<PAGE>
As filed with the Securities and Exchange Commission on March 7, 2000
Registration No. 333-96343
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
ITXC Corp.
(Exact name of registrant as specified in its charter)
-----------------
Delaware 4813 22-3531960
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdictionof Classification Code Number) Identification no.)
incorporation or
organization) 600 College Road East
Princeton, New Jersey 08540
(609) 419-1500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------------
Mr. Edward B. Jordan
Chief Financial Officer
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
(609) 419-1500, Ext. 3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------
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
-----------------
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. [_]
-----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of each class of Amount to be Offering Price Aggregate Registration
securities to be registered Registered(1) Per Share(2) Offering Price(2) Fee(3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share........... 4,600,000 $105.625 $485,875,000 $128,271
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 600,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Determined in accordance with Rule 457(c) under the Securities Act of 1933
as the average of the high and low price of the common stock reported on
the Nasdaq National Market on February 1, 2000.
(3) Previously paid.
-----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated March 7, 2000
4,000,000 Shares
[LOGO]
ITXC Corp.
Common Stock
- --------------------------------------------------------------------------------
This is an offering of shares of common stock of ITXC Corp. Of the 4,000,000
shares being sold in this offering, ITXC is selling 2,000,000 shares and
selling stockholders are selling 2,000,000 shares. We will not receive any of
the proceeds from the sale of shares by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol ITXC.
On March 6, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $89.25 per share.
Investing in the shares involves risks. Risk Factors begin on page 6.
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discount......................................... $ $
Proceeds to ITXC, before expenses............................. $ $
Proceeds to selling stockholders, before expenses............. $ $
</TABLE>
We and four of the selling stockholders have granted the underwriters a 30-day
option to purchase up to an aggregate of 600,000 additional shares of common
stock on the same terms and conditions as set forth above solely to cover over-
allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
- --------------------------------------------------------------------------------
Lehman Brothers
CIBC World Markets
PaineWebber Incorporated
First Analysis Securities Corporation
Kaufman Bros., L.P.
, 2000
<PAGE>
[Outside panel of fold-out: A graphic depicting ITXC.net as a global network
overlaid on the public Internet.]
<PAGE>
[Inside panel of fold-out: A graphic showing map of the world depicting
locations of ITXC equipment, ITXC equipment at customer locations and locations
where ITXC affiliates have equipment to place and complete calls on our network.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 18
Market Price for Our Common Stock........................................ 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Historical Financial Data....................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Our Business............................................................. 31
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management................................................................. 51
Executive Compensation..................................................... 55
Certain Transactions....................................................... 64
Principal and Selling Stockholders......................................... 67
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 74
Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders........... 76
Underwriting............................................................... 80
Legal Matters.............................................................. 82
Experts.................................................................... 82
Additional Information..................................................... 83
Index to Consolidated Financial Statements................................. F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information about us. It may not contain
all of the information that you find important. You should carefully read this
entire document, including the "Risk Factors" section beginning on page 6 and
the consolidated financial statements and their related notes beginning on page
F-1. Unless otherwise indicated, the information in this prospectus assumes
that the underwriters will not exercise their over-allotment option.
Our Company
We are a leading global provider of high quality Internet-based voice and
fax services. Our network and proprietary software allow our customers to
capitalize on the convergence of the traditional telephone network with both
private and public data networks, such as the Internet. ITXC.net, our actively
managed network that is overlaid on the public Internet, delivers high quality
voice communications over the Internet and other data networks. As part of
ITXC.net, we have established ITXC facilities in the U.S. and have arrangements
with affiliates outside of the U.S. to place and complete telephone calls on
our network. We believe that ITXC.net provides our customers with the cost
savings of data networks and the global reach of the Internet and provides us
with a platform for delivering additional value-added services. We intend to
continue to rapidly deploy ITXC.net on a global basis by taking advantage of
the growth of the Internet.
In April 1998, we introduced our WWeXchange(R) service, our first
application using ITXC.net. This service provides international call completion
over the Internet to our carrier and communications service provider customers
and enables them to offer their own customers phone-to-phone global voice
services. We have achieved significant growth in the use of our network since
we began offering this service. That growth has continued since our initial
public offering. The number of minutes of traffic over ITXC.net increased from
42.5 million during the quarter ended September 30, 1999, to 72.0 million
during the quarter ended December 31, 1999. We believe that this growth
demonstrates that our proprietary technology and techniques, which we refer to
as BestValue RoutingSM, are effective in enhancing the quality of voice and fax
services delivered over the Internet. We actively manage ITXC.net with
BestValue Routing to avoid congestion and select optimal routes.
We have developed a reliable network by using the Internet for transport and
our affiliates' local infrastructure for completing calls. We have used our
early entrant status to deploy what we believe to be the broadest global
network for Internet telephony. We believe that the scale of our network
provides us with a significant advantage in increasing market share and
introducing new services. In addition to our facilities in the U.S., our
affiliates place and complete calls on our network in 112 international cities
and operate 185 ITXC.net points of presence. Our affiliates and customers
include Bell Atlantic, China Telecom, COLT Telecom, GTS, Interoute, Korea
Telecom, Pacific Gateway Exchange and the Ameritech division of SBC. On a
typical day, we originate traffic from over 30 countries and deliver it to more
than 180 countries.
1
<PAGE>
In addition, we are developing products and services that we believe will
strengthen our relationships with our customers and enable us to provide them
with enhanced services. For example, in April 1999, we introduced a new
proprietary device called a SNARCTM. This device allows our customers to access
our network directly from their premises, which eliminates the costs of special
traditional telephone connections dedicated to connecting with our network hubs
and improves the economics of our services to them.
In September 1999, we introduced our Borderless800SM service, which offers
non-U.S. carrier affiliates no cost access to toll-free telephone numbers in
the U.S.
In December 1999, we commenced our first service offering as a voice
application service provider. Our webtalkNOW! SM service allows Internet
portals, Internet service providers and web sites to offer web-to-phone calling
to their customers.
We believe that data networks offer superior functionality to traditional
telephone networks and that the Internet, when actively managed, will usually
be the network of choice for both existing and enhanced voice and fax services.
We believe that our early entrant status, our global network of affiliates and
our experience in providing high quality voice communications over ITXC.net
since April 1998 position us to take advantage of the convergence of these
services and data networks including the Internet.
Our Strategy
Our goal is to be the leading provider of Internet-based voice and fax
services. In order to achieve this goal we intend to:
. Exploit our early entrant status and worldwide network
. Rapidly expand ITXC.net by adding additional affiliates worldwide
. Capitalize on the cost advantages of the Internet
. Expand our role as a voice application service provider
. Establish ITXC.net as the standard for quality in our industry
. Provide our customers and affiliates with direct access to ITXC.net
. Continue to provide leadership in the development of industry
standards
. Deliver additional Internet voice services over ITXC.net
Recent Developments
We have significantly expanded the global reach of ITXC.net since we
completed our initial public offering, from 110 ITXC.net points of presence in
71 international cities in September 1999 to 185 ITXC.net points of presence in
112 international cities on January 31, 2000.
2
<PAGE>
We experienced substantial growth in revenue and minutes of traffic over
ITXC.net during the quarter ended December 31, 1999. During this period, we
generated revenue of $11.1 million and a loss from operations of $7.1 million
as compared to revenue of $6.5 million and a loss from operations of $6.3
million for the quarter ended September 30, 1999. The number of minutes of
traffic over ITXC.net increased from 42.5 million during the quarter ended
September 30, 1999 to 72.0 million during the quarter ended December 31, 1999.
In December 1999, we commenced our first service offering as a voice
application service provider. Our webtalkNOW! service enables us to provide
Internet portals, Internet service providers and web sites with an outsourced
voice solution, including dialing software and global call completion over
ITXC.net, thereby enabling these customers to offer their end-users real-time
web-to-phone calling. We believe that our webtalkNOW! service capitalizes on
the global reach and quality of ITXC.net as a platform for enhanced Internet-
based voice services.
Since September 1999, we have been providing our customers with global
access to toll-free U.S. telephone numbers, which we call our Borderless800
service. This allows our customers to provide their non-U.S. subscribers no-
charge or low charge access, over ITXC.net, to toll-free telephone numbers in
the U.S. from telephones and fax machines around the world.
In December 1999, we began installing ITXC-owned equipment called CRANS(TM)
on selected affiliates' premises to connect them directly to the Internet for
the purpose of terminating calls originated over ITXC.net. We generally use
CRANS to rapidly add incumbent national carriers as affiliates and extend
ITXC.net to their premises.
Part of our expansion of the global reach of ITXC.net was due to our
acquisition in November 1999 of contractual rights and software from OzEmail
Interline Pty Limited, a wholly-owned Australian subsidiary of MCI WorldCom. As
a result of the acquisition of those assets, we were able to add certain of
OzEmail's call termination and origination affiliates to ITXC.net.
In January 2000, we added Thomas J. Shoemaker to our management team as
Executive Vice President of Business Development. Prior to joining us, Mr.
Shoemaker had been President and Chief Executive Officer of Electric
Schoolhouse, an Internet education company, and, prior to that, the Vice
President responsible for AT&T's WorldNet Service. Mr. Shoemaker will be
responsible for the development of our new Internet voice and fax services as
well as opportunities to grow ITXC through the acquisition of existing
businesses and complementary technologies.
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.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by ITXC.................. 2,000,000 shares
Common stock offered by selling stockholders.. 2,000,000 shares (1)
Common stock outstanding after the offering... 38,155,886 shares (1)(2)
Use of proceeds............................... We intend to use the net
proceeds to purchase gateways,
SNARCs, CRANS, software and
other equipment used to expand
the scope of our network and
the nature of the services we
provide, to increase our global
sales and marketing presence,
to develop, license or acquire
software for our Internet voice
service offerings, to fund the
acquisition of complementary
businesses and technologies, to
support the continued
development of any acquired
businesses and for general
corporate purposes. We cannot
specify with certainty all of
the particular uses for the net
proceeds we will have upon
completion of the offering. See
"Use of Proceeds."
Nasdaq National Market symbol................. "ITXC"
</TABLE>
(1) Includes 179,690 shares underlying options held by selling stockholders
which are expected to be exercised in connection with this offering.
(2) Based on share information as of January 31, 2000. See "Risk Factors" for
information about additional shares which may be issued in the future,
including those currently reserved for issuance.
4
<PAGE>
Summary Consolidated Financial Data
The following summary financial data for the period from our July 21, 1997
date of inception to December 31, 1997 and for the years ended December 31,
1998 and 1999 are derived from our audited consolidated 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) Year ended
to December 31,
December 31, ---------------------------
1997 1998 1999
--------------------------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 59 $ 1,891 $ 25,411
Total costs and
expenses............... 706 9,189 46,365
Net loss................ (646) (7,207) (19,665)
Basic and diluted net
loss per share
applicable to common
stockholders........... (0.09) (0.88) (1.29)
Weighted average shares
used in computation of
basic and diluted net
loss per share
applicable to common
stockholders........... 7,005 8,185 15,886
Pro forma basic and
diluted net loss per
share.................. (0.45) (0.69)
Weighted average shares
used in computation of
pro forma basic and
diluted net loss per
share.................. 16,155 28,526
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999
-------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities............ $74,396 $241,773
Total assets................................................ 99,862 267,239
Long-term obligations, including current portion............ 5,493 5,493
Working capital............................................. 65,810 233,187
Total stockholders' equity.................................. 80,366 247,744
</TABLE>
- --------
When we completed our initial public offering on October 1, 1999, all of our
outstanding preferred stock converted into common stock. The pro forma line
items in the operating statement data presented above give effect to that
conversion as if that conversion had occurred at the dates of issuance. The as
adjusted column in the balance sheet data presented above reflects the sale of
the 2,000,000 shares of common stock to be sold by us in this offering at an
assumed public offering price of $88.19 per share, after deducting the
estimated underwriting discounts and offering expenses payable by us.
The following summary financial and operating data for our most recent four
quarters have been derived in part from our unaudited consolidated financial
statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Quarterly Financial Information."
<TABLE>
<CAPTION>
Three months ended
-----------------------------------
June Sept. Dec.
March 31, 30, 30, 31,
1999 1999 1999 1999
--------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Minutes of traffic over ITXC.net........... 11,077 24,493 42,513 72,024
======= ======= ======= =======
Revenue.................................... $ 3,118 $ 4,635 $ 6,549 $11,109
Total costs and expenses................... 6,128 9,107 12,876 18,254
Net loss................................... (2,969) (4,358) (6,289) (6,049)
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following factors as well as the other
information in this prospectus before deciding to invest in shares of our
common stock.
As a company with a limited operating history in a new and rapidly changing
industry, it is difficult to predict our future growth and operating results.
Our limited operating history makes predicting our future growth and
operating results difficult. We were incorporated in Delaware in 1997 and began
our first commercial service in April 1998. Our management team and other
employees have worked at ITXC for only a short period of time. Before
investing, you should consider the risks and uncertainties that an early stage
company like ours will face in the new and rapidly evolving market for
Internet-based voice services. Before investing, consider that we have not
proven that we can:
. maintain our current, and develop new, relationships with the
unrelated third parties that complete voice and fax calls over our
network, our affiliates, as well as with our customers;
. respond effectively to competitive pressures; and
. continue to develop and upgrade our network and technology.
If we cannot accomplish these goals, our business may not succeed.
We have not been profitable and expect future losses.
To date, we have not been profitable. We may never be profitable or, if we
become profitable, we may be unable to sustain profitability. We have incurred
significant losses since inception. We reported net losses of $0.6 million for
the inception period from July 21, 1997 through December 31, 1997, $7.2 million
for the year ended December 31, 1998 and $19.7 million for the year ended
December 31, 1999. We expect to continue to incur significant losses for the
foreseeable future. As of December 31, 1999, our accumulated deficit was $27.5
million. Our revenue may not grow or may not even continue at the current
level. After 1999, we expect to recognize non-cash charges of approximately
$10.2 million relating to non-cash compensation in connection with stock
options that we granted prior to our initial public offering. Those charges
will be expensed, generally over the next three to seven years, in connection
with the underlying vesting periods of the options that were granted.
In addition, we have issued 150,000 shares of our common stock in connection
with the termination of our South American joint venture. The value of such
shares, offset by the value of certain securities received in exchange, will be
expensed. We expect that such charge will be reflected in our statement of
operations for the quarter ending March 31, 2000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation--Overview."
The growth of ITXC.net depends upon the growth of the Internet, which may not
continue.
The growth of ITXC.net depends on continued growth in the use of the
Internet generally and on the growth in the use of the Internet through
telephones and other devices,
6
<PAGE>
in addition to personal computers. Growth of the Internet may be inhibited by a
number of factors, such as:
. quality of infrastructure;
. security concerns;
. technological failures, such as viruses;
. inconsistent quality of service; and
. lack of availability of cost-effective, high-speed service.
Even if Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth or its performance or
reliability may decline.
We are growing rapidly and effectively managing our growth may be difficult.
Our business has grown rapidly in terms of customers, employees and the size
of ITXC.net since our inception. This growth has placed a significant strain on
our resources and systems which has resulted in fluctuations in our network
expenses. Our business model depends on continued rapid growth which will put a
further strain on our resources, systems and management. If we are not able to
effectively manage our growth by implementing systems, expanding ITXC.net and
hiring, training and managing employees, our ability to offer our services will
be materially harmed.
Our business may be harmed because we rely on a third-party communications
infrastructure over which we have no control.
Our service could be disrupted, our reputation could be hurt and we could
lose customers, if the quality and maintenance of the third-party
communications infrastructure on which we rely suffers. This infrastructure,
including the Internet, is used to carry our voice traffic between our
customers and affiliates. We have no control over whether the infrastructure on
which we rely will be adequately maintained by these third parties or whether
these third parties are able to upgrade or improve their equipment and prevent
it from becoming obsolete. If these third parties fail to maintain, upgrade or
improve this equipment, our business may be materially harmed.
If we cannot maintain relationships with the few vendors of gateway equipment
and software upon which ITXC.net depends, our network expenses could rise
significantly.
ITXC.net is currently configured to use gateway equipment and software which
is primarily manufactured by four vendors, Cisco Systems, Clarent, Lucent
Technologies and VocalTec Communications. A gateway is a computer server that
translates voice and voice-related signaling back and forth between a
traditional telephone network and a data network. Gateways provided by some of
these vendors are not currently interoperable with each other. If we or our
affiliates are unable to maintain current purchasing terms with Cisco, Clarent,
Lucent and VocalTec, we will have to make significant technological
modifications to ITXC.net which could raise our network expenses significantly
and have a material adverse affect on our business, financial condition,
operating results and future prospects.
7
<PAGE>
Our network may not be able to handle increased traffic and a large number of
simultaneous calls, which could hurt our reputation and result in a loss of
customers.
Our network relies on hardware and software that we or our affiliates have
developed or acquired. We expect that our network traffic and volume of
simultaneous calls will increase significantly. If the hardware and software
used in our network cannot accommodate this additional volume, our reputation
could be damaged and we could lose customers.
Failure to attract and retain affiliates and customers will harm our business.
If we are unable to attract and retain affiliates and customers, the traffic
on ITXC.net may not increase and we may not be able to increase our global
reach. Our ability to attract and retain affiliates and customers will depend
on a number of factors, including:
. our ability to reach agreement with telecommunications companies,
telephony resellers and Internet service providers regarding the
terms and conditions applicable to our business relationship;
. our success in marketing our services to potential new and existing
affiliates and customers;
. pricing by traditional carriers;
. the rate at which we are able to deploy our network and services;
. our ability to locate qualified foreign affiliates and call
termination providers;
. consolidation in the telecommunications industry; and
. the quality of the customer and technical support we provide.
Our quarterly operating results may fluctuate and could fall below expectations
of investors and industry analysts, resulting in a decline in our stock price.
Our quarterly operating results have varied widely in the past and could
fluctuate significantly in the future. Therefore, you should not rely on
quarter-to-quarter comparisons for indications of future performance. Certain
factors may influence our quarterly operating results, including:
. the amount and timing of capital expenditures and other costs
relating to the expansion of ITXC.net;
. the introduction of new or enhanced services or changes in pricing
policies by us or our competitors; and
. economic conditions specific to the Internet or all or a portion of
the technology sector.
If we cannot successfully address these factors, our operating results may fall
below analyst and investor expectations and the price of our common stock could
decline.
Our financial results and our operations could be materially adversely affected
if it becomes necessary for us to discontinue relationships with customers who
become unable to meet their payment obligations.
During 1999, we discontinued service to four companies that had originated
calls over ITXC.net because of their failure to meet their payment obligations.
One of those companies
8
<PAGE>
was a substantial customer of ours. While we have not had difficulty in
replacing that business with other traffic, and while we have fully reserved
against or written-off the outstanding receivables from these firms as of
December 31, 1999, our financial results and our operations could be materially
adversely affected if other comparably situated customers experience similar
difficulties in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Our marketing efforts could be adversely affected if we do not lead the
development of new interoperability standards.
If we do not play a leadership role in the development of new
interoperability standards, the perception that we are an industry leader could
be jeopardized. We achieved that perception, in part, by leading the effort to
develop the iNOW! initiative. A standard for the interoperability of Internet
voice services and products other than iNOW! could emerge without our
participation. If that happens, our marketing efforts could be adversely
affected and it could take longer for us to deploy our network technology.
The lack of interoperability among hardware produced by different vendors may
limit our ability to grow a worldwide, fully interoperable network.
Unless an interoperability standard is widely adopted and used by
manufacturers of gateways and other hardware, ITXC.net's growth will be
limited. Our business model depends on the growth of ITXC.net. Without a widely
adopted interoperability standard, terminators of voice traffic over the
Internet will continue to be required to only accept voice traffic which was
originated on gateways made by the same manufacturer as their terminating
gateway.
If the iNOW! interoperability initiative or another similar initiative is
not widely adopted and implemented, our network may not grow and our business
could be adversely affected.
Intense price competition and the nature of the calls that we place over
ITXC.net may limit our revenues.
Our revenues are not solely tied to the number of minutes of calls that are
placed over ITXC.net. Intense competition could reduce the prices that we
charge for our services. In addition, our revenues are affected by the types of
calls placed over ITXC.net. Calls placed over certain routes or to certain
termination points may generate less revenue than calls of a similar duration
made over different routes or to different termination points.
Intense price competition could reduce the demand for our service.
We may not be able to compete successfully in the developing Internet
telephony market. Many of our competitors are larger than us and have
substantially greater financial resources than we do. The market for our
services has been extremely competitive and is expected to be so for the
foreseeable future. Internet protocol and Internet telephony service providers
such as AT&T Global Clearinghouse, iBasis and GRIC and the wholesale divisions
of Net2Phone and deltathree.com route traffic to destinations worldwide and
compete directly with us. Other Internet telephony service providers focus on a
retail
9
<PAGE>
customer base and may in the future compete with us. In addition, major
telecommunications companies, such as AT&T, Deutsche Telekom, MCI WorldCom and
Qwest Communications, have entered or plan to enter the Internet telephony
market. See "Our Business--Competition."
If we are unable to keep up with rapid technological change in our industry in
a cost-effective manner, our revenues will decrease.
The market we serve, the market for voice services over the Internet, is
characterized by rapid technological developments, evolving industry standards
and customer demands and frequent new services announcements, such as new
hardware and software entrants and releases. In order for us to remain
competitive and continue positive growth of our business and increase the use
of our network, we must respond to these developments quickly and in a cost-
effective manner. If we fail to respond in this manner, our technology could
become obsolete, our customers will choose other alternatives to transmit their
traffic and our revenues will decrease.
We may need additional capital in the future to expand ITXC.net and it may not
be available on acceptable terms or at all, which could force us to curtail or
cease our operations.
The development of our business depends on our ability to expand the global
reach of ITXC.net. The net proceeds of our initial public offering and this
offering and our cash flow from operations could be insufficient to expand
ITXC.net to meet future customer demands. To date, our cash flow from
operations has been insufficient to cover our expenses and capital needs. We
may require significant additional capital in the future which may not be
available on terms acceptable to us or at all. If we cannot raise adequate
capital on acceptable terms, we may be forced to restrict the growth of
ITXC.net, we may not be able to attract new affiliates and we may have to
curtail or cease our operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Foreign political and economic instability could harm our ability to maintain a
global presence.
A key component of our business plan is our global network of affiliates.
Our ability to maintain and expand our global reach may be harmed by foreign
political and economic instability. Before investing, consider that the
following factors may inhibit our ability to maintain and expand our global
presence:
. potentially longer payment cycles outside of the U.S.;
. difficulty in collecting accounts receivable from foreign
affiliates;
. weaknesses in particular foreign economies;
. changes in diplomatic and trade relationships;
. foreign taxes; and
. the economic and administrative burdens of complying with a variety
of foreign laws, trade standards, tariffs and trade barriers.
10
<PAGE>
Damage to our systems and network could interrupt our service and result in
reduced revenue and harm to our reputation.
Our operations are dependent on our ability to maintain the components of
ITXC.net and our other computer and telecommunications systems in effective
working order. In addition, our systems may be damaged by natural disasters,
equipment failure or intentional acts of vandalism. If we fail to safeguard our
systems and network and experience frequent or long system delays or
interruptions, we may not be able to provide our service in a consistent and
cost-effective manner--which will result in reduced revenue and harm to our
reputation.
Our proprietary rights may be difficult to protect or maintain.
Our efforts to protect our intellectual property rights through patent,
copyright, trademark and trade secret laws in the U.S. and in other countries
may not prevent misappropriation, and our failure to protect our proprietary
rights could materially adversely affect our business, financial condition,
operating results and future prospects.
A third party could, without authorization, copy or otherwise appropriate
our proprietary network information. Our agreements with employees and others
who participate in development activities could be breached, we may not have
adequate remedies for any breach, and our trade secrets may otherwise become
known or independently developed by competitors. 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. See "Our Business--Proprietary Rights."
Acquisitions may disrupt our business, divert the attention of our management
and require significant capital infusions.
Our industry is characterized by growth through acquisitions. To compete
effectively, we expect to make investments in complementary companies,
technologies or assets and may consider a number of acquisitions, significant
and otherwise, at any one time. Acquisitions could disrupt our ongoing
business, distract the attention of our small number of senior managers, make
it difficult to maintain our network and operational standards, controls and
procedures and subject us to risks that are different, in nature and magnitude,
than the risks we currently face.
We also may not be able to successfully integrate the services, products and
personnel of any acquisition into our operations. We may be required to incur a
significant amount of debt or issue a significant number of equity securities,
which may dilute your equity interest substantially, to pay for acquisitions
and may be required to invest a substantial amount of cash to support the
further development of any companies that we may acquire. Our acquisitions may
not result in any return, or a sufficient return, on our investment and we may
lose all or a substantial portion of our investment.
Our success is dependent on the continued service of our key management and
technical personnel.
Our future success depends, in part, on the continued service of our key
management and technical personnel, including Tom I. Evslin, Edward B. Jordan,
John G. Musci and
11
<PAGE>
Thomas J. Shoemaker, four of our senior executive officers. If any of those
individuals were unable or unwilling to continue in their present positions,
our business, financial condition, operating results and future prospects could
be materially adversely affected. We do not carry key person life insurance on
our personnel and only Messrs. Evslin, Musci and Shoemaker have employment
agreements.
We may have difficulty attracting and retaining the skilled employees we need
to execute our growth plan.
From time to time we have experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees. Our future success depends on our ability to attract, retain and
motivate highly skilled employees, particularly engineering and technical
personnel. Competition for employees in our industry is intense. We may not be
able to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future.
Future government regulation and legal uncertainties could affect our ability
to provide our services.
Our business, financial condition, operating results and future prospects
could be materially adversely affected if Congress, the Federal Communications
Commission, state regulatory authorities, foreign governments or other bodies
begin to regulate or, in the case of certain foreign governments, prohibit
Internet telephony.
United States. Although our services are not currently actively regulated by
the FCC, aspects of our operations may be subject to state or federal
regulation in the future. Increased regulation of the Internet may slow its
growth, and impact our cost of providing our service over the Internet. In
addition, the FCC may in the future impose surcharges or other regulations upon
us which could materially adversely affect our business, financial condition,
operating results and future prospects.
International. Increased regulation of the Internet and/or Internet
telephony providers or the prohibition of Internet telephony in one or more
foreign countries could materially adversely affect our business, financial
condition, operating results and future prospects.
Our failure to qualify to do business in a foreign jurisdiction in which we
are required to do so or to comply with foreign laws and regulations could harm
our ability to conduct international operations.
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.
12
<PAGE>
Additionally, it is possible that laws--new or already in existence--may be
applied by the U.S. and/or other countries to transport services provided over
the Internet, including laws governing:
. sales and other taxes;
. user privacy;
. pricing controls;
. characteristics and quality of products and services;
. consumer protection;
. cross-border commerce, including laws that would impose tariffs,
duties and other import restrictions; and
. other claims based on the nature and content of Internet materials,
including claims of defamation, negligence and the failure to meet
necessary obligations.
If such laws are applied to our services, our ability to conduct our business
could be materially adversely affected.
The beneficial ownership of a significant amount of our common stock by our
directors and officers could delay or prevent a change in control of ITXC.
The concentrated beneficial ownership of our common stock could delay or
prevent a change in control of ITXC that might otherwise be beneficial to you.
Immediately after the closing of this offering, our executive officers and
directors and their respective affiliates will beneficially own approximately
49% of our outstanding common stock. Accordingly, these stockholders will be
able to exert significant influence over matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combinations.
We have broad discretion in the use of the proceeds of our initial public
offering and this offering and may not use them effectively.
We have only specified how our management intends to use $41.7 million of
the net proceeds from our initial public offering and $100 million of the net
proceeds to us from this offering. We cannot specify with certainty how our
management will use the remaining net proceeds. Our management will have broad
discretion in the application of proceeds and the timing of the expenditure of
all of the net proceeds of our initial public offering and this offering. If
our management fails to apply those proceeds effectively, we may not be
successful in expanding ITXC.net and growing our business and revenues.
13
<PAGE>
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could discourage a takeover.
Provisions of our certificate of incorporation and by-laws and Delaware law
may discourage, delay or prevent a merger or acquisition that you may consider
favorable. These provisions of our certificate of incorporation and by-laws:
. establish a classified board of directors in which only a portion of
the total number of directors will be elected at each annual
meeting;
. authorize the board to issue preferred stock;
. prohibit cumulative voting in the election of directors;
. limit the persons who may call special meetings of stockholders;
. prohibit stockholder action by written consent; and
. establish advance notice requirements for nominations for the
election of the board of directors or for proposing matters that can
be acted on by stockholders at stockholder meetings.
The sale of a substantial number of shares of our common stock after this
offering may adversely affect our stock price.
A substantial amount of our common stock is held by stockholders who have
agreed not to sell their shares until at least 90 days after this offering.
Other stockholders, who are not selling stockholders in this offering, agreed
at the time of our initial public offering not to sell their shares until March
25, 2000. After these restrictions expire or if these restrictions are waived
by the underwriters, those holders could decide to sell some or all of their
shares.
The market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market after this offering or
the perception that substantial sales could occur. These sales also might make
it difficult for us to sell equity securities in the future at a time when, and
at a price which, we deem appropriate.
You will experience an immediate and substantial dilution if you purchase
common stock in this offering.
The public offering price will be substantially higher than the net tangible
book value per share of the outstanding common stock immediately after this
offering. In addition, to the extent that outstanding options and warrants to
purchase common stock are exercised, there could be substantial additional
dilution. See "Dilution."
You will experience dilution when we issue the additional shares of common
stock that we are permitted or required to issue under options, warrants and
our employee stock purchase plan.
You should be aware that we are permitted, and in some cases obligated, to
issue shares of common stock in addition to the common stock that will be
outstanding after this
14
<PAGE>
offering. 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 reserved for issuance as of January 31,
2000:
. 8,000,954 shares are issuable upon the exercise of options or other
benefits under our stock incentive plan, consisting of:
. outstanding options to purchase 5,561,130 shares at a weighted
average exercise price of $4.83 per share, of which options
covering 750,485 shares were exercisable as of January 31, 2000;
and
. 2,439,824 shares available for future awards after January 31,
2000;
. 879,766 shares are issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $.85 per share; and
. 858,164 shares are issuable under our employee stock purchase plan.
For a description of our stock incentive plan and our employee stock
purchase plan, see "Executive Compensation--1998 Incentive Stock Option Plan"
and "Executive Compensation--Employee Stock Purchase Plan."
The stock prices of Internet-related companies such as ours are highly volatile
and could drop unexpectedly resulting in costly litigation and harm to our
business.
The market price of our common stock is subject to significant fluctuations.
Many companies in our industry have been the subject of class action litigation
by investors following periods of volatility in the price of their publicly
traded securities. If the market value of our common stock experiences adverse
fluctuations, and we become the subject of this type of litigation, regardless
of the outcome, we will incur substantial legal costs. In addition, this type
of litigation may strain our resources and divert management attention, causing
our business to suffer.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Our Business" and elsewhere in this prospectus
are forward-looking statements. These forward-looking statements include, but
are not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks" and "estimates" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements. These factors consist primarily of the risks identified under the
caption "Risk Factors."
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to ITXC from the offering will be
approximately $167.4 million, or $192.6 million if the underwriters exercise
their over-allotment option in full, assuming a public offering price of $88.19
per share and after deducting the estimated underwriting discounts and offering
expenses.
We estimate that:
. approximately $100 million of the net proceeds will be used to:
. purchase and deploy gateways, SNARCs, CRANS, software and other
equipment that we will install to expand the scope of our network
and the nature of the services that we provide;
. expand our global sales and marketing presence; and
. develop, license or acquire software for our Internet voice service
offerings; and
. the balance of the net proceeds will be used for general corporate
purposes, including to finance acquisitions and support the continued
development of acquired businesses.
The actual amounts may vary due to:
. the status of our efforts to develop new services;
. the demands placed upon our existing technology;
. the market response to our business initiatives;
. our need to respond to technological and competitive developments; and
. the types of acquisition opportunities that we pursue.
Pending such uses, we intend to invest the net proceeds in direct or
guaranteed obligations of the U.S., interest-bearing, investment-grade
instruments or certificates of deposit.
Since we cannot specify with certainty the precise manner in which the net
proceeds will be allocated, our management will have broad discretion in the
application of the net proceeds.
17
<PAGE>
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will depend upon our
financial condition, operating results, capital requirements and other factors
the board of directors deems relevant. In addition, our credit agreement
restricts our ability to declare and pay dividends without the consent of our
lender.
MARKET PRICE FOR OUR COMMON STOCK
Our common stock has traded on the NASDAQ National Market under the symbol
ITXC since September 28, 1999. The following table sets forth the per share
range of high and low closing sales prices of our common stock for the periods
indicated:
<TABLE>
<CAPTION>
High Low
($) ($)
------ -----
<S> <C> <C>
Year ended December 31, 1999:
Third quarter (September 28-30 only)............................. 32.25 28.25
Fourth quarter................................................... 49.00 27.00
Year ending December 31, 2000:
First quarter (through March 6, 2000)............................ 119.75 36.94
</TABLE>
On March 6, 2000, the last reported sale price for our common stock on the
NASDAQ National Market was $89.25 per share. The market price for our stock is
highly volatile and fluctuates in response to a wide variety of factors. See
"Risk Factors--The stock prices of Internet-related companies such as ours are
highly volatile and could drop unexpectedly resulting in costly litigation and
harm to our business."
18
<PAGE>
CAPITALIZATION
The following table sets forth our cash and cash equivalents, short-term
debt and capitalization as of December 31, 1999. This information is presented:
. on an actual basis; and
. as adjusted to reflect our receipt of the estimated net proceeds from
the sale of 2,000,000 shares of common stock offered by ITXC in this
offering at an assumed public offering price of $88.19 per share and
after deducting the estimated underwriting discounts and offering
expenses.
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 December 31, 1999
---------------------------
Actual As Adjusted
----------- --------------
(in thousands)
<S> <C> <C>
Cash, cash equivalents and marketable securities... $ 74,396 $ 241,773
=========== ============
Equipment note payable............................. 1,723 1,723
Capital lease obligations, less current portion.... 2,149 2,149
Stockholders' equity:
Preferred stock, $0.001 par value; 15,000,000
shares authorized; no shares issued and
outstanding..................................... -- --
Common stock, $0.001 par value; 67,500,000 shares
authorized; 35,816,401 shares issued and
outstanding; 38,155,886 shares issued and
outstanding as adjusted(1)...................... 36 38
Additional paid-in capital....................... 118,089 285,465
Deferred employee compensation................... (10,241) (10,241)
Accumulated deficit.............................. (27,518) (27,518)
----------- ------------
Total stockholders' equity....................... 80,366 247,744
----------- ------------
Total capitalization............................... $ 84,238 $ 251,616
=========== ============
</TABLE>
- --------
(1) The shares issued and outstanding as adjusted include the 2,000,000 shares
to be sold by ITXC in this offering and the 179,690 shares to be issued
upon the exercise of stock options by selling stockholders in connection
with this offering.
The table above does not reflect the proceeds to ITXC from the exercise of
options by the selling stockholders or others after December 31, 1999.
19
<PAGE>
DILUTION
As of December 31, 1999, our net tangible book value was $76.8 million, or
$2.14 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
December 31, 1999, our net tangible book value, as adjusted for the sale of
2,000,000 shares offered in this offering by ITXC at an assumed public offering
price of $88.19 per share, and after deducting the estimated underwriting
discounts and offering expenses, would have been $6.46 per share of common
stock. This represents an immediate increase of $4.32 per share to existing
stockholders and an immediate dilution of $81.73 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Per
Share
------
<S> <C> <C>
Assumed public offering price per share................................. $88.19
Net tangible book value per share as of December 31, 1999....... $ 2.14
Increase per share attributable to new investors ............... $ 4.32
-------
Pro forma net tangible book value per share after this offering......... 6.46
------
Dilution per share to new investors..................................... $81.73
======
</TABLE>
The following table sets forth, as of December 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 who purchase shares of our common stock in this offering. The
following table assumes the issuance by ITXC of 2,000,000 shares in this
offering at an assumed public offering price of $88.19 per share, before
deducting the estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------------------
Percent Percent Average
After After Price
Number Offering Amount Offering Per Share
---------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 35,816,401 95% $113,012,146 39% $ 3.16
New investors............ 2,000,000 5 176,376,000 61 88.19
---------- --- ------------ ---
Total.................... 37,816,401 100% $289,388,146 100%
========== === ============ ===
</TABLE>
The tables above do not reflect the issuance of shares upon, nor the
proceeds to ITXC from, the exercise of options by the selling stockholders or
others after December 31, 1999.
20
<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 years ended December 31,
1998 and 1999 are derived from our audited consolidated 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.
<TABLE>
<CAPTION>
Period from
July 21, 1997
(date of
inception) to
December 31,
1997 Year ended December
------------------ 31,
1998 1999
------------ -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Operating Data:
Revenue:
Telecommunications revenue.... $ -- $ 1,238 $ 24,423
Consulting revenue............ 59 653 988
----------- ------------ -------------
Total revenue................... 59 1,891 25,411
Cost and expenses:
Data communications and
telecommunications........... -- 2,017 23,095
Cost of consulting revenue.... -- 192 --
Network operations............ -- 1,321 3,219
Selling, general and
administrative............... 701 5,120 14,778
Depreciation and
amortization................. 5 345 2,556
Non-cash employee
compensation................. -- 194 2,716
----------- ------------ -------------
Total costs and expenses........ 706 9,189 46,365
----------- ------------ -------------
Loss from operations............ (647) (7,298) (20,953)
Interest income, net............ 1 91 1,289
----------- ------------ -------------
Net loss........................ (646) (7,207) (19,665)
Accretion of redemption value of
mandatorily redeemable
convertible preferred stock.... -- (14) (773)
----------- ------------ -------------
Net loss applicable to common
stockholders................... $ (646) $ (7,222) $ (20,438)
=========== ============ =============
Basic and diluted net loss per
share applicable to common
stockholders................... $ (0.09) $ (0.88) $ (1.29)
=========== ============ =============
Weighted average shares used in
computation of basic and
diluted net
loss per share applicable to
common stockholders............ 7,005 8,185 15,886
Pro forma basic and diluted net
loss per share................. $ (0.45) $ (0.69)
============ =============
Weighted average shares used in
computation of pro forma basic
and diluted net loss per
share.......................... 16,155 28,526
<CAPTION>
As of December 31,
1997 1998 1999
----------------------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
marketable securities.......... $ 498 $ 4,171 $ 74,396
Total assets.................... 795 7,834 99,862
Long-term obligations, including
current portion................ 1,437 5,493
Working capital................. (227) 2,069 65,810
Redeemable preferred stock...... -- 9,867 --
Total stockholders' equity
(deficit)...................... 52 (6,118) 80,366
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a leading global provider of Internet-based voice and fax services.
From our inception in July 1997 through April 1998, our operating activities
were focused primarily on:
. developing monitoring and analysis software to enable us to efficiently
and cost effectively route voice over the Internet which we refer to as
BestValue Routing;
. developing relationships with affiliates throughout the world to
increase the global reach of ITXC.net;
. developing additional business strategies to supplement our affiliate
network; and
. hiring our initial employee group.
In April 1998, we launched our first service delivered over ITXC.net--our
WWeXchange service. Our operations since that time have included:
. increasing our voice traffic, from 2,746 minutes during April 1998 to
approximately 72.0 million minutes during the quarter ended December 31,
1999;
. refining our monitoring and analysis software in order to achieve
BestValue Routing;
. expanding our affiliate network to 107 affiliates at January 31, 2000
and increasing the global reach of ITXC.net; and
. increasing our employee headcount, from 29 employees on April 1, 1998 to
129 employees on January 31, 2000.
Our primary sources of revenue have been the fees that we receive from
customers for terminating calls that they have originated on the Internet.
To date, our revenue for terminating calls over ITXC.net has depended
primarily upon the following factors:
. the volume of voice traffic carried over ITXC.net, which is measured in
terms of minutes of voice traffic;
. the mix of voice traffic carried over ITXC.net, which reflects the fact
that calls made over certain routes will generate greater revenues than
calls of a similar duration made over other routes; and
. pricing pressures resulting from competitive conditions in our markets.
Increased competition from other providers of Internet telephony services
and traditional telephony services could materially adversely affect revenue in
future periods.
We have also received consulting revenue derived from a market trial
agreement that we entered into with a third-party shortly after our inception
in order to generate funds to
22
<PAGE>
sustain operations. Under that agreement, we earned a portion of the revenue
ratably over the term of the agreement and the remainder of the revenue as we
met specific milestones. We do not consider it likely that consulting revenue
will continue beyond the year ended December 31, 1999.
To date, we have derived a significant portion of our revenue from a small
number of customers. The loss of a major customer could have a material adverse
effect on our business, financial condition, operating results and future
prospects.
Our operating expenses have been primarily:
. Data Communications and Telecommunications Expenses. Internet-related
expenses, consisting primarily of:
. costs associated with sending voice traffic over the Internet,
primarily fees that we pay to our affiliates to terminate or assist
us in terminating calls, fees that we pay when we find it necessary
to utilize the traditional telephone network or private data
networks to terminate calls and expenses incurred in connecting our
customers to our network; these expenses are largely proportional to
the volume of voice traffic carried over our network; and
. costs associated with buying Internet access at ITXC-operated
locations; these costs are largely proportional to the bandwidth of
access acquired and do not typically vary based upon volume of voice
traffic until additional bandwidth would need to be acquired.
. 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.
. Selling, General and Administrative Expenses. There are three components
of selling, general and administrative expenses, consisting of the
following:
. Sales and Marketing Expenses. Expenses relating to the salaries,
payroll taxes, benefits and commissions that we pay for sales
personnel and expenses associated with the development and
implementation of our promotion and marketing campaigns. We
anticipate that sales and marketing expenses will increase in the
future as we expand our internal sales force, hire additional
marketing personnel and increase expenditures for promotion and
marketing. We expect that such expenses will also increase as
telecommunications revenue increases.
. Development Expenses. Salary, payroll tax and benefit expenses that
we pay for employees and consultants who work on the development of
our network management approaches and future applications of our
technology. We believe that investing in the enhancement of our
technology is critical to our future success. We expect that our
development expenses will increase in future periods, based upon
various factors, including:
. the importance to us of BestValue Routing;
23
<PAGE>
. the pace of technological change in our industry; and
. our goal of expanding the applications of our technology.
. General and Administrative Expenses. Salary, payroll tax and benefit
expenses and related costs for general corporate functions,
including executive management, administration, facilities,
information technology and human resources. We expect 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 1999, but prior to our initial public offering, we granted
options to purchase 3,413,500 shares of our common stock at exercise
prices equal to or less than fair value, resulting in non-cash charges
of approximately $12.4 million. Such charges will be expensed, generally
over the next three to seven years, in connection with the underlying
vesting periods of the options granted.
We believe that the services we provide over the Internet are not currently
actively regulated in the U.S. Several efforts have been made, however, to
enact federal legislation that would regulate certain aspects of the Internet.
If adopted, such legislation could increase our costs significantly and could
materially adversely affect our business, operating results, financial
condition and future prospects. See "Our Business--Government Regulation."
As ITXC.net continues to grow, we anticipate that from time to time our
operating expenses may increase on a per minute basis. This increase is related
to our decision to route additional traffic over the traditional telephone
network or private data networks in order to maintain quality transmissions
during relatively short periods of time as we transition our network to
increased levels of capacity. During these periods, we occasionally experience
reductions in volume from certain customers. Historically, we have
satisfactorily resolved these transition issues. However, we anticipate that in
the future other anticipated or unanticipated operating problems associated
with the growth of ITXC.net may develop.
Since our inception in July 1997, we have experienced operating losses in
each quarterly and annual period and negative cash flows from operations in
each quarter since we commenced offering services over ITXC.net in April 1998.
As of December 31, 1999, we had an accumulated deficit of $27.5 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."
In February 2000, we recast our relationship with our partner in our South
American joint venture. We issued 150,000 shares of our common stock for: (1)
equity in a private affiliate of our joint venture partner; (2) a termination
of the puts and calls which
24
<PAGE>
previously could have required substantial cash or equity outlays by us; and
(3) certain contractual commitments by the parties. As part of that
transaction, we terminated our joint venture agreement and the license
agreement that we previously furnished to the joint venture. However, we do not
anticipate a material change in our service to the carriers in the territory
previously serviced by the joint venture, since the new arrangement
contemplates the continuation of service to those carriers.
From an accounting perspective, we will be required to expense the
difference between the value of our 150,000 shares and the equity we received.
We anticipate that such charge will be between approximately $7 million and
approximately $10 million. This accounting charge will be reflected in our
statement of operations for the quarter ending March 31, 2000.
Results of Operations
Revenue
We did not receive any revenue for terminating calls during our inception
period from July 21, 1997 through December 31, 1997 or during the quarter ended
March 31, 1998. Our telecommunications revenue for the years ended December 31,
1998 and 1999 was $1.2 million and $24.4 million, respectively. We were able to
achieve this increase despite our decision to terminate services to certain
customers. See "--Operating Expenses--Selling, General and Administrative
Expenses."
Our consulting revenue increased from $59,000 during the inception period to
$653,000 and $988,000 during the years ended December 31, 1998 and 1999,
respectively. Our periodic receipt of consulting revenues reflected the
accomplishment of various performance requirements 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 data
communications and telecommunications expenses until we began providing service
over ITXC.net in April 1998. During the year ended December 31, 1998, such
expenses amounted to $2.0 million, as compared to telecommunications revenue of
$1.2 million during that period. During the initial period of operations, it
was necessary for us to rely upon the traditional telephone network and private
data networks more than we currently do, since we had fewer affiliates at that
time. We also had not reached a point where significant economies of scale
could be realized. During the year ended December 31, 1999, such expenses
amounted to $23.1 million, compared to telecommunications revenue of
$24.4 million.
Cost of Consulting Revenue. We did not incur any expenses under our market
trial agreement during any of the periods described in this prospectus other
than the year ended December 31, 1998. During that period, the cost of
consulting revenue amounted to $192,000, representing 29% of consulting
revenue. During 1999, we were only required to present an update report.
25
<PAGE>
Network Operations Expenses. We did not incur any network operations
expenses during the inception period. Network operations expenses increased
from $1.3 million during the year ended December 31, 1998 to $3.2 million
during the year ended December 31, 1999. Expenses during the earlier period,
representing 107% of our telecommunications revenue, were incurred in preparing
for the implementation of our WWeXchange service in April 1998 and in the
initial delivery of that service. During the latter period, such expenses
primarily reflected the cost of operating the Company's 24-hours-a-day, 7-days-
a-week network operations center and represented 13% of telecommunications
revenue. In general, network operations expenses are not proportional to the
volume of our traffic; regardless of our volume, we are required to pay the
salaries and related costs associated with operating our network operations
center.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $701,000 during the inception period to
$5.1 million during the year ended December 31, 1998 and $14.8 million during
the year ended December 31, 1999. The increase from the inception period to the
following year reflected (1) enhanced sales and marketing efforts that we
undertook once our network was operating, (2) growth in our sales and marketing
staffs, (3) commissions paid on the telecommunications revenue that we
generated during the year ended December 31, 1998, (4) our hiring of employees
and engaging of consultants for development tasks during the year ended
December 31, 1998 and (5) a substantial increase in the number of general and
administrative personnel hired to support our growth. The 1999 increase
reflected further expansion in our sales and marketing efforts, commissions
paid on increased revenue levels, expanded development efforts and a further
increase in general and administrative staff in response to our continued
growth.
The increase in selling, general and administrative expenses during 1999
also included charges of $2.6 million representing additional accounts
receivable reserves and write-offs. These charges reflect general industry
trends and the discontinuance of service to certain significant customers
because of their failure to meet their payment obligations. We do not expect
any material revenue impact from these actions. Such expectation represents a
forward-looking statement under the Private Securities Litigation Reform Act of
1995. Actual results could differ from such expectation as a result of a number
of factors, including the extent to which we are able to attract new customers
to ITXC.net, the extent to which we are able to expand the utilization of
ITXC.net by other existing customers, our capacity constraints and the mix of
traffic that we carry in future periods.
Non-cash Employee Compensation Expenses. Non-cash employee compensation
expense increased from $194,000 during the year ended December 31, 1998 to $2.7
million during the year ended December 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 inception period.
Interest Income, Net
Our interest income, net principally represents income from cash and
investments which, in turn, were derived from capital contributions made by our
investors. In addition to the
26
<PAGE>
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 private
transactions completed during April 1998 and February 1999, respectively, and
we raised net proceeds of $78.4 million from our initial public offering
completed on October 1, 1999. During the year ended December 31, 1998, interest
generated from capital contributions exceeded by $91,000 the interest that we
paid on our line of credit and non-cash interest related to the issuance of
common stock warrants in connection with bridge financing provided by two
officers. During the year ended December 31, 1999, the interest on our
marketable securities, including the interest earned on the proceeds from our
initial public offering, exceeded the interest that we paid on our line of
credit by $1.3 million. Interest income, net is expected to increase as a
result of our initial public offering and this offering.
Loss From Operations
We incurred operating losses of $647,000, $7.3 million and $21.0 million
during the inception period and the years ended December 31, 1998 and 1999,
respectively. We do not consider these amounts to be comparable, since the
first amount reflected operations prior to the introduction of services over
our network, the second amount reflected our active operation of our network
during our initial period of operations and only the third amount represented a
full year of operations. We anticipate that we will incur additional operating
and net losses in the future. The amount of these losses may exceed the amount
of the losses that we have incurred in prior periods.
27
<PAGE>
Quarterly Financial Information
The following table sets forth certain operating data and consolidated
statements of operations data for our most recent four quarters. The financial
information has been derived from our unaudited consolidated financial
statements. In our management's opinion, this unaudited financial information
has been prepared on the same basis as the annual consolidated financial
statements and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
quarters presented. This information should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Minutes of traffic over ITXC.net......... 11,077 24,493 42,513 72,024
======= ======= ======= =======
Revenue:
Telecommunications revenue............. $ 2,429 $ 4,335 $ 6,549 $11,109
Consulting revenue..................... 688 300 -- --
------- ------- ------- -------
Total revenue............................ 3,118 4,635 6,549 11,109
Costs and expenses:
Data communications and
telecommunications.................... 2,528 4,362 6,242 9,963
Network operations..................... 546 736 882 1,054
Selling, general and administrative.... 2,558 3,117 4,031 5,072
Depreciation and amortization.......... 278 421 655 1,203
Non-cash employee compensation......... 217 471 1,066 962
------- ------- ------- -------
Total costs and expenses................. 6,128 9,107 12,876 18,254
------- ------- ------- -------
Loss from operations..................... (3,010) (4,472) (6,327) (7,145)
Interest income, net..................... 41 114 37 1,096
------- ------- ------- -------
Net loss................................. $(2,969) $(4,358) $(6,289) $(6,049)
======= ======= ======= =======
</TABLE>
Liquidity and Capital Resources
Since our inception in July 1997, we have financed our operations primarily
through equity offerings and, to a lesser extent, through equipment financing,
and for the period after June 30, 1999, through capital leases. As of December
31, 1999, we had $74.4 million in cash, cash equivalents and marketable
securities.
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 $93.6
million for the year ended December 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 and
$16.2 million for the years ended December 31, 1998 and 1999, respectively.
Cash used in operating activities in both
28
<PAGE>
of these periods was primarily the result of net operating losses and increased
accounts receivable, partially offset by increases in accounts payable and
accrued liabilities.
Net cash used in investing activities was negligible for the inception
period, $2.3 million for the year ended December 31, 1998 and $32.4 million for
the year ended December 31, 1999. Cash used in investing activities was
primarily related to the purchases of property and equipment and purchases of
investments with the proceeds of our initial public offering.
As of December 31, 1999, our principal commitments consisted of obligations
outstanding under operating and capital leases. At that date, future minimum
payments for non-cancelable leases includes required payments of $2.8 million
during 2000 and $6.1 million for years after 2000 under all leases. We
anticipate a substantial increase in capital expenditures and lease commitments
consistent with the anticipated growth in operations, infrastructure and
personnel.
We maintain a credit agreement (which has been recently amended and
restated) that provides a committed line of credit from a financial institution
in the aggregate amount of $10.0 million. We are permitted to use any portion
of that commitment under a revolving line of credit for working capital or
under an equipment sub-line for the purchase of certain capital equipment and
related software. This credit agreement is collateralized by substantially all
of our assets. We are permitted to borrow under the credit agreement until
February 2001. At that time, we must repay the outstanding working capital
loans unless that revolving line is extended. Loans outstanding under the
equipment sub-line are due and payable 36 months after the final draw under the
equipment sub-line.
Interest accrues at a floating rate per annum equal to the higher of our
lender's published prime rate and the weighted average federal funds rate
available to our lender plus 0.5%.
The credit agreement contains customary financial and other covenants and
may be terminated by our lender 45 days after the occurrence of certain
mergers, acquisitions and investments. As of December 31, 1999, we were in
compliance with all of the covenants under our credit agreement, except for one
covenant regulating the amount of our vendor financing, which covenant has been
amended and our non-compliance waived. We expect that we will be able to comply
with all existing covenants for at least the next twelve months.
We have arranged for financing in the ordinary course for gateway equipment,
switching equipment and general office equipment, from vendors such as Lucent,
Excel and Cisco. See note 10 to our consolidated financial statement contained
elsewhere in this prospectus.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the responses of our competitors, the resources
allocated 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.
29
<PAGE>
Additionally, we will evaluate possible acquisitions of, or investments in,
complementary businesses, technologies or services and plan to expand our sales
and marketing programs. Any such possible acquisition may be material and may
require us to incur a significant amount of debt or issue a significant number
of equity securities. Further, any businesses that we acquire will likely have
their own capital needs, which may be significant, which we would be called
upon to satisfy independent of the acquisition price. We currently believe that
our available cash equivalents, combined with the net proceeds to us from this
offering, will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 12 months. This statement
represents a forward-looking statement under the Private Securities Litigation
Reform Act of 1995. Actual results could differ materially from our
expectations. We may need to raise additional funds 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.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. As we do not currently
engage in derivatives or hedging transactions, we believe that there will be no
current impact to our results of operations, financial position or cash flows
upon the adoption of SFAS No. 133.
Quantitative and Qualitative Disclosure About Market Risk
We have investments of approximately $73.1 million as of December 31, 1999,
in certain marketable securities, which primarily consist of short-term fixed
income investments. Due to the short-term nature of our investments we believe
that the effects of changes in interest rates are limited and would not have a
material impact on our financial condition or operating results.
Year 2000 Compliance
We have not experienced any significant problems associated with year 2000
issues to date. Similarly, to our knowledge, our distributors, suppliers and
other third parties with whom we conduct business have not experienced material
year 2000 problems to date. Expenditures incurred by us to test, repair and
replace equipment did not exceed $1.0 million.
30
<PAGE>
OUR BUSINESS
Overview
We are a leading global provider of high quality Internet-based voice and
fax services. Our services allow communications users and service providers,
such as traditional telephone companies, Internet service providers, Internet
portals, web sites and data network providers, to capitalize on the convergence
of the public Internet and the traditional telephone network. We believe that
our scale, reputation for high quality and ability to rapidly implement new
services addresses the substantial opportunities that are resulting from this
convergence.
We have developed and deployed ITXC.net, an actively-managed network
overlaid 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
January 31, 2000, we had affiliates in 112 international cities operating 185
ITXC.net points of presence. On a typical day, we carry traffic from over 30
countries to more than 180 countries. By using the Internet for transport and
our affiliates' local infrastructure for terminating voice traffic, we have
developed a reliable network, which we are expanding rapidly, at substantially
lower capital expense than traditional carrier networks.
In April 1998, we introduced our WWeXchange service, the first application
enabled by ITXC.net. This service provides international call completion to our
customers and enables them to offer their own customers phone-to-phone global
voice service. We have achieved a high network usage growth rate since
commencing our WWeXchange service. The following table sets forth the number of
minutes of traffic carried over ITXC.net during the past seven quarters:
<TABLE>
<CAPTION>
Minutes
Quarter ended (in millions)
------------- -------------
<S> <C>
June 30, 1998............................................... .1
September 30, 1998.......................................... .6
December 31, 1998........................................... 4.1
March 31, 1999.............................................. 11.1
June 30, 1999............................................... 24.5
September 30, 1999.......................................... 42.5
December 31, 1999........................................... 72.0
</TABLE>
In April 1999, we introduced a new IXTC-owned proprietary device called a
SNARC, which we believe will facilitate the use of our network by our
customers. In addition, since December 1999 we have been installing ITXC-owned
proprietary devices called CRANS on
31
<PAGE>
selected affiliates' premises to connect them directly to the Internet for the
purpose of terminating calls originated by ITXC.net affiliates. We generally
use CRANS to rapidly add incumbent national carriers as affiliates and extend
ITXC.net to their premises. Both of these devices allow access to our network
directly from customer or affiliate premises, avoiding the costs of dedicated
connections to network hubs and improving the economics of our services to
them. We believe that SNARCs and CRANS will strengthen our customers' and
affiliates' relationships with us and position us to deploy additional enhanced
services over ITXC.net.
In December 1999, we commenced our first service offering as a voice
application service provider. Our webtalkNOW! service allows Internet portals,
Internet service providers and web sites to offer web-to-phone calling to their
customers under their own brands. We believe that we offer an outsourced voice
solution for these customers which capitalizes on the global reach and quality
of ITXC.net as a platform for enhanced Internet-based voice services.
MediaRing.com, our first webtalkNOW! service customer, began using our
webtalkNOW! service to offer web-to-phone calling to its customers in December
1999.
In September 1999, we introduced our Borderless800 service. The first phase
of this service allows our carrier and reseller customers located outside of
the U.S. to offer to their subscribers no-charge or low-charge access to 800,
888 and 877 telephone numbers in the U.S. Such numbers often are not accessible
from outside the U.S. using the traditional telephone network or, if
accessible, often result in charges that cost as much or more than
international calls to U.S. toll numbers.
In addition to our current services, we intend to introduce more advanced
communications applications enabled by ITXC.net. We expect that these services
will allow our customers to offer additional Internet-based voice products and
services to their customers. Examples of services we may introduce include:
. enhanced phone-to-phone services;
. phone-to-PC services;
. device-to-phone service and phone-to-device service, including devices
such as personal digital assistants;
. voice-enhanced e-commerce;
. unified messaging, combining voice, fax and e-mail communications; and
. single telephone number service, in which a single billing and reach me
number follows the subscriber.
Industry Overview
Convergence of Global Telecommunications and Data Services
The global telecommunications industry has grown at a rapid rate over the
last decade, driven by domestic and international deregulation, technological
development, network deployment and the globalization of business. The number
of communications service
32
<PAGE>
providers has also been increasing as a result of competition fostered by
domestic and international deregulation. These factors have contributed to a
substantial decrease in the cost of telephony services delivered over the
traditional telephone network. This decrease in price, however, has been offset
by an increase in total revenue driven by the growth in demand that low prices
have created. Based on country-by-country information and other data provided
by the International Telecommunications Union, total telecommunications
services revenue was approximately $700 billion in 1997. According to Insight
Research Corporation, an industry research firm, this market is projected to
grow to approximately $1.3 trillion by 2003. According to TeleGeography, a
market research firm, the total market for international long distance services
in 1997 totaled 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 the traditional
telephone network and the proliferation of data networks, with their enhanced
functionality and efficiency, is driving the convergence of voice traffic and
data networks, including the Internet. We expect this transfer of traffic to
accelerate as corporations and network infrastructure providers attach
increasing value to data networks and as the functionality of computers and
computing devices, such as personal digital assistants, is enhanced by voice
capability.
Network Infrastructure
The basic technology of traditional telecommunications is designed for slow
mechanical switches. Communications over the traditional telephone network are
routed through circuits which must dedicate resources to each call until the
call ends, regardless of whether anyone is actually talking on the circuit.
This circuit-switching technology incurs a significant cost per call and does
not efficiently support the integration of voice with data services.
Data networks, however, were designed for electronic switching. They break
the data stream into small, individually addressed packages of data which are
routed independently of each other from the origin to the destination.
Therefore, they do not require a fixed amount of bandwidth to be reserved
between the origin and destination of each call. This allows multiple voice or
voice and data calls to be pooled, resulting in these networks being able to
carry more calls with an equal amount of bandwidth.
33
<PAGE>
The Emergence of Voice on Data Networks
Internet telephony consists of both traditional and enhanced voice and fax
services, including the addition of interactive voice capability to web sites,
among others. Internet telephony serves both the extensive market of existing
phone users and the expanding market of computer users. We believe data
networks provide lower cost than the traditional telephone network and are
better suited to deliver future enhanced services to both phone users and
computer users.
Telephony based on Internet protocols emerged in 1995, with the invention of
a personal computer program that allowed the transport of voice communications
over the Internet via a microphone connected to a personal computer. Initial
sound quality was poor and the service required that both parties to the
conversation use personal computers instead of telephones. In 1996, the advent
of the gateway for the first time offered anyone with access to a telephone the
ability to complete calls on the Internet. A gateway facilitates Internet
transport of telephone services traditionally carried over the traditional
telephone network.
The Economics of Internet Telephony
Long distance telephone calls transported over the Internet are less
expensive than similar calls carried over the traditional telephone network
primarily because the cost of using the Internet is not determined by the
distance those calls need to travel. Also, routing calls over the Internet is
more cost-effective than routing calls over the traditional telephone network
because the technology that enables Internet telephony is more efficient than
traditional telephone network technology. The greater efficiency of data
networks creates cost savings that can be passed on to the consumer in the form
of lower long distance rates.
Beyond cost benefits, innovation in the provision of enhanced services is
expected to yield increased functionality as well. We believe such enhanced
functionality will expand the addressable market for Internet services to
include anyone with a telephone. We believe this market is potentially larger
than the market for any other existing Internet service which requires a
computer for access. Moreover, computer users will benefit from interactive
voice being an option in web browsing and other computer-based communications.
Limitations of Existing Internet Telephony Solutions
The growth of Internet telephony has been limited in the past due to
perceived poor sound quality caused by technical issues such as delays in
packet transmission and bandwidth limitations related to Internet network
capacity and local access constraints. However, the continuing addition of data
network infrastructure, recent improvements in packet-switching and compression
technology, new software algorithms and improved hardware have substantially
reduced delays in packet transmissions and the effect of these delays.
International Data Corporation projects that Internet protocol telephony
revenue will grow rapidly to over $23.4 billion in 2003.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. Smaller Internet telephony
service providers have also
34
<PAGE>
begun to offer low-cost Internet telephony services from personal computers to
telephones and from telephones to telephones. Traditional carriers have
substantial investments in traditional telephone network technology, and
therefore have been slow to embrace Internet technology. We believe that these
service offerings by large long distance carriers and smaller providers are
generally available in limited geographic areas and can only complete calls to
a limited number of locations.
We believe that the infrastructure required for a global network is too
expensive for most companies to deploy on their own. This mandates that the
network be a combination of gateways owned by different operators. For a
network to achieve optimal functionality, however, the gateways need to be
interoperable, or able to communicate with one another. As a result, uniform
standards for vendors and manufacturers of Internet telephony equipment and
software need to be developed.
In recent years, commercial web sites have grown in popularity. Efforts to
enhance these web sites with voice enabled e-commerce features such as click-
and-call contact with a customer service agent have been hampered by the early
quality problems with voice on the Internet described above.
Increasing Trend Toward Outsourcing Telephony Solutions
We believe that the global reach and functionality of the Internet makes it
especially suited for enhanced voice services. These services, which may
include web-to-phone, phone-to-PC and unified messaging, could be a significant
source of additional revenues to Internet portals, Internet service providers
and web sites that are seeking to expand their service offerings. Such voice
services require considerable expertise and capital to deploy and may involve
execution risk for any Internet portal, Internet service provider or web site
lacking this expertise. We expect that Internet portals, Internet service
providers and web sites will increasingly outsource their communications
services to companies, like us, that provide the network and expertise
necessary to facilitate those services, rather than incurring the risk and
delay of developing and deploying an array of communications services
themselves.
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 web-to-
phone and other Internet-based enhanced voice services. The key advantages of
our solution include:
. Quality. We believe that we deliver to our customers high quality voice
communications over the Internet at competitive pricing. We maintain
high quality primarily through our proprietary BestValue Routing
technology and techniques which include ITXC-developed monitoring and
analysis software and rapid human response from our 24-hours-a-day, 7-
days-a-week network operations center. In addition, we blend the
redundancy of the public Internet with our use of multiple termination
affiliates in many cities to help assure the reliability and quality of
our network. We use dedicated data networks and even the traditional
telephone network when data networks are not available to further assure
consistent quality.
35
<PAGE>
. Lower Costs. By using the public Internet, we are able to reach and
rapidly deploy many affiliates throughout the world at a substantially
lower capital expense than building the dedicated connections that a
traditional telephony carrier would require. Also, as a result of our
ability to use the public Internet, we believe that we have
significantly lower marginal costs than the traditional telephone
network or a private data network.
. Interoperability. We have led an effort called iNOW! resulting in an
industry standard for interoperability. More than 35 Internet telephony
vendors have agreed to comply with the iNOW! initiative. The VocalTec
and Lucent equipment installed on ITXC.net are already interoperable for
voice under a version of iNOW!. We believe that as a result, we and our
affiliates have the only multi-vendor interoperable network in the
Internet protocol telephony industry. Although we have transferred the
iNOW! trademark and web site to an industry standards body, we intend to
continue to provide leadership in interoperability of voice over the
Internet services.
. Global Scale. Our network is overlaid on the public Internet to provide
a global communications medium to voice service providers. ITXC.net is
scalable--by using the public Internet and our global network of
affiliates, we are able to rapidly and easily add capacity when needed.
Many of the ITXC-supplied components of our network, such as routers and
gateways, are relatively inexpensive, allowing us to add additional
capacity without significant capital expenditures. In addition, we
believe that we are able to connect new affiliates to ITXC.net in
significantly less time than it would take for a traditional telephony
carrier or dedicated data network to establish a dedicated connection.
For example, we connected 16 cities in China to ITXC.net within three
weeks after we signed an agreement with China Telecom. Moreover, we have
a business model of purchasing terminating minutes directly from
affiliates and selling call completion to customers and affiliates. This
model eliminates the need for complex settlement between carriers which
had previously slowed the deployment of a global network.
. 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. In addition, our affiliates can terminate calls
directly from ITXC.net using CRANS equipment that we install on their
premises.
. Enhancement of E-commerce Services. Because ITXC.net can deliver high
quality voice on the Internet globally, we believe it can become a
preferred network for a variety of voice-enhanced web sites and enable
us to offer services to e-commerce providers who want to provide their
customers with the ability to talk over the Internet while browsing a
web site.
36
<PAGE>
. 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. We believe that our
operation as a voice application service provider opens our network to
new categories of customers including Internet portals and web sites.
Our Strategy
Our goal is to remain the leading wholesale provider of Internet-based voice
and fax services as measured by revenue and network size. In order to achieve
this goal we intend to:
. Exploit Our Early Entrant Status and Worldwide Network
As of January 31, 2000, we had aggressively deployed ITXC.net in 112
international cities. We believe that with the increasing use of this
network, ITXC has developed a reputation in the communications industry
for providing high quality voice and fax services over the Internet. In
addition, we believe our experience as one of the first providers of
Internet-based voice services has placed us at the forefront of
developing the proprietary tools and techniques which enable us to
offer our service. We intend to continue to enhance and capitalize upon
our reputation and experience in the communications industry as we
provide existing and new voice and fax services.
. Rapidly Expand ITXC.net by Adding Additional Affiliates Worldwide
We have used our affiliate structure to quickly achieve a global reach
for ITXC.net. We believe that this approach allows us to quickly expand
and develop a broader network than our competitors. Our acquisition of
the contract rights associated with the operations of the OzEmail
Internet telephony business enabled us to add certain of OzEmail's
affiliates to ITXC.net. We intend to continue to rapidly add new
affiliates worldwide in order to provide our customers with additional
termination points.
. Capitalize on the Cost Advantages of the Internet
By overlaying ITXC.net on the public Internet, we believe that we are
able to capture significant cost and capital savings. Instead of
incurring the capital expense to deploy a global physical network, we
are able to carry a substantial portion of our customer's traffic using
the existing Internet infrastructure together with our affiliate
network. We believe that it would require significantly more capital
for a carrier using traditional methods of network deployment to
implement a network with the same capacity and global reach as
ITXC.net. Additionally, the cost of transporting our traffic over the
Internet is largely not distance sensitive, since we only pay for the
bandwidth we use. We believe these factors enable us to benefit from
significant cost savings that are not available to operators of the
traditional telephone network or private data networks.
37
<PAGE>
. Expand Our Role as a Voice Application Service Provider
With our webtalkNOW! service we have positioned ourselves as a voice
application service provider, capable of providing an outsourced
solution for web-to-phone services for Internet portals, Internet
service providers and web sites. Our first application of the
webtalkNOW! service enables MediaRing.com to provide web-to-phone
services to its end-users. We believe that our webtalkNOW! service
extends the benefits of the consistent quality, global reach and cost-
effectiveness of ITXC.net to new categories of customers beyond our
original customer base.
. Establish ITXC.net as the Standard for Quality in Our Industry
By combining our BestValue Routing approach with our knowledge of
gateway and Internet technology, we believe that we have demonstrated
that the Internet can be an effective medium for two-way voice and fax
communication. By continuing to provide reliable high quality voice and
fax service with a global reach, our goal is to be the network of
choice for new enhanced services that incorporate voice.
. Provide our Customers and Affiliates with Direct Access to ITXC.net
We are committed to providing our customers with high quality, low cost
voice service. SNARCs provide our customers with a voice communications
solution that minimizes reliance on the traditional telephone network.
By installing SNARCs on customer premises, we can provide our customers
with direct access to all of the ITXC.net termination points worldwide
without the need for a direct, dedicated connection to one of our
network hubs. We believe that, in the future, an extension of our SNARC
program will connect our customers' customers directly to the Internet.
CRANS provide selected affiliates with direct access to voice traffic
sent over ITXC.net for termination without the need for a direct,
dedicated connection to one of our network hubs and improve the
economics of our services to them. We believe that SNARCs and CRANS
will strengthen our customers' and affiliates' relationships with us
and position us to deploy additional Internet-based enhanced voice
services over ITXC.net.
. Continue to Provide Leadership in the Development of Industry Standards
We are a founder of the iNOW! initiative. This initiative began as a
collaboration with Lucent and VocalTec 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 and VocalTec gateways are already interoperable for
voice traffic on ITXC.net. This provides ITXC and its affiliates with a
choice of vendors which other service providers do not have. More than
35 other vendors of gateways, IP telephony components and other
equipment and software had agreed to comply with the iNOW! initiative.
Such vendors include 3Com, Alcatel, Ascend, Cisco, Intel, through its
subsidiary, Dialogic, ECI Telecom, Motorola, Netrix, Samsung
Electronics and Siemens. By leading these efforts among suppliers,
manufacturers, software vendors and carriers,
38
<PAGE>
we believe ITXC.net will be positioned to exploit new opportunities in
Internet voice services.
. Deliver Additional Internet Voice Services Over ITXC.net
We believe that Internet telephony represents only the beginning of the
evolution of the Internet as a medium for voice and fax services and
that our Borderless800 and web-to-phone services are only the early
stages of this evolution. Through enhancements to ITXC.net, we can
position ourselves to provide the network for wide commercial
deployment of new voice and fax services from traditional telephony
technology suppliers like Lucent, new entrants like Cisco, Internet
telephony companies like VocalTec and a number of start-ups. We believe
that, in the future, the Internet will serve as a platform for existing
and enhanced voice and fax services that may be accessed from
traditional phones, personal computers and a variety of devices that
span the range between telephones and personal computers.
ITXC.net
ITXC.net allows us to deliver reliable, high quality voice and fax service
through an actively-managed network overlaid 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. with our affiliates
around the world. We use ITXC-developed software and skilled network management
personnel to help assure the reliability and quality of voice transmission over
the Internet. To further enhance the reliability of ITXC.net, we are also able
to route and terminate voice traffic through alternate channels.
The key components of ITXC.net include:
. The Public Internet
ITXC.net routes voice traffic over the public Internet, which allows
traditional telephone users to benefit from its cost savings. By using
the Internet we are able to reach and rapidly deploy many affiliates
throughout the world at what we believe to be significantly lower
capital costs than that of building the dedicated connections that a
traditional telephony carrier or dedicated data network would require.
. Global Network of Affiliates
We have a global network of independent affiliates that own their own
gateways and originate and/or terminate voice traffic over ITXC.net. We
have used our affiliate structure to rapidly achieve what we believe to
be the broadest global network in the Internet telephony marketplace.
As of January 31, 2000, we had affiliates in 112 international cities
operating 185 ITXC.net points of presence. Our affiliates range from
small Internet service providers to traditional telephone companies.
. Multiple Access Points
As of January 31, 2000, we had three network hubs, one in New York, one
in New Jersey and one in California, each consisting of a switch and
multiple gateways. We
39
<PAGE>
expect to open an additional network hub in London in the first quarter
of 2000. 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 carrier customers' switches to the
Internet and ITXC.net and thereby avoid costly, distance-based
dedicated line charges associated with connecting customer switches to
our network hubs. Selected affiliates connect directly to the Internet
to terminate calls using our CRANS equipment. As of January 31, 2000,
we had installed over 40 SNARCs at 20 carrier customer sites and CRANS
at five affiliate locations.
. BestValue Routing
Our BestValue Routing approach employs ITXC-developed software and
techniques to efficiently and cost-effectively route voice traffic over
ITXC.net. We believe that our ability to develop and deploy intelligent
routing methods represents a significant competitive advantage. We
believe that this approach enables us to provide consistent, reliable
quality since we are able to avoid the majority of Internet congestion
points and minimize packet loss and delay.
We implement our BestValue Routing approach from our 24-hours-a-day, 7-
days-a-week network operations center where we poll our affiliates'
gateways periodically to assure their stability, test the quality of
Internet connections to the gateways and collect call detail records in
near real-time to monitor the quality of calls placed over our network.
We use network analysis software to compare monitoring data to
predetermined parameters from our database of call detail records. This
software generates reports on a per route basis when the measured
parameters fail to meet predetermined standards. Frequent analysis of
this information allows us to rapidly correct network problems such as
congestion or inoperative gateways.
Our monitoring and analysis software helps our staff to manage a
routing scheme across multiple switches and gateways around the world.
Our routing technicians establish predetermined percentages of traffic
to be sent to each provider, based both on price and quality. If a
particular Internet route or termination provider is not meeting our
standards, our staff switches to a better quality route and then
resolves the problem. For example, if transport through the public
Internet proves to be unreliable on a particular route, we can reroute
the traffic through dedicated data networks or the traditional
telephone network to terminate the call in a traditional manner. The
use of multiple termination affiliates in many cities in which we
operate provides us with numerous termination possibilities to help
ensure completed calls with consistent quality.
40
<PAGE>
The following diagram depicts the functions of BestValue Routing:
[MAP]
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 Internet-based voice services. We currently
have strategic relationships with carriers including:
. Bell Atlantic
. China Telecom
. Colt Telecom
. GTS
. Interoute
. Korea Telecom
. Pacific Gateway Exchange
. the Ameritech division of SBC
41
<PAGE>
We do not currently generate significant revenues from most of these
affiliates. They are important to us because they provide expanded global reach
for ITXC.net and termination points in locations which are significant for our
customers.
Because gateways are critical to the infrastructure of ITXC.net, we have
strategic relationships with Cisco, Clarent, Lucent and VocalTec, each of which
is a leading gateway manufacturer. Lucent and Cisco have also provided us with
vendor financing in connection with the purchase of gateways and other
equipment. VocalTec is an equity investor in ITXC. Additionally, we have worked
closely with each of these companies to develop gateway interoperability
standards through our iNOW! initiative.
We expect our strategic relationships to continue and that our relationships
with these and other technology partners will help drive the development of new
voice, fax and voice-enabled services over ITXC.net.
Our Services
WWeXchange Service
In April 1998, we introduced our WWeXchange service, the first application
enabled by ITXC.net. This service provides international call completion to our
customers and enables them to offer their own customers phone-to-phone global
voice and fax service. Our WWeXchange service relies upon Internet telephony
technology. Such technology permits calls originated by a telephone to be
transmitted over the Internet. We believe that Internet telephony is the first
technology that allows non-computer users to access the Internet.
Our WWeXchange service provides our customers with high quality, low cost
global long distance service without their having to understand or deploy
Internet telephony technology themselves. We believe that the high quality of
calls completed using our WWeXchange service allows our customers to use
ITXC.net as an alternative to traditional voice traffic networks.
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 and CRANS
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
42
<PAGE>
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. In addition, since December 1999 we have been installing
equipment similar to SNARCs, called CRANS, on selected affiliates' premises to
connect them directly to the Internet for the purpose of their terminating
calls originated over ITXC.net. As of January 31, 2000, we had installed over
40 SNARCs at 20 customer sites and CRANS at five locations.
webtalkNOW! Service
We believe that ITXC.net has the same advantages of consistent quality,
global coverage and competitive prices for web-to-phone calls as it does for
phone-to-phone calls. We first publicly announced the broad availability of our
webtalkNOW! service in February 2000, although we have been providing web-to-
phone calling on a limited basis since December 1999. Our webtalkNOW! service
provides an outsourced solution to Internet portals, Internet service providers
and web sites allowing them to offer self-branded web-to-phone service to their
users. We can provide our customers with high quality, global call completion
over ITXC.net for their end-users' web-to-phone calling and the dialing
software necessary for their users to actually place calls over ITXC.net from
their PCs. We believe that our webtalkNOW! service will assist our customers in
building their own brands and in retaining their end-users.
Borderless800
Our Borderless800 service allows our carrier and reseller customers located
outside the U.S. to offer to their subscribers no-charge or low-charge access
to 800, 888 and 877 telephone numbers in the U.S. We believe that our service
will promote the convergence of toll-free numbers and web sites used in e-
commerce. Just as web sites can be accessed over the Internet from anywhere in
the world, companies that advertise U.S.-based national 1-800 numbers can now
be accessed globally. Further, we have enabled our affiliates to offer toll-
free calling into their own countries. As our affiliates make this service
available in their own countries, carriers and resellers on ITXC.net will be
able to reach toll-free numbers in these additional countries as well.
Future Enhanced Voice Services
We intend to make significant investments to develop and market additional
services for use over ITXC.net. We believe that as a result of the convergence
of the data and communications networks and the capabilities and size of
ITXC.net, we will be able to offer next-generation, enhanced voice services to
both new and existing customers. In addition, we believe that ITXC.net's open
architecture, combined with the strength and size of our customers, affiliates
and strategic relationships, will attract developers of voice services to our
network.
43
<PAGE>
We may introduce the following enhanced voice services in the future and we
may introduce other services not listed. However, we cannot assure you that we
will be able to successfully develop or implement these or other services in
the future.
. Enhanced Phone-to-Phone Service: Planned enhancements to our existing
WWeXchange service include:
. enhanced 800 and 900 service;
. number portability;
. subscriber authentication;
. conferencing services; and
. subscriber identification through voice prints and voice commands.
. Phone-to-PC Service: We believe that subscribers will be able to specify
that they want to receive ordinary telephone calls on a PC rather than a
standard telephone and that ITXC.net will be able to complete these
calls.
. Device-to-Phone Service and Phone-to-Device Service: There are Internet
phone devices available on the market today that allow owners to make
calls over the Internet. While there is no incremental cost for these
calls over the cost of Internet access, calls can only be made to others
who have Internet phones. We may use ITXC.net to enable the completion
of inexpensive calls from these devices to any telephone. In addition,
we believe that other devices, such as personal digital assistants, will
become voice-enabled.
. Unified Messaging Service: We may be able to offer a service over
ITXC.net that our customers can use to provide their customers with
telephone access to voice messages, e-mail and faxes. In addition, our
customers may be able to provide to their customers access to voice mail
from personal computers.
. Voice-enhanced E-commerce: Internet web sites used both for sales and
for customer service are being enhanced by the addition of click-and-
call services which allow the viewer to talk through his or her personal
computer to an agent, who sees what the user sees, can answer questions
and take orders. As with other Internet telephony applications, voice
quality has been an obstacle to the wide-spread deployment of click-and-
call services. We believe that we can use ITXC.net and its capabilities
to add consistent quality to voice-enhanced e-commerce.
. Single Number Service: We believe that ITXC.net will be able to support
a service enabling subscribers to maintain a single, permanent telephone
number for all calls regardless of their location. This single number
would serve as a billing number when the subscriber is placing calls and
as a reach-me number for receiving calls. The number could be reassigned
to any phone or personal computer. This type of call-forwarding would
take advantage of Internet-addressing and ITXC.net to eliminate most of
the costs and technical obstacles which have prevented the widespread
deployment of such services on the traditional telephone network.
44
<PAGE>
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 the use of our voice application services by Internet portals,
Internet service providers and web sites;
. expand our terminating affiliate base;
. increase the number of carriers that are ITXC affiliates; and
. maintain and expand our market leadership position among providers of
voice and fax services over the Internet.
We use the reputations and industry relationships cultivated by our senior
management and our status as an early entrant to attract affiliates to
ITXC.net. We typically meet potential affiliates at Internet voice trade shows
and seminars we conduct on Internet telephony. We often meet potential
customers through directed sales calls by our sales personnel and at telephony
trade shows. We also target strategic affiliates internationally and have made
joint sales calls with Cisco, Clarent, Lucent and VocalTec.
We have a dedicated sales force that is supplemented by members of our
executive management team. Our salespeople are based regionally within the U.S.
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 achieve BestValue Routing, the enhancement of our management systems,
including our billing and
45
<PAGE>
customer care software, and the development and implementation of new Internet-
based voice services, such as our new wholesale web-to-phone services. Our
future success will depend, in part, on our ability to improve existing
technology and develop and/or implement new voice services that incorporate
leading technology.
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 size and capacity and the availability of enhanced communications
services. Our competitors include major and emerging telecommunications
carriers in the U.S. and foreign telecommunications carriers.
. Internet Protocol and Internet Telephony Service Providers
During the past several years, a number of companies have introduced
services that make Internet telephony or voice services over the
Internet available to businesses and consumers. AT&T Global
Clearinghouse, GRIC Communications and iBasis and the wholesale
divisions of Net2Phone and deltathree.com route traffic to destinations
worldwide and compete directly with us. Other Internet telephony
service providers focus on a retail customer base and may in the future
compete with us. These companies may offer the kinds of voice services
we intend to offer in the future. In addition, companies currently in
related markets have begun to provide voice over the Internet services
or adapt their products to enable voice over the Internet services.
These related companies may potentially migrate into the Internet
telephony market as direct competitors.
. Telecommunications Companies and Long Distance Providers
A number of telecommunications companies, including AT&T, Deutsche
Telekom, Level Three, MCI WorldCom and Qwest Communications, currently
maintain, or plan to maintain, data networks to route the voice traffic
of other telecommunications companies. These companies, which tend to
be large entities with substantial resources, generally have large
budgets available for research and development, and therefore may
further enhance the quality and acceptance of the transmission of voice
over the Internet.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these 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 our key competitive advantages
are our ability to deliver reliable, high quality voice service over the
Internet in a cost-effective manner and the size and rapid growth of our
network. We cannot assure you, however, that this advantage will enable us to
succeed against comparable service offerings from our competitors.
46
<PAGE>
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 U.S. law, the Internet-related
services that we provide constitute information services, as opposed to
regulated telecommunications services, and, as such, are not currently actively
regulated by the FCC or any state agencies charged with regulating
telecommunications carriers. Nevertheless, aspects of our operations may be
subject to state or federal regulation, including regulation governing
universal service funding, disclosure of confidential communications, copyright
and excise tax issues. We cannot assure you that Internet-related services will
not be actively regulated in the future. Several efforts have been made in the
U.S. to enact federal legislation that would either regulate or exempt from
regulation services provided over the Internet. Increased regulation of the
Internet may slow its growth, particularly if other countries also impose
regulations. Such regulation may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, operating
results, financial condition and future prospects.
In addition, the FCC is currently considering whether to impose surcharges
or other common carrier regulations upon certain providers of Internet
telephony, primarily those which, unlike us, provide Internet telephony
services to end users located within the U.S. While the FCC has presently
decided that information service providers, including Internet telephony
providers, are not telecommunications carriers, various companies have
challenged that decision. Congressional dissatisfaction with FCC conclusions
could result in requirements that the FCC impose greater or lesser regulation,
which in turn could materially adversely affect our business, financial
condition, operating results and future prospects.
The FCC has expressed an intention to examine the question of whether
certain forms of phone-to-phone Internet telephony are information services or
telecommunications services. The two are treated differently in several
respects, with certain information services being regulated to a lesser degree.
The FCC has noted that certain forms of phone-to-phone Internet telephony
appear to have the same functionality as non-Internet telecommunications
services and lack the characteristics that would render them information
services.
If the FCC were to determine that certain Internet-related services
including Internet telephony services are subject to FCC regulations as
telecommunications services, the FCC could subject providers of such services
to traditional common carrier regulation, including requirements to make
universal service contributions, and/or pay access charges to local telephone
companies. It is also possible that the FCC may adopt a regulatory framework
other than traditional common carrier regulation which would apply to Internet
telephony providers. Any such determinations could materially adversely affect
our business, financial condition, operating results and future prospects of
ITXC to the extent that any such determinations negatively affect the cost of
doing business over the Internet or otherwise slow the growth of the Internet.
47
<PAGE>
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 Commission regulatory regime, for example, distinguishes
between voice telephony services and other telecommunications services.
In January 1998, the Commission issued a communication addressing whether
Internet telephony was voice telephony and thus subject to regulation by the
member states of the European Union. Consistent with its earlier directives,
the Commission concluded that no form of Internet telephony currently meets the
definition of voice telephony subject to regulation by the member states of the
European Union. The European Commission stated that only phone-to-phone
communications reasonably could be considered voice telephony and that, at
present, even phone-to-phone Internet telephony does not meet all elements of
its voice telephony definition. Therefore, the European Commission concluded
that, at the present time, voice over Internet services cannot be classified as
voice telephony.
As a result of the European Commission's conclusion, providers of Internet
telephony should be subjected to no more than a general authorization or
declaration requirement by European Union member countries. However, we cannot
assure you that more stringent regulatory requirements will not be imposed by
individual member countries of the European Union, since Commission
communications, unlike directives, are not binding on the member states. The
member countries 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. Moreover, in its January 1998 IP
Telephony Communication, the European Commission stated that providers of
Internet telephony whose services satisfy all elements of the voice telephony
definition and whose users can dial out to any telephone number can be
considered providers of voice telephony and may be regulated as such by the
48
<PAGE>
member states of the European Union. We cannot assure you that the services
provided over ITXC.net will not be deemed voice telephony subject to heightened
regulation by one or more member states. Moreover, we cannot assure you that
the failure of us or any of our customers or affiliates to obtain any necessary
authorizations will not have a material adverse effect on our business,
financial condition, operating results and future prospects.
We are also providing service in countries where regulation of Internet
telephony is far more restrictive than in the European Union. Specifically, we
have a strategic affiliate relationship with China Telecom to provide Internet
telephony services in the People's Republic of China. See "--Our Strategic
Carrier and Technology Partners." China currently prohibits foreign ownership
of telecommunications companies and strictly limits competition in the
telecommunications sector. However, a recent yet to be implemented trade
agreement between the U.S. and China enables China's entry into the World Trade
Organization and may open up the Chinese Internet market to foreign investment.
In the event this agreement is implemented, U.S. firms would be permitted to
invest in Chinese-based Internet ventures. Internet telephony is now being
provided on an experimental basis in China by China Telecom, Unicom, and Jitong
Communications in three non-competing geographic regions. It remains uncertain
how Internet telephony will be treated in China once the trial period ends and
specifically, whether China Telecom and/or others will be granted more
permanent authorization to provide Internet telephony in China.
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 has, for example, considered legislation on a wide range of
issues including Internet spamming, database privacy, gambling, pornography and
child protection, Internet fraud, privacy and digital signatures. Various
states have adopted and are considering Internet-related legislation. Increased
U.S. regulation of the Internet may slow its growth, particularly if other
governments follow suit, which may negatively impact the cost of doing business
over the Internet and materially adversely affect our business, financial
condition, results of operations and future prospects.
International. The European Union has also enacted several directives
relating to the Internet. The European Union has, for example, adopted a
directive that imposes restrictions on the collection and use of personal data.
Under the directive, citizens of the European Union are guaranteed rights to
access their data, rights to know where the data originated, rights to have
inaccurate data rectified, rights to recourse in the event of unlawful
processing and rights to withhold permission to use their data for direct
marketing. The directive could, among other things, affect U.S. companies that
collect or transmit information over the Internet from individuals in European
Union member states, and will impose restrictions that are more stringent than
current Internet privacy standards in the U.S. In particular, companies with
offices located in European Union countries will not be allowed to send
personal information to countries that do not maintain adequate standards of
privacy. Although we do not engage in the collection of data for purposes other
than routing our services and billing for our services, the directive is quite
broad and the European Union
49
<PAGE>
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 January 31, 2000, we have registered three trademarks in the
U.S., and have five registered trademarks and eight pending applications for
trademarks in other parts of the world. We have also applied for one patent in
the U.S. for our network monitoring and management techniques. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
do the laws of the U.S., and effective copyright, trademark and trade secret
protection may not be available in such jurisdictions. In general, our efforts
to protect our intellectual property rights through copyright, trademark and
trade secret laws may not be effective to prevent misappropriation of our
content, and our failure to protect our proprietary rights could materially
adversely affect our business, financial condition, operating results and
future prospects. Despite such protection, a third party could, without
authorization, copy or otherwise appropriate our proprietary network
information. Our agreements with employees and others who participate in
development activities could be breached, we may not have adequate remedies for
any breach, and our trade secrets may otherwise become known or independently
developed by competitors.
We rely upon license agreements with respect to our use of the software and
hardware provided to us by our vendors. Those license agreements may not
continue to be available to us on acceptable terms, or at all.
We have transferred to an independent entity certain intellectual property
that we have developed for iNOW!.
Employees
As of January 31, 2000, we employed 129 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 27,000 square feet. We have network hubs in New York City,
Jersey City, New Jersey and Los Angeles under co-location arrangements. We
expect to establish a network hub in London in the first quarter of 2000. We
have sales offices in Singapore and London. We believe that our existing
facilities are adequate for our current requirements and that additional space
can be obtained on commercially reasonable terms to meet future requirements.
Legal Proceedings
From time to time, we are involved in various legal proceedings relating to
claims arising in the ordinary course of business. We are not a party to any
legal proceeding, the adverse outcome of which is expected to have a material
adverse effect on our business, financial condition, operating results or
future prospects.
50
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Tom I. Evslin........ 56 Chairman of the Board, Chief Executive Officer and
President(1)
Edward B. Jordan..... 39 Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
John G. Musci........ 43 Executive Vice President, Chief Operating Officer
and Director
Thomas J. Shoemaker.. 43 Executive Vice President, Business Development
Mary A. Evslin....... 51 Vice President, Marketing and Customer Success
Bradley E. Miller.... 33 Vice President, Operations
Steven J. Ott........ 39 Vice President, Global Sales
Eric G. Weiss........ 33 Vice President and Business Unit Manager,
WWeXchange Service
William P. Collatos.. 45 Director(1)(2)(3)
Elon A. Ganor........ 49 Director(2)(3)
Frederick R. Wilson.. 38 Director(1)(2)(3)
</TABLE>
- --------
(1) Member of our executive committee.
(2) Member of our audit committee.
(3) Member of our compensation committee.
Tom I. Evslin, our founder, has been Chairman of the Board, Chief Executive
Officer and President since our inception in July 1997. From December 1994
until July 1997, Mr. Evslin was employed by AT&T, where he designed its
Internet strategy and launched and ran its Internet service provider, AT&T
WorldNet Service. From December 1991 until December 1994, he worked for
Microsoft, where he last served as General Manager, Server Applications
Division from May 1993. From 1969 to 1991, he was Chairman and Chief Executive
Officer of Solutions, Inc., a communications software development company. He
is the Chairman of the Policy Committee and a member of the Board of the Voice
On The Net Coalition. Mr. Evslin served on the board of directors of VocalTec
from 1997 until his resignation on June 10, 1999. He is Mary A. Evslin's
husband.
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.
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
51
<PAGE>
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.
Thomas J. Shoemaker joined us in January 2000 as our Executive Vice
President of Business Development, responsible for both new service development
and mergers and acquisitions. Prior to joining us, from August 1998 to December
1999, he was President and Chief Executive Officer of Electric Schoolhouse, an
Internet education company providing application and information services to
parents, teachers, students and schools for use at home and in the classroom.
From August 1997 to August 1998, Mr. Shoemaker was the Vice President
responsible for AT&T's WorldNet Service. Prior to that role, he held a number
of business, technical, and marketing positions in AT&T Business Services, Bell
Laboratories, and Bell Communications Research from September 1979 to August
1997.
Mary A. Evslin has been our Vice President, Marketing and Customer Success
since July 1997. From 1993 through July 1997, Ms. Evslin served as a volunteer
for The American Red Cross and for various charitable organizations. From 1992
to 1993, Ms. Evslin was employed by Attachmate Corporation, a provider of
mainframe connectivity software to businesses, as Manager of Service Marketing.
From 1986 to 1992, she served as President of Solutions International, a
software marketing company. From 1978 to 1986, Ms. Evslin served as Vice
President of Marketing and Sales at Solutions, Inc., a communications software
development company. She is Tom I. Evslin's wife.
Bradley E. Miller joined us as our Vice President, Operations in November
1997. From June 1996 to November 1997, Mr. Miller was Director of Operations at
CGX Telecom/CAIS Internet, a tier 1 Internet service provider. From May 1995
until June 1996, Mr. Miller was a Management Information Systems Manager at US
Assist, an international travel assistance company. From June 1987 until May
1995, he was the Director of Operations at Donohoe Constructions Company, a
construction firm.
Steven J. Ott has been our Vice President, Global Sales since January 1998.
From August 1994 to January 1998, Mr. Ott served as Vice President of Global
Sales and Support at Voxware, Inc., a software company providing core audio
compression algorithms and applications to technology companies. Prior to
August 1994, Mr. Ott served first as a Director and then as Vice President of
Corporate Development at Legent Corporation, a software development company.
Eric G. Weiss joined us in October 1997 as our Business Unit Manager,
WWeXchange Service and served in that capacity until May 1998. From May 1998 to
present, Mr. Weiss has served as Vice President and Business Unit Manager,
WWeXchange Service. From May 1995 to October 1997, he was employed by Dialogic
Corporation as a Product Line Manager. From September 1994 until May 1995, Mr.
Weiss was a Manager with BCE Ventures, Bell Canada Enterprises (BCE) Inc., a
telecommunications firm. From 1991 until
52
<PAGE>
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
founder of Spectrum Equity Investors, L.P., a private equity investment firm
which invests in telecommunications, information and media companies. Prior to
co-founding Spectrum in 1994, Mr. Collatos was a founding General Partner of
Media/Communications Partners and a General Partner of TA Associates. Mr.
Collatos currently serves on the boards of directors of Jazztel, plc, and
Golden Sky Systems, Inc. and serves on the board of directors of Galaxy Telecom
GP, the general partner of Galaxy Telecom, LP.
Elon A. Ganor has been a Director since October 1997. He has served as the
Chairman of the Board of VocalTec since 1993. He has served as VocalTec's CEO
since November 1999, and also from 1993 to 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 the Chairman of the Board of TheStreet.com and a director of
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.
Our board of directors is 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 this offering.
Board Committees
Our board of directors has four standing committees: an audit committee, a
compensation committee, an executive committee and a CEO committee.
The audit committee consists of Messrs. Collatos, Wilson and Ganor, with Mr.
Collatos serving as Chairman. The audit committee recommends the firm to be
appointed as independent accountants to audit our financial statements and to
perform services related to the audit; reviews the scope and results of the
audit with the independent accountants; reviews our year-end operating results
with our management and the independent accountants; considers the adequacy of
our internal accounting and control procedures; reviews the non-audit services
to be performed by the independent accountants, if any; and evaluates the
accountants' independence.
53
<PAGE>
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 executive committee consists of Messrs. Collatos, Evslin and Wilson,
with Mr. Evslin serving as Chairman. Except as limited by Delaware law, the
executive committee can perform each of the responsibilities of our full board,
providing us with added flexibility in situations when full board meetings
cannot be convened.
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.
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total cash and non-cash compensation that
we paid or accrued during the years ended December 31, 1999 and 1998 with
respect to our Chief Executive Officer and our four other most highly
compensated executive officers during 1999. The principal components of these
individuals' current cash compensation are the annual base salary and bonus
included in the Summary Compensation Table. We have also described below other
compensation these individuals receive under employment agreements and our
stock incentive plan. Mr. Shoemaker, our Executive Vice President in charge of
business development, joined us in January 2000. His base salary for 2000 is
$180,000. A portion of the bonuses earned in 1999 will not be paid until 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------- ----------------------
Number of Securities
Name and Principal Bonus Underlying
Position Year Salary ($) ($) Options/SARs (#)
------------------ ---- ---------- ------- ----------------------
<S> <C> <C> <C> <C>
Tom I. Evslin............ 1999 250,769 153,672(1) 30,000
Chairman of the Board,
President and 1998 232,308 150,000(1) --
Chief Executive Officer
Edward B. Jordan......... 1999 148,269 102,339(1) 400,000
Executive Vice President
and 1998 120,192 -- --
Chief Financial Officer
John G. Musci(2)......... 1999 176,923 172,350(1)(3) 1,500,000
Executive Vice President
and
Chief Operating Officer
Steven J. Ott............ 1999 101,014 135,242(4) 80,000
Vice President, Global
Sales 1998 96,153 32,924(4) 350,000
Eric G. Weiss............ 1999 121,359 58,181(1) 50,000
Vice President and
Business Unit Manager, 1998 93,654 -- 50,000
WWeXchange Service
</TABLE>
- --------
(1) Bonuses for 1999 include some bonuses that were earned in 1999 but will not
be paid until 2000. Bonuses for 1998 were earned in 1998 but were not paid
until 1999.
(2) Mr. Musci joined us in February 1999.
(3) Excludes reimbursement for relocation expenses.
(4) Consists of commissions earned by Mr. Ott in 1998 and 1999.
55
<PAGE>
The following table presents certain information regarding stock options
granted to the named executive officers during 1999 under our stock incentive
plan.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
----------------------------------------------------------------- -----------------------------
Number of
Securities % of Fair Market
Underlying Total Options Exercise Price Value on
Options Granted to Per Share Grant Date Expiration
Name Granted (#) Employees ($/Sh) ($/Sh) Date 0%($) 5% ($) 10% ($)
---- ----------- ------------- -------------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tom I. Evslin........... 30,000 * 4.00 12.00 6/8/09 240,000 466,402 813,747
Edward B. Jordan........ 200,000 5.73 1.16 2.32 2/25/09 232,000 523,807 971,497
200,000 5.73 4.00 12.00 6/8/09 1,600,000 3,109,347 5,424,982
John G. Musci........... 1,500,000 43.01 .63 2.32 2/1/09 2,542,500 4,731,053 8,088,724
Steven J. Ott........... 50,000(1) 1.43 .63 2.32 1/7/09 84,750 157,702 269,624
30,000 * 4.00 12.00 6/8/09 240,000 466,402 813,747
Eric Weiss.............. 50,000 1.43 4.00 12.00 6/8/09 400,000 777,337 1,356,425
</TABLE>
- --------
(1) These options were granted under the terms of Mr. Ott's offer of
employment.
* Less than one percent.
The following table presents information regarding stock option exercises by
the named executive officers during 1999 and the number and value of stock
options held by the named executive officers at December 31, 1999. The
calculation of the value of unexercised options is based upon a market price of
$33.625 per share, representing the closing sale price of one share of our
common stock on December 31, 1999.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Year-end (#) Fiscal Year-end ($)
------------------------- -------------------------
Number of Value
Shares Acquired Realized
Name on Exercise (#) (1)($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tom I. Evslin........... 30,000 240,000 -- -- -- --
Edward B. Jordan........ 200,000 2,399,000 400,000 400,000 13,217,000 12,649,000
John G. Musci........... -- -- 333,334 1,166,666 11,000,022 38,499,978
Steven J. Ott........... 116,668 1,365,016 -- 313,332 -- 10,314,539
Eric Weiss.............. 50,000 596,050 50,000 133,332 1,677,300 4,265,172
16,668 192,932
</TABLE>
- --------
(1) Each of the options exercised by the named executive officers was exercised
prior to our initial public offering. The amount realized on exercise
represents the number of shares acquired multiplied by the difference
between the public offering price in our initial public offering and the
option exercise price.
56
<PAGE>
Employment Agreements
Tom I. Evslin. We have entered into an amended employment agreement with Tom
I. Evslin, our Chairman, President and Chief Executive Officer. The agreement
expires on March 31, 2001. Under his agreement, Mr. Evslin is entitled to
receive a base salary in 2000 of not less than $300,000 and annual bonuses
which could amount to 100% or more of base salary. The actual amount of bonuses
paid or to be paid is determined by our compensation committee before the start
of the year in which the bonus is to be paid and is contingent upon ITXC's
achieving certain performance objectives. Mr. Evslin is eligible to receive an
additional bonus under our cash incentive plan.
If Mr. Evslin's employment with us is terminated by us without cause, or by
Mr. Evslin for good reason, Mr. Evslin is entitled to receive his salary and
other benefits for a period of six months, as well as his annual bonus for the
year in which the termination occurs and for the severance period. 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 six months after his employment is terminated by us without cause or
by him with or without good reason. We can extend this restriction against
competition for up to an additional 18 months, provided that we pay Mr. Evslin
additional proportionate severance amounts. If we terminate Mr. Evslin's
employment for cause, this restriction will apply for a period of two years.
Under his employment agreement, Mr. Evslin is also bound to keep certain
information confidential and to assign to us any intellectual property
developed by him during the term of his employment.
John G. Musci. We have also entered into an employment agreement with John
G. Musci, our Executive Vice President and Chief Operating Officer. The term of
Mr. Musci's employment agreement began on February 8, 1999 and expires on
February 7, 2001. Under his employment agreement, Mr. Musci is entitled to
receive an annual base salary of not less than $200,000 and he is eligible to
receive a cash bonus under our cash incentive plan. Mr. Musci was also entitled
to receive up to $100,000 in relocation expenses.
Under his employment agreement, Mr. Musci received non-qualified options
covering 1,500,000 shares of ITXC common stock at an exercise price of $0.625
per share under our stock incentive plan. A total of 1,000,000 of Mr. Musci's
options vested or will vest and become exercisable at the rate of 33 1/3% per
year on December 21, 1999, 2000 and 2001. The remaining 500,000 will vest and
become exercisable on December 21, 2005. These options could, however, vest and
become exercisable under certain circumstances, prior to December 21, 2005.
Under his employment agreement, if Mr. Musci is terminated for cause or any
reason other than constructive termination or wrongful termination, he is
entitled to receive accrued but unpaid 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
but unpaid base salary, bonus and other benefits, Mr. Musci is
57
<PAGE>
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 but unpaid 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.
Thomas J. Shoemaker. We entered into an employment agreement with Thomas
Shoemaker, our Executive Vice President of Business Development, effective as
of January 2, 2000. The term of Mr. Shoemaker's employment agreement expires on
January 2, 2001, after which his employment with us will be on an at-will basis
unless the term of the employment agreement is extended by ITXC and Mr.
Shoemaker. Under his employment agreement, Mr. Shoemaker is entitled to receive
an annual base salary of not less than $180,000. In addition, for the calendar
year 2000 and thereafter, Mr. Shoemaker is eligible to receive a cash bonus
under our cash incentive plan.
Under his employment agreement, Mr. Shoemaker received options covering
300,000 shares of our common stock at an exercise price of $40.00 per share
under our stock incentive plan. A total of 250,000 of Mr. Shoemaker's options
will vest and become exercisable at the rate of 33 1/3% per year on January 2,
2001, 2002 and 2003. The remaining 50,000 options will vest and become
exercisable on January 2, 2003. Those 50,000 options could, however, vest and
become exercisable under certain circumstances, on January 2, 2001.
Under his employment agreement, if Mr. Shoemaker is terminated for cause or
any reason other than constructive termination or wrongful termination, he is
entitled to receive accrued but unpaid base salary, bonus and other benefits,
in accordance with our employee benefits plans, and forfeits any unvested
options. If Mr. Shoemaker is terminated by reason of a constructive termination
or wrongful termination, in addition to any accrued but unpaid base salary,
bonus and other benefits, Mr. Shoemaker is entitled to receive, as severance,
payments through January 2, 2001 of his current salary as of the date of
termination, less his income from other employment, and his options will
continue to vest for the remainder of that year.
Mr. Shoemaker's employment agreement prohibits him from becoming associated
with any competing business for six months after the date of his termination.
58
<PAGE>
Under his employment agreement, Mr. Shoemaker 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 1999, Messrs. Ganor, Collatos and Wilson participated on our
compensation committee. Mr. Ganor is the Chairman of the Board and CEO of
VocalTec. Tom I. Evslin, our Chairman of the Board, President and Chief
Executive Officer, served on the board of directors and compensation committee
of VocalTec until June 1999, when he resigned from VocalTec's board. None of
the members of our compensation committee served as an officer or employee of
ITXC or any of its subsidiaries during 1999.
In October 1997, we entered into an agreement with VocalTec under which:
. we issued to VocalTec:
. 1,800,000 shares of common stock;
. 278,000 shares of Series A convertible preferred stock;
. warrants to purchase 122,000 shares of Series A convertible
preferred stock; and
. warrants to purchase 1,200,000 shares of common stock, the
exercisability of which was conditioned, in part, upon our use of
the credit described below.
. we received from VocalTec $500,000 in cash and the rights to certain
information regarding VocalTec's business; and
. we received a credit entitling us to purchase $1.0 million of VocalTec's
equipment.
In April 1998:
. VocalTec Communication's shares of Series A convertible preferred stock
were converted into a total of 556,000 shares of our common stock; and
. VocalTec Communication's preferred stock warrant was converted into a
warrant to purchase a total of 244,000 shares of our common stock.
In June 1999, VocalTec exercised its outstanding warrants, acquiring
1,444,000 shares of common stock upon payment of $722.
VocalTec 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. Each of those shares of
preferred stock was converted into two shares of our common stock when we
completed our initial public offering. See "Certain Transactions--ITXC Equity
Financings."
We also have an ongoing business relationship with VocalTec. From inception
through December 31, 1999, we purchased $1.0 million of hardware and software
from VocalTec. 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.
59
<PAGE>
VocalTec is a selling stockholder in this offering. See "Principal and
Selling Stockholders."
1998 Incentive Stock Option Plan
Our stock incentive plan was adopted by our board of directors on February
17, 1998 and by our shareholders on April 2, 1998. Under the plan, incentive
stock options and non-qualified stock options to purchase shares of our common
stock may be granted to directors, officers, employees and consultants. As of
January 31, 2000, stock options covering 2,439,824 shares were available for
grant under the plan and stock options to purchase 5,561,130 shares were
outstanding with a weighted average exercise price of $4.83 per share. On
January 1 of each subsequent year, the number of shares of common stock
available for issuance under the plan will be increased by the least of:
. 2,000,000 shares;
. 3% of the outstanding shares; or
. a number of shares determined by our board of directors.
The per share exercise price for incentive stock options granted under the
plan will equal the fair market value of the underlying common stock on the
date of grant. The option price for shares purchased through the exercise of an
option is payable in cash or, at the discretion of our Chief Executive Officer
or compensation committee, in common stock or a combination of both.
Our chief executive officer or compensation committee determines the initial
vesting period and the expiration date(s) of each option at the time that it is
granted. As of January 31, 2000, ITXC had not granted any incentive stock
options.
Under the plan, we may also issue stock appreciation rights, either alone or
in connection with options, restricted stock awards and performance awards. As
of January 31, 2000, we had not issued any such stock appreciation rights,
restricted stock awards or performance awards.
The plan provides that in the event of a change in control, all options
outstanding on that date will be immediately and fully exercisable upon
termination of an option holder's employment or service for certain specified
reasons within twelve months following the change in control. In addition,
under certain circumstances upon such specified termination, an option holder
may be permitted to exchange any unexercised options for a cash payment.
The plan provides for options to terminate within specified periods of time
after employment is terminated, depending upon the reason for termination. If
an option holder's employment is terminated for cause, his or her options will
terminate immediately upon termination of employment. Unless otherwise provided
by the compensation committee or our board of directors, options are not
transferable by the option holder and can be exercised only by the option
holder during his or her lifetime or upon the option holder's death only by the
personal representative of his or her estate. The plan may be amended or
terminated by the board of directors at any time; provided, that no such action
may adversely affect any outstanding options without the consent of the
applicable option holder.
60
<PAGE>
The grant of a non-qualified option has no tax consequences to us or to the
option holder. Upon exercise of a non-qualified option, the option holder will
recognize taxable ordinary income equal to the excess of the fair market value
on the date of the exercise of the shares of common stock acquired over the
exercise price of the non-qualified option, and that amount will be deductible
by us for federal income tax purposes. The option holder will, upon a later
sale of shares, recognize short term or long term capital gain or loss,
depending on the holding period of the shares, but we will not be entitled to
an additional tax deduction.
Employee Stock Purchase Plan
We have an employee stock purchase plan intended to meet the qualifications
for such a plan under applicable federal income tax laws. The plan is
administered by the compensation committee of our board of directors. The
number of shares available for purchase under the plan presently consists of
858,164 shares of common stock and will increase on January 1 of each
subsequent year in an amount equal to the least of:
. 600,000 shares of common stock;
. 1% of the common stock outstanding on January 1; or
. a number of shares of common stock specified by our board.
Shares of our common stock will be offered to our employees under the plan
through a series of successive offering periods, not to exceed 24 months, until
either the maximum number of shares available for issuance under the plan has
been purchased or the plan has been otherwise terminated. Each offering period
is of a duration determined by the compensation committee of our board of
directors. The initial offering period terminates on the last business day in
July 2001. The next offering period will commence on the first business day in
August 2001, and subsequent periods will commence as determined by the
compensation committee.
In order to be eligible to participate in the plan, an employee must be
engaged, on a regularly scheduled basis of more than 20 hours per week of work
for ITXC for more than five months per calendar year, in the rendition of
personal services to ITXC. Non-employee directors and non-employee officers are
not eligible to participate.
Each employee who meets the employment criteria on the start date of the
initial offering period will be eligible to enter that offering period or any
subsequent offering period on the start date of any purchase period during
which he or she remains employed by us. Employees who met the eligibility
criteria after the start date of the initial offering period will be eligible
to enter that offering period or any subsequent offering period on the start
date of any purchase period within the applicable offering period on which he
or she meets the eligibility criteria with at least three months of service
with ITXC or one of our corporate affiliates. The date on which an employee
enters an offering period is his or her entry date for the purposes of that
offering period.
61
<PAGE>
Employees who would, immediately after the grant, own or hold outstanding
options or other rights to purchase stock possessing 5% or more of the total
combined voting power or value of all classes of our stock may not be granted
any rights to purchase stock under the plan. Employees whose rights to purchase
stock under this plan or any other qualifying plan would exceed $25,000 worth
of stock in any calendar year are also prohibited from participating.
Employees who participate in the plan will authorize us to deduct any
multiple of one percent of their total cash compensation during each purchase
period up to a maximum of 10% of their total cash compensation, which includes:
. regular base salary;
. pre-tax contributions made by the employee to certain benefits plans;
and
. overtime payments, bonuses, commissions, profit-sharing distributions
and other incentive-type payments.
The maximum number of shares of common stock that an employee may purchase
during any purchase period is 3,000 shares.
During periods when employees are permitted to make purchases, the purchase
price of the shares of common stock will be equal to 85% of the lesser of:
. the fair market value of the common stock on the employee's entry date
into the applicable offering period; or
. the fair market value of the common stock on the date of purchase.
However, the purchase price for any employee whose entry date is other than
the start date of the offering period shall not be less than 85% of the fair
market value of the common stock on the start date of that offering period.
Employees may end their participation in the plan at any time during an
offering period. An employee's participation ends automatically upon
termination of an employee's employment. In general, any payroll deductions for
the purchase period in which the purchase right terminates will be refunded
without interest.
In the event of a stockholder-approved merger or consolidation in which
securities possessing more than 50% of the total combined voting power of our
outstanding securities are transferred to a person or persons different from
the persons holding those securities immediately prior to the transaction, or
in the event of a stockholder-approved sale, transfer or other disposition of
all or substantially all of our assets in complete liquidation or dissolution
of ITXC, each outstanding purchase right shall automatically be exercised.
ITXC will use its best efforts to provide written notice in advance of the
occurrence of any of these transaction. Upon receipt of such notice, employees
may terminate their outstanding purchase rights. Purchase rights granted under
the plan are not assignable by the employee other than by will or the laws of
descent.
62
<PAGE>
Purchase rights granted under the plan are not assignable or transferable by
the employee other than by will or the laws of descent.
The plan will terminate upon the earliest of:
. the last business day in August 2009;
. the date on which all shares available for issuance under the plan have
been sold under purchase rights exercised under the plan; or
. the date on which all purchase rights are exercised in connection with
any corporate transaction described above.
Cash Incentive Plan
We designed our cash incentive plan to encourage and reward our employees
for their contributions to our performance. All of our employees, except
salespeople, are eligible to participate in this plan. Employees who are
eligible receive bonuses calculated according to a formula which takes into
account an individual performance factor and a company performance factor.
63
<PAGE>
CERTAIN TRANSACTIONS
For a description of our relationship with VocalTec, see "Executive
Compensation--Compensation Committee Interlocks and Insider Participation."
Loans from Senior Management
Between February 9, 1998 and April 22, 1998, we borrowed an aggregate of
$550,000 from Tom I. Evslin, our Chairman of the Board, Chief Executive Officer
and President, and $200,000 from Edward B. Jordan, our Executive Vice President
and Chief Financial Officer, and delivered a series of demand notes to these
officers. The notes bore interest at a rate of 10% per year. On April 27, 1998,
each of those notes was canceled and we paid accrued interest to Mr. Evslin and
Mr. Jordan in the amounts of $5,762 and $932, respectively. In consideration
for canceling those notes, Mr. Evslin and Mr. Jordan received 322,581 and
117,302 shares of Series B convertible preferred stock, respectively, and
warrants to purchase 645,162 and 234,604 shares of common stock, respectively,
at an exercise price of $0.8525 per share. We valued the Series B convertible
preferred stock issued to Mr. Evslin and Mr. Jordan at the same $1.705 per
share price paid by all other purchasers of the Series B convertible stock.
Thus, Mr. Evslin's shares and Mr. Jordan's shares had an aggregate value of
$550,000 and $200,000, respectively. We concluded that the fair value of the
warrants granted to Mr. Evslin and Mr. Jordan was $90,000, which was included
in interest expense during 1998.
ITXC Equity Financings
In April 1998, we sold to a limited group of investors a total of 5,865,104
shares of our Series B convertible preferred stock at a purchase price of
$1.705 per share. The following table sets forth the names of those investors
who, either directly or through an affiliate, are presently directors, officers
or five percent stockholders of ITXC, the number of shares of Series B
convertible preferred stock that such investors acquired, the aggregate
purchase price paid by such investors and the aggregate number of shares of our
common stock that were issued upon conversion of the preferred shares when we
completed our initial public offering. Each share of Series B convertible
preferred stock was converted into two shares of our common stock.
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Principal Relationship Stock Total Stock
Investor to ITXC Purchased Price ($) Issued
-------- ---------------------- --------- --------- ---------
<C> <S> <C> <C> <C>
Chase Venture Capital See "Principal and
Associates, L.P.(1).... Selling Stockholders." 1,361,290 2,321,000 2,722,580
Intel Corporation....... See "Principal and 1,173,021 2,000,000 2,346,042
Selling Stockholders."
Spectrum Equity Spectrum Equity 1,173,021 2,000,000 2,346,042
Investors II, L.P. and Investors II, LLP is one
SEA of our principal
1998 II, L.P.(1)....... stockholders. William P.
Collatos, an affiliate
of Spectrum Equity
Investors II, L.P. and
an affiliate of SEA 1998
II, L.P., is one of our
directors.
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock
Investor Principal Relationship to ITXC Purchased Price ($) Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
DS Polaris, Ltd., Polaris
Fund II (Tax Exempt
Investors), LLC, Polaris
Fund II, LLC, Polaris
Fund II, L.P., DS Polaris
Trust Company (foreign
residents) (1997), Ltd.
and Canada--Israel
Opportunity Fund LP(1)... See "Principal and Selling Stockholders." 753,079 1,284,000 1,506,158
VocalTec
Communications(1)........ VocalTec Communications is one of our 668,622 1,140,000 1,337,244
principal stockholders. Elon A. Ganor,
the Chairman of the Board and CEO of
VocalTec, is one of our directors.
Tom I. Evslin and Mary A.
Evslin(1)................ Chairman of the Board, Chief Executive 322,581 550,000 645,162
Officer and President; and Vice
President, Marketing and Customer Success
The fl@tiron Fund LLC(1).. Frederick R. Wilson, the manager of The 296,188 505,000 592,376
fl@tiron Fund LLC, is one of our
directors.
Edward B. Jordan(1)....... Executive Vice President and Chief 117,302 200,000 234,604
Financial Officer
</TABLE>
(1) This investor, or an affiliate of this investor, is a selling
stockholder in this offering.
As part of the Series B financing, we entered into various agreements with
our investors, including a stockholders' agreement, the principal terms of
which terminated upon the closing of our initial public offering, and a
registration rights agreement.
In February 1999, we sold to a limited group of investors a total of
3,229,975 shares of our Series C convertible preferred stock at a purchase
price of $4.644 per share. The following table sets forth the names of those
investors who, either directly or through an affiliate, are presently
directors, officers or five percent stockholders of ITXC, the number of shares
of Series C convertible preferred stock that such investors acquired, the
aggregate purchase price paid by such investors and the aggregate number of
shares of our common stock that were issued upon conversion of the preferred
shares when our initial public offering was completed. Each share of Series C
convertible preferred stock was converted into two shares of our common stock.
65
<PAGE>
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock
Investor Principal Relationship to ITXC Purchased Price ($) Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
Spectrum Equity
Investors II, L.P. and
SEA Spectrum Equity Investors II, LLP is one 1,173,559 5,450,008 2,347,118
1998 II, L.P.(1)....... of our principal stockholders. William P.
Collatos, an affiliate of Spectrum Equity
Investors II, L.P. and an affiliate of
SEA 1998 II, L.P., is one of our
directors.
Chase Venture
Associates, L.P.(1).... See "Principal and Selling Stockholders." 870,138 4,040,921 1,740,276
Intel Corporation....... See "Principal and Selling Stockholders." 484,496 2,249,999 968,992
DS Polaris, Ltd.,
Polaris Fund II (Tax
Exempt Investors), LLC,
Polaris Fund II, LLC,
Polaris Fund II, L.P.,
DS Polaris Trust
Company (foreign
residents) (1997), Ltd.
and Canada-Israel
Opportunity Fund
L.P.(1)................ See "Principal and Selling Stockholders." 263,194 1,222,273 526,388
The Flatiron Fund
1998/99, LLC and
Flatiron Associates, Frederick R. Wilson, the manager of The 223,256 1,036,801 446,512
LLC(1)................. Flatiron Fund 1998/99, LLC, and Flatiron
Associates, LLC is one of our directors.
VocalTec
Communications(1)...... VocalTec Communications is one of our 215,332 1,000,002 430,664
principal stockholders. Elon A. Ganor,
the Chairman of the Board and CEO of
VocalTec, is one of our directors.
</TABLE>
(1) This investor, or an affiliate of this investor, is a selling
stockholder in this offering.
As part of the Series C financing, we entered into various agreements with
our investors, including a stockholders' agreement, the principal terms of
which terminated upon the closing of our initial public offering, and a
registration rights agreement.
Third Amended Registration Rights Agreement
Each of the purchasers of our Series B and Series C convertible preferred
stock, including Mr. and Mrs. Evslin and Mr. Jordan, and ITXC entered into an
amended registration rights agreement whereby each purchaser has the right,
under certain circumstances and subject to certain conditions, to cause us to
register under the Securities Act shares of common stock held by them. Subject
to certain conditions and exceptions, those purchasers also have the right to
require that shares of common stock held by them be included in any
registration under the Securities Act commenced by us. Please see "Description
of Capital Stock--Registration Rights" for additional information.
Stock Option Exercises
During 1999, certain of our executive officers exercised stock options,
resulting in the issuance of a total of 480,004 shares of common stock.
66
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock, as of January 31, 2000 and as
adjusted to reflect the sale of common stock in this offering, by:
. each person known by us to beneficially own more than five percent of
our outstanding common stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table;
. each stockholder who is selling stock in this offering; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, the person or persons named have sole voting and
investment power. In determining the number and percentage of shares
beneficially owned by each person, shares that may be acquired by such person
under options or warrants exercisable within 60 days of January 31, 2000 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.
<TABLE>
<CAPTION>
Shares Beneficially Number of Shares Beneficially
Owned Before the Shares to Owned After the
Offering be Sold Offering
------------------------------ in the ---------------------
Name Number Percentage Offering* Number Percentage
---- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Executive Officers and
Directors
Tom I. Evslin........... 7,439,308(1)(2)(3) 20.28% 375,000(2)(14) 7,064,308 18.16%
Edward B. Jordan........ 1,083,012(1)(3) 2.96% 100,000(14) 983,012 2.53%
John G. Musci........... 346,034(1) ** 77,690(14) 268,344 **
Steven J. Ott........... 250,000(1) ** 64,500 185,500 **
Bradley E. Miller....... 133,333(1) ** 37,500 95,853 **
Eric G. Weiss........... 116,668 ** -- 116,668 **
Elon A. Ganor........... 5,567,908(4) 15.48% 779,743(14)(15) 4,788,165 12.61%
William P. Collatos..... 4,693,160(5) 13.05% 235,917(16) 4,457,243 11.67%
Frederick R. Wilson..... 1,038,888(6) 2.89% 48,824(17) 990,064 2.59%
All executive officers
and directors as a
group (10 persons)..... 20,668,311 54.43% 1,726,931 18,941,380 49.20%
Other Selling
Stockholders
and Beneficial Owners of
5% or
More of ITXC's Common
Stock
VocalTec
Communications......... 5,567,908(4)(7) 15.48% 779,743(14) 4,788,165 12.61%
Spectrum Equity
Investors II, L.P. .... 4,693,160(5)(8) 13.05% 235,917(16) 4,457,243 11.67%
Chase Venture Capital
Associates, L.L.C...... 4,462,856(6)(9) 12.41% 201,461 4,261,395 11.16%
Intel Corporation....... 3,315,034(10) 9.21% -- 3,315,034 8.68%
Essex Investment
Management Company..... 2,096,445(11) 5.83% -- 2,096,445 5.49%
DS Polaris Ltd. ........ 2,032,546(12) 5.65% 79,365(18) 1,953,181 5.14%
Flatiron Partners....... 1,038,888(6)(13) 2.89% 48,824(17) 990,064 2.59%
</TABLE>
- --------
* Includes shares to be sold by trusts established by the named stockholder or
his spouse.
** Represents less than one percent.
67
<PAGE>
(1) The table above includes the following number of shares which the
following persons may acquire under options and warrants held as of
January 31, 2000 and exercisable within 60 days of such date:
<TABLE>
<S> <C>
Tom I. Evslin..................................................... 711,826
Edward B. Jordan.................................................. 634,604
John G. Musci..................................................... 333,334
Steven J. Ott..................................................... 33,332
Bradley E. Miller................................................. 33,333
Eric G. Weiss..................................................... 50,000
All executive officers and directors as a group................... 1,796,429
</TABLE>
The 711,826 shares referenced above for Mr. Evslin include options granted
to Mary A. Evslin, his wife.
The table above excludes:
. options covering 500,000 shares of common stock granted to Mr. Musci
in February 1999 which will vest on the earliest of the date on
which a change in control of his former employer, Qwest
Communications International, occurs, the seventh anniversary of the
date on which the options were granted and such other date as is
provided for in our stock incentive plan;
. options covering an additional 666,666 shares of common stock
granted to Mr. Musci, an additional 400,000 shares of common stock
granted to Mr. Jordan and an additional 893,330 shares granted to
other executive officers, all of which were granted on or before
January 31, 2000 and will not vest prior to March 31, 2000.
(2) Includes shares beneficially owned by Mary A. Evslin, who is Mr. Evslin's
wife and an executive officer of ITXC. With the exception of shares held
with Mary A. Evslin as joint tenants, Tom I. Evslin disclaims beneficial
ownership of the shares owned beneficially by Ms. Evslin. The shares
being sold in this offering are owned jointly by Mr. and Mrs. Evslin. Mr.
Evslin's principal business address is 600 College Road East, Princeton,
New Jersey 08540.
(3) Tom I. Evslin and Edward B. Jordan are each investors in Flatiron
Associates, LLC, a fund described in note 6 below. Mr. Evslin is deemed
to be the beneficial owner of 652 shares of the common stock owned by
Flatiron Associates, LLC and Mr. Jordan is deemed to be the beneficial
owner of 1,304 shares of the common stock owned by Flatiron Associates,
LLC, representing their respective percentage interests in that entity.
After this offering, as a result of the sale by Flatiron Associates of
3,040 shares of common stock in this offering, Mr. Evslin and Mr. Jordan
will be deemed to be the beneficial owners of 604 and 1,208 shares of
ITXC common stock held by Flatiron Associates, respectively. Mr. Evslin's
shares also include 5,000 shares owned by an adult child who resides with
Mr. Evslin. Mr. Jordan's shares also include 22,500 shares owned by his
children, who are minors. Mr. Musci's shares include 2,700 shares owned
by his children, who are minors. Messrs. Evslin, Jordan and Musci
disclaim beneficial ownership of the shares owned by their children.
(4) This number represents 5,567,908 shares of common stock beneficially
owned by VocalTec Communications. Mr. Ganor is the Chairman of the Board
and CEO of VocalTec Communications. Mr. Ganor disclaims beneficial
ownership of these shares.
68
<PAGE>
(5) This number represents 4,649,000 shares of common stock beneficially
owned by Spectrum Equity Investors II, L.P. and 44,160 shares of common
stock beneficially owned by SEA 1998 II, L.P. Mr. Collatos is a managing
general partner of Spectrum Equity Investors II, L.P. and an affiliate of
SEA 1998 II, L.P. Mr. Collatos disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest therein.
(6) This number represents 592,376 shares of common stock beneficially owned
by The fl@tiron Fund LLC, 405,168 shares of common stock beneficially
owned by The Flatiron Fund 1998/99, LLC and 41,344 shares of common stock
beneficially owned by Flatiron Associates, LLC. Mr. Wilson is a manager
of The fl@tiron Fund LLC, The Flatiron Fund 1998/99, LLC and Flatiron
Associates, LLC. Mr. Wilson disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest therein. The
Flatiron entities are parties to certain co-investment arrangements with
affiliates of Chase Venture Capital Associates. These parties disclaim
beneficial ownership of each other's securities.
(7) The principal business address of VocalTec is 1 Executive Drive, Suite
320, Fort Lee, New Jersey 07024.
(8) The principal business address of Spectrum Equity Investors II, L.P. is
One International Place, Boston, Massachusetts 02110.
(9) The principal business address of Chase Venture Capital Associates, L.P.
is 380 Madison Avenue, New York, New York 10017.
(10) The principal business address of Intel Corporation is 2200 Mission
College Boulevard, Santa Clara, California 95052.
(11) Based on information provided by Essex Capital Management Company in its
Schedule 13G filed on February 2, 2000. The principal business address of
Essex Capital Management Company is 125 High Street, Boston,
Massachusetts 02110.
(12) This number represents 37,418 shares of common stock beneficially owned
by DS Polaris Ltd., 738,928 shares of common stock beneficially owned by
Polaris Fund II (Tax Exempt Investors), LLC, 487,692 shares of common
stock beneficially owned by Polaris Fund II, LLC, 184,732 shares of
common stock beneficially owned by Polaris Fund II, L.P., 434,112 shares
of common stock beneficially owned by DS Polaris Trust Company (foreign
residents) (1997), Ltd. and 149,664 shares of common stock beneficially
owned by Canada-Israel Opportunity Fund L.P. We have been informed that
DS Polaris Ltd. is the manager of Polaris Fund II (Tax Exempt Investors)
LLC and Polaris Fund II, LLC, the general partner of Polaris Fund II,
L.P. and DS Polaris Trust Company (foreign residents) (1997), Ltd. and an
affiliate of Canada-Israel Opportunity Fund L.P. The principal business
address of DS Polaris Ltd. is 37 Shaul Hamelech Avenue, Tel Aviv, Israel.
(13) The principal business address of the Flatiron entities is 257 Park
Avenue South, New York, New York 10010.
(14) VocalTec, Mr. Evslin, Mr. Jordan and Mr. Musci may sell up to an
additional 220,257, 125,000, 80,000 and 45,000 shares, respectively, if
our underwriters exercise their over-allotment option in full. See
"Underwriting."
(15) This number represents 779,743 shares of common stock to be sold by
VocalTec Communications in the offering.
(16) This number represents 233,216 and 2,701 shares of common stock to be
sold by Spectrum Equity Investors II L.P. and SEA 1998 II L.P.,
respectively, in the offering.
69
<PAGE>
(17) This number represents 15,992, 3,040 and 29,792 shares of common stock to
be sold by The fl@tiron Fund LLC, Flatiron Associates LLC and Flatiron
Fund II 1998/99 LLC, respectively, in the offering.
(18) This number represents 28,853, 19,043, 7,213, 16,951, 1,461 and 5,844
shares of common stock to be sold by Polaris Fund II (tax exempt
investors) LLC, Polaris Fund II LLC, Polaris Fund II, L.P., DS Polaris
Trust Company (foreign residents) (1997), Ltd., DS Polaris Ltd., and
Canada-Israel Opportunity Fund L.P., respectively, in the offering.
70
<PAGE>
DESCRIPTION OF CAPITAL STOCK
This is a summary of the material terms and provisions of our capital stock
and we refer you to our third restated certificate of incorporation, which has
been incorporated by reference as an exhibit to the registration statement of
which this prospectus is a part.
Our authorized capital stock consists of 67,500,000 shares of common stock,
par value $.001 per share, and 15,000,000 shares of preferred stock, par value
$.001 per share. As of January 31, 2000, our outstanding capital stock
consisted of 35,976,196 shares of common stock. No other shares of any class or
series were issued or outstanding as of January 31, 2000. In addition, the
following shares of common stock were reserved for issuance as of January 31,
2000:
. 879,766 shares were reserved for issuance upon the exercise of warrants
held by Tom I. Evslin and Edward B. Jordan at an exercise price of
$0.8525 per share;
. 5,561,130 shares were reserved for issuance upon exercise of outstanding
stock options granted under our stock incentive plan;
. 2,439,824 shares were reserved for issuance upon the exercise of stock
options or other benefits which may be granted under our stock incentive
plan; and
. 858,164 shares were reserved for issuance under our employee stock
purchase plan.
We intend to ask our stockholders, at our next annual meeting, to increase
the number of shares of authorized capital stock to accommodate, among other
things, stock splits.
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
offering is subject to any assessment.
71
<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
Under a registration rights agreement, certain of our stockholders have the
right, under certain circumstances and subject to certain conditions, to
require us to register under the Securities Act shares of our common stock held
by them. Subject to certain conditions and exceptions, such investors also have
the right to require that shares of common stock held by them be included in
any registration under the Securities Act commenced by us. The registration
rights agreement provides that we will pay all expenses in connection with the
registrations requested by such stockholders. The registration rights agreement
also provides that we will indemnify the stockholders for certain liabilities
they may incur under the securities laws.
Certain Change of Control Provisions
We are a Delaware corporation and are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in certain
business combinations with a 15% stockholder for a period of three years
following the date the person became a 15% stockholder, unless, with certain
exceptions, the business combination or the transaction in which the person
became a 15% stockholder is approved in a prescribed manner. Generally, the
business combinations covered by this statute include a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the 15%
stockholder. In determining whether a stockholder is a 15% stockholder, the
Delaware statute generally includes the voting shares owned by the stockholder
and the stockholder's affiliates and associates.
The authorization of undesignated preferred stock makes it possible for our
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
ITXC.
72
<PAGE>
Our certificate of incorporation provides for staggered terms for members of
our board of directors and eliminates the right of shareholders to act without
a meeting. Additionally, our by-laws establish an advance notice procedure for
stockholder proposals and for nominating candidates for election as directors.
The amendment of any of these provisions requires approval of at least two-
thirds of the outstanding common stock.
The above-mentioned provisions of Delaware law and of our certificate of
incorporation and by-laws may have the effect of delaying, deterring or
preventing a change in control of ITXC, may discourage bids for the common
stock at a premium over the prevailing market price, and may adversely affect
the market price, and the voting and other rights of the holders, of the common
stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Continental Stock
Transfer and Trust Company.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, we will have 38,155,886 shares of
common stock issued and outstanding, based on share information as of January
31, 2000. All of the 4,000,000 shares of common stock to be sold in this
offering and any shares sold upon exercise of the underwriters' over-allotment
options will be freely tradable without restrictions or further registration
under the Securities Act, except for any shares purchased by an affiliate of
ITXC as the term affiliate is defined in Rule 144 under the Securities Act,
which shares will be subject to the resale limitations of Rule 144. After the
completion of this offering, all of our outstanding shares of common stock
other than the shares offered hereby or sold in our initial public offering or
sold subsequent to our initial public offering upon exercise of stock options
will be restricted securities as the phrase restricted securities is defined in
Rule 144 and will be subject to certain restrictions on disposition. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act. Sales of restricted securities in the public market, or the
availability of such shares for sale, could have an adverse effect on the price
of the common stock.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned shares
of common stock for at least one year, including a person who may be deemed an
affiliate of ITXC for Rule 144 purposes, is entitled to sell, within any three-
month period, a number of shares that does not exceed the greater of one
percent of the total number of outstanding shares of the class of stock sold or
the average weekly reported trading volume of the class of stock being sold
during the four calendar weeks preceding such sale. A person who is not deemed
an affiliate of ITXC for Rule 144 purposes at any time during the three months
preceding a sale and who has beneficially owned shares for at least two years
is entitled to sell such shares under Rule 144 without regard to the volume
limitations as described above. As defined in Rule 144, an affiliate of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, is controlled by, or is under common control with,
such issuer. The foregoing summary of Rule 144 is not intended to be a complete
description of that Rule.
Our executive officers and directors who are selling stockholders in this
offering and the other selling stockholders in this offering have signed lock-
up agreements. Subject to certain exceptions, those persons have agreed that
for a period of 90 days after the date of this prospectus, or for a period of
240 days after the date of this prospectus in the case of VocalTec, they will
not offer, sell, contract to sell or otherwise dispose of any shares of common
stock or securities exercisable or exchangeable for common stock or enter into
any derivative transaction with similar effect as a sale of common stock,
unless they receive the prior written consent of Lehman Brothers Inc. Certain
other stockholders entered into lock-up agreements in connection with our
initial public offering; those agreements contain similar restrictions and will
expire on March 25, 2000.
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
74
<PAGE>
purchased from us by our employees, directors, officers, consultants or
advisors prior to the date we become subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended, under written compensatory
benefit plans or written contracts relating to the compensation of these
persons. In addition, Rule 701 will apply to certain stock options granted by
us before we became subject to the reporting requirements of the Securities
Exchange Act, along with the shares acquired upon exercise of these options
including exercises after the date of our initial public offering. Securities
issued in reliance on Rule 701 are restricted securities and, subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, subject to
the contractual restrictions described above, may be sold by:
. persons other than affiliates, subject only to the manner of sale
provisions set forth in Rule 144, and
. by affiliates, under Rule 144 without compliance with its one-year
minimum holding period requirements.
Except as indicated above, we are unable to estimate the amount, timing and
nature of future sales of outstanding common stock. No prediction can be made
as to the effect, if any, that market sales of shares of common stock or the
availability of shares for sale will have on the market price of the common
stock prevailing at any given time. Nevertheless, sales of significant numbers
of shares of common stock in the public market could adversely affect the
market price of the common stock and could impair our ability to raise capital
through an offering of our equity securities. See "Underwriting."
75
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following summary describes the material United States federal income
and estate tax consequences of the ownership of ITXC common stock by a non-U.S.
holder. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such non-U.S. holders in light of their
personal circumstances. Furthermore, the discussion below is based upon the
provisions of United States federal income tax law and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may
be repealed, revoked or modified so as to result in United States federal
income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of common stock should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, U.S. holder means a holder of ITXC common stock that is:
. a citizen or resident of the United States, or someone treated as a
United States citizen or resident individual for United States
federal income tax purposes;
. a corporation or partnership created or organized, or treated as
created or organized for United States federal income tax purposes,
in or under the laws of the United States or any political
subdivision thereof;
. an estate the income of which is subject to United States federal
income taxation regardless of its source;
. a trust the administration of which is subject to the primary
supervision of a court within the United States and the control of
one or more United States persons as described in section
7701(a)(30) of the Internal Revenue Code of 1986; or
. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a domestic trust.
As used herein, non-U.S. holder means a holder of ITXC common stock that
does not fit within the description of a U.S. holder above.
Dividends
Dividends paid to a non-U.S. holder of ITXC common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by the
non-U.S. holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the non-U.S. holder,
are not subject to the withholding tax, but instead are subject to United
States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure
requirements must be satisfied in order
76
<PAGE>
for such effectively connected dividends to be exempt from withholding. Any
such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Through December 31, 2000, dividends paid to an address outside the United
States are presumed to be paid to a resident of such country, unless the payer
has knowledge to the contrary, for purposes of the withholding tax discussed
above and, under the current interpretation of United States Treasury
regulations, for purposes of determining the applicability of a tax treaty
rate. However, under United States Treasury regulations, a non-U.S. holder of
ITXC common stock who wishes to claim the benefit of an applicable treaty rate
and avoid back-up withholding for dividends paid after December 31, 2000 will
be required to satisfy applicable certification and other requirements.
A non-U.S. holder of ITXC common stock eligible for a reduced rate of
United States withholding tax under an income tax treaty may obtain a refund
of any excess amounts withheld by filing an appropriate claim for refund with
the Internal Revenue Service.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
ITXC common stock unless:
(1) the gain is effectively connected with a trade or business of the non-
U.S. holder in the United States, and, where a tax treaty applies, is
attributable to a United States permanent establishment of the non-
U.S. holder,
(2) in the case of a non-U.S. holder who is an individual and holds the
ITXC common stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or
other disposition and certain other conditions are met, or
(3) ITXC is or has been treated as a U.S. real property holding
corporation for United States federal income tax purposes.
An individual non-U.S. holder described in clause (1) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual non-U.S. holder described in
clause (2) above will be subject to a flat 30% tax on the gain derived from
the sale, which may be offset by United States source capital losses (even
though the individual is not considered a resident of the United States). If a
non-U.S. holder that is a foreign corporation falls under clause (1) above, it
will be subject to tax on its gain under regular graduated United States
federal income tax rates and, in addition, may be subject to the branch
profits tax equal to 30% of its effectively connected earnings and profits
within the meaning of the Internal Revenue Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
77
<PAGE>
ITXC believes it is not and does not anticipate becoming a U.S. real
property holding corporation for United States federal income tax purposes. If
ITXC is or becomes a U.S. real property holding corporation, so long as the
ITXC common stock continues to be regularly traded on an established securities
market, only a non-U.S. holder who holds or held, at any time during the
shorter of the five year period preceding the date of disposition or the
holder's holding period, more than five percent of the ITXC common stock will
be subject to U.S. federal income tax on the disposition of the ITXC common
stock.
Special rules may apply to certain non-U.S. holders, such as entities which
are treated as controlled foreign corporations, passive foreign investment
companies or foreign personal holding companies under the Internal Revenue
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them
and their beneficial owners.
Federal Estate Tax
ITXC common stock held by an individual non-U.S. holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
Information Reporting and Backup Withholding
ITXC must report annually to the IRS and to each non-U.S. holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the non-U.S. holder
resides under the provisions of an applicable income tax treaty.
Through December 31, 2000, 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.
After December 31, 2000, and thereafter, however, a non-U.S. holder will be
subject to back-up withholding unless applicable certification requirements are
met.
Payment of the proceeds of a sale of ITXC common stock by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner certifies under penalties of
perjury that it is a non-U.S. holder or otherwise establishes an exemption. In
general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of ITXC common stock by or through a foreign
office of a broker. If, however, such broker is for United States federal
income tax purposes a U.S. person, a controlled foreign corporation, or a
foreign person that derives 50% or more of its gross income for a certain
period from the conduct of a trade or business in the United States, or, for
taxable years beginning after December 31, 2000, a foreign partnership in which
one or more United States persons, in the aggregate, own more than 50% of the
78
<PAGE>
income or capital interests in the partnership or if the partnership is engaged
in a trade or business in the United States, such payments will be subject to
information reporting, but not backup withholding, unless:
. such broker has documentary evidence in its records that the beneficial
owner is a non-U.S. holder and certain other conditions are met, or
. the beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
79
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters named below, for whom Lehman Brothers
Inc., CIBC World Markets Corp., PaineWebber Incorporated, First Analysis
Securities Corporation and Kaufman Bros., L.P. are acting as representatives,
severally agreed to purchase, and we and the selling stockholders 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
Underwriters of shares
------------ ---------
<S> <C>
Lehman Brothers Inc..............................................
CIBC World Markets Corp..........................................
PaineWebber Incorporated.........................................
First Analysis Securities Corporation............................
Kaufman Bros., L.P...............................................
Total.............................................................. 4,000,000
=========
</TABLE>
Lehman Brothers, on behalf of the underwriters, expects to deliver the
shares on or about , 2000.
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in the offering 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 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 public
offering price, the representatives may change the public offering price and
the other selling terms. The representatives have advised us that the
underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority in excess of 5% of the total number of shares
offered by them.
We and four of our stockholders have granted to the underwriters a 30-day
option to purchase up to an aggregate of 600,000 additional shares of our
common stock at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering over-
allotments, if any, in connection with the offering. To the extent the option
is exercised, each underwriter will be obligated, subject to various
conditions, to purchase a number of additional shares approximately
proportionate to its initial purchase commitment.
80
<PAGE>
In the event the underwriters exercise their over-allotment option for less
than the full 600,000 shares of our common stock, the four selling
stockholders who have granted the option will have the right to have all of
their 470,257 shares purchased by the underwriters on a pro rata basis prior
to any of ITXC's 129,743 shares being purchased.
We, our executive officers and directors who are selling stockholders and
the other selling stockholders have agreed, subject to certain exceptions, 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 90
days after the date of this prospectus, or, in the case of VocalTec, for a
period of 240 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;
. shares of common stock we issue under employee benefit plans, stock
option plans or other employee compensation plans existing on the
date of this prospectus or under currently outstanding options,
warrants or rights; and
. shares of common stock or securities convertible into or
exchangeable for common stock that we may issue in a private
placement transaction, provided that such shares are not publicly
resold for a period of 90 days after the date of this prospectus.
(2) sell or grant options, rights or warrants with respect to any shares
of our common stock or securities convertible into or exchangeable for
our common stock or substantially similar securities, other than the
grant of options under benefit plans existing on the date hereof; and
(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.
Any offer of the shares of common stock in Canada will be made only under
an exemption from the prospectus filing requirement and an exemption from the
dealer registration requirement; where such an exemption is not available,
offers shall be made only by a registered dealer, in the relevant Canadian
jurisdiction where any such offer is made.
In connection with this offering, 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. An over-allotment involves
syndicate sales of common stock in excess of the number of shares to be
81
<PAGE>
purchased by the underwriters in the offering, 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 offering 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 effected in the over-the-counter
market or otherwise and, if commenced, may be discontinued at any time.
We and the selling stockholders 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 have in the past and may
in the future provide investment banking, financial advisory and other services
to us for which these representatives have and may continue to receive
customary fees and commissions.
LEGAL MATTERS
Certain legal matters relating to this offering 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 underwriters by Simpson
Thacher & Bartlett, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1999 and 1998, and for the years then
ended and for the period from our July 21, 1997 date of inception to December
31, 1997, 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.
82
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act of 1933 with respect to the common stock offered hereby. This
prospectus does not contain all of the information set forth in the
registration statement, certain portions of which are omitted as permitted by
the rules and regulations of the SEC. For further information pertaining to us
and the common stock to be sold in the offering, reference is made to the
registration statement, including the exhibits thereto and the financial
statements and notes filed as a part thereof. This prospectus summarizes
material provisions of contracts and other documents to which we refer you.
Since this prospectus may not contain all of the information that you may find
important, you may desire to review the full text of these documents. We have
included or incorporated by reference copies of these documents as exhibits to
our registration statement.
You should only rely on the information contained in this prospectus and the
registration statement. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We and the
selling stockholders 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.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and file reports, proxy statements and other information with the
SEC. Such reports, proxy statements and other information, as well as the
registration statement and the exhibits thereto, may be inspected, without
charge, at the public reference facility maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Seven World Trade Center, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Please call the SEC at 1-800-SEC-0330 for information
regarding the public reference rooms. Copies of such material may also be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Such materials can also be
inspected on the SEC's web site at http://www.sec.gov.
83
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............. F-3
Consolidated Statements of Operations for the period from July 21, 1997
(date of inception) to December 31, 1997 and the years ended December
31, 1998 and 1999....................................................... F-4
Consolidated Statements of Stockholders' Equity for the period from July
21, 1997 (date of inception) to December 31, 1997 and the years ended
December 31, 1998 and 1999.............................................. F-5
Consolidated Statements of Cash Flows for the period from July 21, 1997
(date of inception) to December 31, 1997and the years ended December 31,
1998 and 1999........................................................... F-6
Notes to Consolidated 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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
and the period from July 21, 1997 (date of inception) to December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 7, 2000
F-2
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1999
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 3,971,237 $ 49,017,768
Marketable securities............................ 200,000 25,378,297
Accounts receivable, net of allowance of $172,000
in 1998 and $1,284,000 in 1999.................. 500,739 5,738,804
Prepaid expenses and other current assets........ 121,459 1,298,102
----------- ------------
Total current assets............................... 4,793,435 81,432,971
Property and equipment, net........................ 3,015,529 15,411,656
Deposits and other assets.......................... 24,833 66,232
Service contract rights, net of amortization of
$84,000........................................... -- 2,950,750
----------- ------------
Total assets....................................... $ 7,833,797 $ 99,861,609
=========== ============
Liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity (deficit)
Current liabilities:
Accounts payable................................. $ 831,275 $ 10,403,227
Accrued liabilities and other current
liabilities..................................... 786,043 3,157,229
Deferred revenue................................. 888,232 --
Customer deposits................................ 142,500 442,240
Current portion of capital lease obligations..... 76,705 1,620,317
----------- ------------
Total current liabilities.......................... 2,724,755 15,623,013
Equipment note payable............................. 1,200,000 1,723,191
Capital lease obligations, less current portion.... 160,368 2,149,177
Commitments and contingencies......................
Series B Redeemable Convertible Preferred Stock,
$.001 par value, issued and outstanding, 5,865,104
shares in 1998 and none in 1999................... 9,866,723 --
Series C Redeemable Convertible Preferred Stock,
$.001 par value, issued and outstanding, none in
1998 and 1999..................................... -- --
Stockholders' equity (deficit):
Preferred Stock, $.001 par value, authorized
10,000,000 shares in 1998 and 15,000,000 shares
in 1999......................................... -- --
Common Stock, $.001 par value, authorized
67,500,000 shares; issued and outstanding,
8,381,000 shares in 1998; and 35,816,401 shares
in 1999......................................... 8,381 35,816
Additional paid-in capital....................... 2,293,516 118,089,750
Deferred employee compensation................... (566,201) (10,240,858)
Accumulated deficit.............................. (7,853,745) (27,518,480)
----------- ------------
Total stockholders' equity (deficit)............... (6,118,049) 80,366,228
----------- ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit).................................. $ 7,833,797 $ 99,861,609
=========== ============
</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
December 31, Year ended December 31,
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Telecommunications revenue......... $ -- $ 1,238,008 $ 24,423,162
Consulting revenue................. 58,824 652,944 988,232
--------- ----------- ------------
Total revenue........................ 58,824 1,890,952 25,411,394
Costs and expenses:
Data communications and
telecommunications................ -- 2,016,757 23,095,225
Cost of consulting revenue......... -- 192,203 --
Network operations................. -- 1,320,587 3,219,039
Selling, general and
administrative.................... 700,874 5,120,944 14,778,207
Depreciation and amortization...... 5,000 344,587 2,556,436
Non-cash employee compensation..... -- 194,288 2,715,862
--------- ----------- ------------
Total costs and expenses............. 705,874 9,189,366 46,364,769
--------- ----------- ------------
Loss from operations................. (647,050) (7,298,414) (20,953,375)
Interest income...................... 756 230,538 1,495,800
Interest expense..................... -- (139,575) (207,160)
--------- ----------- ------------
Net loss............................. (646,294) (7,207,451) (19,664,735)
Accretion of redemption value of
mandatorily redeemable convertible
preferred stock..................... -- (14,217) (772,795)
--------- ----------- ------------
Net loss applicable to common
stockholders........................ $(646,294) $(7,221,668) $(20,437,530)
========= =========== ============
Basic and diluted net loss per share
applicable to common stockholders... $ (0.09) $ (0.88) $ (1.29)
========= =========== ============
Weighted average shares used in
computation of basic and diluted net
loss per share applicable to common
stockholders........................ 7,004,908 8,184,556 15,885,883
Pro forma basic and diluted net loss
per share (unaudited)............... $ (0.45) $ (0.69)
=========== ============
Weighted average shares used in
computation of pro forma basic and
diluted net loss per share
(unaudited)......................... 16,154,670 28,525,619
</TABLE>
See accompanying notes.
F-4
<PAGE>
ITXC CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from July 21, 1997 (date of inception) to December 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... -- -- 7,800,000 $ 7,800 $ 23,100 $ -- -- $(900) --
Issuance of
Series A Stock
and Preferred
Warrant........ 278,000 $ 278 -- -- 424,722 -- -- -- --
Issuance of
Common Warrants
for software
credit......... -- -- -- -- 1,000,000 (1,000,000) -- -- --
Utilization of
software
credit......... -- -- -- -- -- 243,000 -- -- --
Net loss........ -- -- -- -- -- -- -- -- $ (646,294)
----------- -------- ---------- ------- ------------ ----------- ------------ ----- ------------
Balance, December
31, 1997........ 278,000 278 7,800,000 7,800 1,447,822 (757,000) -- (900) (646,294)
Conversion of
Series A Stock
and Preferred
Warrant to
Common Stock... (278,000) (278) 556,000 556 (278) -- -- -- --
Repayment of
subscription
receivable..... -- -- -- -- (900) -- -- 900 --
Issuance of
Common Stock
for services... -- -- 25,000 25 10,600 -- -- -- --
Utilization of
software
credit......... -- -- -- -- -- 757,000 -- -- --
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- (14,217) -- -- -- --
Deferred non-
cash Employee
compensation... -- -- -- -- 760,489 -- (760,489) -- --
Amortization of
non-cash
deferred
employee
compensation... -- -- -- -- -- -- 194,288 -- --
Non cash
interest
expense........ -- -- -- -- 90,000 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- (7,207,451)
----------- -------- ---------- ------- ------------ ----------- ------------ ----- ------------
Balance, December
31, 1998........ -- -- 8,381,000 8,381 2,293,516 -- (566,201) -- (7,853,745)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... -- -- -- -- (772,795) -- -- -- --
Deferred non-
cash employee
compensation... -- -- -- -- 12,390,519 -- (12,390,519) -- --
Amortization of
non-cash
deferred
employee
compensation... -- -- -- -- -- -- 2,715,862 -- --
Issuance of
common stock
for exercise of
warrants....... -- -- 1,444,000 1,444 (722) -- -- -- --
Issuance of
common stock
for exercise of
options........ -- -- 613,743 614 219,285 -- -- -- --
Issuance of
common stock
for initial
public
offering....... -- -- 7,187,500 7,187 78,407,034 -- -- -- --
Conversion of
mandatorily
redeemable
convertible
preferred stock
to common
stock.......... 18,190,158 18,190 25,552,913
Net loss........ -- -- -- -- -- -- -- -- (19,664,735)
----------- -------- ---------- ------- ------------ ----------- ------------ ----- ------------
Balance, December
31, 1999........ -- $ -- 35,816,401 $35,816 $118,089,750 -- $(10,240,858) -- $(27,518,480)
=========== ======== ========== ======= ============ =========== ============ ===== ============
<CAPTION>
Total
-------------
<S> <C>
Issuance of
Common Stock... $ 30,000
Issuance of
Series A Stock
and Preferred
Warrant........ 425,000
Issuance of
Common Warrants
for software
credit......... --
Utilization of
software
credit......... 243,000
Net loss........ (646,294)
-------------
Balance, December
31, 1997........ 51,706
Conversion of
Series A Stock
and Preferred
Warrant to
Common Stock... --
Repayment of
subscription
receivable..... --
Issuance of
Common Stock
for services... 10,625
Utilization of
software
credit......... 757,000
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... (14,217)
Deferred non-
cash Employee
compensation... --
Amortization of
non-cash
deferred
employee
compensation... 194,288
Non cash
interest
expense........ 90,000
Net loss........ (7,207,451)
-------------
Balance, December
31, 1998........ (6,118,049)
Accretion of
redemption
value of
mandatorily
redeemable
convertible
preferred
stock.......... (772,795)
Deferred non-
cash employee
compensation... --
Amortization of
non-cash
deferred
employee
compensation... 2,715,862
Issuance of
common stock
for exercise of
warrants....... 722
Issuance of
common stock
for exercise of
options........ 219,899
Issuance of
common stock
for initial
public
offering....... 78,414,221
Conversion of
mandatorily
redeemable
convertible
preferred stock
to common
stock.......... 25,571,103
Net loss........ (19,664,735)
-------------
Balance, December
31, 1999........ $ 80,366,228
=============
</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
inception) to Year ended December 31,
December 31, -------------------------
1997 1998 1999
------------- ----------- ------------
<S> <C> <C> <C>
Operating activities
Net loss............................. $(646,294) $(7,207,451) $(19,664,735)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization...... 5,000 344,587 2,556,436
Provision for doubtful accounts.... -- 172,475 2,600,554
Amortization of non-cash deferred
employee compensation............. -- 194,288 2,715,862
Issuance of common stock for
services.......................... -- 10,625 --
Non-cash interest expense.......... -- 90,000 --
Amortization of original issue
discounts......................... -- -- (510,582)
Changes in operating assets and
liabilities:
Increase in accounts receivable.. -- (673,214) (7,838,619)
Increase in prepaid expenses and
other assets.................... (18,846) (127,446) (1,218,042)
Increase in accounts payable and
accrued expenses................ 302,261 1,315,057 5,801,871
Increase (decrease) in customer
deposits and deferred revenue... 441,176 589,556 (588,492)
--------- ----------- ------------
Net cash provided by (used in)
operating activities................ 83,297 (5,291,523) (16,145,747)
Investing activities
Purchase of property and equipment... (40,420) (2,073,696) (4,714,757)
Purchase of service contract rights.. -- -- (3,035,057)
Purchase of available for sale
securities.......................... -- (200,000) (64,367,815)
Maturities of available for sale
securities.......................... -- -- 39,700,000
--------- ----------- ------------
Net cash used in investing
activities.......................... (40,420) (2,273,696) (32,417,629)
Financing activities
Proceeds from equipment line of
credit.............................. -- 1,200,000 523,191
Proceeds from stockholder note....... -- 50,000 --
Repayment of capital lease
obligations......................... -- (13,927) (479,710)
Issuance of common stock............. 30,000 900 220,621
Issuance of convertible preferred
stock............................... 425,000 9,101,606 14,931,584
Proceeds from initial public
offering............................ -- -- 78,414,221
--------- ----------- ------------
Net cash provided by financing
activities.......................... 455,000 11,038,579 93,609,907
--------- ----------- ------------
Increase in cash..................... 497,877 3,473,360 45,046,531
Cash and cash equivalents at
beginning of period................. -- 497,877 3,971,237
--------- ----------- ------------
Cash and cash equivalents at end of
period.............................. $ 497,877 $ 3,971,237 $ 49,017,768
========= =========== ============
Supplemental disclosures of cash flow
information
Cash paid for interest............... -- $ 36,446 $ 223,834
========= =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
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 for which revenues commenced in 1998. During 1997, the Company
was in the development stage and was primarily developing and constructing its
network, and provided consulting services under a market trial agreement with
a company in the telecommunications industry (see Note 11). During 1998 the
Company exited the development stage. The Company operates in one business
segment.
Initial Public Offering
On October 1, 1999, the Company completed an initial public offering (IPO)
of 7.2 million shares of common stock at a price of $12.00 per share,
generating net proceeds of approximately $78.4 million. Under the Company's
Certificate of Incorporation, all outstanding shares of Series B Redeemable
Convertible Preferred Stock and Series C Redeemable Convertible Preferred
Stock were converted into shares of Common Stock on a two-for-one basis
(reflecting the stock split described in Note 11), effective upon the closing
of the Company's IPO, resulting in the issuance of an additional 18.2 million
shares of common stock.
Subsidiaries and Joint Venture
In March 1998, ITXC Data Transport Services LLC ("Data Transport"), a wholly
owned subsidiary, was formed for the purpose of holding licenses and
agreements with certain carriers and re-sellers and to acquire and operate
switching equipment for the Company.
In July 1998, ITXC Asia PTE Ltd, a wholly-owned subsidiary (Singapore
company), was formed for the purpose of selling and marketing the Company's
services in Asia.
In July 1998, the Company obtained a 49% interest in ITXC Comunicacoes Ltda
("ITXC Ltda"), a newly formed Brazilian joint venture, in consideration of
rights to certain technology, which will provide exchange carrier long-
distance services in Brazil. The Company's ownership interest in ITXC Ltda is
accounted for under the equity method of accounting. No investment has been
recorded by the Company as no consideration has been paid.
The ITXC Ltda joint venture agreement, as amended, provided for an exit
clause triggered by an acquisition of the Company, certain business
combinations, failure of the Company or ITXC Ltda to meet certain performance
thresholds or the occurrence of certain
F-7
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
other events. If any of these events occurred, the clause provided the Company
a call option and provided TeleNova Communicacoes Ltda and its assignee
(collectively, "TeleNova") a put option which required the Company to acquire
TeleNova's interest in ITXC Ltda.
In February 2000, the Company agreed to issue 150,000 shares of its common
stock to affiliates of TeleNova in exchange for: (i) equity in TeleNova,
having a value of at least $6 million, (ii) termination of the call and put
options and (iii) certain contractual commitments by each party. As part of
this agreement, the parties also terminated the joint venture agreement and
related license agreement.
In June 1999, the Company formed ITXC, Ltd., a United Kingdom company, to
conduct certain United Kingdom operations.
Basis of Consolidation
The consolidated financial statements include the accounts of ITXC Corp. and
its wholly-owned subsidiaries, Data Transport, ITXC, Ltd. 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.
Marketable Securities
Marketable securities consist of fixed income investments which can be
readily purchased or sold using established markets. In accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities,
management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designations as of each balance sheet
date. Such investments are classified as available-for-sale and, accordingly,
are carried at fair value which approximates amortized cost at December 31,
1998 and 1999. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion, as well as interest, are included in interest
income. Realized gains and losses and declines in value judged to be other
than temporary are included in investment income. The cost of securities sold
is based on the specific identification method.
Concentration of Credit Risk
The Company transacts a significant volume of business with several
customers. Four customers represented 35%, 20%, 13% and 11%, respectively, of
1998 total revenue and three customers represented 12%, 12% and 11%,
respectively, of 1999 total revenue. Accounts receivable from these customers
were approximately $417,800 and $3,090,900 at December 31, 1998 and 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.
F-8
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from July 21, 1997 to December 31, 1997, one customer
accounted for 100% of consulting revenue under the market trial agreement
referred to in the first paragraph of Note 1.
Depreciation and Amortization
Property and equipment are recorded at cost and are depreciated over the
estimated useful lives and leasehold improvements are depreciated over the
term of the lease or over the estimated useful lives, whichever is shorter,
utilizing the straight-line method as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
-----------
<S> <C>
Network equipment and software................................ 2-3
Furniture, fixtures and office equipment...................... 3-7
Leasehold improvements........................................ 2
</TABLE>
Revenue Recognition
The Company recognizes telecommunications revenue and the related costs at
the time the services are rendered. Telecommunications revenue is derived from
fees charged to terminate Internet based voice and fax services over our
network.
In 1997, the Company entered into a market trial agreement with a third
party. Under that agreement, the Company conducted a market trial to determine
the market opportunity, operational requirements and business arrangements
with respect to offering wholesale switching, transport, billing and
settlement services relating to Internet protocol telephony services. While
the agreement was in effect, the Company conducted a market trial of its
wholesale switching, transport, billing and settlement services and provided
periodic reports according to an agreed upon schedule. These reports provided
marketing analyses, service descriptions, operations analyses and business
structure and competitive analyses. The Company recognized consulting revenue
under the market trial agreement as certain milestones were attained and cash
collections were assured, as specified in the contract, and in accordance with
Statement of Financial Accounting Standards, No. 68, Research and Development
Arrangements. This agreement required certain research reports to be delivered
by the Company and accepted by the customer, for payments under the contract
to become due and payable. At December 31, 1998, $888,232, of revenue was
deferred in connection with this market trial agreement for payments received
in advance of delivery and acceptance of certain reports, which was fully
earned during 1999.
Advertising
Advertising costs are expensed as incurred. During 1997, 1998 and 1999, the
Company expensed approximately $14,000, $119,000, and $198,000, respectively,
of such costs.
F-9
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development
Development costs are expensed as incurred. Development costs of
approximately $0, $594,000 and $1,509,000 were expensed in 1997, 1998 and
1999, respectively, and are included in selling, general and administrative
costs.
Income Tax
Deferred income taxes are determined using the liability method in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities (i.e. temporary differences) and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," using an intrinsic value approach to measure
compensation expense, if any. Appropriate disclosures using a fair value based
method, as provided by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), are also reflected in
the accompanying notes to the financial statements. Options issued to non-
employees are accounted for in accordance with SFAS 123, using a fair value
approach. The Company has not issued any options to non-employees.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivatives and Hedging Activities (SFAS 133), which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. As the Company
does not currently engage in derivatives or hedging transactions, there will
be no current impact to the Company's results of operations, financial
position or cash flows upon the adoption of SFAS 133.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-10
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Available for Sale Investments
The Company's available for sale investments which are included in cash
equivalents ($47,715,977 at December 31, 1999) and marketable securities are
as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
-------- -----------
<S> <C> <C>
Money market funds........................................ -- $ 9,409,553
Commercial paper.......................................... -- 48,676,937
Certificates of deposits.................................. $200,000 7,000,296
Asset-backed securities................................... -- 8,007,508
-------- -----------
Total................................................... $200,000 $73,094,294
======== ===========
</TABLE>
Gross realized gains and losses for the years ended December 31, 1998 and
1999 were immaterial.
The Company's available for sale securities have the following maturities at
December 31, 1999:
<TABLE>
<S> <C>
Due in one year or less............................................. $65,086,786
Due after one year through five years............................... 8,007,508
</TABLE>
4. Accounts Receivable
The Company estimates the amount of the allowance for doubtful accounts
required to reduce accounts receivable to expected net realizable value by
reviewing the status of significant past-due receivables and analyzing
historical bad debt trends.
The Company did not write-off any accounts receivable during 1997 and 1998.
The Company wrote-off approximately $1,490,000 of accounts receivable during
1999.
5. Property and Equipment
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- -----------
<S> <C> <C>
Network equipment and software.......................... $1,955,887 $13,494,034
Furniture, fixtures and office equipment................ 1,147,946 4,126,859
Leasehold improvements.................................. 261,283 612,479
---------- -----------
3,365,116 18,233,372
Less accumulated depreciation and amortization.......... 349,587 2,821,716
---------- -----------
$3,015,529 $15,411,656
========== ===========
</TABLE>
Equipment under capital leases totaled approximately $251,000 and $4,265,000
at December 31, 1998 and 1999, respectively. Included in accumulated
depreciation is approximately $14,000 and $609,000 related to such assets at
December 31, 1998 and 1999, respectively.
F-11
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and 1999, network equipment and software includes $1
million of software which is used in Internet gateways and switches. This
software was purchased from a stockholder, who was paid by issuance of common
stock warrants (see Note 11). By December 31, 1999 all such software was
deployed into operations and is being depreciated over a three-year life.
6. Purchase of Contractual Rights
On November 30, 1999, the Company purchased the contractual rights to
certain terminator and reseller agreements and intellectual property, for a
cash purchase price of $3 million, which is being amortized over a three year
period.
7. Accrued Expenses
Accrued liabilities and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ----------
<S> <C> <C>
Compensation............................................... $262,807 $1,367,120
Payroll tax withholding liability.......................... -- 644,954
Accrued contract costs..................................... 300,000 --
Employee relocation costs.................................. 100,000 --
Other...................................................... 123,236 1,145,155
-------- ----------
$786,043 $3,157,229
======== ==========
</TABLE>
Accrued contract costs represent the remaining minimum payments due under a
contract with a telecommunication vendor, which the Company terminated in
December 1998.
8. Income Taxes
Due to operating losses, the Company has no income tax liability for 1997,
1998 or 1999.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $2,977,041 $ 9,400,502
Allowance for doubtful accounts...................... 68,990 513,600
Amortization of non-cash employee compensation....... -- 1,085,658
Other................................................ 120,764 207,599
---------- -----------
3,166,795 11,207,359
Less valuation allowance............................... (3,108,838) (10,870,050)
---------- -----------
Deferred tax asset..................................... 57,957 337,309
Deferred tax liabilities:
Fixed assets......................................... (57,957) (337,309)
---------- -----------
Net deferred tax asset................................. $ -- $ --
========== ===========
</TABLE>
F-12
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation setting forth the differences between the effective tax
rate of the Company and the U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1998 1999
---------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax (benefit) at 34%... $(219,740) 34.0% $(2,450,533) 34.0% $(6,389,893) 34.0%
State income tax
(benefit), net of
federal benefit........ (38,389) 5.9 (404,338) 5.6 (1,116,352) 5.9
Nondeductible
expenses............... -- -- 7,750 (0.1) 21,269 (0.1)
Other................... 1,321 (0.2) (4,909) 0.1 74,077 (0.4)
Increase in valuation
allowance.............. 256,808 (39.7) 2,852,030 (39.6) 7,410,899 (39.4)
--------- ----- ----------- ----- ----------- -----
Total................... $ -- -- $ -- -- $ -- --
========= ===== =========== ===== =========== =====
</TABLE>
At December 31, 1999, the Company has a federal and state net operating loss
("NOL") carryforward of approximately $22.5 million. The federal NOL
carryforwards expire from 2012 to 2019. The state NOL carryforwards expire
from 2004 to 2006. 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 either 1998 or 1999. The effect of an ownership change would
be the imposition of an annual limitation on the use of NOL carryforwards
attributable to periods before the 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 periods.
The Company's existing deferred tax assets at December 31, 1997, 1998 and
1999 have been reduced by a valuation allowance of $256,808, $3,108,838, and
$10,870,050, respectively, due to the uncertainty regarding the realization of
such deferred tax assets. A portion of the deferred tax asset arising during
1999 relates to the exercise of non-qualified stock options by employees.
9. Debt
The Company has a revolving credit agreement with a bank, which, through
February 1, 2000, provided 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. Available borrowings under the revolving line were
determined based on a formula including accounts receivable. Available
borrowings under the equipment line were determined based on a formula
including billable minutes. At December 31, 1999, the maximum available
borrowings were $2.3 million, of which $1.7 million is outstanding.
The Company is contractually required to make an annual payment based on the
previous years' excess cash flow, as defined.
The revolving line bore 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 bore
interest at the greater of (i) the
F-13
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
bank's prime rate plus 0.75%, or (ii) the federal funds rate plus 2.0%. The
rate in effect at December 31, 1999 under the equipment line was 8.75%,
representing the bank's prime rate plus 0.75%.
On February 1, 2000, the credit agreement was amended and restated to
increase the available borrowings to $10 million, which may be used either
under the revolving line or the equipment line. The Company is permitted to
make borrowings through February 1, 2001, with any amount outstanding under
the equipment line to be converted to a term loan due three years from the
final draw down. Each portion of the loan will bear interest at the greater of
(i) the bank's prime rate, or (ii) the federal funds rate plus .5%.
Borrowings under the credit agreement are collateralized by substantially
all of the Company's assets and the Company was required to maintain a
restricted cash balance of $200,000 through December 31, 1998. In addition,
the Company is required to maintain compliance with certain financial
covenants. As of December 31, 1999 the Company was in violation of one
financial covenant and has obtained a letter from the bank waiving the
violation at that date. The amended and restated agreement made such covenant
less restrictive. As a result, the Company believes that it will maintain
compliance with such covenant throughout 2000.
The fair value of the Company's debt approximates its carrying value.
10. 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 $656,000. 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 and 1999, 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>
2000 .................................................... $1,070,000 $1,763,965
2001 .................................................... 1,043,000 1,507,211
2002..................................................... 1,004,000 675,593
2003..................................................... 819,000 157,752
2004..................................................... 819,000 87,357
----------
4,191,870
Less amounts representing interest....................... 422,384
----------
Present value of net minimum lease payments.............. $3,769,494
==========
</TABLE>
F-14
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense for all operating leases was approximately $15,000, $217,000,
and $530,000 in 1997, 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.
11. Capital Stock
On August 25, 1999, the Company's Board of Directors approved a 2 for 1
stock split of its Common Stock which became effective on September 20, 1999.
All Common Stock share amounts and preferred stock conversion ratios included
in the financial statements reflect the stock split for all periods presented.
On September 20, 1999, the Company's stockholders approved an increase in
the authorized Common Stock to 67,500,000 shares which became effective on
September 20, 1999.
On July 21, 1997, the Company issued 6,000,000 shares of Common Stock to its
founder and president for $30,000.
On October 1, 1997, the Company issued 1,800,000 shares of Common Stock to
an investor for $900, which was paid subsequent to December 31, 1997. On
October 1, 1997, the Company issued ten warrants to purchase an aggregate of
1,200,000 shares of Common Stock at par value to an investor in exchange for a
software credit in the amount of $1 million to be used within three years
against the purchase of products from the investor. Each warrant became
exercisable for each $100,000 of the software credit utilized by the Company.
At December 31, 1998, $1 million of the software credit had been utilized by
the Company for the purchase of software, and, accordingly, all warrants were
exercisable. Also, on October 1, 1997, the Company sold to the same investor
278,000 shares of Series A Convertible Preferred Stock (the "Series A Stock"),
and a warrant to purchase an additional 122,000 shares of Series A Stock (the
"Preferred Warrant") with an exercise price of par value, for aggregate
proceeds of $500,000.
On April 27, 1998, in connection with the sale of the Series B Redeemable
Convertible Preferred Stock, all of the outstanding shares of Series A Stock
were converted into 556,000 shares of Common Stock and the Preferred Warrant
was converted into a warrant to purchase 244,000 shares of Common Stock. Such
warrants and the warrant to purchase 1,200,000 shares of common stock were
exercisable at any time prior to the earlier of October 1, 2004 or the
consummation of an initial public offering of the Company's common stock. All
1,444,000 warrants were exercised during 1999 for an aggregate exercise price
of $722.
F-15
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On November 18, 1997, the Company issued a warrant to purchase up to
3,800,000 shares of Common Stock, with an exercise price of $1.32 per share,
to a customer to whom the Company provided 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 canceled.
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 was convertible into two shares of Common
Stock, subject to anti-dilution provisions, as defined. The Series B Stock
automatically converted into Common Stock upon the completion of the initial
public offering of the Company's Common Stock discussed in Note 1, resulting
in the issuance of an additional 11,730,208 shares of Common Stock.
In connection with the Series B Stock private placement, the two officers of
the Company who participated in the offering provided the Company with bridge
financing of $750,000 which was converted into Series B Stock. In addition,
the Company issued the two officers warrants to purchase an aggregate of
879,766 shares of Common Stock with an exercise price of $.8525 per share. The
warrants are exercisable at any time prior to April 30, 2008. The fair value
of these warrants was determined to be $90,000 at the date of the grant, which
is included in 1998 interest expense.
Series C Mandatorily Redeemable Convertible Preferred Stock
On February 24, 1999, the Company issued 3,229,975 shares of Series C
Mandatorily Redeemable Convertible Preferred Stock (the "Series C Stock") to
various investors at a purchase price of $4.644 per share, resulting in net
proceeds of $14,932,000. The Series C Stock had conversion and redemption
features identical to the Series B Stock, and accordingly, also automatically
converted into Common Stock upon the completion of the initial public offering
of the Company's Common Stock discussed in Note 1, resulting in the issuance
of an additional 6,459,950 shares of Common Stock.
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
F-16
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock held by such stockholders, on or after one year from the completion of
the initial public offering of the Company's Common Stock.
Common Shares Reserved
As of December 31, 1999, the Company had reserved shares of Common Stock for
issuance as follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Exercise of common stock options................................ 7,086,257
Exercise of common stock warrants............................... 879,766
Employee stock purchase plan.................................... 500,000
</TABLE>
Stock Option Plan
On February 17, 1998, the Company adopted the 1998 Stock Incentive Plan (the
"Plan"). The Plan, as amended, provides for the granting of awards to purchase
up to 7,700,000 shares of common stock, subject to annual increases in the
number of shares covered by the Plan. 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 1999
------------------ ------------------- -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... -- -- 1,598,340 $ 0.05 2,641,250 $ 0.21
Options granted......... 1,598,340 $0.05 1,517,910 0.35 3,487,500 2.82
Options exercised....... -- -- -- -- (613,743) (0.44)
Options cancelled....... -- -- (475,000) (0.15) (176,083) (1.95)
--------- ----- --------- ------ --------- ------
Options outstanding, end
of year................ 1,598,340 $0.05 2,641,250 $ 0.21 5,338,924 $ 1.83
========= ===== ========= ====== ========= ======
</TABLE>
The weighted-average fair value of options granted in 1997, 1998 and 1999
was $.015, $1.16 and $11.75, respectively.
F-17
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed price stock options
outstanding at December 31, 1999:
<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 1999 Price
- --------------- --------- ---------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.08 833,332 7.7 years $ 0.03 449,998 $0.04
0.26 - 0.43 1,141,592 8.1 years 0.34 251,949 0.33
0.63 - 0.81 1,801,250 8.5 years 0.65 -- --
1.16 - 2.50 540,000 9.2 years 1.59 -- --
4.00 - 12.00 949,500 9.5 years 4.69 -- --
27.00 - 49.00 73,250 9.8 years 40.69 -- --
--------- -------
$ 0.01 - $49.00 5,338,924 $ 1.85 701,947 $0.14
========= ====== ======= =====
</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 1999, 1998 or 1997.
During 1998 and 1999, prior to the IPO, the Company granted options to
employees to purchase an aggregate of 1,517,910 and 3,186,750 shares,
respectively, of common stock at exercise prices ranging from $.30 to $4.00.
The exercise price of each of these option grants was below the fair value of
the Company's common stock at the respective dates of grant, resulting in
aggregate non-cash compensation of approximately $760,000 and $12.4 million in
1998 and 1999, respectively, which is being amortized to expense over the
option vesting periods, generally three to seven years.
12. Stock Purchase Plan
During 1999, the Company's Board of Directors adopted the ITXC Corp.
Employee Stock Purchase Plan, intended to qualify under Section 423 of the
Internal Revenue Code. The Purchase Plan enables eligible employees to
purchase shares of the Company's Common Stock through payroll deductions,
ranging from 1% to 10% of gross pay. The purchase price for Common Stock
purchased under the Purchase Plan is 85% of the lesser of the fair market
value of the shares on the first or last day of the offering period. The first
offering period commenced on October 1, 1999. The Company has initially
reserved 500,000 shares of common stock for issuance under the plan, subject
to annual increases in the number of shares covered by the Purchase Plan.
13. 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-18
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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. The increase in the weighted average shares
outstanding from 1998 to 1999 is largely attributable to the completion of the
Company's IPO and conversion of preferred stock to Common Stock, which both
occurred on October 1, 1999.
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. 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 is not dilutive.
14. Geographic Data
During 1999, the Company generated approximately 7% 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.
15. Unaudited Pro Forma Information
The Company's historical capital structure prior to the completion of the
IPO is not indicative of its ongoing structure due to the automatic conversion
of all Series B and Series C Stock upon closing of the IPO on October 1, 1999.
Accordingly, the unaudited pro forma net loss per share assumes the
conversion of the Series B and Series C Stock to Common Stock as if it had
been converted at the date of issuance, even though the result is
antidilutive.
F-19
<PAGE>
ITXC CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 December 31, 1999
------------------------------ --------------------------------
Denominator Denominator
(Weighted (Weighted
Numerator Average Per Numerator Average Per
(Net Loss) Shares) Share (Net Loss) Shares) Share
----------- ----------- ----- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net
loss per common share.. $(7,221,668) 8,184,556 $(.88) $(20,437,530) 15,885,883 $(1.29)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock........ 14,217 -- -- 772,795 -- --
Assumed conversion of
shares of mandatorily
redeemable convertible
preferred stock into
shares of common stock
at issuance............ -- 7,970,114 -- -- 12,639,736 --
----------- ---------- ----- ------------ ---------- ------
Pro forma basic and
diluted net loss per
common share........... $(7,207,451) 16,154,670 $(.45) $(19,664,735) 28,525,619 $ (.69)
=========== ========== ===== ============ ========== ======
</TABLE>
F-20
<PAGE>
[Inside back cover: A graphic depicting ITXC logo surrounded by portions of
global map and people talking on telephones.]
<PAGE>
[MAP]
4,000,000 Shares
[LOGO]
ITXC Corp.
Common Stock
--------------------------
PROSPECTUS
, 2000
--------------------------
Lehman Brothers
CIBC World Markets
PaineWebber Incorporated
First Analysis Securities Corporation
Kaufman Bros., L.P.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth estimated expenses, all of which are to be
paid by ITXC, 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........................................... $ 128,271
NASD filing fee................................................ 30,500
Nasdaq listing fee............................................. 17,500
Printing and engraving expenses................................ 175,000
Legal fees and expenses........................................ 225,000
Accounting fees and expenses................................... 150,000
Transfer agent and registrar fees.............................. 4,200
Miscellaneous.................................................. 119,529
---------
Total...................................................... $ 850,000
=========
</TABLE>
Item 14. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law (DGCL), a
corporation has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which any of them is a party by reason of
his being a director or officer of the corporation if it is determined that he
acted in good faith and in a manner he believed to be in (or not opposed to)
the interests of the corporation, and, in the case of a criminal proceeding, he
had no reason to believe his conduct was unlawful. Our certificate of
incorporation provides that we will indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that he is or was a director
or officer of ITXC, or is or was serving at our request as a director, officer,
employee, manager or agent of another entity, against certain liabilities,
costs and expenses. It further permits us to maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of ITXC, or is
or was serving at our request as a director, officer, employee or agent of
another entity against any liability asserted against such person and incurred
by such person in any such capacity or arising out of his status as such,
whether or not we would have the power to indemnify such person against such
liability under the DGCL.
Section 102(b)(7) of the DGCL permits a corporation, in its certificate of
incorporation, to limit or eliminate, subject to certain statutory limitations,
the personal liability of directors to the corporation or its stockholders for
monetary damages for breaches of fiduciary duty, as a director except for
liability (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the DGCL, or (d) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
Article TENTH of our Certificate of Incorporation contains the following
provision regarding limitation of liability of our directors and officers:
"No director of the Corporation shall be liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit."
The underwriting agreement contains provisions pursuant to which each
underwriter severally agrees to indemnify us, any person controlling us within
the meaning of Section 15 of the Securities Act of 1933, or Section 20 of the
Securities Exchange Act of 1934, each of our directors, and each officer of
ITXC who signs this registration statement with respect to information relating
to such underwriter furnished in writing to us by or on behalf of such
underwriter specifically for inclusion in this registration statement.
Item 15. Recent Sales of Unregistered Securities
Since ITXC was incorporated in July 1997, ITXC sold shares of its capital
stock in the following transactions, each of which was intended to be exempt
from the registration requirements of the Securities Act of 1933:
On July 21, 1997, ITXC sold to its Chief Executive Officer, Tom Evslin,
6,000,000 shares of common stock, for an aggregate purchase price of $30,000.
For the foregoing transaction, ITXC relied upon the exemption from registration
under Section 4(2) of the Securities Act; such shares continue to bear a
restrictive legend.
On October 1, 1997, ITXC sold to one accredited investor 1,800,000 shares of
common stock, for an aggregate cash purchase price of $900 and the contribution
by the investor of certain property. On October 1, 1997, ITXC sold to that same
investor 278,000 shares of Series A convertible preferred stock (which
converted into 556,000 shares of common stock), warrants covering 122,000
shares of such Series A convertible preferred stock (which have been converted
into warrants to purchase 244,000 shares of common stock) and warrants covering
1,200,000 shares of common stock (exercisable subject, in part, to ITXC's
utilization of software credits) in exchange for $500,000 in cash, and $1.0
million of software credits to purchase VocalTec equipment. Such shares of
Series A convertible preferred stock have been converted into common stock. For
the foregoing transactions, ITXC relied upon the exemption from registration
under Section 4(2) of the Securities Act; such shares continue to be subject to
a restrictive legend.
On April 27, 1998, ITXC sold an aggregate of 5,865,104 shares of its Series
B Convertible Preferred Stock for an aggregate cash consideration of $10.0
million to a total of fourteen accredited investors. For the foregoing
transaction, ITXC relied upon the exemption from registration under Regulation
D under the Securities Act. Each of these shares continues to be subject to
restrictive legends.
II-2
<PAGE>
On September 23, 1998, ITXC issued 25,000 shares of common stock to Howard
Fischer Associates, Inc. for consideration consisting of certain services
provided to ITXC. For the foregoing transaction, ITXC relied upon the exemption
from registration under Section 4(2) of the Securities Act. Such shares
continue to bear a restrictive legend.
On February 24, 1999, ITXC sold an aggregate of 3,229,975 shares of its
Series C Convertible Preferred Stock for aggregate cash consideration of $15.0
million to a total of fourteen accredited investors. For the foregoing
transaction, ITXC relied upon the exemption from registration under Regulation
D under the Securities Act. Further, each of these shares continues to be
subject to restrictive legends.
On April 27, 1998, ITXC entered into certain warrant agreements with Mr.
Evslin and Mr. Jordan. Their warrants are fully vested and currently
exercisable and entitle the holder to purchase 645,162 shares of common stock
and 234,604 shares of common stock, respectively. For the foregoing
transaction, ITXC relied upon the exemption from registration under Section
4(2) of the Securities Act.
From inception through December 31, 1999, ITXC granted to certain of its
officers, directors and employees options to purchase up to an aggregate of
6,603,750 shares of common stock. Options to purchase 613,743 of such shares
were exercised. For the foregoing transactions, ITXC relied upon the exemption
from registration contained in Sections 3(b) and 4(2) of the Securities Act and
Rule 701 promulgated thereunder relative to sales pursuant to certain
compensatory benefits plans.
On June 11, 1999, VocalTec exercised all of the warrants previously granted
to it by ITXC. As a result, ITXC issued 1,444,000 shares of its common stock
upon payment to it of $722. For the foregoing transaction, ITXC relied upon the
exemption from registration under Section 4(2) of the Securities Act; such
shares continue to be subject to a restrictive legend.
On February 14, 2000, IXTC issued an aggregate of 150,000 shares of common
stock to two affiliates of IXTC's South American joint venture partner in
connection with the termination of its South American joint venture agreement.
For the foregoing transaction, IXTC relied upon the exemption from registration
under Section 4(2) of the Securities Act. Such shares bear a restrictive
legend.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
No. Description
----- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Third Restated Certificate of Incorporation(1)
3.2 By-laws, as amended(2)
4.1 Form of certificate representing shares of common stock(3)
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(4)
10.3 1998 Stock Incentive Plan, as amended(4)
10.4 Employee Cash Incentive Plan, as amended
10.5 Employee Stock Purchase Plan(5)
10.6 Joint Venture and Quotaholders Agreement, dated as of July 19, 1998, by
and between TeleNova
Comunicacoes Ltda. and ITXC Corp.(4)
10.7 First Amendment to Joint Venture and Quotaholders' Agreement, dated
August 18, 1998, by and
between TeleNova Comunicacoes Ltda. and ITXC Corp.(4)
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.(4)
10.9 Lease Agreement, dated February 2, 1998 by and between the Registrant
and Peregrine Investment
Partners--I(4)
10.10 First Amendment to Lease dated April 16, 1999, by and between the
Registrant and Peregrine
Investment Partners--I(4)
10.11 Employment Agreement between the Registrant and Thomas Shoemaker*
10.12 Second Amendment to Lease, dated December 6, 1999, by and between the
Registrant and Peregrine Investment Partners--I*
10.13 Amended and Restated Loan Agreement, dated February 7, 2000, between the
Registrant and PNC Bank*
10.14 Joint Venture Exit Agreement by and among the Registrant, TeleNova
Comunicacoes Ltda., TeleNova Overseas, Ltd., Telesisa Sistemas em
Telecomunicacoes S.A., and ITXC Comunicacoes Ltda., dated February 7,
2000*
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>
- --------
* Previously filed.
(1) Incorporated by reference to Exhibit 3.2 of the registrant's Form 10-Q for
the quarter ended September 30, 1999.
(2) Incorporated by reference to Exhibit 3.4 of the registrant's Form 10-Q for
the quarter ended September 30, 1999.
(3) Incorporated by reference to Exhibit 4.2 of the registrant's Registration
Statement on Form S-1 (No. 333-80411).
(4) Incorporated by reference to the similarly numbered Exhibit of the
registrant's Registration Statement on Form S-1 (No. 333-80411).
(5) Incorporated by reference to the similarly numbered Exhibit of the
registrant's Form 10-Q for the quarter ended September 30, 1999.
(b) Financial Statement Schedules: Not applicable
II-4
<PAGE>
Item 17. Undertakings
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Princeton, State of New Jersey, on March 7, 2000.
ITXC Corp.
/s/ Edward B. Jordan
By: _________________________________
Edward B. Jordan
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registrant's Registration Statement has been signed by the
following persons in the capacities indicated on this 7th day of March, 2000.
<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-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description
----- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Third Restated Certificate of Incorporation(1)
3.2 By-laws, as amended(2)
4.1 Form of certificate representing shares of common stock(3)
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(4)
10.3 1998 Stock Incentive Plan, as amended(4)
10.4 Employee Cash Incentive Plan, as amended
10.5 Employee Stock Purchase Plan(5)
10.6 Joint Venture and Quotaholders Agreement, dated as of July 19, 1998, by
and between TeleNova Comunicacoes Ltda. and ITXC Corp.(4)
10.7 First Amendment to Joint Venture and Quotaholders' Agreement, dated
August 18, 1998, by and between TeleNova Comunicacoes Ltda. and ITXC
Corp.(4)
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.(4)
10.9 Lease Agreement, dated February 2, 1998 by and between the Registrant
and Peregrine Investment Partners--I(4)
10.10 First Amendment to Lease dated April 16, 1999, by and between the
Registrant and Peregrine Investment Partners--I(4)
10.11 Employment Agreement between the Registrant and Thomas Shoemaker*
10.12 Second Amendment to Lease, dated December 6, 1999, by and between the
Registrant and Peregrine Investment Partners--I*
10.13 Amended and Restated Loan Agreement, dated February 7, 2000, between the
Registrant and PNC Bank*
10.14 Joint Venture Exit Agreement by and among the Registrant, Telenova
Comunicacoes Ltda., TeleNova Overseas, Ltd., Telesisa Sistemas em
Telecomunicacoes S.A., and ITXC Comunicacoes Ltda., dated February 7,
2000*
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>
- --------
* Previously filed.
(1) Incorporated by reference to Exhibit 3.2 of the registrant's Form 10-Q for
the quarter ended September 30, 1999.
(2) Incorporated by reference to Exhibit 3.4 of the registrant's Form 10-Q for
the quarter ended September 30, 1999.
(3) Incorporated by reference to Exhibit 4.2 of the registrant's Registration
Statement on Form S-1 (No. 333-80411).
(4) Incorporated by reference to the similarly numbered Exhibit of the
registrant's Registration Statement on Form S-1 (No. 333-80411).
(5) Incorporated by reference to the similarly numbered Exhibit of the
registrant's Form 10-Q for the quarter ended September 30, 1999.
<PAGE>
EXHIBIT 1.1
[FORM OF UNDERWRITING AGREEMENT]
4,600,000 Shares
ITXC Corp.
Common Stock
UNDERWRITING AGREEMENT
----------------------
March __, 2000
Lehman Brothers Inc.
CIBC World Markets Corp.
PaineWebber Incorporated
First Analysis Securities Corporation
Kaufman Bros., L.P.,
As Representatives of the several
Underwriters named in Schedule 1 hereto,
c/o Lehman Brothers Inc.
Three World Financial Center
New York New York 10285
Dear Sirs:
ITXC Corp., a Delaware corporation (the "Company"), and certain
stockholders of the Company named in Schedule 2 hereto (the "Selling
Stockholders") propose to sell an aggregate of 4,000,000 shares (the "Firm
Stock") of the Company's Common Stock, par value $0.001 per share (the "Common
Stock"). Of the 4,000,000 shares of the Firm Stock, 2,000,000 shares are being
sold by the Company and 2,000,000 by the Selling Stockholders. In addition, the
Company and certain of the Selling Stockholders propose to grant to the
Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional 600,000 shares of Common Stock on the terms and for
the purposes set forth in Section 3 (the "Option Stock"). Of the 600,000 shares
of the Option Stock, 129,743 shares are being sold by the Company and 470,257 by
certain Selling Stockholders. The Firm Stock and the Option Stock, if purchased,
are hereinafter collectively called the "Stock." This is to confirm the
agreement concerning the purchase of the Stock from the Company and the Selling
Stockholders by the Underwriters.
SECTION 1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 and one or more amendments
thereto with respect to the Stock have (i) been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the
<PAGE>
2
"Commission") thereunder, (ii) been filed with the Commission under the
Securities Act and (iii) become effective under the Securities Act. Copies of
such registration statement and each of the amendments thereto have been
delivered by the Company to you as the representatives (the "Representatives")
of the Underwriters. As used in this Agreement, "Effective Time" means the date
and the time as of which such registration statement, or the most recent post-
effective amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time; "Preliminary Prospectus"
means each prospectus included in such registration statement, or amendments
thereof, before it became effective under the Securities Act and any prospectus
filed with the Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement"
means such registration statement, as amended at the Effective Time, including
all information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations and deemed to be a part of
the registration statement as of the Effective Time pursuant to Rule 430A of the
Rules and Regulations; and "Prospectus" means the prospectus in the form first
used to confirm sales of Stock. If the Company has filed an abbreviated
registration statement to register additional shares of Common Stock pursuant to
Rule 462(b) under the Securities Act (the "Rule 462 Registration Statement"),
then any reference herein to the term "Registration Statement" shall be deemed
to include such Rule 462 Registration Statement. The Commission has not issued
any order preventing or suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the Commission, as
the case may be, conform in all material respects to the requirements of the
Securities Act and the Rules and Regulations and do not and will not, as of the
applicable effective date (as to the Registration Statement and any amendment
thereto) and as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading; provided that no
representation or warranty is made as to information contained in or omitted
from the Registration Statement or the Prospectus in reliance upon and in
conformity with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein.
(c) The Company and each of its subsidiaries (as defined in Section
17) have (i) been duly incorporated or organized and are validly existing as
corporations or limited liability companies in good standing under the laws of
their respective jurisdictions of incorporation or organization, (ii) are duly
qualified to do business and are in good standing as foreign corporations or
foreign limited liability companies in each jurisdiction in which their
respective ownership or lease of property or the conduct of their respective
businesses requires such qualification, and (iii) have all power and authority
necessary to own or hold their respective properties and to conduct the
businesses in which they are engaged, except, in the case of clauses (ii) and
(iii), where the failure to so qualify and be in good standing as a foreign
corporation or foreign limited liability companies or have such power or
authority would not,
<PAGE>
3
singularly or in the aggregate, reasonably be expected to have a material
adverse effect on the general affairs, management, consolidated financial
position, stockholders' equity, results of operations, business or prospects of
the Company and its subsidiaries taken as a whole (a "Material Adverse Effect");
the Company has no subsidiaries other than ITXC Data Transport Services LLC, a
Delaware limited liability company (the "Domestic Subsidiary"), ITXC, Ltd., a
[Lowenstein to provide] company, and ITXC Asia PTE Ltd., a Singapore company;
and none of the subsidiaries of the Company is a "significant subsidiary", as
such term is defined in Rule 405 of the Rules and Regulations.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform in all material respects to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock or membership
interests, as the case may be, of each subsidiary of the Company have been duly
and validly authorized and issued and are fully paid and non-assessable and
(except for directors' qualifying shares and except as set forth in the
Prospectus) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims, other than liens securing the
Credit Agreement, dated as of August 20, 1998, as amended and/or restated
through the date hereof (the "Credit Agreement"), between the Company and PNC
Bank, National Association.
(e) The shares of the Stock to be issued and sold by the Company to
the Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein will be duly
and validly issued, fully paid and non-assessable; and the Stock will conform in
all material respects to the description thereof contained in the Prospectus.
(f) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law), and except insofar as
the indemnification and contribution provisions hereof may be limited by
considerations of public policy.
(g) The Company has all requisite power and authority to execute,
deliver and perform its obligations under this Agreement.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such actions result in any
violation of the provisions of (i) the certificate of
<PAGE>
4
incorporation (or other equivalent organizational document) or by-laws (or other
equivalent organizational document) of the Company or any of its subsidiaries or
(ii) any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company or any of its subsidiaries
or any of their properties or assets; and except for the registration of the
Stock under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and applicable state or foreign
securities laws or by the National Association of Securities Dealers, Inc. (the
"NASD") in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby.
(i) Except as set forth in the Registration Statement, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right (other than rights which have been waived or
satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act.
(j) Except as set forth in the Registration Statement, the Company
has not sold or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to Rule 144A
under, or Regulations D or S of, the Securities Act other than shares issued
pursuant to employee benefit plans, stock options plans or other employee
compensation plans or pursuant to outstanding options, rights or warrants.
(k) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such date, there
has not been any material change in the capital stock or long-term debt of the
Company and its subsidiaries on a consolidated basis or any material adverse
change, or any development involving a prospective material adverse change, in
or affecting the general affairs, management, consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries taken as a whole, otherwise than as set forth or
contemplated in the Prospectus.
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or included in
the Prospectus present fairly the financial condition and results of operations
of the entities purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved. The other financial information and data filed as part of the
Registration Statement or included in
<PAGE>
5
the Prospectus is fairly presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(m) Ernst & Young LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who have
delivered the initial letter referred to in Section 9(h) hereof, are independent
public accountants as required by the Securities Act and the Rules and
Regulations.
(n) The Company and each of its subsidiaries have good and marketable
title in fee simple to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all liens,
encumbrances and defects, except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not materially
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; all assets held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not materially interfere with
the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries taken as a whole.
(o) The Company and each of its subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the conduct
of their respective businesses and the value of their respective properties and
as is customary for companies engaged in similar businesses in similar
industries.
(p) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark registrations,
copyrights and licenses necessary for the conduct of their respective businesses
and have no reason to believe that the conduct of their respective businesses
will conflict with, and have not received any notice of any claim of conflict
with, any such rights of others, in each case except as could not reasonably be
expected to have a Material Adverse Effect.
(q) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries would reasonably
be expected to have a Material Adverse Effect; and to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(r) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described in the Prospectus or filed as exhibits to the Registration
Statement or incorporated by reference as exhibits as permitted by the Rules and
Regulations.
<PAGE>
6
(s) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, shareholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Prospectus which is not so described.
(t) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent, which would reasonably be expected
to have a Material Adverse Effect.
(u) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any material liability; the Company has not incurred and does not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and,
to the best of the Company's knowledge, nothing has occurred, whether by action
or by failure to act, which would cause the loss of such qualification.
(v) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof (except where
the failure to file would not reasonably be expected to have a Material Adverse
Effect) and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company or any of its subsidiaries which has had
(nor does the Company have any knowledge of any tax deficiency which, if
determined adversely to the Company or any of its subsidiaries, would reasonably
be expected to have) a Material Adverse Effect.
(w) Since the date as of which information is given in the Prospectus
through the date hereof, and except as may otherwise be disclosed in the
Prospectus, the Company has not (i) issued or granted any securities (other than
shares of Common Stock issued upon the exercise of options described in the
Prospectus), (ii) incurred any material liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in the
ordinary course of business, (iii) entered into any material transaction not in
the ordinary course of business or (iv) declared or paid any dividend on its
capital stock.
(x) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of its financial statements and to maintain accountability for its assets, (C)
access to its assets is permitted only in accordance with management's
authorization and (D) the reported accountability for its assets is compared
with existing assets at reasonable intervals.
<PAGE>
7
(y) Neither the Company nor any of its subsidiaries (i) is in
violation of its certificate of incorporation (or other equivalent
organizational document) or by-laws (or other equivalent organizational
document), (ii) is in default in any respect, and no event has occurred which,
with notice or lapse of time or both, would constitute such a default, in the
due performance or observance of any term, covenant or condition contained in
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to which any of its
properties or assets is subject or (iii) is in violation in any respect of any
law, ordinance, governmental rule, regulation or court decree to which it or its
property or assets may be subject or has failed to obtain any license, permit,
certificate, franchise or other governmental authorization or permit necessary
to the ownership of its property or to the conduct of its business except, in
the case of clauses (ii) and (iii), for such defaults, violations and failures
which would not, singularly or in the aggregate, reasonably be expected to have
a Material Adverse Effect.
(z) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated with or acting on
behalf of the Company or any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; made any direct or indirect unlawful payment to
any foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt Practices
Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or
other unlawful payment.
(aa) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of its
subsidiaries (or, to the knowledge of the Company, any of their predecessors in
interest) at, upon or from any of the property now or previously owned or leased
by the Company or its subsidiaries in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which would
require remedial action under any applicable law, ordinance, rule, regulation,
order, judgment, decree or permit, except for any violation or remedial action
which would not have, or would not be reasonably expected to have, singularly or
in the aggregate with all such violations and remedial actions, a Material
Adverse Effect; there has been no material spill, discharge, leak emission,
injection, escape, dumping or release of any kind onto such property or into the
environment surrounding such property of any toxic wastes, medical wastes, solid
wastes, hazardous wastes or hazardous substances due to or caused by the Company
or any of its subsidiaries or with respect to which the Company or any of its
subsidiaries have knowledge, except for any such spill, discharge, leak,
emission, injection, escape, dumping or release which would not have or would
not be reasonably likely to have, singularly or in the aggregate with all such
spills, discharges, leaks, emissions, injections, escapes, dumpings and
releases, a Material Adverse Effect; and the terms "hazardous wastes", "toxic
wastes", "hazardous substances" and "medical wastes" shall have the meanings
specified in any applicable local, state, federal and foreign laws or
regulations with respect to environmental protection.
<PAGE>
8
(bb) Neither the Company nor any subsidiary is, or upon application
of the net proceeds from the sale of the Stock as set forth in the Prospectus,
will be, an "investment company" as defined in the Investment Company Act of
1940, as amended.
SECTION 2. Representations, Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder (or in the case of Section 2(f), each
Management Selling Stockholder, as defined below) severally represents, warrants
and agrees that:
(a) The Selling Stockholder has, and immediately prior to the First
Delivery Date (as defined in Section 5 hereof) the Selling Stockholder will
have, good and valid title to the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens, encumbrances,
equities or claims; and upon delivery of such shares and payment therefor
pursuant hereto, good and valid title to such shares, free and clear of all
liens, encumbrances, equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement" and, together with all other similar
agreements executed by the other Selling Stockholders, the "Custody Agreements")
with Continental Stock Transfer & Trust Company, as custodian (the "Custodian"),
for delivery under this Agreement, certificates in negotiable form representing
the shares of Stock to be sold by the Selling Stockholder hereunder.
(c) The Selling Stockholder has duly executed and delivered an
irrevocable power of attorney (the "Power of Attorney" and, together with all
other similar agreements executed by the other Selling Stockholders, the "Powers
of Attorney") appointing Tom I. Evslin and Edward B. Jordan as attorneys-in-
fact, with full power of substitution, and with full authority (exercisable by
any one or more of them) to execute and deliver this Agreement and to take such
other action as may be necessary or desirable to carry out the provisions hereof
on behalf of the Selling Stockholder.
(d) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement; the
execution, delivery and performance of this Agreement, the Power of Attorney and
the Custody Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby and thereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound or to which
any of the property or assets of the Selling Stockholder is subject, nor will
such actions result in any violation of the provisions of applicable
organizational documents of the Selling Stockholder (unless an individual) or
any statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Selling Stockholder or the property or
assets of the Selling Stockholder; and, except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange Act and
applicable state and foreign securities laws and by the NASD in connection with
the purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or
<PAGE>
9
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of this Agreement, the Power of Attorney
or the Custody Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby and thereby.
(e) The Registration Statement and the Prospectus and any further
amendments or supplements to the Registration Statement or the Prospectus will,
when they become effective or are filed with the Commission, as the case may be,
do not and will not, as of the applicable effective date (as to the Registration
Statement and any amendment thereto) and as of the applicable filing date (as to
the Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided that no representation or warranty is made as to information contained
in or omitted from the Registration Statement or the Prospectus in reliance upon
and in conformity with written information furnished to the Company (i) through
the Representatives by or on behalf of any Underwriter specifically for
inclusion therein or (ii) by or on behalf of any other Selling Stockholder
specifically for inclusion therein; provided further that except for Tom I.
Evslin, Edward B. Jordan and John G. Musci (collectively, the "Management
Selling Stockholders"), the Selling Stockholder shall have no liability under
this Section 2(e) except to the extent that the untrue statement or omission is
or will be made in reliance upon and in conformity with information concerning
such Selling Stockholder furnished to the Company in writing by or on behalf of
that Selling Stockholder specifically for inclusion therein.
(f) Each Management Selling Stockholder has no reason to believe that
the representations and warranties of the Company contained in Section 1 hereof
are not materially true and correct, is familiar with the Registration Statement
and the Prospectus (as amended or supplemented) and has no knowledge of any
material fact, condition or information not disclosed in the Registration
Statement, as of the Effective Date, or the Prospectus (or any amendment or
supplement thereto), as of the applicable filing date, which has had or may have
a Material Adverse Effect and is not prompted to sell shares of Common Stock by
any information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
(g) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the shares of the Stock.
SECTION 3. Purchase of the Stock by the Underwriters. On the basis
of the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell 2,000,000 shares of
the Firm Stock and each Selling Stockholder agrees to sell the number of shares
of the Firm Stock set forth opposite his, her or its name on Schedule 2 hereto,
severally and not jointly, to the several Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase the number of shares
of the Firm Stock set forth opposite that Underwriter's name in Schedule 1
hereto. Each Underwriter shall be obligated to purchase from the Company, and
from each Selling Stockholder, that number of shares of the Firm Stock which
represents the same proportion of the number of
<PAGE>
10
shares of the Firm Stock to be sold by the Company, and by each Selling
Stockholder, as the number of shares of the Firm Stock set forth opposite the
name of such Underwriter in Schedule 1 represents of the total number of shares
of the Firm Stock to be purchased by all of the Underwriters pursuant to this
Agreement. The respective purchase obligations of the Underwriters with respect
to the Firm Stock shall be rounded among the Underwriters to avoid fractional
shares, as the Representatives may determine.
In addition, the Company and the Selling Stockholders identified as
"Option Stockholders" in Schedule 2 hereto (collectively, the "Option
Stockholders") grant, severally and not jointly, to the Underwriters an option
to purchase up to an aggregate of 600,000 shares of the Option Stock. Such
options are granted solely for the purpose of covering over-allotments in the
sale of Firm Stock and are exercisable as provided in Section 5 hereof. Shares
of Option Stock shall be purchased from the Company and the Option Stockholders
in the priority described in Section 5 severally for the account of the
Underwriters in proportion to the number of shares of Firm Stock set forth
opposite the name of such Underwriters in Schedule 1 hereto. The respective
purchase obligations of each Underwriter with respect to the Option Stock shall
be adjusted by the Representatives so that no Underwriter shall be obligated to
purchase Option Stock other than in 100 share amounts.
The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company and the Selling Stockholders shall not be obligated to
deliver any of the Stock to be delivered on any Delivery Date (as hereinafter
defined), except upon payment for all the Stock to be purchased on such Delivery
Date as provided herein.
SECTION 4. Offering of Stock by the Underwriters. Upon authorization
by the Representatives of the release of the Firm Stock, the several
Underwriters propose to offer the Firm Stock for sale upon the terms and
conditions set forth in the Prospectus.
SECTION 5. Delivery of and Payment for the Stock. Delivery of and
payment for the Firm Stock shall be made at the offices of Simpson Thacher &
Bartlett, 425 Lexington Avenue, New York New York 10017, at 10:00 A.M., New York
City time, on the fourth full business day following the date of this Agreement
or at such other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to
as the "First Delivery Date." On the First Delivery Date, the Company and the
Selling Stockholders shall deliver or cause to be delivered certificates
representing the Firm Stock to the Representatives for the account of each
Underwriter against payment to or upon the order of the Company and the Selling
Stockholders of the purchase price by wire transfer in immediately available
funds to bank accounts designated by the Company and the Selling Stockholders at
least two business days prior to the First Delivery Date. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
<PAGE>
11
expediting the checking and packaging of the certificates for the Firm Stock the
Company and the Selling Stockholders shall make the certificates representing
the Firm Stock available for inspection by the Representatives in New York, New
York, not later than 2:00 P.M., New York City time, on the business day prior to
the First Delivery Date.
The option granted in Section 3 will expire 30 days after the date of
this Agreement and may be exercised in whole or in part from time to time by
written notice being given to the Company by the Representatives. Such notice
shall set forth the aggregate number of shares of Option Stock as to which the
option is being exercised, the names in which the shares of Option Stock are to
be registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; provided, however, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as a "Second Delivery Date" and the First Delivery
Date and any Second Delivery Date are sometimes each referred to as a "Delivery
Date".
The priority of purchases and sales of any such shares of Option Stock
shall be determined as follows:
(i) In the event the Underwriters exercise the option granted in
Section 3 in full, then (A) each of the Option Stockholders
agrees to sell the number of shares of Option Stock set forth in
Schedule 2 opposite his, her or its name and (B) the Company
agrees to sell the number of shares of Option Stock set forth in
the first paragraph of this Agreement.
(ii) In the event the Underwriters exercise the over-allotment option
for a number of shares of Option Stock (the "Actual Exercise
Amount") which is less than 600,000 but greater than 470,257,
then each of the Option Stockholders and the Company agrees,
severally and not jointly, to sell the number of shares of Option
Stock determined as follows:
(A) first, each Option Stockholder agrees to sell the number of
shares of Option Stock set forth in Schedule 2 opposite his,
her or its name; and
(B) second, the Company agrees to sell the number of shares of
Option Stock which, when added to the number of shares of
Option Stock sold by the Option Stockholders pursuant to
clause (A) above, equals the Actual Exercise Amount.
(iii) In the event the Actual Exercise Amount is less than or equal to
470,257 shares of Option Stock, then each of the Option
Stockholders agrees, severally and not jointly, to sell the
number of shares of Option Stock equal to the number of shares of
Option Stock granted by such Option
<PAGE>
12
Stockholder that bears the same proportion to the Actual Exercise
Amount as the number of shares of Option Stock set forth in
Schedule 2 opposite his, her or its name bears to the total
number of shares of Option Stock granted by such Option
Stockholders collectively, and the Company shall not sell any
shares of Option Stock.
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 5
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on such
Second Delivery Date. On such Second Delivery Date, the Company and the Option
Stockholders shall deliver or cause to be delivered the certificates
representing the Option Stock to the Representatives for the account of each
Underwriter against payment to or upon the order of the Company and the Option
Stockholders of the purchase price by wire transfer in immediately available
funds to bank accounts designated by the Company and the Option Stockholders at
least two business days prior to the Second Delivery Date. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Representatives shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company and the Option Stockholders shall
make the certificates representing the applicable Option Stock available for
inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to such Second Delivery
Date.
SECTION 6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Representatives, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the issuance by
the Commission of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Stock for offering or sale in any jurisdiction, of the
initiation or threatening of any proceeding for any such purpose, or of any
request by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
<PAGE>
13
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as originally
filed with the Commission, and each amendment thereto filed with the Commission,
including all consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits) and (ii)
each Preliminary Prospectus, the Prospectus and any amended or supplemented
Prospectus; and, if the delivery of a prospectus is required at any time after
the Effective Time in connection with the offering or sale of the Stock or any
other securities relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus is delivered,
not misleading, or, if for any other reason it shall be necessary to amend or
supplement the Prospectus in order to comply with the Securities Act, to notify
the Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as the
Representatives may from time to time reasonably request of an amended or
supplemented Prospectus which will correct such statement or omission or effect
such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the Prospectus
that may, in the reasonable judgment of the Company or the Representatives, be
required by the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the consent of
the Representatives to the filing, which consent shall not be unreasonably
delayed or withheld;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least June 15, 2001), to make
generally available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 1l(a) of the Securities Act and the
Rules and Regulations (including, at the option of the Company, Rule 158);
(g) Upon the request of the Representatives, for a period of two
years following the Effective Date, to furnish to the Representatives copies of
all materials furnished by the Company to its shareholders generally and all
public reports and all reports and financial statements furnished by the Company
to the principal national securities exchange upon which the Common Stock may be
listed pursuant to requirements of or agreements with such exchange
<PAGE>
14
or to the Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for offering and
sale under the securities laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the continuance of sales
and dealings therein in such jurisdictions for as long as may be necessary to
complete the distribution of the Stock; provided that in connection therewith
the Company shall not be required to qualify as a foreign corporation, to submit
to general taxation or to file a general consent to service of process in any
jurisdiction;
(i) For a period of 90 days from the date of the Prospectus, not to,
directly or indirectly, (1) offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device which is designed to, 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 (other than (w) the Stock, (x) shares of Common Stock issued
pursuant to employee benefit plans, stock option plans or other employee
compensation plans existing on the date hereof or pursuant to currently
outstanding options, warrants or rights, or (y) shares of Common Stock or
securities convertible into or exchangeable for Common Stock issued in a private
placement transaction (provided that such shares shall not be publicly resold
during the period of 90 days after the date of the Prospectus; provided,
further, that the holder of shares issued in such a transaction shall furnish to
the Representatives at or prior to the time of such issuance a letter in the
form of Exhibit A hereto)) or substantially similar securities, or sell or grant
options, rights or warrants with respect to any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or substantially
similar securities (other than the grant of options pursuant to benefit plans
existing on the date hereof), or (2) enter into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock, whether any such
transaction described in clause (1) or (2) above 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 Inc. on behalf of the Underwriters; and
to cause each Selling Stockholder of the Company and each executive officer and
director of the Company, to furnish to the Representatives, prior to the First
Delivery Date, a letter or letters, substantially in the form of Exhibit A
hereto.
(j) To apply for the inclusion of the Stock in the National Market
System, and to use its best efforts to complete that process, subject only to
official notice of issuance, prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock as set forth
in the Prospectus;
(l) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment company" as defined
in the Investment Company Act of 1940, as amended, and the rules and regulations
of the Commission thereunder; and
<PAGE>
15
(m) During the period of 90 days from the date of the Prospectus, to
obtain an executed letter in the form of Exhibit A hereto from each executive
officer and director who has not previously executed such a letter.
SECTION 7. Further Agreements of the Selling Stockholders. Each
Selling Stockholder agrees:
(a) That concurrently with the execution hereof, such Selling
Stockholder will execute and deliver to the Representatives a letter in the form
of Exhibit A hereto;
(b) That the Stock to be sold by the Selling Stockholder hereunder,
which is represented by the certificates held in custody for the Selling
Stockholder, is subject to the interest of the Underwriters and the other
Selling Stockholders thereunder, that the arrangements made by the Selling
Stockholder for such custody are to that extent irrevocable, and that the
obligations of the Selling Stockholder hereunder shall not be terminated by any
act of the Selling Stockholder, or to the extent permitted by applicable law, by
the death, incapacity, disability or incompetence, liquidation or dissolution of
any Selling Stockholder or, in the case of a trust, by the death or incapacity
of any executor or trustee or the termination of such trust, to the extent
applicable, or the occurrence of any other event; and
(c) To deliver to the Representatives prior to the First Delivery
Date a properly completed and executed United States Treasury Department Form W-
8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the
Selling Stockholder is a United States person).
SECTION 8. Expenses. The Company agrees to pay (a) the costs
incident to the authorization, issuance, sale and delivery of the Stock and any
taxes payable in that connection; (b) the costs incident to the preparation,
printing and filing under the Securities Act of the Registration Statement and
any amendments and exhibits thereto; (c) the costs of distributing the
Registration Statement as originally filed and each amendment thereto and any
post-effective amendments thereof (including, in each case, exhibits), any
Preliminary Prospectus, the Prospectus and any amendment or supplement to the
Prospectus, all as provided in this Agreement; (d) the costs of reproducing and
distributing this Agreement and any other related documents in connection with
the offering, purchase, sale and delivery of the Stock; (e) the filing fees
incident to securing the review by the National Association of Securities
Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or
other fees; (g) the fees and expenses of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 6(h) and of
preparing and distributing a Blue Sky Memorandum (including related fees and
expenses of counsel to the Underwriters); (h) the costs and expenses of the
Company (excluding costs and expenses of the Underwriters and their
representatives) relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Stock
including, without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants (other than
representatives of the Underwriters) engaged in connection with the road show
presentations with the prior approval of
<PAGE>
16
the Company, travel and lodging expenses of the representatives and officers of
the Company and any such consultants, and the Company's share of the cost of any
aircraft chartered in connection with the road show and (i) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholders under this Agreement; provided that, except as provided in
this Section 8 and in Section 13, the Underwriters shall pay their own costs and
expenses, including the costs and expenses of their counsel, any transfer taxes
on the Stock which they may sell and the expenses of advertising any offering of
the Stock made by the Underwriters.
SECTION 9. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject (x) to the accuracy when
made and on each Delivery Date, of the representations and warranties of the
Company and the Selling Stockholders contained herein (provided that, in the
case of this clause (x), the obligations of the Underwriters hereunder shall be
subject to the accuracy in all material respects of those representations and
warranties that are not qualified as to materiality), (y) to the performance by
the Company and the Selling Stockholders of their respective obligations
hereunder and (z) to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 6(a); no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the
Commission; and any request of the Commission for inclusion of additional
information in the Registration Statement or the Prospectus or otherwise shall
have been complied with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement or the
Prospectus or any amendment or supplement thereto contains an untrue statement
of fact which, in the opinion of Simpson Thacher & Bartlett, counsel for the
Underwriters, is material or omits to state a fact which, in the opinion of such
counsel, is material and is required to be stated therein or is necessary to
make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Custody Agreement, the
Powers of Attorney, the Stock, the Registration Statement and the Prospectus,
and all other legal matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all material respects to
counsel for the Underwriters, and the Company and the Selling Stockholders shall
have furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Lowenstein Sandler PC shall have furnished to the Representatives
its written opinion, as counsel to the Company, addressed to the Underwriters
and dated such Delivery Date, in substantially the form attached hereto as
Exhibit B.
<PAGE>
17
(e) Swidler Berlin Shereff Friedman, LLP shall have furnished to the
Representatives its written opinion, as special regulatory counsel to the
Company, addressed to the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the effect that the
statements contained in the Prospectus under the captions "Our Business C
Government Regulation" and "Risk Factors C Future government regulation and
legal uncertainties could affect our ability to provide our services", to the
extent such statements constitute a summary of the United States federal laws,
rules and regulations referred to therein, have been reviewed by such counsel
and accurately describe in all material respects such United States federal
laws, rules and regulations.
(f) The respective counsel for the Selling Stockholders shall each
have furnished to the Representatives its written opinion, as counsel to the
Selling Stockholder for whom it is acting as counsel, addressed to the
Underwriters and dated such Delivery Date, in substantially the form attached
hereto as Exhibit C.
(g) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as the
Representatives may reasonably require, and the Company and the Selling
Stockholders shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such matters.
(h) At the time of execution of this Agreement, the Representatives
shall have received from Ernst & Young LLP a letter, in form and substance
satisfactory to the Representatives, addressed to the Underwriters and dated the
date hereof (i) confirming that they are independent public accountants within
the meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission and (ii) stating, as of the date hereof (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date hereof), the conclusions and
findings of such firm with respect to the financial information and other
matters ordinarily covered by accountants' "comfort letters" to underwriters in
connection with registered public offerings.
(i) With respect to the letter of Ernst & Young LLP referred to in
the preceding paragraph and delivered to the Representatives concurrently with
the execution of this Agreement (the "initial letter"), the Company shall have
furnished to the Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the meaning of
the Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission, (ii) stating, as of the date of the bring-down letter (or,
with respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the Prospectus, as
of a date not more than five days prior to the date of the bring-down letter),
the conclusions and findings of such firm with respect to the financial
information and other matters
<PAGE>
18
covered by the initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(j) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board and its
chief financial officer stating that:
(i) The representations, warranties and agreements of the Company in
Section 1 are true and correct as of such Delivery Date (provided that such
representations, warranties and agreements that are not qualified as to
materiality shall be true in all material respects); the Company has
complied with all its agreements contained herein; and the conditions set
forth in Sections 9(a) and 9(l) have been fulfilled; and
(ii) They have carefully examined the Registration Statement and the
Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and the Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and (B) since the Effective Date no event has occurred
which should have been set forth in a supplement or amendment to the
Registration Statement or the Prospectus.
(k) Each Selling Stockholder (or one or more attorneys-in-fact on
behalf of the Selling Stockholders) shall have furnished to the Representatives
a certificate, dated such Delivery Date, signed by, or on behalf of, the Selling
Stockholder (or one or more attorneys-in-fact) stating that the representations,
warranties and agreements of the Selling Stockholder in Section 2 are true and
correct as of such Delivery Date (provided that such representations, warranties
and agreements that are not qualified as to materiality shall be true in all
material respects); and that the Selling Stockholder has complied with all
agreements contained herein required to be complied with by the Selling
Stockholder on or prior to such Delivery Date.
(l) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Prospectus (i) any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus or (ii) since such date
there shall not have been any change in the capital stock or long-term debt of
the Company and its subsidiaries on a consolidated basis or any adverse change,
or any development involving a prospective adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or results
of operations of the Company and its subsidiaries, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is, in the judgment of the Representatives, so
material and adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Stock being delivered on such
Delivery Date on the terms and in the manner contemplated in the Prospectus.
<PAGE>
19
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or in
the over-the-counter market, or trading in any securities of the Company on any
exchange or in the over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such market by the
Commission, by such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have been
declared by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a declaration
of a national emergency or war by the United States or (iv) there shall have
occurred such a material adverse change in general economic, political or
financial conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment of
the Representatives, impracticable or inadvisable to proceed with the public
offering or delivery of the Stock being delivered on such Delivery Date on the
terms and in the manner contemplated in the Prospectus.
(n) The National Market System shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
(o) Prior to the First Delivery Date, the Representatives shall have
received from each Selling Stockholder and from each executive officer and
director of the Company, an executed letter in the form of Exhibit A pursuant to
Section 6(i) hereto.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
SECTION 10. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter,
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage, liability or action
relating to purchases and sales of Stock), to which that Underwriter, officer,
employee or controlling person may become subject, under the Securities Act or
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or in any amendment or supplement thereto, (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky application, any material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above
<PAGE>
20
(provided that the Company shall not be liable under this clause (iii) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful misconduct), and
shall reimburse each Underwriter and each such officer, employee or controlling
person promptly upon demand for any legal or other expenses reasonably incurred
by that Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of, or is based upon,
any untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, in reliance upon and in
conformity with written information concerning such Underwriter furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein which information consists solely of the
information specified in Section 10(g); and provided further that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus, or in
any such amendment or supplement, in reliance upon and in conformity with
written information concerning any Selling Stockholder furnished to the Company
in writing by or on behalf of such Selling Stockholder specifically for
inclusion therein; and provided further that as to any Preliminary Prospectus,
this indemnity agreement shall not inure to the benefit of any Underwriter, its
officers or employees, or any person controlling that Underwriter, on account of
any loss, claim, damage, liability or action arising from the sale of Stock to
any person by that Underwriter if that Underwriter failed to send or give a copy
of the Prospectus, as the same may be amended or supplemented, to that person
within the time required by the Securities Act, and the untrue statement or
alleged untrue statement of any material fact or omission or alleged omission to
state a material fact in such Preliminary Prospectus was corrected in the
Prospectus, unless such failure resulted from non-compliance by the Company with
Section 6(c). The foregoing indemnity agreement is in addition to any liability
which the Company may otherwise have to any Underwriter or to any officer,
employee or controlling person of that Underwriter.
(b) The Selling Stockholders named in Schedule 2 hereto as the
"Designated Selling Stockholders" (the "Designated Selling Stockholders"),
severally in proportion to the number of shares of Stock to be sold by each of
them hereunder and not jointly, shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who controls
any Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Stock), to which that Underwriter,
officer, employee or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (ii) the omission or alleged omission to state in any Preliminary
<PAGE>
21
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky application, any material fact required
to be stated therein or necessary to make the statements therein not misleading,
and shall reimburse each Underwriter and each such officer, employee or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by that Underwriter, officer, employee or controlling person
in connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Designated Selling Stockholders shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein which
information consists solely of the information specified in Section 10(g); and
provided further that a Designated Selling Stockholder shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, in reliance upon and in conformity with written information
concerning any other Selling Stockholder furnished to the Company by or on
behalf of such other Selling Stockholder specifically for inclusion therein; and
provided further that as to any Preliminary Prospectus, this indemnity agreement
shall not inure to the benefit of any Underwriter, its officers or employees, or
any person controlling that Underwriter, on account of any loss, claim, damage,
liability or action arising from the sale of Stock to any person by that
Underwriter if that Underwriter failed to send or give a copy of the Prospectus,
as the same may be amended or supplemented, to that person within the time
required by the Securities Act, and the untrue statement or alleged untrue
statement of any material fact or omission or alleged omission to state a
material fact in such Preliminary Prospectus was corrected in the Prospectus,
unless such failure resulted from non-compliance by the Company with Section
6(c). Notwithstanding the foregoing, the aggregate liability of each Designated
Selling Stockholder pursuant to the provisions of this Section 10(b) and Section
10(c) shall be limited to an amount equal to the net proceeds (before deducting
expenses) received by such Designated Selling Stockholder from the sale of its
shares of Stock hereunder. The foregoing indemnity agreement is in addition to
any liability which any Designated Selling Stockholder may otherwise have to any
Underwriter or to any officer, employee or controlling person of that
Underwriter.
(c) The Selling Stockholders, severally in proportion to the number of
shares of Stock to be sold by each of them hereunder and not jointly, shall
indemnify and hold harmless each Underwriter, its officers and employees and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof (including, but not limited to, any
loss, claim, damage, liability or action relating to purchases and sales of
Stock), to which that Underwriter, officer, employee or controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained in any
<PAGE>
22
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or in any Blue Sky application, or (ii) the
omission or alleged omission to state in any Preliminary Prospectus,
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky application, any material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
information concerning such Selling Stockholder furnished to the Company by or
on behalf of that Selling Stockholder specifically for inclusion therein, and
shall reimburse each Underwriter, its officers and employees and each such
controlling person for any legal or other expenses reasonably incurred by that
Underwriter, its officers and employees or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided that as to
any Preliminary Prospectus, this indemnity agreement shall not inure to the
benefit of any Underwriter, its officers or employees, or any person controlling
that Underwriter, on account of any loss, claim, damage, liability or action
arising from the sale of Stock to any person by that Underwriter if that
Underwriter failed to send or give a copy of the Prospectus, as the same may be
amended or supplemented, to that person within the time required by the
Securities Act, and the untrue statement or alleged untrue statement of any
material fact or omission or alleged omission to state a material fact in such
Preliminary Prospectus was corrected in the Prospectus, unless such failure
resulted from non-compliance by the Company with Section 6(c). Notwithstanding
the foregoing, the aggregate liability of each Selling Stockholder pursuant to
the provisions of this Section 10(c) and Section 10(b), if applicable, shall be
limited to an amount equal to the net proceeds (before deducting expenses)
received by such Selling Stockholder from the sale of its shares of Stock
hereunder. The foregoing indemnity agreement is in addition to any liability
which any Selling Stockholder may otherwise have to any Underwriter or any
officer, employee or controlling person of that Underwriter.
(d) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, any material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that the untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information concerning such Underwriter
furnished to the Company through the Representatives by or on behalf of that
Underwriter specifically for inclusion therein, and shall reimburse the Company
and any such director, officer or controlling person for any legal or other
expenses reasonably incurred by the Company or any
<PAGE>
23
such director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is in
addition to any liability which any Underwriter may otherwise have to the
Company or any such director, officer, employee or controlling person.
(e) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
any indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
employment thereof has been specifically authorized by the indemnifying party in
writing, (ii) such indemnified party shall have been advised by such counsel
that there may be one or more legal defenses available to it which are different
from or additional to those available to the indemnifying party and in the
reasonable judgement of such counsel it is advisable for such indemnified party
to employ separate counsel or (iii) the indemnifying party has failed to assume
the defense of such action and employ counsel reasonably satisfactory to the
indemnified party, in which case, if such indemnified party notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys at any time for all such indemnified
parties, which firm shall be designated in writing by the Representatives, if
the indemnified parties under this Section 10 consist of any Underwriter or any
Underwriter's officers, employees or controlling persons, or by the Company, if
the indemnified parties under this Section consist of the Company or any of the
Company's directors, officers, employees or controlling persons. No
indemnifying party shall (i) without the prior written consent of the
indemnified parties (which consent shall not be unreasonably withheld), settle
or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
<PAGE>
24
which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise, consent or judgment includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with the consent of the indemnifying
party or if there be a final judgment of the plaintiff in any such action, the
indemnifying party agrees to indemnify and hold harmless any indemnified party
from and against any loss or liability by reason of such settlement or judgment.
(f) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a), 10(b), 10(c) or 10(d) in respect of any loss, claim,
damage or liability, or any action 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 loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Stockholders (with the fault of the Company also being considered in
determining the fault of the Designated Selling Stockholders) on the one hand
and the Underwriters on the other with respect to the statements or omissions
which resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds (before deducting
expenses) from the offering of the Stock purchased under this Agreement received
by the Company and the Selling Stockholders on the one hand, and the total
underwriting discounts and commissions received by the Underwriters with respect
to the shares of the Stock purchased under this Agreement on the other hand bear
to the total gross proceeds from the offering of the shares of the Stock under
this Agreement, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders (with the fault of the Company also being
considered in determining the fault of the Designated Selling Stockholders) or
the Underwriters, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it would
not be just and equitable if contributions pursuant to this Section were to be
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take into account the equitable considerations referred to herein. The amount
paid or payable by an indemnified party as a result of the loss, claim, damage
or liability, or action in respect thereof, referred to above in this Section
shall be deemed to include, for purposes of this Section 10(f), any legal or
other expenses reasonably incurred by such indemnified party in
<PAGE>
25
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 10(f), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Stock underwritten by it and distributed to the public was
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise paid or become liable to pay by reason of any untrue or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 10(f) are several in proportion to their respective
underwriting obligations and not joint. Notwithstanding the foregoing, the
aggregate liability of each Selling Stockholder pursuant to the provisions of
this Section 10(f) shall be limited to an amount equal to the net proceeds
(before deducting expenses) received by such Selling Stockholder from the sale
of its shares of Stock hereunder.
(g) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth in the third sentence of the first paragraph of the cover
page and in paragraphs 2, 3, 4, 9 and 11 under the caption "Underwriting" in,
the Prospectus are correct and constitute the only information concerning such
Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
SECTION 11. Defaulting Underwriters.
If, on either Delivery Date, any Underwriter defaults in the
performance of its obligations under this Agreement, the remaining non-
defaulting Underwriters shall be obligated to purchase the Stock which the
defaulting Underwriter agreed but failed to purchase on such Delivery Date in
the respective proportions which the number of shares of the Firm Stock set
opposite the name of each remaining non-defaulting Underwriter in Schedule 1
hereto bears to the total number of shares of the Firm Stock set opposite the
names of all the remaining non-defaulting Underwriters in Schedule 1; provided,
however, that the remaining non-defaulting Underwriters shall not be obligated
to purchase any of the Stock on such Delivery Date if the total number of shares
of the Stock which the defaulting Underwriter or Underwriters agreed but failed
to purchase on such date exceeds 9.09% of the total number of shares of the
Stock to be purchased on such Delivery Date, and any remaining non-defaulting
Underwriter shall not be obligated to purchase more than 110% of the number of
shares of the Stock which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 3. If the foregoing maximums are exceeded, the
remaining non-defaulting Underwriters, or those other underwriters satisfactory
to the Representatives who so agree, shall have the right, but shall not be
obligated, to purchase, in such proportion as may be agreed upon among them, all
the Stock to be purchased on such Delivery Date. If the foregoing maximums are
exceeded and the remaining Underwriters or other underwriters satisfactory to
the Representatives do not elect to purchase the shares which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such Delivery Date,
this Agreement (or, with respect to the Second Delivery Date, the obligation of
the Underwriters to purchase, and of the Company and the Option Stockholders to
sell, the Option Stock) shall terminate without liability on the part of any
non-defaulting Underwriter or the Company or the
<PAGE>
26
Selling Stockholders, except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 8 and 13. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 11, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company and the Selling Stockholders for damages
caused by its default. If other underwriters are obligated or agree to purchase
the Stock of a defaulting or withdrawing Underwriter, either the Representatives
or the Company may postpone the Delivery Date for up to seven full business days
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
SECTION 12. Termination. The obligations of the Underwriters
hereunder may be terminated by the Representatives by notice given to and
received by the Company and the Selling Stockholders prior to delivery of and
payment for the Firm Stock if, prior to that time, any of the events described
in Sections 9(l) or 9(m), shall have occurred or if the Underwriters shall
decline to purchase the Stock for any reason permitted under this Agreement.
SECTION 13. Reimbursement of Underwriters' Expenses. If the Company
or any Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholders to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholders is
not fulfilled, the Company or the respective Selling Stockholder, as the case
may be, will reimburse the Underwriters for all reasonable out-of-pocket
expenses (including reasonable fees and disbursements of counsel) incurred by
the Underwriters in connection with this Agreement and the proposed purchase of
the Stock and upon demand the Company or the respective Selling Stockholder, as
the case may be, shall pay the full amount thereof to the Representatives. If
this Agreement is terminated pursuant to Section 12 by reason of the default of
one or more Underwriters, neither the Company nor the Selling Stockholders shall
be obligated to reimburse any defaulting Underwriter on account of those
expenses.
SECTION 14. Notices, Etc. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World Financial Center,
New York New York 10285, Attention: Syndicate Department (Fax: 212-526-6588),
with a copy, in the case of any notice pursuant to Section 10(d), to the
Director of Litigation, Office of the General Counsel, Lehman Brothers Inc.,
Three World Financial Center, 10th Floor, New York NY 10285;
(b) if to the Company, shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention:
<PAGE>
27
Edward B. Jordan, (Fax: (609) 275-8600), with a copy to Peter H. Ehrenberg,
Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, New Jersey 07068 (fax:
973-597-2351); and
(c) if to any Selling Stockholder, shall be delivered or sent by
mail, telex or facsimile transmission to the address of such Selling Stockholder
set forth on Schedule 2 hereto.
provided, however, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and
the Selling Stockholders shall be entitled to act and rely upon any request,
consent, notice or agreement given or made on behalf of the Underwriters by
Lehman Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholders by the
Custodian or the attorneys-in-fact acting on behalf of the Selling Stockholders.
.
SECTION 15. Persons Entitled to Benefit of Agreement. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
the Selling Stockholders and their respective representatives and successors.
This Agreement and the terms and provisions hereof are for the sole benefit of
only those persons, except that (A) the representations, warranties, indemnities
and agreements of the Company and the Selling Stockholders contained in this
Agreement shall also be deemed to be for the benefit of the person or persons,
if any, who control any Underwriter within the meaning of Section 15 of the
Securities Act and (B) the indemnity agreement of the Underwriters contained in
Section 10(c) of this Agreement shall be deemed to be for the benefit of
directors, officers and employees of the Company, and any person controlling the
Company within the meaning of Section 15 of the Securities Act. Nothing in this
Agreement is intended or shall be construed to give any person, other than the
persons referred to in this Section 15, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision contained herein.
SECTION 16. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Stockholders and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
SECTION 17. Definition of the Terms "Business Day" and "Subsidiary".
For purposes of this Agreement, (a) "business day" means each Monday, Tuesday,
Wednesday, Thursday or Friday which is not a day on which banking institutions
in New York are generally authorized or obligated by law or executive order to
close and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
<PAGE>
28
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of New York.
SECTION 19. Counterparts. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
SECTION 20. Headings. The headings herein are inserted for
convenience of reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Agreement.
<PAGE>
If the foregoing correctly sets forth the agreement among the Company,
the Selling Stockholders and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
ITXC Corp.
By_________________________________
Name:
Title:
The Selling Stockholders named in Schedule
2 to this Agreement
By_________________________________
Attorney-in-Fact
Accepted:
Lehman Brothers Inc.
CIBC World Markets Corp.
PaineWebber Incorporated
First Analysis Securities Corporation
Kaufman Bros., L.P.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By Lehman Brothers Inc.
By______________________________
Authorized Representative
<PAGE>
Exhibit A
LOCK-UP LETTER AGREEMENT
Lehman Brothers Inc.
CIBC World Markets Corp.
PaineWebber Incorporated
First Analysis Securities Corporation
Kaufman Bros., L.P.,
As Representatives of the several
Underwriters,
c/o Lehman Brothers Inc.
Three World Financial Center
New York New York 10285
Dear Sirs:
The undersigned understands that you and certain other firms propose
to enter into an Underwriting Agreement (the "Underwriting Agreement") providing
for the purchase by you and such other firms (the "Underwriters") of shares (the
AShares") of common stock, par value $0.001 per share (the "Common Stock"), of
ITXC Corp., a Delaware corporation (the "Company"), from the Company and from
certain selling stockholders of the Company (the "Selling Stockholders") and
that the Underwriters propose to reoffer the Shares to the public (the
"Offering").
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the undersigned
hereby irrevocably agrees that, without the prior written consent of Lehman
Brothers Inc., on behalf of the Underwriters, the undersigned will not, directly
or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose of (or
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of) any
shares of Common Stock (including, without limitation, shares of Common Stock
that may be deemed to be beneficially owned by the undersigned in accordance
with the rules and regulations of the Securities and Exchange Commission and
shares of Common Stock that may be issued upon exercise of any option or
warrant) or securities convertible into or exchangeable for Common Stock (other
than the Shares) or substantially similar securities owned by the undersigned on
the date of execution of this Lock-Up Letter Agreement or on the date of the
execution of the Underwriting Agreement, or sell or grant options, rights or
warrants with respect to any shares of Common Stock or substantially similar
securities (other than the grant of options pursuant to option plans existing on
the date hereof) or (2) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of such shares of Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common
Stock or other securities, in cash or
<PAGE>
2
otherwise, except to the Underwriters pursuant to the Underwriting Agreement,
for a period of 90/1/ days after the effective date of the Registration
Statement relating to the Offering.
In furtherance of the foregoing, the Company and its Transfer Agent
are hereby authorized to decline to make any transfer of securities if such
transfer would constitute a violation or breach of this Lock-Up Letter
Agreement.
It is understood that, if the Company notifies you that it does not
intend to proceed with the Offering, if the Underwriting Agreement does not
become effective, or if the Underwriting Agreement (other than the provisions
thereof which survive termination) shall terminate or be terminated prior to
payment for and delivery of the Shares, the undersigned will be released from
the undersigned's obligations under this Lock-Up Letter Agreement.
The undersigned understands that the Company, the Selling Stockholders
and the Underwriters will proceed with the Offering in reliance on this Lock-Up
Letter Agreement.
Whether or not the Offering actually occurs depends on a number of
factors, including market conditions. Any Offering will only be made pursuant
to an Underwriting Agreement, the terms of which are subject to negotiation
among the Company, the Selling Stockholders and the Underwriters.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to enter into this Lock-Up Letter Agreement and
that, upon request, the undersigned will execute any additional documents
necessary in connection with the enforcement hereof. Any obligations of the
undersigned shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned.
Very truly yours,
By:_________________________________
Name:
Title:
Dated:__________________________
- --------------
/1/ 240 days solely with respect to VocalTec Communications, Inc..
<PAGE>
Exhibit B
Opinion of Counsel to the Company
1. Each of the Company and the Domestic Subsidiary (A) has been duly
organized and is validly existing as a corporation (in the case of the Company)
or limited liability company (in the case of the Domestic Subsidiary) in good
standing under the laws of its jurisdiction of organization, (B) is duly
qualified to do business and is in good standing as a foreign corporation (in
the case of the Company) or limited liability company (in the case of the
Domestic Subsidiary) in each jurisdiction in the United States in which its
ownership or lease of property or the conduct of its business requires such
qualification and (C) has all power and authority necessary to own or hold its
properties and conduct the business in which it is engaged, except, in the case
of clauses (B) and (C), where the failure to be so qualified and to be in good
standing as a foreign corporation (in the case of the Company) or limited
liability company (in the case of the Domestic Subsidiary) or to have such power
or authority would not, singularly or in the aggregate, reasonably be expected
to have a Material Adverse Effect.
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the shares of Stock being delivered on such Delivery Date) have been
duly and validly authorized and issued, are fully paid and non-assessable and
conform in all material respects to the description thereof contained in the
Prospectus; to the best of such firm's knowledge after reasonable investigation,
the Company is the sole member of the Domestic Subsidiary, which is organized as
a limited liability company, and the Company holds such membership interest free
and clear of all liens, encumbrances, equities or claims, other than liens
securing the Credit Agreement.
3. There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any shares of the
Stock pursuant to the Company's certificate of incorporation or by-laws or any
agreement or other instrument known to such counsel;
4. To the best of such counsel's knowledge and other than as set forth in
the Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property or
assets of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would be
reasonably likely to have a Material Adverse Effect; and, to the best of such
counsel's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
5. Such counsel has been advised by the Commission that the Registration
Statement was declared effective under the Securities Act as of the date and
time specified in such opinion; the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and Regulations
specified in such opinion on the date specified therein and, to the knowledge of
such counsel, no stop order suspending the effectiveness of the Registration
<PAGE>
2
Statement has been issued and no proceeding for that purpose is pending or
threatened by the Commission;
6. The Registration Statement, as of its effective date, and the
Prospectus, as of its date, and any further amendments or supplements thereto
made by the Company prior to such Delivery Date (except for the financial
statements, the notes thereto, supporting schedules and other financial or
statistical data included therein or omitted therefrom, as to which such counsel
need express no opinion) complied as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
7. The statements contained in the Prospectus under the captions "Certain
U.S. Federal Income Tax Considerations to Non-U.S. Holders", insofar as they
describe federal statutes, rules and regulations, constitute a fair summary
thereof;
8 The statements contained in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute summaries
of the terms of the Company's capital stock (including the Stock) constitute
accurate summaries of the terms of such capital stock in all material respects;
9. To the best of such counsel's knowledge, there are no contracts or
other documents which are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to the
Registration Statement;
10. This Agreement has been duly authorized, executed and delivered by the
Company;
11. The issue and sale of the shares of Stock being delivered on such
Delivery Date by the Company pursuant to this Agreement, and the execution,
delivery and compliance by the Company with all of the provisions of this
Agreement and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument identified on the
schedule annexed to such counsel's opinion furnished to such counsel by the
Company, nor will such actions result in any violation of the provisions of (i)
the certificate of incorporation (as amended through such Delivery Date) or by-
laws (as amended through such Delivery Date) of the Company or the
organizational documents of the Domestic Subsidiary or (ii) any statute, rule or
regulation or any order known to such counsel of any court or governmental
agency or body having jurisdiction over the Company or its Domestic Subsidiary
or any of their properties or assets; and except for the registration of the
Stock under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange Act and
applicable state or foreign securities laws or by the NASD in connection with
the purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with, any such
court or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
<PAGE>
3
transactions contemplated hereby, other than such consents, approvals,
authorizations, orders, filings and registrations as have been made or obtained;
and
12. To the best of such counsel's knowledge, except as otherwise disclosed
in the Registration Statement, there are no contracts, agreements or
understandings between the Company and any person granting such person the right
(other than rights which have been waived or satisfied) to require the Company
to file a registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act.
In rendering such opinion, such counsel may state that its opinion is
limited to matters governed by the Federal laws of the United States of America,
the laws of the State of New Jersey and the General Corporation Law of the State
of Delaware and that such counsel is not admitted in the State of Delaware. The
opinion of Lowenstein Sandler PC shall also be to the effect that (x) such
counsel has acted as counsel to the Company on a regular basis (other than with
respect to certain regulatory matters), has acted as counsel to the Company in
connection with previous financing transactions and has acted as counsel to the
Company in connection with the preparation of the Registration Statement, (y)
such counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, counsel to the Underwriters
and the Company's independent certified public accountants, at which the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and (z) based on the foregoing, together with such counsel's
examination of the Registration Statement and the Prospectus and its
investigations made in connection with the preparation of the Registration
Statement and the Prospectus, no facts have come to the attention of such
counsel which lead it to believe that, as of the Effective Date, the
Registration Statement (other than the financial statements, the notes thereto,
supporting schedules and other financial or statistical data included therein or
omitted therefrom, as to which such counsel need express no opinion) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, or that, as of its date and the applicable Delivery
Date, the Prospectus (other than the financial statements, the notes thereto,
supporting schedules and other financial or statistical data included therein or
omitted therefrom, as to which such counsel need express no opinion) contains
any untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The foregoing opinion and statement may be qualified by a statement
to the effect that such counsel does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as set forth in clauses 7
and 8 above).
<PAGE>
Exhibit C
Opinion of Counsel to the Selling Stockholders
1. The Selling Stockholder has full right, power and authority to enter
into the Underwriting Agreement, the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of the Underwriting
Agreement, the Power of Attorney and the Custody Agreement by the Selling
Stockholder and the consummation by the Selling Stockholder of the transactions
contemplated thereby will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
statute, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument identified on Annex A hereto furnished to us by the
Selling Stockholder and which the Selling Stockholder has represented to us
lists all material agreements to which the Selling Stockholder [and its
subsidiaries]/2/ [is/are] a party or by which the Selling Stockholder [and its
subsidiaries] [is/are] bound or to which any of the property or assets of the
Selling Stockholder [and its subsidiaries] is subject, nor will such actions
result in any violation of [the [organizational documents] of the Selling
Stockholder or]/3/ any statute or any order, rule or regulation known to us of
any court or governmental agency or body having jurisdiction over the Selling
Stockholder or the property or assets of the Selling Stockholder; and, except
for the registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state and foreign securities laws and by
the National Association of Securities Dealers, Inc. and the Nasdaq Stock Market
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or body is required for
the execution, delivery and performance of the Underwriting Agreement, the Power
of Attorney or the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
thereby;
2. The Underwriting Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Stockholder;
3. The Power-of-Attorney and Custody Agreement have been duly authorized,
executed and delivered by the Selling Stockholder and constitute valid and
binding agreements of the Selling Stockholder, enforceable in accordance with
their respective terms; and
- ------------------
/2/ Insert if applicable.
/3/ Non-individual Selling Stockholder to fill-in governing organizational
documents.
<PAGE>
4. [Option 1 -- The Selling Stockholder has full power, right and
authority to sell the shares of Stock to be sold by it and upon the payment and
transfer contemplated by the Underwriting Agreement, the Underwriters will
acquire a security entitlement with respect to such shares and no action based
on any adverse claim may be asserted against the Underwriters.]/4/ or
[Option 2 -- The Selling Stockholder is the sole registered owner of
the shares of Stock to be sold by it; the Selling Stockholder has full power,
right and authority to sell such shares and upon payment for and delivery of the
shares of Stock in accordance with the
- --------------
/4/ To be used if immediately prior to the transfer to the Underwriters, the
shares are included in a global or balance certificate registered in the name of
Cede & Co., as nominee for DTC, and are held in the custody of DTC, as
securities intermediary, or its agent, and (2) the Underwriters receive security
entitlements with respect to the shares through book entries by DTC to the
accounts of the Underwriters. This option is used when one of the following
situations applies:
(a) prior to the closing the Selling Stockholder holds share certificates
representing the shares to be sold, registered in the name of the Selling
Stockholder, and the Selling Stockholder delivers such certificates to the
Company's transfer agent, with instructions to transfer such certificates to DTC
or Cede & Co., as its nominee, at the closing, for credit of security
entitlements to the securities accounts of the underwriters;
(b) prior to the closing the Selling Stockholder owns security
entitlements (with respect to either certificated or uncertificated securities)
and transfers such security entitlements to the underwriters by entitlement
orders to the Selling Stockholder's securities intermediaries; or
(c) prior to the closing the shares to be sold are uncertificated
securities registered on the books of the Company in the name of the Selling
Stockholder, and at the closing the Selling Stockholder instructs the Company to
transfer registration of such shares to Cede & Co., as nominee for DTC, for
credit of security entitlements to the securities accounts of the underwriters.
<PAGE>
Underwriting Agreement, the Underwriters will acquire all of the rights of the
Selling Stockholder in such shares and will also acquire their interest in such
shares free of any adverse claim.]/5/
In rendering the opinion in paragraph 4, counsel may assume:
* If Option 1 for paragraph 4 is used, that (i) DTC is a
"securities intermediary" as defined in Section 8-102 of the New
York UCC, and the State of New York is the "securities
intermediary's jurisdiction" of DTC for purposes of Section 8-110
of the New York UCC, (ii) the shares of Stock are registered in
the name of DTC or its nominee, and DTC or another person on
behalf of DTC maintains possession of certificates representing
the shares of Stock, (iii) DTC indicates by book entries on its
books that security entitlements with respect to the shares of
Stock have been credited to the Underwriters' securities accounts
and (iv) the Underwriters are purchasing the shares of Stock in
good faith and without notice of any adverse claim (within the
meaning of the New York UCC); or
* If Option 2 for paragraph 4 is used, that the Underwriters
purchase the Stock in good faith and do not have notice of any
adverse claim (within the meaning of the Uniform Commercial Code
as in effect in the State of New York (the "New York UCC")) to
the shares of Stock.
Such counsel shall also furnish to the Representatives a written
statement, addressed to the Underwriters and dated the First Delivery Date, in
form and substance satisfactory to the Representatives, to the effect that such
counsel has acted as counsel to the Selling Stockholder on a regular basis, if
applicable, and has acted as counsel to the Selling Stockholder in connection
with the execution of the Underwriting Agreement, the Power of Attorney and the
Custody Agreement.
- ----------------
/5/ To be used if the shares sold by the Selling Stockholder (1) are
represented by certificates registered in the name of the Selling Stockholder
(and not in the name of DTC or a nominee thereof) and (2) are delivered at the
closing of the secondary offering to the Underwriters, accompanied by a stock
power or other indorsement.
<PAGE>
EXHIBIT 5.1
March 7, 2000
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
Dear Sirs:
In connection with the pending registration under the Securities Act of 1933, as
amended (the "Act"), of the shares of common stock of ITXC Corp., a Delaware
corporation (the "Company"), offered for sale by the Company (the "Company
Shares") and by the selling stockholders (the "Selling Stockholder Shares" and,
collectively with the Company Shares, the "Shares")) pursuant to the
registration statement described below, we have examined such corporate records,
certificates and other documents and such questions of law as we have considered
necessary or appropriate for the purposes of this opinion. On the basis of such
examination, we advise you that (a) the Selling Stockholder Shares have been
validly issued and are fully paid and non-assessable and (b) when the Company's
Registration Statement on Form S-1 (No. 333-96343) has become effective under
the Act, the terms of the Company Shares and of their issue and sale have been
duly established in conformity with the Company's certificate of incorporation
and the Company Shares have been issued and sold as contemplated in such
Registration Statement, the Company Shares will be validly issued, fully paid
and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to such
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus included within such Registration Statement.
Very truly yours,
LOWENSTEIN SANDLER PC
<PAGE>
EXHIBIT 10.4
CASH INCENTIVE PLAN (AMENDED)
1. Individual performance will be evaluated twice a year by each employee's
direct supervisor, rather than on a quarterly basis. 25% of the employee's
bonus pool will be paid out after each six-month measurement period. This
will provide a total pay out of 50% of the bonus on an annual basis. Each
employee will be measured against a set of 5 high level objectives. Each
objective will be weighted based upon its relative value to the company such
that the sum of the weighting of all five objectives equals 100%. Each
objective will be evaluated on a 0 to 1 scale and a weighted average
performance will be calculated. The direct supervisor preparing the
evaluation may with his/her manager's approval add up to 10% as a
discretionary performance factor for additional tasks performed during the
evaluation period.
2. Company performance will be evaluated quarterly against the attainment of
the Company's budgeted revenue targets with the existing gross margin
collar. This will be a straight ratio of actual performance over budgeted
performance. This will provide a quarterly payment of 12.5% each quarter for
a total of 50% of the employee's bonus on an annual basis.
3. Employee must work a minimum of two full months of the given quarter in
order to be eligible for a prorated Company performance bonus. Similarly,
employee must work a minimum of two months of a six month period in order to
qualify for a prorated individual performance bonus. An employee must also
be actively employed at time of payout in order to be eligible for any bonus
payment.
4. Employee must be in good standing with the Company at the end of each
quarter in order to qualify for either an Individual and/or Company
performance bonus. No quarterly bonus will be paid to an employee on
probationary status.
5. If Company performance percentage is below 70% in any quarter, no quarterly
bonus related to Company performance will be paid. (See 2. Above) If Company
performance percentage is below 70% in Q2 and/or Q4, employee will still be
eligible to earn his/her individual performance bonus.
If individual performance percentage is below 70%, employee will not be
eligible for individual or company performance bonus for the given quarterly
period and may not be eligible for subsequent bonuses, as described in the
following paragraph.
<PAGE>
If an employee does not meet the 70% threshold in Q2 or Q4, the employee
will be subject to an interim three month individual performance review. For
example, if an employee is paid the 12.5% Company bonus in Q1 and then only
achieves 60% of his/her individual MBOs at the end of Q2, he/she will not be
entitled to either an individual or Company performance bonus for that
quarter. In addition, employee will be subject to a three month MBO
evaluation at the end of Q3. In order to qualify for that quarter's Company
performance bonus, the employee must have attained at least a 70% rating for
this three month evaluation.
The table below shows the projected pay-outs over a given year:
<TABLE>
<CAPTION>
Company Individual Total
Performance (sales Performance (top 5
with margin floor) weighted objectives)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Q1 12.5% 12.5%
- --------------------------------------------------------------------------------------
Q2 12.5% 25% 37.5%
- --------------------------------------------------------------------------------------
Q3 12.5% 12.5%
- --------------------------------------------------------------------------------------
Q4 12.5% 25% 37.5%
- --------------------------------------------------------------------------------------
TOTAL 50% 50% 100%
- --------------------------------------------------------------------------------------
</TABLE>
o 70% floor on company performance
o 70% floor on individual performance
o no bonus if employee does not attain a minimum of 70% on individual
performance
o employee must be in good standing (not on probation) to receive company
and/or individual performance bonus
o managers can assign an additional 10% for exceptional performance; must be
approved by their manager
<PAGE>
EXHIBIT 21.1
ITXC CORP.
List of Subsidiaries
--------------------
NAME JURISDICTION
---- ------------
ITXC Data Transport Services, LLC Delaware
ITXC Asia PTE LTD Singapore
ITXC Ltd. United Kingdom
<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 7, 2000, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-96343) and related Prospectus of ITXC
Corp. for the registration of 4,600,000 shares of its common stock.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 6, 2000
