SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended MARCH 31, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from __________ to __________
COMMISSION FILE NUMBER 000-27127
IBASIS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-3332534
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 SECOND AVENUE, BURLINGTON, MA 01803
(Address of Principal Executive Offices, Including Zip Code)
(781) 505-7500
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
As of May 11, 2001, there were 44,944,026 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
IBASIS, INC.
Index
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements
Consolidated Balance Sheets at March 31, 2001(unaudited) and
December 31, 2000 2
Consolidated Statements of Operations for the Three Months Ended
March 31, 2001 and 2000 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2001 and 2000 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 8-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14
Signature 15
1
IBASIS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 183,653,641 $208,180,625
Marketable securities 5,021,282 77,146,773
Accounts receivable, net of allowance of approximately $8.6 million
and $2.2 million, respectively 22,201,910 17,343,294
Prepaid expenses and other current assets 11,224,560 5,883,560
------------- ------------
Total current assets 222,101,393 308,554,252
------------- ------------
Property and equipment, at cost:
Equipment under capital lease 47,050,401 44,765,170
Network equipment 41,757,661 24,702,891
Construction in process 41,556,997 38,991,409
Computer software 7,565,387 5,749,908
Leasehold improvements 3,401,257 3,181,840
Furniture and fixtures 1,275,798 680,276
------------- ------------
142,607,501 118,071,494
Less--Accumulated depreciation and amortization (25,119,260) (18,201,384)
------------- ------------
117,488,241 99,870,110
Goodwill and other purchased intangible assets, net of accumulated
amortization of approximately $2.4 million and 0, respectively 82,762,047 --
Deferred debt financing costs, net of accumulated amortization of
approximately $1,075,000 and $816,000, respectively 4,098,055 4,356,708
Long term investments in marketable securities 34,615,698 15,000,000
Long term investment in nonmarketable security 5,000,000 5,000,000
Due from PriceInteractive, Inc. -- 10,000,000
Other assets 3,237,883 5,036,649
------------- ------------
$ 469,303,317 $447,817,719
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,662,669 $ 9,080,409
Accrued expenses 18,046,057 14,855,026
Deferred revenue 1,830,573 --
Long term debt, current portion 31,702,709 26,105,842
------------- ------------
Total current liabilities 58,242,008 50,041,277
------------- ------------
Long term debt, net of current portion 188,399,391 190,880,257
Stockholders' equity:
Common stock, $.001 par value, authorized--85,000,000 shares, issued
and outstanding--44,918,191 and 34,203,083, respectively 44,918 34,203
Additional paid-in capital 369,111,765 298,572,842
Deferred compensation (3,241,680) (1,604,462)
Accumulated deficit (143,253,085) (90,106,398)
------------- ------------
Total stockholders' equity 222,661,918 206,896,185
------------- ------------
$469,303,317 $447,817,719
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
2
IBASIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Net revenue:
Data communications and telecommunications $ 26,020,320 $ 9,725,492
Professional services 1,032,914 --
------------ ------------
Total net revenue 27,053,234 9,725,492
Operating expenses:
Data communications and telecommunications 23,798,163 10,080,503
Professional services 393,343 --
Research and development 5,477,523 2,819,009
Selling and marketing 6,083,229 3,288,280
General and administrative 10,633,598 3,809,602
Depreciation and amortization 6,939,475 1,926,272
Amortization of goodwill and other purchased intangible assets 2,364,630 --
Write-off of in-process research and development costs 24,431,466 --
------------ ------------
Total operating expenses 80,121,427 21,923,666
------------ ------------
Loss from operations (53,068,193) (12,198,174)
Interest income 4,013,001 2,451,292
Interest expense (3,893,323) (909,265)
Income taxes (198,174) --
------------ ------------
Net loss $(53,146,689) $(10,656,147)
============ ============
Net loss per share before acquisition-related and non-cash
compensation charges (1):
Basic and diluted net loss per share $ (0.69) $ (0.33)
============ ============
Basic and diluted weighted average common
shares outstanding 37,866,350 32,205,878
============ ============
Net loss per share:
Basic and diluted net loss per share $ (1.40) $ (0.33)
============ ============
Basic and diluted weighted average common
shares outstanding 37,866,350 32,205,878
============ ============
(1) The calculation of net loss per share before acquisition-related and
non-cash compensation charges does not include the one-time write-off of
in-process research and development costs nor the amortization of goodwill and
other purchased intangible assets associated with the acquisition of
PriceInteractive Inc. All non-cash compensation charges associated with the
issuance of stock options are also not included within the calculation.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
3
IBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net loss $(53,146,689) $(10,656,147)
Adjustments to reconcile net loss to net cash used in
operating activities
Write-off of in-process research and development costs 24,431,466 --
Amortization of goodwill and other purchased intangible assets 2,364,630 --
Depreciation and amortization 6,939,475 1,926,272
Amortization of deferred debt financing costs 258,653 43,271
Amortization of deferred compensation 196,960 149,021
Changes in current assets and liabilities (exclusive of the
acquisition of PriceInteractive, Inc. (see Note 2):
Accounts receivable, net (1,017,635) (859,804)
Prepaid expenses and other current assets (1,272,129) (804,918)
Accounts payable (3,219,491) 127,716
Accrued expenses (4,961,112) 1,631,089
Deferred revenue (552,561) --
------------ ------------
Net cash used in operating activities (29,978,433) (8,443,500)
------------ ------------
Cash flows from investing activities:
Cash paid in connection with the acquisition of PriceInteractive
Inc, net of cash acquired (33,694,416) --
Decrease (increase) in current marketable securities 71,692,753 (39,000,000)
Increase in long-term marketable securities (18,752,968) --
Purchases of property and equipment (10,719,417) (8,354,168)
Decrease in other assets 1,117,062 16,776
------------ ------------
Net cash provided by (used in) investing activities 9,643,014 (47,337,392)
------------ ------------
Cash flows from financing activities:
Net proceeds from secondary offering of stock -- 140,493,000
Net proceeds from issuance of bonds -- 144,983,475
Proceeds from exercise of stock options 556,040 88,396
Proceeds from issuance of shares related to
employee stock purchase plan 211,651 --
Payments on capital lease obligations (4,959,256) (621,493)
------------ ------------
Net cash (used in) provided by financing activities (4,191,565) 284,943,378
------------ ------------
Net (decrease) increase in cash and cash equivalents (24,526,984) 229,162,486
Cash and cash equivalents, beginning of period 208,180,625 123,665,961
------------ ------------
Cash and cash equivalents, end of period $183,653,641 $352,828,447
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
4
IBASIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
The interim condensed consolidated financial statements presented herein have
been prepared by iBasis, Inc. ("iBasis" or the "Company") without audit and, in
the opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair presentation. Interim results are not necessarily
indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2000, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The unaudited condensed consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, but the Company believes that the
disclosures are adequate to make the information presented not misleading. The
condensed consolidated financial statements and notes included herein should be
read in conjunction with the consolidated financial statements and notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
(2) Acquisition of PriceInteractive Inc.
On February 27, 2001, the Company completed its acquisition of all of the
outstanding capital stock and options of PriceInteractive Inc.
("PriceInteractive"). The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations for
PriceInteractive have been included within the consolidated results of the
Company since the acquisition date. The aggregate purchase price, which was
comprised of cash, common stock and options to purchase common stock, was
allocated to the tangible and intangible assets of PriceInteractive based upon
the fair value of such assets acquired. Fair value was determined by an
independent appraisal.
The Company recorded goodwill equal to the excess of the total consideration
paid over the fair value of the net assets acquired. The goodwill and other
purchased intangible assets are being amortized over three years, the estimated
useful life.
5
A summary of the total consideration and the allocation of the aggregate
purchase price is as follows:
Purchase Price:
Cash paid $ 47,078,041
Accrued professional fees and other costs 3,537,531
Fair value of common stock issued 64,591,425
Fair value of common stock options issued 4,249,871
------------
Total purchase price $119,457,668
============
Allocation of Purchase Price:
Cash and cash equivalents $ 13,384,425
Other current assets 8,241,325
Property and equipment 10,324,865
Goodwill and other purchased intangible assets 85,126,677
Other assets 38,277
Current liabilities (9,105,263)
Long term debt (12,984,104)
In-process research and development 24,431,466
------------
Total allocation of purchase price $119,457,668
============
The following unaudited pro forma information presents the results of the
Company's operations for the three months ended March 31, 2001 as if the
acquisition of PriceInteractive had occurred on January 1, 2001:
Net revenue $30,604,031
===========
Net loss $59,239,421
===========
Basic and diluted net loss per share $ (1.36)
===========
Basic and diluted weighted average common shares outstanding 43,680,128
===========
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisition taken place as of January 1, 2001. Furthermore, the pro forma
results do not give effect to all cost savings or incremental costs which may
occur as a result of the integration and consolidation of the businesses.
(3) Long term debt
Long term debt consists of the following:
MARCH 31, DECEMBER 31,
2001 2000
---- ----
5-3/4% Convertible Subordinated Notes, due 2005 $150,000,000 $150,000,000
Capital lease and other obligations 70,102,100 66,986,099
------------ ------------
220,102,100 216,986,099
Less: current portion 31,702,709 26,105,842
------------ ------------
Long term debt, net of current portion $188,399,391 $190,880,257
============ ============
6
(4) Net Loss Per Share
In accordance with Statement of Financial Accounting Standards No. 128, Earnings
Per Share, basic net loss per common share is calculated by dividing net loss by
the weighted average number of common shares outstanding. The calculation of
diluted net loss per share is consistent with that of basic net loss per share
but gives effect to all dilutive potential common shares (that is, securities
such as options, warrants or convertible securities) that were outstanding
during the period, unless the effect is antidilutive. For the quarters ended
March 31, 2001 and 2000, 2,546,356 and 2,639,701 potential common shares,
respectively, have been excluded from the calculation of diluted net loss per
share, as their effects are antidilutive.
The following table reconciles the weighted average common shares outstanding to
the shares used in the computation of basic and diluted weighted average common
shares outstanding:
THREE MONTHS ENDED MARCH 31,
----------------------------
2001 2000
---- ----
Weighted average common shares outstanding
38,246,467 32,228,378
Less: Weighted average unvested common shares
outstanding (380,117) (22,500)
---------- ----------
Basic and diluted weighted average common shares
outstanding 37,866,350 32,205,878
========== ==========
(5) Subsequent Event- Cost Reduction Measures
In April 2001, the Company announced cost reduction measures to better position
the organization to meet its strategic goals. The Company anticipates to take an
aggregate charge in its second quarter financial statements of approximately $35
million. Of this amount, approximately $33 million is related to the write-off
of fixed assets and associated contractual obligations relating to certain
non-revenue generating Internet Central Offices and data centers. The remaining
$2 million of this charge is related to the elimination of 84 employees across
the Company's research and development, selling and marketing, and general and
administrative functions.
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations for the three months ended March 31, 2001 and 2000 should
be read in conjunction with the condensed consolidated financial statements and
footnotes for the three months ended March 31, 2001 included herein, and the
year ended December 31, 2000, included in the Company's Annual Report on Form
10-K.
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the subsection entitled "Factors That May Affect
Future Results and Financial Condition" below. The following discussion should
be read in conjunction with the Company's Annual Report on Form 10-K and the
condensed consolidated financial statements and notes thereto included elsewhere
in this Form 10-Q. All information is based on the Company's fiscal calendar.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
The Company operates in a rapidly changing environment that involves a number of
uncertainties, some of which are beyond the Company's control. In addition to
the uncertainties described elsewhere in this report, there are many factors
that will affect the Company's future results and business, which may cause the
actual results to differ from those currently expected. The Company's future
operating results and financial condition are dependent upon the Company's
ability to successfully develop, manufacture, and market technologically
innovative products and services in order to meet dynamic customer demand
patterns. Inherent in this process are a number of factors that the Company must
successfully manage in order to achieve favorable future operating results and a
favorable financial condition. Potential risks and uncertainties that could
affect the Company's future operating results and financial condition include,
among other things, continued competitive pressures in the marketplace and the
effect of any reaction by the Company to such competitive pressures, including
pricing actions by the Company; risks associated with international operations,
including economic and labor conditions, regional economic problems, political
instability, tax laws, and currency fluctuations; increasing dependence on
third-parties key services on terms acceptable to the Company; the continued
availability of certain components and services essential to the Company's
business currently obtained by the Company from sole or limited sources, and the
final assembly of certain of the Company's products and services; the Company's
ability to supply products and services in certain categories; the Company's
ability to supply products and services free of latent defects or other faults;
the Company's ability to make timely delivery to the marketplace of
technological innovations, including its ability to continue to make timely
delivery of planned enhancements; the availability of third-party software for
particular applications; the Company's ability to attract, motivate and retain
key employees; the Company's ability to successfully integrate the operations
from the recent acquisition the effect of previously undetected Y2K compliance
issues; managing the continuing impact of the European Union's transition to the
Euro as its common legal currency; continuing fluctuations in the fair value of
the Company's non-current debt and equity investments, and the Company's ability
to retain the operational and cost benefits derived from its recently completed
restructuring programs. For a discussion of these and other factors affecting
the Company's future results and financial condition, see "Item 7 --
Management's Discussion and Analysis -- Factors That May Affect Future Results
and Financial Condition" in the Company's 2000 Form 10-K.
8
OVERVIEW
The Company is a provider of international voice and fax call completion
services, and other value-added services using the Internet. We were
incorporated in August 1996 and commenced commercial operations in May 1997. We
first recorded revenue from the sale of equipment in May 1997, and first
recorded revenue from the sale of voice and fax services over our network in
January 1998. In July 1999, we changed our name from "VIP Calling, Inc." to
"iBasis, Inc."
In November 1999, we completed our initial public offering and issued 7,820,000
shares of common stock, which resulted in total net proceeds to us of
approximately $114.7 million. In March 2000, we completed a secondary public
offering of our common stock and issued 2,026,637 shares of common stock, which
resulted in total net proceeds to us of approximately $140.3 million. Also in
March 2000, we completed an offering of $150.0 million in 5 3/4% convertible
subordinated notes, due in 2005.
On February 27, 2001, the Company completed its previously announced acquisition
of privately held PriceInteractive Inc. a leading Speech Application Service
Provider (ASP) whose products and services give enterprises and service
providers the ability to speech-enable business-critical, customer-facing
solutions, such as e-commerce, call-center, employee self-service, product and
sales information, customer care and other interactive applications. Connecting
these services to The iBasis Network, with its global reach and reduced network
costs, should increase the value and scope of the solutions PriceInteractive
provides to its large enterprise and carrier customers. By leveraging The iBasis
Network and its global footprint with these hosted speech-enabled services,
iBasis also expects to accelerate its revenue generation from enhanced services.
The acquisition of PriceInteractive is an important step in iBasis' strategy to
enhance the capabilities of its global VoIP infrastructure with its new,
speech-enabled solutions that connect mobile and fixed phone users to Web-based
applications and services. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations for
PriceInteractive have been included within the consolidated results of the
Company since the acquisition date.
In April 2001, the Company announced cost reduction measures to better position
the organization to meet its strategic goals. The Company anticipates to take an
aggregate charge in its second quarter financial statements of approximately $35
million. Of this amount, approximately $33 million is related to the write-off
of fixed assets and associated contractual obligations relating to certain
non-revenue generating Internet Central Offices and data centers. The remaining
$2 million of this charge is related to the elimination of 84 employees across
the Company's research and development, selling and marketing, and general and
administrative functions.
RESULTS FROM OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH
31, 2000
DATA COMMUNICATIONS AND TELECOMMUNICATIONS REVENUE. Our primary source of
data communications and telecommunications revenue is the fees that we
receive from customers for completing calls over our network. This revenue is
dependent on the volume of voice and fax traffic carried over the network,
which is measured in minutes. We charge our customers fees per minute of
traffic that are dependent on the length and destination of the call and
recognize this revenue in the period in which the call is completed. We also
derive a limited amount of revenue from the sale of equipment to our
customers. Most of the equipment sales are financed by us by offsetting
termination fees otherwise payable to local service providers against the
equipment purchase price until the full purchase price has been paid.
Our data communications and telecommunications revenue, which consists of voice
and fax call completion services as well as the sale of telecommunications
equipment, increased by $16.3 million to $26.0 million for the first quarter of
2001 from $9.7 million for the first quarter of 2000.
9
The increase in revenue from voice and fax call completion services to $25.1
million for the first quarter of 2001 from $9.6 million for the first quarter of
2000 was the result of the acquisition of PriceInteractive which contributed
$1.5 million in voice and fax call completion services revenue. Further, voice
and fax call completion services revenue increased as a result of the increase
in traffic carried over the combined Company's network to 290.5 million minutes
in the first quarter of 2001 from 85.2 million minutes in the first quarter of
2000. During the first quarter of 2001, PriceInteractive carried 12.8 million
minutes over its network. Net revenue from the sale of equipment increased to
$882,000 in the first quarter of 2001 from $100,000 in the first quarter of
2000.
PROFESSIONAL SERVICES REVENUE. Professional services revenue represents fees
received from customers for providing professional services to design, develop
and test speech applications. Professional service revenue is billed on an
hourly basis and is dependent upon the number of employees engaged in the
process of designing, developing, and testing speech and other interactive voice
response (IVR) applications. The Company recognizes a portion of this revenue as
services are performed and defers the remaining portion over the life of the
hosting period. During the first quarter of 2001, the Company recognized $1.0
million in professional services revenue.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications and
telecommunications expenses are comprised primarily of termination fees,
purchased minutes, equipment expense and other expenses associated with data
communications and telecommunications. Termination fees are paid to local
service providers to terminate calls received from our network. This traffic is
measured in minutes, and the per minute rates charged for terminating calls are
negotiated with the local service provider and included in our contract with our
local service provider. Should competition cause a decrease in our prices and,
as a result our profit margins, our contracts with our providers provide us with
the right to renegotiate the per minute termination fees. Purchased minutes are
fees we pay to other telecommunications carriers for completing calls over the
public circuit-switched network to destinations outside of our network, and as a
back-up to our network when our proprietary Assured Quality Routing software
indicates that either these carriers are needed to maintain the quality of our
services or our capacity to a particular destination has been exceeded. The
amount of these fees depends on the volume of voice and fax traffic carried over
the public circuit-switched network, which is also measured in minutes of
traffic. Presently, less than 10% of our traffic is completed using the
public-switched telephone network as a backup to The iBasis Network. The per
minute rate charge for purchased minutes is negotiated with public
circuit-switched network carriers for each destination served. The primary
direct expenses that we incur in selling our equipment are those incurred to
purchase the component parts of our equipment from a variety of vendors. The
equipment expenses vary based on the number of units contracted, assembled and
sold in a particular period, and will increase as equipment sales increase.
Other data communication and telecommunications expenses include charges for
Internet access at our Internet Central Offices, fees for the fiber optic
connections between our Internet offices and our customers and/or suppliers,
facilities charges for overseas Internet access and phone lines to the primary
telecommunications carriers in particular countries, and charges for the limited
number of dedicated international private line circuits we use.
Data communications and telecommunications expenses increased by $13.7 million
to $23.8 million for the first quarter of March 31, 2001 from $10.1 million for
the first quarter of 2000. Combined termination fees and purchased minutes
increased by $11.3 million to $19.2 million from $7.9 million as a result of the
increase in traffic as described above. Further, data communications and
telecommunications expenses increased as a result of the acquisition of
PriceInteractive, which incurred $617,000 of these expenses during the first
quarter of 2001. Equipment expenses directly related to equipment sales
increased to $762,000 for the first quarter of 2001 from $100,000 for the first
quarter of 2000. Other data communications and telecommunications expenses,
including Internet access, public circuit-switched network access, and
international private line charges, increased to $3.8 million for the first
quarter of 2001 from $2.1 million for the first quarter of 2000. As a percentage
of total revenue, data
10
communications and telecommunications expenses decreased to 88% for the first
quarter of 2001 from 104% for the first quarter of 2000. We expect data
communications and telecommunication expenses to continue to decrease as a
percentage of revenues as we increase utilization and efficiency of our
network and achieve economies of scale.
PROFESSIONAL SERVICES EXPENSES. Professional services expenses represent direct
labor costs incurred in the process of designing developing and testing speech
and other IVR applications. During the first quarter of 2001, the Company
incurred $393,000 of costs related to professional services.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses include the
expenses associated with developing, operating, supporting and expanding our
international and domestic network, expenses for improving and operating our
global network operations center, salaries, and payroll taxes and benefits paid
for employees directly involved in the development and operation of our global
network operations center and the rest of our network. Also included in this
category are research and development expenses that consist primarily of
expenses incurred in enhancing, developing, updating and supporting our network
and our proprietary software applications.
Research and development expenses increased by $2.7 million to $5.5 million
for the first quarter of 2001 from $2.8 million for the first quarter of
2000. This increase in research and development expenses is due principally
to the continued expansion of The iBasis Network as well as an increase in
personnel within the group to 259 as of March 31, 2001 from 114 as of March
31, 2000. As a percentage of total revenue, research and development expenses
decreased to 20% for the first quarter of 2001 from 29% for the first quarter
of 2000. We expect that research and development expenses will continue to
decrease as a percentage of revenue.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include expenses
relating to the salaries, payroll taxes, benefits and commissions that we pay
for sales personnel and the expenses associated with the development and
implementation of our promotion and marketing campaigns, including expenses
relating to our outside public relations firm and industry analysts.
Selling and marketing expenses increased by $2.8 million to $6.1 million for the
first quarter of 2001 from $3.3 million for the first quarter of 2000. This
increase is primarily attributable to an increase in the number of personnel in
the selling and marketing departments to 154 as of March 31, 2001 from 70 as
of March 31, 2000. As a percentage of total revenue, selling and marketing
expenses decreased to 23% for the first quarter of 2001 from 34% for the first
quarter of 2000. We anticipate that selling and marketing expenses will
continue to decrease as a percentage of revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include
salary, payroll tax and benefit expenses and related costs for general corporate
functions, including executive management, finance and administration, legal and
regulatory, facilities, information technology and human resources.
General and administrative expenses increased by $6.8 million to $10.6
million for the first quarter of 2001 from $3.8 million for the first quarter
of 2000. General and administrative expenses increased primarily due to an
increase in the number of personnel in these functions to 108 as of March 31,
2001 from 55 as of March 31, 2000, an increase in consulting and professional
fees for information technology initiatives and the increased use of
outsourced billing services. In addition, general and administrative expenses
include a charge for bad debt expenses in the first quarter of 2001, to build
reserves that the Company believes will be sufficient to cover potential
credit risk from non-tier one carriers. As a percentage of total revenue,
general and administrative expenses was 39% for the first quarter of 2001 and
for the first quarter of 2000. We expect general and administrative expenses
to
11
decrease as a percentage of sales as we leverage our current employee base
through automation and other efficiency improvement projects.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
increased by $5.0 million to $6.9 million for the first quarter of 2001 from
$1.9 million for the first quarter of 2000. This increase resulted from
additional purchases of capital equipment and software that were needed to
support our expanding network. As a percentage of total revenue, depreciation
and amortization expense increased to 26% for the first quarter of 2001 from 20%
for the first quarter of 2000. We expect depreciation and amortization expenses
to decrease as a percentage of sales as we ramp revenues and utilization of The
iBasis Network.
AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS. In connection
with the acquisition of PriceInteractive, the Company recorded goodwill equal to
the excess of the total consideration paid less the fair value of the net assets
acquired. The goodwill and other purchased intangible assets are being amortized
over three years, the estimated useful life.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COST. In connection with the
acquisition of PriceInteractive, the Company recorded a $24.4 million charge
during the first quarter of 2001 for in-process research and development.
INTEREST EXPENSE. Interest expense is primarily comprised of interest paid on
the convertible subordinated notes and various capital lease agreements
established to finance a substantial majority of the hardware and software
components of our network. Interest expense increased by $3.0 million to $3.9
million for the first quarter of 2001 from $909,000 for the first quarter of
2000. This increase was attributable to interest paid on convertible
subordinated notes as well as interest paid on capital equipment financing.
INTEREST INCOME. Interest income is primarily composed of income earned on our
cash and cash equivalents. Interest income increased by $1.5 million to $4.0
million for the first quarter of 2001 from $2.5 million for the first quarter of
2000. This increase was primarily attributable to increased interest earnings on
our cash and cash equivalents, marketable securities and long term investments,
as a result of our secondary offering of common stock completed in March 2000
and the sale of convertible subordinated notes also completed in March 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have related to the
development of our network infrastructure, our sales and marketing activities,
research and development expenses, and general capital needs. Our capital needs
have been met, in large part, from the net proceeds from our initial and
secondary public offerings of common stock and the sale of convertible
subordinated notes. As we placed greater emphasis on expanding our network
infrastructure, we have also sought to meet our capital needs through vendor
capital leases and other equipment financings.
We have also established a $2.5 million line of credit with a bank, which
matures in June 2001. Borrowings under this line are collateralized by
substantially all assets of the Company, are payable at maturity and bear
interest at the bank's prime rate 8% at March 31, 2001) plus 1% per annum.
There were no outstanding borrowings under the line of credit as of March 31,
2001. However, the Company has approximately $1.4 million of letters of
credit outstanding against the line of credit.
In connection with the acquisition of PriceInteractive, the Company assumed a
credit facility consisting of two term loans and two lines of credit. The
term loans mature in November 2001 and July 2002, have outstanding balances
due as of March 31, 2001 of $500,000 and $385,000, respectively, and bear
interest at 6.85% and 8.81%, respectively. The lines of credit mature in June
2003 and May 2004, have outstanding balances as of March 31, 2001 of
$1,625,000 and $2,000,000 and bear interest at Libor plus 2.5% (7.79% as of
March 31, 2001).
Net cash used in operating activities was $30.3 million for the first quarter of
2001, as compared to $8.4 million for the first quarter of 2000. Cash used in
operating activities for both periods was predominantly related to net losses
and increases in accounts receivable. During the first quarter of 2001, $24.4
million of our net loss was attributable to a one time charge related to
in-process research and development and others costs incurred in connection with
the Company's acquisition of PriceInteractive.
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Net cash provided by investing activities was $10.1 million for the first
quarter of 2001, as compared to net cash used in investing activities of $47.3
million for the first quarter of 2000. Cash provided by investing activities for
the first quarter of 2001 was primarily related to a decrease in current
marketable securities, partially offset by the cash paid for the acquisition of
PriceInteractive and the purchases of equipment and marketable securities.
Net cash used in financing activities was $4.4 million for the first quarter of
2001, as compared to net cash provided by financing activities of $284.9 million
for the first quarter of 2000. These amounts are primarily attributable to the
net proceeds from our initial public offering, our secondary public offering,
and the issuance of convertible notes and were partially offset by payments on
capital lease obligations.
SECONDARY PUBLIC OFFERING. In March 2000, we completed our secondary public
offering in which we sold 2,026,637 shares of common stock, which resulted in
total net proceeds to us of $140.3 million. Concurrently, we offered $150
million in 5 3/4% convertible subordinated notes due 2005 which resulted in
total net proceeds to us of $144.8 million. The notes are convertible at any
time prior to maturity into common stock at a conversion price of $86.14 per
share, subject to adjustment upon certain events.
EQUIPMENT LEASING AND FINANCING. We lease equipment from various vendors under
master agreements and multiple lease sub-agreements. Each of the multiple
equipment leases specifies its own term, rate and payment schedule, depending
upon the value and amount of equipment leased. As of March 31, 2001, we had an
additional $26 million available for borrowing under a $90 million master
agreement with Cisco Systems Capital Corporation.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, we have not engaged in trading market risk sensitive instruments or
purchasing hedging instruments that would be likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk. We have not purchased options or entered into swaps of forward or
futures contracts. Our primary market risk exposure is that of interest rate
risk on borrowings under our credit lines, which are subject to interest rates
based on the banks' prime rate, and a change in the applicable interest rate
that would affect the rate at which we could borrow funds or finance equipment
purchases. While to date our global operations have generated revenues in United
States dollars, we are currently evaluating the impact of foreign currency
exchange risk on our results of operations as we continue to expand globally.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On February 26, 2001, the Company filed a current report on Form 8-K
pertaining to the audited financial statements and Management's
Discussion and Analysis of PriceInteractive, Inc. for the year ended
December 31, 2000 as well as the unaudited proforma condensed combined
financial information of iBasis, Inc. and PriceInteractive, Inc. for such
period and as of such date.
On February 27, 2001, the Company filed a current report on Form 8-K
pertaining to the completion of the acquisition of all of the outstanding
capital stock of PriceInteractive, Inc. pursuant to an Agreement and Plan
of Merger and Reorganization dated December 12, 2000.
CERTAIN IMPORTANT FACTORS
This quarterly report on Form 10-Q contains forward-looking statements based on
current expectations, estimates and projections about iBasis's industry and
management's beliefs and assumptions. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would" or similar
words. You should read statements that contain these words carefully because
they discuss future expectations, contain projections of future results of
operations or of financial position or state other "forward-looking"
information. You should be aware that the occurrence of the events described in
this quarterly report could have an adverse effect on the business, results of
operations and financial position of iBasis.
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SIGNATURE
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 thereunto duly authorized.
iBasis, Inc.
MAY 15, 2001 By: /s/ Michael J. Hughes
- ------------ ------------------------------------------
(date) Michael J. Hughes
Vice President and Chief Financial Officer
(Authorized Officer and
Principal Accounting Officer)
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