<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): October 12, 2000
ITXC Corp.
(Exact Name of Registrant as Specified in its Charter)
New Jersey 000-26739 22-35-31960
(State or Other (Commission File No.) (IRS Identification No.)
Jurisdiction of Incorporation)
600 College Road East, Princeton, New Jersey 08540
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (609) 750-3333
<PAGE>
Item 2. Acquisition or Disposition of Assets
On October 12, 2000, ITXC Corp., a New Jersey corporation (the
"Registrant"), completed the merger (the "Merger") of its wholly owned Eye
Merger Corp. subsidiary ("Subcorp") with and into eFusion, Inc. ("eFusion").
eFusion was the surviving corporation of the Merger and is now a wholly owned
subsidiary of the Registrant. Pursuant to the Amended and Restated Agreement and
Plan of Merger, dated as of July 25, 2000, by and among the Registrant, Subcorp
and eFusion (the "Merger Agreement"), each outstanding share of eFusion's common
stock, par value $.001 per share ("eFusion Common Stock"), was converted into
0.2604614 (the "Common Exchange Number") of a share of ITXC's Common Stock, par
value $.001 per share (the "ITXC Common Stock"), each outstanding share of
eFusion's Series A Convertible Preferred Stock, par value $.001 per share, was
converted into 0.2890421 of a share of ITXC's Common Stock, each outstanding
share of eFusion's Series B Convertible Preferred Stock, par value $.001 per
share, was converted into 0.3870740 of a share of ITXC's Common Stock, each
outstanding share of eFusion's Series C Convertible Preferred Stock, par value
$.001 per share, was converted into 0.4605265 of a share of ITXC's Common Stock
and each outstanding share of eFusion's Series D Convertible Preferred Stock,
par value $.001 per share, was converted into 0.4891073 of a share of ITXC's
Common Stock. Furthermore, each outstanding option to purchase eFusion Common
Stock (an "eFusion Option") was converted into an option to purchase ITXC Common
Stock (an "ITXC Exchange Option"). Each ITXC Exchange Option will entitle the
holder to purchase a number of shares of ITXC Common Stock equal to the number
of shares of eFusion Common Stock subject to the related eFusion Option
multiplied by the Common Exchange Number; the per share exercise price of each
ITXC Exchange Option is the exercise price of the related eFusion Option divided
by the Common Exchange Number. Pursuant to the terms of the Merger Agreement,
approximately 5.9 million shares of ITXC Common Stock are issuable upon
conversion of eFusion Common Stock in the Merger and upon exercise of ITXC
Exchange Options. The exchange ratios were determined by arms-length
negotiations between eFusion and its representatives and the Registrant and its
representatives.
Additional information concerning the Merger and the transactions related
thereto (including pro forma financial information and historical eFusion and
ITXC financial information) is contained in the Registrant's Registration
Statement on Form S-4 (Registration Number 333-44248) previously filed with the
Securities and Exchange Commission on September 7, 2000.
Item 7. Financial Statements and Exhibits
(a) Consolidated Financial Statements of eFusion Inc. and Subsidiaries:
2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1998 (audited), December 31, 1999
(audited) and June 30, 2000 (unaudited).................................. F-3
Statements of Operations for the Years Ended December 31, 1998 and 1999
(audited) and for the Six Months Ended June 30, 1999 and 2000
(unaudited).............................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit) for the Years Ended December 31, 1998 and 1999
(audited) and for the Six Months Ended June 30, 2000 (unaudited)......... F-5
Statements of Cash Flows for the Years Ended December 31, 1998 and 1999
(audited) and for the Six Months Ended June 30, 1999 and 2000
(unaudited).............................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
eFusion, Inc.
We have audited the accompanying balance sheets of eFusion, Inc. as of December
31, 1998 and 1999, and the related statements of operations, redeemable
convertible preferred stock and stockholders' equity (deficit), and cash flows
for the years ended December 31, 1998 and 1999. 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 of America. 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 financial position of eFusion, Inc. as of December
31, 1998 and 1999, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1999 in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 31, 2000
F-2
<PAGE>
EFUSION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 902,815 $3,929,394 $13,710,878
Investments.......................................... -- 317,427 --
Accounts receivable, net............................. 2,699,666 832,447 297,439
Inventory, net....................................... 930,532 523,414 308,454
Prepaid and other assets............................. 92,562 140,525 236,830
---------- ---------- -----------
Total current assets................................. 4,625,575 5,743,207 14,553,601
Property and equipment, net.......................... 908,982 1,444,566 2,139,721
Other assets, net.................................... 12,796 -- --
---------- ---------- -----------
Total assets......................................... $5,547,353 $7,187,773 $16,693,322
========== ========== ===========
Liabilities, Redeemable Convertible Preferred Stock
and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued
expenses............................................. $ 815,954 $1,294,142 $ 694,246
Accrued compensation and related
party payable........................................ 66,515 24 --
Short-term debt...................................... 1,899,980 -- --
Current portion of long-term debt.................... 167,893 1,157,303 157,303
Current portion of capital lease
obligations.......................................... 111,087 40,455 5,025
Deferred revenue..................................... 1,788,374 84,733 163,399
---------- ---------- -----------
Total current liabilities............................ 4,849,803 2,576,657 1,019,973
Long-term debt, less current portion................. 1,353,932 170,411 91,760
Capital lease obligations, less
current portion...................................... 40,063 -- --
---------- ---------- -----------
Total liabilities.................................... 6,243,798 2,747,068 1,111,733
---------- ---------- -----------
Commitments and contingencies
Redeemable convertible preferred
stock:
Convertible preferred stock, Series
C, $.001 par value. Authorized
2,589,013 shares; issued and
outstanding 352,941, 2,589,013 and
2,589,013 (unaudited) shares at
December 31, 1998 and 1999 and June
30, 2000, respectively (liquidation
preference $18,123,091).............................. 2,999,999 17,190,599 17,190,599
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Convertible preferred stock, Series
D, $.001 par value. Authorized
2,500,000 shares; issued and
outstanding -0-, -0- and 2,491,102
(unaudited) shares at December 31,
1998 and 1999 and June 30, 2000,
respectively (liquidation preference
$19,928,816 (unaudited))............................. -- -- 20,356,391
----------- ------------ ------------
Total redeemable convertible
preferred stock...................................... 2,999,999 17,190,599 37,546,990
----------- ------------ ------------
Stockholders' deficit:
Convertible preferred stock,
authorized 15,000,000 shares
convertible preferred stock, Series
A and B, $.001 par value. Authorized
4,928,736 shares; issued and
outstanding 4,428,736, 4,428,736 and
4,428,736 (unaudited) shares at
December 31, 1998 and 1999 and June
30, 2000, respectively (liquidation
preference $11,010,000).............................. 4,429 4,429 4,429
Common stock, $.001 par value.
Authorized 30,000,000 shares; issued
and outstanding 4,959,405, 5,214,532
and 5,441,280 (unaudited) shares at
December 31, 1998 and 1999 and June
30, 2000, respectively............................... 3,859 4,114 4,341
Additional paid-in capital........................... 12,020,201 12,104,562 12,208,778
Stock warrants....................................... 1,526,824 1,526,824 1,564,010
Accumulated deficit.................................. (17,251,757) (26,389,823) (35,746,959)
----------- ------------ ------------
Total stockholders' deficit.......................... (3,696,444) (12,749,894) (21,965,401)
----------- ------------ ------------
Total liabilities, redeemable
convertible preferred stock and
stockholders' deficit................................ $ 5,547,353 $ 7,187,773 $ 16,693,322
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
EFUSION, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended For the six months
December 31, ended June 30,
----------- -------------
1998 1999 1999 2000
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Revenues, net:
Product and other revenue............ $ 3,427,110 $ 3,517,433 $ 1,924,274 $ 236,045
Application service revenue.......... -- -- -- 71,530
----------- ----------- ----------- -----------
Total revenues................... 3,427,110 3,517,433 1,924,274 307,575
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales--product and other..... 1,203,271 1,465,843 823,441 65,449
Network operations................... -- -- -- 1,087,897
Research and development............. 4,032,203 3,689,632 1,726,122 2,588,830
Sales and marketing.................. 5,306,407 5,699,515 2,654,139 3,911,034
General and administrative........... 1,312,666 1,941,216 700,021 1,753,019
----------- ----------- ----------- -----------
Total operating expenses......... 11,854,547 12,796,206 5,903,723 9,406,229
----------- ----------- ----------- -----------
Loss from operations............. (8,427,437) (9,278,773) (3,979,449) (9,098,654)
Other income (expense):
Interest income...................... 111,978 248,815 73,491 229,648
Interest expense..................... (139,250) (108,108) (85,249) (20,758)
----------- ----------- ----------- -----------
Loss before provision
for income taxes................ (8,454,709) (9,138,066) (3,991,207) (8,889,764)
Provision for income taxes.............. -- -- -- --
----------- ----------- ----------- -----------
Net loss......................... (8,454,709) (9,138,066) (3,991,207) (8,889,764)
----------- ----------- ----------- -----------
Accretion of preferred
stock redemption....................... -- -- -- 467,372
----------- ----------- ----------- -----------
Net loss attributed to
common stockholders............. $(8,454,709) $(9,138,066) $(3,991,207) $(9,357,136)
=========== =========== =========== ===========
Net loss per common share--basic and
diluted................................ $(2.15) $(2.00) $(0.92) $(1.81)
=========== =========== =========== ===========
Shares used in computing net loss per
common share--basic and diluted........ 3,930,224 4,565,573 4,356,843 5,174,626
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
EFUSION, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1998 and 1999
and the six months ended June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Redeemable convertible Convertible
preferred stock preferred stock Common stock Additional
------------------- ------------- ------- paid-in
Shares Amount Shares Amount Shares Amount capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997. -- $ -- 4,428,736 $4,429 5,250,000 $4,150 $12,004,571
Issuance of preferred
stock.................. 352,941 2,999,999 -- -- -- -- --
Repurchase of
common stock........... -- -- -- -- (385,148) (385) (1,541)
Exercise of
stock options.......... -- -- -- -- 94,553 94 17,171
Net loss................ -- -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------ -----------
Balance at December 31,
1998................... 352,941 2,999,999 4,428,736 4,429 4,959,405 3,859 12,020,201
Issuance of preferred
stock.................. 2,236,072 14,190,600 -- -- -- -- --
Repurchase of
common stock........... -- -- -- -- (31,250) (31) (125)
Exercise of
stock options.......... -- -- -- -- 286,377 286 51,112
Issuance of options to
nonemployees........... -- -- -- -- -- -- 33,374
Net loss................ -- -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------ -----------
Balance at December 31,
1999................... 2,589,013 17,190,599 4,428,736 4,429 5,214,532 4,114 12,104,562
Issuance of preferred
stock (unaudited)...... 2,491,102 19,889,019 -- -- -- -- --
Exercise of stock
options (unaudited).... -- -- -- -- 226,748 227 96,196
Issuance of options to
nonemployees
(unaudited)............ -- -- -- -- -- -- 8,020
Issuance of stock
warrants (unaudited).... -- -- -- -- -- -- --
Accretion of preferred
stock redemption
preference
(unaudited)... ......... -- 467,372 -- -- -- -- --
Net loss (unaudited).... -- -- -- -- -- -- --
--------- ----------- --------- ------ --------- ------ -----------
Balance at June
30, 2000
(unaudited)........... 5,080,115 $37,546,990 4,428,736 $4,429 5,441,280 $4,341 $12,208,778
========= =========== ========= ====== ========= ====== ===========
<CAPTION>
Total
stockholders'
Stock Accumulated equity
warrants deficit (deficit)
-------- ------- ---------
<S> <C> <C> <C>
Balance at December 31,
1997. $ 1,526,824 $ (8,797,048) $ 4,742,926
Issuance of preferred
stock.................... -- -- --
Repurchase of
common stock............. -- -- (1,926)
Exercise of
stock options............ -- -- 17,265
Net loss................... -- (8,454,709) (8,454,709)
------------ ------------ ------------
Balance at December 31,
1998..................... 1,526,824 (17,251,757) (3,696,444)
Issuance of preferred
stock.................... -- -- --
Repurchase of
common stock............. -- -- (156)
Exercise of
stock options............ -- -- 51,398
Issuance of
options to
nonemployees............. -- -- 33,374
Net loss................... -- (9,138,066) (9,138,066)
------------ ------------ ------------
Balance at December 31,
1999..................... 1,526,824 (26,389,823) (12,749,894)
Issuance of preferred stock
(unaudited).............. -- -- --
Exercise of
stock options
(unaudited).............. -- -- 96,423
Issuance of
options to
nonemployees
(unaudited).............. -- -- 8,020
Issuance of
stock warrants
(unaudited).............. 37,186 -- 37,186
Accretion of
preferred stock
redemption
preference
(unaudited).............. -- (467,372) (467,372)
Net loss
(unaudited).............. -- (8,889,764) (8,889,764)
------------ ------------ ------------
Balance at June
30, 2000
(unaudited).............. $ 1,564,010 $(35,746,959) (21,965,401)
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
EFUSION, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended For the six months
December 31, ended June 30,
------------ -------------
1998 1999 1999 2000
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(8,454,709) $(9,138,066) $(3,991,207) $(8,889,764)
Adjustments to reconcile net loss to
net cash used in operating activities:
Noncash compensation expense......... -- 33,374 30,040 45,206
Depreciation and amortization........ 445,497 578,891 275,407 449,581
Loss on disposal of
property and equipment.............. 68,204 17,136 -- 22,436
Change in certain assets
and liabilities:
Accounts receivable............. (2,482,495) 1,867,219 2,593,210 535,008
Inventory....................... (350,845) 407,118 724,917 214,960
Prepaid expenses and
other assets.................. 32,751 (47,963) (24,194) (96,305)
Accounts payable and
accrued expenses.............. 586,056 411,697 (499,264) (599,920)
Deferred revenue................ 1,700,149 (1,703,641) (1,728,967) 78,666
----------- ----------- ----------- -----------
Net cash used in
operating activities......... (8,455,392) (7,574,235) (2,620,058) (8,240,132)
----------- ----------- ----------- -----------
Cash used in investing activities:
Purchase of property and
equipment.............................. (617,341) (1,118,815) (245,455) (1,167,172)
Purchase of investments................... (1,178,952) (8,459,397) (7,866,694) --
Sale/maturity of investments.............. 4,439,702 8,141,970 -- 317,427
Increase in other assets.................. (655) -- -- --
----------- ----------- ----------- -----------
Net cash provided by
(used in) investing
activities...................... 2,642,754 (1,436,242) (8,112,149) (849,745)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings of short-term debt............. 1,899,980 -- -- 500,000
Payments of long-term debt................ 272,668 (194,111) (115,459) (1,078,651)
Principal payments under
capital lease obligations............... (104,493) (110,695) (58,120) (35,430)
Proceeds from issuance of
preferred and common stock.............. 3,017,264 12,342,018 12,318,722 19,485,442
Repurchase of common stock................ (1,926) (156) -- --
----------- ----------- ----------- -----------
Net cash provided by
financing activities........... 5,083,493 12,037,056 12,145,143 18,871,361
----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents.................... (729,145) 3,026,579 1,412,936 9,781,484
Cash and cash equivalents
at beginning of period...................... 1,631,960 902,815 902,815 3,929,394
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period............................ $ 902,815 $ 3,929,394 $ 2,315,751 $13,710,878
=========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 130,250 $ 108,108 $ 26,261 $ 8,537
Supplemental disclosure of noncash
activities:
Conversion of short-term
debt to preferred stock............... $ -- $ 1,899,980 $ 1,899,980 $ 500,000
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
(1) Summary of Significant Accounting Policies
(a) Company Background
eFusion, Inc. (eFusion) provides a suite of value-added Internet applications
and services that seamlessly integrate Web interaction with real- time
communication. eFusion's application service provider business model allows
network providers and eCommerce companies to differentiate their services to
businesses and consumers and allows businesses to better interact with their
customers through enhanced communication. eFusion was incorporated in Oregon on
April 5, 1996 and began operations on August 12, 1996.
(b) Unaudited Six Month Information
The financial information included herein for the six-month periods ended June
30, 1999 and 2000 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
interim financial statements should be read in conjunction with the financial
statements and the notes included in the financial statements. The results of
operations for the interim period presented are not necessarily indicative of
the results to be expected for the full year.
(c) Cash and Cash Equivalents
eFusion classifies all highly liquid investments purchased with an original
maturity of three months or less to be cash and cash equivalents. Cash
equivalents of $707,214, $1,986,163 and $12,905,758 (unaudited) at December 31,
1998 and 1999 and June 30, 2000, respectively, consist of short-term bonds with
original maturities of three months or less.
(d) Investments
Investments consist of commercial paper which have maturities greater than three
months at the time of purchase by eFusion. These investments are classified as
held-to-maturity and are recorded at amortized cost which approximates fair
value.
(e) Accounts Receivable
Credit is extended to customers as deemed necessary and generally does not
require collateral. Management evaluates customer information and historical
statistics in providing for an allowance of doubtful accounts. Historically,
eFusion has incurred no write-offs of accounts receivable. At December 31, 1998
and 1999, the allowance for doubtful accounts was $-0-.
(f) Inventory
Inventory is stated at the lower of cost or market (net realizable value).
(g) Property and Equipment
Property and equipment is recorded at cost. Property and equipment recorded
under capital lease arrangements are stated at the lower of the present value of
the minimum lease payments at the beginning of the lease term or the fair value
of the leased assets at the inception of the lease.
F-7
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Depreciation and amortization are calculated by using the straight-line method
over the assets' estimated useful lives, generally three years. Property and
equipment acquired under capital leases are amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
assets. Maintenance and repairs are expensed as incurred.
(h) Other Assets
At December 31, 1998, other noncurrent assets primarily consisted of
organizational costs. In accordance with SOP 98-5, Reporting on the Cost of
Start-up Activities, these costs were written off as of January 1, 1999.
(i) Income Taxes
eFusion accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences of
events that have been included in the financial statements and tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to be recovered or settled.
Valuation allowances are established to reduce deferred tax assets to the amount
expected to be realized.
(j) Revenue Recognition
eFusion generates revenue from the sale of products, licenses, system rentals,
service and maintenance agreements, and Application Service Provider (ASP) usage
or subscriptions.
License fees are generally recognized when a non-cancelable license agreement
has been signed, the software has been shipped, there are no uncertainties
surrounding product acceptance, the fees are fixed and determinable and
collection is probable.
Revenue from the sale of products and software licenses are recognized at the
time of shipment, except for those that have significant post-delivery
obligations. When significant post-delivery obligations exist, revenue is
deferred until no such significant obligations remain. Typically eFusion's post-
delivery obligations are for installation and/or acceptance.
System rental revenue primarily represents income earned from product
evaluations, which typically last approximately six months. Service and
maintenance revenue consist primarily of installation, training, engineer
support and maintenance revenues. Service and maintenance agreements typically
last twelve months. These revenues are recognized ratably over the term of the
agreement.
In November 1999, eFusion implemented its ASP business model. ASP revenue is
generated through actual use by customers of eFusion provided application
services. Revenues are recognized when the customer uses the product.
(k) Warranty
eFusion warrants its hardware products against defects. Estimated future
warranty obligations are charged to operations ratably over the warranty period,
typically twelve months. eFusion has a warranty reserve of $77,413 and $44,665
at December 31, 1998 and 1999, respectively.
F-8
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(l) Research and Development
Expenditures for research and development are expensed as incurred.
(m) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, investments, accounts receivable, accounts payable, accrued
liabilities and deferred revenue approximate fair values due to the short-term
maturities of those instruments. The carrying amount of capital leases and debt
approximate fair value as the stated interest rates reflect current market
rates. Fair value estimates are made at a specific point in time, based on
relevant market information about the financial instruments when available.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment and, therefore, cannot be determined with precision.
(n) Concentrations of Credit Risk
During 1998 and 1999, 29% and 43%, respectively, of total revenue was from
products sold outside the United States. Operations and substantially all assets
reside in the United States. For the year ended December 31, 1998, two customers
accounted for 36% and 16%, respectively, of eFusion's total revenues. For the
year ended December 31, 1999, two customers accounted for 55% and 28%,
respectively, of eFusion's total revenues.
At December 31, 1998 and 1999, eFusion had accounts receivable from one
customer, each year, representing approximately 79% and 83%, respectively, of
trade accounts receivable. Loss or non-performance by this significant customer
could adversely affect eFusion's financial position, liquidity or results of
operations.
eFusion is subject to concentrations of credit risk from its cash and cash
equivalents, investments and trade receivables. eFusion limits its exposure to
credit risk associated with cash and cash equivalents and investments by placing
its cash and cash equivalents with a major financial institution and by
investing in investment-grade securities.
(o) Software Development Costs
eFusion accounts for software development costs in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed. Software development costs
are to be capitalized beginning when a product's technological feasibility has
been established and ending when a product is made available for general release
to customers. To date, the establishment of technological feasibility of
eFusion's products has occurred shortly before general release and, accordingly,
no costs have been capitalized.
Internal use software development costs are accounted for in accordance with SOP
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. Costs incurred in the preliminary project stage are expensed as
incurred and costs incurred in the application and development stage, which meet
the capitalization criteria, are capitalized and amortized on a straight- line
basis over the estimated useful life of the asset. To date, no costs have been
capitalized.
(p) Advertising Cost
The cost of advertising is expensed as incurred. Advertising costs were not
significant for the years ended December 31, 1998 and 1999.
F-9
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(q) Net Loss Per Share
eFusion follows the provisions of Statement of Financial Accounting Standards
No. 128, Earnings Per Share, (SFAS 128) and SEC Staff Accounting Bulletin No. 98
(SAB No. 98). Under the provisions of SFAS 128 and SAB No. 98, basic and diluted
net loss per share is computed by dividing net loss available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted net loss per share has not been presented as the effect of
the assumed exercise of stock options, restricted stock warrants for preferred
stock and convertible securities is antidilutive due to eFusion's net loss.
The following table sets forth for the periods indicated the weighted- average
potential shares of common stock issuable under stock options, warrants and
restricted stock using the treasury method, convertible preferred stock on an
if-converted basis, which are not included in calculating net loss per share due
to their antidilutive effect:
<TABLE>
<CAPTION>
Years ended Six months ended
December 31, June 30,
------------ --------
1998 1999 1999 2000
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Shares issuable under stock options................ 1,070,796 852,231 510,048 286,242
Warrants........................................... -- -- -- 7,494
Restricted stock................................... 1,341,786 913,343 1,022,761 284,358
Weighted-average shares of common stock
issuable upon conversion of preferred
stock.............................................. 4,551,540 6,222,546 5,444,241 8,529,162
--------- --------- --------- ---------
6,964,122 7,988,120 6,977,050 9,107,256
========= ========= ========= =========
</TABLE>
(r) Segment Reporting
Effective January 1, 1998, eFusion adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. eFusion
identifies its operating segment based on business activities, management
responsibilities and geographic location. During all years presented, eFusion
operated in one business segment providing internet service solutions.
(s) Stock-Based Compensation
eFusion accounts for stock-based compensation using the Financial Accounting
Standard Board's (FASB) Statement of Financial Accounting Standards No. 123
(SFAS No. 123), Accounting for Stock-Based Compensation. This statement permits
a company to choose either a fair value based method of accounting for its
stock-based compensation arrangements or to comply with the current Accounting
Principles Board Opinion 25 (APB 25) intrinsic value-based method adding pro
forma disclosures of net loss computed as if the fair value-based method had
been applied in the financial statements. eFusion applies SFAS No. 123 by
retaining the APB 25 (and interpretations) method of accounting for stock-based
compensation for employees with annual pro forma disclosure of net loss. eFusion
accounts for stock and stock options issued to non-employees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) consensus
on Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.
F-10
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(t) 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 and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as revenues and expenses reported for the periods presented. Actual results
could differ from those estimates.
(u) Risk of Technological Change
A substantial portion of eFusion's revenues each year are generated from the
development software for use over the Internet. In the extremely competitive
industry environment in which eFusion operates, such product generation,
development and marketing processes are uncertain and complex, requiring
accurate prediction of demand as well as successful management of various
development risks inherent to the Internet. In light of these dependencies, it
is possible that failure to successfully manage future changes in technology
with respect to the Internet could have long-term impact on eFusion's growth and
results of operations.
(v) Effect of Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, (SFAS No. 133) in June 1998.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as a hedge. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and the
resulting designation. SFAS No. 133, as amended by SFAS No. 137, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of this statement is not expected to have a material impact on
eFusion's financial statements.
In December 31, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. In June 2000, SAB 101B was issued which
defers the implementation date of SAB 101 until October 1, 2000. eFusion does
not expect that this statement will have a significant impact on its financial
condition or results of operations.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, (FIN 44). FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee, which apply to awards issued after December 15, 1998.
The provisions related to modifications to fixed stock options awards to add a
reload feature are effective for awards modified after January 12, 2000. eFusion
does not expect that this statement will have a significant impact on its
financial condition or results of operations.
F-11
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(2) Balance Sheet Components
(a) Inventory
Inventory, net of reserves, consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Raw materials................................................ $ 183,017 $ 319,275 $ 267,536
Work in progress............................................. 27,493 127,803 6,229
Finished goods............................................... 720,022 76,336 34,689
---------- ---------- ----------
$ 930,532 $ 523,414 $ 308,454
========== ========== ==========
(b) Property and Equipment
Property and equipment consist of the following:
December 31,
-------------------
June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Property and equipment under capital
leases............................................. $ 305,330 $ 266,000 $ 266,000
Furniture and fixtures............................. 302,539 336,547 377,684
Equipment.......................................... 911,216 1,990,044 2,954,831
Software........................................... 28,061 -- 134,080
---------- ---------- ----------
1,547,146 2,592,591 3,732,595
Less accumulated depreciation and
amortization....................................... 638,164 1,148,025 1,592,874
---------- ---------- ----------
$ 908,982 $1,444,566 $2,139,721
========== ========== ==========
</TABLE>
Accumulated amortization for property and equipment under capital leases was
$169,421, $231,335 and $255,991 (unaudited) as of December 31, 1998 and 1999 and
June 30, 2000, respectively.
(c) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
June 30,
1998 1999 2000
-------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Accounts payable......................... $476,972 $ 644,997 $317,431
Accrued liabilities...................... 338,982 649,145 376,815
-------- ---------- ----------
$815,954 $1,294,142 $694,246
======== ========== ==========
</TABLE>
(3) Short-term Debt
There is no short-term debt at December 31, 1999. During 1999, the bridge loans
entered into in 1998 were converted to preferred stock in accordance with their
original terms. The bridge loans were considered related party agreements, which
were convertible to preferred stock after the Series C financing was complete.
The bridge loans represented money provided to eFusion from key investors, and
were recorded as short-term debt at December 31, 1998.
F-12
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(4) Long-term Debt
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Note payable to a bank due in monthly
installments of $17,088, plus interest at
prime plus 2% (10.5% at December 31, 1999),
maturing on March 30, 1999, secured by the
assets purchased with the borrowings................ $ 49,916 $ -- $ --
Note payable to a bank due in monthly
installments of $13,108, plus interest at
prime plus 1.5% (10.0% at December 31,
1999), maturing on March 30, 2002, secured
by the assets purchased with the
borrowings.......................................... 471,909 327,714 249,063
Note payable to a shareholder due in full on
May 1, 2000, noninterest bearing.................... 1,000,000 1,000,000 --
---------- ---------- ----------
1,521,825 1,327,714 249,063
Less current portion................................ 167,893 1,157,303 157,303
---------- ---------- ----------
$1,353,932 $ 170,411 $ 91,760
========== ========== ==========
</TABLE>
The note payable maturing on March 30, 2002 was originally a $1,000,000 line of
credit, which converted to a note payable on February 17, 1999. Due to the
conversion, the outstanding balance has been included in the accompanying
financial statements as long-term debt at December 31, 1998 and 1999. eFusion's
notes payable to the bank contain certain financial covenants. eFusion is in
compliance with the covenants at December 31, 1999.
eFusion's notes payable to the bank contain certain financial covenants. eFusion
is in compliance with the covenants at December 31, 1999.
The schedule of future principal payments on long-term debt is as follows:
Year ending December 31:
2000................................................. $1,157,303
2001................................................. 157,303
2002................................................. 13,108
---- ----------
$1,327,714
==========
(5) Leases
eFusion has leased property and equipment under a $350,000 lease line of credit.
Each lease balance is payable over a three year period at an interest rate of
approximately 15.4% beginning on the date the lease is finalized. The leases are
accounted for as capital leases. At December 31, 1998 and 1999, eFusion had an
outstanding balance of $151,150 and $40,455, respectively, against its lease
line of credit.
F-13
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Future minimum lease payments under capital leases as of December 31, 1999 is as
follows:
Capital
leases
------
Year ending December 31:
2000........................................................ $42,593
---- -------
Total minimum lease payments............................... 42,593
Less amount representing interest................................... 2,138
-------
Present value of net minimum capital lease payments 40,455
Less current portion of capital lease obligations................... 40,455
-------
$ --
=======
(6) Stockholders' Equity
eFusion has authorized 2,510,000 shares of Series A preferred stock with
2,510,000 shares issued and outstanding as of December 31, 1998 and 1999 and
June 30, 2000 (unaudited), respectively. eFusion has authorized 2,418,736 shares
of Series B preferred stock with 1,918,736 shares issued and outstanding as of
December 31, 1998 and 1999 and June 30, 2000 (unaudited), respectively.
(a) Series A, B and C Preferred Stock
The terms of the Series A, B and C preferred stock are:
The holders of preferred stock are entitled to voting rights whereby they
receive the number of votes equal to the number of shares of common stock which
the shares of preferred stock could be converted.
Upon declaration of the Board of Directors, preferred stockholders are
entitled to receive dividends at a rate of 8% per share of the original issue
price of each series of preferred shares per annum. The right to receive
dividends on preferred stock is noncumulative. No dividends may be paid to
holders of common stock until all declared dividends on preferred stock have
been paid.
Upon dissolution, liquidation, or winding-up of the affairs of eFusion, the
holders of Series A, B and C preferred stock shall receive preference over the
common stockholders. The liquidation value per share is equal to the applicable
original purchase price of each series of preferred shares for outstanding
shares of Series A, B and C preferred stock, adjusted for any stock dividends,
stock splits, or dividends declared but unpaid.
Each share of preferred stock is voluntarily convertible into common stock
at any time after the date of issuance at an initial rate of 1- to-1, subject to
eFusion's restated Articles of Incorporation. For Series A and B preferred
stock, conversion is automatic upon the closing of a public offering of
eFusion's common stock which results in aggregate proceeds of at least
$10,000,000 and at a public offering price of at least $5.00 per share. For
Series C preferred stock, conversion is automatic upon closing of a public
offering of eFusion's common stock which results in aggregate proceeds of at
least $40,000,000 and at a public offering price of at least $12.00 per share.
The holders of Series C preferred stock may at any time after the fifth
anniversary of the initial purchase date request eFusion to redeem the
outstanding Series C preferred stock. The redemption price shall equal the
original issue price per share, as adjusted for any stock split, combination or
similar recapitalization, plus any declared and unpaid dividends on the Series C
preferred stock.
F-14
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
As of December 31, 1998 and 1999, eFusion had reserved 5,281,677 and 7,517,479
shares, respectively, of its common stock pursuant to the conversion privileges
of the Series A, B and C preferred stock and the preferred stock warrants.
(b) Warrants
As part of a Marketing Agreement, on June 24, 1997, eFusion agreed to grant a
fully vested warrant to purchase up to 500,000 shares of Series B preferred
stock at an exercise and weighted average price of $7.00 per share to a product
marketer, who is also a shareholder. The warrant terminates at the earliest of
June 24, 2007, the closing of a firm commitment underwritten public offering of
not less than $10,000,000 or upon the sale of eFusion. The fair value of the
warrant was calculated using the Black-Scholes model with the following
assumptions: expected dividends, zero; risk-free interest rate, 6.49%;
volatility, 60%; and contractual term of ten years. The fair value of the
warrant was $1,526,824.
(c) Stock Options
eFusion has a Stock Option Plan (the Plan) under which it has reserved 3,700,000
shares of common stock for grants. As of December 31, 1999, 3,527,448 shares
have been granted pursuant to the Plan. Options granted under the Plan may be
designated as incentive or nonqualified at the discretion of the Plan
administrator.
Option prices for incentive stock options are set at not less than the deemed
fair market value of the common stock at the date of the grant. Options granted
to new employees vest 25% after the first year of employment and in an equal
amount over the following 36 months of employment. Options granted to existing
employees vest in equal amounts over 48 months. Options are contingent on
continued employment with eFusion and expire ten years from the date of grant.
The per share weighted-average fair value of stock options granted during 1998
and 1999 was $0.35 and $0.45, respectively, on the date of grant using the
minimum value option pricing model with the following weighted-average
assumptions: 1998 and 1999--expected dividend yield 0%, risk-free interest rate
of 6.0%, and an expected life of 5 years.
eFusion applies APB Opinion No. 25 in accounting for its Plan and, accordingly,
no compensation cost has been recognized for its stock options to employees in
the financial statements. Had eFusion determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, eFusion's
net loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
------------
June 30,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Net loss attributed to common
stockholders:
As reported.................... $(8,454,709) $(9,138,066) $(9,357,136)
Pro forma...................... (8,554,630) (9,444,161) (9,485,375)
Net loss per share:
As reported.................... (2.15) (2.00) (1.81)
Pro forma...................... (2.18) (2.07) (1.83)
</TABLE>
F-15
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
average
Number exercise
of shares price
---------- ---------
<S> <C> <C>
Options outstanding at December 31, 1997........... 1,352,950 $0.19
Granted............................................ 701,248 1.35
Exercised.......................................... (94,553) 0.18
Canceled........................................... (160,861) 0.52
--------- -----
Options outstanding at December 31, 1998........... 1,798,784 0.61
Granted............................................ 1,473,250 1.75
Exercised.......................................... (286,377) 1.64
Canceled........................................... (570,897) 0.69
--------- -----
Options outstanding at December 31, 1999........... 2,414,760 1.33
Granted (unaudited)................................ 472,930 1.86
Exercised (unaudited).............................. (226,748) .42
Canceled (unaudited)............................... (273,669) 1.61
--------- -----
Options outstanding at June 30, 2000 (unaudited)... 2,387,273 $1.48
========= =====
</TABLE>
The following table summarizes information regarding stock options outstanding
and exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Number Weighted- Number
outstanding average Weighted- exercisable Weighted-
Range of as of remaining average as of average
exercise December 31, contractual exercise December 31, exercise
prices 1999 life price 1999 price
---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$0.10 413,263 8 $0.10 317,093 $0.10
0.44 134,896 8 0.44 80,204 0.44
0.75 44,400 9 0.75 20,119 0.75
1.00 132,250 9 1.00 57,613 1.00
1.75 1,689,951 10 1.75 133,156 1.75
--------- -- ----- ------- -----
$0.10-1.75 2,414,760 9 $1.33 608,185 $0.61
========= == ===== ======= =====
</TABLE>
(d) Stock Repurchase Agreement
As of December 31, 1996, eFusion had sold 3,150,000 shares of common stock for
$0.001 to senior management of eFusion under agreements which allow eFusion, at
its option, to repurchase shares of common stock at $0.005 per share. Under the
repurchase agreements, 25% of the shares vested immediately and the remaining
75% subject to repurchase are reduced in equal increments over the following 48
months. During 1998 and 1999, 385,148 and 31,250 common shares, respectively,
were repurchased by eFusion at $0.005 per share.
Under the terms of the repurchase agreements, if eFusion is acquired by merger,
consolidation or sale of assets, the repurchase agreements will cease to apply.
F-16
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
(7) Income Taxes
eFusion incurred a loss for both financial reporting and tax return purposes
and, as such, there was no current or deferred tax provision for the year 1999.
The reconciliation of the statutory federal income tax rate to eFusion's
effective income tax rate is as follows:
1998 1999
----- -----
Federal statutory rate........................... (34)% (34)%
Increases (decreases) resulting from:
State income taxes, net of federal tax benefit... (4) (4)
Change in valuation allowance.................... 40 40
Federal and state research credits............... (2) (2)
---- ----
--% --%
==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising eFusion's deferred tax assets and deferred tax
liabilities as of December 31 are as follows:
1998 1999
---- ----
Deferred tax assets:
Research and experimentation credit
carryforwards............................ $ 273,000 $ 529,000
Net operating loss carryforwards......... 5,930,000 9,407,000
Inventory and warranty reserves.......... 52,000 37,000
Other.................................... 28,329 43,000
---------- -----------
Total gross deferred tax assets.......... 6,283,329 10,016,000
Less valuation allowance................. 6,283,329 10,016,000
---------- -----------
Net deferred tax assets.................. $ -- $ --
========== ===========
At December 31, 1999, eFusion has federal and state net operating loss and
research and experimentation credit carryforwards of approximately $24,525,000
and $613,000, respectively. These carryforwards will expire through 2019 if not
used by eFusion to reduce income taxes payable in future periods.
A provision of the Internal Revenue Code requires the utilization of net
operating losses and research and experimentation credits be limited when there
is a change of more than 50% in ownership of eFusion. Such a change occurred
with the sale of preferred stock in May of 1999. Accordingly, the utilization of
the net operating loss carryforwards generated from periods prior to May of 1999
is limited.
(8) Retirement Benefit Plan
eFusion sponsors a defined contribution 401(k) plan (the Plan). Employees in the
United States who are at least 18 years old and have 30 days of service are
eligible to participate in the Plan. Participants may defer up to 20% of
eligible compensation. Currently, eFusion does not provide matching
contributions for the Plan.
(9) Transactions with Related Parties
Included in accounts receivable are receivables from investors for sales in the
ordinary course of business of $26,914 and $608,668 at December 31, 1998 and
1999, respectively.
F-17
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
Also included in revenue are sales to investors in the ordinary course of
business of $269,509 and $1,003,920 at December 31, 1998 and 1999, respectively.
(10) Commitments and Contingencies
(a) Operating leases
eFusion leases office space under a non-cancelable operating lease through 2005.
Future minimum lease payments under the non-cancelable operating lease as of
December 31, 1999 was as follows:
Year ending December 31:
2000................................................... $ 538,410
2001................................................... 558,853
2002................................................... 580,114
2003................................................... 602,226
2004................................................... 625,222
Thereafter............................................ 649,138
---------- ----------
$3,553,963
==========
Rent expense under the operating lease was $614,215 and $686,389 for the years
ended December 31, 1998 and 1999, respectively.
(b) Royalties
eFusion has contractually entered into various agreements with certain
technology developers to pay royalties based on the number of ports that are
sold with the technology in place. Royalty payments were not significant for the
years ended December 31, 1998 and 1999.
(11) Unaudited Subsequent Events
(a) Series D Offering
On March 15, 2000, eFusion sold 2,491,102 shares of Series D preferred stock for
$8.00 per share, or an aggregate of $19,889,017, net of offering costs. The
Series D preferred rights of liquidation preference and conversion are similar
to those of Series A, B and C preferred stock. eFusion shall redeem the Series D
preferred stock at the option of the holders of the Series D preferred stock on
or after March 15, 2004. The holders of the Series D preferred stock shall be
entitled to a redemption price per share equal to the original issuance price
plus an 8% annual accrued dividend on the original investment. The carrying
amount of Series D has been increased by periodic accretions, based on the
deemed fair value of the preferred stock at the balance sheet date and using the
interest method.
(b) Joint Venture
On May 15, 2000, eFusion entered into an Joint Venture Agreement to form
TriFusion, a stock corporation in the Republic of Korea. TriFusion will
incorporate the eFusion Push to Talk (PtT) technology with the Public Switched
Telephone Network and maximize ongoing IP/Telco connectivity in the Republic of
Korea. Pursuant to the terms of the Joint Venture Agreement, eFusion will
contribute hardware and software with a fair value up to $3,600,000 and $160,000
of cash in exchange for a 47% ownership interest in
F-18
<PAGE>
EFUSION, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1999
TriFusion. eFusion will account for its investment in TriFusion under the equity
method of accounting. eFusion will record its percentage share of the net income
or loss of the joint venture. The difference, if any, between the cost of the
eFusion investment and the amount of the underlying equity in the net assets of
the joint venture would result in an adjustment to the net income or loss of the
joint venture in eFusion's financial statements. No capital contributions have
been made as of June 30, 2000.
(c) Sale of Business
On July 25, 2000, eFusion entered into an Agreement and Plan of Merger (the
Agreement) with ITXC Corp. (ITXC). Pursuant to the Agreement, among other
things, all the issued and outstanding shares of eFusion shall be converted into
the right to receive shares of the common stock of ITXC. Commensurate with the
closing, all outstanding preferred stock will be converted in accordance with
the respective preferred stock conversion ratios. Additionally, all outstanding
options under eFusion's 1996 stock option plan, whether vested or invested, will
be assumed by ITXC.
F-20
<PAGE>
(b) Unaudited Pro Forma Condensed Consolidated Financial Information:
PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial information
gives effect to the merger of eFusion, Inc. with and into Eye Merger Corp., a
wholly owned subsidiary of ITXC Corp., under the purchase method of accounting.
These pro forma statements are presented for illustrative purposes only. The pro
forma adjustments are based upon available information and assumptions that we
believe are reasonable. The pro forma condensed consolidated financial
statements do not purport to represent what the consolidated results of
operations or financial position of ITXC would actually have been if the merger
had in fact occurred on the dates that we refer to below, nor do they purport to
project the results of operations or financial position of ITXC for any future
period or as of any date, respectively.
Under the purchase method of accounting, tangible and identifiable intangible
assets acquired and liabilities assumed are recorded at their estimated fair
market values. The excess of the purchase price, including estimated fees and
expenses related to the merger, over the net assets acquired is classified as
goodwill on the accompanying unaudited pro forma condensed consolidated balance
sheet. The estimated fair values and useful lives of assets acquired and
liabilities assumed are based on a preliminary valuation and are subject to
final valuation adjustments which may cause some of the intangibles to be
amortized over a shorter life than the goodwill amortization period of five
years. ITXC intends to undertake a study to determine the allocation of the
total purchase price to the various assets acquired, including in-process
research and development, and the liabilities assumed and to determine the
amortization period of intangible assets, including goodwill. ITXC currently
believes that amounts allocated to goodwill will be amortized over a life not to
exceed five years while other intangibles may be amortized over shorter periods.
The unaudited pro forma condensed consolidated balance sheet as of June 30,
2000, was prepared by combining the historical cost balance sheet at June 30,
2000, for ITXC with the historical cost balance sheet at June 30, 2000, for
eFusion, giving effect to the merger as though it had been completed on June 30,
2000.
The unaudited pro forma condensed consolidated statements of operations for the
periods presented were prepared by combining ITXC's statements of operations for
the year ended December 31, 1999, and the six months ended June 30, 2000, with
eFusion's statements of operations for the year ended December 31, 1999, and the
six months ended June 30, 2000, respectively, giving effect to the merger as
though it had occurred on January 1, 1999. These unaudited pro forma condensed
consolidated financial data do not give effect to any restructuring costs or to
any potential cost savings or other operating efficiencies that could result
from the merger.
<PAGE>
The historical financial statements of ITXC and eFusion for the year ended
December 31, 1999, are derived from audited consolidated financial statements
presented elsewhere in this document or in previously filed documents. The
condensed consolidated historical financial statements of ITXC and eFusion for
the six months ended June 30, 2000, are derived from unaudited condensed
consolidated financial statements presented elsewhere in this document or in
previously filed documents.
You should read the financial information in this section along with ITXC's and
eFusion's historical consolidated financial statements and accompanying notes
presented elsewhere in this document and in previously filed documents.
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 2000
<TABLE>
<CAPTION>
Pro Forma
Adjustments ITXC Pro
ITXC eFusion --------------------------- Forma
Historical Historical Debits Credits Consolidated
----------- ----------- ----------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and marketable
securities................ $211,195 $ 13,711 $ 1,000(3) $223,906
Accounts receivable,
net....................... 10,576 297 10,873
Inventory, net............ -- 308 308
Prepaid expenses and
other current assets...... 2,403 237 2,640
-------- -------- -------- ----------- ------------
Total current assets...... 224,174 14,553 -- 1,000 237,727
Property and equipment,
net....................... 24,773 2,140 26,913
Deposits and other
assets.................... 81 -- 81
Long-term investment...... 7,924 -- 7,924
Service contract rights,
net of amortization....... 2,459 -- 2,459
Goodwill, net of
amortization.............. -- -- 143,815(3) 143,815
-------- -------- -------- ----------- ------------
Total assets.............. 259,411 16,693 143,815 1,000 418,919
======== ======== ======== =========== ============
Accounts payable and
accrued liabilities....... 11,812 693 12,505
Customer deposits......... 866 -- 866
Current portion of
capital lease
obligations............... 1,834 162 1,996
Deferred revenue.......... -- 164 164
-------- -------- ------------
Total current
liabilities............... 14,512 1,019 15,531
Equipment note payable
and long term debt........ 1,723 92 1,815
Capital lease
obligation, less
current portion........... 2,795 -- 2,795
Redeemable convertible
preferrerd stock.......... -- 37,547 37,547(1) --
Preferred stock........... -- 4 4(1) --
Common stock.............. 39 4 4(1) 6(2) 45
Additional paid in
capital................... 297,366 12,209 12,209(1) 163,208(2) 460,574
Deferred employee
compensation.............. (8,120) -- 4,817(4) (12,937)
Warrants.................. -- 1,564 1,564(1) --
Accumulated other
comprehensive income...... 89 -- 89
Accumulated deficit....... (48,993) (35,746) 35,746(1) (48,993)
-------- -------- ----------- ------------
Total stockholders'
equity.................... 240,381 (21,965) 18,598 198,960 398,778
-------- -------- -------- ----------- ------------
Total liabilities and
stockholders' equity...... $259,411 $ 16,693 $ 56,145 $198,960 $418,919
======== ======== ======== =========== ============
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
ITXC
ITXC eFusion Pro Forma Pro Forma
Historical Historical Adjustments Consolidated
---------- ---------- ----------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Telecommunications revenue... $ 24,423 $ 3,517 $ 27,940
Consulting revenue........... 988 -- 988
-------- ------- ----------
Total revenue................ 25,411 3,517 28,928
Data communications and
telecommunications........... 23,095 1,452 24,547
Network operations........... 3,219 -- 3,219
Selling, general and
administrative............... 14,778 10,765 25,543
Depreciation and
amortization................. 2,556 579 $ 28,763 (3) 31,898
Non-cash employee
compensation................. 2,716 -- 1,875 (4) 4,591
-------- ------- ---------- --------
Total costs and expenses..... 46,365 12,796 30,638 89,799
Loss from operations......... (20,953) (9,279) (30,638) (60,870)
Interest income, net......... 1,289 141 1,430
-------- ------- ---------- --------
Net loss..................... (19,665) (9,138) (30,638) (59,441)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock.............. (773) -- 773 --
-------- ------- ---------- --------
Net loss applicable to
common stockholders.......... $(20,438) $(9,138) $ (29,865) $(59,441)
======== ======= ========== ========
Basic and diluted net loss
per share applicable to
common stockholders.......... $(1.29) $(2.00) $(2.80)(5)
======== ======= ========
Weighted average shares used
in computation of basic and
diluted net loss per share
applicable to common
stockholders................. 15,886 4,566 21,211(5)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
<PAGE>
Six Months Ended June 30, 2000
ITXC
ITXC eFusion Pro Forma Pro Forma
Historical Historical Adjustments Consolidated
---------- ---------- ----------- ------------
(in thousands, except per share data)
Telecommunications revenue..... $ 33,685 $ 308 $ 33,993
Consulting revenue............. -- -- --
-------- ------- ---------- --------
Total revenue.................. 33,685 308 33,993
Costs and expenses:
Data communications and
telecommunications............. 30,196 66 30,261
Network operations............. 2,423 942 3,365
Selling, general and
administrative................. 12,466 7,949 20,415
Depreciation and
amortization................... 4,353 450 $ 14,381(3) 19,184
Non-cash employee
compensation................... 2,121 -- 954(4) 3,075
-------- ------- ---------- --------
Total costs and expenses....... 51,559 9,407 15,335 76,301
Loss from operations........... (17,874) (9,099) (15,335) (42,308)
Loss relating to joint
venture........................ (8,195) -- (8,195)
Interest income, net........... 4,594 209 4,803
-------- ------- ---------- --------
Net loss....................... (21,475) (8,890) (15,335) (45,700)
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock................ -- (467) 467(1) --
-------- ------- ---------- --------
Net loss applicable to
common stockholders............ $(21,475) $(9,357) $ (14,868) $(45,700)
======== ======= ========== ========
Basic and diluted net loss
per share applicable to
common stockholders............ $ (0.57) $ (1.81) $ (1.07)(5)
======== ======= =======
Weighted average shares used
in computation of basic and
diluted net loss per share
applicable to common
stockholders................... 37,546 5,175 42,871(5)
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(1) Reflects the elimination of eFusion's stockholders' equity accounts and
eFusion's redeemable convertible preferred stock, and the related preferred
stock accretion. We have assumed that all eFusion warrants outstanding will not
be exercised prior to the completion of the merger. Those warrants will not be
exercisable after the merger occurs.
(2) Reflects the issuance of 5,324,755 shares of ITXC common stock in connection
with the merger, which are valued at an average price based on the closing price
of ITXC common stock two days before, the day of and two days after the merger
was announced on July 25, 2000. The number of shares of ITXC common stock to be
issued may vary based on the actual eFusion cash at the date of closing (see
Note 3).
(3) Reflects the excess consideration over the net assets acquired, goodwill,
and the related amortization expense. The preliminary goodwill is calculated as
follows, in thousands:
Fair value of ITXC shares issued to eFusion stockholders......... $152,954
Fair value of eFusion stock options (less intrinsic value of
unvested options of $4,817)...................................... 5,442
Estimated ITXC transaction costs................................. 1,000
--------
Estimated total consideration.................................... 159,396
Historical net tangible asset value of eFusion at June 30, 2000.. 15,581
--------
Preliminary goodwill............................................. $143,815
========
The above assumes that ITXC will issue 5,324,755 shares of common stock in
exchange for all of the outstanding common and preferred stock of eFusion. The
remainder of the merger shares will be allocated to eFusion's option holders
pursuant to the merger agreement. The actual shares issued may vary based on the
actual eFusion cash and cash equivalents at the date of closing. ITXC has
tentatively considered the carrying value of the acquired assets to approximate
fair value, with all excess consideration being preliminarily allocated to
goodwill. Goodwill associated with the transaction is currently anticipated to
be amortized over an estimated 5- year life. A final allocation of the purchase
price to the assets acquired and liabilities assumed of eFusion and final
determination of the goodwill amortization period are dependent upon valuations
and studies that have not yet been completed. A portion of the purchase price
may be allocated to inprocess research and development. To the extent that a
portion of the purchase price is allocated to in-process research and
development projects for which technological feasibility has not yet been
established, a charge would be recognized in the period in which the acquisition
is completed. To the extent amounts are allocated to in-process research and
development projects, pro forma amortization expense would be ratably reduced.
(4) Reflects deferred compensation related to the intrinsic value of stock
options issued by ITXC in exchange for unvested outstanding options of eFusion
and the related non-cash compensation expense over the remaining vesting
periods, as if the merger was completed as of the earliest date presented, in
accordance with Financial Accounting Standards Board Interpretation No. 44 of
APB Opinion No. 25. To calculate the intrinsic value, ITXC assumed a market
price of $18.125 per share of common stock on the date of grant of the options,
which represents the closing price of ITXC common stock as of July 31, 2000. The
actual amount of deferred compensation and non-cash compensation will vary based
on the actual market price of ITXC common stock on the date the merger is
consummated.
(5) Pro forma per share data are based on the number of ITXC common shares that
would have been outstanding had the merger occurred on January 1, 1999. In
addition, ITXC completed its initial public offering of common stock on October
1, 1999, which resulted in the automatic conversion of ITXC's Series B and
Series C redeemable convertible preferred stock into shares of common stock.
Accordingly, the capital structure of ITXC prior to such conversion is not
indicative of its ongoing capital structure. The table below presents additional
pro forma per share data for the year ended December 31, 1999, had the
conversion of the Series B convertible preferred stock occurred at January 1,
1999 and the Series C convertible preferred stock occurred at February 24, 1999,
date of issuance:
Conversion
of ITXC
Redeemable Adjusted Pro
Pro Forma Preferred Forma
Consolidated Stock Consolidated
------------ ----- ------------
Basic and diluted net loss per
share................................. $ (2.80) -- $ (1.76)
Weighted average shares outstanding... 21,211 12,640 33,851
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ITXC CORP.
By: /s/ Edward B. Jordan
----------------------------
Edward B. Jordan
Executive Vice President
Dated: October 13, 2000
<PAGE>
EXHIBIT INDEX
2.1 Amended and Restated Agreement and Plan of Merger, dated as of July 25,
2000, among the Registrant, Eye Merger Corp. and eFusion, Inc. is
incorporated by reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-4 (No. 333-44248) as filed with the Securities and
Exchange Commission on September 7, 2000
23.1 Consent of KPMG LLP
-35-
