free and
clear of any act of Tenant purporting to burden or encumber the Premises.
(iii) To grant to anyone the exclusive right to conduct any business
in or render any service to the Building, provided such exclusive right shall
not operate to exclude Tenant from the Permitted Use.
(iv) [INTENTIONALLY DELETED]
(v) [INTENTIONALLY DELETED]
(vi) To take all such reasonable measures as Landlord may deem
advisable for the security of the Building and its occupants, including, without
limitation, the search of persons entering or leaving the Building, the
evacuation of the Building for cause, suspected cause, or for drill purposes,
the temporary denial of access to the Building, and the closing of the Building
after normal business hours and on Saturdays, Sundays and holidays, subject,
however, to Tenant's right to admittance when the Building is closed after
normal business hours under such reasonable regulations as Landlord may
prescribe from time-to-time which may include, by way of example but not
limitation, that persons entering or leaving the Building, whether or not during
normal business hours, identify themselves to a security officer by registration
or otherwise and that such persons establish their right to enter or leave the
Building.
(vii) To enter the Premises to perform Landlord's covenants under
this Lease, to exercise Landlord's remedies under this Lease, to ascertain if
Tenant is in compliance with its covenants under this Lease, to inspect the
Premises, and to exhibit the Premises to
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Mortgagees and Lessors and to prospective lenders, purchasers and tenants;
provided any such entries for inspection or exhibition shall be during normal
business hours after reasonable notice.
(viii) To change the name by which the Building is designated.
(ix) To transfer, assign and convey, in whole or in part, the
Building and any and all of its rights under this Lease, and in the event
Landlord assigns its rights under this Lease, Landlord shall thereby be released
from any further obligations hereunder, accruing after the date of such
assignment, and Tenant agrees to attorn to and look solely to such successor in
interest of the Landlord for performance of such obligations.
(c) Building Systems. Landlord represents and warrants that the
----------------
electrical, plumbing and HVAC Building systems will be in working order as of
the Commencement Date.
(d) Compliance with Law. Landlord covenants and agrees that it shall
-------------------
comply with applicable laws and codes with respect to the Building.
12. Loss. Damage or Injury.
----------------------
(a) Tenant will be responsible for and hereby relieves Landlord from
and indemnifies Landlord against all liability by reason of any injury, damage
or loss to any person or property which occurs in the Premises or in any other
part of the Building, and which is caused wholly or in part by the negligence of
Tenant, its agents, servants, invitees or employees. Tenant further releases
Landlord from all liability for damage to or loss of any property of Tenant, or
any third party which may result from the leakage of water into the Premises, or
from any other cause unless resulting from the negligence of Landlord, its
agents or employees.
(b) Tenant will not conduct nor permit to be conducted, any activity,
nor place any equipment in or about the Premises or the Building or the Common
Facilities, which will in any way increase the rate of fire insurance or other
insurance on the Building or cause the cancellation or other termination
thereof; and if any increase in the rate of fire insurance or other insurance is
stated by any insurance company or by the applicable Insurance Rating Bureau to
be due to any activity or equipment of Tenant in or about the Premises or the
Building or the Common Facilities, such statement shall be conclusive evidence
that the increase in such rate is due to such activity or equipment and, as a
result thereof, Tenant shall be liable for such increase and shall reimburse
Landlord therefor upon demand and any such sum shall be considered Additional
Rent due and payable pursuant to Section 3(b), above.
(c) Tenant shall carry public liability insurance in a company or
companies licensed to do business in the State of New Jersey and carrying a
rating reasonably satisfactory to Landlord. Said insurance shall be in minimum
amounts approved by Landlord from time to time (as set forth in the rules and
regulations attached hereto as Exhibit "C"), which amounts may be adjusted by at
least an amount equal to the amount by which inflation (as measured by the
change from the Lease Date to the last day of the month preceding such
adjustment in the Consumer Price Index,(CPI-W), 1982-84 Base, Philadelphia-New
Jersey as published by the
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<PAGE>
United States Department of Labor (Bureau of Labor Statistics), or if such index
is discontinued, its successor, or if no successor is designated, any other
index reasonably acceptable to Landlord and Tenant) affects the original
insurance limits; shall name Landlord and any mortgagee of the Building or Land
as additional insureds, as their interests may appear, and shall contain an
endorsement that such policy shall remain in full force and effect
notwithstanding that the insured has waived his right of action against any
party prior to the occurrence of a loss. If required by Landlord, receipts
evidencing payment for said insurance shall be delivered to Landlord at least
annually by Tenant. Each policy shall contain an endorsement that will prohibit
its cancellation prior to the expiration of thirty (30) days after notice of
such proposed cancellation to Landlord. Landlord agrees to keep and maintain
such casualty insurance as may be required by the mortgagee of the Building from
time to time.
(d) Each party agrees to use its best efforts to include in each of
its insurance policies a waiver of the insurer's right of subrogation against
the other party, or if such waiver should be unobtainable or unenforceable, an
agreement that such policy shall not be invalidated if the assured waives the
right of recovery against any party responsible for a casualty covered by the
policy before the casualty. Each party hereby releases the other party with
respect to any claim (including a claim for negligence) which it might otherwise
have against the other party for loss, damage or destruction with respect to its
property occurring during the term of this Lease and with respect and to the
extent to which it is insured under a policy or policies containing a waiver of
subrogation or naming the other party as an additional assured.
13. Restoration of Damage. If the Premises are damaged by
---------------------
fire or other casualty:
(a) Landlord will restore the Premises (but not Tenant's property
located therein) with reasonable promptness at Landlord's expense unless the
nature of the damage to the Building is such that Landlord determines that the
restoration cannot be completed within one-hundred eighty (180) days, in which
event either Landlord or Tenant may, upon notice to the other party given within
thirty (30) days after Landlord's determination, terminate this Lease.
(b) Landlord will not be liable to Tenant for any interruption in use
of the Premises which results from damage to any part of the Building, but Rent
will be proportionately abated during any period of time when any part (or all)
of the Premises is untenable.
(c) The provisions of this Section 13 shall be considered an express
agreement governing any case of damage or destruction of the Premises by fire or
other casualty, and any law of the State of New Jersey providing for such a
contingency in the absence of an express agreement and any other law of like
import, now or hereafter in force, shall have no application in such case.
14. Condition of Leased Space. Landlord leases the Premises in its
-------------------------
condition when the Term begins and without any representation with respect to it
or any duty to repair or alter it, except as to punch-list items.
15. Default by Tenant.
-----------------
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<PAGE>
(a) Each of the following shall constitute an event of default (an
"Event of Default") hereunder:
(i) If Tenant fails to pay within five (5) days after written
notice all amounts due hereunder, including, without limitation, Basic Rent and
Additional Rent; or
(ii) If Tenant fails to perform any of its other obligations
hereunder within thirty (30) days after written notice of any such failure has
been given by Landlord; or
(iii) If Tenant abandons the Premises or without having given
prior written notice to Landlord either vacates the Premises or removes
therefrom all or substantially all of its property; or
(iv) If Tenant files a petition commencing a voluntary case
under the Federal Bankruptcy Code (Title 11 of the United States Code), as now
or hereafter in effect, or under any similar law, or files a petition in
bankruptcy or for reorganization or for an arrangement pursuant to any state
bankruptcy law or any similar state law; or
(v) If an involuntary case against Tenant as debtor is
commenced by a petition under the Federal Bankruptcy Code (Title 11 of the
United States Code), as now or hereafter in effect, or under any similar law; or
a petition or answer proposing the adjudication of Tenant as a bankrupt or its
reorganization pursuant to any state bankruptcy law or any similar law shall be
filed in any court and shall not be dismissed, discharged or denied within sixty
(60) days after the filing thereof, or if Tenant shall consent or acquiesce in
the filing thereof; or
(vi) If a custodian, receiver, trustee or liquidator of Tenant
or of all or substantially all of Tenant's property or of the Premises shall be
appointed in any proceedings brought by Tenant; or if any such custodian,
receiver, trustee or liquidator shall be appointed in any proceedings brought
against Tenant and shall not be discharged within sixty (60) days after such
appointment; or if Tenant shall consent to or acquiesce in such appointment; or
(vii) If Tenant shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts, generally
as they become due.
(b) If Tenant commits an Event of Default hereunder, then Landlord
will have the right to do once or more often any one or more of the following:
(i) declare due and payable and sue to recover all unpaid Rent
and all Rent for the unexpired Term of this Lease and all costs and commissions
provided or permitted by law, together with the unamortized cost of the
improvements to the Premises performed by Landlord or reimbursed by Landlord to
Tenant under the Work Letter. In the event Landlord has granted Tenant any
concessions in the making of this lease (including, by way of illustration and
not limitation, free Basic Rent, excess Tenant improvement allowances, moving
allowances or other payments or credits to or on behalf of Tenant, collectively,
"Concessions") all such
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<PAGE>
Concessions shall be due and payable in full to Landlord and collectible as
Rent, notwithstanding any other provision herein or in any Rider hereto to the
contrary.
(ii) declare this Lease ended;
(iii) lease all or any part of the Premises to any other
person with or without first altering the same; and
(iv) regain possession through summary dispossess proceedings
or through any other lawful manner.
(c) If a default by Tenant not involving the payment of money occurs
and is of such a nature that it cannot reasonably be cured within thirty (30)
days after written notice as aforesaid, Landlord will not exercise any right,
power or remedy hereunder so long as Tenant is proceeding with due diligence, in
good faith and with continuity to complete the curing of such default, provided
in all cases that the default is completely cured with ninety (90) days after
such written notice, and if not so cured within such 90-day period then Landlord
shall be fully empowered to exercise any right, power or remedy hereunder.
16. Eminent Domain. If all or part of the Building is taken or
---------------
condemned for public use (or if Landlord elects to convey title to the condemnor
by a deed in lieu of condemnation), then at the option of Landlord this Lease
will end as of the date title vests in the condemnor and rent will abate for the
Premises. Tenant will have no claim against Landlord or the condemnor as a
result of such condemnation or conveyance except to the extent that an award
shall specifically include an amount in respect of Tenant's moving expenses.
17. Assignment and Subletting.
--------------------------
(a) In the event Tenant desires to assign this Lease or sublet the
Premises or any part thereof, Tenant shall give Landlord written notice of such
desire. Landlord shall then have a period of thirty (30) days following receipt
of such notice within which to notify Tenant in writing that Landlord elects any
of the following options (which options shall be within the sole and absolute
discretion of Landlord): (i) to terminate this Lease as to the space affected by
the proposed assignment or sublease as of the date specified by Tenant, in which
event Tenant will be relieved of all further obligations hereunder after such
date as to such space; or (ii) to permit Tenant to assign or sublet such space
subject, however, to subsequent written approval of the proposed assignee or
sublessee by Landlord, which approval shall not be unreasonably withheld or
delayed; provided, however, that if the rental rate agreed upon between Tenant
and its sublessee is greater than the rental rate payable under this Lease, then
one-half (1/2) of such excess rental (and each installment thereof) shall be
paid by Tenant to Landlord as Additional Rent hereunder within five (5) days of
Tenant's receipt thereof.
(b) In respect of the foregoing: (i) no assignment or subletting by
Tenant shall relieve Tenant of any obligation under this Lease; (ii) any
attempted assignment or sublease by Tenant in violation of the terms and
conditions of this Section 17 shall be void; and (iii) the
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provisions of this Section 17 shall apply fully to any subsequent assignment or
subletting by an assignee or sublessee.
(c) For purposes of this Section 17 any transfer or change in control
of Tenant (or any sublessee or assignee) by operation of law or otherwise shall
be deemed an assignment hereunder, including, without limitation, any merger,
consolidation, dissolution or any change in the controlling equity interests of
Tenant or any subtenant or assignee (in a single transaction or a series of
related transactions); provided, however, that Landlord shall neither terminate
this Lease nor deny approval to an assignment arising from (i) an issuance of
stock in a public offering or (ii) the sale of a controlling equity interest of
Tenant where the purchaser is publicly held and the net worth of the resulting
entity shall be greater than the net worth of the Tenant immediately prior to
the transaction.
(d) Upon prior written notice to Landlord, Tenant may assign this
Lease to an affiliate of Tenant provided that following such assignment Tenant
shall continue to be responsible for all of the obligations of Tenant under this
Lease, provided further that the assignee shall execute an agreement in form and
substance reasonably satisfactory to Landlord confirming the assumption of the
Lease by the assignee and the continued responsibility of the Tenant hereunder.
For purposes of this Lease, and "affiliate" is an entity that controls, is
controlled by or is under common control of Tenant.
18. Extension of Term; Waiver; Holding Over.
----------------------------------------
(a) This Lease will end at the conclusion of the Term. Tenant waives,
to the extent permissible under law, all rights to receive any notice to quit
the Premises upon termination of this Lease (whether on conclusion of the Term
or any renewal thereof or on earlier termination following a default by Tenant).
(b) If Tenant retains possession of the Premises or any part thereof
after termination of this Lease by expiration of the Lease Term or otherwise,
Tenant shall pay Landlord: (i) as agreed liquidated damages (and not as a
penalty) for such wrongful retention alone, an amount, calculated on a per diem
basis for each day of such wrongful retention, equal to twice the annual Basic
Rent and the Additional Rent for the time Tenant thus remains in possession, and
(ii) all other damages, costs and expenses sustained by Landlord by reason of
Tenant's wrongful retention. Without limiting any rights and remedies of
Landlord resulting by reason of the wrongful holding over by Tenant, or creating
any right in Tenant to continue in possession of the Premises, all of Tenant's
obligations with respect to the use, occupancy and maintenance of the Premises
shall continue during such period of wrongful retention.
19. Delays in Exercising Rights. No delay or omission by Landlord or
---------------------------
Tenant in exercising any right upon any default by the other will impair any
such right or be construed as a waiver of any such default or an acquiescence in
it. No waiver of any default will affect any later default or impair any rights
of Landlord or Tenant with respect thereto. No single, partial or full exercise
of any right by Landlord or Tenant will preclude other or further exercise
thereof.
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20. Subordination; Attornment. This Lease and all rights of Tenant
-------------------------
hereunder are and shall be subject to and subordinate in all respects to all
present and future ground leases, overriding leases and underlying leases of the
Premises, Building or the Land and to all mortgages and building loan
agreements, including leasehold mortgages and building loan mortgages, which may
now or hereafter affect the same, to each and every advance made or to be made
under such mortgages, and to all renewals, modifications, replacements and
consolidations of such mortgages. This Section 21 shall be self-operative and no
further instrument of subordination shall be required. If the holder of a
superior mortgage shall succeed to Landlord's estate in the Building or the
rights of Landlord under this Lease, whether through possession or foreclosure
action or delivery of a deed or otherwise, then at the election of such party so
succeeding to Landlord's rights (herein sometimes called "successor landlord"),
Tenant shall attorn to and recognize such successor landlord as Tenant's
landlord under this Lease, and shall promptly execute and deliver any instrument
that such successor landlord may reasonably request to evidence such attornment.
Tenant hereby irrevocably appoints such successor landlord as Tenant's attorney-
in-fact to execute and deliver such instrument for and on behalf of Tenant.
Tenant hereby waives any right Tenant may have under any present or future law
to terminate this Lease or surrender the Premises by reason of the institution
of any action to foreclose a superior mortgage, and this Lease shall not be
affected by any such action unless and until the holder of the superior mortgage
elects in such proceeding or action to terminate this Lease. Landlord agrees to
request from its mortgagee a Non-Disturbance Agreement in favor of Tenant,
provided all costs and expenses related to securing such agreement shall be
borne by Tenant.
21. Limitation of Liability. Tenant shall look only to Landlord's
-----------------------
interest in the Building and the Land (or the proceeds of any sale thereof) for
the satisfaction of Tenant's remedies for the collection of any judgment (or
other judicial process) requiring the payment of money by Landlord in the event
of any default by Landlord under this Lease, and no other property or other
assets of Landlord or any person owning an interest in Landlord shall be subject
to levy, execution or other enforcement procedure for the satisfaction of
Tenant's remedies under or with respect to this Lease, the relationship of
Landlord and Tenant hereunder or Tenant's use and occupancy of the Premises.
22. Environmental Matters.
----------------------
(a) Hazardous Wastes. Tenant shall not engage in operations at the
----------------
Premises which involve the generation, manufacture, refining, transportation,
treatment, storage, handling or disposal of "hazardous substances" or "hazardous
waste" as such terms are defined under the Industrial Site Recovery Act,
N.J.S.A. 13:1K-6, et seq., ("ISRA"). Tenant further covenants that it will not
cause or permit to exist as a result of an intentional or unintentional action
or omission on its part, the releasing, spilling, leaking, pumping, pouring,
emitting, emptying or dumping from, on or about the Building or the Land on
which is located of any hazardous substance (as such term is defined under
N.J.S.A. 58:10-23.11(b)(k) and N.J.A.C. 7:26B-1.3). Notwithstanding anything set
forth above, Tenant may handle, store, use or dispose of products containing
small quantities of hazardous substances, if (i) such products are used in the
ordinary course of Tenant's business, (ii) are customarily found in offices
(such as cleaning fluids, toner for copies, and the like), and (iii) Tenant
handles, stores, uses and disposes of any such hazardous
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substances in a safe and lawful manner and shall not allow such hazardous
substances to contaminate the Premises, the Building or the environment. Tenant
shall not be responsible for any hazardous substances brought into the Premises
by Landlord, its agents, contractors or employees.
(b) ISRA Compliance. Tenant shall, at Tenant's own expense, comply
---------------
with ISRA, if applicable to Tenant. Tenant shall, at Tenant's own expense, make
all submissions to, provide all information to, and comply with all applicable
requirements of, the Bureau of Industrial Site Evaluation ("the Bureau") of the
New Jersey Department of Environmental Protection ("NJDEP"). Should the Bureau
or any other division of NJDEP determine that a cleanup plan be prepared and
that a cleanup be undertaken because of any spills or discharges of hazardous
substances or hazardous wastes at the Premises and not caused by Landlord which
occur during the Term of this Lease, then Tenant shall, at the Tenant's own
expense, prepare and submit the required plans and financial assurances, and
carry out the approved plans. Tenant's obligations under this paragraph shall
arise if there is any closing, terminating or transferring of operations of an
industrial establishment at the Premises pursuant to ISRA. At no expense to the
Landlord, Tenant shall promptly provide all information reasonably required by
Landlord for preparation of non-applicability affidavits and shall promptly sign
such affidavits when requested by Landlord. Tenant shall indemnify, defend and
save harmless Landlord from all fines, suits, procedures, claims and actions of
any kind arising out of or in any way connected with spills or discharges of
hazardous substances or hazardous wastes at the Premises which occur during the
Term of this Lease; and from all fines, suits, procedures, claims and actions of
any kind arising out of Tenant's failure to provide all information, make all
submissions and take all actions required by ISRA, the Bureau or any other
division of NJDEP. Tenant's obligations and liabilities under this paragraph
shall continue so long as Landlord remains responsible for any spills or
discharges of hazardous substances or hazardous wastes at the Premises which
occur during the Term of this Lease. Tenant's failure to abide by the terms of
this paragraph shall be subject to equitable relief.
(c) Environmental Reports. With respect to Tenant's occupancy of the
---------------------
Premises, Tenant shall promptly provide Landlord with any notices,
correspondence and submissions made by Tenant to or to Tenant from NJDEP, the
United States Environmental Protection Agency (EPA), the United States
Occupational Safety and Health Administration (OSHA), or any other local, state
or federal authority which requires submission of any information concerning
environmental matters or hazardous wastes or hazardous substances.
(d) Conditions Precedent to Assignment and Sublease. As a condition
-----------------------------------------------
precedent to Tenant's right to sublease the Premises or to assign this Lease,
Tenant shall, at Tenant's own expense, comply with ISRA or secure a Non-
Applicability letter.
(e) SIC Number. Tenant represents and warrants that its SIC Number
----------
set forth in the Basic Lease Provisions is true and correct.
(f) Landlord's Right to Perform. In the event of Tenant's failure to
---------------------------
comply in full with this Section 22, Landlord may, at its option, perform any
and all of Tenant's obligations as
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aforesaid and all reasonable costs and expenses incurred by Landlord in the
exercise of this right shall be deemed to be Additional Rent payable in
accordance with paragraph 3, above.
(g) Survival of Tenant's Obligations. Tenant's obligations under
--------------------------------
this Section 22 shall survive the expiration or sooner termination of this
Lease.
(h) Landlord hereby represents to Tenant that as of the date hereof,
Landlord has received no notice of any violation of any environmental laws with
respect to the Building or the Premises. Notwithstanding anything to the
contrary contained in this Lease, Tenant shall have no responsibility for any
cost or expense arising from any hazardous substances determined to have been in
existence at the Premises or the Building prior to the commencement of the
Lease.
23. Relocation of Tenant. Landlord, by at least ninety (90) days'
--------------------
prior written notice to Tenant, may require Tenant to move from the Premises to
another single location substantially similar to and of comparable size with the
Premises in the Building. In the event of any such relocation: (a) Landlord will
pay all expenses of preparing and decorating the relocated premises so that they
will be substantially similar to the Premises and, in addition, will pay the
expense of moving Tenant's furniture and equipment to the relocated premises,
the cost of reinstalling Tenant's telecommunication and tele-data equipment and
all other expenses reasonably related to the move (e.g. reprinting of
stationery, etc.); and (b) Landlord and Tenant will execute a modification of or
supplement to this Lease in respect of and identifying such relocated premises,
such to be otherwise on terms identical to the terms hereof.
24. Miscellaneous.
--------------
(a) No Representations by Landlord. Tenant acknowledges that neither
------------------------------
Landlord nor any broker, agent or employee of Landlord has made any
representations or promises with respect to the Premises or the Building except
as herein expressly set forth, and no rights, privileges, easements or licenses
are acquired by Tenant except as herein expressly set forth.
(b) No Partnership. Nothing contained in this Lease shall be deemed
--------------
or construed to create a partnership or joint venture of or between Landlord and
Tenant, or to create any other relationship between the parties hereto other
than that of Landlord and Tenant.
(c) Brokers. Landlord recognizes Broker as the broker procuring this
-------
Lease and shall pay Broker a commission therefor pursuant to a separate
agreement between Broker and Landlord. Landlord and Tenant each represent and
warrant one to another that except as set forth herein neither of them has
employed any broker, agent or finder in carrying on the negotiations relating to
this Lease. Landlord shall indemnify and hold Tenant harmless, and Tenant shall
indemnify and hold Landlord harmless, from and against any claim or claims for
brokerage or other commission arising from or out of any breach of the foregoing
representation and warranty by the respective indemnitors.
(d) Estoppel Certificates. Tenant agrees, at any time and from time
---------------------
to time, upon not less than ten (10) days prior written notice by Landlord, to
execute, acknowledge and deliver
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to Landlord written statements or other documents (i) certifying that this Lease
is unmodified and in full force and effect (or if there have been modifications,
that the Lease is in full force and effect as modified and stating the
modifications), (ii) stating the dates to which the Rent and any other charges
hereunder have been paid by Tenant, (iii) stating whether or not to the best
knowledge of Tenant, Landlord is in default in the performance of any covenant,
agreement or condition contained in this Lease, and if so, specifying each such
default of which Tenant may have knowledge, (iv) stating that this Lease is
subject and subordinate to the lien of any deed of trust, mortgage, or other
security instrument which may in the future encumber or affect the Building, and
any renewals, extensions, modifications, recastings or refinancing thereof, and
that if requested to do so, Tenant will attorn to a secured party or purchaser
that succeeds to Landlord's interests as a result of any foreclosure action on
the Land or the Building, (v) stating the address to which notices to Tenant
should be sent, and (vi) such other matters relating to this Lease as may be
reasonably requested by Landlord or its designee. Any such statement delivered
pursuant hereto may be relied upon by any owner of the Building or the Land, any
prospective purchaser of the Building or the land, any mortgagee or prospective
mortgagee of the Building or the Land or of Landlord's interest in either, or
any prospective assignee of any such mortgage. Landlord agrees at any time and
from time to time upon not less than ten (10) days prior written notice from
Tenant, to execute, acknowledge and deliver to Tenant a written statement
covering the matters set forth in items (i) through (vi) of the first sentence
of this subparagraph (d).
(e) Waiver of Jury Trial. Landlord and Tenant hereby waive trial by
--------------------
jury in any action, proceeding or counterclaim brought by either of the parties
hereto against the other on or in respect of any matter whatsoever arising out
of or in any way connected with this Lease, the relationship of Landlord and
Tenant hereunder, Tenant's use or occupancy of the Premises, and/or any claim of
injury or damage.
(f) Notices. All notices or other communications hereunder shall be
-------
in writing and shall be deemed duly given if hand delivered (with receipt
therefor), or if delivered by certified or registered mail, return receipt
requested, first-class postage prepaid, (i) if to Landlord, at the address
provided in the Basic Lease Provisions, and (ii) if to Tenant, at the Premises,
unless notice of a change of address is given pursuant to the provisions of this
Section. If any notice sent by certified and registered mail is returned to the
sender by the United States Post Office as undeliverable, notice shall be deemed
duly given when mailed.
(g) Applicable Law. This Lease shall be construed, governed, and
--------------
enforced under the laws of the State of New Jersey. It is expressly understood
that if any future or present law, ordinance, regulation or order requires an
occupancy permit for the Premises, Tenant will obtain such permit at Tenant's
own expense.
(h) Invalidity of Particular Provisions. If any provision of this
-----------------------------------
Lease or the application thereof to any person or circumstances shall to any
extent be invalid or unenforceable, the remainder of this Lease or the
application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable shall not be affected thereby. Each
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
-24-
<PAGE>
(i) Gender and Number. Feminine or neuter pronouns shall be
-----------------
substituted for those of the masculine form, and the plural shall be substituted
for the singular number, in any place or places herein in which the context may
require such substitution.
(j) Benefit and Burden. The provisions of this Lease shall be
------------------
binding upon and shall inure to the benefit of the parties hereto and each of
their respective representatives, successors and assigns. Landlord may freely
and fully assign its interest hereunder.
(k) Captions. The captions and headings herein are for convenience
--------
of reference only and in no way define or limit the scope or content of this
Lease or any provision thereof.
(l) Joint and Several Liability. If two or more individuals,
---------------------------
corporations, partnerships, or other business associations (or any combination
of two or more thereof) shall sign this Lease as Tenant, the liability of each
such individual, corporation, partnership or other business association to pay
Rent and perform all other obligations hereunder shall be deemed to be joint and
several. In like manner, if the Tenant named in this Lease shall be a
partnership or other business association, the members of which are subject to
personal liability by virtue of statute or general law, the liability of each
such member shall be joint and several.
(m) Corporate Tenancy. If Tenant is a corporation, the undersigned
-----------------
officer of Tenant warrants and certifies to Landlord that Tenant is a
corporation in good standing and duly organized under the laws of the state in
which the Premises are located, or if chartered in a state other than that in
which the Premises are located, is a corporation in good standing and duly
organized under the laws of such state and is authorized to do business in the
state in which the Premises are located. The undersigned officer of Tenant
hereby further warrants and certifies to Landlord that he, as such officer, is
authorized and empowered to bind the corporation to the terms of this Lease by
his signature thereto.
(n) Parking. Landlord agrees to make available for Tenant's use four
-------
(4) parking spaces per 1000 square feet of rentable area in the Premises. Tenant
covenants and agrees to comply with all reasonable rules and regulations which
Landlord may hereafter from time to time make to assure use of designated
parking spaces on the Land by permitted users. Landlord's remedies under such
rules and regulations may include, but shall not be limited to, the right to tow
away at the owner's expense any vehicles not parked in compliance with these
rules and regulations. Landlord shall not be responsible to Tenant for the non-
compliance or breach by any other tenant of said rules and regulations,
provided, however, Landlord agrees to use reasonable efforts to enforce such
rules and regulations uniformly.
(o) Time of Essence. Time shall be of the essence with respect to
----------------
this Lease and all the attached Exhibits, except as otherwise therein provided.
-25-
<PAGE>
(p) No Option. The submission of this Lease for examination does not
---------
constitute a reservation of or option for the Premises, and this Lease becomes
effective only upon execution and delivery thereof by Landlord.
(q) Price Controls. If at any time during the Term of this Lease,
--------------
any of Tenant's percentage of increases in Rent or any other charges payable by
Tenant hereunder shall be frozen or limited by any local, State or Federal
governmental agency or statute, ordinance or regulation to a sum less than that
provided for herein, and Landlord shall be prevented from collecting any such
portion of Tenant's percentage of increase or any such charge provided for
herein, then Landlord shall be entitled to collect so much thereof as shall be
permitted by such local, State or Federal governmental agency or statute,
ordinance or regulation, and should the additional amounts which Landlord is
unable to collect become collectible at a later date, whether prior to or after
the termination of this Lease for any reason, then Tenant agrees to pay all such
increases to Landlord immediately upon notice from Landlord specifying such
amounts. Any statute or statutes of limitations applicable to the collection of
such sums or portion thereof shall be tolled as to such portion which is
uncollectible from the date on which Landlord is prevented from collecting said
sums to the date on which such sums become legally collectible by Landlord.
(r) Arbitration. At either party's option, all claims, disputes and
-----------
other matters in question or calling for mutual agreement between Landlord and
Tenant arising out of or relating to this Lease or the breach hereof, shall be
decided by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then obtaining. Any arbitration arising out
of or relating to this Lease or any breach hereof shall include, by
consolidation, joinder or joint filing, any other person not a party to this
Lease to the extent necessary for the final resolution of the matter in
controversy. This agreement to arbitrate shall be specifically enforceable under
the prevailing arbitration law. The award rendered by the arbitrators shall be
final and judgment may be entered upon it in accordance with applicable law in
any court having jurisdiction thereof. Notice of the demand for arbitration
shall be filed with the other party and with the American Arbitration
Association. The demand for arbitration shall be made within a reasonable time
after the claim, dispute or other matter has arisen and in no event shall it be
made after the date when institution of legal or equitable proceedings based on
such claim, dispute or other matter would be barred by the applicable statute of
limitations. Unless otherwise agreed in writing by Landlord and Tenant, Landlord
and Tenant shall continue to perform their obligations under this Lease in
accordance with Landlord's interpretation of the claim, dispute or other matter
during any arbitration proceedings until final resolution thereof. The venue for
arbitration or litigation with respect to all claims, controversies and disputes
arising out of or relating to this Lease or any breach hereof shall be the
county in which the Land and Building are located.
(s) Renewal Option. Provided Tenant is not in default and this Lease
--------------
shall be in effect, Tenant shall have the right to renew this Lease on one (1)
occasion for an additional five (5) year term at the then applicable fair market
rental rate. If the term of the Lease has been extended pursuant to the exercise
by Tenant of its rights under subparagraph (t) below, then such five (5) year
renewal term shall commence upon expiration of the extended term as provided
-26-
<PAGE>
below. In order to exercise its right, Tenant shall give Landlord one hundred
eighty (180) days prior written notice of exercise following which notice
Landlord shall determine the fair market rental rate. If Tenant shall disagree
with Landlord's determination, the fair market rental rate shall be determined
in accordance with the provisions of subparagraph (u) below.
(t) Rights as to Certain Adjacent Space. Provided Tenant is
-----------------------------------
not in default and this Lease shall be in effect:
(i) Tenant is hereby given the right of first refusal with
respect to the adjacent space marked as "Expansion Space A" on Exhibit "A-2"
(the "Expansion Space A") as follows: at such time as Expansion Space A becomes
available and Landlord determines to issue a proposal for the Expansion Space A,
it shall first provide Tenant with the terms and conditions under which Landlord
is willing to offer the Expansion Space A for lease and Tenant shall have the
period of fifteen (15) days to accept or decline Landlord's offer. Landlord's
proposal shall provide for a fair market rental rate as determined by Landlord.
If Tenant shall accept Landlord's proposal but disagrees with Landlord's
determination of the fair market rental rate, the same shall be determined in
accordance with the provisions of subparagraph (u) below. The term of the lease
for Expansion Space A shall be for such minimum term as Landlord is willing to
offer the space for lease, provided, however, that, in accepting Landlord's
proposal, Tenant may at that time elect extend the term of this Lease for the
Premises to be coterminous with the term of the lease for Expansion Space A,
basic rent for such extended period being the fair market rental rate for the
Premises as either determined by Landlord and agreed to by Tenant or as
determined under subparagraph (u) below. If Tenant shall accept the provisions,
then Landlord and Tenant shall promptly enter into an amendment to this Lease
incorporating the terms of Landlord's proposal. If Tenant shall decline
Landlord's offer, then Tenant's rights under this subparagraph (i) shall cease
provided, however that Landlord shall agree to use its reasonable best efforts
to lease Expansion Space A under terms and conditions which allow the Landlord
to relocate the tenant for such space. In the event of such reletting, provided
Tenant is not in default and this Lease shall be in effect, upon one hundred
twenty (120) days prior written notice of Tenant's need for additional space in
the Building, Landlord agrees to use its reasonable best efforts to cause
Expansion Space A to be made available to Tenant under mutually agreeable terms
and conditions, with rent at the then fair market rental for such space.
(ii) Tenant is hereby given a second right of refusal (under
and subject to rights granted to Wiltel Communications, LLC ("Wiltel"), its
successors and assigns) with respect to the space marked as "Expansion Space B"
on Exhibit "A-3" ("Expansion Space B") as follows: at such time as Expansion
Space B becomes available (following the waiver or expiration of the rights of
Wiltel) and Landlord determines to issue a proposal for Expansion Space B, it
shall provide Tenant with the terms and conditions under which Landlord is
willing to offer Expansion Space B for lease and Tenant shall have a period of
fifteen (15) days to accept or decline Landlord's offer. Landlord's proposal
shall provide for a fair market rental rate as determined by Landlord. If Tenant
shall accept Landlord's proposal but disagrees with Landlord's determination of
the fair market rental rate, the same shall be determined in accordance with the
provisions of subparagraph (u) below. The term of the lease for Expansion Space
B shall be for such minimum term as Landlord is willing to offer the space for
lease, provided, however, that,
-27-
<PAGE>
in accepting Landlord's proposal, Tenant may at that time elect to extend the
term of this Lease for the Premises to be coterminous with the term of the lease
for Expansion Space B, basic rent for such extended period being the fair market
rental rate for the Premises as either determined by Landlord and agreed to by
Tenant or as determined under subparagraph (u) below. If Tenant shall accept the
provisions, then Landlord and Tenant shall promptly enter into an amendment to
this Lease incorporating the terms of Landlord's proposal. If Tenant shall
decline Landlord's offer, then Tenant's rights under this subparagraph (ii)
shall cease.
(iii) Tenant is hereby give a right of first refusal with
respect to space marked as "Expansion Space C" on Exhibit "A-4" ("Expansion
Space C"), as follows: at such time during the first two (2) years of the Term
hereof as Expansion Space C becomes available and Landlord determines to issue a
proposal for Expansion Space C, it shall first provide Tenant with the terms and
conditions under which Landlord is willing to offer the Expansion Space C for
lease and Tenant shall have the period of fifteen (15) days to accept or decline
Landlord's offer. Landlord's proposal shall provide for a fair market rental
rate as determined by Landlord. If Tenant shall accept Landlord's proposal but
disagrees with Landlord's determination of the fair market rental rate, the same
shall be determined in accordance with the provisions of subparagraph (u) below.
The term of the lease for Expansion Space C shall be for such minimum term as
Landlord is willing to offer the space for lease, provided, however, that, in
accepting Landlord's proposal, Tenant may at that time elect to extend the term
of this Lease for the Premises to be coterminous with the term of the lease for
Expansion Space C, basic rent for such extended period being the fair market
rental rate for the Premises as either determined by Landlord and agreed to by
Tenant or as determined under subparagraph (u) below. If Tenant shall accept the
provisions, then Landlord and Tenant shall promptly enter into an amendment to
this Lease incorporating the terms of Landlord's proposal. If Tenant shall
decline Landlord's offer, then Tenant's rights under this subparagraph (iii)
shall cease. Tenant's rights under this subparagraph (iii) shall be subject and
subordinate to the rights of any proposed tenant negotiating with Landlord to
lease all of the south wing of the second floor of the Building, together with
additional space in the Building, and Landlord shall have no obligation to issue
Tenant a proposal for Expansion Space C so long as it is negotiating a lease for
such space; provided, however, that in such event, Tenant's rights under this
subparagraph (iii) shall relate and apply with respect to any remainder of
Expansion Space C or additional space on the first floor of the Building not
being let to such other tenant.
(u) In the event Landlord and Tenant are unable to agree upon the
fair market rental rate under subparagraph (s) above within thirty (30) days of
Landlord's initial determination, then the rate shall be established by an
appraiser mutually agreed upon by the parties. If the parties are unable to
agree upon the selection of an appraiser within ten (10) days, then each party
shall within an additional five (5) days designate an appraiser and the
appraiser so designated shall within ten (10) additional days designate a third
appraiser. The three (3) appraisers so designated shall each render an opinion
as to the fair market rental rate and the average of the three (3)
determinations shall be the fair market rental rate. In the event of a delay in
establishing the fair market rental rate, Landlord's determination shall govern,
pending the final determination, following which any necessary adjustments shall
be made.
-28-
<PAGE>
(v) Termination. Provided Tenant is not in default and this Lease
-----------
shall be in effect, Tenant may upon one hundred eighty (180) days prior written
notice to Landlord terminate this Lease either at the end of the eighteenth
(18th) month or thirty-sixth (36th) month of the Lease Term without payment or
penalty.
(w) Existing Lease. Upon execution of this Lease, Landlord agrees to
--------------
take over or buy out Tenant's existing space lease dated November 13, 1997 by
and between ITXC Corp. and Portfolio Investors, L.P. (successor landlord to K.
Hovnanian Investment Properties, Inc.), in order that Tenant shall be released
by the Landlord thereunder as of the Commencement Date hereunder. Provided
Tenant vacates the Premises and leaves the same in the condition required under
the existing lease, Landlord shall cause Tenant to be refunded its Security
Deposit under such lease.
(x) Entire Agreement. This Lease contains and embodies the entire
----------------
agreement of the parties hereto, and no representations, inducements or
agreements, oral or otherwise, between the parties not contained in this Lease
shall be of any force or effect. This Lease may not be modified, changed or
terminated in whole or in part in any manner other than by an agreement in
writing duly signed by both parties hereto.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Lease as of the date first above written.
LANDLORD:
Witness/Attest: PEREGRINE INVESTMENT PARTNERS -I,
A PENNSYLVANIA LIMITED PARTNERSHIP
/s/ Mary Favor
______________________ By: Berwind Realty Services, Inc.
Assistant Secretary
/s/ Barry Howard
By: _______________________________
Barry Howard
Vice Chairman
TENANT:
Witness/Attest:
ITXC CORP.
/s/Carole Mahn /s/ Edward B. Jordan
______________________ ______________________________
-29-
<PAGE>
EXHIBIT "A"
______________________________________________________________________________
DESCRIPTION OF BUILDING AND PREMISES
______________________________________________________________________________
The Building shall mean the real property, and improvements thereon,
known as Lot 18.05, Block 5 in Plainsboro, New Jersey as shown on a certain map
entitled "Preliminary and Final Plan P.M.U.D. Subdivision of Property of the
Trustees of Princeton University" filed 12/1/82 as Map 4512, File 969 in the
County of Middlesex, State of New Jersey.
The Premises shall mean the space outlined in red on the following page
<PAGE>
EXHIBIT "A-2"
------------
______________________________________________________________________________
EXPANSION SPACE A
______________________________________________________________________________
[Map/Graphics]
A-2
<PAGE>
EXHIBIT "A-3"
______________________________________________________________________________
EXPANSION SPACE B
______________________________________________________________________________
[Map/Graphics]
<PAGE>
EXHIBIT "A-4"
______________________________________________________________________________
EXPANSION SPACE C
______________________________________________________________________________
[Map/Graphics]
<PAGE>
EXHIBIT "B"
______________________________________________________________________________
WORK LETTER
______________________________________________________________________________
Reference is made to certain lease Agreement dated February 28, 1998
(the "Lease") to which this Work Letter is attached and made a part.
1. Landlord and Tenant mutually agree the Premises shall be finished
in accordance with plans described in paragraph 2 below.
2. Tenant, at Tenant's sole cost and expense, shall cause to be
prepared complete, finished and detailed architectural and engineering
(electrical, mechanical, plumbing and structural, if any) drawings and
specifications for Tenant's partition layout, reflected ceiling plan, floor
finishes and other installations, for the work to be done by Landlord under this
Work Letter ("Tenant Improvement Work") conforming to the attached plans. All
such plans and specifications are expressly subject to Landlord's written
approval, which Landlord will not unreasonable withhold. Any written approval of
plans or specifications by Landlord shall not make Landlord responsible in any
way for the design of any installed systems and Tenant shall look solely to its
architect, engineers, designers and any of its other agents for damages
resulting from design errors or omissions. At the time Landlord approves the
plans for the Tenant Improvement Work, Landlord shall also notify Tenant of
which portions thereof, if any, shall be required to be removed by Tenant, at
Tenant's expense, at the end of the Lease Term or sooner termination of this
Lease. If Landlord shall fail to so notify Tenant, then Tenant shall be
required to remove all of the Tenant Improvement Work at the expiration or
sooner termination of this Lease.
3. Landlord agrees to demolish, at Landlord's expense, the area shown
on the attached Exhibit B-l (the "Demolition Work"). All other costs, excluding
the Demolition Work, shall be paid by Tenant.
4. Tenant may elect to either use Landlord to complete the Tenant
Improvement Work or perform the Tenant Improvement Work itself using contractors
approved by Landlord, which approval shall not be unreasonably withheld. If
Tenant elects that Landlord shall complete the Tenant Improvement Work, or any
part thereof, Tenant shall cause to be submitted to Landlord all drawings,
plans, specifications and other date required to complete the Tenant Improvement
Work or applicable portion thereof, described in paragraph 2 hereof, by February
21, 1998.
If Landlord performs the Tenant Improvement Work, Landlord shall
solicit bids from at least three (3) qualified contractors and upon receipt
shall review the bids with the Tenant, shall
B(1)
<PAGE>
award a contract before completion of the improvements and shall hold regular
weekly meetings with the Contractor and generally supervise performance of the
contract. Landlord's fee shall be limited to five percent (5%) of the cost of
the Tenant Improvement Work.
5. If Tenant elects for Landlord to do the Tenant Improvement Work,
notwithstanding the date provided in the Lease as the Lease Commencement Date,
Tenant's obligations for the payment of rent thereunder shall not commence until
Landlord has substantially completed all work by Landlord as set forth in
paragraph 2 hereof; as evidenced by issuance of a Temporary Certificate of
Occupancy; provided, however, that if Landlord shall be delayed in substantially
completing said work as a result of:
(a) Tenant's failure to cause drawings, plans and specifications to be
furnished within the time required under paragraph 4 hereof;
(b) Tenant's submission of drawings, plans and specifications to be
furnished within the time required under paragraph 4 hereof;
(c) Tenant's request for changes in drawings, plans and specifications
subsequent to the date called for in paragraph 4 hereof; or
(d) The performance by a person, firm or corporation employed by
Tenant and/or the completion of the work of said person, firm of corporation;
then Tenant shall be liable for the payment of rent commencing on the Lease
Commencement Date and the Lease Commencement Date and Lease Expiration Date
shall not be extended; except to the extent of the number of days that
Landlord's architect determines, in its sole but reasonable judgment, that
Landlord's work would not have been completed by the Lease Commencement Date,
without the occurrence of the foregoing delays. The number of days that the
Lease Commencement Date shall be extended shall be that number of days of delay
that is determined by Landlord's architect to be due to the actions of Landlord
and Tenant shall not be responsible for the payment of rent until the Lease
Commencement Date as extended pursuant to the provisions hereof. If Tenant
undertakes completion of the Tenant Improvement Work, the Lease Commencement
Date shall be sixty (60) days after Landlord delivers the Premises to Tenant for
commencement of the Tenant Improvement Work.
6. If Tenant elects for Landlord to perform the Tenant Improvement
Work, Landlord covenants that it will use its best efforts to substantially
complete Landlord's Work under paragraph 2 herein by the Lease Commencement
Date, but it is hereby agreed that Landlord shall not be responsible for any
delay as a result of any delays resulting from those events denoted in paragraph
5 herein, or any delays beyond Landlord's control.
7. If Tenant elects for Landlord to perform the Tenant Improvement
Work, Tenant may, at its own expense, select and employ its own contractors for
finishing work such as telephone installation, carpeting, cabinetry, millwork,
decorations and installations of special equipment such as computers or telex
machines ("Tenant's Work") and such work may be
B(2)
<PAGE>
performed prior to the date specified as the Lease Commencement Date. The
foregoing license to enter prior to the commencement of the term, however, is
conditioned upon Tenant's workmen and mechanics working in harmony and not
interfering with the labor employed by the Landlord, Landlord's mechanics or
contractors or by any other tenant or their contractors. If at any times such
entry shall cause disharmony or interference therewith, this license may be
withdrawn by Landlord upon forty-eight (48) hours written notice to Tenant. Such
entry shall be deemed to be under all of the terms, covenants, provisions and
conditions of the Lease except as to the covenant to pay rent. Landlord shall
not be liable in any way for any injury, loss or damage which may occur to any
of Tenant's decorations or installations so make prior to the commencement of
the terms of the Lease, the same being solely at Tenant's risk. Furthermore,
Tenant and its contractors shall be responsible for transportation, safekeeping
ans storage of materials and equipment used in the performance of Tenant's Work
and for the removal of waste and debris resulting from the performance of
Tenant's Work. Such waste and debris shall be deposited by Tenant and its
contractors in its own dumpsters or other containers and shall not be deposited
in those of Landlord or Landlord's contractors unless by prearrangement and in
exchange for an agreement to pay the costs of additional waste pick-ups at the
Building.
B(3)
<PAGE>
EXHIBIT "C"
______________________________________________________________________________
MECHANICAL SPECIFICATIONS
______________________________________________________________________________
Mechanical specifications are:
Summer: 70 degrees dry bulb indoor
20% humidity indoor
88 degrees dry bulb outdoor
78 degrees wet bulb outdoor
Winter: 76 degrees dry bulb indoor
20 degrees dry bulb outdoor
<PAGE>
EXHIBIT "D"
______________________________________________________________________________
ELECTRICAL SPECIFICATIONS
______________________________________________________________________________
The Building provides 4 watts per square foot for power.
<PAGE>
EXHIBIT 10.10
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (the "Amendment") is made this 16th day of
April, 1999 between PEREGINE INVESTMENT PARTNERS - I, a Pennsylvania limited
partnership ("Landlord") and ITXC CORP. ("Tenant").
BACKGROUND
----------
Landlord and Tenant are parties to a Lease dated February 28, 1998 (the
"Lease") pursuant to which Landlord has agreed to lease and Tenant has agreed to
rent certain First Floor Space situate in Arbor 600 (the "Building"), 600
College Road East, Princeton Forrestal Center, Plainsboro, New Jersey, as such
space is more particularly described in the Lease. Landlord and Tenant have
agreed to amend the Lease in accordance with the provisions set forth at length
below.
AGREEMENT
---------
NOW, THEREFORE, intending to be legally bound hereby, Landlord and Tenant
agree as follows:
1. Defined Terms. Except as otherwise expressly provided herein, the
-------------
terms defined in the Lease shall have the meanings in this Amendment as in the
Lease.
2. Expansion Space. Landlord agrees to make available for leasing and
---------------
occupancy by Tenant and Tenant agrees to rent from Landlord between June 1, 1999
and July 1, 1999, that portion of the First Floor of the Building shown on
Exhibit "A" as the "Expansion Space". Landlord shall deliver the Expansion
Space in its "as is" condition.
3. Size and Tenant's Allocated Share of Premises. The Premises shall be
---------------------------------------------
changed to include the Expansion Space whereupon the Rental Area of the Premises
shall be 22.043 square feet and Tenant's Allocated Share shall be 8.90%.
4. Term. The Term of the Lease with respect to the Expansion Space shall
----
commence on the date of delivery thereof by Landlord to Tenant and shall expire
May 31, 2003 (the "Expansion Space Term").
5. Rent. Throughout the Expansion Space Term, the Basic Rent for the
----
Premises shall be increased by $15,060.42 per month being calculated at the rate
of $25.00 per rentable square foot payable in accordance with the Lease and
prorated for any partial month. Tenant electric and Additional Rent for the
Expansion Space shall be payable in accordance with the provisions of the Lease
throughout the Expansion Space Term.
<PAGE>
6. Termination Right Amendment. Section 24(b) is amended to provide as
---------------------------
follows:
"Provided Tenant is not in default and this Lease shall be in effect,
Tenant may upon one hundred eighty (180) days prior written notice to
Landlord terminate this Lease with respect to the original Premises
(excluding the Expansion Space) at the end of the thirty-sixth (36th)
month of the Lease Term without payment or penalty."
7. Ratification. Except as expressly amended herein, the terms and
conditions of the Lease shall remain in full force and effect and Landlord and
Tenant expressly ratify and confirm those terms and provisions.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date first above written.
LANDLORD:
PEREGRINE INVESTMENT PARTNERS - I,
A PENNSYLVANIA LIMITED PARTNERSHIP
By: Berwind Realty Services, Inc.
/s/ Joseph Mullen
By: ________________________________
Witness/Attest:
TENANT:
ITXC CORP.
/s/ Nancy A. Ridgeway /s/ Edward B. Jordan
By: ______________________________ By: ________________________________
- 2 -
<PAGE>
EXHIBIT "A"
DIAGRAM OF
FIRST FLOOR EXPANSION SPACE
- 3 -
<PAGE>
EXHIBIT 21.1
ITXC CORP.
List of Subsidiaries
--------------------
NAME JURISDICTION
---- ------------
ITXC Data Transport Services, LLC Delaware
ITXC Asia PTE LTD Singapore
<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, as to which the date is February 24, 1999), in the Registration Statement
(Form S-1 No. 333-00000) and related Prospectus of ITXC Corp. dated June 10,
1999.
/s/ Ernst & Young LLP
Metropark, New Jersey
June 9, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
WHEREAS, the undersigned officers and directors of ITXC Corp. ("ITXC")
desire to authorize Tom Evslin, John G. Musci and Edward B. Jordan to act as
their attorneys-in-fact and agents, for the purpose of executing and filing the
registration statement described below, including all amendments and supplements
thereto,
NOW, THEREFORE,
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Tom Evslin, John G. Musci and Edward B.
Jordan , and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and re-substitution, to sign the registrant's
Registration Statement on Form S-1 pertaining to the registration of the Common
Stock, par value $.001 per share, of ITXC in connection with ITXC's proposed
initial public offering, including any and all amendments and supplements to
such Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this power of
attorney in the following capacities as of the day of June, 1999.
------
Signature Title
- --------- -----
/s/ Tom Evslin Chairman, President and
- ------------------------------------- Chief Executive Officer
Tom Evslin
/s/ John G. Musci Director
- -------------------------------------
John G. Musci
/s/ Edward B. Jordan Chief Financial and Accounting
- ------------------------------------- Officer and Director
Edward B. Jordan
/s/ William P. Collatos Director
- -------------------------------------
William P. Collatos
/s/ Elon A. Ganor Director
- -------------------------------------
Elon A. Ganor
/s/ Frederick R. Wilson Director
- -------------------------------------
Frederick R. Wilson
-2-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 3,971,237 16,509,233
<SECURITIES> 200,000 200,00
<RECEIVABLES> 673,214 974,796
<ALLOWANCES> 172,475 205,693
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,793,435 17,745,028
<PP&E> 3,365,116 4,873,231
<DEPRECIATION> 349,587 627,723
<TOTAL-ASSETS> 7,833,797 22,015,157
<CURRENT-LIABILITIES> 2,636,523 4,226,828
<BONDS> 0 0
9,866,723 24,911,753
0 0
<COMMON> 4,191 4,191
<OTHER-SE> 1,447,217 1,437,455
<TOTAL-LIABILITY-AND-EQUITY> 7,833,797 22,015,157
<SALES> 1,538,008 3,029,413
<TOTAL-REVENUES> 1,538,008 3,029,413
<CGS> 0 0
<TOTAL-COSTS> 3,529,547 3,074,495
<OTHER-EXPENSES> 5,465,531 2,939,952
<LOSS-PROVISION> 172,475 312,294
<INTEREST-EXPENSE> 49,575 27,289
<INCOME-PRETAX> (7,276,107) (2,943,545)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,276,107) (2,943,545)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,276,107) (2,943,545)
<EPS-BASIC> (1.78) (0.73)
<EPS-DILUTED> (1.78) (0.73)
</TABLE>
