<PAGE>
As filed with the Securities and Exchange Commission on February 8, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ITXC Corp.
(Exact name of registrant as specified in its charter)
-----------------
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. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum Proposed Maximum
Title of each class of Amount to be Offering Price Aggregate Amount of
securities to be registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.001 per share........... 4,600,000 $105.625 $485,875,000 $128,271
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</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.
-----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated February 8, 2000
PROSPECTUS
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 February 7, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $119.75 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>
Management................................................................. 51
Executive Compensation..................................................... 55
Certain Transactions....................................................... 64
Principal and Selling Stockholders......................................... 67
Description of Capital Stock............................................... 70
Shares Eligible for Future Sale............................................ 73
Certain U.S. Federal Income Tax Consequences to Non-U.S. Holders........... 75
Underwriting............................................................... 79
Legal Matters.............................................................. 81
Experts.................................................................... 81
Additional Information..................................................... 82
Index to Consolidated Financial Statements................................. F-1
</TABLE>
<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>
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 71.2 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 71.2 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... 38,193,386 shares (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 217,190 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 $302,056
Total assets................................................ 99,862 327,522
Long-term obligations, including current portion............ 5,493 5,493
Working capital............................................. 65,810 293,470
Total stockholders' equity.................................. 80,366 308,026
</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 $119.75 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 has 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 71,209
======= ======= ======= =======
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 agreed to issue 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 that we will receive
in exchange, will be expensed. We expect that such change will be reflected in
our statement of operations for the quarter ending March 31, 2000. See
"Management's 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.
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. 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 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,
11
<PAGE>
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 $78.4 million net proceeds from our initial public offering and $100
million of the $227.7 million of our net proceeds 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.
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:
13
<PAGE>
. 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 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:
14
<PAGE>
. 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 $227.7 million, or $261.9 million if the underwriters exercise
their over-allotment option in full, assuming a public offering price of
$119.75 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 February 7, 2000)......................... 119.75 36.94
</TABLE>
On February 7, 2000, the last reported sale price for our common stock on
the NASDAQ National Market was $119.75 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 $119.75 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 $ 302,056
=========== ============
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; 38,033,591 shares issued and
outstanding as adjusted(1)...................... 36 38
Additional paid-in capital....................... 118,089 345,748
Deferred employee compensation................... (10,241) (10,241)
Accumulated deficit.............................. (27,518) (27,518)
----------- ------------
Total stockholders' equity....................... 80,366 308,026
----------- ------------
Total capitalization............................... $ 84,238 $ 311,899
=========== ============
</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 217,190 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.
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<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 $119.75 per share, and after deducting the estimated underwriting
discounts and offering expenses, would have been $8.05 per share of common
stock. This represents an immediate increase of $5.91 per share to existing
stockholders and an immediate dilution of $111.70 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................................ $119.75
Net tangible book value per share as of December 31, 1999...... $ 2.14
Increase per share attributable to new investors .............. $ 5.91
-------
Pro forma net tangible book value per share after this offering........ 8.05
-------
Dilution per share to new investors.................................... $111.70
=======
</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 $119.75 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 32% $ 3.16
New investors............ 2,000,000 5 239,500,000 68 119.75
---------- --- ------------ ---
Total.................... 37,816,401 100% $352,512,146 100%
========== === ============ ===
</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>
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<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 71.2 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 revenues
in future periods.
We have also received consulting revenue derived from a market trial
agreement that we entered into with a third-party shortly after our inception
in order to generate funds to
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."
24
<PAGE>
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 "--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.
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.
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<PAGE>
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 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.
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<PAGE>
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.
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 71,209
======= ======= ======= =======
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
Sales, 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.
27
<PAGE>
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 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.
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<PAGE>
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. 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.
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OUR BUSINESS
Overview
We are a leading global provider of high quality Internet-based voice and
fax services. Our services allow communications users and service providers,
such as traditional telephone companies, Internet service providers, 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........................................... 71.2
</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
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<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.
In February 2000, we recast our relationship with our partner in our South
American joint venture. We agreed to issue 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 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.
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<PAGE>
From an accounting perspective, we will be required to expense the
difference between the value of our 150,000 shares and the equity we will
receive. We presently estimate that the value of that equity, upon receipt,
will be $6 million, although we cannot assure you that such value will be
maintained. We expect that this accounting change will be reflected in our
statement of operations for the quarter ending March 31, 2000.
Industry Overview
Convergence of Global Telecommunications and Data Services
The global telecommunications industry has grown at a rapid rate over the
last decade, driven by domestic and international deregulation, technological
development, network deployment and the globalization of business. The number
of communications service providers has also been increasing as a result of
competition fostered by domestic and international deregulation. These factors
have contributed to a substantial decrease in the cost of telephony services
delivered over the traditional telephone network. This decrease in price,
however, has been offset by an increase in total revenue driven by the growth
in demand that low prices have created. Based on country-by-country information
and other data provided by the International Telecommunications Union, total
telecommunications services revenue was approximately $700 billion in 1997.
According to Insight Research Corporation, an industry research firm, this
market is projected to grow to approximately $1.3 trillion by 2003. According
to TeleGeography, a market research firm, the total market for international
long distance services in 1997 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
33
<PAGE>
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.
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
34
<PAGE>
bandwidth limitations related to Internet network capacity and local access
constraints. However, the continuing addition of data network infrastructure,
recent improvements in packet-switching and compression technology, new
software algorithms and improved hardware have substantially reduced delays in
packet transmissions and the effect of these delays. International Data
Corporation projects that Internet protocol telephony revenue will grow rapidly
to over $23.4 billion in 2003.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. Smaller Internet telephony
service providers have also begun to offer low-cost Internet telephony services
from personal computers to telephones and from telephones to telephones.
Traditional carriers have substantial investments in traditional telephone
network technology, and therefore have been slow to embrace Internet
technology. We believe that these service offerings by large long distance
carriers and smaller providers are generally available in limited geographic
areas and can only complete calls to a limited number of locations.
We believe that the infrastructure required for a global network is too
expensive for most companies to deploy on their own. This mandates that the
network be a combination of gateways owned by different operators. For a
network to achieve optimal functionality, however, the gateways need to be
interoperable, or able to communicate with one another. As a result, uniform
standards for vendors and manufacturers of Internet telephony equipment and
software need to be developed.
In recent years, commercial web sites have grown in popularity. Efforts to
enhance these web sites with voice enabled e-commerce features such as click-
and-call contact with a customer service agent have been hampered by the early
quality problems with voice on the Internet described above.
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:
35
<PAGE>
. Quality. We believe that we deliver to our customers high quality voice
communications over the Internet at competitive pricing. We maintain
high quality primarily through our proprietary BestValue Routing
technology and techniques which include ITXC-developed monitoring and
analysis software and rapid human response from our 24-hours-a-day, 7-
days-a-week network operations center. In addition, we blend the
redundancy of the public Internet with our use of multiple termination
affiliates in many cities to help assure the reliability and quality of
our network. We use dedicated data networks and even the traditional
telephone network when data networks are not available to further assure
consistent quality.
. Lower Costs. By using the public Internet, we are able to reach and
rapidly deploy many affiliates throughout the world at a substantially
lower capital expense than building the dedicated connections that a
traditional telephony carrier would require. Also, as a result of our
ability to use the public Internet, we believe that we have
significantly lower marginal costs than the traditional telephone
network or a private data network.
. Interoperability. We have led an effort called iNOW! resulting in 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
36
<PAGE>
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.
. 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
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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.
. 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
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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,
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
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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 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.
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The following diagram depicts the functions of BestValue Routing:
DIAGRAM
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
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.
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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 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
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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.
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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.
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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 customer care software, and the development and
implementation of new Internet-based
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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.
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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.
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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
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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
52
<PAGE>
Ventures, Bell Canada Enterprises (BCE) Inc., a telecommunications firm. From
1991 until September 1994, he held various management positions with Hewlett
Packard Company, a manufacturer of electronic equipment.
William P. Collatos has been a Director since April 1998. Mr. Collatos is a
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 year ended December 31, 1999 with respect to our
Chief Executive Officer and our four other most highly compensated executive
officers. The principal components of these individuals' current cash
compensation are the annual base salary and bonus included in the Summary
Compensation Table. We have also described below other compensation these
individuals receive under employment agreements and our stock incentive plan.
Mr. Shoemaker, our Executive Vice President in charge of business development,
joined us in January 2000. His base salary for 2000 is $180,000. A portion of
the bonuses earned in 1999 will not be paid until 2000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------- ----------------------
Number of Securities
Name and Principal Bonus Underlying
Position Year Salary ($) ($) Options/SARs (#)
------------------ ---- ---------- ------- ----------------------
<S> <C> <C> <C> <C>
Tom I. Evslin............ 1999 250,769 153,672(1) 30,000
Chairman of the Board,
President and 1998 232,308 150,000(1) --
Chief Executive Officer
Edward B. Jordan......... 1999 148,269 102,339(1) 400,000
Executive Vice President
and 1998 120,192 -- --
Chief Financial Officer
John G. Musci(2)......... 1999 176,923 172,350(1)(4) 1,500,000
Executive Vice President
and
Chief Operating Officer
Steven J. Ott............ 1999 101,014 135,242(3) 80,000
Vice President, Global
Sales 1998 96,153 32,924(3) 350,000
Eric G. Weiss............ 1999 121,359 58,181(1) 50,000
Vice President and
Business Unit Manager, 1998 93,654 -- 50,000
WWeXchange Service
</TABLE>
- --------
(1) Bonuses for 1999 include some bonuses that were earned in 1999 but will not
be paid until 2000. Bonuses for 1998 were earned in 1998 but were not paid
until 1999.
(2) Mr. Musci joined us in February 1999.
(3) Consists of commissions earned by Mr. Ott in 1998 and 1999.
(4) Excludes reimbursement for relocation expenses.
55
<PAGE>
The following table presents certain information regarding stock options
granted to the named executive officers during 1999 under our stock incentive
plan.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Individual Grants Term
----------------------------------------------------------------- -----------------------------
Number of
Securities % of Fair Market
Underlying Total Options Exercise Price Value on
Options Granted to Per Share Grant Date Expiration
Name Granted (#) Employees ($/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 is also entitled
to receive up to $100,000 in relocation expenses.
Under his employment agreement, Mr. Musci received non-qualified options
covering 1,500,000 shares of ITXC common stock at an exercise price of $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 base salary, bonus and other benefits and forfeits
any unvested options. If Mr. Musci is terminated by reason of a constructive
termination or wrongful termination, in addition to any accrued base salary,
bonus and other benefits, Mr. Musci is entitled to receive as severance a lump
sum payment in cash equal to his current salary as of the date of
57
<PAGE>
termination for a period equal to the greater of the remainder of the then
current term or six months, certain additional benefits and an acceleration of
the vesting period for any of his options that have not vested as of the date
of the termination. Upon expiration of the term of his employment, Mr. Musci is
entitled to receive as severance his base salary compensation in effect at the
time of the termination for a period of six months, any accrued base salary,
bonus and other benefits and forfeits any unvested options.
Mr. Musci's employment agreement prohibits him from becoming associated with
any competing business for the applicable severance period in the case of a
company wrongful termination or expiration of his term of employment or for six
months in the case of his termination for any other reason.
Under his employment agreement, Mr. Musci is also bound to keep certain
information confidential and to assign to us any intellectual property
developed by him during the term of his employment.
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. 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 base salary, bonus and other benefits and forfeits
any unvested options. If Mr. Shoemaker is terminated by reason of a
constructive termination or wrongful termination, in addition to any accrued
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.
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.
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<PAGE>
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.
VocalTec is a selling stockholder in this offering. See "Principal and
Selling Stockholders."
59
<PAGE>
1998 Incentive Stock Option Plan
Our stock incentive plan was adopted by our board of directors on February
17, 1998 and by our shareholders on April 2, 1998. Under the plan, incentive
stock options and non-qualified stock options to purchase shares of our common
stock may be granted to directors, officers, employees and consultants. As of
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.
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<PAGE>
The grant of a non-qualified option has no tax consequences to us or to the
option holder. Upon exercise of a non-qualified option, the option holder will
recognize taxable ordinary income equal to the excess of the fair market value
on the date of the exercise of the shares of common stock acquired over the
exercise price of the non-qualified option, and that amount will be deductible
by us for federal income tax purposes. The option holder will, upon a later
sale of shares, recognize short term or long term capital gain or loss,
depending on the holding period of the shares, but we will not be entitled to
an additional tax deduction.
Employee Stock Purchase Plan
We have an employee stock purchase plan intended to meet the qualifications
for such a plan under applicable federal income tax laws. The plan will be
administered by the compensation committee of our board of directors. The
number of shares available for purchase under the plan presently consists of
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.
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<PAGE>
Purchase rights granted under the plan are not assignable or transferable by
the employee other than by will or the laws of descent.
The plan will terminate upon the earliest of:
. the last business day in August 2009;
. the date on which all shares available for issuance under the plan have
been sold under purchase rights exercised under the plan; or
. the date on which all purchase rights are exercised in connection with
any corporate transaction described above.
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)....... shareholders. 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 to
Investor Principal Relationship to ITXC Purchased Price ($) be Issued
-------- ------------------------------ --------- --------- ---------
<C> <S> <C> <C> <C>
DS Polaris, Ltd., Polaris
Fund II (Tax Exempt
Investors), LLC, Polaris
Fund II, LLC, Polaris
Fund II, L.P., DS Polaris
Trust Company (foreign
residents) (1997), Ltd.
and Canada--Israel
Opportunity Fund LP(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 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 $4.644 per share. The following table sets forth the names of those
investors who, either directly or through an affiliate, are presently
directors, officers or five percent stockholders of ITXC, the number of shares
of Series C convertible preferred stock that such investors acquired, the
aggregate purchase price paid by such investors and the aggregate number of
shares of our common stock that were issued upon conversion of the preferred
shares when our initial public offering was completed. Each share of Series C
convertible preferred stock was converted into two shares of our common stock.
65
<PAGE>
<TABLE>
<CAPTION>
Shares of Shares of
Preferred Common
Stock Total Stock to
Investor Principal Relationship to ITXC Purchased Price ($) be 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 shareholders. 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 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 stockholder 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 stockholders also have the right to
require that shares of common stock held by them be included in any
registration under the Securities Act commenced by us. Please see "Description
of Capital Stock--Registration Rights" for additional information.
Stock Option Exercises
During 1999, certain of our executive officers exercised stock options,
resulting in the issuance of a total of 480,004 shares of common stock.
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<PAGE>
PRINCIPAL 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 * 37,500 79,168 *
Elon A. Ganor........... 5,567,908(4) 15.48% 750,000(14)(15) 4,817,908 12.61%
William P. Collatos..... 4,693,160(5) 13.05% 235,917(16) 235,917 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% 750,000(14) 4,817,196 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.P........ 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% 71,608(18) 1,960,938 5.13%
Flatiron Associates,
LLC.................... 1,038,888(6)(13) 2.89% 48,824(17) 990,064 2.59%
</TABLE>
- --------
* Represents less than one percent.
67
<PAGE>
(1) The table above includes the following number of shares which the
following persons may acquire under options and warrants held as of
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 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 the Company. With the exception of
shares held with Mary A. Evslin as joint tenants, Tom I. Evslin disclaims
beneficial ownership of the shares owned of record 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.
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.
(4) This number represents 5,567,908 shares of common stock beneficially
owned by VocalTec Communications. Mr. Ganor is the Chairman of the Board
of VocalTec Communications. Mr. Ganor disclaims beneficial ownership of
these shares.
(5) This number represents 4,649,000 shares of common stock beneficially
owned by Spectrum Equity Investors II, L.P. and 44,160 shares of common
stock beneficially 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.
68
<PAGE>
(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 250,000, 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 750,000 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.
(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 26,033, 17,182, 6,508, 15,294, 1,318 and 5,273
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.
69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
This is a summary of the material terms and provisions of our capital stock
and we refer you to our 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.
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
70
<PAGE>
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.
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 will 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.
71
<PAGE>
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.
72
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, we will have 38,193,386 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
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 and the 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 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
73
<PAGE>
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."
74
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
TO NON-U.S. HOLDERS
The following summary describes the material United States federal income
and estate tax consequences of the ownership of ITXC common stock by a non-U.S.
holder. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such non-U.S. holders in light of their
personal circumstances. Furthermore, the discussion below is based upon the
provisions of United States federal income tax law and regulations, rulings and
judicial decisions thereunder as of the date hereof, and such authorities may
be repealed, revoked or modified so as to result in United States federal
income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of common stock should
consult their own tax advisors concerning the United States federal income tax
consequences in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction.
As used herein, U.S. holder means a holder of ITXC common stock that is:
. a citizen or resident of the United States, or someone treated as a
United States citizen or resident individual for United States
federal income tax purposes;
. a corporation or partnership created or organized, or treated as
created or organized for United States federal income tax purposes,
in or under the laws of the United States or any political
subdivision thereof;
. an estate the income of which is subject to United States federal
income taxation regardless of its source;
. a trust the administration of which is subject to the primary
supervision of a court within the United States and the control of
one or more United States persons as described in section
7701(a)(30) of the Internal Revenue Code of 1986; or
. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a domestic trust.
As used herein, non-U.S. holder means a holder of ITXC common stock that
does not fit within the description of a U.S. holder above.
Dividends
Dividends paid to a non-U.S. holder of ITXC common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by the
non-U.S. holder within the United States and, where a tax treaty applies, are
attributable to a United States permanent establishment of the non-U.S. holder,
are not subject to the withholding tax, but instead are subject to United
States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure
requirements must be satisfied in order
75
<PAGE>
for such effectively connected dividends to be exempt from withholding. Any
such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional branch profits tax at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
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.
76
<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
77
<PAGE>
income or capital interests in the partnership or if the partnership is engaged
in a trade or business in the United States, such payments will be subject to
information reporting, but not backup withholding, unless:
. such broker has documentary evidence in its records that the beneficial
owner is a non-U.S. holder and certain other conditions are met, or
. the beneficial owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
78
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, the underwriters 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.
79
<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 500,000 shares purchased by the underwriters on a pro rata basis prior
to any of ITXC's 100,000 shares being purchased.
We, our executive officers and directors and all selling stockholders have
agreed not to do any of the following, whether any transaction described in
clause (1), (2) or (3) below is to be settled by delivery of common stock or
other securities, in cash or otherwise, in each case without the prior written
consent of Lehman Brothers, on behalf of the underwriters, for a period of 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
80
<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.
81
<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.
82
<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
Sales and marketing................ 349,100 2,517,752 6,338,212
Development........................ -- 594,104 1,509,127
General and administrative......... 351,774 2,009,088 6,930,868
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 WWeXchangeSM 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 requires 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 TeleNova in exchange for i) equity in TeleNova, valued at $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.
Basis of Consolidation
The consolidated financial statements include the accounts of ITXC Corp. and
its wholly-owned subsidiaries, Data Transport and ITXC Asia PTE, Ltd. All
significant intercompany balances and transactions have been eliminated in
consolidation.
2. Significant Accounting Policies
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
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)
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>
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>
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>
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 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 is determined based on a formula
including accounts receivable. Available borrowings under the equipment line
is 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 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%.
F-13
<PAGE>
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>
Rental expense for all operating leases was approximately $15,000, $217,000,
and $530,000 in 1997, 1998 and 1999, respectively.
F-14
<PAGE>
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.
On November 18, 1997, the Company issued a warrant to purchase up to
3,800,000 shares of Common Stock, with an exercise price of $1.32 per share,
to a customer to whom the Company provides consulting services (see Note 1).
The fair value of the warrant was determined to be de minimis on the date of
grant. The warrant was not exercised, and, on April 6, 1998, was canceled.
F-15
<PAGE>
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 Stock held by such stockholders, on or after one year
from the completion of the initial public offering of the Company's Common
Stock.
F-16
<PAGE>
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>
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 1998 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.
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).
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
F-18
<PAGE>
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.
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-19
<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 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................................... 100,000
Transfer agent and registrar fees.............................. 4,200
Miscellaneous.................................................. 94,529
---------
Total...................................................... $775,000
=========
</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.
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(4)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lowenstein Sandler PC (to be included in Exhibit 5.1)
24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Princeton, State of New
Jersey, on February 8, 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
Registration Statement has been signed by the following persons in the
capacities indicated on this 8th day of February, 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
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(4)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lowenstein Sandler PC (to be included in Exhibit 5.1)
24.1 Powers of Attorney
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
(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 10.1
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of September 1,
1997, as amended and restated as of April 27, 1998 and as further amended and
restated as of February 1, 2000, is between ITXC Corp., a Delaware corporation
(the "Company"), and Tom Evslin (the "Executive").
WHEREAS, the Executive is the founder of the Company and has served as
Chairman and Chief Executive Officer of the Company since its formation; and
WHEREAS, the Company desires to assure the continuing services of the
Executive, the Executive desires to continue employment with the Company, and
each desires to enter into an agreement to provide for the terms of such
employment set forth herein;
WHEREAS, the Company and the Executive entered into an employment
agreement in September 1997 (the "Prior Agreement") which was amended and
restated in April 1998 (the "Amended and Restated Agreement"); and
WHEREAS, the Company and the Executive desire to further amend and
restate the Prior Agreement and the Amended and Restated Agreement,
NOW, THEREFORE, the Company and the Executive, intending for this
Agreement to (a) further amend the Prior Agreement and the Amended and Restated
Agreement and (b) restate the Prior Agreement and the Amended and Restated
Agreement in their entirety, hereby agree as follows:
1. Employment, Duties and Acceptance Term.
--------------------------------------
1.1 Employment, Duties. The Company hereby employs the Executive for
------------------
the Term (as defined in Section 1.4), to render services to the Company as
Chairman and Chief Executive Officer (reporting directly to the Company's Board
of Directors), and to perform such other duties consistent with such position as
may be assigned to the Executive by the Board of Directors. Notwithstanding
the foregoing, the Company expressly acknowledges and agrees that as the
Executive may, in his sole and absolute discretion, deem appropriate, the
Executive may be a member of the board of directors of corporations other than
the Company.
1.2 Acceptance. The Executive hereby accepts such employment and
----------
agrees to render the services described above. During the Term, the Executive
agrees to devote substantially all of the Executive's business time, effort and
skill to promote the interests of the Company, except as may be required as a
result of his membership on the board of directors of another corporation and
except for normal holiday and vacation periods and of periods of illness and
incapacity. The Executive further agrees to accept election, and to serve
during all or any part of the Term, as an officer or director of any subsidiary
of the Company, without any additional compensation therefor.
<PAGE>
1.3 Location. The duties to be performed by the Executive hereunder
--------
shall be performed primarily at the headquarters office of the Company, subject
to reasonable travel requirements on behalf of the Company; the location of such
office shall not be changed outside of a radius of 25 miles from its current
location without the Executive's consent.
1.4 The Term. The term of the Executive's employment under this
--------
Agreement (the "Term") shall commence on the date hereof and shall end on March
31, 2001 (or such later date to which the Term may be extended by mutual written
agreement between the Company and the Executive), unless earlier terminated as
hereinafter provided.
2. Compensation; Benefits.
-----------------------
2.1 (a) As compensation for services to be rendered pursuant to this
Agreement, the Company agrees to pay the Executive during the Term a base
salary, payable in accordance with the Company's payment policy for executive
officers, at the annual rates set forth below, less such deductions or amounts
to be withheld as required by applicable law and regulations (the "Base
Salary"), plus such increases as may be implemented from time to time in
accordance with this Section 2.1(a). Any increase in the Base Salary from the
annual rates set forth below shall be implemented by the Company only if
approved by the Board of Directors of the Company (or, if such Board delegates
such authority to its Compensation Committee, by such Compensation Committee)in
its discretion. In the event that the Board (or such Compensation Committee, if
applicable), in its sole discretion , from time to time determines to increase
the Base Salary, such increased amount shall, from and after the effective date
of the increase, constitute "Base Salary" for purposes of this Agreement and
shall not thereafter be reduced except as otherwise contemplated by Section
2.1(b) hereof. The Executive shall be entitled to annual compensation reviews in
which all aspects of his compensation (including, without limitation, benefits)
will be compared with the compensation (including, without limitation, benefits)
of chief executive officers of similarly situated companies toward the objective
of providing the Executive with appropriate rewards and incentives.
(b) Subject to Section 2.1(a) hereof, for the period from January 1,
2000 through March 31, 2001, the Base Salary shall be not less than a rate of
Three Hundred Thousand Dollars ($300,000) per year.
2.2 Bonus. In addition to the amounts to be paid to the Executive
-----
pursuant to Section 2.1, the Executive shall be eligible for an annual bonus.
The amount of the annual bonus shall be determined by the Board of Directors of
the Company (or, if such Board delegates such authority to its Compensation
Committee, by such Compensation Committee), in its sole discretion, and shall be
based upon the extent to which the Company has achieved financial goals approved
by the Board of Directors of the Company (or, if such Board delegates such
authority to its Compensation Committee, by such Compensation Committee). In the
event that the Company meets such goals, such annual bonus shall equal 100% of
the applicable Base Salary. In the event that the Company fails to meet such
goals or exceeds such goals, the amount of such annual bonus shall be determined
by the Board of Directors of the Company (or, if such Board delegates such
authority to its Compensation Committee, by such Compensation Committee), in
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accordance with the guidelines established by the Board of the Directors of the
Company (or the Compensation Committee) with respect to the relationship between
bonus payments and the achievement of targeted goals, as a bonus that is less
than (if the Company fails to meet such goals) or greater than (if the Company
exceeds such goals) 100% of the applicable Base Salary.
2.3 Business Expenses. The Company shall pay or reimburse the
-----------------
Executive for all expenses actually incurred or paid by the Executive during the
Term in the performance of the Executive's services under this Agreement, upon
presentation of expense statements or vouchers or such other supporting
information as the Company customarily may require of its officers.
2.4 Vacation. During the Term, the Executive shall be entitled to
--------
four (4) weeks paid vacation per year, taken in accordance with the vacation
policy of the Company during each year of the Term.
2.5 Fringe Benefits. The Executive shall be entitled to all benefits
---------------
for which the Executive shall be eligible under the Company's 1998 Stock
Incentive Plan and any qualified pension plan, 401(k) plan, group insurance or
other so-called "fringe" benefit plan which the Company provides to its
employees generally, together with executive medical benefits for the Executive,
as from time to time in effect for executives of the Company generally.
3. Termination; Severance. The Executive's employment Term may be
----------------------
earlier terminated as follows:
3.1 By the Company.
--------------
(a) For Cause. The Company may, by majority vote of the Board of
---------
Directors of the Company and written notice to the Executive, terminate his
employment for Cause (as defined below) and, upon such termination, this
Agreement shall terminate and the Executive shall be entitled to receive no
further compensation or benefits hereunder, except any as shall have been
accrued to the date of such termination or as required by law. "Cause" means
-----
any of the following: (i) the willful and continued failure by the Executive to
substantially perform any of his material duties hereunder or to follow the
reasonable and lawful orders of the Board of Directors of the Company, provided
--------
the Executive has received written notice of such failure from the Board of
Directors, the Executive has been given 30 days to cure such failure and the
Executive has failed to effect such cure; (ii) any act of fraud, moral
turpitude, misappropriation of material assets of the Company or similar conduct
against the Company; (iii) the conviction of the Executive for a felony or (iv)
any material breach (other than an inadvertent and curable breach) of the non-
competition covenant contained in Section 4 hereof or the confidentiality
covenant contained in Section 5 hereof.
(b) For other than Cause. The Company may at any time, by giving at
--------------------
least sixty (60) days prior written notice to the Executive, terminate his
employment for any reason. In the event the Company terminates the Executive's
employment for other than Cause, the Executive shall be entitled to receive, in
addition to compensation and other benefits accrued
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<PAGE>
to the date of termination and anything else the Executive may be entitled to at
law or in equity, the severance payments set forth in Section 3.4 below.
3.2 By the Executive.
----------------
(a) For Good Reason. The Executive may at any time by giving at
---------------
least thirty (30) days prior written notice to the Company terminate his
employment for Good Reason (as defined below) and, upon such termination, this
Agreement shall terminate and the Executive shall be entitled to receive, in
addition to compensation and other benefits accrued to the date of termination
and anything else the Executive may be entitled to at law or in equity, the
severance payments set forth in Section 3.4 below. "Good Reason" means the
-----------
Company's breach of any material provision of this Agreement (including,
without limitation, any failure to pay the compensation or provide the benefits
described in Section 2 hereof or any reduction in the Executive's position or
change in the nature of the Executive responsibilities from that contemplated in
Section 1.1 hereof or any relocation inconsistent with Section 1.3 hereof);
provided the Company has received written notice of such breach from the
- --------
Executive, the Company has been given 30 days to cure such breach and the
Company has failed to effect such cure.
(b) For other than Good Reason. The Executive may at any time, by
--------------------------
giving at least sixty (60) days prior written notice to the Company, resign from
the Company without Good Reason. In the event the Executive terminates his
employment for other than Good Reason, this Agreement shall terminate and the
Executive shall be entitled to receive no further compensation or benefits
hereunder, except (i) any as shall have accrued to the date of such termination,
(ii) any provided by Section 4.2(b) or (iii) as required by law.
3.3 Death; Disability. If the Executive shall die during the Term,
-----------------
the Term shall terminate and no further compensation or benefits shall be
payable hereunder except any as shall have been accrued to the date of such
termination or as required by law. If during the Term the Executive shall
become physically or mentally disabled, whether totally or partially, such that
the Executive is unable to perform the Executive's services hereunder for a
period of one hundred and fifty (150) consecutive days, or two hundred and ten
(210) non-consecutive days during a period of three hundred and sixty-five (365)
days, the Company shall have the right to terminate this Agreement within sixty
(60) days after the Company ascertains that it has the right to terminate this
Agreement, in which case no further compensation or benefits shall be payable
hereunder except any as shall have been accrued to the date of such termination
or as required by law.
3.4 Severance. In the event this Agreement is terminated (i) by the
---------
Company for other than Cause or (ii) by the Executive for Good Reason, the
Executive shall be entitled to receive his salary at the rate in effect
immediately prior to such termination (pursuant to Section 2.1), a bonus equal
to 100% of such salary and all other benefits then afforded to the senior
executive officers of the Company, paid at the Company's option in bi-weekly or
monthly installments, for a period of six (6) months (the "Severance Period").
In addition, the Executive shall receive a pro rata portion of the annual bonus
(pursuant to Section 2.2) for the year in which
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<PAGE>
such termination occurs (the "Pro Rata Bonus"). Within ten (10) days of such
termination, the Company shall pay the Executive the Pro Rata Bonus. In the
event that the Company fails to pay (within five days after receiving written
notice of default) any amount required to be paid to Executive pursuant to this
Section 3.4, the Executive shall have no further obligation to comply with
Section 4 hereof; provided, however, that if the Company fails to make any such
payments due to a lack of sufficient financial resources to make such payments,
(i) the Executive shall remain obligated to comply with Section 4 hereof for a
period of ninety days after the Company first defaults in its obligations under
this Section 3.4 (but in no event for a period expiring after the last day in
which Section 4 would be operative had the Company made all required payments)
and (ii) the Executive shall not solicit any employee of the Company to leave
his or her employ with the Company for a period of twelve months after the
termination of Executive's employment with the Company.
4. Covenant not to Compete.
-----------------------
4.1 The Executive covenants and agrees that he shall not, directly or
indirectly, anywhere within the United States or Canada, (1) become "Associated
With" any "Competing Business" or (2) solicit, sell, call upon or induce others
to solicit, sell or call upon, directly or indirectly, any customer or
prospective customer of the Company for the purpose of inducing any such
customer or prospective customer to purchase, license or lease a product or
service of a Competing Business. Notwithstanding the foregoing, nothing in this
Section 4 shall preclude Executive from becoming "Associated With" an entity
(including, without limitation, any telephone company) that (a) is engaged
predominantly in the business of providing telephony services to retail (and not
wholesale) customers and does not otherwise satisfy the definition of a
"Competing Business" below, or (b) as part of its overall business, engages in
the provision of Internet telephony services to wholesale customers if and only
if (A) Executive's responsibilities in connection with Executive's association
with such entity do not include the provision of such Internet telephony
services and (B) the provision of Internet telephony services to wholesale
customers does not represent a substantial portion of such entity's overall
business activities. For purposes of this Agreement, the following terms shall
have the following meanings:
"Competing Business" means the business of any person, corporation (for
profit or not for profit) or other entity which indirectly or directly
provides Internet telephony services, including without limitation, (i)
linking Internet telephone service providers ("ITSPs") to each other; (ii)
providing billing and settlement services to Internet telephony customers;
and/or (iii) connecting participating ITSPs to telephone numbers using a
combination of Internet providers and traditional telephony for wholesale
or retail customers.
"Associated With" means serving as an owner, officer, employee, independent
contractor, agent or a holder of 5% or more of any class of equity
securities of, director, trustee, member, consultant or partner of any
person, corporation (for profit or not for profit) or other entity engaged
in a Competing Business.
4.2 Non-compete Period.
------------------
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<PAGE>
(a) The covenant not to compete set forth in Section 4.1 of this
Agreement shall restrict the Executive from the date of this Agreement until the
earliest of: (i) two (2) years following termination of this Agreement by the
Company for Cause; (ii) six (6) months following termination of this Agreement
by the Company other than for Cause; (iii) six (6) months following the
Executive's resignation with Good Reason prior to the expiration of the Term;
(iv) six (6) months following the Executive's resignation without Good Reason
prior to the expiration of the Term; and (v) upon termination of this Agreement,
if this Agreement terminates pursuant to Section 3.3 hereof or upon expiration
of the Term. Notwithstanding anything contained herein to the contrary, the
Company may, at its option, elect to extend the non-compete period set forth in
clauses (ii), (iii) and (iv) above, respectively, for successive periods of six
(6) months each (each such six (6) month period being referred to herein as an
"Extension Period"); provided, however, that no such extension shall be
-------- -------
effective unless the Company provides written notice of such extension to the
Executive at least thirty (30) days prior to the date that the non-compete
period is due to expire; and provided further that in no event shall the non-
-------- -------
compete period (including the initial non-compete period and any Extension
Periods) exceed two (2) years in the aggregate.
(b) In the event that the Company elects to extend the Non-Compete
Period pursuant to Section 4.2(a) above, (a) the Severance Period set forth in
Section 3.4 shall continue until the end of the Extension Period and (b) the
Company shall pay the Executive during any Extension Period his salary at the
rate in effect immediately prior to the termination of the Executive's
employment hereunder (pursuant to Section 2.1), a bonus equal to 100% of such
salary and all other benefits then afforded to the senior executive officers of
the Company, paid at the Company's option in bi-weekly or monthly installments.
4.3 If any of the covenants contained in Sections 4.1 or 4. 2, or any
part thereof, hereafter are construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants, which shall be
given full effect, without regard to the invalid portions.
4.4 If any of the covenants contained in Sections 4.1, 4.2 or 5, or
any part thereof, are held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that the court making
such determination shall have the power to reduce the duration and/or area of
such provision to the maximum extent possible and, in its reduced form, said
provision shall then be enforceable.
4.5 The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in Sections 4.1 and 4.2 upon the courts of any
state within the geographical scope of such covenants. In the event that the
courts of any one or more of such states shall hold such covenants wholly
unenforceable by reason of the breadth of such covenants or otherwise, it is the
intention of the parties hereto that such determination not bar or in any way
affect the Company's right to the relief provided above in the courts of any
other states within the geographical scope of such covenants as to breaches of
such covenants in such other respective jurisdictions, the above covenants as
they relate to each state being for this purpose severable into diverse and
independent covenants.
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<PAGE>
4.6. In the event that any action, suit or other proceeding in law or
in equity is brought to enforce the covenants contained in Sections 4.1 and 4.2
or to obtain money damages for the breach thereof, and such action results in
the award of a judgment for money damages or in the granting of any injunction
in favor of the Company, all expenses (including reasonable attorneys' fees) of
the Company in such action, suit or other proceeding shall (on demand of the
Company) be paid by the Executive. In the event the Company fails to obtain a
judgment for money damages or an injunction in favor of the Company, all
expenses (including reasonable attorneys' fees) of the Executive in such action,
suit or other proceeding shall (on demand of the Executive) be paid by the
Company.
5. Confidential Information and Materials.
--------------------------------------
5.1 "Confidential Information" means any information including without
limitation plans, specifications, drawings, sketches, models, samples, data,
computer programs, documentation, reports, accountings, and other technical
and/or business information, that can be communicated by any means whatsoever,
including without limitation oral, visual, written and electronic transmission,
that relates to the Company's current or future business, products, services or
development including, without limitation:
(i) products and services, including without limitation
existing hardware and software products and hardware and software in
various stages of research and development;
(ii) business policies, practices, and customer and supplier
lists and information pertaining to customers and suppliers; and
(iii) information received from others that the Company is
obligated to treat as confidential or proprietary.
Confidential Information shall include the Inventions as defined in Section 1
hereof and shall also include any materials that relate to, pertain to, record
or embody any of the foregoing.
5.2 "Confidential Information" shall not include information which
would otherwise fit the definition of Confidential Information above if
Executive can conclusively establish to the Company that such information has:
(i) entered or was in the public domain other than due to
the breach by Executive or another, by act or omission, of any
obligation owed to the Company;
(ii) become demonstrably known to Executive prior to the
Company's disclosure of such information to Executive;
(iii) become demonstrably known by or available to
Executive from a source other than the Company subsequent to the
disclosure by the
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<PAGE>
Company of such information to Executive, without any breach - by act
or omission - of any obligation of confidentiality
owed to the Company, as evidenced by written documents received by
Executive.
5.3. Executive acknowledges that (1) the Confidential Information has
been or will be developed at considerable time, expense and effort by or on
behalf of the Company, (2) the Confidential Information is or likely will be
unique and constitute valuable property of the Company, (3) the Confidential
Information provides or likely will provide the Company with a valuable
competitive advantage, (4) the Confidential Information has been or will be
owned by or on behalf of the Company or disclosed to the Company by third
parties with an expectation of confidentiality and (5) Executive shall not have
any ownership or other proprietary interest in any Confidential Information,
notwithstanding that it may be necessary for the Company to disclose some or all
of the Confidential Information to Executive in confidence in order for
Executive to perform his duties for the Company.
5.4 With respect to Confidential Information:
5.4.1 Executive shall use the Confidential Information only in
the performance of his duties to the Company, and shall not use or permit to be
used any Confidential Information at any time (whether during or after his
employment) for personal benefit, for the benefit of any other individual, firm,
corporation or other entity, or in any manner adverse to the Company's
interests; and
5.4.2 Executive shall not disclose or permit to be disclosed
any Confidential Information at any time (whether during or after his
employment) except to authorized personnel of the Company, unless (x) the
Company (or other owner of the Confidential Information) consents in advance in
writing or (y) such Confidential Information is required to be disclosed by any
court or governmental agency, or (z) the Confidential Information is required to
be disclosed in connection with the hearing of any dispute between the parties,
provided that in the case of any disclosure pursuant to clause (y) or (z),
Executive shall provide to the Company advance written notice of the proposed
disclosure and the Company shall be entitled to seek an appropriate protective
order to prevent the disclosure or to otherwise preserve confidentiality.
5.5 Executive shall take all reasonable security precautions, at
least as great as the precautions Executive takes to protect Executive's own
confidential information, to maintain the confidentiality of the Confidential
Information.
5.6 Executive shall notify the Company immediately upon discovery of
any unauthorized disclosure or use of Confidential Information, whether by
Executive or others, or any other breach of this Agreement by Executive, and
shall cooperate with the Company in every reasonable way to help the Company
regain possession of the Confidential Information and prevent further disclosure
and/or unauthorized use.
5.7 Confidential Information may be reproduced, summarized or
otherwise copied only for the performance of Executive's duties to the Company.
Executive shall
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<PAGE>
segregate all materials that comprise, relate to, pertain to, record or embody
any Confidential Information from the confidential materials of others in order
to prevent commingling.
5.8 Executive shall return all originals, copies,
reproductions and summaries of Confidential Information upon any termination of
Executive's employment with the Company and also upon the Company's request.
5.9 All Confidential Information is and shall remain the
property of the Company. It is expressly agreed and understood that by
disclosing information to Executive, the Company does not grant any express or
implied right to Executive under any of the Company's patents, copyrights,
service marks or trademarks.
6. Intellectual Property.
---------------------
6.1 The Executive agrees that all patents, patent rights, copyrights
or any pending applications for registration thereof (if registered) relating to
the Company's business of providing Internet protocol telephony services and
operation of gateways, including, without limitation, computer programs and all
related material, licenses, inventions, research records, trade secrets,
processes, procedures, designs, engineering specifications and drawings and
analyses (collectively, "Intellectual Property") developed, invented or made by
him during the Term shall belong to the Company; provided that such Intellectual
Property was the result of the Executive's work with the Company or any of its
subsidiaries or affiliates during the Term.
6.2 If any Intellectual Property is described in a patent application
or is disclosed to third parties, directly or indirectly, by the Executive
within three (3) months after the termination of the Executive's employment by
the Company, it is to be presumed that the Intellectual Property was developed,
invented or made during the Term.
7. Indemnification.
---------------
The Company shall indemnity the Executive, to the maximum extent
permitted by applicable law and except for any willful act, omission or gross
negligence, against all claims, liabilities, damages, losses, costs, charges and
expenses (including, without limitation, reasonable legal fees and expenses)
incurred, suffered or sustained by the Executive in connection with any pending
or threatened action, suit or proceeding to which the Executive may be made a
party by reason of the Executive's being an officer, director or employee of the
Company or of any subsidiary or affiliate of the Company. The right of
indemnification herein provided shall nor be deemed a waiver of any of the
rights to which the Executive may be entitled as a matter of law and any rights
of indemnity under any insurance policy carried by the Company.
8. Notices.
-------
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<PAGE>
All notices, requests, consents and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, sent by overnight courier or mailed
first class, postage prepaid, by registered or certified mail (notices mailed
shall be deemed to have been given on the date mailed), as follows (or to such
other address as either party shall designate by notice in writing to the other
in accordance herewith):
If to the Company, to:
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
Attention: Chief Financial Officer
If to the Executive, to:
Tom Evslin
107 Library Place
Princeton, New Jersey 08540
9. General.
-------
9.1 Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of New Jersey applicable
to agreements made and to be performed entirely in New Jersey.
9.2 Section Headings. The section headings contained herein are for
----------------
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
9.3 Assignability. This Agreement, and the Executive's rights and
-------------
obligations hereunder, may not be assigned by the Executive. The Company may
not assign its rights, together with its obligations, hereunder without the
express written consent of the Executive.
9.4 Subsidiaries and Affiliates. As used herein, the term
---------------------------
"subsidiary" shall mean any corporation or other business entity controlled
directly or indirectly by the corporation or other business entity in question,
and the term "affiliate" shall mean and include any corporation or other
business entity directly or indirectly controlling, controlled by or under
common control with the corporation or other business entity in question.
9.5 Amendments. This Agreement may be amended, modified. superseded.
----------
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both of the parties hereto, or in the
case of a waiver, by the party waiving compliance. The failure of either party
at any time or times to require performance of any provision hereof shall in no
manner affect the right at a later time to enforce the same. No waiver by
either party of the breach of any term or covenant contained in this Agreement,
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<PAGE>
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
9.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one and the same instrument
9.7 Further Assurances. Each of the parties hereto shall, from time
------------------
to time, upon the request of the other party hereto, duly execute, acknowledge
and deliver or cause to be duly executed, acknowledged and delivered, all such
further instruments and documents reasonably requested by the other party to
further effectuate the intent and purposes of this Agreement.
9.8 Entire Agreement. This Agreement sets forth the entire agreement
----------------
and understanding of the parties relating to the subject matter hereof and
supersedes all prior agreements, arrangements and understandings, written or
oral, relating to the subject matter hereof, including without limitation the
Prior Agreement and the Amended and Restated Agreement. No representation,
promise or inducement has been made by either party that is not embodied in this
Agreement, and neither party shall be bound by or liable for any alleged
representation, promise or inducement not so set forth.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ITXC CORP.
By: /s/ Edward B. Jordan
--------------------
Edward B. Jordan
Executive:
/s/ Tom Evslin
--------------
Tom Evslin
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<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
AGREEMENT made this 2ND day of January, 2000, by and between ITXC
Corp., a corporation formed under the laws of the State of Delaware (the
"Company"), and Thomas Shoemaker (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive and the Executive
wishes to accept such employment, and each desires to enter into an agreement to
provide for the terms and conditions of such employment set forth herein;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. Employment
----------
The Company agrees to employ the Executive during the Term specified in
section 2, and the Executive agrees to accept such employment, upon the terms
and conditions hereinafter set forth.
2. Term
----
(a) Subject to Section 6 below and the other terms and conditions of
this Agreement, the Executive's employment by the Company shall be for a term
(the "Term") commencing on January 5, 2000 (the "Effective Date") and expiring
on the date (hereafter referred to as the "Expiration Date") which is (a) the
one year anniversary date of the Effective Date or (b) any later date to which
the Term may be extended by written agreement of the parties. Notwithstanding
anything contained herein to the contrary, in the event that the Executive's
employment with the Company continues after the Expiration Date, the Executive's
employment shall be deemed to be "at will". The effective date of the
termination of the Executive's employment with the Company, regardless of the
reason therefor, is referred to in this Agreement as the "Date of Termination".
(b) Upon termination of the employment of the Executive with the
Company on or after the Expiration Date, the Company shall pay the Executive,
subject to appropriate offsets, as permitted by applicable law, for debts or
money due to the Company (collectively, "Offsets"), any earned but unpaid salary
and bonus compensation, and any unused Personal Time Off ("PTO") days accrued
under Company policy, only through or as of, and any unpaid reimbursement
expenses outstanding as of, the Date of Termination. Any benefits to
<PAGE>
which the Executive or his beneficiaries may be entitled to under the plans and
programs described in section 5(b) below, or any other applicable plans and
programs, as of the Date of Termination shall be determined in accordance with
the terms of such plans and programs. In addition, unless the Executive's
employment terminates on or after the Expiration Date other than as a result of
the Executive's death, disability or by the Company for Cause (as defined in
section 6(a), the Company shall continue to pay the Executive his rate of base
salary compensation then in effect for a period of six months. Except as
provided in this section 2(b), in connection with the Executive's termination of
employment pursuant to section 2(a), the Company shall have no further liability
to the Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amount of whatever
nature.
3. Duties and Responsibilities
---------------------------
(a) During the Term, the Executive shall have the position of Executive
Vice President or such other title as may be agreed between the Executive and
the Company. The Executive shall perform such duties and responsibilities as may
be assigned to him from time to time consistent with his position, and in the
absence of such assignment, such duties as are customary and commensurate with
such position. The Executive further agrees, if elected or appointed, to accept
appointment or election, and to serve during all or any part of the Term, as a
director of the Company and as an officer or director of any subsidiary of the
Company, without any additional compensation therefor.
(b) The Executive's employment by the Company shall be full-time and
exclusive, and during the Term, the Executive agrees that he will (i) devote
substantially all of his business time and attention, his best efforts, and all
his skill and ability to promote the interests of the Company and its
affiliates; (ii) carry out his duties in a competent and professional manner;
(iii) work with other employees of the Company and its affiliates in a competent
and professional manner; and (iv) generally promote the interests of the Company
and its affiliates. Notwithstanding the foregoing, the Executive shall be
permitted to engage in civic or charitable activities and manage his personal
investments, provided that such activities (individually or collectively) do not
materially interfere with the performance of his duties or responsibilities
under this Agreement.
4. Compensation
------------
(a) As compensation for his services hereunder, the Company shall pay
the Executive, in accordance with its normal payroll practices, base salary
compensation at an annual rate not less than $180,000.
(b) Executive shall participate in the Company's Cash Incentive Plan,
subject to the terms and conditions of such Plan as in effect from time to time.
For purposes of the Cash Incentive Plan, Executive's target bonus for the year
ending December 31, 2000 shall be 37.5% of base salary for such year.
Executive's target bonus for each year of the Term, if any, beginning after
December 31, 2000 shall be 75.0% of base salary for such year
-2-
<PAGE>
or such other percentage as is established by the Board of Directors of the
Company (the "Board") for Executive Vice Presidents of the Company generally.
For purposes of determining Executive's bonus under the Company's Cash Incentive
Plan, the standard procedures of the Company's Cash Incentive Plan as in effect
at the relevant time shall be used.
(c) As of the first day of the Term, the Executive shall be granted
non-qualified options ("Options") under the ITXC Corp. Stock Incentive Plan (the
"Stock Incentive Plan") to purchase 300,000 shares of ITXC Corp. common stock.
The exercise price of such Options shall be the fair market value of ITXC Corp.
common stock on the Effective Date (the "Grant Date") as determined in
accordance with the terms of the Stock Incentive Plan.
The Options shall vest and become exercisable as follows:
(A) 250,000 of such Options shall vest and become exercisable as
follows:
(i) 83,333 of such Options shall vest and become exercisable
on the one-year anniversary of the Grant Date;
(ii) 83,333 of such Options shall vest and become exercisable
on the second anniversary of the Grant Date;and
(iii) the balance of such 250,000 Options shall vest and
become exercisable on the third anniversary of the Grant Date.
(B) The remaining 50,000 Options shall vest and become exercisable on
the third anniversary of the Grant Date; provided, however, that a
number of such Options equal to the quotient determined by multiplying
50,000 by the Bonus Fraction (as hereinafter defined) shall vest and
become exercisable on the one-year anniversary of the Grant Date. For
this purpose, the Bonus Fraction is the lesser of one (1) or a
fraction, the numerator of which is the cash bonus earned by Executive
under section 4(b) above for the year ending December 31, 2000 and the
denominator of which is $67,500.00.
Notwithstanding the foregoing, except as provided by section 6(d) or
the Stock Incentive Plan, upon the Executive's termination of employment with
the Company, all Options which are not vested shall be forfeited.
Except as set forth herein, the Options shall be subject in all
respects to the terms and conditions of the plan governing the Options.
(d) All compensation paid to the Executive shall be subject to
applicable tax withholding requirements.
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<PAGE>
5. Expenses; Fringe Benefits
-------------------------
(a) The Company agrees to pay or to reimburse the Executive during the
Term for all reasonable, ordinary and necessary vouchered business or
entertainment expenses incurred in the performance of his services hereunder in
accordance with the policy of the Company as from time to time in effect.
(b) During the Term, the Executive and, to the extent eligible, his
dependents, shall be entitled to participate in and receive all benefits under
any employee benefit plans and programs provided by the Company (including
without limitation, 401(k), medical, dental, disability, group life (including
accidental death and dismemberment) and business travel insurance plans and
programs) applicable generally to the employees of the Company, subject,
however, to the terms and conditions of the various plans and programs in effect
from time to time.
(c) Notwithstanding anything contained herein to the contrary, the
Company reserves the right to modify, amend or terminate any employee benefit
plan or policy as it deems appropriate in its discretion; provided that unless
required by law, the Company shall not amend, modify or terminate any such plan
or policy in a manner that treats the Executive differently from other similarly
situated employees.
6. Termination
(a) The Company, by direction of its Board and/or Chief Executive
Officer, shall be entitled to terminate the Term prior to the Expiration Date
and to discharge the Executive for "Cause" effective upon the giving of written
notice. The term "Cause" shall be limited to the following grounds:
(i) The willful and continued failure by the Executive to
substantially perform any of his material duties hereunder or to follow
the reasonable and lawful orders of the Board or the Chief Executive
Officer of the Company;
(ii) The Executive's misappropriation of material assets of
the Company;
(iii) Use of alcohol or illegal drugs, materially interfering
with the performance of the Executive's obligations under this
Agreement;
(iv) Indictment, arraignment or conviction of a felony or of
any crime involving moral turpitude, dishonesty or theft;
(v) The commission by the Executive of any willful or
intentional act, or the Executive's willful or intentional failure to
act, which could reasonably be expected to injure the reputation,
business or business
-4-
<PAGE>
relationships of the Company; provided, however, that no act or failure
to act on the part of the Executive shall be deemed to be willful or
intentional if it was due primarily to an error of judgment or
negligence, but shall be deemed willful or intentional if done, or
omitted to be done, by the Executive not in good faith and without
reasonable belief that his action or omission was in or not opposed to
the best interests of the Company. Failure to meet performance
standards or objectives of the Company by itself shall not constitute
Cause for purposes of this Agreement.
(vi) Any material breach (not covered by any of the clauses
(i) through (v)) of any term, provision or condition of this Agreement
or of any Company policy.
(b) The Executive shall be entitled to terminate this Agreement and the
Term hereunder prior to the Expiration Date in the event that the Company is in
default of a material term of this Agreement, which default remains uncured for
a period of 30 days after written notice of such default from the Executive to
the Company, such notice to specify the specific nature of the claimed default
and the manner in which the Executive requires such default to be cured.
Notwithstanding any such termination, or in the event the Company terminates the
employment of the Executive prior to the Expiration Date in breach of its
obligations under this Agreement (hereinafter referred to as a "Termination
Without Cause"), the restrictions set forth in section 8 shall remain in full
force and effect.
(c) Upon the termination of the employment of the Executive with the
Company pursuant to section 6(a) or by virtue of a resignation other than
pursuant to a termination under section 6(b) above, the Company shall pay the
Executive, subject to any Offsets, (i) any earned but unpaid salary
compensation, (ii) any earned but unpaid cash bonus, (iii) any unused accrued
PTO days, and (iv) any unpaid reimbursable expenses (except as provided under
Section 5(d), in each case, as of the Date of Termination. Any benefits to which
the Executive or his beneficiaries may be entitled to under the plans and
programs described in section 5(b) above, or any other applicable plans and
programs, as of his Date of Termination shall be determined in accordance with
the terms of such plans and programs. Except as provided in this section 6(c),
the Company shall have no further liability to the Executive or the Executive's
heirs, beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amount of whatever nature.
(d) In the event of the termination of the Executive's employment by
the Executive pursuant to section 6(b) above or in the event of a Termination
Without Cause by the Company (each such event being called a "Wrongful
Termination"), as liquidated damages, the Executive shall be entitled to
continue to receive from the Company, subject to any Offsets and for so long as
the Executive is not in breach of his obligations to the Company under sections
8 and 9 hereof, (i) his then applicable salary compensation when otherwise
payable through the remainder of the then current Term hereof reduced by any
income earned by the Executive as a result of gainful activity during the
remainder of such Term whether as an employee, principal, partner, agent,
consultant, co-venturer or in any other capacity
-5-
<PAGE>
(hereinafter referred to as "Other Employment"), (ii) any earned but unpaid
bonus as of the Date of Termination, and (iii) any unpaid reimbursable expenses
outstanding, and any unused accrued PTO days, as of the Date of Termination. Any
benefits to which Executive or his beneficiaries may be entitled to under the
plans and programs described in section 5(b) above, or any other applicable
plans and programs, as of his Date of Termination shall be determined in
accordance with the terms of such plans and programs. In addition, the Executive
shall continue to vest in the Options in accordance with the terms set forth in
section 4(c) for the remainder of the Term. Except as provided in this section
6(d) in connection with a Wrongful Termination, (x) the Company shall have no
further liability to the Executive or the Executive's heirs, beneficiaries or
estate for damages, compensation, benefits, severance, indemnities or other
amount of whatever nature and (y) the Executive shall be under no obligation to
mitigate his damages or to seek Other Employment; provided that, as indicated in
this section 6(d), any income the Executive earns from Other Employment shall
reduce payments by the Company under section 6(d)(i). From time to time, upon
the Company's reasonable request, the Executive shall provide the Company
written verification of amounts earned from Other Employment. In the event the
Executive fails to supply such information, the obligations of the Company to
the Executive under this section 6(d) shall terminate. It is agreed that a
termination of the Executive's employment on or after the Expiration Date shall
not be deemed a Wrongful Termination.
7. Disability; Death
-----------------
(a) In the event the Executive shall be unable to perform his duties
hereunder by virtue of illness or physical or mental incapacity or disability
(from any cause or causes whatsoever) in substantially the manner and to the
extent required hereunder prior to the commencement of such disability (all such
causes being herein referred to as "disability"), the Company shall have the
right to terminate the Executive's employment hereunder as at the end of any
calendar month during the continuance of such disability upon at least 30 days'
prior written notice to him. In the event of the Executive's death, the Date of
Termination shall be the date of such death.
(b) In the event the Executive's employment terminates pursuant to
section 7(a), the Executive, or in the case of his death, the Executive's
estate, shall be entitled to receive, subject to any Offsets, (i) all salary and
bonus compensation earned but unpaid as of the Date of Termination and (ii) any
unpaid reimbursable expenses outstanding, and any unused accrued PTO days, as of
such date. Any benefits to which the Executive or his beneficiaries may be
entitled under the plans and programs described in sections 5(b) above, or any
other applicable plans and programs, as of his Date of Termination shall be
determined in accordance with the terms of such plans and programs. Except as
provided in this section 7(b), in the event of the Executive's termination due
to disability or death, the Company shall have no further liability to the
Executive or the Executive's heirs, beneficiaries or estate for damages,
compensation, benefits, severance, indemnities or other amounts of whatever
nature.
8. Confidential Information In consideration of the covenants of the
------------------------
Company herein, the Executive agrees as follows:
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<PAGE>
(a) The Executive hereby agrees and acknowledges that he has
and has had access to or is aware of Confidential Information. The Executive
hereby agrees that he shall keep strictly confidential and will not prior to or
after his Date of Termination, without the Company's express written consent,
divulge, furnish or make accessible to any person or entity, or make use of for
the benefit of himself or others, any Confidential Information obtained,
possessed, or known by him except as required in the regular course of
performing the duties and responsibilities of his employment by the Company
while in the employ of the Company, and that he will, prior to or upon his Date
of Termination deliver or return to the Company all such Confidential
Information that is in written or other physical or recorded form or which has
been reduced to written or other physical or recorded form, and all copies
thereof, in his possession, custody or control. The foregoing covenant shall not
apply to (i) any Confidential Information that becomes generally known or
available to the public other than as a result of a breach of the agreements of
the Executive contained herein, (ii) any disclosure of Confidential Information
by the Executive that is expressly required by judicial or administrative order;
provided however that the Executive shall have (x) notified the Company as
promptly as possible of the existence, terms and circumstances of any notice,
subpoena or other process or order issued by a court or administrative authority
that may require him to disclose any Confidential Information, and (y)
cooperated with the Company, at the Company's request, in taking legally
available steps to resist or narrow such process or order and to obtain an order
or other reliable assurance that confidential treatment will be given to such
Confidential Information as is required to be disclosed.
(b) For purposes of this Agreement, "Confidential Information" means
any information including without limitation plans, specifications, drawings,
sketches, models, samples, data, computer programs, documentation, reports,
accountings, and other technical and/or business information, that can be
communicated by any means whatsoever, including without limitation oral, visual,
written and electronic transmission, that relates to the Company's current or
future business, products, services or development including, without
limitation:
(i) products and services, including without limitation
existing hardware and software products and hardware and software in
various stages of research and development;
(ii) business policies, practices, and customer and supplier
lists and information pertaining to customers and suppliers; and
(iii) information received from others that the Company is
obligated to treat as confidential or proprietary.
Confidential Information shall include any materials that relate to,
pertain to, record or embody any of the foregoing.
-7-
<PAGE>
"Confidential Information" shall not include information which would
otherwise fit the definition of Confidential Information above if Executive can
conclusively establish to the Company that such information has:
(i) entered or was in the public domain other than due to the
breach by Executive or another, by act or omission, of any obligation
owed to the Company;
(ii) become demonstrably known to Executive prior to the
Company's disclosure of such information to Executive;
(iii) become demonstrably known by or available to Executive
from a source other than the Company subsequent to the disclosure by
the Company of such information to Executive, without any breach - by
act or omission - of any obligation of confidentiality owed to the
Company, as evidenced by written documents received by Executive.
9. Post-Employment Obligations In consideration of the covenants of the
---------------------------
Company herein, the Executive agrees as follows:
(a) The Executive agrees that his services hereunder are of a special,
unique, extraordinary and intellectual character, and his position with the
Company places him in a position of confidence and trust with employees,
suppliers of the Company. The Executive further agrees and acknowledges that in
the course of the Executive's employment with the Company, the Executive has
been and will be privy to Confidential Information. The Executive consequently
agrees that it is reasonable and necessary for the protection of the trade
secrets, goodwill and business of the Company that the Executive make the
covenants contained herein. Accordingly, the Executive agrees that while he is
in the employ of the Company and for a period of six months after the Date of
Termination (regardless of the reason for his ceasing to be employed by the
Company), he shall not, without the prior written consent of the Company,
directly or indirectly, anywhere within the United Sates or Canada:
(i) become Associated With any Competing Business; or
(ii) solicit, sell, call upon or induce others to solicit,
sell or call upon, directly or indirectly, any customer or prospective
customer of the Company for the purpose of inducing any such customer
or prospective customer to purchase, license or lease a product or
service of a Competing Business; or
(iii) employ, solicit for employment, or advise or
recommend to any other person that they employ or solicit for
employment or retention as a consultant, any person who is, or
was at any time within twelve (12) months
-8-
<PAGE>
prior to the Date of Termination, an employee of, or exclusive
consultant to, the Company.
(b) For purposes of this section 9, the following terms shall have the
following meanings:
"Competing Business" means that portion or segment of the business
of any person, corporation (for profit or not for profit) or other entity which
indirectly or directly provides wholesale internet telephony services, including
without limitation, (i) linking internet telephone service providers ("ITSPs")
to each other; (ii) providing billing and settlement services to internet
telephony customers; and/or (iii) connecting participating ITSPs to telephone
numbers using a combination of internet providers and traditional telephony for
wholesale or retail customers.
"Associated With" means serving as an owner, officer, employee,
independent contractor, agent or a holder of 5% or more of any class of equity
securities of, director, trustee, member, consultant or partner of any person,
corporation (for profit or not for profit) or other entity engaged in a
Competing Business.
(c) If the Executive commits a breach or is about to commit a breach,
of any of the provisions of sections 8 or 9 hereof, the Company shall have the
right to have the provisions of this Agreement specifically enforced by any
court having equity jurisdiction without being required to post bond or other
security and without having to prove the inadequacy of the available remedies at
law, it being acknowledged and agreed that any such breach or threatened breach
will cause irreparable injury to the Company and that money damages will not
provide an adequate remedy to the Company. In addition, the Company may take all
such other actions and remedies available to them under law or in equity and
shall be entitled to such damages as they can show they have sustained by reason
of such breach.
(d) The parties acknowledge that the type and periods of restriction
imposed in the provisions of sections 8 and 9 hereof are fair and reasonable and
are reasonably required for the protection of the Company and the goodwill
associated with the business of the Company; and that the time, scope,
geographic area and other provisions of sections 8 and 9 have been specifically
negotiated by sophisticated parties and are given as an integral part of this
Agreement. The Executive specifically acknowledges that the restrictions
contemplated by this Agreement will not prevent him from being employed or
earning a livelihood. If any of the covenants in sections 8 or 9 hereof, or any
part thereof, is hereafter construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenants or covenants, which shall be
given full effect, without regard to the invalid portions. If any of the
covenants contained in sections 8 or 9 hereof, or any part thereof, is held to
be unenforceable because of the duration of such provision or the area covered
thereby, the parties agree that the court making such determination shall have
the power to reduce the duration and/or areas of such provision and, in its
reduced form, such provision shall then be enforceable. The parties hereto
intend to and hereby confer jurisdiction to enforce the covenants contained in
sections 8 or 9 hereof above upon the courts of any state or other jurisdiction
within the geographical
-9-
<PAGE>
scope of such covenants. In the event that the courts of any one or more of such
states or other jurisdictions shall hold such covenants wholly unenforceable by
reason of the breadth of such scope or otherwise, it is the intention of the
parties hereto that such determination not bar or in any way affect the right of
the Company to the relief provided above in the courts of any other states or
other jurisdictions within the geographical scope of such covenants, as to
breaches of such covenants in such other respective states or other
jurisdictions, the above covenants as they relate to each state or other
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
10. Intellectual Property
---------------------
The Executive will disclose to the Company all ideas, inventions and
business plans developed by him during the period of his employment with the
Company which relate directly or indirectly to the business of the Company,
including without limitation, any design, logo, slogan or campaign or any
process, operation, product or improvement which may be patentable or
copyrightable. The Executive agrees that all patents, licenses, copyrights,
tradenames, trademarks, service marks, advertising campaigns, promotional
campaigns, designs, logos, slogans and business plans developed or created by
the Executive in the course of his employment hereunder, either individually or
in collaboration with others, will be deemed works for hire and the sole and
absolute property of the Company. The Executive agrees, that at the Company's
request, he will take all steps necessary to secure the rights thereto to the
Company by patent, copyright or otherwise.
11. Enforceability
--------------
The failure of any party at any time to require performance by another
party of any provision hereunder shall in no way affect the right of that party
thereafter to enforce the same, nor shall it affect any other party's right to
enforce the same, or to enforce any of the other provisions in this Agreement;
nor shall the waiver by any party of the breach of any provision hereof be taken
or held to be a waiver of any subsequent breach of such provision or as a waiver
of the provision itself.
12. Assignment
----------
This Agreement is a personal contract and the Executive's rights and
obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. The rights and obligation of the Company
hereunder shall be binding upon and run in favor of the successors and assigns
of the Company; provided, however, the Company may not assign or transfer its
rights or obligations under this Agreement unless such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law.
13. Modification
------------
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<PAGE>
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement.
-11-
<PAGE>
14. Severability; Survival
----------------------
In the event any provision or portion of this Agreement is determined
to be invalid or unenforceable for any reason, in whole or in part, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the invalid or unenforceable part had
been severed and deleted. The respective rights and obligations of the parties
hereunder shall survive the termination of the Executive's employment to the
extent necessary to the intended preservation of such rights and obligations.
15. Notice
------
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall be
deemed effective (a) upon person delivery, if delivered by hand, or (b) three
days after the date of deposit in the mails, postage prepaid if mailed by
certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission or prepaid overnight courier service, and in each case,
addressed as follows:
If to the Executive:
-------------------
Thomas Shoemaker
878 Madison Ave.
Bridgewater, New Jersey 08807
If to the Company:
-----------------
ITXC Corp.
600 College Road East
Princeton, New Jersey 08540
Attention: Chief Executive Officer
Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. Applicable Law
--------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New Jersey, without application of conflict or law
provisions applicable herein.
17. Subsidiaries and Affiliates
---------------------------
As used herein, the term "subsidiary" shall mean any corporation or
other business entity controlled directly or indirectly by the corporation or
other business entity in question, and the term "affiliate" shall mean and
include any corporation or other business
-12-
<PAGE>
entity directly or indirectly controlling, controlled by or under common control
with the corporation or other business entity in question.
18. No Conflict
-----------
The Executive represents and warrants that he is not subject to any
agreement, instrument, order, judgment or decree of any kind, or any other
restrictive agreement of any character, which would prevent him from entering
into this Agreement or which would be breached by the Executive upon his
performance of his duties pursuant to this Agreement.
19. Entire Agreement
This Agreement represents the entire agreement between the Company and
the Executive with respect to the subject matter hereof, and all prior
agreements, plans and arrangements relating to the employment of the Executive
the Company are nullified and superseded hereby.
20. Headings
The headings contained in this Agreement are for reference purposes
only, and shall not affect the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ITXC CORP.
By: /s/ Tom Evslin
--------------------------
Name: Tom Evslin
Title: Chairman, CEO
Executive's Signature
/s/Thomas J. Shoemaker
------------------------------
Thomas Shoemaker
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<PAGE>
Exhibit 10.12
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE (the "Amendment") is made this 6th day of
December, 1999 between PEREGRINE INVESTMENT PARTNERS-I, a Pennsylvania limited
partnership ("Landlord") and ITXC Corp. ("Tenant").
BACKGROUND
----------
Landlord and Tenant are parties to a Lease dated February 28, 1998 as
amended by First Amendment to lease ("First Amendment") dated April 16, 1999
(collectively, the "Lease") pursuant to which Landlord has agreed to lease and
Tenant has agreed to rent certain First Floor Space situated in Arbor 600 (the
"Building"), 600 College Road East, Princeton Forrestal Center, Plainsboro, New
Jersey, as such space is more particularly described in the Lease. Under the
First Amendment, the Premises was expanded to include the Expansion Space, as
defined herein. Landlord and Tenant have agreed to further amend the Lease in
accordance with the provisions set forth at length below.
AGREEMENT
---------
NOW, THEREFORE, intending to be legally bound hereby, Landlord and Tenant
agree as follows:
1. Defined Terms. Except as otherwise expressly provided herein, the
-------------
terms defined in the Lease shall have the same meanings in this Amendment as in
the Lease.
2. Second Expansion Space. Landlord agrees to make available for leasing
----------------------
and occupancy by Tenant no later than December 1, 1999 and Tenant agrees to rent
from Landlord that portion of the Second Floor of the Building shown on Exhibit
"A" as the "Second Expansion Space". Landlord shall deliver the Second
Expansion Space in its "as is" condition.
3. Size and Tenant's Allocated Share of Premises. The Premises shall be
---------------------------------------------
changed to include the Second Expansion Space whereupon the Rentable Area of the
Premises shall be 28,423 square feet and Tenant's Allocated Share shall be
11.48%.
4. Term. The Term of the Lease with respect to the Second Expansion Space
----
shall commence on the earlier of occupancy by Tenant or February 1, 2000 and
shall expire on January 31, 2005 (the "Second Expansion Space Term").
5. Rent. Throughout the Second Expansion Space Term, the Basic Rent for
----
the Premises shall be increased by $13,557.50 per month being calculated at the
rate of $25.50 per rentable square foot per annum payable in accordance with the
Lease and prorated for any partial month. Tenant electric and Additional Rent
for the Expansion Space shall be payable
<PAGE>
in accordance with the provisions of the Lease throughout the Second Expansion
Space Term except the Base Year shall be calendar year 2000.
6. Tenant Fit Out Allowance. Landlord shall reimburse Tenant for the
------------------------
costs of improvements made by Tenant to the Second Expansion Space up to a
maximum of $47,850.00 within 30 days of receipt of applicable invoices
evidencing the work.
7. Termination Right Amendment. Tenant's right to terminate the Lease
---------------------------
with respect to the original Premises under paragraph 24(b), as amended in the
First Amendment to Lease shall not apply to the Expansion Space or the Second
Expansion Space.
8. Ratification. Except as expressly amended herein, the terms and
------------
conditions of the Lease shall remain in full force and effect and Landlord and
Tenant expressly ratify and confirm those terms and provisions.
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
date first above written.
LANDLORD:
Witness/Attest: PEREGRINE INVESTMENT PARTNERS-I,
A PENNSYLVANIA LIMITED PARTNERSHIP
_______________________________ By: Berwind Realty Services, Inc.
By: /s/
------------------------------------
TENANT:
Witness/Attest: ITXC CORP.
/s/ Debra L. Blanco /s/Edward B. Jordan
- ---------------------------- ----------------------------------------
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<PAGE>
EXHIBIT A
Second Expansion Space
[DIAGRAM]
-3-
<PAGE>
Exhibit 10.13
EXECUTION COPY
--------------
Amended and Restated
Loan Agreement
THIS AMENDED AND RESTATED LOAN AGREEMENT (this "Agreement"), is entered
into as of February 1, 2000 (the "Closing Date"), by and between ITXC Corp., a
Delaware corporation (the "Borrower"), and PNC Bank, National Association, (the
"Bank").
This Agreement amends and restates in its entirety the Loan Agreement
between the Borrower and the Bank dated as of August 20, 1998 (the "Original
Loan Agreement") as amended November ___, 1998 ("Amendment No. 1 to the Original
Loan Agreement").
The Borrower and the Bank, with the intent to be legally bound, agree as
follows:
1. Loan. The following loan and credit facilities (collectively referred to as
----
the "Loan"), shall be subject to and governed by this Agreement:
$10,000,000 Secured Revolving Credit (less advances made under the
Equipment Line) ("Revolving Credit")
$10,000,000 Equipment Line of Credit ("Equipment Line")
The aggregate maximum availability of the Loan shall be $10,000,000. The
proceeds of the Revolving Credit shall be used for general corporate and working
capital purposes except as otherwise set forth herein. The proceeds of the
Equipment Line shall be used only for the purpose of purchasing personal
computers for employees, servers, ERP software and other equipment and related
software necessary to build IP telephony facilities.
2. Terms and Conditions. Subject to the terms and conditions hereof and
--------------------
relying upon the representations and warranties herein set forth, the Bank
agrees to make the Loan available to the Borrower at any time or from time to
time on or after the date hereof in accordance with the terms of this Agreement.
The credit facility shall consist of the components set forth in Section 1
hereof in accordance with the following terms:
2.1 Expiration Date.
---------------
(a) Revolving Credit. Twelve (12) months from the date of the closing
----------------
of this Agreement ("Closing Date"), or on such subsequent anniversary
of the Closing Date as the parties hereto may agree (the "Revolving
Credit Expiration Date").
<PAGE>
(b) Equipment Line. Thirty-six (36) months from the date of the final
--------------
draw under the Equipment Line. Borrower shall make no more than five
(5) draws under the Equipment Line, which draws must be requested and
made within the twelve (12) month period immediately following the
Closing Date (the "Equipment Line Expiration Date").
2.2 Interest Rates. Interest shall be calculated on the basis of a 360-
--------------
day year for the actual number of days elapsed. The interest rate
applicable to the Obligations shall change on each date there is a
change in the Base Rate (as defined below).
(a) Revolving Credit and Equipment Line. The Revolving Credit and
--------------------------------------
Equipment Line Base Rate shall equal the greater of (i) the Prime Rate
and (ii) the Federal Funds Rate plus .5% ("Base Rate"). "Prime Rate"
means the rate announced from time to time by Bank as its "prime
rate;" it is a base rate upon which other rates charged by the Bank
are based, and it is not necessarily the best rate offered by the
Bank. "Federal Funds Rate" means the weighted average of the federal
funds effective rate available to the Bank.
2.3 Facility Fee. The Borrower shall pay to the Bank during the twelve
------------
(12) month period beginning on the Closing Date a facility fee at a
rate of 0.5% per annum on the daily average amount of the unused
balance of the Revolving Credit and Equipment Line, payable quarterly
in arrears.
2.4 Borrowing Base/Availability.
---------------------------
(a) Revolving Credit. The Revolving Credit shall be available in
----------------
amounts determined in accordance with the Borrowing Base Rider in the
form attached hereto as Exhibit A.
---------
(b) Equipment Line. The Equipment Line shall be available at the
--------------
Closing Date in such amounts as determined pursuant to the Borrowing
Base Rider. Advances under the Equipment Line shall be limited to 90%
of the face amount of equipment invoice (excluding taxes, shipping and
installation) submitted with any Advance Request (as provided below in
2.5).
2.5 Requests. Except as otherwise provided herein, the Borrower may from
--------
time to time prior to the applicable Expiration Date request the Bank
to make a Loan under the Revolving Credit or Equipment Line by
delivering to the Bank, not later than 12:00 Noon, Eastern Standard
time a request by telephone immediately confirmed in writing by
letter, facsimile or telex in such form (a "Loan Request"), it being
understood that the Bank may rely on the authority of any individual
making such a telephonic request without the necessity of receipt of
such written confirmation. Each Loan Request shall be irrevocable and
shall
2
<PAGE>
specify (a) the proposed borrowing date; and (b) the aggregate amount
of the proposed borrowing hereunder.
2.6 Promissory Note. The Obligation of the Borrower to repay the
---------------
aggregate unpaid principal amount of the Revolving Credit and the
Equipment Line, together with interest thereon, shall be evidenced by
a promissory note of the Borrower ("Note") payable to the order of the
Bank in a face amount equal to the maximum amount of the Revolving
Credit.
2.7 Lockbox. If an Event of Default has occurred and remains uncured
-------
after ninety (90) days, the Bank, in its discretion, may establish a
lockbox at the Bank to which account debtors of the Borrower will
submit all payments in respect of the Borrower's accounts receivable,
provided, however, that any notices directing the Borrower's customers
to pay to the lockbox shall, in the absence of any fraud or cessation
of business by the Borrower be sent in the name of the Borrower, shall
indicate only that the Borrower has a new post office box and shall
not indicate that the lockbox is under the Bank's control.
2.8 Additional EXIM Terms. In the event that the Borrower elects to
---------------------
pursue financing through the Export-Import Bank of the United States
("EXIM Bank"), the additional terms related to such financing shall be
set forth in an Agreement (the "EXIM Borrower Agreement") in the form
of agreement customarily used by EXIM Bank in such financings.
2.9 Letter of Credit Subfacility.
----------------------------
(a) Issuance of Letters of Credit. The Borrower may request the
-----------------------------
issuance of a letter of credit (each a "Letter of Credit") by
delivering to the Bank a completed application and agreement for
standby letters of credit in such form as the Bank may specify from
time to time by no later than 10:00 a.m., Eastern time, at least three
(3) business days, or such shorter period as may be agreed to by the
Bank, in advance of the proposed date of issuance. Subject to the
terms and conditions hereof, the Bank will issue a Letter of Credit
provided that each Letter of Credit shall have a maximum maturity date
of December __, 2000, and providing that in no event shall the
aggregate amount of all Letters of Credit outstanding exceed, at any
one time, One Million Dollars ($1,000,000).
(b) Letter of Credit Fees. The Borrowers shall pay to the Bank, with
---------------------
respect to any Letter of Credit, a flat fee of 2% on the daily average
undrawn face amount of such standby Letter of Credit for the period
from and including the date of issuance of such Letter of Credit,
payable quarterly in arrears commencing with the last business day of
each March, June, September and December following issuance of each
Letter of Credit. The Borrower shall also pay to the Bank then in
effect customary fees and administrative expenses payable with respect
to the
3
<PAGE>
Letters of Credit as the Bank may generally charge or incur from time
to time in connection with the issuance, maintenance, modification (if
any), assignment or transfer (if any), negotiation, and administration
of Letters of Credit.
(c) Reimbursement. In the event of any request for a drawing under a
-------------
Letter of Credit by the beneficiary or transferee thereof, the Bank
will promptly notify the Borrower. Provided that it shall have
received such notice, the Borrower shall reimburse (such obligation to
reimburse the Bank shall sometimes be referred to as a "Reimbursement
Obligation") the Bank prior to 12:00 noon, Eastern time on each date
that an amount is paid by the Bank under any Letter of Credit (each
such date, an "Drawing Date") in an amount equal to the amount so paid
by the Bank. Any notice given by the Bank pursuant to this Section
2.9(c) may be oral if immediately confirmed in writing; provided that
the lack of such an immediate confirmation shall not affect the
conclusiveness or binding effect of such notice.
With respect to any unreimbursed drawing, the Borrower shall be
deemed to have incurred from the Bank a Letter of Credit Borrowing in
the amount of such drawing. Such Letter of Credit Borrowing shall be
due and payable on demand (together with interest) and shall bear
interest at the rate per annum applicable to the Revolving Credit.
(d) Determinations to Honor Drawing Requests. In determining whether
----------------------------------------
to honor any request for drawing under any Letter of Credit by the
beneficiary thereof, the Bank shall be responsible only to determine
that the documents and certificates required to be delivered under
such Letter of Credit have been delivered and that they comply on
their face with the requirements of such Letter of Credit.
(e) Nature of Reimbursement Obligations. The Obligations of the
-----------------------------------
Borrower to reimburse the Bank upon a draw under a Letter of Credit,
shall be absolute, unconditional and irrevocable, and shall be
performed strictly in accordance with the terms of this Section 2.9
under all circumstances, including the following circumstances:
(i) any set-off, counterclaim, recoupment, defense or other
right which the Bank may have against the Borrower or any other
Person for any reason whatsoever;
(ii) any lack of validity or enforceability of any Letter of
Credit;
(iii) the existence of any claim, set-off, defense or other
right which the Bank may have at any time against a beneficiary
or any transferee of any Letter of Credit (or any Persons for
whom any such
4
<PAGE>
transferee may be acting), the Bank or any other Person or,
whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction (including any
underlying transaction between the Borrower or and the
beneficiary for which any Letter of Credit was procured);
(iv) any draft, demand, certificate or other document
presented under any Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect even
if the Bank has been notified thereof;
(v) payment by the Bank under any Letter of Credit against
presentation of a demand, draft or certificate or other document
which does not comply with the terms of such Letter of Credit;
(vi) any adverse change in the business, operations,
properties, assets, condition (financial or otherwise) or
prospects of the Borrower;
(vii) any breach of this Agreement or any other Loan
Document by any party thereto;
(viii) the occurrence or continuance of any bankruptcy or
insolvency proceeding as described in Section 7.5 with respect to
any Borrower;
(ix) the fact that an Event of Default shall have occurred
and be continuing; and
(x) the fact that the Revolving Credit Expiration Date shall
have passed or this Agreement shall have been terminated.
(f) Indemnity. In addition to amounts payable as provided in Section
---------
9, the Borrower shall protect, indemnify, pay and save harmless the
Bank from and against any and all claims, demands, liabilities,
damages, losses, costs, charges and expenses (including reasonable
fees, expenses and disbursements of counsel and allocated costs of
internal counsel) which the Bank may incur or be subject to as a
consequence, direct or indirect, of (i) the issuance of any Letter of
Credit, other than as a result of (A) the gross negligence or willful
misconduct of the Bank as determined by a final judgment of a court of
competent jurisdiction or (B) subject to the following clause (ii),
the wrongful dishonor by the Bank of a proper demand for payment made
under any Letter of Credit, or (ii) the failure of the Bank to honor a
drawing under any such Letter of Credit as a result of any act or
omission, whether rightful or wrongful, of any present or future de
jure or de facto government or governmental authority (all such acts
or omissions herein called "Governmental Acts").
5
<PAGE>
(g) Liability for Acts and Omissions. As between the Borrower and the
--------------------------------
Bank, the Borrower assumes all risks of the acts and omissions of, or
misuse of the Letters of Credit by, the respective beneficiaries of
such Letters of Credit. In furtherance and not in limitation of the
foregoing, the Bank shall not be responsible (except to the extent
that such acts and omissions are attributable to or result from the
gross negligence or willful misconduct of the Bank as determined by a
final judgment of a court of competent jurisdiction) for: (i) the
form, validity, sufficiency, accuracy, genuineness or legal effect of
any document submitted by any party in connection with the application
for an issuance of any such Letter of Credit, even if it should in
fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged (even if the Bank shall have been
notified thereof); (ii) the validity or sufficiency of any instrument
transferring or assigning or purporting to transfer or assign any such
Letter of Credit or the rights or benefits thereunder or proceeds
thereof, in whole or in part, which may prove to be invalid or
ineffective for any reason; (iii) the failure of the beneficiary of
any such Letter of Credit, or any other party to which such Letter of
Credit may be transferred, to comply fully with any conditions
required in order to draw upon such Letter of Credit or any other
claim of the Borrower against any beneficiary of such Letter of
Credit, or any such transferee, or any dispute between or among the
Borrower and any beneficiary of any Letter of Credit or any such
transferee; (iv) errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, telecopy or
otherwise; (v) errors in interpretation of technical terms; (vi) any
loss or delay in the transmission or otherwise of any document
required in order to make a drawing under any such Letter of Credit or
of the proceeds thereof; (vii) the misapplication by the beneficiary
of any such Letter of Credit of the proceeds of any drawing under such
Letter of Credit; or (viii) any consequences arising from causes
beyond the control of the Bank or any issuing bank, including any
Governmental Acts, and none of the above shall affect or impair, or
prevent the vesting of, any of the Bank's rights or powers hereunder.
In furtherance and extension and not in limitation of the
specific provisions set forth above, any action taken or omitted by
the Bank or any issuing Bank under or in connection with the Letters
of Credit issued by it or any documents and certificates delivered
thereunder, if taken or omitted in good faith, shall not put the Bank
under any resulting liability to the Borrower.
3. Security. The security for repayment of the Loan shall be as set forth in
--------
the Security Agreement dated as of August 20, 1998 by and between the Borrower
and the Bank (the "Security Agreement") and documents heretofore,
contemporaneously or hereafter executed and delivered to the Bank (the "Security
Documents"), which shall secure
6
<PAGE>
repayment of the Loan and the Note and any amendments, extensions, renewals or
increases and all costs and expenses of the Bank incurred in the documentation,
negotiation, modification, enforcement, collection or otherwise in connection
with any of the foregoing, including but not limited to reasonable attorneys'
fees and expenses (hereinafter referred to collectively as the "Obligations").
This Agreement (including the Addendum and any Riders thereto), the Note and the
Security Documents are collectively referred to as the "Loan Documents".
4. Representations and Warranties. The Borrower makes the following
------------------------------
representations and warranties to the Bank which shall be true and correct as of
the date of this Agreement and the date of the making of a Loan, and which shall
be true and correct except as otherwise set forth on the Addendum attached
hereto and incorporated herein by reference (the "Addendum").
4.1. Existence, Power and Authority. The Borrower is duly organized, validly
------------------------------
existing and in good standing under the laws of the State of its
incorporation or organization and has the power and authority to own
and operate its assets and to conduct its business as now or proposed
to be carried on, and is duly qualified, licensed and in good standing
to do business in all jurisdictions where its ownership of property or
the nature of its business requires such qualification or licensing,
except where the failure to be so qualified or licensed would not have
a material adverse effect on the business, operations or financial
condition of the Borrower. The Borrower is duly authorized to execute
and deliver the Loan Documents, all necessary action to authorize the
execution and delivery of the Loan Documents has been properly taken,
and the Borrower is and will continue to be duly authorized to borrow
under this Agreement and to perform all of the other terms and
provisions of the Loan Documents.
4.2. Financial Statements.
--------------------
(a) The Borrower has delivered or caused to be delivered to the Bank
its consolidated balance sheet and income statement for the three month
period ended September 30, 1999 (the "Historical Financial
Statements"). The Historical Financial Statements are true, complete
and accurate in all material respects and fairly present the
consolidated financial condition, assets and liabilities, whether
accrued, absolute, contingent or otherwise and the result of Borrower's
operations for the period specified therein. The Historical Financial
Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") consistently applied from period to
period subject in the case of interim statements to normal year-end
adjustments and to any comments and notes acceptable to the Bank.
7
<PAGE>
(b) The Borrower has delivered to the Bank projections of its
anticipated financial performance for a thirty-six (36) month period
reflecting, among other things, the Initial Public Offering proceeds
(the "Financial Projections").
4.3. No Material Adverse Change. Since the date of the Historical Financial
--------------------------
Statements, the Borrower has not suffered any material damage,
destruction or loss to its assets, and no event or condition has
occurred or exists, which has resulted or could reasonably be expected
to result in a material adverse change in its business, assets,
operations, financial condition or results of operation. Since the
preparation of the Financial Projections, there has been no material
adverse change as against such Financial Projections.
4.4. Binding Obligations. The Borrower has full power and authority to
-------------------
enter into the transactions provided for in this Agreement and has been
duly authorized to do so by appropriate action of its Board of
Directors; and the Loan Documents, when executed and delivered by such
Borrower, will constitute the legal, valid and binding obligations of
such Borrower enforceable in accordance with their terms.
4.5. No Defaults or Violations. There does not exist any Event of Default
-------------------------
under this Agreement or any material default or violation by the
Borrower of or under any of the terms, conditions or obligations of:
(i) its articles or certificate of incorporation, regulations or bylaws
and the articles or certificate of incorporation and bylaws of the
Borrower delivered to the Bank on the Closing Date have not been
amended, revised, supplemented, restated or changed in any way and are
still in full force and effect; (ii) any material indenture, mortgage,
deed of trust, franchise, permit, contract, agreement, or other
instrument to which it is a party or by which it is bound; or (iii) any
material law, regulation, ruling, order, injunction, decree, condition
or other requirement applicable to or imposed upon it by any law, the
action by any court or any governmental authority or agency; and the
consummation of this Agreement and the transactions set forth herein
will not result in any such default or violation.
4.6. Title to Assets. The Borrower has valid title to its assets reflected
---------------
on the Historical Financial Statements, free and clear of all liens and
encumbrances, except for (i) current taxes and assessments not yet due
and payable, (ii) liens and encumbrances, if any, reflected or noted in
the Historical Financial Statements, (iii) assets disposed of by such
Borrower in the ordinary course of business since the date of the
Historical Financial Statements, and (iv) those liens or encumbrances
specified on the Addendum.
4.7. Litigation. There are no actions, suits, proceedings or governmental
----------
investigations pending or, to the Borrower's knowledge, threatened
against the Borrower, which could reasonably be expected to result in a
material adverse
8
<PAGE>
change in its business, assets, operations, financial condition or
results of operations and there is no basis known to the Borrower for
any action, suit, proceedings or investigation which could reasonably
be expected to result in such a material adverse change. All pending
or threatened litigation against the Borrower of which the Borrower
has knowledge is listed on the Addendum.
4.8. Tax Returns. The Borrower has filed all returns and reports that are
-----------
required to be filed in connection with any federal, state or local
tax, duty or charge levied, assessed or imposed upon it or its
property or withheld by it, including unemployment, social security
and similar taxes and all of such taxes, have been either paid or
adequate reserves or other provisions have been made.
4.9. Employee Benefit Plans. Each employee benefit plan as to which the
----------------------
Borrower may have any liability complies in all material respects with
all applicable provisions of the Employee Retirement Income Security
Act of 1974 ("ERISA"), including minimum funding requirements, and (i)
no Prohibited Transaction (as defined under ERISA) has occurred with
respect to any such plan, (ii) no Reportable Event (as defined under
Section 4043 of ERISA) has occurred with respect to any such plan
which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Section 4042 of ERISA, (iii) the Borrower
has not withdrawn from any such plan or initiated steps to do so, and
(iv) no steps have been taken to terminate any such plan.
4.10. Environmental Matters. The Borrower is in compliance, in all material
---------------------
respects, with all Environmental Laws, including, without limitation,
all Environmental Laws in jurisdictions in which the Borrower owns or
operates, or has owned or operated, a facility or site, stores
Collateral, arranges or has arranged for disposal or treatment of
hazardous substances, solid waste or other waste, accepts or has
accepted for transport any hazardous substances, solid waste or other
wastes or holds or has held any interest in real property or
otherwise. Except as otherwise disclosed on the Addendum, no
litigation or proceeding arising under, relating to or in connection
with any Environmental Law is pending or, to the best of the
Borrower's knowledge, threatened against the Borrower, any real
property which the Borrower holds or has held an interest or any past
or present operation of the Borrower. No release, threatened release
or disposal of hazardous waste, solid waste or other wastes is
occurring, or to the best of the Borrower's knowledge has occurred,
on, under or to any real property in which the Borrower holds any
interest or performs any of its operations, in material violation of
any Environmental Law. As used in this Section, "litigation or
proceeding" means any demand, claim notice, suit, suit in equity,
action, administrative action, investigation or inquiry whether
brought by a governmental authority or other person, and
"Environmental Laws" means all provisions of laws, statutes,
ordinances, rules, regulations, permits, licenses, judgments, writs,
injunctions, decrees, orders, awards and standards promulgated by any
governmental authority
9
<PAGE>
concerning health, safety and protection of, or regulation of the
discharge of substances into, the environment.
4.11. Intellectual Property. The Borrower owns or, to the best of
---------------------
Borrower's knowledge, has the right to use all patents, patent
rights, trademarks, trade names, service marks, copyrights,
intellectual property, technology, know-how and processes necessary
for the conduct of its business as currently conducted that are
material to the condition (financial or otherwise), business or
operations of the Borrower.
4.12. Regulatory Matters. No part of the proceeds of the Loan will be use
------------------
for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of
the Board of Governors of the Federal Reserve System as now and from
time to time in effect or for any purpose which violates the
provisions of the Regulations of such Board of Governors.
4.13. Solvency. As of the date hereof and after giving effect to the
--------
transactions contemplated by the Loan Documents, the Borrower will
have sufficient cash flow to enable it to pay its debts as they
mature.
4.14. Disclosure. None of the Loan Documents contains or will contain any
----------
untrue statement of material fact or omits or will omit to state a
material fact necessary in order to make the statements contained in
this Agreement or the Loan Documents not misleading. There is no fact
known to the Borrower which materially adversely affects or, to the
best knowledge of the Borrower, might materially adversely affect the
business, assets, operations, financial condition or results of
operation of the Borrower and which has not otherwise been fully set
forth in this Agreement or in the Loan Documents.
4.15. Year 2000. The Borrower has reviewed the areas within its business
---------
and operations which could be adversely affected by, and has
developed or is developing a program to address on a timely basis the
risk that certain computer applications used by the Borrower may be
unable to recognize and perform properly date-sensitive functions
involving dates prior to and after December 31, 1999 (the "Year 2000
Problem"). The Year 2000 Problem will not have, and is not reasonably
expected to have, a material adverse effect on the business, assets,
operations or financial conditions of the Borrower.
5. Affirmative Covenants. The Borrower agrees that from the date of execution
---------------------
of this Agreement until all Obligations have been fully paid and any
commitments of the Bank to the Borrower have been terminated, the Borrower
will:
5.1. Books and Records. Maintain books and records in accordance with GAAP
-----------------
and give representatives of the Bank access thereto at all reasonable
times following notice from the Bank, including permission to examine,
copy and make abstracts
10
<PAGE>
from any of such books and records and such other information as the
Bank may from time to time reasonably request, and the Borrower will
make available to the Bank for examination copies of any reports,
statements or returns which the Borrower may make to or file with any
governmental department, bureau or agency, federal or state.
5.2. Interim Financial Statements; Certificate of No Default; Accounts
-----------------------------------------------------------------
Receivable. Furnish the Bank within 15 days after the end of each month
----------
a detailed report on its accounts receivable in such reasonable detail
consistent with the form currently used by the Borrower's management. A
copy of the most recently prepared form is attached hereto as Exhibit
-------
B. The Borrower shall also provide within 30 days of the end
-
of each month its Financial Statements (as defined hereinafter) for
such period, in reasonable detail, certified by the president, chief
executive officer or chief financial officer of the Borrower and
prepared in accordance with GAAP applied from period to period. The
Borrower shall also deliver, within 30 days of the end of each quarter,
a certificate signed by such officer which verifies compliance with
applicable financial covenants for the period then ended and whether
any Event of Default exists, and, if so, the nature thereof and the
corrective measures the Borrower proposes to take. "Financial
Statements" means the Borrower's consolidated and, if required by the
Bank in its reasonable discretion, consolidating balance sheets, income
statements and statements of cash flows for the year, month or
(excepting statements of cash flows) quarter together with year-to-date
figures and comparative figures for the corresponding periods of the
prior year. The Borrower shall be deemed to have satisfied the
reporting requirements of this Section 5.2 with respect to quarterly
Financial Statements to the extent that each such Financial Statement
is included among the Form 10Q filings made to the Securities and
Exchange Commission ("SEC") via the Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR").
5.3. Annual Financial Statements. Furnish the Borrower's Financial
---------------------------
Statements to the Bank within 90 days after the end of each fiscal
year. Those Financial Statements will be prepared in accordance with
GAAP and audited by an independent certified public accountant selected
by the Borrower and reasonably satisfactory to the Bank. Audited
Financial Statements shall contain the unqualified opinion of an
independent certified public accountant and its examination shall have
been made in accordance with GAAP consistently applied from period to
period. The Borrower will also provide filings made with any regulatory
authority, to the extent requested by the Bank, and such other
information reasonably requested by the Bank, from time to time. The
Borrower shall be deemed to have satisfied the reporting requirements
of this Section 5.3 with respect to annual Financial Statements to the
extent that each such Financial Statement is included among the Form
10K filings made to the SEC via EDGAR.
11
<PAGE>
5.4. Payment of Taxes and Other Charges. Pay and discharge in accordance
----------------------------------
with past practice all indebtedness and pay when due all taxes,
assessments, charges, levies and other liabilities imposed by
government authorities upon the Borrower, its income, profits,
property or business, except those which currently are being contested
in good faith by appropriate proceedings and for which the Borrower
shall have set aside adequate reserves in accordance with GAAP or made
other adequate provision with respect thereto acceptable to the Bank.
5.5. Maintenance of Existence, Operation and Assets. Do all things
----------------------------------------------
necessary to maintain, renew and keep in full force and effect its
organizational existence and all rights, permits and franchises
necessary to enable it to continue its business; continue in operation
in substantially the same manner as at present; keep its properties in
good operating condition and repair; and make all necessary and proper
repairs, renewals, replacements, additions and improvements thereto.
5.6. Insurance. Maintain with financially sound and reputable insurers,
---------
insurance with respect to its property and business against such
casualties and contingencies, of such types and in such amounts as is
customary for established companies engaged in the same or similar
business and similarly situated. In the event of a conflict between
the provisions of this Section and the terms of any Security Documents
relating to insurance, the provisions in the Security Documents will
control.
5.7. Compliance with Laws. Comply in all material respects with all laws
--------------------
applicable to the Borrower and to the operation of its business
(including any statute, rule or regulation relating to employment
practices and pension benefits or to environmental, occupational and
health standards and controls).
5.8. Operating Account. Maintain the Borrower's main operating account at
-----------------
the Bank or at an affiliate of the Bank.
5.9. Financial Covenants. Comply with all of the financial and other
-------------------
covenants, if any, set forth on the Addendum, subject to all
applicable cure periods set forth herein.
5.10. Additional Reports. Provide prompt written notice to the Bank of the
------------------
occurrence of any of the following of which the Borrower obtains
knowledge (together with a description of the action which the
Borrower proposes to take with respect thereto): (i) any Event of
Default or any Event of Default that the Borrower reasonably
determines is likely to occur, (ii) any litigation filed by or against
the Borrower to the extent and if the Borrower reasonably determines
that such litigation would be required to be reported in the
Borrower's SEC filings, (iii) any Reportable Event or Prohibited
Transaction with respect to any Employee Benefit Plan(s) (as defined
in ERISA), or (iv) any event which might reasonably be
12
<PAGE>
expected to result in a material adverse change in the business,
assets, operations, financial condition or results of operation of the
Borrower.
5.11. Notice of Certain Transactions. Provide a Transaction Notice (defined
------------------------------
below) to the Bank at least five (5) days prior to the proposed
consummation, directly or indirectly, of (a) any merger or
consolidation, or acquisition by purchase, lease or otherwise, all or
substantially all of the assets or capital stock of any other person,
firm or corporation (each a "Person"), or (b) the lease sale, transfer
or other disposition of the Borrower's property or assets (excluding
the sale of inventory in the ordinary course of business); provided,
--------
however, that the forgoing five (5) day notice requirement
-------
shall not apply to any of the events described in the preceding
clauses (a) and (b) above (each a "Transaction") with respect to
which:
(i) the consideration to be paid or received by the Borrower (or
any subsidiary through which such Transaction is completed)
is, or has a value of, less than Ten Million Dollars
($10,000,000) (in which case no such Transaction Notice shall
be required); or
(ii) the agreement between the parties to such Transaction is not
executed more than five (5) days in advance of consummation
of the Transaction (in which case the Borrower shall provide
a Transaction Notice to the Bank immediately upon execution
of such agreement).
For purposes of this Agreement, a "Transaction Notice" shall mean a
written notice in which the Borrower (A) describes in reasonable
detail the proposed Transaction, (B) identifies any information
which must be amended or updated in order to make the
representations and warranties of the Borrower true and correct on
the date on which the Transaction is consummated (except
representations and warranties which expressly relate solely to an
earlier date and time, which representations and warranties shall
be true and correct on and as of the specific dates and times
referred to therein), (C) demonstrates compliance with all
covenants under this Agreement immediately prior to the
consummation of the proposed Transaction with after giving pro
forma effect to such Transaction, and (D) represents and warrants
that it has, and will continue to have, after giving effect to the
Transaction, cash or cash equivalents in an amount sufficient to
satisfy all the Borrower's Obligations under this Agreement.
At any time within fifteen (15) days after consummation of any
Transaction with respect to which the Bank has, or should have,
received a Transaction Notice pursuant to this Section 5.11, the
Bank may, in its sole discretion, without regard to whether an
Event of Default or potential Event of Default has occurred or is
continuing, terminate all of its commitments under this Agreement
and declare all Obligations under this Agreement due and payable,
such termination and
13
<PAGE>
acceleration to be effective forty five (45) days after receipt by
the Borrower of written notice from the Bank of such intention to
terminate.
6. Negative Covenants. The Borrower covenants and agrees that from the date of
------------------
execution of this Agreement until all Obligations have been fully paid and any
commitments of the Bank to the Borrower have been terminated, the Borrower will
not, except as set forth in the Addendum, without the prior written consent of
the Bank, which will not be unreasonably withheld or delayed:
6.1. Indebtedness. Incur any indebtedness for borrowed money other than: (i)
------------
the Loan and any subsequent indebtedness to the Bank; (ii) existing
indebtedness disclosed on the Borrower's Historical Financial
Statements; (iii) additional indebtedness (including capital leases)
for any equipment or furniture used in the ordinary course of the
Borrower's business in an amount not to exceed in the aggregate at any
time Fifteen Million Dollars ($15,000,000); or (iv) such payables
incurred in the ordinary course of business.
6.2. Liens and Encumbrances. Except as provided in Section 4.6, create,
----------------------
assume or permit to exist any mortgage, pledge, encumbrance or other
security interest or lien upon any assets now owned or hereafter
acquired or enter into any lease or any arrangement for the acquisition
of property subject to any conditional sales agreement, other than
purchase money security interests ("PMSIs") (in respect of which the
Bank will provide to the vendor of property subject to a PMSI and
acknowledgment of such vendor's prior security interest) or capital
leases permitted under Section 6.1.
6.3. Guarantees. Guarantee, endorse or voluntarily become contingently
----------
liable for the obligations of any person, firm or corporation, except
in connection with the endorsement and deposit of checks in the
ordinary course of business for collection and letters of credit issued
for the account of the Borrower in the ordinary course of business and
except for wholly-owned subsidiaries of the Borrower.
6.4. Loans or Investments. Purchase or hold beneficially any stock, other
--------------------
securities or evidences of indebtedness of any loans (except trade
credit on usual and customary business terms incurred in the ordinary
course of business and loans to employees of up to $100,000 in the
aggregate at any one time outstanding) or advances to, or make any
investment or acquire any interest whatsoever in, any other person,
firm or corporation, except for (i) ownership of the stock of wholly
owned subsidiaries, (ii) stock or other securities purchased or held by
the Borrower in exchange for other equity interests or (iii) transfers
to subsidiaries or affiliates consistent with the Borrower's past
business practice or investments disclosed on the Historical Financial
Statements or acceptable to the Bank.
14
<PAGE>
6.5. Line of Business. Acquire, directly or indirectly, any business, or
----------------
ownership interest in any Person whose business, is not similar,
complementary or related to the line or lines of business of the
Borrower as of the date of this Agreement.
6.6. Dividends. Declare or pay any dividends on or make any distribution
---------
with respect to any class of its equity or ownership interest, or
purchase, redeem, retire or otherwise acquire any of its equity other
than the repurchase of shares from employees acquired through stock
option plans and repurchase of shares pursuant to the exercise of
contractual rights of first refusal to repurchase its shares.
7. Events of Default. The occurrence of any of the following will be deemed to
-----------------
be an "Event of Default":
7.1. Payment Default. The Borrower shall fail to pay any payment of
---------------
principal when due or any payment of interest within ten (10) business
days following the date when due, in respect of the Obligations.
7.2. Material Adverse Change. There shall be a material adverse change in
-----------------------
the business, operations, assets, financial condition or results of
operations of the Borrower.
7.3. Covenant Default. The Borrower shall default in the performance of, or
----------------
violate any of, the covenants or agreements contained in this
Agreement, which default shall not have been cured within thirty (30)
business days after the occurrence thereof.
7.4. Breach of Warranty. Any Financial Statement, representation, warranty
------------------
or certificate made or furnished by the Borrower to the Bank in
connection with this Agreement shall be false, incorrect or incomplete
when made.
7.5. Bankruptcy or Insolvency. A proceeding shall have been instituted in a
------------------------
court having jurisdiction over the Borrower seeking a decree or order
for relief in respect of the Borrower in an involuntary case under any
applicable bankruptcy, insolvency reorganization or other similar law
and such involuntary case shall remain undismissed or unstayed and in
effect for a period of sixty (60) consecutive days, or the Borrower
shall commence a voluntary case under any such law or consent to the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator, conservator (or other similar official).
7.6. Other Default. The occurrence of an Event of Default as defined in the
-------------
Note or any of the Security Documents, or a violation of any of the
requirements set forth in the Borrowing Base Rider.
Upon the occurrence of an Event of Default, and at any time thereafter, the Bank
may declare all Obligations hereunder immediately due and payable will have all
rights and remedies (which are
15
<PAGE>
cumulative and not exclusive) specified in the Note and the Security Documents
and available under applicable law or in equity upon the delivery of prior
written notice to the Borrower.
8. Conditions. The Bank's obligation to make any advance under the Loan shall
----------
be subject to the following conditions being satisfied as of the date of the
advance:
8.1. No Event of Default. No Event of Default or material event which with
-------------------
the passage of time, provision of notice or both would constitute an
Event of Default shall have occurred and be continuing.
8.2. Authorization Documents. The Borrower shall have furnished to the Bank
-----------------------
certified copies of resolutions of the board of directors authorizing
the execution of this Agreement, the Note, and the Security Documents;
or other proof of authorization satisfactory to the Bank.
8.3. Delivery of Loan Documents. The Borrower shall have delivered to the
--------------------------
Bank the Loan Documents and such other instruments and documents which
the Bank may reasonably request in connection with the transactions
provided for in this Agreement, including without limitation, a
subsidiary guaranty and security agreement executed by ITXC Data
Transport LLC..
8.4. Opinion of Counsel. Counsel for the Borrower shall have delivered a
------------------
written opinion, dated the Closing Date and in form and substance
satisfactory to the Bank and its counsel, as to matters incident to the
transactions contemplated herein as the Bank may reasonably request.
8.5. Representations and Warranties. The representations and warranties of
------------------------------
the Borrower to the Bank shall be true and correct in all material
respects.
8.6. Opening Balance Sheet. The Borrower shall furnish to the Bank its
---------------------
balance sheet dated September 30, 1999.
9. Expenses. The Borrower agrees to pay the Bank, upon the closing of this
--------
Agreement, and otherwise on demand, all reasonable and necessary costs and
expenses incurred by the Bank in connection with the (i) preparation,
negotiation and delivery of this Agreement and the other Loan Documents, and
any modifications thereto, and (ii) collection of the loan or instituting,
maintaining, preserving, enforcing and foreclosing the security interest in
any of the collateral securing the Loan, whether through judicial proceedings
or otherwise, or in defending or prosecuting any actions or proceedings
arising out of or relating to this Agreement, including reasonable fees and
expenses of counsel, expenses for auditors, appraisers and environmental
consultants, lien searches, recording and filing fees and taxes. In addition,
the Borrower agrees to pay to the Bank (for the account of the EXIM Bank) all
fees imposed by the EXIM Bank with respect to its export support programs.
16
<PAGE>
10. Increased Costs. Within twenty (20) days following written demand,
---------------
together with the written evidence of the justification therefor, the
Borrower agrees to pay the Bank all direct costs incurred and any losses
suffered or payments made by the Bank as a consequence of making the Loan by
reason of any change in law or regulation or its interpretation imposing any
reserve, deposit, allocation of capital or similar requirement (including
without limitation, Regulation D of the Board of Governors of the Federal
Reserve System) on the Bank, its holding company or any of their respective
assets; provided, however, that the Bank shall make no such written demand
-------- -------
on the Borrower unless similar demands have been made against all other
similarly situated customers of the Bank.
11. Miscellaneous.
--------------
11.1. Notices. All notices, demands, requests, consents, approvals and other
-------
communications required or permitted hereunder must be in writing and
will be effective upon receipt if delivered personally to such party,
or if sent by facsimile transmission with confirmation of delivery, or
by nationally recognized overnight courier service, to the address set
forth below or to such other address as any party may give to the
other in writing for such purpose:
To the Bank: To the Borrower:
PNC Bank, National Association ITXC Corp.
1000 Westlakes Drives 600 College Road East
Suite 200 Princeton, New Jersey 08540
Berwyn, PA 19312 Attention: Ed Jordan
Attention: John T. Freyhof Facsimile No.: (609) 419-1511
Facsimile No.: (610) 725-5799
With a copy to:
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
Attention: Peter H. Ehrenberg, Esq.
Facsimile No.: (973) 597-2351
11.2. Preservation of Rights. No delay or omission on the part of the Bank
----------------------
to exercise any right or power arising hereunder will impair any such
right or power or be considered a waiver of any such right or power or
any acquiescence therein, nor will the action or inaction of the Bank
impair any right or power arising hereunder. The rights and remedies
hereunder of the Bank are cumulative and not exclusive of any other
rights or remedies which the Bank may have under other agreements, at
law or in equity.
17
<PAGE>
11.3. Illegality. In case any one or more of the provisions contained in
----------
this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or
impaired thereby.
11.4. Changes in Writing. No modification, amendment or waiver of any
------------------
provision of this Agreement will in any event be effective unless the
same is in writing and signed by the Bank and then such waiver or
consent shall be effective only in the specific instance and for the
purpose for which given. No notice to or demand on the Borrower in any
case will entitle the Borrower to any other or further notice or
demand in the same, similar or other circumstance.
11.5. Entire Agreement. This Agreement (including the documents and
----------------
instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written
and oral, between the parties with respect to the subject matter
hereof.
11.6. Counterparts. This Agreement may be signed in any number of
------------
counterpart copies and by the parties hereto on separate counterparts,
but all such copies shall constitute one and the same instrument.
11.7. Successors and Assigns. This Agreement will be binding upon and inure
----------------------
to the benefit of the Borrower and the Bank and their respective,
successors and assigns; provided, however, that the Borrower may not
-------- -------
assign this Agreement in whole or in part without the prior written
consent of the Bank and the Bank at any time may assign this Agreement
to a recognized institutional lender who agrees in writing to be bound
to all confidentiality obligations of the Bank in connection with any
Loan Documents, in whole or in part, upon prior written notice to the
Borrower.
11.8. Interpretation. In this Agreement, unless the Bank and the Borrower
--------------
otherwise agree in writing, the singular includes the plural and the
plural the singular; words importing any gender include the other
genders; references to statutes are to be construed as including all
statutory provisions consolidating, amending or replacing the statute
referred to; the word "or" shall be deemed to include "and/or", the
words "including", "includes" and "include" shall be deemed to be
followed by the words "without limitation"; references to articles,
sections (or subdivisions of sections) or exhibits are to those of
this Agreement unless otherwise indicated; and references to
agreements and other contractual instruments shall be deemed to
include all subsequent amendments and other modifications to such
instruments, but only to the extent such amendments and other
modifications are not prohibited by the terms of this Agreement.
Section headings in this Agreement are included for convenience of
reference only and shall not constitute a part of this Agreement for
any other purpose. Unless
18
<PAGE>
otherwise specified in this Agreement, all accounting terms shall be
interpreted and all accounting determinations shall be made in
accordance with GAAP. If this Agreement is executed by more than one
party as Borrower, the obligations of such persons or entities will be
joint and several.
11.9. Assignments and Participation. Notwithstanding any other provisions
-----------------------------
of this Agreement, the Bank may, at any time in its sole discretion,
without any notice to the Borrower, sell, assign, transfer,
negotiate, grant participation in, or otherwise dispose of all or any
part of the Bank's interest in the Loan to a recognized institutional
lender organized under the laws of the United States of America who
agrees in writing to be bound to all confidentiality obligations of
the Bank in connection with any Loan Documents. The Borrower hereby
authorizes the Bank to provide, without any notice to the Borrower,
any information concerning the Borrower to recognize institutional
lenders, including information pertaining to the Borrower's financial
condition, business operations or general creditworthiness, to any
person or entity which may succeed to or participate in all or any
part of the Bank's interest in the Loan, provided that such person or
entity agrees to maintain the confidentiality of such information and
be bound by all the Bank's confidentiality obligations to the
Borrower.
11.10. Governing Law and Jurisdiction. This Agreement has been delivered to
------------------------------
and accepted by the Bank and will be deemed to be made in the
Commonwealth of Pennsylvania. THIS AGREEMENT WILL BE INTERPRETED AND
THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA,
EXCLUDING ITS CONFLICT OF LAWS RULES. The Borrower hereby irrevocably
consents to the exclusive jurisdiction of any state or federal court
seated in Allegheny County, Pennsylvania, and consents that all
service of process be sent by nationally recognized overnight courier
service directed to the Borrower at the Borrower's address set forth
herein and service so made will be deemed to be completed on the
business day after deposit with such courier; provided that nothing
contained in this Agreement will prevent the Bank from bringing any
action, enforcing any award or judgment or exercising any rights
against the Borrower, against any security or against any property of
the Borrower within any other county, state or other foreign or
domestic jurisdiction. The Bank and the Borrower agree that the venue
provided above is the most convenient forum for both the Bank and the
Borrower. The Borrower waives any objection to venue and any
objection based on a more convenient forum in any action instituted
under this Agreement.
11.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK IRREVOCABLY WAIVES
--------------------
ANY AND ALL RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS AGREEMENT, ANY
DOCUMENTS
19
<PAGE>
EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED IN ANY OF SUCH DOCUMENTS. THE BORROWER AND THE BANK
ACKNOWLEDGE THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
The Borrower acknowledges that it has read and understood all the provisions of
this Agreement, including the waiver of jury trial, and has been advised by
counsel as necessary or appropriate.
20
<PAGE>
WITNESS the due execution of this Loan Agreement as a
document under seal, as of the date first written above.
ATTEST: ITXC CORP.
By: By: /s/ Edward B. Jordan
----------------------------- -----------------------------------
Print Name: Print Name: Edward B.Jordan
-------------------- ---------------------------
Title: Title: Executive Vice President and CFO
------------------------- --------------------------------
PNC BANK,
NATIONAL ASSOCIATION
By: /s/ John Freyhoff
------------------------------------
Print Name: John Freyhoff
---------------------------
Title: Vice President
--------------------------------
21
<PAGE>
ADDENDUM to that certain Loan Agreement dated February 1, 2000 between ITXC
Corp., as the Borrower, and PNC Bank, National Association.
I. FINANCIAL COVENANTS
-------------------
1. The Borrower will not permit its Tangible Net Worth to be less than
$50,000,000; provided, that if at any time after the date of this Agreement
--------
the Borrower raises additional equity in excess of $75,000,000, then the
foregoing minimum Tangible Net Worth level shall be increased to
$80,000,000.
2. The Borrower shall have a minimum Quick Ratio of Current Assets to Current
Liabilities by the end of each fiscal quarter as specified below:
Quarter Ending Quick Ratio
-------------- -----------------
March 31, 2000 2.0:1.0
June 30, 2000 2.0:1.0
September 30, 2000 1.5:1.0
December 31, 2000 1.2:1.0
March 31, 2001 1.0:1.0
June 30, 2001 1.0:1.0
September 30, 2001 1.0:1.0
December 31, 2001 1.0:1.0
March 31, 2002 0.75:1.0
22
<PAGE>
Quarter Ending Quick Ratio
-------------- -----------------
June 30, 2002 0.75:1.0
September 30, 2002 0.6:1.0
December 31, 2002 0.6:1.0
March 31, 2003 0.6:1.0
June 30, 2003 0.6:1.0
September 30, 2003 0.6:1.0
December 31, 2003 0.6:1.0
3. The Borrower shall not experience two consecutive quarters of Negative Net
Operating Income after June 30, 2001.
4. The Borrower shall maintain a minimum Fixed Charge Coverage Ratio of
1.0:1.0 after September 30, 2000 (to be tested quarterly).
5. The Borrower shall maintain a minimum ratio of total Debt to Tangible Net
Worth of 0.4:1.0 (to be tested quarterly).
Definitions:
- -----------
"Current Assets" means the sum of cash, accounts receivable and marketable
securities.
"Current Liabilities" means the sum of all current liabilities other than
deferred revenue plus amounts outstanding under the Revolving Credit not
classified as current liabilities.
"Debt" means the maximum combined debt outstanding under the Revolving
Credit, any equipment leases, or any other debt arrangements maturing
within one year.
"Fixed Charge Coverage Ratio" means EBITDA plus rent divided by interest
plus principal plus rent.
"Negative Net Operating Income" means earnings before interest, taxes,
depreciation and amortization (or "EBITDA") less than zero calculated in
accordance with generally accepted accounting principles.
"Tangible Net Worth" means shareholders' equity less intangible assets
(calculated in accordance with generally accepted accounting principles),
plus any equity or subordinated and/or convertible debt investments created
after the date of this Agreement.
"Quick Ratio" means Current Assets divided by Current Liabilities.
23
<PAGE>
II. PERMITTED ENCUMBRANCES
----------------------
1. Purchase money security interests.
2. Capital Leases permitted under Section 6.1 hereto.
III. ENVIRONMENTAL MATTERS
---------------------
None
AMENDED AND RESTATED
BORROWING BASE RIDER
THIS AMENDED AND RESTATED BORROWING BASE RIDER ("Rider") is executed
this 1st day of February, 2000, by and between ITXC CORP., a Delaware
corporation (the "Borrower"), and PNC BANK, N.A. (the "Bank"). This Rider is
incorporated into and made part of that certain Amended and Restated Loan
Agreement dated February 1, 2000 (the "Loan Agreement"), and also into such
other financing documents and security agreements as may be executed and
delivered pursuant to said Loan Agreement (all such documents including this
Rider are collectively referred to as the "Loan Documents"). All initially
capitalized terms not otherwise defined in this Rider shall have the same
meanings ascribed to such terms in the other Loan Documents.
Pursuant to the Loan Documents, the Bank has extended a "Loan" to the
Borrower which includes a "Revolving Credit Facility" under which the Borrower
may borrow, repay and reborrow funds at any time prior to the Revolving Credit
Expiration Date and an "Equipment Line of Credit" (collectively, the
"Facility"). As a condition to the Bank's willingness to extend the Facility to
the Borrower, the Bank and the Borrower are entering into this Rider in order to
set forth their agreement regarding the maximum amount which may be outstanding
under the Facility at any time, and for the other purposes set forth below:
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties hereto covenant and agree as follows:
1. Limitations on Borrowings Under Facility. Notwithstanding any provisions to
----------------------------------------
the contrary in any of the other Loan Documents, at no time shall the aggregate
principal amounts of indebtedness outstanding at any one time under the Facility
exceed the Borrowing
24
<PAGE>
Base (as defined hereinafter) at such time. If at any time the aggregate
principal amount of indebtedness outstanding under the Facility exceeds the
limitation set forth in this Section 1 for any reason, then the Borrower shall
immediately repay the amount of such excess to the Bank in immediately available
funds.
2. Borrowing Base Certificates. The Borrower shall deliver an updated
---------------------------
Borrowing Base Certificate upon the Bank's request and in no event later than on
or before the 15th day of each month or the first business day thereafter if
such day falls on a weekend or holiday, if no new advances have been requested
by the Borrower under the Facility since the date of the preceding Borrowing
Base Certificate.
3. Certain Defined Terms. In addition to the words and terms defined elsewhere
---------------------
in this Rider or in the other Loan Documents, as used in this Rider, the
following words and terms shall have the following meanings:
"Account" shall mean an "account" or a "general intangible" as defined
in the Uniform Commercial Code as in effect in the jurisdiction whose Law
governs the perfection of the Bank's security interest therein, whether now
owned or hereafter acquired or arising.
"Account Debtor" shall mean, with respect to any Account, each Person
who is obligated to make payments to either of the Borrower on such Account.
"Affiliate" of the Borrower or any Account Debtor shall mean (a) any
Person who (either alone or with a group of Persons, and either directly or
indirectly through one or more intermediaries) is in control of, is controlled
by or is under common control with the Borrower or such Account Debtor, (b) any
director, officer, partner, employee or agent of the Borrower or such Account
Debtor, and (c) any member of the immediate family of any natural person
described in the preceding clauses (a) and (b). A Person or group of Persons
shall be deemed to be in control of the Borrower or an Account Debtor when such
Person or group of Persons possesses, directly or indirectly, the power to
direct or cause the direction of the management or policies of the Borrower or
such Account Debtor, whether through the ownership of voting securities, by
contract or otherwise.
"Borrowing Base" shall mean for the Revolving Credit, at any time
through the Revolving Credit Expiration Date, the lesser of (a) $10,000,000 (the
maximum principal amount of the Facility) and (b) the sum of (i) 80% of
Qualified Accounts at such time, (ii) 100% of foreign receivables qualified
under the Credit Insurance Agreement entered into pursuant to Section 2.9 of the
Loan Agreement and (iii) 100% of Cash Collateral Balance.
The value at any time of the collateral described in this definition shall be
determined by reference to the most recent Borrowing Base Certificate delivered
by the Borrower to the Bank.
"Borrowing Base Certificate" shall mean each Borrowing Base
Certificate to be delivered by the Borrower to the Bank pursuant to Section 2 of
this Rider, in substantially the
25
<PAGE>
form attached as Exhibit A to this Rider, with blanks appropriately completed,
---------
as amended, supplemented or otherwise modified from time to time. References in
the Borrowing Base Certificate to the "Credit and Security Agreement" shall be
deemed to be references to this Rider and the other Loan Documents.
"Cash Collateral Balance" shall mean all certificates of deposit
maintained by the Bank as security for Reimbursement Obligations of the Borrower
to the Bank with respect to Letters of Credit; provided, that the rights of the
--------
Bank to foreclose on such certificates of deposit shall supplement and not limit
any general rights of offset or recoupment which the Bank may have under the
Loan Documents.
"Law" shall mean any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"Lien" shall mean any mortgage, pledge, security interest, bailment,
encumbrance, claim, lien or charge of any kind, including any agreement to give
any of the foregoing, any conditional sale or other title retention agreement
and any lease in the nature thereof, and the filing of or agreement to give any
financing statement under the Uniform Commercial Code.
"Official Body" shall mean any government or political subdivision or
any agency, authority, bureau, central bank, commission, department or
instrumentality of any government or political subdivision, or any court,
tribunal, grand jury or arbitrator, in each case whether foreign or domestic.
"Person" shall mean an individual, sole proprietorship, corporation,
partnership (general or limited), trust, business trust, limited liability
company, unincorporated organization or association, joint venture, joint-stock
company, Official Body, or any other entity of whatever nature.
"Qualified Accounts" shall mean Accounts which are and at all times
continue to meet the following conditions:
(a) The Account duly complies with all applicable Laws, whether
Federal, state or local, including but not limited to usury Laws,
the Federal Truth in Lending Act, the Federal Consumer Credit
Protection Act, the Fair Credit Billing Act, and Regulation Z of
the Board of Governors of the Federal Reserve Systems;
(b) The Account was not originated in or subject to the Laws of a
jurisdiction whose Laws would make the account or the grant of
the security interest in the Account to the Bank unlawful,
invalid or unenforceable;
26
<PAGE>
(c) The Account was originated by the Borrower in connection with the
sale of goods or the rendering of services by the Borrower in the
ordinary course of business under an enforceable contract, and
such sale has been consummated and such goods have been delivered
or such services have been rendered so that the performance of
such contracts has been completed by such Borrower and by all
parties other than the Account Debtor;
(d) The Account is evidenced by a written invoice or other
documentation and arises from a contract, all of which are in
form and substance satisfactory to the Bank;
(e) The Account does not arise out of a contract with, or order from,
an Account Debtor that, by its terms, forbids or makes void or
unenforceable the grant of the security interest by the Borrower
to the Bank in and to the Account arising with respect thereto;
(f) The title of the Borrower to the Account and, except as to the
Account Debtor, to any related goods is absolute and is not
subject to any Lien except Liens in favor of the Bank;
(g) The Account provides for payment in United States Dollars by the
Account Debtor;
(h) The Account shall have amounts owing that are not less than the
amounts represented by the Borrower;
(i) The portion of the Account for which income has not yet been
earned or which constitutes unearned discount, services charges
or deferred interest shall be ineligible;
(j) The Account shall be eligible only to the extent that it is not
subject to any defense, claim of reduction, counterclaim,
set-off, recoupment, or any dispute or claim for credits,
allowances or adjustments by the Account Debtor because of
returned, inferior, damaged goods or unsatisfactory service, or
for any other reason;
(k) The goods the sale of which gave rise to the Account were shipped
or delivered or provided to the Account Debtor on an absolute
sale basis and not on a bill and hold sale basis, a consignment
sale basis, a guaranteed sale basis, a sale or return basis or on
the basis of any other similar terms making the Account Debtor's
payment obligations conditional;
27
<PAGE>
(l) The Account Debtor has not returned, rejected or refused to
retain, or otherwise notified the Borrower of any dispute
concerning, or claimed nonconformity of, any of the goods from
the sale of which the Account arose;
(m) No default exists under the Account by any party thereto, and all
rights and remedies of the Borrower under the Account are freely
assignable by the Borrower;
(n) The Account has not been outstanding for more than ninety (90)
days past the invoice date and is not subject to "dating" terms;
(o) The Account shall be ineligible to the extent that the aggregate
amount of all the Accounts of the Account Debtor and its
Affiliates exceed 20% of all of the Borrower's Accounts;
(p) The Borrower has not received any note, trade acceptance, draft,
chattel paper or other instrument with respect to, or in payment
of, the Account, unless, if any such instrument has been
received, the Borrower immediately notifies the Bank and, at the
Bank's request, endorses or assigns and delivers such instrument
to the Bank;
(q) The Borrower has not received any notice of (i) the filing by or
against the Account Debtor of any proceeding in bankruptcy,
receivership, insolvency, reorganization, liquidation,
conservatorship or any similar proceeding, or (ii) any assignment
by the Account Debtor for the benefit of creditors. Upon receipt
by the Borrower of any such notice, it will give the Bank prompt
written notice thereof;
(r) The Account Debtor is not an Affiliate of the Borrower;
(s) The Account shall be ineligible if the Account Debtor is an
Official Body, unless the Borrower shall have taken all actions
deemed necessary by the Bank in order to perfect the Bank's
security interest therein, including but not limited to any
notices or filings required under the Assignment of Claims Act of
1940, as amended, or other applicable Laws; and
(t) The Bank has not deemed such Account ineligible because of
uncertainty about the creditworthiness of the Account Debtor
(including, without limitation, unsatisfactory past experiences
of the Borrower or the Bank with the Account Debtor) or because
the Bank otherwise makes a reasonable determination that the
collateral value of the Account to the Bank is impaired or that
the Bank's ability to realize such value is insecure.
28
<PAGE>
Standards of acceptability shall be fixed and may be revised from time to time
by mutual agreement of Bank and the Borrower. In the case of any dispute about
whether an Account is or has ceased to be a Qualified Account, the decision of
the Bank shall be final.
4. Governing Law. This Rider will be interpreted and the rights and
-------------
liabilities of the parties hereto determined in accordance with the laws of the
commonwealth of pennsylvania, excluding its conflicts of law rules.
5. Counterparts. This Rider may be signed in any number of counterpart
------------
copies and by the parties hereto on separate counterparts, but all such copies
shall constitute one and the same instrument.
[Signature Page to Follow]
29
<PAGE>
WITNESS the due execution of this Borrowing Base Rider as a document
under seal, as of the date first written above.
ATTEST: ITXC CORP.
By: By: /s/ Edward B. Jordan
---------------------------- -----------------------------(SEAL)
Print Name: Print Name: Edward B. Jordan
------------------- ---------------------------
Title: Title: Executive Vice President and CFO
-------------------------- ----------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: John Freyhof
----------------------------(SEAL)
Print Name: John Freyhof
----------------------------
Title: Vice President
--------------------------------
30
<PAGE>
EXHIBIT 10.14
JOINT VENTURE EXIT AGREEMENT
THIS JOINT VENTURE EXIT AGREEMENT ("Agreement") is made as of this 7th day
of February, 2000, by and among TeleNova Comunicacoes Ltda., a limited liability
quota company, duly organized and existing under the laws of the Federative
Republic of Brazil ("Brazil"), having a place of business at Alameda Araguaia,
933, conj. 46, Alphaville, Barueri, State of Sao Paulo, Brazil, registered with
the C.G.C./M.F. under No. 02.519.780/0001-06 ("TeleNova"), TeleNova Overseas
Ltd., a British Virgin Islands corporation and a wholly-owned indirect
subsidiary of TeleNova ("TeleNova Overseas"), Telesisa Sistemas
emTelecomunicacoes S.A., a company duly organized and existing under the laws of
Brazil, having a place of business at R. Luigi Galvani, 200, 11.A, Sao Paulo,
Brazil ("Telesisa"), ITXC Comunicacoes Ltda., a limited liability quota company
duly organized and existing under the laws of Brazil, having a principal place
of business at Alameda Araguaia, 933, conj. 46, sub-conj. 1, Alphaville, Barueri
State of Sao Paulo, Brazil, registered with the C.G.C./M.F. under No.
02.691.621/0001-94 ("Ltda"), and ITXC Corp., a corporation duly organized and
existing under the laws of the State of Delaware, USA, having a principal place
of business at 600 College Road East, Princeton, New Jersey, USA 08540 ("ITXC").
Each of TeleNova, Telesisa, Overseas, Ltda and ITXC are also referred to
individually as a "Party" and collectively as the "Parties."
RECITALS
WHEREAS, effective as of July 19, 1998, TeleNova, Ltda and ITXC entered
into that certain Joint Venture and Quotaholders Agreement (as amended, the "JV
Agreement") pursuant to which such Parties organized Ltda as a limited liability
quota company according to the laws of Brazil;
WHEREAS, also effective as of July 19, 1998, the Parties entered into that
certain Trademark, Service and Technology License Agreement pursuant to which
ITXC licensed certain identified intellectual property to Ltda (the "License
Agreement");
WHEREAS, pursuant to the JV Agreement, TeleNova initially owned a fifty-one
percent (51%) interest in Ltda and ITXC initially owned the remaining forty-nine
percent (49%) interest in Ltda, such interests represented by quotas issued by
Ltda;
WHEREAS, TeleNova has assigned to Telesisa a ten percent (10%) portion of
its interest in Ltda;
WHEREAS, each of the Parties, for their respective mutual benefit and in
accordance with the terms and conditions contained herein, desire to terminate
the joint venture relationship and license relationship created between them
pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
the Parties hereto hereby agree as follows:
<PAGE>
1. Sale to TeleNova of ITXC's 49% Interest in Ltda.
-----------------------------------------------
(a) Contemporaneously with the execution of this Agreement, ITXC hereby
transfers to TeleNova ITXC's forty-nine percent (49%) ownership interest in
Ltda. To effect such transfer, ITXC hereby delivers to TeleNova all of its
interest in one million four hundred seventy thousand (1,470,000) quotas of
Ltda, representing ITXC's entire ownership interest in Ltda. Telesisa expressly
waives its right to purchase its pro rata share of ITXC's 49% ownership interest
in Ltda. TeleNova shall take all actions required to modify and amend Ltda's
organizational documents to reflect the fact that ITXC no longer has any
ownership interest in Ltda; provided that, to the extent necessary, ITXC (or its
representative in Brazil), as the former owner of such forty-nine percent (49%)
ownership interest, shall execute such documents as shall be necessary to
reflect the fact that ITXC no longer has any ownership interest in Ltda.
(b) TeleNova or any of its affiliates intends to commence a private placement
of TeleNova's quotas or any of its affiliates' equity securities ("TeleNova
Quotas") (such private placement, the "Proposed Private Placement"). In
connection with the Proposed Private Placement, TeleNova shall receive from Bank
of America, within seven days from the date hereof, a written valuation report
setting forth the valuation of the issuer of the TeleNova Quotas immediately
prior to the Proposed Private Placement (the "Valuation Report"). Within seven
days of the date hereof, TeleNova shall (provided that ITXC complies with
Section 4 hereof) transfer to ITXC a number of TeleNova Quotas equal to Six
Million Dollars U.S. ($6,000,000) divided by the "Per Quota Price" (as
hereinafter defined). For purposes of this Agreement, the term "Per Quota
Price" shall mean a fraction, the numerator of which is the aggregate valuation
of the issuer of the TeleNova Quotas, as set forth in the Valuation Report,
expressed in U.S. dollars, and the denominator of which is the number of quotas
or other equity interests, as the case may be, of such issuer outstanding on the
date hereof. It is understood that such TeleNova Quotas will not be registered
under the securities laws of any jurisdiction. The Parties shall not take any
action, such as a stock split, stock dividend or other recapitalization, which
will prejudice ITXC's rights under this Section 1(b) unless a reasonable
adjustment is made under this Section 1(b) such that ITXC shall not be adversely
affected by such action.
2. Termination of JV Agreement. The JV Agreement is hereby terminated. None
---------------------------
of the Parties shall have any remaining obligations under the JV Agreement,
except with respect to (a) liabilities that have accrued thereunder prior to the
date hereof and (b) obligations expressly described in the JV Agreement as
obligations that survive termination of the JV Agreement.
3. Termination of the License Agreement. The License Agreement is hereby
------------------------------------
terminated. None of the Parties shall have any remaining obligations under the
JV Agreement, except with respect to (a) liabilities that have accrued
thereunder prior to the date hereof and (b) obligations expressly described in
the License Agreement as obligations that survive termination of the License
Agreement.
4. Issuance of Shares. Within seven days from the date hereof, ITXC shall
------------------
(provided that TeleNova complies with Section 1(b) hereof) issue and transmit to
TeleNova Overseas a stock certificate, in TeleNova Overseas' name, representing
one hundred and thirty-
<PAGE>
five thousand (135,000) shares of ITXC's common stock (the "TeleNova Shares")
and shall issue and transmit to Telesisa a stock certificate, in Telesisa's
name, representing fifteen thousand (15,000) shares of ITXC's common stock (the
"Telesisa Shares" and, collectively with the TeleNova Shares, the "Shares").
5. Representations and Agreements of the TeleNova Parties.
------------------------------------------------------
(a) TeleNova, TeleNova Overseas and Telesisa (collectively, the "TeleNova
Parties") acknowledge that the Shares have not been registered under the United
States Securities Act of 1933 (the "Act") or under the laws of any other
jurisdiction.
(b) The TeleNova Parties acknowledge that they are acquiring the Shares for
investment purposes and not for purposes of distributing the Shares in violation
of the provisions of the Act or any other laws.
(c) The TeleNova Parties agree that they will not transfer the Shares unless
(i) such transfer is registered under the Act and all other laws requiring
registration prior to such transfer, (ii) ITXC receives an opinion of counsel,
in form and substance satisfactory to ITXC, to the effect that such transfer is
exempt from registration under the Act and all other applicable laws or (iii)
the Securities and Exchange Commission (the "SEC") issues a letter, in form and
substance reasonably satisfactory to ITXC, to the effect that the SEC will not
take any enforcement action under the Act in connection with such transfer and
counsel reasonably satisfactory to ITXC provides an opinion to ITXC that no
other law requires such transfer to be registered. The opinion of counsel
referred to in clause (ii) may be based on (a) the conclusion (if applicable)
that the transfer is made outside the United States in compliance with the
requirements of Rule 904 of Regulation S of the SEC and in compliance with
applicable local laws and regulations, (b) the conclusion (if applicable) that
the transfer is made pursuant to an exemption from registration under the Act
provided by Rule 144 thereunder or (c) the conclusion that the Shares are
otherwise transferred in a transaction that does not require registration under
the Act or any applicable laws and regulations governing the offer and sale of
securities.
(d) The TeleNova Parties acknowledge that until, in the reasonable opinion of
ITXC's counsel, such time as a legend is no longer required under applicable
requirements of law, the certificates representing the Shares will bear a
restrictive legend stating as follows:
"The Shares represented by this Certificate have not been registered
under the Securities Act of 1933 (the "Act") and may not be transferred
unless (i) such transfer is registered under the Act and all other laws
requiring registration prior to such transfer, (ii) ITXC receives an opinion
of counsel satisfactory to ITXC to the effect that such transfer is exempt
from registration under the Act and all other applicable laws or (iii) the
Securities and Exchange Commission (the "SEC") issues a letter, in form and
substance reasonably satisfactory to ITXC, to the effect that the SEC will
not take any enforcement action under the Act in connection with such
transfer and counsel reasonably satisfactory to ITXC provides an opinion to
ITXC that no other law requires such transfer to be registered. The
<PAGE>
opinion of counsel referred to in clause (ii) may be based on (a) the
conclusion (if applicable) that the transfer is made outside the United
States in compliance with the requirements of Rule 904 of Regulation S of
the SEC and in compliance with applicable local laws and regulations, (b)
the conclusion (if applicable) that the transfer is made pursuant to an
exemption from registration under the Act provided by Rule 144 thereunder or
(c) the conclusion that the Shares are otherwise transferred in a
transaction that does not require registration under the Act or any
applicable laws and regulations governing the offer and sale of securities."
(e) The TeleNova Parties acknowledge that they have been advised that ITXC
intends to instruct its transfer agent to impose stop transfer restrictions in
its records with respect to the Shares.
(f) The TeleNova Parties acknowledge that they have received a copy of ITXC's
final prospectus with respect to its September 1999 initial public offering (the
"Prospectus") and have received a copy of ITXC's quarterly report on Form 10-Q
with respect to the quarter ended September 30, 1999.
6. Name Change of Ltda. Within 30 days after the date hereof, the parties
-------------------
hereto other than ITXC shall change the name of Ltda to a name that does not
include or make reference to the name ITXC and that is not confusingly similar
to the name ITXC and shall provide evidence thereof in a form reasonably
satisfactory to ITXC.
7. Ltda Agreements. All agreements, other than (a) the JV Agreement, (b) the
---------------
License Agreement and (c) any other agreement between Ltda and ITXC or any
subsidiary or affiliate of ITXC, shall remain in full force and effect in
accordance with their terms.
8. ITXC/TeleNova Affiliation. Within seven days from the date hereof,
-------------------------
TeleNova and ITXC shall execute ITXC's standard WWeXchange Network Services
Origination/Termination Agreement, in the form and substance of the agreement
annexed hereto and incorporated herein as Exhibit A, and ITXC's standard Agent
---------
Agreement, in the form and substance of the agreement annexed hereto and
incorporated herein as Exhibit B.
---------
9. Non-Compete. Set forth in Exhibit C annexed hereto and incorporated
----------- ---------
herein is a list of certain agreements or prospective agreements between Ltda
and customers of Ltda which survive the expiration of the JV Agreement and the
License Agreement (each a "Ltda Contract" and, collectively, the "Ltda
Contracts"). Notwithstanding the foregoing, a prospective agreement described
in such Exhibit C shall cease to be a "Ltda Contract" if such agreement is not
executed within three (3) months from the date hereof. With respect to each
customer that is a party to a Ltda Contract a ("Ltda Contract Customer"), ITXC
shall not compete with TeleNova for the business of such customer within the
"Territory" (as hereinafter defined) until the soonest of (i) four (4) years
following the date hereof, (ii) such contract ceases to be a Ltda Contract in
accordance with the immediately preceding sentence or (iii) the date on which
TeleNova no longer provides IP telephony services to such customer within the
Territory under
<PAGE>
such Ltda Contract (with respect to each Ltda Contract Customer, the "Non-
Compete Period"). TeleNova acknowledges and agrees that upon the termination of
any Ltda Contract (or upon the cessation of any treatment of such contract as a
Ltda Contract) or in the event that a Ltda Contract Customer is no longer
obtaining services from TeleNova within the Territory, ITXC's non-competition
obligation with respect to the applicable Ltda Contract Customer expires and
ITXC may solicit the business of such Ltda Contract Customer in the Territory
(as well as outside the Territory). During the Non-Compete Period for each Ltda
Contract Customer, TeleNova shall exclusively route through ITXC, at competitive
market prices, or shall cause Ltda to exclusively route through ITXC, all IP
telephony traffic from or to such Ltda Contract Customer inside or outside the
Territory, including without limitation all traffic which (x) originates within
any of the countries of Brazil, Argentina, Uruguay, Paraguay and Chile (the
"Territory") and terminates outside the Territory, (y) originates from outside
the Territory and terminates in the Territory or (z) originates and terminates
outside the Territory; provided, however, that traffic which both originates and
terminates within the Territory shall not be subject to such exclusivity
requirement.
10. Publicity Announcement. At the appropriate time, ITXC shall issue a
----------------------
public announcement identifying TeleNova as the first international distributor
for corporate SNARCs (as described in the Prospectus) to Spanish and Portuguese
speaking markets (the "SNARC Announcement") and, if applicable, that ITXC is a
shareholder of TeleNova. The timing of the SNARC Announcement shall be at the
sole discretion of ITXC and is dependent on a successful pilot test by ITXC of
the corporate SNARC product.
11. Compliance with Laws. Each Party agrees to comply in all material
--------------------
respects with all applicable laws, rules and regulations of any jurisdiction
required for the purpose of fulfilling its obligations under this Agreement.
12. Expenses. Except as otherwise expressly provided herein, all expenses
--------
incurred by the Parties in connection with this Agreement will be borne wholly
by the Party incurring such expenses.
13. Publicity. Except as set forth in Section 10 hereof or as required by
---------
law or as disclosed in documents filed by ITXC with the SEC or by TeleNova with
any comparable agency, no Party shall create, publish, distribute or permit any
written material making reference to the other Party or Parties, without first
submitting such material to the other Party and/or Parties and obtaining such
Party's prior written consent, such consent not to be unreasonably delayed or
withheld.
14. Intellectual Property. Except as expressly set forth herein, this
---------------------
Agreement shall not be construed as a license for any Party to use any
trademark, service mark or other intellectual property right of any other Party.
Any inventions or other intellectual property developed by a Party hereto shall
be the property of that Party.
15. Assignment and Subcontracting; Successors and Assigns. This Agreement
-----------------------------------------------------
may not be assigned by any Party without the consent of each other Party, which
consent shall not be
<PAGE>
unreasonably withheld or delayed, provided, however, that this Agreement may be
assigned without prior consent to a third party that acquires substantially all
of the stock or assets of a Party. The Parties acknowledge that any Party may
contract or subcontract any of its rights, duties or obligations under this
Agreement to a third party, but that such contracting or subcontracting shall
not relieve a Party from its obligations hereunder. This Agreement shall be
binding upon and inure to the benefit of the Parties hereto and their respective
successors, heirs, permitted assigns and legal representatives.
16. Construction of Agreement. Each of the Parties have participated fully
-------------------------
in the preparation and revision of this Agreement. Any rule of construction to
the effect that ambiguities are to be resolved against the drafting Party shall
not apply to the interpretation of this Agreement.
17. No Partnership. The Parties hereto are independent contractors, and
--------------
nothing in this Agreement will create any partnership, joint venture, agency,
franchise, sales representative, or employment relationship between or among the
Parties. No Party has authority to make or accept any offers or representations
on behalf of any other Party hereto.
18. Further Assurances. Each Party will do such further acts, including
------------------
executing and delivering additional agreements or instruments as the other may
reasonably require, to consummate, evidence, confirm or give effect to the
agreements contained in this Agreement.
19. Governing Law. This Agreement, the performance thereof and any and all
-------------
matters arising directly or indirectly herefrom and/or therefrom shall be
construed, interpreted, applied and governed in all respects in accordance with
the laws of the State of New Jersey, USA, without regard to such State's
conflicts or choice of laws provisions.
20. Notices. Any notice or other communication required or permitted to be
-------
given hereunder shall be in writing and given by hand delivery or by confirmed
facsimile, or sent, postage prepaid, by registered, certified (return receipt
requested) or express mail or reputable overnight courier service and shall be
deemed given when so delivered by hand or confirmed facsimile or if mailed, five
calendar days after mailing (three days in the case of express mail or overnight
courier service), addressed as follows:
If to ITXC: With a Copy to:
---------- --------------
ITXC Corp. LOWENSTEIN SANDLER PC
600 College Road East 65 Livingston Avenue
Princeton, NJ USA 08540 Roseland, NJ USA 07068
Facsimile: 609-419-1511 Facsimile: 973-597-2400
Attn: Mr. Thomas Evslin Attn: Peter H. Ehrenberg, Esq.
<PAGE>
If to TeleNova, TeleNova Overseas and With a Copy to:
------------------------------------- --------------
and Telesisa:
------------
TeleNova Comunicacoes Ltda. TeleNova Communications Corp.
R. Arandu, 281 9.A 100 N. Biscayne Blvd. Suite 2905
04562-030 Sao Paulo, SP Brazil Miami, Florida 33152
Facsimile:(+5511) 5506-4525 x.120 Facsimile: 305-357-2508
Attn: Mr. Ulrich Kuhn Attn: Mr. Hiran Marques
If to Ltda: With a Copy to:
---------- --------------
ITXC Comunicacoes Ltda. TeleNova Communications Corp.
Alameda Araguaia, 100 N. Biscayne Blvd. Suite 2905
933, conj. 46,sc 1, Miami, Florida 33152
Alphaville, Barueri, Facsimile: 305-357-2508
Sao Paulo, Brazil Attn: Mr. Hiran Marques
Facsimile:(+5511)5506-4525 x.120
Attn: Mr. Claudio Collado
or to such other address as a Party may designate in writing to another Party.
21. Partial Invalidity. If any term or provision of this Agreement is held to
------------------
be invalid, illegal or unenforceable in any respect, such invalidity, illegality
or unenforceability shall not affect any other provision of this Agreement, but
such provision or provisions shall be ineffective only to the extent of such
invalidity, illegality or unenforceability and shall be enforced to the fullest
extent permitted by applicable law, without invalidating the remainder of such
provision or provisions or the remaining provisions of this Agreement.
22. Successors and Assigns. The rights and obligations of the Parties
----------------------
shall be binding upon and inure to the benefit of the Parties and their
respective heirs, representatives, successors and permitted assigns.
23. Waiver. The failure to enforce or the delay in enforcement of any
------
provision, right or option of this Agreement by any Party hereto shall in no way
be construed to be a waiver of such provision, right or option, nor shall such
action be deemed a waiver of any other right which that Party may otherwise have
at law or in equity.
24. Headings. The titles and headings contained in this Agreement are for
--------
reference purposes only and shall not in any manner limit the construction of
this Agreement.
25. Counterparts. This Agreement may be executed simultaneously in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
26. Entire Agreement; Amendment. This Agreement sets forth the entire
---------------------------
agreement and understanding among the Parties with respect to its subject matter
and merges and supersedes all previous communications, negotiations,
representations, understandings and agreements, either oral or written, between
or among the Parties with respect to the subject matter hereof. No amendment or
modification of this Agreement shall be binding on either Party hereto, unless
reduced to writing and duly executed by an authorized representative of each of
the Parties hereto.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TeleNova Comunicacoes Ltda. Telesisa Sistemas emTelecomunicacoes S.A.
By: /s/ Ulrich Kuhn By: /s/ Antonio M. Moracci
Name: Ulrich Kuhn Name: Antonio M. Moracci
Title: Chief Operating Officer Title: President
ITXC Comunicacoes Ltda. ITXC Corp.
By: /s/ Claudio Collado By: /s/ Tom Evslin
Name: Claudio Collado Name: Tome Evslin
Title: General Manager Title: Chairman and Chief Executive
Officer
TeleNova Overseas Ltd.
By: /s/ Hiran Marques
Name: Hiran Marques
Title: Director
<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 the Registration Statement (Form
S-1 No. 333-00000) 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
February 7, 2000
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
WHEREAS, the undersigned officers and directors of ITXC Corp. desire to
authorize Tom I. Evslin, John G. Musci and Edward B. Jordan to act as their
attorneys-in-fact and agents, for the purpose of executing and filing a
registration statement on Form S-1, including all amendments thereto,
NOW, THEREFORE,
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tom I. Evslin, John G. Musci and Edward B.
Jordan, and each of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, to sign a Registration Statement
on Form S-1 initially registering up to 6,000,000 shares of the Common Stock of
ITXC Corp., including any and all amendments and supplements thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this power of attorney in
the following capacities as of the 7 day of February, 2000.
Signature Title
- ------------------------------------- --------------------------------
/s/ Tom Evslin Chairman, President and
- -------------------------------------
Tom Evslin Chief Executive Officer
/s/ John G. Musci Director
- -------------------------------------
John G. Musci
/s/ Edward B. Jordan Chief Financial and Accounting
- -------------------------------------
Edward B. Jordan Officer and Director
/s/ William P. Collatos Director
- -------------------------------------
William P. Collatos
Director
- -------------------------------------
Elon A. Ganor
/s/ Frederick R. Wilson Director
- -------------------------------------
Frederick R. Wilson
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 3,971,237 49,017,768
<SECURITIES> 200,000 25,378,297
<RECEIVABLES> 673,214 7,022,388
<ALLOWANCES> 172,475 1,283,554
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,793,435 81,432,971
<PP&E> 3,365,116 18,233,372
<DEPRECIATION> 349,587 2,821,716
<TOTAL-ASSETS> 7,833,797 99,861,609
<CURRENT-LIABILITIES> 2,724,755 15,623,013
<BONDS> 0 0
9,866,723 0
0 0
<COMMON> 8,381 35,816
<OTHER-SE> 1,727,315 107,848,492
<TOTAL-LIABILITY-AND-EQUITY> 7,833,797 99,861,609
<SALES> 1,890,952 25,411,394
<TOTAL-REVENUES> 1,890,952 25,411,394
<CGS> 0 0
<TOTAL-COSTS> 3,529,547 26,314,264
<OTHER-EXPENSES> 5,659,819 20,050,505
<LOSS-PROVISION> 172,475 2,600,554
<INTEREST-EXPENSE> 139,575 207,160
<INCOME-PRETAX> (7,207,451) (19,664,735)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,207,451) (19,664,735)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,207,451) (19,664,735)
<EPS-BASIC> (0.88) (1.29)
<EPS-DILUTED> (0.88) (1.29)
</TABLE>
